UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20222023
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-35292
LCNB Corp.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Ohio | | 31-1626393 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
2 North Broadway, Lebanon, Ohio 45036
(Address of principal executive offices, including Zip Code)
(513) 932-1414
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, No Par Value | LCNB | NASDAQ |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
☐ Yes ☒ No
The number of shares outstanding of the issuer's common stock, without par value, as of May 10, 20222023 was 11,401,67711,121,212 shares.
LCNB CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Glossary of Abbreviations and Acronyms
| | | | | | | | |
ACL | | Allowance for Credit Losses |
AFS | | Available-for-Sale |
ASC | | Accounting Standards Codification |
ASU | | Accounting Standards Update |
Bank | | LCNB National Bank |
| | |
CARES Act | | Coronavirus Aid, Relief, and Economic Security Act |
CECL | | Current expected credit losses |
CEO | | Chief Executive Officer |
CFO | | Chief Financial Officer |
| | |
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 |
Economic Aid Act | | Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act |
FASB | | Financial Accounting Standards Board |
FDIC | | Federal Deposit Insurance Corporation |
FFIEC | | Financial Institutions Examination Council |
FHLB | | Federal Home Loan Bank |
FOMC | | Federal Open Market Committee of the Federal Reserve System |
GAAP | | Generally Accepted Accounting Principles |
HTM | | Held-to-Maturity |
ICS | | Insured Cash Sweep |
IRA | | Individual Retirement Account |
LCNB | | LCNB Corp. and its consolidated subsidiaries as a whole |
LDA | | Loss Driver Analysis |
LGD | | Loss Given Default |
LIBOR | | London Interbank Offered Rate |
LIHTC | | Low Income Housing Tax Credit |
NOW | | Negotiable Order of Withdrawal |
OCC | | Office of the Comptroller of the Currency |
PD | | Probability of Default |
PPP | | Paycheck Protection Program |
| | |
SBA | | Small Business Administration |
SEC | | Securities and Exchange Commission |
| | |
TDRs | | Troubled Debt Restructurings |
WARM | | Weighted Average Remaining Maturity |
PART I – FINANCIAL INFORMATION
| | | | | |
Item 1. | Financial Statements |
LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share data)thousands)
| | | March 31, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| | (Unaudited) | | | (Unaudited) | |
ASSETS: | ASSETS: | | | | | ASSETS: | | | | |
Cash and due from banks | Cash and due from banks | | $ | 18,062 | | | 16,810 | | Cash and due from banks | | $ | 18,071 | | | 20,244 | |
Interest-bearing demand deposits | Interest-bearing demand deposits | | 1,879 | | | 1,326 | | Interest-bearing demand deposits | | 13,805 | | | 2,457 | |
Total cash and cash equivalents | Total cash and cash equivalents | | 19,941 | | | 18,136 | | Total cash and cash equivalents | | 31,876 | | | 22,701 | |
| Investment securities: | Investment securities: | | | | | Investment securities: | | | | |
Equity securities with a readily determinable fair value, at fair value | Equity securities with a readily determinable fair value, at fair value | | 2,424 | | | 2,546 | | Equity securities with a readily determinable fair value, at fair value | | 1,286 | | | 2,273 | |
Equity securities without a readily determinable fair value, at cost | Equity securities without a readily determinable fair value, at cost | | 2,099 | | | 2,099 | | Equity securities without a readily determinable fair value, at cost | | 2,099 | | | 2,099 | |
Debt securities, available-for-sale, at fair value | Debt securities, available-for-sale, at fair value | | 293,464 | | | 308,177 | | Debt securities, available-for-sale, at fair value | | 293,427 | | | 289,850 | |
Debt securities, held-to-maturity, at cost | | 22,873 | | | 22,972 | | |
Debt securities, held-to-maturity, at cost, net | | Debt securities, held-to-maturity, at cost, net | | 19,763 | | | 19,878 | |
Federal Reserve Bank stock, at cost | Federal Reserve Bank stock, at cost | | 4,652 | | | 4,652 | | Federal Reserve Bank stock, at cost | | 4,652 | | | 4,652 | |
Federal Home Loan Bank stock, at cost | Federal Home Loan Bank stock, at cost | | 5,203 | | | 5,203 | | Federal Home Loan Bank stock, at cost | | 6,967 | | | 4,415 | |
Loans, net | Loans, net | | 1,373,991 | | | 1,363,939 | | Loans, net | | 1,386,972 | | | 1,395,632 | |
Premises and equipment, net | Premises and equipment, net | | 34,940 | | | 35,385 | | Premises and equipment, net | | 33,186 | | | 33,042 | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | | 6,191 | | | 6,357 | | Operating lease right-of-use assets | | 6,093 | | | 6,248 | |
Goodwill | Goodwill | | 59,221 | | | 59,221 | | Goodwill | | 59,221 | | | 59,221 | |
Core deposit and other intangibles, net | Core deposit and other intangibles, net | | 2,328 | | | 2,473 | | Core deposit and other intangibles, net | | 1,665 | | | 1,827 | |
Bank owned life insurance | | 43,488 | | | 43,224 | | |
Bank-owned life insurance | | Bank-owned life insurance | | 44,569 | | | 44,298 | |
Interest receivable | Interest receivable | | 8,364 | | | 7,999 | | Interest receivable | | 8,005 | | | 7,482 | |
Other assets, net | Other assets, net | | 20,451 | | | 21,246 | | Other assets, net | | 24,750 | | | 25,503 | |
TOTAL ASSETS | TOTAL ASSETS | | $ | 1,899,630 | | | 1,903,629 | | TOTAL ASSETS | | $ | 1,924,531 | | | 1,919,121 | |
| LIABILITIES: | LIABILITIES: | | | | | LIABILITIES: | | | | |
Deposits: | Deposits: | | | | | Deposits: | | | | |
Noninterest-bearing | Noninterest-bearing | | $ | 517,621 | | | 501,531 | | Noninterest-bearing | | $ | 473,345 | | | 505,824 | |
Interest-bearing | Interest-bearing | | 1,118,985 | | | 1,127,288 | | Interest-bearing | | 1,130,536 | | | 1,099,146 | |
Total deposits | Total deposits | | 1,636,606 | | | 1,628,819 | | Total deposits | | 1,603,881 | | | 1,604,970 | |
Short-term borrowings | Short-term borrowings | | 24,746 | | | — | | Short-term borrowings | | 76,500 | | | 71,455 | |
Long-term debt | Long-term debt | | 10,000 | | | 10,000 | | Long-term debt | | 18,598 | | | 19,072 | |
Operating lease liabilities | Operating lease liabilities | | 6,337 | | | 6,473 | | Operating lease liabilities | | 6,246 | | | 6,370 | |
Accrued interest and other liabilities | Accrued interest and other liabilities | | 15,066 | | | 19,733 | | Accrued interest and other liabilities | | 15,234 | | | 16,579 | |
TOTAL LIABILITIES | TOTAL LIABILITIES | | 1,692,755 | | | 1,665,025 | | TOTAL LIABILITIES | | 1,720,459 | | | 1,718,446 | |
| COMMITMENTS AND CONTINGENT LIABILITIES | COMMITMENTS AND CONTINGENT LIABILITIES | | — | | | — | | COMMITMENTS AND CONTINGENT LIABILITIES | | — | | | — | |
| SHAREHOLDERS' EQUITY: | SHAREHOLDERS' EQUITY: | | | | | SHAREHOLDERS' EQUITY: | | | | |
Preferred shares – no par value, authorized 1,000,000 shares, none outstanding | Preferred shares – no par value, authorized 1,000,000 shares, none outstanding | | — | | | — | | Preferred shares – no par value, authorized 1,000,000 shares, none outstanding | | — | | | — | |
Common shares – no par value; authorized 19,000,000 shares; issued 14,252,027 and 14,213,792 shares at March 31, 2022 and December 31, 2021, respectively; outstanding 11,401,503 and 12,414,956 shares at March 31, 2022 and December 31, 2021, respectively | | 143,432 | | | 143,130 | | |
Common shares – no par value; authorized 19,000,000 shares; issued 14,320,561 and 14,270,550 shares at March 31, 2023 and December 31, 2022, respectively; outstanding 11,202,063 and 11,259,080 shares at March 31, 2023 and December 31, 2022, respectively | | Common shares – no par value; authorized 19,000,000 shares; issued 14,320,561 and 14,270,550 shares at March 31, 2023 and December 31, 2022, respectively; outstanding 11,202,063 and 11,259,080 shares at March 31, 2023 and December 31, 2022, respectively | | 144,488 | | | 144,069 | |
Retained earnings | Retained earnings | | 128,555 | | | 126,312 | | Retained earnings | | 139,115 | | | 139,249 | |
Treasury shares at cost, 2,850,524 and 1,798,836 shares at March 31, 2022 and December 31, 2021, respectively | | (50,115) | | | (29,029) | | |
Treasury shares at cost, 3,118,498 and 3,011,470 shares at March 31, 2023 and December 31, 2022, respectively | | Treasury shares at cost, 3,118,498 and 3,011,470 shares at March 31, 2023 and December 31, 2022, respectively | | (54,527) | | | (52,689) | |
Accumulated other comprehensive loss, net of taxes | Accumulated other comprehensive loss, net of taxes | | (14,997) | | | (1,809) | | Accumulated other comprehensive loss, net of taxes | | (25,004) | | | (29,954) | |
TOTAL SHAREHOLDERS' EQUITY | TOTAL SHAREHOLDERS' EQUITY | | 206,875 | | | 238,604 | | TOTAL SHAREHOLDERS' EQUITY | | 204,072 | | | 200,675 | |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | $ | 1,899,630 | | | 1,903,629 | | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | $ | 1,924,531 | | | 1,919,121 | |
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)
| | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2022 | | 2021 |
INTEREST INCOME: | | | | | | | | |
Interest and fees on loans | | | | | | $ | 13,786 | | | 14,535 | |
Dividends on equity securities: | | | | | | | | |
With a readily determinable fair value | | | | | | 12 | | | 13 | |
Without a readily determinable fair value | | | | | | 5 | | | 6 | |
Interest on debt securities: | | | | | | | | |
Taxable | | | | | | 1,095 | | | 718 | |
Non-taxable | | | | | | 189 | | | 224 | |
Other investments | | | | | | 35 | | | 39 | |
TOTAL INTEREST INCOME | | | | | | 15,122 | | | 15,535 | |
| | | | | | | | |
INTEREST EXPENSE: | | | | | | | | |
Interest on deposits | | | | | | 739 | | | 1,028 | |
Interest on short-term borrowings | | | | | | 86 | | | 1 | |
Interest on long-term debt | | | | | | 74 | | | 134 | |
TOTAL INTEREST EXPENSE | | | | | | 899 | | | 1,163 | |
NET INTEREST INCOME | | | | | | 14,223 | | | 14,372 | |
PROVISION (CREDIT) FOR LOAN LOSSES | | | | | | 49 | | | (52) | |
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES | | | | | | 14,174 | | | 14,424 | |
| | | | | | | | |
NON-INTEREST INCOME: | | | | | | | | |
Fiduciary income | | | | | | 1,695 | | | 1,529 | |
Service charges and fees on deposit accounts | | | | | | 1,406 | | | 1,366 | |
| | | | | | | | |
Bank owned life insurance income | | | | | | 265 | | | 267 | |
Gains from sales of loans | | | | | | 124 | | | 43 | |
Other operating income | | | | | | 60 | | | 260 | |
TOTAL NON-INTEREST INCOME | | | | | | 3,550 | | | 3,465 | |
| | | | | | | | |
NON-INTEREST EXPENSE: | | | | | | | | |
Salaries and employee benefits | | | | | | 7,215 | | | 6,433 | |
Equipment expenses | | | | | | 408 | | | 368 | |
Occupancy expense, net | | | | | | 775 | | | 794 | |
State financial institutions tax | | | | | | 436 | | | 444 | |
Marketing | | | | | | 262 | | | 268 | |
Amortization of intangibles | | | | | | 140 | | | 257 | |
FDIC insurance premiums, net | | | | | | 126 | | | 113 | |
Contracted services | | | | | | 610 | | | 540 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Other non-interest expense | | | | | | 2,278 | | | 2,275 | |
TOTAL NON-INTEREST EXPENSE | | | | | | 12,250 | | | 11,492 | |
INCOME BEFORE INCOME TAXES | | | | | | 5,474 | | | 6,397 | |
PROVISION FOR INCOME TAXES | | | | | | 951 | | | 1,157 | |
NET INCOME | | | | | | $ | 4,523 | | | 5,240 | |
| | | | | | | | |
Dividends declared per common share | | | | | | $ | 0.20 | | | 0.19 | |
Earnings per common share: | | | | | | | | |
Basic | | | | | | $ | 0.38 | | | 0.41 | |
Diluted | | | | | | 0.38 | | | 0.41 | |
Weighted average common shares outstanding: | | | | | | | | |
Basic | | | | | | 11,818,614 | | | 12,794,824 | |
Diluted | | | | | | 11,818,614 | | | 12,794,852 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
INTEREST INCOME: | | | | | | | | |
Interest and fees on loans | | | | | | $ | 16,143 | | | 13,786 | |
Dividends on equity securities: | | | | | | | | |
With a readily determinable fair value | | | | | | 17 | | | 12 | |
Without a readily determinable fair value | | | | | | 20 | | | 5 | |
Interest on debt securities: | | | | | | | | |
Taxable | | | | | | 1,343 | | | 1,095 | |
Non-taxable | | | | | | 176 | | | 189 | |
Other investments | | | | | | 219 | | | 35 | |
TOTAL INTEREST INCOME | | | | | | 17,918 | | | 15,122 | |
| | | | | | | | |
INTEREST EXPENSE: | | | | | | | | |
Interest on deposits | | | | | | 2,456 | | | 739 | |
Interest on short-term borrowings | | | | | | 1,304 | | | 86 | |
Interest on long-term debt | | | | | | 216 | | | 74 | |
TOTAL INTEREST EXPENSE | | | | | | 3,976 | | | 899 | |
NET INTEREST INCOME | | | | | | 13,942 | | | 14,223 | |
| | | | | | | | |
PROVISION FOR (RECOVERY OF) CREDIT LOSSES | | | | | | (57) | | | 49 | |
NET INTEREST INCOME AFTER PROVISION FOR (RECOVERY OF) CREDIT LOSSES | | | | | | 13,999 | | | 14,174 | |
| | | | | | | | |
NON-INTEREST INCOME: | | | | | | | | |
Fiduciary income | | | | | | 1,740 | | | 1,695 | |
Service charges and fees on deposit accounts | | | | | | 1,482 | | | 1,406 | |
| | | | | | | | |
Bank-owned life insurance income | | | | | | 271 | | | 265 | |
Gains from sales of loans | | | | | | 6 | | | 124 | |
Other operating income | | | | | | 82 | | | 60 | |
TOTAL NON-INTEREST INCOME | | | | | | 3,581 | | | 3,550 | |
| | | | | | | | |
NON-INTEREST EXPENSE: | | | | | | | | |
Salaries and employee benefits | | | | | | 7,349 | | | 7,215 | |
Equipment expenses | | | | | | 361 | | | 408 | |
Occupancy expense, net | | | | | | 963 | | | 775 | |
State financial institutions tax | | | | | | 397 | | | 436 | |
Marketing | | | | | | 192 | | | 262 | |
Amortization of intangibles | | | | | | 111 | | | 140 | |
FDIC insurance premiums, net | | | | | | 215 | | | 126 | |
Contracted services | | | | | | 641 | | | 610 | |
| | | | | | | | |
| | | | | | | | |
Other non-interest expense | | | | | | 2,296 | | | 2,278 | |
TOTAL NON-INTEREST EXPENSE | | | | | | 12,525 | | | 12,250 | |
INCOME BEFORE INCOME TAXES | | | | | | 5,055 | | | 5,474 | |
PROVISION FOR INCOME TAXES | | | | | | 898 | | | 951 | |
NET INCOME | | | | | | $ | 4,157 | | | 4,523 | |
| | | | | | | | |
Earnings per common share: | | | | | | | | |
Basic | | | | | | $ | 0.37 | | | 0.38 | |
Diluted | | | | | | 0.37 | | | 0.38 | |
Weighted average common shares outstanding: | | | | | | | | |
Basic | | | | | | 11,189,170 | | | 11,818,614 | |
Diluted | | | | | | 11,189,170 | | | 11,818,614 | |
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)
| | | | | Three Months Ended March 31, | | | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 | | | | | 2023 | | 2022 |
Net income | Net income | | | | $ | 4,523 | | | 5,240 | | Net income | | | | 4,157 | | | 4,523 | |
Other comprehensive income (loss): | Other comprehensive income (loss): | | | | | | | Other comprehensive income (loss): | | | | | | |
Net unrealized losses on available-for-sale debt securities (net of taxes of $(3,506) and $(915) for the three months ended March 31, 2022 and 2021, respectively) | | | | (13,189) | | | (3,441) | | |
Net unrealized gain (loss) on available-for-sale debt securities (net of taxes of $1,316 and $(3,506) for the three months ended March 31, 2023 and 2022, respectively) | | Net unrealized gain (loss) on available-for-sale debt securities (net of taxes of $1,316 and $(3,506) for the three months ended March 31, 2023 and 2022, respectively) | | | | 4,950 | | | (13,189) | |
| Change in nonqualified pension plan unrecognized net gain and unrecognized prior service cost (net of taxes of $1 and $1 for the three months ended March 31, 2022 and 2021, respectively) | | | | 1 | | | 1 | | |
Other comprehensive loss, net of tax | | | | (13,188) | | | (3,440) | | |
Change in nonqualified pension plan unrecognized net gain and unrecognized prior service cost (net of taxes of $0 and $1 for the three months ended March 31, 2023 and 2022, respectively) | | Change in nonqualified pension plan unrecognized net gain and unrecognized prior service cost (net of taxes of $0 and $1 for the three months ended March 31, 2023 and 2022, respectively) | | | | — | | | 1 | |
Other comprehensive income (loss), net of tax | | Other comprehensive income (loss), net of tax | | | | 4,950 | | | (13,188) | |
TOTAL COMPREHENSIVE INCOME (LOSS) | TOTAL COMPREHENSIVE INCOME (LOSS) | | | | $ | (8,665) | | | 1,800 | | TOTAL COMPREHENSIVE INCOME (LOSS) | | | | 9,107 | | | (8,665) | |
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)
| | | | | Common Shares Outstanding | | Common Stock | | Retained Earnings | | Treasury Shares | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders' Equity |
| Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2023 | | | | | | | | | | | | |
Balance at January 1, 2023 | | Balance at January 1, 2023 | | 11,259,080 | | | $ | 144,069 | | | 139,249 | | | (52,689) | | | (29,954) | | | 200,675 | |
Cumulative change in accounting principle - ASC 326 | | Cumulative change in accounting principle - ASC 326 | | (1,922) | | | (1,922) | |
Balance at January 1, 2023, adjusted | | Balance at January 1, 2023, adjusted | | 11,259,080 | | | 144,069 | | | 137,327 | | | (52,689) | | | (29,954) | | | 198,753 | |
Net income | | Net income | | | | | | 4,157 | | | | | | | 4,157 | |
Other comprehensive income, net of taxes | | Other comprehensive income, net of taxes | | | | | | | | 4,950 | | | 4,950 | |
Dividend Reinvestment and Stock Purchase Plan | | Dividend Reinvestment and Stock Purchase Plan | | 5,861 | | | 103 | | | | | | | 103 | |
| Repurchase of common stock | | Repurchase of common stock | | (107,028) | | | (1,838) | | | (1,838) | |
Shares issued for restricted stock awards | | Shares issued for restricted stock awards | | 44,150 | | |
Compensation expense relating to restricted stock | | Compensation expense relating to restricted stock | | 316 | | | 316 | |
Common stock dividends, $0.21 per share | | Common stock dividends, $0.21 per share | | | | | | (2,369) | | | | | | | (2,369) | |
Balance at March 31, 2023 | | Balance at March 31, 2023 | | 11,202,063 | | | $ | 144,488 | | | 139,115 | | | (54,527) | | | (25,004) | | | 204,072 | |
| | | Common Shares Outstanding | | Common Stock | | Retained Earnings | | Treasury Shares | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders' Equity | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 | Three Months Ended March 31, 2022 | | | | | | | | | | | | | Three Months Ended March 31, 2022 | |
Balance at December 31, 2021 | | 12,414,956 | | | $ | 143,130 | | | 126,312 | | | (29,029) | | | (1,809) | | | 238,604 | | |
Net income | | | | | | 4,523 | | | | | | | 4,523 | | |
Other comprehensive loss, net of taxes | | | | | | | | (13,188) | | | (13,188) | | |
Dividend Reinvestment and Stock Purchase Plan | | 5,681 | | | 105 | | | | | | | 105 | | |
| Repurchase of common stock | | (1,051,688) | | | (21,086) | | | (21,086) | | |
| Compensation expense relating to restricted stock | | 32,554 | | | 197 | | | 197 | | |
Common stock dividends, $0.20 per share | | | | | | (2,280) | | | | | | | (2,280) | | |
Balance at March 31, 2022 | | 11,401,503 | | | $ | 143,432 | | | 128,555 | | | (50,115) | | | (14,997) | | | 206,875 | | |
| | Three Months Ended March 31, 2021 | | |
Balance at December 31, 2020 | | 12,858,325 | | | $ | 142,443 | | | 115,058 | | | (20,719) | | | 4,043 | | | 240,825 | | |
Balance at January 1, 2022 | | Balance at January 1, 2022 | | 12,414,956 | | | $ | 143,130 | | | 126,312 | | | (29,029) | | | (1,809) | | | 238,604 | |
Net income | Net income | | | | | | 5,240 | | | | | | | 5,240 | | Net income | | | | | | 4,523 | | | | | | | 4,523 | |
Other comprehensive loss, net of taxes | Other comprehensive loss, net of taxes | | | | | | | | | | (3,440) | | | (3,440) | | Other comprehensive loss, net of taxes | | | | | | | | | | (13,188) | | | (13,188) | |
Dividend Reinvestment and Stock Purchase Plan | Dividend Reinvestment and Stock Purchase Plan | | 5,472 | | | 99 | | | | | | | | | 99 | | Dividend Reinvestment and Stock Purchase Plan | | 5,681 | | | 105 | | | | | | | | | 105 | |
Repurchase of common stock | Repurchase of common stock | | (70,321) | | | (1,140) | | | (1,140) | | Repurchase of common stock | | (1,051,688) | | | (21,086) | | | (21,086) | |
| Exercise of stock options | | 311 | | | 4 | | | | | 4 | | |
| Shares issued for restricted stock awards, net of forfeitures | | Shares issued for restricted stock awards, net of forfeitures | | 32,554 | | |
Compensation expense relating to restricted stock | Compensation expense relating to restricted stock | | 26,321 | | | 93 | | | 93 | | Compensation expense relating to restricted stock | | 197 | | | 197 | |
Common stock dividends, $0.19 per share | | | | | | (2,435) | | | | | | | (2,435) | | |
Balance at March 31, 2021 | | 12,820,108 | | | $ | 142,639 | | | 117,863 | | | (21,859) | | | 603 | | | 239,246 | | |
Common stock dividends, $0.20 per share | | Common stock dividends, $0.20 per share | | | | | | (2,280) | | | | | | | (2,280) | |
Balance at March 31, 2022 | | Balance at March 31, 2022 | | 11,401,503 | | | $ | 143,432 | | | 128,555 | | | (50,115) | | | (14,997) | | | 206,875 | |
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)
| | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | | 2022 | | 2021 | | | 2023 | | 2022 |
CASH FLOWS FROM OPERATING ACTIVITIES: | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | |
Net income | Net income | | $ | 4,523 | | | 5,240 | | Net income | | $ | 4,157 | | | 4,523 | |
Adjustments to reconcile net income to net cash flows from operating activities: | Adjustments to reconcile net income to net cash flows from operating activities: | | | | | Adjustments to reconcile net income to net cash flows from operating activities: | | | | |
Depreciation, amortization, and accretion | Depreciation, amortization, and accretion | | 772 | | | 308 | | Depreciation, amortization, and accretion | | 720 | | | 772 | |
Provision (credit) for loan losses | | 49 | | | (52) | | |
Deferred income tax provision | | 93 | | | 74 | | |
Increase in cash surrender value of bank owned life insurance | | (265) | | | (267) | | |
Provision for (recovery of) credit losses | | Provision for (recovery of) credit losses | | (57) | | | 49 | |
(Benefit from) provision for deferred income taxes | | (Benefit from) provision for deferred income taxes | | (648) | | | 93 | |
Increase in cash surrender value of bank-owned life insurance | | Increase in cash surrender value of bank-owned life insurance | | (271) | | | (265) | |
| (Gain) loss from equity securities | | 126 | | | (112) | | |
Loss on equity securities | | Loss on equity securities | | 31 | | | 126 | |
| Realized gain from sales of premises and equipment | Realized gain from sales of premises and equipment | | (12) | | | (5) | | Realized gain from sales of premises and equipment | | — | | | (12) | |
| Origination of mortgage loans for sale | Origination of mortgage loans for sale | | (5,159) | | | (1,354) | | Origination of mortgage loans for sale | | (335) | | | (5,159) | |
Realized gains from sales of loans | Realized gains from sales of loans | | (124) | | | (43) | | Realized gains from sales of loans | | (6) | | | (124) | |
Proceeds from sales of mortgage loans | Proceeds from sales of mortgage loans | | 5,223 | | | 1,381 | | Proceeds from sales of mortgage loans | | 338 | | | 5,223 | |
Compensation expense related to restricted stock | Compensation expense related to restricted stock | | 197 | | | 93 | | Compensation expense related to restricted stock | | 316 | | | 197 | |
Changes in: | Changes in: | | | | | Changes in: | | | | |
Accrued interest receivable | Accrued interest receivable | | (365) | | | (328) | | Accrued interest receivable | | (523) | | | (365) | |
Other assets | Other assets | | 3,025 | | | 1,565 | | Other assets | | 597 | | | 3,025 | |
Other liabilities | Other liabilities | | (3,480) | | | (2,461) | | Other liabilities | | (1,827) | | | (3,480) | |
TOTAL ADJUSTMENTS | TOTAL ADJUSTMENTS | | 80 | | | (1,201) | | TOTAL ADJUSTMENTS | | (1,665) | | | 80 | |
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES | NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES | | 4,603 | | | 4,039 | | NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES | | 2,492 | | | 4,603 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | |
| Proceeds from sales of equity securities | | Proceeds from sales of equity securities | | 963 | | | — | |
| Proceeds from maturities and calls of debt securities: | Proceeds from maturities and calls of debt securities: | | Proceeds from maturities and calls of debt securities: | |
Available-for-sale | Available-for-sale | | 9,801 | | | 7,833 | | Available-for-sale | | 2,769 | | | 9,801 | |
Held-to-maturity | Held-to-maturity | | 99 | | | 115 | | Held-to-maturity | | 108 | | | 99 | |
Purchases of equity securities | Purchases of equity securities | | (4) | | | (5) | | Purchases of equity securities | | (7) | | | (4) | |
Purchases of debt securities: | | |
Available-for-sale | | (12,092) | | | (40,759) | | |
Held-to-maturity | | — | | | — | | |
| Purchases of debt securities, available-for-sale | | Purchases of debt securities, available-for-sale | | (300) | | | (12,092) | |
| Net increase in loans | | (9,827) | | | (34,733) | | |
Purchase of Federal Home Loan Bank stock | | Purchase of Federal Home Loan Bank stock | | (3,306) | | | — | |
Proceeds from redemption of Federal Home Loan Bank stock | | Proceeds from redemption of Federal Home Loan Bank stock | | 754 | | | — | |
Net (increase) decrease in loans | | Net (increase) decrease in loans | | 6,912 | | | (9,827) | |
| Purchases of premises and equipment | Purchases of premises and equipment | | (59) | | | (302) | | Purchases of premises and equipment | | (588) | | | (59) | |
Proceeds from sale of premises and equipment | Proceeds from sale of premises and equipment | | 12 | | | 5 | | Proceeds from sale of premises and equipment | | — | | | 12 | |
| NET CASH FLOWS USED IN INVESTING ACTIVITIES | | (12,070) | | | (67,846) | | |
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES | | NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES | | 7,305 | | | (12,070) | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | |
Net increase in deposits | | 7,787 | | | 81,693 | | |
Net increase (decrease) in deposits | | Net increase (decrease) in deposits | | (1,089) | | | 7,787 | |
Net increase in short-term borrowings | Net increase in short-term borrowings | | 24,746 | | | — | | Net increase in short-term borrowings | | 5,045 | | | 24,746 | |
| Principal payments on long-term debt | Principal payments on long-term debt | | — | | | (5,000) | | Principal payments on long-term debt | | (474) | | | — | |
Proceeds from issuance of common stock | Proceeds from issuance of common stock | | 105 | | | 8 | | Proceeds from issuance of common stock | | 103 | | | 105 | |
Repurchase of common stock | Repurchase of common stock | | (21,086) | | | (1,140) | | Repurchase of common stock | | (1,838) | | | (21,086) | |
Proceeds from exercise of stock options | | — | | | 4 | | |
| Cash dividends paid on common stock | Cash dividends paid on common stock | | (2,280) | | | (2,344) | | Cash dividends paid on common stock | | (2,369) | | | (2,280) | |
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES | | 9,272 | | | 73,221 | | |
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES | | NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES | | (622) | | | 9,272 | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | NET CHANGE IN CASH AND CASH EQUIVALENTS | | 1,805 | | | 9,414 | | NET CHANGE IN CASH AND CASH EQUIVALENTS | | 9,175 | | | 1,805 | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | | 18,136 | | | 31,730 | | CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | | 22,701 | | | 18,136 | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 19,941 | | | 41,144 | | CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 31,876 | | | 19,941 | |
| SUPPLEMENTAL CASH FLOW INFORMATION: | SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | SUPPLEMENTAL CASH FLOW INFORMATION: | | | | |
Interest paid | Interest paid | | $ | 836 | | | 1,265 | | Interest paid | | $ | 3,433 | | | 836 | |
Income taxes paid, net of refunds | Income taxes paid, net of refunds | | (468) | | | — | | Income taxes paid, net of refunds | | — | | | (468) | |
| SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES: | | | | | |
| Right-of-use assets obtained in exchange for lease obligations | | — | | | 801 | | |
|
The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NoteNOTE 1 - Basis of PresentationBASIS OF PRESENTATION
Basis of PresentationBASIS 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, 20212022 has been derived from the audited consolidated balance sheet as of that date.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Results of operations for the three months ended March 31, 20222023 are not necessarily indicative of the results to be expected for the full year ending December 31, 2022.2023. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies, and financial notes thereto included in LCNB's 20212022 Annual Report on Form 10-K filed with the SEC.
Accounting ChangesADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards (“FASB”) Accounting Standards Update (“ASU”) No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting"
ASU No. 2020-04 was issued in March 2020 and provides optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. TheOriginally, the amendments in this update arewere effective for all entities as of March 12, 2020 through December 31, 2022. ASU No. 2022-06, "Reference
Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848" extended the sunset date from December 31, 2022 to
December 31, 2024. LCNB has adopted the standard and utilized the LIBOR transition relief allowed under ASU 2020-04 and ASU 2020-06. The impact was immaterial as all loans indexed to LIBOR were transitioned to another referenced index, predominately the Secured Overnight Financing Rate ("SOFR") for one, three, and six months. In all instances, LCNB was able to meet the criteria for the practical expedients and there was no impact on it's results of consolidated operations or financial position.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 1 - BASIS OF PRESENTATION (continued)
ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments" ("ASC 326")
The Company adopted ASC 326 on January 1, 2023. It significantly changed guidance for recognizing impairment of financial instruments. Previous guidance required an "incurred loss" methodology for recognizing credit losses that delayed recognition until it was probable a loss had been incurred. ASC 326 replaced the incurred loss impairment methodology with a new "current expected credit loss" ("CECL") methodology that reflects expected credit losses over the lives of the credit instruments and requires consideration of a broader range of information to estimate credit losses. ASC 326 requires an organization to estimate all expected credit losses for financial assets measured at amortized cost, including loans and held-to-maturity debt securities, based on historical experience, current conditions, and reasonable and supportable forecasts. It also applies to off-balance sheet credit exposures, such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. ASC 326 also made changes to the accounting for credit losses on available-for-sale debt securities. Additional disclosures are required.
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, 2013 (in thousands):
| | | | | | | | | | | | | | | | | |
| As Reported Pre-ASC 326 | | Impact of ASC 326 Adoption | | As Reported Under ASC 326 |
| | | | | |
Assets: | | | | | |
Loans, gross of allowance | $ | 1,401,278 | | | 341 | | | 1,401,619 | |
ACL on loans | (5,646) | | | (2,196) | | | (7,842) | |
ACL on debt securities, held to maturity | — | | | (7) | | | (7) | |
Deferred tax assets, net | 6,639 | | | 511 | | | 7,150 | |
| | | | | |
Liabilities: | | | | | |
ACL on off-balance sheet credit exposures | — | | | 571 | | | 571 | |
| | | | | |
Shareholders' Equity: | | | | | |
Retained earnings | 139,249 | | | (1,922) | | | 137,327 | |
ACL - LOANS
The allowance for credit losses ("ACL") is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes that the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as changes in external conditions, such as changes in unemployment rates, property values, or other relevant factors.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 1 - BASIS OF PRESENTATION (continued)
Accrued interest receivable totaling $6.5 million at March 31, 2023 was excluded from the amortized cost basis of the estimate of credit losses and is reported in interest receivable on the consolidated condensed balance sheets. Loans are generally placed on non-accrual status at 90 days past due or when the borrower's ability to repay becomes doubtful. When a loan is placed on non-accrual status, any accrued interest is reversed and charged against interest income.
ACL - LOANS - COLLECTIVELY EVALUATED
The ACL is measured on a collective pool basis when similar risk characteristics exist. LCNB has identified the following portfolio segments:
•Commercial and industrial loans
•Commercial, secured by real estate
•Real estate loans secured by owner occupied commercial real estate
•Real estate loans secured by non-owner occupied commercial real estate
•Real estate loans secured by farms
•Real estate loans secured by multi-family dwellings
•Construction loans secured by 1-4 family dwellings
•Construction loans secured by other real estate
•Residential real estate
•Residential real estate loans secured by senior liens on 1-4 family dwellings
•Residential real estate loans secured by junior liens on 1-4 family dwellings
•Home equity line of credit loans
•Consumer loans
•Agricultural loans not secured by real estate
•DDA Overdrafts
Measures of the allowance for credit loss are as follows:
| | | | | | | | | | | |
Portfolio Segment | Pool | Methodology | Loss Driver(s) |
Agricultural | Ag Production and Other Farm | Remaining Life | N/A |
Commercial & industrial | Commercial & Industrial | Discounted Cash Flow | Weighted Combined MSA Unemployment and Coincident Economic Activity (CEA) Index for Ohio |
Commercial, secured by real estate | Commercial Real Estate (CRE) Non-Owner Occupied | Discounted Cash Flow | Weighted Combined MSA Unemployment |
Commercial, secured by real estate | Commercial Real Estate (CRE) Owner Occupied | Discounted Cash Flow | Weighted Combined MSA Unemployment and Moody's Commercial Real Estate Price Indexes (CREPI) - US Commercial |
Commercial, secured by real estate | Farm Real Estate | Remaining Life | N/A |
Residential real estate | Home Equity Line | Discounted Cash Flow | Weighted Combined MSA Unemployment |
Consumer | Installment - Direct and ODP (Consumer) | Discounted Cash Flow | Weighted Combined MSA Unemployment |
Consumer | Letter of Credit | Discounted Cash Flow/Manual | N/A |
Commercial, secured by real estate | Multifamily | Discounted Cash Flow | Weighted Combined MSA Unemployment |
Commercial, secured by real estate | Other Construction, Land Development, and Other Land | Discounted Cash Flow | Weighted Combined MSA Unemployment and Weighted Combined MSA Home Price Index |
Consumer | Overdrafts | Manual | N/A |
Other | Other Loans | Remaining Life | N/A |
Residential real estate | Real Estate Mortgage | Discounted Cash Flow | Weighted Combined MSA Unemployment |
Residential real estate | Residential 1-4 Family Construction | Discounted Cash Flow | Weighted Combined MSA Unemployment and Weighted Combined MSA Home Price Index |
Residential real estate | Second Mortgage (Residential) | Discounted Cash Flow | Weighted Combined MSA Unemployment |
*MSA referenced above combines forecasts for Cincinnati, Dayton and Columbus metro areas.
**Weighted referenced above refers to weighted average of baseline and alternative scenarios
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 1 - BASIS OF PRESENTATION (continued)
Management has chosen the discounted cash flow ("DCF") methodology to estimate the quantitative portion of the allowance for credit losses on loans for all loan pools except for the farm real estate and agricultural pools, which use the weighted average remaining maturity ("WARM") methodology. A Loss Driver Analysis (“LDA”) was performed for each segment to identify potential loss drivers and create a regression model for use in forecasting cash flows. The LDA analyses for all DCF-based pools utilized LCNB’s data and peer data from the Federal Financial Institutions Examination Council's (“FFIEC”) Call Report filings.
In creating the DCF model, as well as reviewing the model quarterly, management established a one-quarter reasonable and supportable forecast period with a two-quarter straight line reversion to the long-term historical average. Due to the infrequency of losses within the farm real estate and agricultural loan portfolios, LCNB elected to use peer data for a more statistically sound calculation.
Key assumptions in the DCF model include the probability of default (“PD”), loss given default (“LGD”), and prepayment/curtailment rates. The model-driven PD and LGD are derived using company specific historical data. Prepayment and curtailment rates were calculated using third party studies of LCNB's data.
Expected credit losses are estimated over the contractual term of the loans, adjusted for prepayments when appropriate. The contractual term excludes extensions, renewals, and modifications unless the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
Qualitative factors for the DCF and WARM methodologies include the following:
•Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the Company operates that affect the collectability of financial assets;
•The effect of other external factors such as the regulatory, legal and technological environments, competition, and events such as natural disasters or pandemics; and
•Model risk including statistical risk, reversion risk, timing risk, and model limitation risk.
ACL - LOANS - INDIVIDUALLY EVALUATED
Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation.
Management has determined that any loans which have been placed on non-performing status will be individually evaluated. When management determines that foreclosure is probable, expected credit losses for collateral dependent loans are based on the estimated fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of the collateral. Other non-performing loans may estimate fair value using either the collateral valuation or the net present value of expected future cash receipts, depending on the financial situation of the borrower.
ACL - HELD-TO-MATURITY (“HTM”) DEBT SECURITIES
Expected credit losses on HTM debt securities are measured on a collective basis by major security type. Accrued interest receivable on HTM securities totaled $188,000 at March 31, 2023 and is excluded from the estimate of credit losses. The HTM securities portfolio consists of taxable and nontaxable municipal securities from local governmental entities. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. At the time of adoption, the estimated reserve was immaterial.
ACL - AVAILABLE-FOR-SALE (“AFS”) DEBT SECURITIES
For AFS debt securities in an unrealized loss position, LCNB first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any decline in fair value that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 1 - BASIS OF PRESENTATION (continued)
Changes in the ACL are recorded as a provision for (or recovery of) credit loss expense. Losses are charged against allowance when management believes that uncollectability of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest receivable on AFS debt securities totaled $1.3 million at March 31, 2023 and is excluded from the estimate of credit losses.
ACL - OFF-BALANCE SHEET CREDIT EXPOSURES
LCNB estimates expected credit losses over the contractual period during which it is exposed to credit risk by a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate is made of expected credit losses on commitments expected to be funded over their estimated lives. Funding rates are based on a historical analysis of the Company’s portfolio, while estimates of credit losses are determined using the same loss rates as funded loans.
REGULATORY CAPITAL
Federal banking regulatory agencies allow an optional phase-in period of three years for banks to absorb the impact to regulatory capital of implementing CECL. LCNB has elected not to exercise this option and the full impact of adopting ASU No. 2016-13 is included in regulatory capital as of March 31, 2023. Adoption of the ASU did not materially affect LCNB's regulatory capital ratios.
ASU No. 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures"
ASU No. 2022-02 was issued in March 2022 and became effective for LCNB on January 1, 2023. These amendments eliminated previous TDR recognition and measurement guidance and, instead, required that an entity evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance disclosure requirements and introduce new disclosure requirements for certain modifications to borrowers experiencing financial difficulties. Additionally, the amendments require the disclosure of current-period gross charge-offs by year of origination.
RECENT ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE
From time to time the FASB issues an ASU to communicate changes to U.S. GAAP. The following information provides brief summaries of newly issued but not yet effective ASUs that could have an effect on LCNB’s financial position or results of consolidated operations:
ASU No. 2023-02, "Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a Consensus of the Emerging Issues Task Force)"
ASU No. 2023-02 was issued in March 2023 and allows reporting entities the option to use the proportional amortization method to account for equity investments made primarily for the purpose of receiving income tax credits and other income tax benefits when certain requirements are met, regardless of the tax credit program from which the income tax credits are received. The proportional amortization method was previously limited to Low-Income Housing Tax Credit investments. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense (benefit). For public business entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted. LCNB does not expect the guidance inadoption of ASU No. 2020-04 will2023-02 to have a material impact on its results of consolidated operations or financial position.
ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans"
ASU No. 2018-14 was issued in August 2018 and was adopted by LCNB on January 1, 2021. The amendments in this update modify disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans, including the deletion, modification, and addition of certain targeted disclosures. The amendments are to be applied on a retrospective basis to all periods presented upon adoption. Adoption of ASU No. 2018-14 did not have a material impact on LCNB's results of consolidated operations or financial position.
ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes"
ASU No. 2019-12 was issued in December 2019 and adopted by LCNB on January 1, 2021. It simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifies and amends certain other guidance. Adoption of ASU No. 2019-12 did not have a material impact on LCNB's results of consolidated operations or financial position.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NoteNOTE 2 - Investment SecuritiesINVESTMENT SECURITIES
The amortized cost and estimated fair value of equitydebt securities and debtthe allowance for credit losses of securities held-to-maturity at March 31, 20222023 and December 31, 20212022 are summarized as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
March 31, 2023 | | | | | | | |
Debt Securities, Available-for-Sale: | | | | | | | |
U.S. Treasury notes | $ | 84,865 | | | — | | | 6,968 | | | 77,897 | |
U.S. Agency notes | 89,093 | | | — | | | 9,257 | | | 79,836 | |
Corporate bonds | 7,450 | | | — | | | 823 | | | 6,627 | |
U.S. Agency mortgage-backed securities | 88,229 | | | 8 | | | 9,847 | | | 78,390 | |
Municipal securities: | | | | | | | |
Non-taxable | 8,872 | | | — | | | 284 | | | 8,588 | |
Taxable | 46,533 | | | 2 | | | 4,446 | | | 42,089 | |
| $ | 325,042 | | | 10 | | | 31,625 | | | 293,427 | |
| | | | | | | |
Debt Securities, Held-to-Maturity: | | | | | | | |
Municipal securities: | | | | | | | |
Non-taxable | $ | 16,339 | | | 10 | | | 984 | | | 15,365 | |
Taxable | 3,431 | | | — | | | 354 | | | 3,077 | |
| $ | 19,770 | | | 10 | | | 1,338 | | | 18,442 | |
| | | | | | | |
| | | | | | | |
December 31, 2022 | | | | | | | |
Debt Securities, Available-for-Sale: | | | | | | | |
U.S. Treasury notes | $ | 84,927 | | | — | | | 8,480 | | | 76,447 | |
U.S. Agency notes | 89,160 | | | — | | | 11,184 | | | 77,976 | |
Corporate Bonds | 7,450 | | | 13 | | | 778 | | | 6,685 | |
U.S. Agency mortgage-backed securities | 90,746 | | | 5 | | | 11,311 | | | 79,440 | |
Municipal securities: | | | | | | | — | |
Non-taxable | 8,892 | | | — | | | 368 | | | 8,524 | |
Taxable | 46,556 | | | 1 | | | 5,779 | | | 40,778 | |
| $ | 327,731 | | | $ | 19 | | | 37,900 | | | 289,850 | |
| | | | | | | |
Debt Securities, Held-to-Maturity: | | | | | | | |
Municipal securities: | | | | | | | |
Non-taxable | $ | 16,447 | | | 10 | | | 594 | | | 15,863 | |
Taxable | 3,431 | | | — | | | 409 | | | 3,022 | |
| $ | 19,878 | | | 10 | | | 1,003 | | | 18,885 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
March 31, 2022 | | | | | | | |
Debt Securities, Available-for-Sale: | | | | | | | |
U.S. Treasury notes | $ | 79,477 | | | 2 | | | 4,746 | | | 74,733 | |
U.S. Agency notes | 89,282 | | | — | | | 6,536 | | | 82,746 | |
Corporate bonds | 6,200 | | | 44 | | | 317 | | | 5,927 | |
U.S. Agency mortgage-backed securities | 91,497 | | | 110 | | | 4,807 | | | 86,800 | |
Municipal securities: | | | | | | | |
Non-taxable | 8,496 | | | 5 | | | 228 | | | 8,273 | |
Taxable | 37,151 | | | 88 | | | 2,254 | | | 34,985 | |
| $ | 312,103 | | | 249 | | | 18,888 | | | 293,464 | |
| | | | | | | |
Debt Securities, Held-to-Maturity: | | | | | | | |
Municipal securities: | | | | | | | |
Non-taxable | $ | 19,304 | | | 43 | | | 309 | | | 19,038 | |
Taxable | 3,569 | | | — | | | 198 | | | 3,371 | |
| $ | 22,873 | | | 43 | | | 507 | | | 22,409 | |
| | | | | | | |
December 31, 2021 | | | | | | | |
Debt Securities, Available-for-Sale: | | | | | | | |
U.S. Treasury notes | $ | 75,443 | | | 57 | | | 756 | | | 74,744 | |
U.S. Agency notes | 89,293 | | | 45 | | | 2,092 | | | 87,246 | |
Corporate Bonds | 5,200 | | | 70 | | | 118 | | | 5,152 | |
U.S. Agency mortgage-backed securities | 96,018 | | | 1,350 | | | 692 | | | 96,676 | |
Municipal securities: | | | | | | | |
Non-taxable | 8,959 | | | 125 | | | 18 | | | 9,066 | |
Taxable | 35,208 | | | 531 | | | 446 | | | 35,293 | |
| $ | 310,121 | | | 2,178 | | | 4,122 | | | 308,177 | |
| | | | | | | |
Debt Securities, Held-to-Maturity: | | | | | | | |
Municipal securities: | | | | | | | |
Non-taxable | $ | 19,403 | | | 98 | | | — | | | 19,501 | |
Taxable | 3,569 | | | 21 | | | 4 | | | 3,586 | |
| $ | 22,972 | | | 119 | | | 4 | | | 23,087 | |
The Company estimated the expected credit losses at March 31, 2023 to be immaterial based on the composition of the securities portfolio.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NoteNOTE 2 - Investment SecuritiesINVESTMENT SECURITIES (continued)
Information concerning debt securities with gross unrealized losses at March 31, 20222023 and December 31, 2021,2022, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (dollars in thousands):
| | | Less than Twelve Months | | Twelve Months or Greater | | Less than Twelve Months | | Twelve Months or Greater |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
March 31, 2022 | | | | | | | | |
March 31, 2023 | | March 31, 2023 | | | | | | | |
Available-for-Sale: | Available-for-Sale: | | Available-for-Sale: | |
U.S. Treasury notes | U.S. Treasury notes | $ | 73,736 | | | 4,746 | | | — | | | — | | U.S. Treasury notes | $ | 6,577 | | | 26 | | | 71,321 | | | 6,942 | |
U.S. Agency notes | U.S. Agency notes | 35,960 | | | 2,316 | | | 46,786 | | | 4,220 | | U.S. Agency notes | — | | | — | | | 79,835 | | | 9,257 | |
Corporate bonds | Corporate bonds | 4,536 | | | 264 | | | 647 | | | 53 | | Corporate bonds | 1,871 | | | 79 | | | 4,756 | | | 744 | |
U.S. Agency mortgage-backed securities | U.S. Agency mortgage-backed securities | 58,478 | | | 2,739 | | | 20,942 | | | 2,068 | | U.S. Agency mortgage-backed securities | 5,891 | | | 104 | | | 71,902 | | | 9,743 | |
Municipal securities: | Municipal securities: | | | | | Municipal securities: | | | | |
Non-taxable | Non-taxable | 6,088 | | | 228 | | | — | | | — | | Non-taxable | 1,579 | | | 6 | | | 5,959 | | | 278 | |
Taxable | Taxable | 21,200 | | | 1,387 | | | 7,667 | | | 867 | | Taxable | 5,529 | | | 169 | | | 36,378 | | | 4,277 | |
| | $ | 199,998 | | | 11,680 | | | 76,042 | | | 7,208 | | | $ | 21,447 | | | 384 | | | 270,151 | | | 31,241 | |
| Held-to-Maturity: | Held-to-Maturity: | | Held-to-Maturity: | |
Municipal securities: | Municipal securities: | | Municipal securities: | |
Non-taxable | Non-taxable | $ | 7,434 | | | 309 | | | — | | | — | | Non-taxable | $ | 6,759 | | | 508 | | | 6,932 | | | 476 | |
Taxable | Taxable | 3,371 | | | 198 | | | — | | | — | | Taxable | — | | | — | | | 3,077 | | | 354 | |
| | $ | 10,805 | | | 507 | | | — | | | — | | | $ | 6,759 | | | 508 | | | 10,009 | | | 830 | |
| December 31, 2021 | | |
December 31, 2022 | | December 31, 2022 | |
Available-for-Sale: | Available-for-Sale: | | Available-for-Sale: | |
U.S. Treasury notes | U.S. Treasury notes | $ | 66,891 | | | 756 | | | — | | | — | | U.S. Treasury notes | $ | 16,521 | | | 931 | | | 59,927 | | | 7,549 | |
U.S. Agency notes | U.S. Agency notes | 58,648 | | | 1,257 | | | 20,289 | | | 835 | | U.S. Agency notes | 7,729 | | | 543 | | | 70,247 | | | 10,641 | |
Corporate Bonds | Corporate Bonds | 3,898 | | | 102 | | | 484 | | | 16 | | Corporate Bonds | 2,667 | | | 283 | | | 3,255 | | | 495 | |
U.S. Agency mortgage-backed securities | U.S. Agency mortgage-backed securities | 49,813 | | | 692 | | | — | | | — | | U.S. Agency mortgage-backed securities | 41,543 | | | 3,597 | | | 37,282 | | | 7,714 | |
Municipal securities: | Municipal securities: | | | | | | | Municipal securities: | | | | | | |
Non-taxable | Non-taxable | 1,020 | | | 18 | | | — | | | — | | Non-taxable | 6,831 | | | 248 | | | 893 | | | 120 | |
Taxable | Taxable | 18,434 | | | 322 | | | 3,535 | | | 124 | | Taxable | 22,162 | | | 1,951 | | | 18,435 | | | 3,828 | |
| | $ | 198,704 | | | 3,147 | | | 24,308 | | | 975 | | | $ | 97,453 | | | 7,553 | | | 190,039 | | | 30,347 | |
| Held-to-Maturity: | Held-to-Maturity: | | Held-to-Maturity: | |
Municipal securities: | Municipal securities: | | Municipal securities: | |
Non-taxable | Non-taxable | $ | 46 | | | — | | | — | | | — | | Non-taxable | $ | 9,567 | | | 593 | | | 31 | | | 1 | |
Taxable | Taxable | 271 | | | 4 | | | — | | | — | | Taxable | 2,811 | | | 370 | | | 212 | | | 39 | |
| | $ | 317 | | | 4 | | | — | | | — | | | $ | 12,378 | | | 963 | | | 243 | | | 40 | |
ManagementLCNB has determinednot specifically identified available-for-sale securities in a loss position that it intends to sell in the unrealized losses at March 31, 2022 are primarily due to fluctuations in market interest ratesnear term and do not reflect credit quality deterioration of the securities. Because LCNB does not have the intent to sell the investments andbelieve that it is more likely than not that LCNB will not be required to sell any such securities. Securities are reviewed on a quarterly basis to assess declines in fair value for credit losses. Consideration is given to such factors as the investments before recoverycredit rating of their amortized cost bases, which may be at maturity, LCNB does not consider these investmentsthe borrower, market conditions such as current interest rates, any adverse conditions specific to be other-than-temporarily impaired.
the security, and delinquency status on contractual payments. For the three months ended March 31, 2023 and 2022, management concluded that, in all instances, fair values were less than carrying values due to market and other factors and that no credit loss provisions were required.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NoteNOTE 2 - Investment SecuritiesINVESTMENT SECURITIES (continued)
Debt securities with a market value of $129.0 million and $166.4 million at March 31, 2023 and December 31, 2022, respectively, were pledged to secure public deposits and for other purposes required or as permitted by law.
Excluding holdings in U.S. Treasury securities and U.S. Government Agencies, there were no investments in securities of any
issuer that exceeded 10% of LCNB's consolidated shareholders' equity at March 31, 2023.
Contractual maturities of debt securities at March 31, 20222023 were as follows (in thousands). Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations.
| | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-Sale | | Held-to-Maturity |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Due within one year | $ | 522 | | | 524 | | | 1,867 | | | 1,867 | |
Due from one to five years | 90,192 | | | 85,832 | | | 4,960 | | | 4,818 | |
Due from five to ten years | 129,163 | | | 119,631 | | | 2,894 | | | 2,785 | |
Due after ten years | 729 | | | 677 | | | 13,152 | | | 12,939 | |
| 220,606 | | | 206,664 | | | 22,873 | | | 22,409 | |
U.S. Agency mortgage-backed securities | 91,497 | | | 86,800 | | | — | | | — | |
| $ | 312,103 | | | 293,464 | | | 22,873 | | | 22,409 | |
Debt securities with a market value of $140,418,000 and $128,426,000 at March 31, 2022 and December 31, 2021, respectively, were pledged to secure public deposits and for other purposes required or as permitted by law. | | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-Sale | | Held-to-Maturity |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Due within one year | $ | 15,219 | | | 15,060 | | | 755 | | | 754 | |
Due from one to five years | 145,761 | | | 132,899 | | | 3,628 | | | 3,501 | |
Due from five to ten years | 75,103 | | | 66,423 | | | 2,440 | | | 2,290 | |
Due after ten years | 730 | | | 655 | | | 12,947 | | | 11,897 | |
| 236,813 | | | 215,037 | | | 19,770 | | | 18,442 | |
U.S. Agency mortgage-backed securities | 88,229 | | | 78,390 | | | — | | | — | |
| $ | 325,042 | | | 293,427 | | | 19,770 | | | 18,442 | |
0EquityEquity securities with a readily determinable fair value are carried at fair value, with changes in fair value recognized in other operating income in the consolidated condensed statements of income. Equity securities without a readily determinable fair value are measured at cost minus impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions, as defined, for identical or similar investments of the same issuer. LCNB was not aware of any impairment or observable price change adjustments that needed to be made at March 31, 20222023 on its investments in equity securities without a readily determinable fair value.
The cost and estimated fair value of equity securities with a readily determinable fair value at March 31, 20222023 and December 31, 20212022 are summarized as follows (in thousands):
| | | March 31, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| | Cost | | Fair Value | | Cost | | Fair Value | | AmortizedCost | | Fair Value | | Amortized Cost | | Fair Value |
Mutual funds | Mutual funds | $ | 1,414 | | | 1,317 | | | 1,410 | | | 1,379 | | Mutual funds | $ | 1,391 | | | 1,219 | | | 1,429 | | | 1,234 | |
Equity securities | Equity securities | 778 | | | 1,107 | | | 778 | | | 1,167 | | Equity securities | 10 | | | 67 | | | 778 | | | 1,039 | |
Total equity securities with a readily determinable fair value | Total equity securities with a readily determinable fair value | $ | 2,192 | | | 2,424 | | | 2,188 | | | 2,546 | | Total equity securities with a readily determinable fair value | $ | 1,401 | | | 1,286 | | | 2,207 | | | 2,273 | |
Changes in the fair value of equity securities with a readily determinable fair value for the three months ended March 31, 2023 and 2022 and 2021 were due solely to changes in unrealized gains and losses.as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Net losses recognized | | | | | (31) | | | (126) | |
Less net realized gains on equity securities sold | | | | | 151 | | | — | |
Net unrealized losses recognized and still held at period end | | | | | (182) | | | (126) | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NoteNOTE 3 - LoansLOANS
Major classifications of loans at March 31, 20222023 and December 31, 20212022 were as follows (in thousands):
| | | March 31, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
Commercial & industrial | Commercial & industrial | $ | 105,809 | | | 101,598 | | Commercial & industrial | $ | 124,354 | | | 120,327 | |
Commercial, secured by real estate | Commercial, secured by real estate | 904,562 | | | 887,679 | | Commercial, secured by real estate | 930,506 | | | 936,255 | |
Residential real estate | Residential real estate | 328,574 | | | 335,106 | | Residential real estate | 303,610 | | | 306,128 | |
Consumer | Consumer | 32,541 | | | 34,291 | | Consumer | 28,745 | | | 28,414 | |
Agricultural | Agricultural | 7,990 | | | 10,649 | | Agricultural | 7,553 | | | 10,073 | |
Other loans, including deposit overdrafts | Other loans, including deposit overdrafts | 45 | | | 122 | | Other loans, including deposit overdrafts | 62 | | | 81 | |
Loans, gross | Loans, gross | 1,379,521 | | | 1,369,445 | | Loans, gross | 1,394,830 | | | 1,401,278 | |
Less allowance for loan losses | Less allowance for loan losses | 5,530 | | | 5,506 | | Less allowance for loan losses | 7,858 | | | 5,646 | |
Loans, net | Loans, net | $ | 1,373,991 | | | 1,363,939 | | Loans, net | $ | 1,386,972 | | | 1,395,632 | |
Loans in the above table are shown net of deferred origination fees and costs. Deferred origination fees, net of related costs, were $928,000$865,000 and $961,000$980,000 at March 31, 20222023 and December 31, 2021,2022, respectively.
Non-accrual past-due, and accruing restructured loans by class of receivable as of March 31, 20222023 and December 31, 20212022 were as follows (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Non-accrual loans: | | | |
| | | |
Commercial, secured by real estate | $ | 1,173 | | | 1,182 | |
Residential real estate | 282 | | | 299 | |
| | | |
| | | |
Total non-accrual loans | 1,455 | | | 1,481 | |
Past-due 90 days or more and still accruing | — | | | 56 | |
Total non-accrual and past-due 90 days or more and still accruing | 1,455 | | | 1,537 | |
Accruing troubled debt restructured loans | 2,280 | | | 2,622 | |
Total | $ | 3,735 | | | 4,159 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Non-accrual Loans with no Allowance for Credit Losses | | Total Non-accrual Loans | | Interest Income Recognized | | Non-accrual Loans with no Allowance for Credit Losses | | Total Non-accrual Loans | | Interest Income Recognized |
Commercial & industrial | $ | 6 | | | 24 | | | — | | | $ | — | | | — | | | 3 | |
Commercial, secured by real estate: | | | | | | | | | | | |
Owner occupied | 228 | | | 228 | | | 1 | | | 231 | | | 231 | | | 15 | |
Non-owner occupied | — | | | — | | | — | | | — | | | — | | | — | |
Farms | 88 | | | 88 | | | — | | | 88 | | | 88 | | | 12 | |
Multi-family | — | | | — | | | — | | | — | | | — | | | — | |
Construction loans secured by 1-4 family dwellings | — | | | — | | | — | | | — | | | — | | | — | |
Construction loans secured by other real estate | — | | | — | | | — | | | — | | | — | | | — | |
Residential real estate: | | | | | | | | | | | |
Secured by senior liens on 1-4 family dwellings | 361 | | | 361 | | | 2 | | | 72 | | | 72 | | | 4 | |
Secured by junior liens on 1-4 family dwellings | — | | | — | | | — | | | — | | | — | | | — | |
Home equity line-of-credit loans | — | | | — | | | — | | | — | | | — | | | — | |
Consumer | — | | | — | | | — | | | — | | | — | | | — | |
Agricultural | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | 683 | | | 701 | | | 3 | | | $ | 391 | | | 391 | | | 34 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NoteNOTE 3 – LoansLOANS (continued)
Two residential real estate loans secured by senior liens on 1-4 family dwellings were added to the non-accrual classification during the first quarter of 2023. Accrued interest reversed and charged against interest income for these loans totaled approximately $3,000.
The ratio of non-accrual loans to total loans outstanding at March 31, 2023 and December 31, 2022 was 0.05% and 0.03%, respectively. The ratio of the allowance for loancredit losses for the three months endedloans to total non-accrual loans at March 31, 2023 and December 31, 2022 was 1,121.09% and 2021 were1,445.88%, respectively.
ALLOWANCE FOR CREDIT LOSSES
The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost, which is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. A provision for credit losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors as follows (in thousands):discussed within Note 1 – Nature of Operations and Summary of Significant Accounting Policies included in this Form 10-Q.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial & Industrial | | Commercial, Secured by Real Estate | | Residential Real Estate | | Consumer | | Agricultural | | Other | | Total |
|
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Three Months Ended March 31, 2022 |
Balance, beginning of year | $ | 1,095 | | | 3,607 | | | 665 | | | 105 | | | 30 | | | 4 | | | 5,506 | |
Provision (credit) charged to expenses | 202 | | | (113) | | | (22) | | | (27) | | | (12) | | | 21 | | | 49 | |
Losses charged off | — | | | — | | | (5) | | | (5) | | | — | | | (27) | | | (37) | |
Recoveries | — | | | — | | | 1 | | | — | | | — | | | 11 | | | 12 | |
Balance, end of period | $ | 1,297 | | | 3,494 | | | 639 | | | 73 | | | 18 | | | 9 | | | 5,530 | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Three Months Ended March 31, 2021 |
Balance, beginning of year | $ | 816 | | | 3,903 | | | 837 | | | 153 | | | 28 | | | (9) | | | 5,728 | |
Provision (credit) charged to expenses | 141 | | | (267) | | | 71 | | | (20) | | | 11 | | | 12 | | | (52) | |
Losses charged off | — | | | (2) | | | (16) | | | (3) | | | — | | | (21) | | | (42) | |
Recoveries | — | | | — | | | 27 | | | 1 | | | — | | | 17 | | | 45 | |
Balance, end of period | $ | 957 | | | 3,634 | | | 919 | | | 131 | | | 39 | | | (1) | | | 5,679 | |
During the first quarter of 2023, the Company adopted ASU 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 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 analysis utilized peer FFIEC Call Report data for all pools. The Company plans to update the LDA when materially relevant.
•Probability of default – PD is the probability that an asset will be in default within a given time frame. The Company has defined default as when a charge-off has occurred, a loan goes to non-accrual status, a loan is greater than 90 days past due, or financial difficulty modification status change. The forecast model is utilized to estimate PDs.
•Loss given default – LGD is the percentage of the asset not expected to be collected due to default. The LGD is derived from company specific loss data.
•Prepayments and curtailments – Prepayments and curtailments are calculated based on the Company’s own data. This analysis is updated annually.
•Forecast and reversion – the Company as of January 1, 2023 established a one-quarter reasonable and supportable forecast period with a one-quarter straight line reversion to the long-term historical average. As of March 31, 2023, the Company established a one-quarter reasonable and supportable forecast period with a two-quarter straight line reversion to the long-term 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 January 1, 2023, the date of CECL adoption, the Company selected a forecast which forecasted unemployment between 4.16% and 4.43%, the change in Coincident Economic Activity between 0.82% and 1.77%, the change in Commercial Real Estate Price Indexes between 5% and 9%, and change in Home Price Index between -(6%) and -(1%) during the forecast and reversion periods. As of March 31, 2023, the Company selected a forecast which forecasts unemployment between 4.11% and 4.76%, the change in Coincident Economic Activity between 0.64% and 0.87%, the change in Commercial Real Estate Price Indexes between 12% and 16%, and change in Home Price Index between -(5%) and -(2%) during the forecast and reversion periods.. Management believes that the resulting quantitative reserve appropriately balances economic indicators with identified risks.
QUALITATIVE CONSIDERATIONS
In addition to the quantitative model, management considers the need for qualitative adjustment for risks not considered in the DCF. Factors that are considered by management in determining loan collectability and the appropriate level of the ACL are listed below:
•Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the Company operates that affect the collectability of financial assets;
•The effect of other external factors such as the regulatory, legal and technological environments, competition, and events such as natural disasters or pandemics.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NoteNOTE 3 – LoansLOANS (continued)
A breakdown of•Model risk including statistical risk, reversion risk, timing risk and model limitation risk;
The following table presents activity in the allowance for loancredit losses andby portfolio segment for the loan portfolio by loan segment atthree months ended March 31, 20222023 and December 31, 2021 were as follows2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial & Industrial | | Commercial, Secured by Real Estate | | Residential Real Estate | | Consumer | | Agricultural | | Other | | Total |
March 31, 2022 | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 5 | | | 12 | | | 9 | | | — | | | — | | | — | | | 26 | |
Collectively evaluated for impairment | 1,292 | | | 3,482 | | | 630 | | | 73 | | | 18 | | | 9 | | | 5,504 | |
Acquired credit impaired loans | — | | | — | | | — | | | — | | | — | | | 0 | | — | |
Balance, end of period | $ | 1,297 | | | 3,494 | | | 639 | | | 73 | | | 18 | | | 9 | | | 5,530 | |
| | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 145 | | | 2,617 | | | 535 | | | — | | | — | | | — | | | 3,297 | |
Collectively evaluated for impairment | 105,585 | | | 900,396 | | | 326,901 | | | 32,541 | | | 7,990 | | | 45 | | | 1,373,458 | |
Acquired credit impaired loans | 79 | | | 1,549 | | | 1,138 | | | — | | | — | | | — | | | 2,766 | |
Balance, end of period | $ | 105,809 | | | 904,562 | | | 328,574 | | | 32,541 | | | 7,990 | | | 45 | | | 1,379,521 | |
| | | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 5 | | | 11 | | | 9 | | | — | | | — | | | — | | | 25 | |
Collectively evaluated for impairment | 1,090 | | | 3,596 | | | 656 | | | 105 | | | 30 | | | 4 | | | 5,481 | |
Acquired credit impaired loans | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Balance, end of period | $ | 1,095 | | | 3,607 | | | 665 | | | 105 | | | 30 | | | 4 | | | 5,506 | |
| | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 155 | | | 2,945 | | | 559 | | | — | | | — | | | — | | | 3,659 | |
Collectively evaluated for impairment | 101,355 | | | 883,122 | | | 333,384 | | | 34,291 | | | 10,649 | | | 122 | | | 1,362,923 | |
Acquired credit impaired loans | 88 | | | 1,612 | | | 1,163 | | | — | | | — | | | — | | | 2,863 | |
Balance, end of period | $ | 101,598 | | | 887,679 | | | 335,106 | | | 34,291 | | | 10,649 | | | 122 | | | 1,369,445 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial & Industrial | | Commercial, Secured by Real Estate | | Residential Real Estate | | Consumer | | Agricultural | | Other | | Total |
|
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| | | | | | | | | | | | | |
Three Months Ended March 31, 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 | 259 | | | (122) | | | (109) | | | (3) | | | (6) | | | 13 | | | 32 | |
Losses charged off | — | | | — | | | — | | | (5) | | | — | | | (31) | | | (36) | |
Recoveries | — | | | — | | | — | | | 2 | | | — | | | 18 | | | 20 | |
Balance, end of period | $ | 1,047 | | | 4,927 | | | 1,351 | | | 526 | | | 7 | | | — | | | 7,858 | |
| | | | | | | | | | | | | |
Ratio of net charge-offs to average loans | — | % | | — | % | | — | % | | 0.01 | % | | — | % | | 18.18 | % | | — | % |
| | | | | | | | | | | | | |
|
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| | | | | | | | | | | | | |
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| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Three Months Ended March 31, 2022 |
Balance, beginning of year | $ | 1,095 | | | 3,607 | | | 665 | | | 105 | | | 30 | | | 4 | | | 5,506 | |
Provision for (recovery of) credit losses | 202 | | | (113) | | | (22) | | | (27) | | | (12) | | | 21 | | | 49 | |
Losses charged off | — | | | — | | | (5) | | | (5) | | | — | | | (27) | | | (37) | |
Recoveries | — | | | — | | | 1 | | | — | | | — | | | 11 | | | 12 | |
Balance, end of period | $ | 1,297 | | | 3,494 | | | 639 | | | 73 | | | 18 | | | 9 | | | 5,530 | |
| | | | | | | | | | | | | |
Ratio of net charge-offs to average loans | — | % | | — | % | | — | % | | 0.01 | % | | — | % | | 19.16 | % | | — | % |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NoteNOTE 3 – LoansLOANS (continued)
A breakdown of the allowance for loan losses and the loan portfolio by portfolio segment at March 31, 2023 and December 31, 2022 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial & Industrial | | Commercial, Secured by Real Estate | | Residential Real Estate | | Consumer | | Agricultural | | Other | | Total |
March 31, 2023 | | | | | | | | | | | | | |
Allowance for credit losses: | | | | | | | | | | | | | |
Individually evaluated for credit losses | $ | 19 | | | 10 | | | 6 | | | — | | | — | | | — | | | 35 | |
Collectively evaluated for credit loss | 1,028 | | | 4,917 | | | 1,345 | | | 526 | | | 7 | | | — | | | 7,823 | |
| | | | | | | | | | | | | |
Balance, end of period | $ | 1,047 | | | 4,927 | | | 1,351 | | | 526 | | | 7 | | | — | | | 7,858 | |
| | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | |
Individually evaluated for credit losses | $ | 224 | | | 1,675 | | | 929 | | | — | | | — | | | — | | | 2,828 | |
Collectively evaluated for credit loss | 124,130 | | | 928,831 | | | 302,681 | | | 28,745 | | | 7,553 | | | 62 | | | 1,392,002 | |
| | | | | | | | | | | | | |
Balance, end of period | $ | 124,354 | | | 930,506 | | | 303,610 | | | 28,745 | | | 7,553 | | | 62 | | | 1,394,830 | |
| | | | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | | | |
Allowance for credit losses: | | | | | | | | | | | | | |
Individually evaluated for credit losses | $ | 4 | | | 11 | | | 6 | | | — | | | — | | | — | | | 21 | |
Collectively evaluated for credit loss | 1,296 | | | 3,598 | | | 618 | | | 86 | | | 22 | | | 5 | | | 5,625 | |
Acquired credit impaired loans | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Balance, end of period | $ | 1,300 | | | 3,609 | | | 624 | | | 86 | | | 22 | | | 5 | | | 5,646 | |
| | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | |
Individually evaluated for credit losses | $ | 114 | | | 963 | | | 482 | | | — | | | — | | | — | | | 1,559 | |
Collectively evaluated for credit loss | 119,799 | | | 934,568 | | | 304,770 | | | 28,414 | | | 10,073 | | | 81 | | | 1,397,705 | |
Acquired credit impaired loans | 414 | | | 724 | | | 876 | | | — | | | — | | | — | | | 2,014 | |
Balance, end of period | $ | 120,327 | | | 936,255 | | | 306,128 | | | 28,414 | | | 10,073 | | | 81 | | | 1,401,278 | |
The ratio of the allowance for credit losses for loans to total loans at March 31, 2023 and December 31, 2022 was 0.56% and 0.40%, respectively.
For collateral dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the allowance for credit losses is measured based on the difference between the fair value of the collateral, less costs to sell, and the amortized cost basis of the loan as of the measurement date.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 3 – LOANS (continued)
The following table presents the carrying value and related allowance of collateral dependent individually evaluated loans by class segment at the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Carrying Value | | Related Allowance | | Carrying Value | | Related Allowance |
Commercial & industrial | $ | 24 | | | 15 | | | — | | | — | |
Commercial, secured by real estate | | | | | | | |
Owner occupied | 228 | | | — | | | 230 | | | — | |
Non-owner occupied | 700 | | | — | | | — | | | — | |
Farms | 88 | | | — | | | 88 | | | — | |
Multi-family | — | | | — | | | — | | | — | |
Construction loans secured by 1-4 family dwellings | — | | | — | | | — | | | — | |
Construction loans secured by other real estate | — | | | — | | | — | | | |
Residential real estate | | | | | | | |
Secured by senior liens on 1-4 family dwellings | 361 | | | — | | | 40 | | | — | |
Secured by junior liens on 1-4 family dwellings | — | | | — | | | — | | | — | |
Home equity line-of-credit loans | — | | | — | | | — | | | — | |
Consumer | — | | | — | | | — | | | — | |
Agricultural | — | | | — | | | — | | | — | |
Other loans, including deposit overdrafts | — | | | — | | | — | | | — | |
Total | $ | 1,401 | | | 15 | | | 358 | | | — | |
The risk characteristics of LCNB's material loan portfolio segments were as follows:
Commercial & Industrial Loans. LCNB’s commercial & industrial loan portfolio consists of loans for variousa variety of purposes, including, for example, loans to fund working capital requirements (such as inventory and receivables financing) and purchases of machinery and equipment. LCNB offers a variety of commercial & industrial loan arrangements, including term loans, balloon loans, and lines of credit. Commercial & industrial loans can have a fixed or variable rate, with maturities ranging from one to ten years. Commercial & industrial loans are offered to businesses and professionals for short and medium terms on both a collateralized and uncollateralized basis. Commercial & industrial loans typically are underwritten on the basis of the borrower’s ability to make repayment from the cash flow of the business. Collateral, when obtained, may include liens on furniture, fixtures, equipment, inventory, receivables, or other assets. As a result, such loans involve complexities, variables, and risks that require thorough underwriting and more robust servicing than other types of loans.
This category includes PPP loans that were authorized under the CARES Act and updated by the Economic Aid Act. The PPP was implemented by the SBA with support from the Department of the Treasury and provided small businesses that were negatively impacted by the COVID-19 pandemic with government guaranteed and potentially forgivable loans that could be used to pay up to eight or twenty-four weeks, depending on the date of the loan, of payroll costs including benefits. Funds could also be used to pay interest on mortgages, rent, utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures. Eligible borrowers could apply for a First Draw or a Second Draw PPP Loan prior to the program ending on May 31, 2021. PPP loans made by LCNB have a maturity of two years if issued prior to June 5, 2020 and five years if issued on or after June 5, 2020. The loans have an interest rate of 1%. In addition, the SBA paid originating lenders processing fees based on the size of the loan. Outstanding PPP loans at March 31, 20222023 and December 31, 20212022 totaled $1,415,000$37,000 and $6,935,000, respectively, and unrecognized fees at those dates totaled $66,000 and $272,000,$40,000, respectively.
Commercial, Secured by Real Estate Loans. Commercial real estate loans include loans secured by a variety of commercial, retail and office buildings, religious facilities, hotels, multifamily (more than four-family) residential properties, construction and land development loans, and other land loans. Mortgage loans secured by owner-occupied agricultural property are included in this category. Commercial real estate loan products generally amortize over five to twenty-five years and are payable in monthly principal and interest installments. Some have balloon payments due within one to ten years after the origination date. The majority have adjustable interest rates with adjustment periods ranging from one to ten years, some of which are subject to established “floor” interest rates.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 3 – LOANS (continued)
Commercial real estate loans are underwritten based on the ability of the property, in the case of income producingincome-producing property, or the borrower’s business to generate sufficient cash flow to amortize the debt. Secondary emphasis is placed upon global debt service, collateral value, financial strength and liquidity of any and all guarantors, and other factors. Commercial real estate loans are generally originated with a 75% to 85% maximum loan to appraised value ratio, depending upon borrower occupancy.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. HomeA 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%.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 3 – Loans (continued)
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 collectibilitycollectability and loss when compared to certain other types of loans. Collateral, if present, is generally subject to damage, wear, and depreciation. The borrower’s ability to repay is of primary importance in the underwriting of consumer loans.
Agricultural Loans. LCNB’s portfolio of agricultural loans includes loans for financing agricultural production and for financing the purchase of equipment used in the production of agricultural products. LCNB’s agricultural loans are generally secured by farm machinery, livestock, crops, vehicles, or other agricultural-related collateral.
Other Loans, Including Deposit Overdrafts. Other loans may include loans that do not fit in any of the other categories, but it is primarily composed of overdrafts from transaction deposit accounts. Overdraft payments are recorded as a recovery and overdrafts are generally written off after 34 days with a negative balance.
LCNB uses a risk-rating system to quantify loan quality. A loan is assigned to a risk category based on relevant information about the ability of the borrower to service the debt including, but not limited to, current financial information, historical payment experience, credit documentation, public information, and current economic trends. The categories used are:
•Pass – loans categorized in this category are higher quality loans that do not fit any of the other categories described below.
•Other Assets Especially Mentioned ("OAEM") – loans in this category are currently protected but are potentially weak. These loans constitute a risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitute an undue risk in light of the circumstances surrounding a specific asset.
•Substandard – loans in this category are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the possibility that LCNB will sustain some loss if the deficiencies are not corrected.
•Doubtful – loans classified in this category have all the weaknesses inherent in loans classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
A breakdown of the loan portfolio by credit quality indicators at March 31, 2022 and December 31, 2021 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | OAEM | | Substandard | | Doubtful | | Total |
March 31, 2022 | | | | | | | | | |
Commercial & industrial | $ | 102,024 | | | 3,652 | | | 133 | | | — | | | 105,809 | |
Commercial, secured by real estate | 877,229 | | | 17,566 | | | 9,767 | | | — | | | 904,562 | |
Residential real estate | 326,458 | | | — | | | 2,116 | | | — | | | 328,574 | |
Consumer | 32,541 | | | — | | | — | | | — | | | 32,541 | |
Agricultural | 7,990 | | | — | | | — | | | — | | | 7,990 | |
Other | 45 | | | — | | | — | | | — | | | 45 | |
Total | $ | 1,346,287 | | | 21,218 | | | 12,016 | | | — | | | 1,379,521 | |
| | | | | | | | | |
December 31, 2021 | | | | | | | | | |
Commercial & industrial | $ | 98,694 | | | 2,757 | | | 147 | | | — | | | 101,598 | |
Commercial, secured by real estate | 851,709 | | | 22,336 | | | 13,634 | | | — | | | 887,679 | |
Residential real estate | 332,962 | | | — | | | 2,144 | | | — | | | 335,106 | |
Consumer | 34,281 | | | — | | | 10 | | | — | | | 34,291 | |
Agricultural | 10,649 | | | — | | | — | | | — | | | 10,649 | |
Other | 122 | | | — | | | — | | | — | | | 122 | |
Total | $ | 1,328,417 | | | 25,093 | | | 15,935 | | | — | | | 1,369,445 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NoteNOTE 3 – LoansLOANS (continued)
A loan portfolio aging analysisThe following table presents the amortized cost basis of loans by vintage and credit quality indicators at March 31, 20222023 and December 31, 2021 is as follows2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 30-59 Days Past Due | | 60-89 Days Past Due | | Greater Than 90 Days Past Due | | Total Past Due | | Current | | Total Loans Receivable | | Total Loans Greater Than 90 Days and Accruing |
March 31, 2022 | | | | | | | | | | | | | |
Commercial & industrial | $ | — | | | — | | | — | | | — | | | 105,809 | | | 105,809 | | | — | |
Commercial, secured by real estate | 105 | | | — | | | 784 | | | 889 | | | 903,673 | | | 904,562 | | | — | |
Residential real estate | 542 | | | — | | | 58 | | | 600 | | | 327,974 | | | 328,574 | | | — | |
Consumer | — | | | — | | | — | | | — | | | 32,541 | | | 32,541 | | | — | |
Agricultural | — | | | — | | | — | | | — | | | 7,990 | | | 7,990 | | | — | |
Other | 45 | | | — | | | — | | | 45 | | | — | | | 45 | | | — | |
Total | $ | 692 | | | — | | | 842 | | | 1,534 | | | 1,377,987 | | | 1,379,521 | | | — | |
| | | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | | |
Commercial & industrial | $ | — | | | — | | | — | | | — | | | 101,598 | | | 101,598 | | | — | |
Commercial, secured by real estate | 181 | | | — | | | 784 | | | 965 | | | 886,714 | | | 887,679 | | | — | |
Residential real estate | 1,130 | | | 1 | | | 109 | | | 1,240 | | | 333,866 | | | 335,106 | | | 51 | |
Consumer | 22 | | | 5 | | | 5 | | | 32 | | | 34,259 | | | 34,291 | | | 5 | |
Agricultural | — | | | — | | | — | | | — | | | 10,649 | | | 10,649 | | | — | |
Other | 122 | | | — | | | — | | | 122 | | | — | | | 122 | | | — | |
Total | $ | 1,455 | | | 6 | | | 898 | | | 2,359 | | | 1,367,086 | | | 1,369,445 | | | 56 | |
Impaired loans, including acquired credit impaired loans, at March. The December 31, 2022 and December 31, 2021 were as follows (in thousands):table is shown for comparison purposes.
| | | March 31, 2022 | | December 31, 2021 | | Term Loans by Origination Year | |
| | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term | | Total |
With no related allowance recorded: | | |
March 31, 2023 | | March 31, 2023 | | | | | | | | | | | | | | | | | |
Commercial & industrial | Commercial & industrial | $ | 79 | | | 296 | | | — | | | 88 | | | 316 | | | — | | Commercial & industrial | |
Pass | | Pass | $ | 8,117 | | | 31,615 | | | 35,658 | | | 18,140 | | | 3,415 | | | 7,668 | | | 13,983 | | | 145 | | | 118,741 | |
OAEM | | OAEM | — | | | — | | | — | | | — | | | 2,007 | | | — | | | 1,630 | | | — | | | 3,637 | |
Substandard | | Substandard | — | | | 1,510 | | | — | | | 122 | | | — | | | 65 | | | 279 | | | — | | | 1,976 | |
Doubtful | | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | | Total | 8,117 | | | 33,125 | | | 35,658 | | | 18,262 | | | 5,422 | | | 7,733 | | | 15,892 | | | 145 | | | 124,354 | |
Gross charge-offs | | Gross charge-offs | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Commercial, secured by real estate | Commercial, secured by real estate | 3,510 | | | 4,318 | | | — | | | 3,897 | | | 4,736 | | | — | | Commercial, secured by real estate | | | | | | | | | | | | | | | | | |
Pass | | Pass | 26,193 | | | 140,474 | | | 135,343 | | | 100,904 | | | 96,220 | | | 291,220 | | | 113,382 | | | 1,113 | | | 904,849 | |
OAEM | | OAEM | — | | | 7,867 | | | — | | | — | | | 827 | | | 7,366 | | | — | | | — | | | 16,060 | |
Substandard | | Substandard | — | | | — | | | 700 | | | — | | | 1,140 | | | 7,757 | | | — | | | — | | | 9,597 | |
Doubtful | | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | | Total | 26,193 | | | 148,341 | | | 136,043 | | | 100,904 | | | 98,187 | | | 306,343 | | | 113,382 | | | 1,113 | | | 930,506 | |
Gross charge-offs | | Gross charge-offs | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Residential real estate | Residential real estate | 1,457 | | | 1,807 | | | — | | | 1,501 | | | 1,857 | | | — | | Residential real estate | | | | | | | | | | | | | | | | | |
Pass | | Pass | 5,440 | | | 28,593 | | | 86,327 | | | 52,737 | | | 17,138 | | | 87,835 | | | 22,481 | | | 125 | | | 300,676 | |
OAEM | | OAEM | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | Substandard | — | | | — | | | — | | | — | | | — | | | 2,934 | | | — | | | — | | | 2,934 | |
Doubtful | | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | | Total | 5,440 | | | 28,593 | | | 86,327 | | | 52,737 | | | 17,138 | | | 90,769 | | | 22,481 | | | 125 | | | 303,610 | |
Gross charge-offs | | Gross charge-offs | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Consumer | Consumer | — | | | — | | | — | | | — | | | — | | | — | | Consumer | | | | | | | | | | | | | | | | | |
Pass | | Pass | 3,686 | | | 7,779 | | | 6,888 | | | 7,088 | | | 2,568 | | | 583 | | | 77 | | | — | | | 28,669 | |
OAEM | | OAEM | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | Substandard | — | | | — | | | 53 | | | 23 | | | — | | | — | | | — | | | — | | | 76 | |
Doubtful | | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | | Total | 3,686 | | | 7,779 | | | 6,941 | | | 7,111 | | | 2,568 | | | 583 | | | 77 | | | — | | | 28,745 | |
Gross charge-offs | | Gross charge-offs | — | | | — | | | 5 | | | — | | | — | | | — | | | — | | | — | | | 5 | |
Agricultural | Agricultural | — | | | — | | | — | | | — | | | — | | | — | | Agricultural | | | | | | | | | | | | | | | | | |
Pass | | Pass | 211 | | | 500 | | | 241 | | | 787 | | | 63 | | | 146 | | | 5,481 | | | 124 | | | 7,553 | |
OAEM | | OAEM | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | Substandard | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | | Total | 211 | | | 500 | | | 241 | | | 787 | | | 63 | | | 146 | | | 5,481 | | | 124 | | | 7,553 | |
Gross charge-offs | | Gross charge-offs | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Other | Other | — | | | — | | | — | | | — | | | — | | | — | | Other | | | | | | | | | | | | | | | | | |
Pass | | Pass | — | | | — | | | — | | | — | | | — | | | — | | | 62 | | | — | | | 62 | |
OAEM | | OAEM | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | Substandard | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | Total | $ | 5,046 | | | 6,421 | | | — | | | 5,486 | | | 6,909 | | | — | | Total | — | | | — | | | — | | | — | | | — | | | — | | | 62 | | | — | | | 62 | |
Gross charge-offs | | Gross charge-offs | — | | | — | | | — | | | — | | | — | | | — | | | 31 | | | — | | | 31 | |
Total loans | | Total loans | $ | 43,647 | | | 218,338 | | | 265,210 | | | 179,801 | | | 123,378 | | | 405,574 | | | 157,375 | | | 1,507 | | | 1,394,830 | |
| With an allowance recorded: | | | | | | | |
Commercial & industrial | $ | 145 | | | 150 | | | 5 | | | 155 | | | 160 | | | 5 | | |
Commercial, secured by real estate | 656 | | | 656 | | | 12 | | | 660 | | | 660 | | | 11 | | |
Residential real estate | 216 | | | 216 | | | 9 | | | 221 | | | 221 | | | 9 | | |
Consumer | — | | | — | | | — | | | — | | | — | | | — | | |
Agricultural | — | | | — | | | — | | | — | | | — | | | — | | |
Other | — | | | — | | | — | | | — | | | — | | | — | | |
Total | $ | 1,017 | | | 1,022 | | | 26 | | | 1,036 | | | 1,041 | | | 25 | | |
| Total: | | | | | | | |
Commercial & industrial | $ | 224 | | | 446 | | | 5 | | | 243 | | | 476 | | | 5 | | |
Commercial, secured by real estate | 4,166 | | | 4,974 | | | 12 | | | 4,557 | | | 5,396 | | | 11 | | |
Residential real estate | 1,673 | | | 2,023 | | | 9 | | | 1,722 | | | 2,078 | | | 9 | | |
Consumer | — | | | — | | | — | | | — | | | — | | | — | | |
Agricultural | — | | | — | | | — | | | — | | | — | | | — | | |
Other | — | | | — | | | — | | | — | | | — | | | — | | |
Total | $ | 6,063 | | | 7,443 | | | 26 | | | 6,522 | | | 7,950 | | | 25 | | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NoteNOTE 3 – LoansLOANS (continued)
The following presents information related to the average recorded investment and interest income recognized on impaired loans, including acquired credit impaired loans, for the three months ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loans by Origination Year | | | | | | |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term | | Total |
December 31, 2022 | | | | | | | | | | | | | | | | | |
Commercial & industrial | | | | | | | | | | | | | | | | | |
Pass | $ | 30,132 | | | 36,341 | | | 20,936 | | | 3,632 | | | 2,499 | | | 5,630 | | | 15,403 | | | — | | | 114,573 | |
OAEM | — | | | — | | | — | | | 2,142 | | | — | | | — | | | 1,602 | | | — | | | 3,744 | |
Substandard | 1,540 | | | — | | | 106 | | | — | | | — | | | 51 | | | 313 | | | — | | | 2,010 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | 31,672 | | | 36,341 | | | 21,042 | | | 5,774 | | | 2,499 | | | 5,681 | | | 17,318 | | | — | | | 120,327 | |
Gross charge-offs | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Commercial, secured by real estate | | | | | | | | | | | | | | | | | |
Pass | 135,503 | | | 142,446 | | | 96,272 | | | 100,363 | | | 75,387 | | | 229,175 | | | 129,274 | | | 4,955 | | | 913,375 | |
OAEM | 7,931 | | | — | | | — | | | — | | | 7,413 | | | — | | | — | | | — | | | 15,344 | |
Substandard | — | | | — | | | — | | | — | | | — | | | 7,536 | | | — | | | — | | | 7,536 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | 143,434 | | | 142,446 | | | 96,272 | | | 100,363 | | | 82,800 | | | 236,711 | | | 129,274 | | | 4,955 | | | 936,255 | |
Gross charge-offs | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Residential real estate | | | | | | | | | | | | | | | | | |
Pass | 27,892 | | | 86,952 | | | 54,144 | | | 17,804 | | | 13,298 | | | 78,969 | | | 24,359 | | | 1,095 | | | 304,513 | |
OAEM | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | — | | | — | | | — | | | 37 | | | — | | | 1,572 | | | — | | | 6 | | | 1,615 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | 27,892 | | | 86,952 | | | 54,144 | | | 17,841 | | | 13,298 | | | 80,541 | | | 24,359 | | | 1,101 | | | 306,128 | |
Gross charge-offs | — | | | — | | | — | | | — | | | — | | | 5 | | | — | | | — | | | 5 | |
Consumer | | | | | | | | | | | | | | | | | |
Pass | 8,786 | | | 7,561 | | | 8,108 | | | 3,145 | | | 413 | | | 316 | | | 82 | | | — | | | 28,411 | |
OAEM | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | 3 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 3 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | 8,789 | | | 7,561 | | | 8,108 | | | 3,145 | | | 413 | | | 316 | | | 82 | | | — | | | 28,414 | |
Gross charge-offs | — | | | — | | | — | | | 5 | | | — | | | — | | | — | | | — | | | 5 | |
Agricultural | | | | | | | | | | | | | | | | | |
Pass | 533 | | | 243 | | | 865 | | | 63 | | | 116 | | | 29 | | | 8,224 | | | — | | | 10,073 | |
OAEM | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | 533 | | | 243 | | | 865 | | | 63 | | | 116 | | | 29 | | | 8,224 | | | — | | | 10,073 | |
Gross charge-offs | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Other | | | | | | | | | | | | | | | | | |
Pass | — | | | — | | | — | | | — | | | — | | | — | | | 81 | | | — | | | 81 | |
OAEM | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | — | | | — | | | — | | | — | | | — | | | — | | | 81 | | | — | | | 81 | |
Gross charge-offs | — | | | — | | | — | | | — | | | — | | | — | | | 27 | | | — | | | 27 | |
Total loans | $ | 212,320 | | | 273,543 | | | 180,431 | | | 127,186 | | | 99,126 | | | 323,278 | | | 179,338 | | | 6,056 | | | 1,401,278 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 3 – LOANS (continued)
A loan portfolio aging analysis by class segment at March 31, 2023 and December 31, 2022 and 2021is as follows (in thousands):
| | | 2022 | | 2021 | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due | | Total Past Due | | Current | | Total Loans Receivable | | 90 Days or More Past Due and Accruing |
March 31, 2023 | | March 31, 2023 | | | | | | | | | | | | | |
Commercial & industrial | | Commercial & industrial | $ | — | | | — | | | 24 | | | 24 | | | 124,330 | | | 124,354 | | | — | |
Commercial, secured by real estate: | | Commercial, secured by real estate: | |
Owner occupied | | Owner occupied | 229 | | | — | | | — | | | 229 | | | 206,296 | | | 206,525 | | | — | |
Non-owner occupied | | Non-owner occupied | 39 | | | — | | | — | | | 39 | | | 418,083 | | | 418,122 | | | — | |
Farms | | Farms | — | | | — | | | — | | | — | | | 36,923 | | | 36,923 | | | — | |
Multi-family | | Multi-family | 217 | | | — | | | — | | | 217 | | | 180,717 | | | 180,934 | | | — | |
Construction loans secured by 1-4 family dwellings | | Construction loans secured by 1-4 family dwellings | — | | | — | | | — | | | — | | | 8,809 | | | 8,809 | | | — | |
Construction loans secured by other real estate | | Construction loans secured by other real estate | — | | | — | | | — | | | — | | | 79,193 | | | 79,193 | | | — | |
Residential real estate: | | Residential real estate: | |
Secured by senior liens on 1-4 family dwellings | | Secured by senior liens on 1-4 family dwellings | 900 | | | 400 | | | 39 | | | 1,339 | | | 266,475 | | | 267,814 | | | — | |
Secured by junior liens on 1-4 family dwellings | | Secured by junior liens on 1-4 family dwellings | 1 | | | — | | | — | | | 1 | | | 10,602 | | | 10,603 | | | — | |
Home equity line-of-credit loans | | Home equity line-of-credit loans | 267 | | | — | | | — | | | 267 | | | 24,926 | | | 25,193 | | | — | |
Consumer | | Consumer | 60 | | | — | | | — | | | 60 | | | 28,685 | | | 28,745 | | | — | |
Agricultural | | Agricultural | — | | | — | | | — | | | — | | | 7,553 | | | 7,553 | | | — | |
Other | | Other | 62 | | | — | | | — | | | 62 | | | — | | | 62 | | | — | |
Total | | Total | $ | 1,775 | | | 400 | | | 63 | | | 2,238 | | | 1,392,592 | | | 1,394,830 | | | — | |
| | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | | | |
With no related allowance recorded: | | |
December 31, 2022 | | December 31, 2022 | | | | | | | | | | | | | |
Commercial & industrial | Commercial & industrial | $ | 84 | | | 14 | | | 235 | | | 25 | | Commercial & industrial | $ | — | | | — | | | — | | | — | | | 120,327 | | | 120,327 | | | — | |
Commercial, secured by real estate | Commercial, secured by real estate | 3,704 | | | 73 | | | 6,794 | | | 119 | | Commercial, secured by real estate | — | | | — | | | — | | | — | | | 936,255 | | | 936,255 | | | — | |
Residential real estate | Residential real estate | 1,477 | | | 29 | | | 3,448 | | | 66 | | Residential real estate | 81 | | | — | | | 79 | | | 160 | | | 305,968 | | | 306,128 | | | 39 | |
Consumer | Consumer | — | | | — | | | 4 | | | — | | Consumer | 117 | | | 3 | | | — | | | 120 | | | 28,294 | | | 28,414 | | | — | |
Agricultural | Agricultural | — | | | — | | | — | | | — | | Agricultural | — | | | — | | | — | | | — | | | 10,073 | | | 10,073 | | | — | |
Other | Other | — | | | — | | | 191 | | | 15 | | Other | 81 | | | — | | | — | | | 81 | | | — | | | 81 | | | — | |
Total | Total | $ | 5,265 | | | 116 | | | 10,672 | | | 225 | | Total | $ | 279 | | | 3 | | | 79 | | | 361 | | | 1,400,917 | | | 1,401,278 | | | 39 | |
| With an allowance recorded: | | | | | | | | |
Commercial & industrial | $ | 150 | | | 2 | | | 189 | | | 3 | | |
Commercial, secured by real estate | 659 | | | 9 | | | 1,617 | | | 17 | | |
Residential real estate | 218 | | | 3 | | | 307 | | | 4 | | |
Consumer | — | | | — | | | — | | | — | | |
Agricultural | — | | | — | | | — | | | — | | |
Other | — | | | — | | | — | | | — | | |
Total | $ | 1,027 | | | 14 | | | 2,113 | | | 24 | | |
| Total: | | | | | | | | |
Commercial & industrial | $ | 234 | | | 16 | | | 424 | | | 28 | | |
Commercial, secured by real estate | 4,363 | | | 82 | | | 8,411 | | | 136 | | |
Residential real estate | 1,695 | | | 32 | | | 3,755 | | | 70 | | |
Consumer | — | | | — | | | 4 | | | — | | |
Agricultural | — | | | — | | | — | | | — | | |
Other | — | | | — | | | 191 | | | 15 | | |
Total | $ | 6,292 | | | 130 | | | 12,785 | | | 249 | | |
OfNo residential consumer mortgage loans secured by residential real estate were in the interest income recognized on impaired loans during the three months endedprocess of foreclosure at March 31, 2022 and 2021, NaN was recognized on a cash basis.2023 or December 31, 2022.
From time to time, the terms of certain loans are modified as troubled debt restructurings ("TDRs") wherewhen 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.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 3 – Loans (continued)
Loan modifications that were classified as TDRsthe restructuring date during the three months ended March 31, 20222023 and 2021 were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Number of Loans | | Pre-Modification Recorded Balance | | Post-Modification Recorded Balance | | Number of Loans | | Pre-Modification Recorded Balance | | Post-Modification Recorded Balance |
| | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Three Months Ended March 31, | | | | | | | | | | |
Commercial & industrial | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | |
Commercial, secured by real estate | — | | | — | | | — | | | — | | | — | | | — | |
Residential real estate | — | | | — | | | — | | | 1 | | | 21 | | | 21 | |
Consumer | — | | | — | | | — | | | — | | | — | | | — | |
Total | — | | | $ | — | | | $ | — | | | 1 | | | $ | 21 | | | $ | 21 | |
0LCNB is not committed to lend additional funds to borrowers whose loan terms were modified in a troubled debt restructuring.
There were no troubled debt restructured loans for which there was a payment default within twelve months of the restructuring date during the three months ended March 31, 2022 and 2021.
All troubled debt restructurings are considered impaired loans. The allowance for loan losses on such restructured loans is based on the present value of future expected cash flows.
Information concerning loans that were modified during the three months ended March 31, 2022 and 2021 and that were determined to be troubled debt restructurings follows (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
Impaired loans without a valuation allowance | $ | — | | | 21 | |
Impaired loans with a valuation allowance | — | | | — | |
Mortgage loans sold to and serviced for 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 March 31, 20222023 and December 31, 20212022 were approximately $152,271,000$142.2 million and $149,382,000,$148.4 million, respectively.
The total recorded investment in residential consumer mortgage loans secured by residential real estate that were in the process of foreclosure at March 31, 2022 and December 31, 2021 was $58,000 for both dates.
LCNB CORP. AND SUBSIDIARIESSUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NoteNOTE 4 - Acquired Credit Impaired Loans
The following table provides at March 31, 2022 and December 31, 2021 the major classifications of acquired credit impaired loans that are accounted for in accordance with ASC 310-30 (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Acquired from First Capital Bancshares, Inc. | | | |
Commercial & industrial | $ | 1 | | | 1 | |
Commercial, secured by real estate | — | | | — | |
Residential real estate | 388 | | | 398 | |
Other loans, including deposit overdrafts | — | | | — | |
Loans, gross | 389 | | | 399 | |
Less allowance for loan losses | — | | | — | |
Loans, net | $ | 389 | | | 399 | |
| | | |
Acquired from Eaton National Bank & Trust Co. | | | |
Commercial & industrial | $ | — | | | — | |
Commercial, secured by real estate | 284 | | | 310 | |
Residential real estate | 452 | | | 463 | |
Other loans, including deposit overdrafts | — | | | — | |
Loans, gross | 736 | | | 773 | |
Less allowance for loan losses | — | | | — | |
Loans, net | $ | 736 | | | 773 | |
| | | |
Acquired from BNB Bancorp, Inc. | | | |
Commercial & industrial | $ | — | | | — | |
Commercial, secured by real estate | 665 | | | 688 | |
Residential real estate | 50 | | | 51 | |
Other loans, including deposit overdrafts | — | | | — | |
Loans, gross | 715 | | | 739 | |
Less allowance for loan losses | — | | | — | |
Loans, net | $ | 715 | | | 739 | |
| | | |
Acquired from Columbus First Bancorp, Inc. | | | |
Commercial & industrial | $ | 78 | | | 87 | |
Commercial, secured by real estate | 600 | | | 614 | |
Residential real estate | 248 | | | 251 | |
Other loans, including deposit overdrafts | — | | | — | |
Loans, gross | 926 | | | 952 | |
Less allowance for loan losses | — | | | — | |
Loans, net | $ | 926 | | | 952 | |
| | | |
Total | | | |
Commercial & industrial | $ | 79 | | | 88 | |
Commercial, secured by real estate | 1,549 | | | 1,612 | |
Residential real estate | 1,138 | | | 1,163 | |
Other loans, including deposit overdrafts | — | | | — | |
Loans, gross | 2,766 | | | 2,863 | |
Less allowance for loan losses | — | | | — | |
Loans, net | $ | 2,766 | | | 2,863 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 4 - Acquired Credit Impaired Loans (continued)
The following table provides the outstanding balance and related carrying amount for acquired credit impaired loans at the dates indicated (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Outstanding balance | $ | 3,624 | | | 3,769 | |
Carrying amount | 2,766 | | | 2,863 | |
Activity during the three months ended March 31, 2022 and 2021 for the accretable discount related to acquired credit impaired loans is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Accretable discount at beginning of period | | | | | $ | 116 | | | 182 | |
| | | | | | | |
Reclassification from nonaccretable discount to accretable discount | | | | | 17 | | | 12 | |
| | | | | | | |
Accretion | | | | | (50) | | | (71) | |
Accretable discount at end of period | | | | | $ | 83 | | | 123 | |
Note 5 - Affordable Housing Tax Credit Limited PartnershipAFFORDABLE 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 March 31, 20222023 and December 31, 20212022 (in thousands):
| | | March 31, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
Affordable housing tax credit investment | Affordable housing tax credit investment | $ | 14,950 | | | 14,950 | | Affordable housing tax credit investment | $ | 16,950 | | | 16,950 | |
Less amortization | Less amortization | 2,423 | | | 2,126 | | Less amortization | 3,625 | | | 3,268 | |
Net affordable housing tax credit investment | Net affordable housing tax credit investment | $ | 12,527 | | | 12,824 | | Net affordable housing tax credit investment | $ | 13,325 | | | 13,682 | |
| Unfunded commitment | Unfunded commitment | $ | 7,180 | | | 8,655 | | Unfunded commitment | $ | 6,852 | | | 7,185 | |
The net affordable housing tax credit investment is included in other assets and the unfunded commitment is included in accrued interest and other liabilities in the consolidated condensed balance sheets.
LCNB expects to fund the unfunded commitment over thirteenten years.
The following table presents other information relating to LCNB's affordable housing tax credit investments for the three months ended March 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Tax credits and other tax benefits recognized | | | | | $ | 430 | | | 357 | |
Tax credit amortization expense included in provision for income taxes | | | | | 357 | | | 297 | |
LCNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NoteNOTE 5 – Affordable Housing Tax Credit Limited Partnership (continued)
- DEPOSITSThe following table presents other information relating tothe composition of LCNB's affordable housing tax credit investments for the three months endeddeposits at March 31, 20222023 and 2021December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Tax credits and other tax benefits recognized | | | | | $ | 357 | | | 260 | |
Tax credit amortization expense included in provision for income taxes | | | | | 297 | | | 217 | |
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Demand deposits | $ | 473,345 | | | 505,824 | |
NOW and money fund deposits | 519,293 | | | 510,324 | |
Savings deposits | 406,354 | | | 432,322 | |
IRA and time certificates | 204,889 | | | 156,500 | |
Total | $ | 1,603,881 | | | 1,604,970 | |
| | | |
| | | |
| | | |
| | | |
Contractual maturities of time deposits at March 31, 2023 were as follows (in thousands):
| | | | | |
April 1, 2023 - March 31, 2024 | $ | 75,994 | |
April 1, 2024 - March 31, 2025 | 108,895 | |
April 1, 2025 - March 31, 2026 | 7,447 | |
April 1, 2026 - March 31, 2027 | 7,931 | |
April 1, 2027 - March 31, 2028 | 3,327 | |
Thereafter | 1,295 | |
| $ | 204,889 | |
The aggregate amount of time deposits in denominations of $250,000 or more at March 31, 2023 and December 31, 2022 was $30.6 million and $16.1 million, respectively.
NoteNOTE 6 – BorrowingsBORROWINGS
BorrowingsLong-term debt at March 31, 20222023 and December 31, 2021 were2022 was as follows (dollars in thousands):
| | | March 31, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| | Amount | | Rate | | Amount | | Rate | | Amount | | Rate | | Amount | | Rate |
Lines of credit | $ | 24,746 | | | 2.62 | % | | $ | — | | | — | % | |
| Term loan | | Term loan | $ | 13,598 | | | 4.25 | % | | $ | 14,072 | | | 4.25 | % |
FHLB long-term advances | FHLB long-term advances | 10,000 | | | 3.00 | % | | 10,000 | | | 3.00 | % | FHLB long-term advances | 5,000 | | | 3.02 | % | | 5,000 | | | 3.02 | % |
| | $ | 34,746 | | | 2.73 | % | | $ | 10,000 | | | 3.00 | % | | $ | 18,598 | | | 3.92 | % | | $ | 19,072 | | | 3.93 | % |
The term loan with a correspondant financial institution bears a fixed interest rate of 4.25%, amortizes quarterly, and has a final balloon payment due on June 15, 2025.
The FHLB advances at March 31, 2023 and December 31, 2022 had interest rates of 3.02%. All advances from the FHLB of Cincinnati are secured by a blanket pledge of LCNB's 1-4 family first lien mortgage loans in the amount of approximately $296$268 million and $303$270 million at March 31, 20222023 and December 31, 2021,2022, respectively. Total remainingRemaining borrowing capacity, including short-term borrowing arrangements, at March 31, 20222023 was approximately $225.5$127.9 million.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 6 – BORROWINGS (continued)
Contractual maturities of long-term debt at March 31, 2023 and December 31, 2022 were as follows ( in thousands):
| | | | | | | | | | | |
| March 31, 2023 | December 31, 2022 |
April 1, 2023 - March 31, 2024 | $ | 6,937 | | | 6,918 | |
April 1, 2024 - March 31, 2025 | 11,661 | | | 2,001 | |
April 1, 2025 - March 31, 2026 | — | | | 10,153 | |
| | | |
| | | |
| | | |
Total | $ | 18,598 | | | 19,072 | |
Short-term borrowings at March 31, 2023 and December 31, 2022 were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Amount | | Rate | | Amount | | Rate |
Revolving line of credit | $ | 1,500 | | | 7.75 | % | | $ | 3,000 | | | 7.25 | % |
Other lines of credit | — | | | — | % | | 18,455 | | | 5.00 | % |
FHLB short-term advances | 75,000 | | | 5.00 | % | | 50,000 | | | 4.40 | % |
| 76,500 | | | 5.05 | % | | $ | 71,455 | | | 4.67 | % |
At March 31, 2022,2023, LCNB Corp. had a short-term revolving line of credit arrangement with a financial institution for a maximum amount of $20$5 million at an interest rate equal to the Wall Street Journal Prime Rate minus 25 basis points. The full amount of the line of credit was outstanding at that date. This agreement expires on February 8,June 15, 2023.
At March 31, 2022,2023, LCNB had a short-term line of credit borrowing arrangementsarrangement with twoa correspondent financial institutions. The first arrangement is a short-term line of credit for a maximum amount of $25 million atinstitution. Under the interest rate in effect at the timeterms of the borrowing. The second arrangement, is a short-term line of credit for a maximum amount ofLCNB can borrow up to $30 million of which $4,746,000 was outstanding at March 31, 2022, at an interest rate equal to the lending institution’s federal funds rate plus a spread of 50 basis points. The Company had no short-term borrowings outstanding under this arrangement at March 31, 2023.
At March 31, 2023, LCNB had 2 short-term borrowing arrangements with the FHLB of Cincinnati. Under the terms of a REPO Based Advance program, with the FHLB of Cincinnati, LCNB can borrow up to $87.1$95.0 million in short-term advances, as of March 31, 2022, subject to total remaining borrowing capacity limitations. LCNB can selectlimitations mentioned above. Available terms rangingrange from one day to one year. The interest rate is the published rate in effect at the time of the advance. This agreement expires on February 8, 2023.
Under the terms of a Cash Management Advance program, with the FHLB of Cincinnati, LCNB can borrow up to $87.1$95.0 million in short-term advances, as of March 31, 2022, subject to total remaining borrowing capacity limitations.limitations mentioned above. LCNB can select a variable rate of interest for up to ninety days or a fixed rate of interest for a maximum of thirty days. The interest rate is the published rate in effect at the time of the advance. This agreement expiresBoth arrangements expire on February 8, 2023.2024.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NoteNOTE 7 - LeasesLEASES
Lease expenses for offices are included in the consolidated condensed statements of income in net occupancy expense and lease expenses for equipment and ATMs are included in equipment expense. Components of lease expense for the three months ended March 31, 20222023 were as follows (in thousands):
| | | | | Three Months Ended March 31, | | | | Three Months Ended March 31, |
| | | | 2022 | | 2021 | | | | 2023 | | 2022 |
Operating lease expense | Operating lease expense | | | $ | 159 | | | 215 | | Operating lease expense | | | 181 | | | 159 | |
Short-term lease expense | Short-term lease expense | | | 34 | | | 14 | | Short-term lease expense | | | 30 | | | 34 | |
Variable lease expense | Variable lease expense | | | — | | | 1 | | Variable lease expense | | | 1 | | | — | |
Other | Other | | | 3 | | | 3 | | Other | | | 5 | | | 3 | |
Total lease expense | Total lease expense | | | $ | 196 | | | 233 | | Total lease expense | | | 217 | | | 196 | |
Other information related to leases at March 31, 20222023 were as follows (dollars in thousands):
| | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 130186 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | — | |
Weighted average remaining lease term in years for operating leases | 33.132.3 |
Weighted average discount rate for operating leases | 3.413.47 | % |
NoteNOTE 8 – Income TaxesINCOME TAXES
A reconciliation between the statutory income tax and LCNB's effective tax rate on income from continuing operations follows:
| | | | | Three Months Ended March 31, | | | | Three Months Ended March 31, |
| | | | 2022 | | 2021 | | | | 2023 | | 2022 |
Statutory tax rate | Statutory tax rate | | | 21.0 | % | | 21.0 | % | Statutory tax rate | | | 21.0 | % | | 21.0 | % |
Increase (decrease) resulting from: | Increase (decrease) resulting from: | | | | | | Increase (decrease) resulting from: | | | | | |
Tax exempt interest | Tax exempt interest | | | (0.7) | % | | (0.7) | % | Tax exempt interest | | | (0.7) | % | | (0.7) | % |
Tax exempt income on bank owned life insurance | | | (1.0) | % | | (0.9) | % | |
Tax exempt income on bank-owned life insurance | | Tax exempt income on bank-owned life insurance | | | (1.1) | % | | (1.0) | % |
Captive insurance premium income | Captive insurance premium income | | | (0.9) | % | | (0.7) | % | Captive insurance premium income | | | (1.0) | % | | (0.9) | % |
| Other, net | Other, net | | | (1.0) | % | | (0.6) | % | Other, net | | | (0.4) | % | | (1.0) | % |
Effective tax rate | Effective tax rate | | | 17.4 | % | | 18.1 | % | Effective tax rate | | | 17.8 | % | | 17.4 | % |
NoteNOTE 9 - Commitments and Contingent LiabilitiesCOMMITMENTS AND CONTINGENT LIABILITIES
LCNB is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. Exposure to credit loss in the event of nonperformance by the other parties to financial instruments for commitments to extend credit is represented by the contract amount of those instruments.
The Bounce Protection product, a customer deposit overdraft program, is offered as a service and does not constitute a contract between the customer and LCNB.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NoteNOTE 9 – Commitments and Contingent LiabilitiesCOMMITMENTS AND CONTINGENT LIABILITIES (continued)
LCNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent off-balance-sheet credit risk at March 31, 20222023 and December 31, 20212022 were as follows (in thousands):
| | | March 31, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
Commitments to extend credit: | Commitments to extend credit: | | | | Commitments to extend credit: | | | |
Commercial loans | Commercial loans | $ | 66,854 | | | 82,578 | | Commercial loans | $ | 33,163 | | | 22,823 | |
Other loans | Other loans | | | | Other loans | | | |
Fixed rate | Fixed rate | 5,959 | | | 5,196 | | Fixed rate | 3,643 | | | 191 | |
Adjustable rate | Adjustable rate | 3,563 | | | 2,784 | | Adjustable rate | 2,106 | | | 1,422 | |
Unused lines of credit: | Unused lines of credit: | | | | Unused lines of credit: | | | |
Fixed rate | Fixed rate | 34,570 | | | 32,655 | | Fixed rate | 40,277 | | | 41,558 | |
Adjustable rate | Adjustable rate | 193,015 | | | 150,746 | | Adjustable rate | 207,102 | | | 238,876 | |
Unused overdraft protection amounts on demand and NOW accounts | Unused overdraft protection amounts on demand and NOW accounts | 16,654 | | | 16,711 | | Unused overdraft protection amounts on demand and NOW accounts | 16,556 | | | 16,566 | |
Standby letters of credit | Standby letters of credit | 5 | | | 5 | | Standby letters of credit | 5 | | | 5 | |
Total commitments | Total commitments | $ | 320,620 | | | 290,675 | | Total commitments | $ | 302,852 | | | 321,441 | |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Unused lines of credit include amounts not drawn on line of credit loans. Commitments to extend credit and unused lines of credit generally have fixed expiration dates or other termination clauses.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees generally are fully secured and have varying maturities.
The Bounce Protection product, a customer deposit overdraft program, is offered as a service and does not constitute a contract between the customer and LCNB.
LCNB evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary, is based on management's credit evaluation of the borrower. Collateral held varies, butborrower and may include accounts receivable, inventory, residential realty, income-producing commercial property, agricultural property, and property, plant, and equipment.
Capital expenditures include the construction or acquisition of new office buildings, improvements to LCNB's offices, purchases of furniture and equipment, and additions or improvements to LCNB's information technology system. Commitments outstanding for capital expenditures as of March 31, 20222023 totaled approximately $356,000.$2.6 million.
Management believes that LCNB has sufficient liquidity to fund its lending and capital expenditure commitments.
LCNB and its subsidiaries are parties to various claims and proceedings arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings and claims will not be material to theLCNB's consolidated financial position or results of operations.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note
NOTE 10 – Accumulated Other Comprehensive Income (Loss)ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in accumulated other comprehensive income (loss)loss for the three months ended March 31, 20222023 and 20212022 were as follows (in thousands):
| | | | | Three Months Ended March 31, | | | | Three Months Ended March 31, |
| | | | Unrealized Gains and Losses on Available-for-Sale Debt Securities | | Changes in Pension Plan Assets and Benefit Obligations | | Total | | | | Unrealized Gains and Losses on Available-for-Sale Debt Securities | | Changes in Pension Plan Assets and Benefit Obligations | | Total |
2023 | | 2023 | | | | | | | |
Balance at beginning of period | | Balance at beginning of period | | | $ | (29,927) | | | (27) | | | (29,954) | |
Other comprehensive income, net of taxes | | Other comprehensive income, net of taxes | | | 4,950 | | | — | | | 4,950 | |
| Balance at end of period | | Balance at end of period | | | $ | (24,977) | | | (27) | | | (25,004) | |
| 2022 | 2022 | | | | | | | | 2022 | | | | | | | |
Balance at beginning of period | Balance at beginning of period | | | $ | (1,536) | | | (273) | | | (1,809) | | Balance at beginning of period | | | $ | (1,536) | | | (273) | | | (1,809) | |
Before reclassifications | | | (13,189) | | | 1 | | | (13,188) | | |
Reclassifications | | | — | | | — | | | — | | |
Other comprehensive (loss) income, net of taxes | | Other comprehensive (loss) income, net of taxes | | | (13,189) | | | 1 | | | (13,188) | |
| Balance at end of period | Balance at end of period | | | $ | (14,725) | | | (272) | | | (14,997) | | Balance at end of period | | | $ | (14,725) | | | (272) | | | (14,997) | |
| 2021 | | | | | | | | |
Balance at beginning of period | | | $ | 4,349 | | | (306) | | | 4,043 | | |
Before reclassifications | | | (3,441) | | | 1 | | | (3,440) | | |
Reclassifications | | | — | | | — | | | — | | |
Balance at end of period | | | $ | 908 | | | (305) | | | 603 | | |
There were no reclassifications out of accumulated other comprehensive income (loss)loss during the three months ended March 31, 20222023 and 2021.2022.
0
NoteNOTE 11 – Retirement PlansRETIREMENT PLANS
LCNB participates in a noncontributory defined benefit multi-employer retirement plan that covers substantially all regular full-time employees hired before January 1, 2009. Employees hired before this date who received a benefit reduction under certain amendments to the defined benefit retirement plan receive an automatic contribution of 5% or 7% of their annual compensation, depending on the sum of an employee's age and vesting service, into their defined contribution plans (401(k) plans), regardless of the contributions made by the employees. These contributions are made annually and these employees do not receive any employer matches to their 401(k) contributions.
Employees hired on or after January 1, 2009 receive a 50% employer match on their contributions into the 401(k) plan, up to a maximum LCNB contribution of 3% of each individual employee's annual compensation.
Funding and administrative costs of the qualified noncontributory defined benefit retirement plan and 401(k) plan charged to pension and other employee benefits in the consolidated condensed statements of income for the three-month period ended March 31, 20222023 and 20212022 were as follows (in thousands):
| | | | | Three Months Ended March 31, | | | | Three Months Ended March 31, |
| | | | 2022 | | 2021 | | | | 2023 | | 2022 |
Qualified noncontributory defined benefit retirement plan | Qualified noncontributory defined benefit retirement plan | | | $ | 308 | | | 279 | | Qualified noncontributory defined benefit retirement plan | | | $ | 339 | | | 308 | |
401(k) plan | 401(k) plan | | | 180 | | | 160 | | 401(k) plan | | | 200 | | | 180 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 11NOTE 10 – Retirement PlansRETIREMENT PLANS (continued)
Certain highly compensated former employees participate in a nonqualified defined benefit retirement plan. The nonqualified plan ensures that participants receive the full amount of benefits to which they would have been entitled under the noncontributory defined benefit retirement plan in the absence of limits on benefit levels imposed by certain sections of the Internal Revenue Code. This plan is limited to the original participants and no new participants have been added.
The components of net periodic pension cost of the nonqualified defined benefit retirement plan for the three months ended March 31, 20222023 and 20212022 are summarized as follows (in thousands):
| | | | | | Three Months Ended March 31, | | | | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 | | | | | 2023 | | 2022 |
| Interest cost | Interest cost | | | | $ | 12 | | | 13 | | Interest cost | | | | $ | 19 | | | 12 | |
Amortization of unrecognized net loss | Amortization of unrecognized net loss | | | | 2 | | | 2 | | Amortization of unrecognized net loss | | | | — | | | 2 | |
| Net periodic pension cost | Net periodic pension cost | | | | $ | 14 | | | 15 | | Net periodic pension cost | | | | $ | 19 | | | 14 | |
Amounts recognized in accumulated other comprehensive income (loss),loss, net of tax, for the nonqualified defined benefit retirement plan for the three months ended March 31, 20222023 and 20212022 were as follows (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Net actuarial gain | $ | (1) | | | (2) | |
| | | |
| | | |
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Net actuarial gain | | | | | $ | — | | | (1) | |
| | | | | | | |
| | | | | | | |
NoteNOTE 12 – Stock Based CompensationSTOCK BASED COMPENSATION
LCNB established an Ownership Incentive Plan (the "2002 Plan") during 2002 that allowed for stock-based awards to eligible employees, as determined by the Board of Directors. The awards were made in the form of stock options, share awards, and/or appreciation rights. The 2002 Plan provided for the issuance of up to 200,000 shares of common stock. Options granted under the 2002 Plan vested ratably over a five-year period and expired ten years after the date of grant. The 2002 Plan expired on April 16, 2012. Any outstanding unexercised options, however, continued to be exercisable in accordance with their terms.
The 2015 Ownership Incentive Plan (the "2015 Plan") was ratified by LCNB's shareholders at the annual meeting on April 28, 2015 and allows for stock-based awards to eligible employees, as determined by the Compensation Committee of the Board of Directors. Awards may be made in the form of stock options, appreciation rights, restricted shares, and/or restricted share units. The 2015 Plan provides for the issuance of up to 450,000 shares of common stock. The 2015 Plan will terminate on April 28, 2025 and iscould be subject to earlier termination by the Compensation Committee.
Stock-based awards may be in the form of treasury shares or newly issued shares.
LCNB has notRestricted stock awards granted stock option awards since 2012.under the 2015 Plan during the three months ended March 31, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
Outstanding, January 1, | 58,314 | | | $ | 17.99 | | | 44,512 | | | $ | 17.08 | |
Granted | 44,150 | | | 17.84 | | | 32,554 | | | 19.25 | |
Vested | (21,624) | | | 17.86 | | | (17,229) | | | 17.98 | |
Forfeited | — | | | — | | | — | | | — | |
Outstanding, March 31, | 80,840 | | | $ | 17.94 | | | 59,837 | | | $ | 18.00 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NoteNOTE 12 – Stock Based CompensationSTOCK BASED COMPENSATION (continued)
The following table summarizes stock option activity for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value (in thousands) (1) | | Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value (in thousands) (1) |
Outstanding, January 1, | — | | | $ | — | | | | | 311 | | | $ | 12.60 | | | |
Granted | — | | | — | | | | | — | | | — | | | |
Exercised | — | | | — | | | | | (311) | | | 12.60 | | | |
Expired | — | | | — | | | | | — | | | — | | | |
Outstanding, March 31, | — | | | — | | | $ | — | | | — | | | — | | | $ | — | |
Exercisable, March 31, | — | | | — | | | $ | — | | | — | | | — | | | $ | — | |
(1) Aggregate Intrinsic Value is defined as the amount by which the current market value of the underlying stock exceeds the exercise price of the option. |
The following table provides information related to stock options exercised during the periods indicated (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Intrinsic value of options exercised | $ | — | | | 1 | |
Cash received from options exercised | — | | | 4 | |
Tax benefit realized from options exercised | — | | | — | |
Restricted stock awards granted under the 2015 Plan were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
Outstanding, January 1, | 44,512 | | | $ | 17.08 | | | 28,596 | | | $ | 17.42 | |
Granted | 32,554 | | | 19.25 | | | 26,321 | | | 16.85 | |
Vested | (17,229) | | | 17.98 | | | (8,817) | | | 17.55 | |
Forfeited | — | | | — | | | (122) | | | 16.87 | |
Outstanding, March 31, | 59,837 | | | $ | 18.00 | | | 45,978 | | | $ | 17.07 | |
The following table presents expense recorded in salaries and employee benefits for restricted stock awards and the related tax information for the three months ended March 31, 20222023 and 20212022 (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Restricted stock expense | | | | | $ | 197 | | | 93 | |
Tax effect | | | | | 41 | | | 20 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued) | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Restricted stock expense | | | | | $ | 316 | | | 197 | |
Tax effect | | | | | 66 | | | 41 | |
Note 12 – Stock Based Compensation (continued)
Unrecognized compensation expense for restricted stock awards was $1,034,000$1,173,000 at March 31, 20222023 and is expected to be recognized over a period of 4.94.8 years.
NoteNOTE 13 – Earnings per Common ShareEARNINGS 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 months ended March 31, 20222023 and 20212022 were calculated as follows (dollars in thousands, except share and per share data):
| | | | | Three Months Ended March 31, | | | | Three Months Ended March 31, |
| | | | 2022 | | 2021 | | | | 2023 | | 2022 |
Net income | Net income | | | $ | 4,523 | | | 5,240 | | Net income | | | $ | 4,157 | | | 4,523 | |
Less allocation of earnings and dividends to participating securities | Less allocation of earnings and dividends to participating securities | | | 24 | | | 18 | | Less allocation of earnings and dividends to participating securities | | | 30 | | | 24 | |
Net income allocated to common shareholders | Net income allocated to common shareholders | | | $ | 4,499 | | | 5,222 | | Net income allocated to common shareholders | | | $ | 4,127 | | | 4,499 | |
| Weighted average common shares outstanding, gross | Weighted average common shares outstanding, gross | | | 11,878,451 | | | 12,840,782 | | Weighted average common shares outstanding, gross | | | 11,270,010 | | | 11,878,451 | |
Less average participating securities | Less average participating securities | | | 59,837 | | | 45,958 | | Less average participating securities | | | 80,840 | | | 59,837 | |
Weighted average number of shares outstanding used in the calculation of basic earnings per common share | Weighted average number of shares outstanding used in the calculation of basic earnings per common share | | | 11,818,614 | | | 12,794,824 | | Weighted average number of shares outstanding used in the calculation of basic earnings per common share | | | 11,189,170 | | | 11,818,614 | |
Add dilutive effect of: | Add dilutive effect of: | | | | | | Add dilutive effect of: | | | | | |
Stock options | Stock options | | | — | | | 28 | | Stock options | | | — | | | — | |
Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share | Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share | | | 11,818,614 | | | 12,794,852 | | Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share | | | 11,189,170 | | | 11,818,614 | |
| Earnings per common share: | Earnings per common share: | | | | | | Earnings per common share: | | | | | |
Basic | Basic | | | $ | 0.38 | | | 0.41 | | Basic | | | $ | 0.37 | | | 0.38 | |
Diluted | Diluted | | | 0.38 | | | 0.41 | | Diluted | | | 0.37 | | | 0.38 | |
There were no anti-dilutive stock options outstanding at March 31, 2022 or 2021.LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NoteNOTE 14 - Fair Value MeasurementsFAIR 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.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 14 - Fair Value Measurements (continued)
•Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly. Level 2 inputs may include quoted prices for similar assets in active markets, quoted prices for identical assets or liabilities in markets that are not active, inputs other than quoted prices (such as interest rates or yield curves) that are observable for the asset or liability, and inputs that are derived from or corroborated by observable market data.
•Level 3 – inputs that are unobservable for the asset or liability.
Equity Securities With a Readily Determinable Fair Value
EQUITY SECURITIES WITH A READILY DETERMINABLE FAIR VALUE
Equity securities with a readily determinable fair value are reported at fair value with changes in fair value reported in other operating income in the consolidated condensed statements of income. Fair values for equity securities are determined based on market quotations (level 1). At December 31, 2022, LCNB has investedhad investments in two mutual funds that arewere traded in active markets and their fair values arewere based on market quotations (level 1). These two mutual funds were sold during the first quarter of 2023. Investments in another two mutual funds are measured at fair value using net asset values and are considered level 1 because the net asset values are determined and published and are the basis for current transactions.
Debt Securities, Available-for-SaleDEBT 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 BasisASSETS 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.
A loan is considered impaired when management believes it is probableLCNB does not record loans at fair value on a recurring basis.However, from time to time, nonrecurring fair value adjustments to collateral dependent loans are recorded to reflect partial write-downs or specific reserves that payment of interest and principal will not be made in accordance withare based on the contractual termsobservable market price or current estimated value of the loan agreement. Impairedcollateral.These loans are carriedreported 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 present valuesales comparison approach or income approach. Respective unobservable inputs for the approaches consist of estimated future cash flows usingadjustments for differences between comparable sales and the loan's existing rate or the fair valueutilization of collateral if the loan is collateral dependent, if this value is less than the loan balance. These inputs are considered to be level 3.
appropriate capitalization rates.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NoteNOTE 14 - Fair Value MeasurementsFAIR VALUE MEASUREMENTS (continued)
The following table summarizes the valuation of LCNB's assets recorded at fair value by input levels as of March 31, 20222023 and December 31, 20212022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at the End of the Reporting Period Using |
| | | Fair Value Measurements | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
March 31, 2022 | | | | | | | | |
Recurring fair value measurements: | | | | | | | | |
| Equity securities with a readily determinable fair value: | | | | | | | | |
| Equity securities | | $ | 1,107 | | | 1,107 | | | — | | | — | |
| Mutual funds | | 47 | | | 47 | | | — | | | — | |
| Mutual funds measured at net asset value | | 1,270 | | | 1,270 | | | — | | | — | |
| | | | | | | | | |
| Debt securities, available-for-sale: | | | | | | | | |
| U.S. Treasury notes | | 74,733 | | | 74,733 | | | — | | | — | |
| U.S. Agency notes | | 82,746 | | | — | | | 82,746 | | | — | |
| Corporate bonds | | 5,927 | | | — | | | 5,927 | | | — | |
| U.S. Agency mortgage-backed securities | | 86,800 | | | — | | | 86,800 | | | — | |
| Municipal securities: | | | | | | | | |
| Non-taxable | | 8,273 | | | — | | | 8,273 | | | — | |
| Taxable | | 34,985 | | | — | | | 34,985 | | | — | |
| Total recurring fair value measurements | | $ | 295,888 | | | 77,157 | | | 218,731 | | | — | |
| | | | | | | | | |
Nonrecurring fair value measurements: | | | | | | | | |
| Impaired loans | | $ | 991 | | | — | | | — | | | 991 | |
| | | | | | | | | |
| Total nonrecurring fair value measurements | | $ | 991 | | | — | | | — | | | 991 | |
| | | | | | | | | |
December 31, 2021 | | | | | | | | |
Recurring fair value measurements: | | | | | | | | |
| Equity securities with a readily determinable fair value: | | | | | | | | |
| Equity securities | | $ | 1,167 | | | 1,167 | | | — | | | — | |
| Mutual funds | | 51 | | | 51 | | | — | | | — | |
| Mutual funds measured at net asset value | | 1,328 | | | 1,328 | | | — | | | — | |
| | | | | | | | | |
| Debt securities, available-for-sale: | | | | | | | | |
| U.S. Treasury notes | | 74,744 | | | 74,744 | | | — | | | — | |
| U.S. Agency notes | | 87,246 | | | — | | | 87,246 | | | — | |
| Corporate bonds | | 5,152 | | | — | | | 5,152 | | | — | |
| U.S. Agency mortgage-backed securities | | 96,676 | | | — | | | 96,676 | | | — | |
| Municipal securities: | | | | | | | | |
| Non-taxable | | 9,066 | | | — | | | 9,066 | | | — | |
| Taxable | | 35,293 | | | — | | | 35,293 | | | — | |
| Total recurring fair value measurements | | $ | 310,723 | | | 77,290 | | | 233,433 | | | — | |
| | | | | | | | | |
Nonrecurring fair value measurements: | | | | | | | | |
| Impaired loans | | $ | 1,011 | | | — | | | — | | | 1,011 | |
| | | | | | | | | |
| Total nonrecurring fair value measurements | | $ | 1,011 | | | — | | | — | | | 1,011 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at the End of the Reporting Period Using |
| | | Fair Value Measurements | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
March 31, 2023 | | | | | | | | |
Recurring fair value measurements: | | | | | | | | |
| Equity securities with a readily determinable fair value: | | | | | | | | |
| Equity securities | | $ | 67 | | | 67 | | | — | | | — | |
| | | | | | | | | |
| Mutual funds measured at net asset value | | 1,219 | | | 1,219 | | | — | | | — | |
| | | | | | | | | |
| Debt securities, available-for-sale: | | | | | | | | |
| U.S. Treasury notes | | 77,897 | | | 77,897 | | | — | | | — | |
| U.S. Agency notes | | 79,836 | | | — | | | 79,836 | | | — | |
| Corporate bonds | | 6,627 | | | — | | | 6,627 | | | — | |
| U.S. Agency mortgage-backed securities | | 78,390 | | | — | | | 78,390 | | | — | |
| Municipal securities: | | | | | | | | |
| Non-taxable | | 8,588 | | | — | | | 8,588 | | | — | |
| Taxable | | 42,089 | | | — | | | 42,089 | | | — | |
| Total recurring fair value measurements | | $ | 294,713 | | | 79,183 | | | 215,530 | | | — | |
| | | | | | | | | |
Nonrecurring fair value measurements: | | | | | | | | |
| Individually evaluated loans | | $ | 1,018 | | | — | | | — | | | 1,018 | |
| | | | | | | | | |
| Total nonrecurring fair value measurements | | $ | 1,018 | | | — | | | — | | | 1,018 | |
| | | | | | | | | |
December 31, 2022 | | | | | | | | |
Recurring fair value measurements: | | | | | | | | |
| Equity securities with a readily determinable fair value: | | | | | | | | |
| Equity securities | | $ | 1,039 | | | 1,039 | | | — | | | — | |
| Mutual funds | | 41 | | | 41 | | | — | | | — | |
| Mutual funds measured at net asset value | | 1,193 | | | 1,193 | | | — | | | — | |
| | | | | | | | | |
| Debt securities, available-for-sale: | | | | | | | | |
| U.S. Treasury notes | | 76,447 | | | 76,447 | | | — | | | — | |
| U.S. Agency notes | | 77,976 | | | — | | | 77,976 | | | — | |
| Corporate bonds | | 6,685 | | | — | | | 6,685 | | | — | |
| U.S. Agency mortgage-backed securities | | 79,440 | | | — | | | 79,440 | | | — | |
| Municipal securities: | | | | | | | | |
| Non-taxable | | 8,524 | | | — | | | 8,524 | | | — | |
| Taxable | | 40,778 | | | — | | | 40,778 | | | — | |
| Total recurring fair value measurements | | $ | 292,123 | | | 78,720 | | | 213,403 | | | — | |
| | | | | | | | | |
Nonrecurring fair value measurements: | | | | | | | | |
| Individually evaluated loans | | $ | 923 | | | — | | | — | | | 923 | |
| | | | | | | | | |
| Total nonrecurring fair value measurements | | $ | 923 | | | — | | | — | | | 923 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NoteNOTE 14 - Fair Value MeasurementsFAIR VALUE MEASUREMENTS (continued)
The following table presents quantitative information about unobservable inputs used in nonrecurring level 3 fair value measurements at March 31, 20222023 and December 31, 20212022 (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Range |
| | Fair Value | | Valuation Technique | | Unobservable Inputs | | High | | Low | | Weighted Average |
March 31, 2022 | | | | | | | | | | | | |
Impaired loans | | $ | — | | | Estimated sales price | | Adjustments for comparable properties, discounts to reflect current market conditions | | Not applicable |
Impaired loans | | $ | 991 | | | Discounted cash flows | | Discount rate | | 8.125 | % | | 4.625 | % | | 6.07 | % |
| | | | | | | | |
| | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | |
Impaired loans | | $ | — | | | Estimated sales price | | Adjustments for comparable properties, discounts to reflect current market conditions | | Not applicable |
| | 1,011 | | | Discounted cash flows | | Discount rate | | 8.25 | % | | 4.00 | % | | 6.07 | % |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Range |
| | Fair Value | | Valuation Technique | | Unobservable Inputs | | High | | Low | | Weighted Average |
March 31, 2023 | | | | | | | | | | | | |
Individually evaluated collateral dependent loans | | $ | 3 | | | Estimated sales price | | Adjustments for comparable properties, discounts to reflect current market conditions | | Not applicable |
| | | | | | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | | |
Individually evaluated loans | | $ | — | | | Estimated sales price | | Adjustments for comparable properties, discounts to reflect current market conditions | | Not applicable |
Individually evaluated loans | | 923 | | | Discounted cash flows | | Discount rate | | 8.13 | % | | 4.63 | % | | 6.04 | % |
| | | | | | | | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NoteNOTE 14 - Fair Value MeasurementsFAIR VALUE MEASUREMENTS (continued)
Carrying amounts and estimated fair values of financial instruments as of March 31, 20222023 and December 31, 20212022 were as follows (in thousands): | | | | | | Fair Value Measurements at the End of the Reporting Period Using | | | | | Fair Value Measurements at the End of the Reporting Period Using |
| | Carrying Amount | | Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Carrying Amount | | Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
March 31, 2022 | | | | | | | | | | | |
March 31, 2023 | | March 31, 2023 | | | | | | | | | | |
FINANCIAL ASSETS: | FINANCIAL ASSETS: | | FINANCIAL ASSETS: | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 19,941 | | | 19,941 | | | 19,941 | | | — | | | — | | Cash and cash equivalents | | $ | 31,876 | | | 31,876 | | | 31,876 | | | — | | | — | |
| Debt securities, held-to-maturity | | 22,873 | | | 22,409 | | | — | | | — | | | 22,409 | | |
Federal Reserve Bank stock | | 4,652 | | | 4,652 | | | 4,652 | | | — | | | — | | |
Federal Home Loan Bank stock | | 5,203 | | | 5,203 | | | 5,203 | | | — | | | — | | |
Debt securities, held-to-maturity, net | | Debt securities, held-to-maturity, net | | 19,763 | | | 18,442 | | | — | | | — | | | 18,442 | |
| Loans, net | Loans, net | | 1,373,991 | | | 1,299,509 | | | — | | | — | | | 1,299,509 | | Loans, net | | 1,386,972 | | | 1,229,404 | | | — | | | — | | | 1,229,404 | |
Accrued interest receivable | Accrued interest receivable | | 8,364 | | | 8,364 | | | — | | | 8,364 | | | — | | Accrued interest receivable | | 8,005 | | | 8,005 | | | — | | | 8,005 | | | — | |
| FINANCIAL LIABILITIES: | FINANCIAL LIABILITIES: | | | | | | FINANCIAL LIABILITIES: | | | | | |
Deposits | Deposits | | 1,636,606 | | | 1,637,621 | | | 1,451,644 | | | 185,977 | | | — | | Deposits | | 1,603,881 | | | 1,603,113 | | | 1,398,992 | | | 204,121 | | | — | |
Short-term borrowings | Short-term borrowings | | 24,746 | | | 24,746 | | | 24,746 | | | — | | | — | | Short-term borrowings | | 76,500 | | | 76,500 | | | 76,500 | | | — | | | — | |
Long-term debt | Long-term debt | | 10,000 | | | 10,243 | | | — | | | 10,243 | | | — | | Long-term debt | | 18,598 | | | 18,558 | | | — | | | 18,558 | | | — | |
Accrued interest payable | Accrued interest payable | | 339 | | | 339 | | | — | | | 339 | | | — | | Accrued interest payable | | 854 | | | 854 | | | — | | | 854 | | | — | |
| December 31, 2021 | | |
December 31, 2022 | | December 31, 2022 | |
FINANCIAL ASSETS: | FINANCIAL ASSETS: | | FINANCIAL ASSETS: | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 18,136 | | | 18,136 | | | 18,136 | | | — | | | — | | Cash and cash equivalents | | $ | 22,701 | | | 22,701 | | | 22,701 | | | — | | | — | |
| Debt securities, held-to-maturity | | 22,972 | | | 23,087 | | | — | | | — | | | 23,087 | | |
Federal Reserve Bank stock | | 4,652 | | | 4,652 | | | 4,652 | | | — | | | — | | |
Federal Home Loan Bank stock | | 5,203 | | | 5,203 | | | 5,203 | | | — | | | — | | |
Debt securities, held-to-maturity, net | | Debt securities, held-to-maturity, net | | 19,878 | | | 18,885 | | | — | | | — | | | 18,885 | |
| Loans, net | Loans, net | | 1,363,939 | | | 1,333,840 | | | — | | | — | | | 1,333,840 | | Loans, net | | 1,395,632 | | | 1,219,112 | | | — | | | — | | | 1,219,112 | |
Accrued interest receivable | Accrued interest receivable | | 7,999 | | | 7,999 | | | — | | | 7,999 | | | — | | Accrued interest receivable | | 7,482 | | | 7,482 | | | — | | | 7,482 | | | — | |
| FINANCIAL LIABILITIES: | FINANCIAL LIABILITIES: | | | | | | FINANCIAL LIABILITIES: | | | | | |
Deposits | Deposits | | 1,628,819 | | | 1,630,158 | | | 1,435,487 | | | 194,671 | | | — | | Deposits | | 1,604,970 | | | 1,604,380 | | | 1,448,470 | | | 155,910 | | | — | |
| Short-term borrowings | | Short-term borrowings | | 71,455 | | | 71,455 | | | 71,455 | | | — | | | — | |
Long-term debt | Long-term debt | | 10,000 | | | 10,292 | | | — | | | 10,292 | | | — | | Long-term debt | | 19,072 | | | 18,573 | | | — | | | 18,573 | | | — | |
Accrued interest payable | Accrued interest payable | | 277 | | | 277 | | | — | | | 277 | | | — | | Accrued interest payable | | 311 | | | 311 | | | — | | | 311 | | | — | |
The fair values of off-balance-sheet financial instruments such as loan commitments and letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of such instruments were not material at March 31, 20222023 and December 31, 2021.2022.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 15 – Recent Accounting Pronouncements
From time to time the FASB issues an ASU to communicate changes to U.S. GAAP. The following information provides brief summaries of newly issued but not yet effective ASUs that could have an effect on LCNB’s financial position or results of consolidated operations:
ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments"
ASU No. 2016-13 was issued in June 2016 and, once effective, will significantly change current guidance for recognizing impairment of financial instruments. Current guidance requires an "incurred loss" methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. ASU No. 2016-13 replaces the incurred loss impairment methodology with a new current expected credit loss ("CECL") methodology that reflects expected credit losses over the lives of the loans and requires consideration of a broader range of information to inform credit loss estimates. The ASU requires an organization to estimate all expected credit losses for financial assets measured at amortized cost, including loans and held-to-maturity debt securities, based on historical experience, current conditions, and reasonable and supportable forecasts. Additional disclosures are required.
ASU No. 2016-13 also amends the accounting for credit losses on debt securities, available-for-sale, and purchased financial assets with credit deterioration. Under the new guidance, entities will determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. Any credit loss will be recognized as an allowance for credit losses on debt securities, available-for-sale, rather than as a direct reduction of the amortized cost basis of the investment, as is currently required. As a result, entities will recognize improvements to estimated credit losses on debt securities, available-for-sale, immediately in earnings rather than as interest income over time, as currently required.
ASU No. 2016-13 eliminates the current accounting model for purchased credit impaired loans and debt securities. Instead, purchased financial assets with credit deterioration will be recorded gross of estimated credit losses as of the date of acquisition and the estimated credit losses amounts will be added to the allowance for credit losses. Thereafter, entities will account for additional impairment of such purchased assets using the models listed above.
Originally, ASU No. 2016-13 would have taken effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. At their meeting on October 16, 2019, FASB approved a final ASU delaying the effective date for several major standards, including ASU No. 2016-13, if certain qualifications are met. The new effective date for SEC filers eligible to be smaller reporting companies ("SRC"), as defined, will be fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. As an SRC, LCNB intends to adopt ASU No. 2016-13 for the fiscal year, and interim periods within the fiscal year, beginning after December 15, 2022.
LCNB has created a cross-functional CECL Committee, which reports to the Audit Committee, composed of members from the lending, Wealth Management, and finance departments. During 2017, the CECL Committee selected a vendor to assist in implementation of and ongoing compliance with the new requirements. It has completed analyzing its data collection efforts, selected a calculation model, analyzed its pool segmentation and reporting mechanisms, and has finished back testing in preparation for adoption of the new methodology. While the committee and management expect that implementation of ASU No. 2016-13 will increase the balance of the allowance for loan losses, they continue to analyze modeling after studying the impacts that the most recent economic conditions presented due to the pandemic. As they adjust and finalize appropriate modeling, they are continuing to evaluate the modeling and its potential impact on LCNB's results of consolidated operations and financial position. The consolidated financial statement impact of this new standard cannot be reasonably estimated at this time; however, it is anticipated during 2022 that modeling adjustments should be complete after finalizing review of prepayment, curtailment, and forecasting assessments.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 15 – Recent Accounting Pronouncements (continued)
ASU No. 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures"
ASU No. 2022-02 was issued in March 2022 and, once effective, will eliminate the accounting guidance on TDRs for creditors who have adopted ASU No. 2016-13 and provides for enhanced disclosures for certain modifications to borrowers experiencing financial difficulties. The update also amends the guidance on vintage disclosures for public business entities, as defined, to require the disclosure of current-period gross charge-offs by year of origination. For entities that have adopted ASU No. 2016-13, the update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU No. 2016-13, this update needs to be adopted at the same time that ASU No. 2016-13 is adopted. Early adoption is permitted if an entity has already adopted ASU No. 2016-13.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
Certain statements made in this document regarding LCNB’s financial condition, results of operations, plans, objectives, future performance and business, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by the fact they are not historical facts and include words such as “anticipate”, “could”, “may”, “feel”, “expect”, “believe”, “plan”, and similar expressions. Please refer to LCNB’s Annual Report on Form 10-K for the year ended December 31, 2021,2022, as well as its other filings with the SEC, for a more detailed discussion of risks, uncertainties and factors that could cause actual results to differ from those discussed in the forward-looking statements.
These forward-looking statements reflect management's current expectations based on all information available to management and its knowledge of LCNB’s business and operations. Additionally, LCNB’s financial condition, results of operations, plans, objectives, future performance and business are subject to risks and uncertainties that may cause actual results to differ materially. These factors include, but are not limited to:
1.the success, impact, and timing of the implementation of LCNB’s business strategies;
2.the significant risks and uncertainties for LCNB's business, results of operations and financial condition as well as its regulatory capital and liquidity ratios and other regulatory requirements, caused byresulting from the COVID-19 pandemic, which will depend on several factors, includingrecovery from the scope and duration of the pandemic, its influence on financial markets, the effectiveness of LCNB's work from home arrangements and staffing levels in operational facilities, the impact of market participants on which LCNB relies and actions taken by governmental authorities and other third parties in response to theCOVID-19 pandemic;
3.the disruption of global, national, state, and local economies associated with the COVID-19 pandemic and the Russia/Ukraine conflict, which could affect LCNB's liquidity and capital positions, impair the ability of our borrowers to repay outstanding loans, impair collateral values, and further increase the allowance for credit losses;
4.LCNB’s ability to integrate future acquisitions may be unsuccessful or may be more difficult, time-consuming, or costly than expected;
5.4.LCNB may incur increased loan charge-offs in the future;future and the allowance for credit losses may be inadequate;
6.5.LCNB may face competitive loss of customers;
7.6.changes in the interest rate environment, which may include continuedfurther interest rate increases, may have results on LCNB’s operations materially different from those anticipated by LCNB’s market risk management functions;
8.7.changes in general economic conditions and increased competition could adversely affect LCNB’s operating results;
9.8.changes in regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact LCNB’s operating results;
10.9.LCNB may experience difficulties growing loan and deposit balances;
11.10.United States trade relations with foreign countries could negatively impact the financial condition of LCNB's
customers, which could adversely affect LCNB 's operating results and financial condition;
12.deterioration in the financial condition of the U.S. banking system may impact the valuations of investments LCNB has made in the securities of other financial institutions resulting in either actual losses or other-than-temporary impairments on such investments;
13.11.difficulties with technology or data security breaches, including cyberattacks, that could negatively affect LCNB's ability to conduct business and its relationships with customers, vendors, and others;
14.12.adverse weather events and natural disasters and global and/or national epidemics;epidemics could negatively affect LCNB's customers given its concentrated geographic scope, which could impact LCNB's operating results; and
15.13.government intervention in the U.S. financial system, including the effects of legislative, tax, accounting, and regulatory actions and reforms, including the CARES Act, the Dodd-Frank Act, the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau, the capital ratios of Basel III as adopted by the federal banking authorities, and the Tax Cuts and Jobs Act.Act, 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.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Coronavirus Update/Status
The COVID-19 pandemic has continued to disrupt the global economy and the lives of individuals throughout the world. Governments, businesses, and the public have taken and are taking actions to contain the spread of COVID-19 and to mitigate its effects. While the effects of COVID-19 are not fully known, the pandemic and related efforts to contain it have disrupted economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. While vaccination efforts continue, the future affects from the pandemic, including the potential scope of recovery, are not fully known.
LCNB participated in the CARES Act PPP that provided government guaranteed and potentially forgivable loans to applicants. The PPP was implemented by the SBA with support from the Department of the Treasury and provided small businesses with funds to pay up to eight or twenty-four weeks, depending on the date of the loan, of payroll costs including benefits. Funds could also be used to pay interest on mortgages, rent, utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures. Outstanding PPP loans at March 31, 2022 and December 31, 2021 totaled $1,415,000 and $6,935,000, respectively, and unrecognized fees at those dates totaled $66,000 and $272,000, respectively.
LCNB continues to closely monitor the COVID-19 pandemic and its impact on its business, customers, employees, vendors, and service providers and expects to make future changes to respond to the pandemic as this situation continues to evolve.
Critical Accounting Estimates
Allowance for Loan LossesCredit Losses.. The allowance foris maintained at a level LCNB management believes is adequate to absorb estimated credit losses identified and inherent in the loan lossesportfolio. The allowance is established through a provision for loancredit losses charged to expense. Loans are charged against the allowance for loancredit losses when management believes that the collectibilitycollectability 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 inherentestimated losses over the contractual terms in the loan portfolio based on evaluations of the collectibilitycollectability 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.
The allowance consistsIn June 2016, the FASB issued ASU No. 2016-13, Measurement of specificCredit 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 general components. The specific component typically relates to loanscertain other instruments that are classifiednot measured at fair value through net income. This standard replaced the “incurred loss” approach with an “expected loss” model. Referred to as doubtful, substandard, or special mention. For such loans an allowance is established when the discounted cash flows or collateral value is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors, which include trends in underperforming loans, trends in the volume and terms of loans, economic trends and conditions, concentrations of credit, trends in the quality of loans, and borrower financial statement exceptions.
Based on its evaluations, management believes that the allowance for loan losses will be adequate to absorb estimated losses inherent in the current loan portfolio.
Acquired Credit Impaired Loans. LCNB accounts for acquisitions using the acquisition method of accounting, which requires thatexpected credit loss (“CECL”) model, this standard applies to financial assets acquiredsubject to credit losses and liabilities assumed be measured at their fair values atamortized 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 acquisition date. Acquired loans are reviewedallowance. In addition, entities need to determine if there is evidencedisclose the amortized cost balance for each class of deterioration infinancial asset by credit quality since inception and if it is probable that LCNB will be unable to collect all amounts due underindicator, disaggregated by the contractual loan agreements. The analysis includes expected prepayments and estimated cash flows including principal and interest payments at the dateyear of acquisition. The amount in excess of the estimated future cash flows is not accreted into earnings. The amount in excess of the estimated future cash flows over the book value of the loan is accreted into interest income over the remaining life of the loan (accretable yield). LCNB records these loans on the acquisition date at their fair values. Thus, an allowance for estimated future losses is not established on the acquisition date. Subsequent to the date of acquisition, expected future cash flows on loans acquired are updated and any losses or reductions in estimated cash flows which arise subsequent to the date of acquisition are reflected as a charge through the provision for loan losses. An increase in the expected cash flows adjusts the level of the accretable yield recognized on a prospective basis over the remaining life of the loan. Due to the number, size, and complexity of loans within the acquired loan portfolio, there is always a possibility of inherent undetected losses.
LCNB CORP. AND SUBSIDIARIESadopted 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 a decrease in the allowance of $0.4 million, and a $0.3 million increase to the retained earnings account to reflect the cumulative effect of adopting CECL on the Consolidated Balance Sheet, with the $0.1 million tax impact portion being recorded as part of the deferred tax asset in other assets in the Consolidated Balance Sheet.
Item 2. Management's DiscussionSee Note 1- Basis of Presentation in this Quarterly Report on Form 10-Q for further detailed descriptions of LCNB's estimation process and Analysis of Financial Conditionmethodology related to the allowance. See also Note 3 – Loans in this Quarterly Report on Form 10-Q for further information regarding LCNB's loan portfolio and Results of Operations (continued)allowance.
Accounting for Intangibles. LCNB’s intangible assets at March 31, 2022 are composed primarily of goodwill and core deposit intangibles related to acquisitions of other financial institutions. It also includes mortgage servicing rights recorded from sales of mortgage loans to the Federal Home Loan Mortgage Corporation and mortgage servicing rights acquired through the acquisition of Eaton National Bank & Trust Co. and Columbus First Bancorp, Inc. CFB.
Goodwill is not subject to amortization, but is reviewed annually for impairment. A review for impairment or soonermay be conducted more frequently than annually if circumstances indicate a possible impairment. Impairment indicators that may be considered include the condition of the economy and banking industry; estimated future cash flows; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of LCNB’s stock; and other relevant events. These and other factors could lead to a conclusion that goodwill is impaired, which would require LCNB to write off the difference between the estimated fair value of the Company and the carrying value.
Core deposit intangibles acquired from business combinations are beinginitially measured at their estimated fair values and are then amortized on a straight linestraight-line basis over their respective estimated weighted averageuseful lives. Management evaluates whether events or circumstances have occurred that indicate the remaining useful life or carrying value of the amortizing intangible should be revised.
Mortgage servicing rights are capitalized by allocating the total cost of loans between mortgage servicing rights and the loans based on their estimated fair values. Capitalized mortgage servicing rights are amortized to loan servicing income in proportion to and over the period of estimated servicing income, subject to periodic review for impairment.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Fair Value Accounting for Debt Securities. Debt securities classified as available-for-sale are carried at estimated fair value. Unrealized gains and losses, net of taxes, are reported as accumulated other comprehensive income or loss in shareholders' equity. Fair value is estimated using market quotations for U.S. Treasury investments. Fair value for the majority of the remaining available-for-sale securities is estimated using the discounted cash flow method for each security with discount rates based on rates observed in the market.
Results of Operations
Net income for the three months ended March 31, 20222023 was $4,523,000$4.2 million (total basic and diluted earnings per share of $0.38). This compares$0.37), compared to net income of $5,240,000$4.5 million (total basic and diluted earnings per share of $0.41)$0.38) for the same three monththree-month period in 2021.2022.
Net interest income for the three months ended March 31, 20222023 was $14,223,000,$13.9 million, compared to $14,372,000$14.2 million for the same period in 2021.2022. The decrease in net interest income was primarily due to a decreasehigher interest expense associated with the rapid year-over-year increase in the average rate earned onEffective Federal Funds Rate. LCNB's tax equivalent net interest margin for the loan portfolio, partially offset by an increase in average loan and taxable debt security balances. A decrease in fees recognized from PPP loans contributedfirst quarter of 2023 was 3.28%, compared to 3.35% for the decrease in average loan rates.same period last year.
An increase in the provision for loan losses negatively affected earnings during the 2022 period. LCNB recorded a recovery of credit losses of $57,000 for the three-month period ended March 31, 2023. This compared to a provision for credit losses of $49,000 for the three months ended March 31, 2022, compared to a credit of $52,000 for the same three monththree-month period in 2021.2022.
Non-interest income for the three months ended March 31, 2023 and 2022 was $3,550,000. This compares to $3,465,000$3.6 million for the same period in 2021. The increase was primarily due to increases in fiduciaryboth periods. Fiduciary income and service charges and fees on deposit accounts andincreased during 2023, partially offset by decreased gains from sales of loans. These increases were partially offset by a decrease in other operating income, primarily due to a decrease in market values for LCNB's equity investments portfolio.
Non-interest expense for the three months ended March 31, 20222023 was $12,250,000,$12.5 million, compared to $11,492,000$12.2 million for the same three monththree-month period in 2021. The increase was2022. Other non-interest expense increased primarily due to a an increase inincreased salaries and employee benefits.benefits, occupancy expenses, and FDIC insurance premiums. These higher costs were partially offset by decreases in equipment expenses, state financial institutions tax expense, and marketing expenses.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Net Interest Income
Three Months Ended March 31, 20222023 vs. March 31, 20212022
LCNB's primary source of earnings is net interest income, which is the difference between earnings from loans and other investments and interest paid on deposits and other liabilities. The following table presents, for the three months ended March 31, 20222023 and March 31, 2021,2022, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resulting average yields earned or rates paid.
| | | | Three Months Ended March 31, | | | Three Months Ended March 31, |
| | | 2022 | | 2021 | | | 2023 | | 2022 |
| | Average Outstanding Balance | | Interest Earned/ Paid | | Average Yield/ Rate | | Average Outstanding Balance | | Interest Earned/ Paid | | Average Yield/ Rate | | Average Outstanding Balance | | Interest Earned/ Paid | | Average Yield/ Rate | | Average Outstanding Balance | | Interest Earned/ Paid | | Average Yield/ Rate |
| | | | | (Dollars in thousands) | | | | | | | | | (Dollars in thousands) | | | | |
Loans (1) | Loans (1) | | $ | 1,376,926 | | | 13,786 | | | 4.06 | % | | $ | 1,313,803 | | | 14,535 | | | 4.49 | % | Loans (1) | | $ | 1,389,385 | | | 16,143 | | | 4.71 | % | | $ | 1,376,926 | | | 13,786 | | | 4.06 | % |
Interest-bearing demand deposits | Interest-bearing demand deposits | | 9,743 | | | 9 | | | 0.37 | % | | 15,632 | | | 13 | | | 0.34 | % | Interest-bearing demand deposits | | 12,500 | | | 157 | | | 5.09 | % | | 9,743 | | | 9 | | | 0.37 | % |
| Federal Reserve Bank stock | Federal Reserve Bank stock | | 4,652 | | | — | | | — | % | | 4,652 | | | — | | | — | % | Federal Reserve Bank stock | | 4,652 | | | — | | | — | % | | 4,652 | | | — | | | — | % |
Federal Home Loan Bank stock | Federal Home Loan Bank stock | | 5,203 | | | 26 | | | 2.03 | % | | 5,203 | | | 26 | | | 2.03 | % | Federal Home Loan Bank stock | | 6,796 | | | 62 | | | 3.70 | % | | 5,203 | | | 26 | | | 2.03 | % |
Investment securities: | Investment securities: | | Investment securities: | |
Equity securities | Equity securities | | 4,611 | | | 17 | | | 1.50 | % | | 4,500 | | | 19 | | | 1.71 | % | Equity securities | | 4,337 | | | 37 | | | 3.46 | % | | 4,611 | | | 17 | | | 1.50 | % |
Debt securities, taxable | Debt securities, taxable | | 298,152 | | | 1,095 | | | 1.49 | % | | 211,618 | | | 718 | | | 1.38 | % | Debt securities, taxable | | 286,369 | | | 1,343 | | | 1.90 | % | | 298,152 | | | 1,095 | | | 1.49 | % |
Debt securities, non-taxable (2) | Debt securities, non-taxable (2) | | 28,048 | | | 239 | | | 3.46 | % | | 34,174 | | | 284 | | | 3.37 | % | Debt securities, non-taxable (2) | | 24,969 | | | 223 | | | 3.62 | % | | 28,048 | | | 239 | | | 3.46 | % |
Total earnings assets | Total earnings assets | | 1,727,335 | | | 15,172 | | | 3.56 | % | | 1,589,582 | | | 15,595 | | | 3.98 | % | Total earnings assets | | 1,729,008 | | | 17,965 | | | 4.21 | % | | 1,727,335 | | | 15,172 | | | 3.56 | % |
Non-earning assets | Non-earning assets | | 195,394 | | | | | | | 191,287 | | | | | | Non-earning assets | | 200,256 | | | | | | | 195,394 | | | | | |
Allowance for loan losses | | (5,503) | | | | | | | (5,715) | | | | | | |
Allowance for credit losses | | Allowance for credit losses | | (7,522) | | | | | | | (5,503) | | | | | |
Total assets | Total assets | | $ | 1,917,226 | | | | | | | $ | 1,775,154 | | | | | | Total assets | | $ | 1,921,742 | | | | | | | $ | 1,917,226 | | | | | |
| NOW and money fund deposits | | $ | 511,250 | | | 147 | | | 0.12 | % | | $ | 419,832 | | | 132 | | | 0.13 | % | |
NOW and money market deposits | | NOW and money market deposits | | $ | 505,382 | | | 1,245 | | | 1.00 | % | | $ | 511,250 | | | 147 | | | 0.12 | % |
Savings deposits | Savings deposits | | 444,243 | | | 147 | | | 0.13 | % | | 375,194 | | | 148 | | | 0.16 | % | Savings deposits | | 415,873 | | | 139 | | | 0.14 | % | | 444,243 | | | 147 | | | 0.13 | % |
IRA and time certificates | IRA and time certificates | | 189,305 | | | 445 | | | 0.95 | % | | 234,134 | | | 748 | | | 1.30 | % | IRA and time certificates | | 185,297 | | | 1,072 | | | 2.35 | % | | 189,305 | | | 445 | | | 0.95 | % |
Short-term borrowings | Short-term borrowings | | 12,503 | | | 86 | | | 2.79 | % | | 342 | | | 1 | | | 1.19 | % | Short-term borrowings | | 94,591 | | | 1,304 | | | 5.59 | % | | 12,503 | | | 86 | | | 2.79 | % |
Long-term debt | Long-term debt | | 10,000 | | | 74 | | | 3.00 | % | | 19,689 | | | 134 | | | 2.76 | % | Long-term debt | | 18,983 | | | 216 | | | 4.61 | % | | 10,000 | | | 74 | | | 3.00 | % |
Total interest-bearing liabilities | Total interest-bearing liabilities | | 1,167,301 | | | 899 | | | 0.31 | % | | 1,049,191 | | | 1,163 | | | 0.45 | % | Total interest-bearing liabilities | | 1,220,126 | | | 3,976 | | | 1.32 | % | | 1,167,301 | | | 899 | | | 0.31 | % |
Demand deposits | Demand deposits | | 501,829 | | | | | | | 458,996 | | | | | Demand deposits | | 477,305 | | | | | | | 501,829 | | | | |
Other liabilities | Other liabilities | | 22,371 | | | | | | | 25,450 | | | | | | Other liabilities | | 21,892 | | | | | | | 22,371 | | | | | |
Capital | | 225,725 | | | | | | | 241,517 | | | | | | |
Total liabilities and capital | | $ | 1,917,226 | | | | | | | $ | 1,775,154 | | | | | | |
Equity | | Equity | | 202,419 | | | | | | | 225,725 | | | | | |
Total liabilities and equity | | Total liabilities and equity | | $ | 1,921,742 | | | | | | | $ | 1,917,226 | | | | | |
Net interest rate spread (3) | Net interest rate spread (3) | | | | | | 3.25 | % | | | | | | 3.53 | % | Net interest rate spread (3) | | | | | | 2.89 | % | | | | | | 3.25 | % |
Net interest income and net interest margin on a taxable-equivalent basis (4) | Net interest income and net interest margin on a taxable-equivalent basis (4) | | | | 14,273 | | | 3.35 | % | | | | 14,432 | | | 3.68 | % | Net interest income and net interest margin on a taxable-equivalent basis (4) | | | | 13,989 | | | 3.28 | % | | | | 14,273 | | | 3.35 | % |
Ratio of interest-earning assets to interest-bearing liabilities | Ratio of interest-earning assets to interest-bearing liabilities | | 147.98 | % | | | | | | 151.51 | % | | | | | Ratio of interest-earning assets to interest-bearing liabilities | | 141.71 | % | | | | | | 147.98 | % | | | | |
(1)Includes non-accrual loans.
(2)Income from tax-exempt securities is included in interest income on a taxable-equivalent basis. Interest income has been divided
by a factor comprised of the complement of the incremental tax rate of 21%.
(3)The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities.
(4)The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table presents the changes in taxable-equivalent basis interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the three months ended March 31, 20222023 as compared to the same period in 2021.2022. Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each.
| | | Three Months Ended March 31, 2022 vs. 2021 | | Three Months Ended March 31, 2023 vs. 2022 |
| | Increase (decrease) attributable to: | | Increase (decrease) attributable to: |
| | | Volume | | Rate | | Total | | | Volume | | Rate | | Total |
| | | (In thousands) | | | (In thousands) |
Interest-earning Assets: | Interest-earning Assets: | | Interest-earning Assets: | |
Loans | Loans | | $ | 676 | | | (1,425) | | | (749) | | Loans | | $ | 126 | | | 2,231 | | | 2,357 | |
| Interest-bearing demand deposits | Interest-bearing demand deposits | | (5) | | | 1 | | | (4) | | Interest-bearing demand deposits | | 3 | | | 145 | | | 148 | |
| Federal Reserve Bank stock | Federal Reserve Bank stock | | — | | | — | | | — | | Federal Reserve Bank stock | | — | | | — | | | — | |
Federal Home Loan Bank stock | Federal Home Loan Bank stock | | — | | | — | | | — | | Federal Home Loan Bank stock | | 10 | | | 26 | | | 36 | |
Investment securities: | Investment securities: | | | Investment securities: | | |
Equity securities | Equity securities | | — | | | (2) | | | (2) | | Equity securities | | (1) | | | 21 | | | 20 | |
Debt securities, taxable | Debt securities, taxable | | 314 | | | 63 | | | 377 | | Debt securities, taxable | | (45) | | | 293 | | | 248 | |
Debt securities, non-taxable | Debt securities, non-taxable | | (52) | | | 7 | | | (45) | | Debt securities, non-taxable | | (27) | | | 11 | | | (16) | |
Total interest income | Total interest income | | 933 | | | (1,356) | | | (423) | | Total interest income | | 66 | | | 2,727 | | | 2,793 | |
| Interest-bearing Liabilities: | Interest-bearing Liabilities: | | | | | Interest-bearing Liabilities: | | | | |
NOW and money fund deposits | | 27 | | | (12) | | | 15 | | |
NOW and money market deposits | | NOW and money market deposits | | (2) | | | 1,100 | | | 1,098 | |
Savings deposits | Savings deposits | | 25 | | | (26) | | | (1) | | Savings deposits | | (9) | | | 1 | | | (8) | |
IRA and time certificates | IRA and time certificates | | (127) | | | (176) | | | (303) | | IRA and time certificates | | (10) | | | 637 | | | 627 | |
Short-term borrowings | Short-term borrowings | | 82 | | | 3 | | | 85 | | Short-term borrowings | | 1,056 | | | 162 | | | 1,218 | |
Long-term debt | Long-term debt | | (71) | | | 11 | | | (60) | | Long-term debt | | 89 | | | 53 | | | 142 | |
Total interest expense | Total interest expense | | (64) | | | (200) | | | (264) | | Total interest expense | | 1,124 | | | 1,953 | | | 3,077 | |
Net interest income | Net interest income | | $ | 997 | | | (1,156) | | | (159) | | Net interest income | | $ | (1,058) | | | 774 | | | (284) | |
Net interest income on a fully taxable-equivalent basis for the three months ended March 31, 20222023 totaled $14,273,000,$13,989,000, a decrease of $159,000$284,000 from the comparable period in 2021.2022. Total interest income decreased $423,000,increased $2,793,000, which was partiallymore than offset by a $264,000 decreasean increase in total interest expense.expense of $3,077,000.
The $423,000 decrease$2,793,000 increase in total interest income was due primarily to a $749,000 decrease$2,357,000 increase in loan interest income which was partially offset byand a $377,000$248,000 increase in interest income from taxable debt securities. The decreaseincrease in loan interest income was primarily due to a 43net 65 basis point (a basis point equals 0.01%) decreaseincrease in the average rate earned on loans, partially offset by a $63.1 million increase in the average balance of LCNB's loan portfolio. Loan interest income for the first quarter 2022 included $248,000 of PPP loan fees recognized, as compared to $523,000 of PPP fees recognized during the first quarter 2021. The increase in interest income from taxable debt securities was due to an $86.5 million increase in average securities and to an 11a 41 basis point increase in the average rate earned on these securities. Thesecurities, partially offset by an $11.8 million decrease in average securities. The increase in loan and taxable debt securities average rates for loansreflects higher market rates.
The $3,077,000 increase in total interest expense was primarily due to a $1,098,000 increase in interest expense for NOW and money market conditionsdeposits, a $627,000 increase in interest expense for IRA and also reflectedtime certificates, a $1,218,000 increase in interest expense for short-term borrowings, and a $142,000 increase in interest expense for long-term debt. Interest expense increased primarily due to an 88 basis point increase in the decreaseaverage rate paid for NOW and money market deposits, a 139 basis point increase in PPP fees recognized.
average rates paid for IRA and time certificates, a 280 basis point increase in the average rate paid on short-term borrowings, and a 161 basis point increase in average rates paid for long-term debt. In addition, the average balance of short-term borrowings increased $82.1 million and the average balance of long-term debt increased $9.0 million, reflecting a new one-year line of credit borrowing originated during February 2022 and a new term loan originated during June 2022.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Increases in market rates during 2022 and 2023 were primarily caused by increases in the Targeted Federal Funds rate by the FOMC. The $264,000 decrease in total interest expense was due to a $303,000 decrease in interest expense for IRATargeted Federal Funds rate increased by 425 basis points during 2022 and time certificates and a $60,000 decrease in interest expense for long-term debt, partially offset by an $85,000 increase in interest expense for short-term borrowings. Interest expense for IRA and time certificates decreased due to a 34additional 50 basis point decrease inpoints during the average rate paid for these deposits and to an $44.8 million decrease in the average balancefirst quarter of these deposits. Management believes the decrease reflects customer preferences for liquidity during uncertain economic periods. Balances in demand deposits, NOW and money fund deposits, and savings deposits have grown, while balances in IRA and time deposits have decreased. Interest expense for long-term debt decreased due to a $9.7 million decrease in average debt outstanding, slightly offset by a 24 basis point increase in the average rate paid. Interest expense for short-term borrowings increased primarily because of a $12.2 million increase in average borrowings outstanding.2023.
Provision and Allowance For LoanCredit Losses
The total provision for loan losses is determined based upon management's evaluation as to the amount needed to maintain the allowance for loan losses atLCNB recorded a level considered appropriate in relation to the risk of losses inherent in the portfolio. For analysis purposes, the loan portfolio is separated into pools of similar loans. These pools include commercial & industrial loans, owner occupied commercial real estate loans, non-owner occupied commercial real estate loans, real estate loans secured by farms, real estate loans secured by multi-family dwellings, residential real estate loans secured by senior liens on 1-4 family dwellings, residential real estate loans secured by junior liens on 1-4 family dwellings, home equity linerecovery 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 poollosses of loans, LCNB examines a variety of factors to determine the adequacy of the allowance for loan losses, including historic charge-off percentages, overall pool quality, a review of specific problem loans, current economic trends and conditions that may affect borrowers' ability to pay, and the nature, volume, and consistency of the loan pool.
The provision for loan losses$57,000 for the three months ended March 31, 2022 was $49,000,2023, compared to a net provision for credit losses of $52,000$49,000 for the samethree months ended March 31, 2022. The recovery for the first three months in 2023 included a recovery of credit losses on off-balance sheet credit exposures of $89,000, partially offset by a provision for credit losses on loans of $32,000. The provision for credit losses on loans includes an increase in the allowance for individually evaluated loans because of loans that were evaluated for the first time. In the pooled loan categories, there was a provision for commercial and industrial loans, largely offset by recoveries in most of the other pool categories. The allowance for commercial and industrial loans increased largely due to an increase in outstanding balances and to an increase in the qualitative part of the loss rate. The other loan categories had recoveries primarily due to decreases in loss rates, reflecting a change in the forecasted period from one quarter with a one quarter reversion to the long-term historical average to a forecasted period of one quarter with a two quarter reversion period. Off-balance sheet credit exposures had a recovery due to a decrease in 2021. commitments outstanding and to the decrease in the loss rate.
Calculating an appropriate level for the allowance and provision for loancredit losses involves a high degree of management judgment and is, by its nature, imprecise. Revisions may be necessary as more information becomes available.
Net charge-offs for the three months ended March 31, 2022 were $25,000, as2023 totaled $16,000, compared to net recoveriescharge-offs of $3,000$25,000 for the same three-month period in 2021.2022.
Non-Interest Income
A comparison of non-interest income for the three months ended March 31, 20222023 and March 31, 20212022 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | | | 2022 | | 2021 | | Difference |
Fiduciary income | | | | | | | $ | 1,695 | | | 1,529 | | | 166 | |
Service charges and fees on deposit accounts | | | | | | | 1,406 | | | 1,366 | | | 40 | |
| | | | | | | | | | | |
Bank owned life insurance income | | | | | | | 265 | | | 267 | | | (2) | |
Gains from sales of loans | | | | | | | 124 | | | 43 | | | 81 | |
Other operating income | | | | | | | 60 | | | 260 | | | (200) | |
Total non-interest income | | | | | | | $ | 3,550 | | | 3,465 | | | 85 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | | | 2023 | | 2022 | | Difference |
Fiduciary income | | | | | | | $ | 1,740 | | | 1,695 | | | 45 | |
Service charges and fees on deposit accounts | | | | | | | 1,482 | | | 1,406 | | | 76 | |
| | | | | | | | | | | |
Bank-owned life insurance income | | | | | | | 271 | | | 265 | | | 6 | |
Gains from sales of loans | | | | | | | 6 | | | 124 | | | (118) | |
Other operating income | | | | | | | 82 | | | 60 | | | 22 | |
Total non-interest income | | | | | | | $ | 3,581 | | | 3,550 | | | 31 | |
Reasons for changes include:
•Fiduciary income increased primarily due to a combination of new accounts and increases in the fair valuevalues of trust and brokerage assets managed.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 an increase in the volume of fees recognized in relation to the ICS deposit program and to an increase in fees received from debit card usage and overdraft fees collected. The ICS deposit program is a service offered by LCNB in partnership with IntraFi. When a depositor submits funds in an amount greater than FDIC insurance limits and if this program is selected, the funds will be divided into amounts within FDIC limits and distributed to other banks within the IntraFi network.
•Gains from sales of loans increaseddecreased primarily due to a higherlower volume of residential real estate loan sales.loans sold during the first quarter of 2023 as compared to the same period in 2022.
•
Other operating income decreased primarily due to a decrease in unrealized net gains or losses recognized on equity securities.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Non-Interest Expense
A comparison of non-interest expense for the three months ended March 31, 20222023 and March 31, 20212022 is as follows (in thousands):
| | | | | Three Months Ended March 31, | | | | Three Months Ended March 31, |
| | | | 2022 | | 2021 | | Difference | | | | 2023 | | 2022 | | Difference |
Salaries and employee benefits | Salaries and employee benefits | | | $ | 7,215 | | | 6,433 | | | 782 | | Salaries and employee benefits | | | $ | 7,349 | | | 7,215 | | | 134 | |
Equipment expenses | Equipment expenses | | | 408 | | | 368 | | | 40 | | Equipment expenses | | | 361 | | | 408 | | | (47) | |
Occupancy expense, net | Occupancy expense, net | | | 775 | | | 794 | | | (19) | | Occupancy expense, net | | | 963 | | | 775 | | | 188 | |
State financial institutions tax | State financial institutions tax | | | 436 | | | 444 | | | (8) | | State financial institutions tax | | | 397 | | | 436 | | | (39) | |
Marketing | Marketing | | | 262 | | | 268 | | | (6) | | Marketing | | | 192 | | | 262 | | | (70) | |
Amortization of intangibles | Amortization of intangibles | | | 140 | | | 257 | | | (117) | | Amortization of intangibles | | | 111 | | | 140 | | | (29) | |
FDIC insurance premiums, net | FDIC insurance premiums, net | | | 126 | | | 113 | | | 13 | | FDIC insurance premiums, net | | | 215 | | | 126 | | | 89 | |
Contracted services | Contracted services | | | 610 | | | 540 | | | 70 | | Contracted services | | | 641 | | | 610 | | | 31 | |
Other real estate owned, net | | Other real estate owned, net | | | — | | | — | | | — | |
| Other non-interest expense | Other non-interest expense | | | 2,278 | | | 2,275 | | | 3 | | Other non-interest expense | | | 2,296 | | | 2,278 | | | 18 | |
Total non-interest expense | Total non-interest expense | | | $ | 12,250 | | | 11,492 | | | 758 | | Total non-interest expense | | | $ | 12,525 | | | 12,250 | | | 275 | |
Reasons for changes include:
•Salaries and employee benefits increased primarily due to increases in salariesoverall wage and wages, increased bonus expense accruals,benefit increases, increased compensation expense for restricted stock grants,awards granted, and increased FICApension and 401(k) matching expense, and to a higher percentage of personnel expenses deferred in 2021 attributable to the high volume of PPP loans originated in that period.expenses. These increases were partially offset by lower health insurance costs.
•AmortizationOccupancy expense increased due to repair and maintenance costs for LCNB's office locations.
•FDIC insurance premiums increased because of intangibles decreased becausea two basis point increase in the coreFDIC's initial base deposit intangibles frominsurance assessment rate that took effect at the First Capital Bancshares, Inc. and Eaton National Bank & Trust Co. acquisitions amortized in full during the first quarter 2022.beginning of 2023.
Income Taxes
LCNB's effective tax rate for the three months ended March 31, 20222023 was 17.4%17.8%, compared to 18.1%17.4% for the three months ended March 31, 2021.2022. The difference between the statutory rate of 21% and the effective tax rates is primarily due to tax-exempt interest income from municipal securities, tax-exempt earnings from bank ownedbank-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.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Financial Condition
A comparison of balance sheet line items at March 31, 20222023 and December 31, 20212022 is as follows (dollars in thousands):
| | | March 31, 2022 | | December 31, 2021 | | Difference $ | | Difference % | | March 31, 2023 | | December 31, 2022 | | Difference $ | | Difference % |
ASSETS: | ASSETS: | | | | | | | | ASSETS: | | | | | | | |
Total cash and cash equivalents | Total cash and cash equivalents | $ | 19,941 | | | 18,136 | | | 1,805 | | | 9.95 | % | Total cash and cash equivalents | $ | 31,876 | | | 22,701 | | | 9,175 | | | 40.42 | % |
| Investment securities: | Investment securities: | | Investment securities: | |
Equity securities with a readily determinable fair value, at fair value | Equity securities with a readily determinable fair value, at fair value | 2,424 | | | 2,546 | | | (122) | | | (4.79) | % | Equity securities with a readily determinable fair value, at fair value | 1,286 | | | 2,273 | | | (987) | | | (43.42) | % |
Equity securities without a readily determinable fair value, at cost | Equity securities without a readily determinable fair value, at cost | 2,099 | | | 2,099 | | | — | | | — | % | Equity securities without a readily determinable fair value, at cost | 2,099 | | | 2,099 | | | — | | | — | % |
Debt securities, available-for-sale, at fair value | Debt securities, available-for-sale, at fair value | 293,464 | | | 308,177 | | | (14,713) | | | (4.77) | % | Debt securities, available-for-sale, at fair value | 293,427 | | | 289,850 | | | 3,577 | | | 1.23 | % |
Debt securities, held-to-maturity, at cost | 22,873 | | | 22,972 | | | (99) | | | (0.43) | % | |
Debt securities, held-to-maturity, net, at cost | | Debt securities, held-to-maturity, net, at cost | 19,763 | | | 19,878 | | | (115) | | | (0.58) | % |
Federal Reserve Bank stock, at cost | Federal Reserve Bank stock, at cost | 4,652 | | | 4,652 | | | — | | | — | % | Federal Reserve Bank stock, at cost | 4,652 | | | 4,652 | | | — | | | — | % |
Federal Home Loan Bank stock, at cost | Federal Home Loan Bank stock, at cost | 5,203 | | | 5,203 | | | — | | | — | % | Federal Home Loan Bank stock, at cost | 6,967 | | | 4,415 | | | 2,552 | | | 57.80 | % |
Loans, net | Loans, net | 1,373,991 | | | 1,363,939 | | | 10,052 | | | 0.74 | % | Loans, net | 1,386,972 | | | 1,395,632 | | | (8,660) | | | (0.62) | % |
Premises and equipment, net | Premises and equipment, net | 34,940 | | | 35,385 | | | (445) | | | (1.26) | % | Premises and equipment, net | 33,186 | | | 33,042 | | | 144 | | | 0.44 | % |
Operating lease right-of-use assets | Operating lease right-of-use assets | 6,191 | | | 6,357 | | | (166) | | | (2.61) | % | Operating lease right-of-use assets | 6,093 | | | 6,248 | | | (155) | | | (2.48) | % |
Goodwill | Goodwill | 59,221 | | | 59,221 | | | — | | | — | % | Goodwill | 59,221 | | | 59,221 | | | — | | | — | % |
Core deposit and other intangibles | Core deposit and other intangibles | 2,328 | | | 2,473 | | | (145) | | | (5.86) | % | Core deposit and other intangibles | 1,665 | | | 1,827 | | | (162) | | | (8.87) | % |
Bank owned life insurance | 43,488 | | | 43,224 | | | 264 | | | 0.61 | % | |
Bank-owned life insurance | | Bank-owned life insurance | 44,569 | | | 44,298 | | | 271 | | | 0.61 | % |
Interest receivable | Interest receivable | 8,364 | | | 7,999 | | | 365 | | | 4.56 | % | Interest receivable | 8,005 | | | 7,482 | | | 523 | | | 6.99 | % |
Other assets | Other assets | 20,451 | | | 21,246 | | | (795) | | | (3.74) | % | Other assets | 24,750 | | | 25,503 | | | (753) | | | (2.95) | % |
Total assets | Total assets | $ | 1,899,630 | | | 1,903,629 | | | (3,999) | | | (0.21) | % | Total assets | $ | 1,924,531 | | | 1,919,121 | | | 5,410 | | | 0.28 | % |
| LIABILITIES: | LIABILITIES: | | LIABILITIES: | |
Deposits: | Deposits: | | Deposits: | |
Non-interest-bearing | Non-interest-bearing | $ | 517,621 | | | 501,531 | | | 16,090 | | | 3.21 | % | Non-interest-bearing | $ | 473,345 | | | 505,824 | | | (32,479) | | | (6.42) | % |
Interest-bearing | Interest-bearing | 1,118,985 | | | 1,127,288 | | | (8,303) | | | (0.74) | % | Interest-bearing | 1,130,536 | | | 1,099,146 | | | 31,390 | | | 2.86 | % |
Total deposits | Total deposits | 1,636,606 | | | 1,628,819 | | | 7,787 | | | 0.48 | % | Total deposits | 1,603,881 | | | 1,604,970 | | | (1,089) | | | (0.07) | % |
Short-term borrowings | Short-term borrowings | 24,746 | | | — | | | 24,746 | | | N/A | Short-term borrowings | 76,500 | | | 71,455 | | | 5,045 | | | 7.06 | % |
Long-term debt | Long-term debt | 10,000 | | | 10,000 | | | — | | | — | % | Long-term debt | 18,598 | | | 19,072 | | | (474) | | | (2.49) | % |
Operating lease liabilities | Operating lease liabilities | 6,337 | | | 6,473 | | | (136) | | | (2.10) | % | Operating lease liabilities | 6,246 | | | 6,370 | | | (124) | | | (1.95) | % |
Accrued interest and other liabilities | Accrued interest and other liabilities | 15,066 | | | 19,733 | | | (4,667) | | | (23.65) | % | Accrued interest and other liabilities | 15,234 | | | 16,579 | | | (1,345) | | | (8.11) | % |
Total liabilities | Total liabilities | 1,692,755 | | | 1,665,025 | | | 27,730 | | | 1.67 | % | Total liabilities | 1,720,459 | | | 1,718,446 | | | 2,013 | | | 0.12 | % |
| SHAREHOLDERS' EQUITY: | SHAREHOLDERS' EQUITY: | | SHAREHOLDERS' EQUITY: | |
Common shares | Common shares | 143,432 | | | 143,130 | | | 302 | | | 0.21 | % | Common shares | 144,488 | | | 144,069 | | | 419 | | | 0.29 | % |
Retained earnings | Retained earnings | 128,555 | | | 126,312 | | | 2,243 | | | 1.78 | % | Retained earnings | 139,115 | | | 139,249 | | | (134) | | | (0.10) | % |
Treasury shares at cost | (50,115) | | | (29,029) | | | (21,086) | | | 72.64 | % | |
Treasury shares, at cost | | Treasury shares, at cost | (54,527) | | | (52,689) | | | (1,838) | | | 3.49 | % |
Accumulated other comprehensive loss, net of taxes | Accumulated other comprehensive loss, net of taxes | (14,997) | | | (1,809) | | | (13,188) | | | 729.02 | % | Accumulated other comprehensive loss, net of taxes | (25,004) | | | (29,954) | | | 4,950 | | | (16.53) | % |
Total shareholders' equity | Total shareholders' equity | 206,875 | | | 238,604 | | | (31,729) | | | (13.30) | % | Total shareholders' equity | 204,072 | | | 200,675 | | | 3,397 | | | 1.69 | % |
Total liabilities and shareholders' equity | Total liabilities and shareholders' equity | $ | 1,899,630 | | | 1,903,629 | | | (3,999) | | | (0.21) | % | Total liabilities and shareholders' equity | $ | 1,924,531 | | | 1,919,121 | | | 5,410 | | | 0.28 | % |
Reasons for changes include:
•DebtAvailable-for-sale debt securities available-for-sale, decreasedincreased due to a partial recovery in market valuation during the first quarter of 2023, partially offset by maturities and calls of securities totaling $9.8 million and decreases in market value totaling $16.7 million, largely offset by purchases of additional securities totaling $12.1 million.calls.
•Net loansFederal Home Loan Bank stock increased due to organic growth in the loan portfolio. Mostpurchase of the growth occurred in the commercial real estate and commercial and industrial portfolios,additional stock to support additional short-term borrowings, partially offset by decreases in the residential real estate and agricultural loan portfolios.FHLB's repurchase of excess stock.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
•Non-interest-bearing depositsNet loans decreased primarily due to payments and interest-bearing deposits have grown substantially sincepayoffs received from borrowers, partially offset by the startorigination of new loans. Contributing to the COVID-19 pandemic and this trend continued duringdecrease was a $2.2 million increase in the first three monthsallowance for credit losses primarily due to adoption of 2022. Management believes the growth reflects customer preferences for liquidity during uncertain economic periods. Balances in demand deposits and NOW and savings accounts have grown, while balances in IRA and time deposits have decreased. Interest-bearing deposits show a decrease because of a $29.5 million decrease in ICS® Demand Reciprocal deposit balances.ASU No. 2016-13.
•Short-term borrowings increased due to a $20 million one-year revolving line of credit obtainedTotal deposits remained substantially stable during the first quarter 2022. The borrowing was used to finance the repurchase of 1,051,688 shares of LCNB common stock.
•Accrued interest and other liabilities decreased due to a combination of decreases in accrued bonuses caused by the payment of annual bonuses in January, a decrease in LIHTC liabilities due to funding payments made during the first quarter, and net deferred federal income taxes being categorized as an asset2023, with total deposits at March 31, 2022 vs.2023 being categorized as a liability$1.1 million or 0.07% less than at December 31, 2021.2022. There was, however significant movement from non-interest-bearing deposits to interest-bearing deposits during the quarter, reflecting the increase in market rates.
•Treasury shares increased because of the purchase referred to above.repurchase of 107,028 share of common stock during the first quarter of 2003, which represents almost 1.0% of the shares outstanding at December 31, 2022.
•Accumulated other comprehensive loss, net of taxes increased because of market-driven decreasesa partial recovery in the fair valuemarket valuation of LCNB's available-for-sale debt security investments.
Regulatory Capital
The Bank must meet certain minimum capital requirements set by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company's and Bank's financial statements. LCNB’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.
In addition to the minimum capital requirements, a financial institution needs to maintain a Capital Conservation Buffer composed of Common Equity Tier 1 Capital of at least 2.5% above its minimum risk-weighted capital requirements to avoid limitations on its ability to make capital distributions, including dividend payments to shareholders and certain discretionary bonus payments to executive officers. A financial institution with a buffer below 2.5% is subject to increasingly stringent limitations on capital distributions as the buffer approaches zero.
For various regulatory purposes, financial institutions are classified into categories based upon capital adequacy:
| | | | | | | | | | | | | | | | | | | | |
| | Minimum Requirement | | Minimum Requirement with Capital Conservation Buffer | | To Be Considered Well-Capitalized |
Ratio of Common Equity Tier 1 Capital to risk-weighted assets | | 4.5 | % | | 7.0 | % | | 6.5 | % |
Ratio of Tier 1 Capital to risk-weighted assets | | 6.0 | % | | 8.5 | % | | 8.0 | % |
Ratio of Total Capital (Tier 1 Capital plus Tier 2 Capital) to risk-weighted assets | | 8.0 | % | | 10.5 | % | | 10.0 | % |
Leverage Ratio (Tier 1 Capital to adjusted quarterly average total assets) | | 4.0 | % | | N/A | | 5.0 | % |
As of the most recent notification from their regulators, the Bank and LCNB were categorized as "well-capitalized" under the regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since the last notification that would change the Bank's or LCNB's category.
Federal banking regulatory agencies allow an optional phase-in period of three years for banks to absorb the impact to regulatory capital of implementing CECL. LCNB has elected not to exercise this option and the full impact of adopting ASU No. 2016-13 is included in regulatory capital as of March 31, 2023.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
A summary of the Bank's regulatory capital and capital ratios follows (dollars in thousands):
| | | March 31, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
Regulatory Capital: | Regulatory Capital: | | | Regulatory Capital: | | |
Shareholders' equity | Shareholders' equity | | $ | 222,813 | | | 234,451 | | Shareholders' equity | | $ | 216,407 | | | 213,052 | |
Goodwill and other intangibles | Goodwill and other intangibles | | (60,516) | | | (60,655) | | Goodwill and other intangibles | | (60,066) | | | (60,177) | |
Accumulated other comprehensive (income) loss | | 14,997 | | | 1,809 | | |
Accumulated other comprehensive loss | | Accumulated other comprehensive loss | | 24,996 | | | 29,945 | |
Tier 1 risk-based capital | Tier 1 risk-based capital | | 177,294 | | | 175,605 | | Tier 1 risk-based capital | | 181,337 | | | 182,820 | |
Eligible allowance for loan losses | Eligible allowance for loan losses | | 5,530 | | | 5,506 | | Eligible allowance for loan losses | | 8,346 | | | 5,646 | |
Total risk-based capital | Total risk-based capital | | $ | 182,824 | | | 181,111 | | Total risk-based capital | | $ | 189,683 | | | 188,466 | |
Capital ratios: | Capital ratios: | | | | | Capital ratios: | | | | |
Common Equity Tier 1 Capital to risk-weighted assets | Common Equity Tier 1 Capital to risk-weighted assets | | 12.05 | % | | 12.25 | % | Common Equity Tier 1 Capital to risk-weighted assets | | 11.97 | % | | 11.94 | % |
Tier 1 Capital to risk-weighted assets | Tier 1 Capital to risk-weighted assets | | 12.05 | % | | 12.25 | % | Tier 1 Capital to risk-weighted assets | | 11.97 | % | | 11.94 | % |
Total Capital to risk-weighted assets | Total Capital to risk-weighted assets | | 12.42 | % | | 12.64 | % | Total Capital to risk-weighted assets | | 12.52 | % | | 12.31 | % |
Leverage | Leverage | | 9.54 | % | | 9.58 | % | Leverage | | 9.58 | % | | 9.72 | % |
On September 17, 2019, the FDIC finalizedQualifications for community banking organizations to use a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations, as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The simplified rule was designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. Its use was permitted beginning with the March 31, 2020 Call Report. Qualifications to use the simplified approach include having a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the Community Bank Leverage Ratio framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. LCNB qualifies to use the simplified measure, but did not opt in for the March 31, 20222023 regulatory capital calculations.
Liquidity
LCNB depends on dividends from the Bank for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders. National banking law limits the amount of dividends the Bank may pay to the sum of retained net income for the current year plus retained net income for the previous two years. Prior approval from the OCC, the Bank's primary regulator, is necessary for the Bank to pay dividends in excess of this amount. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines. Management believes the Bank will be able to pay anticipated dividends to LCNB without needing to request approval. The Bank is not aware of any reasons why it would not receive such approval, if required.
Effective liquidity management ensures that cash is available to meet the cash flow needs of borrowers and depositors, as well as meeting LCNB's operating cash needs. Primary funding sources include customer deposits with the Bank, short-term and long-term borrowings from the Federal Home Loan Bank, short-term line of credit arrangements with two correspondent banks, and interest and repayments received from LCNB's loan and investment portfolios.
Total remaining borrowing capacity with the Federal Home Loan Bank at March 31, 20222023 was approximately $225.5$127.9 million. In addition, additionalAdditional borrowings of approximately $50.3$33.5 million were available through the line of credit arrangements with correspondent banks at March 31, 2022.2023.
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.
LCNB CORP. AND SUBSIDIARIES
| | | | | |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Market risk for LCNB is primarily interest rate risk. LCNB attempts to mitigate this risk through asset/liability management strategies designed to decrease the vulnerability of its earnings to material and prolonged changes in interest rates. LCNB does not use derivatives such as interest rate swaps, caps, or floors to hedge this risk. LCNB has not entered into any market risk instruments for trading purposes.
The Bank's Asset and Liability Management Committee ("ALCO") primarily uses a combination of Interest Rate Sensitivity Analysis ("IRSA") and Economic Value of Equity ("EVE") analysis for measuring and managing interest rate risk. IRSA is used to estimate the effect on net interest income ("NII") during a one-year period of instantaneous and sustained movements in interest rates, also called interest rate shocks, of 100, 200, 300, and 400300 basis points. Management considers the results of any significant downward scenarios of more than 100 basis points to not be meaningful in the current interest rate environment. The base projection uses a current interest rate scenario. As shown below, the March 31, 20222023 IRSA indicates that an increase in interest rates of 200or a 100 basis points or morepoint decrease will have a positivenegative effect on NII and a 100 basis point increase or decrease in interest rates of 200 or 300 basis points will have a negativepositive effect on NII. The changes in NII for all rate assumptions are within LCNB's acceptable ranges.
| Rate Shock Scenario in Basis Points | Rate Shock Scenario in Basis Points | | Amount | | $ Change in NII | | % Change in NII | Rate Shock Scenario in Basis Points | | Amount | | $ Change in NII | | % Change in NII | | Limits |
| | | (Dollars in thousands) | | | (Dollars in thousands) |
Up 400 | | $ | 65,115 | | | 3,499 | | | 5.68 | % | |
Up 300 | Up 300 | | 63,837 | | | 2,221 | | | 3.60 | % | Up 300 | | 65,089 | | | (1,570) | | | (2.36) | % | | 20 | % |
Up 200 | Up 200 | | 62,574 | | | 958 | | | 1.55 | % | Up 200 | | 65,584 | | | (1,075) | | | (1.61) | % | | 15 | % |
Up 100 | Up 100 | | 61,328 | | | (288) | | | (0.47) | % | Up 100 | | 65,908 | | | (751) | | | (1.13) | % | | 10 | % |
Base | Base | | 61,616 | | | — | | | — | % | Base | | 66,659 | | | — | | | — | % | | — | % |
Down 100 | Down 100 | | 59,510 | | | (2,106) | | | (3.42) | % | Down 100 | | 66,535 | | | (124) | | | (0.19) | % | | 10 | % |
Down 200 | | Down 200 | | 66,845 | | | 186 | | | 0.28 | % | | 15 | % |
Down 300 | | Down 300 | | 67,210 | | | 551 | | | 0.83 | % | | 20 | % |
IRSA shows the effect on NII during a one-year period only. A more long-range model is the EVE analysis, which shows the estimated present value of future cash inflows from interest-earning assets less the present value of future cash outflows for interest-bearing liabilities for the same rate shocks. As shown below, the March 31, 20222023 EVE analysis indicates that an increase in interest rates of 200 or 300 basis points will have a negative effect on the EVE and aan increase in interest rates of 100 basis pointpoints or a decrease in interest rates will have a positive effect on the EVE. The changes in the EVE for all upward rate assumptions are within LCNB's acceptable ranges. The change in EVEranges except for the 100down 200 basis point downwardpoints scenario, which is slightly outsideabove LCNB's acceptable range of 20%. for that scenario.
| Rate Shock Scenario in Basis Points | Rate Shock Scenario in Basis Points | | Amount | | $ Change in EVE | | % Change in EVE | Rate Shock Scenario in Basis Points | | Amount | | $ Change in EVE | | % Change in EVE | | Limits |
| | | (Dollars in thousands) | | | (Dollars in thousands) | | |
Up 400 | | $ | 140,166 | | | (26,297) | | | (15.80) | % | |
Up 300 | Up 300 | | 149,004 | | | (17,459) | | | (10.49) | % | Up 300 | | 152,957 | | | (24,169) | | | (13.65) | % | | 25 | % |
Up 200 | Up 200 | | 157,434 | | | (9,029) | | | (5.42) | % | Up 200 | | 166,128 | | | (10,998) | | | (6.21) | % | | 20 | % |
Up 100 | Up 100 | | 165,473 | | | (990) | | | (0.59) | % | Up 100 | | 178,742 | | | 1,616 | | | 0.91 | % | | 15 | % |
Base | Base | | 166,463 | | | — | | | — | % | Base | | 177,126 | | | — | | | — | % | | — | % |
Down 100 | Down 100 | | 203,646 | | | 37,183 | | | 22.34 | % | Down 100 | | 202,679 | | | 25,553 | | | 14.43 | % | | 15 | % |
Down 200 | | Down 200 | | 215,238 | | | 38,112 | | | 21.52 | % | | 20 | % |
Down 300 | | Down 300 | | 215,739 | | | 38,613 | | | 21.80 | % | | 25 | % |
The IRSA and EVE simulations discussed above are not projections of future income or equity and should not be relied on as being indicative of future operating results. Assumptions used, including the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment or replacement of asset and liability cash flows, are inherently uncertain and, as a result, the models cannot precisely measure future net interest incomeNII 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.
LCNB CORP. AND SUBSIDIARIES
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Item 4. | Controls and Procedures |
a) Disclosure controls and procedures. The Chief Executive Officer and the Chief Financial Officer have carried out an evaluation of the effectiveness of LCNB's disclosure controls and procedures that ensure that information relating to LCNB required to be disclosed by LCNB in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to LCNB's management, including its principal executive officer and principal financial officer, as appropriate, in order to allow timely decisions to be made regarding required disclosures. Based upon this evaluation, these officers have concluded that, as of March 31, 2022,2023, LCNB's disclosure controls and procedures were effective.
b) Changes in internal control over financial reporting. During the period covered by this report, there were no changes in LCNB's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, LCNB's internal control over financial reporting.
LCNB CORP. AND SUBSIDIARIES
PART II. OTHER INFORMATION
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.
ReadersIn addition to the following, readers should carefully consider the risk factors previously disclosed in Part I, Item 1A. Risk Factors in LCNB's Form 10-K for the year ended December 31, 2021.2022.
Operational risk created byRisks Related to Recent Events Impacting the war waged on Ukraine.Financial Services Industry
On February 24, 2022, Russian forces launched a military invasionRecent events impacting the financial services industry, including the failures of Ukraine. In response, the United StatesSilicon Valley Bank, Signature Bank and First Republic Bank, have decreased confidence in banks among consumer and commercial depositors, other counterparties and investors, as well as caused significant disruption, volatility, and reduced valuations of equity and other European Union countriessecurities of banks and bank holding companies in the capital markets. These events are occurring during a period of continued rises to interest rates which, among other things, have imposed significant economic sanctions on Russiaresulted in unrealized losses in longer-duration securities and Russia has responded with counter-sanctions. As a result,loans held by banks, increased competition for bank deposits, and the Russian/Ukraine conflict has disrupted international commerce, exacerbated already existing supply chain disruptions, and negatively affected the global economy. While it is difficult to estimate the impact current or future disruptions could have on LCNB's business and financial position or thatpossibility of its borrowers, such economic disruptions may affect the ability of borrowers to repay loans, thus increasingan increase the risk of borrower defaults.a potential recession. These recent events have, and could continue to have, an adverse impact on the market price and volatility of LCNB's common stock.
There is widespread concern that cyberattacksThese recent events may also result in potentially adverse changes to laws and/or regulations governing banks and bank holding companies or result in the imposition of restrictions through supervisory or enforcement activities, including higher capital requirements, which could intensify as the crisis continues and perhaps worsens, with impacts that could be both regional and global.
LCNB continues to monitor the evolving situation and its potentialhave a material impact on its business,LCNB's business. LCNB may be impacted by concerns from depositors, investors, and other counterparties regarding the soundness or creditworthiness of other financial condition, results of operations,institutions, which could cause substantial and cash flows.cascading disruption within the financial markets and increase Company expenses.
LCNB may face risk causedbe subject to increases in FDIC insurance assessments as a result of recent bank failures.
Deposits of LCNB are insured up to statutory limits by additional interest rate increases.
Interest rate increases bythe FDIC and, accordingly, LCNB and other banks and financial institutions pay quarterly premiums to the FDIC to maintain the DIF. On March 12, 2023, the FDIC made a joint statement with the Department of the Treasury and the Board of Governors of the Federal Reserve such asthat any losses to the 50 basis point increaseDIF in connection with support for uninsured depositors in connection with the Signature Bank and Silicon Valley Bank closures will be recovered by a special assessment paid by insured depository institutions. The FDIC has announced that it intends to publish a notice of proposed rulemaking for the special assessment in May 2023. The amount, timing, and potential impact of the special assessment cannot be determined at this time.
In addition, it is possible that the FDIC may alter regular quarterly assessments in the federal fundsfuture in response to recent bank failures. The likelihood and extent of any further rate announced May 4, 2022, may continue throughout 2022 and into 2023. The higher borrowing cost resulting from increasing interest rates may cause financial hardship on consumers and businesses, including LCNB's borrowers, which could lead to increased loan losses, especially in fixed interest rate products. In addition, uncertainty about the timing and magnitude of future interest rate increases could reduced borrowing demand and, thus, the need for LCNB's lending services.increase are indeterminable,
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
During the period covered by this report, LCNB did not sell any of its securities that were not registered under the Securities Act.
On August 24, 2020,February 27, 2023, LCNB's Board of Directors authorized a share repurchase programnew Issuer Stock Repurchase Plan Agreement (the "Program""Plan"). Under the terms of the Program,Plan, LCNB is authorized to repurchase up to 645,000500,000 of its outstanding common shares. The Program is authorized to last no longer than five years. The ProgramPlan replaced and superseded LCNB’s prior share repurchase program,Issuer Stock Repurchase Plan Agreement, which was adopted in April 2019.on May 27, 2022.
Under the Program,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 will beare 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 ProgramPlan may be suspended or discontinued at any time and does not obligate LCNB to acquire any specific number of its common shares.
As part of the Program,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.
LCNB CORP. AND SUBSIDIARIES
The following table sets forth information relating to repurchases made under the ProgramMay 27, 2022 and February 27, 2023 plans during the three months ended March 31, 2022:2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
January 1 through 31, 2022 | | — | | $ | — | | | — | | 21,191 |
February 1 through 28, 2022 | | — | | $ | — | | | — | | 21,191 |
March 1 through 31, 2022 | | — | | $ | — | | | — | | 21,191 |
The repurchase of 1,051,688 shares of common stock at $20.00 per share during the first quarter 2022 was not completed under the terms of the ongoing share repurchase program. | | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
January 1 - 31, 2023 | | 14,960 | | $ | 17.92 | | | 14,960 | | — |
February 1 - 28, 2023 | | — | | $ | — | | | — | | 500,000 |
March 1 - 31, 2023 | `` | 92,068 | | $ | 16.85 | | | 92,068 | | 407,932 |
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Item 3. | Defaults Upon Senior Securities |
None.
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Item 4. | Mine Safety Disclosures |
Not applicable.
None.
LCNB CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| LCNB Corp. | |
| | |
May 11, 2022 | /s/ Eric J. Meilstrup | |
| Eric J. Meilstrup | |
| Chief Executive Officer and President | |
| | |
May 11, 2022 | /s/ Robert C. Haines, II | |
| Robert C. Haines, II | |
| Executive Vice President and Chief Financial Officer |
LCNB CORP. AND SUBSIDIARIES
| | | | | |
Exhibit No. | Exhibit Description |
2.1 | |
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3.1 | |
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3.2 | |
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10.1 | |
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10.2 | |
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10.3 | |
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10.4 | |
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10.5 | |
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10.6 | |
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10.7 | |
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31.1 | |
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31.2 | |
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32 | |
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101 | The following financial information from LCNB Corp.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 20222023 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. |
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104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
LCNB CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| LCNB Corp. | |
| | |
May 11, 2023 | /s/ Eric J. Meilstrup | |
| Eric J. Meilstrup | |
| Chief Executive Officer and President | |
| | |
May 11, 2023 | /s/ Robert C. Haines, II | |
| Robert C. Haines, II | |
| Executive Vice President and Chief Financial Officer |