Companies: 10,762     total market cap: $132.051 T
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LCNB Corp.
LCNB
#8387
Rank
$0.22 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$15.54
Share price
-1.30%
Change (1 day)
8.18%
Change (1 year)
๐Ÿ’ณ Financial services๐Ÿ’ฐ Investment
Categories
  1. LCNB Corp.
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2022 Q1

LCNB Corp. - 10-Q quarterly report FY2022 Q1


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549

FORM 10-Q

(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                                        to                                                      

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

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

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

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

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

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


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
            ☐ Yes         ☒ No
The number of shares outstanding of the issuer's common stock, without par value, as of May 10, 2022 was 11,401,677 shares.



LCNB CORP. AND SUBSIDIARIES

TABLE OF CONTENTS
3
  
Item 1.  Financial Statements
3
  
CONSOLIDATED CONDENSED BALANCE SHEETS
3
  
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
4
  
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
5
  
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
6
  
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
7
  
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
8
  
Item 2. Management's Discussion and Analysis of Financial Condition and Results of  Operations
35
  
Item 3.  Quantitative and Qualitative Disclosures about Market Risks
45
  
Item 4.  Controls and Procedures
46
  
47
  
Item 1.   Legal Proceedings
47
  
Item 1A.  Risk Factors
47
  
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
47
  
Item 3.   Defaults Upon Senior Securities
48
  
Item 4.   Mine Safety Disclosures
48
  
Item 5.   Other Information
48
  
Item 6.   Exhibits
50
  
49










1


Glossary of Abbreviations and Acronyms
ASCAccounting Standards Codification
ASUAccounting Standards Update
BankLCNB National Bank
CARES ActCoronavirus Aid, Relief, and Economic Security Act
CEOChief Executive Officer
CFOChief Financial Officer
CompanyLCNB Corp. and its consolidated subsidiaries as a whole
Dodd-Frank ActDodd-Frank Wall Street Reform and Consumer Protection Act
Economic Aid ActEconomic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act
FASBFinancial Accounting Standards Board
FDICFederal Deposit Insurance Corporation
FHLBFederal Home Loan Bank
GAAPGenerally Accepted Accounting Principles
ICSInsured Cash Sweep
IRAIndividual Retirement Account
LCNBLCNB Corp. and its consolidated subsidiaries as a whole
LIHTCLow Income Housing Tax Credit
OCCOffice of the Comptroller of the Currency
PPPPaycheck Protection Program
SBASmall Business Administration
SECSecurities and Exchange Commission
TDRsTroubled Debt Restructurings
    

2


PART I – FINANCIAL INFORMATION
 
Item 1.Financial Statements

LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share data)
March 31, 2022December 31,
2021
(Unaudited)
ASSETS:
Cash and due from banks$18,062 16,810 
Interest-bearing demand deposits1,879 1,326 
Total cash and cash equivalents19,941 18,136 
Investment securities:  
Equity securities with a readily determinable fair value, at fair value2,424 2,546 
Equity securities without a readily determinable fair value, at cost2,099 2,099 
Debt securities, available-for-sale, at fair value293,464 308,177 
Debt securities, held-to-maturity, at cost22,873 22,972 
Federal Reserve Bank stock, at cost4,652 4,652 
Federal Home Loan Bank stock, at cost5,203 5,203 
Loans, net1,373,991 1,363,939 
Premises and equipment, net34,940 35,385 
Operating lease right-of-use assets6,191 6,357 
Goodwill59,221 59,221 
Core deposit and other intangibles, net2,328 2,473 
Bank owned life insurance43,488 43,224 
Interest receivable8,364 7,999 
Other assets, net20,451 21,246 
TOTAL ASSETS$1,899,630 1,903,629 
LIABILITIES:  
Deposits:  
Noninterest-bearing$517,621 501,531 
Interest-bearing1,118,985 1,127,288 
Total deposits1,636,606 1,628,819 
Short-term borrowings24,746 — 
Long-term debt10,000 10,000 
Operating lease liabilities6,337 6,473 
Accrued interest and other liabilities15,066 19,733 
TOTAL LIABILITIES1,692,755 1,665,025 
COMMITMENTS AND CONTINGENT LIABILITIES— — 
SHAREHOLDERS' EQUITY:  
Preferred shares – no par value, authorized 1,000,000 shares, none outstanding
— — 
Common shares – no par value; authorized 19,000,000 shares; issued 14,252,027 and 14,213,792 shares at March 31, 2022 and December 31, 2021, respectively; outstanding 11,401,503 and 12,414,956 shares at March 31, 2022 and December 31, 2021, respectively
143,432 143,130 
Retained earnings128,555 126,312 
Treasury shares at cost, 2,850,524 and 1,798,836 shares at March 31, 2022 and December 31, 2021, respectively
(50,115)(29,029)
Accumulated other comprehensive loss, net of taxes(14,997)(1,809)
TOTAL SHAREHOLDERS' EQUITY206,875 238,604 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY$1,899,630 1,903,629 

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
3


LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended 
March 31,
 20222021
INTEREST INCOME:
Interest and fees on loans$13,786 14,535 
Dividends on equity securities:
With a readily determinable fair value12 13 
Without a readily determinable fair value5 6 
Interest on debt securities:
Taxable1,095 718 
Non-taxable189 224 
Other investments35 39 
TOTAL INTEREST INCOME15,122 15,535 
INTEREST EXPENSE:  
Interest on deposits739 1,028 
Interest on short-term borrowings86 1 
Interest on long-term debt74 134 
TOTAL INTEREST EXPENSE899 1,163 
NET INTEREST INCOME14,223 14,372 
PROVISION (CREDIT) FOR LOAN LOSSES49 (52)
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES14,174 14,424 
NON-INTEREST INCOME:  
Fiduciary income1,695 1,529 
Service charges and fees on deposit accounts1,406 1,366 
Bank owned life insurance income265 267 
Gains from sales of loans124 43 
Other operating income60 260 
TOTAL NON-INTEREST INCOME3,550 3,465 
NON-INTEREST EXPENSE:  
Salaries and employee benefits7,215 6,433 
Equipment expenses408 368 
Occupancy expense, net775 794 
State financial institutions tax436 444 
Marketing262 268 
Amortization of intangibles140 257 
FDIC insurance premiums, net126 113 
Contracted services610 540 
Other non-interest expense2,278 2,275 
TOTAL NON-INTEREST EXPENSE12,250 11,492 
INCOME BEFORE INCOME TAXES5,474 6,397 
PROVISION FOR INCOME TAXES951 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 
Diluted0.38 0.41 
Weighted average common shares outstanding:  
Basic11,818,614 12,794,824 
Diluted11,818,614 12,794,852 

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
4


LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
Three Months Ended 
March 31,
 20222021
Net income$4,523 5,240 
Other comprehensive income (loss):  
Net unrealized losses on available-for-sale debt securities (net of taxes of $(3,506) and $(915) for the three months ended March 31, 2022 and 2021, respectively)
(13,189)(3,441)
Change in nonqualified pension plan unrecognized net gain and unrecognized prior service cost (net of taxes of $1 and $1 for the three months ended March 31, 2022 and 2021, respectively)
1 1 
  Other comprehensive loss, net of tax(13,188)(3,440)
TOTAL COMPREHENSIVE INCOME (LOSS)$(8,665)1,800 

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

5


LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
(Unaudited)
 Common Shares OutstandingCommon StockRetained
Earnings		Treasury
Shares		Accumulated Other Comprehensive Income (Loss)Total Shareholders'
Equity
Three Months Ended March 31, 2022
Balance at December 31, 202112,414,956 $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 Plan5,681 105   105 
Repurchase of common stock(1,051,688)(21,086)(21,086)
Compensation expense relating to restricted stock32,554 197 197 
Common stock dividends, $0.20 per share
  (2,280)  (2,280)
Balance at March 31, 202211,401,503 $143,432 128,555 (50,115)(14,997)206,875 
Three Months Ended March 31, 2021
Balance at December 31, 202012,858,325 $142,443 115,058 (20,719)4,043 240,825 
Net income  5,240   5,240 
Other comprehensive loss, net of taxes    (3,440)(3,440)
Dividend Reinvestment and Stock Purchase Plan5,472 99    99 
Repurchase of common stock(70,321)(1,140)(1,140)
Exercise of stock options311 4  4 
Compensation expense relating to restricted stock26,321 93 93 
Common stock dividends, $0.19 per share
  (2,435)  (2,435)
Balance at March 31, 202112,820,108 $142,639 117,863 (21,859)603 239,246 

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
6


LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended 
March 31,
 20222021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income$4,523 5,240 
Adjustments to reconcile net income to net cash flows from operating activities:  
Depreciation, amortization, and accretion772 308 
Provision (credit) for loan losses49 (52)
Deferred income tax provision93 74 
Increase in cash surrender value of bank owned life insurance(265)(267)
(Gain) loss from equity securities126 (112)
Realized gain from sales of premises and equipment(12)(5)
Origination of mortgage loans for sale(5,159)(1,354)
Realized gains from sales of loans(124)(43)
Proceeds from sales of mortgage loans5,223 1,381 
Compensation expense related to restricted stock197 93 
Changes in:  
Accrued interest receivable(365)(328)
Other assets3,025 1,565 
Other liabilities(3,480)(2,461)
TOTAL ADJUSTMENTS80 (1,201)
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES4,603 4,039 
CASH FLOWS FROM INVESTING ACTIVITIES:  
Proceeds from maturities and calls of debt securities:
Available-for-sale9,801 7,833 
Held-to-maturity99 115 
Purchases of equity securities(4)(5)
Purchases of debt securities:
Available-for-sale(12,092)(40,759)
Held-to-maturity— — 
Net increase in loans(9,827)(34,733)
Purchases of premises and equipment(59)(302)
Proceeds from sale of premises and equipment12 5 
NET CASH FLOWS USED IN INVESTING ACTIVITIES(12,070)(67,846)
CASH FLOWS FROM FINANCING ACTIVITIES:  
Net increase in deposits7,787 81,693 
Net increase in short-term borrowings24,746 — 
Principal payments on long-term debt— (5,000)
Proceeds from issuance of common stock105 8 
Repurchase of common stock(21,086)(1,140)
Proceeds from exercise of stock options— 4 
Cash dividends paid on common stock(2,280)(2,344)
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES9,272 73,221 
NET CHANGE IN CASH AND CASH EQUIVALENTS1,805 9,414 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD18,136 31,730 
CASH AND CASH EQUIVALENTS AT END OF PERIOD$19,941 41,144 
SUPPLEMENTAL CASH FLOW INFORMATION:  
Interest paid$836 1,265 
Income taxes paid, net of refunds(468)— 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:  
Right-of-use assets obtained in exchange for lease obligations— 801 

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
7
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

Note 1 - Basis of Presentation
 
Basis of Presentation
The accompanying unaudited interim consolidated condensed financial statements include LCNB Corp. and its wholly-owned subsidiaries: LCNB National Bank and LCNB Risk Management, Inc., its captive insurance company. All material intercompany transactions and balances are eliminated in consolidation.

The unaudited interim consolidated condensed financial statements have been prepared in accordance with U.S. GAAP for interim financial information and the rules and regulations of the SEC.  Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations.  In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of financial position, results of consolidated operations, and cash flows for the interim periods, as required by Regulation S-X, Rule 8-03.

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

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

Results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year ending December 31, 2022.  These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies, and financial notes thereto included in LCNB's 2021 Annual Report on Form 10-K filed with the SEC.

Accounting Changes
Financial Accounting Standards (“FASB”) Accounting Standards Update (“ASU”) No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting"
ASU No. 2020-04 was issued in March 2020 and provides optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. LCNB does not expect the guidance in ASU No. 2020-04 will have a material impact on its results of consolidated operations or financial position.

ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans"
ASU No. 2018-14 was issued in August 2018 and was adopted by LCNB on January 1, 2021. The amendments in this update modify disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans, including the deletion, modification, and addition of certain targeted disclosures. The amendments are to be applied on a retrospective basis to all periods presented upon adoption. Adoption of ASU No. 2018-14 did not have a material impact on LCNB's results of consolidated operations or financial position.

ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes"
ASU No. 2019-12 was issued in December 2019 and adopted by LCNB on January 1, 2021. It simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifies and amends certain other guidance. Adoption of ASU No. 2019-12 did not have a material impact on LCNB's results of consolidated operations or financial position.
8
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)


Note 2 - Investment Securities
 
The amortized cost and estimated fair value of equity and debt securities at March 31, 2022 and December 31, 2021 are summarized as follows (in thousands):
 Amortized
Cost		Unrealized
Gains		Unrealized
Losses		Fair
Value
March 31, 2022
Debt Securities, Available-for-Sale:
U.S. Treasury notes$79,477 2 4,746 74,733 
U.S. Agency notes89,282 — 6,536 82,746 
Corporate bonds6,200 44 317 5,927 
U.S. Agency mortgage-backed securities91,497 110 4,807 86,800 
Municipal securities:    
Non-taxable8,496 5 228 8,273 
Taxable37,151 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 
Taxable3,569 — 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 notes89,293 45 2,092 87,246 
Corporate Bonds5,200 70 118 5,152 
U.S. Agency mortgage-backed securities96,018 1,350 692 96,676 
Municipal securities:    
Non-taxable8,959 125 18 9,066 
Taxable35,208 531 446 35,293 
 $310,121 2,178 4,122 308,177 
Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable$19,403 98 — 19,501 
Taxable3,569 21 4 3,586 
$22,972 119 4 23,087 
9
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 2 - Investment Securities (continued)

Information concerning debt securities with gross unrealized losses at March 31, 2022 and December 31, 2021, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (dollars in thousands):
 Less than Twelve MonthsTwelve Months or Greater
 Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
March 31, 2022
Available-for-Sale:
U.S. Treasury notes$73,736 4,746 — — 
U.S. Agency notes35,960 2,316 46,786 4,220 
Corporate bonds4,536 264 647 53 
U.S. Agency mortgage-backed securities58,478 2,739 20,942 2,068 
Municipal securities:  
Non-taxable6,088 228 — — 
Taxable21,200 1,387 7,667 867 
 $199,998 11,680 76,042 7,208 
Held-to-Maturity:
Municipal securities:
  Non-taxable$7,434 309 — — 
  Taxable3,371 198 — — 
$10,805 507 — — 
December 31, 2021
Available-for-Sale:
U.S. Treasury notes$66,891 756 — — 
U.S. Agency notes58,648 1,257 20,289 835 
Corporate Bonds3,898 102 484 16 
U.S. Agency mortgage-backed securities49,813 692 — — 
Municipal securities:   
Non-taxable1,020 18 — — 
Taxable18,434 322 3,535 124 
 $198,704 3,147 24,308 975 
Held-to-Maturity:
Municipal securities:
  Non-taxable$46 — — — 
  Taxable271 4 — — 
$317 4 — — 

Management has determined that the unrealized losses at March 31, 2022 are primarily due to fluctuations in market interest rates and do not reflect credit quality deterioration of the securities.   Because LCNB does not have the intent to sell the investments and it is more likely than not that LCNB will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, LCNB does not consider these investments to be other-than-temporarily impaired.


10
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 2 - Investment Securities (continued)

Contractual maturities of debt securities at March 31, 2022 were as follows (in thousands).  Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations.
 Available-for-SaleHeld-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 years90,192 85,832 4,960 4,818 
Due from five to ten years129,163 119,631 2,894 2,785 
Due after ten years729 677 13,152 12,939 
 220,606 206,664 22,873 22,409 
U.S. Agency mortgage-backed securities91,497 86,800 — — 
 $312,103 293,464 22,873 22,409 

Debt securities with a market value of $140,418,000 and $128,426,000 at March 31, 2022 and December 31, 2021, respectively, were pledged to secure public deposits and for other purposes required or as permitted by law.
Equity securities with a readily determinable fair value are carried at fair value, with changes in fair value recognized in other operating income in the consolidated condensed statements of income. Equity securities without a readily determinable fair value are measured at cost minus impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions, as defined, for identical or similar investments of the same issuer. LCNB was not aware of any impairment or observable price change adjustments that needed to be made at March 31, 2022 on its investments in equity securities without a readily determinable fair value.

The cost and estimated fair value of equity securities with a readily determinable fair value at March 31, 2022 and December 31, 2021 are summarized as follows (in thousands):
March 31, 2022December 31, 2021
 CostFair
Value		CostFair
Value
Mutual funds$1,414 1,317 1,410 1,379 
Equity securities778 1,107 778 1,167 
Total equity securities with a readily determinable fair value$2,192 2,424 2,188 2,546 

Changes in the fair value of equity securities with a readily determinable fair value for the three months ended March 31, 2022 and 2021 were due solely to changes in unrealized gains and losses.
11
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)



Note 3 - Loans
 
Major classifications of loans at March 31, 2022 and December 31, 2021 were as follows (in thousands):
March 31, 2022December 31, 2021
Commercial & industrial$105,809 101,598 
Commercial, secured by real estate904,562 887,679 
Residential real estate328,574 335,106 
Consumer32,541 34,291 
Agricultural7,990 10,649 
Other loans, including deposit overdrafts45 122 
  Loans, gross1,379,521 1,369,445 
Less allowance for loan losses5,530 5,506 
Loans, net$1,373,991 1,363,939 
Loans in the above table are shown net of deferred origination fees and costs. Deferred origination fees, net of related costs, were $928,000 and $961,000 at March 31, 2022 and December 31, 2021, respectively.

Non-accrual, past-due, and accruing restructured loans as of March 31, 2022 and December 31, 2021 were as follows (in thousands):
March 31, 2022December 31, 2021
Non-accrual loans:
Commercial, secured by real estate$1,173 1,182 
Residential real estate282 299 
Total non-accrual loans1,455 1,481 
Past-due 90 days or more and still accruing— 56 
Total non-accrual and past-due 90 days or more and still accruing1,455 1,537 
Accruing troubled debt restructured loans2,280 2,622 
Total$3,735 4,159 



















12
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

The allowance for loan losses for the three months ended March 31, 2022 and 2021 were as follows (in thousands):
 Commercial
& Industrial		Commercial, Secured by
Real Estate		Residential
Real Estate		ConsumerAgriculturalOtherTotal
Three Months Ended March 31, 2022
Balance, beginning of year$1,095 3,607 665 105 30 4 5,506 
Provision (credit) charged to expenses202 (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 expenses141 (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 
13
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

A breakdown of the allowance for loan losses and the loan portfolio by loan segment at March 31, 2022 and December 31, 2021 were as follows (in thousands):
 Commercial
& Industrial		Commercial, Secured by
Real Estate		Residential
Real Estate		ConsumerAgriculturalOtherTotal
March 31, 2022
Allowance for loan losses:
Individually evaluated for impairment$5 12 9 — — — 26 
Collectively evaluated for impairment1,292 3,482 630 73 18 9 5,504 
Acquired credit impaired loans— — — — — — 
Balance, end of period$1,297 3,494 639 73 18 9 5,530 
Loans:
Individually evaluated for impairment$145 2,617 535 — — — 3,297 
Collectively evaluated for impairment105,585 900,396 326,901 32,541 7,990 45 1,373,458 
Acquired credit impaired loans79 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 impairment1,090 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 impairment101,355 883,122 333,384 34,291 10,649 122 1,362,923 
Acquired credit impaired loans88 1,612 1,163 — — — 2,863 
Balance, end of period$101,598 887,679 335,106 34,291 10,649 122 1,369,445 

14
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

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

Commercial & Industrial Loans. LCNB’s commercial & industrial loan portfolio consists of loans for various purposes, including loans to fund working capital requirements (such as inventory and receivables financing) and purchases of machinery and equipment.  LCNB offers a variety of commercial & industrial loan arrangements, including term loans, balloon loans, and lines of credit.  Commercial & industrial loans can have a fixed or variable rate, with maturities ranging from one to ten years.  Commercial & industrial loans are offered to businesses and professionals for short and medium terms on both a collateralized and uncollateralized basis. Commercial & industrial loans typically are underwritten on the basis of the borrower’s ability to make repayment from the cash flow of the business.  Collateral, when obtained, may include liens on furniture, fixtures, equipment, inventory, receivables, or other assets.  As a result, such loans involve complexities, variables, and risks that require thorough underwriting and more robust servicing than other types of loans.

This category includes PPP loans that were authorized under the CARES Act and updated by the Economic Aid Act. The PPP was implemented by the SBA with support from the Department of the Treasury and provided small businesses that were negatively impacted by the COVID-19 pandemic with government guaranteed and potentially forgivable loans that could be used to pay up to eight or twenty-four weeks, depending on the date of the loan, of payroll costs including benefits. Funds could also be used to pay interest on mortgages, rent, utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures. Eligible borrowers could apply for a First Draw or a Second Draw PPP Loan prior to the program ending on May 31, 2021. PPP loans made by LCNB have a maturity of two years if issued prior to June 5, 2020 and five years if issued on or after June 5, 2020. The loans have an interest rate of 1%. In addition, the SBA paid originating lenders processing fees based on the size of the loan. Outstanding PPP loans at March 31, 2022 and December 31, 2021 totaled $1,415,000 and $6,935,000, respectively, and unrecognized fees at those dates totaled $66,000 and $272,000, respectively.


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

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

Residential Real Estate Loans.  Residential real estate loans include loans secured by first or second mortgage liens on one to four-family residential properties.  Home equity lines of credit are included in this category.  First and second mortgage loans are generally amortized over five to thirty years with monthly principal and interest payments.  Home equity lines of credit generally have a five year or less draw period with interest only payments followed by a repayment period with monthly payments based on the amount outstanding.  LCNB offers both fixed and adjustable rate mortgage loans.  Adjustable rate loans are available with adjustment periods ranging between one to fifteen years and adjust according to an established index plus a margin, subject to certain floor and ceiling rates.  Home equity lines of credit have a variable rate based on the Wall Street Journal prime rate plus a margin.

Residential real estate loans are underwritten primarily based on the borrower’s ability to repay, prior credit history, and the value of the collateral.  LCNB generally requires private mortgage insurance for first mortgage loans that have a loan to appraised value ratio of greater than 80%.
15
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

Consumer Loans.  LCNB’s portfolio of consumer loans generally includes secured and unsecured loans to individuals for household, family and other personal expenditures.  Secured loans include loans to fund the purchase of automobiles, recreational vehicles, boats, and similar acquisitions. Consumer loans made by LCNB generally have fixed rates and terms ranging up to 72 months, depending upon the nature of the collateral, size of the loan, and other relevant factors. Consumer loans generally have higher interest rates, but pose additional risks of collectibility and loss when compared to certain other types of loans. Collateral, if present, is generally subject to damage, wear, and depreciation.  The borrower’s ability to repay is of primary importance in the underwriting of consumer loans.

Agricultural Loans.  LCNB’s portfolio of agricultural loans includes loans for financing agricultural production and for financing the purchase of equipment used in the production of agricultural products.  LCNB’s agricultural loans are generally secured by farm machinery, livestock, crops, vehicles, or other agricultural-related collateral.

LCNB uses a risk-rating system to quantify loan quality.  A loan is assigned to a risk category based on relevant information about the ability of the borrower to service the debt including, but not limited to, current financial information, historical payment experience, credit documentation, public information, and current economic trends.  The categories used are:

•Pass – loans categorized in this category are higher quality loans that do not fit any of the other categories described below.
•Other Assets Especially Mentioned ("OAEM") – loans in this category are currently protected but are potentially weak. These loans constitute a risk but not to the point of justifying a classification of substandard.  The credit risk may be relatively minor yet constitute an undue risk in light of the circumstances surrounding a specific asset.
•Substandard – loans in this category are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the possibility that LCNB will sustain some loss if the deficiencies are not corrected.
•Doubtful – loans classified in this category have all the weaknesses inherent in loans classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
 
A breakdown of the loan portfolio by credit quality indicators at March 31, 2022 and December 31, 2021 is as follows (in thousands):
 PassOAEMSubstandardDoubtfulTotal
March 31, 2022
Commercial & industrial$102,024 3,652 133 — 105,809 
Commercial, secured by real estate877,229 17,566 9,767 — 904,562 
Residential real estate326,458 — 2,116 — 328,574 
Consumer32,541 — — — 32,541 
Agricultural7,990 — — — 7,990 
Other45 — — — 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 estate851,709 22,336 13,634 — 887,679 
Residential real estate332,962 — 2,144 — 335,106 
Consumer34,281 — 10 — 34,291 
Agricultural10,649 — — — 10,649 
Other122 — — — 122 
Total$1,328,417 25,093 15,935 — 1,369,445 

16
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

A loan portfolio aging analysis at March 31, 2022 and December 31, 2021 is as follows (in thousands):
 30-59 Days
Past Due		60-89 Days
Past Due		Greater Than
90 Days
Past Due		Total
Past Due		CurrentTotal Loans
Receivable		Total Loans Greater Than
90 Days and
Accruing
March 31, 2022
Commercial & industrial$— — — — 105,809 105,809 — 
Commercial, secured by real estate105 — 784 889 903,673 904,562 — 
Residential real estate542 — 58 600 327,974 328,574 — 
Consumer— — — — 32,541 32,541 — 
Agricultural— — — — 7,990 7,990 — 
Other45 — — 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 estate181 — 784 965 886,714 887,679 — 
Residential real estate1,130 1 109 1,240 333,866 335,106 51 
Consumer22 5 5 32 34,259 34,291 5 
Agricultural— — — — 10,649 10,649 — 
Other122 — — 122 — 122 — 
Total$1,455 6 898 2,359 1,367,086 1,369,445 56 

Impaired loans, including acquired credit impaired loans, at March 31, 2022 and December 31, 2021 were as follows (in thousands):
March 31, 2022December 31, 2021
 Recorded InvestmentUnpaid Principal BalanceRelated AllowanceRecorded InvestmentUnpaid Principal BalanceRelated Allowance
With no related allowance recorded:
Commercial & industrial$79 296 — 88 316 — 
Commercial, secured by real estate3,510 4,318 — 3,897 4,736 — 
Residential real estate1,457 1,807 — 1,501 1,857 — 
Consumer— — — — — — 
Agricultural— — — — — — 
Other— — — — — — 
Total$5,046 6,421 — 5,486 6,909 — 
With an allowance recorded:   
Commercial & industrial$145 150 5 155 160 5 
Commercial, secured by real estate656 656 12 660 660 11 
Residential real estate216 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 estate4,166 4,974 12 4,557 5,396 11 
Residential real estate1,673 2,023 9 1,722 2,078 9 
Consumer— — — — — — 
Agricultural— — — — — — 
Other— — — — — — 
Total$6,063 7,443 26 6,522 7,950 25 
17
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

The following presents information related to the average recorded investment and interest income recognized on impaired loans, including acquired credit impaired loans, for the three months ended March 31, 2022 and 2021 (in thousands):
20222021
 Average Recorded InvestmentInterest Income RecognizedAverage Recorded InvestmentInterest Income Recognized
Three Months Ended March 31,
With no related allowance recorded:
Commercial & industrial$84 14 235 25 
Commercial, secured by real estate3,704 73 6,794 119 
Residential real estate1,477 29 3,448 66 
Consumer— — 4 — 
Agricultural— — — — 
Other— — 191 15 
Total$5,265 116 10,672 225 
With an allowance recorded:    
Commercial & industrial$150 2 189 3 
Commercial, secured by real estate659 9 1,617 17 
Residential real estate218 3 307 4 
Consumer— — — — 
Agricultural— — — — 
Other— — — — 
Total$1,027 14 2,113 24 
Total:    
Commercial & industrial$234 16 424 28 
Commercial, secured by real estate4,363 82 8,411 136 
Residential real estate1,695 32 3,755 70 
Consumer— — 4 — 
Agricultural— — — — 
Other— — 191 15 
Total$6,292 130 12,785 249 

Of the interest income recognized on impaired loans during the three months ended March 31, 2022 and 2021, none was recognized on a cash basis.

From time to time, the terms of certain loans are modified as troubled debt restructurings ("TDRs") where concessions are granted to borrowers experiencing financial difficulties. Each modification is separately negotiated with the borrower and includes terms and conditions that reflect the borrower's ability to pay the debt as modified. The modification of the terms of such loans may have included one, or a combination of, the following: a temporary or permanent reduction of the stated interest rate of the loan, an increase in the stated rate of interest lower than the current market rate for new debt with similar risk, forgiveness of principal, an extension of the maturity date, or a change in the payment terms.














18
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

Loan modifications that were classified as TDRs during the three months ended March 31, 2022 and 2021 were as follows (dollars in thousands):
 20222021
 Number
of
Loans		Pre-Modification Recorded BalancePost-Modification Recorded BalanceNumber of LoansPre-Modification Recorded BalancePost-Modification Recorded Balance
Three Months Ended March 31,    
Commercial & industrial— $— $— — $— $— 
Commercial, secured by real estate— — — — — — 
Residential real estate— — — 1 21 21 
Consumer— — — — — — 
Total— $— $— 1 $21 $21 
LCNB is not committed to lend additional funds to borrowers whose loan terms were modified in a troubled debt restructuring.

There were no troubled debt restructured loans for which there was a payment default within twelve months of the restructuring date during the three months ended March 31, 2022 and 2021.

All troubled debt restructurings are considered impaired loans. The allowance for loan losses on such restructured loans is based on the present value of future expected cash flows.

Information concerning loans that were modified during the three months ended March 31, 2022 and 2021 and that were determined to be troubled debt restructurings follows (in thousands):
20222021
Impaired loans without a valuation allowance$— 21 
Impaired loans with a valuation allowance— — 


Mortgage loans sold to and serviced for investors are not included in the accompanying consolidated condensed balance sheets.  The unpaid principal balances of those loans at March 31, 2022 and December 31, 2021 were approximately $152,271,000 and $149,382,000, respectively.

The total recorded investment in residential consumer mortgage loans secured by residential real estate that were in the process of foreclosure at March 31, 2022 and December 31, 2021 was $58,000 for both dates.
19
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)



Note 4 - Acquired Credit Impaired Loans

The following table provides at March 31, 2022 and December 31, 2021 the major classifications of acquired credit impaired loans that are accounted for in accordance with ASC 310-30 (in thousands):
March 31, 2022December 31, 2021
Acquired from First Capital Bancshares, Inc.
Commercial & industrial$1 1 
Commercial, secured by real estate— — 
Residential real estate388 398 
Other loans, including deposit overdrafts— — 
  Loans, gross389 399 
Less allowance for loan losses— — 
  Loans, net$389 399 
Acquired from Eaton National Bank & Trust Co.
Commercial & industrial$— — 
Commercial, secured by real estate284 310 
Residential real estate452 463 
Other loans, including deposit overdrafts— — 
  Loans, gross736 773 
Less allowance for loan losses— — 
  Loans, net$736 773 
Acquired from BNB Bancorp, Inc.
Commercial & industrial$— — 
Commercial, secured by real estate665 688 
Residential real estate50 51 
Other loans, including deposit overdrafts— — 
  Loans, gross715 739 
Less allowance for loan losses— — 
  Loans, net$715 739 
Acquired from Columbus First Bancorp, Inc.
Commercial & industrial$78 87 
Commercial, secured by real estate600 614 
Residential real estate248 251 
Other loans, including deposit overdrafts— — 
  Loans, gross926 952 
Less allowance for loan losses— — 
  Loans, net$926 952 
Total
Commercial & industrial$79 88 
Commercial, secured by real estate1,549 1,612 
Residential real estate1,138 1,163 
Other loans, including deposit overdrafts— — 
Loans, gross2,766 2,863 
Less allowance for loan losses— — 
  Loans, net$2,766 2,863 
20
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, 2022December 31, 2021
Outstanding balance$3,624 3,769 
Carrying amount2,766 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,
20222021
Accretable discount at beginning of period$116 182 
Reclassification from nonaccretable discount to accretable discount17 12 
Accretion(50)(71)
Accretable discount at end of period$83 123 


Note 5 - Affordable Housing Tax Credit Limited Partnership

LCNB is a limited partner in limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit pursuant to Section 42 of the Internal Revenue Code. The purpose of the investments is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants.

The following table presents the balances of LCNB's affordable housing tax credit investments and related unfunded commitments at March 31, 2022 and December 31, 2021 (in thousands):
 March 31,
2022		December 31,
2021
Affordable housing tax credit investment$14,950 14,950 
Less amortization2,423 2,126 
Net affordable housing tax credit investment$12,527 12,824 
Unfunded commitment$7,180 8,655 

The net affordable housing tax credit investment is included in other assets and the unfunded commitment is included in accrued interest and other liabilities in the consolidated condensed balance sheets.

LCNB expects to fund the unfunded commitment over thirteen years.







21
LCNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 5 – Affordable Housing Tax Credit Limited Partnership (continued)
The following table presents other information relating to LCNB's affordable housing tax credit investments for the three months ended March 31, 2022 and 2021 (in thousands):
Three Months Ended March 31,
 20222021
Tax credits and other tax benefits recognized$357 260 
Tax credit amortization expense included in provision for income taxes297 217 


Note 6 – Borrowings

Borrowings at March 31, 2022 and December 31, 2021 were as follows (dollars in thousands):
March 31, 2022December 31, 2021
AmountRateAmountRate
Lines of credit$24,746 2.62 %$— — %
FHLB long-term advances10,000 3.00 %10,000 3.00 %
$34,746 2.73 %$10,000 3.00 %

All advances from the FHLB of Cincinnati are secured by a blanket pledge of LCNB's 1-4 family first lien mortgage loans in the amount of approximately $296 million and $303 million at March 31, 2022 and December 31, 2021, respectively.  Total remaining borrowing capacity at March 31, 2022 was approximately $225.5 million.

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

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

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

Under the terms of a Cash Management Advance program with the FHLB of Cincinnati, LCNB can borrow up to $87.1 million in short-term advances as of March 31, 2022, subject to total remaining borrowing capacity limitations. LCNB can select a variable rate of interest for up to ninety days or a fixed rate of interest for a maximum of thirty days. The interest rate is the published rate in effect at the time of the advance. This agreement expires on February 8, 2023.
22
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)



Note 7 - Leases

Lease expenses for offices are included in the consolidated condensed statements of income in net occupancy expense and lease expenses for equipment and ATMs are included in equipment expense. Components of lease expense for the three months ended March 31, 2022 were as follows (in thousands):
Three Months Ended 
March 31,
20222021
Operating lease expense$159 215 
Short-term lease expense34 14 
Variable lease expense— 1 
Other3 3 
Total lease expense$196 233 

Other information related to leases at March 31, 2022 were as follows (dollars in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$130 
Weighted average remaining lease term in years for operating leases33.1
Weighted average discount rate for operating leases3.41 %


Note 8 – Income Taxes

A reconciliation between the statutory income tax and LCNB's effective tax rate on income from continuing operations follows:
 Three Months Ended March 31,
 20222021
Statutory tax rate21.0 %21.0 %
Increase (decrease) resulting from:  
Tax exempt interest(0.7)%(0.7)%
Tax exempt income on bank owned life insurance(1.0)%(0.9)%
Captive insurance premium income(0.9)%(0.7)%
Other, net(1.0)%(0.6)%
Effective tax rate17.4 %18.1 %


Note 9 - Commitments and Contingent Liabilities
 
LCNB is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit.  These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.  Exposure to credit loss in the event of nonperformance by the other parties to financial instruments for commitments to extend credit is represented by the contract amount of those instruments.

The Bounce Protection product, a customer deposit overdraft program, is offered as a service and does not constitute a contract between the customer and LCNB.
23
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 9 – Commitments and Contingent Liabilities (continued)

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

Financial instruments whose contract amounts represent off-balance-sheet credit risk at March 31, 2022 and December 31, 2021 were as follows (in thousands):
March 31, 2022December 31, 2021
Commitments to extend credit:
Commercial loans$66,854 82,578 
Other loans  
Fixed rate5,959 5,196 
Adjustable rate3,563 2,784 
Unused lines of credit:  
Fixed rate34,570 32,655 
Adjustable rate193,015 150,746 
Unused overdraft protection amounts on demand and NOW accounts16,654 16,711 
Standby letters of credit5 5 
Total commitments$320,620 290,675 

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

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

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

Capital expenditures include the construction or acquisition of new office buildings, improvements to LCNB's offices, purchases of furniture and equipment, and additions or improvements to LCNB's information technology system. Commitments outstanding for capital expenditures as of March 31, 2022 totaled approximately $356,000.

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

LCNB and its subsidiaries are parties to various claims and proceedings arising in the normal course of business.  Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings and claims will not be material to the consolidated financial position or results of operations.
24
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)


Note 10 – Accumulated Other Comprehensive Income (Loss)
 
Changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021 were as follows (in thousands):
Three Months Ended March 31,
 Unrealized Gains and Losses on Available-for-Sale Debt SecuritiesChanges in Pension Plan Assets and Benefit ObligationsTotal
2022
Balance at beginning of period$(1,536)(273)(1,809)
Before reclassifications(13,189)1 (13,188)
Reclassifications— — — 
Balance at end of period$(14,725)(272)(14,997)
2021   
Balance at beginning of period$4,349 (306)4,043 
Before reclassifications(3,441)1 (3,440)
Reclassifications— — — 
Balance at end of period$908 (305)603 

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

Note 11 – Retirement Plans
 
LCNB participates in a noncontributory defined benefit multi-employer retirement plan that covers substantially all regular full-time employees hired before January 1, 2009. Employees hired before this date who received a benefit reduction under certain amendments to the defined benefit retirement plan receive an automatic contribution of 5% or 7% of their annual compensation, depending on the sum of an employee's age and vesting service, into their defined contribution plans (401(k) plans), regardless of the contributions made by the employees.  These contributions are made annually and these employees do not receive any employer matches to their 401(k) contributions.

Employees hired on or after January 1, 2009 receive a 50% employer match on their contributions into the 401(k) plan, up to a maximum LCNB contribution of 3% of each individual employee's annual compensation.

Funding and administrative costs of the qualified noncontributory defined benefit retirement plan and 401(k) plan charged to pension and other employee benefits in the consolidated condensed statements of income for the three-month period ended March 31, 2022 and 2021 were as follows (in thousands):
Three Months Ended 
March 31,
 20222021
Qualified noncontributory defined benefit retirement plan$308 279 
401(k) plan180 160 
25
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)


Note 11 – Retirement Plans (continued)

Certain highly compensated former employees participate in a nonqualified defined benefit retirement plan.  The nonqualified plan ensures that participants receive the full amount of benefits to which they would have been entitled under the noncontributory defined benefit retirement plan in the absence of limits on benefit levels imposed by certain sections of the Internal Revenue Code. This plan is limited to the original participants and no new participants have been added.

The components of net periodic pension cost of the nonqualified defined benefit retirement plan for the three months ended March 31, 2022 and 2021 are summarized as follows (in thousands):
 Three Months Ended 
March 31,
 20222021
Interest cost$12 13 
Amortization of unrecognized net loss2 2 
Net periodic pension cost$14 15 

Amounts recognized in accumulated other comprehensive income (loss), net of tax, for the nonqualified defined benefit retirement plan for the three months ended March 31, 2022 and 2021 were as follows (in thousands):
Three Months Ended March 31,
20222021
Net actuarial gain$(1)(2)


Note 12 – Stock Based Compensation
 
LCNB established an Ownership Incentive Plan (the "2002 Plan") during 2002 that allowed for stock-based awards to eligible employees, as determined by the Board of Directors.  The awards were made in the form of stock options, share awards, and/or appreciation rights.  The 2002 Plan provided for the issuance of up to 200,000 shares of common stock. Options granted under the 2002 Plan vested ratably over a five-year period and expired ten years after the date of grant. The 2002 Plan expired on April 16, 2012. Any outstanding unexercised options, however, continued to be exercisable in accordance with their terms.

The 2015 Ownership Incentive Plan (the "2015 Plan") was ratified by LCNB's shareholders at the annual meeting on April 28, 2015 and allows for stock-based awards to eligible employees, as determined by the Compensation Committee of the Board of Directors. Awards may be made in the form of stock options, appreciation rights, restricted shares, and/or restricted share units. The 2015 Plan provides for the issuance of up to 450,000 shares of common stock. The 2015 Plan will terminate on April 28, 2025 and is subject to earlier termination by the Compensation Committee.

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

LCNB has not granted stock option awards since 2012.
26
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 12 – Stock Based Compensation (continued)

The following table summarizes stock option activity for the periods indicated:
Three Months Ended March 31,
 20222021
 OptionsWeighted Average Exercise
Price		Aggregate Intrinsic Value (in thousands) (1)OptionsWeighted 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,
 20222021
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:
20222021
  
 
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 
Granted32,554 19.25 26,321 16.85 
Vested(17,229)17.98 (8,817)17.55 
Forfeited— — (122)16.87 
Outstanding, March 31,59,837 $18.00 45,978 $17.07 

The following table presents expense recorded in salaries and employee benefits for restricted stock awards and the related tax information for the three months ended March 31, 2022 and 2021 (in thousands):
 Three Months Ended 
March 31,
20222021
Restricted stock expense$197 93 
Tax effect41 20 
27
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 12 – Stock Based Compensation (continued)
Unrecognized compensation expense for restricted stock awards was $1,034,000 at March 31, 2022 and is expected to be recognized over a period of 4.9 years.


Note 13 – Earnings per Common Share
 
LCNB has granted restricted stock awards with non-forfeitable dividend rights, which are considered participating securities. Accordingly, earnings per share is computed using the two-class method as required by ASC 260-10-45. Basic earnings per common share is calculated by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period, which excludes the participating securities.  Diluted earnings per common share is adjusted for the dilutive effects of stock options, warrants, and restricted stock.  The diluted average number of common shares outstanding has been increased for the assumed exercise of stock options and warrants with proceeds used to purchase treasury shares at the average market price for the period.  

Earnings per share for the three months ended March 31, 2022 and 2021 were calculated as follows (dollars in thousands, except share and per share data):
Three Months Ended 
March 31,
 20222021
Net income$4,523 5,240 
Less allocation of earnings and dividends to participating securities24 18 
Net income allocated to common shareholders$4,499 5,222 
Weighted average common shares outstanding, gross11,878,451 12,840,782 
Less average participating securities59,837 45,958 
Weighted average number of shares outstanding used in the calculation of basic earnings per common share11,818,614 12,794,824 
Add dilutive effect of:  
Stock options— 28 
Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share11,818,614 12,794,852 
Earnings per common share:  
Basic$0.38 0.41 
Diluted0.38 0.41 

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


Note 14 - Fair Value Measurements
 
LCNB measures certain assets at fair value using various valuation techniques and assumptions, depending on the nature of the asset.  Fair value is defined as the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date.

The inputs to the valuation techniques used to measure fair value are assigned to one of three broad levels:
•Level 1 – quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the reporting date.
28
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 are reported at fair value with changes in fair value reported in other operating income in the consolidated condensed statements of income. Fair values for equity securities are determined based on market quotations (level 1). LCNB has invested in two mutual funds that are traded in active markets and their fair values are based on market quotations (level 1). Investments in another two mutual funds are measured at fair value using net asset values and are considered level 1 because the net asset values are determined and published and are the basis for current transactions.

Debt Securities, Available-for-Sale
The majority of LCNB's financial debt securities are classified as available-for-sale.  The securities are reported at fair value with unrealized holding gains and losses reported net of income taxes in accumulated other comprehensive income. LCNB utilizes a pricing service for determining the fair values of its debt securities.  Methods and significant assumptions used to estimate fair value were as follows:

•Fair values for U.S. Treasury notes are determined based on market quotations (level 1).
•Fair values for the other debt securities are calculated using the discounted cash flow method for each security.  The discount rates for these cash flows are estimated by the pricing service using rates observed in the market (level 2). Cash flow streams are dependent on estimated prepayment speeds and the overall structure of the securities given existing market conditions.  

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

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



















29
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 14 - Fair Value Measurements (continued)
The following table summarizes the valuation of LCNB's assets recorded at fair value by input levels as of March 31, 2022 and December 31, 2021 (in thousands):
Fair Value Measurements at the End of
the Reporting Period Using
 Fair Value MeasurementsQuoted 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 funds47 47 — — 
     Mutual funds measured at net asset value1,270 1,270 — — 
Debt securities, available-for-sale:
     U.S. Treasury notes74,733 74,733 — — 
     U.S. Agency notes82,746 — 82,746 — 
     Corporate bonds5,927 — 5,927 — 
     U.S. Agency mortgage-backed securities86,800 — 86,800 — 
     Municipal securities:    
          Non-taxable8,273 — 8,273 — 
          Taxable34,985 — 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 funds51 51 — — 
     Mutual funds measured at net asset value1,328 1,328 — — 
Debt securities, available-for-sale:    
     U.S. Treasury notes74,744 74,744 — — 
     U.S. Agency notes87,246 — 87,246 — 
     Corporate bonds5,152 — 5,152 — 
     U.S. Agency mortgage-backed securities96,676 — 96,676 — 
     Municipal securities:    
          Non-taxable9,066 — 9,066 — 
          Taxable35,293 — 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 


30
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 14 - Fair Value Measurements (continued)
The following table presents quantitative information about unobservable inputs used in nonrecurring level 3 fair value measurements at March 31, 2022 and December 31, 2021 (dollars in thousands):
Range
Fair ValueValuation TechniqueUnobservable InputsHighLowWeighted Average
March 31, 2022
Impaired loans$— Estimated sales priceAdjustments for comparable properties, discounts to reflect current market conditionsNot applicable
Impaired loans$991 Discounted cash flowsDiscount rate8.125 %4.625 %6.07 %
December 31, 2021
Impaired loans$— Estimated sales priceAdjustments for comparable properties, discounts to reflect current market conditionsNot applicable
1,011 Discounted cash flowsDiscount rate8.25 %4.00 %6.07 %






















31
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 14 - Fair Value Measurements (continued)
Carrying amounts and estimated fair values of financial instruments as of March 31, 2022 and December 31, 2021 were as follows (in thousands):
 Fair Value Measurements at the End of
the Reporting Period Using
Carrying
Amount		Fair
Value		Quoted
Prices
in Active
Markets for Identical Assets
(Level 1)		Significant Other Observable Inputs
(Level 2)		Significant Unobservable Inputs
(Level 3)
March 31, 2022
FINANCIAL ASSETS:
Cash and cash equivalents$19,941 19,941 19,941 — — 
Debt securities, held-to-maturity22,873 22,409 — — 22,409 
Federal Reserve Bank stock4,652 4,652 4,652 — — 
Federal Home Loan Bank stock5,203 5,203 5,203 — — 
Loans, net1,373,991 1,299,509 — — 1,299,509 
  Accrued interest receivable8,364 8,364 — 8,364 — 
FINANCIAL LIABILITIES:  
Deposits1,636,606 1,637,621 1,451,644 185,977 — 
Short-term borrowings24,746 24,746 24,746 — — 
Long-term debt10,000 10,243 — 10,243 — 
  Accrued interest payable339 339 — 339 — 
December 31, 2021
FINANCIAL ASSETS:
Cash and cash equivalents$18,136 18,136 18,136 — — 
Debt securities, held-to-maturity22,972 23,087 — — 23,087 
Federal Reserve Bank stock4,652 4,652 4,652 — — 
Federal Home Loan Bank stock5,203 5,203 5,203 — — 
Loans, net1,363,939 1,333,840 — — 1,333,840 
  Accrued interest receivable7,999 7,999 — 7,999 — 
FINANCIAL LIABILITIES:  
Deposits1,628,819 1,630,158 1,435,487 194,671 — 
Long-term debt10,000 10,292 — 10,292 — 
Accrued interest payable277 277 — 277 — 

The fair values of off-balance-sheet financial instruments such as loan commitments and letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of such instruments were not material at March 31, 2022 and December 31, 2021.
32
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.





33
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.
34

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, as well as its other filings with the SEC, for a more detailed discussion of risks, uncertainties and factors that could cause actual results to differ from those discussed in the forward-looking statements.

These forward-looking statements reflect management's current expectations based on all information available to management and its knowledge of LCNB’s business and operations. Additionally, LCNB’s financial condition, results of operations, plans, objectives, future performance and business are subject to risks and uncertainties that may cause actual results to differ materially. These factors include, but are not limited to:

1.the success, impact, and timing of the implementation of LCNB’s business strategies;
2.the significant risks and uncertainties for LCNB's business, results of operations and financial condition, as well as its regulatory capital and liquidity ratios and other regulatory requirements, caused by the COVID-19 pandemic, which will depend on several factors, including the scope and duration of the pandemic, its influence on financial markets, the effectiveness of LCNB's work from home arrangements and staffing levels in operational facilities, the impact of market participants on which LCNB relies and actions taken by governmental authorities and other third parties in response to the pandemic;
3.the disruption of global, national, state, and local economies associated with the COVID-19 pandemic and the Russia/Ukraine conflict, which could affect LCNB's liquidity and capital positions, impair the ability of our borrowers to repay outstanding loans, impair collateral values, and further increase the allowance for credit losses;
4.LCNB’s ability to integrate future acquisitions may be unsuccessful or may be more difficult, time-consuming, or costly than expected;
5.LCNB may incur increased loan charge-offs in the future;
6.LCNB may face competitive loss of customers;
7.changes in the interest rate environment, which may include continued interest rate increases, may have results on LCNB’s operations materially different from those anticipated by LCNB’s market risk management functions;
8.changes in general economic conditions and increased competition could adversely affect LCNB’s operating results;
9.changes in regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact LCNB’s operating results;
10.LCNB may experience difficulties growing loan and deposit balances;
11.United States trade relations with foreign countries could negatively impact the financial condition of LCNB's
customers, which could adversely affect LCNB 's operating results and financial condition;
12.deterioration in the financial condition of the U.S. banking system may impact the valuations of investments LCNB has made in the securities of other financial institutions resulting in either actual losses or other-than-temporary impairments on such investments;
13.difficulties with technology or data security breaches, including cyberattacks, that could negatively affect LCNB's ability to conduct business and its relationships with customers, vendors, and others;
14.adverse weather events and natural disasters and global and/or national epidemics; and
15.government intervention in the U.S. financial system, including the effects of legislative, tax, accounting, and regulatory actions and reforms, including the CARES Act, the Dodd-Frank Act, the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau, the capital ratios of Basel III as adopted by the federal banking authorities, and the Tax Cuts and Jobs Act. 

Forward-looking statements made herein reflect management's expectations as of the date such statements are made. Such information is provided to assist shareholders and potential investors in understanding current and anticipated financial operations of LCNB and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. LCNB undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise after the date such statements are made. 
 
35

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 Losses.  The allowance for loan losses is established through a provision for loan losses charged to expense.  Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely.  Subsequent recoveries, if any, are credited to the allowance.  The allowance is an amount that management believes will be adequate to absorb inherent losses in the loan portfolio, based on evaluations of the collectibility of loans and prior loan loss experience.  The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components.  The specific component typically relates to loans that are classified as doubtful, substandard, or special mention.  For such loans an allowance is established when the discounted cash flows or collateral value is lower than the carrying value of that loan.  The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors, which include trends in underperforming loans, trends in the volume and terms of loans, economic trends and conditions, concentrations of credit, trends in the quality of loans, and borrower financial statement exceptions.

Based on its evaluations, management believes that the allowance for loan losses will be adequate to absorb estimated losses inherent in the current loan portfolio.

Acquired Credit Impaired Loans. LCNB accounts for acquisitions using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be measured at their fair values at the acquisition date. Acquired loans are reviewed to determine if there is evidence of deterioration in credit quality since inception and if it is probable that LCNB will be unable to collect all amounts due under the contractual loan agreements. The analysis includes expected prepayments and estimated cash flows including principal and interest payments at the date of acquisition. The amount in excess of the estimated future cash flows is not accreted into earnings. The amount in excess of the estimated future cash flows over the book value of the loan is accreted into interest income over the remaining life of the loan (accretable yield). LCNB records these loans on the acquisition date at their fair values. Thus, an allowance for estimated future losses is not established on the acquisition date. Subsequent to the date of acquisition, expected future cash flows on loans acquired are updated and any losses or reductions in estimated cash flows which arise subsequent to the date of acquisition are reflected as a charge through the provision for loan losses. An increase in the expected cash flows adjusts the level of the accretable yield recognized on a prospective basis over the remaining life of the loan. Due to the number, size, and complexity of loans within the acquired loan portfolio, there is always a possibility of inherent undetected losses.

36

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Accounting for Intangibles.  LCNB’s intangible assets at March 31, 2022 are composed primarily of goodwill and core deposit intangibles related to acquisitions of other financial institutions. It also includes mortgage servicing rights recorded from sales of mortgage loans to the Federal Home Loan Mortgage Corporation and mortgage servicing rights acquired through the acquisition of Eaton National Bank & Trust Co. and Columbus First Bancorp, Inc. Goodwill is not subject to amortization, but is reviewed annually for impairment or sooner if circumstances indicate a possible impairment.  Core deposit intangibles are being amortized on a straight line basis over their respective estimated weighted average lives.  Mortgage servicing rights are capitalized by allocating the total cost of loans between mortgage servicing rights and the loans based on their estimated fair values.  Capitalized mortgage servicing rights are amortized to loan servicing income in proportion to and over the period of estimated servicing income, subject to periodic review for impairment.

Fair Value Accounting for Debt Securities. Debt securities classified as available-for-sale are carried at estimated fair value. Unrealized gains and losses, net of taxes, are reported as accumulated other comprehensive income or loss in shareholders' equity. Fair value is estimated using market quotations for U.S. Treasury investments. Fair value for the majority of the remaining available-for-sale securities is estimated using the discounted cash flow method for each security with discount rates based on rates observed in the market.

Results of Operations

Net income for the three months ended March 31, 2022 was $4,523,000 (total basic and diluted earnings per share of $0.38). This compares to net income of $5,240,000 (total basic and diluted earnings per share of $0.41) for the same three month period in 2021.

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

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

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

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

37

LCNB CORP. AND SUBSIDIARIES

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

Three Months Ended March 31, 2022 vs. March 31, 2021
LCNB's primary source of earnings is net interest income, which is the difference between earnings from loans and other investments and interest paid on deposits and other liabilities.  The following table presents, for the three months ended March 31, 2022 and March 31, 2021, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resulting average yields earned or rates paid.
 Three Months Ended March 31,
 20222021
Average
Outstanding
Balance		Interest
Earned/
Paid		Average
Yield/
Rate		Average
Outstanding
Balance		Interest
Earned/
Paid		Average
Yield/
Rate
 (Dollars in thousands)
Loans (1)$1,376,926 13,786 4.06 %$1,313,803 14,535 4.49 %
Interest-bearing demand deposits9,743 9 0.37 %15,632 13 0.34 %
Federal Reserve Bank stock4,652 — — %4,652 — — %
Federal Home Loan Bank stock5,203 26 2.03 %5,203 26 2.03 %
Investment securities:
Equity securities4,611 17 1.50 %4,500 19 1.71 %
Debt securities, taxable298,152 1,095 1.49 %211,618 718 1.38 %
Debt securities, non-taxable (2)28,048 239 3.46 %34,174 284 3.37 %
Total earnings assets1,727,335 15,172 3.56 %1,589,582 15,595 3.98 %
Non-earning assets195,394   191,287   
Allowance for loan losses(5,503)  (5,715)  
Total assets$1,917,226   $1,775,154   
NOW and money fund deposits$511,250 147 0.12 %$419,832 132 0.13 %
Savings deposits444,243 147 0.13 %375,194 148 0.16 %
IRA and time certificates189,305 445 0.95 %234,134 748 1.30 %
Short-term borrowings12,503 86 2.79 %342 1 1.19 %
Long-term debt10,000 74 3.00 %19,689 134 2.76 %
Total interest-bearing liabilities1,167,301 899 0.31 %1,049,191 1,163 0.45 %
Demand deposits501,829   458,996  
Other liabilities22,371   25,450   
Capital225,725   241,517   
Total liabilities and capital$1,917,226   $1,775,154   
Net interest rate spread (3)  3.25 %  3.53 %
Net interest income and net interest margin on a taxable-equivalent basis (4) 14,273 3.35 % 14,432 3.68 %
Ratio of interest-earning assets to interest-bearing liabilities147.98 %  151.51 %  
(1)Includes non-accrual loans.
(2)Income from tax-exempt securities is included in interest income on a taxable-equivalent basis.  Interest income has been divided
    by a factor comprised of the complement of the incremental tax rate of 21%.
(3)The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities.
(4)The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets.





38

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table presents the changes in taxable-equivalent basis interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the three months ended March 31, 2022 as compared to the same period in 2021.  Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each.
Three Months Ended 
March 31, 2022 vs. 2021
Increase (decrease) attributable to:
 VolumeRateTotal
 (In thousands)
Interest-earning Assets:
Loans$676 (1,425)(749)
Interest-bearing demand deposits(5)1 (4)
Federal Reserve Bank stock— — — 
Federal Home Loan Bank stock— — — 
Investment securities: 
Equity securities— (2)(2)
Debt securities, taxable314 63 377 
Debt securities, non-taxable(52)7 (45)
Total interest income933 (1,356)(423)
Interest-bearing Liabilities:  
NOW and money fund deposits27 (12)15 
Savings deposits25 (26)(1)
IRA and time certificates(127)(176)(303)
Short-term borrowings82 3 85 
Long-term debt(71)11 (60)
Total interest expense(64)(200)(264)
Net interest income$997 (1,156)(159)

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

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






39

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The $264,000 decrease in total interest expense was due to a $303,000 decrease in interest expense for IRA and time certificates and a $60,000 decrease in interest expense for long-term debt, partially offset by an $85,000 increase in interest expense for short-term borrowings. Interest expense for IRA and time certificates decreased due to a 34 basis point decrease in the average rate paid for these deposits and to an $44.8 million decrease in the average balance of these deposits. Management believes the decrease reflects customer preferences for liquidity during uncertain economic periods. Balances in demand deposits, NOW and money fund deposits, and savings deposits have grown, while balances in IRA and time deposits have decreased. Interest expense for long-term debt decreased due to a $9.7 million decrease in average debt outstanding, slightly offset by a 24 basis point increase in the average rate paid. Interest expense for short-term borrowings increased primarily because of a $12.2 million increase in average borrowings outstanding.

Provision and Allowance For Loan Losses

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

The provision for loan losses for the three months ended March 31, 2022 was $49,000, compared to a credit of $52,000 for the same period in 2021. Calculating an appropriate level for the allowance and provision for loan losses involves a high degree of management judgment and is, by its nature, imprecise. Revisions may be necessary as more information becomes available.

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

Non-Interest Income

A comparison of non-interest income for the three months ended March 31, 2022 and March 31, 2021 is as follows (in thousands):
Three Months Ended 
March 31,
 20222021Difference
Fiduciary income$1,695 1,529 166 
Service charges and fees on deposit accounts1,406 1,366 40 
Bank owned life insurance income265 267 (2)
Gains from sales of loans124 43 81 
Other operating income60 260 (200)
Total non-interest income$3,550 3,465 85 

Reasons for changes include:
•Fiduciary income increased due to a combination of new accounts and increases in the fair value of trust and brokerage assets managed.
•Gains from sales of loans increased primarily due to a higher volume of residential real estate loan sales.
•Other operating income decreased primarily due to a decrease in unrealized net gains or losses recognized on equity securities.


40

LCNB CORP. AND SUBSIDIARIES

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

A comparison of non-interest expense for the three months ended March 31, 2022 and March 31, 2021 is as follows (in thousands):
Three Months Ended 
March 31,
 20222021Difference
Salaries and employee benefits$7,215 6,433 782 
Equipment expenses408 368 40 
Occupancy expense, net775 794 (19)
State financial institutions tax436 444 (8)
Marketing262 268 (6)
Amortization of intangibles140 257 (117)
FDIC insurance premiums, net126 113 13 
Contracted services610 540 70 
Other non-interest expense2,278 2,275 3 
Total non-interest expense$12,250 11,492 758 

Reasons for changes include:
•Salaries and employee benefits increased primarily due to increases in salaries and wages, increased bonus expense accruals, increased compensation expense for restricted stock grants, increased FICA matching expense, and to a higher percentage of personnel expenses deferred in 2021 attributable to the high volume of PPP loans originated in that period.
•Amortization of intangibles decreased because the core deposit intangibles from the First Capital Bancshares, Inc. and Eaton National Bank & Trust Co. acquisitions amortized in full during the first quarter 2022.

Income Taxes

LCNB's effective tax rate for the three months ended March 31, 2022 was 17.4%, compared to 18.1% for the three months ended March 31, 2021.  The difference between the statutory rate of 21% and the effective tax rates is primarily due to tax-exempt interest income from municipal securities, tax-exempt earnings from bank owned life insurance, tax-exempt earnings from LCNB Risk Management, Inc., and tax credits and losses related to investments in affordable housing tax credit limited partnerships.





















41

LCNB CORP. AND SUBSIDIARIES

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

A comparison of balance sheet line items at March 31, 2022 and December 31, 2021 is as follows (dollars in thousands):
 March 31, 2022December 31, 2021Difference $Difference %
ASSETS:
Total cash and cash equivalents$19,941 18,136 1,805 9.95 %
Investment securities:
Equity securities with a readily determinable fair value, at fair value2,424 2,546 (122)(4.79)%
Equity securities without a readily determinable fair value, at cost2,099 2,099 — — %
Debt securities, available-for-sale, at fair value293,464 308,177 (14,713)(4.77)%
Debt securities, held-to-maturity, at cost22,873 22,972 (99)(0.43)%
Federal Reserve Bank stock, at cost4,652 4,652 — — %
Federal Home Loan Bank stock, at cost5,203 5,203 — — %
Loans, net1,373,991 1,363,939 10,052 0.74 %
Premises and equipment, net34,940 35,385 (445)(1.26)%
Operating lease right-of-use assets6,191 6,357 (166)(2.61)%
Goodwill59,221 59,221 — — %
Core deposit and other intangibles2,328 2,473 (145)(5.86)%
Bank owned life insurance43,488 43,224 264 0.61 %
Interest receivable8,364 7,999 365 4.56 %
Other assets20,451 21,246 (795)(3.74)%
Total assets$1,899,630 1,903,629 (3,999)(0.21)%
LIABILITIES:
Deposits:
Non-interest-bearing$517,621 501,531 16,090 3.21 %
Interest-bearing1,118,985 1,127,288 (8,303)(0.74)%
Total deposits1,636,606 1,628,819 7,787 0.48 %
Short-term borrowings24,746 — 24,746 N/A
Long-term debt10,000 10,000 — — %
Operating lease liabilities6,337 6,473 (136)(2.10)%
Accrued interest and other liabilities15,066 19,733 (4,667)(23.65)%
Total liabilities1,692,755 1,665,025 27,730 1.67 %
SHAREHOLDERS' EQUITY:
  Common shares143,432 143,130 302 0.21 %
  Retained earnings128,555 126,312 2,243 1.78 %
  Treasury shares at cost(50,115)(29,029)(21,086)72.64 %
  Accumulated other comprehensive loss, net of taxes(14,997)(1,809)(13,188)729.02 %
  Total shareholders' equity206,875 238,604 (31,729)(13.30)%
  Total liabilities and shareholders' equity$1,899,630 1,903,629 (3,999)(0.21)%

Reasons for changes include:
•Debt securities, available-for-sale, decreased due to maturities and calls of securities totaling $9.8 million and decreases in market value totaling $16.7 million, largely offset by purchases of additional securities totaling $12.1 million.
•Net loans increased due to organic growth in the loan portfolio. Most of the growth occurred in the commercial real estate and commercial and industrial portfolios, partially offset by decreases in the residential real estate and agricultural loan portfolios.
42

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
•Non-interest-bearing deposits and interest-bearing deposits have grown substantially since the start of the COVID-19 pandemic and this trend continued during the first three months of 2022. Management believes the growth reflects customer preferences for liquidity during uncertain economic periods. Balances in demand deposits and NOW and savings accounts have grown, while balances in IRA and time deposits have decreased. Interest-bearing deposits show a decrease because of a $29.5 million decrease in ICS® Demand Reciprocal deposit balances.
•Short-term borrowings increased due to a $20 million one-year revolving line of credit obtained during the first quarter 2022. The borrowing was used to finance the repurchase of 1,051,688 shares of LCNB common stock.
•Accrued interest and other liabilities decreased due to a combination of decreases in accrued bonuses caused by the payment of annual bonuses in January, a decrease in LIHTC liabilities due to funding payments made during the first quarter, and net deferred federal income taxes being categorized as an asset at March 31, 2022 vs. being categorized as a liability at December 31, 2021.
•Treasury shares increased because of the purchase referred to above.
•Accumulated other comprehensive loss, net of taxes increased because of market-driven decreases in the fair value of LCNB's debt security investments.

Regulatory Capital

The Bank must meet certain minimum capital requirements set by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company's and Bank's financial statements. LCNB’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.

In addition to the minimum capital requirements, a financial institution needs to maintain a Capital Conservation Buffer composed of Common Equity Tier 1 Capital of at least 2.5% above its minimum risk-weighted capital requirements to avoid limitations on its ability to make capital distributions, including dividend payments to shareholders and certain discretionary bonus payments to executive officers. A financial institution with a buffer below 2.5% is subject to increasingly stringent limitations on capital distributions as the buffer approaches zero.

For various regulatory purposes, financial institutions are classified into categories based upon capital adequacy:
 Minimum RequirementMinimum Requirement with Capital Conservation BufferTo Be Considered
Well-Capitalized
Ratio of Common Equity Tier 1 Capital to risk-weighted assets4.5 %7.0 %6.5 %
Ratio of Tier 1 Capital to risk-weighted assets6.0 %8.5 %8.0 %
Ratio of Total Capital (Tier 1 Capital plus Tier 2 Capital) to risk-weighted assets8.0 %10.5 %10.0 %
Leverage Ratio (Tier 1 Capital to adjusted quarterly average total assets)4.0 %N/A5.0 %

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













43

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, 2022December 31, 2021
Regulatory Capital:
Shareholders' equity$222,813 234,451 
Goodwill and other intangibles(60,516)(60,655)
Accumulated other comprehensive (income) loss14,997 1,809 
Tier 1 risk-based capital177,294 175,605 
Eligible allowance for loan losses5,530 5,506 
Total risk-based capital$182,824 181,111 
Capital ratios:  
Common Equity Tier 1 Capital to risk-weighted assets12.05 %12.25 %
Tier 1 Capital to risk-weighted assets12.05 %12.25 %
Total Capital to risk-weighted assets12.42 %12.64 %
Leverage9.54 %9.58 %

On September 17, 2019, the FDIC finalized a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations, as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The simplified rule was designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. Its use was permitted beginning with the March 31, 2020 Call Report. Qualifications to use the simplified approach include having a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the Community Bank Leverage Ratio framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. LCNB qualifies to use the simplified measure, but did not opt in for the March 31, 2022 regulatory capital calculations.

Liquidity

LCNB depends on dividends from the Bank for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders.  National banking law limits the amount of dividends the Bank may pay to the sum of retained net income for the current year plus retained net income for the previous two years.  Prior approval from the OCC, the Bank's primary regulator, is necessary for the Bank to pay dividends in excess of this amount. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines.  Management believes the Bank will be able to pay anticipated dividends to LCNB without needing to request approval.  The Bank is not aware of any reasons why it would not receive such approval, if required.

Effective liquidity management ensures that cash is available to meet the cash flow needs of borrowers and depositors, as well as meeting LCNB's operating cash needs. Primary funding sources include customer deposits with the Bank, short-term and long-term borrowings from the Federal Home Loan Bank, short-term line of credit arrangements with two correspondent banks, and interest and repayments received from LCNB's loan and investment portfolios.

Total remaining borrowing capacity with the Federal Home Loan Bank at March 31, 2022 was approximately $225.5 million. In addition, additional borrowings of approximately $50.3 million were available through the line of credit arrangements at March 31, 2022.

Management closely monitors the level of liquid assets available to meet ongoing funding needs.  It is management's intent to maintain adequate liquidity so that sufficient funds are readily available at a reasonable cost.  LCNB experienced no liquidity or operational problems as a result of current liquidity levels.
44


LCNB CORP. AND SUBSIDIARIES
Item 3.Quantitative and Qualitative Disclosures about Market Risk

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

The Bank's Asset and Liability Management Committee ("ALCO") primarily uses a combination of Interest Rate Sensitivity Analysis ("IRSA") and Economic Value of Equity ("EVE") analysis for measuring and managing interest rate risk.  IRSA is used to estimate the effect on net interest income ("NII") during a one-year period of instantaneous and sustained movements in interest rates, also called interest rate shocks, of 100, 200, 300, and 400 basis points.  Management considers the results of any significant downward scenarios of more than 100 basis points to not be meaningful in the current interest rate environment. The base projection uses a current interest rate scenario.  As shown below, the March 31, 2022 IRSA indicates that an increase in interest rates of 200 basis points or more will have a positive effect on NII and a 100 basis point increase or decrease in interest rates will have a negative effect on NII. The changes in NII for all rate assumptions are within LCNB's acceptable ranges.
Rate Shock Scenario in Basis PointsAmount$ Change in
NII		% Change in
NII
 (Dollars in thousands)
Up 400$65,115 3,499 5.68 %
Up 30063,837 2,221 3.60 %
Up 20062,574 958 1.55 %
Up 10061,328 (288)(0.47)%
Base61,616 — — %
Down 10059,510 (2,106)(3.42)%

IRSA shows the effect on NII during a one-year period only.  A more long-range model is the EVE analysis, which shows the estimated present value of future cash inflows from interest-earning assets less the present value of future cash outflows for interest-bearing liabilities for the same rate shocks.  As shown below, the March 31, 2022 EVE analysis indicates that an increase in interest rates will have a negative effect on the EVE and a 100 basis point decrease in interest rates will have a positive effect on the EVE.  The changes in the EVE for all upward rate assumptions are within LCNB's acceptable ranges. The change in EVE for the 100 basis point downward scenario is slightly outside LCNB's acceptable range of 20%.
Rate Shock Scenario in Basis PointsAmount$ Change in
EVE		% Change in
EVE
 (Dollars in thousands)
Up 400$140,166 (26,297)(15.80)%
Up 300149,004 (17,459)(10.49)%
Up 200157,434 (9,029)(5.42)%
Up 100165,473 (990)(0.59)%
Base166,463 — — %
Down 100203,646 37,183 22.34 %

The IRSA and EVE simulations discussed above are not projections of future income or equity and should not be relied on as being indicative of future operating results.  Assumptions used, including the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment or replacement of asset and liability cash flows, are inherently uncertain and, as a result, the models cannot precisely measure future net interest income or equity.  Furthermore, the models do not reflect actions that borrowers, depositors, and management may take in response to changing economic conditions and interest rate levels.

45

LCNB CORP. AND SUBSIDIARIES

Item 4.Controls and Procedures

a)  Disclosure controls and procedures.  The Chief Executive Officer and the Chief Financial Officer have carried out an evaluation of the effectiveness of LCNB's disclosure controls and procedures that ensure that information relating to LCNB required to be disclosed by LCNB in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to LCNB's management, including its principal executive officer and principal financial officer, as appropriate, in order to allow timely decisions to be made regarding required disclosures.  Based upon this evaluation, these officers have concluded that, as of March 31, 2022, LCNB's disclosure controls and procedures were effective.

b)  Changes in internal control over financial reporting.  During the period covered by this report, there were no changes in LCNB's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, LCNB's internal control over financial reporting.
46

LCNB CORP. AND SUBSIDIARIES

PART II.  OTHER INFORMATION
 
Item 1.Legal Proceedings
Except for routine litigation incidental to its business, LCNB is not a party to any material pending legal proceedings and none of its property is the subject of any material proceedings.

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

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

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

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

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

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
During the period covered by this report, LCNB did not sell any of its securities that were not registered under the Securities Act.

On August 24, 2020, LCNB's Board of Directors authorized a share repurchase program (the "Program"). Under the terms of the Program, LCNB is authorized to repurchase up to 645,000 of its outstanding common shares. The Program is authorized to last no longer than five years. The Program replaced and superseded LCNB’s prior share repurchase program, which was adopted in April 2019.

Under the Program, LCNB may purchase common shares through various means such as open market transactions, including block purchases, and privately negotiated transactions. The number of shares repurchased and the timing, manner, price and amount of any repurchases will be determined at LCNB's discretion. Factors include, but are not limited to, share price, trading volume, and general market conditions, along with LCNB’s general business conditions. The Program may be suspended or discontinued at any time and does not obligate LCNB to acquire any specific number of its common shares.

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






47

LCNB CORP. AND SUBSIDIARIES
The following table sets forth information relating to repurchases made under the Program during the three months ended March 31, 2022:
PeriodTotal Number of Shares PurchasedAverage Price Paid Per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 through 31, 2022—$— —21,191
February 1 through 28, 2022—$— —21,191
March 1 through 31, 2022—$— —21,191

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

Item 3.Defaults Upon Senior Securities
None.

Item 4.Mine Safety Disclosures
Not applicable.

Item 5.Other Information
None.
 
48

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, 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
49
Table of Contents

LCNB CORP. AND SUBSIDIARIES

Item 6.Exhibits
Exhibit No.Exhibit Description
2.1
3.1
  
3.2
10.1
10.2
  
10.3
  
10.4
10.5
10.6
  
31.1
  
31.2
  
32
  
101
The following financial information from LCNB Corp.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 is formatted in Extensible Business Reporting Language:  (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Income, (iii) the Consolidated Condensed Statements of Comprehensive Income, (iv) the Consolidated Condensed Statements of Shareholders' Equity, (v) the Consolidated Condensed Statements of Cash Flows, and (vi) the Notes to Consolidated Condensed Financial Statements.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
50

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