Table of Contents
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, 2025
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-35292
LCNB Corp.
(Exact name of registrant as specified in its charter)
Ohio
31-1626393
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
2 North Broadway, Lebanon, Ohio 45036
(Address of principal executive offices, including Zip Code)
(513) 932-1414
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, No Par Value
LCNB
NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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 7, 2025 was 14,167,428 shares.
LCNB CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
3
Item 1. Financial Statements
CONSOLIDATED CONDENSED BALANCE SHEETS
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
4
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
5
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
6
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
39
Item 3. Quantitative and Qualitative Disclosures about Market Risks
52
Item 4. Controls and Procedures
53
PART II. OTHER INFORMATION
54
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
55
SIGNATURES
56
Glossary of Abbreviations and Acronyms
ACL
Allowance for Credit Losses
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Bank
LCNB National Bank
CECL
Current expected credit losses
CNNB
Cincinnati Bancorp, Inc.
Company
LCNB Corp. and its consolidated subsidiaries as a whole
DCF
Discounted Cash Flow
EFBI
Eagle Financial Bancorp, Inc.
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
FFIEC
Financial Institutions Examination Council
FHLB
Federal Home Loan Bank
FICO
Fair Isaac Corporation
FOMC
Federal Open Market Committee of the Federal Reserve System
FRB
Federal Reserve Bank
GAAP
Generally Accepted Accounting Principles
IRA
Individual Retirement Account
LDA
Loss Driver Analysis
LGD
Loss Given Default
PCD
Purchased Credit Deteriorated
PD
Probability of Default
SEC
Securities and Exchange Commission
(Dollars in thousands)
March 31, 2025
December 31, 2024
Unaudited
Audited
ASSETS:
Cash and due from banks
Interest-bearing demand deposits
Total cash and cash equivalents
Interest-bearing time deposits
Investment securities:
Equity securities with a readily determinable fair value, at fair value
Equity securities without a readily determinable fair value, at cost
Debt securities, available-for-sale, at fair value
Debt securities, held-to-maturity, at cost, net of allowance for credit losses of $5 at March 31, 2025 and December 31, 2024
Federal Reserve Bank stock, at cost
Federal Home Loan Bank stock, at cost
Loans held-for-sale
Loans, net of allowance for credit losses of $12,124 and $12,001 at March 31, 2025 and December 31, 2024, respectively
Premises and equipment, net
Operating lease right-of-use assets
Goodwill
Core deposit and other intangibles, net
Bank-owned life insurance
Interest receivable
Other assets, net
TOTAL ASSETS
LIABILITIES:
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Long-term debt
Operating lease liabilities
Accrued interest and other liabilities
TOTAL LIABILITIES
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 17,378,298 and 17,329,423 shares at March 31, 2025 and December 31, 2024, respectively; outstanding 14,166,915 and 14,118,040 shares at March 31, 2025 and December 31, 2024, respectively
Retained earnings
Treasury shares at cost, 3,211,383 shares at March 31, 2025 and December 31, 2024
Accumulated other comprehensive loss, net of taxes
TOTAL SHAREHOLDERS' EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
2025
2024
INTEREST INCOME:
Interest and fees on loans
Dividends on equity securities:
With a readily determinable fair value
Without a readily determinable fair value
Interest on debt securities:
Taxable
Non-taxable
Other investments
TOTAL INTEREST INCOME
INTEREST EXPENSE:
Interest on deposits
Interest on short-term borrowings
Interest on long-term debt
TOTAL INTEREST EXPENSE
NET INTEREST INCOME
PROVISION FOR CREDIT LOSSES
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
NON-INTEREST INCOME:
Fiduciary income
Service charges and fees on deposit accounts
Net losses from sales of debt securities, available-for-sale
Bank-owned life insurance income
Net gains from sales of loans
Other operating income (loss)
TOTAL NON-INTEREST INCOME
NON-INTEREST EXPENSE:
Salaries and employee benefits
Equipment expenses
Occupancy expense, net
State financial institutions tax
Marketing
Amortization of intangibles
FDIC insurance premiums, net
Contracted services
Merger-related expenses
Other non-interest expense
TOTAL NON-INTEREST EXPENSE
INCOME BEFORE INCOME TAXES
PROVISION FOR INCOME TAXES
NET INCOME
Earnings per common share:
Basic
Diluted
Weighted average common shares outstanding:
(In thousands)
Net income
Other comprehensive income (loss):
Net unrealized gain (loss) on available-for-sale debt securities (net of tax expense (benefit) of $973 and $(342) for the three months ended March 31, 2025 and 2024, respectively)
Reclassification adjustment for net realized losses on sales of available-for-sale debt securities included in net income (net of tax benefit of $45 for the three months ended March 31, 2024)
Other comprehensive income (loss), net of tax
TOTAL COMPREHENSIVE INCOME
Accumulated
Common
Other
Total
Shares
Retained
Treasury
Comprehensive
Shareholders'
Outstanding
Stock
Earnings
Loss
Equity
Three Months Ended March 31, 2025
Balance at January 1, 2025
Other comprehensive income, net of taxes
Dividend Reinvestment and Stock Purchase Plan
Shares issued for restricted stock awards
Compensation expense relating to restricted stock
Common stock dividends, $0.22 per share
Balance at March 31, 2025
Three Months Ended March 31, 2024
Balance at January 1, 2024
Other comprehensive loss, net of taxes
Balance at March 31, 2024
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation, amortization, and accretion
Provision for credit losses
Deferred income tax provision
Increase in cash surrender value of bank-owned life insurance
Realized and unrealized (gains) losses from equity securities, net
Realized losses from sales of debt securities, available-for-sale
Impairment charge recognized on premises and equipment
Origination of mortgage loans for sale
Realized gains from sales of loans
Proceeds from sales of originated loans
Compensation expense related to restricted stock
Changes in:
Accrued interest receivable
Other assets
Other liabilities
TOTAL ADJUSTMENTS
NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
Equity securities:
Purchases of securities
Available for-sale debt securities:
Proceeds from sales
Proceeds from maturities, prepayments and calls
Held-to-maturity debt securities:
Purchase of Federal Reserve Bank stock
Purchases of Federal Home Loan Bank stock
Net decrease in loans
Purchases of premises and equipment
Funding of tax credit investments
NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in customer deposits
Net decrease in short-term borrowings
Proceeds from issuance of long-term debt
Principal payments on long-term debt
Proceeds from issuance of common stock
Cash dividends paid on common stock
NET CASH FLOWS USED IN FINANCING ACTIVITIES
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS AT END OF PERIOD
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Transfer from loans held-for-investment to loans held-for-sale
Transfer from premises and equipment to premises held-for-sale
Right-of-use assets obtained in exchange for lease obligations
NOTE 1 - BASIS OF PRESENTATION
BASIS OF PRESENTATION
The accompanying unaudited interim consolidated condensed financial statements include LCNB Corp. and its wholly-owned subsidiaries: LCNB National Bank and LCNB Risk Management, Inc., its captive insurance company. All material intercompany transactions and balances are eliminated in consolidation.
The unaudited interim consolidated condensed financial statements have been prepared in accordance with U.S. GAAP for interim financial information and the rules and regulations of the SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of the Company's financial position, results of consolidated operations, and cash flows for the interim periods, as required by Regulation S-X, Rule 10-01.
The consolidated condensed balance sheet as of December 31, 2024 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, 2025 are not necessarily indicative of the results to be expected for the full year ending December 31, 2025. 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 2024 Annual Report on Form 10-K filed with the SEC.
Certain prior period amounts have been reclassified to conform to the current year presentation. Specifically, prior period cash flows previously presented as a change in other liabilities have been reclassified to funding of tax credit investments to align with the current year's reporting. These reclassifications do not impact the reported results of operations.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
ASU 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.”
ASU No. 2023-09 was issued in December 2023 and became effective for LCNB on January 1, 2025. The amendments require that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation, and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income (or loss) by the applicable statutory income tax rate). The amendments require that all entities disclose on an annual basis the following information about income taxes paid: (1) the amount of income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes; and (2) the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5 percent of total income taxes paid (net of refunds received). The amendments also require that all entities disclose the following information: (1) income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign; and (2) income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign. Adoption of ASU No. 2023-09 did not have a material impact to the financial statements of the Company.
ASU 2024-01 “Compensation - Stock Compensation (Topic 718) - Scope Application of Profits Interest and Similar Awards,”
ASU No. 2024-01 was issued in March 2024 and became effective for LCNB on January 1, 2025. It clarifies how an entity determines whether a profits interest or similar award is within the scope of Topic 718 or is not a share-based payment arrangement and, therefore, is within the scope of other guidance. ASU 2024-01 provides an illustrative example with multiple fact patterns and also amends certain language in the “Scope” and “Scope Exceptions” sections of Topic 718 to improve its clarity and operability without changing the guidance. Entities can apply the amendments either retrospectively to all prior periods presented in the financial statements or prospectively to profits interest and similar awards granted or modified on or after the date of adoption. If prospective application is elected, an entity must disclose the nature of and reason for the change in accounting principle. Adoption of ASU No. 2024-01 did not have a material impact to the financial statements of the Company.
RECENT ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE
From time to time the FASB issues an ASU to communicate changes to U.S. GAAP. As of March 31, 2025, there are no newly issued but not yet effective ASUs that could have an effect on LCNB’s financial position or results of consolidated operations.
NOTE 2 - BUSINESS COMBINATIONS
On April 12, 2024, LCNB acquired Eagle Financial Bancorp, Inc. (“EFBI”), the holding company for EAGLE.bank, an Ohio state-chartered bank. Under the terms of the definitive merger agreement, EFBI merged with and into LCNB Corp., immediately followed by the merger of EAGLE.bank with and into LCNB National Bank. EAGLE.bank operated three full-service banking offices in Cincinnati, Ohio, which became offices of LCNB after the merger. This transaction increased LCNB’s presence in the Cincinnati market.
Subject to the terms of the merger agreement, EFBI shareholders had the opportunity to elect to receive either 1.1401 shares of LCNB Corp. stock, $19.10 per share in cash for each share of EFBI common stock owned, or a combination thereof subject to at least 60%, but not more than 70%, of the shares of EFBI being exchanged for LCNB common stock. The fair value of the common stock issued as part of the consideration was determined on the basis of the closing price of LCNB's common stock on the acquisition date.
NOTE 2 - BUSINESS COMBINATIONS (continued)
The following table summarizes the fair value of the total consideration transferred as a part of the EFBI acquisition and the fair value of identifiable assets acquired and liabilities assumed as originally reported at June 30, 2024 and as adjusted at March 31, 2025 (in thousands). No adjustments to goodwill were recorded in the first quarter of 2025.
June 30, 2024
Adjustments
Consideration:
Cash consideration
Common stock (868,001 shares issued at $14.04 per share)
Fair value of total consideration transferred
Identifiable Assets Acquired:
Cash and cash equivalents
Debt securities, available-for-sale
Federal Home Loan Bank stock
Loans, net
Premises and equipment
Core deposit and other intangibles
Bank owned life insurance
Deferred income taxes
Total identifiable assets acquired
Liabilities Assumed:
Deposits
Short-term borrowings
Total liabilities assumed
Total Identifiable Net Assets Acquired
Goodwill Resulting From Merger
The fair value and gross contractual amounts of non-PCD loans as of the acquisition date was $101.7 million and $112.5 million, respectively. LCNB recorded a provision for credit losses on these loans of $763 thousand during the second quarter of 2024.
As permitted by ASC No. 805-10-25, Business Combinations, the above estimated amounts may be adjusted up to one year after the closing date of the transaction to reflect any new information obtained about facts and circumstances existing at the acquisition date. While the Company believes that the information available on the merger date provided a reasonable basis for estimating fair value, additional information and evidence may be provided which will be utilized to finalize all valuations and record final adjustments during the one year subsequent measurement period. These adjustments may include: (i) changes in deferred tax assets or liabilities related to fair value estimates and changes in the expected realization of items considered to be net operating loss carryforwards due to tax calculations still in process, and (ii) changes in goodwill as a result of the net effect of any adjustments. As such, any changes in the estimated fair value of assets will be recognized in the period the adjustment is identified.
The consideration adjustments are associated with the unearned portion of EAGLE.bank's employee stock ownership plan. The other assets, other liabilities and resulting deferred tax adjustments in the table above were related to the updated fair value adjustments.
The amount of goodwill recorded reflects LCNB's expansion in the Cincinnati market and related synergies that are expected to result from the acquisition and represents the excess purchase price over the estimated fair value of the net assets acquired. The goodwill will not be amortizable on LCNB's financial records and will not be deductible for tax purposes. Total goodwill will be subject to an annual test for impairment and the amount impaired, if any, will be charged to expense at the time of impairment.
Direct expenses related to the EFBI acquisition totaled $298 thousand during the three months ended March 31, 2024. They were expensed as incurred and are recorded as merger-related expenses in the consolidated statements of income. There were no direct expenses related to the EFBI acquisition in 2025.
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of debt securities at March 31, 2025 and December 31, 2024 are summarized as follows (in thousands):
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
Debt Securities, Available-for-Sale:
U.S. Treasury notes
U.S. Agency notes
Corporate bonds
U.S. Agency mortgage-backed securities
Municipal securities:
Debt Securities, Held-to-Maturity:
Corporate Bonds
The amortized cost of debt securities in the above table excludes accrued interest of $1.1 million and $993 thousand at March 31, 2025 and December 31, 2024, respectively, that is recorded in other assets on the consolidated condensed balance sheets.
Expected credit losses on debt securities were $5 thousand at March 31, 2025 and December 31, 2024.
NOTE 3 - INVESTMENT SECURITIES (continued)
Information concerning debt securities with gross unrealized losses at March 31, 2025 and December 31, 2024, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (in thousands):
Less than Twelve Months
Twelve Months or Greater
Available-for-Sale:
Held-to-Maturity:
At March 31, 2025, LCNB’s securities portfolio consisted of 159 securities, 153 of which were in an unrealized loss position. At December 31, 2024, LCNB's securities portfolio consisted of 161 securities, 157 of which were in an unrealized loss position.
Each quarter, LCNB performs an analysis to determine if any of the unrealized losses on available-for-sale debt securities are comprised of credit losses as compared to unrealized losses due to market interest rate adjustments. The assessment includes a review of the unrealized loss for each security issuance held; the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades; and LCNB's ability and intent to hold the security for a period of time sufficient for a recovery in value. LCNB also considers the extent to which the securities are issued by the federal government or its agencies and any guarantee of issued amounts by those agencies. The portfolio continues to consist of a mix of fixed and floating-rate, high quality securities, largely rated AA (or better), displaying an overall effective duration of approximately 3.2 years. No credit losses were determined to be present as of March 31, 2025, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on available-for-sale debt securities was recognized for the first quarter of 2025.
Debt securities with a market value of $135.7 million and $116.2 million at March 31, 2025 and December 31, 2024, respectively, were pledged to secure public deposits and for other purposes required or as permitted by law.
Excluding holdings in U.S. Treasury securities and U.S. Government Agencies, there were no investments in securities of any issuer that exceeded 10% of LCNB's consolidated shareholders' equity at March 31, 2025.
Contractual maturities of debt securities at March 31, 2025 were as follows (in thousands). Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations.
Available-for-Sale
Held-to-Maturity
Due within one year
Due from one to five years
Due from five to ten years
Due after ten years
Certain information concerning the sale of debt securities available-for-sale for the three months ended March 31, 2025 and 2024 was as follows (in thousands):
Gross realized gains
Gross realized losses
Realized gains or losses from the sale of securities are computed using the specific identification method.
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, 2025 on its investments in equity securities without a readily determinable fair value.
The amortized cost and estimated fair value of equity securities with a readily determinable fair value at March 31, 2025 and December 31, 2024 are summarized as follows (in thousands):
Amortized
Fair
Cost
Value
Mutual Funds
Equity Securities
Total equity securities with a readily determinable fair value
Certain information concerning changes in the fair value of equity securities with a readily determinable fair value for the three months ended March 31, 2025 and 2024 were as follows (in thousands):
Net gains (losses) recognized during the period on equity securities
Less net gains (losses) recognized during the period on equity securities sold during the period
Net unrealized gains (losses) recognized during the reporting period on equity securities still held at period end
LCNB is a member of the FHLB system and its regional FRB. Members are required to own a certain amount of stock based on predetermined formulas. FHLB and FRB stock are carried at cost, which is equal to par value, and periodically evaluated for impairment based on ultimate recovery of par value.
NOTE 4 - LOANS
Major classifications of loans at March 31, 2025 and December 31, 2024 were as follows (in thousands):
Commercial & industrial
Commercial, secured by real estate:
Owner occupied
Non-owner occupied
Farmland
Multi-family
Construction
Residential real estate:
Secured by senior liens on 1-4 family dwellings
Secured by junior liens on 1-4 family dwellings
Home equity line-of-credit loans
Consumer
Agricultural
Other loans, including deposit overdrafts
Loans, gross
Less allowance for credit losses
Loans in the above table are shown net of deferred origination fees and costs. Deferred origination fees, net of related costs, were $929 thousand and $796 thousand at March 31, 2025 and December 31, 2024, respectively. Accrued interest receivable of $7.9 million and $7.7 million are excluded from the balances above as of March 31, 2025 and December 31, 2024, respectively, and are recorded in other assets in the consolidated condensed balance sheets.
NOTE 4 – LOANS (continued)
Non-accrual loans by class of receivable as of March 31, 2025 and December 31, 2024 were as follows (in thousands):
Non-accrual
Loans with no
Allowance for
Credit Losses
Loans
Interest income recognized on nonaccrual loans totaled approximately $1 thousand and $116 thousand during the three months ended March 31, 2025 and 2024, respectively. Accrued interest reversed and charged against interest income for these loans totaled approximately $9 thousand and $27 thousand during the three months ended March 31, 2025 and 2024, respectively.
The ratio of non-accrual loans to total loans outstanding at March 31, 2025 and December 31, 2024 was 0.27% and 0.26%, respectively.
ALLOWANCE FOR CREDIT LOSSES
The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost, which is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. A provision for credit losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors.
QUANTITATIVE CONSIDERATIONS
The ACL is primarily calculated utilizing a DCF model. Key inputs and assumptions used in this model are discussed below:
•
Probability of default – PD is the probability that an asset will be in default within a given time frame. The Company has defined default as when a charge-off has occurred, a loan goes to non-accrual status, or a loan is greater than 90 days past due. The forecast model is utilized to estimate PDs.
Loss given default – LGD is the percentage of the asset not expected to be collected due to default. The LGD is derived from company specific and peer loss data.
Prepayments and curtailments – Prepayments and curtailments are calculated based on the Company’s own data. This analysis is updated when materially relevant.
QUALITATIVE CONSIDERATIONS
In addition to the quantitative model, management considers the need for qualitative adjustment for risks not considered in the DCF. Factors that are considered by management in determining loan collectability and the appropriate level of the ACL are listed below:
Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the Company operates that affect the collectability of financial assets;
The effect of other external factors such as the regulatory, legal and technological environments, competition, and events such as natural disasters or pandemics;
Model risk including statistical risk, reversion risk, timing risk, and model limitation risk;
Changes in the nature and volume of the portfolio and terms of loans; and
Lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries.
The following table presents activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2025 and 2024 (in thousands):
Commercial,
Commercial
Secured by
Residential
& Industrial
Real Estate
Balance, beginning of period
Provision for (recovery of) credit losses
Losses charged off
Recoveries
Balance, end of period
Ratio of net charge-offs to average loans
The ratio of the allowance for credit losses for loans to total loans at March 31, 2025 and December 31, 2024 was 0.71% and 0.70%, respectively.
For collateral dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the allowance for credit losses is measured based on the difference between the fair value of the collateral, less costs to sell, and the amortized cost basis of the loan as of the measurement date.
The following table presents the carrying value and related allowance of collateral dependent individually evaluated loans by class segment at the dates indicated (in thousands):
Related
Cost Basis
Allowance
The risk characteristics of LCNB's material loan portfolio segments were as follows:
Commercial & Industrial Loans. LCNB’s commercial & industrial loan portfolio consists of loans for a variety of purposes, including, for example, loans to fund working capital requirements (such as inventory and receivables financing) and purchases of machinery and equipment. LCNB offers a variety of commercial & industrial loan arrangements, including term loans, balloon loans, and lines of credit. Commercial & industrial loans can have a fixed or variable rate, with maturities ranging from one to ten years. Commercial & industrial loans are offered to businesses and professionals for short and medium terms on both a collateralized and uncollateralized basis. Commercial & industrial loans typically are underwritten on the basis of the borrower’s ability to make repayment from the cash flow of the business. Collateral, when obtained, may include liens on furniture, fixtures, equipment, inventory, receivables, or other assets. As a result, such loans involve complexities, variables, and risks that require thorough underwriting and more robust servicing than other types of loans.
Commercial, Secured by Real Estate Loans. Commercial real estate loans include loans secured by a variety of commercial, retail and office buildings, religious facilities, hotels, multifamily (more than four-family) residential properties, construction and land development loans, and other land loans. Mortgage loans secured by owner-occupied agricultural property are included in this category. Commercial real estate loan products generally amortize over five to twenty-five years and are payable in monthly principal and interest installments. Some have balloon payments due within one to ten years after the origination date. The majority have adjustable interest rates with adjustment periods ranging from one to ten years, some of which are subject to established “floor” interest rates.
Commercial real estate loans are underwritten based on the ability of the property, in the case of income-producing property, or the borrower’s business to generate sufficient cash flow to amortize the debt. Secondary emphasis is placed upon global debt service, collateral value, financial strength and liquidity of any and all guarantors, and other factors. Commercial real estate loans are generally originated with a 75% to 85% maximum loan to appraised value ratio, depending upon borrower occupancy rates.
Residential Real Estate Loans. Residential real estate loans include loans secured by first or second mortgage liens on one to four-family residential properties. Home equity lines of credit are also included in this category. First and second mortgage loans are generally amortized over five to thirty years with monthly principal and interest payments. Home equity lines of credit generally have a five year or less draw period with interest only payments followed by a repayment period with monthly payments based on the amount outstanding. LCNB offers both fixed and adjustable-rate mortgage loans. Adjustable-rate loans are available with adjustment periods ranging between one to fifteen years and adjust according to an established index plus a margin, subject to certain floor and ceiling rates. A substantial majority of home equity lines of credit have a variable rate of interest based on the Wall Street Journal prime rate plus a margin.
Residential real estate loans are underwritten primarily based on the borrower’s ability to repay, prior credit history, and the value of the collateral. LCNB generally requires private mortgage insurance for first mortgage loans that have a loan to appraised value ratio of greater than 80% or may require other credit enhancements for second lien mortgage loans.
Consumer Loans. LCNB’s portfolio of consumer loans generally includes secured and unsecured loans to individuals for household, family and other personal expenditures. Secured loans include loans to fund the purchase of automobiles, recreational vehicles, boats, and similar acquisitions. Consumer loans made by LCNB generally have fixed rates and terms ranging up to 72 months, depending upon the nature of the collateral, size of the loan, and other relevant factors. Consumer loans generally have higher interest rates but pose additional risks of collectability and loss when compared to certain other types of loans. Collateral, if present, is generally subject to damage, wear, and depreciation. The borrower’s ability to repay is of primary importance in the underwriting of consumer loans.
Agricultural Loans. LCNB’s portfolio of agricultural loans includes loans for financing agricultural production and for financing the purchase of equipment used in the production of agricultural products. LCNB’s agricultural loans are generally secured by farm machinery, livestock, crops, vehicles, or other agricultural-related collateral.
Other Loans, Including Deposit Overdrafts. Other loans may include loans that do not fit in any of the other categories, but it is primarily composed of overdrafts from transaction deposit accounts. Overdraft payments are recorded as a recovery and overdrafts are generally written off after 34 days with a negative balance.
LCNB’s management monitors the credit quality of its loans on an ongoing basis. This monitoring includes annual reviews for loans with a principal balance greater than $1 million and bi-annual reviews for loans with a principal balance of more than $500 thousand through $1 million. LCNB also has a loan grade monitoring system in place to track and report loan grades and classifications, enabling the identification and management of non-performing loans. Major factors used in determining loan grades vary based on the nature of the loan, but commonly include factors such as debt service coverage, internal cash flow, liquidity, leverage, operating performance, debt burden, FICO scores, occupancy, interest rate sensitivity, and expense burden. Commercial real estate loans rated OAEM or worse are reviewed at least quarterly for credit deterioration.
A loan is assigned to a risk category based on relevant information about the ability of the borrower to service the debt including, but not limited to, current financial information, historical payment experience, credit documentation, public information, and current economic trends. The categories used are:
Pass – loans categorized in this category are higher quality loans that do not fit any of the other categories described below.
Other Assets Especially Mentioned ("OAEM") – loans in this category are currently protected but are potentially weak. These loans constitute a risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitute an undue risk in light of the circumstances surrounding a specific asset.
Substandard – loans in this category are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the possibility that LCNB will sustain some loss if the deficiencies are not corrected.
Doubtful – loans classified in this category have all the weaknesses inherent in loans classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
LCNB generally performs a classification of assets review, including the regulatory classification of assets, on an ongoing basis. The results of the classification of assets review are validated annually by an independent third-party loan review firm. In the event of a difference in rating or classification between those assigned by the internal and external resources, the Company will utilize the more critical or conservative rating or classification. Loans with regulatory classifications are presented monthly to the Board of Directors.
The following table presents the amortized cost basis of loans by vintage and credit quality indicators at March 31, 2025 and December 31, 2024 (in thousands):
Term Loans by Origination Year
Revolving
Converted
2023
2022
2021
Prior
to Term
Pass
OAEM
Substandard
Doubtful
Gross charge-offs (1)
Commercial, secured by real estate
Residential real estate
Total loans
(1) - for the three months ended March 31, 2025.
2020
Gross charge-offs (2)
(2) - for the year ended December 31, 2024.
A loan portfolio aging analysis by class segment at March 31, 2025 and December 31, 2024 is as follows (in thousands):
90 Days
or More
30-59 Days
60-89 Days
Total Loans
Past Due
Current
Receivable
and Accruing
Farms
Residential consumer mortgage loans secured by residential real estate in the process of foreclosure totaled $60 thousand and $33 thousand at March 31, 2025 and December 31, 2024, respectively.
From time to time, the terms of certain loans are modified when concessions are granted to borrowers experiencing financial difficulties. Each modification is separately negotiated with the borrower and includes terms and conditions that reflect the borrower's ability to pay the debt as modified. The modification of the terms of such loans may have included one, or a combination of, the following: an interest rate reduction, term extension, forgiveness of principal, or an other-than-insignificant payment delay.
Excluding individually evaluated collateral dependent loans that are measured at fair value, the following tables present the amortized cost basis of loans modified during the reporting period for borrowers who were experiencing financial difficulty at the time of modification, disaggregated by class of financing receivable and type of concession granted (in thousands), as of March 31, 2024 and 2025:
Interest Rate Reduction
Extended Maturity
Principal Forgiveness
Payment Delay
Combination - Interest Rate Reduction and Extended Maturity
Combination - Interest Rate Reduction and Payment Delay
Total Modifications
Percent of Total Class
Commercial, secured by real estate, owner occupied
Residential real estate, secured by senior liens on 1-4 family dwellings
During the third quarter of 2024, one borrower defaulted on two consumer loans that underwent maturity-extension and payment-delay modifications during quarter two of 2024 while the borrower was known to be experiencing financial difficulty. The borrower remained in default through February 2025. At March 31, 2025, the amortized cost basis of these two consumer loans totaled $27 thousand. No other loans defaulted during the quarter ended March 31, 2025 that, within twelve months prior to their default, were modified for borrowers experiencing financial difficulty. During the quarter ended March 31, 2024, no loans defaulted which, in the twelve months preceding their default, were modified for borrowers experiencing financial difficulty.
At March 31, 2025 and December 31, 2024, LCNB was not committed to lend additional funds to borrowers who, during the respective three and twelve-month reporting period, were granted loan modifications while experiencing financial difficulty.
Mortgage loans sold to and serviced for the Federal Home Loan Mortgage Corporation and other investors are not included in the accompanying consolidated condensed balance sheets. The unpaid principal balances of those loans at March 31, 2025 and December 31, 2024 were approximately $354.6 million and $397.6 million, respectively.
NOTE 5 - PURCHASED CREDIT DETERIORATED LOANS
Activity during the three months ended March 31, 2024 and 2025 for the accretable discount related to PCD loans acquired from EFBI and CNNB is as follows (in thousands):
Three Months Ended March 31,
Accretable discount, beginning of period
Less accretion
Accretable discount, end of period
NOTE 6 - AFFORDABLE HOUSING TAX CREDIT LIMITED PARTNERSHIP INVESTMENTS
LCNB is a limited partner in multiple limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit pursuant to Section 42 of the Internal Revenue Code. The purpose of the investments is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants.
The following table presents the balances of LCNB's affordable housing tax credit investments and related unfunded commitments at March 31, 2025 and December 31, 2024 (in thousands):
December 31,
Affordable housing tax credit investment
Less amortization
Net affordable housing tax credit investment
Unfunded commitment
The net affordable housing tax credit investment is included in other assets and the unfunded commitment is included in accrued interest and other liabilities in the consolidated condensed balance sheets.
LCNB anticipates to fund the unfunded commitment over twelve years.
The following table presents other information relating to LCNB's affordable housing tax credit investments for the three months ended March 31, 2025 and 2024 (in thousands):
Tax credits and other tax benefits recognized
Tax credit amortization expense included in provision for income taxes
NOTE 7 - DEPOSITS
The following table presents the composition of LCNB's deposits at March 31, 2025 and December 31, 2024 (in thousands):
Demand deposits
Interest-bearing demand and money fund deposits
Savings deposits
IRA and time certificates
NOTE 7 - DEPOSITS (continued)
Contractual maturities of time deposits at March 31, 2025 were as follows (in thousands):
Three months or less
Over three through six months
Over six through twelve months
April 1, 2025 - March 31, 2026
April 1, 2026 - March 31, 2027
April 1, 2027 - March 31, 2028
April 1, 2028 - March 31, 2029
April 1, 2029 - March 31, 2030
Thereafter
Total contractual maturities
The aggregate amount of time deposits in denominations of $250 thousand or more at March 31, 2025 and December 31, 2024 was $102.2 million and $107.8 million, respectively.
NOTE 8 – BORROWINGS
Long-term debt at March 31, 2025 and December 31, 2024 was as follows (dollars in thousands):
Amount
Weighted Average Interest Rate
Term loan
FHLB long-term advances
The term loan with a correspondent financial institution bears a fixed interest rate of 4.25%, amortizes quarterly, and has a final balloon payment due on June 15, 2025.
Contractual maturities of long-term debt at March 31, 2025 and December 31, 2024 were as follows (in thousands):
Maturing within one year
Maturing after one year through two years
Maturing after two years through three years
Maturing after three years through four years
Maturing after four years through five years
NOTE 8 – BORROWINGS (continued)
There were no short-term borrowings at March 31, 2025 or December 31, 2024.
At March 31, 2025, LCNB had a short-term revolving line of credit arrangement with a financial institution for a maximum amount of $10 million at an interest rate equal to the Wall Street Journal Prime Rate minus 25 basis points. This agreement expires on June 15, 2025.
At March 31, 2025, LCNB had short-term line of credit borrowing arrangements with three correspondent financial institutions. Under the terms of the first arrangement, LCNB can borrow up to $30 million at an interest rate equal to the lending institution’s federal funds rate plus a spread of 50 basis points. Under the terms of the second arrangement, LCNB can borrow up to $50 million at an interest rate equal to the FOMC targeted federal funds rate plus a spread of 25 basis points. Under the terms of the third arrangement, LCNB can borrow up to $25 million at the interest rate in effect at the time of borrowing. At March 31, 2025, LCNB had not drawn down on any of these borrowing arrangements.
All long-term and short-term advances from the FHLB of Cincinnati are secured by a blanket pledge of LCNB's 1-4 family first lien mortgage loans in the amount of approximately $414 million and $410 million at March 31, 2025 and December 31, 2024, respectively. Remaining borrowing capacity with the FHLB, including both long-term and short-term borrowings, at March 31, 2025 was approximately $144.3 million.
NOTE 9 - LEASES
Lease expenses for offices are included in the consolidated condensed statements of income in net occupancy expense and lease expenses for equipment and ATMs are included in equipment expense. Components of lease expense for the three months ended March 31, 2025 and 2024 were as follows (in thousands):
Operating lease expense
Short-term lease expense
Variable lease expense
Total lease expense
Other information related to leases at March 31, 2025 were as follows (dollars in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Right-of-use assets obtained in exchange for new operating lease liabilities
Weighted average remaining lease term in years for operating leases
Weighted average discount rate for operating leases
NOTE 10 – INCOME TAXES
A reconciliation between the statutory income tax and LCNB's effective tax rate on income from continuing operations follows:
Statutory tax rate
Increase (decrease) resulting from:
Tax exempt interest
Tax exempt income on bank-owned life insurance
Captive insurance premium income
Affordable housing tax credit limited partnerships
Nondeductible merger-related expenses
Other, net
Effective tax rate
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES
LCNB is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated condensed balance sheets. Exposure to credit loss in the event of nonperformance by the other parties to financial instruments for commitments to extend credit is represented by the contract amount of those instruments.
In addition to such commitments to extend credit, LCNB may have services for customers in place that, though they obligate LCNB to provide credit on certain terms, do not constitute commitments to extend credit. For example, the Account Protection product, LCNB's deposit overdraft program, is offered as a service by the Bank and does not constitute a contract between the customer and LCNB.
LCNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
NOTE 11 – COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Financial instruments whose contract amounts represent off-balance-sheet credit risk at March 31, 2025 and December 31, 2024 were as follows (in thousands):
Commitments to extend credit:
Commercial loans
Other loans
Fixed rate
Adjustable rate
Unused lines of credit:
Unused overdraft protection amounts on demand accounts
Standby letters of credit
Total commitments
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Unused lines of credit include amounts not drawn on line of credit loans. Commitments to extend credit and unused lines of credit generally have fixed expiration dates or other termination clauses.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees generally are fully secured and have varying maturities.
LCNB evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the borrower and may include accounts receivable; inventory, property, plant, and equipment; residential realty; and income-producing commercial properties.
Activity in the allowance for credit losses on off-balance sheet credit exposures, recorded in other liabilities on the consolidated balance sheets, for the three months ended March 31, 2025 and 2024 is as follows (in thousands):
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, 2025 totaled approximately $26 thousand.
Management believes that LCNB has sufficient liquidity to fund its lending and capital expenditure commitments.
LCNB and its subsidiaries are parties to various claims and proceedings arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings and claims will not be material to LCNB's consolidated financial position or results of operations.
NOTE 12 – ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in accumulated other comprehensive loss for the three months ended March 31, 2025 and 2024 were as follows (in thousands):
Changes in
Unrealized
Pension Plan
Losses on
Assets and
Available-for-
Benefit
Sale Debt Securities
Obligations
Balance at beginning of period
Reclassifications
Balance at end of period
Reclassifications out of accumulated other comprehensive loss during the three months ended March 31, 2025 and 2024 and the affected line items in the condensed consolidated statements of income were as follows (in thousands):
Affected Line Item in the
Consolidated Condensed
Statements of Income
Income tax benefit
Provision for income taxes
Reclassification adjustment, net of taxes
NOTE 13 – RETIREMENT PLANS
LCNB participates in a noncontributory defined benefit multi-employer retirement plan that covers substantially all regular full-time employees hired before January 1, 2009, on which date the plan was soft-frozen. 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 did not receive any employer matches to their 401(k) contributions until March 1, 2025 as described below.
The noncontributory defined benefit multi-employer retirement plan was hard-frozen on March 1, 2025, meaning that benefit increases will no longer accrue to covered employees as of that date.
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. Employees who did not receive an employer match on their 401(k) contributions because of their participation in the noncontributory defined benefit multi-employer retirement plan started receiving matches on March 1, 2025.
NOTE 13 – RETIREMENT PLANS (continued)
Funding and administrative costs of the qualified noncontributory defined benefit retirement plan and 401(k) plan charged to pension and other employee benefits in the consolidated condensed statements of income for the three-month period ended March 31, 2025 and 2024 were as follows (in thousands):
Qualified noncontributory defined benefit retirement plan
401(k) plan
Certain highly compensated former employees participate in a nonqualified defined benefit retirement plan. The nonqualified plan ensures that participants receive the full amount of benefits to which they would have been entitled under the noncontributory defined benefit retirement plan in the absence of limits on benefit levels imposed by certain sections of the Internal Revenue Code. This plan is limited to the original participants and no new participants have been added.
The net periodic pension cost of the nonqualified defined benefit retirement plan consists solely of interest cost of $19 thousand for the three months ended March 31, 2025 and $18 thousand for the three months ended March 31, 2024.
NOTE 14 – STOCK BASED COMPENSATION
The 2015 Ownership Incentive Plan (the "2015 Plan") was ratified by LCNB Corp.'s shareholders at the annual meeting on April 28, 2015 and allows for stock-based awards to eligible employees, as determined by the Compensation Committee of the Board of Directors. Awards may be made in the form of stock options, appreciation rights, restricted shares, and/or restricted share units. The 2015 Plan provides for the issuance of up to 450 thousand shares of common stock. The 2015 Plan terminated on April 28, 2025.
Stock-based awards may be in the form of treasury shares or newly issued shares.
Restricted stock awards granted under the 2015 Plan during the three months ended March 31, 2025 and 2024 were as follows:
Weighted
Average
Grant Date
Nonvested at January 1,
Granted
Vested
Forfeited
Nonvested at March 31,
At March 31, 2025, there were 85,545 restricted stock awards outstanding with an approximate stock value of $1.3 million based on that day's closing stock price. At March 31, 2024, there were 84,593 restricted stock awards outstanding with an approximate stock value of $1.3 million based on that day's closing stock price. The fair value of restricted stock awards was $569 thousand on the grant date of February 24, 2025 and $578 thousand on the grant date of March 4, 2024. Grants to officers of LCNB vest over a period of five years while grants to members of the board of directors vest immediately. The grant date fair value is recognized ratably into expense over the vesting period.
NOTE 14 – STOCK BASED COMPENSATION (continued)
The following table presents expense recorded in salaries and employee benefits for restricted stock awards and the related tax information for the three months ended March 31, 2025 and 2024 (in thousands):
Restricted stock expense
Tax effect
Unrecognized compensation expense for restricted stock awards was $1.2 million at March 31, 2025 and is expected to be recognized over a period of 5.0 years.
NOTE 15 – EARNINGS PER COMMON SHARE
LCNB has granted restricted stock awards with non-forfeitable dividend rights, which are considered participating securities. Accordingly, earnings per share is computed using the two-class method as required by ASC No. 260-10-45. Basic earnings per common share is calculated by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period, which excludes the participating securities. Diluted earnings per common share is adjusted for the dilutive effects of stock options, warrants, and restricted stock. The diluted average number of common shares outstanding has been increased for the assumed exercise of stock options and warrants with proceeds used to purchase treasury shares at the average market price for the period.
Earnings per share for the three months ended March 31, 2025 and 2024 were calculated as follows (dollars in thousands, except share and per share data):
Less allocation of earnings and dividends to participating securities
Net income allocated to common shareholders
Weighted average common shares outstanding, gross
Less average participating securities
Adjusted weighted average number of shares outstanding used in the calculation of basic and diluted earnings per common share
NOTE 16 - FAIR VALUE MEASUREMENTS
LCNB measures certain assets at fair value using various valuation techniques and assumptions, depending on the nature of the asset. Fair value is defined as the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date.
The inputs to the valuation techniques used to measure fair value are assigned to one of three broad levels:
Level 1 – quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the reporting date.
Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly. Level 2 inputs may include quoted prices for similar assets in active markets, quoted prices for identical assets or liabilities in markets that are not active, inputs other than quoted prices (such as interest rates or yield curves) that are observable for the asset or liability, and inputs that are derived from or corroborated by observable market data.
Level 3 – inputs that are unobservable for the asset or liability.
EQUITY SECURITIES WITH A READILY DETERMINABLE FAIR VALUE
Equity securities with a readily determinable fair value are reported at fair value with changes in fair value reported in other operating income in the consolidated condensed statements of income. Fair values for equity securities are determined based on market quotations (level 1). LCNB has an investment in a mutual fund that is measured at fair value using net asset values, which are considered level 1 because the net asset values are determined and published and are the basis for current transactions.
DEBT SECURITIES, AVAILABLE-FOR-SALE
The majority of LCNB's financial debt securities are classified as available-for-sale. The securities are reported at fair value with unrealized holding gains and losses reported net of income taxes in accumulated other comprehensive loss. LCNB utilizes a pricing service for determining the fair values of its debt securities. Methods and significant assumptions used to estimate fair value were as follows:
Fair values for U.S. Treasury notes are determined based on market quotations (level 1).
Fair values for the other debt securities are calculated using the discounted cash flow method for each security. The discount rates for these cash flows are estimated by the pricing service using rates observed in the market (level 2). Cash flow streams are dependent on estimated prepayment speeds and the overall structure of the securities given existing market conditions.
ASSETS RECORDED AT FAIR VALUE ON A NONRECURRING BASIS
Assets that may be recorded at fair value on a nonrecurring basis include individually evaluated collateral dependent loans (or impaired loans prior to the adoption of ASC 326), other real estate owned, and other repossessed assets.
LCNB does not record loans at fair value on a recurring basis, except for loans held-for-sale. However, from time to time, nonrecurring fair value adjustments to collateral dependent loans are recorded to reflect partial write-downs or specific reserves that are based on the observable market price or current estimated value of the collateral. These loans are reported in the nonrecurring table below at initial recognition of significant borrower distress and on an ongoing basis until recovery or charge-off. The fair values of distressed loans are determined using either the sales comparison approach or income approach. Respective unobservable inputs for the approaches consist of adjustments for differences between comparable sales and the utilization of appropriate capitalization rates.
NOTE 16 - FAIR VALUE MEASUREMENTS (continued)
The following table summarizes the valuation of LCNB's assets recorded at fair value by input levels as of March 31, 2025 and December 31, 2024 (in thousands):
Fair Value Measurements at the End of
the Reporting Period Using
Quoted Prices
Significant
in Active
Markets for
Observable
Unobservable
Identical Assets
Inputs
Measurements
(Level 1)
(Level 2)
(Level 3)
Recurring fair value measurements:
Equity securities with a readily determinable fair value:
Equity securities
Mutual funds measured at net asset value
Debt securities, available-for-sale:
Total recurring fair value measurements
Nonrecurring fair value measurements:
Individually evaluated collateral dependent loans
Total nonrecurring fair value measurements
The following table presents quantitative information about unobservable inputs used in nonrecurring level 3 fair value measurements at March 31, 2025 and December 31, 2024 (dollars in thousands):
Range
Valuation
Technique
High
Low
Estimated sales price
Adjustments for comparable properties, discounts to reflect current market conditions
Not applicable
Carrying amounts and estimated fair values of financial instruments as of March 31, 2025 and December 31, 2024 were as follows (in thousands):
Quoted
Prices
Carrying
FINANCIAL ASSETS:
Debt securities, held-to-maturity, net
Lender risk account
FINANCIAL LIABILITIES:
Accrued interest payable
The methodology to derive the fair value of loans at March 31, 2025 is consistent with the methodology utilized to determine the fair value of loans acquired in the Company’s recent acquisitions of CNNB and EFBI.
Fair values of financial instruments are based on various assumptions, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in actual transactions. In addition, because the required disclosures exclude certain financial instruments and all nonfinancial instruments, any aggregation of the fair value amounts presented would not represent the underlying value of LCNB.
NOTE 17 - SEGMENT INFORMATION
LCNB has one reportable segment, which is determined by the members of the executive team who, as a group, act as the designated chief operating decision makers. Based upon information provided about LCNB's products and services offered, the reportable segment is primarily banking operations. The segment is also distinguished by the level of information provided to the chief operating decision makers, who use such information to review performance of various components of the business, such as branches, which are then aggregated if operating performance, products and services, and customers are similar. The chief operating decision makers will evaluate the financial performance of LCNB's business components by evaluating revenue streams, significant expenses, and budget to actual results in assessing LCNB's segment and in determining the allocation of resources. The chief operating decision makers use revenue streams to evaluate product pricing and significant expenses to assess performance and evaluate return on assets. The chief operating decision makers use consolidated net income to benchmark LCNB against its competitors. The benchmarking analysis coupled with monitoring of budget to actual results are used in assessing performance and in establishing compensation. Loans, investments, and deposits provide the revenues in the banking operation. Interest expense, provisions for credit losses, and payroll provide the significant expenses in the banking operation. All operations are domestic.
Accounting policies for the reportable segment are the same as those described in Note 1. Segment performance is evaluated using consolidated net income.
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, 2024, as well as its other filings with the SEC, for a more detailed discussion of risks, uncertainties and factors that could cause actual results to differ from those discussed in the forward-looking statements.
These forward-looking statements reflect management's current expectations based on all information available to management and its knowledge of LCNB’s business and operations. Additionally, LCNB’s financial condition, results of operations, plans, objectives, future performance and business are subject to risks and uncertainties that may cause actual results to differ materially. These factors include, but are not limited to:
1.
the success, impact, and timing of the implementation of LCNB’s business strategies;
2.
LCNB’s ability to integrate recent and future acquisitions, including CNNB and EFBI, may be unsuccessful or may be more difficult, time-consuming, or costly than expected;
3.
LCNB may incur increased loan charge-offs in the future and the allowance for credit losses may be inadequate;
4.
LCNB may face competitive loss of customers;
5.
changes in the interest rate environment, either by interest rate increases or decreases, may have results on LCNB’s operations materially different from those anticipated by LCNB’s market risk management functions;
6.
changes in general economic conditions and increased competition could adversely affect LCNB’s operating results;
7.
changes in regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact LCNB’s operating results;
8.
LCNB may experience difficulties growing loan and deposit balances;
9.
United States trade relations with foreign countries could negatively impact the financial condition of LCNB's customers, which could adversely affect LCNB's operating results and financial condition;
10.
global and/or domestic geopolitical relations and/or conflicts could create financial market uncertainty and have negative impacts on commodities, currency, and stability, which could adversely affect LCNB's operating results and financial condition;
11.
difficulties with technology or data security breaches, including cyberattacks or widespread outages, could negatively affect LCNB's ability to conduct business and its relationships with customers, vendors, and others;
12.
adverse weather events and natural disasters and global and/or national epidemics could negatively affect LCNB's customers given its concentrated geographic scope, which could impact LCNB's operating results; and
13.
government intervention in the U.S. financial system, including the effects of legislative, tax, accounting, and regulatory actions and reforms, including the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau, the capital ratios of Basel III as adopted by the federal banking authorities, changes in deposit insurance premium levels, and any such future regulatory actions or reforms.
Forward-looking statements made herein reflect management's expectations as of the date such statements are made. Such information is provided to assist shareholders and potential investors in understanding current and anticipated financial operations of LCNB and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. LCNB undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise after the date such statements are made.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Critical Accounting Estimates
The accounting policies of LCNB conform to U.S. generally accepted accounting principles and require management to make estimates and develop assumptions that affect the amounts reported in the financial statements and related footnotes. These estimates and assumptions are based on information available to management as of the date of the financial statements. Actual results could differ significantly from management’s estimates. As this information changes, management’s estimates and assumptions used to prepare LCNB’s financial statements and related disclosures may also change. The most significant accounting policies followed by LCNB are presented in Note 1 of the Notes to Consolidated Financial Statements included in LCNB's 2024 Annual Report on Form 10-K filed with the SEC. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the items described below to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new information becomes available.
Business Combinations. Assets acquired, including identified intangible assets such as core deposit intangibles, and liabilities assumed as a result of a merger or acquisition transaction are recorded at their estimated fair values. The difference between the consideration paid and the net fair value of assets acquired and liabilities assumed is recorded as goodwill. Management engages third-party specialists to assist in the development of fair value estimates. Significant estimates and assumptions used to value acquired assets and liabilities assumed include, but are not limited to, projected cash flows, future growth rates, repayment rates, default rates and losses assuming default, discount rates, and realizable collateral values. The allowance for credit losses for PCD loans is recognized within acquisition accounting. The allowance for credit losses for non-PCD assets is recognized as provision for credit losses in the same reporting period as the merger or acquisition. Fair value adjustments are amortized or accreted into the income statement over the estimated lives of the acquired assets and assumed liabilities. The purchase date valuations and any subsequent adjustments determine the amount of goodwill recognized in connection with the merger or acquisition.
Preliminary estimates of fair values may be adjusted for a period of time no greater than one year subsequent to the merger or acquisition date if new information is obtained about facts and circumstances that existed as of the merger or acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Adjustments recorded during this period are recognized in the current reporting period.
Allowance for Credit Losses. The allowance is maintained at a level LCNB management believes is adequate to absorb estimated credit losses identified and inherent in the loan portfolio. The allowance is established through a provision for credit losses charged as an expense. Loans are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb estimated losses over the contractual terms in the loan portfolio based on evaluations of the collectability of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current and forecasted economic conditions that may affect the borrowers' ability to pay. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU (as subsequently amended by ASU 2018-19) significantly changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. This standard replaced the “incurred loss” approach with an “expected loss” model. Referred to as the CECL model, this standard applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures. The standard also expanded disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance. In addition, entities need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination.
LCNB adopted CECL effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the allowance of $2.4 million, and a $1.9 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on the Consolidated Balance Sheet, with the $0.5 million tax impact portion being recorded as part of the deferred tax asset in other assets in the condensed consolidated balance sheet.
See Note 1- Basis of Presentation - Adoption of New Accounting Pronouncements in the 2024 Annual Report on Form 10-K for further detailed descriptions of LCNB's estimation process and methodology related to the allowance. See also Note 4 – Loans in this Quarterly Report on Form 10-Q for further information regarding LCNB's loan portfolio and allowance.
Accounting for Intangibles. LCNB’s intangible assets are composed primarily of goodwill and core deposit intangibles related to acquisitions of other financial institutions.
Accounting rules require LCNB to determine the fair value of all the assets and liabilities of an acquired entity and to record their fair values on the date of acquisition. LCNB employs a variety of means in determining fair values, including the use of discounted cash flow analysis, market comparisons and projected future revenue streams. For those items for which management concludes that LCNB has the appropriate expertise to determine fair value, management may choose to use its own calculation of fair value. In other cases, where the fair value is not readily determined, consultation with outside parties is used to determine fair value. Once valuations have been determined, the net difference between the price paid for the acquired entity and the fair value of the balance sheet is recorded as goodwill. Goodwill is assessed at least annually for impairment, with any such impairment recognized in the period identified. A more frequent assessment is performed if there are material changes in the marketplace or within the organizational structure.
Core deposit intangibles acquired from business combinations are initially measured at their estimated fair values and are then amortized on a straight-line basis over their estimated useful lives. Management evaluates whether triggering events or circumstances have occurred that indicate the remaining useful life or carrying value of the amortizing intangible should be revised.
Fair Value Accounting for Debt Securities. Debt securities classified as available-for-sale are recorded at fair value with unrealized gains and losses recorded in other comprehensive income (loss), net of tax. Available-for-sale debt securities in unrealized loss positions are evaluated to determine if the decline in fair value should be recorded in income or in other comprehensive income (loss). LCNB first determines if it intends to sell or if it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criteria is met, the security's amortized cost basis is written down to fair value through income. If neither of these criteria is met, LCNB evaluates whether the decline in fair value resulted from credit factors. In making this determination, management considers, among other factors, the extent to which fair value is less than the amortized cost basis, any changes to the rating of the security by rating agencies, and any adverse conditions specifically related to the security or issuer. If the present value of cash flows expected to be collected is less than the amortized cost basis, a provision is recorded to the allowance for credit losses. Any decline in fair value not recorded through an allowance for credit losses is recognized in accumulated other comprehensive income (loss), net of applicable taxes.
Results of Operations
Net income for the three months ended March 31, 2025 was $4.6 million (total basic and diluted earnings per share of $0.33). This compares to net income of $1.9 million (total basic and diluted earnings per share of $0.15) for the same three-month periods in 2024. Results for the 2024 periods were affected by the expenses incurred in connection with the acquisition of Eagle Financial Bancorp, Inc. on April 12, 2024 and Cincinnati Bancorp, Inc. on November 1, 2023.
Net interest income for the three months ended March 31, 2025 was $16.3 million. This compares to net interest income of $13.9 million for the same three-month period in 2024. The growth in net interest income was primarily due to the reduction in average interest rates paid on interest-bearing liabilities and higher average rates earned on loans. LCNB’s tax equivalent net interest margin was 3.25% for the first quarter 2025, compared to 2.72% for the same period last year.
LCNB recorded a provision for credit losses of $197 thousand for the three months ended March 31, 2025. This compares to a provision of $125 thousand for the same three-month period in 2024.
Non-interest income for the three months ended March 31, 2025 was $5.2 million. This compares to non-interest income of $3.9 million for the same period in 2024. The increase was primarily due to higher amounts of net gains from sales of loans, fiduciary income, service charges and fees on deposit accounts, and other income.
Non-interest expense for the three months ended March 31, 2025 was $15.8 million, compared to $15.5 million for the same three-month period in 2024. The $300 thousand increase was primarily due to higher operating expenses associated with the Eagle acquisition during April 2024 and increased marketing expenses, partially offset by the lack of merger-related expenses compared to the same period last year. LCNB had $775 thousand of one-time merger-related expenses that occurred in the first quarter of 2024.
Net Interest Income
Three Months Ended March 31, 2025 vs. March 31, 2024
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, 2025 and March 31, 2024, 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.
Earned/
Yield/
Balance
Paid
Rate
Loans (1)
Federal Reserve Bank stock
Debt securities, taxable
Debt securities, non-taxable (2)
Total earnings assets
Non-earning assets
Allowance for credit losses
Total assets
Interest-bearing demand and money market deposits
Total interest-bearing liabilities
Total liabilities and equity
Net interest rate spread (3)
Net interest income and net interest margin on a taxable-equivalent basis (4)
Ratio of interest-earning assets to interest-bearing liabilities
(1)
Includes non-accrual loans and loans held-for-sale.
(2)
Income from tax-exempt securities is included in interest income on a taxable-equivalent basis. Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 21%.
(3)
The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities.
(4)
The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets.
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, 2025 as compared to the same period in 2024. 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.
March 31, 2025 vs. 2024
Increase (decrease) attributable to:
Volume
Interest-earning Assets:
Debt securities, non-taxable
Total interest income
Interest-bearing Liabilities:
Total interest expense
Net interest income
Net interest income on a fully taxable-equivalent basis for the three months ended March 31, 2025 totaled $16.3 million, an increase of $2.4 million from the comparable period in 2024. Total interest income increased $559 thousand and total interest expense decreased $1.8 million.
The $559 thousand increase in total interest income was primarily due to a $499 thousand increase in loan interest income. The increase in loan interest income was primarily due to a 16 basis point (a basis point equals 0.01%) increase in the average rate earned on the loan portfolio, slightly offset by a $674 thousand decrease in average loan balances.
The $1.8 million decrease in total interest expense was primarily due to a $1.6 million decrease in interest expense for interest-bearing demand deposits, money market deposits, and short-term borrowings The decrease was partially offset by an increase in interest expense for IRA and time certificates. Interest expense on interest-bearing demand and money market deposits decreased primarily due to a 79 basis point decrease in the average rate paid for these deposits and secondarily to a $72.7 million decrease in average deposit balances. Interest expense associated with short-term borrowings decreased due to payoffs of short-term borrowings during 2024. Interest expense increased on IRA and time certificates due to increased balances, primarily from acquisition activity, and was partially offset by a 32 basis point decrease in the average rate paid for these deposits.
Provision and Allowance For Credit Losses
LCNB continuously reviews the loan portfolio for credit risk through the use of its lending and loan review functions. Independent loan reviews analyze specific loans, providing validation that credit risks are appropriately identified, graded, and reported to the Loan Committee, Board of Directors, and the Audit Committee of the Board of Directors. New credits meeting specific criteria are analyzed prior to origination and are reviewed by the Loan Committee, the Loan Committee of the Board of Directors, and the Board of Directors.
The total provision for credit losses is determined based upon management's evaluation as to the amount needed to maintain the allowance for credit losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio. For analysis purposes, the loan portfolio is separated into pools of similar loans. These pools include commercial and industrial loans, owner occupied commercial real estate loans, non-owner occupied commercial real estate loans, real estate loans secured by farms, real estate loans secured by multi-family dwellings, residential real estate loans secured by senior liens on 1-4 family dwellings, residential real estate loans secured by junior liens on 1-4 family dwellings, home equity line of credit loans, consumer loans, loans for agricultural purposes not secured by real estate, construction loans secured by 1-4 family dwellings, construction loans secured by other real estate, and several smaller classifications. Within each pool of loans, LCNB examines a variety of factors to determine the adequacy of the allowance for credit losses, including historic charge-off percentages, overall pool quality, a review of specific problem loans, current economic trends and conditions that may affect borrowers' ability to pay, and the nature, volume, and consistency of the loan pool.
LCNB recorded a provision for credit losses of $197 thousand for the first quarter of 2025, compared to $125 thousand for the comparable period in 2024. The provision for the 2025 period included a provision for credit losses on loans of $162 thousand and a provision for off-balance-sheet credit exposures of $34 thousand. The provision for the 2024 period included a provision for credit losses on loans of $77 thousand and a provision for off-balance-sheet credit exposures of $48 thousand.
Calculating an appropriate level for the allowance and provision for credit losses involves a high degree of management judgment and is, by its nature, imprecise. Revisions may be necessary as more information becomes available or if market conditions change.
Net charge-offs for the three months ended March 31, 2025 totaled $39 thousand, compared to net charge-offs of $45 thousand for the same period in 2024.
Non-Interest Income
A comparison of non-interest income for the three months ended March 31, 2025 and March 31, 2024 is as follows (in thousands):
Difference
Total non-interest income
Reasons for changes include:
Fiduciary income increased primarily due to increases in the fair values of trust and brokerage assets managed, on which fees are based. The increases in fair value are due to the opening of new Wealth Management customer accounts.
Service charges and fees on deposit accounts increased primarily due to increased fee income received on the ICS product and secondarily to an increase in overdraft fees.
There were no sales of debt securities during the three months ended March 31, 2025.
Net gains from sales of loans increased due to a higher volume of residential real estate loan sales.
Other operating income increased primarily due to a decrease in amortization of capitalized mortgage servicing rights, which amortization is netted for accounting purposes against fee income recognized from the servicing of sold residential mortgage loans.
Non-Interest Expense
A comparison of non-interest expense for the three months ended March 31, 2025 and March 31, 2024 is as follows (in thousands):
Total non-interest expense
Salaries and employee benefits increased due to overall wage and benefit increases, an increased number of employees due to the acquisition of EFBI, and higher health insurance costs.
Amortization of core deposit intangibles increased due to the acquisition of EFBI.
Merger-related expenses during the first quarter of 2024 reflect costs incurred in connection with the acquisitions of EFBI and CNNB.
Other non-interest expense for the first quarter 2025 includes a $73 thousand impairment charge on the fair value of a closed office. The remaining net increase can be attributed to smaller increases in various other accounts.
Income Taxes
LCNB's effective tax rate for the three months ended March 31, 2025 was 16.4%, compared to 14.0% for the same period in 2024. The difference between the statutory rate of 21% and the effective tax rates is primarily due to tax-exempt interest income from municipal securities, tax-exempt earnings from bank-owned life insurance, tax-exempt earnings from LCNB Risk Management, Inc., and tax credits and losses related to investments in affordable housing tax credit limited partnerships. The effective tax rate for 2024 was lower due to tax-exempt items not decreasing in proportion to the overall decrease in earnings.
Financial Condition
A comparison of balance sheet line items at March 31, 2025 and December 31, 2024 is as follows (dollars in thousands):
Difference $
Difference %
Debt securities, held-to-maturity, net, at cost
Common shares
Treasury shares, at cost
NM - Not Meaningful
Debt securities, held-to-maturity, increased due to purchases of new securities.
Total interest-bearing deposits increased primarily due to an increase in deposits obtained through the ICS service, partially offset by decreases in IRA and time certificate deposits.
Long-term debt decreased due to the early payoff of $50 million in advances bearing a weighted average interest rate of 4.23% from the FHLB of Cincinnati. Funds for the payoff were provided by the increase in ICS deposits mentioned above, resulting in an overall decrease in the average interest rate.
LCNB's loan portfolio represents its largest asset category and is its most significant source of interest income. Loan classifications have been identified as Commercial & Industrial, Commercial Real Estate, Residential Real Estate, Consumer, Agricultural, and Other. Commercial real estate is the largest classification in LCNB's loan portfolio, comprising about 65% of total loans at March 31, 2025.
Loans secured by commercial real estate consist of owner-occupied, non-owner-occupied, farmland, multi-family, and construction loans. A commercial real estate, owner-occupied loan finances the purchase, construction, or refinance of a building or other property for which the repayment of principal is dependent upon cash flows from ongoing operations conducted by the party, or an affiliate of the party, who owns the property. A commercial real estate, non-owner occupied loan finances the purchase, construction or refinance of a building or other property for which the repayment of principal is dependent upon rental income associated with the property or the subsequent sale of the property. The values of these loans are primarily impacted by the level of interest rates associated with the debt and to local economic conditions, which dictate occupancy rates and the amount of rent charged. The increase in debt service due to higher interest rates may not be able to be passed on to tenants. As part of the origination process, loan interest rates and occupancy rates are stressed to determine the impact on the borrower’s ability to maintain adequate debt service under different economic conditions. Further, LCNB monitors the concentration in any one industry and has established limits relative to the total of the Bank's tier 1 and tier 2 capital for each category of loan. Credit quality trends are monitored by industry to determine if a change in the risk exposure to a certain industry may warrant a change in underwriting standards.
The following table provides a breakdown of amortized cost of commercial real estate loans by property-type classification as of March 31, 2025, excluding loans which are junior in lien or covered by collateral secured with varying classes of assets (dollars in thousands):
% of Total
Multi-family & Multi-family Construction
Retail
Office
Mixed Use
Hotel/Motel
Self storage
Warehouse (one tenant)
Light Industrial
Warehouse (more than one tenant)
Healthcare Facilities
Manufacturing
Dental
Most of LCNB's commercial real estate loans are made within its general market area of Southwest and South-Central Ohio and Northern Kentucky. The following table provides a breakdown of amortized cost of commercial real estate loans by real estate collateral location as of March 31, 2025, excluding loans which are junior in lien or covered by collateral secured with varying classes of assets (dollars in thousands):
Franklin County, Ohio
Hamilton County, Ohio
Montgomery County, Ohio
Butler County, Ohio
Warren County, Ohio
Other, Ohio
Delaware County, Ohio
Greene County, Ohio
Boone County, Kentucky
Kenton County, Kentucky
Clermont County, Ohio
Preble County, Ohio
Licking County, Ohio
Ross County, Ohio
Other, Kentucky
Other, Indiana
Other, West Virginia
Regulatory Capital
The Bank must meet certain minimum capital requirements set by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company's and the Bank's financial statements. LCNB’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.
In addition to the minimum capital requirements, a financial institution needs to maintain a Capital Conservation Buffer composed of Common Equity Tier 1 Capital of at least 2.5% above its minimum risk-weighted capital requirements to avoid limitations on its ability to make capital distributions, including dividend payments to shareholders and certain discretionary bonus payments to executive officers. A financial institution with a buffer below 2.5% is subject to increasingly stringent limitations on capital distributions as the buffer approaches zero.
For various regulatory purposes, financial institutions are classified into categories based upon capital adequacy:
Minimum
Requirement
To Be
with Capital
Considered
Conservation
Well-
Buffer
Capitalized
Ratio of Common Equity Tier 1 Capital to risk-weighted assets
Ratio of Tier 1 Capital to risk-weighted assets
Ratio of Total Capital (Tier 1 Capital plus Tier 2 Capital) to risk-weighted assets
Leverage Ratio (Tier 1 Capital to adjusted quarterly average total assets)
NA
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.
A summary of the Bank's regulatory capital and capital ratios follows (dollars in thousands):
Regulatory Capital:
Shareholders' equity
Goodwill and other intangibles
Accumulated other comprehensive loss, net
Tier 1 risk-based capital
Eligible allowance for credit losses
Total risk-based capital
Capital ratios:
Common Equity Tier 1 Capital to risk-weighted assets
Tier 1 Capital to risk-weighted assets
Total Capital to risk-weighted assets
Leverage
Qualifications for community banking organizations to use a simplified measure of capital adequacy approach include having a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the Community Bank Leverage Ratio framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. LCNB did not qualify to use the simplified measure for the March 31, 2025 or December 31, 2024 regulatory capital calculations.
Liquidity
Effective liquidity management ensures that cash is available to meet the cash flow needs of borrowers and depositors, pay dividends to shareholders, and meet LCNB's operating cash needs. Primary funding sources include customer deposits with the Bank, short-term and long-term borrowings from the Federal Home Loan Bank, line of credit arrangements totaling $115.0 million with three correspondent banks, and interest and repayments received from LCNB's loan and investment portfolios. In addition, LCNB has approximately $108 million in off-balance sheet insured cash sweeps immediately available for liquidity.
Total remaining borrowing capacity with the Federal Home Loan Bank at March 31, 2025 was approximately $144.3 million. Additional borrowings of approximately $115.0 million were available through line of credit arrangements with correspondent banks.
Management closely monitors the level of liquid assets available to meet ongoing funding needs. It is management's intent to maintain adequate liquidity so that sufficient funds are readily available at a reasonable cost. LCNB experienced no liquidity or operational problems as a result of current liquidity levels. Management believes LCNB has the ability to generate and obtain adequate amounts of liquidity to meet its requirements in the short and long-term.
Commitments to extend credit at March 31, 2025 totaled $291.5 million and are more fully described in Note 11 - Commitments and Contingent Liabilities to LCNB's condensed consolidated financial statements. Since many commitments to extend credit may expire without being drawn upon, the total commitment amount does not necessarily represent future cash required to satisfy the commitment reported prior to its expiration.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk for LCNB is primarily due to interest rate risk. LCNB attempts to mitigate this risk through asset/liability management strategies designed to decrease the vulnerability of its earnings to material and prolonged changes in interest rates. LCNB does not use derivatives such as interest rate swaps, caps, or floors to hedge this risk. LCNB has not entered into any market risk instruments for trading purposes.
The Bank's Asset and Liability Management Committee primarily uses a combination of Interest Rate Sensitivity Analysis ("IRSA") and Economic Value of Equity ("EVE") analysis for measuring and managing interest rate risk. IRSA is used to estimate the effect on net interest income ("NII") during a one-year period of instantaneous and sustained movements in interest rates, also called interest rate shocks, of 100, 200, and 300 basis points. The base projection uses a current interest rate scenario. As shown below, the March 31, 2025 IRSA indicates that an increase in interest rates would have a negative effect on NII, while a decrease in interest rates would have a positive effect on NII. The changes in NII for all rate shock scenarios are within LCNB's acceptable ranges.
$ Change in
% Change in
Rate Shock Scenario in Basis Points
NII
Limits
Up 300
Up 200
Up 100
Base
Down 100
Down 200
Down 300
The IRSA shows the effect on NII during a one-year period only. A longer-range model is the EVE analysis, which shows, accounting for the same rate shocks, the estimated present value of future cash inflows from interest-earning assets less the present value of future cash outflows for interest-bearing liabilities for the same rate shocks. As shown below, the March 31, 2025 EVE analysis indicates that an increase in interest rates will have a negative effect on the EVE and a decrease in interest rates will have a positive effect on the EVE. The changes in EVE for all rate shock scenarios are within LCNB's acceptable ranges.
EVE
The IRSA and EVE simulations discussed above are not projections of future income or equity and should not be relied on as being indicative of future operating results. Assumptions used, including the nature and timing of interest rate levels, yield curve conditions, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment or replacement of asset and liability cash flows, are inherently uncertain and, as a result, the models cannot precisely measure future NII or equity. Furthermore, the models do not reflect actions that borrowers, depositors, and management may take in response to changing economic conditions and interest rate levels.
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, 2025, 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.
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.
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, 2024.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
During the period covered by this report, LCNB did not sell any of its securities that were not registered under the Securities Act.
Under the Issuer Stock Repurchase Plan Agreement (the "Plan"), LCNB may purchase common shares through various means such as open market transactions, including block purchases and privately negotiated transactions. The number of shares repurchased and the timing, manner, price and amount of any repurchases are determined at LCNB's discretion. Factors include, but are not limited to, share price, trading volume, and general market conditions, along with LCNB’s general business conditions. The Plan may be suspended or discontinued at any time and does not obligate LCNB to acquire any specific number of its common shares.
As part of the Plan, LCNB entered into a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The 10b5-1 trading plan permits common shares to be repurchased at times that LCNB might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. The 10b5-1 trading plan is administered by an independent broker and is subject to price, market volume, and timing restrictions.
On February 27, 2023, LCNB's Board of Directors authorized the Plan. Under the terms of the Plan, LCNB is authorized to repurchase up to 500,000 of its outstanding common shares. The Plan replaced and superseded LCNB’s prior Issuer Stock Repurchase Plan Agreement, which was adopted on May 27, 2022.
No purchases were made under the Plan during the three months ended March 31, 2025. The maximum number of shares that may yet be purchased under the Plan is 315,047.
None.
Not applicable.
During the three months ended March 31, 2025, none of our directors or officers informed us of the adoption, modification, or termination of a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as those terms are defined in Regulation S-K, Item 408.
Exhibit No.
Exhibit Description
2.1
Agreement and Plan of Merger dated as of May 17, 2023 by and between LCNB Corp. and Cincinnati Bancorp, Inc. - incorporated by reference to the Registrant's Current Report on Form 8-K filed on May 18, 2023, Exhibit 2.1.
2.2
Agreement and Plan of Merger dated as of November 28, 2023 by and between LCNB Corp. and Eagle Financial Bancorp, Inc. - incorporated by reference to the Registrant's Current Report on Form 8-K filed on November 29, 2023,Exhibit 2.1.
3.1
Amended and Restated Articles of Incorporation of LCNB Corp., as amended. (This document represents the Amended and Restated Articles of Incorporation of LCNB Corp. in compiled form incorporating all amendments. The compiled document has not been filed with the Ohio Secretary of State.) - incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, Exhibit 3.1.
31.1
Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32
Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
101
The following financial information from LCNB Corp.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2025 is formatted in Extensible Business Reporting Language: (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Income, (iii) the Consolidated Condensed Statements of Comprehensive Income, (iv) the Consolidated Condensed Statements of Shareholders' Equity, (v) the Consolidated Condensed Statements of Cash Flows, and (vi) the Notes to Consolidated Condensed Financial Statements.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
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.
May 7, 2025
/s/ Eric J. Meilstrup
Eric J. Meilstrup
Chief Executive Officer and President
/s/ Robert C. Haines, II
Robert C. Haines, II
Executive Vice President and Chief Financial Officer