UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
| | 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
LCNB Corp.
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
(Address of principal executive offices, including Zip Code)
(
(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 |
| | | |
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.
☒
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 ☐
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).
The number of shares outstanding of the issuer's common stock, without par value, as of November 6, 2024 was
LCNB CORP. AND SUBSIDIARIES
Glossary of Abbreviations and Acronyms
| ACL |
Allowance for Credit Losses |
|
| ASC |
Accounting Standards Codification |
|
| ASU |
Accounting Standards Update |
|
| Bank |
LCNB National Bank |
|
| CECL |
Current expected credit losses |
|
| CNNB |
Cincinnati Bancorp, Inc. |
|
| Company |
LCNB Corp. and its consolidated subsidiaries as a whole |
|
| DCF |
Discounted Cash Flow |
|
| Dodd-Frank Act |
Dodd-Frank Wall Street Reform and Consumer Protection Act |
|
| EFBI |
Eagle Financial Bancorp, Inc. |
|
| FASB |
Financial Accounting Standards Board |
|
| FDIC |
Federal Deposit Insurance Corporation |
|
| FFIEC |
Financial Institutions Examination Council |
|
| FHLB |
Federal Home Loan Bank |
|
| FICO |
Fair Isaac Corporation |
|
| FOMC |
Federal Open Market Committee of the Federal Reserve System |
|
| FRB |
Federal Reserve Bank |
|
| GAAP |
Generally Accepted Accounting Principles |
|
| IRA |
Individual Retirement Account |
|
| LCNB |
LCNB Corp. and its consolidated subsidiaries as a whole |
|
| LDA |
Loss Driver Analysis |
|
| LGD |
Loss Given Default |
|
| OCC |
Office of the Comptroller of the Currency |
|
| OAEM | Other Assets Especially Mentioned | |
| PCD |
Purchased Credit Deteriorated |
|
| PD |
Probability of Default |
|
| SEC |
Securities and Exchange Commission |
|
| TDR |
Troubled Debt Restructuring |
PART I – FINANCIAL INFORMATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
| September 30, 2024 | December 31, 2023 | |||||||
| Unaudited | Audited | |||||||
| ASSETS: | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest-bearing demand deposits | ||||||||
| Total cash and cash equivalents | ||||||||
| 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 $ and $ at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Federal Reserve Bank stock, at cost | ||||||||
| Federal Home Loan Bank stock, at cost | ||||||||
| Loans, net of allowance for credit losses of $ and $ at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Loans held for sale | ||||||||
| 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 | ||||||||
| Short-term borrowings | ||||||||
| Long-term debt | ||||||||
| Operating lease liabilities | ||||||||
| Accrued interest and other liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENT LIABILITIES | — | — | ||||||
| SHAREHOLDERS' EQUITY: | ||||||||
| Preferred shares – par value, authorized shares, outstanding | ||||||||
| Common shares – par value; authorized shares; issued and shares at September 30, 2024 and December 31, 2023, respectively; outstanding and shares at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Retained earnings | ||||||||
| Treasury shares at cost, and shares at September 30, 2024 and December 31, 2023, respectively | ( | ) | ( | ) | ||||
| 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.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2024 |
2023 |
2024 |
2023 |
|||||||||||||
| INTEREST INCOME: |
||||||||||||||||
| Interest and fees on loans |
$ | |||||||||||||||
| Dividends on equity securities: |
||||||||||||||||
| With a readily determinable fair value |
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| Without a readily determinable fair value |
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| Interest on debt securities: |
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| Taxable |
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| Non-taxable |
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| Other investments |
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| TOTAL INTEREST INCOME |
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| INTEREST EXPENSE: |
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| Interest on deposits |
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| Interest on short-term borrowings |
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| Interest on long-term debt |
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| TOTAL INTEREST EXPENSE |
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| NET INTEREST INCOME |
||||||||||||||||
| PROVISION FOR (RECOVERY OF) CREDIT LOSSES |
( |
) | ( |
) | ||||||||||||
| NET INTEREST INCOME AFTER PROVISION FOR (RECOVERY OF) CREDIT LOSSES |
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| NON-INTEREST INCOME: |
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| 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 |
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| Other operating income |
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| TOTAL NON-INTEREST INCOME |
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| NON-INTEREST EXPENSE: |
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| Salaries and employee benefits |
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| Equipment expenses |
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| Occupancy expense, net |
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| State financial institutions tax |
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| Marketing |
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| Amortization of intangibles |
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| FDIC insurance premiums, net |
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| Contracted services |
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| Merger-related expenses |
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| Other non-interest expense |
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| TOTAL NON-INTEREST EXPENSE |
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| INCOME BEFORE INCOME TAXES |
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| PROVISION FOR INCOME TAXES |
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| NET INCOME |
$ | |||||||||||||||
| Earnings per common share: |
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| Basic |
$ | |||||||||||||||
| Diluted |
||||||||||||||||
| Weighted average common shares outstanding: |
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| Basic |
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| Diluted |
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The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net income | $ | |||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Net unrealized gain (loss) on available-for-sale debt securities (net of tax expense (benefit) of $ and $() for the three months ended September 30, 2024 and 2023, respectively, and $ and $() for the nine months ended September 30, 2024 and 2023, respectively) | ( | ) | ( | ) | ||||||||||||
| Reclassification adjustment for net realized (gains) losses on sales of available-for-sale debt securities included in net income (net of tax expense (benefit) of $ and $() for the three and nine months ended September 30, 2024, respectively) | ||||||||||||||||
| Other comprehensive income (loss), net of tax | ( | ) | ( | ) | ||||||||||||
| TOTAL COMPREHENSIVE INCOME | $ | |||||||||||||||
The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
(Unaudited)
| Accumulated | ||||||||||||||||||||||||
| Common | Other | Total | ||||||||||||||||||||||
| Shares | Common | Retained | Treasury | Comprehensive | Shareholders' | |||||||||||||||||||
| Outstanding | Stock | Earnings | Shares | Loss | Equity | |||||||||||||||||||
| Three Months Ended September 30, 2024 | ||||||||||||||||||||||||
| Balance at July, 1 2024 | $ | ( | ) | ( | ) | |||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive income, net of taxes | ||||||||||||||||||||||||
| Dividend Reinvestment and Stock Purchase Plan | ||||||||||||||||||||||||
| Adjustment to stock issued for acquisition of Eagle Financial Bancorp, Inc. | ( | ) | ( | ) | — | ( | ) | |||||||||||||||||
| Compensation expense relating to restricted stock | ||||||||||||||||||||||||
| Common stock dividends, $ per share | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at September 30, 2024 | $ | ( | ) | ( | ) | |||||||||||||||||||
| Nine Months Ended September 30, 2024 | ||||||||||||||||||||||||
| Balance at January 1, 2024 | $ | ( | ) | ( | ) | |||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive income, net of taxes | ||||||||||||||||||||||||
| Dividend Reinvestment and Stock Purchase Plan | ||||||||||||||||||||||||
| Adjustment to stock issued for acquisition of Eagle Financial Bancorp, Inc. | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Stock issued for acquisition of Eagle Financial Bancorp, Inc. | ||||||||||||||||||||||||
| Shares issued for restricted stock awards | — | |||||||||||||||||||||||
| Compensation expense relating to restricted stock | ||||||||||||||||||||||||
| Common stock dividends, $ per share | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at September 30, 2024 | $ | ( | ) | ( | ) | |||||||||||||||||||
| Three Months Ended September 30, 2023 | ||||||||||||||||||||||||
| Balance at July, 1 2023 | $ | ( | ) | ( | ) | |||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive loss, net of taxes | ( | ) | ( | ) | ||||||||||||||||||||
| Dividend Reinvestment and Stock Purchase Plan | ||||||||||||||||||||||||
| Compensation expense relating to restricted stock | — | |||||||||||||||||||||||
| Common stock dividends, $ per share | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at September 30, 2023 | $ | ( | ) | ( | ) | |||||||||||||||||||
| Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||
| Balance at January 1, 2023 | $ | ( | ) | ( | ) | |||||||||||||||||||
| Cumulative change in accounting principle - ASC 326 | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at January 1, 2023, adjusted | ( | ) | ( | ) | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive income, net of taxes | ( | ) | ( | ) | ||||||||||||||||||||
| Dividend Reinvestment and Stock Purchase Plan | ||||||||||||||||||||||||
| Repurchase of common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Shares issued for restricted stock awards | ||||||||||||||||||||||||
| Compensation expense relating to restricted stock | ||||||||||||||||||||||||
| Common stock dividends, $ per share | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at September 30, 2023 | $ | ( | ) | ( | ) | |||||||||||||||||||
The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine Months Ended |
||||||||
| September 30, |
||||||||
| 2024 |
2023 |
|||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
| Net income |
$ | |||||||
| Adjustments to reconcile net income to net cash flows from operating activities: |
||||||||
| Depreciation, amortization, and accretion |
||||||||
| Provision for (recovery of) credit losses |
( |
) | ||||||
| Deferred income tax provision (benefit) |
( |
) | ( |
) | ||||
| Increase in cash surrender value of bank-owned life insurance |
( |
) | ( |
) | ||||
| Bank-owned life insurance death benefits in excess of cash surrender value |
( |
) | ||||||
| Realized and unrealized (gains) losses from equity securities, net |
( |
) | ||||||
| Realized losses from sales of debt securities, available-for-sale |
||||||||
| Realized (gains) losses from sales of premises and equipment |
( |
) | ( |
) | ||||
| Origination of mortgage loans for sale |
( |
) | ( |
) | ||||
| Realized gains from sales of mortgage loans |
( |
) | ( |
) | ||||
| Proceeds from sales of mortgage loans |
||||||||
| Realized losses from sales of acquired loans |
||||||||
| Proceeds from sales of acquired loans |
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| Compensation expense related to restricted stock |
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| Changes in: |
||||||||
| Accrued interest receivable |
( |
) | ( |
) | ||||
| Other assets |
( |
) | ||||||
| Other liabilities |
( |
) | ( |
) | ||||
| TOTAL ADJUSTMENTS |
( |
) | ||||||
| NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES |
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| CASH FLOWS FROM INVESTING ACTIVITIES: |
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| Proceeds from sales of equity securities |
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| Proceeds from sales of debt securities, available-for-sale |
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| Proceeds from maturities and calls of debt securities: |
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| Available-for-sale |
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| Held-to-maturity |
||||||||
| Purchases of equity securities |
( |
) | ( |
) | ||||
| Purchases of debt securities: |
||||||||
| Available-for-sale |
( |
) | ( |
) | ||||
| Held-to-maturity |
( |
) | ( |
) | ||||
| Purchase of Federal Reserve Bank stock |
( |
) | ||||||
| Purchases of Federal Home Loan Bank stock |
( |
) | ( |
) | ||||
| Proceeds from redemption of Federal Home Loan Bank stock |
||||||||
| Net (increase) decrease in loans |
( |
) | ||||||
| Purchases of premises and equipment |
( |
) | ( |
) | ||||
| Proceeds from sale of premises and equipment |
||||||||
| Cash and cash equivalents paid for acquisition, net of cash acquired |
( |
) | ||||||
| NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES |
( |
) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
| Net increase (decrease) in customer deposits |
( |
) | ||||||
| Net increase (decrease) in short-term borrowings |
( |
) | ( |
) | ||||
| Proceeds from issuance of long-term debt |
||||||||
| Principal payments on long-term debt |
( |
) | ( |
) | ||||
| Proceeds from issuance of common stock |
||||||||
| Repurchase of common stock |
( |
) | ||||||
| Cash dividends paid on common stock |
( |
) | ( |
) | ||||
| NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES |
( |
) | ||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS |
( |
) | ||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
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| CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | |||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: |
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| CASH PAID DURING THE YEAR FOR: |
||||||||
| Interest paid |
$ | |||||||
| Income taxes paid, net of refunds |
||||||||
| SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES: |
||||||||
| Transfer from loans held-for-investment to loans held-for-sale |
$ | |||||||
| Transfer from loans held-for-sale to loans held-for-investment |
||||||||
| Right-of-use assets obtained in exchange for lease obligations |
||||||||
The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
BASIS OF PRESENTATION
The accompanying unaudited interim consolidated condensed financial statements include LCNB Corp. and its wholly-owned subsidiaries: LCNB National Bank and LCNB Risk Management, Inc., its captive insurance company. All material intercompany transactions and balances are eliminated in consolidation.
The unaudited interim consolidated condensed financial statements have been prepared in accordance with U.S. GAAP for interim financial information and the rules and regulations of the SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of the Company's financial position, results of consolidated operations, and cash flows for the interim periods, as required by Regulation S-X, Rule 8-03.
The consolidated condensed balance sheet as of December 31, 2023 has been derived from the audited consolidated balance sheet as of that date.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results to be expected for the full year ending December 31, 2024. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies, and financial notes thereto included in LCNB's 2023 Annual Report on Form 10-K filed with the SEC.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASC 326")
The Company adopted ASC 326 on January 1, 2023. It significantly changed guidance for recognizing impairment of financial instruments. Previous guidance required an "incurred loss" methodology for recognizing credit losses that delayed recognition until it was probable a loss had been incurred. ASC 326 replaced the incurred loss impairment methodology with a new "current expected credit loss" ("CECL") methodology that reflects expected credit losses over the lives of the credit instruments and requires consideration of a broader range of information to estimate credit losses. ASC 326 requires an organization to estimate all expected credit losses for financial assets measured at amortized cost, including loans and held-to-maturity debt securities, based on historical experience, current conditions, and reasonable and supportable forecasts. It also applies to off-balance sheet credit exposures, such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. ASC 326 also made changes to the accounting for credit losses on available-for-sale debt securities, requiring additional disclosures.
LCNB adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable guidance. The following table shows the impact of adopting ASC 326 on January 1, 2023 (in thousands):
| As Reported | Impact of | As Reported | ||||||||||
| Pre-ASC 326 | ASC 326 Adoption | Under ASC 326 | ||||||||||
| Assets: | ||||||||||||
| Loans, gross of allowance | $ | |||||||||||
| ACL on loans | ( | ) | ( | ) | ( | ) | ||||||
| ACL on debt securities, held to maturity | ( | ) | ( | ) | ||||||||
| Deferred tax assets, net | ||||||||||||
| Liabilities: | ||||||||||||
| ACL on off-balance sheet credit exposures | ||||||||||||
| Shareholders' Equity: | ||||||||||||
| Retained earnings | ( | ) | ||||||||||
Federal banking regulatory agencies allow an optional phase-in period of three years for banks to absorb the impact to regulatory capital of implementing CECL. LCNB has elected not to exercise this option, and the full impact of adopting ASC 326 is included in regulatory capital as of September 30, 2024. Adoption of the ASC did not materially affect LCNB's regulatory capital ratios.
ASU No. 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures"
ASU No. 2022-02 was issued in March 2022 and became effective for LCNB on January 1, 2023. These amendments eliminated previous TDR recognition and measurement guidance and, instead, required that an entity evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance disclosure requirements and introduce new disclosure requirements for certain modifications to borrowers experiencing financial difficulties. Additionally, the amendments require the disclosure of current-period gross charge-offs by year of origination. Adoption of ASU No. 2022-02 did not have a material impact on LCNB's results of consolidated operations or financial position.
ASU No. 2023-02, "Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a Consensus of the Emerging Issues Task Force)"
ASU No. 2023-02 was issued in March 2023 and became effective for LCNB on January 1, 2024. It allows reporting entities the option to use the proportional amortization method to account for equity investments made primarily for the purpose of receiving income tax credits and other income tax benefits when certain requirements are met, regardless of the tax credit program from which the income tax credits are received. The proportional amortization method was previously limited to Low-Income Housing Tax Credit investments. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense (benefit). Adoption of ASU No. 2023-02 did not have a material impact on LCNB's results of consolidated operations or financial position.
RECENT ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE
From time to time the FASB issues an ASU to communicate changes to U.S. GAAP. The following information provides brief summaries of newly issued but not yet effective ASUs that could have an effect on LCNB’s financial position or results of consolidated operations:
ASU No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures"
ASU No. 2023-07 was issued in November 2023 and changes the requirements for segment disclosures, primarily through enhancing disclosure requirements for significant segment expenses, enhancing interim disclosure requirements, clarifying circumstances in which an entity can disclose multiple segment measures of profit or loss, providing new segment disclosure requirements for entities with a single reportable segment, and modifying other disclosure requirements. A public entity should apply the amendments retrospectively to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. LCNB does not expect adoption of ASU No. 2023-02 will have a material impact on its results of consolidated operations or financial position.
ASU 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.”
ASU No. 2023-09 was issued in December 2023. The amendments require that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation, and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income (or loss) by the applicable statutory income tax rate). The amendments require that all entities disclose on an annual basis the following information about income taxes paid: (1) the amount of income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes; and (2) the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5 percent of total income taxes paid (net of refunds received). The amendments also require that all entities disclose the following information: (1) income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign; and (2) income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign. The ASU is effective for public business entities for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. LCNB will adopt this ASU for the reporting period beginning January 1, 2025, and does not expect the amendments to have a material impact to the financial statements of the Company.
ASU 2024-01 “Compensation - Stock Compensation (Topic 718) - Scope Application of Profits Interest and Similar Awards,”
ASU No. 2024-01 was issued in March 2024 and clarifies how an entity determines whether a profits interest or similar award is within the scope of Topic 718 or is not a share-based payment arrangement and, therefore, is within the scope of other guidance. ASU 2024-01 provides an illustrative example with multiple fact patterns and also amends certain language in the “Scope” and “Scope Exceptions” sections of Topic 718 to improve its clarity and operability without changing the guidance. Entities can apply the amendments either retrospectively to all prior periods presented in the financial statements or prospectively to profits interest and similar awards granted or modified on or after the date of adoption. If prospective application is elected, an entity must disclose the nature of and reason for the change in accounting principle. ASU 2024-01 is effective January 1, 2025, including interim periods, and is not expected to have a material impact to the financial statements of the Company.
NOTE 2 - BUSINESS COMBINATIONS
Cincinnati Bancorp, Inc.
On November 1, 2023, LCNB acquired Cincinnati Bancorp, Inc. (“CNNB”), the holding company for Cincinnati Federal, a federally chartered stock savings and loan association. Under the terms of the definitive merger agreement, CNNB merged with and into LCNB Corp., immediately followed by the merger of Cincinnati Federal with and into LCNB National Bank. CNNB operated full-service branch offices in Cincinnati, Ohio and
CNNB results of operations were included in LCNB's results beginning November 1, 2023.
Under the terms of the merger agreement, CNNB shareholders had the opportunity to elect to receive either
The following table summarizes the fair value of the total consideration transferred as a part of the CNNB acquisition and the fair value of identifiable assets acquired and liabilities assumed as originally reported at December 31, 2023 and as adjusted at September 30, 2024 (in thousands):
| December 31, 2023 | Adjustments | September 30, 2024 | ||||||||||
| Consideration: | ||||||||||||
| Cash consideration | $ | — | ||||||||||
| Common stock ( shares issued at $ 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 | — | |||||||||||
| Operating lease right-of-use assets | — | |||||||||||
| Core deposit and other intangibles | — | |||||||||||
| Bank owned life insurance | — | |||||||||||
| Deferred income taxes | 82 | |||||||||||
| Other assets | ||||||||||||
| Total identifiable assets acquired | ( | ) | ||||||||||
| Liabilities Assumed: | ||||||||||||
| Deposits | — | |||||||||||
| Short-term borrowings | — | |||||||||||
| Long-term debt | — | |||||||||||
| Operating lease liabilities | ( | ) | ||||||||||
| Other liabilities | — | |||||||||||
| 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 $
As permitted by ASC No. 805-10-25, Business Combinations, the above estimated amounts may be adjusted up to one year after the closing date of the transaction to reflect any new information obtained about facts and circumstances existing at the acquisition date. While the Bank believes that the information available on the merger date provided a reasonable basis for estimating fair value, additional information and evidence may be provided during the fourth quarter of 2024 which will be utilized to finalize all valuations and record final adjustments during the one year subsequent measurement period. These adjustments may include: (i) changes in deferred tax assets or liabilities related to fair value estimates and changes in the expected realization of items considered to be net operating loss carryforwards due to tax calculations still in process, and (ii) changes in goodwill as a result of the net effect of any adjustments. As such, any changes in the estimated fair value of assets, including acquired loans, will be recognized in the period the adjustment is identified.
The loan adjustment in the table above was due to a fair value adjustment to deferred fees and costs on loans acquired. The other assets, operating lease liabilities and resulting deferred tax adjustments in the table above were related to the updated fair value adjustments.
The amount of goodwill recorded reflects LCNB's expansion in the Cincinnati market and related synergies that are expected to result from the acquisition and represents the excess purchase price over the estimated fair value of the net assets acquired. The goodwill will not be amortizable on LCNB's financial records and will not be deductible for tax purposes. Total goodwill will be subject to an annual test for impairment and the amount impaired, if any, will be charged to expense at the time of impairment. The core deposit intangible will be amortized over the estimated weighted average economic life of the various core deposit types, which is years.
Direct expenses related to the CNNB acquisition totaled $
Eagle Financial Bancorp, Inc.
On April 12, 2024, LCNB acquired Eagle Financial Bancorp, Inc. (“EFBI”), the holding company for EAGLE.bank, an Ohio state-chartered bank. Under the terms of the definitive merger agreement, EFBI merged with and into LCNB Corp., immediately followed by the merger of EAGLE.bank with and into LCNB National Bank. EAGLE.bank operated 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
The following table summarizes the fair value of the total consideration transferred as a part of the EFBI acquisition and the fair value of identifiable assets acquired and liabilities assumed as originally reported at June 30, 2024 and as adjusted at September 30, 2024 (in thousands):
| June 30, 2024 | Adjustments | September 30, 2024 | ||||||||||
| Consideration: | ||||||||||||
| Cash consideration | $ | ( | ) | |||||||||
| Common stock ( shares issued at $ 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 | — | |||||||||||
| Operating lease right-of-use assets | — | |||||||||||
| Core deposit and other intangibles | — | |||||||||||
| Bank owned life insurance | — | |||||||||||
| Deferred income taxes | ||||||||||||
| Other assets | ||||||||||||
| Total identifiable assets acquired | ||||||||||||
| Liabilities Assumed: | ||||||||||||
| Deposits | — | |||||||||||
| Short-term borrowings | — | |||||||||||
| Operating lease liabilities | — | |||||||||||
| Other liabilities | ( | ) | ||||||||||
| 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 $
As permitted by ASC No. 805-10-25, Business Combinations, the above estimated amounts may be adjusted up to one year after the closing date of the transaction to reflect any new information obtained about facts and circumstances existing at the acquisition date. While the Company believes that the information available on the merger date provided a reasonable basis for estimating fair value, additional information and evidence may be provided during the fourth quarter of 2024 or later which will be utilized to finalize all valuations and record final adjustments during the one year subsequent measurement period. These adjustments may include: (i) changes in deferred tax assets or liabilities related to fair value estimates and changes in the expected realization of items considered to be net operating loss carryforwards due to tax calculations still in process, and (ii) changes in goodwill as a result of the net effect of any adjustments. As such, any changes in the estimated fair value of assets will be recognized in the period the adjustment is identified.
The consideration adjustments are associated with the unearned portion of Eagle.bank's employee stock ownership plan. The other assets, other liabilities and resulting deferred tax adjustments in the table above were related to the updated fair value adjustments.
The amount of goodwill recorded reflects LCNB's expansion in the Cincinnati market and related synergies that are expected to result from the acquisition and represents the excess purchase price over the estimated fair value of the net assets acquired. The goodwill will not be amortizable on LCNB's financial records and will not be deductible for tax purposes. Total goodwill will be subject to an annual test for impairment and the amount impaired, if any, will be charged to expense at the time of impairment. The core deposit intangible will be amortized over the estimated weighted average economic life of the various core deposit types, which is years.
Direct expenses related to the EFBI acquisition totaled $
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of debt securities at September 30, 2024 and December 31, 2023 are summarized as follows (in thousands):
| Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
| September 30, 2024 | ||||||||||||||||
| Debt Securities, Available-for-Sale: | ||||||||||||||||
| U.S. Treasury notes | $ | |||||||||||||||
| U.S. Agency notes | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| U.S. Agency mortgage-backed securities | ||||||||||||||||
| Municipal securities: | — | |||||||||||||||
| Non-taxable | ||||||||||||||||
| Taxable | ||||||||||||||||
| $ | ||||||||||||||||
| Debt Securities, Held-to-Maturity: | ||||||||||||||||
| Municipal securities: | ||||||||||||||||
| Non-taxable | $ | |||||||||||||||
| Taxable | ||||||||||||||||
| $ | ||||||||||||||||
| December 31, 2023 | ||||||||||||||||
| Debt Securities, Available-for-Sale: | ||||||||||||||||
| U.S. Treasury notes | $ | |||||||||||||||
| U.S. Agency notes | ||||||||||||||||
| Corporate Bonds | ||||||||||||||||
| U.S. Agency mortgage-backed securities | ||||||||||||||||
| Municipal securities: | ||||||||||||||||
| Non-taxable | ||||||||||||||||
| Taxable | ||||||||||||||||
| $ | ||||||||||||||||
| Debt Securities, Held-to-Maturity: | ||||||||||||||||
| Municipal securities: | ||||||||||||||||
| Non-taxable | $ | |||||||||||||||
| Taxable | ||||||||||||||||
| $ | ||||||||||||||||
The amortized cost of debt securities in the above table excludes accrued interest of $
The Company estimated the expected credit losses at September 30, 2024 and December 31, 2023 to be immaterial based on the composition of the securities portfolio.
Information concerning debt securities with gross unrealized losses at September 30, 2024 and December 31, 2023, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (in thousands):
| Less than Twelve Months | Twelve Months or Greater | |||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||
| September 30, 2024 | ||||||||||||||||
| Available-for-Sale: | ||||||||||||||||
| U.S. Treasury notes | $ | |||||||||||||||
| U.S. Agency notes | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| U.S. Agency mortgage-backed securities | ||||||||||||||||
| Municipal securities: | — | — | — | — | ||||||||||||
| Non-taxable | ||||||||||||||||
| Taxable | ||||||||||||||||
| $ | ||||||||||||||||
| Held-to-Maturity: | ||||||||||||||||
| Municipal securities: | ||||||||||||||||
| Non-taxable | $ | |||||||||||||||
| Taxable | ||||||||||||||||
| $ | ||||||||||||||||
| December 31, 2023 | ||||||||||||||||
| Available-for-Sale: | ||||||||||||||||
| U.S. Treasury notes | $ | |||||||||||||||
| U.S. Agency notes | ||||||||||||||||
| Corporate Bonds | ||||||||||||||||
| U.S. Agency mortgage-backed securities | ||||||||||||||||
| Municipal securities: | ||||||||||||||||
| Non-taxable | ||||||||||||||||
| Taxable | ||||||||||||||||
| $ | ||||||||||||||||
| Held-to-Maturity: | ||||||||||||||||
| Municipal securities: | ||||||||||||||||
| Non-taxable | $ | |||||||||||||||
| Taxable | ||||||||||||||||
| $ | ||||||||||||||||
At September 30, 2024, LCNB’s securities portfolio consisted of
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
Debt securities with a market value of $
Excluding holdings in U.S. Treasury securities and U.S. Government Agencies, there were no investments in securities of any issuer that exceeded 10% of LCNB's consolidated shareholders' equity at September 30, 2024.
Contractual maturities of debt securities at September 30, 2024 were as follows (in thousands). Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations.
| Available-for-Sale | Held-to-Maturity | |||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
| Due within one year | $ | |||||||||||||||
| Due from one to five years | ||||||||||||||||
| Due from five to ten years | ||||||||||||||||
| Due after ten years | ||||||||||||||||
| U.S. Agency mortgage-backed securities | ||||||||||||||||
| $ | ||||||||||||||||
Certain information concerning the sale of debt securities available-for-sale for the three and nine months ended September 30, 2024 and 2023 was as follows (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Proceeds from sales | $ | |||||||||||||||
| 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 September 30, 2024 on its investments in equity securities without a readily determinable fair value.
The amortized cost and estimated fair value of equity securities with a readily determinable fair value at September 30, 2024 and December 31, 2023 are summarized as follows (in thousands):
| September 30, 2024 | December 31, 2023 | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| Mutual Funds | $ | |||||||||||||||
| 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 and nine months ended September 30, 2024 and 2023 were as follows (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net gains (losses) recognized during the period on equity securities | $ | ( | ) | ( | ) | |||||||||||
| Less net 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 September 30, 2024 and December 31, 2023 were as follows (in thousands):
| September 30, 2024 | December 31, 2023 | |||||||
| Commercial & industrial | $ | |||||||
| Commercial, secured by real estate: | ||||||||
| Owner occupied | ||||||||
| Non-owner occupied | ||||||||
| Farmland | ||||||||
| Multi-family | ||||||||
| Construction loans secured by 1-4 family dwellings | ||||||||
| Construction loans secured by other real estate | ||||||||
| Residential real estate: | ||||||||
| Secured by senior liens on 1-4 family dwellings | ||||||||
| 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, net | $ | |||||||
Loans in the above table are shown net of deferred origination fees and costs. Deferred origination fees, net of related costs, were $
Non-accrual loans by class of receivable as of September 30, 2024 and December 31, 2023 were as follows (in thousands):
| September 30, 2024 | December 31, 2023 | |||||||||||||||
| Non-accrual | Non-accrual | |||||||||||||||
| Loans with no | Total | Loans with no | Total | |||||||||||||
| Allowance for | Non-accrual | Allowance for | Non-accrual | |||||||||||||
| Credit Losses | Loans | Credit Losses | Loans | |||||||||||||
| Commercial & industrial | $ | |||||||||||||||
| Commercial, secured by real estate: | ||||||||||||||||
| Owner occupied | ||||||||||||||||
| Non-owner occupied | ||||||||||||||||
| Farmland | ||||||||||||||||
| Multi-family | ||||||||||||||||
| Construction loans secured by 1-4 family dwellings | ||||||||||||||||
| Construction loans secured by other real estate | ||||||||||||||||
| Residential real estate: | ||||||||||||||||
| Secured by senior liens on 1-4 family dwellings | ||||||||||||||||
| Secured by junior liens on 1-4 family dwellings | ||||||||||||||||
| Home equity line-of-credit loans | ||||||||||||||||
| Consumer | ||||||||||||||||
| Agricultural | ||||||||||||||||
| Total | $ | |||||||||||||||
Interest income recognized on nonaccrual loans totaled approximately $
The ratio of non-accrual loans to total loans outstanding at September 30, 2024 and December 31, 2023 was
ALLOWANCE FOR CREDIT LOSSES
The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost, which is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. A provision for credit losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors.
During the first quarter of 2023, the Company adopted ASU No. 2016-13, including the CECL methodology for estimating the ACL. This standard was adopted using a modified retrospective approach on January 1, 2023. See Note 1 - Basis of Presentation - Adoption of New Accounting Pronouncements for a summary of the impact adoption of ASU No. 2016-13 had on LCNB's ACL, retained earnings, and deferred taxes.
QUANTITATIVE CONSIDERATIONS
The ACL is primarily calculated utilizing a DCF model. Key inputs and assumptions used in this model are discussed below:
| • | Forecast model - For each portfolio segment, an LDA was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows. The LDA utilized peer FFIEC Call Report data for all pools. The Company updated the LDA for the September 30, 2024 calculation. The new LDA utilized the same economic factor loss drivers as previous analyses but added an additional factor to three pools to improve correlation with loss data. |
| • | Probability of default – PD is the probability that an asset will be in default within a given time frame. The Company has defined default as when a charge-off has occurred, a loan goes to non-accrual status, or a loan is greater than 90 days past due. The forecast model is utilized to estimate PDs. |
| • | Loss given default – LGD is the percentage of the asset not expected to be collected due to default. The LGD is derived from company specific and peer loss data. |
| • | Prepayments and curtailments – Prepayments and curtailments are calculated based on the Company’s own data. This analysis is updated when materially relevant. |
| • | Forecast and reversion – the Company, as of June 30, 2024, established a two-quarter reasonable and supportable forecast period with a ten-quarter straight line reversion to the long-term historical average. As of September 30, 2024, the Company established a four-quarter reasonable and supportable forecast period with a six-quarter straight line reversion to the long-term historical average due to increased uncertainty surrounding the economy. Extending the forecast and shortening the reversion periods from previous quarters has differing effects on pools based on the economic indicators used and the relation of the selected forecast range to the historical average. For example, the historical average for the Company's unemployment indicator is 5.78%, which is higher than the forecasted range utilized as of September 30, 2024. The extended forecast and reversion period ultimately decreases the reserve associated with the unemployment factor when compared to the historical average. |
| • | Economic forecast – the Company utilizes a third party to provide economic forecasts under various scenarios, which are assessed against economic indicators and management’s observations in the market. As of September 30, 2024, the Company selected a forecast which forecasts unemployment between 4.86% and 5.48%, the change in Coincident Economic Activity between -0.04% and 0.83%, the change in Commercial Real Estate Price Indexes between -6.45% and -0.68%, and the change in the Home Price Index between -4.12% and 2.98% during the forecast periods. Management believes that the resulting quantitative reserve appropriately balances economic indicators with identified risks. As of June 30, 2024, the Company selected a forecast which forecasts unemployment between 4.50% and 4.85%, the change in Coincident Economic Activity between -0.06% and 0.07%, the change in Commercial Real Estate Price Indexes between -5.33% and -3.86%, and the change in the Home Price Index between 0.63% and 2.89% during the forecast periods. The historical averages for LCNB’s economic indicators are unemployment – 5.78%, change in Coincident Economic Activity – 1.99%, change in Commercial Real Estate Price Indexes – 5.95%, and change in Home Price Index – 2.71% |
QUALITATIVE CONSIDERATIONS
In addition to the quantitative model, management considers the need for qualitative adjustment for risks not considered in the DCF. Factors that are considered by management in determining loan collectability and the appropriate level of the ACL are listed below:
| • | Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the Company operates that affect the collectability of financial assets; |
| • | The effect of other external factors such as the regulatory, legal and technological environments, competition, and events such as natural disasters or pandemics; and |
| • | Model risk including statistical risk, reversion risk, timing risk, and model limitation risk. |
| • | Changes in the nature and volume of the portfolio and terms of loans. |
| • | Lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries. |
The following table presents activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2024 and 2023 (in thousands):
| Commercial, | ||||||||||||||||||||||||||||
| Commercial | Secured by | Residential | ||||||||||||||||||||||||||
| & Industrial | Real Estate | Real Estate | Consumer | Agricultural | Other | Total | ||||||||||||||||||||||
| Three Months Ended September 30, 2024 | ||||||||||||||||||||||||||||
| Balance, beginning of period | $ | |||||||||||||||||||||||||||
| Acquisition of Eagle Financial Bancorp, Inc. - PCD Loans | ||||||||||||||||||||||||||||
| Provision for (recovery of) credit losses | ( | ) | ||||||||||||||||||||||||||
| Acquisition of Eagle Financial Bancorp, Inc. - provision for credit losses on non-PCD loans charged to expense | ||||||||||||||||||||||||||||
| Losses charged off | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||
| Balance, end of period | $ | |||||||||||||||||||||||||||
| Ratio of net charge-offs to average loans | % | % | % | ( | )% | % | % | % | ||||||||||||||||||||
| Nine Months Ended September 30, 2024 | ||||||||||||||||||||||||||||
| Balance, beginning of year | $ | |||||||||||||||||||||||||||
| Acquisition of Eagle Financial Bancorp, Inc. - PCD Loans | ||||||||||||||||||||||||||||
| Provision for (recovery of) credit losses | ( | ) | ( | ) | ||||||||||||||||||||||||
| Acquisition of Eagle Financial Bancorp, Inc. - provision for credit losses on non-PCD loans charged to expense | ||||||||||||||||||||||||||||
| Losses charged off | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||
| Balance, end of period | $ | |||||||||||||||||||||||||||
| Ratio of net charge-offs (recoveries) to average loans | % | % | % | ( | )% | % | % | % | ||||||||||||||||||||
| Commercial, | ||||||||||||||||||||||||||||
| Commercial | Secured by | Residential | ||||||||||||||||||||||||||
| & Industrial | Real Estate | Real Estate | Consumer | Agricultural | Other | Total | ||||||||||||||||||||||
| Three Months Ended September 30, 2023 | ||||||||||||||||||||||||||||
| 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 | % | % | % | % | % | % | % | |||||||||||||||||||||
| Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||||
| Balance, beginning of year, prior to adoption of ASC 326 | $ | |||||||||||||||||||||||||||
| Impact of adopting ASC 326 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| 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 September 30, 2024 and December 31, 2023 was
For collateral dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the allowance for credit losses is measured based on the difference between the fair value of the collateral, less costs to sell, and the amortized cost basis of the loan as of the measurement date.
The following table presents the carrying value and related allowance of collateral dependent individually evaluated loans by class segment at the dates indicated (in thousands):
| September 30, 2024 | December 31, 2023 | |||||||||||||||
| Carrying | Related | Carrying | Related | |||||||||||||
| Value | Allowance | Value | Allowance | |||||||||||||
| Commercial & industrial | $ | |||||||||||||||
| Commercial, secured by real estate: | ||||||||||||||||
| Owner occupied | ||||||||||||||||
| Non-owner occupied | ||||||||||||||||
| Farmland | ||||||||||||||||
| Multi-family | ||||||||||||||||
| Construction loans secured by 1-4 family dwellings | ||||||||||||||||
| Construction loans secured by other real estate | ||||||||||||||||
| Residential real estate: | ||||||||||||||||
| Secured by senior liens on 1-4 family dwellings | ||||||||||||||||
| Secured by junior liens on 1-4 family dwellings | ||||||||||||||||
| Home equity line-of-credit loans | ||||||||||||||||
| Consumer | ||||||||||||||||
| Agricultural | ||||||||||||||||
| Other loans, including deposit overdrafts | ||||||||||||||||
| Total | $ | |||||||||||||||
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 to 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 to years and are payable in monthly principal and interest installments. Some have balloon payments due within to years after the origination date. The majority have adjustable interest rates with adjustment periods ranging from to 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
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 to years with monthly principal and interest payments. Home equity lines of credit generally have a 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 to 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
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 $500,000 through $1 million. LCNB also has a loan grade monitoring system in place to track and report loan grades and classifications, enabling the identification and management of non-performing loans. Major factors used in determining loan grades vary based on the nature of the loan, but commonly include factors such as debt service coverage, internal cash flow, liquidity, leverage, operating performance, debt burden, FICO scores, occupancy, interest rate sensitivity, and expense burden. Commercial real estate loans rated OAEM or worse are reviewed at least quarterly for credit deterioration.
A loan is assigned to a risk category based on relevant information about the ability of the borrower to service the debt including, but not limited to, current financial information, historical payment experience, credit documentation, public information, and current economic trends. The categories used are:
| • | Pass – loans categorized in this category are higher quality loans that do not fit any of the other categories described below. |
| • | Other Assets Especially Mentioned ("OAEM") – loans in this category are currently protected but are potentially weak. These loans constitute a risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitute an undue risk in light of the circumstances surrounding a specific asset. |
| • | Substandard – loans in this category are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the possibility that LCNB will sustain some loss if the deficiencies are not corrected. |
| • | Doubtful – loans classified in this category have all the weaknesses inherent in loans classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. |
An independent consultant is contracted to conduct a review of LCNB's loan portfolio on an annual basis. The independent review examines LCNB's underwriting activities, documentation, credit quality, and includes an assessment of proper risk ratings. Loans selected for review include all loans meeting certain pre-determined criteria and a sample of other loans. The independent review provides assurance that LCNB’s loan portfolio and credit quality complies with the policies set forth by the board of directors and senior management and with regulatory requirements.
The following table presents the amortized cost basis of loans by vintage and credit quality indicators at September 30, 2024 and December 31, 2023 (in thousands):
| Term Loans by Origination Year | ||||||||||||||||||||||||||||||||||||
| Revolving | Revolving | |||||||||||||||||||||||||||||||||||
| Loans | Loans | |||||||||||||||||||||||||||||||||||
| Amortized | Converted | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Cost Basis | to Term | Total | ||||||||||||||||||||||||||||
| September 30, 2024 | ||||||||||||||||||||||||||||||||||||
| Commercial & industrial | ||||||||||||||||||||||||||||||||||||
| Pass | $ | |||||||||||||||||||||||||||||||||||
| OAEM | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||
| Gross charge-offs (1) | ||||||||||||||||||||||||||||||||||||
| Commercial, secured by real estate | ||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||
| OAEM | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||
| Gross charge-offs (1) | ||||||||||||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||
| OAEM | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||
| Gross charge-offs (1) | ||||||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||
| OAEM | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||
| Gross charge-offs (1) | ||||||||||||||||||||||||||||||||||||
| Agricultural | ||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||
| OAEM | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||
| Gross charge-offs (1) | ||||||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||
| OAEM | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||
| Gross charge-offs (1) | ||||||||||||||||||||||||||||||||||||
| Total loans | $ | |||||||||||||||||||||||||||||||||||
| (1) - for the nine months ended September 30, 2024. |
| Term Loans by Origination Year | ||||||||||||||||||||||||||||||||||||
| Revolving | Revolving | |||||||||||||||||||||||||||||||||||
| Loans | Loans | |||||||||||||||||||||||||||||||||||
| Amortized | Converted | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Cost Basis | to Term | Total | ||||||||||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||||||||||||
| Commercial & industrial | ||||||||||||||||||||||||||||||||||||
| Pass | $ | |||||||||||||||||||||||||||||||||||
| OAEM | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||
| Gross charge-offs (2) | ||||||||||||||||||||||||||||||||||||
| Commercial, secured by real estate | ||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||
| OAEM | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||
| Gross charge-offs (2) | ||||||||||||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||
| OAEM | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||
| Gross charge-offs (2) | ||||||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||
| OAEM | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||
| Gross charge-offs (2) | ||||||||||||||||||||||||||||||||||||
| Agricultural | ||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||
| OAEM | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||
| Gross charge-offs (2) | ||||||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||
| OAEM | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||
| Gross charge-offs (2) | ||||||||||||||||||||||||||||||||||||
| Total loans | $ | |||||||||||||||||||||||||||||||||||
| (2) - for the year ended December 31, 2023. |
A loan portfolio aging analysis by class segment at September 30, 2024 and December 31, 2023 is as follows (in thousands):
| 90 Days | ||||||||||||||||||||||||||||
| 90 Days | or More | |||||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | or More | Total | Total Loans | Past Due | |||||||||||||||||||||||
| Past Due | Past Due | Past Due | Past Due | Current | Receivable | and Accruing | ||||||||||||||||||||||
| September 30, 2024 | ||||||||||||||||||||||||||||
| Commercial & industrial | $ | |||||||||||||||||||||||||||
| Commercial, secured by real estate: | ||||||||||||||||||||||||||||
| Owner occupied | ||||||||||||||||||||||||||||
| Non-owner occupied | ||||||||||||||||||||||||||||
| Farmland | ||||||||||||||||||||||||||||
| Multi-family | ||||||||||||||||||||||||||||
| Construction loans secured by 1-4 family dwellings | ||||||||||||||||||||||||||||
| Construction loans secured by other real estate | ||||||||||||||||||||||||||||
| Residential real estate: | ||||||||||||||||||||||||||||
| Secured by senior liens on 1-4 family dwellings | ||||||||||||||||||||||||||||
| Secured by junior liens on 1-4 family dwellings | ||||||||||||||||||||||||||||
| Home equity line-of-credit loans | ||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||
| Agricultural | ||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| Total | $ | |||||||||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||||
| Commercial & industrial | $ | |||||||||||||||||||||||||||
| Commercial, secured by real estate: | ||||||||||||||||||||||||||||
| Owner occupied | ||||||||||||||||||||||||||||
| Non-owner occupied | ||||||||||||||||||||||||||||
| Farms | ||||||||||||||||||||||||||||
| Multi-family | ||||||||||||||||||||||||||||
| Construction loans secured by 1-4 family dwellings | ||||||||||||||||||||||||||||
| Construction loans secured by other real estate | ||||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||
| Secured by senior liens on 1-4 family dwellings | ||||||||||||||||||||||||||||
| Secured by junior liens on 1-4 family dwellings | ||||||||||||||||||||||||||||
| Home equity line-of-credit loans | ||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||
| Agricultural | ||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| Total | $ | |||||||||||||||||||||||||||
Residential consumer mortgage loans secured by residential real estate in the process of foreclosure at September 30, 2024 totaled $
From time to time, the terms of certain loans are modified when concessions are granted to borrowers experiencing financial difficulties. Each modification is separately negotiated with the borrower and includes terms and conditions that reflect the borrower's ability to pay the debt as modified. The modification of the terms of such loans may have included one, or a combination of, the following: a temporary or permanent reduction of the stated interest rate of the loan, an increase in the stated rate of interest lower than the current market rate for new debt with similar risk, forgiveness of principal, an extension of the maturity date, or a change in the payment terms.
The following table presents the amortized cost basis at September 30, 2024 of all loan modifications made to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted (in thousands):
| Combination - | Combination - | |||||||||||||||||||||||||||||||
| Interest Rate | Extended | Principal | Payment | Extended Maturity and | Interest Rate Reduction and | Total | Percent of | |||||||||||||||||||||||||
| Reduction | Maturity | Forgiveness | Deferral | Payment Deferral | Payment Deferral | Modifications | Total Class | |||||||||||||||||||||||||
| Three Months Ended September 30, 2024 | ||||||||||||||||||||||||||||||||
| Residential real estate, secured by senior liens on 1-4 family dwellings | % | |||||||||||||||||||||||||||||||
| Consumer | % | |||||||||||||||||||||||||||||||
| Total | $ | |||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2024 | ||||||||||||||||||||||||||||||||
| Residential real estate, secured by senior liens on 1-4 family dwellings | % | |||||||||||||||||||||||||||||||
| Consumer | % | |||||||||||||||||||||||||||||||
| Total | $ | |||||||||||||||||||||||||||||||
The amortized cost basis of loan modifications made to borrowers experiencing financial difficulty during 2023 was zero at September 30, 2023.
Mortgage loans sold to and serviced for the Federal Home Loan Mortgage Corporation and other investors are not included in the accompanying consolidated condensed balance sheets. The unpaid principal balances of those loans at September 30, 2024 and December 31, 2023 were approximately $
NOTE 5 - PURCHASED CREDIT DETERIORATED LOANS
LCNB acquired loans through the merger with EFBI for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of these loans at acquisition on April 12, 2024 is as follows (in thousands):
| Purchase price of loans at acquisition | ||||
| Allowance for credit losses at acquisition | ||||
| Non-credit discount (premium) at acquisition | ||||
| Par value of acquired loans at acquisition | $ |
The following table provides, as of September 30, 2024, the major classifications of purchased credit deteriorated loans acquired from EFBI (in thousands):
| Commercial & industrial | $ | |||
| Commercial, secured by real estate | ||||
| Residential real estate | ||||
| Total | $ |
The following table provides the outstanding balance and related carrying amount for purchased credit deteriorated loans acquired from EFBI as of September 30, 2024 (in thousands):
| Outstanding balance | $ | |||
| Carrying amount |
Activity during 2024 for the accretable discount related to purchased credit deteriorated loans acquired from EFBI and CNNB is as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Accretable discount, beginning of period | $ | |||||||||||||||
| Accretable discount acquired during period from merger with EFBI | ||||||||||||||||
| Less loans transferred to held-for-sale | ||||||||||||||||
| 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 September 30, 2024 and December 31, 2023 (in thousands):
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| 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
The following table presents other information relating to LCNB's affordable housing tax credit investments for the three and nine months ended September 30, 2024 and 2023 (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Tax credits and other tax benefits recognized | $ | |||||||||||||||
| Tax credit amortization expense included in provision for income taxes | ||||||||||||||||
NOTE 7 - DEPOSITS
The following table presents the composition of LCNB's deposits at September 30, 2024 and December 31, 2023 (in thousands):
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Demand deposits | $ | |||||||
| Interest-bearing demand and money fund deposits | ||||||||
| Savings deposits | ||||||||
| IRA and time certificates | ||||||||
| Total | $ | |||||||
Contractual maturities of time deposits at September 30, 2024 were as follows (in thousands):
| Three months or less | $ | |||
| Over three through six months | ||||
| Over six through twelve months | ||||
| October 1, 2024 - September 30, 2025 | ||||
| October 1, 2025 - September 30, 2026 | ||||
| October 1, 2026 - September 30, 2027 | ||||
| October 1, 2027 - September 30, 2028 | ||||
| October 1, 2028 - September 30, 2029 | ||||
| Thereafter | ||||
| $ |
The aggregate amount of time deposits in denominations of $250,000 or more at September 30, 2024 and December 31, 2023 was $
NOTE 8 – BORROWINGS
Long-term debt at September 30, 2024 and December 31, 2023 was as follows (dollars in thousands):
| September 30, 2024 | December 31, 2023 | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
| Term loan | $ | % | $ | % | ||||||||||||
| FHLB long-term advances | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
The term loan with a correspondent financial institution bears a fixed interest rate of
Contractual maturities of long-term debt at September 30, 2024 and December 31, 2023 were as follows (in thousands):
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Maturing within one year | $ | |||||||
| 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 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
Short-term borrowings at September 30, 2024 and December 31, 2023 were as follows (dollars in thousands):
| September 30, 2024 | December 31, 2023 | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
| Lines of credit | $ | % | $ | % | ||||||||||||
| FHLB short-term advances | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
At September 30, 2024, LCNB had a short-term revolving line of credit arrangement with a financial institution for a maximum amount of $
At September 30, 2024, LCNB had overnight line of credit borrowing arrangements with three correspondent financial institutions. Under the terms of the first arrangement, LCNB can borrow up to $
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 $
NOTE 9 - LEASES
Lease expenses for offices are included in the consolidated condensed statements of income in net occupancy expense and lease expenses for equipment and ATMs are included in equipment expense. Components of lease expense for the three and nine months ended September 30, 2024 were as follows (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Operating lease expense | $ | |||||||||||||||
| Short-term lease expense | ||||||||||||||||
| Variable lease expense | ||||||||||||||||
| Other | ||||||||||||||||
| Total lease expense | $ | |||||||||||||||
Other information related to leases at September 30, 2024 were as follows (dollars in thousands):
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flows from operating leases | $ | |||
| 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:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| 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 purposes of this Note 11. For example, the Bounce Protection product, LCNB's deposit overdraft program, is offered as a service by the Bank and does not constitute a contract between the customer and LCNB.
LCNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent off-balance-sheet credit risk at September 30, 2024 and December 31, 2023 were as follows (in thousands):
| September 30, 2024 | December 31, 2023 | |||||||
| Commitments to extend credit: | ||||||||
| Commercial loans | $ | |||||||
| Other loans | ||||||||
| Fixed rate | ||||||||
| Adjustable rate | ||||||||
| Unused lines of credit: | ||||||||
| Fixed rate | ||||||||
| Adjustable rate | ||||||||
| 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 and nine months ended September 30, 2024 and 2023 is as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Balance, beginning of period | $ | |||||||||||||||
| Impact of adopting ASC 326 | ||||||||||||||||
| Acquisition of Eagle Financial Bancorp, Inc. | ||||||||||||||||
| Provision for (recovery of) credit losses | ( | ) | ( | ) | ( | ) | ||||||||||
| Balance, end of period | $ | |||||||||||||||
Capital expenditures include the construction or acquisition of new office buildings, improvements to LCNB's offices, purchases of furniture and equipment, and additions or improvements to LCNB's information technology system. Commitments outstanding for capital expenditures as of September 30, 2024 totaled approximately $
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 and nine months ended September 30, 2024 and 2023 were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
| Changes in | Changes in | |||||||||||||||||||||||
| Unrealized | Pension Plan | Unrealized | Pension Plan | |||||||||||||||||||||
| Losses on | Assets and | Losses on | Assets and | |||||||||||||||||||||
| Available-for- | Benefit | Available-for- | Benefit | |||||||||||||||||||||
| Sale Debt Securities | Obligations | Total | Sale Debt Securities | Obligations | Total | |||||||||||||||||||
| 2024 | ||||||||||||||||||||||||
| Balance at beginning of period | $ | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
| Other comprehensive income (loss), net of taxes | ||||||||||||||||||||||||
| Reclassifications | ||||||||||||||||||||||||
| Balance at end of period | $ | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
| 2023 | ||||||||||||||||||||||||
| Balance at beginning of period | $ | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
| Other comprehensive (loss) income, net of taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Balance at end of period | $ | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
Reclassifications out of accumulated other comprehensive loss during the three and nine months ended September 30, 2024 and 2023 and the affected line items in the condensed consolidated statements of income were as follows (in thousands):
| Three Months Ended | Nine Months Ended | Affected Line Item in the | |||||||||||||||
| September 30, | September 30, | Consolidated Condensed | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | Statements of Income | |||||||||||||
| Realized losses from sales of debt securities, available-for-sale | $ | ( | ) | Net losses from sales of debt securities, available-for-sale | |||||||||||||
| 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. Employees hired before this date who received a benefit reduction under certain amendments to the defined benefit retirement plan receive an automatic contribution of
Employees hired on or after January 1, 2009 receive a
Funding and administrative costs of the qualified noncontributory defined benefit retirement plan and 401(k) plan charged to pension and other employee benefits in the consolidated condensed statements of income for the three and nine-month period ended September 30, 2024 and 2023 were as follows (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Qualified noncontributory defined benefit retirement plan | $ | |||||||||||||||
| 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 $
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
Stock-based awards may be in the form of treasury shares or newly issued shares.
Restricted stock awards granted under the 2015 Plan during the three and nine months ended September 30, 2024 and 2023 were as follows:
| 2024 | 2023 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Grant Date | Grant Date | |||||||||||||||
| Shares | Fair Value | Shares | Fair Value | |||||||||||||
| Nonvested at January 1, | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Vested | ( | ) | ( | ) | ||||||||||||
| Forfeited | ||||||||||||||||
| Nonvested at September 30, | $ | $ | ||||||||||||||
At September 30, 2024, there were
The following table presents expense recorded in salaries and employee benefits for restricted stock awards and the related tax information for the three and nine months ended September 30, 2024 and 2023 (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Restricted stock expense | $ | |||||||||||||||
| Tax effect | ||||||||||||||||
Unrecognized compensation expense for restricted stock awards was $
NOTE 15 – EARNINGS PER COMMON SHARE
LCNB has granted restricted stock awards with non-forfeitable dividend rights, which are considered participating securities. Accordingly, earnings per share is computed using the two-class method as required by ASC No. 260-10-45. Basic earnings per common share is calculated by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period, which excludes the participating securities. Diluted earnings per common share is adjusted for the dilutive effects of stock options, warrants, and restricted stock. The diluted average number of common shares outstanding has been increased for the assumed exercise of stock options and warrants with proceeds used to purchase treasury shares at the average market price for the period.
Earnings per share for the three and nine months ended September 30, 2024 and 2023 were calculated as follows (dollars in thousands, except share and per share data):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net income | $ | |||||||||||||||
| 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 | ||||||||||||||||
| Earnings per common share: | ||||||||||||||||
| Basic | $ | |||||||||||||||
| Diluted | ||||||||||||||||
NOTE 16 - FAIR VALUE MEASUREMENTS
LCNB measures certain assets at fair value using various valuation techniques and assumptions, depending on the nature of the asset. Fair value is defined as the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date.
The inputs to the valuation techniques used to measure fair value are assigned to one of three broad levels:
| • | Level 1 – quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the reporting date. |
| • | Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly. Level 2 inputs may include quoted prices for similar assets in active markets, quoted prices for identical assets or liabilities in markets that are not active, inputs other than quoted prices (such as interest rates or yield curves) that are observable for the asset or liability, and inputs that are derived from or corroborated by observable market data. |
| • | Level 3 – inputs that are unobservable for the asset or liability. |
EQUITY SECURITIES WITH A READILY DETERMINABLE FAIR VALUE
Equity securities with a readily determinable fair value are reported at fair value with changes in fair value reported in other operating income in the consolidated condensed statements of income. Fair values for equity securities are determined based on market quotations (level 1). LCNB has an investment in a mutual fund that is measured at fair value using net asset values, which are considered level 1 because the net asset values are determined and published and are the basis for current transactions.
DEBT SECURITIES, AVAILABLE-FOR-SALE
The majority of LCNB's financial debt securities are classified as available-for-sale. The securities are reported at fair value with unrealized holding gains and losses reported net of income taxes in accumulated other comprehensive income. LCNB utilizes a pricing service for determining the fair values of its debt securities. Methods and significant assumptions used to estimate fair value were as follows:
| • | Fair values for U.S. Treasury notes are determined based on market quotations (level 1). |
| • | Fair values for the other debt securities are calculated using the discounted cash flow method for each security. The discount rates for these cash flows are estimated by the pricing service using rates observed in the market (level 2). Cash flow streams are dependent on estimated prepayment speeds and the overall structure of the securities given existing market conditions. |
ASSETS RECORDED AT FAIR VALUE ON A NONRECURRING BASIS
Assets that may be recorded at fair value on a nonrecurring basis include individually evaluated collateral dependent loans (or impaired loans prior to the adoption of ASC 326), other real estate owned, and other repossessed assets.
LCNB does not record loans at fair value on a recurring basis, except for loans held-for-sale. However, from time to time, nonrecurring fair value adjustments to collateral dependent loans are recorded to reflect partial write-downs or specific reserves that are based on the observable market price or current estimated value of the collateral. These loans are reported in the nonrecurring table below at initial recognition of significant borrower distress and on an ongoing basis until recovery or charge-off. The fair values of distressed loans are determined using either the sales comparison approach or income approach. Respective unobservable inputs for the approaches consist of adjustments for differences between comparable sales and the utilization of appropriate capitalization rates.
The following table summarizes the valuation of LCNB's assets recorded at fair value by input levels as of September 30, 2024 and December 31, 2023 (in thousands):
| Fair Value Measurements at the End of | ||||||||||||||||
| the Reporting Period Using | ||||||||||||||||
| Quoted Prices | Significant | |||||||||||||||
| in Active | Other | Significant | ||||||||||||||
| Markets for | Observable | Unobservable | ||||||||||||||
| Fair Value | Identical Assets | Inputs | Inputs | |||||||||||||
| Measurements | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| September 30, 2024 | ||||||||||||||||
| Recurring fair value measurements: | ||||||||||||||||
| Equity securities with a readily determinable fair value: | ||||||||||||||||
| Equity securities | $ | |||||||||||||||
| Mutual funds measured at net asset value | ||||||||||||||||
| Debt securities, available-for-sale: | ||||||||||||||||
| U.S. Treasury notes | ||||||||||||||||
| U.S. Agency notes | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| U.S. Agency mortgage-backed securities | ||||||||||||||||
| Municipal securities: | ||||||||||||||||
| Non-taxable | ||||||||||||||||
| Taxable | ||||||||||||||||
| Total recurring fair value measurements | $ | |||||||||||||||
| Nonrecurring fair value measurements: | ||||||||||||||||
| Individually evaluated collateral dependent loans | $ | |||||||||||||||
| Total nonrecurring fair value measurements | $ | |||||||||||||||
| December 31, 2023 | ||||||||||||||||
| 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: | ||||||||||||||||
| U.S. Treasury notes | ||||||||||||||||
| U.S. Agency notes | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| U.S. Agency mortgage-backed securities | ||||||||||||||||
| Municipal securities: | ||||||||||||||||
| Non-taxable | ||||||||||||||||
| Taxable | ||||||||||||||||
| 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 September 30, 2024 and December 31, 2023 (dollars in thousands):
| Range | |||||||||||||
| Valuation | Unobservable | Weighted | |||||||||||
| Fair Value | Technique | Inputs | High | Low | Average | ||||||||
| September 30, 2024 | |||||||||||||
| Individually evaluated collateral dependent loans | $ | Estimated sales price | Adjustments for comparable properties, discounts to reflect current market conditions | Not applicable | |||||||||
| December 31, 2023 | |||||||||||||
| Individually evaluated collateral dependent loans | $ | Estimated sales price | Adjustments for comparable properties, discounts to reflect current market conditions | Not applicable | |||||||||
Carrying amounts and estimated fair values of financial instruments as of September 30, 2024 and December 31, 2023 were as follows (in thousands):
| Fair Value Measurements at the End of | ||||||||||||||||||||
| the Reporting Period Using | ||||||||||||||||||||
| Quoted | ||||||||||||||||||||
| Prices | Significant | |||||||||||||||||||
| in Active | Other | Significant | ||||||||||||||||||
| Markets for | Observable | Unobservable | ||||||||||||||||||
| Carrying | Fair | Identical Assets | Inputs | Inputs | ||||||||||||||||
| Amount | Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
| September 30, 2024 | ||||||||||||||||||||
| FINANCIAL ASSETS: | ||||||||||||||||||||
| Cash and cash equivalents | $ | |||||||||||||||||||
| Debt securities, held-to-maturity, net | ||||||||||||||||||||
| Loans, net | ||||||||||||||||||||
| Loans held-for-sale | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| FINANCIAL LIABILITIES: | ||||||||||||||||||||
| Deposits | ||||||||||||||||||||
| Short-term borrowings | ||||||||||||||||||||
| Long-term debt | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||
| FINANCIAL ASSETS: | ||||||||||||||||||||
| Cash and cash equivalents | $ | |||||||||||||||||||
| Debt securities, held-to-maturity, net | ||||||||||||||||||||
| Loans, net | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| FINANCIAL LIABILITIES: | ||||||||||||||||||||
| Deposits | ||||||||||||||||||||
| Short-term borrowings | ||||||||||||||||||||
| Long-term debt | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
The methodology to derive the fair value of loans at September 30, 2024 is consistent with the methodology utilized to determine the fair value of loans acquired in the Company’s recent acquisitions of CNNB and EFBI
Fair values of financial instruments are based on various assumptions, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in actual transactions. In addition, because the required disclosures exclude certain financial instruments and all nonfinancial instruments, any aggregation of the fair value amounts presented would not represent the underlying value of LCNB.
NOTE 17 - SUBSEQUENT EVENT
On September 20, 2024, LCNB received a non-binding letter of intent from a third party intending to purchase a pool of loans with an unpaid principal balance of $
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
Certain statements made in this document regarding LCNB’s financial condition, results of operations, plans, objectives, future performance and business, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by the fact they are not historical facts and include words such as “anticipate”, “could”, “may”, “feel”, “expect”, “believe”, “plan”, and similar expressions. Please refer to LCNB’s Annual Report on Form 10-K for the year ended December 31, 2023, as well as its other filings with the SEC, for a more detailed discussion of risks, uncertainties and factors that could cause actual results to differ from those discussed in the forward-looking statements.
These forward-looking statements reflect management's current expectations based on all information available to management and its knowledge of LCNB’s business and operations. Additionally, LCNB’s financial condition, results of operations, plans, objectives, future performance and business are subject to risks and uncertainties that may cause actual results to differ materially. These factors include, but are not limited to:
| 1. |
the success, impact, and timing of the implementation of LCNB’s business strategies; |
| 2. |
LCNB’s ability to integrate recent and future acquisitions, including CNNB and EFBI, may be unsuccessful or may be more difficult, time-consuming, or costly than expected; |
| 3. |
LCNB may incur increased loan charge-offs in the future and the allowance for credit losses may be inadequate; |
| 4. |
LCNB may face competitive loss of customers; |
| 5. |
changes in the interest rate environment, either by interest rate increases or decreases, may have results on LCNB’s operations materially different from those anticipated by LCNB’s market risk management functions; |
| 6. |
changes in general economic conditions and increased competition could adversely affect LCNB’s operating results; |
| 7. |
changes in regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact LCNB’s operating results; |
| 8. |
LCNB may experience difficulties growing loan and deposit balances; |
| 9. |
United States trade relations with foreign countries could negatively impact the financial condition of LCNB's customers, which could adversely affect LCNB's operating results and financial condition; |
| 10. |
global and/or domestic geopolitical relations and/or conflicts could create financial market uncertainty and have negative impacts on commodities, currency, and stability, which could adversely affect LCNB's operating results and financial condition; |
| 11. |
difficulties with technology or data security breaches, including cyberattacks or widespread outages, could negatively affect LCNB's ability to conduct business and its relationships with customers, vendors, and others; |
| 12. |
adverse weather events and natural disasters and global and/or national epidemics could negatively affect LCNB's customers given its concentrated geographic scope, which could impact LCNB's operating results; and |
| 13. |
government intervention in the U.S. financial system, including the effects of legislative, tax, accounting, and regulatory actions and reforms, including the Dodd-Frank Act, the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau, the capital ratios of Basel III as adopted by the federal banking authorities, changes in deposit insurance premium levels, and any such future regulatory actions or reforms. |
Forward-looking statements made herein reflect management's expectations as of the date such statements are made. Such information is provided to assist shareholders and potential investors in understanding current and anticipated financial operations of LCNB and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. LCNB undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise after the date such statements are made.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Critical Accounting Estimates
The accounting policies of LCNB conform to U.S. generally accepted accounting principles and require management to make estimates and develop assumptions that affect the amounts reported in the financial statements and related footnotes. These estimates and assumptions are based on information available to management as of the date of the financial statements. Actual results could differ significantly from management’s estimates. As this information changes, management’s estimates and assumptions used to prepare LCNB’s financial statements and related disclosures may also change. The most significant accounting policies followed by LCNB are presented in Note 1 of the Notes to Consolidated Financial Statements included in LCNB's 2023 Annual Report on Form 10-K filed with the SEC. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the items described below to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new information becomes available.
Business Combinations. Assets acquired, including identified intangible assets such as core deposit intangibles, and liabilities assumed as a result of a merger or acquisition transaction are recorded at their estimated fair values. The difference between the consideration paid and the net fair value of assets acquired and liabilities assumed is recorded as goodwill. Management engages third-party specialists to assist in the development of fair value estimates. Significant estimates and assumptions used to value acquired assets and liabilities assumed include, but are not limited to, projected cash flows, future growth rates, repayment rates, default rates and losses assuming default, discount rates, and realizable collateral values. The allowance for credit losses for PCD loans is recognized within acquisition accounting. The allowance for credit losses for non-PCD assets is recognized as provision for credit losses in the same reporting period as the merger or acquisition. Fair value adjustments are amortized or accreted into the income statement over the estimated lives of the acquired assets and assumed liabilities. The purchase date valuations and any subsequent adjustments determine the amount of goodwill recognized in connection with the merger or acquisition.
Preliminary estimates of fair values may be adjusted for a period of time no greater than one year subsequent to the merger or acquisition date if new information is obtained about facts and circumstances that existed as of the merger or acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Adjustments recorded during this period are recognized in the current reporting period.
Allowance for Credit Losses. The allowance is maintained at a level LCNB management believes is adequate to absorb estimated credit losses identified and inherent in the loan portfolio. The allowance is established through a provision for credit losses charged as an expense. Loans are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb estimated losses over the contractual terms in the loan portfolio based on evaluations of the collectability of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current and forecasted economic conditions that may affect the borrowers' ability to pay. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU (as subsequently amended by ASU 2018-19) significantly changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. This standard replaced the “incurred loss” approach with an “expected loss” model. Referred to as the CECL model, this standard applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures. The standard also expanded disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance. In addition, entities need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
LCNB adopted CECL effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the allowance of $2.4 million, and a $1.9 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on the Consolidated Balance Sheet, with the $0.5 million tax impact portion being recorded as part of the deferred tax asset in other assets in the condensed consolidated balance sheet.
Accounting for Intangibles. LCNB’s intangible assets are composed primarily of goodwill and core deposit intangibles related to acquisitions of other financial institutions.
Accounting rules require LCNB to determine the fair value of all the assets and liabilities of an acquired entity and to record their fair values on the date of acquisition. LCNB employs a variety of means in determining fair values, including the use of discounted cash flow analysis, market comparisons and projected future revenue streams. For those items for which management concludes that LCNB has the appropriate expertise to determine fair value, management may choose to use its own calculation of fair value. In other cases, where the fair value is not readily determined, consultation with outside parties is used to determine fair value. Once valuations have been determined, the net difference between the price paid for the acquired entity and the fair value of the balance sheet is recorded as goodwill. Goodwill is assessed at least annually for impairment, with any such impairment recognized in the period identified. A more frequent assessment is performed if there are material changes in the market place or within the organizational structure.
Core deposit intangibles acquired from business combinations are initially measured at their estimated fair values and are then amortized on a straight-line basis over their estimated useful lives. Management evaluates whether triggering events or circumstances have occurred that indicate the remaining useful life or carrying value of the amortizing intangible should be revised.
Fair Value Accounting for Debt Securities. Debt securities classified as available-for-sale are recorded at fair value with unrealized gains and losses recorded in other comprehensive income (loss), net of tax. Available-for-sale debt securities in unrealized loss positions are evaluated to determine if the decline in fair value should be recorded in income or in other comprehensive income (loss). LCNB first determines if it intends to sell or if it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criteria is met, the security's amortized cost basis is written down to fair value through income. If neither of these criteria is met, LCNB evaluates whether the decline in fair value resulted from credit factors. In making this determination, management considers, among other factors, the extent to which fair value is less than the amortized cost basis, any changes to the rating of the security by rating agencies, and any adverse conditions specifically related to the security or issuer. If the present value of cash flows expected to be collected is less than the amortized cost basis, a provision is recorded to the allowance for credit losses. Any decline in fair value not recorded through an allowance for credit losses is recognized in accumulated other comprehensive income (loss), net of applicable taxes.
Loans Held-For-Sale. Loans held-for-sale (“LHFS”) represent mortgage loans intended to be sold in the secondary market and other loans that management has an active plan to sell. LHFS are carried at the lower-of-cost-or-fair value as determined on an aggregate basis by type of loan. Any writedowns to fair value upon the transfer of loans to LHFS are reflected in loan charge-offs. Any further decreases are recognized in non-interest income and increases in fair value above the loan cost basis are not recognized until the loans are sold.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Results of Operations
Net income for the respective three and nine months ended September 30, 2024 was $4,532,000 (total basic and diluted earnings per share of $0.31) and $7,372,000 (total basic and diluted earnings per share of $0.53). This compares to net income of $4,070,000 (total basic and diluted earnings per share of $0.37) and $12,921,000 (total basic and diluted earnings per share of $1.16) for the same respective three and nine-month periods in 2023. Results for the 2024 periods were affected by the expenses incurred in connection with the acquisition of Eagle Financial Bancorp, Inc. on April 12, 2024 and Cincinnati Bancorp, Inc. on November 1, 2023.
Net interest income for the three and nine months ended September 30, 2024 was $14,970,000 and $44,082,000, respectively. This compares to net interest income of $13,571,000 and $41,690,000 for the same respective three and nine-month periods in 2023. The increase in net interest income was primarily due to increased loan interest income caused by higher average loan balances and an increase in the average rate earned on the loan portfolio. This increase was partially offset by increased interest expense recognized on higher amounts of average interest-bearing demand and money market deposits, IRA and time certificates, and long-term borrowings and to higher interest expense paid for these liabilities. The higher average loan and deposit balances during the 2024 periods were due to the acquisition of EFBI and CNNB. The increases in average rates earned on loans and paid for deposits and debt is associated with the rapid increase in the Effective Federal Funds Rate. LCNB's tax equivalent net interest margin for the first nine months of 2024 was 2.81%, compared to 3.20% for the same period last year.
LCNB recorded a provision for credit losses of $660,000 and $1,313,000 for the three and nine months ended September 30, 2024, respectively. This compares to net recoveries of credit losses of $114,000 and $141,000 for the same respective three and nine month periods in 2023. The provision for the nine months ended September 30, 2024 includes $763,000 recognized on non-PCD loans acquired through the Eagle Financial Bancorp merger.
Non-interest income for the three and nine months ended September 30, 2024 was $6,407,000 and $14,416,000, respectively. This compares to non-interest income of $3,578,000 and $10,805,000 for the same respective periods in 2023. The increase for both the three and nine-month periods was primarily due to higher amounts of fiduciary income, service charges and fees on deposit accounts, bank-owned life insurance income, and net gains recognized on the sale of residential mortgage loans. Partially offsetting non-interest income during the nine months ended September 30, 2024 was an $843,000 pretax loss on the sale of approximately $48.9 million of below market rate loans acquired from Cincinnati Bancorp during the second quarter.
Non-interest expense for the three and nine months ended September 30, 2024 was $15,387,000 and $48,684,000, respectively, compared to $12,244,000 and $36,847,000 for the same three and nine-month periods in 2023. The increases were primarily due to higher expenses associated with the additional personnel and offices resulting from the acquisitions of Eagle Financial Bancorp and Cincinnati Bancorp and, for the nine month comparative periods, the increase in one-time expenses associated with the two acquisitions.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Net Interest Income
Three Months Ended September 30, 2024 vs. September 30, 2023
LCNB's primary source of earnings is net interest income, which is the difference between earnings from loans and other investments and interest paid on deposits and other liabilities. The following table presents, for the three months ended September 30, 2024 and September 30, 2023, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resulting average yields earned or rates paid.
| Three Months Ended September 30, |
||||||||||||||||||||||||
| 2024 |
2023 |
|||||||||||||||||||||||
| Average |
Interest |
Average |
Average |
Interest |
Average |
|||||||||||||||||||
| Outstanding |
Earned/ |
Yield/ |
Outstanding |
Earned/ |
Yield/ |
|||||||||||||||||||
| Balance |
Paid |
Rate |
Balance |
Paid |
Rate |
|||||||||||||||||||
| (Dollars in thousands) |
||||||||||||||||||||||||
| Loans (1) |
$ | 1,770,330 | 24,342 | 5.47 | % | $ | 1,451,153 | 17,875 | 4.89 | % | ||||||||||||||
| Interest-bearing demand deposits |
15,369 | 209 | 5.41 | % | 10,891 | 152 | 5.54 | % | ||||||||||||||||
| Federal Reserve Bank stock |
6,393 | (1 | ) | (0.06 | )% | 4,652 | — | 0.00 | % | |||||||||||||||
| Federal Home Loan Bank stock |
20,710 | 464 | 8.91 | % | 7,007 | 134 | 7.59 | % | ||||||||||||||||
| Investment securities: |
||||||||||||||||||||||||
| Equity securities |
5,026 | 40 | 3.17 | % | 3,382 | 38 | 4.46 | % | ||||||||||||||||
| Debt securities, taxable |
262,220 | 1,181 | 1.79 | % | 274,494 | 1,296 | 1.87 | % | ||||||||||||||||
| Debt securities, non-taxable (2) |
19,906 | 206 | 4.12 | % | 24,134 | 219 | 3.60 | % | ||||||||||||||||
| Total earnings assets |
2,099,954 | 26,441 | 5.01 | % | 1,775,713 | 19,714 | 4.40 | % | ||||||||||||||||
| Non-earning assets |
277,003 | 203,514 | ||||||||||||||||||||||
| Allowance for credit losses |
(11,281 | ) | (7,958 | ) | ||||||||||||||||||||
| Total assets |
$ | 2,365,676 | $ | 1,971,269 | ||||||||||||||||||||
| Interest-bearing demand and money market deposits |
$ | 585,823 | 3,006 | 2.04 | % | $ | 541,487 | 2,298 | 1.68 | % | ||||||||||||||
| Savings deposits |
367,045 | 274 | 0.30 | % | 379,515 | 129 | 0.13 | % | ||||||||||||||||
| IRA and time certificates |
538,070 | 6,298 | 4.66 | % | 230,030 | 1,999 | 3.45 | % | ||||||||||||||||
| Short-term borrowings |
11 | — | 0.00 | % | 63,018 | 830 | 5.23 | % | ||||||||||||||||
| Long-term debt |
158,419 | 1,850 | 4.65 | % | 72,550 | 841 | 4.60 | % | ||||||||||||||||
| Total interest-bearing liabilities |
1,649,368 | 11,428 | 2.76 | % | 1,286,600 | 6,097 | 1.88 | % | ||||||||||||||||
| Demand deposits |
445,663 | 459,476 | ||||||||||||||||||||||
| Other liabilities |
21,275 | 21,226 | ||||||||||||||||||||||
| Equity |
249,370 | 203,967 | ||||||||||||||||||||||
| Total liabilities and equity |
$ | 2,365,676 | $ | 1,971,269 | ||||||||||||||||||||
| Net interest rate spread (3) |
2.25 | % | 2.52 | % | ||||||||||||||||||||
| Net interest income and net interest margin on a taxable-equivalent basis (4) |
15,013 | 2.84 | % | 13,617 | 3.04 | % | ||||||||||||||||||
| Ratio of interest-earning assets to interest-bearing liabilities |
127.32 | % | 138.02 | % | ||||||||||||||||||||
| (1) |
Includes non-accrual loans and loans held-for-sale. |
| (2) |
Income from tax-exempt securities is included in interest income on a taxable-equivalent basis. Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 21%. |
| (3) |
The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities. |
| (4) |
The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets. |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table presents the changes in taxable-equivalent basis interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the three months ended September 30, 2024 as compared to the same period in 2023. Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each.
| Three Months Ended |
||||||||||||
| September 30, 2024 vs. 2023 |
||||||||||||
| Increase (decrease) attributable to: |
||||||||||||
| Volume |
Rate |
Total |
||||||||||
| (In thousands) |
||||||||||||
| Interest-earning Assets: |
||||||||||||
| Loans |
$ | 4,231 | 2,236 | 6,467 | ||||||||
| Interest-bearing demand deposits |
61 | (4 | ) | 57 | ||||||||
| Federal Reserve Bank stock |
— | (1 | ) | (1 | ) | |||||||
| Federal Home Loan Bank stock |
303 | 27 | 330 | |||||||||
| Investment securities: |
||||||||||||
| Equity securities |
15 | (13 | ) | 2 | ||||||||
| Debt securities, taxable |
(57 | ) | (58 | ) | (115 | ) | ||||||
| Debt securities, non-taxable |
(41 | ) | 28 | (13 | ) | |||||||
| Total interest income |
4,512 | 2,215 | 6,727 | |||||||||
| Interest-bearing Liabilities: |
||||||||||||
| Interest-bearing demand and money market deposits |
199 | 509 | 708 | |||||||||
| Savings deposits |
(4 | ) | 149 | 145 | ||||||||
| IRA and time certificates |
3,414 | 885 | 4,299 | |||||||||
| Short-term borrowings |
(415 | ) | (415 | ) | (830 | ) | ||||||
| Long-term debt |
1,003 | 6 | 1,009 | |||||||||
| Total interest expense |
4,197 | 1,134 | 5,331 | |||||||||
| Net interest income |
$ | 315 | 1,081 | 1,396 | ||||||||
Net interest income on a fully taxable-equivalent basis for the three months ended September 30, 2024 totaled $15,013,000, an increase of $1,396,000 from the comparable period in 2023. Total interest income increased $6,727,000, which was partially offset by an increase in total interest expense of $5,331,000.
The $6,727,000 increase in total interest income was primarily due to a $6,467,000 increase in loan interest income. The increase in loan interest income was primarily due to a $319.2 million increase in average loan balances and secondarily to a 58 basis point (a basis point equals 0.01%) increase in the average rate earned on the loan portfolio due to consistent market rates. Loan balances increased primarily due to loans acquired in the mergers with EFBI and CNNB.
The $5,331,000 increase in total interest expense was primarily due to a $708,000 increase in interest expense for interest-bearing demand and money market deposits, a $4,299,000 increase in interest expense for IRA and time certificates, and a $1,009,000 increase in interest expense for long-term debt. Interest expense on interest-bearing demand and money market deposits increased primarily due to a 36 basis point increase in the average rate paid for these deposits and secondarily to a $44.3 million increase in average deposit balances. Interest expense on IRA and time certificates increased due to a $308.0 million increase in average deposit balances and to a 121 basis point increase in the average rate paid. Deposit balances increased due to a combination of organic growth and to balances obtained in the mergers with EFBI and CNNB.
Interest expense on long-term debt increased primarily due to a $85.9 million increase in the average balance outstanding caused by new FHLB advances, which were used to pay down short-term borrowings, promote loan growth, and increase liquidity.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Market rates were consistent throughout the beginning two months of the quarter as the targeted federal funds rate remained unchanged for the previous ten months. In September of 2024, the FOMC decreased the targeted federal funds rate by 50 basis points.
Nine Months Ended September 30, 2024 vs. September 30, 2023
The following table presents, for the nine months ended September 30, 2024 and September 30, 2023, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resulting average yields earned or rates paid.
| Nine Months Ended September 30, |
||||||||||||||||||||||||
| 2024 |
2023 |
|||||||||||||||||||||||
| Average |
Interest |
Average |
Average |
Interest |
Average |
|||||||||||||||||||
| Outstanding |
Earned/ |
Yield/ |
Outstanding |
Earned/ |
Yield/ |
|||||||||||||||||||
| Balance |
Paid |
Rate |
Balance |
Paid |
Rate |
|||||||||||||||||||
| (Dollars in thousands) |
||||||||||||||||||||||||
| Loans (1) |
$ | 1,770,383 | 71,860 | 5.42 | % | $ | 1,415,719 | 50,781 | 4.80 | % | ||||||||||||||
| Interest-bearing demand deposits |
17,602 | 747 | 5.67 | % | 11,051 | 453 | 5.48 | % | ||||||||||||||||
| Federal Reserve Bank stock |
6,051 | 176 | 3.89 | % | 4,652 | 140 | 4.02 | % | ||||||||||||||||
| Federal Home Loan Bank stock |
19,040 | 1,172 | 8.22 | % | 6,840 | 317 | 6.20 | % | ||||||||||||||||
| Investment securities: |
||||||||||||||||||||||||
| Equity securities |
5,002 | 119 | 3.18 | % | 3,698 | 113 | 4.09 | % | ||||||||||||||||
| Debt securities, taxable |
262,360 | 3,596 | 1.83 | % | 280,998 | 3,962 | 1.89 | % | ||||||||||||||||
| Debt securities, non-taxable (2) |
19,098 | 571 | 3.99 | % | 24,518 | 662 | 3.61 | % | ||||||||||||||||
| Total earnings assets |
2,099,536 | 78,241 | 4.98 | % | 1,747,476 | 56,428 | 4.32 | % | ||||||||||||||||
| Non-earning assets |
266,641 | 200,897 | ||||||||||||||||||||||
| Allowance for credit losses |
(11,064 | ) | (7,782 | ) | ||||||||||||||||||||
| Total assets |
$ | 2,355,113 | $ | 1,940,591 | ||||||||||||||||||||
| Interest-bearing demand and money market deposits |
$ | 625,785 | 10,498 | 2.42 | % | $ | 522,896 | 5,140 | 1.31 | % | ||||||||||||||
| Savings deposits |
369,104 | 787 | 0.28 | % | 396,785 | 402 | 0.14 | % | ||||||||||||||||
| IRA and time certificates |
467,425 | 16,173 | 4.62 | % | 210,407 | 4,675 | 2.97 | % | ||||||||||||||||
| Short-term borrowings |
25,358 | 1,116 | 5.88 | % | 78,916 | 3,142 | 5.32 | % | ||||||||||||||||
| Long-term debt |
157,056 | 5,465 | 4.65 | % | 36,878 | 1,240 | 4.50 | % | ||||||||||||||||
| Total interest-bearing liabilities |
1,644,728 | 34,039 | 2.76 | % | 1,245,882 | 14,599 | 1.57 | % | ||||||||||||||||
| Demand deposits |
446,832 | 469,580 | ||||||||||||||||||||||
| Other liabilities |
20,724 | 21,633 | ||||||||||||||||||||||
| Equity |
242,829 | 203,496 | ||||||||||||||||||||||
| Total liabilities and equity |
$ | 2,355,113 | $ | 1,940,591 | ||||||||||||||||||||
| Net interest rate spread (3) |
2.22 | % | 2.75 | % | ||||||||||||||||||||
| Net interest income and net interest margin on a taxable-equivalent basis (4) |
44,202 | 2.81 | % | 41,829 | 3.20 | % | ||||||||||||||||||
| Ratio of interest-earning assets to interest-bearing liabilities |
127.65 | % | 140.26 | % | ||||||||||||||||||||
| (1) |
Includes non-accrual loans and loans held-for-sale. |
| (2) |
Income from tax-exempt securities is included in interest income on a taxable-equivalent basis. Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 21%. |
| (3) |
The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities. |
| (4) |
The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets. |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table presents the changes in taxable-equivalent basis interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the nine months ended September 30, 2024 as compared to the same period in 2023. Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each.
| Nine Months Ended |
||||||||||||
| September 30, 2024 vs. 2023 |
||||||||||||
| Increase (decrease) attributable to: |
||||||||||||
| Volume |
Rate |
Total |
||||||||||
| (In thousands) |
||||||||||||
| Interest-earning Assets: |
||||||||||||
| Loans |
$ | 13,819 | 7,260 | 21,079 | ||||||||
| Interest-bearing demand deposits |
277 | 17 | 294 | |||||||||
| Federal Reserve Bank stock |
41 | (5 | ) | 36 | ||||||||
| Federal Home Loan Bank stock |
722 | 133 | 855 | |||||||||
| Investment securities: |
||||||||||||
| Equity securities |
34 | (28 | ) | 6 | ||||||||
| Debt securities, taxable |
(258 | ) | (108 | ) | (366 | ) | ||||||
| Debt securities, non-taxable |
(157 | ) | 66 | (91 | ) | |||||||
| Total interest income |
14,478 | 7,335 | 21,813 | |||||||||
| Interest-bearing Liabilities: |
||||||||||||
| Interest-bearing demand and money market deposits |
1,167 | 4,191 | 5,358 | |||||||||
| Savings deposits |
(30 | ) | 415 | 385 | ||||||||
| IRA and time certificates |
7,896 | 3,602 | 11,498 | |||||||||
| Short-term borrowings |
(2,327 | ) | 301 | (2,026 | ) | |||||||
| Long-term debt |
4,180 | 45 | 4,225 | |||||||||
| Total interest expense |
10,886 | 8,554 | 19,440 | |||||||||
| Net interest income |
$ | 3,592 | (1,219 | ) | 2,373 | |||||||
Net interest income on a fully taxable-equivalent basis for the nine months ended September 30, 2024 totaled $44,202,000, an increase of $2,373,000 from the comparable period in 2023. Total interest income increased $21,813,000, which was partially offset by an increase in total interest expense of $19,440,000.
The $21,813,000 increase in total interest income was primarily due to a $21,079,000 increase in loan interest income. The increase in loan interest income was primarily due to a $354.7 million increase in average loan balances and secondarily to a 62 basis point increase in the average rate earned on the loan portfolio due to higher market rates. Loan balances increased primarily due to loans acquired in the mergers with EFBI and CNNB.
The $19,440,000 increase in total interest expense was primarily due to a $5,358,000 increase in interest expense for interest-bearing demand and money market deposits, an $11,498,000 increase in interest expense for IRA and time certificates, and a $4,225,000 increase in interest expense for long-term debt. Interest expense on interest-bearing demand and money market deposits increased primarily due to a 93 basis point increase in the average rate paid for these deposits and secondarily to a $102.9 million increase in average deposit balances. Interest expense on IRA and time certificates increased due to a $257.0 million increase in average deposit balances and to a 165 basis point increase in the average rate paid. Deposit balances increased due to a combination of organic growth and to balances obtained in the mergers with EFBI and CNNB.
Interest expense on long-term debt increased primarily due to a $120.2 million increase in the average balance outstanding caused by new FHLB advances, which were used to pay down short-term borrowings, promote loan growth, and increase liquidity.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Provision and Allowance For Credit Losses
LCNB continuously reviews the loan portfolio for credit risk through the use of its lending and loan review functions. Independent loan reviews analyze specific loans, providing validation that credit risks are appropriately identified, graded, and reported to the Loan Committee, Board of Directors, and the Audit Committee of the Board of Directors. New credits meeting specific criteria are analyzed prior to origination and are reviewed by the Loan Committee, the Loan Committee of the Board of Directors, and the Board of Directors.
The total provision for credit losses is determined based upon management's evaluation as to the amount needed to maintain the allowance for credit losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio. For analysis purposes, the loan portfolio is separated into pools of similar loans. These pools include commercial and industrial loans, owner occupied commercial real estate loans, non-owner occupied commercial real estate loans, real estate loans secured by farms, real estate loans secured by multi-family dwellings, residential real estate loans secured by senior liens on 1-4 family dwellings, residential real estate loans secured by junior liens on 1-4 family dwellings, home equity line of credit loans, consumer loans, loans for agricultural purposes not secured by real estate, construction loans secured by 1-4 family dwellings, construction loans secured by other real estate, and several smaller classifications. Within each pool of loans, LCNB examines a variety of factors to determine the adequacy of the allowance for credit losses, including historic charge-off percentages, overall pool quality, a review of specific problem loans, current economic trends and conditions that may affect borrowers' ability to pay, and the nature, volume, and consistency of the loan pool.
LCNB recorded a provision for credit losses of $660,000 for the third quarter of 2024, compared to a recovery of credit losses of $114,000 for the comparable period in 2023. The provision for the 2024 period included a provision for credit losses on loans of $681,000 and a recovery of credit losses for off-balance-sheet credit exposures of $22,000. The provision for the 2023 period included a provision for credit losses on loans of $9,000 and a recovery of credit losses for off-balance-sheet credit exposures of $123,000. For the nine months ended September 30, 2024, LCNB recorded a provision for credit losses of $1,313,000, compared to a recovery of credit losses of $141,000 for the comparable period in 2023. The provision for the 2024 nine-month period included a provision for credit losses on loans of $1,300,000 and a provision for off-balance-sheet credit exposures of $11,000. The recovery of credit losses for the 2023 nine-month period included a provision for credit losses on loans of $173,000 and a recovery of credit losses for off-balance-sheet credit exposures of $123,000.
The provisions for credit losses on loans during the nine-month 2024 period included $763,000 recognized on non-PCD loans acquired through the EFBI merger and a $1.2 million increase for a commercial real estate, non-owner occupied loan that was individually evaluated for the first time during the first quarter 2024. These increases were largely offset by a recovery of credit losses in the pooled real estate mortgage loan category. The residential real estate mortgage loan category had a recovery of credit losses primarily due to a decrease in loan balances caused by a transfer to the loans held-for-sale category.
Calculating an appropriate level for the allowance and provision for credit losses involves a high degree of management judgment and is, by its nature, imprecise. Revisions may be necessary as more information becomes available or if market conditions change.
Net charge-offs for the three and nine months ended September 30, 2024 totaled $84,000 and $147,000, respectively, compared to net charge-offs of $34,000 and $83,000 for the respective periods in 2023.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Non-Interest Income
A comparison of non-interest income for the three and nine months ended September 30, 2024 and September 30, 2023 is as follows (in thousands):
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||
| September 30, |
September 30, |
|||||||||||||||||||||||
| 2024 |
2023 |
Difference |
2024 |
2023 |
Difference |
|||||||||||||||||||
| Fiduciary income |
$ | 2,097 | 1,736 | 361 | 6,137 | 5,263 | 874 | |||||||||||||||||
| Service charges and fees on deposit accounts |
1,899 | 1,397 | 502 | 4,820 | 4,324 | 496 | ||||||||||||||||||
| Net losses from sales of debt securities, available-for-sale |
— | — | — | (214 | ) | — | (214 | ) | ||||||||||||||||
| Bank-owned life insurance income |
654 | 282 | 372 | 1,313 | 830 | 483 | ||||||||||||||||||
| Net gains from sales of loans |
1,625 | 29 | 1,596 | 2,197 | 38 | 2,159 | ||||||||||||||||||
| Other operating income (loss) |
132 | 134 | (2 | ) | 163 | 350 | (187 | ) | ||||||||||||||||
| Total non-interest income |
$ | 6,407 | 3,578 | 2,829 | 14,416 | 10,805 | 3,611 | |||||||||||||||||
Reasons for changes include:
| • |
Fiduciary income increased primarily due to increases in the fair values of trust and brokerage assets managed, on which fees are based. The increases in fair value are due to the opening of new Wealth Management customer accounts and to an increase in the market values of managed assets. |
| • |
Service charges and fees on deposit accounts increased primarily due to increases in check card income, ATM usage fees, and fee income received on the ICS product, partially offset by a decrease in overdraft fees and deposit account fees in general. LCNB reduced overdraft fees from $35 per occurrence to $25 effective November 1, 2023. |
| • |
Net losses from sales of debt securities during the nine months ended September 30, 2024 reflect losses recognized on the sale of municipal securities with an amortized cost basis of approximately $9.8 million. |
| • | Bank-owned life insurance ("BOLI") income increased primarily due to mortality proceeds recognized during 2024. The 2023 periods did not include mortality proceeds. Other BOLI income increased to a lesser extent due to insurance policies acquired in the mergers with EFBI and CNNB. | |
| • |
Net gains from sales of loans increased due to a higher volume of residential real estate loan sales. Partially offsetting these gains for the nine-month period was an $843,000 pretax loss on the sale of approximately $48.9 million of below market rate loans acquired from CNNB. |
| • |
Other operating income decreased during the nine-month period primarily due to an increase in amortization of capitalized mortgage servicing rights, which amortization is netted for accounting purposes against fee income recognized from the servicing of sold residential mortgage loans. |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Non-Interest Expense
A comparison of non-interest expense for the three and nine months ended September 30, 2024 and September 30, 2023 is as follows (in thousands):
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||
| September 30, |
September 30, |
|||||||||||||||||||||||
| 2024 |
2023 |
Difference |
2024 |
2023 |
Difference |
|||||||||||||||||||
| Salaries and employee benefits |
$ | 9,025 | 7,044 | 1,981 | 26,585 | 21,454 | 5,131 | |||||||||||||||||
| Equipment expenses |
420 | 397 | 23 | 1,205 | 1,175 | 30 | ||||||||||||||||||
| Occupancy expense, net |
966 | 805 | 161 | 2,915 | 2,367 | 548 | ||||||||||||||||||
| State financial institutions tax |
505 | 396 | 109 | 1,409 | 1,189 | 220 | ||||||||||||||||||
| Marketing |
320 | 223 | 97 | 704 | 735 | (31 | ) | |||||||||||||||||
| Amortization of intangibles |
304 | 113 | 191 | 838 | 336 | 502 | ||||||||||||||||||
| FDIC insurance premiums, net |
547 | 224 | 323 | 1,445 | 663 | 782 | ||||||||||||||||||
| Contracted services |
807 | 671 | 136 | 2,435 | 1,978 | 457 | ||||||||||||||||||
| Merger-related expenses |
281 | 302 | (21 | ) | 3,376 | 742 | 2,634 | |||||||||||||||||
| Other non-interest expense |
2,212 | 2,069 | 143 | 7,772 | 6,208 | 1,564 | ||||||||||||||||||
| Total non-interest expense |
$ | 15,387 | 12,244 | 3,143 | 48,684 | 36,847 | 11,837 | |||||||||||||||||
Reasons for changes include:
| • |
Salaries and employee benefits increased due to overall wage and benefit increases, an increased number of employees due to the acquisition of EFBI and CNNB, higher sales commissions, and higher health insurance costs. |
| • |
Occupancy expense increased primarily due to increased utility and depreciation expenses caused by the additional offices acquired from EFBI and CNNB. Maintenance and repair costs related to LCNB's office facilities also contributed to the increase for the nine-month period. |
| • |
Amortization of intangibles increased due to the amortization of core deposit intangibles recognized from the acquisitions of EFBI and CNNB. |
| • |
FDIC insurance premiums increased due to a higher assessment base, partially reflecting increased assets resulting from the acquisitions of EFBI and CNNB, and to an increase in the assessment rate charged. |
| • |
Merger-related expenses reflect costs incurred in connection with the acquisitions of EFBI and CNNB. |
| • |
Other non-interest expense for the 2024 third quarter benefited from a $454,000 gain recognized on the sale of a closed office building. Likewise, the 2023 second quarter benefited from a $425,000 gain recognized on the sale of a closed office building. The remaining net increases for the three and nine-month periods can be attributed to smaller increases in various other accounts. |
Income Taxes
LCNB's effective tax rate for the three and nine months ended September 30, 2024 was 15.0% and 13.3%, respectively, compared to 18.9% and 18.2% for the same respective periods in 2023. The difference between the statutory rate of 21% and the effective tax rates is primarily due to tax-exempt interest income from municipal securities, tax-exempt earnings from bank-owned life insurance, tax-exempt earnings from LCNB Risk Management, Inc., and tax credits and losses related to investments in affordable housing tax credit limited partnerships. The effective tax rates for 2024 were lower due to tax-exempt items not decreasing in proportion to the overall decrease in earnings.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Financial Condition
A comparison of balance sheet line items at September 30, 2024 and December 31, 2023 is as follows (dollars in thousands):
| September 30, 2024 |
December 31, 2023 |
Difference $ |
Difference % |
|||||||||||||
| ASSETS: |
||||||||||||||||
| Total cash and cash equivalents |
$ | 39,374 | 39,723 | (349 | ) | (0.88 | )% | |||||||||
| Investment securities: |
||||||||||||||||
| Equity securities with a readily determinable fair value, at fair value |
1,388 | 1,336 | 52 | 3.89 | % | |||||||||||
| Equity securities without a readily determinable fair value, at cost |
3,666 | 3,666 | — | 0.00 | % | |||||||||||
| Debt securities, available-for-sale, at fair value |
262,622 | 276,601 | (13,979 | ) | (5.05 | )% | ||||||||||
| Debt securities, held-to-maturity, net, at cost |
18,730 | 16,858 | 1,872 | 11.10 | % | |||||||||||
| Federal Reserve Bank stock, at cost |
6,429 | 5,086 | 1,343 | 26.41 | % | |||||||||||
| Federal Home Loan Bank stock, at cost |
20,710 | 15,176 | 5,534 | 36.47 | % | |||||||||||
| Loans, net |
1,707,193 | 1,712,946 | (5,753 | ) | (0.34 | )% | ||||||||||
| Loans held-for-sale |
35,687 | — | 35,687 | NM | ||||||||||||
| Premises and equipment, net |
41,233 | 36,302 | 4,931 | 13.58 | % | |||||||||||
| Operating lease right-of-use assets |
5,853 | 6,000 | (147 | ) | (2.45 | )% | ||||||||||
| Goodwill |
90,209 | 79,509 | 10,700 | 13.46 | % | |||||||||||
| Core deposit and other intangibles |
11,605 | 9,494 | 2,111 | 22.24 | % | |||||||||||
| Bank-owned life insurance |
53,650 | 49,847 | 3,803 | 7.63 | % | |||||||||||
| Interest receivable |
9,450 | 8,405 | 1,045 | 12.43 | % | |||||||||||
| Other assets |
39,109 | 30,643 | 8,466 | 27.63 | % | |||||||||||
| Total assets |
$ | 2,346,908 | 2,291,592 | 55,316 | 2.41 | % | ||||||||||
| LIABILITIES: |
||||||||||||||||
| Deposits: |
||||||||||||||||
| Non-interest-bearing |
$ | 446,626 | 462,267 | (15,641 | ) | (3.38 | )% | |||||||||
| Interest-bearing |
1,470,379 | 1,362,122 | 108,257 | 7.95 | % | |||||||||||
| Total deposits |
1,917,005 | 1,824,389 | 92,616 | 5.08 | % | |||||||||||
| Short-term borrowings |
— | 97,395 | (97,395 | ) | (100.00 | )% | ||||||||||
| Long-term debt |
155,662 | 113,123 | 42,539 | 37.60 | % | |||||||||||
| Operating lease liabilities |
6,152 | 6,261 | (109 | ) | (1.74 | )% | ||||||||||
| Accrued interest and other liabilities |
14,843 | 15,121 | (278 | ) | (1.84 | )% | ||||||||||
| Total liabilities |
2,093,662 | 2,056,289 | 37,373 | 1.82 | % | |||||||||||
| SHAREHOLDERS' EQUITY: |
||||||||||||||||
| Common shares |
186,716 | 173,637 | 13,079 | 7.53 | % | |||||||||||
| Retained earnings |
138,325 | 140,017 | (1,692 | ) | (1.21 | )% | ||||||||||
| Treasury shares, at cost |
(56,015 | ) | (56,015 | ) | — | 0.00 | % | |||||||||
| Accumulated other comprehensive loss, net of taxes |
(15,780 | ) | (22,336 | ) | 6,556 | (29.35 | )% | |||||||||
| Total shareholders' equity |
253,246 | 235,303 | 17,943 | 7.63 | % | |||||||||||
| Total liabilities and shareholders' equity |
$ | 2,346,908 | 2,291,592 | 55,316 | 2.41 | % | ||||||||||
NM - Not Meaningful
Reasons for changes include:
| • |
Available-for-sale debt securities decreased due to maturities, paydowns, sales, and calls, partially offset by purchases of new securities and increases in market valuation. |
| • |
Net loans decreased primarily due to loans transferred to the held-for-sale category, partially offset by the addition of loans acquired through the merger with EFBI. During the nine months ended September 30, 2024, approximately $104.3 million of single-family residential loans were sold in secondary market. |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
| • | Goodwill increased primarily due to additional goodwill recorded as a result of the merger with EFBI and secondarily to goodwill adjustments for the merger with CNNB. | |
| • | Core deposit and other intangibles increased due to the addition of a core deposit intangible rights obtained in the merger with EFBI. | |
| • |
Total deposits increased due to a combination of deposits acquired through the merger with EFBI and through organic deposit growth. There was, however, significant movement from non-interest-bearing deposits to interest-bearing deposits during 2023 and 2024, likely due to the increases in market rates. |
| • |
Long-term debt increased due to additional advances from the FHLB of Cincinnati. The new debt was used to pay down short-term borrowings and to support growth in liquidity and the loan portfolio. |
| • |
Common shares increased primarily due to stock issued as part of the acquisition price for EFBI. |
|
| • | Accumulated other comprehensive loss, net of taxes decreased because of market-driven partial recoveries in the fair value of LCNB's available-for-sale debt securities investments. |
LCNB's loan portfolio represents its largest asset category and is its most significant source of interest income. Loan classifications have been identified as Commercial & Industrial, Commercial Real Estate, Residential Real Estate, Consumer, Agricultural, and Other. Commercial real estate is the largest classification in LCNB's loan portfolio, comprising about 64% of total loans at September 30, 2024.
Loans secured by commercial real estate consist of owner-occupied, non-owner-occupied, farmland, multi-family, and construction loans. A commercial real estate, owner-occupied loan finances the purchase, construction, or refinance of a building or other property for which the repayment of principal is dependent upon cash flows from ongoing operations conducted by the party, or an affiliate of the party, who owns the property. A commercial real estate, non-owner occupied loan finances the purchase, construction or refinance of a building or other property for which the repayment of principal is dependent upon rental income associated with the property or the subsequent sale of the property. The values of these loans are primarily impacted by the level of interest rates associated with the debt and to local economic conditions, which dictate occupancy rates and the amount of rent charged. The increase in debt service due to higher interest rates may not be able to be passed on to tenants. As part of the origination process, loan interest rates and occupancy rates are stressed to determine the impact on the borrower’s ability to maintain adequate debt service under different economic conditions. Further, LCNB monitors the concentration in any one industry and has established limits relative to the total of the Bank's tier 1 and tier 2 capital for each category of loan. Credit quality trends are monitored by industry to determine if a change in the risk exposure to a certain industry may warrant a change in underwriting standards.
The following table provides a breakdown of amortized cost of commercial real estate loans by property-type classification as of September 30, 2024, excluding loans which are junior in lien or covered by collateral secured with varying classes of assets (dollars in thousands):
| Amount |
% of Total |
|||||||
| Multi-family |
$ | 261,558 | 26 | % | ||||
| Retail |
163,800 | 16 | % | |||||
| Office |
124,168 | 12 | % | |||||
| Mixed use |
97,455 | 10 | % | |||||
| Hotel/Motel |
87,147 | 9 | % | |||||
| Self storage |
46,274 | 5 | % | |||||
| Warehouse (one tenant) |
43,828 | 4 | % | |||||
| Light industrial |
31,444 | 3 | % | |||||
| Healthcare facilities |
25,092 | 3 | % | |||||
| Manufacturing |
20,301 | 2 | % | |||||
| Warehouse (more than one tenant) |
17,737 | 2 | % | |||||
| Dental |
10,853 | 1 | % | |||||
| Other |
69,369 | 7 | % | |||||
| Total |
$ | 999,026 | 100 | % | ||||
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Most of LCNB's commercial real estate loans are made within its general market area of Southwest and South-Central Ohio and Northern Kentucky. The following table provides a breakdown of amortized cost of commercial real estate loans by real estate collateral location as of September 30, 2024, excluding loans which are junior in lien or covered by collateral secured with varying classes of assets (dollars in thousands):
| Amount |
% of Total |
|||||||
| Franklin County, Ohio |
$ | 290,624 | 29 | % | ||||
| Hamilton County, Ohio |
197,976 | 20 | % | |||||
| Butler County, Ohio |
91,764 | 9 | % | |||||
| Warren County, Ohio |
88,364 | 9 | % | |||||
| Montgomery County, Ohio |
87,214 | 9 | % | |||||
| Delaware County, Ohio |
40,258 | 4 | % | |||||
| Boone County, Kentucky |
29,443 | 3 | % | |||||
| Greene County, Ohio |
28,225 | 3 | % | |||||
| Kenton County, Kentucky |
20,865 | 2 | % | |||||
| Clermont County, Ohio |
19,130 | 2 | % | |||||
| Licking County, Ohio |
14,871 | 1 | % | |||||
| Fayette County, Ohio |
13,578 | 1 | % | |||||
| Other, Ohio |
65,305 | 7 | % | |||||
| Other, Kentucky |
7,110 | 1 | % | |||||
| Other, Indiana |
3,425 | 0 | % | |||||
| Other, West Virginia |
874 | 0 | % | |||||
| Total |
$ | 999,026 | 100 | % | ||||
Regulatory Capital
The Bank must meet certain minimum capital requirements set by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company's and the Bank's financial statements. LCNB’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.
In addition to the minimum capital requirements, a financial institution needs to maintain a Capital Conservation Buffer composed of Common Equity Tier 1 Capital of at least 2.5% above its minimum risk-weighted capital requirements to avoid limitations on its ability to make capital distributions, including dividend payments to shareholders and certain discretionary bonus payments to executive officers. A financial institution with a buffer below 2.5% is subject to increasingly stringent limitations on capital distributions as the buffer approaches zero.
For various regulatory purposes, financial institutions are classified into categories based upon capital adequacy:
| Minimum |
||||||||||||
| Requirement |
To Be |
|||||||||||
| with Capital |
Considered |
|||||||||||
| Minimum |
Conservation |
Well- |
||||||||||
| Requirement |
Buffer |
Capitalized |
||||||||||
| Ratio of Common Equity Tier 1 Capital to risk-weighted assets |
4.5 | % | 7.0 | % | 6.5 | % | ||||||
| Ratio of Tier 1 Capital to risk-weighted assets |
6.0 | % | 8.5 | % | 8.0 | % | ||||||
| Ratio of Total Capital (Tier 1 Capital plus Tier 2 Capital) to risk-weighted assets |
8.0 | % | 10.5 | % | 10.0 | % | ||||||
| Leverage Ratio (Tier 1 Capital to adjusted quarterly average total assets) |
4.0 | % | NA |
5.0 | % | |||||||
As of the most recent notification from their regulators, the Bank and LCNB were categorized as "well-capitalized" under the regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since the last notification that would change the Bank's or LCNB's category.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
A summary of the Bank's regulatory capital and capital ratios follows (dollars in thousands):
| September 30, 2024 |
December 31, 2023 |
|||||||
| Regulatory Capital: |
||||||||
| Shareholders' equity |
$ | 259,897 | 242,528 | |||||
| Goodwill and other intangibles |
(98,518 | ) | (84,897 | ) | ||||
| Accumulated other comprehensive loss, net |
15,775 | 22,336 | ||||||
| Tier 1 risk-based capital |
177,154 | 179,967 | ||||||
| Eligible allowance for credit losses |
11,735 | 10,318 | ||||||
| Total risk-based capital |
$ | 188,889 | 190,285 | |||||
| Capital ratios: |
||||||||
| Common Equity Tier 1 Capital to risk-weighted assets |
9.81 | % | 10.17 | % | ||||
| Tier 1 Capital to risk-weighted assets |
9.81 | % | 10.17 | % | ||||
| Total Capital to risk-weighted assets |
10.46 | % | 10.75 | % | ||||
| Leverage |
7.74 | % | 8.05 | % | ||||
Qualifications for community banking organizations to use a simplified measure of capital adequacy approach include having a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the Community Bank Leverage Ratio framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. LCNB qualifies to use the simplified measure, but did not opt in for the September 30, 2024 regulatory capital calculations.
Liquidity
LCNB Corp. depends on dividends from the Bank for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders. Federal banking law limits the amount of dividends the Bank may pay to the sum of retained net income for the current year plus retained net income for the previous two years. Prior approval from the OCC, the Bank's primary regulator, is necessary for the Bank to pay dividends in excess of this amount. If dividends exceed net income for a year, a bank is generally not required to carry forward the negative amount resulting from such excess if the bank can attribute the excess to the preceding two years. If the excess is greater than the Bank's previously undistributed net income for the preceding two years, prior OCC approval of the dividend is required and a negative amount would be carried forward in future dividend calculations. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines.
At December 31, 2023, the Bank had paid $650,000 in excess of the previous two years' Bank net income to the holding company due to an $8.75 million dividend for the acquisition of CNNB. In addition, dividend payments during 2024 were also in excess of the previous two years' Bank net income due to a $10.5 million dividend for the acquisition of EFBI. The Company does not expect the excess dividends will result in any adverse supervisory action by the OCC.
Effective liquidity management ensures that cash is available to meet the cash flow needs of borrowers and depositors, pay dividends to shareholders, and meet LCNB's operating cash needs. Primary funding sources include customer deposits with the Bank, short-term and long-term borrowings from the Federal Home Loan Bank, line of credit arrangements totaling $115.0 million with three correspondent banks, and interest and repayments received from LCNB's loan and investment portfolios. In addition, LCNB has approximately $162 million in off-balance sheet insured cash sweeps immediately available for liquidity.
Total remaining borrowing capacity with the Federal Home Loan Bank at September 30, 2024 was approximately $120.9 million. Additional borrowings of approximately $115.0 million were available through line of credit arrangements with correspondent banks.
Management closely monitors the level of liquid assets available to meet ongoing funding needs. It is management's intent to maintain adequate liquidity so that sufficient funds are readily available at a reasonable cost. LCNB experienced no liquidity or operational problems as a result of current liquidity levels. Management believes LCNB has the ability to generate and obtain adequate amounts of liquidity to meet its requirements in the short and long-term.
Commitments to extend credit at September 30, 2024 totaled $349.8 million and are more fully described in Note 11 - Commitments and Contingent Liabilities to LCNB's condensed consolidated financial statements. Since many commitments to extend credit may expire without being drawn upon, the total commitment amount does not necessarily represent future cash required to satisfy the commitment reported prior to its expiration.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk for LCNB is primarily due to interest rate risk. LCNB attempts to mitigate this risk through asset/liability management strategies designed to decrease the vulnerability of its earnings to material and prolonged changes in interest rates. LCNB does not use derivatives such as interest rate swaps, caps, or floors to hedge this risk. LCNB has not entered into any market risk instruments for trading purposes.
The Bank's Asset and Liability Management Committee primarily uses a combination of Interest Rate Sensitivity Analysis ("IRSA") and Economic Value of Equity ("EVE") analysis for measuring and managing interest rate risk. IRSA is used to estimate the effect on net interest income ("NII") during a one-year period of instantaneous and sustained movements in interest rates, also called interest rate shocks, of 100, 200, and 300 basis points. The base projection uses a current interest rate scenario. As shown below, the September 30, 2024 IRSA indicates that an increase in interest rates or a decrease in interest rates of 100 basis points will have a negative effect on NII and a decrease in interest rates of 200 or 300 basis points will have a positive effect on NII. The changes in NII for all rate assumptions are within LCNB's acceptable ranges.
| $ Change in |
% Change in |
|||||||||||||||
| Rate Shock Scenario in Basis Points |
Amount |
NII |
NII |
Limits |
||||||||||||
| (Dollars in thousands) |
||||||||||||||||
| Up 300 |
$ | 74,740 | (1,332 | ) | (1.75 | )% | 15 | % | ||||||||
| Up 200 |
75,171 | (901 | ) | (1.19 | )% | 10 | % | |||||||||
| Up 100 |
75,428 | (644 | ) | (0.85 | )% | 5 | % | |||||||||
| Base |
76,072 | — | — | % | — | % | ||||||||||
| Down 100 |
75,877 | (195 | ) | (0.26 | )% | 5 | % | |||||||||
| Down 200 |
76,110 | 38 | 0.05 | % | 10 | % | ||||||||||
| Down 300 |
76,244 | 172 | 0.23 | % | 15 | % | ||||||||||
The IRSA shows the effect on NII during a one-year period only. A more long-range model is the EVE analysis, which shows, accounting for the same rate shocks, the estimated present value of future cash inflows from interest-earning assets less the present value of future cash outflows for interest-bearing liabilities for the same rate shocks. As shown below, the September 30, 2024 EVE analysis indicates that an increase in interest rates will have a negative effect on the EVE and a decrease in interest rates will have a positive effect on the EVE. The changes in the EVE for all upward rate shocks are within LCNB's acceptable ranges. The changes in the EVE for the down 200 and 300 basis point rate shocks are outside LCNB's acceptable ranges as shown below. Management has determined the downward shifts would be acceptable, despite being outside of acceptable ranges, due to the positive nature of the results with respect to cash flows.
| $ Change in |
% Change in |
|||||||||||||||
| Rate Shock Scenario in Basis Points |
Amount |
EVE |
EVE |
Limits |
||||||||||||
| (Dollars in thousands) |
||||||||||||||||
| Up 300 |
$ | 158,722 | (36,037 | ) | (18.50 | )% | 25 | % | ||||||||
| Up 200 |
175,726 | (19,034 | ) | (9.77 | )% | 20 | % | |||||||||
| Up 100 |
192,724 | (2,036 | ) | (1.05 | )% | 15 | % | |||||||||
| Base |
194,760 | — | — | % | — | % | ||||||||||
| Down 100 |
222,702 | 27,942 | 14.35 | % | 15 | % | ||||||||||
| Down 200 |
236,782 | 42,022 | 21.58 | % | 20 | % | ||||||||||
| Down 300 |
246,248 | 51,488 | 26.44 | % | 25 | % | ||||||||||
The IRSA and EVE simulations discussed above are not projections of future income or equity and should not be relied on as being indicative of future operating results. Assumptions used, including the nature and timing of interest rate levels, yield curve conditions, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment or replacement of asset and liability cash flows, are inherently uncertain and, as a result, the models cannot precisely measure future NII or equity. Furthermore, the models do not reflect actions that borrowers, depositors, and management may take in response to changing economic conditions and interest rate levels.
Item 4. Controls and Procedures
a) Disclosure controls and procedures. The Chief Executive Officer and the Chief Financial Officer have carried out an evaluation of the effectiveness of LCNB's disclosure controls and procedures that ensure that information relating to LCNB required to be disclosed by LCNB in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to LCNB's management, including its principal executive officer and principal financial officer, as appropriate, in order to allow timely decisions to be made regarding required disclosures. Based upon this evaluation, these officers have concluded that, as of September 30, 2024, LCNB's disclosure controls and procedures were effective.
b) Changes in internal control over financial reporting. During the period covered by this report, there were no changes in LCNB's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, LCNB's internal control over financial reporting.
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, 2023.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
During the period covered by this report, LCNB did not sell any of its securities that were not registered under the Securities Act.
Under the Issuer Stock Repurchase Plan Agreement (the "Plan"), LCNB may purchase common shares through various means such as open market transactions, including block purchases and privately negotiated transactions. The number of shares repurchased and the timing, manner, price and amount of any repurchases are determined at LCNB's discretion. Factors include, but are not limited to, share price, trading volume, and general market conditions, along with LCNB’s general business conditions. The Plan may be suspended or discontinued at any time and does not obligate LCNB to acquire any specific number of its common shares.
As part of the Plan, LCNB entered into a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The 10b5-1 trading plan permits common shares to be repurchased at times that LCNB might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. The 10b5-1 trading plan is administered by an independent broker and is subject to price, market volume, and timing restrictions.
The following table sets forth information relating to repurchases made under the Plan during the three months ended September 30, 2024:
| Total Number of |
Maximum Number |
|||||||||||||||
| Shares Purchased |
of Shares that May |
|||||||||||||||
| Total Number |
as Part of Publicly |
Yet Be Purchased |
||||||||||||||
| of Shares |
Average Price |
Announced Plans |
Under the Plans |
|||||||||||||
| Period |
Purchased |
Paid Per Share |
or Programs |
or Programs |
||||||||||||
| July 1 - 31, 2024 |
— | $ | — | — | 315,047 | |||||||||||
| August 1 - 31, 2024 |
— | $ | — | — | 315,047 | |||||||||||
| September 1 - 30, 2024 |
— | $ | — | — | 315,047 | |||||||||||
On February 27, 2023, LCNB's Board of Directors authorized the Plan. Under the terms of the Plan, LCNB is authorized to repurchase up to 500,000 of its outstanding common shares. The Plan replaced and superseded LCNB’s prior Issuer Stock Repurchase Plan Agreement, which was adopted on May 27, 2022.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
During the three months ended September 30, 2024, 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 |
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| 2.2 |
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| 3.1 |
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| 3.2 |
|
| 10.1 |
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| 10.2 |
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| 10.3 |
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| 10.4 |
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| 10.5 |
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| 10.6 |
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| 10.7 |
|
| 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 |
|
| 101 |
The following financial information from LCNB Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2024 is formatted in Extensible Business Reporting Language: (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Income, (iii) the Consolidated Condensed Statements of Comprehensive Income, (iv) the Consolidated Condensed Statements of Shareholders' Equity, (v) the Consolidated Condensed Statements of Cash Flows, and (vi) the Notes to Consolidated Condensed Financial Statements. |
| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| LCNB Corp. |
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| November 6, 2024 |
/s/ Eric J. Meilstrup |
|
| Eric J. Meilstrup |
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| Chief Executive Officer and President |
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| November 6, 2024 |
/s/ Robert C. Haines, II |
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| Robert C. Haines, II |
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| Executive Vice President and Chief Financial Officer |
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