# LCNB CORP (LCNB) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from LCNB CORP's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1074902/000107490224000060/lcnb-20231231.htm
Accession: 0001074902-24-000060
Filing date: 2024-03-15
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/LCNB/
All MD&A years: /company/LCNB/mda/
Previous year: /company/LCNB/mda/fy2022/ (FY 2022)
Next year: /company/LCNB/mda/fy2024/ (FY 2024)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction

This discussion and analysis of the consolidated financial condition and consolidated results of operations of LCNB is intended to amplify certain financial information regarding LCNB and should be read in conjunction with the consolidated financial statements and related notes thereto contained in this Annual Report to Shareholders on Form 10-K.

Overview

Net income for 2023 was $12,628,000 (basic and diluted earnings per share of $1.10), compared to $22,128,000 (basic and diluted earnings per share of $1.93) in 2022 and $20,974,000 (basic and diluted earnings per share of $1.66) in 2021.

The following items affected financial position and results of operations for the years indicated:

•Cincinnati Bancorp, Inc. merged with and into LCNB Corp. on November 1, 2023.

•Eagle Financial Bancorp, Inc. is expected to merge with and into LCNB Corp. during the second quarter 2024.

•Merger related expenses connected with the above two acquisitions totaled $4,656,000 during 2023.

•Net interest income in 2023 was $56,349,000, compared to $61,042,000 in 2022 and $57,124,000 in 2021.

•The provision for credit losses in 2023 totaled $2,077,000, compared to a provision of $250,000 for 2022 and a recovery of $269,000 for 2021. Included in the provision for credit losses for 2023 was a $1,722,000 provision expense related to loans acquired through the Cincinnati Federal acquisition that were not considered purchased with credit deterioration ("non-PCD loans").

•Net gains from sales of loans totaled $697,000 in 2023, $196,000 in 2022, and $852,000 in 2021. Gains were lower in 2022 primarily due to the volume of loans sold.

•Other non-interest expense for 2023 was partially offset by a $425,000 gain recognized on the sale of an office building as a result of LCNB's branch consolidation strategy.

•Other non-interest expense for 2022 included $471,000 in losses from the sales of two office buildings as a result of LCNB's branch consolidation strategy.

•Other non-interest expense for 2022 was partially offset by an $889,000 gain recognized from the sale of other real estate owned.

Net Interest Income

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 years indicated, 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.

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LCNB CORP. AND SUBSIDIARIES

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

[[GREPCENT_TABLE]]
[["","Years ended December 31,"],["","2023","","2022","","2021"],["","Average Outstanding Balance","","Interest Earned/ Paid","","Average Yield/ Rate","","Average Outstanding Balance","","Interest Earned/ Paid","","Average Yield/ Rate","","Average Outstanding Balance","","Interest Earned/ Paid","","Average Yield/ Rate"],["","(Dollars in thousands)"],["Loans (1)","$","1,467,981","","","$","71,894","","","4.90","%","","$","1,380,272","","","$","59,247","","","4.29","%","","$","1,329,072","","","$","56,142","","","4.22","%"],["Interest-bearing demand deposits","13,039","","","734","","","5.63","%","","9,027","","","166","","","1.84","%","","14,876","","","48","","","0.32","%"],["Federal Reserve Bank stock","4,722","","","283","","","5.99","%","","4,652","","","279","","","6.00","%","","4,652","","","279","","","6.00","%"],["Federal Home Loan Bank stock","8,293","","","590","","","7.11","%","","4,716","","","196","","","4.16","%","","5,203","","","104","","","2.00","%"],["Investment securities:"],["Equity securities","3,879","","","175","","","4.51","%","","4,451","","","85","","","1.91","%","","4,576","","","72","","","1.57","%"],["Debt securities, taxable","277,157","","","5,235","","","1.89","%","","293,700","","","5,027","","","1.71","%","","272,251","","","3,668","","","1.35","%"],["Debt securities, non-taxable (2)","24,031","","","871","","","3.62","%","","27,532","","","953","","","3.46","%","","32,937","","","1,094","","","3.32","%"],["Total earning assets","1,799,102","","","79,782","","","4.43","%","","1,724,350","","","65,953","","","3.82","%","","1,663,567","","","61,407","","","3.69","%"],["Non-earning assets","210,509","","","","","","","196,995","","","","","","","193,597"],["Allowance for credit losses","(8,046)","","","","","","","(5,629)","","","","","","","(5,701)"],["Total assets","$","2,001,565","","","","","","","$","1,915,716","","","","","","","$","1,851,463"],["Interest-bearing demand and money market deposits","$","535,865","","","7,850","","","1.46","%","","$","516,949","","","1,372","","","0.27","%","","$","463,636","","","556","","","0.12","%"],["Savings deposits","398,299","","","725","","","0.18","%","","449,841","","","618","","","0.14","%","","407,298","","","599","","","0.15","%"],["IRA and time certificates","233,604","","","7,996","","","3.42","%","","172,119","","","1,692","","","0.98","%","","214,344","","","2,423","","","1.13","%"],["Short-term borrowings","75,383","","","4,060","","","5.39","%","","14,482","","","416","","","2.87","%","","821","","","6","","","0.73","%"],["Long-term debt","56,798","","","2,619","","","4.61","%","","17,910","","","613","","","3.42","%","","16,148","","","469","","","2.90","%"],["Total interest-bearing liabilities","1,299,949","","","23,250","","","1.79","%","","1,171,301","","","4,711","","","0.40","%","","1,102,247","","","4,053","","","0.37","%"],["Noninterest-bearing demand deposits","472,232","","","","","","","513,400","","","","","","","482,402"],["Other liabilities","21,557","","","","","","","22,744","","","","","","","25,991"],["Capital","207,827","","","","","","","208,271","","","","","","","240,823"],["Total liabilities and capital","$","2,001,565","","","","","","","$","1,915,716","","","","","","","$","1,851,463"],["Net interest rate spread (3)","","","","","2.64","%","","","","","","3.42","%","","","","","","3.32","%"],["Net interest income and net interest margin on a tax equivalent basis (4)","","","$","56,532","","","3.14","%","","","","$","61,242","","","3.55","%","","","","$","57,354","","","3.45","%"],["Ratio of interest-earning assets to interest-bearing liabilities","138.40","%","","","","","","147.22","%","","","","","","150.93","%"]]
[[/GREPCENT_TABLE]]

(1)Includes non-accrual loans if any.

(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.

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LCNB CORP. AND SUBSIDIARIES

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

The following table presents the changes in 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 years indicated.  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.

[[GREPCENT_TABLE]]
[["","For the years ended December 31,"],["","2023 vs. 2022","","2022 vs. 2021"],["","Increase (decrease) due to","","Increase (decrease) due to"],["","Volume","","Rate","","Total","","Volume","","Rate","","Total"],["","(In thousands)"],["Interest income attributable to:"],["Loans (1)","$","3,930","","","8,717","","","12,647","","","2,187","","","918","","","3,105"],["Interest-bearing demand deposits","101","","","467","","","568","","","(26)","","","144","","","118"],["Federal Reserve Bank stock","4","","","\u2014","","","4","","","\u2014","","","\u2014","","","\u2014"],["Federal Home Loan Bank stock","203","","","191","","","394","","","(11)","","","103","","","92"],["Investment securities:"],["Equity securities","(12)","","","102","","","90","","","(2)","","","15","","","13"],["Debt securities, taxable","(293)","","","501","","","208","","","307","","","1,052","","","1,359"],["Debt securities, non-taxable (2)","(125)","","","43","","","(82)","","","(186)","","","45","","","(141)"],["Total interest income","3,808","","","10,021","","","13,829","","","2,269","","","2,277","","","4,546"],["Interest expense attributable to:"],["Interest-bearing demand and money market deposits","52","","","6,426","","","6,478","","","71","","","745","","","816"],["Savings deposits","(77)","","","184","","","107","","","60","","","(41)","","","19"],["IRA and time certificates","793","","","5,511","","","6,304","","","(440)","","","(291)","","","(731)"],["Short-term borrowings","3,016","","","628","","","3,644","","","349","","","61","","","410"],["Long-term debt","1,729","","","277","","","2,006","","","55","","","89","","","144"],["Total interest expense","5,513","","","13,026","","","18,539","","","95","","","563","","","658"],["Net interest income","$","(1,705)","","","(3,005)","","","(4,710)","","","2,174","","","1,714","","","3,888"]]
[[/GREPCENT_TABLE]]

(1)Non-accrual loans, if any, are included in average loan balances.

(2)Change in interest income from non-taxable investment securities is computed based on interest income determined on a taxable-equivalent yield basis.  Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 21%.

2023 vs. 2022.  Net interest income on a fully tax-equivalent basis for 2023 totaled $56,532,000, a decrease of $4,710,000 from 2022.  The decrease resulted from an increase in total taxable-equivalent interest income of $13,829,000, which was more than offset by an increase in total interest expense of $18,539,000.

The increase in total interest income was due primarily to a $12,647,000 increase in interest income from loans due to an $87.7 million increase in average loans and to a 61 basis point increase in the average rate earned. Average loans increased due to organic growth in the portfolio and to loans acquired through the merger with CNNB.

The increase in total interest expense was primarily due to a $6,478,000 increase in interest paid on interest-bearing demand and money market deposits, a $6,304,000 increase in interest paid on IRA and time certificates, a $3,644,000 increase in interest paid on short-term borrowings, and a $2,006,000 increase in interest paid on long-term debt. Interest paid on interest-bearing demand and money market deposits increased due to an $18.9 million increase in average balances and to a 119 basis point increase in the average rate paid. Interest paid on IRA and time certificates increased due to a $61.5 million increase in average deposit balances and to a 244 basis point increase in the average rate paid. Interest paid on short-term borrowings increased due to a $60.9 million increase in average balances and to a 251 basis point increase in the average rate paid. Interest paid on long-term debt increased due to a $38.9 million increase in average balances and to a 119 basis point increase in the average rate paid.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

The increased rates paid on interest-bearing liabilities and the increased yield earned on interest-earning assets is largely the result of higher market interest rates that were caused by FOMC increases in the Targeted Federal Funds rate. The Targeted Federal Funds rate increased by 425 basis points during 2022 and by an additional 100 basis points during 2023.

2022 vs. 2021.  Net interest income on a fully tax-equivalent basis for 2022 totaled $61,242,000, an increase of $3,888,000 from 2021.  The increase resulted from an increase in total taxable-equivalent interest income of $4,546,000, partially offset by an increase in total interest expense of $658,000.

The increase in total interest income was due primarily to a $3,105,000 increase in interest income from loans and a $1,359,000 increase in interest income from taxable debt securities. Loan interest increased due to a $51.2 million increase in average loans and to a 7 basis point increase in the average rate earned. The average rate earned includes loan prepayment fees, which increased from $601,000 for 2021 to $1,025,000 for 2022. Interest income from taxable debt securities increased due to a $21.4 million increase in average securities and to a 36 basis point increase in the average rate earned on these securities.

The increase in total interest expense was primarily due to an $816,000 increase in interest paid on NOW and money market deposits, a $410,000 increase in interest paid on short-term borrowings, and a $144,000 increase in interest paid on long-term debt, partially offset by a $731,000 decrease in interest paid on IRA and time certificates. Interest paid on NOW and money market deposits increased due to a $53.3 million increase in average balances and to a 15 basis point increase in the average rate paid. Interest paid on IRA and time certificates decreased due to a $42.2 million decrease in average deposit balances and to a 15 basis point decrease in the average rate paid. Interest paid on short-term borrowings increased due to a $13.7 million increase in average balances and to a 214 basis point increase in the average rate paid. Interest paid on long-term debt increased due to a $1.8 million increase in average balances and to a 52 basis point increase in the average rate paid.

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 provisions for credit losses totaling $2,077,000 for 2023, compared to a $250,000 provision for 2022 and a $269,000 net recovery for 2021. Included in the provision for credit losses for 2023 was a $1,722,000 provision expense related to non-PCD loans acquired through the Cincinnati Federal acquisition. 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.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Non-Interest Income

A comparison of non-interest income for 2023, 2022, and 2021 is as follows:

[[GREPCENT_TABLE]]
[["","","","","","","","Increase (Decrease)"],["","2023","","2022","","2021","","2023 vs. 2022","","2022 vs. 2021"],["","(In thousands)"],["Fiduciary income","$","7,091","","","6,468","","","6,674","","","623","","","(206)"],["Service charges and fees on deposit accounts","5,856","","","6,190","","","6,036","","","(334)","","","154"],["Net gains on sales of debt securities","\u2014","","","\u2014","","","303","","","\u2014","","","(303)"],["Bank owned life insurance income","1,136","","","1,074","","","1,074","","","62","","","\u2014"],["Net gains from sales of loans","697","","","196","","","852","","","501","","","(656)"],["Other operating income","631","","","360","","","1,293","","","271","","","(933)"],["Total non-interest income","$","15,411","","","14,288","","","16,232","","","1,123","","","(1,944)"]]
[[/GREPCENT_TABLE]]

Reasons for changes include:

•Fiduciary income increased during 2023 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. Fiduciary income decreased during 2022 primarily due to decreases in the fair values of trust and brokerage assets managed due to an overall decrease in the market values of equity and debt securities caused by general economic conditions. The decreases in fair value were partially offset by an increase in the number of wealth management accounts.

•Service charges and fees on deposit accounts decreased during 2023 primarily due to decreases in most fee categories, including fees received from check cards, ATM usage fees, and deposit account fees in general. Service charges and fees on deposit accounts increased during 2022 primarily due to an increase in the volume of overdraft fees collected and fees recognized in relation to the ICS deposit program, partially offset by an overall decrease in service charges collected on deposit accounts.

•Net gains from sales of loans were greater during 2023 and 2021 as compared to 2022 primarily due to the volume of loans sold.

•Other operating income increased in 2023 as compared to 2022 primarily because of realized and unrealized net gains on equity securities, reflecting a partial recovery in market values. Other operating income decreased in 2022 as compared to 2021 primarily because LCNB recognized $292,000 in losses on equity securities during 2022 as compared to $142,000 in gains during 2021. In addition, other operating income for 2021 included a one-time Ohio Financial Institutions Tax refund of $508,000.

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LCNB CORP. AND SUBSIDIARIES

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Non-Interest Expense

A comparison of non-interest expense for 2023, 2022, and 2021 is as follows:

[[GREPCENT_TABLE]]
[["","","","","","","","Increase (Decrease)"],["","2023","","2022","","2021","","2023 vs. 2022","","2022 vs. 2021"],["","(In thousands)"],["Salaries and employee benefits","$","29,108","","","28,483","","","27,616","","","625","","","867"],["Equipment expenses","1,616","","","1,629","","","1,678","","","(13)","","","(49)"],["Occupancy expense, net","3,301","","","3,067","","","2,949","","","234","","","118"],["State financial institutions tax","1,628","","","1,740","","","1,758","","","(112)","","","(18)"],["Marketing","1,101","","","1,184","","","1,239","","","(83)","","","(55)"],["Amortization of intangibles","532","","","478","","","1,043","","","54","","","(565)"],["FDIC premiums","932","","","530","","","492","","","402","","","38"],["ATM expense","1,112","","","1,370","","","1,416","","","(258)","","","(46)"],["Computer maintenance and supplies","1,358","","","1,114","","","1,213","","","244","","","(99)"],["Contracted services","2,776","","","2,503","","","2,430","","","273","","","73"],["Other real estate owned, net","4","","","(866)","","","2","","","870","","","(868)"],["Merger-related expenses","4,656","","","\u2014","","","\u2014","","","4,656","","","\u2014"],["Other non-interest expense","6,299","","","6,902","","","6,204","","","(603)","","","698"],["Total non-interest expense","$","54,423","","","48,134","","","48,040","","","6,289","","","94"]]
[[/GREPCENT_TABLE]]

Reasons for changes include:

•Salaries and employee benefits were 2.2% greater in 2023 than in 2022 and 3.1% greater in 2022 than in 2021. The increase in 2023 was primarily due to overall wage and benefit increases, a higher number of employees during November and December as a result of the CNNB merger, and a higher amount recognized for 401-K plan matching. These increases were partially offset by decreased pension and health insurance expenses and to a higher amount of personnel expenses deferred during 2023 as a cost of loan originations. The increase in 2022 was primarily due to overall wage and benefit increases, increased compensation expense recognized on restricted stock grants, increased pension expense, and to a higher amount of personnel expenses deferred in 2021 attributable to the high volume of PPP loans originated in that period.

•Occupancy expense, net increased during 2023 and 2022 due to a higher amount of maintenance and repair costs on LCNB's properties in general as well as incremental expenses related to the CNNB acquisition in 2023.

•State financial institutions tax, which is based on year-end capital levels, decreased during 2023 as compared to 2022 due to reductions in capital caused by treasury share purchases during 2022 and a decrease in the fair value of debt securities during 2022, which was recorded net of taxes as an increase in accumulated other comprehensive loss, a component of capital.

•Amortization of intangibles decreased during 2022 as compared to 2021 because the core deposit intangibles from the First Capital Bancshares, Inc. and Eaton National Bank & Trust Co. acquisitions amortized in full during the first quarter of 2022.

•FDIC insurance premiums increased in 2023 because of a two basis point increase in the FDIC's initial base deposit insurance assessment rate that took effect at the beginning of 2023.

•Other real estate owned, net for 2022 is primarily due to a gain recognized on the sale of foreclosed property, slightly offset by other expenses recognized on such property.

•Merger-related expenses reflect costs incurred in connection with the acquisitions of Cincinnati Bancorp, Inc., which closed on November 1, 2023, and Eagle Financial Bancorp, Inc., which is anticipated to close during the second quarter of 2024.

•Other non-interest expense decreased during 2023 primarily due to a $425,000 gain recognized on the sale of an office building that was closed as a result of LCNB's office consolidation strategy, which was netted against other non-interest expense for accounting purposes. Other non-interest expense for 2022 included $471,000 in losses from the sales of two closed office buildings.

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LCNB CORP. AND SUBSIDIARIES

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Income Taxes

LCNB's effective tax rates for the years ended December 31, 2023, 2022, and 2021 were 17.2%, 17.9%, and 18.0%, respectively.  The difference between the statutory rate of 21% and the effective tax rate 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.

Financial Condition

A comparison of balance sheet line items at December 31 is as follows (in thousands):

[[GREPCENT_TABLE]]
[["","2023","","2022","","Difference $","","Difference %"],["ASSETS:"],["Total cash and cash equivalents","$","39,723","","","22,701","","","17,022","","","74.98","%"],["Investment securities:"],["Equity securities with a readily determinable fair value, at fair value","1,336","","","2,273","","","(937)","","","(41.22)","%"],["Equity securities without a readily determinable fair value, at cost","3,666","","","2,099","","","1,567","","","74.65","%"],["Debt securities, available-for-sale, at fair value","276,601","","","289,850","","","(13,249)","","","(4.57)","%"],["Debt securities, held-to-maturity, at cost","16,858","","","19,878","","","(3,020)","","","(15.19)","%"],["Federal Reserve Bank stock, at cost","5,086","","","4,652","","","434","","","9.33","%"],["Federal Home Loan Bank stock, at cost","15,176","","","4,415","","","10,761","","","243.74","%"],["Loans, net","1,712,946","","","1,395,632","","","317,314","","","22.74","%"],["Premises and equipment, net","36,302","","","33,042","","","3,260","","","9.87","%"],["Operating lease right-of-use assets","6,000","","","6,525","","","(525)","","","(8.05)","%"],["Goodwill","79,509","","","59,221","","","20,288","","","34.26","%"],["Core deposit and other intangibles, net","9,494","","","1,827","","","7,667","","","419.65","%"],["Bank owned life insurance","49,847","","","44,298","","","5,549","","","12.53","%"],["Interest receivable","8,405","","","7,482","","","923","","","12.34","%"],["Other assets, net","30,643","","","25,503","","","5,140","","","20.15","%"],["Total assets","$","2,291,592","","","1,919,398","","","372,194","","","19.39","%"],["LIABILITIES:"],["Deposits:"],["Non-interest-bearing","$","462,267","","","505,824","","","(43,557)","","","(8.61)","%"],["Interest-bearing","1,362,122","","","1,099,146","","","262,976","","","23.93","%"],["Total deposits","1,824,389","","","1,604,970","","","219,419","","","13.67","%"],["Short-term borrowings","97,395","","","71,455","","","25,940","","","36.30","%"],["Long-term debt","113,123","","","19,072","","","94,051","","","493.14","%"],["Operating leases liability","6,261","","","6,647","","","(386)","","","(5.81)","%"],["Accrued interest and other liabilities","15,121","","","16,579","","","(1,458)","","","(8.79)","%"],["Total liabilities","2,056,289","","","1,718,723","","","337,566","","","19.64","%"],["SHAREHOLDERS' EQUITY:"],["Common shares","173,637","","","144,069","","","29,568","","","20.52","%"],["Retained earnings","140,017","","","139,249","","","768","","","0.55","%"],["Treasury shares, at cost","(56,015)","","","(52,689)","","","(3,326)","","","6.31","%"],["Accumulated other comprehensive loss, net of taxes","(22,336)","","","(29,954)","","","7,618","","","(25.43)","%"],["Total shareholders' equity","235,303","","","200,675","","","34,628","","","17.26","%"],["Total liabilities and shareholders' equity","$","2,291,592","","","1,919,398","","","372,194","","","19.39","%"]]
[[/GREPCENT_TABLE]]

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LCNB CORP. AND SUBSIDIARIES

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Reasons for changes include:

•Debt securities, available-for-sale, decreased due to maturities, paydowns, calls, and decreases in market valuation. There were no security purchases during 2023.

•Federal Home Loan Bank stock increased due to the addition of stock previously held by Cincinnati Federal and to the purchase of additional stock to support additional borrowings and loans sold to the FHLB, partially offset by the FHLB's repurchase of excess stock.

•Net loans increased due to loans obtained through the merger with CNNB and to organic growth in the loan portfolio. Offsetting the increases were a $2,196,000 increase to the allowance for credit losses on loans due to the adoption of ASC 326, a $493,000 increase to the allowance for purchased credit deteriorated loans obtained in the merger with CNNB, and a $1,722,000 provision for credit losses on non-PCD loans obtained in the merger with CNNB.

•Goodwill increased due to additional goodwill recorded as a result of the merger with CNNB.

•Core deposit and other intangibles increased due to the additions of a core deposit intangible and mortgage servicing rights obtained in the merger with CNNB.

•Bank owned life insurance increased primarily due to additional policies obtained in the merger with CNNB and secondarily due to increases in the cash values of the policies. No new policies were purchased during 2023.

•Other assets increased primarily due to current and deferred tax assets recorded as a result of the CNNB merger.

•Total deposits increased primarily due to additional deposits obtained as a result of the CNNB merger. Generally, non-interest and interest-bearing demand deposits and savings account balances decreased during the year, while money market accounts and IRA and time certificates increased as depositors sought higher interest rates.

•Short-term borrowings and long-term debt increased primarily to support an increase in liquidity and to support growth in the loan portfolio, as the increase in net loans was greater than the increase in deposits. LCNB assumed approximately $56.0 million in short-term borrowings, largely paid off by year-end, and $6.0 million in long-term debt as a result of the merger with CNNB.

•Common shares increased primarily because 2,042,598 shares of LCNB common stock valued at

$28,576,000 were issued to CNNB shareholders to effectuate the merger.

•Treasury shares increased because of the repurchase of 199,913 shares of common stock during 2023, which represents almost 1.8% of shares outstanding at December 31, 2022.

•Accumulated other comprehensive loss, net of taxes increased because of market-driven partial recoveries in the fair value of LCNB's available-for-sale debt securities investments.

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 profit 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.

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, short-term line of credit arrangements totaling $85.0 million with three correspondent banks, and interest and repayments received from LCNB's loan and investment portfolios.

Total remaining borrowing capacity with the Federal Home Loan Bank at December 31, 2023 was approximately $89.2 million. Additional borrowings of approximately $63.6 million were available through the line of credit arrangements at year-end.

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.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Commitments to extend credit at December 31, 2023 totaled $267.4 million and are more fully described in Note 14 - Commitments and Contingent Liabilities to LCNB's 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 requirements.

The following table provides information concerning LCNB's commitments at December 31, 2023:

[[GREPCENT_TABLE]]
[["","","","Amount of Commitment Expiration Per Period"],["","Total Amounts Committed","","1 year or less","","Over 1 through 3 years","","Over 3 through 5 years","","More than 5 years"],["","(In thousands)"],["Commitments to extend credit","$","45,406","","","45,406","","","\u2014","","","\u2014","","","\u2014"],["Unused lines of credit","222,006","","","73,699","","","57,943","","","17,776","","","72,588"],["Standby letters of credit","5","","","5","","","\u2014","","","\u2014","","","\u2014"],["Total","$","267,417","","","119,110","","","57,943","","","17,776","","","72,588"]]
[[/GREPCENT_TABLE]]

Capital Resources

The Bank is required by banking regulators to meet certain minimum levels of capital adequacy. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on LCNB's and the Bank's financial statements.  These minimum levels are expressed in the form of certain ratios. Capital is separated into Tier 1 capital (essentially shareholders' equity less goodwill and other intangibles) and Tier 2 capital (essentially the allowance for credit losses limited to 1.25% of risk-weighted assets). Common Equity Tier 1 Capital is the sum of common stock, related surplus, and retained earnings, net of treasury stock, accumulated other comprehensive income, and other adjustments. The first three ratios, which are based on the degree of credit risk in the Bank's assets, provide for weighting assets based on assigned risk factors and include off-balance sheet items such as loan commitments and stand-by letters of credit. Information summarizing the regulatory capital of the Bank at December 31, 2023 and 2022 and corresponding regulatory minimum requirements is included in Note 15 - Regulatory Matters and Impact on Payment of Dividends.

The FDIC, the insurer of deposits in financial institutions, has adopted a risk-based insurance premium system based in part on an institution's capital adequacy. Under this system, a depository institution is required to pay successively higher premiums depending on its capital levels and its supervisory rating by its primary regulator. It is management's intention to maintain sufficient capital to permit the Bank to maintain a "well capitalized" designation, which is the FDIC's highest rating.

On May 27, 2022, LCNB's Board of Directors authorized a share repurchase program (the “Program”). Under the terms of

the Program, LCNB is authorized to repurchase up to 500,000 of its outstanding common shares. The Program replaced and superseded LCNB’s prior share repurchase program, which was adopted on August 24, 2020.

Under the Program, LCNB may purchase common shares through various means such as open market transactions, including

block purchases, and privately negotiated transactions. The number of shares repurchased and the timing, manner, price and

amount of any repurchases will be determined at LCNB's discretion. Factors include, but are not limited to, share price, trading

volume, and general market conditions, along with LCNB’s general business conditions. The Program may be suspended or

discontinued at any time and does not obligate LCNB to acquire any specific number of its common shares.

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

The Program expired on or around December 31, 2022 and was replaced with a new share repurchase program that was authorized by the Board of Directors on February 27, 2023. The new share repurchase program authorizes the repurchase of up to 500,000 shares of common stock.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

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

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 herein. 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 to 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.

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Item 7. 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

Consolidated Balance Sheet.

See Note 1- Basis of Presentation - Adoption of New Accounting Pronouncements in this Annual Report on Form 10-K for

further detailed descriptions of LCNB's estimation process and methodology related to the allowance. See also Note 4 – Loans

in this Annual Report on Form 10-K for further information regarding LCNB's loan portfolio and allowance.

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

Accounting rules require LCNB to determine the fair value of all the assets and liabilities of an acquired entity, and to record their fair value on the date of acquisition. LCNB employs a variety of means in determining fair value, 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.

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