Equibles

10-Q

LCNB CORP (LCNB)

10-Q 2024-11-06 For: 2024-09-30
View Original
Added on April 06, 2026

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2024

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  to

Commission File Number 001-35292

LCNB Corp.

(Exact name of registrant as specified in its charter)

Ohio 31-1626393
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)

2 North Broadway, Lebanon, Ohio 45036

(Address of principal executive offices, including Zip Code)

(513) 932-1414

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, No Par Value LCNB NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒ Yes         ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

☒ Yes         ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐                                                               Accelerated filer ☐

Non-accelerated filer ☒                                                                Smaller reporting company ☒

Emerging growth company ☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

☐ Yes         ☒ No

The number of shares outstanding of the issuer's common stock, without par value, as of November 6, 2024 was 14,110,337 shares.

Table of Contents

LCNB CORP. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
CONSOLIDATED CONDENSED BALANCE SHEETS 3
CONSOLIDATED CONDENSED STATEMENTS OF INCOME 4
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) 5
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY 6
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS 7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 44
Item 3. Quantitative and Qualitative Disclosures about Market Risks 59
Item 4. Controls and Procedures 60
PART II. OTHER INFORMATION 61
Item 1.  Legal Proceedings 61
Item 1A. Risk Factors 61
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 61
Item 3.  Defaults Upon Senior Securities 61
Item 4.  Mine Safety Disclosures 61
Item 5.  Other Information 61
Item 6.  Exhibits 62
SIGNATURES 63

1

Table of Contents

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

2

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.         Financial Statements

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in thousands)

December 31, 2023
Audited
ASSETS: **** ****
Cash and due from banks 27,661 $ 36,535
Interest-bearing demand deposits 11,713 3,188
Total cash and cash equivalents 39,374 39,723
Investment securities:
Equity securities with a readily determinable fair value, at fair value 1,388 $ 1,336
Equity securities without a readily determinable fair value, at cost 3,666 3,666
Debt securities, available-for-sale, at fair value 262,622 276,601
Debt securities, held-to-maturity, at cost, net of allowance for credit losses of 7 and 5 at September 30, 2024 and December 31, 2023, respectively 18,730 16,858
Federal Reserve Bank stock, at cost 6,429 5,086
Federal Home Loan Bank stock, at cost 20,710 15,176
Loans, net of allowance for credit losses of 11,867 and 10,525 at September 30, 2024 and December 31, 2023, respectively 1,707,193 1,712,946
Loans held for sale 35,687 —
Premises and equipment, net 41,233 36,302
Operating lease right-of-use assets 5,853 6,000
Goodwill 90,209 79,509
Core deposit and other intangibles, net 11,605 9,494
Bank-owned life insurance 53,650 49,847
Interest receivable 9,450 8,405
Other assets, net 39,109 30,643
TOTAL ASSETS 2,346,908 2,291,592
LIABILITIES: **** ****
Deposits:
Noninterest-bearing 446,626 $ 462,267
Interest-bearing 1,470,379 1,362,122
Total deposits 1,917,005 1,824,389
Short-term borrowings — 97,395
Long-term debt 155,662 113,123
Operating lease liabilities 6,152 6,261
Accrued interest and other liabilities 14,843 15,121
TOTAL LIABILITIES 2,093,662 2,056,289
COMMITMENTS AND CONTINGENT LIABILITIES — —
SHAREHOLDERS' EQUITY: **** ****
Preferred shares – no par value, authorized 1,000,000 shares, none outstanding — —
Common shares – no par value; authorized 19,000,000 shares; issued 17,321,593 and 16,384,952 shares at September 30, 2024 and December 31, 2023, respectively; outstanding 14,110,210 and 13,173,569 shares at September 30, 2024 and December 31, 2023, respectively 186,716 173,637
Retained earnings 138,325 140,017
Treasury shares at cost, 3,211,383 and 3,211,383 shares at September 30, 2024 and December 31, 2023, respectively (56,015 ) (56,015 )
Accumulated other comprehensive loss, net of taxes (15,780 ) (22,336 )
TOTAL SHAREHOLDERS' EQUITY 253,246 235,303
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 2,346,908 $ 2,291,592

All values are in US Dollars.

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

3

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LCNB CORP. AND SUBSIDIARIES

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 $ 24,342 17,875 71,860 50,781
Dividends on equity securities:
With a readily determinable fair value 10 9 28 34
Without a readily determinable fair value 30 29 91 79
Interest on debt securities:
Taxable 1,181 1,296 3,596 3,962
Non-taxable 163 173 451 523
Other investments 672 286 2,095 910
TOTAL INTEREST INCOME 26,398 19,668 78,121 56,289
INTEREST EXPENSE: **** **** ****
Interest on deposits 9,578 4,426 27,458 10,217
Interest on short-term borrowings — 830 1,116 3,142
Interest on long-term debt 1,850 841 5,465 1,240
TOTAL INTEREST EXPENSE 11,428 6,097 34,039 14,599
NET INTEREST INCOME 14,970 13,571 44,082 41,690
PROVISION FOR (RECOVERY OF) CREDIT LOSSES 660 (114 ) 1,313 (141 )
NET INTEREST INCOME AFTER PROVISION FOR (RECOVERY OF) CREDIT LOSSES 14,310 13,685 42,769 41,831
NON-INTEREST INCOME: **** **** ****
Fiduciary income 2,097 1,736 6,137 5,263
Service charges and fees on deposit accounts 1,899 1,397 4,820 4,324
Net losses from sales of debt securities, available-for-sale — — (214 ) —
Bank-owned life insurance income 654 282 1,313 830
Net gains from sales of loans 1,625 29 2,197 38
Other operating income 132 134 163 350
TOTAL NON-INTEREST INCOME 6,407 3,578 14,416 10,805
NON-INTEREST EXPENSE: **** **** ****
Salaries and employee benefits 9,025 7,044 26,585 21,454
Equipment expenses 420 397 1,205 1,175
Occupancy expense, net 966 805 2,915 2,367
State financial institutions tax 505 396 1,409 1,189
Marketing 320 223 704 735
Amortization of intangibles 304 113 838 336
FDIC insurance premiums, net 547 224 1,445 663
Contracted services 807 671 2,435 1,978
Merger-related expenses 281 302 3,376 742
Other non-interest expense 2,212 2,069 7,772 6,208
TOTAL NON-INTEREST EXPENSE 15,387 12,244 48,684 36,847
INCOME BEFORE INCOME TAXES 5,330 5,019 8,501 15,789
PROVISION FOR INCOME TAXES 798 949 1,129 2,868
NET INCOME $ 4,532 4,070 7,372 12,921
Earnings per common share:
Basic $ 0.31 0.37 0.53 1.16
Diluted 0.31 0.37 0.53 1.16
Weighted average common shares outstanding:
Basic 14,103,358 11,038,720 13,761,582 11,094,185
Diluted 14,103,358 11,038,720 13,761,582 11,094,185

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

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LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

Nine Months Ended
September 30,
2023 2024 2023
Net income 4,532 4,070 7,372 12,921
Other comprehensive income (loss):
Net unrealized gain (loss) on available-for-sale debt securities (net of tax expense (benefit) of 1,879 and (782) for the three months ended September 30, 2024 and 2023, respectively, and 1,698 and (203) for the nine months ended September 30, 2024 and 2023, respectively) 7,069 (2,941 ) 6,387 (758 )
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 (45) for the three and nine months ended September 30, 2024, respectively) — — 169 —
Other comprehensive income (loss), net of tax 7,069 (2,941 ) 6,556 (758 )
TOTAL COMPREHENSIVE INCOME 11,601 1,129 13,928 12,163

All values are in US Dollars.

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

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LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY

(Dollars in thousands, except per share data)

(Unaudited)

Accumulated
Other Total
Common Retained Treasury Comprehensive Shareholders'
Stock Earnings Shares Loss Equity
Three Months Ended September 30, 2024 **** **** **** **** **** ****
Balance at July, 1 2024 14,151,755 $ 187,195 136,883 (56,015 ) (22,849 ) 245,214
Net income 4,532 4,532
Other comprehensive income, net of taxes 7,069 7,069
Dividend Reinvestment and Stock Purchase Plan 8,582 131 131
Adjustment to stock issued for acquisition of Eagle Financial Bancorp, Inc. (50,127 ) (704 ) — (704 )
Compensation expense relating to restricted stock 94 94
Common stock dividends, 0.22 per share (3,090 ) (3,090 )
Balance at September 30, 2024 14,110,210 $ 186,716 138,325 (56,015 ) (15,780 ) 253,246
Nine Months Ended September 30, 2024 **** **** **** **** **** ****
Balance at January 1, 2024 13,173,569 $ 173,637 140,017 (56,015 ) (22,336 ) 235,303
Net income 7,372 7,372
Other comprehensive income, net of taxes 6,556 6,556
Dividend Reinvestment and Stock Purchase Plan 26,937 391 391
Adjustment to stock issued for acquisition of Eagle Financial Bancorp, Inc. (50,127 ) (704 ) (704 )
Stock issued for acquisition of Eagle Financial Bancorp, Inc. 918,128 12,891 12,891
Shares issued for restricted stock awards 41,703 —
Compensation expense relating to restricted stock 501 501
Common stock dividends, 0.66 per share (9,064 ) (9,064 )
Balance at September 30, 2024 14,110,210 $ 186,716 138,325 (56,015 ) (15,780 ) 253,246
Three Months Ended September 30, 2023 **** **** **** **** **** ****
Balance at July, 1 2023 11,116,080 $ 144,671 141,431 (56,015 ) (27,771 ) 202,316
Net income 4,070 4,070
Other comprehensive loss, net of taxes (2,941 ) (2,941 )
Dividend Reinvestment and Stock Purchase Plan 7,302 111 111
Compensation expense relating to restricted stock — 83 83
Common stock dividends, 0.21 per share (2,290 ) (2,290 )
Balance at September 30, 2023 11,123,382 $ 144,865 143,211 (56,015 ) (30,712 ) 201,349
Nine Months Ended September 30, 2023 **** **** **** **** **** ****
Balance at January 1, 2023 11,259,080 $ 144,069 139,249 (52,689 ) (29,954 ) 200,675
Cumulative change in accounting principle - ASC 326 (1,922 ) (1,922 )
Balance at January 1, 2023, adjusted 11,259,080 144,069 137,327 (52,689 ) (29,954 ) 198,753
Net income 12,921 12,921
Other comprehensive income, net of taxes (758 ) (758 )
Dividend Reinvestment and Stock Purchase Plan 20,065 315 315
Repurchase of common stock (199,913 ) (3,326 ) (3,326 )
Shares issued for restricted stock awards 44,150
Compensation expense relating to restricted stock 481 481
Common stock dividends, 0.63 per share (7,037 ) (7,037 )
Balance at September 30, 2023 11,123,382 $ 144,865 143,211 (56,015 ) (30,712 ) 201,349

All values are in US Dollars.

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

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LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Nine Months Ended
September 30,
2024 2023
CASH FLOWS FROM OPERATING ACTIVITIES: **** ****
Net income $ 7,372 12,921
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation, amortization, and accretion 755 2,395
Provision for (recovery of) credit losses 1,313 (141 )
Deferred income tax provision (benefit) (1,421 ) (793 )
Increase in cash surrender value of bank-owned life insurance (1,007 ) (830 )
Bank-owned life insurance death benefits in excess of cash surrender value (306 ) —
Realized and unrealized (gains) losses from equity securities, net (25 ) 78
Realized losses from sales of debt securities, available-for-sale 214 —
Realized (gains) losses from sales of premises and equipment (454 ) (427 )
Origination of mortgage loans for sale (104,719 ) (2,205 )
Realized gains from sales of mortgage loans (3,040 ) (38 )
Proceeds from sales of mortgage loans 107,357 2,218
Realized losses from sales of acquired loans 842 —
Proceeds from sales of acquired loans 47,718 —
Compensation expense related to restricted stock 501 481
Changes in:
Accrued interest receivable (754 ) (605 )
Other assets (223 ) 1,497
Other liabilities (1,008 ) (2,300 )
TOTAL ADJUSTMENTS 45,743 (670 )
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 53,115 12,251
CASH FLOWS FROM INVESTING ACTIVITIES: **** ****
Proceeds from sales of equity securities — 963
Proceeds from sales of debt securities, available-for-sale 9,615 —
Proceeds from maturities and calls of debt securities:
Available-for-sale 18,218 14,262
Held-to-maturity 684 1,146
Purchases of equity securities (27 ) (22 )
Purchases of debt securities:
Available-for-sale (6,195 ) (497 )
Held-to-maturity (2,558 ) (280 )
Purchase of Federal Reserve Bank stock (1,343 ) —
Purchases of Federal Home Loan Bank stock (1,293 ) (4,537 )
Proceeds from redemption of Federal Home Loan Bank stock 93 1,369
Net (increase) decrease in loans 50,442 (56,711 )
Purchases of premises and equipment (3,423 ) (1,723 )
Proceeds from sale of premises and equipment 846 514
Cash and cash equivalents paid for acquisition, net of cash acquired (2,144 ) —
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES 62,915 (45,516 )
CASH FLOWS FROM FINANCING ACTIVITIES: **** ****
Net increase (decrease) in customer deposits (39,819 ) 11,920
Net increase (decrease) in short-term borrowings (110,395 ) (41,455 )
Proceeds from issuance of long-term debt 50,000 95,000
Principal payments on long-term debt (7,492 ) (1,431 )
Proceeds from issuance of common stock 391 315
Repurchase of common stock — (3,326 )
Cash dividends paid on common stock (9,064 ) (7,037 )
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES (116,379 ) 53,986
NET CHANGE IN CASH AND CASH EQUIVALENTS (349 ) 20,721
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 39,723 22,701
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 39,374 43,422
SUPPLEMENTAL CASH FLOW INFORMATION: **** ****
CASH PAID DURING THE YEAR FOR:
Interest paid $ 32,707 13,706
Income taxes paid, net of refunds — 2,226
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES: **** ****
Transfer from loans held-for-investment to loans held-for-sale $ 60,471 —
Transfer from loans held-for-sale to loans held-for-investment 4,817
Right-of-use assets obtained in exchange for lease obligations 62 —

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

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

BASIS OF PRESENTATION

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

The unaudited interim consolidated condensed financial statements have been prepared in accordance with U.S. GAAP for interim financial information and the rules and regulations of the SEC.  Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations.  In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of 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.

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

NOTE 1 - BASIS OF PRESENTATION (continued)

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 $ 1,401,278 341 1,401,619
ACL on loans (5,646 ) (2,196 ) (7,842 )
ACL on debt securities, held to maturity — (7 ) (7 )
Deferred tax assets, net 6,639 511 7,150
Liabilities:
ACL on off-balance sheet credit exposures — 571 571
Shareholders' Equity:
Retained earnings 139,249 (1,922 ) 137,327

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.

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

NOTE 1 - BASIS OF PRESENTATION (continued)

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.

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

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 four full-service branch offices in Cincinnati, Ohio and 1 full-service office in Florence, Kentucky, which became offices of LCNB after the merger. The merger significantly increased LCNB’s existing presence in the Cincinnati market and expanded LCNB’s community banking franchise across the Ohio River into the Northern Kentucky market. During the quarter ended September 30, 2024, LCNB consolidated one of the full-service branches acquired from Cincinnati Federal with a full-service branch acquired from EAGLE.Bank resulting in the closure of one branch office in Cincinnati, Ohio.

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 0.9274 shares of LCNB Corp. stock or $17.21 in cash for each share of CNNB common stock owned, subject to the limitation that 80% of the consideration be in the form of LCNB Corp. common stock and 20% of the consideration be in the form of cash. The fair value of the common stock issued as part of the consideration was determined on the basis of the closing price of LCNB Corp.'s common stock on the acquisition date.

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NOTE 2 - BUSINESS COMBINATIONS (continued)

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):

Adjustments September 30, 2024
Consideration:
Cash consideration 9,475 — 9,475
Common stock (2,042,598 shares issued at 13.99 per share) 28,576 — 28,576
Fair value of total consideration transferred 38,051 — 38,051
Identifiable Assets Acquired:
Cash and cash equivalents 11,368 — 11,368
Debt securities, available-for-sale 5,210 — 5,210
Federal Home Loan Bank stock 7,508 — 7,508
Loans, net 236,692 (732 ) 235,960
Premises and equipment 2,767 — 2,767
Operating lease right-of-use assets 64 — 64
Core deposit and other intangibles 8,391 — 8,391
Bank owned life insurance 4,413 — 4,413
Deferred income taxes 4,451 82 4,533
Other assets 12,950 122 13,072
Total identifiable assets acquired 293,814 (528 ) 293,286
Liabilities Assumed:
Deposits 210,532 — 210,532
Short-term borrowings 55,999 — 55,999
Long-term debt 5,963 — 5,963
Operating lease liabilities 68 (4 ) 64
Other liabilities 3,489 — 3,489
Total liabilities assumed 276,051 (4 ) 276,047
Total Identifiable Net Assets Acquired 17,763 (524 ) 17,239
Goodwill Resulting From Merger 20,288 524 20,812

All values are in US Dollars.

The fair value and gross contractual amounts of non-PCD loans as of the acquisition date was $231.9 million and $258.6 million, respectively. LCNB recorded a provision for credit losses on these loans of $1,722,000.

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.

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NOTE 2 - BUSINESS COMBINATIONS (continued)

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 ten years.

Direct expenses related to the CNNB acquisition totaled $10,000 and $332,000 during the three and nine months ended September 30, 2024, respectively, and totaled $290,000 and $705,000 during the three and nine months ended September 30, 2023, respectively. They were expensed as incurred and are recorded as merger-related expenses in the consolidated statements of income.

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 three full-service banking offices in Cincinnati, Ohio, which became offices of LCNB after the merger. This transaction increased LCNB’s presence in the Cincinnati market.

Subject to the terms of the merger agreement, EFBI shareholders had the opportunity to elect to receive either 1.1401 shares of LCNB Corp. stock, $19.10 per share in cash for each share of EFBI common stock owned, or a combination thereof subject to at least 60%, but not more than 70%, of the shares of EFBI being exchanged for LCNB common stock. The fair value of the common stock issued as part of the consideration was determined on the basis of the closing price of LCNB's common stock on the acquisition date.

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NOTE 2 - BUSINESS COMBINATIONS (continued)

The following table summarizes the fair value of the total consideration transferred as a part of the EFBI acquisition and the fair value of identifiable assets acquired and liabilities assumed as originally reported at June 30, 2024 and as adjusted at  September 30, 2024 (in thousands):

Adjustments September 30, 2024
Consideration:
Cash consideration 10,256 (83 ) 10,173
Common stock (918,128 shares issued at 14.04 per share) 12,891 (704 ) 12,187
Fair value of total consideration transferred 23,147 (787 ) 22,360
Identifiable Assets Acquired:
Cash and cash equivalents 8,029 — 8,029
Debt securities, available-for-sale 698 — 698
Federal Home Loan Bank stock 4,334 — 4,334
Loans, net 127,700 — 127,700
Premises and equipment 3,427 — 3,427
Operating lease right-of-use assets 48 — 48
Core deposit and other intangibles 3,760 — 3,760
Bank owned life insurance 3,004 — 3,004
Deferred income taxes 1,813 2,555 4,368
Other assets 2,590 482 3,072
Total identifiable assets acquired 155,403 3,037 158,440
Liabilities Assumed:
Deposits 132,435 — 132,435
Short-term borrowings 13,000 — 13,000
Operating lease liabilities 48 — 48
Other liabilities 773 (1 ) 772
Total liabilities assumed 146,256 (1 ) 146,255
Total Identifiable Net Assets Acquired 9,147 3,038 12,185
Goodwill Resulting From Merger 14,000 (3,825 ) 10,175

All values are in US Dollars.

The fair value and gross contractual amounts of non-PCD loans as of the acquisition date was $101.7 million and $112.5 million, respectively. LCNB recorded a provision for credit losses on these loans of $763,000.

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.

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NOTE 2 - BUSINESS COMBINATIONS (continued)

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 nine years.

Direct expenses related to the EFBI acquisition totaled $271,000 and $3,044,000 during the three and nine months ended September 30, 2024, respectively, and totaled $12,000 and $37,000 during the three and nine months ended September 30, 2023, respectively. They were expensed as incurred and are recorded as merger-related expenses in the consolidated statements of income.

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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 $ 69,717 — 4,145 65,572
U.S. Agency notes 88,668 — 5,360 83,308
Corporate bonds 7,450 — 588 6,862
U.S. Agency mortgage-backed securities 75,422 7 7,090 68,339
Municipal securities: —
Non-taxable 4,596 — 222 4,374
Taxable 36,674 1 2,508 34,167
$ 282,527 8 19,913 262,622
Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable $ 15,454 10 765 14,699
Taxable 3,283 — 300 2,983
$ 18,737 10 1,065 17,682
December 31, 2023
Debt Securities, Available-for-Sale:
U.S. Treasury notes $ 74,404 — 6,202 68,202
U.S. Agency notes 88,978 — 8,077 80,901
Corporate Bonds 7,450 — 916 6,534
U.S. Agency mortgage-backed securities 81,634 2 8,846 72,790
Municipal securities:
Non-taxable 7,416 — 245 7,171
Taxable 44,923 1 3,921 41,003
$ 304,805 3 28,207 276,601
Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable $ 13,580 4 872 12,712
Taxable 3,283 — 316 2,967
$ 16,863 4 1,188 15,679

The amortized cost of debt securities in the above table excludes accrued interest of $1.23 million and $1.07 million at September 30, 2024 and December 31, 2023, respectively, that is recorded in other assets on the consolidated balance sheets.

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.

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NOTE 3 - INVESTMENT SECURITIES (continued)

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 $ 1,982 6 63,590 4,139
U.S. Agency notes — — 83,308 5,360
Corporate bonds — — 6,862 588
U.S. Agency mortgage-backed securities — — 68,025 7,090
Municipal securities: — — — —
Non-taxable — — 4,374 222
Taxable — — 34,046 2,508
$ 1,982 6 260,205 19,907
Held-to-Maturity:
Municipal securities:
Non-taxable $ — — 11,707 765
Taxable — — 2,983 300
$ — — 14,690 1,065
December 31, 2023
Available-for-Sale:
U.S. Treasury notes $ — — 68,202 6,202
U.S. Agency notes — — 80,901 8,077
Corporate Bonds 734 16 5,800 900
U.S. Agency mortgage-backed securities — — 72,287 8,846
Municipal securities:
Non-taxable 1,540 10 5,631 235
Taxable — — 40,392 3,921
$ 2,274 26 273,213 28,181
Held-to-Maturity:
Municipal securities:
Non-taxable $ 6,012 476 5,975 396
Taxable — — 2,966 316
$ 6,012 476 8,941 712

At September 30, 2024, LCNB’s securities portfolio consisted of 167 securities, 161 of which were in an unrealized loss position. At December 31, 2023, LCNB's securities portfolio consisted of 207 securities, 176 of which were in an unrealized loss position. After considering the issuers of the securities, LCNB management determined that that the unrealized losses were due to changing interest rate environments. LCNB had no intent at September 30, 2024 to sell its debt securities before recovery of their cost basis and as it was more likely than not that it will not be required to sell its debt securities before recovery of their cost basis.

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NOTE 3 - INVESTMENT SECURITIES (continued)

Each quarter, LCNB performs an analysis to determine if any of the unrealized losses on available-for-sale debt securities are comprised of credit losses as compared to unrealized losses due to market interest rate adjustments. The assessment includes a review of the unrealized loss for each security issuance held; the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades; and LCNB's ability and intent to hold the security for a period of time sufficient for a recovery in value. LCNB also considers the extent to which the securities are issued by the federal government or its agencies and any guarantee of issued amounts by those agencies. The portfolio continues to consist of a mix of fixed and floating-rate, high quality securities, largely rated AA (or better), displaying an overall effective duration of approximately 3.3 years. No credit losses were determined to be present as of September 30, 2024, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on available-for-sale debt securities was recognized for the third quarter of 2024.

Debt securities with a market value of $148.7 million and $124.4 million at September 30, 2024 and December 31, 2023, respectively, were pledged to secure public deposits and for other purposes required or as permitted by law.

Excluding holdings in U.S. Treasury securities and U.S. Government Agencies, there were no investments in securities of any issuer that exceeded 10% of LCNB's consolidated shareholders' equity at 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 $ 25,093 24,668 1,163 1,158
Due from one to five years 153,392 143,285 1,301 1,278
Due from five to ten years 28,620 26,331 10,459 9,919
Due after ten years — — 5,814 5,327
207,105 194,284 18,737 17,682
U.S. Agency mortgage-backed securities 75,422 68,338 — —
$ 282,527 262,622 18,737 17,682

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 $ — — 9,615 —
Gross realized gains — — — —
Gross realized losses — — 214 —

Realized gains or losses from the sale of securities are computed using the specific identification method.

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NOTE 3 - INVESTMENT SECURITIES (continued)

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 $ 1,442 1,294 1,415 1,240
Equity Securities 10 94 10 96
Total equity securities with a readily determinable fair value $ 1,452 1,388 1,425 1,336

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 $ 49 (33 ) 25 (78 )
Less net losses recognized during the period on equity securities sold during the period — — — (61 )
Net unrealized gains (losses) recognized during the reporting period on equity securities still held at period end $ 49 (33 ) 25 (17 )

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.

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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 $ 119,215 120,541
Commercial, secured by real estate:
Owner occupied 216,262 206,705
Non-owner occupied 509,978 501,108
Farmland 38,005 37,367
Multi-family 239,645 240,033
Construction loans secured by 1-4 family dwellings 15,341 9,058
Construction loans secured by other real estate 84,275 111,373
Residential real estate:
Secured by senior liens on 1-4 family dwellings 395,906 402,026
Secured by junior liens on 1-4 family dwellings 21,683 19,999
Home equity line-of-credit loans 42,970 38,579
Consumer 22,113 25,600
Agricultural 13,171 11,000
Other loans, including deposit overdrafts 496 82
Loans, gross 1,719,060 1,723,471
Less allowance for credit losses 11,867 10,525
Loans, net $ 1,707,193 1,712,946

Loans in the above table are shown net of deferred origination fees and costs. Deferred origination fees, net of related costs, were $861,000 and $181,000 at September 30, 2024 and December 31, 2023, respectively. Accrued interest receivable of $8.22 million and $7.33 million are excluded from the balances above as of September 30, 2024 and December 31, 2023, respectively, that are recorded in other assets on the consolidated balance sheets.

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NOTE 4 – LOANS (continued)

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 — 2,642 — —
Farmland 52 52 51 51
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 — 307 29 29
Secured by junior liens on 1-4 family dwellings — — — —
Home equity line-of-credit loans — — — —
Consumer — — — —
Agricultural — — — —
Total $ 52 3,001 80 80

Interest income recognized on nonaccrual loans totaled approximately $67,000 and $1,000 during the nine months ended  September 30, 2024  and 2023, respectively. Accrued interest reversed and charged against interest income for these loans totaled approximately $36,000 and $0 during the nine months ended  September 30, 2024  and 2023, respectively.

The ratio of non-accrual loans to total loans outstanding at September 30, 2024 and December 31, 2023 was 0.17% and 0.00%, respectively.

ALLOWANCE FOR CREDIT LOSSES

The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost, which is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. A provision for credit losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors.

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.

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NOTE 4 – LOANS (continued)

• 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.
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• Prepayments and curtailments – Prepayments and curtailments are calculated based on the Company’s own data. This analysis is updated when materially relevant.
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• 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.
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• 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%
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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
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• Model risk including statistical risk, reversion risk, timing risk, and model limitation risk.
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• Changes in the nature and volume of the portfolio and terms of loans.
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• Lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries.
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NOTE 4 – LOANS (continued)

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 $ 1,568 6,228 3,222 212 38 2 11,270
Acquisition of Eagle Financial Bancorp, Inc. - PCD Loans — — — — — — —
Provision for (recovery of) credit losses (214 ) 258 572 — 41 24 681
Acquisition of Eagle Financial Bancorp, Inc. - provision for credit losses on non-PCD loans charged to expense — — — — — — —
Losses charged off (22 ) — — — (57 ) (43 ) (122 )
Recoveries — — — 19 — 19 38
Balance, end of period $ 1,332 6,486 3,794 231 22 2 11,867
Ratio of net charge-offs to average loans 0.07 % — % — % (0.34 )% 1.82 % 26.19 % 0.02 %
Nine Months Ended September 30, 2024 **** **** **** **** **** **** ****
Balance, beginning of year $ 1,039 5,414 3,816 238 18 — 10,525
Acquisition of Eagle Financial Bancorp, Inc. - PCD Loans 101 8 79 — — — 188
Provision for (recovery of) credit losses 163 818 (576 ) (32 ) 61 104 538
Acquisition of Eagle Financial Bancorp, Inc. - provision for credit losses on non-PCD loans charged to expense 51 246 466 — — — 763
Losses charged off (22 ) — — (43 ) (57 ) (164 ) (286 )
Recoveries — — 9 68 — 62 139
Balance, end of period $ 1,332 6,486 3,794 231 22 2 11,867
Ratio of net charge-offs (recoveries) to average loans 0.02 % — % — % (0.14 )% 0.63 % 61.65 % 0.01 %

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NOTE 4 – LOANS (continued)

Commercial,
Commercial Secured by Residential
& Industrial Real Estate Real Estate Consumer Agricultural Other Total
Three Months Ended September 30, 2023 **** **** **** **** **** **** ****
Balance, beginning of period $ 1,065 5,023 1,326 535 5 2 7,956
Provision for (recovery of) credit losses 2 (70 ) 125 (75 ) — 28 10
Losses charged off — — (4 ) (1 ) — (54 ) (59 )
Recoveries — — — 1 — 24 25
Balance, end of period $ 1,067 4,953 1,447 460 5 — 7,932
Ratio of net charge-offs to average loans — % — % 0.01 % — % — % 154.44 % 0.01 %
Nine Months Ended September 30, 2023 **** **** **** **** **** **** ****
Balance, beginning of year, prior to adoption of ASC 326 $ 1,300 3,609 624 86 22 5 5,646
Impact of adopting ASC 326 (512 ) 1,440 836 446 (9 ) (5 ) 2,196
Provision for (recovery of) credit losses 294 (96 ) (9 ) (66 ) (8 ) 58 173
Losses charged off (15 ) — (4 ) (10 ) — (115 ) (144 )
Recoveries — — — 4 — 57 61
Balance, end of period $ 1,067 4,953 1,447 460 5 — 7,932
Ratio of net charge-offs to average loans 0.02 % — % — % 0.03 % — % 106.23 % 0.01 %

The ratio of the allowance for credit losses for loans to total loans at  September 30, 2024 and December 31, 2023 was 0.69% and 0.61%, respectively.

For collateral dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the allowance for credit losses is measured based on the difference between the fair value of the collateral, less costs to sell, and the amortized cost basis of the loan as of the measurement date.

The following table presents the carrying value and related allowance of collateral dependent individually evaluated loans by class segment at the dates indicated (in thousands):

September 30, 2024 December 31, 2023
Carrying Related Carrying Related
Value Allowance Value Allowance
Commercial & industrial $ — — — —
Commercial, secured by real estate:
Owner occupied 52 — 72 —
Non-owner occupied 2,642 1,180 — —
Farmland 52 — 51 —
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 421 52 — —
Secured by junior liens on 1-4 family dwellings — — — —
Home equity line-of-credit loans 73 41 — —
Consumer — — — —
Agricultural — — — —
Other loans, including deposit overdrafts — — — —
Total $ 3,240 1,273 123 —

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NOTE 4 – LOANS (continued)

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

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

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

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

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

Residential real estate loans are underwritten primarily based on the borrower’s ability to repay, prior credit history, and the value of the collateral.  LCNB generally requires private mortgage insurance for first mortgage loans that have a loan to appraised value ratio of greater than 80% or may require other credit enhancements for second lien mortgage loans.

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

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

Other Loans, Including Deposit Overdrafts. Other loans may include loans that do not fit in any of the other categories, but it is primarily composed of overdrafts from transaction deposit accounts. Overdraft payments are recorded as a recovery and overdrafts are generally written off after 34 days with a negative balance.

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NOTE 4 – LOANS (continued)

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.

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NOTE 4 – LOANS (continued)

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 $ 11,721 12,284 33,311 25,803 9,878 6,895 14,947 — 114,839
OAEM — — 1,966 — — — — — 1,966
Substandard — — 1,788 — 88 103 431 — 2,410
Doubtful — — — — — — — — —
Total 11,721 12,284 37,065 25,803 9,966 6,998 15,378 — 119,215
Gross charge-offs (1) — — — 22 — — — — 22
Commercial, secured by real estate
Pass 22,944 118,628 182,884 168,066 102,689 347,233 141,309 — 1,083,753
OAEM — — 3,788 1,507 — 3,361 — — 8,656
Substandard — — 7,468 — — 3,629 — — 11,097
Doubtful — — — — — — — — —
Total 22,944 118,628 194,140 169,573 102,689 354,223 141,309 — 1,103,506
Gross charge-offs (1) — — — — — — — — —
Residential real estate
Pass 27,265 61,429 75,446 88,665 53,705 108,750 40,522 — 455,782
OAEM — — — — — 235 — — 235
Substandard — 231 191 291 487 3,170 172 — 4,542
Doubtful — — — — — — — — —
Total 27,265 61,660 75,637 88,956 54,192 112,155 40,694 — 460,559
Gross charge-offs (1) — — — — — — — — —
Consumer
Pass 5,895 5,840 4,015 3,163 2,434 654 71 — 22,072
OAEM — — — — — — — — —
Substandard — — 25 11 — 5 — — 41
Doubtful — — — — — — — — —
Total 5,895 5,840 4,040 3,174 2,434 659 71 — 22,113
Gross charge-offs (1) — 1 39 3 — — — — 43
Agricultural
Pass 950 1,471 384 154 318 29 9,865 — 13,171
OAEM — — — — — — — — —
Substandard — — — — — — — — —
Doubtful — — — — — — — — —
Total 950 1,471 384 154 318 29 9,865 — 13,171
Gross charge-offs (1) — — — — 57 — — — 57
Other
Pass — — — — — — 496 — 496
OAEM — — — — — — — — —
Substandard — — — — — — — — —
Doubtful — — — — — — — — —
Total — — — — — — 496 — 496
Gross charge-offs (1) — — — — — — 164 — 164
Total loans $ 68,775 199,883 311,266 287,660 169,599 474,064 207,813 — 1,719,060
(1) - for the nine months ended September 30, 2024.
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NOTE 4 – LOANS (continued)

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 $ 17,169 30,518 29,587 11,426 2,732 5,641 16,919 113 114,105
OAEM — — 1,474 — — — — — 1,474
Substandard — 1,813 — 105 1,592 137 1,315 — 4,962
Doubtful — — — — — — — — —
Total 17,169 32,331 31,061 11,531 4,324 5,778 18,234 113 120,541
Gross charge-offs (2) — — — — — 15 — — 15
Commercial, secured by real estate
Pass 99,055 200,735 156,865 109,810 92,895 283,564 141,354 6,056 1,090,334
OAEM — 7,671 — — — 3,004 — — 10,675
Substandard — — — — 1,648 2,987 — — 4,635
Doubtful — — — — — — — — —
Total 99,055 208,406 156,865 109,810 94,543 289,555 141,354 6,056 1,105,644
Gross charge-offs (2) — — — — — — — — —
Residential real estate
Pass 55,232 83,511 107,120 62,177 19,208 95,643 33,800 — 456,691
OAEM — — — — — 18 — — 18
Substandard — 446 — 217 — 3,062 170 — 3,895
Doubtful — — — — — — — — —
Total 55,232 83,957 107,120 62,394 19,208 98,723 33,970 — 460,604
Gross charge-offs (2) — — — — 4 — — — 4
Consumer
Pass 8,087 5,820 4,868 4,671 1,382 304 460 — 25,592
OAEM — — — — — — — — —
Substandard — — — — 8 — — — 8
Doubtful — — — — — — — — —
Total 8,087 5,820 4,868 4,671 1,390 304 460 — 25,600
Gross charge-offs (2) — — 62 21 — — — — 83
Agricultural
Pass 1,883 464 197 694 46 31 7,685 — 11,000
OAEM — — — — — — — — —
Substandard — — — — — — — — —
Doubtful — — — — — — — — —
Total 1,883 464 197 694 46 31 7,685 — 11,000
Gross charge-offs (2) — — — — — — — — —
Other
Pass — — — — — — 82 — 82
OAEM — — — — — — — — —
Substandard — — — — — — — — —
Doubtful — — — — — — — — —
Total — — — — — — 82 — 82
Gross charge-offs (2) — — — — — — 166 — 166
Total loans $ 181,426 330,978 300,111 189,100 119,511 394,391 201,785 6,169 1,723,471
(2) - for the year ended December 31, 2023.
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NOTE 4 – LOANS (continued)

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 $ — — — — 119,215 119,215 —
Commercial, secured by real estate:
Owner occupied — — — — 216,262 216,262 —
Non-owner occupied — — 2,642 2,642 507,336 509,978 —
Farmland 52 — — 52 37,953 38,005 —
Multi-family — — — — 239,645 239,645 —
Construction loans secured by 1-4 family dwellings — — — — 15,341 15,341 —
Construction loans secured by other real estate — — — — 84,275 84,275 —
Residential real estate:
Secured by senior liens on 1-4 family dwellings 4 626 436 1,066 394,840 395,906 198
Secured by junior liens on 1-4 family dwellings — — — — 21,683 21,683 —
Home equity line-of-credit loans 98 49 73 220 42,750 42,970 73
Consumer 25 25 11 61 22,052 22,113 11
Agricultural — — — — 13,171 13,171 —
Other 496 — — 496 — 496 —
Total $ 675 700 3,162 4,537 1,714,523 1,719,060 282
December 31, 2023
Commercial & industrial $ — — — — 120,541 120,541 —
Commercial, secured by real estate:
Owner occupied — — 72 72 206,633 206,705 72
Non-owner occupied 2,645 — — 2,645 498,463 501,108 —
Farms — — — — 37,367 37,367 —
Multi-family — — — — 240,033 240,033 —
Construction loans secured by 1-4 family dwellings — — — — 9,058 9,058 —
Construction loans secured by other real estate — — — — 111,373 111,373 —
Residential real estate
Secured by senior liens on 1-4 family dwellings 1,020 414 29 1,463 400,563 402,026 —
Secured by junior liens on 1-4 family dwellings 27 — — 27 19,972 19,999 —
Home equity line-of-credit loans 174 30 — 204 38,375 38,579 —
Consumer 136 — — 136 25,464 25,600 —
Agricultural — — — — 11,000 11,000 —
Other 82 — — 82 — 82 —
Total $ 4,084 444 101 4,629 1,718,842 1,723,471 72

Residential consumer mortgage loans secured by residential real estate in the process of foreclosure at September 30, 2024 totaled $54,000. No residential consumer mortgage loans secured by residential real estate were in the process of foreclosure at December 31, 2023.

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NOTE 4 – LOANS (continued)

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 — — — — — 21 21 0.01 %
Consumer — — — — 29 — 29 0.13 %
Total $ — — — — 29 21 50

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NOTE 4 – LOANS (continued)

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 $335.1 million and $391.8 million, respectively.

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 2,811
Allowance for credit losses at acquisition 189
Non-credit discount (premium) at acquisition 253
Par value of acquired loans at acquisition $ 3,253

The following table provides, as of September 30, 2024, the major classifications of purchased credit deteriorated loans acquired from EFBI (in thousands):

Commercial & industrial $ 182
Commercial, secured by real estate 373
Residential real estate 2,379
Total $ 2,934

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 $ 3,185
Carrying amount 2,934

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 $ 1,159 — 1,467 —
Accretable discount acquired during period from merger with EFBI — — 253 —
Less loans transferred to held-for-sale — — 396 —
Less accretion 17 — 182 —
Accretable discount, end of period $ 1,142 — 1,142 —

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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 $ 18,950 16,950
Less amortization 5,721 4,626
Net affordable housing tax credit investment $ 13,229 12,324
Unfunded commitment $ 4,775 4,527

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 12.0 years.

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 $ 450 438 1,338 1,302
Tax credit amortization expense included in provision for income taxes 355 362 1,096 1,080

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 $ 446,626 462,267
Interest-bearing demand and money fund deposits 571,452 643,989
Savings deposits 365,781 379,162
IRA and time certificates 533,146 338,971
Total $ 1,917,005 1,824,389

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NOTE 7 - DEPOSITS (continued)

Contractual maturities of time deposits at September 30, 2024 were as follows (in thousands):

Three months or less $ 94,032
Over three through six months 86,915
Over six through twelve months 195,593
October 1, 2024 - September 30, 2025 376,540
October 1, 2025 - September 30, 2026 145,448
October 1, 2026 - September 30, 2027 7,613
October 1, 2027 - September 30, 2028 1,586
October 1, 2028 - September 30, 2029 1,477
Thereafter 482
$ 533,146

The aggregate amount of time deposits in denominations of $250,000 or more at September 30, 2024 and December 31, 2023 was $110.0 million and $50.2 million, respectively. While the acquisition of EFBI contributed to the increase in the total amount of time deposits in denominations of $250,000 or more, most of the growth was generated organically. LCNB had a special rate promotion for time deposits, accompanied by a bonus rate promotion for new deposits, during much of the 2024 period.

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 $ 10,662 4.25 % $ 12,154 4.25 %
FHLB long-term advances 145,000 4.62 % 100,969 4.87 %
$ 155,662 4.60 % $ 113,123 4.80 %

The term loan with a correspondent financial institution bears a fixed interest rate of 4.25%, amortizes quarterly, and has a final balloon payment due on June 15, 2025.

Contractual maturities of long-term debt at September 30, 2024 and December 31, 2023 were as follows (in thousands):

September 30, December 31,
2024 2023
Maturing within one year $ 10,662 4,988
Maturing after one year through two years 25,000 13,135
Maturing after two years through three years 35,000 25,000
Maturing after three years through four years 45,000 25,000
Maturing after four years through five years 30,000 25,000
Thereafter 10,000 20,000
Total $ 155,662 113,123

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NOTE 8 – BORROWINGS (continued)

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 $ — — % $ 21,395 6.00 %
FHLB short-term advances — — % 76,000 5.53 %
$ — — % $ 97,395 5.63 %

At September 30, 2024, LCNB had a short-term revolving line of credit arrangement with a financial institution for a maximum amount of $10 million at an interest rate equal to the Wall Street Journal Prime Rate minus 25 basis points. This agreement expires on June 15, 2025.

At 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 $30 million at an interest rate equal to the lending institution’s federal funds rate plus a spread of 50 basis points. Under the terms of the second arrangement, LCNB can borrow up to $50 million at an interest rate equal to the FOMC targeted federal funds rate plus a spread of 25 basis points. Under the terms of the third arrangement, LCNB can borrow up to $25 million at the interest rate in effect at the time of borrowing.

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 $452 million and $417 million at September 30, 2024 and December 31, 2023, respectively. Remaining borrowing capacity with the FHLB, including both long-term and short-term borrowings, at September 30, 2024 was approximately $120.9 million.

NOTE 9 - LEASES

Lease expenses for offices are included in the consolidated condensed statements of income in net occupancy expense and lease expenses for equipment and ATMs are included in equipment expense. Components of lease expense for the three 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 $ 249 219 714 661
Short-term lease expense 8 16 43 62
Variable lease expense 11 2 31 5
Other 14 15 32 25
Total lease expense $ 282 252 820 753

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 $ 779
Right-of-use assets obtained in exchange for new operating lease liabilities $ 62
Weighted average remaining lease term in years for operating leases 33.3
Weighted average discount rate for operating leases 3.65 %

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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 21.0 % 21.0 % 21.0 % 21.0 %
Increase (decrease) resulting from:
Tax exempt interest (0.6 )% (0.7 )% (1.0 )% (0.6 )%
Tax exempt income on bank-owned life insurance (2.6 )% (1.2 )% (3.2 )% (1.1 )%
Captive insurance premium income (1.4 )% (0.5 )% (2.5 )% (0.7 )%
Affordable housing tax credit limited partnerships (1.8 )% (1.5 )% (2.9 )% (1.4 )%
Nondeductible merger-related expenses 0.2 % 1.7 % 1.6 % 0.7 %
Other, net 0.2 % 0.1 % 0.3 % 0.3 %
Effective tax rate 15.0 % 18.9 % 13.3 % 18.2 %

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.

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NOTE 11 – COMMITMENTS AND CONTINGENT LIABILITIES (continued)

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 $ 39,257 28,111
Other loans
Fixed rate 30,368 15,349
Adjustable rate 2,162 1,946
Unused lines of credit:
Fixed rate 14,360 21,532
Adjustable rate 240,896 184,056
Unused overdraft protection amounts on demand accounts 16,333 16,418
Standby letters of credit 5 5
Total commitments $ 343,381 267,417

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 $ 362 381 281 —
Impact of adopting ASC 326 — — — 571
Acquisition of Eagle Financial Bancorp, Inc. — — 48 —
Provision for (recovery of) credit losses (22 ) (123 ) 11 (313 )
Balance, end of period $ 340 258 340 258

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 $92,000.

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

LCNB and its subsidiaries are parties to various claims and proceedings arising in the normal course of business.  Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings and claims will not be material to LCNB's consolidated financial position or results of operations.

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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 $ (22,794 ) (55 ) (22,849 ) (22,281 ) (55 ) (22,336 )
Other comprehensive income (loss), net of taxes 7,069 — 7,069 6,387 — 6,387
Reclassifications — — — 169 — 169
Balance at end of period $ (15,725 ) (55 ) (15,780 ) (15,725 ) (55 ) (15,780 )
2023 **** **** **** **** **** ****
Balance at beginning of period $ (27,744 ) (27 ) (27,771 ) (29,927 ) (27 ) (29,954 )
Other comprehensive (loss) income, net of taxes (2,941 ) — (2,941 ) (758 ) — (758 )
Balance at end of period $ (30,685 ) (27 ) (30,712 ) (30,685 ) (27 ) (30,712 )

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 $ — — (214 ) — Net losses from sales of debt securities, available-for-sale
Income tax benefit — — (45 ) — Provision for income taxes
Reclassification adjustment, net of taxes $ — — (169 ) —

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 5% or 7% of their annual compensation, depending on the sum of an employee's age and vesting service, into their defined contribution plans (401(k) plans), regardless of the contributions made by the employees.  These contributions are made annually and these employees do not receive any employer matches to their 401(k) contributions.

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

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NOTE 13 – RETIREMENT PLANS (continued)

Funding and administrative costs of the qualified noncontributory defined benefit retirement plan and 401(k) plan charged to pension and other employee benefits in the consolidated condensed statements of income for the three 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 $ 350 267 1,004 944
401(k) plan 210 164 630 529

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 $18,000 and $54,000 for the three and nine months ended September 30, 2024, respectively, and $19,000 and $57,000 for the three and nine months ended September 30, 2023, respectively.

NOTE 14 – STOCK BASED COMPENSATION

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

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, 79,017 $ 17.94 58,314 $ 17.99
Granted 41,703 13.87 44,150 17.84
Vested (36,127 ) 16.39 (23,447 ) 17.89
Forfeited — — — —
Nonvested at September 30, 84,593 $ 16.59 79,017 $ 17.94

At September 30, 2024, there were 84,593 restricted stock awards outstanding with an approximate stock value of $1,275,000 based on that day's closing stock price. At September 30, 2023, there were 79,017 restricted stock awards outstanding with an approximate stock value of $1,166,000 based on that day's closing stock price. The fair value of restricted stock awards was $578,000 on the grant date of March 4, 2024 and $788,000 on the grant date of January 23, 2023. Grants to officers of LCNB vest over a period of five years while grants to members of the board of directors vest immediately. The grant date fair value is recognized ratably into expense over the vesting period.

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NOTE 14 – STOCK BASED COMPENSATION (continued)

The following table presents expense recorded in salaries and employee benefits for restricted stock awards and the related tax information for the three 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 $ 94 82 501 480
Tax effect 20 18 105 101

Unrecognized compensation expense for restricted stock awards was $988,000 at September 30, 2024 and is expected to be recognized over a period of 4.5 years.

NOTE 15 – EARNINGS PER COMMON SHARE

LCNB has granted restricted stock awards with non-forfeitable dividend rights, which are considered participating securities. Accordingly, earnings per share is computed using the two-class method as required by ASC No. 260-10-45. Basic earnings per common share is calculated by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period, which excludes the participating securities.  Diluted earnings per common share is adjusted for the dilutive effects of stock options, warrants, and restricted stock.  The diluted average number of common shares outstanding has been increased for the assumed exercise of stock options and warrants with proceeds used to purchase treasury shares at the average market price for the period.

Earnings per share for the three 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 $ 4,532 4,070 7,372 12,921
Less allocation of earnings and dividends to participating securities 28 29 46 92
Net income allocated to common shareholders $ 4,504 4,041 7,326 12,829
Weighted average common shares outstanding, gross 14,187,951 11,117,737 13,846,175 11,173,810
Less average participating securities 84,593 79,017 84,593 79,625
Adjusted weighted average number of shares outstanding used in the calculation of basic and diluted earnings per common share 14,103,358 11,038,720 13,761,582 11,094,185
Earnings per common share:
Basic $ 0.31 0.37 0.53 1.16
Diluted 0.31 0.37 0.53 1.16

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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.
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• Level 3 – inputs that are unobservable for the asset or liability.
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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.
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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.

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NOTE 16 - FAIR VALUE MEASUREMENTS (continued)

The following table summarizes the valuation of LCNB's assets recorded at fair value by input levels as of 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 $ 94 94 — —
Mutual funds measured at net asset value 1,294 1,294 — —
Debt securities, available-for-sale:
U.S. Treasury notes 65,572 65,572 — —
U.S. Agency notes 83,308 — 83,308 —
Corporate bonds 6,862 — 6,862 —
U.S. Agency mortgage-backed securities 68,339 — 68,339 —
Municipal securities:
Non-taxable 4,374 — 4,374 —
Taxable 34,167 — 34,167 —
Total recurring fair value measurements $ 264,010 66,960 197,050 —
Nonrecurring fair value measurements:
Individually evaluated collateral dependent loans $ 1,678 — — 1,678
Total nonrecurring fair value measurements $ 1,678 — — 1,678
December 31, 2023
Recurring fair value measurements:
Equity securities with a readily determinable fair value:
Equity securities $ 96 96 — —
Mutual funds measured at net asset value 1,240 1,240 — —
Debt securities, available-for-sale:
U.S. Treasury notes 68,202 68,202 — —
U.S. Agency notes 80,901 — 80,901 —
Corporate bonds 6,534 — 6,534 —
U.S. Agency mortgage-backed securities 72,790 — 72,790 —
Municipal securities:
Non-taxable 7,171 — 7,171 —
Taxable 41,003 — 41,003 —
Total recurring fair value measurements $ 277,937 69,538 208,399 —
Nonrecurring fair value measurements:
Individually evaluated collateral dependent loans $ — — — —
Total nonrecurring fair value measurements $ — — — —

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NOTE 16 - FAIR VALUE MEASUREMENTS (continued)

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 $ 1,678 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 $ 39,374 39,374 39,374 — —
Debt securities, held-to-maturity, net 18,730 17,675 — 17,675 —
Loans, net 1,707,193 1,700,822 — — 1,700,822
Loans held-for-sale 35,687 35,687 — 35,687 —
Accrued interest receivable 9,450 9,450 — 9,450 —
FINANCIAL LIABILITIES:
Deposits 1,917,005 1,930,109 1,383,859 546,250 —
Short-term borrowings — — — — —
Long-term debt 155,662 155,964 — 155,964 —
Accrued interest payable 2,127 2,127 — 2,127 —
December 31, 2023
FINANCIAL ASSETS:
Cash and cash equivalents $ 39,723 39,723 39,723 — —
Debt securities, held-to-maturity, net 16,858 15,679 — — 15,679
Loans, net 1,712,946 1,534,406 — — 1,534,406
Accrued interest receivable 8,405 8,405 — 8,405 —
FINANCIAL LIABILITIES:
Deposits 1,824,389 1,824,105 1,485,418 338,687 —
Short-term borrowings 97,395 97,395 — 97,395 —
Long-term debt 113,123 112,986 — 112,986 —
Accrued interest payable 1,697 1,697 — 1,697 —

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

The fair values of off-balance-sheet financial instruments such as loan commitments and letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of such instruments were not material at  September 30, 2024

and  December 31, 2023.

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.

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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 $39.5 million. The sale of these loans is expected to close in November of 2024 and is not expected to result in a material gain or loss.

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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;
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3. LCNB may incur increased loan charge-offs in the future and the allowance for credit losses may be inadequate;
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4. LCNB may face competitive loss of customers;
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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;
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6. changes in general economic conditions and increased competition could adversely affect LCNB’s operating results;
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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;
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8. LCNB may experience difficulties growing loan and deposit balances;
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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;
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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;
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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;
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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
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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.
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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.

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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.

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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.

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(Continued)

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.

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(Continued)

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.

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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.

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(Continued)

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.

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(Continued)

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.

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(Unaudited)

(Continued)

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.

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(Unaudited)

(Continued)

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.
--- ---

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(Unaudited)

(Continued)

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.

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(Unaudited)

(Continued)

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 ) (0.88 )%
Investment securities:
Equity securities with a readily determinable fair value, at fair value 1,388 1,336 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 ) (5.05 )%
Debt securities, held-to-maturity, net, at cost 18,730 16,858 11.10 %
Federal Reserve Bank stock, at cost 6,429 5,086 26.41 %
Federal Home Loan Bank stock, at cost 20,710 15,176 36.47 %
Loans, net 1,707,193 1,712,946 ) (0.34 )%
Loans held-for-sale 35,687 — NM
Premises and equipment, net 41,233 36,302 13.58 %
Operating lease right-of-use assets 5,853 6,000 ) (2.45 )%
Goodwill 90,209 79,509 13.46 %
Core deposit and other intangibles 11,605 9,494 22.24 %
Bank-owned life insurance 53,650 49,847 7.63 %
Interest receivable 9,450 8,405 12.43 %
Other assets 39,109 30,643 27.63 %
Total assets $ 2,346,908 2,291,592 2.41 %
LIABILITIES: **** **** **** ****
Deposits:
Non-interest-bearing $ 446,626 462,267 ) (3.38 )%
Interest-bearing 1,470,379 1,362,122 7.95 %
Total deposits 1,917,005 1,824,389 5.08 %
Short-term borrowings — 97,395 ) (100.00 )%
Long-term debt 155,662 113,123 37.60 %
Operating lease liabilities 6,152 6,261 ) (1.74 )%
Accrued interest and other liabilities 14,843 15,121 ) (1.84 )%
Total liabilities 2,093,662 2,056,289 1.82 %
SHAREHOLDERS' EQUITY: **** **** **** ****
Common shares 186,716 173,637 7.53 %
Retained earnings 138,325 140,017 ) (1.21 )%
Treasury shares, at cost (56,015 ) (56,015 ) 0.00 %
Accumulated other comprehensive loss, net of taxes (15,780 ) (22,336 ) (29.35 )%
Total shareholders' equity 253,246 235,303 7.63 %
Total liabilities and shareholders' equity $ 2,346,908 2,291,592 2.41 %

All values are in US Dollars.

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.
--- ---

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

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 %

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

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.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

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.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

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 ) (1.75 )% 15 %
Up 200 75,171 ) (1.19 )% 10 %
Up 100 75,428 ) (0.85 )% 5 %
Base 76,072 — % — %
Down 100 75,877 ) (0.26 )% 5 %
Down 200 76,110 0.05 % 10 %
Down 300 76,244 0.23 % 15 %

All values are in US Dollars.

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 ) (18.50 )% 25 %
Up 200 175,726 ) (9.77 )% 20 %
Up 100 192,724 ) (1.05 )% 15 %
Base 194,760 — % — %
Down 100 222,702 14.35 % 15 %
Down 200 236,782 21.58 % 20 %
Down 300 246,248 26.44 % 25 %

All values are in US Dollars.

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.

59

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

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.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

PART II. OTHER INFORMATION

Item 1.         Legal Proceedings

Except for routine litigation incidental to its business, LCNB is not a party to any material pending legal proceedings and none of its property is the subject of any material proceedings.

Item 1A.      Risk Factors

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

Item 5.         Other Information

During the three months ended September 30, 2024, none of our directors or officers informed us of the adoption, modification, or termination of a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as those terms are defined in Regulation S-K, Item 408.

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Item 6.         Exhibits

Exhibit No. Exhibit Description
2.1 Agreement and Plan of Merger dated as of May 17, 2023 by and between LCNB Corp. and Cincinnati Bancorp, Inc. - incorporated by reference to the Registrant's Current Report on Form 8-K filed on May 18, 2023, Exhibit 2.1.
2.2 Agreement and Plan of Merger dated as of November 28, 2023 by and between LCNB Corp. and Eagle Financial Bancorp, Inc. - incorporated by reference to the Registrant's Current Report on Form 8-K filed on November 29, 2023,Exhibit 2.1.
3.1 Amended and Restated Articles of Incorporation of LCNB Corp., as amended. (This document represents the Amended and Restated Articles of Incorporation of LCNB Corp. in compiled form incorporating all amendments. The compiled document has not been filed with the Ohio Secretary of State.) - incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, Exhibit 3.1.
3.2 Code of Regulations of LCNB Corp. – incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005, Exhibit 3(ii).
10.1 LCNB Corp. Ownership Incentive Plan – incorporated by reference to Registrant's Form DEF 14A Proxy Statement pursuant to Section 14(a), dated March 15, 2002, Exhibit A (000-26121).
10.2 LCNB Corp. 2015 Ownership Incentive Plan - incorporated by reference to Registrant's Form DEF 14A Proxy Statement pursuant to Section 14(a), dated March 13, 2015, Exhibit A (001-35292)
10.3 Form of Option Grant Agreement under the LCNB Corp. Ownership Incentive Plan – incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2005, Exhibit 10.2.
10.4 Nonqualified Executive Retirement Plan – incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2009, Exhibit 10.4.
10.5 Form of Restricted Share Grant Agreement under the LCNB Corp. 2015 Ownership Incentive Plan - incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2015, Exhibit 10.7.
10.6 Form of Business Loan Agreement for the revolving line of credit between LCNB Corp. and Bankers' Bank - incorporated by reference to Registrant's Form 8-K filed on June 21, 2022, Exhibit 10.1.
10.7 Form of Business Loan Agreement for the term loan between LCNB Corp. and Bankers' Bank - incorporated by reference to Registrant's Form 8-K filed on June 21, 2022, Exhibit 10.2.
31.1 Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
101 The following financial information from LCNB Corp.'s Quarterly Report on Form 10-Q for the quarter ended 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).

62

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

LCNB Corp.
November 6, 2024 /s/ Eric J. Meilstrup
Eric J. Meilstrup
Chief Executive Officer and President
November 6, 2024 /s/ Robert C. Haines, II
Robert C. Haines, II
Executive Vice President and Chief Financial Officer

63

ex_712600.htm

Exhibit 31.1

CERTIFICATIONS

In connection with the Quarterly Report of LCNB Corp. on Form 10-Q for the period ending September 30, 2024, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Eric J. Meilstrup, Chief Executive Officer of LCNB Corp., certify that:

1) I have reviewed this quarterly report on Form 10-Q of LCNB Corp.;
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
--- ---
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
--- ---
4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
--- ---
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
--- ---
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
--- ---
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
--- ---
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
--- ---
5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
--- ---
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
--- ---
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
--- ---
/s/ Eric J. Meilstrup
---
Eric J. Meilstrup
Chief Executive Officer and President
November 6, 2024

ex_712601.htm

Exhibit 31.2

CERTIFICATIONS

In connection with the Quarterly Report of LCNB Corp. on Form 10-Q for the period ending September 30, 2024, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert C. Haines, II, Executive Vice President and Chief Financial Officer of LCNB Corp., certify that:

1) I have reviewed this quarterly report on Form 10-Q of LCNB Corp.;
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
--- ---
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
--- ---
4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
--- ---
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
--- ---
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
--- ---
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
--- ---
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
--- ---
5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
--- ---
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
--- ---
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
--- ---
/s/ Robert C. Haines, II
---
Robert C. Haines, II
Executive Vice President and<br> Chief Financial Officer
November 6, 2024

ex_712602.htm

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of LCNB Corp. (the "Company") on Form 10-Q for the period ending September 30, 2024, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Eric J. Meilstrup, Chief Executive Officer, and Robert C. Haines, II, Executive Vice President and Chief Financial Officer, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
--- ---
/s/ Eric J. Meilstrup /s/ Robert C. Haines, II
--- ---
Eric J. Meilstrup<br> Chief Executive Officer and President Robert C. Haines, II<br> Executive Vice President and Chief Financial Officer

Date:  November 6, 2024

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