LCNB CORP. 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 endedDecember 31, 2021 , as well as its other filings with theSEC , for a more detailed discussion of risks, uncertainties and factors that could cause actual results to differ from those discussed in the forward-looking statements. These forward-looking statements reflect management's current expectations based on all information available to management and its knowledge of LCNB's business and operations. Additionally, LCNB's financial condition, results of operations, plans, objectives, future performance and business are subject to risks and uncertainties that may cause actual results to differ materially. These factors include, but are not limited to: 1.the success, impact, and timing of the implementation of LCNB's business strategies; 2.the significant risks and uncertainties for LCNB's business, results of operations and financial condition, as well as its regulatory capital and liquidity ratios and other regulatory requirements, caused by the COVID-19 pandemic, which will depend on several factors, including the scope and duration of the pandemic, its influence on financial markets, the effectiveness of LCNB's work from home arrangements and staffing levels in operational facilities, the impact of market participants on which LCNB relies and actions taken by governmental authorities and other third parties in response to the pandemic; 3.the disruption of global, national, state, and local economies associated with the COVID-19 pandemic and theRussia /Ukraine conflict, which could affect LCNB's liquidity and capital positions, impair the ability of our borrowers to repay outstanding loans, impair collateral values, and further increase the allowance for credit losses; 4.LCNB's ability to integrate future acquisitions may be unsuccessful or may be more difficult, time-consuming, or costly than expected; 5.LCNB may incur increased loan charge-offs in the future; 6.LCNB may face competitive loss of customers; 7.changes in the interest rate environment, which may include continued interest rate increases, may have results on LCNB's operations materially different from those anticipated by LCNB's market risk management functions; 8.changes in general economic conditions and increased competition could adversely affect LCNB's operating results; 9.changes in regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact LCNB's operating results; 10.LCNB may experience difficulties growing loan and deposit balances; 11.United States trade relations with foreign countries could negatively impact the financial condition of LCNB's customers, which could adversely affect LCNB 's operating results and financial condition; 12.deterioration in the financial condition of theU.S. banking system may impact the valuations of investments LCNB has made in the securities of other financial institutions resulting in either actual losses or other-than-temporary impairments on such investments; 13.difficulties with technology or data security breaches, including cyberattacks, that could negatively affect LCNB's ability to conduct business and its relationships with customers, vendors, and others; 14.adverse weather events and natural disasters and global and/or national epidemics; and 15.government intervention in theU.S. financial system, including the effects of legislative, tax, accounting, and regulatory actions and reforms, including the CARES Act, the Dodd-Frank Act, the Jumpstart Our Business Startups Act, theConsumer Financial Protection Bureau , the capital ratios of Basel III as adopted by the federal banking authorities, and the Tax Cuts and Jobs Act. Forward-looking statements made herein reflect management's expectations as of the date such statements are made. Such information is provided to assist shareholders and potential investors in understanding current and anticipated financial operations of LCNB and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. LCNB undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise after the date such statements are made. 36
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LCNB CORP. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Coronavirus Update/Status The COVID-19 pandemic has continued to disrupt the global economy and the lives of individuals throughout the world. Governments, businesses, and the public have taken and are taking actions to contain the spread of COVID-19 and to mitigate its effects. While the effects of COVID-19 are not fully known, the pandemic and related efforts to contain it have disrupted economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. While vaccination efforts continue, the future effects from the pandemic, including the potential scope of recovery, are not fully known. LCNB participated in the CARES Act PPP that provided government guaranteed and potentially forgivable loans to applicants. The PPP was implemented by the SBA with support from theDepartment of the Treasury and provided small businesses with funds to pay up to eight or twenty-four weeks, depending on the date of the loan, of payroll costs including benefits. Funds could also be used to pay interest on mortgages, rent, utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures. Outstanding PPP loans atJune 30, 2022 andDecember 31, 2021 totaled$404,000 and$6,935,000 , respectively, and unrecognized fees at those dates totaled$25,000 and$272,000 , respectively. LCNB continues to closely monitor the COVID-19 pandemic and its impact on its business, customers, employees, vendors, and service providers and expects to make future changes to respond to the pandemic as this situation continues to evolve.
Critical Accounting Estimates
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb inherent losses in the loan portfolio, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of specific and general components. The specific component typically relates to loans that are classified as doubtful, substandard, or special mention. For such loans an allowance is established when the discounted cash flows or collateral value is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors, which include trends in underperforming loans, trends in the volume and terms of loans, economic trends and conditions, concentrations of credit, trends in the quality of loans, and borrower financial statement exceptions.
Based on its evaluations, management believes that the allowance for loan losses will be adequate to absorb estimated losses inherent in the current loan portfolio.
Acquired Credit Impaired Loans. LCNB accounts for acquisitions using the
acquisition method of accounting, which requires that assets acquired and
liabilities assumed be measured at their fair values at the acquisition date.
Acquired loans are reviewed to determine if there is evidence of deterioration
in credit quality since inception and if it is probable that LCNB will be unable
to collect all amounts due under the contractual loan agreements. The analysis
includes expected prepayments and estimated cash flows including principal and
interest payments at the date of acquisition. The amount in excess of the
estimated future cash flows is not accreted into earnings. The amount in excess
of the estimated future cash flows over the book value of the loan is accreted
into interest income over the remaining life of the loan (accretable yield).
LCNB records these loans on the acquisition date at their fair values. Thus, an
allowance for estimated future losses is not established on the acquisition
date. Subsequent to the date of acquisition, expected future cash flows on loans
acquired are updated and any losses or reductions in estimated cash flows which
arise subsequent to the date of acquisition are reflected as a charge through
the provision for loan losses. An increase in the expected cash flows adjusts
the level of the accretable yield recognized on a prospective basis over the
remaining life of the loan. Due to the number, size, and complexity of loans
within the acquired loan portfolio, there is always a possibility of inherent
undetected losses.
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LCNB CORP. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Accounting for Intangibles. LCNB's intangible assets atJune 30, 2022 are composed primarily of goodwill and core deposit intangibles related to acquisitions of other financial institutions. It also includes mortgage servicing rights recorded from sales of mortgage loans to the Federal Home Loan Mortgage Corporation and mortgage servicing rights acquired through the acquisition ofEaton National Bank & Trust Co. andColumbus First Bancorp, Inc. Goodwill is not subject to amortization, but is reviewed annually for impairment or sooner if circumstances indicate a possible impairment. Core deposit intangibles are being amortized on a straight line basis over their respective estimated weighted average lives. Mortgage servicing rights are capitalized by allocating the total cost of loans between mortgage servicing rights and the loans based on their estimated fair values. Capitalized mortgage servicing rights are amortized to loan servicing income in proportion to and over the period of estimated servicing income, subject to periodic review for impairment. Fair Value Accounting forDebt Securities . Debt securities classified as available-for-sale are carried at estimated fair value. Unrealized gains and losses, net of taxes, are reported as accumulated other comprehensive income or loss in shareholders' equity. Fair value is estimated using market quotations forU.S. Treasury investments. Fair value for the majority of the remaining available-for-sale securities is estimated using the discounted cash flow method for each security with discount rates based on rates observed in the market.
Results of Operations
Net income for the three and six months endedJune 30, 2022 was$5,618,000 and$10,141,000 , respectively (total basic and diluted earnings per share of$0.49 and$0.87 ). This compares to net income of$5,290,000 and$10,530,000 (total basic and diluted earnings per share of$0.41 and$0.82 ) for the same three and six month periods in 2021. Net interest income for the three and six months endedJune 30, 2022 was$15,167,000 and$29,390,000 , respectively, compared to$14,369,000 and$28,741,000 for the same periods in 2021. Favorably contributing to the variances for both the three- and six-month periods were overall growth in the taxable debt securities and loan portfolios and decreases in the average rates paid on deposits, aided by a shift from higher cost certificates of deposit to lower cost demand and savings products. An increase in the provision for loan losses negatively affected earnings during the 2022 period. LCNB recorded a provision of$377,000 and$426,000 for the respective three and six month periods endedJune 30, 2022 , compared to credits of$15,000 and$67,000 for the same three and six month periods in 2021. Non-interest income for the three and six months endedJune 30, 2022 was$3,528,000 and$7,078,000 , respectively. This compares to$4,314,000 and$7,779,000 for the same periods in 2021. Non-interest income for the three and six months endedJune 30, 2021 included a one-time refund on the Company'sOhio Financial Institutions Taxes, which was included in other operating income. The remainder of the second quarter decrease was primarily due to decreased fiduciary income, decreased gains from sales of loans, and net unrealized losses recognized on LCNB's equity securities investment portfolio. The remainder of the decrease for the six month period was primarily due to net unrealized losses recognized on LCNB's equity securities investment portfolio. Non-interest expense for the three and six months endedJune 30, 2022 was$11,469,000 and$23,719,000 , respectively, compared to$12,208,000 and$23,700,000 for the same three and six month periods in 2021. The 2022 periods benefited from an$889,000 gain recognized on the sale of other real estate owned, partially offset by a$140,000 impairment charge included in other operating expense that was associated with the sale of LCNB'sColerain Office building inJuly 2022 . 38
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LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Net Interest Income
Three Months Ended June 30, 2022 vs. June 30, 2021
LCNB's primary source of earnings is net interest income, which is the
difference between earnings from loans and other investments and interest paid
on deposits and other liabilities. The following table presents, for the three
months ended June 30, 2022 and June 30, 2021 , average balances for
interest-earning assets and interest-bearing liabilities, the income or expense
related to each item, and the resulting average yields earned or rates paid.
Three Months Ended June 30,
2022 2021
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
Loans (1) $ 1,375,710 14,548 4.24 % $ 1,328,760 14,108 4.26 %
Interest-bearing demand deposits 8,644 21 0.97 % 24,770 14 0.23 %
Federal Reserve Bank stock 4,652 140 12.07 % 4,652 140 12.07 %
Federal Home Loan Bank stock 5,203 38 2.93 % 5,203 26 2.00 %
Investment securities:
Equity securities 4,456 19 1.71 % 4,619 18 1.56 %
Debt securities, taxable 296,280 1,254 1.70 % 264,908 905 1.37 %
Debt securities, non-taxable (2) 27,558 238 3.46 % 33,214 276 3.33 %
Total earnings assets 1,722,503 16,258 3.79 % 1,666,126 15,487 3.73 %
Non-earning assets 195,604 191,587
Allowance for loan losses (5,532) (5,678)
Total assets $ 1,912,575 $ 1,852,035
NOW and money fund deposits $ 496,818 193 0.16 % $ 462,320 142 0.12 %
Savings deposits 457,027 159 0.14 % 404,602 159 0.16 %
IRA and time certificates 181,110 423 0.94 % 219,625 644 1.18 %
Short-term borrowings 18,263 163 3.58 % 716 1 0.56 %
Long-term debt 12,637 103 3.27 % 15,571 114 2.94 %
Total interest-bearing liabilities 1,165,855 1,041 0.36 % 1,102,834 1,060 0.39 %
Demand deposits 520,434 483,523
Other liabilities 20,641 24,027
Capital 205,645 241,651
Total liabilities and capital $ 1,912,575 $ 1,852,035
Net interest rate spread (3) 3.43 % 3.34 %
Net interest income and net interest
margin on a taxable-equivalent basis (4) 15,217 3.54 % 14,427 3.47 %
Ratio of interest-earning assets to
interest-bearing liabilities 147.75 % 151.08 %
(1)Includes non-accrual loans. (2)Income from tax-exempt securities is included in interest income on a taxable-equivalent basis. Interest income has been divided
by a factor comprised of the complement of the incremental tax rate of 21%.
(3)The net interest spread is the difference between the average rate on total
interest-earning assets and interest-bearing liabilities.
(4)The net interest margin is the taxable-equivalent net interest income divided
by average interest-earning assets.
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LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The following table presents the changes in taxable-equivalent basis interest
income and expense for each major category of interest-earning assets and
interest-bearing liabilities and the amount of change attributable to volume and
rate changes for the three months ended June 30, 2022 as compared to the same
period in 2021. Changes not solely attributable to rate or volume have been
allocated to volume and rate changes in proportion to the relationship of
absolute dollar amounts of the changes in each.
Three Months Ended
June 30, 2022 vs. 2021
Increase (decrease) attributable to:
Volume Rate Total
(In thousands)
Interest-earning Assets:
Loans $ 497 (57) 440
Interest-bearing demand deposits (14) 21 7
Federal Reserve Bank stock - - -
Federal Home Loan Bank stock - 12 12
Investment securities:
Equity securities (1) 2 1
Debt securities, taxable 116 233 349
Debt securities, non-taxable (49) 11 (38)
Total interest income 549 222 771
Interest-bearing Liabilities:
NOW and money fund deposits 11 40 51
Savings deposits 19 (19) -
IRA and time certificates (102) (119) (221)
Short-term borrowings 133 29 162
Long-term debt (23) 12 (11)
Total interest expense 38 (57) (19)
Net interest income $ 511 279 790
Net interest income on a fully taxable-equivalent basis for the three months
ended June 30, 2022 totaled $15,217,000 , an increase of $790,000 from the
comparable period in 2021. Total interest income increased $771,000 and total
interest expense decreased $19,000 .
The $771,000 increase in total interest income was due primarily to a $440,000
increase in loan interest income and a $349,000 increase in interest income from
taxable debt securities. The increase in loan interest income was primarily due
to a $47.0 million increase in the average balance of LCNB's loan portfolio,
partially offset by a net 2 basis point (a basis point equals 0.01%) decrease in
the average rate earned on the loan portfolio. Prepayment penalty fees totaling
$638,000 were included in loan interest income during the second quarter of
2022, as compared to $391,000 in such fees during the second quarter of 2021.
The increase in interest income from taxable debt securities was due to an $31.4
million increase in average securities and to a 33 basis point increase in the
average rate earned on these securities, reflecting higher market rates
available on the new purchases.
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LCNB CORP. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The$19,000 decrease in total interest expense was primarily due to a$221,000 decrease in interest expense for IRA and time certificates partially offset by a$162,000 increase in interest expense for short-term borrowings. Interest expense for IRA and time certificates decreased due to a 24 basis point decrease in the average rate paid for these deposits and to a$38.5 million decrease in the average balance of these deposits. Management believes the decrease reflects customer preferences for liquidity during uncertain economic periods. Balances in demand deposits, NOW and money fund deposits, and savings deposits have grown, while balances in IRA and time deposits have decreased. Interest expense for short-term borrowings increased primarily because of a$17.5 million increase in average borrowings outstanding and secondarily to a 302 basis point increase in the average rate paid on such borrowings, reflecting a new one-year line of credit borrowing originated duringFebruary 2022 . Increases in market rates during 2022 were primarily caused by increases in the Targeted Federal Funds rate by theFOMC . The Targeted Federal Funds rate was increased by 25 basis points during the first quarter of 2022 and by 125 basis points during the second quarter of 2022. This rate was increased by an additional 75 basis points duringJuly 2022 with more increases forecasted to occur during the remainder of 2022 and into 2023. 41
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LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Six Months Ended June 30, 2022 vs. June 30, 2021
The following table presents, for the three months ended June 30, 2022 and
June 30, 2021 , average balances for interest-earning assets and interest-bearing
liabilities, the income or expense related to each item, and the resulting
average yields earned or rates paid.
Six Months Ended June 30,
2022 2021
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
Loans (1) $ 1,376,315 28,334 4.15 % $ 1,321,323 28,643 4.37 %
Interest-bearing demand deposits 9,191 29 0.64 % 20,226 27 0.27 %
Federal Reserve Bank stock 4,652 140 6.07 % 4,652 140 6.07 %
Federal Home Loan Bank stock 5,203 65 2.52 % 5,203 52 2.02 %
Investment securities:
Equity securities 4,533 36 1.60 % 4,560 37 1.64 %
Debt securities, taxable 297,242 2,349 1.59 % 238,411 1,623 1.37 %
Debt securities, non-taxable (2) 27,802 477 3.46 % 33,691 559 3.35 %
Total earnings assets 1,724,938 31,430 3.67 % 1,628,066 31,081 3.85 %
Non-earning assets 195,344 191,517
Allowance for loan losses (5,517) (5,696)
Total assets $ 1,914,765 $ 1,813,887
NOW and money fund deposits $ 503,994 340 0.14 % $ 441,193 274 0.13 %
Savings deposits 450,670 306 0.14 % 389,979 307 0.16 %
IRA and time certificates 185,185 868 0.95 % 226,840 1,392 1.24 %
Short-term borrowings 15,399 249 3.26 % 530 2 0.76 %
Long-term debt 11,326 177 3.15 % 17,619 248 2.84 %
Total interest-bearing liabilities 1,166,574 1,940 0.34 % 1,076,161 2,223 0.42 %
Demand deposits 511,183 471,327
Other liabilities 21,379 24,814
Capital 215,629 241,585
Total liabilities and capital $ 1,914,765 $ 1,813,887
Net interest rate spread (3) 3.33 % 3.43 %
Net interest income and net interest
margin on a taxable-equivalent basis (4) 29,490 3.45 % 28,858 3.57 %
Ratio of interest-earning assets to
interest-bearing liabilities 147.86 % 151.28 %
(1)Includes non-accrual loans. (2)Income from tax-exempt securities is included in interest income on a taxable-equivalent basis. Interest income has been divided
by a factor comprised of the complement of the incremental tax rate of 21%.
(3)The net interest spread is the difference between the average rate on total
interest-earning assets and interest-bearing liabilities.
(4)The net interest margin is the taxable-equivalent net interest income divided
by average interest-earning assets.
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LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The following table presents the changes in taxable-equivalent basis interest
income and expense for each major category of interest-earning assets and
interest-bearing liabilities and the amount of change attributable to volume and
rate changes for the six months ended June 30, 2022 as compared to the same
period in 2021. Changes not solely attributable to rate or volume have been
allocated to volume and rate changes in proportion to the relationship of
absolute dollar amounts of the changes in each.
Six Months Ended June 30, 2022 vs. 2021
Increase (decrease) attributable to:
Volume Rate Total
(In thousands)
Interest-earning Assets:
Loans $ 1,165 (1,474) (309)
Interest-bearing demand deposits (20) 22 2
Federal Reserve Bank stock - - -
Federal Home Loan Bank stock - 13 13
Investment securities:
Equity securities - (1) (1)
Debt securities, taxable 439 287 726
Debt securities, non-taxable (100) 18 (82)
Total interest income 1,484 (1,135) 349
Interest-bearing Liabilities:
NOW and money fund deposits 41 25 66
Savings deposits 44 (45) (1)
IRA and time certificates (229) (295) (524)
Short-term borrowings 221 26 247
Long-term debt (96) 25 (71)
Total interest expense
(19) (264) (283)
Net interest income $ 1,503 (871) 632
Net interest income on a fully taxable-equivalent basis for the six months ended
June 30, 2022 totaled $29,490,000 , an increase of $632,000 from the comparable
period in 2021. Total interest income increased $349,000 and total interest
expense decreased $283,000 .
The $349,000 increase in total interest income was due primarily to a $726,000
increase in interest income from taxable debt securities, partially offset by a
$309,000 decrease in loan interest income. The increase in interest income from
taxable debt securities was due to a $58.8 million increase in average
securities and to a 22 basis point increase in the average rate earned on these
securities, reflecting higher market rates available on the new purchases. The
decrease in loan interest income was primarily due to a 22 basis point decrease
in the average rate earned on loans, largely offset by a $55.0 million increase
in the average balance of LCNB's loan portfolio. Prepayment penalty fees
totaling $657,000 were included in loan interest income during the first half of
2022, as compared to $502,000 in such fees during the first half of 2021.
The $283,000 decrease in total interest expense was due to a $524,000 decrease
in interest expense for IRA and time certificates, partially offset by a
$247,000 increase in interest expense for short-term borrowings. Interest
expense for IRA and time certificates decreased due to a 29 basis point decrease
in the average rate paid for these deposits and to a $41.7 million decrease in
the average balance of these deposits. Management believes the decrease reflects
customer preferences for liquidity during uncertain economic periods. Balances
in demand deposits, NOW and money fund deposits, and savings deposits have
grown, while balances in IRA and time deposits have decreased. Interest expense
for short-term borrowings increased primarily due to a $14.9 million increase in
average borrowings outstanding and secondarily to a 250 basis point increase in
the average rate paid for these borrowings, reflecting a new one-year line of
credit borrowing originated during February 2022 .
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LCNB CORP. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Provision and Allowance For Loan Losses The total provision for loan losses is determined based upon management's evaluation as to the amount needed to maintain the allowance for loan losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio. For analysis purposes, the loan portfolio is separated into pools of similar loans. These pools include commercial & industrial loans, owner occupied commercial real estate loans, non-owner occupied commercial real estate loans, real estate loans secured by farms, real estate loans secured by multi-family dwellings, residential real estate loans secured by senior liens on 1-4 family dwellings, residential real estate loans secured by junior liens on 1-4 family dwellings, home equity line of credit loans, consumer loans, loans for agricultural purposes not secured by real estate, construction loans secured by 1-4 family dwellings, construction loans secured by other real estate, and several smaller classifications. Within each pool of loans, LCNB examines a variety of factors to determine the adequacy of the allowance for loan losses, including historic charge-off percentages, overall pool quality, a review of specific problem loans, current economic trends and conditions that may affect borrowers' ability to pay, and the nature, volume, and consistency of the loan pool. The provision for loan losses for the three and six months endedJune 30, 2022 was$377,000 and$426,000 , respectively, compared to credits of$15,000 and$67,000 for the same periods in 2021. The increase in the provision for loan losses was partially due to slightly higher net charge-offs and additional provisioning for the increase in volume of the commercial real estate loan portfolio. Calculating an appropriate level for the allowance and provision for loan losses involves a high degree of management judgment and is, by its nature, imprecise. Revisions may be necessary as more information becomes available. Net charge-offs for the three and six months endedJune 30, 2022 were$74,000 and$99,000 , respectively, compared to net charge-offs of$12,000 and$9,000 for the same three and six-month periods in 2021.
Non-Interest Income
A comparison of non-interest income for the three and six months ended
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 Difference 2022 2021 Difference
Fiduciary income $ 1,643 1,735 (92) 3,338 3,264 74
Service charges and fees on deposit
accounts 1,546 1,519 27 2,952 2,885 67
Bank owned life insurance income 269 269 - 534 536 (2) Gains from sales of loans 64 151 (87) 188 194 (6) Other operating income 6 640 (634) 66 900 (834) Total non-interest income$ 3,528 4,314 (786) 7,078 7,779 (701) Reasons for changes include: •Fiduciary income decreased during the second quarter primarily due to a decrease in the fair value of trust and brokerage assets managed, on which fees are based. •Gains from sales of loans decreased during the second quarter primarily due to a lower volume of residential real estate loan sales. •Other operating income for the 2021 periods includes a state tax refund of$508,000 recognized during the second quarter 2021. The remainder of the decrease is primarily due to an increase in net unrealized losses recognized on equity securities. 44
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LCNB CORP. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Non-Interest Expense
A comparison of non-interest expense for the three and six months ended
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 Difference 2022 2021 Difference
Salaries and employee benefits $ 7,014 7,111 (97) $ 14,229 13,544 685
Equipment expenses 428 443 (15) 836 811 25
Occupancy expense, net 735 729 6 1,510 1,523 (13)
State financial institutions tax 437 437 - 873 881 (8)
Marketing 368 357 11 630 625 5 Amortization of intangibles 112 260 (148) 252 517
(265)
FDIC insurance premiums, net 134 123 11 260 236 24 Contracted services 679 623 56 1,289 1,163 126 Other real estate owned, net (879) 1 (880) (879) 2
(881)
Other non-interest expense 2,441 2,124 317 4,719 4,398 321 Total non-interest expense$ 11,469 12,208 (739)$ 23,719 23,700 19 Reasons for changes include: •Salaries and employee benefits for the six months period increased primarily due to overall wage and benefit increases, increased compensation expense for restricted stock grants, and to a higher amount of personnel expenses deferred in 2021 attributable to the high volume of PPP loans originated in that period. •Amortization of intangibles decreased because the core deposit intangibles from the First Capital Bancshares, Inc. andEaton National Bank & Trust Co. acquisitions amortized in full during the first quarter 2022. •Other real estate owned, net for the 2022 periods is primarily due to a gain recognized on the sale of foreclosed property, slightly offset by other expenses recognized on such property. •Other non-interest expense for the 2022 periods includes a$140,000 impairment charge recognized on a closed office building. OnJune 21, 2022 , theFDIC issued a proposed rule that, if adopted in its current form, would increase the initial base deposit insurance assessment rate by two basis points, beginning with the first quarterly assessment period of 2023. According to theFDIC , the proposal increases the likelihood that its designated reserve ratio will reach the required minimum level of 1.35% by the statutory deadline ofSeptember 30, 2028 and will support progress toward achieving the long-term goal of a 2% ratio. LCNB's current initial base deposit insurance rate is three basis points and it will increase to five basis points if the proposal is adopted. The proposed increase would remain in effect until the long-term goal of a 2%FDIC designated reserve ratio is achieved.
Income Taxes
LCNB's effective tax rate for the three and six months endedJune 30, 2022 was 18.0% and 17.7%, respectively, compared to 18.5% and 18.2% for the three and six months endedJune 30, 2021 . The difference between the statutory rate of 21% and the effective tax rates is primarily due to tax-exempt interest income from municipal securities, tax-exempt earnings from bank owned life insurance, tax-exempt earnings fromLCNB Risk Management, Inc. , and tax credits and losses related to investments in affordable housing tax credit limited partnerships. 45
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LCNB CORP. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Financial Condition
A comparison of balance sheet line items at
June 30, 2022 December 31, 2021 Difference $ Difference %
ASSETS:
Total cash and cash equivalents$ 31,815 18,136 13,679
75.42 %
Investment securities: Equity securities with a readily determinable fair value, at fair value
2,250 2,546 (296) (11.63) % Equity securities without a readily determinable fair value, at cost
2,099 2,099 - - %
Debt securities, available-for-sale, at fair value 301,232 308,177 (6,945) (2.25) %
Debt securities, held-to-maturity, at cost 22,516 22,972 (456) (1.99) %
Federal Reserve Bank stock, at cost 4,652 4,652 - - %
Federal Home Loan Bank stock, at cost 5,203 5,203 - - %
Loans, net 1,367,644 1,363,939 3,705 0.27 %
Premises and equipment, net 34,519 35,385 (866) (2.45) %
Operating lease right-of-use assets 6,101 6,357 (256) (4.03) %
Goodwill 59,221 59,221 - - %
Core deposit and other intangibles 2,178 2,473 (295) (11.93) %
Bank owned life insurance 43,758 43,224 534 1.24 %
Interest receivable 7,448 7,999 (551) (6.89) %
Other assets 21,991 21,246 745 3.51 %
Total assets $ 1,912,627 1,903,629 8,998 0.47 %
LIABILITIES:
Deposits:
Non-interest-bearing $ 499,124 501,531 (2,407) (0.48) %
Interest-bearing 1,159,701 1,127,288 32,413 2.88 %
Total deposits 1,658,825 1,628,819 30,006 1.84 %
Short-term borrowings 5,000 - 5,000 N/A
Long-term debt 25,000 10,000 15,000 150.00 %
Operating lease liabilities 6,227 6,473 (246) (3.80) %
Accrued interest and other liabilities 14,615 19,733 (5,118) (25.94) %
Total liabilities 1,709,667 1,665,025 44,642 2.68 %
SHAREHOLDERS' EQUITY:
Common shares 143,635 143,130 505 0.35 %
Retained earnings 131,894 126,312 5,582 4.42 %
Treasury shares at cost (50,629) (29,029) (21,600) 74.41 %
Accumulated other comprehensive loss, net of taxes (21,940) (1,809) (20,131) 1,112.82 %
Total shareholders' equity 202,960 238,604 (35,644) (14.94) %
Total liabilities and shareholders' equity $ 1,912,627 1,903,629 8,998 0.47 %
Reasons for changes include:
•Debt securities, available-for-sale, decreased due to maturities and calls of
securities totaling $13.7 million and decreases in market value totaling $25.5
million , largely offset by purchases of additional securities totaling $32.8
million .
•Net loans increased due to organic growth in the loan portfolio. Most of the
growth occurred in the commercial real estate and commercial and industrial
portfolios, partially offset by decreases in the residential real estate,
consumer, and agricultural loan portfolios.
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LCNB CORP. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) •Interest-bearing deposits have grown substantially since the start of the COVID-19 pandemic and this trend continued during the first six months of 2022. Management believes the growth reflects customer preferences for liquidity during uncertain economic periods. Balances in NOW and savings accounts grew, while balances in IRA and time deposits decreased. •Short-term borrowings increased due to a$20 million one-year revolving line of credit obtained inFebruary 2022 . The borrowing was used to finance the repurchase of 1,051,688 shares of LCNB common stock. DuringJune 2022 , this revolving line of credit was restructured into a$15 million amortizing term loan with a maturity of three years and a$5 million revolving line of credit with a maturity of one year. •Long-term debt increased due to the$15 million term loan referred to above. •Accrued interest and other liabilities decreased due to a combination of decreases in accrued bonuses caused by the payment of annual bonuses in January, a decrease in LIHTC liabilities due to funding payments made during the first half, and net deferred federal income taxes that were categorized as a net asset atJune 30, 2022 being categorized as a net liability atDecember 31, 2021 . •Treasury shares increased because of the repurchase of 1,084,723 share of common stock during 2022, which represents 8.7% of the shares outstanding atDecember 31, 2021 . •Accumulated other comprehensive loss, net of taxes increased because of market-driven decreases in the fair value of LCNB's debt security investments.
The Bank must meet certain minimum capital requirements set by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company's and Bank's financial statements. LCNB's and the Bank's capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors. In addition to the minimum capital requirements, a financial institution needs to maintain a Capital Conservation Buffer composed of Common Equity Tier 1 Capital of at least 2.5% above its minimum risk-weighted capital requirements to avoid limitations on its ability to make capital distributions, including dividend payments to shareholders and certain discretionary bonus payments to executive officers. A financial institution with a buffer below 2.5% is subject to increasingly stringent limitations on capital distributions as the buffer approaches zero.
For various regulatory purposes, financial institutions are classified into categories based upon capital adequacy:
Minimum Requirement
with Capital To Be Considered
Minimum Requirement Conservation Buffer Well-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 8.0 % 10.5 % 10.0 %
risk-weighted assets
Leverage Ratio (Tier 1 Capital to adjusted quarterly average 4.0 % N/A 5.0 %
total assets)
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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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):
June 30, 2022 December 31, 2021
Regulatory Capital:
Shareholders' equity $ 217,508 234,451
Goodwill and other intangibles (60,403) (60,655)
Accumulated other comprehensive (income) loss 21,940 1,809
Tier 1 risk-based capital 179,045 175,605
Eligible allowance for loan losses 5,833 5,506
Total risk-based capital $ 184,878 181,111
Capital ratios:
Common Equity Tier 1 Capital to risk-weighted assets 12.01 % 12.25 %
Tier 1 Capital to risk-weighted assets 12.01 % 12.25 %
Total Capital to risk-weighted assets 12.40 % 12.64 %
Leverage 9.58 % 9.58 %
On September 17, 2019 , the FDIC finalized a rule that introduced an optional
simplified measure of capital adequacy for qualifying community banking
organizations, as required by the Economic Growth, Regulatory Relief and
Consumer Protection Act. The simplified rule was designed to reduce burden by
removing the requirements for calculating and reporting risk-based capital
ratios for qualifying community banking organizations that opt into the
framework. Its use was permitted beginning with the March 31, 2020 Call Report.
Qualifications to use the simplified approach include having a tier 1 leverage
ratio of greater than 9%, less than $10 billion in total consolidated assets,
and limited amounts of off-balance-sheet exposures and trading assets and
liabilities. A qualifying community banking organization that opts into the
Community Bank Leverage Ratio framework and meets all requirements under the
framework will be considered to have met the well-capitalized ratio requirements
under the Prompt Corrective Action regulations and will not be required to
report or calculate risk-based capital. LCNB qualifies to use the simplified
measure, but did not opt in for the June 30, 2022 regulatory capital
calculations.
Liquidity
LCNB depends on dividends from the Bank for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders. National banking law limits the amount of dividends the Bank may pay to the sum of retained net income for the current year plus retained net income for the previous two years. Prior approval from the OCC, the Bank's primary regulator, is necessary for the Bank to pay dividends in excess of this amount. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines. Management believes the Bank will be able to pay anticipated dividends to LCNB without needing to request approval. The Bank is not aware of any reasons why it would not receive such approval, if required. Effective liquidity management ensures that cash is available to meet the cash flow needs of borrowers and depositors, as well as meeting LCNB's operating cash needs. Primary funding sources include customer deposits with the Bank, short-term and long-term borrowings from theFederal Home Loan Bank , short-term line of credit arrangements with two correspondent banks, and interest and repayments received from LCNB's loan and investment portfolios. Total remaining borrowing capacity with theFederal Home Loan Bank atJune 30, 2022 was approximately$220.4 million . Additional borrowings of approximately$55.0 million were available through the line of credit arrangements atJune 30, 2022 . Management closely monitors the level of liquid assets available to meet ongoing funding needs. It is management's intent to maintain adequate liquidity so that sufficient funds are readily available at a reasonable cost. LCNB experienced no liquidity or operational problems as a result of current liquidity levels. 48
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