LCNB CORP. Introduction
The following is management's discussion and analysis of the consolidated financial condition and consolidated results of operations of LCNB. It is intended to amplify certain financial information regarding LCNB and should be read in conjunction with the consolidated financial statements and related notes contained in the 2021 Annual Report to Shareholders.
Overview
Net income for 2021 was$20,974,000 (basic and diluted earnings per share of$1.66 ), compared to$20,075,000 (basic and diluted earnings per share of$1.55 ) in 2020 and$18,912,000 (basic and diluted earnings per share of$1.44 ) in 2019 . The following items affected earnings for the years indicated: •Net loans increased 5.4% to$1.36 billion atDecember 31, 2021 compared to$1.29 billion atDecember 31, 2020 . •Total assets increased 9.0% to$1.90 billion atDecember 31, 2021 compared to$1.75 billion atDecember 31, 2020 . •Total deposits increased 11.9% to$1.63 billion atDecember 31, 2021 compared to$1.46 billion atDecember 31, 2020 . •Wealth Management assets, which includes trust, investment, and brokerage accounts, increased 14.7% to$1.06 billion atDecember 31, 2021 compared to$0.92 billion atDecember 31, 2020 . •The credit for loan losses during 2021 was$269,000 , compared to provisions for loan losses of$2,014,000 and$207,000 for 2020 and 2019, respectively. The provision for loan losses in 2020 was higher partially due to adjustments for potential impacts from the economic recession caused by the COVID-19 pandemic. •Net gains from sales of loans totaled$852,000 in 2021,$2,297,000 in 2020, and$328,000 in 2019. Gains were higher in 2020 primarily due to the volume of loans sold. Coronavirus Update/Status The ongoing COVID-19 pandemic has created extensive disruptions to the global economy and to the lives of individuals throughout the world. Governments, businesses, and the public have taken and are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of or restrictions on the operations of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the effects of COVID-19 are rapidly evolving and 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 have continued since the beginning of 2021, the pandemic has not yet been contained and economic activity has not yet returned to pre-pandemic levels. OnMay 12, 2021 ,Ohio GovernorMike DeWine announced that the vast majority ofOhio Department of Health orders related to COVID-19 would be rescinded onJune 2, 2021 . Measures that have been removed include facial covering protocols, social distancing guidelines, and capacity restrictions for indoor and outdoor events. Businesses can choose to continue facial mask and social distancing protocols in their facilities. Further, onJune 17, 2021 ,Governor DeWine announced thatOhio's State of Emergency caused by the COVID-19 pandemic would be lifted, effective the next day. The National Emergency Declaration remains in force, as does the National Public Health Emergency Declaration. In response, LCNB management rescinded requirements to wear facial masks and practice social distancing, effectiveJune 2, 2021 , except for branches located in areas with local mandates. Employees and customers at branches without local mandates who wish to continue wearing facial masks may continue to do so. Depending on local conditions and employee availability, branch hours of operation and lobby usage may be adjusted for brief periods of time. Plexiglass barriers remain at teller stations and will remain until and if management decides to remove them. Remote and hybrid work arrangements remain available for certain employees and departments. Management continues to monitor LCNB's market area for areas of COVID-19 resurgence or regression and may adjust local branch or corporate operations accordingly. -30-
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Because of the economic disruption caused by the pandemic, LCNB provided COVID-19 related payment deferrals, primarily agreements to accept interest only payments for a period of time or agreements to defer principal and interest payments for a period of time, on a number of loans. There were no loans remaining on deferral for COVID-19 reasons atDecember 31, 2021 . Loan balances atDecember 31, 2021 ,December 31, 2020 , and the time of deferral were as follows (in thousands): At December 31, 2021 At December 31, 2020 At Time of Deferral Commercial and industrial $ - - 33,683 Commercial, secured by real estate - 20,231 337,263 Residential real estate - 324 48,903 Consumer - 21 868 Total loans deferred $ - 20,576 420,717 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 atDecember 31, 2021 and 2020 totaled$6,935,000 and$21,088,000 , respectively, and unrecognized fees at those dates totaled$272,000 and$747,000 , respectively.
LCNB continues to closely monitor this pandemic and expects to make future changes to respond to the pandemic as this situation continues to evolve.
Net Interest Income
LCNB's primary source of earnings is net interest income, which is the
difference between earnings from loans and other investments and interest paid
on deposits and other liabilities. The following table presents, for the years
indicated, average balances for interest-earning assets and interest-bearing
liabilities, the income or expense related to each item, and the resulting
average yields earned or rates paid.
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LCNB CORP. AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Years ended December 31,
2021 2020 2019
Average Interest Average Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
Loans (1) $ 1,329,072 $ 56,142 4.22 % $ 1,306,314 $ 59,267 4.54 % $ 1,221,375 $ 59,009 4.83 %
Interest-bearing demand deposits 14,876 48 0.32 % 20,808 83 0.40 % 8,389 241 2.87 %
Interest-bearing time deposits - - - % - - - % 488 11 2.25
%
Federal Reserve Bank stock 4,652 279 6.00 % 4,652 279 6.00 % 4,652 279 6.00
%
Federal HomeLoan Bank stock 5,203 104 2.00 % 5,203 117 2.25 % 5,108 249 4.87
%
Investment securities: Equity securities 4,576 72 1.57 % 4,303 91 2.11 % 4,310 127 2.95
%
Debt securities, taxable 272,251 3,668 1.35 % 148,415 2,916 1.96 % 159,377 3,601 2.26
%
Debt securities, non-taxable (2) 32,937 1,094 3.32 % 38,439 1,300 3.38 % 73,634 2,123 2.88 % Total earning assets 1,663,567 61,407 3.69 % 1,528,134 64,053 4.19 % 1,477,333 65,640 4.44 % Non-earning assets 193,311 183,819 169,314 Allowance for loan losses (5,701) (5,029) (4,056) Total assets$ 1,851,177 $ 1,706,924 $ 1,642,591 NOW and money fund deposits$ 463,636 556 0.12 %$ 391,490 838 0.21 %$ 400,094 1,825 0.46 % Savings deposits 407,298 599 0.15 % 323,867 595 0.18 % 287,364 621 0.22 % IRA and time certificates 214,344 2,423 1.13 % 289,775 5,201 1.79 % 327,321 7,080 2.16 % Short-term borrowings 821 6 0.73 % 372 7 1.88 % 6,064 227 3.74 % Long-term debt 16,148 469 2.90 % 34,265 921 2.69 % 42,733 1,035 2.42 % Total interest-bearing liabilities 1,102,247 4,053 0.37 % 1,039,769 7,562 0.73 % 1,063,576 10,788 1.01
%
Noninterest-bearing demand deposits 482,402 407,961 336,257 Other liabilities 25,705 22,798 18,119 Capital 240,823 236,396 224,639 Total liabilities and capital$ 1,851,177 $ 1,706,924 $ 1,642,591 Net interest rate spread (3) 3.32 % 3.46 % 3.43
%
Net interest income and net interest margin on a tax equivalent basis (4)
$ 57,354 3.45 %$ 56,491 3.70 %$ 54,852 3.71 % Ratio of interest-earning assets to interest-bearing liabilities 150.93 % 146.97 % 138.90 % (1)Includes non-accrual loans if any. (2)Income from tax-exempt securities is included in interest income on a taxable-equivalent basis. Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 21%. (3)The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities. (4)The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets. -32-
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table presents the changes in interest income and expense for each
major category of interest-earning assets and interest-bearing liabilities and
the amount of change attributable to volume and rate changes for the years
indicated. Changes not solely attributable to rate or volume have been allocated
to volume and rate changes in proportion to the relationship of absolute dollar
amounts of the changes in each.
For the years ended December 31,
2021 vs. 2020 2020 vs. 2019
Increase (decrease) due to Increase (decrease) due to
Volume Rate Total Volume Rate Total
(In thousands)
Interest income attributable to:
Loans (1) $ 1,018 (4,143) (3,125) 3,970 (3,712) 258
Interest-bearing demand deposits (21) (14) (35) 163 (321) (158)
Interest-bearing time deposits - - - (11) - (11) Federal Reserve Bank stock - - - - - - Federal Home Loan Bank stock - (13) (13) 5 (137) (132) Investment securities: Equity securities 5 (24) (19) - (36) (36) Debt securities, taxable 1,878 (1,126) 752 (237) (448) (685) Debt securities, non-taxable (2) (183) (23) (206) (1,144) 321 (823) Total interest income 2,697 (5,343) (2,646) 2,746 (4,333) (1,587) Interest expense attributable to: NOW and money fund deposits 134 (416) (282) (38) (949) (987) Savings deposits 136 (132) 4 73 (99) (26) IRA and time certificates (1,147) (1,631) (2,778) (756) (1,123) (1,879) Short-term borrowings 5 (6) (1) (144) (76) (220) Long-term debt (521) 69 (452) (220) 106 (114) Total interest expense (1,393) (2,116) (3,509) (1,085) (2,141) (3,226) Net interest income$ 4,090 (3,227) 863 3,831 (2,192) 1,639 (1)Non-accrual loans, if any, are included in average loan balances. (2)Change in interest income from non-taxable investment securities is computed based on interest income determined on a taxable-equivalent yield basis. Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 21%. 2021 vs. 2020. Net interest income on a fully tax-equivalent basis for 2021 totaled$57,354,000 , an increase of$863,000 from 2020. The increase resulted from a decrease in total interest expense of$3,509,000 , partially offset by a decrease in total taxable-equivalent interest income of$2,646,000 . The decrease in total interest income was due primarily to a$3,125,000 decrease in interest income from loans and a$206,000 decrease in interest income from non-taxable debt securities, partially offset by a$752,000 increase in interest income from taxable debt securities. Loan interest decreased due to a 32 basis point decrease in the average rate earned, partially offset by a$22.8 million increase in average loans and by fees recognized from PPP loans of$1,655,000 . Interest income from non-taxable debt securities decreased due to a$5.5 million decrease in average securities and to a 6 basis point decrease in the average rate earned on these securities. Interest income from taxable debt securities increased due to an$123.8 million increase in average securities, partially offset by a 61 basis point decrease in the average rate earned on these securities. -33-
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The decrease in total interest expense was primarily due to a$2,778,000 decrease in interest paid on IRA and time certificates, a$452,000 decrease in interest paid on long-term debt, and a$282,000 decrease in interest paid on NOW and money fund deposits. Interest paid on IRA and time certificates decreased due to a 66 basis point decrease in the average rate paid and to a$75.4 million decrease in average deposit balances. Interest paid on long-term debt decreased due to an$18.1 million decrease in average balances, partially offset by 21 basis point increase in the average rate paid. Interest paid on NOW and money fund deposits decreased due to a 9 basis point decrease in the average rate paid, partially offset by a$72.1 million increase in average balances. Decreases in average rates paid for IRA and time certificates and NOW and money fund deposits were primarily due to decreases in market rates. The increase in the average paid on long-term debt reflects the maturity of comparatively lower rate debt during the year. No new debt was obtained during 2021. 2020 vs. 2019. Net interest income on a fully tax-equivalent basis for 2020 totaled$56,491,000 , an increase of$1,639,000 from 2019. The increase resulted from a decrease in total interest expense of$3,226,000 , partially offset by a decrease in total taxable-equivalent interest income of$1,587,000 . The decrease in total interest income was due primarily to a$685,000 decrease in interest income from taxable debt securities and an$823,000 decrease from taxable-equivalent interest income from non-taxable debt securities. Interest income from taxable debt securities decreased due to an$11.0 million decrease in average securities and to a 30 basis point decrease in the average rate earned on these securities. Interest income from non-taxable debt securities decreased due to a$35.2 million decrease in average securities, partially offset by a 50 basis point increase in the average rate earned on these securities. The decreases in debt securities were invested in the loan portfolio and used to pay down short-term borrowings and long-term debt. Loan interest income increased by$258,000 due to an$84.9 million increase in average loans, largely offset by a 29 basis point decrease in the average rate earned on loans. The decrease in total interest expense was primarily due to a$987,000 decrease in interest paid on NOW and money fund deposits and a$1,879,000 decrease in interest paid on IRA and time certificates. Interest paid on NOW and money fund deposits decreased primarily due to a 25 basis point decrease in the average rate paid and to an$8.6 million decrease in average deposit balances. Interest paid on IRA and time certificates decreased due to a 37 basis point decrease in the average rate paid and to a$37.5 million decrease in average deposit balances. Decreases in average rates paid for NOW and money fund deposits and IRA and time certificates were primarily due to decreases in market rates.
Provisions and Allowance for Loan 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 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 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 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 credit for loan losses for 2021 was$269,000 , compared to provisions of$2,014,000 for 2020 and$207,000 for 2019. The 2020 period included qualitative adjustments for estimated impacts from the economic downturn caused by the COVID-19 pandemic. 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. -34-
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Non-Interest Income
A comparison of non-interest income for 2021, 2020, and 2019 is as follows:
Increase (Decrease)
2021 2020 2019 2021 vs. 2020 2020 vs. 2019
(In thousands)
Fiduciary income $ 6,674 5,009 4,354 1,665 655
Service charges and fees on deposit
accounts 6,036 5,482 5,875 554 (393)
Net gains (losses) on sales of
securities 303 221 (41) 82 262
Bank owned life insurance income 1,074 1,441 943 (367) 498
Net gains from sales of loans 852 2,297 328 (1,445) 1,969
Other operating income 1,293 1,291 889 2 402
Total non-interest income $ 16,232 15,741 12,348 491 3,393
Reasons for changes include:
•Fiduciary income increased during 2021 and 2020 due to a combination of new
accounts and increases in the fair value of trust and brokerage assets managed.
•Service charges and fees on deposit accounts increased during 2021 primarily
due to increases in fees received from debit card usage, partially offset by a
decrease in fee income recognized on the ICS deposit program. Service charges
and fees on deposit accounts decreased during 2020 primarily due to decreases in
fee income recognized on the ICS deposit program, overdraft fees, and smaller
decreases in other fee accounts, partially offset by an increase in fees
received from debit card usage.
•Net gains (losses) on sales of securities were greater during 2021 and 2020 as
compared to 2019 primarily due to market pricing at the times of the sales. The
book value of sales for 2021, 2020, and 2019 were, respectively, $20.9 million ,
$8.6 million , and $84.6 million .
•Bank owned life insurance income was greater in 2020 partially due to $12.0
million of new policies purchased at the beginning of the third quarter 2019 and
partially due to a mortality benefit received during the first quarter 2020.
•Net gains from sales of loans was greater during 2020 as compared to 2021 and
2019 primarily due to the volume of loans sold.
•Other operating income increased in 2020, as compared to 2019, primarily due to
gains recognized on the sale of equity securities, partially offset by decreases
in the fair value of equity security investments.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Non-Interest Expense
A comparison of non-interest expense for 2021, 2020, and 2019 is as follows:
Increase (Decrease)
2021 2020 2019 2021 vs. 2020 2020 vs. 2019
(In thousands)
Salaries and employee benefits $ 27,616 27,178 25,320 438 1,858
Equipment expenses 1,678 1,377 1,209 301 168
Occupancy expense, net 2,949 2,875 2,961 74 (86)
State financial institutions tax 1,758 1,708 1,669 50 39
Marketing 1,239 1,254 1,319 (15) (65)
Amortization of intangibles 1,043 1,046 1,043 (3) 3
FDIC premiums 492 256 225 236 31
ATM expense 1,416 1,028 580 388 448
Computer maintenance and supplies 1,213 1,107 1,094 106 13
Telephone expense 420 706 707 (286) (1)
Contracted services 2,430 1,821 1,865 609 (44)
Merger-related expenses - - 114 - (114)
Other non-interest expense 5,786 5,429 5,416 357 13
Total non-interest expense $ 48,040 45,785 43,522 2,255 2,263
Reasons for changes include:
•Salaries and employee benefits were 1.6% greater in 2021 than in 2020 and 7.3%
greater in 2020 than in 2019. The increase in 2021 was primarily due to
increased employer taxes on employee payroll and increased compensation expense
recognized on restricted stock grants. The increase for 2020 was primarily due
to salary and wage increases, incentive payment increases, and newly hired
employees, including additional business development positions. Increases in
health insurance costs also contributed to the increases for both years.
•Equipment expenses increased during 2021 and 2020 primarily due to increased
depreciation charges for furniture and equipment and increased equipment rental
costs. During 2020, LCNB replaced ATMs that it had previously owned with new
ATMs obtained through an outsourcing arrangement.
•Occupancy expense increased during 2021 primarily due to increased costs for
janitorial service, utilities, and branch rentals. The increase in branch
rentals reflects a new lease for the Union Village Office. Occupancy expense
decreased during 2020 primarily due to decreased costs for facility maintenance
and repairs and smaller decreases in utility costs and depreciation charges for
bank premises, partially offset by higher janitorial costs.
•FDIC premiums were lower in 2020 and 2019 as compared to 2021 because LCNB
received small bank assessment credits from the FDIC during the first and second
quarters of 2020 and the third and fourth quarters of 2019. Premium payments
returned to their normal levels after the second quarter 2020.
•ATM expense increased during 2021 and 2020 partially due to a strategic
decision to outsource LCNB's ATM operations to a third-party vendor, relieving
LCNB branch personnel from various ATM maintenance responsibilities. The
transition took place gradually during 2020 and all ATMs were outsourced during
2021.
•Computer maintenance and supplies increased in 2021 due to increased technology
and software related expenditures designed to offer technological convenience to
customers, to protect the integrity of LCNB's data systems and software, and to
protect the confidentiality of customer information.
•Telephone expense decreased in 2021, as compared to 2020 and 2019, due to
connection modifications.
•Contracted services increased in 2021, as compared to 2020 and 2019, due to
additional fees paid for data services, recruitment services, and general price
increases on other contracted services.
•Other non-interest expense increased in 2021, as compared to 2020 and 2019,
primarily due to increased ATM maintenance costs due to the outsourcing
agreement, increased costs to support LCNB's electronic banking products,
increased printing and supply costs, and increased legal fees.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Income Taxes LCNB's effective tax rates for the years endedDecember 31, 2021 , 2020, and 2019 were 18.0%, 16.9%, and 17.9%, respectively. The difference between the statutory rate of 21% and the effective tax rate is primarily due to tax-exempt interest income from municipal securities, tax-exempt earnings from bank owned life insurance, tax-exempt earnings fromLCNB Risk Management, Inc. , and tax credits and losses related to investments in affordable housing tax credit limited partnerships. A one-time tax benefit recognized as a result of certain provisions in the CARES Act also contributed to the difference during 2020.
Financial Condition
A comparison of balance sheet line items atDecember 31, 2021 and 2020 is as follows (in thousands): December 31, 2021 December 31, 2020 Difference $ Difference % ASSETS: Total cash and cash equivalents$ 18,136 31,730 (13,594)
(42.84) %
Investment securities: Equity securities with a readily determinable fair value, at fair value
2,546 2,389 157 6.57 %
Equity securities without a readily determinable fair value, at cost
2,099 2,099 - - %
Debt securities, available-for-sale, at fair value 308,177 209,471 98,706 47.12
%
Debt securities, held-to-maturity, at cost 22,972 24,810 (1,838) (7.41) % Federal Reserve Bank stock, at cost 4,652 4,652 - -
%
Federal Home Loan Bank stock, at cost 5,203 5,203 - - % Loans, net 1,363,939 1,293,693 70,246 5.43 % Premises and equipment, net 35,385 35,376 9 0.03
%
Operating lease right-of-use assets 6,357 6,274 83 1.32 % Goodwill 59,221 59,221 - - % Core deposit and other intangibles, net 2,473 3,453 (980) (28.38) % Bank owned life insurance 43,224 42,149 1,075 2.55 % Interest receivable 7,999 8,337 (338) (4.05) % Other assets, net 21,246 17,027 4,219 24.78 % Total assets$ 1,903,629 1,745,884 157,745 9.04 % LIABILITIES: Deposits: Non-interest-bearing$ 501,531 455,073 46,458 10.21 % Interest-bearing 1,127,288 1,000,350 126,938 12.69 % Total deposits 1,628,819 1,455,423 173,396 11.91 % Long-term debt 10,000 22,000 (12,000) (54.55) % Operating leases liability 6,473 6,371 102 1.60 % Accrued interest and other liabilities 19,733 21,265 (1,532) (7.20) % Total liabilities 1,665,025 1,505,059 159,966 10.63 % TOTAL SHAREHOLDERS' EQUITY 238,604 240,825 (2,221) (0.92) % Total liabilities and shareholders' equity$ 1,903,629 1,745,884 157,745 9.04 % Reasons for changes include: •Debt securities, available-for-sale, increased due to purchase of new securities totaling$161.8 million . This increase was partially offset by sales of securities with a total book value of$20.9 million , maturities and calls of securities totaling$6.7 million , principal payments on mortgage-backed securities totaling$26.4 million , and decreases in fair values totaling$7.5 million . -37-
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
•Net loans increased due to organic growth in the loan portfolio. Most of the growth occurred in the commercial real estate and residential real estate loan portfolios. Growth in the commercial and industrial loan portfolio was largely offset by forgiveness payments and other paydowns received on PPP loans. •Core deposit and other intangibles decreased due to amortization of core deposit intangibles. •Bank owned life insurance increased due to increases in the cash values of the policies. No new policies were purchased during 2021. •Other assets increased primarily due to an additional$3.0 investment in Affordable Housing Tax Credit Limited Partnerships, an increase in prepaid expenses, and a temporary increase in a clearing account. •Non-interest-bearing deposits and interest-bearing deposits have grown substantially since the start of the COVID-19 pandemic. Management believes the growth reflects customer preferences for liquidity during uncertain economic periods. Balances in demand deposits and NOW and savings accounts have grown, while balances in IRA and time deposits have decreased. A$77.4 million increase in ICS reciprocal accounts deposited with LCNB also contributed to the increase. The increase in deposit balances was invested in loan growth, additional debt securities purchases, and was also used to pay off maturing long-term debt. •Long-term debt decreased due to payoffs of matured debt. There were no new borrowings during 2021. •Accrued interest and other liabilities decreased primarily due to a$1.6 .million decrease in deferred federal income taxes on debt securities, reflective of fair value decreases during the year. •Total shareholders' equity decreased primarily due to$8.3 million of treasury stock purchases during the year and to a$5.9 million decrease in accumulated other comprehensive income, net of taxes, caused by market-driven decreases in the fair value of LCNB's debt security investments. These decreases were partially offset by earnings retained during 2021.
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. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines. Management believes the Bank will be able to pay anticipated dividends toLCNB Corp. 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, 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 theFederal Home Loan Bank , short-term line of credit arrangements totaling$55.0 million with two correspondent banks, and interest and repayments received from LCNB's loan and investment portfolios.
Total remaining borrowing capacity with the
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 atDecember 31, 2021 totaled$290.7 million and are more fully described in Note 13 - Commitments and Contingent Liabilities to LCNB's consolidated financial statements. Since many commitments to extend credit may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. -38-
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table provides information concerning LCNB's commitments at
Amount of Commitment Expiration Per Period
Total Over 1 Over 3
Amounts 1 year through 3 through 5 More than
Committed or less years years 5 years
(In thousands)
Commitments to extend credit $ 90,558 90,558 - - -
Unused lines of credit 200,112 72,632 75,652 11,085 40,743
Standby letters of credit 5 5 - - -
Total $ 290,675 163,195 75,652 11,085 40,743
Capital Resources
The Bank is required by banking regulators to meet certain minimum levels of
capital adequacy. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a material effect on LCNB's and the Bank's
financial statements. These minimum levels are expressed in the form of certain
ratios. Capital is separated into Tier 1 capital (essentially shareholders'
equity less goodwill and other intangibles) and Tier 2 capital (essentially the
allowance for loan losses limited to 1.25% of risk-weighted assets). Common
Equity Tier 1 Capital is the sum of common stock, related surplus, and retained
earnings, net of treasury stock, accumulated other comprehensive income, and
other adjustments. The first three ratios, which are based on the degree of
credit risk in the Bank's assets, provide for weighting assets based on assigned
risk factors and include off-balance sheet items such as loan commitments and
stand-by letters of credit. Information summarizing the regulatory capital of
the Bank at December 31, 2021 and 2020 and corresponding regulatory minimum
requirements is included in Note 14 - Regulatory Matters of the consolidated
financial statements.
The FDIC , the insurer of deposits in financial institutions, has adopted a
risk-based insurance premium system based in part on an institution's capital
adequacy. Under this system, a depository institution is required to pay
successively higher premiums depending on its capital levels and its supervisory
rating by its primary regulator. It is management's intention to maintain
sufficient capital to permit the Bank to maintain a "well capitalized"
designation, which is the FDIC's highest rating.
On August 24, 2020 , LCNB's Board of Directors authorized a share repurchase
program (the "Program"). Under the terms of
the Program, LCNB is authorized to repurchase up to 645,000 of its outstanding
common shares. The Program is authorized to
last no longer than five years. The Program replaced and superseded LCNB's prior
share repurchase program, which was
adopted in April 2019 .
Under the Program, LCNB may purchase common shares through various means such as
open market transactions, including
block purchases, and privately negotiated transactions. The number of shares
repurchased and the timing, manner, price and
amount of any repurchases will be determined at LCNB's discretion. Factors
include, but are not limited to, share price, trading
volume, and general market conditions, along with LCNB's general business
conditions. The Program may be suspended or
discontinued at any time and does not obligate LCNB to acquire any specific
number of its common shares.
As part of the Program, LCNB entered into a trading plan adopted in accordance
with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The 10b5-1
trading plan permits common shares to be repurchased at times that LCNB might
otherwise be precluded from doing so under insider trading laws or self-imposed
trading restrictions. The 10b5-1 trading plan is administered by an independent
broker and is subject to price, market volume and timing restrictions.
LCNB established an Ownership Incentive Plan during 2002 that allowed for
stock-based awards to eligible employees. Under the plan, awards could be in the
form of stock options, share awards, and/or appreciation rights. The plan
provided for the issuance of up to 200,000 shares, as restated for a stock
dividend. The plan expired on April 16, 2012 , but outstanding unexercised
options continued to be exercisable in accordance with their terms and the last
of the options were exercised during 2021.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The 2015 Ownership Incentive Plan (the "2015 Plan") was approved by LCNB's shareholders at the annual meeting onApril 28, 2015 and allows for stock-based awards to eligible employees, as determined by the Compensation Committee of the Board of Directors. Awards may be made in the form of stock options, appreciation rights, restricted shares, and/or restricted share units. The 2015 Plan provides for the issuance of up to 450,000 shares. The 2015 Plan will terminate onApril 28, 2025 and is subject to earlier termination by the Compensation Committee.
Critical Accounting Estimates
The accounting policies of LCNB conform toU.S. generally accepted accounting principles and require management to make estimates and develop assumptions that affect the amounts reported in the financial statements and related footnotes. These estimates and assumptions are based on information available to management as of the date of the financial statements. Actual results could differ significantly from management's estimates. As this information changes, management's estimates and assumptions used to prepare LCNB's financial statements and related disclosures may also change. The most significant accounting policies followed by LCNB are presented in Note 1 of the Notes to Consolidated Financial Statements included herein. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the items described below to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new information becomes available. 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 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 inherent losses 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 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 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. Accounting for Intangibles. LCNB's intangible assets atDecember 31, 2021 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 of Eaton National and CFB. -40-
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Goodwill is not subject to amortization, but is reviewed annually for impairment. A review for impairment may be conducted more frequently than annually if circumstances indicate a possible impairment. Impairment indicators that may be considered include the condition of the economy and banking industry; estimated future cash flows; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of LCNB's stock; and other relevant events. These and other factors could lead to a conclusion that goodwill is impaired, which would require LCNB to write off the difference between the estimated fair value of the Company and the carrying value.
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. -41-
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