LCNB 10-Q Quarter ended March 31, 2020

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•	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.

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•	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.

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Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets in active markets,  quoted prices for identical assets or liabilities in markets that are not active, inputs other than quoted prices (such as interest rates or yield curves) that are observable for the asset or liability, and inputs that are derived from or corroborated by observable market data.

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

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•	Fair value 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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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.	LCNB’s ability to integrate recent and any future acquisitions may be unsuccessful or may be more difficult, time-consuming, or costly than expected;

4.	LCNB may incur increased loan charge-offs in the future;

5.	LCNB may face competitive loss of customers;

6.	changes in the interest rate environment may have results on LCNB’s operations materially different from those anticipated by LCNB’s market risk management functions;

7.	changes in general economic conditions and increased competition could adversely affect LCNB’s operating results;

8.	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;

9.	LCNB may experience difficulties growing loan and deposit balances;

10.	United States trade relations with foreign countries could negatively impact the financial condition of LCNB's

11.	deterioration in the financial condition of the U.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;

12.	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;

13.	adverse weather events and natural disasters and global and/or national epidemics; and

14.

government intervention in the U.S. financial system, including the effects of legislative, tax, accounting, and regulatory actions and reforms, including the the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Dodd-Frank Wall Street Reform and Consumer Protection 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, and the Tax Cuts and Jobs Act.

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•	We have addressed the safety of our 35 branches, following the guidelines of the Center for Disease Control, by closing our lobbies in an effort to encourage use of mobile banking applications and our drive-thru facilities, while allowing access to the lobbies by appointment only and only when necessary;

•	We hold daily executive meetings to address issues that change rapidly;

•	We moved our Annual Shareholders’ Meeting, held on April 21, 2020, from a physical meeting to a virtual meeting;

•	We provided payment deferrals to over 500 loan customers with loans totaling approximately $369 million who were affected by COVID-19, provided such customers were not 30 days past due at December 31, 2019; and

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We have chosen to participate in the CARES Act Paycheck Protection Program ("PPP") that will provide government guaranteed and potentially forgivable loans to applicants. The PPP is implemented by the Small Business Administration with support from the Department of the Treasury and provides small businesses with funds to pay up to eight weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. Through April 30, 2020, we were able to assist over 300 small businesses and had funding for over $46 million of such loans. We believe these loans and our participation in the program is good for our customers, the employees who work for these companies, and the communities we serve.

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•	Net gains (losses) from sales of available-for-sale debt securities increased due to market valuations at the times of sales, as the volume of debt securities sold during the 2020 period was less than that for the 2019 period.

•	Bank owned life insurance income increased due to $12.0 million of new policies purchased at the beginning of the third quarter 2019 and to a mortality benefit recognized during the first quarter 2020.

•	Other operating income increased primarily due to net gains realized from the sale of equity security investments.

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•	Salaries and employee benefits increased 9.8% primarily due to salary and wage increases and newly hired employees, including additional business development positions. An increase in health insurance costs also contributed to the increase in salaries and employee benefits.

•	Marketing decreased primarily due to a realignment of the marketing strategy within LCNB.

•	FDIC insurance premiums (credit), net for the 2020 period reflects a Small Bank Assessment Credit received from the FDIC because the Deposit Insurance Fund was above the mandated 1.35% level. LCNB has used the substantial portion of the credit and anticipates quarterly premium payments will resume in the second quarter 2020.

•	Other non-interest expense increased due to smaller net increases in a variety of accounts.

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•	Debt securities, available-for-sale, decreased due to sales of securities with a total book value of $8.6 million and maturities and calls of securities totaling $31.0 million. These decreases were partially offset by a net increase in fair values totaling $3.1 million. The net funds received were invested in the loan portfolio and used to help pay down long-term debt.

•	Net loans increased due to organic growth in the loan portfolio. Most of the growth occurred in the commercial and industrial and commercial real estate portfolios, slightly offset by a decrease in the residential real estate portfolio.

•	Premises and equipment, net increased due primarily to Main Office remodeling costs, partially offset by depreciation expense.

•	Core deposit and other intangibles decreased due to amortization of core deposit intangibles.

•	Bank owned life insurance decreased due to a mortality claim recognized during the first quarter 2020.

•	Non-interest-bearing deposits decreased due to a decrease in business demand deposit accounts, slightly offset by an increase in personal demand deposit accounts.

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•	Interest-bearing deposits increased primarily due to increases in NOW and savings accounts, partially offset by decreases in IRA and time certificates.

•	Long-term debt decreased due to payoffs of matured debt. There were no new borrowings during the three months ended March 31, 2020.

•	Total shareholders' equity increased primarily due to earnings retained during the first three months of 2020 and to a $2.5 million increase in accumulated other comprehensive income (loss), net of taxes caused by market-driven increases in the fair value of LCNB's debt security investments. These increases were partially offset by dividends paid to shareholders.

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