LCNB 10-Q Quarterly Report Sept. 30, 2022 | Alphaminr
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LCNB 10-Q Quarter ended Sept. 30, 2022

Balance Sheet
Cash Flow
Income Statement
Debt
LCNB CORP
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549

FORM 10-Q

(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number 001-35292
LCNB Corp.
(Exact name of registrant as specified in its charter)
Ohio 31-1626393
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)

2 North Broadway , Lebanon , Ohio 45036
(Address of principal executive offices, including Zip Code)

(513) 932-1414
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, No Par Value LCNB NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐

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


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
☐ Yes ☒ No
The number of shares outstanding of the issuer's common stock, without par value, as of November 8, 2022 was 11,267,459 shares.



LCNB CORP. AND SUBSIDIARIES

TABLE OF CONTENTS










1


Glossary of Abbreviations and Acronyms
AFS Available-for-Sale
ASC Accounting Standards Codification
ASU Accounting Standards Update
Bank LCNB National Bank
CARES Act Coronavirus Aid, Relief, and Economic Security Act
CEO Chief Executive Officer
CFO Chief Financial Officer
Company LCNB Corp. and its consolidated subsidiaries as a whole
Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer Protection Act
Economic Aid Act Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FHLB Federal Home Loan Bank
FOMC Federal Open Market Committee of the Federal Reserve System
GAAP Generally Accepted Accounting Principles
HTM Held-to-Maturity
ICS Insured Cash Sweep
IRA Individual Retirement Account
LCNB LCNB Corp. and its consolidated subsidiaries as a whole
LIHTC Low Income Housing Tax Credit
NOW Negotiable Order of Withdrawal
OCC Office of the Comptroller of the Currency
PPP Paycheck Protection Program
SBA Small Business Administration
SEC Securities and Exchange Commission
TDRs Troubled Debt Restructurings

2


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share data)
September 30, 2022 December 31,
2021
(Unaudited)
ASSETS:
Cash and due from banks $ 17,754 16,810
Interest-bearing demand deposits 11,706 1,326
Total cash and cash equivalents 29,460 18,136
Investment securities:
Equity securities with a readily determinable fair value, at fair value 2,175 2,546
Equity securities without a readily determinable fair value, at cost 2,099 2,099
Debt securities, available-for-sale, at fair value 290,419 308,177
Debt securities, held-to-maturity, at cost 22,415 22,972
Federal Reserve Bank stock, at cost 4,652 4,652
Federal Home Loan Bank stock, at cost 4,041 5,203
Loans, net 1,371,045 1,363,939
Premises and equipment, net 33,152 35,385
Operating lease right-of-use assets 6,025 6,357
Goodwill 59,221 59,221
Core deposit and other intangibles, net 1,996 2,473
Bank owned life insurance 44,027 43,224
Interest receivable 7,622 7,999
Other assets, net 26,351 21,246
TOTAL ASSETS $ 1,904,700 1,903,629
LIABILITIES:
Deposits:
Noninterest-bearing $ 521,704 501,531
Interest-bearing 1,135,666 1,127,288
Total deposits 1,657,370 1,628,819
Short-term borrowings 4,000 —
Long-term debt 24,539 10,000
Operating lease liabilities 6,116 6,473
Accrued interest and other liabilities 17,236 19,733
TOTAL LIABILITIES 1,709,261 1,665,025
COMMITMENTS AND CONTINGENT LIABILITIES — —
SHAREHOLDERS' EQUITY:
Preferred shares – no par value, authorized 1,000,000 shares, none outstanding
— —
Common shares – no par value; authorized 19,000,000 shares; issued 14,264,931 and 14,213,792 shares at September 30, 2022 and December 31, 2021, respectively; outstanding 11,293,639 and 12,414,956 shares at September 30, 2022 and December 31, 2021, respectively
143,855 143,130
Retained earnings 135,202 126,312
Treasury shares at cost, 2,971,292 and 1,798,836 shares at September 30, 2022 and December 31, 2021, respectively
( 52,009 ) ( 29,029 )
Accumulated other comprehensive loss, net of taxes ( 31,609 ) ( 1,809 )
TOTAL SHAREHOLDERS' EQUITY 195,439 238,604
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,904,700 1,903,629

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
3


LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2022 2021 2022 2021
INTEREST INCOME:
Interest and fees on loans $ 15,026 13,729 43,360 42,372
Dividends on equity securities:
With a readily determinable fair value 14 12 40 38
Without a readily determinable fair value 6 5 16 16
Interest on debt securities:
Taxable 1,323 1,027 3,672 2,650
Non-taxable 190 214 567 656
Other investments 145 37 379 256
TOTAL INTEREST INCOME 16,704 15,024 48,034 45,988
INTEREST EXPENSE:
Interest on deposits 979 836 2,493 2,809
Interest on short-term borrowings 71 2 320 4
Interest on long-term debt 210 113 387 361
TOTAL INTEREST EXPENSE 1,260 951 3,200 3,174
NET INTEREST INCOME 15,444 14,073 44,834 42,814
PROVISION FOR (RECOVERY OF) LOAN LOSSES ( 157 ) 306 269 239
NET INTEREST INCOME AFTER PROVISION FOR (RECOVERY OF) LOAN LOSSES 15,601 13,767 44,565 42,575
NON-INTEREST INCOME:
Fiduciary income 1,513 1,695 4,851 4,959
Service charges and fees on deposit accounts 1,706 1,621 4,658 4,506
Bank owned life insurance income 269 269 803 805
Gains from sales of loans — 366 188 560
Other operating income 93 155 159 1,055
TOTAL NON-INTEREST INCOME 3,581 4,106 10,659 11,885
NON-INTEREST EXPENSE:
Salaries and employee benefits 7,062 7,096 21,291 20,640
Equipment expenses 398 421 1,234 1,232
Occupancy expense, net 790 713 2,300 2,236
State financial institutions tax 439 437 1,312 1,318
Marketing 215 253 845 878
Amortization of intangibles 113 263 365 780
FDIC insurance premiums, net 137 129 397 365
Contracted services 613 655 1,902 1,818
Other real estate owned, net 5 — ( 874 ) 2
Other non-interest expense 2,578 2,062 7,297 6,460
TOTAL NON-INTEREST EXPENSE 12,350 12,029 36,069 35,729
INCOME BEFORE INCOME TAXES 6,832 5,844 19,155 18,731
PROVISION FOR INCOME TAXES 1,253 1,027 3,435 3,384
NET INCOME $ 5,579 4,817 15,720 15,347
Dividends declared per common share $ 0.20 0.19 0.60 0.57
Earnings per common share:
Basic $ 0.49 0.39 1.36 1.21
Diluted 0.49 0.39 1.36 1.21
Weighted average common shares outstanding:
Basic 11,284,225 12,455,276 11,478,256 12,663,368
Diluted 11,284,225 12,455,276 11,478,256 12,663,378

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
4


LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2022 2021 2022 2021
Net income $ 5,579 4,817 15,720 15,347
Other comprehensive loss:
Net unrealized loss on available-for-sale debt securities (net of taxes of $( 2,571 ) and $( 178 ) for the three months ended September 30, 2022 and 2021, respectively, and $( 7,923 ) and $( 838 ) for the nine months ended September 30, 2022 and 2021, respectively)
( 9,670 ) ( 669 ) ( 29,804 ) ( 3,152 )
Change in nonqualified pension plan unrecognized net gain and unrecognized prior service cost (net of taxes of $ — and $ — for the three months ended September 30, 2022 and 2021, respectively, and $ 1 and $ 1 for the nine months ended September 30, 2022 and 2021, respectively)
1 2 4 5
Other comprehensive loss, net of tax ( 9,669 ) ( 667 ) ( 29,800 ) ( 3,147 )
TOTAL COMPREHENSIVE INCOME (LOSS) $ ( 4,090 ) 4,150 ( 14,080 ) 12,200

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

5


LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
(Unaudited)
Common Shares Outstanding Common Stock Retained
Earnings 		Treasury
Shares 		Accumulated Other Comprehensive Income (Loss) Total Shareholders'
Equity
Three Months Ended September 30, 2022
Balance at June 30, 2022 11,374,515 $ 143,635 131,894 ( 50,629 ) ( 21,940 ) 202,960
Net income 5,579 5,579
Other comprehensive loss, net of taxes ( 9,669 ) ( 9,669 )
Dividend Reinvestment and Stock Purchase Plan 6,857 107 107
Repurchase of common stock ( 87,733 ) ( 1,380 ) ( 1,380 )
Compensation expense relating to restricted stock — 113 113
Common stock dividends, $ 0.20 per share
( 2,271 ) ( 2,271 )
Balance at September 30, 2022 11,293,639 $ 143,855 135,202 ( 52,009 ) ( 31,609 ) 195,439
Nine Months Ended September 30, 2022
Balance at December 31, 2021 12,414,956 $ 143,130 126,312 ( 29,029 ) ( 1,809 ) 238,604
Net income 15,720 15,720
Other comprehensive loss, net of taxes ( 29,800 ) ( 29,800 )
Dividend Reinvestment and Stock Purchase Plan 18,585 308 308
Repurchase of common stock ( 1,172,456 ) ( 22,980 ) ( 22,980 )
Shares issued for restricted stock awards 32,554
Compensation expense relating to restricted stock 417 417
Common stock dividends, $ 0.60 per share
( 6,830 ) ( 6,830 )
Balance at September 30, 2022 11,293,639 $ 143,855 135,202 ( 52,009 ) ( 31,609 ) 195,439
Three Months Ended September 30, 2021
Balance at June 30, 2021 12,634,845 $ 142,791 120,720 ( 25,122 ) 1,563 239,952
Net income 4,817 4,817
Other comprehensive loss, net of taxes ( 667 ) ( 667 )
Dividend Reinvestment and Stock Purchase Plan 6,007 104 104
Repurchase of common stock ( 206,768 ) ( 3,468 ) ( 3,468 )
Forfeiture of shares issued for restricted stock awards ( 756 )
Compensation expense relating to restricted stock 51 51
Common stock dividends, $ 0.19 per share
( 2,370 ) ( 2,370 )
Balance at September 30, 2021 12,433,328 $ 142,946 123,167 ( 28,590 ) 896 238,419
Nine Months Ended September 30, 2021
Balance at December 31, 2020 12,858,325 $ 142,443 115,058 ( 20,719 ) 4,043 240,825
Net income 15,347 15,347
Other comprehensive loss, net of taxes ( 3,147 ) ( 3,147 )
Dividend Reinvestment and Stock Purchase Plan 17,199 303 303
Repurchase of common stock ( 468,072 ) ( 7,871 ) ( 7,871 )
Exercise of stock options 311 4 4
Shares issued for restricted stock awards, net of forfeitures 25,565
Compensation expense relating to restricted stock 196 196
Common stock dividends, $ 0.57 per share
( 7,238 ) ( 7,238 )
Balance at September 30, 2021 12,433,328 $ 142,946 123,167 ( 28,590 ) 896 238,419

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
6


LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
2022 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,720 15,347
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation, amortization, and accretion 2,177 1,665
Provision for loan losses 269 239
(Benefit from) provision for deferred income taxes ( 444 ) 76
Increase in cash surrender value of bank owned life insurance ( 803 ) ( 805 )
Loss (gain) on equity securities 384 ( 76 )
Realized (gain) loss from sales of premises and equipment 456 ( 6 )
Realized gain from sales of other real estate owned ( 889 ) —
Origination of mortgage loans for sale ( 8,468 ) ( 21,558 )
Realized gains from sales of loans ( 188 ) ( 560 )
Proceeds from sales of mortgage loans 8,562 21,860
Compensation expense related to restricted stock 417 196
Changes in:
Accrued interest receivable 377 ( 287 )
Other assets 2,079 ( 1,740 )
Other liabilities ( 1,307 ) 438
TOTAL ADJUSTMENTS 2,622 ( 558 )
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 18,342 14,789
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and calls of debt securities:
Available-for-sale 17,797 23,464
Held-to-maturity 1,312 1,605
Purchases of equity securities ( 13 ) ( 13 )
Purchases of debt securities:
Available-for-sale ( 38,581 ) ( 132,428 )
Held-to-maturity ( 755 ) ( 1,215 )
Proceeds from redemption of Federal Home Loan Bank stock 1,162 —
Net increase in loans ( 7,454 ) ( 38,861 )
Proceeds from sale of other real estate owned 1,605 —
Purchases of premises and equipment ( 553 ) ( 1,203 )
Proceeds from sale of premises and equipment 874 6
NET CASH FLOWS USED IN INVESTING ACTIVITIES ( 24,606 ) ( 148,645 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 28,551 147,780
Net increase in short-term borrowings 4,000 —
Proceeds from long-term debt 15,000 —
Principal payments on long-term debt ( 461 ) ( 7,000 )
Proceeds from issuance of common stock 308 28
Repurchase of common stock ( 22,980 ) ( 7,871 )
Proceeds from exercise of stock options — 4
Cash dividends paid on common stock ( 6,830 ) ( 6,963 )
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 17,588 125,978
NET CHANGE IN CASH AND CASH EQUIVALENTS 11,324 ( 7,878 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,136 31,730
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,460 23,852
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 3,243 3,336
Income taxes paid, net of refunds 2,900 3,190
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Transfer from loans to other real estate owned 716 —
Right-of-use assets obtained in exchange for lease obligations — 801

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
7
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

Note 1 - Basis of Presentation
Basis of Presentation
The accompanying unaudited interim consolidated condensed financial statements include LCNB Corp. and its wholly-owned subsidiaries: LCNB National Bank and LCNB Risk Management, Inc., its captive insurance company. All material intercompany transactions and balances are eliminated in consolidation.

The unaudited interim consolidated condensed financial statements have been prepared in accordance with U.S. GAAP for interim financial information and the rules and regulations of the SEC.  Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations.  In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of financial position, results of consolidated operations, and cash flows for the interim periods, as required by Regulation S-X, Rule 8-03.

The consolidated condensed balance sheet as of December 31, 2021 has been derived from the audited consolidated balance sheet as of that date.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the full year ending December 31, 2022.  These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies, and financial notes thereto included in LCNB's 2021 Annual Report on Form 10-K filed with the SEC.

Accounting Changes
From time to time the FASB issues an ASU to communicate changes to U.S. GAAP. The following information provides brief summaries of ASUs that have recently become effective:

Financial Accounting Standards (“FASB”) Accounting Standards Update (“ASU”) No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting"
ASU No. 2020-04 was issued in March 2020 and provides optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. LCNB does not expect the guidance in ASU No. 2020-04 will have a material impact on its results of consolidated operations or financial position.

ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans"
ASU No. 2018-14 was issued in August 2018 and was adopted by LCNB on January 1, 2021. The amendments in this update modify disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans, including the deletion, modification, and addition of certain targeted disclosures. The amendments are to be applied on a retrospective basis to all periods presented upon adoption. Adoption of ASU No. 2018-14 did not have a material impact on LCNB's results of consolidated operations or financial position.




8
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 1 - Basis of Presentation (continued)

Recent Accounting Pronouncements
The following information provides brief summaries of newly issued but not yet effective ASUs that could have an effect on LCNB’s financial position or results of consolidated operations:

ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments"
ASU No. 2016-13 was issued in June 2016 and, once effective, will significantly change current guidance for recognizing impairment of financial instruments. Current guidance requires an "incurred loss" methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. ASU No. 2016-13 replaces the incurred loss impairment methodology with a new current expected credit loss ("CECL") methodology that reflects expected credit losses over the lives of the loans and requires consideration of a broader range of information to inform credit loss estimates. The ASU requires an organization to estimate all expected credit losses for financial assets measured at amortized cost, including loans and held-to-maturity debt securities, based on historical experience, current conditions, and reasonable and supportable forecasts. Additional disclosures are required.

ASU No. 2016-13 also amends the accounting for credit losses on debt securities, available-for-sale, and purchased financial assets with credit deterioration. Under the new guidance, entities will determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. Any credit loss will be recognized as an allowance for credit losses on debt securities, available-for-sale, rather than as a direct reduction of the amortized cost basis of the investment, as is currently required. As a result, entities will recognize improvements to estimated credit losses on debt securities, available-for-sale, immediately in earnings rather than as interest income over time, as currently required.

ASU No. 2016-13 eliminates the current accounting model for purchased credit impaired loans and debt securities. Instead, purchased financial assets with credit deterioration will be recorded gross of estimated credit losses as of the date of acquisition and the estimated credit losses amounts will be added to the allowance for credit losses. Thereafter, entities will account for additional impairment of such purchased assets using the models listed above.
Originally, ASU No. 2016-13 would have taken effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. At their meeting on October 16, 2019, FASB approved a final ASU delaying the effective date for several major standards, including ASU No. 2016-13, if certain qualifications are met. The new effective date for SEC filers eligible to be smaller reporting companies ("SRC"), as defined, will be fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. As an SRC, LCNB intends to adopt ASU No. 2016-13 for the fiscal year, and interim periods within the fiscal year, beginning after December 15, 2022.

LCNB has created a cross-functional CECL Committee composed of members from the lending, Wealth Management, and finance departments. During 2017, the CECL Committee selected a vendor to assist in implementation of and ongoing compliance with the new requirements. It has completed analyzing its data collection efforts, selected a calculation model, analyzed its pool segmentation and reporting mechanisms, and has finished back testing in preparation for adoption of the new methodology. Management has chosen the Discounted Cash Flow methodology for all loan pools except for the farm real estate and agricultural pools, which will use the Weighted Average Remaining Maturity (WARM) methodology. While the committee and management expect that implementation of ASU No. 2016-13 will increase the balance of the allowance for loan losses by a range of 24% to 53%, they are continuing to evaluate the modeling and its potential impact on LCNB's results of consolidated operations and financial position. A second, updated back test is currently in process. LCNB is also developing internal control processes and disclosure documentation related to adoption of this standard.

ASU No. 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures"
ASU No. 2022-02 was issued in March 2022 and, once effective, will eliminate the accounting guidance on TDRs for creditors who have adopted ASU No. 2016-13 and provides for enhanced disclosures for certain modifications to borrowers experiencing financial difficulties. The update also amends the guidance on vintage disclosures for public business entities, as defined, to require the disclosure of current-period gross charge-offs by year of origination. For entities that have adopted ASU No. 2016-13, the update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU No. 2016-13, this update needs to be adopted at the same time that ASU No. 2016-13 is adopted. Early adoption is permitted if an entity has already adopted ASU No. 2016-13. Adoption of ASU No. 2022-02 is not expected to have a material impact on LCNB's results of consolidated operations or financial position.
9
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 1 - Basis of Presentation (continued)

ASU No. 2022-03, "Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions"
ASU No. 2022-03 was issued in June 2022 and, once effective, will clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of the security and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value. The update clarifies that a sales restriction is not considered in measuring fair value. In addition an entity will need to disclose the fair value of equity securities subject to contractual sales restrictions, the nature and remaining durations of the sales restrictions, and any circumstances that could cause a lapse in the restrictions. For public business entities, ASU No.2022-03 is effective for fiscal years beginning after December 15, 2023 and interim periods within those fiscal years. Early adoption is permitted. The amendments are to be applied prospectively with any adoption adjustments recognized in earnings and disclosed on the date of adoption. Adoption of ASU No. 2022-03 is not expected to have a material impact on LCNB's results of consolidated operations or financial position. LCNB does not currently own any equity securities subject to contractual sale restrictions.
10
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)


Note 2 - Investment Securities
The amortized cost and estimated fair value of debt securities at September 30, 2022 and December 31, 2021 are summarized as follows (in thousands):
Amortized
Cost 		Unrealized
Gains 		Unrealized
Losses 		Fair
Value
September 30, 2022
Debt Securities, Available-for-Sale:
U.S. Treasury notes $ 84,990 — 9,173 75,817
U.S. Agency notes 89,196 — 11,597 77,599
Corporate bonds 6,700 — 815 5,885
U.S. Agency mortgage-backed securities 93,288 7 12,044 81,251
Municipal securities:
Non-taxable 9,239 — 547 8,692
Taxable 46,677 4 5,506 41,175
$ 330,090 11 39,682 290,419
Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable $ 18,846 — 980 17,866
Taxable 3,569 — 508 3,061
$ 22,415 — 1,488 20,927
December 31, 2021
Debt Securities, Available-for-Sale:
U.S. Treasury notes $ 75,443 57 756 74,744
U.S. Agency notes 89,293 45 2,092 87,246
Corporate Bonds 5,200 70 118 5,152
U.S. Agency mortgage-backed securities 96,018 1,350 692 96,676
Municipal securities:
Non-taxable 8,959 125 18 9,066
Taxable 35,208 531 446 35,293
$ 310,121 2,178 4,122 308,177
Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable $ 19,403 98 — 19,501
Taxable 3,569 21 4 3,586
$ 22,972 119 4 23,087
11
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 2 - Investment Securities (continued)

Information concerning debt securities with gross unrealized losses at September 30, 2022 and December 31, 2021, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (dollars in thousands):
Less than Twelve Months Twelve Months or Greater
Fair
Value 		Unrealized
Losses 		Fair
Value 		Unrealized
Losses
September 30, 2022
Available-for-Sale:
U.S. Treasury notes $ 16,461 1,011 59,356 8,162
U.S. Agency notes 11,993 1,280 65,606 10,317
Corporate bonds 4,244 556 1,641 259
U.S. Agency mortgage-backed securities 47,713 4,824 32,914 7,220
Municipal securities:
Non-taxable 7,367 392 861 155
Taxable 23,869 2,117 17,062 3,389
$ 111,647 10,180 177,440 29,502
Held-to-Maturity:
Municipal securities:
Non-taxable $ 11,973 980 — —
Taxable 2,822 472 239 36
$ 14,795 1,452 239 36
December 31, 2021
Available-for-Sale:
U.S. Treasury notes $ 66,891 756 — —
U.S. Agency notes 58,648 1,257 20,289 835
Corporate Bonds 3,898 102 484 16
U.S. Agency mortgage-backed securities 49,813 692 — —
Municipal securities:
Non-taxable 1,020 18 — —
Taxable 18,434 322 3,535 124
$ 198,704 3,147 24,308 975
Held-to-Maturity:
Municipal securities:
Non-taxable $ 46 — — —
Taxable 271 4 — —
$ 317 4 — —

Management has determined that the unrealized losses at September 30, 2022 are primarily due to fluctuations in market interest rates and do not reflect credit quality deterioration of the securities.   Because LCNB does not have the intent to sell the investments and it is more likely than not that LCNB will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, LCNB does not consider these investments to be other-than-temporarily impaired.

12
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 2 - Investment Securities (continued)

Debt securities with a market value of $ 177,126,000 and $ 128,426,000 at September 30, 2022 and December 31, 2021, respectively, were pledged to secure public deposits and for other purposes required or as permitted by law.

Excluding holdings in U.S. Treasury securities and U.S. Government Agencies, there were no investments in securities of any
issuer that exceeded 10% of LCNB's consolidated shareholders' equity at September 30, 2022.

Contractual maturities of debt securities at September 30, 2022 were as follows (in thousands).  Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations.
Available-for-Sale Held-to-Maturity
Amortized
Cost 		Fair
Value 		Amortized
Cost 		Fair
Value
Due within one year $ 7,146 7,071 1,671 1,662
Due from one to five years 116,308 105,061 4,923 4,680
Due from five to ten years 112,618 96,423 2,888 2,606
Due after ten years 730 613 12,933 11,979
236,802 209,168 22,415 20,927
U.S. Agency mortgage-backed securities 93,288 81,251 — —
$ 330,090 290,419 22,415 20,927
Equity securities with a readily determinable fair value are carried at fair value, with changes in fair value recognized in other operating income in the consolidated condensed statements of income. Equity securities without a readily determinable fair value are measured at cost minus impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions, as defined, for identical or similar investments of the same issuer. LCNB was not aware of any impairment or observable price change adjustments that needed to be made at September 30, 2022 on its investments in equity securities without a readily determinable fair value.

The cost and estimated fair value of equity securities with a readily determinable fair value at September 30, 2022 and December 31, 2021 are summarized as follows (in thousands):
September 30, 2022 December 31, 2021
Cost Fair
Value 		Cost Fair
Value
Mutual funds $ 1,423 1,220 1,410 1,379
Equity securities 778 955 778 1,167
Total equity securities with a readily determinable fair value $ 2,201 2,175 2,188 2,546

Changes in the fair value of equity securities with a readily determinable fair value for the three and nine months ended September 30, 2022 and 2021 were due solely to changes in unrealized gains and losses.
13
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)



Note 3 - Loans
Major classifications of loans at September 30, 2022 and December 31, 2021 were as follows (in thousands):
September 30, 2022 December 31, 2021
Commercial & industrial $ 114,763 101,598
Commercial, secured by real estate 906,408 887,679
Residential real estate 317,250 335,106
Consumer 29,566 34,291
Agricultural 8,651 10,649
Other loans, including deposit overdrafts 51 122
Loans, gross 1,376,689 1,369,445
Less allowance for loan losses 5,644 5,506
Loans, net $ 1,371,045 1,363,939
Loans in the above table are shown net of deferred origination fees and costs. Deferred origination fees, net of related costs, were $ 937,000 and $ 961,000 at September 30, 2022 and December 31, 2021, respectively.

Non-accrual, past-due 90 days or more and still accruing, and accruing restructured loans as of September 30, 2022 and December 31, 2021 were as follows (in thousands):
September 30, 2022 December 31, 2021
Non-accrual loans:
Commercial, secured by real estate $ 356 1,182
Residential real estate 109 299
Total non-accrual loans 465 1,481
Past-due 90 days or more and still accruing — 56
Total non-accrual and past-due 90 days or more and still accruing 465 1,537
Accruing troubled debt restructured loans 1,282 2,622
Total $ 1,747 4,159


















14
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

The allowance for loan losses for the three and nine months ended September 30, 2022 and 2021 were as follows (in thousands):
Commercial
& Industrial 		Commercial, Secured by
Real Estate 		Residential
Real Estate 		Consumer Agricultural Other Total
Three Months Ended September 30, 2022
Balance, beginning of period $ 1,287 3,825 625 67 18 11 5,833
Provision for (recovery of) loan losses ( 33 ) ( 164 ) 7 19 2 12 ( 157 )
Losses charged off — — — ( 14 ) — ( 39 ) ( 53 )
Recoveries — — — — — 21 21
Balance, end of period $ 1,254 3,661 632 72 20 5 5,644
Nine Months Ended September 30, 2022
Balance, beginning of year $ 1,095 3,607 665 105 30 4 5,506
Provision for (recovery of) loan losses 159 121 ( 47 ) ( 14 ) ( 10 ) 60 269
Losses charged off — ( 67 ) ( 5 ) ( 19 ) — ( 115 ) ( 206 )
Recoveries — — 19 — — 56 75
Balance, end of period $ 1,254 3,661 632 72 20 5 5,644
Three Months Ended September 30, 2021
Balance, beginning of period $ 1,043 3,743 697 122 37 10 5,652
Provision for (recovery of) loan losses ( 38 ) 368 ( 31 ) ( 9 ) ( 1 ) 17 306
Losses charged off — ( 110 ) — ( 4 ) — ( 32 ) ( 146 )
Recoveries — — — — — 16 16
Balance, end of period $ 1,005 4,001 666 109 36 11 5,828
Nine Months Ended September 30, 2021
Balance, beginning of year $ 816 3,903 837 153 28 ( 9 ) 5,728
Provision for (recovery of) loan losses 189 210 ( 183 ) ( 37 ) 8 52 239
Losses charged off — ( 112 ) ( 16 ) ( 9 ) — ( 75 ) ( 212 )
Recoveries — — 28 2 — 43 73
Balance, end of period $ 1,005 4,001 666 109 36 11 5,828
15
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

A breakdown of the allowance for loan losses and the loan portfolio by loan segment at September 30, 2022 and December 31, 2021 were as follows (in thousands):
Commercial
& Industrial 		Commercial, Secured by
Real Estate 		Residential
Real Estate 		Consumer Agricultural Other Total
September 30, 2022
Allowance for loan losses:
Individually evaluated for impairment $ 4 12 9 — — — 25
Collectively evaluated for impairment 1,250 3,636 623 72 20 5 5,606
Acquired credit impaired loans — 13 — — — — 13
Balance, end of period $ 1,254 3,661 632 72 20 5 5,644
Loans:
Individually evaluated for impairment $ 125 1,010 491 — — — 1,626
Collectively evaluated for impairment 114,142 904,664 315,972 29,566 8,651 51 1,373,046
Acquired credit impaired loans 496 734 787 — — — 2,017
Balance, end of period $ 114,763 906,408 317,250 29,566 8,651 51 1,376,689
December 31, 2021
Allowance for loan losses:
Individually evaluated for impairment $ 5 11 9 — — — 25
Collectively evaluated for impairment 1,090 3,596 656 105 30 4 5,481
Acquired credit impaired loans — — — — — — —
Balance, end of period $ 1,095 3,607 665 105 30 4 5,506
Loans:
Individually evaluated for impairment $ 155 2,945 559 — — — 3,659
Collectively evaluated for impairment 101,355 883,122 333,384 34,291 10,649 122 1,362,923
Acquired credit impaired loans 88 1,612 1,163 — — — 2,863
Balance, end of period $ 101,598 887,679 335,106 34,291 10,649 122 1,369,445

16
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

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

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

This category includes PPP loans that were authorized under the CARES Act and updated by the Economic Aid Act. The PPP was implemented by the SBA with support from the Department of the Treasury and provided small businesses that were negatively impacted by the COVID-19 pandemic with g overnment guaranteed and potentially forgivable loans that could be used 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 at September 30, 2022 and December 31, 2021 totaled $ 362,000 and $ 6,935,000 , respectively, and unrecognized fees at those dates totaled $ 16,000 and $ 272,000 , respectively.

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

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

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

Residential real estate loans are underwritten primarily based on the borrower’s ability to repay, prior credit history, and the value of the collateral.  LCNB generally requires private mortgage insurance for first mortgage loans that have a loan to appraised value ratio of greater than 80 % or may require other credit enhancements for second lien mortgage loans.
17
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

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

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

LCNB uses a risk-rating system to quantify loan quality.  A loan is assigned to a risk category based on relevant information about the ability of the borrower to service the debt including, but not limited to, current financial information, historical payment experience, credit documentation, public information, and current economic trends.  The categories used are:

• Pass – loans categorized in this category are higher quality loans that do not fit any of the other categories described below.
• Other Assets Especially Mentioned ("OAEM") – loans in this category are currently protected but are potentially weak. These loans constitute a risk but not to the point of justifying a classification of substandard.  The credit risk may be relatively minor yet constitute an undue risk in light of the circumstances surrounding a specific asset.
• Substandard – loans in this category are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the possibility that LCNB will sustain some loss if the deficiencies are not corrected.
• Doubtful – loans classified in this category have all the weaknesses inherent in loans classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
A breakdown of the loan portfolio by credit quality indicators at September 30, 2022 and December 31, 2021 is as follows (in thousands):
Pass OAEM Substandard Doubtful Total
September 30, 2022
Commercial & industrial $ 109,658 3,459 1,646 — 114,763
Commercial, secured by real estate 882,809 15,453 8,146 — 906,408
Residential real estate 315,277 — 1,973 — 317,250
Consumer 29,562 — 4 — 29,566
Agricultural 8,651 — — — 8,651
Other 51 — — — 51
Total $ 1,346,008 18,912 11,769 — 1,376,689
December 31, 2021
Commercial & industrial $ 98,694 2,757 147 — 101,598
Commercial, secured by real estate 851,709 22,336 13,634 — 887,679
Residential real estate 332,962 — 2,144 — 335,106
Consumer 34,281 — 10 — 34,291
Agricultural 10,649 — — — 10,649
Other 122 — — — 122
Total $ 1,328,417 25,093 15,935 — 1,369,445
18
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

A loan portfolio aging analysis at September 30, 2022 and December 31, 2021 is as follows (in thousands):
30-59 Days
Past Due 		60-89 Days
Past Due 		Greater Than
90 Days
Past Due 		Total
Past Due 		Current Total Loans
Receivable 		Total Loans Greater Than
90 Days and
Accruing
September 30, 2022
Commercial & industrial $ 313 — — 313 114,450 114,763 —
Commercial, secured by real estate 121 14 — 135 906,273 906,408 —
Residential real estate 98 301 41 440 316,810 317,250 —
Consumer 80 4 — 84 29,482 29,566 —
Agricultural — — — — 8,651 8,651 —
Other 51 — — 51 — 51 —
Total $ 663 319 41 1,023 1,375,666 1,376,689 —
December 31, 2021
Commercial & industrial $ — — — — 101,598 101,598 —
Commercial, secured by real estate 181 — 784 965 886,714 887,679 —
Residential real estate 1,130 1 109 1,240 333,866 335,106 51
Consumer 22 5 5 32 34,259 34,291 5
Agricultural — — — — 10,649 10,649 —
Other 122 — — 122 — 122 —
Total $ 1,455 6 898 2,359 1,367,086 1,369,445 56

Impaired loans, including acquired credit impaired loans, at September 30, 2022 and December 31, 2021 were as follows (in thousands):
September 30, 2022 December 31, 2021
Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance
With no related allowance recorded:
Commercial & industrial $ 496 691 — 88 316 —
Commercial, secured by real estate 1,077 1,318 — 3,897 4,736 —
Residential real estate 1,074 1,391 — 1,501 1,857 —
Total $ 2,647 3,400 — 5,486 6,909 —
With an allowance recorded:
Commercial & industrial $ 125 130 4 155 160 5
Commercial, secured by real estate 667 667 25 660 660 11
Residential real estate 204 204 9 221 221 9
Total $ 996 1,001 38 1,036 1,041 25
Total:
Commercial & industrial $ 621 821 4 243 476 5
Commercial, secured by real estate 1,744 1,985 25 4,557 5,396 11
Residential real estate 1,278 1,595 9 1,722 2,078 9
Total $ 3,643 4,401 38 6,522 7,950 25







19
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

The following presents information related to the average recorded investment and interest income recognized on impaired loans, including acquired credit impaired loans, for the three and nine months ended September 30, 2022 and 2021 (in thousands):
2022 2021
Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
Three Months Ended September 30,
With no related allowance recorded:
Commercial & industrial $ 486 23 310 21
Commercial, secured by real estate 1,466 148 5,038 97
Residential real estate 1,169 26 2,072 43
Consumer — — — —
Other — — 169 13
Total $ 3,121 197 7,589 174
With an allowance recorded:
Commercial & industrial $ 130 2 170 2
Commercial, secured by real estate 672 18 671 9
Residential real estate 207 3 246 3
Consumer — — — —
Other — — — —
Total $ 1,009 23 1,087 14
Total:
Commercial & industrial $ 616 25 480 23
Commercial, secured by real estate 2,138 166 5,709 106
Residential real estate 1,376 29 2,318 46
Consumer — — — —
Other — — 169 13
Total $ 4,130 220 8,676 188
Nine Months Ended September 30,
With no related allowance recorded:
Commercial & industrial $ 285 52 273 64
Commercial, secured by real estate 2,543 271 6,432 299
Residential real estate 1,324 108 2,826 179
Consumer — — 2 —
Other — — 180 44
Total $ 4,152 431 9,713 586
With an allowance recorded:
Commercial & industrial $ 140 6 179 8
Commercial, secured by real estate 673 35 677 27
Residential real estate 213 9 251 11
Consumer — — — —
Other — — — —
Total $ 1,026 50 1,107 46
Total:
Commercial & industrial $ 425 58 452 72
Commercial, secured by real estate 3,216 306 7,109 326
Residential real estate 1,537 117 3,077 190
Consumer — — 2 —
Other — — 180 44
Total $ 5,178 481 10,820 632

Of the interest income recognized on impaired loans during the nine months ended September 30, 2022, $ 4,000 was recognized on a cash basis and none was recognized on a cash basis during the nine months ended September 30, 2021.

20
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

From time to time, the terms of certain loans are modified as troubled debt restructurings ("TDRs") where concessions are granted to borrowers experiencing financial difficulties. Each modification is separately negotiated with the borrower and includes terms and conditions that reflect the borrower's ability to pay the debt as modified. The modification of the terms of such loans may have included one, or a combination of, the following: a temporary or permanent reduction of the stated interest rate of the loan, an increase in the stated rate of interest lower than the current market rate for new debt with similar risk, forgiveness of principal, an extension of the maturity date, or a change in the payment terms.

Loan modifications that were classified as TDRs during the three and nine months ended September 30, 2022 and 2021 were as follows (dollars in thousands):
2022 2021
Number
of
Loans 		Pre-Modification Recorded Balance Post-Modification Recorded Balance Number of Loans Pre-Modification Recorded Balance Post-Modification Recorded Balance
Three Months Ended September 30,
Residential real estate — — — 1 49 49
Total — $ — — 1 $ 49 49
Nine Months Ended September 30,
Residential real estate — — — 3 97 101
Total — $ — $ — 3 $ 97 $ 101
LCNB is not committed to lend additional funds to borrowers whose loan terms were modified in a troubled debt restructuring.

There were no troubled debt restructured loans for which there was a payment default within twelve months of the restructuring date during the nine months ended September 30, 2022 and 2021.

All troubled debt restructurings are considered impaired loans. The allowance for loan losses on such restructured loans is based on the present value of future expected cash flows.

I nformation concerning loans that were modified during the nine months ended September 30, 2022 and 2021 and that were determined to be troubled debt restructurings follows (in thousands):
2022 2021
Impaired loans without a valuation allowance $ — 101
Impaired loans with a valuation allowance — —

Mortgage loans sold to and serviced for investors are not included in the accompanying consolidated condensed balance sheets.  The unpaid principal balances of those loans at September 30, 2022 and December 31, 2021 were approximately $ 145,317,000 and $ 149,382,000 , respectively.

The total recorded investment in residential consumer mortgage loans secured by residential real estate that were in the process of foreclosure at December 31, 2021 was $ 58,000 . No residential consumer mortgage loans secured by residential real estate were in the process of foreclosure at September 30, 2022.
21
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)



Note 4 - Acquired Credit Impaired Loans

The following table provides at September 30, 2022 and December 31, 2021 the major classifications of acquired credit impaired loans that are accounted for in accordance with ASC 310-30 (in thousands):
September 30, 2022 December 31, 2021
Acquired from First Capital Bancshares, Inc.
Commercial & industrial $ 1 1
Commercial, secured by real estate — —
Residential real estate 229 398
Loans, gross 230 399
Less allowance for loan losses — —
Loans, net $ 230 399
Acquired from Eaton National Bank & Trust Co.
Commercial & industrial $ 433 —
Commercial, secured by real estate 80 310
Residential real estate 413 463
Loans, gross 926 773
Less allowance for loan losses 13 —
Loans, net $ 913 773
Acquired from BNB Bancorp, Inc.
Commercial & industrial $ — —
Commercial, secured by real estate 616 688
Residential real estate 48 51
Loans, gross 664 739
Less allowance for loan losses — —
Loans, net $ 664 739
Acquired from Columbus First Bancorp, Inc.
Commercial & industrial $ 62 87
Commercial, secured by real estate 38 614
Residential real estate 97 251
Loans, gross 197 952
Less allowance for loan losses — —
Loans, net $ 197 952
Total
Commercial & industrial $ 496 88
Commercial, secured by real estate 734 1,612
Residential real estate 787 1,163
Loans, gross 2,017 2,863
Less allowance for loan losses 13 —
Loans, net $ 2,004 2,863

The following table provides the outstanding balance and related carrying amount for acquired credit impaired loans at the dates indicated (in thousands):
September 30, 2022 December 31, 2021
Outstanding balance $ 2,645 3,769
Carrying amount 2,017 2,863
22
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 4 - Acquired Credit Impaired Loans (continued)

Activity during the three and nine months ended September 30, 2022 and 2021 for the accretable discount related to acquired credit impaired loans is as follows (in thousands):
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2022 2021 2022 2021
Accretable discount at beginning of period $ 43 84 $ 116 182
Reclassification from nonaccretable discount to accretable discount 115 22 143 65
Accretion ( 141 ) ( 77 ) ( 242 ) ( 218 )
Accretable discount at end of period $ 17 29 $ 17 29


Note 5 - Affordable Housing Tax Credit Limited Partnership

LCNB is a limited partner in limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit pursuant to Section 42 of the Internal Revenue Code. The purpose of the investments is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants.

The following table presents the balances of LCNB's affordable housing tax credit investments and related unfunded commitments at September 30, 2022 and December 31, 2021 (in thousands):
September 30,
2022 		December 31,
2021
Affordable housing tax credit investment $ 16,950 14,950
Less amortization 3,033 2,126
Net affordable housing tax credit investment $ 13,917 12,824
Unfunded commitment $ 8,316 8,655

The net affordable housing tax credit investment is included in other assets and the unfunded commitment is included in accrued interest and other liabilities in the consolidated condensed balance sheets.

LCNB expects to fund the unfunded commitment over thirteen years .

The following table presents other information relating to LCNB's affordable housing tax credit investments for the three and nine months ended September 30, 2022 and 2021 (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Tax credits and other tax benefits recognized $ 357 240 1,071 760
Tax credit amortization expense included in provision for income taxes 306 198 907 630
23
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)




Note 6 – Borrowings

Long-term debt at September 30, 2022 and December 31, 2021 was as follows (dollars in thousands):
September 30, 2022 December 31, 2021
Amount Rate Amount Rate
Term loan $ 14,539 4.25 % $ — — %
FHLB long-term advances 10,000 3.00 % 10,000 3.00 %
$ 24,539 3.74 % $ 10,000 3.00 %

At September 30, 2022, LCNB Corp. had a three-year term loan with a financial institution at a fixed interest rate of 4.25 % and a final payment date of June 15, 2025 .

All advances from the FHLB of Cincinnati are secured by a blanket pledge of LCNB's 1-4 family first lien mortgage loans in the amount of approximately $ 280 million and $ 303 million at September 30, 2022 and December 31, 2021, respectively.  Total remaining borrowing capacity at September 30, 2022 was approximately $ 206.5 million.

Short-term borrowings at September 30, 2022 and December 31, 2021 were as follows (dollars in thousands):
September 30, 2022 December 31, 2021
Amount Rate Amount Rate
Revolving line of credit $ 4,000 6.00 % $ — — %

At September 30, 2022, LCNB Corp. had a short-term revolving line of credit arrangement with a financial institution for a maximum amount of $ 5 million at an interest rate equal to the Wall Street Journal Prime Rate minus 25 basis points. Remaining borrowing capacity at September 30, 2022 was $1.0 million. This agreement expires on June 15, 2023 .

At September 30, 2022, LCNB had short-term line of credit borrowing arrangements with two financial institutions. The first arrangement is a short-term line of credit for a maximum amount of $ 25 million at the interest rate in effect at the time of the borrowing. The second arrangement is a short-term line of credit for a maximum amount of $ 30 million, at an interest rate equal to the lending institution’s federal funds rate plus 50 basis points. The full amounts of the lines of credit were available at September 30, 2022 because funds were not outstanding on either arrangement.

Under the terms of a REPO Based Advance program with the FHLB of Cincinnati, LCNB can borrow up to $ 87.1 million in short-term advances as of September 30, 2022, subject to total remaining borrowing capacity limitations. LCNB can select terms ranging from one day to one year . The interest rate is the published rate in effect at the time of the advance. This agreement expires on February 8, 2023 .

Under the terms of a Cash Management Advance program with the FHLB of Cincinnati, LCNB can borrow up to $ 87.1 million in short-term advances as of September 30, 2022, subject to total remaining borrowing capacity limitations. LCNB can select a variable rate of interest for up to ninety days or a fixed rate of interest for a maximum of thirty days . The interest rate is the published rate in effect at the time of the advance. This agreement expires on February 8, 2023 .

24
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)



Note 7 - Leases

Lease expenses for offices are included in the consolidated condensed statements of income in net occupancy expense and lease expenses for equipment and ATMs are included in equipment expense. Components of lease expense for the three and nine months ended September 30, 2022 were as follows (in thousands):
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2022 2021 2022 2021
Operating lease expense $ 117 208 461 635
Short-term lease expense 100 11 184 36
Variable lease expense 1 1 2 3
Other 2 2 7 8
Total lease expense $ 220 222 654 682

Other information related to leases at September 30, 2022 were as follows (dollars in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 477
Right-of-use assets obtained in exchange for new operating lease liabilities $ —
Weighted average remaining lease term in years for operating leases 33.6
Weighted average discount rate for operating leases 3.45 %


Note 8 – Income Taxes

A reconciliation between the statutory income tax and LCNB's effective tax rate on income from continuing operations follows:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Statutory tax rate 21.0 % 21.0 % 21.0 % 21.0 %
Increase (decrease) resulting from:
Tax exempt interest ( 0.6 ) % ( 0.8 ) % ( 0.6 ) % ( 0.7 ) %
Tax exempt income on bank owned life insurance ( 0.8 ) % ( 1.0 ) % ( 0.9 ) % ( 0.9 ) %
Captive insurance premium income ( 0.7 ) % ( 1.0 ) % ( 0.8 ) % ( 0.8 ) %
Other, net ( 0.6 ) % ( 0.6 ) % ( 0.8 ) % ( 0.5 ) %
Effective tax rate 18.3 % 17.6 % 17.9 % 18.1 %


Note 9 - Commitments and Contingent Liabilities
LCNB is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit.  These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.  Exposure to credit loss in the event of nonperformance by the other parties to financial instruments for commitments to extend credit is represented by the contract amount of those instruments.

25
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 9 – Commitments and Contingent Liabilities (continued)

LCNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Financial instruments whose contract amounts represent off-balance-sheet credit risk at September 30, 2022 and December 31, 2021 were as follows (in thousands):
September 30, 2022 December 31, 2021
Commitments to extend credit:
Commercial loans $ 35,675 82,578
Other loans
Fixed rate 5,894 5,196
Adjustable rate 987 2,784
Unused lines of credit:
Fixed rate 31,188 32,655
Adjustable rate 245,492 150,746
Unused overdraft protection amounts on demand and NOW accounts 16,687 16,711
Standby letters of credit 5 5
Total commitments $ 335,928 290,675

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Unused lines of credit include amounts not drawn on line of credit loans.  Commitments to extend credit and unused lines of credit generally have fixed expiration dates or other termination clauses.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.  These guarantees generally are fully secured and have varying maturities.

The Bounce Protection product, a customer deposit overdraft program, is offered as a service and does not constitute a contract between the customer and LCNB.

LCNB evaluates each customer's credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the borrower.  Collateral held varies, but may include accounts receivable, inventory, residential realty, income-producing commercial property, agricultural property, and property, plant, and equipment.

Capital expenditures include the construction or acquisition of new office buildings, improvements to LCNB's offices, purchases of furniture and equipment, and additions or improvements to LCNB's information technology system. Commitments outstanding for capital expenditures as of September 30, 2022 totaled approximately $ 514,000 .

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

LCNB and its subsidiaries are parties to various claims and proceedings arising in the normal course of business.  Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings and claims will not be material to the consolidated financial position or results of operations.
26
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)


Note 10 – Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2022 and 2021 were as follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
Unrealized Gains and Losses on Available-for-Sale Debt Securities Changes in Pension Plan Assets and Benefit Obligations Total Unrealized Gains and Losses on Available-for-Sale Debt Securities Changes in Pension Plan Assets and Benefit Obligations Total
2022
Balance at beginning of period $ ( 21,670 ) ( 270 ) ( 21,940 ) ( 1,536 ) ( 273 ) ( 1,809 )
Other comprehensive (loss) income, net of taxes ( 9,670 ) 1 ( 9,669 ) ( 29,804 ) 4 ( 29,800 )
Balance at end of period $ ( 31,340 ) ( 269 ) ( 31,609 ) ( 31,340 ) ( 269 ) ( 31,609 )
2021
Balance at beginning of period $ 1,866 ( 303 ) 1,563 4,349 ( 306 ) 4,043
Other comprehensive (loss) income, net of taxes ( 669 ) 2 ( 667 ) ( 3,152 ) 5 ( 3,147 )
Balance at end of period $ 1,197 ( 301 ) 896 1,197 ( 301 ) 896
There were no reclassifications out of accumulated other comprehensive income (loss) during the three and nine months ended September 30, 2022 and 2021.

Note 11 – Retirement Plans
LCNB participates in a noncontributory defined benefit multi-employer retirement plan that covers substantially all regular full-time employees hired before January 1, 2009. Employees hired before this date who received a benefit reduction under certain amendments to the defined benefit retirement plan receive an automatic contribution of 5 % or 7 % of their annual compensation, depending on the sum of an employee's age and vesting service, into their defined contribution plans (401(k) plans), regardless of the contributions made by the employees.  These contributions are made annually and these employees do not receive any employer matches to their 401(k) contributions.

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

Funding and administrative costs of the qualified noncontributory defined benefit retirement plan and 401(k) plan charged to pension and other employee benefits in the consolidated condensed statements of income for the three and nine-month period ended September 30, 2022 and 2021 were as follows (in thousands):
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2022 2021 2022 2021
Qualified noncontributory defined benefit retirement plan $ 342 261 958 822
401(k) plan 157 162 494 474

27
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)


Note 11 – Retirement Plans (continued)

Certain highly compensated former employees participate in a nonqualified defined benefit retirement plan.  The nonqualified plan ensures that participants receive the full amount of benefits to which they would have been entitled under the noncontributory defined benefit retirement plan in the absence of limits on benefit levels imposed by certain sections of the Internal Revenue Code. This plan is limited to the original participants and no new participants have been added.

The components of net periodic pension cost of the nonqualified defined benefit retirement plan for the three and nine months ended September 30, 2022 and 2021 are summarized as follows (in thousands):
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2022 2021 2022 2021
Interest cost $ 14 13 40 39
Amortization of unrecognized net loss 2 2 6 6
Net periodic pension cost $ 16 15 46 45

Amounts recognized in accumulated other comprehensive income (loss), net of tax, for the nonqualified defined benefit retirement plan for the three and nine months ended September 30, 2022 and 2021 were as follows (in thousands):
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2022 2021 2022 2021
Net actuarial gain $ ( 1 ) ( 2 ) $ ( 4 ) ( 5 )


Note 12 – Stock Based Compensation
LCNB established an Ownership Incentive Plan (the "2002 Plan") during 2002 that allowed for stock-based awards to eligible employees, as determined by the Board of Directors.  The awards were made in the form of stock options, share awards, and/or appreciation rights.  The 2002 Plan provided for the issuance of up to 200,000 shares of common stock. Options granted under the 2002 Plan vested ratably over a five-year period and expired ten years after the date of grant. The 2002 Plan expired on April 16, 2012. Any outstanding unexercised options, however, continued to be exercisable in accordance with their terms. The last of the outstanding options were exercised during the first quarter of 2021.

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

Stock-based awards may be in the form of treasury shares or newly issued shares.

LCNB has not granted stock option awards since 2012.

28
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 12 – Stock Based Compensation (continued)
T he following table summarizes stock option activity for the periods indicated:
Nine Months Ended September 30,
2022 2021
Options Weighted Average Exercise
Price 		Options Weighted Average Exercise
Price
Outstanding, January 1, — $ — 311 $ 12.60
Exercised — — ( 311 ) 12.60
Outstanding, September 30, — — — —

The following table provides information related to stock options exercised during the periods indicated (in thousands):
Nine Months Ended September 30,
2022 2021
Intrinsic value of options exercised $ — 1
Cash received from options exercised — 4
Tax benefit realized from options exercised — —

Restricted stock awards granted under the 2015 Plan were as follows:
2022 2021


Shares 		Weighted Average Grant Date Fair Value

Shares 		Weighted Average Grant Date Fair Value
Outstanding, January 1, 44,512 $ 17.08 28,596 $ 17.42
Granted 32,554 19.25 26,321 16.85
Vested ( 18,814 ) 18.01 ( 8,959 ) 17.54
Forfeited — — ( 756 ) 16.86
Outstanding, September 30, 58,252 $ 17.99 45,202 $ 17.08

The following table presents expense recorded in salaries and employee benefits for restricted stock awards and the related tax information for the three and nine months ended September 30, 2022 and 2021 (in thousands):
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2022 2021 2022 2021
Restricted stock expense $ 113 51 417 196
Tax effect 24 11 88 41

Unrecognized compensation expense for restricted stock awards was $ 814,000 at September 30, 2022 and is expected to be recognized over a period of 4.4 years.
29
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)


Note 13 – Earnings per Common Share
LCNB has granted restricted stock awards with non-forfeitable dividend rights, which are considered participating securities. Accordingly, earnings per share is computed using the two-class method as required by ASC 260-10-45. Basic earnings per common share is calculated by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period, which excludes the participating securities.  Diluted earnings per common share is adjusted for the dilutive effects of stock options, warrants, and restricted stock.  The diluted average number of common shares outstanding has been increased for the assumed exercise of stock options and warrants with proceeds used to purchase treasury shares at the average market price for the period.

Earnings per share for the three and nine months ended September 30, 2022 and 2021 were calculated as follows (dollars in thousands, except share and per share data):
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2022 2021 2022 2021
Net income $ 5,579 4,817 15,720 15,347
Less allocation of earnings and dividends to participating securities 28 18 81 56
Net income allocated to common shareholders $ 5,551 4,799 15,639 15,291
Weighted average common shares outstanding, gross 11,342,539 12,501,234 11,537,078 12,709,326
Less average participating securities 58,314 45,958 58,822 45,958
Weighted average number of shares outstanding used in the calculation of basic earnings per common share 11,284,225 12,455,276 11,478,256 12,663,368
Add dilutive effect of:
Stock options — — — 10
Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share 11,284,225 12,455,276 11,478,256 12,663,378
Earnings per common share:
Basic $ 0.49 0.39 1.36 1.21
Diluted 0.49 0.39 1.36 1.21


Note 14 - Fair Value Measurements
LCNB measures certain assets at fair value using various valuation techniques and assumptions, depending on the nature of the asset.  Fair value is defined as the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date.

The inputs to the valuation techniques used to measure fair value are assigned to one of three broad levels:
• Level 1 – quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the reporting date.
• Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets in active markets,  quoted prices for identical assets or liabilities in markets that are not active, inputs other than quoted prices (such as interest rates or yield curves) that are observable for the asset or liability, and inputs that are derived from or corroborated by observable market data.
30
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 14 - Fair Value Measurements (continued)
• Level 3 – inputs that are unobservable for the asset or liability.
Equity Securities With a Readily Determinable Fair Value
Equity securities with a readily determinable fair value are reported at fair value with changes in fair value reported in other operating income in the consolidated condensed statements of income. Fair values for equity securities are determined based on market quotations (level 1). LCNB has invested in two mutual funds that are traded in active markets and their fair values are based on market quotations (level 1). Investments in another two mutual funds are measured at fair value using net asset values and are considered level 1 because the net asset values are determined and published and are the basis for current transactions.

Debt Securities, Available-for-Sale
The majority of LCNB's financial debt securities are classified as available-for-sale.  The securities are reported at fair value with unrealized holding gains and losses reported net of income taxes in accumulated other comprehensive income. LCNB utilizes a pricing service for determining the fair values of its debt securities.  Methods and significant assumptions used to estimate fair value were as follows:

• Fair values for U.S. Treasury notes are determined based on market quotations (level 1).
• Fair values for the other debt securities are calculated using the discounted cash flow method for each security.  The discount rates for these cash flows are estimated by the pricing service using rates observed in the market (level 2). Cash flow streams are dependent on estimated prepayment speeds and the overall structure of the securities given existing market conditions.

Assets Recorded at Fair Value on a Nonrecurring Basis
Assets that may be recorded at fair value on a nonrecurring basis include impaired loans, other real estate owned, and other repossessed assets.

A loan is considered impaired when management believes it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement.  Impaired loans are carried at the present value of estimated future cash flows using the loan's existing rate or the fair value of collateral if the loan is collateral dependent, if this value is less than the loan balance.  These inputs are considered to be level 3.



















31
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 14 - Fair Value Measurements (continued)
The following table summarizes the valuation of LCNB's assets recorded at fair value by input levels as of September 30, 2022 and December 31, 2021 (in thousands):
Fair Value Measurements at the End of
the Reporting Period Using
Fair Value Measurements Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs
(Level 2) 		Significant Unobservable Inputs
(Level 3)
September 30, 2022
Recurring fair value measurements:
Equity securities with a readily determinable fair value:
Equity securities $ 955 955 — —
Mutual funds 36 36 — —
Mutual funds measured at net asset value 1,184 1,184 — —
Debt securities, available-for-sale:
U.S. Treasury notes 75,817 75,817 — —
U.S. Agency notes 77,599 — 77,599 —
Corporate bonds 5,885 — 5,885 —
U.S. Agency mortgage-backed securities 81,251 — 81,251 —
Municipal securities:
Non-taxable 8,692 — 8,692 —
Taxable 41,175 — 41,175 —
Total recurring fair value measurements $ 292,594 77,992 214,602 —
Nonrecurring fair value measurements:
Impaired loans $ 958 — — 958
Total nonrecurring fair value measurements $ 958 — — 958
December 31, 2021
Recurring fair value measurements:
Equity securities with a readily determinable fair value:
Equity securities $ 1,167 1,167 — —
Mutual funds 51 51 — —
Mutual funds measured at net asset value 1,328 1,328 — —
Debt securities, available-for-sale:
U.S. Treasury notes 74,744 74,744 — —
U.S. Agency notes 87,246 — 87,246 —
Corporate bonds 5,152 — 5,152 —
U.S. Agency mortgage-backed securities 96,676 — 96,676 —
Municipal securities:
Non-taxable 9,066 — 9,066 —
Taxable 35,293 — 35,293 —
Total recurring fair value measurements $ 310,723 77,290 233,433 —
Nonrecurring fair value measurements:
Impaired loans $ 1,011 — — 1,011
Total nonrecurring fair value measurements $ 1,011 — — 1,011


32
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 14 - Fair Value Measurements (continued)
The following table presents quantitative information about unobservable inputs used in nonrecurring level 3 fair value measurements at September 30, 2022 and December 31, 2021 (dollars in thousands):
Range
Fair Value Valuation Technique Unobservable Inputs High Low Weighted Average
September 30, 2022
Impaired loans $ — Estimated sales price Adjustments for comparable properties, discounts to reflect current market conditions Not applicable
Impaired loans $ 958 Discounted cash flows Discount rate 8.125 % 4.625 % 6.06 %
December 31, 2021
Impaired loans $ — Estimated sales price Adjustments for comparable properties, discounts to reflect current market conditions Not applicable
Impaired loans 1,011 Discounted cash flows Discount rate 8.13 % 4.63 % 6.07 %






















33
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 14 - Fair Value Measurements (continued)
Carrying amounts and estimated fair values of financial instruments as of September 30, 2022 and December 31, 2021 were as follows (in thousands):
Fair Value Measurements at the End of
the Reporting Period Using
Carrying
Amount 		Fair
Value 		Quoted
Prices
in Active
Markets for Identical Assets
(Level 1) 		Significant Other Observable Inputs
(Level 2) 		Significant Unobservable Inputs
(Level 3)
September 30, 2022
FINANCIAL ASSETS:
Cash and cash equivalents $ 29,460 29,460 29,460 — —
Debt securities, held-to-maturity 22,415 20,927 — — 20,927
Loans, net 1,371,045 1,206,806 — — 1,206,806
Accrued interest receivable 7,622 7,622 — 7,622 —
FINANCIAL LIABILITIES:
Deposits 1,657,370 1,657,818 1,500,286 157,532 —
Short-term borrowings 4,000 4,000 4,000 — —
Long-term debt 24,539 24,015 — 24,015 —
Accrued interest payable 233 233 — 233 —
December 31, 2021
FINANCIAL ASSETS:
Cash and cash equivalents $ 18,136 18,136 18,136 — —
Debt securities, held-to-maturity 22,972 23,087 — — 23,087
Loans, net 1,363,939 1,333,840 — — 1,333,840
Accrued interest receivable 7,999 7,999 — 7,999 —
FINANCIAL LIABILITIES:
Deposits 1,628,819 1,630,158 1,435,487 194,671 —
Long-term debt 10,000 10,292 — 10,292 —
Accrued interest payable 277 277 — 277 —

The fair values of off-balance-sheet financial instruments such as loan commitments and letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of such instruments were not material at September 30, 2022 and December 31, 2021.
34

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements

Certain statements made in this document regarding LCNB’s financial condition, results of operations, plans, objectives, future performance and business, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by the fact they are not historical facts and include words such as “anticipate”, “could”, “may”, “feel”, “expect”, “believe”, “plan”, and similar expressions. Please refer to LCNB’s Annual Report on Form 10-K for the year ended December 31, 2021, as well as its other filings with the SEC, for a more detailed discussion of risks, uncertainties and factors that could cause actual results to differ from those discussed in the forward-looking statements.

These forward-looking statements reflect management's current expectations based on all information available to management and its knowledge of LCNB’s business and operations. Additionally, LCNB’s financial condition, results of operations, plans, objectives, future performance and business are subject to risks and uncertainties that may cause actual results to differ materially. These factors include, but are not limited to:

1. the success, impact, and timing of the implementation of LCNB’s business strategies;
2. 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 the Russia/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 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;
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 the U.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, 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.

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.
35

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. 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 progress has been made in combating the COVID-19 pandemic, the likelihood and extent to which COVID-19 will continue to impact LCNB's operating results will depend on future developments, including resurgences of the virus and variants or sub-variants of the virus in LCNB's geographic markets, which are uncertain and unpredictable.

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 the Department 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 at September 30, 2022 and December 31, 2021 totaled $362,000 and $6,935,000, respectively, and unrecognized fees at those dates totaled $16,000 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.
36

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 at September 30, 2022 are composed primarily of goodwill and core deposit intangibles related to acquisitions of other financial institutions. Goodwill is not subject to amortization, but is reviewed annually for impairment or sooner if circumstances indicate a possible impairment.  Core deposit intangibles are amortized on a straight line basis over their respective estimated weighted average lives.

Fair Value Accounting for Debt 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 for U.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 nine months ended September 30, 2022 was $5,579,000 and $15,720,000, respectively (total basic and diluted earnings per share of $0.49 and $1.36). This compares to net income of $4,817,000 and $15,347,000 (total basic and diluted earnings per share of $0.39 and $1.21) for the same three and nine-month periods in 2021.

Net interest income for the three and nine months ended September 30, 2022 was $15,444,000 and $44,834,000, respectively, compared to $14,073,000 and $42,814,000 for the same periods in 2021. Favorably contributing to the variances for both the three and nine-month periods were overall growth in the portfolio, an increase in average rates earned on taxable debt securities, and an increase in prepayment fees included in loan interest income.

LCNB recorded a net loan loss recovery of $157,000 and a provision for loan losses of $269,000 for the respective three and nine-month periods ended September 30, 2022. This compares to provisions of $306,000 and $239,000 for the same three and nine-month periods in 2021.

Non-interest income for the three and nine months ended September 30, 2022 was $3,581,000 and $10,659,000, respectively. This compares to $4,106,000 and $11,885,000 for the same periods in 2021. Non-interest income for the nine months ended September 30, 2021 included a one-time $508,000 refund on the Company’s Ohio Financial Institutions Taxes, which was
included in other operating income. The remainder of the 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.

Non-interest expense for the three and nine months ended September 30, 2022 was $12,350,000 and $36,069,000, respectively, compared to $12,029,000 and $35,729,000 for the same three and nine-month periods in 2021. Other non-interest expense for the three and nine months ended September 30, 2022, included $332,000 and $471,000, respectively, in losses from the sales of two office buildings as a result of LCNB's office consolidation strategy. For the 2022 nine-month period, the year-over-year increase in non-interest expense was partially offset by an $889,000 gain from the sale of other real estate owned recognized during the second quarter 2022.


37

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 September 30, 2022 vs. September 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 September 30, 2022 and September 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 September 30,
2022 2021
Average
Outstanding
Balance 		Interest
Earned/
Paid 		Average
Yield/
Rate 		Average
Outstanding
Balance 		Interest
Earned/
Paid 		Average
Yield/
Rate
(Dollars in thousands)
Loans (1) $ 1,384,520 15,026 4.31 % $ 1,321,629 13,729 4.12 %
Interest-bearing demand deposits 13,212 80 2.40 % 10,746 11 0.41 %
Federal Reserve Bank stock 4,652 — — % 4,652 — — %
Federal Home Loan Bank stock 4,369 65 5.90 % 5,203 26 1.98 %
Investment securities:
Equity securities 4,387 20 1.81 % 4,588 17 1.47 %
Debt securities, taxable 297,001 1,323 1.77 % 309,136 1,027 1.32 %
Debt securities, non-taxable (2) 27,890 241 3.43 % 32,635 271 3.29 %
Total earnings assets 1,736,031 16,755 3.83 % 1,688,589 15,081 3.54 %
Non-earning assets 198,667 196,292
Allowance for loan losses (5,830) (5,567)
Total assets $ 1,928,868 $ 1,879,314
NOW and money market deposits $ 539,228 422 0.31 % $ 490,596 142 0.11 %
Savings deposits 453,420 159 0.14 % 418,074 149 0.14 %
IRA and time certificates 168,358 398 0.94 % 207,010 545 1.04 %
Short-term borrowings 5,728 71 4.92 % 1,320 2 0.60 %
Long-term debt 24,920 210 3.34 % 15,000 113 2.99 %
Total interest-bearing liabilities 1,191,654 1,260 0.42 % 1,132,000 951 0.33 %
Demand deposits 508,926 480,093
Other liabilities 23,237 26,245
Capital 205,051 240,976
Total liabilities and capital $ 1,928,868 $ 1,879,314
Net interest rate spread (3) 3.41 % 3.21 %
Net interest income and net interest margin on a taxable-equivalent basis (4) 15,495 3.54 % 14,130 3.32 %
Ratio of interest-earning assets to interest-bearing liabilities 145.68 % 149.17 %
(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.





38

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 September 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
September 30, 2022 vs. 2021
Increase (decrease) attributable to:
Volume Rate Total
(In thousands)
Interest-earning Assets:
Loans $ 668 629 1,297
Interest-bearing demand deposits 3 66 69
Federal Reserve Bank stock — — —
Federal Home Loan Bank stock (5) 44 39
Investment securities:
Equity securities (1) 4 3
Debt securities, taxable (42) 338 296
Debt securities, non-taxable (41) 11 (30)
Total interest income 582 1,092 1,674
Interest-bearing Liabilities:
NOW and money market deposits 15 265 280
Savings deposits 12 (2) 10
IRA and time certificates (95) (52) (147)
Short-term borrowings 22 47 69
Long-term debt 82 15 97
Total interest expense 36 273 309
Net interest income $ 546 819 1,365

Net interest income on a fully taxable-equivalent basis for the three months ended September 30, 2022 totaled $15,495,000, an increase of $1,365,000 from the comparable period in 2021.  Total interest income increased $1,674,000 and total interest expense increased $309,000.

The $1,674,000 increase in total interest income was due primarily to a $1,297,000 increase in loan interest income and a $296,000 increase in interest income from taxable debt securities. The increase in loan interest income was due to a $62.9 million increase in the average balance of LCNB's loan portfolio and to a net 19 basis point (a basis point equals 0.01%) increase in the average rate earned on the loan portfolio. Contributing to this rate increase was loan prepayment penalty income totaling $265,000 during the third quarter of 2022, as compared to $56,000 in such income during the third quarter of 2021. The increase in interest income from taxable debt securities was due to a 45 basis point increase in the average rate earned on these securities, partially offset by a $12.1 million decrease in average securities. The increase in loan and taxable debt securities average rates reflects higher market rates.







39

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The $309,000 increase in total interest expense was primarily due to a $280,000 increase in interest expense for NOW and money market deposits, a $69,000 increase in interest expense for short-term borrowings, and a $97,000 increase in interest expense for long-term debt, partially offset by a $147,000 decrease in interest expense for IRA and time certificates. Interest expense for NOW and money market deposits increased primarily due to a 20 basis point increase in the average rate paid for these deposits, reflecting higher market rates. Interest expense for short-term borrowings increased primarily because of a 432 basis point increase in the average rate paid on such borrowings and secondarily to a $4.4 million increase in average borrowings outstanding. These increases are reflective of a new one-year line of credit borrowing originated during February 2022. Interest expense for long-term debt increased primarily due to a $9.9 million increase in average debt outstanding and secondarily to a 35 basis point increase in the average rate paid on such debt. These increases are reflective of a new term loan originated during June 2022. Interest expense for IRA and time certificates decreased due to a $38.7 million decrease in the average balance of these deposits and to a 10 basis point decrease in the average rate paid for these deposits. Management believes the decrease reflects customer preferences for liquidity during uncertain economic periods. Balances in demand deposits, NOW and money market deposits, and savings deposits grew, while balances in IRA and time deposits decreased.

Increases in market rates during 2022 were primarily caused by increases in the Targeted Federal Funds rate by the FOMC. The Targeted Federal Funds rate was increased by 300 basis points during the first nine months of 2022, with more increases forecasted to occur during the remainder of 2022 and into 2023.

40

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Nine Months Ended September 30, 2022 vs. September 30, 2021
The following table presents, for the three months ended September 30, 2022 and September 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.
Nine Months Ended September 30,
2022 2021
Average
Outstanding
Balance 		Interest
Earned/
Paid 		Average
Yield/
Rate 		Average
Outstanding
Balance 		Interest
Earned/
Paid 		Average
Yield/
Rate
(Dollars in thousands)
Loans (1) $ 1,379,080 43,360 4.20 % $ 1,321,426 42,372 4.29 %
Interest-bearing demand deposits 10,546 109 1.38 % 17,031 38 0.30 %
Federal Reserve Bank stock 4,652 140 4.02 % 4,652 140 4.02 %
Federal Home Loan Bank stock 4,922 130 3.53 % 5,203 78 2.00 %
Investment securities:
Equity securities 4,484 56 1.67 % 4,569 54 1.58 %
Debt securities, taxable 297,162 3,672 1.65 % 262,245 2,650 1.35 %
Debt securities, non-taxable (2) 27,831 718 3.45 % 33,335 830 3.33 %
Total earnings assets 1,728,677 48,185 3.73 % 1,648,461 46,162 3.74 %
Non-earning assets 196,750 193,079
Allowance for loan losses (5,623) (5,653)
Total assets $ 1,919,804 $ 1,835,887
NOW and money market deposits $ 515,868 762 0.20 % $ 457,842 416 0.12 %
Savings deposits 451,597 465 0.14 % 399,447 456 0.15 %
IRA and time certificates 179,514 1,266 0.94 % 220,157 1,937 1.18 %
Short-term borrowings 12,140 320 3.52 % 796 4 0.67 %
Long-term debt 15,907 387 3.25 % 16,736 361 2.88 %
Total interest-bearing liabilities 1,175,026 3,200 0.36 % 1,094,978 3,174 0.39 %
Demand deposits 510,422 474,281
Other liabilities 22,292 25,249
Capital 212,064 241,379
Total liabilities and capital $ 1,919,804 $ 1,835,887
Net interest rate spread (3) 3.37 % 3.35 %
Net interest income and net interest margin on a taxable-equivalent basis (4) 44,985 3.48 % 42,988 3.49 %
Ratio of interest-earning assets to interest-bearing liabilities 147.12 % 150.55 %
(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.








41

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 nine months ended September 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.

Nine Months Ended September 30, 2022 vs. 2021
Increase (decrease) attributable to:
Volume Rate Total
(In thousands)
Interest-earning Assets:
Loans $ 1,824 (836) 988
Interest-bearing demand deposits (19) 90 71
Federal Reserve Bank stock — — —
Federal Home Loan Bank stock (4) 56 52
Investment securities:
Equity securities (1) 3 2
Debt securities, taxable 382 640 1,022
Debt securities, non-taxable (141) 29 (112)
Total interest income 2,041 (18) 2,023
Interest-bearing Liabilities:
NOW and money market deposits 58 288 346
Savings deposits 56 (47) 9
IRA and time certificates (323) (348) (671)
Short-term borrowings 243 73 316
Long-term debt (19) 45 26
Total interest expense 15 11 26
Net interest income $ 2,026 (29) 1,997

Net interest income on a fully taxable-equivalent basis for the nine months ended September 30, 2022 totaled $44,985,000, an increase of $1,997,000 from the comparable period in 2021.  Total interest income increased $2,023,000 and total interest expense increased $26,000.

The $2,023,000 increase in total interest income was due primarily to a $1,022,000 increase in interest income from taxable debt securities and to a $988,000 increase in loan interest income. The increase in interest income from taxable debt securities was due to a $34.9 million increase in average securities and to a 30 basis point increase in the average rate earned on these securities, reflecting higher market rates available on new purchases. The increase in loan interest income was primarily due to a $57.7 million increase in the average balance of LCNB's loan portfolio, partially offset by a 9 basis point decrease in the average rate earned on loans caused, in part, by a decrease in PPP loan fees recognized. Contributing to the increase in loan interest income was loan prepayment penalty income totaling $998,000 during the first nine months of 2022, as compared to $558,000 in such income during the first nine months of 2021.







42

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The $26,000 increase in total interest expense was due to a $346,000 increase in interest expense for NOW and money fund deposits and a $316,000 increase in interest expense for short-term borrowings, largely offset by a $671,000 decrease in interest expense for IRA and time certificates. Interest expense for NOW and money market deposits increased primarily due to an 8 basis point increase for the average rate paid for these deposits and secondarily to a $58.0 million increase in average balances outstanding. Interest expense for short-term borrowings increased primarily due to an $11.3 million increase in average borrowings outstanding and secondarily to a 285 basis point increase in the average rate paid for these borrowings, reflecting a new one-year line of credit borrowing originated during February 2022. Interest expense for IRA and time certificates decreased due to a 23 basis point decrease in the average rate paid for these deposits and to a $40.6 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 market deposits, and savings deposits grew, while balances in IRA and time deposits decreased.

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.

LCNB recorded a net loan loss recovery of $157,000 for the three months ended September 30, 2022 and a net provision for loan losses of $269,000 for the nine months ended September 30, 2022. This compares to net provisions for loan losses of $306,000 and $239,000 for the three and nine months ended September 30, 2021. The decrease for the three month period ended September 30, 2022 was largely driven by an improvement in the five-year historical loss history, decreases in certain qualitative factors, and a decrease in loans individually evaluated for impairment. 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 nine months ended September 30, 2022 were $32,000 and $131,000, respectively, compared to net charge-offs of $130,000 and $139,000 for the same three and nine-month periods in 2021.

Non-Interest Income

A comparison of non-interest income for the three and nine months ended September 30, 2022 and September 30, 2021 is as follows (in thousands):
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2022 2021 Difference 2022 2021 Difference
Fiduciary income $ 1,513 1,695 (182) 4,851 4,959 (108)
Service charges and fees on deposit accounts 1,706 1,621 85 4,658 4,506 152
Bank owned life insurance income 269 269 — 803 805 (2)
Gains from sales of loans — 366 (366) 188 560 (372)
Other operating income 93 155 (62) 159 1,055 (896)
Total non-interest income $ 3,581 4,106 (525) 10,659 11,885 (1,226)



43

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Reasons for changes include:
• Fiduciary income decreased primarily due to decreases in the fair values of trust and brokerage assets managed, on which fees are based. The decreases in fair value are primarily due to an overall decrease in the market values of equity securities caused by current general economic conditions.
• Gains from sales of loans decreased primarily due to a lower volume of residential real estate loans sold during 2022, including no loan sales at all during the third quarter 2022.
• Other operating income for the nine months ended September 30, 2021 included a one-time Ohio Financial Institutions Tax refund of $508,000 recognized during the second quarter 2021. In addition, during the three and nine-month periods ending on September 30, 2022, LCNB recognized $80,000 and $384,000 in net unrealized losses due to a decrease in the fair value of equity securities investments, compared to a net unrealized losses of $14,000 recorded during the comparable three-month period in 2021 and a $76,000 net unrealized gain recorded for the comparable nine-month period in 2021.

Non-Interest Expense

A comparison of non-interest expense for the three and nine months ended September 30, 2022 and September 30, 2021 is as follows (in thousands):
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2022 2021 Difference 2022 2021 Difference
Salaries and employee benefits $ 7,062 7,096 (34) $ 21,291 20,640 651
Equipment expenses 398 421 (23) 1,234 1,232 2
Occupancy expense, net 790 713 77 2,300 2,236 64
State financial institutions tax 439 437 2 1,312 1,318 (6)
Marketing 215 253 (38) 845 878 (33)
Amortization of intangibles 113 263 (150) 365 780 (415)
FDIC insurance premiums, net 137 129 8 397 365 32
Contracted services 613 655 (42) 1,902 1,818 84
Other real estate owned, net 5 — 5 (874) 2 (876)
Other non-interest expense 2,578 2,062 516 7,297 6,460 837
Total non-interest expense $ 12,350 12,029 321 $ 36,069 35,729 340

Reasons for changes include:
• Salaries and employee benefits for the nine months period increased primarily due to overall wage and benefit increases, increased compensation expense for restricted stock grants, increased pension expense, and to a higher amount of personnel expenses deferred in 2021 attributable to the high volume of PPP loans originated in that period.
• Amortization of intangibles decreased because the core deposit intangibles from the First Capital Bancshares, Inc. and Eaton National Bank & Trust Co. acquisitions amortized in full during the first quarter 2022.
• Other real estate owned, net for the 2022 nine-month period 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 three and nine months ended September 30, 2022, included $332,000 and $471,000, respectively, in losses from the sales of office buildings as a result of LCNB's office consolidation strategy. One building was sold during the three-month period and two buildings were sold during the nine-month period.

On October 18, 2022, the FDIC issued a final rule that will increase the initial base deposit insurance assessment rate paid by insured depository institutions by two basis points, beginning with the first quarterly assessment period of 2023. According to the FDIC, the proposal increases the likelihood that its designated reserve ratio will reach the required minimum level of 1.35% by the statutory deadline of September 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. If the increased rate had been in effect for the September 30, 2022 payment to the FDIC, LCNB estimates that it would have paid approximately $88,000 in additional premiums. The increase will remain in effect until the long-term goal of a 2% FDIC designated reserve ratio is achieved. Progressively lower assessment rates will take effect when the reserve ratio reaches 2% and again when the reserve ratio reaches 2.5%.

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LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
On September 2, 2022, the OCC announced reduced assessment rates for OCC-chartered community banks, such as LCNB. Effective with the March 2023 assessment, the OCC will make a 40% reduction in assessments based on the first $200 million in bank assets and a 20% reduction for assets between $200 million and $20 billion. If the new rates had been in effect for its September 30, 2022 assessment, LCNB estimates that its assessment would have been approximately 22% lower than the amount actually paid.

Income Taxes

LCNB's effective tax rate for the three and nine months ended September 30, 2022 was 18.3% and 17.9%, respectively, compared to 17.6% and 18.1% for the three and nine months ended September 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 from LCNB Risk Management, Inc., and tax credits and losses related to investments in affordable housing tax credit limited partnerships.










































45

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 September 30, 2022 and December 31, 2021 is as follows (dollars in thousands):
September 30, 2022 December 31, 2021 Difference $ Difference %
ASSETS:
Total cash and cash equivalents $ 29,460 18,136 11,324 62.44 %
Investment securities:
Equity securities with a readily determinable fair value, at fair value 2,175 2,546 (371) (14.57) %
Equity securities without a readily determinable fair value, at cost 2,099 2,099 — — %
Debt securities, available-for-sale, at fair value 290,419 308,177 (17,758) (5.76) %
Debt securities, held-to-maturity, at cost 22,415 22,972 (557) (2.42) %
Federal Reserve Bank stock, at cost 4,652 4,652 — — %
Federal Home Loan Bank stock, at cost 4,041 5,203 (1,162) (22.33) %
Loans, net 1,371,045 1,363,939 7,106 0.52 %
Premises and equipment, net 33,152 35,385 (2,233) (6.31) %
Operating lease right-of-use assets 6,025 6,357 (332) (5.22) %
Goodwill 59,221 59,221 — — %
Core deposit and other intangibles 1,996 2,473 (477) (19.29) %
Bank owned life insurance 44,027 43,224 803 1.86 %
Interest receivable 7,622 7,999 (377) (4.71) %
Other assets 26,351 21,246 5,105 24.03 %
Total assets $ 1,904,700 1,903,629 1,071 0.06 %
LIABILITIES:
Deposits:
Non-interest-bearing $ 521,704 501,531 20,173 4.02 %
Interest-bearing 1,135,666 1,127,288 8,378 0.74 %
Total deposits 1,657,370 1,628,819 28,551 1.75 %
Short-term borrowings 4,000 — 4,000 N/A
Long-term debt 24,539 10,000 14,539 145.39 %
Operating lease liabilities 6,116 6,473 (357) (5.52) %
Accrued interest and other liabilities 17,236 19,733 (2,497) (12.65) %
Total liabilities 1,709,261 1,665,025 44,236 2.66 %
SHAREHOLDERS' EQUITY:
Common shares 143,855 143,130 725 0.51 %
Retained earnings 135,202 126,312 8,890 7.04 %
Treasury shares, at cost (52,009) (29,029) (22,980) 79.16 %
Accumulated other comprehensive loss, net of taxes (31,609) (1,809) (29,800) 1,647.32 %
Total shareholders' equity 195,439 238,604 (43,165) (18.09) %
Total liabilities and shareholders' equity $ 1,904,700 1,903,629 1,071 0.06 %

Reasons for changes include:
• Debt securities, available-for-sale, decreased due to maturities and calls of securities totaling $17.8 million and decreases in market value totaling $37.7 million, largely offset by purchases of additional securities totaling $38.6 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)
• Federal Home Loan Bank stock decreased due to the repurchase by the Federal Home Loan Bank of excess stock held by LCNB.
• Other assets increased due to an increase in net deferred tax assets caused by an increase in the net unrealized loss incurred by LCNB's available-for-sale debt securities portfolio.
• Interest-bearing deposits increased due to continued growth in NOW account, money market deposit, and savings account balances, partially offset by decreases in IRA and time deposit account balances.
• Short-term borrowings increased due to a $20 million one-year revolving line of credit obtained in February 2022. The borrowing was used to finance the repurchase of 1,051,688 shares of LCNB common stock. During June 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. LCNB repaid $1 million of the line of credit during the third quarter 2022, leaving a balance of $4 million.
• Long-term debt increased due to the $15 million term loan referred to above, less repayments made during the third quarter 2022.
• 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 three quarters of 2022, and net deferred federal income taxes that were categorized as a net asset at September 30, 2022 being categorized as a net liability at December 31, 2021.
• Treasury shares increased because of the repurchase of 1,172,456 share of common stock during 2022, which represents 9.4% of the shares outstanding at December 31, 2021.
• Accumulated other comprehensive loss, net of taxes increased because of market-driven decreases in the fair value of LCNB's AFS debt securities investments.

Regulatory Capital

The Bank must meet certain minimum capital requirements set by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company's and 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 Minimum Requirement with Capital Conservation Buffer To Be Considered
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 risk-weighted assets 8.0 % 10.5 % 10.0 %
Leverage Ratio (Tier 1 Capital to adjusted quarterly average total assets) 4.0 % N/A 5.0 %

As of the most recent notification from their regulators, the Bank and LCNB were categorized as "well-capitalized" under the regulatory framework for prompt corrective action.  Management believes that no conditions or events have occurred since the last notification that would change the Bank's or LCNB's category.






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LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
A summary of the Bank's regulatory capital and capital ratios follows (dollars in thousands):
September 30, 2022 December 31, 2021
Regulatory Capital:
Shareholders' equity $ 209,831 234,451
Goodwill and other intangibles (60,290) (60,655)
Accumulated other comprehensive loss 31,603 1,809
Tier 1 risk-based capital 181,144 175,605
Eligible allowance for loan losses 5,644 5,506
Total risk-based capital $ 186,788 181,111
Capital ratios:
Common Equity Tier 1 Capital to risk-weighted assets 12.02 % 12.25 %
Tier 1 Capital to risk-weighted assets 12.02 % 12.25 %
Total Capital to risk-weighted assets 12.39 % 12.64 %
Leverage 9.57 % 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 September 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 the Federal Home Loan Bank, short-term line of credit arrangements with three correspondent banks, and interest and repayments received from LCNB's loan and investment portfolios.

Total remaining borrowing capacity with the Federal Home Loan Bank at September 30, 2022 was approximately $206.5 million. Additional borrowings of approximately $56.0 million were available through line of credit arrangements at September 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.
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LCNB CORP. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk for LCNB is primarily interest rate risk.  LCNB attempts to mitigate this risk through asset/liability management strategies designed to decrease the vulnerability of its earnings to material and prolonged changes in interest rates.  LCNB does not use derivatives such as interest rate swaps, caps, or floors to hedge this risk.  LCNB has not entered into any market risk instruments for trading purposes.

The Bank's Asset and Liability Management Committee ("ALCO") primarily uses a combination of Interest Rate Sensitivity Analysis ("IRSA") and Economic Value of Equity ("EVE") analysis for measuring and managing interest rate risk.  IRSA is used to estimate the effect on net interest income ("NII") during a one-year period of instantaneous and sustained movements in interest rates, also called interest rate shocks, of 100, 200, 300, and 400 basis points.  Management considers the results of any significant downward scenarios of more than 100 basis points to not be meaningful in the current interest rate environment. The base projection uses a current interest rate scenario.  As shown below, the September 30, 2022 IRSA indicates that an increase in interest rates will have a positive effect on NII and a decrease in interest rates will have a negative effect on NII. The changes in NII for all rate assumptions are within LCNB's acceptable ranges.
Rate Shock Scenario in Basis Points Amount $ Change in
NII 		% Change in
NII
(Dollars in thousands)
Up 400 $ 75,137 3,574 4.99 %
Up 300 74,257 2,694 3.76 %
Up 200 73,255 1,692 2.36 %
Up 100 72,252 689 0.96 %
Base 71,563 — — %
Down 100 70,425 (1,138) (1.59) %

IRSA shows the effect on NII during a one-year period only.  A more long-range model is the EVE analysis, which shows the estimated present value of future cash inflows from interest-earning assets less the present value of future cash outflows for interest-bearing liabilities for the same rate shocks.  As shown below, the September 30, 2022 EVE analysis indicates that an increase in interest rates of 200, 300, or 400 basis points will have a negative effect on the EVE and an increase in interest rates of 100 basis points or a decrease in interest rates of 100 basis points will have a positive effect on the EVE.  The changes in the EVE for all rate assumptions are within LCNB's acceptable ranges.
Rate Shock Scenario in Basis Points Amount $ Change in
EVE 		% Change in
EVE
(Dollars in thousands)
Up 400 154,963 (22,166) (12.51) %
Up 300 165,440 (11,689) (6.60) %
Up 200 174,917 (2,212) (1.25) %
Up 100 183,289 6,160 3.48 %
Base 177,129 — — %
Down 100 197,970 20,841 11.77 %

The IRSA and EVE simulations discussed above are not projections of future income or equity and should not be relied on as being indicative of future operating results.  Assumptions used, including the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment or replacement of asset and liability cash flows, are inherently uncertain and, as a result, the models cannot precisely measure future net interest income or equity.  Furthermore, the models do not reflect actions that borrowers, depositors, and management may take in response to changing economic conditions and interest rate levels.

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LCNB CORP. AND SUBSIDIARIES

Item 4. Controls and Procedures

a) Disclosure controls and procedures. The Chief Executive Officer and the Chief Financial Officer have carried out an evaluation of the effectiveness of LCNB's disclosure controls and procedures that ensure that information relating to LCNB required to be disclosed by LCNB in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to LCNB's management, including its principal executive officer and principal financial officer, as appropriate, in order to allow timely decisions to be made regarding required disclosures.  Based upon this evaluation, these officers have concluded that, as of September 30, 2022, LCNB's disclosure controls and procedures were effective.

b) Changes in internal control over financial reporting. During the period covered by this report, there were no changes in LCNB's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, LCNB's internal control over financial reporting.
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LCNB CORP. AND SUBSIDIARIES

PART II.  OTHER INFORMATION
Item 1. Legal Proceedings
Except for routine litigation incidental to its business, LCNB is not a party to any material pending legal proceedings and none of its property is the subject of any material proceedings.

Item 1A. Risk Factors
Readers should carefully consider the risk factors previously disclosed in Part I, Item 1A. Risk Factors in LCNB's Form 10-K for the year ended December 31, 2021.

Operational risk created by the war waged on Ukraine.
On February 24, 2022, Russian forces launched a military invasion of Ukraine. In response, the United States and other European Union countries have imposed significant economic sanctions on Russia and Russia has responded with counter-sanctions. As a result, the Russian/Ukraine conflict has disrupted international commerce, exacerbated already existing supply chain disruptions, and negatively affected the global economy. While it is difficult to estimate the impact current or future disruptions could have on LCNB's business and financial position or that of its borrowers, such economic disruptions may affect the ability of borrowers to repay loans, thus increasing the risk of borrower defaults.

There is widespread concern that cyberattacks could intensify as the crisis continues and perhaps worsens, with impacts that could be both regional and global.

LCNB continues to monitor the evolving situation and its potential impact on its business, financial condition, results of operations, and cash flows.

LCNB may face risk caused by additional interest rate increases.
The FOMC increased the Federal Funds target range by 300 basis points during the first nine months of 2022 in an effort to dampen increasing inflation rates. Interest rate increases by the Federal Reserve may continue throughout the rest of 2022 and into 2023. The higher borrowing cost resulting from increasing interest rates may cause financial hardship on consumers and businesses, including LCNB's borrowers, which could lead to increased loan losses. In addition, uncertainty about the timing and magnitude of future interest rate increases could reduce borrowing demand and, thus, the need for LCNB's lending services.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the period covered by this report, LCNB did not sell any of its securities that were not registered under the Securities Act.

On May 27, 2022, LCNB's Board of Directors authorized entry into a new Issuer Stock Repurchase Plan Agreement (the "Plan"). Under the terms of the Plan, LCNB is authorized to repurchase up to 500,000 of its outstanding common shares. The Plan will expire by or around December 31, 2022. The Plan replaced and superseded LCNB’s prior Issuer Stock Repurchase Plan Agreement, which was adopted in August 2020.

Under the Plan, LCNB may purchase common shares through various means such as open market transactions, including block purchases, and privately negotiated transactions. The number of shares repurchased and the timing, manner, price and amount of any repurchases 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 Plan, LCNB entered into a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The 10b5-1 trading plan permits common shares to be repurchased at times that LCNB might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. The 10b5-1 trading plan is administered by an independent broker and is subject to price, market volume, and timing restrictions.





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LCNB CORP. AND SUBSIDIARIES
The following table sets forth information relating to repurchases made under the Plan during the three months ended September 30, 2022:
Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 15,740 $ 15.15 15,740 451,225
August 34,390 $ 16.14 34,390 416,835
September 37,603 $ 15.49 37,603 379,232

Item 3. Defaults Upon Senior Securities
None.

Item 4. Mine Safety Disclosures
Not applicable.

Item 5. Other Information
None.
52

LCNB CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LCNB Corp.
November 9, 2022 /s/ Eric J. Meilstrup
Eric J. Meilstrup
Chief Executive Officer and President
November 9, 2022 /s/ Robert C. Haines, II
Robert C. Haines, II
Executive Vice President and Chief Financial Officer
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LCNB CORP. AND SUBSIDIARIES

Item 6. Exhibits
Exhibit No. Exhibit Description
2.1
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
31.1
31.2
32
101
The following financial information from LCNB Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 is formatted in Extensible Business Reporting Language:  (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Income, (iii) the Consolidated Condensed Statements of Comprehensive Income, (iv) the Consolidated Condensed Statements of Shareholders' Equity, (v) the Consolidated Condensed Statements of Cash Flows, and (vi) the Notes to Consolidated Condensed Financial Statements.
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
54
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsNote 1 - Basis Of PresentationNote 1 - Basis Of Presentation (continued)Note 2 - Investment SecuritiesNote 2 - Investment Securities (continued)Note 3 - LoansNote 3 Loans (continued)Note 4 - Acquired Credit Impaired LoansNote 4 - Acquired Credit Impaired Loans (continued)Note 5 - Affordable Housing Tax Credit Limited PartnershipNote 6 BorrowingsNote 7 - LeasesNote 8 Income TaxesNote 9 - Commitments and Contingent LiabilitiesNote 9 Commitments and Contingent Liabilities (continued)Note 10 Accumulated Other Comprehensive Income (loss)Note 11 Retirement PlansNote 11 Retirement Plans (continued)Note 12 Stock Based CompensationNote 12 Stock Based Compensation (continued)Note 13 Earnings Per Common ShareNote 14 - Fair Value MeasurementsNote 14 - Fair Value Measurements (continued)Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations (continued)Item 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits

Exhibits

2.1 Agreement and Plan of Merger dated as of December 20, 2017 by and between LCNB Corp. and Columbus First Bancorp, Inc. - incorporated by reference to the Registrant's Current Report on Form 8-K filed on December 21, 2017, Exhibit 2.1. 3.1 Amended and Restated Articles of Incorporation of LCNB Corp., as amended. (This document represents the Amended and Restated Articles of Incorporation of LCNB Corp. in compiled form incorporating all amendments. The compiled document has not been filed with the Ohio Secretary of State.) - incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, Exhibit 3.1. 3.2 Code of Regulations of LCNB Corp. incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005, Exhibit 3(ii). 10.1 LCNB Corp. Ownership Incentive Plan incorporated by reference to Registrant's Form DEF 14A Proxy Statement pursuant to Section 14(a), dated March 15, 2002, Exhibit A (000-26121). 10.2 LCNB Corp. 2015 Ownership Incentive Plan - incorporated by reference to Registrant's Form DEF 14A Proxy Statement pursuant to Section 14(a), dated March 13, 2015, Exhibit A (001-35292) 10.3 Form of Option Grant Agreement under the LCNB Corp. Ownership Incentive Plan incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2005, Exhibit 10.2. 10.4 Nonqualified Executive Retirement Plan incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2009, Exhibit 10.4. 10.5 Form of Restricted Share Grant Agreement under the LCNB Corp. 2015 Ownership Incentive Plan - incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2015, Exhibit 10.7. 10.6 Form of Business Loan Agreement for the revolving line of credit between LCNB Corp. and Bankers' Bank - incorporated by reference to Registrant's Form 8-K filed on June 21, 2022, Exhibit 10.1. 10.7 Form of Business Loan Agreement for the term loan between LCNB Corp. and Bankers' Bank - incorporated by reference to Registrant's Form 8-K filed on June 21, 2022, Exhibit 10.2. 31.1 Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.