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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 June 30, 2021
| | | | | |
☐ | 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 August 3, 2021 was 12,500,367 shares.
LCNB CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Glossary of Abbreviations and Acronyms
| | | | | | | | |
ASC | | Accounting Standards Codification |
ASU | | Accounting Standards Update |
Bank | | LCNB National Bank |
BSA | | Bank Secrecy Act |
CARES Act | | Coronavirus Aid, Relief, and Economic Security Act |
CEO | | Chief Executive Officer |
CFO | | Chief Financial Officer |
CFPB | | Consumer Financial Protection Bureau |
Company | | LCNB Corp. and its consolidated subsidiaries as a whole |
CRA | | Community Reinvestment Act of 1977 |
DIF | | Deposit Insurance Fund |
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 |
GAAP | | Generally Accepted Accounting Principles |
ICS | | Insured Cash Sweep |
IRA | | Individual Retirement Account |
LCNB | | LCNB Corp. and its consolidated subsidiaries as a whole |
LIHTC | | Low Income Housing Tax Credit |
OCC | | Office of the Comptroller of the Currency |
PPP | | Paycheck Protection Program |
PPPLF | | Paycheck Protection Program Liquidity Facility |
SBA | | Small Business Administration |
SEC | | Securities and Exchange Commission |
SVP | | Senior Vice President |
PART I – FINANCIAL INFORMATION
| | | | | |
Item 1. | Financial Statements |
LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share data)
| | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 |
| | (Unaudited) | |
ASSETS: | | | | |
Cash and due from banks | | $ | 18,411 | | | 17,383 | |
Interest-bearing demand deposits | | 4,498 | | | 14,347 | |
Total cash and cash equivalents | | 22,909 | | | 31,730 | |
| | | | |
Investment securities: | | | | |
Equity securities with a readily determinable fair value, at fair value | | 2,488 | | | 2,389 | |
Equity securities without a readily determinable fair value, at cost | | 2,099 | | | 2,099 | |
Debt securities, available-for-sale, at fair value | | 310,515 | | | 209,471 | |
Debt securities, held-to-maturity, at cost | | 24,242 | | | 24,810 | |
Federal Reserve Bank stock, at cost | | 4,652 | | | 4,652 | |
Federal Home Loan Bank stock, at cost | | 5,203 | | | 5,203 | |
Loans, net | | 1,312,113 | | | 1,293,693 | |
Premises and equipment, net | | 35,356 | | | 35,376 | |
| | | | |
Operating lease right-of-use assets | | 6,730 | | | 6,274 | |
Goodwill | | 59,221 | | | 59,221 | |
Core deposit and other intangibles, net | | 2,853 | | | 3,453 | |
Bank owned life insurance | | 42,685 | | | 42,149 | |
Interest receivable | | 8,395 | | | 8,337 | |
Other assets | | 17,209 | | | 17,027 | |
TOTAL ASSETS | | $ | 1,856,670 | | | 1,745,884 | |
| | | | |
LIABILITIES: | | | | |
Deposits: | | | | |
Noninterest-bearing | | $ | 472,830 | | | 455,073 | |
Interest-bearing | | 1,104,515 | | | 1,000,350 | |
Total deposits | | 1,577,345 | | | 1,455,423 | |
Short-term borrowings | | — | | | — | |
Long-term debt | | 15,000 | | | 22,000 | |
Operating lease liabilities | | 6,846 | | | 6,371 | |
Accrued interest and other liabilities | | 17,527 | | | 21,265 | |
TOTAL LIABILITIES | | 1,616,718 | | | 1,505,059 | |
| | | | |
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 14,201,728 and 14,163,904 shares at June 30, 2021 and December 31, 2020, respectively; outstanding 12,634,845 and 12,858,325 shares at June 30, 2021 and December 31, 2020, respectively | | 142,791 | | | 142,443 | |
Retained earnings | | 120,720 | | | 115,058 | |
Treasury shares at cost, 1,566,883 and 1,305,579 shares at June 30, 2021 and December 31, 2020, respectively | | (25,122) | | | (20,719) | |
Accumulated other comprehensive income, net of taxes | | 1,563 | | | 4,043 | |
TOTAL SHAREHOLDERS' EQUITY | | 239,952 | | | 240,825 | |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | $ | 1,856,670 | | | 1,745,884 | |
The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
INTEREST INCOME: | | | | | | | | |
Interest and fees on loans | | $ | 14,108 | | | 14,822 | | | 28,643 | | | 30,049 | |
Dividends on equity securities: | | | | | | | | |
With a readily determinable fair value | | 13 | | | 13 | | | 26 | | | 27 | |
Without a readily determinable fair value | | 5 | | | 12 | | | 11 | | | 28 | |
Interest on debt securities: | | | | | | | | |
Taxable | | 905 | | | 667 | | | 1,623 | | | 1,617 | |
Non-taxable | | 218 | | | 254 | | | 442 | | | 539 | |
Other investments | | 180 | | | 189 | | | 219 | | | 253 | |
TOTAL INTEREST INCOME | | 15,429 | | | 15,957 | | | 30,964 | | | 32,513 | |
| | | | | | | | |
INTEREST EXPENSE: | | | | | | | | |
Interest on deposits | | 945 | | | 1,732 | | | 1,973 | | | 3,849 | |
Interest on short-term borrowings | | 1 | | | — | | | 2 | | | 7 | |
Interest on long-term debt | | 114 | | | 227 | | | 248 | | | 481 | |
TOTAL INTEREST EXPENSE | | 1,060 | | | 1,959 | | | 2,223 | | | 4,337 | |
NET INTEREST INCOME | | 14,369 | | | 13,998 | | | 28,741 | | | 28,176 | |
(CREDIT) PROVISION FOR LOAN LOSSES | | (15) | | | 16 | | | (67) | | | 1,189 | |
NET INTEREST INCOME AFTER (CREDIT) PROVISION FOR LOAN LOSSES | | 14,384 | | | 13,982 | | | 28,808 | | | 26,987 | |
| | | | | | | | |
NON-INTEREST INCOME: | | | | | | | | |
Fiduciary income | | 1,735 | | | 1,201 | | | 3,264 | | | 2,304 | |
Service charges and fees on deposit accounts | | 1,519 | | | 1,237 | | | 2,885 | | | 2,532 | |
Net gains from sales of debt securities, available-for-sale | | — | | | — | | | — | | | 221 | |
Bank owned life insurance income | | 269 | | | 287 | | | 536 | | | 888 | |
Gains from sales of loans | | 151 | | | 317 | | | 194 | | | 437 | |
Other operating income | | 640 | | | 277 | | | 900 | | | 776 | |
TOTAL NON-INTEREST INCOME | | 4,314 | | | 3,319 | | | 7,779 | | | 7,158 | |
| | | | | | | | |
NON-INTEREST EXPENSE: | | | | | | | | |
Salaries and employee benefits | | 7,111 | | | 6,648 | | | 13,544 | | | 13,416 | |
Equipment expenses | | 443 | | | 289 | | | 811 | | | 576 | |
Occupancy expense, net | | 729 | | | 723 | | | 1,523 | | | 1,405 | |
State financial institutions tax | | 437 | | | 420 | | | 881 | | | 856 | |
Marketing | | 357 | | | 258 | | | 625 | | | 435 | |
Amortization of intangibles | | 260 | | | 260 | | | 517 | | | 520 | |
FDIC insurance premiums, net | | 123 | | | 31 | | | 236 | | | 30 | |
Contracted services | | 623 | | | 475 | | | 1,163 | | | 877 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Other non-interest expense | | 2,125 | | | 2,012 | | | 4,400 | | | 4,073 | |
TOTAL NON-INTEREST EXPENSE | | 12,208 | | | 11,116 | | | 23,700 | | | 22,188 | |
INCOME BEFORE INCOME TAXES | | 6,490 | | | 6,185 | | | 12,887 | | | 11,957 | |
PROVISION FOR INCOME TAXES | | 1,200 | | | 1,128 | | | 2,357 | | | 1,874 | |
NET INCOME | | $ | 5,290 | | | 5,057 | | | 10,530 | | | 10,083 | |
| | | | | | | | |
Dividends declared per common share | | $ | 0.19 | | | 0.18 | | | 0.38 | | | 0.36 | |
Earnings per common share: | | | | | | | | |
Basic | | $ | 0.41 | | | 0.39 | | | 0.82 | | | 0.78 | |
Diluted | | 0.41 | | | 0.39 | | | 0.82 | | | 0.78 | |
Weighted average common shares outstanding: | | | | | | | | |
Basic | | 12,743,726 | | | 12,940,975 | | | 12,769,131 | | | 12,933,528 | |
Diluted | | 12,743,726 | | | 12,941,001 | | | 12,769,146 | | | 12,934,158 | |
The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Net income | | $ | 5,290 | | | 5,057 | | | 10,530 | | | 10,083 | |
Other comprehensive income (loss): | | | | | | | | |
Net unrealized (losses) gains on available-for-sale debt securities (net of taxes of $255 and $190 for the three months ended June 30, 2021 and 2020, respectively, and $(660) and $896 for the six months ended June 30, 2021 and 2020, respectively) | | 958 | | | 711 | | | (2,483) | | | 3,369 | |
Reclassification adjustment for net realized gains on sales of available-for-sale debt securities included in net income (net of taxes of $46 for the six months ended June 30, 2020) | | — | | | — | | | — | | | (175) | |
Change in nonqualified pension plan unrecognized net gain and unrecognized prior service cost (net of taxes of $1 and $1 for the three and six months ended June 30, 2021) | | 2 | | | 1 | | | 3 | | | 1 | |
Other comprehensive (loss) income, net of tax | | 960 | | | 712 | | | (2,480) | | | 3,195 | |
TOTAL COMPREHENSIVE INCOME | | $ | 6,250 | | | 5,769 | | | 8,050 | | | 13,278 | |
The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
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 | | Total Shareholders' Equity |
Three Months Ended June 30, 2021 | | | | | | | | | | | | |
Balance at March 31, 2021 | | 12,820,108 | | | $ | 142,639 | | | 117,863 | | | (21,859) | | | 603 | | | 239,246 | |
Net income | | | | | | 5,290 | | | | | | | 5,290 | |
Other comprehensive income, net of taxes | | | | | | | | | | 960 | | | 960 | |
Dividend Reinvestment and Stock Purchase Plan | | 5,720 | | | 100 | | | | | | | | | 100 | |
| | | | | | | | | | | | |
Repurchase of common stock | | (190,983) | | | | | | | (3,263) | | | | | (3,263) | |
| | | | | | | | | | | | |
Compensation expense relating to restricted stock | | — | | | 52 | | | | | | | | | 52 | |
Common stock dividends, $0.19 per share | | | | | | (2,433) | | | | | | | (2,433) | |
Balance at June 30, 2021 | | 12,634,845 | | | $ | 142,791 | | | 120,720 | | | (25,122) | | | 1,563 | | | 239,952 | |
| | | | | | | | | | | | |
Six Months Ended June 30, 2021 | | | | | | | | | | | | |
Balance at December 31, 2020 | | 12,858,325 | | | $ | 142,443 | | | 115,058 | | | (20,719) | | | 4,043 | | | 240,825 | |
Net income | | | | | | 10,530 | | | | | | | 10,530 | |
Other comprehensive loss, net of taxes | | | | | | | | | | (2,480) | | | (2,480) | |
Dividend Reinvestment and Stock Purchase Plan | | 11,192 | | | 199 | | | | | | | | | 199 | |
| | | | | | | | | | | | |
Repurchase of common stock | | (261,304) | | | | | | | (4,403) | | | | | (4,403) | |
Exercise of stock options | | 311 | | | 4 | | | | | | | | | 4 | |
Compensation expense relating to restricted stock | | 26,321 | | | 145 | | | | | | | | | 145 | |
Common stock dividends, $0.38 per share | | | | | | (4,868) | | | | | | | (4,868) | |
Balance at June 30, 2021 | | 12,634,845 | | | $ | 142,791 | | | 120,720 | | | (25,122) | | | 1,563 | | | 239,952 | |
| | | | | | | | | | | | |
Three Months Ended June 30, 2020 | | | | | | | | | | | | |
Balance at March 31, 2020 | | 12,969,076 | | | $ | 142,046 | | | 107,123 | | | (18,847) | | | 3,156 | | | 233,478 | |
Net income | | | | | | 5,057 | | | | | | | 5,057 | |
Other comprehensive income, net of taxes | | | | | | | | | | 712 | | | 712 | |
Dividend Reinvestment and Stock Purchase Plan | | 6,803 | | | 101 | | | | | | | | | 101 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Compensation expense relating to restricted stock | | — | | | 34 | | | | | | | | | 34 | |
Common stock dividends, $0.18 per share | | | | | | (2,335) | | | | | | | (2,335) | |
Balance at June 30, 2020 | | 12,975,879 | | | $ | 142,181 | | | 109,845 | | | (18,847) | | | 3,868 | | | 237,047 | |
| | | | | | | | | | | | |
Six Months Ended June 30, 2020 | | | | | | | | | | | | |
Balance at December 31, 2019 | | 12,936,783 | | | $ | 141,791 | | | 104,431 | | | (18,847) | | | 673 | | | 228,048 | |
Net income | | | | | | 10,083 | | | | | | | 10,083 | |
Other comprehensive income, net of taxes | | | | | | | | | | 3,195 | | | 3,195 | |
Dividend Reinvestment and Stock Purchase Plan | | 13,842 | | | 208 | | | | | | | | | 208 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Exercise of stock options | | 9,593 | | | 115 | | | | | | | | | 115 | |
Compensation expense relating to restricted stock | | 15,661 | | | 67 | | | | | | | | | 67 | |
Common stock dividends, $0.36 per share | | | | | | (4,669) | | | | | | | (4,669) | |
Balance at June 30, 2020 | | 12,975,879 | | | $ | 142,181 | | | 109,845 | | | (18,847) | | | 3,868 | | | 237,047 | |
The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2021 | | 2020 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | |
Net income | | $ | 10,530 | | | 10,083 | |
Adjustments to reconcile net income to net cash flows from operating activities: | | | | |
Depreciation, amortization, and accretion | | 989 | | | 936 | |
Provision (credit) for loan losses | | (67) | | | 1,189 | |
Deferred income tax provision | | 356 | | | 126 | |
Increase in cash surrender value of bank owned life insurance | | (536) | | | (571) | |
Bank owned life insurance mortality benefits in excess of cash surrender value | | — | | | (317) | |
Gain from equity securities | | (90) | | | (453) | |
Realized gain from sales of debt securities, available-for-sale | | — | | | (221) | |
Realized gain from sales of premises and equipment | | (5) | | | (50) | |
| | | | |
Realized gain from sales and impairment of other real estate owned and repossessed assets | | — | | | (11) | |
Origination of mortgage loans for sale | | (7,591) | | | (16,551) | |
Realized gains from sales of loans | | (194) | | | (437) | |
Proceeds from sales of mortgage loans | | 7,690 | | | 16,821 | |
Compensation expense related to restricted stock | | 145 | | | 67 | |
Changes in: | | | | |
Accrued interest receivable | | (58) | | | (4,444) | |
Other assets | | (180) | | | (3,529) | |
Other liabilities | | (3,431) | | | 2,293 | |
TOTAL ADJUSTMENTS | | (2,972) | | | (5,152) | |
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES | | 7,558 | | | 4,931 | |
| | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | |
Proceeds from sales of equity securities | | — | | | 646 | |
Proceeds from sales of debt securities, available-for-sale | | — | | | 8,786 | |
Proceeds from maturities and calls of debt securities: | | | | |
Available-for-sale | | 16,592 | | | 39,560 | |
Held-to-maturity | | 1,508 | | | 1,773 | |
Purchases of equity securities | | (9) | | | (44) | |
Purchases of debt securities: | | | | |
Available-for-sale | | (121,604) | | | (20,002) | |
Held-to-maturity | | (940) | | | (1,485) | |
| | | | |
| | | | |
| | | | |
Net increase in loans | | (16,855) | | | (91,276) | |
| | | | |
Proceeds from bank owned life insurance mortality benefits | | — | | | 958 | |
Proceeds from sale of other real estate owned and repossessed assets | | — | | | 208 | |
Purchases of premises and equipment | | (930) | | | (1,604) | |
Proceeds from sale of premises and equipment | | 5 | | | 225 | |
| | | | |
NET CASH FLOWS USED IN INVESTING ACTIVITIES | | (122,233) | | | (62,255) | |
| | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | |
Net increase in deposits | | 121,922 | | | 90,641 | |
| | | | |
| | | | |
Principal payments on long-term debt | | (7,000) | | | (7,000) | |
Proceeds from issuance of common stock | | 16 | | | 36 | |
Repurchase of common stock | | (4,403) | | | — | |
Proceeds from exercise of stock options | | 4 | | | 115 | |
Cash dividends paid on common stock | | (4,685) | | | (4,497) | |
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES | | 105,854 | | | 79,295 | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | | (8,821) | | | 21,971 | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | | 31,730 | | | 20,765 | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 22,909 | | | 42,736 | |
| | | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | |
Interest paid | | 2,365 | | | 4,466 | |
Income taxes paid | | 2,290 | | | — | |
| | | | |
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES: | | | | |
| | | | |
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.
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 generally accepted accounting principles 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, 2020 has been derived from the audited consolidated balance sheet as of that date.
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles 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 six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the full year ending December 31, 2021. 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 2020 Annual Report on Form 10-K filed with the SEC.
Accounting Changes
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.
ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes"
ASU No. 2019-12 was issued in December 2019 and adopted by LCNB on January 1, 2021. It simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifies and amends certain other guidance. Adoption of ASU No. 2019-12 did not have a material impact on LCNB's results of consolidated operations or financial position.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 2 - Investment Securities
The amortized cost and estimated fair value of equity and debt securities at June 30, 2021 and December 31, 2020 are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
June 30, 2021 | | | | | | | |
Debt Securities, Available-for-Sale: | | | | | | | |
U.S. Treasury notes | $ | 64,317 | | | 255 | | | 78 | | | 64,494 | |
U.S. Agency notes | 95,830 | | | 587 | | | 928 | | | 95,489 | |
Corporate bonds | 1,900 | | | 7 | | | 14 | | | 1,893 | |
U.S. Agency mortgage-backed securities | 98,358 | | | 2,123 | | | 388 | | | 100,093 | |
Municipal securities: | | | | | | | |
Non-taxable | 11,725 | | | 188 | | | 14 | | | 11,899 | |
Taxable | 36,023 | | | 828 | | | 204 | | | 36,647 | |
| $ | 308,153 | | | 3,988 | | | 1,626 | | | 310,515 | |
| | | | | | | |
Debt Securities, Held-to-Maturity: | | | | | | | |
Municipal securities: | | | | | | | |
Non-taxable | $ | 20,840 | | | 125 | | | — | | | 20,965 | |
Taxable | 3,402 | | | 22 | | | — | | | 3,424 | |
| $ | 24,242 | | | 147 | | | — | | | 24,389 | |
| | | | | | | |
December 31, 2020 | | | | | | | |
Debt Securities, Available-for-Sale: | | | | | | | |
U.S. Treasury notes | $ | 2,268 | | | 120 | | | — | | | 2,388 | |
U.S. Agency notes | 66,983 | | | 950 | | | 33 | | | 67,900 | |
Corporate Bonds | 1,200 | | | — | | | 21 | | | 1,179 | |
U.S. Agency mortgage-backed securities | 88,455 | | | 3,180 | | | 1 | | | 91,634 | |
Municipal securities: | | | | | | | |
Non-taxable | 12,651 | | | 282 | | | — | | | 12,933 | |
Taxable | 32,409 | | | 1,031 | | | 3 | | | 33,437 | |
| $ | 203,966 | | | 5,563 | | | 58 | | | 209,471 | |
| | | | | | | |
Debt Securities, Held-to-Maturity: | | | | | | | |
Municipal securities: | | | | | | | |
Non-taxable | $ | 21,408 | | | 181 | | | — | | | 21,589 | |
Taxable | 3,402 | | | 6 | | | 37 | | | 3,371 | |
| $ | 24,810 | | | 187 | | | 37 | | | 24,960 | |
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 June 30, 2021 and December 31, 2020, 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 |
June 30, 2021 | | | | | | | |
Available-for-Sale: | | | | | | | |
U.S. Treasury notes | $ | 29,734 | | | 78 | | | — | | | — | |
U.S. Agency notes | 68,180 | | | 928 | | | — | | | — | |
Corporate bonds | 1,186 | | | 14 | | | — | | | — | |
U.S. Agency mortgage-backed securities | 32,947 | | | 388 | | | — | | | — | |
Municipal securities: | | | | | | | |
Non-taxable | 1,741 | | | 14 | | | — | | | — | |
Taxable | 13,488 | | | 204 | | | — | | | — | |
| $ | 147,276 | | | 1,626 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
December 31, 2020 | | | | | | | |
Available-for-Sale: | | | | | | | |
U.S. Treasury notes | $ | — | | | — | | | — | | | — | |
U.S. Agency notes | 10,674 | | | 33 | | | — | | | — | |
Corporate Bonds | 679 | | | 21 | | | — | | | — | |
U.S. Agency mortgage-backed securities | 290 | | | 1 | | | — | | | — | |
Municipal securities: | | | | | | | |
Non-taxable | 38 | | | — | | | — | | | — | |
Taxable | 3,063 | | | 3 | | | — | | | — | |
| $ | 14,744 | | | 58 | | | — | | | — | |
| | | | | | | |
Held-to-Maturity: | | | | | | | |
Municipal securities: | | | | | | | |
Non-taxable | $ | 1 | | | — | | | — | | | |
Taxable | 3,113 | | | 37 | | | — | | | — | |
| $ | 3,114 | | | 37 | | | — | | | — | |
Management has determined that the unrealized losses at June 30, 2021 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.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 2 - Investment Securities (continued)
Contractual maturities of debt securities at June 30, 2021 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 | $ | 7,476 | | | 7,563 | | | 1,830 | | | 1,837 | |
Due from one to five years | 87,421 | | | 88,315 | | | 5,641 | | | 5,688 | |
Due from five to ten years | 113,868 | | | 113,528 | | | 2,038 | | | 2,066 | |
Due after ten years | 1,030 | | | 1,016 | | | 14,733 | | | 14,798 | |
| 209,795 | | | 210,422 | | | 24,242 | | | 24,389 | |
U.S. Agency mortgage-backed securities | 98,358 | | | 100,093 | | | — | | | — | |
| $ | 308,153 | | | 310,515 | | | 24,242 | | | 24,389 | |
Debt securities with a market value of $142,938,000 and $118,599,000 at June 30, 2021 and December 31, 2020, respectively, were pledged to secure public deposits and for other purposes required or as permitted by law.
Certain information concerning the sale of debt securities, available-for-sale, for the three and six months ended June 30, 2021 and 2020 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Proceeds from sales | $ | — | | | — | | | — | | | 8,786 | |
Gross realized gains | — | | | — | | | — | | | 221 | |
Gross realized losses | — | | | — | | | — | | | — | |
Realized gains or losses from the sale of securities are computed using the specific identification method.
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 June 30, 2021 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 June 30, 2021 and December 31, 2020 are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
| Cost | | Fair Value | | Cost | | Fair Value |
Mutual funds | $ | 1,403 | | | 1,394 | | | 1,395 | | | 1,402 | |
Equity securities | 778 | | | 1,094 | | | 778 | | | 987 | |
Total equity securities with a readily determinable fair value | $ | 2,181 | | | 2,488 | | | 2,173 | | | 2,389 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 2 - Investment Securities (continued)
Certain information concerning changes in fair value of equity securities with a readily determinable fair value for the three and six months ended June 30, 2021 and 2020 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net gains (losses) recognized | $ | (22) | | | 120 | | | 90 | | | 453 | |
Less net realized gains on equity securities sold | — | | | — | | | — | | | 559 | |
Net unrealized gains (losses) recognized and still held at period end | $ | (22) | | | 120 | | | 90 | | | (106) | |
Note 3 - Loans
Major classifications of loans at June 30, 2021 and December 31, 2020 were as follows (in thousands):
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Commercial & industrial | $ | 97,240 | | | 100,254 | |
Commercial, secured by real estate | 836,085 | | | 843,230 | |
Residential real estate | 341,447 | | | 309,692 | |
Consumer | 35,257 | | | 36,917 | |
Agricultural | 8,765 | | | 10,100 | |
Other loans, including deposit overdrafts | 369 | | | 363 | |
Loans, gross | 1,319,163 | | | 1,300,556 | |
Deferred origination fees, net | (1,398) | | | (1,135) | |
Loans, net of deferred origination fees | 1,317,765 | | | 1,299,421 | |
Less allowance for loan losses | 5,652 | | | 5,728 | |
Loans, net | $ | 1,312,113 | | | 1,293,693 | |
Non-accrual, past-due, and accruing restructured loans as of June 30, 2021 and December 31, 2020 were as follows (in thousands):
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Non-accrual loans: | | | |
| | | |
Commercial, secured by real estate | $ | 2,092 | | | 2,458 | |
Residential real estate | 1,246 | | | 1,260 | |
| | | |
| | | |
Total non-accrual loans | 3,338 | | | 3,718 | |
Past-due 90 days or more and still accruing | — | | | — | |
Total non-accrual and past-due 90 days or more and still accruing | 3,338 | | | 3,718 | |
Accruing restructured loans | 2,964 | | | 5,176 | |
Total | $ | 6,302 | | | 8,894 | |
.
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 six months ended June 30, 2021 and 2020 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial & Industrial | | Commercial, Secured by Real Estate | | Residential Real Estate | | Consumer | | Agricultural | | Other | | Total |
Three Months Ended June 30, 2021 |
Balance, beginning of period | $ | 957 | | | 3,634 | | | 919 | | | 131 | | | 39 | | | (1) | | | 5,679 | |
Provision (credit) charged to expenses | 86 | | | 109 | | | (223) | | | (8) | | | (2) | | | 23 | | | (15) | |
Losses charged off | — | | | — | | | — | | | (2) | | | — | | | (22) | | | (24) | |
Recoveries | — | | | — | | | 1 | | | 1 | | | — | | | 10 | | | 12 | |
Balance, end of period | $ | 1,043 | | | 3,743 | | | 697 | | | 122 | | | 37 | | | 10 | | | 5,652 | |
| | | | | | | | | | | | | |
Six Months Ended June 30, 2021 |
Balance, beginning of year | $ | 816 | | | 3,903 | | | 837 | | | 153 | | | 28 | | | (9) | | | 5,728 | |
Provision (credit) charged to expenses | 227 | | | (158) | | | (152) | | | (28) | | | 9 | | | 35 | | | (67) | |
Losses charged off | — | | | (2) | | | (16) | | | (5) | | | — | | | (43) | | | (66) | |
Recoveries | — | | | — | | | 28 | | | 2 | | | — | | | 27 | | | 57 | |
Balance, end of period | $ | 1,043 | | | 3,743 | | | 697 | | | 122 | | | 37 | | | 10 | | | 5,652 | |
| | | | | | | | | | | | | |
Three Months Ended June 30, 2020 |
Balance, beginning of period | $ | 633 | | | 3,574 | | | 629 | | | 129 | | | 39 | | | 4 | | | 5,008 | |
Provision (credit) charged to expenses | 72 | | | (109) | | | 68 | | | (10) | | | (13) | | | 8 | | | 16 | |
Losses charged off | (14) | | | — | | | — | | | (3) | | | — | | | (27) | | | (44) | |
Recoveries | — | | | — | | | — | | | 17 | | | — | | | 19 | | | 36 | |
Balance, end of period | $ | 691 | | | 3,465 | | | 697 | | | 133 | | | 26 | | | 4 | | | 5,016 | |
| | | | | | | | | | | | | |
Six Months Ended June 30, 2020 |
Balance, beginning of year | $ | 456 | | | 2,924 | | | 528 | | | 99 | | | 34 | | | 4 | | | 4,045 | |
Provision (credit) charged to expenses | 231 | | | 811 | | | 99 | | | 31 | | | (8) | | | 25 | | | 1,189 | |
Losses charged off | (14) | | | (270) | | | (3) | | | (15) | | | — | | | (63) | | | (365) | |
Recoveries | 18 | | | — | | | 73 | | | 18 | | | — | | | 38 | | | 147 | |
Balance, end of period | $ | 691 | | | 3,465 | | | 697 | | | 133 | | | 26 | | | 4 | | | 5,016 | |
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 June 30, 2021 and December 31, 2020 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial & Industrial | | Commercial, Secured by Real Estate | | Residential Real Estate | | Consumer | | Agricultural | | Other | | Total |
June 30, 2021 | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 8 | | | 14 | | | 10 | | | — | | | — | | | — | | | 32 | |
Collectively evaluated for impairment | 1,035 | | | 3,729 | | | 687 | | | 122 | | | 37 | | | 10 | | | 5,620 | |
Acquired credit impaired loans | — | | | — | | | — | | | — | | | — | | | | | — | |
Balance, end of period | $ | 1,043 | | | 3,743 | | | 697 | | | 122 | | | 37 | | | 10 | | | 5,652 | |
| | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 175 | | | 4,137 | | | 1,538 | | | — | | | — | | | — | | | 5,850 | |
Collectively evaluated for impairment | 95,838 | | | 828,736 | | | 339,243 | | | 35,371 | | | 8,730 | | | 206 | | | 1,308,124 | |
Acquired credit impaired loans | 426 | | | 1,950 | | | 1,252 | | | — | | | — | | | 163 | | | 3,791 | |
Balance, end of period | $ | 96,439 | | | 834,823 | | | 342,033 | | | 35,371 | | | 8,730 | | | 369 | | | 1,317,765 | |
| | | | | | | | | | | | | |
December 31, 2020 | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 8 | | | 17 | | | 27 | | | — | | | — | | | — | | | 52 | |
Collectively evaluated for impairment | 808 | | | 3,886 | | | 810 | | | 153 | | | 28 | | | (9) | | | 5,676 | |
Acquired credit impaired loans | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Balance, end of period | $ | 816 | | | 3,903 | | | 837 | | | 153 | | | 28 | | | (9) | | | 5,728 | |
| | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 194 | | | 6,613 | | | 1,641 | | | 5 | | | — | | | — | | | 8,453 | |
Collectively evaluated for impairment | 99,040 | | | 833,548 | | | 306,138 | | | 37,047 | | | 10,116 | | | 179 | | | 1,286,068 | |
Acquired credit impaired loans | 362 | | | 2,048 | | | 2,306 | | | — | | | — | | | 184 | | | 4,900 | |
Balance, end of period | $ | 99,596 | | | 842,209 | | | 310,085 | | | 37,052 | | | 10,116 | | | 363 | | | 1,299,421 | |
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 various purposes, including 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 government 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. Eligible borrowers can apply for a First Draw or a Second Draw PPP Loan. PPP loans made by LCNB have a maturity of two years if issued prior to June 5, 2020 and five years if issued on or after June 5, 2020. The loans have an interest rate of 1%. In addition, the SBA pays originating lenders processing fees based on the size of the loan. A borrower who meets certain requirements can request loan forgiveness from the SBA. If loan forgiveness is granted, the SBA will forward the forgiveness amount to the lender. LCNB originated 316 PPP loans with original balances totaling $45.5 million during 2020 and originated an additional 358 loans with original balances totaling $38.3 million during the first half of 2021. The outstanding balance at June 30, 2021 was $23.8 million.
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 occupancy.
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 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. Home equity lines of credit have a variable rate 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%.
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 June 30, 2021 and December 31, 2020 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | OAEM | | Substandard | | Doubtful | | Total |
June 30, 2021 | | | | | | | | | |
Commercial & industrial | $ | 96,218 | | | — | | | 221 | | | — | | | 96,439 | |
Commercial, secured by real estate | 797,440 | | | 17,079 | | | 20,304 | | | — | | | 834,823 | |
Residential real estate | 339,331 | | | — | | | 2,702 | | | — | | | 342,033 | |
Consumer | 35,371 | | | — | | | — | | | — | | | 35,371 | |
Agricultural | 8,730 | | | — | | | — | | | — | | | 8,730 | |
Other | 369 | | | — | | | — | | | — | | | 369 | |
Total | $ | 1,277,459 | | | 17,079 | | | 23,227 | | | — | | | 1,317,765 | |
| | | | | | | | | |
December 31, 2020 | | | | | | | | | |
Commercial & industrial | $ | 97,391 | | | — | | | 2,205 | | | — | | | 99,596 | |
Commercial, secured by real estate | 811,558 | | | 9,279 | | | 21,372 | | | — | | | 842,209 | |
Residential real estate | 306,092 | | | 1,005 | | | 2,988 | | | — | | | 310,085 | |
Consumer | 37,050 | | | — | | | 2 | | | — | | | 37,052 | |
Agricultural | 10,116 | | | — | | | — | | | — | | | 10,116 | |
Other | 363 | | | — | | | — | | | — | | | 363 | |
Total | $ | 1,262,570 | | | 10,284 | | | 26,567 | | | — | | | 1,299,421 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 3 – Loans (continued)
A loan portfolio aging analysis at June 30, 2021 and December 31, 2020 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 |
June 30, 2021 | | | | | | | | | | | | | |
Commercial & industrial | $ | — | | | — | | | — | | | — | | | 96,439 | | | 96,439 | | | — | |
Commercial, secured by real estate | — | | | — | | | 895 | | | 895 | | | 833,928 | | | 834,823 | | | — | |
Residential real estate | 6 | | | 13 | | | 454 | | | 473 | | | 341,560 | | | 342,033 | | | |
Consumer | 4 | | | — | | | — | | | 4 | | | 35,367 | | | 35,371 | | | — | |
Agricultural | — | | | — | | | — | | | — | | | 8,730 | | | 8,730 | | | — | |
Other | 87 | | | — | | | — | | | 87 | | | 282 | | | 369 | | | — | |
Total | $ | 97 | | | 13 | | | 1,349 | | | 1,459 | | | 1,316,306 | | | 1,317,765 | | | — | |
| | | | | | | | | | | | | |
December 31, 2020 | | | | | | | | | | | | | |
Commercial & industrial | $ | — | | | — | | | — | | | — | | | 99,596 | | | 99,596 | | | — | |
Commercial, secured by real estate | 16 | | | — | | | 1,476 | | | 1,492 | | | 840,717 | | | 842,209 | | | — | |
Residential real estate | 497 | | | 219 | | | 675 | | | 1,391 | | | 308,694 | | | 310,085 | | | — | |
Consumer | 4 | | | 1 | | | — | | | 5 | | | 37,047 | | | 37,052 | | | — | |
Agricultural | — | | | — | | | — | | | — | | | 10,116 | | | 10,116 | | | — | |
Other | 60 | | | — | | | — | | | 60 | | | 303 | | | 363 | | | — | |
Total | $ | 577 | | | 220 | | | 2,151 | | | 2,948 | | | 1,296,473 | | | 1,299,421 | | | — | |
Impaired loans, including acquired credit impaired loans, at June 30, 2021 and December 31, 2020 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
| Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
With no related allowance recorded: | | | | | | | | | | | |
Commercial & industrial | $ | 426 | | | 679 | | | | | 362 | | | 646 | | | |
Commercial, secured by real estate | 5,413 | | | 6,407 | | | | | 6,050 | | | 6,735 | | | |
Residential real estate | 2,542 | | | 2,949 | | | | | 3,261 | | | 3,695 | | | |
Consumer | — | | | — | | | | | 4 | | | 4 | | | |
Agricultural | — | | | — | | | | | — | | | — | | | |
Other | 163 | | | 253 | | | | | 184 | | | 297 | | | |
Total | $ | 8,544 | | | 10,288 | | | | | 9,861 | | | 11,377 | | | |
| | | | | | | | | | | |
With an allowance recorded: | | | | | | | | | | | |
Commercial & industrial | $ | 175 | | | 180 | | | 8 | | | 194 | | | 199 | | | 8 | |
Commercial, secured by real estate | 674 | | | 675 | | | 14 | | | 2,611 | | | 2,908 | | | 17 | |
Residential real estate | 248 | | | 248 | | | 10 | | | 686 | | | 687 | | | 27 | |
Consumer | — | | | — | | | — | | | 1 | | | 1 | | | — | |
Agricultural | — | | | — | | | — | | | — | | | — | | | — | |
Other | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | 1,097 | | | 1,103 | | | 32 | | | 3,492 | | | 3,795 | | | 52 | |
| | | | | | | | | | | |
Total: | | | | | | | | | | | |
Commercial & industrial | $ | 601 | | | 859 | | | 8 | | | 556 | | | 845 | | | 8 | |
Commercial, secured by real estate | 6,087 | | | 7,082 | | | 14 | | | 8,661 | | | 9,643 | | | 17 | |
Residential real estate | 2,790 | | | 3,197 | | | 10 | | | 3,947 | | | 4,382 | | | 27 | |
Consumer | — | | | — | | | — | | | 5 | | | 5 | | | — | |
Agricultural | — | | | — | | | — | | | — | | | — | | | — | |
Other | 163 | | | 253 | | | — | | | 184 | | | 297 | | | — | |
Total | $ | 9,641 | | | 11,391 | | | 32 | | | 13,353 | | | 15,172 | | | 52 | |
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 six months ended June 30, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
| Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
Three Months Ended June 30, | | | | | | | |
With no related allowance recorded: | | | | | | | |
Commercial & industrial | $ | 267 | | | 19 | | | 1,219 | | | 18 | |
Commercial, secured by real estate | 6,406 | | | 76 | | | 5,981 | | | 196 | |
Residential real estate | 2,909 | | | 70 | | | 3,026 | | | 56 | |
Consumer | — | | | — | | | 8 | | | — | |
Agricultural | — | | | — | | | — | | | — | |
Other | 181 | | | 16 | | | 247 | | | 7 | |
Total | $ | 9,763 | | | 181 | | | 10,481 | | | 277 | |
| | | | | | | |
With an allowance recorded: | | | | | | | |
Commercial & industrial | $ | 180 | | | 2 | | | 216 | | | 5 | |
Commercial, secured by real estate | 677 | | | 8 | | | 1,786 | | | 11 | |
Residential real estate | 251 | | | 4 | | | 323 | | | 5 | |
Consumer | — | | | — | | | 3 | | | — | |
Agricultural | — | | | — | | | — | | | — | |
Other | — | | | — | | | — | | | — | |
Total | $ | 1,108 | | | 14 | | | 2,328 | | | 21 | |
| | | | | | | |
Total: | | | | | | | |
Commercial & industrial | $ | 447 | | | 21 | | | 1,435 | | | 23 | |
Commercial, secured by real estate | 7,083 | | | 84 | | | 7,767 | | | 207 | |
Residential real estate | 3,160 | | | 74 | | | 3,349 | | | 61 | |
Consumer | — | | | — | | | 11 | | | — | |
Agricultural | — | | | — | | | — | | | — | |
Other | 181 | | | 16 | | | 247 | | | 7 | |
Total | $ | 10,871 | | | 195 | | | 12,809 | | | 298 | |
| | | | | | | |
Six Months Ended June 30, | | | | | | | |
With no related allowance recorded: | | | | | | | |
Commercial & industrial | $ | 299 | | | 44 | | | 1,227 | | | 289 | |
Commercial, secured by real estate | 7,061 | | | 201 | | | 7,172 | | | 530 | |
Residential real estate | 3,180 | | | 136 | | | 3,162 | | | 149 | |
Consumer | 2 | | | — | | | 14 | | | 1 | |
Agricultural | — | | | — | | | — | | | — | |
Other | 182 | | | 30 | | | 252 | | | 15 | |
Total | $ | 10,724 | | | 411 | | | 11,827 | | | 984 | |
| | | | | | | |
With an allowance recorded: | | | | | | | |
Commercial & industrial | $ | 184 | | | 5 | | | 221 | | | 8 | |
Commercial, secured by real estate | 680 | | | 19 | | | 1,799 | | | 21 | |
Residential real estate | 254 | | | 8 | | | 327 | | | 10 | |
Consumer | — | | | — | | | 4 | | | — | |
Agricultural | — | | | — | | | — | | | — | |
Other | — | | | — | | | — | | | — | |
Total | $ | 1,118 | | | 32 | | | 2,351 | | | 39 | |
| | | | | | | |
Total: | | | | | | | |
Commercial & industrial | $ | 483 | | | 49 | | | 1,448 | | | 297 | |
Commercial, secured by real estate | 7,741 | | | 220 | | | 8,971 | | | 551 | |
Residential real estate | 3,434 | | | 144 | | | 3,489 | | | 159 | |
Consumer | 2 | | | — | | | 18 | | | 1 | |
Agricultural | — | | | — | | | — | | | — | |
Other | 182 | | | 30 | | | 252 | | | 15 | |
Total | $ | 11,842 | | | 443 | | | 14,178 | | | 1,023 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 3 – Loans (continued)
Of the interest income recognized on impaired loans during the six months ended June 30, 2021 and 2020, approximately $0 and $10,000, respectively, were recognized on a cash basis.
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 six months ended June 30, 2021 and 2020 were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
| 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 June 30, | | | | | | | | | | |
Commercial and industrial | — | | | $ | — | | | — | | | — | | | $ | — | | | — | |
Commercial, secured by real estate | — | | | — | | | — | | | — | | | — | | | — | |
Residential real estate | 1 | | | 27 | | | 31 | | | — | | | — | | | — | |
Consumer | — | | | — | | | — | | | — | | | — | | | — | |
Total | 1 | | | $ | 27 | | | 31 | | | — | | | $ | — | | | — | |
| | | | | | | | | | | |
Six Months Ended June 30, | | | | | | | | | | |
Commercial & industrial | — | | | $ | — | | | $ | — | | | 1 | | | $ | 4 | | | $ | 5 | |
Commercial, secured by real estate | — | | | — | | | — | | | — | | | — | | | — | |
Residential real estate | 2 | | | 48 | | | 52 | | | — | | | — | | | — | |
Consumer | — | | | — | | | — | | | — | | | — | | | — | |
Total | 2 | | | $ | 48 | | | $ | 52 | | | 1 | | | $ | 4 | | | $ | 5 | |
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 restructurings that subsequently defaulted within twelve months of the restructuring date for the six months ended June 30, 2021 and 2020.
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.
Information concerning loans that were modified during the six months ended June 30, 2021 and 2020 and that were determined to be troubled debt restructurings follows (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
Impaired loans without a valuation allowance | $ | 48 | | | 3 | |
Impaired loans with a valuation allowance | — | | | — | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 3 – Loans (continued)
The CARES Act includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances (“Section 4013”). To be eligible under Section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. The Consolidated Appropriations Act, 2021 was signed into law on December 20, 2020 and, among other provisions, extended the provisions in Section 4013 to January 1, 2022.
In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement on April 7, 2020 that, in consultation with the FASB, confirmed that, for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under ASC Subtopic 310-40. This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.
The carrying value of loans that remain on modified terms under the guidance of Section 4013 totaled $10,404,000 and $19,023,000 at June 30, 2021 and December 31, 2020, respectively. No loans remain on modified terms under the guidance of the revised interagency statement at June 30, 2021 and such loans totaled $1,553,000 at December 31, 2020.
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 June 30, 2021 and December 31, 2020 were approximately $126,924,000 and $137,188,000, respectively.
The total recorded investment in residential consumer mortgage loans secured by residential real estate that were in the process of foreclosure at June 30, 2021 was $454,000.
Note 4 - Acquired Credit Impaired Loans
Loans acquired through mergers are recorded at fair value with no carryover of the acquired entity's previously established allowance for loan losses. The excess of expected cash flows over the estimated fair value of acquired loans is recognized as interest income over the remaining contractual lives of the loans using the level yield method. Subsequent decreases in expected cash flows will require additions to the allowance for loan losses. Subsequent improvements in expected cash flows result in the recognition of additional interest income over the then-remaining contractual lives of the loans.
Impaired loans acquired are accounted for under ASC 310-30. Factors considered in evaluating whether an acquired loan was impaired include delinquency status and history, updated borrower credit status, collateral information, and updated loan-to-value information. The difference between contractually required payments at the time of acquisition and the cash flows expected to be collected is referred to as the nonaccretable difference. The interest component of the cash flows expected to be collected is referred to as the accretable yield and is recognized as interest income over the remaining contractual life of the loan using the level yield method. Subsequent decreases in expected cash flows will require additions to the allowance for loan losses. Subsequent improvements in expected cash flows will result in a reclassification from the nonaccretable difference to the accretable yield.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 4 – Acquired Credit Impaired Loans (continued)
The following table provides at June 30, 2021 and December 31, 2020 the major classifications of acquired credit impaired loans that are accounted for in accordance with ASC 310-30 (in thousands):
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Acquired from First Capital Bancshares, Inc. | | | |
Commercial & industrial | $ | 1 | | | 1 | |
Commercial, secured by real estate | — | | | — | |
Residential real estate | 412 | | | 449 | |
Other loans, including deposit overdrafts | — | | | — | |
Loans, gross | 413 | | | 450 | |
Less allowance for loan losses | — | | | — | |
Loans, net | $ | 413 | | | 450 | |
| | | |
Acquired from Eaton National Bank & Trust Co. | | | |
Commercial & industrial | $ | 324 | | | 249 | |
Commercial, secured by real estate | 571 | | | 601 | |
Residential real estate | 530 | | | 595 | |
Other loans, including deposit overdrafts | 163 | | | 184 | |
Loans, gross | 1,588 | | | 1,629 | |
Less allowance for loan losses | — | | | — | |
Loans, net | $ | 1,588 | | | 1,629 | |
| | | |
Acquired from BNB Bancorp, Inc. | | | |
Commercial & industrial | $ | — | | | — | |
Commercial, secured by real estate | 738 | | | 780 | |
Residential real estate | 52 | | | 85 | |
Other loans, including deposit overdrafts | — | | | — | |
Loans, gross | 790 | | | 865 | |
Less allowance for loan losses | — | | | — | |
Loans, net | $ | 790 | | | 865 | |
| | | |
Acquired from Columbus First Bancorp, Inc. | | | |
Commercial & industrial | $ | 101 | | | 112 | |
Commercial, secured by real estate | 641 | | | 667 | |
Residential real estate | 258 | | | 1,177 | |
Other loans, including deposit overdrafts | — | | | — | |
Loans, gross | 1,000 | | | 1,956 | |
Less allowance for loan losses | — | | | — | |
Loans, net | $ | 1,000 | | | 1,956 | |
| | | |
Total | | | |
Commercial & industrial | $ | 426 | | | 362 | |
Commercial, secured by real estate | 1,950 | | | 2,048 | |
Residential real estate | 1,252 | | | 2,306 | |
Other loans, including deposit overdrafts | 163 | | | 184 | |
Loans, gross | 3,791 | | | 4,900 | |
Less allowance for loan losses | — | | | — | |
Loans, net | $ | 3,791 | | | 4,900 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 4 – Acquired Credit Impaired Loans (continued)
The following table provides the outstanding balance and related carrying amount for acquired credit impaired loans at the dates indicated (in thousands):
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Outstanding balance | $ | 4,883 | | | 6,128 | |
Carrying amount | 3,791 | | | 4,900 | |
Activity during the three and six months ended June 30, 2021 and 2020 for the accretable discount related to acquired credit impaired loans is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Accretable discount at beginning of period | $ | 123 | | | 318 | | | 182 | | | 480 | |
| | | | | | | |
Reclassification from nonaccretable discount to accretable discount | 31 | | | 29 | | | 43 | | | 362 | |
| | | | | | | |
Accretion | (70) | | | (143) | | | (141) | | | (638) | |
Accretable discount at end of period | $ | 84 | | | 204 | | | 84 | | | 204 | |
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 June 30, 2021 and December 31, 2020 (in thousands):
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Affordable housing tax credit investment | $ | 11,950 | | | 12,000 | |
Less amortization | 1,752 | | | 1,320 | |
Net affordable housing tax credit investment | $ | 10,198 | | | 10,680 | |
| | | |
Unfunded commitment | $ | 6,964 | | | 8,237 | |
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 13.5 years.
LCNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 5 – Affordable Housing Tax Credit Limited Partnership (continued)
The following table presents other information relating to LCNB's affordable housing tax credit investments for the three and six months ended June 30, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Tax credits and other tax benefits recognized | $ | 260 | | | 379 | | | 520 | | | 538 | |
Tax credit amortization expense included in provision for income taxes | 215 | | | 137 | | | 432 | | | 263 | |
Note 6 – Borrowings
Borrowings at June 30, 2021 and December 31, 2020 were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
| Amount | | Rate | | Amount | | Rate |
| | | | | | | |
| | | | | | | |
FHLB long-term advances | 15,000 | | | 2.98 | % | | 22,000 | | | 2.68 | % |
| | | | | | | |
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 $310 million and $276 million at June 30, 2021 and December 31, 2020, respectively. Total remaining borrowing capacity at June 30, 2021 was approximately $212.1 million.
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 six months ended June 30, 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Operating lease expense | $ | 212 | | | 148 | | | 427 | | | 301 | |
Short-term lease expense | 11 | | | 15 | | | 25 | | | 27 | |
Variable lease expense | 1 | | | 4 | | | 2 | | | 7 | |
Other | 3 | | | 5 | | | 6 | | | 6 | |
Total lease expense | $ | 227 | | | 172 | | | 460 | | | 341 | |
Other information related to leases at June 30, 2021 were as follows (dollars in thousands):
| | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 408 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 801 | |
Weighted average remaining lease term in years for operating leases | 32.0 |
Weighted average discount rate for operating leases | 3.36 | % |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
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 June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Statutory tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % | | 21.0 | % |
Increase (decrease) resulting from: | | | | | | | |
Tax exempt interest | (0.7) | % | | (0.8) | % | | (0.7) | % | | (0.9) | % |
Tax exempt income on bank owned life insurance | (0.9) | % | | (1.0) | % | | (0.9) | % | | (1.6) | % |
Captive insurance premium income | (0.8) | % | | (0.7) | % | | (0.7) | % | | (0.7) | % |
Tax benefit from certain provisions of the CARES Act | — | % | | — | % | | — | % | | (1.6) | % |
Other, net | (0.1) | % | | (0.3) | % | | (0.4) | % | | (0.5) | % |
Effective tax rate | 18.5 | % | | 18.2 | % | | 18.3 | % | | 15.7 | % |
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. They 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.
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 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 June 30, 2021 and December 31, 2020 were as follows (in thousands):
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Commitments to extend credit: | | | |
Commercial loans | $ | 34,781 | | | 24,581 | |
Other loans | | | |
Fixed rate | 7,922 | | | 14,668 | |
Adjustable rate | 2,816 | | | 4,386 | |
Unused lines of credit: | | | |
Fixed rate | 52,047 | | | 24,205 | |
Adjustable rate | 152,405 | | | 133,073 | |
Unused overdraft protection amounts on demand and NOW accounts | 16,686 | | | 16,471 | |
Standby letters of credit | 55 | | | 243 | |
Total commitments | $ | 266,712 | | | 217,627 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 9 – Commitments and Contingent Liabilities (continued)
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Unused lines of credit include amounts not drawn on line of credit loans. Commitments to extend credit and unused lines of credit generally have fixed expiration dates or other termination clauses.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees generally are fully secured and have varying maturities.
LCNB evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, 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 June 30, 2021 totaled approximately $1,726,000.
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.
Note 10 – Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) for the three and six months ended June 30, 2021 and 2020 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| Unrealized Gains 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 |
2021 | | | | | | | | | | | |
Balance at beginning of period | $ | 908 | | | (305) | | | 603 | | | 4,349 | | | (306) | | | 4,043 | |
Before reclassifications | 958 | | | 2 | | | 960 | | | (2,483) | | | 3 | | | (2,480) | |
Reclassifications | — | | | — | | | — | | | — | | | — | | | — | |
Balance at end of period | $ | 1,866 | | | (303) | | | 1,563 | | | 1,866 | | | (303) | | | 1,563 | |
| | | | | | | | | | | |
2020 | | | | | | | | | | | |
Balance at beginning of period | $ | 3,340 | | | (184) | | | 3,156 | | | 857 | | | (184) | | | 673 | |
Before reclassifications | 711 | | | 1 | | | 712 | | | 3,369 | | | 1 | | | 3,370 | |
Reclassifications | — | | | — | | | — | | | (175) | | | — | | | (175) | |
Balance at end of period | $ | 4,051 | | | (183) | | | 3,868 | | | 4,051 | | | (183) | | | 3,868 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 10 – Accumulated Other Comprehensive Income (Loss), continued
Reclassifications out of accumulated other comprehensive income (loss) during the three and six months ended June 30, 2021 and 2020 and the affected line items in the consolidated condensed statements of income were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | Affected Line Item in the Consolidated Condensed Statements of Income |
| 2021 | | 2020 | | 2021 | | 2020 | |
Realized gains from sales of debt securities, available-for-sale | $ | — | | | — | | | — | | | 221 | | | Net gains from sales of debt securities, available-for-sale |
Income tax expense | — | | | — | | | — | | | 46 | | | Provision for income taxes |
Reclassification adjustment, net of taxes | $ | — | | | — | | | — | | | 175 | | | |
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 six-month period ended June 30, 2021 and 2020 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Qualified noncontributory defined benefit retirement plan | $ | 282 | | | 271 | | | 561 | | | 541 | |
401(k) plan | 152 | | | 147 | | | 312 | | | 312 | |
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 six months ended June 30, 2021 and 2020 are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | | |
Interest cost | | $ | 13 | | | 16 | | | 26 | | | 32 | |
Amortization of unrecognized net loss | | 2 | | | — | | | 4 | | | — | |
| | | | | | | | |
Net periodic pension cost | | $ | 15 | | | 16 | | | 30 | | | 32 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 11 – Retirement Plans (continued)
Amounts recognized in accumulated other comprehensive income, net of tax, at June 30, 2021 and December 31, 2020 for the nonqualified defined benefit retirement plan consists of (in thousands):
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Net actuarial loss | $ | 303 | | | 306 | |
Past service cost | — | | | — | |
Total recognized, net of tax | $ | 303 | | | 306 | |
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 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 is 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.
The following table summarizes stock option activity for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
| Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value (in thousands) (1) | | Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value (in thousands) (1) |
Outstanding, January 1, | 311 | | | $ | 12.60 | | | | | 9,904 | | | $ | 11.96 | | | |
Granted | — | | | — | | | | | — | | | — | | | |
Exercised | (311) | | | 12.60 | | | | | (9,593) | | | 11.94 | | | |
Expired | — | | | — | | | | | — | | | — | | | |
Outstanding, June 30, | — | | | — | | | $ | — | | | 311 | | | 12.60 | | | $ | 1 | |
Exercisable, June 30, | — | | | — | | | $ | — | | | 311 | | | 12.60 | | | $ | 1 | |
(1) Aggregate Intrinsic Value is defined as the amount by which the current market value of the underlying stock exceeds the exercise price of the option. |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 12 – Stock Based Compensation (continued)
The following table provides information related to stock options exercised during the periods indicated (in thousands):
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
Intrinsic value of options exercised | $ | 1 | | | 46 | |
Cash received from options exercised | 4 | | | 115 | |
Tax benefit realized from options exercised | — | | | 5 | |
Restricted stock awards granted under the 2015 Plan were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
| Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
Outstanding, January 1, | 28,596 | | | $ | 17.42 | | | 17,752 | | | $ | 18.03 | |
Granted | 26,321 | | | 16.85 | | | 19,211 | | | 16.87 | |
Vested | (8,817) | | | 17.55 | | | (3,818) | | | 18.45 | |
Forfeited | (122) | | | 16.87 | | | (3,550) | | | 16.90 | |
Outstanding, June 30, | 45,978 | | | $ | 17.07 | | | 29,595 | | | $ | 17.37 | |
The following table presents expense recorded in salaries and employee benefits for restricted stock awards and the related tax information for the three and six months ended June 30, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Restricted stock expense | $ | 52 | | | 35 | | | 145 | | | 68 | |
Tax effect | 10 | | | 7 | | | 30 | | | 14 | |
Unrecognized compensation expense for restricted stock awards was $709,000 at June 30, 2021 and is expected to be recognized over a period of 4.7 years.
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.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 13 – Earnings per Common Share (continued)
Earnings per share for the three and six months ended June 30, 2021 and 2020 were calculated as follows (dollars in thousands, except share and per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net income | $ | 5,290 | | | 5,057 | | | 10,530 | | | 10,083 | |
Less allocation of earnings and dividends to participating securities | 19 | | | 12 | | | 38 | | | 23 | |
Net income allocated to common shareholders | $ | 5,271 | | | 5,045 | | | 10,492 | | | 10,060 | |
| | | | | | | |
Weighted average common shares outstanding, gross | 12,789,684 | | | 12,970,570 | | | 12,815,089 | | | 12,963,123 | |
Less average participating securities | 45,958 | | | 29,595 | | | 45,958 | | | 29,595 | |
Weighted average number of shares outstanding used in the calculation of basic earnings per common share | 12,743,726 | | | 12,940,975 | | | 12,769,131 | | | 12,933,528 | |
Add dilutive effect of: | | | | | | | |
Stock options | — | | | 26 | | | 15 | | | 630 | |
Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share | 12,743,726 | | | 12,941,001 | | | 12,769,146 | | | 12,934,158 | |
| | | | | | | |
Earnings per common share: | | | | | | | |
Basic | $ | 0.41 | | | 0.39 | | | 0.82 | | | 0.78 | |
Diluted | 0.41 | | | 0.39 | | | 0.82 | | | 0.78 | |
There were no anti-dilutive stock options outstanding at June 30, 2021 or 2020.
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.
•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 ("NAV") and are considered level 1 because the NAVs are determined and published and are the basis for current transactions.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 14 - Fair Value Measurements (continued)
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 (loss). 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 value for U.S. Treasury notes are determined based on market quotations (level 1).
•Fair values for the other debt securities are calculated using the discounted cash flow method for each security. The discount rates for these cash flows are estimated by the pricing service using rates observed in the market (level 2). Cash flow streams are dependent on estimated prepayment speeds and the overall structure of the securities given existing market conditions.
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.
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 June 30, 2021 and December 31, 2020 (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) |
June 30, 2021 | | | | | | | | |
Recurring fair value measurements: | | | | | | | | |
| Equity securities with a readily determinable fair value: | | | | | | | | |
| Equity securities | | $ | 1,094 | | | 1,094 | | | — | | | — | |
| Mutual funds | | 54 | | | 54 | | | — | | | — | |
| Mutual funds measured at net asset value | | 1,340 | | | 1,340 | | | — | | | — | |
| | | | | | | | | |
| Debt securities, available-for-sale: | | | | | | | | |
| U.S. Treasury notes | | 64,494 | | | 64,494 | | | — | | | — | |
| U.S. Agency notes | | 95,489 | | | — | | | 95,489 | | | — | |
| Corporate bonds | | 1,893 | | | — | | | 1,893 | | | — | |
| U.S. Agency mortgage-backed securities | | 100,093 | | | — | | | 100,093 | | | — | |
| Municipal securities: | | | | | | | | |
| Non-taxable | | 11,899 | | | — | | | 11,899 | | | — | |
| Taxable | | 36,647 | | | — | | | 36,647 | | | — | |
| Total recurring fair value measurements | | $ | 313,003 | | | 66,982 | | | 246,021 | | | — | |
| | | | | | | | | |
Nonrecurring fair value measurements: | | | | | | | | |
| Impaired loans | | $ | 1,065 | | | — | | | — | | | 1,065 | |
| | | | | | | | | |
| Total nonrecurring fair value measurements | | $ | 1,065 | | | — | | | — | | | 1,065 | |
| | | | | | | | | |
December 31, 2020 | | | | | | | | |
Recurring fair value measurements: | | | | | | | | |
| Equity securities with a readily determinable fair value: | | | | | | | | |
| Equity securities | | $ | 987 | | | 987 | | | — | | | — | |
| Mutual funds | | 50 | | | 50 | | | — | | | — | |
| Mutual funds measured at net asset value | | 1,352 | | | 1,352 | | | — | | | — | |
| | | | | | | | | |
| Debt securities, available-for-sale: | | | | | | | | |
| U.S. Treasury notes | | 2,388 | | | 2,388 | | | — | | | — | |
| U.S. Agency notes | | 67,900 | | | — | | | 67,900 | | | — | |
| Corporate bonds | | 1,179 | | | — | | | 1,179 | | | — | |
| U.S. Agency mortgage-backed securities | | 91,634 | | | — | | | 91,634 | | | — | |
| Municipal securities: | | | | | | | | |
| Non-taxable | | 12,933 | | | — | | | 12,933 | | | — | |
| Taxable | | 33,437 | | | — | | | 33,437 | | | — | |
| Total recurring fair value measurements | | $ | 211,860 | | | 4,777 | | | 207,083 | | | — | |
| | | | | | | | | |
Nonrecurring fair value measurements: | | | | | | | | |
| Impaired loans | | $ | 3,439 | | | — | | | — | | | 3,439 | |
| | | | | | | | | |
| Total nonrecurring fair value measurements | | $ | 3,439 | | | — | | | — | | | 3,439 | |
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 June 30, 2021 and December 31, 2020 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Range |
| | Fair Value | | Valuation Technique | | Unobservable Inputs | | High | | Low | | Weighted Average |
June 30, 2021 | | | | | | | | | | | | |
| | | | | | | | |
Impaired loans | | 1,065 | | | Discounted cash flows | | Discount rate | | 8.25 | % | | 4.00 | % | | 6.12 | % |
| | | | | | | | |
| | | | | | | | | | | | |
December 31, 2020 | | | | | | | | | | | | |
Impaired loans | | $ | 1,352 | | | Estimated sales price | | Adjustments for comparable properties, discounts to reflect current market conditions | | Not applicable |
| | 2,087 | | | Discounted cash flows | | Discount rate | | 8.25 | % | | 4.00 | % | | 4.74 | % |
| | | | | | | | |
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 June 30, 2021 and December 31, 2020 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) |
June 30, 2021 | | | | | | | | | | |
FINANCIAL ASSETS: | | | | | | | | | | |
Cash and cash equivalents | | $ | 22,909 | | | 22,909 | | | 22,909 | | | — | | | — | |
| | | | | | | | | | |
Debt securities, held-to-maturity | | 24,242 | | | 24,389 | | | — | | | — | | | 24,389 | |
Federal Reserve Bank stock | | 4,652 | | | 4,652 | | | 4,652 | | | — | | | — | |
Federal Home Loan Bank stock | | 5,203 | | | 5,203 | | | 5,203 | | | — | | | — | |
Loans, net | | 1,312,113 | | | 1,272,961 | | | — | | | — | | | 1,272,961 | |
Accrued interest receivable | | 8,395 | | | 8,395 | | | — | | | 8,395 | | | — | |
| | | | | | | | | | |
FINANCIAL LIABILITIES: | | | | | | | | | | |
Deposits | | 1,577,345 | | | 1,579,285 | | | 1,362,599 | | | 216,686 | | | — | |
| | | | | | | | | | |
Long-term debt | | 15,000 | | | 15,437 | | | — | | | 15,437 | | | — | |
Accrued interest payable | | 311 | | | 311 | | | — | | | 311 | | | — | |
| | | | | | | | | | |
December 31, 2020 | | | | | | | | | | |
FINANCIAL ASSETS: | | | | | | | | | | |
Cash and cash equivalents | | $ | 31,730 | | | 31,730 | | | 31,730 | | | — | | | — | |
| | | | | | | | | | |
Debt securities, held-to-maturity | | 24,810 | | | 24,960 | | | — | | | — | | | 24,960 | |
Federal Reserve Bank stock | | 4,652 | | | 4,652 | | | 4,652 | | | — | | | — | |
Federal Home Loan Bank stock | | 5,203 | | | 5,203 | | | 5,203 | | | — | | | — | |
Loans, net | | 1,293,693 | | | 1,252,642 | | | — | | | — | | | 1,252,642 | |
Accrued interest receivable | | 8,337 | | | 8,337 | | | — | | | 8,337 | | | — | |
| | | | | | | | | | |
FINANCIAL LIABILITIES: | | | | | | | | | | |
Deposits | | 1,455,423 | | | 1,458,413 | | | 1,212,903 | | | 245,510 | | | — | |
| | | | | | | | | | |
Long-term debt | | 22,000 | | | 22,595 | | | — | | | 22,595 | | | — | |
Accrued interest payable | | 452 | | | 452 | | | — | | | 452 | | | — | |
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 June 30, 2021 and December 31, 2020.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 15 – Recent Accounting Pronouncements
From time to time the FASB issues an ASU to communicate changes to U.S. generally accepted accounting principles. 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, which reports to the Audit 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. While the committee and management expect that the implementation of ASU No. 2016-13 will increase the balance of the allowance for loan losses, they are continuing to evaluate the potential impact on LCNB's results of consolidated operations and financial position. The consolidated financial statement impact of this new standard cannot be reasonably estimated at this time.
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, 2020, 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, 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 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.
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 created extensive disruptions to the global economy and to the lives of individuals throughout the world. Governments, businesses, and the public have taken and are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of or restrictions on the operations of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. While vaccination efforts are underway, the pandemic has not yet been contained and economic activity has not yet returned to pre-pandemic levels.
On May 12, 2021, Governor Mike DeWine announced that the vast majority of Ohio Department of Health orders related to COVID-19 would be rescinded on June 2, 2021. Measures that have been removed include facial covering protocols, social distancing guidelines, and capacity restrictions for indoor and outdoor events. Businesses can choose to continue facial mask and social distancing protocols in their facilities. In response, LCNB management rescinded requirements to wear facial masks and practice social distancing, effective June 2, 2021. Employees and customers who wish to continue wearing facial masks may continue to do so. Plexiglass barriers at teller stations will remain until and if management decides to remove them. Further, on June 17, 2021, Governor DeWine announced that Ohio's State of Emergency caused by the COVID-19 pandemic would be lifted, effective the next day. The National Emergency Declaration remains in force, as does the National Public Health Emergency Declaration.
Because of the economic disruption caused by the pandemic, LCNB has provided COVID-19 related payment deferrals, primarily agreements to accept interest only payments for a period of time or agreements to defer principal and interest payments for a period of time, on a number of loans. Loans still on deferral at June 30, 2021 and December 31, 2020 are as follows (in thousands):
| | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 |
| | | | |
Commercial, secured by real estate | | $ | 10,404 | | | 20,231 | |
Residential real estate | | — | | | 324 | |
Consumer | | — | | | 21 | |
| | $ | 10,404 | | | 20,576 | |
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 June 30, 2021 and December 31, 2020 totaled $23,824,000 and $21,088,000, respectively, and unrecognized fees at those dates totaled $926,000 and $747,000, respectively.
LCNB continues to closely monitor the COVID-19 pandemic and expects to make future changes to respond to the pandemic as this situation continues to evolve.
Critical Accounting Policies
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.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
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.
Accounting for Intangibles. LCNB’s intangible assets at June 30, 2021 are composed primarily of goodwill and core deposit intangibles related to acquisitions of other financial institutions. It also includes mortgage servicing rights recorded from sales of mortgage loans to the Federal Home Loan Mortgage Corporation and mortgage servicing rights acquired through the acquisition of Eaton National Bank & Trust Co. and Columbus First Bancorp, Inc. Goodwill is not subject to amortization, but is reviewed annually for impairment or sooner if circumstances indicate a possible impairment. Core deposit intangibles are being amortized on a straight line basis over their respective estimated weighted average lives. Mortgage servicing rights are capitalized by allocating the total cost of loans between mortgage servicing rights and the loans based on their estimated fair values. Capitalized mortgage servicing rights are amortized to loan servicing income in proportion to and over the period of estimated servicing income, subject to periodic review for impairment.
Fair Value Accounting 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 six months ended June 30, 2021 was $5,290,000 (total basic and diluted earnings per share of $0.41) and $10,530,000 (total basic and diluted earnings per share of $0.82), respectively. This compares to net income of $5,057,000 (total basic and diluted earnings per share of $0.39) and $10,083,000 (total basic and diluted earnings per share of $0.78) for the same three and six month periods in 2020.
Net interest income for the three months ended June 30, 2021, was $14,369,000, compared to $13,998,000 for the comparable period in 2020. Net interest income for the six-month period ended June 30, 2021, increased $565,000 to $28,741,000, as compared to $28,176,000 in the same period last year. Favorably contributing to the variances for both the three- and six-month periods were fees recognized from PPP loans and market driven decreases in the average rates paid on deposits, aided by a shift from higher cost certificates of deposit to lower cost demand and savings products.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Increases in the provision for loan losses, partially due to adjustments for estimated impacts from the economic downturn caused by the COVID-19 pandemic, negatively affected earnings during the 2020 period. LCNB recorded loan loss credits of $15,000 and $67,000 for the three and six month months ended June 30, 2021, respectively. This compares to respective provisions of $16,000 and $1,189,000 for the same three and six month periods in 2020.
Non-interest income for the three months ended June 30, 2021, increased $995,000 or by 30.0% to $4,314,000, compared to $3,319,000 for the same period last year. For the six months ended June 30, 2021, non-interest income increased $621,000 or by 8.7% to $7,779,000, compared to $7,158,000 for the same period last year. The primary drivers of the second quarter and first half year-over-year increases in non-interest income were increased fiduciary income, deposit service charges, and a one-
time refund for the Company’s Ohio Financial Institution taxes, which was included in other operating income.
Non-interest expense for the three months ended June 30, 2021, was $1,092,000 greater than the comparable period in 2020 primarily due to increases in salaries and employee benefits, equipment, marketing, FDIC insurance, contracted services, and other non-interest expenses. For the first half ended June 30, 2021, non-interest expense increased $1,512,000 from the comparable period in 2020.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Net Interest Income
Three Months Ended June 30, 2021 vs. June 30, 2020
LCNB's primary source of earnings is net interest income, which is the difference between earnings from loans and other investments and interest paid on deposits and other liabilities. The following table presents, for the three months ended June 30, 2021 and June 30, 2020, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resulting average yields earned or rates paid.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| | 2021 | | 2020 |
| | Average Outstanding Balance | | Interest Earned/ Paid | | Average Yield/ Rate | | Average Outstanding Balance | | Interest Earned/ Paid | | Average Yield/ Rate |
| | | | (Dollars in thousands) | | | | |
Loans (1) | | $ | 1,328,760 | | | 14,108 | | | 4.31 | % | | $ | 1,318,753 | | | 14,822 | | | 4.52 | % |
Interest-bearing demand deposits | | 24,770 | | | 14 | | | 0.23 | % | | 27,486 | | | 17 | | | 0.25 | % |
| | | | | | | | | | | | |
Federal Reserve Bank stock | | 4,652 | | | 140 | | | 12.21 | % | | 4,652 | | | 140 | | | 12.10 | % |
Federal Home Loan Bank stock | | 5,203 | | | 26 | | | 2.03 | % | | 5,203 | | | 32 | | | 2.47 | % |
Investment securities: | | | | | | | | | | | | |
Equity securities | | 4,619 | | | 18 | | | 1.58 | % | | 4,206 | | | 25 | | | 2.39 | % |
Debt securities, taxable | | 264,908 | | | 905 | | | 1.39 | % | | 131,018 | | | 667 | | | 2.05 | % |
Debt securities, non-taxable (2) | | 33,214 | | | 276 | | | 3.37 | % | | 37,292 | | | 322 | | | 3.47 | % |
Total earnings assets | | 1,666,126 | | | 15,487 | | | 3.77 | % | | 1,528,610 | | | 16,025 | | | 4.22 | % |
Non-earning assets | | 191,587 | | | | | | | 180,691 | | | | | |
Allowance for loan losses | | (5,678) | | | | | | | (4,998) | | | | | |
Total assets | | $ | 1,852,035 | | | | | | | $ | 1,704,303 | | | | | |
| | | | | | | | | | | | |
Savings deposits | | $ | 866,922 | | | 301 | | | 0.14 | % | | $ | 703,889 | | | 307 | | | 0.14 | % |
IRA and time certificates | | 219,625 | | | 644 | | | 1.19 | % | | 305,284 | | | 1,425 | | | 1.88 | % |
Short-term borrowings | | 716 | | | 1 | | | 0.57 | % | | 82 | | | — | | | — | % |
Long-term debt | | 15,571 | | | 114 | | | 2.97 | % | | 34,964 | | | 227 | | | 2.61 | % |
Total interest-bearing liabilities | | 1,102,834 | | | 1,060 | | | 0.39 | % | | 1,044,219 | | | 1,959 | | | 0.75 | % |
Demand deposits | | 483,523 | | | | | | | 402,909 | | | | | |
Other liabilities | | 24,027 | | | | | | | 21,588 | | | | | |
Capital | | 241,651 | | | | | | | 235,587 | | | | | |
Total liabilities and capital | | $ | 1,852,035 | | | | | | | $ | 1,704,303 | | | | | |
Net interest rate spread (3) | | | | | | 3.38 | % | | | | | | 3.47 | % |
Net interest income and net interest margin on a taxable-equivalent basis (4) | | | | 14,427 | | | 3.51 | % | | | | 14,066 | | | 3.70 | % |
Ratio of interest-earning assets to interest-bearing liabilities | | 151.08 | % | | | | | | 146.39 | % | | | | |
(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.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table presents the changes in taxable-equivalent basis interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the three months ended June 30, 2021 as compared to the same period in 2020. Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each.
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2021 vs. 2020 |
| | Increase (decrease) due to: |
| | Volume | | Rate | | Total |
| | (In thousands) |
Interest-earning Assets: | | | | | | |
Loans | | $ | 112 | | | (826) | | | (714) | |
| | | | | | |
Interest-bearing demand deposits | | (2) | | | (1) | | | (3) | |
| | | | | | |
Federal Reserve Bank stock | | — | | | — | | | — | |
Federal Home Loan Bank stock | | — | | | (6) | | | (6) | |
Investment securities: | | | | | | |
Equity securities | | 2 | | | (9) | | | (7) | |
Debt securities, taxable | | 512 | | | (274) | | | 238 | |
Debt securities, non-taxable | | (34) | | | (12) | | | (46) | |
Total interest income | | 590 | | | (1,128) | | | (538) | |
| | | | | | |
Interest-bearing Liabilities: | | | | | | |
Savings deposits | | 63 | | | (69) | | | (6) | |
IRA and time certificates | | (336) | | | (445) | | | (781) | |
Short-term borrowings | | — | | | 1 | | | 1 | |
Long-term debt | | (139) | | | 26 | | | (113) | |
Total interest expense | | (412) | | | (487) | | | (899) | |
Net interest income | | $ | 1,002 | | | (641) | | | 361 | |
Net interest income on a fully taxable-equivalent basis for the three months ended June 30, 2021 totaled $14,427,000, an increase of $361,000 from the comparable period in 2020. Total interest expense decreased $899,000, which was partially offset by a $538,000 decrease in total interest income.
The $538,000 decrease in total interest income was due primarily to a $714,000 decrease in loan interest income, which was partially offset by a $238,000 increase in interest income from taxable debt securities. The decrease in loan interest income was primarily due to a 21 basis point (a basis point equals 0.01%) decrease in the average rate earned on loans, which was partially offset by a $10.0 million increase in the average balance of LCNB's loan portfolio. Loan interest income for the second quarter 2021 included $401,000 of PPP loan fees recognized. The increase in interest income from taxable debt securities was due to a $133.9 million increase in average securities, which was partially offset by a 66 basis point decrease in the average rate earned on these securities. The decrease in average rates was primarily due to market conditions.
The $899,000 decrease in total interest expense was due to a $781,000 decrease in interest expense for IRA and time certificates and a $113,000 decrease in interest expense for long-term debt. Interest expense for IRA and time certificates decreased primarily due to a 69 basis point decrease in the average rate paid for these deposits and secondarily to an $85.7 million decrease in the average balance of these deposits. Interest expense for long-term debt decreased due to a $19.4 million decrease in average debt outstanding, slightly offset by a 36 basis point increase in the average rate paid.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Six Months Ended June 30, 2021 vs. June 30, 2020
The following table presents, for the six months ended June 30, 2021 and June 30, 2020, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resulting average yields earned or rates paid.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2021 | | 2020 |
| | Average Outstanding Balance | | Interest Earned/ Paid | | Average Yield/ Rate | | Average Outstanding Balance | | Interest Earned/ Paid | | Average Yield/ Rate |
| | | | (Dollars in thousands) | | | | |
Loans (1) | | $ | 1,321,323 | | | 28,643 | | | 4.37 | % | | $ | 1,285,654 | | | 30,049 | | | 4.70 | % |
Interest-bearing demand deposits | | 20,226 | | | 27 | | | 0.27 | % | | 16,483 | | | 48 | | | 0.59 | % |
| | | | | | | | | | | | |
Federal Reserve Bank stock | | 4,652 | | | 140 | | | 6.07 | % | | 4,652 | | | 140 | | | 6.05 | % |
Federal Home Loan Bank stock | | 5,203 | | | 52 | | | 2.02 | % | | 5,203 | | | 65 | | | 2.51 | % |
Investment securities: | | | | | | | | | | | | |
Equity securities | | 4,560 | | | 37 | | | 1.64 | % | | 4,260 | | | 55 | | | 2.60 | % |
Debt securities, taxable | | 238,411 | | | 1,623 | | | 1.37 | % | | 138,986 | | | 1,617 | | | 2.34 | % |
Debt securities, non-taxable (2) | | 33,691 | | | 559 | | | 3.35 | % | | 40,541 | | | 682 | | | 3.38 | % |
Total earnings assets | | 1,628,066 | | | 31,081 | | | 3.85 | % | | 1,495,779 | | | 32,656 | | | 4.39 | % |
Non-earning assets | | 191,517 | | | | | | | 180,083 | | | | | |
Allowance for loan losses | | (5,696) | | | | | | | (4,468) | | | | | |
Total assets | | $ | 1,813,887 | | | | | | | $ | 1,671,394 | | | | | |
| | | | | | | | | | | | |
Savings deposits | | $ | 831,172 | | | 581 | | | 0.14 | % | | $ | 691,490 | | | 793 | | | 0.23 | % |
IRA and time certificates | | 226,840 | | | 1,392 | | | 1.24 | % | | 312,968 | | | 3,056 | | | 1.96 | % |
Short-term borrowings | | 530 | | | 2 | | | 0.76 | % | | 749 | | | 7 | | | 1.88 | % |
Long-term debt | | 17,619 | | | 248 | | | 2.84 | % | | 36,644 | | | 481 | | | 2.64 | % |
Total interest-bearing liabilities | | 1,076,161 | | | 2,223 | | | 0.42 | % | | 1,041,851 | | | 4,337 | | | 0.84 | % |
Demand deposits | | 471,327 | | | | | | | 374,968 | | | | | |
Other liabilities | | 24,814 | | | | | | | 21,253 | | | | | |
Capital | | 241,585 | | | | | | | 233,322 | | | | | |
Total liabilities and capital | | $ | 1,813,887 | | | | | | | $ | 1,671,394 | | | | | |
Net interest rate spread (3) | | | | | | 3.43 | % | | | | | | 3.55 | % |
Net interest income and net interest margin on a taxable-equivalent basis (4) | | | | 28,858 | | | 3.57 | % | | | | 28,319 | | | 3.81 | % |
Ratio of interest-earning assets to interest-bearing liabilities | | 151.28 | % | | | | | | 143.57 | % | | | | |
(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.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table presents the changes in taxable-equivalent basis interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the six months ended June 30, 2021 as compared to the same period in 2020. Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each.
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2021 vs. 2020 |
| | Increase (decrease) due to: |
| | Volume | | Rate | | Total |
| | (In thousands) |
Interest-earning Assets: | | | | | | |
Loans | | $ | 817 | | | (2,223) | | | (1,406) | |
| | | | | | |
Interest-bearing demand deposits | | 9 | | | (30) | | | (21) | |
| | | | | | |
Federal Reserve Bank stock | | — | | | — | | | — | |
Federal Home Loan Bank stock | | — | | | (13) | | | (13) | |
Investment securities: | | | | | | |
Equity securities | | 4 | | | (22) | | | (18) | |
Debt securities, taxable | | 853 | | | (847) | | | 6 | |
Debt securities, non-taxable | | (114) | | | (9) | | | (123) | |
Total interest income | | 1,569 | | | (3,144) | | | (1,575) | |
| | | | | | |
Interest-bearing Liabilities: | | | | | | |
Savings deposits | | 139 | | | (351) | | | (212) | |
IRA and time certificates | | (708) | | | (956) | | | (1,664) | |
Short-term borrowings | | (2) | | | (3) | | | (5) | |
Long-term debt | | (266) | | | 33 | | | (233) | |
Total interest expense | | (837) | | | (1,277) | | | (2,114) | |
Net interest income | | $ | 2,406 | | | (1,867) | | | 539 | |
Net interest income on a fully taxable-equivalent basis for the six months ended June 30, 2021 totaled $28,858,000, an increase of $539,000 from the comparable period in 2020. Total interest expense decreased $2,114,000, which was partially offset by a $1,575,000 decrease in total interest income.
The $1,575,000 decrease in total interest income was due primarily to a $1,406,000 decrease in loan interest income. The decrease in loan interest income was primarily due to a 33 basis point decrease in the average rate earned on loans, which was partially offset by a $35.7 million increase in the average balance of LCNB's loan portfolio. The decrease in average rates was due primarily to market conditions. Loan interest income for the first half of 2021 included $916,000 of PPP loan fees recognized.
The $2,114,000 decrease in total interest expense was primarily due to a $1,664,000 decrease in interest expense for IRA and time certificates. Interest expense for IRA and time certificates decreased primarily due to a 72 basis point decrease in the average rate paid for these deposits and secondarily to an $86.1 million decrease in the average balance of these deposits.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Provision and Allowance For Loan Losses
The total provision for loan losses is determined based upon management's evaluation as to the amount needed to maintain the allowance for loan losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio. For analysis purposes, the loan portfolio is separated into pools of similar loans. These pools include commercial & industrial loans, owner occupied commercial real estate loans, non-owner occupied commercial real estate loans, real estate loans secured by farms, real estate loans secured by multi-family dwellings, residential real estate loans secured by senior liens on 1-4 family dwellings, residential real estate loans secured by junior liens on 1-4 family dwellings, home equity line of credit loans, consumer loans, loans for agricultural purposes not secured by real estate, construction loans secured by 1-4 family dwellings, construction loans secured by other real estate, and several smaller classifications. Within each pool of loans, LCNB examines a variety of factors to determine the adequacy of the allowance for loan losses, including historic charge-off percentages, overall pool quality, a review of specific problem loans, current economic trends and conditions that may affect borrowers' ability to pay, and the nature, volume, and consistency of the loan pool.
The credit for loan losses for the three and six months ended June 30, 2021 was respectively $15,000 and $67,000, compared to provisions of $16,000 and $1,189,000 for the same periods in 2020. The 2020 first quarter period included qualitative adjustments for estimated impacts from the economic downturn caused by the COVID-19 pandemic. Calculating an appropriate level for the allowance and provision for loan losses involves a high degree of management judgment and is, by its nature, imprecise. Revisions may be necessary as more information becomes available.
Net charge-offs for the three and six months ended June 30, 2021 were $12,000 and $9,000, respectively, as compared to net charge-offs of $8,000 and $218,000 for the same three and six-month periods in 2020.
Non-Interest Income
A comparison of non-interest income for the three and six months ended June 30, 2021 and June 30, 2020 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | Difference | | 2021 | | 2020 | | Difference |
Fiduciary income | $ | 1,735 | | | 1,201 | | | 534 | | | 3,264 | | | 2,304 | | | 960 | |
Service charges and fees on deposit accounts | 1,519 | | | 1,237 | | | 282 | | | 2,885 | | | 2,532 | | | 353 | |
Net gains from sales of debt securities, available-for-sale | — | | | — | | | — | | | — | | | 221 | | | (221) | |
Bank owned life insurance income | 269 | | | 287 | | | (18) | | | 536 | | | 888 | | | (352) | |
Gains from sales of loans | 151 | | | 317 | | | (166) | | | 194 | | | 437 | | | (243) | |
Other operating income | 640 | | | 277 | | | 363 | | | 900 | | | 776 | | | 124 | |
Total non-interest income | $ | 4,314 | | | 3,319 | | | 995 | | | 7,779 | | | 7,158 | | | 621 | |
Reasons for changes include:
•Fiduciary income increased primarily due to growth in the market value of assets serviced.
•Service charges and fees on deposit accounts for the three month period increased primarily due to increases in check card income and overdraft fees. Service charges and fees on deposit accounts for the six month period increased primarily due to increases in check card income, which was partially offset by decreases in overdraft fees and fee income recognized on Insured Cash Sweep ("ICS") deposit products.
•Net gains from sales of debt securities, available-for-sale, decreased due to the absence of security sales during the 2021 period.
•Bank owned life insurance income for the six months ended June 30, 2020 included a mortality benefit, while no mortality benefits were recognized during the 2021 period.
•Gains from sales of loans decreased primarily due to a lower volume of residential real estate loan sales.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
•Other operating income increased due to a state tax refund of $508,000 recognized during the second quarter 2021, which was partially offset by decreases in realized and unrealized net gains or losses recognized on equity security investments.
Non-Interest Expense
A comparison of non-interest expense for the three and six months ended June 30, 2021 and June 30, 2020 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | Difference | | 2021 | | 2020 | | Difference |
Salaries and employee benefits | $ | 7,111 | | | 6,648 | | | 463 | | | 13,544 | | | 13,416 | | | 128 | |
Equipment expenses | 443 | | | 289 | | | 154 | | | 811 | | | 576 | | | 235 | |
Occupancy expense, net | 729 | | | 723 | | | 6 | | | 1,523 | | | 1,405 | | | 118 | |
State financial institutions tax | 437 | | | 420 | | | 17 | | | 881 | | | 856 | | | 25 | |
Marketing | 357 | | | 258 | | | 99 | | | 625 | | | 435 | | | 190 | |
Amortization of intangibles | 260 | | | 260 | | | — | | | 517 | | | 520 | | | (3) | |
FDIC insurance premiums, net | 123 | | | 31 | | | 92 | | | 236 | | | 30 | | | 206 | |
Contracted services | 623 | | | 475 | | | 148 | | | 1,163 | | | 877 | | | 286 | |
| | | | | | | | | | | |
Other non-interest expense | 2,125 | | | 2,012 | | | 113 | | | 4,400 | | | 4,073 | | | 327 | |
Total non-interest expense | $ | 12,208 | | | 11,116 | | | 1,092 | | | 23,700 | | | 22,188 | | | 1,512 | |
Reasons for changes include:
•Salaries and employee benefits increased primarily due to increased health care costs, increased bonus expense accruals, and to a decrease in salaries and benefits netted against deferred costs on loans, reflecting a lower volume of originations during the 2021 period.
•Equipment expenses increased primarily due to increased equipment rental costs and increased depreciation charges for furniture and equipment. During 2020, LCNB gradually replaced ATMs that it had previously owned with new ATMs obtained through an outsourcing arrangement.
•Occupancy expense increased primarily due to increased janitorial and cleaning costs and to increases in facility repair and maintenance costs.
•Marketing increased primarily due to expanded use of television, radio, and digital media.
•FDIC insurance premiums increased in 2021 because LCNB received small bank assessment credits from the FDIC during the first and second quarters 2020. Premium payments returned to their normal levels after the second quarter 2020.
•Contracted services increased due to employee recruitment services paid during the second quarter 2021, increased usage of technology services, and to price increases in general.
•Other non-interest expense increased partially due to a strategic decision to outsource LCNB's ATM operations to a third-party vendor during 2020, relieving LCNB branch personnel from various ATM maintenance responsibilities.
Income Taxes
LCNB's effective tax rate for the three and six months ended June 30, 2021 was 18.5% and 18.2%, respectively, compared to 18.3% and 15.7% for the three and six months ended June 30, 2020. 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. A one-time tax benefit recognized as a result of certain provisions in the CARES Act passed by Congress and signed by President Trump during the first quarter 2020 also contributed to the effective tax rate for the six months ended June 30, 2020.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Financial Condition
A comparison of balance sheet line items at June 30, 2021 and December 31, 2020 is as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 | | Difference $ | | Difference % |
ASSETS: | | | | | | | |
Total cash and cash equivalents | $ | 22,909 | | | 31,730 | | | (8,821) | | | (27.80) | % |
| | | | | | | |
Investment securities: | | | | | | | |
Equity securities with a readily determinable fair value, at fair value | 2,488 | | | 2,389 | | | 99 | | | 4.14 | % |
Equity securities without a readily determinable fair value, at cost | 2,099 | | | 2,099 | | | — | | | — | % |
Debt securities, available-for-sale, at fair value | 310,515 | | | 209,471 | | | 101,044 | | | 48.24 | % |
Debt securities, held-to-maturity, at cost | 24,242 | | | 24,810 | | | (568) | | | (2.29) | % |
Federal Reserve Bank stock, at cost | 4,652 | | | 4,652 | | | — | | | — | % |
Federal Home Loan Bank stock, at cost | 5,203 | | | 5,203 | | | — | | | — | % |
Loans, net | 1,312,113 | | | 1,293,693 | | | 18,420 | | | 1.42 | % |
Premises and equipment, net | 35,356 | | | 35,376 | | | (20) | | | (0.06) | % |
Operating lease right-of-use assets | 6,730 | | | 6,274 | | | 456 | | | 7.27 | % |
Goodwill | 59,221 | | | 59,221 | | | — | | | — | % |
Core deposit and other intangibles | 2,853 | | | 3,453 | | | (600) | | | (17.38) | % |
Bank owned life insurance | 42,685 | | | 42,149 | | | 536 | | | 1.27 | % |
Interest receivable | 8,395 | | | 8,337 | | | 58 | | | 0.70 | % |
Other assets | 17,209 | | | 17,027 | | | 182 | | | 1.07 | % |
Total assets | $ | 1,856,670 | | | 1,745,884 | | | 110,786 | | | 6.35 | % |
| | | | | | | |
LIABILITIES: | | | | | | | |
Deposits: | | | | | | | |
Non-interest-bearing | $ | 472,830 | | | 455,073 | | | 17,757 | | | 3.90 | % |
Interest-bearing | 1,104,515 | | | 1,000,350 | | | 104,165 | | | 10.41 | % |
Total deposits | 1,577,345 | | | 1,455,423 | | | 121,922 | | | 8.38 | % |
Short-term borrowings | — | | | — | | | — | | | — | % |
Long-term debt | 15,000 | | | 22,000 | | | (7,000) | | | (31.82) | % |
Operating lease liabilities | 6,846 | | | 6,371 | | | 475 | | | 7.46 | % |
Accrued interest and other liabilities | 17,527 | | | 21,265 | | | (3,738) | | | (17.58) | % |
Total liabilities | 1,616,718 | | | 1,505,059 | | | 111,659 | | | 7.42 | % |
| | | | | | | |
TOTAL SHAREHOLDERS' EQUITY | 239,952 | | | 240,825 | | | (873) | | | (0.36) | % |
Total liabilities and shareholders' equity | $ | 1,856,670 | | | 1,745,884 | | | 110,786 | | | 6.35 | % |
Reasons for changes include:
•Debt securities, available-for-sale, increased due to purchases of additional securities totaling $121.6 million, which was partially offset by maturities and calls of securities totaling $16.6 million.
•Net loans increased due to organic growth in the loan portfolio, including a net increase in PPP loans of $2.7 million. Most of the growth occurred in the commercial real estate and residential real estate portfolios.
•Operating lease right-of-use assets and operating lease liabilities increased due to a new lease for the Union Village office and the renewal of a postage machine lease.
•Core deposit and other intangibles decreased due to amortization of core deposit intangibles and mortgage servicing rights.
•Non-interest-bearing deposits and interest-bearing deposits have grown substantially since the start of the COVID-19 pandemic and this trend continued during the first half of 2021. Management believes the growth reflects customer preferences for liquidity during uncertain economic periods. Balances in demand deposits and NOW and savings accounts have grown, while balances in IRA and time deposits have decreased.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
•Long-term debt decreased due to payoffs of matured debt.
•Accrued interest and other liabilities decreased due to reductions in several liability categories. Accrued bonuses decreased because annual bonus payments are made in January. The liability for affordable housing tax credit limited partnership investments decreased as funding payments were made to the partnerships (see note 5 for more information on these investments). A decrease in deferred federal income taxes payable due to movements in the fair value of debt security investments also contributed to the overall decrease.
•Total shareholders' equity decreased primarily due to a decrease in accumulated other comprehensive income, net of taxes caused by market-driven decreases in the fair value of LCNB's debt security investments, dividends paid to shareholders, and treasury shares purchased. These decreases were partially offset by earnings retained during the first six months of 2021.
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.
On September 17, 2019, the FDIC finalized a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations, as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The simplified rule was designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. Its use was permitted beginning with the March 31, 2020 Call Report. Qualifications to use the simplified approach include having a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the Community Bank Leverage Ratio framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. LCNB qualifies to use the simplified measure, but did not opt in for the June 30, 2021 regulatory capital calculations.
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):
| | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 |
Regulatory Capital: | | |
Shareholders' equity | | $ | 235,778 | | | 234,092 | |
Goodwill and other intangibles | | (61,181) | | | (61,698) | |
Accumulated other comprehensive (income) loss | | (1,563) | | | (4,043) | |
Tier 1 risk-based capital | | 173,034 | | | 168,351 | |
Eligible allowance for loan losses | | 5,652 | | | 5,728 | |
Total risk-based capital | | $ | 178,686 | | | 174,079 | |
Capital ratios: | | | | |
Common Equity Tier 1 Capital to risk-weighted assets | | 12.68 | % | | 12.48 | % |
Tier 1 Capital to risk-weighted assets | | 12.68 | % | | 12.48 | % |
Total Capital to risk-weighted assets | | 13.10 | % | | 12.91 | % |
Leverage | | 9.69 | % | | 10.06 | % |
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 two 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 June 30, 2021 was approximately $212.1 million. In addition, additional borrowings of approximately $55.0 million were available through the line of credit arrangements at June 30, 2021.
On April 9, 2020, the Federal Reserve established the PPPLF to bolster the effectiveness of the SBA’s PPP. The PPPLF will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. LCNB management has decided not to currently use the PPPLF as a source of liquidity, as other sources of liquidity are believed to be adequate at this time.
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.
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 June 30, 2021 IRSA indicates that an increase in interest rates of 200 basis points or more will have a positive effect on NII and a 100 basis point increase or 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 | | $ | 60,629 | | | 2,215 | | | 3.79 | % |
Up 300 | | 59,678 | | | 1,264 | | | 2.16 | % |
Up 200 | | 58,750 | | | 336 | | | 0.58 | % |
Up 100 | | 57,847 | | | (567) | | | (0.97) | % |
Base | | 58,414 | | | — | | | — | % |
Down 100 | | 56,433 | | | (1,981) | | | (3.39) | % |
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 June 30, 2021 EVE analysis indicates that an increase in interest rates will have a negative effect on the EVE and a 100 basis point decrease in interest rates 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 | | $ | 171,097 | | | (39,903) | | | (18.91) | % |
Up 300 | | 182,383 | | | (28,617) | | | (13.56) | % |
Up 200 | | 193,211 | | | (17,789) | | | (8.43) | % |
Up 100 | | 204,479 | | | (6,521) | | | (3.09) | % |
Base | | 211,000 | | | — | | | — | % |
Down 100 | | 243,795 | | | 32,795 | | | 15.54 | % |
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.
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 June 30, 2021, 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.
LCNB CORP. AND SUBSIDIARIES
PART II. OTHER INFORMATION
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.
There have been no material changes in the risk factors previously disclosed in the December 31, 2020 Form 10-K.
| | | | | |
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 August 24, 2020, LCNB's Board of Directors authorized a share repurchase program (the "Program"). Under the terms of the Program, LCNB is authorized to repurchase up to 645,000 of its outstanding common shares. The Program is authorized to last no longer than five years. The Program replaced and superseded LCNB’s prior share repurchase program, which was adopted in April 2019.
Under the Program, LCNB may purchase common shares through various means such as open market transactions, including block purchases, and privately negotiated transactions. The number of shares repurchased and the timing, manner, price and amount of any repurchases will be determined at LCNB's discretion. Factors include, but are not limited to, share price, trading volume, and general market conditions, along with LCNB’s general business conditions. The Program may be suspended or discontinued at any time and does not obligate LCNB to acquire any specific number of its common shares.
As part of the Program, LCNB entered into a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The 10b5-1 trading plan permits common shares to be repurchased at times that LCNB might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. The 10b5-1 trading plan is administered by an independent broker and is subject to price, market volume, and timing restrictions.
The following table sets forth information relating to repurchases made under the Program during the three months ended June 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
April 2021 | | — | | $ | — | | | — | | 444,127 |
May 2021 | | 18,429 | | $ | 17.31 | | | 18,429 | | 425,698 |
June 2021 | | 172,554 | | $ | 17.06 | | | 172,554 | | 253,144 |
| | | | | |
Item 3. | Defaults Upon Senior Securities |
None.
| | | | | |
Item 4. | Mine Safety Disclosures |
Not applicable.
None.
LCNB CORP. AND SUBSIDIARIES
| | | | | |
Exhibit No. | Exhibit Description |
2.1 | |
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3.1 | |
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3.2 | |
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10.1 | |
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10.2 | |
| |
10.3 | |
| |
10.4 | |
| |
10.5 | |
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31.1 | |
| |
31.2 | |
| |
32 | |
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101 | The following financial information from LCNB Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 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). |
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. | |
| | |
August 4, 2021 | /s/ Eric J. Meilstrup | |
| Eric J. Meilstrup | |
| Chief Executive Officer and President | |
| | |
August 4, 2021 | /s/ Robert C. Haines, II | |
| Robert C. Haines, II | |
| Executive Vice President and Chief Financial Officer |