XML 24 R14.htm IDEA: XBRL DOCUMENT v3.24.1.1.u2
Loans
 3 Months Ended
Mar. 31, 2024
Receivables [Abstract]  
Loans LOANS
 
Major classifications of loans at March 31, 2024 and December 31, 2023 were as follows (in thousands):
March 31, 2024December 31, 2023
Commercial & industrial$122,357 120,541 
Commercial, secured by real estate:
Owner occupied 208,255 206,705 
Non-owner occupied 507,109 501,108 
Farmland38,411 37,367 
Multi-family 240,411 240,033 
Construction loans secured by 1-4 family dwellings 11,674 9,058 
Construction loans secured by other real estate 91,798 111,373 
Residential real estate:
Secured by senior liens on 1-4 family dwellings 343,014 402,026 
Secured by junior liens on 1-4 family dwellings 19,469 19,999 
Home equity line-of-credit loans 36,930 38,579 
Consumer24,159 25,600 
Agricultural12,694 11,000 
Other loans, including deposit overdrafts73 82 
  Loans, gross1,656,354 1,723,471 
Less allowance for credit losses10,557 10,525 
Loans, net$1,645,797 1,712,946 

Loans in the above table are shown net of deferred origination fees and costs. Deferred origination fees, net of related costs, were $583,000 and $181,000 at March 31, 2024 and December 31, 2023, respectively.
Non-accrual loans by class of receivable as of March 31, 2024 and December 31, 2023 were as follows (in thousands):
March 31, 2024December 31, 2023
Non-accrual Loans with no Allowance for Credit LossesTotal Non-accrual LoansInterest Income RecognizedNon-accrual Loans with no Allowance for Credit LossesTotal Non-accrual LoansInterest Income Recognized
Commercial & industrial$— — — — — — 
Commercial, secured by real estate:
Owner occupied— — — — — — 
Non-owner occupied— 2,642 — — — — 
Farmland52 52 16 51 51 26 
Multi-family— — — — — — 
Construction loans secured by 1-4 family dwellings— — — — — — 
Construction loans secured by other real estate— — — — — — 
Residential real estate:
Secured by senior liens on 1-4 family dwellings25 25 1 29 29 — 
Secured by junior liens on 1-4 family dwellings— — — — — — 
Home equity line-of-credit loans— — — — — — 
Consumer— — — — — — 
Agricultural— — — — — — 
Total$77 2,719 17 80 80 26 

One commercial loan secured by real estate, non-owner occupied, was added to the non-accrual classification during the first quarter of 2024. Accrued interest reversed and charged against interest income for these loans totaled approximately $27,000.

The ratio of non-accrual loans to total loans outstanding at March 31, 2024 and December 31, 2023 was 0.16% and 0.00%, respectively.

ALLOWANCE FOR CREDIT LOSSES
The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost, which is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. A provision for credit losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors.

During the first quarter of 2023, the Company adopted ASU No. 2016-13, including the CECL methodology for estimating the ACL. This standard was adopted using a modified retrospective approach on January 1, 2023. See Note 1 - Basis of Presentation - Adoption of New Accounting Pronouncements for a summary of the impact adoption of ASU No. 2016-13 had on LCNB's ACL, retained earnings, and deferred taxes.

QUANTITATIVE CONSIDERATIONS
The ACL is primarily calculated utilizing a DCF model. Key inputs and assumptions used in this model are discussed below:
•Forecast model - For each portfolio segment, an LDA was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows. The LDA utilized peer FFIEC Call Report data for all pools. The Company plans to update the LDA when materially relevant.
•Probability of default – PD is the probability that an asset will be in default within a given time frame. The Company has defined default as when a charge-off has occurred, a loan goes to non-accrual status, a loan is greater than 90 days past due, or financial difficulty modification status change. The forecast model is utilized to estimate PDs.
•Loss given default – LGD is the percentage of the asset not expected to be collected due to default. The LGD is derived from company specific and peer loss data.
•Prepayments and curtailments – Prepayments and curtailments are calculated based on the Company’s own data. This analysis is updated when materially relevant.
•Forecast and reversion – the Company as of December 31, 2023 established a two-quarter reasonable and supportable forecast period with a six-quarter straight line reversion to the long-term historical average. As of March 31, 2024, the Company established a three-quarter reasonable and supportable forecast period with a seven-quarter straight line reversion to the long-term historical average because management believes the economy has shown more stability and resiliency than previously assumed. Extending the forecast and reversion periods from previous quarters has differing effects on pools based on the economic indicators used and the relation of the selected forecast range to the historical average. For example, the historical average for the bank’s unemployment indicator is 5.85%, which is higher than the forecasted range utilized as of March 31, 2024. The extended forecast and reversion period ultimately decreases the reserve associated with the unemployment factor when compared to the historical average.
◦The historical averages for LCNB’s economic indicators are unemployment – 5.85%, change in Coincident Economic Activity – 1.83%, change in Commercial Real Estate Price Indexes – 5.50%, and change in Home Price Index – 3.42%
•Economic forecast – the Company utilizes a third party to provide economic forecasts under various scenarios, which are assessed against economic indicators and management’s observations in the market. As of December 31, 2023, the Company selected a forecast which forecasts unemployment between 4.21% and 4.55%, the change in Coincident Economic Activity between 0.62% and 1.91%, the change in Commercial Real Estate Price Indexes between -8.56% and -6.64%, and the change in the Home Price Index between 0.09% and 4.47% during the forecast periods. As of March 31, 2024, the Company selected a forecast which forecasts unemployment between 4.45% and 5.14%, the change in Coincident Economic Activity between -0.53% and 0.47%, the change in Commercial Real Estate Price Indexes between -10.17% and -3.82%, and the change in the Home Price Index between -3.92% and 2.19% during the forecast periods. Management believes that the resulting quantitative reserve appropriately balances economic indicators with identified risks.

QUALITATIVE CONSIDERATIONS
In addition to the quantitative model, management considers the need for qualitative adjustment for risks not considered in the DCF. Factors that are considered by management in determining loan collectability and the appropriate level of the ACL are listed below:
•Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the Company operates that affect the collectability of financial assets;
•The effect of other external factors such as the regulatory, legal and technological environments, competition, and events such as natural disasters or pandemics; and
•Model risk including statistical risk, reversion risk, timing risk, and model limitation risk.
•Changes in the nature and volume of the portfolio and terms of loans.
•Lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries.
The following table presents activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2024 and 2023 (in thousands):
 Commercial
& Industrial		Commercial, Secured by
Real Estate		Residential
Real Estate		ConsumerAgriculturalOtherTotal
Three Months Ended March 31, 2024
Balance, beginning of year$1,039 5,414 3,816 238 18 — 10,525 
Provision for (recovery of) credit losses(72)1,072 (964)(11)— 52 77 
Losses charged off— — — (3)— (75)(78)
Recoveries— — — 8 — 25 33 
Balance, end of period$967 6,486 2,852 232 18 2 10,557 
Ratio of net charge-offs (recoveries) to average loans— %— %— %(0.08)%— %259.48 %0.01 %
Three Months Ended March 31, 2023
Balance, beginning of year, prior to adoption of ASC 326$1,300 3,609 624 86 22 5 5,646 
Impact of adopting ASC 326(512)1,440 836 446 (9)(5)2,196 
Provision for (recovery of) credit losses259 (122)(109)(3)(6)13 32 
Losses charged off— — — (5)— (31)(36)
Recoveries— — — 2 — 18 20 
Balance, end of period$1,047 4,927 1,351 526 7 — 7,858 
Ratio of net charge-offs to average loans— %— %— %0.01 %— %18.18 %— %



The ratio of the allowance for credit losses for loans to total loans at March 31, 2024 and December 31, 2023 was 0.64% and 0.61%, respectively.

For collateral dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the allowance for credit losses is measured based on the difference between the fair value of the collateral, less costs to sell, and the amortized cost basis of the loan as of the measurement date.
The following table presents the carrying value and related allowance of collateral dependent individually evaluated loans by class segment at the dates indicated (in thousands):

March 31, 2024December 31, 2023
Carrying ValueRelated AllowanceCarrying ValueRelated Allowance
Commercial & industrial$3,244 — — — 
Commercial, secured by real estate:
Owner occupied783 — 72 — 
Non-owner occupied2,642 1,161 — — 
Farmland52 — 51 — 
Multi-family— — — — 
Construction loans secured by 1-4 family dwellings— — — — 
Construction loans secured by other real estate— — — 
Residential real estate:
Secured by senior liens on 1-4 family dwellings— — — — 
Secured by junior liens on 1-4 family dwellings— — — — 
Home equity line-of-credit loans— — — — 
Consumer— — — — 
Agricultural— — — — 
Other loans, including deposit overdrafts— — — — 
Total$6,721 1,161 123 — 

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

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

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

Commercial real estate loans are underwritten based on the ability of the property, in the case of income-producing property, or the borrower’s business to generate sufficient cash flow to amortize the debt. Secondary emphasis is placed upon global debt service, collateral value, financial strength and liquidity of any and all guarantors, and other factors. Commercial real estate loans are generally originated with a 75% to 85% maximum loan to appraised value ratio, depending upon borrower capacity.
Residential Real Estate Loans.  Residential real estate loans include loans secured by first or second mortgage liens on one to four-family residential properties.  Home equity lines of credit are also included in this category.  First and second mortgage loans are generally amortized over five to thirty years with monthly principal and interest payments.  Home equity lines of credit generally have a five year or less draw period with interest only payments followed by a repayment period with monthly payments based on the amount outstanding.  LCNB offers both fixed and adjustable-rate mortgage loans.  Adjustable-rate loans are available with adjustment periods ranging between one to fifteen years and adjust according to an established index plus a margin, subject to certain floor and ceiling rates.  A substantial majority of home equity lines of credit have a variable rate of interest based on the Wall Street Journal prime rate plus a margin.

Residential real estate loans are underwritten primarily based on the borrower’s ability to repay, prior credit history, and the value of the collateral.  LCNB generally requires private mortgage insurance for first mortgage loans that have a loan to appraised value ratio of greater than 80% or may require other credit enhancements for second lien mortgage loans.
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 collectability 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.

Other Loans, Including Deposit Overdrafts. Other loans may include loans that do not fit in any of the other categories, but it is primarily composed of overdrafts from transaction deposit accounts. Overdraft payments are recorded as a recovery and overdrafts are generally written off after 34 days with a negative balance.

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.
 
The following table presents the amortized cost basis of loans by vintage and credit quality indicators at March 31, 2024 and December 31, 2023 (in thousands):
Term Loans by Origination Year
 20242023202220212020PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted to TermTotal
March 31, 2024
Commercial & industrial
Pass$2,593 16,629 30,732 28,954 10,733 7,704 17,715 — 115,060 
OAEM— — — 1,471 — — — — 1,471 
Substandard— — 1,815 — 99 3,362 550 — 5,826 
Doubtful— — — — — — — — — 
Total2,593 16,629 32,547 30,425 10,832 11,066 18,265 — 122,357 
Gross charge-offs (1)— — — — — — — — — 
Commercial, secured by real estate
Pass10,437 103,123 186,745 154,319 104,355 369,284 150,620 — 1,078,883 
OAEM— — 2,707 — — 3,881 — — 6,588 
Substandard— — 7,604 — — 4,583 — — 12,187 
Doubtful— — — — — — — — — 
Total10,437 103,123 197,056 154,319 104,355 377,748 150,620 — 1,097,658 
Gross charge-offs (1)— — — — — — — — — 
Residential real estate
Pass6,574 48,822 64,354 84,862 51,177 106,384 33,412 — 395,585 
OAEM— — — — — 215 — — 215 
Substandard— — — 299 531 2,651 132 — 3,613 
Doubtful— — — — — — — — — 
Total6,574 48,822 64,354 85,161 51,708 109,250 33,544 — 399,413 
Gross charge-offs (1)— — — — — — — — — 
Consumer
Pass1,834 7,269 5,110 4,252 3,881 1,279 253 — 23,878 
OAEM— — — — — — — — — 
Substandard— — 72 — — 8 201 — 281 
Doubtful— — — — — — — — — 
Total1,834 7,269 5,182 4,252 3,881 1,287 454 — 24,159 
Gross charge-offs (1)— — — 2 — 1 — — 3 
Agricultural
Pass— 1,588 432 194 723 1,060 8,697 — 12,694 
OAEM— — — — — — — — — 
Substandard— — — — — — — — — 
Doubtful— — — — — — — — — 
Total— 1,588 432 194 723 1,060 8,697 — 12,694 
Gross charge-offs (1)— — — — — — — — — 
Other
Pass— — — — — — 73 — 73 
OAEM— — — — — — — — — 
Substandard— — — — — — — — — 
Doubtful— — — — — — — — — 
Total— — — — — — 73 — 73 
Gross charge-offs (1)— — — — — — 75 — 75 
Total loans$21,438 177,431 299,571 274,351 171,499 500,411 211,653 — 1,656,354 
(1) - for the three months ended March 31, 2024.
Term Loans by Origination Year
20232022202120202019PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted to TermTotal
December 31, 2023     
Commercial & industrial
Pass$17,169 30,518 29,587 11,426 2,732 5,641 16,919 113 114,105 
OAEM— — 1,474 — — — — — 1,474 
Substandard— 1,813 — 105 1,592 137 1,315 — 4,962 
Doubtful— — — — — — — — — 
Total17,169 32,331 31,061 11,531 4,324 5,778 18,234 113 120,541 
Gross charge-offs (2)— — — — — 15 — — 15 
Commercial, secured by real estate
Pass99,055 200,735 156,865 109,810 92,895 283,564 141,354 6,056 1,090,334 
OAEM— 7,671 — — — 3,004 — — 10,675 
Substandard— — — — 1,648 2,987 — — 4,635 
Doubtful— — — — — — — — — 
Total99,055 208,406 156,865 109,810 94,543 289,555 141,354 6,056 1,105,644 
Gross charge-offs (2)— — — — — — — — — 
Residential real estate
Pass55,232 83,511 107,120 62,177 19,208 95,643 33,800 — 456,691 
OAEM— — — — — 18 — — 18 
Substandard— 446 — 217 — 3,062 170 — 3,895 
Doubtful— — — — — — — — — 
Total55,232 83,957 107,120 62,394 19,208 98,723 33,970 — 460,604 
Gross charge-offs (2)— — — — 4 — — — 4 
Consumer
Pass8,087 5,820 4,868 4,671 1,382 304 460 — 25,592 
OAEM— — — — — — — — — 
Substandard— — — — 8 — — — 8 
Doubtful— — — — — — — — — 
Total8,087 5,820 4,868 4,671 1,390 304 460 — 25,600 
Gross charge-offs (2)— — 62 21 — — — — 83 
Agricultural
Pass1,883 464 197 694 46 31 7,685 — 11,000 
OAEM— — — — — — — — — 
Substandard— — — — — — — — — 
Doubtful— — — — — — — — — 
Total1,883 464 197 694 46 31 7,685 — 11,000 
Gross charge-offs (2)— — — — — — — — — 
Other
Pass— — — — — — 82 — 82 
OAEM— — — — — — — — — 
Substandard— — — — — — — — — 
Doubtful— — — — — — — — — 
Total— — — — — — 82 — 82 
Gross charge-offs (2)— — — — — — 166 — 166 
Total loans$181,426 330,978 300,111 189,100 119,511 394,391 201,785 6,169 1,723,471 
(2) - for the year ended December 31, 2023.
A loan portfolio aging analysis by class segment at March 31, 2024 and December 31, 2023 is as follows (in thousands):
 30-59 Days
Past Due		60-89 Days
Past Due		90 Days or More Past DueTotal
Past Due		CurrentTotal Loans
Receivable		90 Days or More Past Due and
Accruing
March 31, 2024
Commercial & industrial$1,793 — — 1,793 120,564 122,357 — 
Commercial, secured by real estate:
Owner occupied88 — 69 157 208,098 208,255 69 
Non-owner occupied2,642 — — 2,642 504,467 507,109 — 
Farmland— — — — 38,411 38,411 — 
Multi-family— — — — 240,411 240,411 — 
Construction loans secured by 1-4 family dwellings— — — — 11,674 11,674 — 
Construction loans secured by other real estate— — — — 91,798 91,798 — 
Residential real estate:
Secured by senior liens on 1-4 family dwellings231 289 92 612 342,402 343,014 92 
Secured by junior liens on 1-4 family dwellings— — — — 19,469 19,469 — 
Home equity line-of-credit loans81 — 31 112 36,818 36,930 31 
Consumer62 44 28 134 24,025 24,159 28 
Agricultural— — — — 12,694 12,694 — 
Other73 — — 73 — 73 — 
Total$4,970 333 220 5,523 1,650,831 1,656,354 220 
December 31, 2023       
Commercial & industrial$— — — — 120,541 120,541 — 
Commercial, secured by real estate:
Owner occupied— — 72 72 206,633 206,705 72 
Non-owner occupied2,645 — — 2,645 498,463 501,108 — 
Farms— — — — 37,367 37,367 — 
Multi-family— — — — 240,033 240,033 — 
Construction loans secured by 1-4 family dwellings— — — — 9,058 9,058 — 
Construction loans secured by other real estate— — — — 111,373 111,373 — 
Residential real estate
Secured by senior liens on 1-4 family dwellings1,020 414 29 1,463 400,563 402,026 — 
Secured by junior liens on 1-4 family dwellings27 — — 27 19,972 19,999 — 
Home equity line-of-credit loans174 30 — 204 38,375 38,579 — 
Consumer136 — — 136 25,464 25,600 — 
Agricultural— — — — 11,000 11,000 — 
Other82 — — 82 — 82 — 
Total$4,084 444 101 4,629 1,718,842 1,723,471 72 

No residential consumer mortgage loans secured by residential real estate were in the process of foreclosure at March 31, 2024 or December 31, 2023.
From time to time, the terms of certain loans are modified when 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.

The following table presents the amortized cost basis at March 31, 2024 of loan modifications made to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted (in thousands):
Interest Rate ReductionTerm ExtensionPrincipal ForgivenessTotal ModificationsPercent of Total Class
Three Months Ended March 31, 2024    
Commercial & industrial$— 1,793 — 1,793 1.47 %
Commercial, secured by real estate, non-owner occupied— 2,642 — 2,642 0.52 %
Total$— 4,435 — 4,435 

The commercial, secured by real estate, non-owner occupied loan with an amortized balance of $2,642,000 shown in the table above subsequently defaulted on payment.

Mortgage loans sold to and serviced for the Federal Home Loan Mortgage Corporation and other investors are not included in the accompanying consolidated condensed balance sheets.  The unpaid principal balances of those loans at March 31, 2024 and December 31, 2023 were approximately $386.5 million and $391.8 million, respectively.