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, 2024		December 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
Farmland	38,411		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
Consumer	24,159		25,600
Agricultural	12,694		11,000
Other loans, including deposit overdrafts	73		82
Loans, gross	1,656,354		1,723,471
Less allowance for credit losses	10,557		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, 2024				December 31, 2023
	Non-accrual Loans with no Allowance for Credit Losses		Total Non-accrual Loans	Interest Income Recognized	Non-accrual Loans with no Allowance for Credit Losses	Total Non-accrual Loans	Interest Income Recognized
Commercial & industrial	$	—	—	—	—	—	—
Commercial, secured by real estate:
Owner occupied	—		—	—	—	—	—
Non-owner occupied	—		2,642	—	—	—	—
Farmland	52		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 dwellings	25		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		Consumer		Agricultural		Other		Total
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 losses	259			(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, 2024			December 31, 2023
	Carrying Value		Related Allowance	Carrying Value	Related Allowance
Commercial & industrial	$	3,244	—	—	—
Commercial, secured by real estate:
Owner occupied	783		—	72	—
Non-owner occupied	2,642		1,161	—	—
Farmland	52		—	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
	2024		2023	2022	2021	2020	Prior	Revolving Loans Amortized Cost Basis	Revolving Loans Converted to Term	Total
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	—		—	—	—	—	—	—	—	—
Total	2,593		16,629	32,547	30,425	10,832	11,066	18,265	—	122,357
Gross charge-offs (1)	—		—	—	—	—	—	—	—	—
Commercial, secured by real estate
Pass	10,437		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	—		—	—	—	—	—	—	—	—
Total	10,437		103,123	197,056	154,319	104,355	377,748	150,620	—	1,097,658
Gross charge-offs (1)	—		—	—	—	—	—	—	—	—
Residential real estate
Pass	6,574		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	—		—	—	—	—	—	—	—	—
Total	6,574		48,822	64,354	85,161	51,708	109,250	33,544	—	399,413
Gross charge-offs (1)	—		—	—	—	—	—	—	—	—
Consumer
Pass	1,834		7,269	5,110	4,252	3,881	1,279	253	—	23,878
OAEM	—		—	—	—	—	—	—	—	—
Substandard	—		—	72	—	—	8	201	—	281
Doubtful	—		—	—	—	—	—	—	—	—
Total	1,834		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
	2023		2022	2021	2020	2019	Prior	Revolving Loans Amortized Cost Basis	Revolving Loans Converted to Term	Total
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	—		—	—	—	—	—	—	—	—
Total	17,169		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
Pass	99,055		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	—		—	—	—	—	—	—	—	—
Total	99,055		208,406	156,865	109,810	94,543	289,555	141,354	6,056	1,105,644
Gross charge-offs (2)	—		—	—	—	—	—	—	—	—
Residential real estate
Pass	55,232		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	—		—	—	—	—	—	—	—	—
Total	55,232		83,957	107,120	62,394	19,208	98,723	33,970	—	460,604
Gross charge-offs (2)	—		—	—	—	4	—	—	—	4
Consumer
Pass	8,087		5,820	4,868	4,671	1,382	304	460	—	25,592
OAEM	—		—	—	—	—	—	—	—	—
Substandard	—		—	—	—	8	—	—	—	8
Doubtful	—		—	—	—	—	—	—	—	—
Total	8,087		5,820	4,868	4,671	1,390	304	460	—	25,600
Gross charge-offs (2)	—		—	62	21	—	—	—	—	83
Agricultural
Pass	1,883		464	197	694	46	31	7,685	—	11,000
OAEM	—		—	—	—	—	—	—	—	—
Substandard	—		—	—	—	—	—	—	—	—
Doubtful	—		—	—	—	—	—	—	—	—
Total	1,883		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 Due	Total Past Due	Current	Total 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 occupied	88		—	69	157	208,098	208,255	69
Non-owner occupied	2,642		—	—	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 dwellings	231		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 loans	81		—	31	112	36,818	36,930	31
Consumer	62		44	28	134	24,025	24,159	28
Agricultural	—		—	—	—	12,694	12,694	—
Other	73		—	—	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 occupied	2,645		—	—	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 dwellings	1,020		414	29	1,463	400,563	402,026	—
Secured by junior liens on 1-4 family dwellings	27		—	—	27	19,972	19,999	—
Home equity line-of-credit loans	174		30	—	204	38,375	38,579	—
Consumer	136		—	—	136	25,464	25,600	—
Agricultural	—		—	—	—	11,000	11,000	—
Other	82		—	—	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 Reduction		Term Extension	Principal Forgiveness	Total Modifications	Percent 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.