| LOANS | LOANS Major classifications of loans at December 31 were as follows (in thousands): 2023 2022 Commercial and industrial $ 120,541 120,327 Commercial, secured by real estate: Owner occupied 206,705 208,485 Non-owner occupied 501,108 420,075 Farmland 37,367 36,340 Multi-family 240,033 189,917 Construction loans secured by 1-4 family dwellings 9,058 7,786 Construction loans secured by other real estate 111,373 73,652 Residential real estate Secured by senior liens on 1-4 family dwellings 402,026 269,822 Secured by junior liens on 1-4 family dwellings 19,999 10,197 Home equity line-of-credit loans 38,579 26,109 Consumer 25,600 28,414 Agricultural 11,000 10,073 Other loans, including deposit overdrafts 82 81 1,723,471 1,401,278 Less allowance for credit losses 10,525 5,646 Loans-net $ 1,712,946 1,395,632 Loans in the above table are shown net of deferred origination fees and costs. Deferred origination fees, net of related costs, were $181,000 and $980,000 at December 31, 2023 and 2022, respectively. Non-accrual loans by class of receivable at December 31 were as follows (dollars in thousands): 2023 2022 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 and industrial $ — — — — — 3 Commercial, secured by real estate Owner occupied — — — 231 231 15 Non-owner occupied — — — — — — Farmland 51 51 26 88 88 12 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 29 29 — 72 72 4 Secured by junior liens on 1-4 family dwellings — — — — — — Home equity line-of-credit loans — — — — — — Consumer — — — — — — Agricultural — — — — — — Total non-accrual loans $ 80 80 26 391 391 34 Two residential real estate loans secured by senior liens on 1-4 family dwellings were added to the non-accrual classification during the first quarter of 2023. Accrued interest reversed and charged against interest income for these loans totaled approximately $3,000. Both loans were paid in full during the third quarter 2023. An additional residential real estate loan was added to the non-accrual classification during the fourth quarter of 2023. Accrued interest reversed and charged against interest income for this loan was approximately $4,000. Interest income that would have been recorded during 2023 and 2022 if loans on non-accrual status at December 31, 2023 and 2022 had been current and in accordance with their original terms was approximately $14,000 and $32,000, respectively. The ratio of non-accrual loans to total loans outstanding at December 31, 2023 and 2022 was 0.00% and 0.01%, 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 as discussed within Note 1 – Basis of Presentation - Adoption of New Accounting Pronouncements included in this Form 10-K. During the first quarter of 2023, the Company adopted ASU 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 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 analysis 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 January 1, 2023 established a one-quarter reasonable and supportable forecast period with a one-quarter straight line reversion to the long-term historical average. As of December 31, 2023, the Company established a two-quarter reasonable and supportable forecast period with a six-quarter straight line reversion to the long-term historical average. 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 5.88%, which is higher than the forecasted range utilized. 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 – 5.88%, change in Coincident Economic Activity – 1.81%, change in Commercial Real Estate Price Indexes – 5.43%, and change in Home Price Index – 3.38% • 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 January 1, 2023, the date of CECL adoption, the Company selected a forecast which forecasted unemployment at 4.16%, the change in Coincident Economic Activity at 1.77%, the change in Commercial Real Estate Price Indexes at 9.35%, and the change in Home Price Index at -1.17% during the forecast periods. 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. 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; • 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; and • The lending policies and procedures, including changes in undersriting standards and practices for collections, write-offs, and recoveries. The following table presents activity in the allowance for credit losses and a breakdown of the recorded investment in the allowance for credit losses by portfolio segment for the three years ended December 31 and a breakdown of the recorded investment in the loan portfolio by portfolio segment for the two years ended December 31 (in thousands): Commercial Commercial, Residential Consumer Agricultural Other Total 2023 Allowance for credit losses on loans: 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 Acquisition of Cincinnati Bancorp, Inc. - PCD Loans — 90 403 — — — 493 Provision for (recovery of) credit losses 266 (176) 689 (219) 5 88 653 Acquisition of Cincinnati Bancorp, Inc. - provision for credit losses on non-PCD loans charged to expense — 451 1,268 3 — — 1,722 Losses charged off (15) — (4) (83) — (166) (268) Recoveries — — — 5 — 78 83 Balance, end of year $ 1,039 5,414 3,816 238 18 — 10,525 Individually evaluated for credit loss $ 2 12 5 — — — 19 Collectively evaluated for credit loss 1,037 5,402 3,811 238 18 — 10,506 Balance, end of year $ 1,039 5,414 3,816 238 18 — 10,525 Loans: Individually evaluated for credit loss $ 107 3,293 537 — — — 3,937 Collectively evaluated for credit loss 120,434 1,102,351 460,067 25,600 11,000 82 1,719,534 Balance, end of year $ 120,541 1,105,644 460,604 25,600 11,000 82 1,723,471 Percent of loans in each category to total loans 7.0 % 64.2 % 26.7 % 1.5 % 0.6 % — % 100.0 % Ratio of net charge-offs to average loans 0.01 % — % — % 0.28 % — % 117.65 % 0.01 % 2022 Allowance for credit losses on loans: Balance, beginning of year $ 1,095 3,607 665 105 30 4 5,506 Provision for (recovery of) loan losses 205 69 (81) (12) (8) 77 250 Losses charged off — (67) (5) (37) — (157) (266) Recoveries — — 45 30 — 81 156 Balance, end of year $ 1,300 3,609 624 86 22 5 5,646 Individually evaluated for impairment $ 4 11 6 — — — 21 Collectively evaluated for impairment 1,296 3,598 618 86 22 5 5,625 Acquired credit impaired loans — — — — — — — Balance, end of year $ 1,300 3,609 624 86 22 5 5,646 Loans: Individually evaluated for impairment $ 114 963 482 — — — 1,559 Collectively evaluated for impairment 119,799 934,568 304,770 28,414 10,073 81 1,397,705 Acquired credit impaired loans 414 724 876 — — — 2,014 Balance, end of year $ 120,327 936,255 306,128 28,414 10,073 81 1,401,278 Percent of loans in each category to total loans 8.6 % 66.9 % 21.8 % 2.0 % 0.7 % — % 100.0 % Ratio of net charge-offs to average loans — % 0.01 % (0.01) % 0.02 % — % 100.00 % 0.01 % Commercial Commercial, Residential Consumer Agricultural Other Total 2021 Allowance for credit losses on loans: Balance, beginning of year $ 816 3,903 837 153 28 (9) 5,728 Provision for (recovery of) loan losses 279 (375) (190) (45) 2 60 (269) Losses charged off — (112) (28) (9) — (105) (254) Recoveries — 191 46 6 — 58 301 Balance, end of year $ 1,095 3,607 665 105 30 4 5,506 Individually evaluated for impairment $ 5 11 9 — — — 25 Collectively evaluated for impairment 1,090 3,596 656 105 30 4 5,481 Balance, end of year $ 1,095 3,607 665 105 30 4 5,506 Percent of loans in each category to total loans 7.4 % 64.8 % 24.5 % 2.5 % 0.8 % — % 100.0 % Ratio of net charge-offs to average loans — % (0.01) % (0.01) % 0.01 % — % 16.24 % — % The ratio of the allowance for credit losses for loans to total loans at December 31, 2023 and 2022 was 0.61% and 0.40%, 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 for the years ended December 31 (in thousands): 2023 2022 Carrying Value Related Allowance Carrying Value Related Allowance Commercial & industrial $ — — — — Commercial, secured by real estate Owner occupied 72 — 230 — Non-owner occupied — — — — Farmland 51 — 88 — 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 — — 40 — Secured by junior liens on 1-4 family dwellings — — — — Home equity line-of-credit loans — — — — Consumer — — — — Agricultural — — — — Other loans, including deposit overdrafts — — — — Total $ 123 — 358 — The risk characteristics of LCNB's material loan portfolio segments were as follows: Commercial & Industrial Loans. LCNB’s commercial and industrial loan portfolio consists of loans for various 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 and 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 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 one one 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 one 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 or 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 December 31 (in thousands). The December 31, 2022 table is shown for comparison purposes. Term Loans by Origination Year 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total 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 — — — — — 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 — — — — — — — — — 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 — — — — 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 — — 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 — — — — — — — — — Other Pass — — — — — — 82 — 82 OAEM — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total — — — — — — 82 — 82 Gross charge-offs — — — — — — 166 — 166 Total loans $ 181,426 330,978 300,111 189,100 119,511 394,391 201,785 6,169 1,723,471 Term Loans by Origination Year 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total 2022 Commercial & industrial Pass $ 30,132 36,341 20,936 3,632 2,499 5,630 15,403 — 114,573 OAEM — — — 2,142 — — 1,602 — 3,744 Substandard 1,540 — 106 — — 51 313 — 2,010 Doubtful — — — — — — — — — Total 31,672 36,341 21,042 5,774 2,499 5,681 17,318 — 120,327 Gross charge-offs — — — — — — — — — Commercial, secured by real estate Pass 135,503 142,446 96,272 100,363 75,387 229,175 129,274 4,955 913,375 OAEM 7,931 — — — 7,413 — — — 15,344 Substandard — — — — — 7,536 — — 7,536 Doubtful — — — — — — — — — Total 143,434 142,446 96,272 100,363 82,800 236,711 129,274 4,955 936,255 Gross charge-offs — — — — — 67 — — 67 Residential real estate Pass 27,892 86,952 54,144 17,804 13,298 78,969 24,359 1,095 304,513 OAEM — — — — — — — — — Substandard — — — 37 — 1,572 — 6 1,615 Doubtful — — — — — — — — — Total 27,892 86,952 54,144 17,841 13,298 80,541 24,359 1,101 306,128 Gross charge-offs — — — — — — 5 — 5 Consumer Pass 8,786 7,561 8,108 3,145 413 316 82 — 28,411 OAEM — — — — — — — — — Substandard 3 — — — — — — — 3 Doubtful — — — — — — — — — Total 8,789 7,561 8,108 3,145 413 316 82 — 28,414 Gross charge-offs — 4 24 9 — — — — 37 Agricultural Pass 533 243 865 63 116 29 8,224 — 10,073 OAEM — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 533 243 865 63 116 29 8,224 — 10,073 Gross charge-offs — — — — — — — — — Other Pass — — — — — — 81 — 81 OAEM — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total — — — — — — 81 — 81 Gross charge-offs — — — — — — 157 — 157 Total loans $ 212,320 273,543 180,431 127,186 99,126 323,278 179,338 6,056 1,401,278 LCNB generally performs a classification of assets review, including the regulatory classification of assets, on an ongoing basis. The results of the classification of assets review are validated annually by an independent third party loan review firm. In the event of a difference in rating or classification between those assigned by the internal and external resources, the Company will utilize the more critical or conservative rating or classification. Loans with regulatory classifications are presented monthly to the Board of Directors. LCNB evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis. No significant changes were made to either during the past year. A loan portfolio aging analysis by class segment at December 31 is as follows (in thousands): 30-59 Days 60-89 Days Greater Than Total Current Total Loans Total Loans Greater Than 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 — Farmland — — — — 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 2022 Commercial & industrial $ — — — — 120,327 120,327 — Commercial, secured by real estate: Owner occupied — — — — 208,485 208,485 — Non-owner occupied — — — — 420,075 420,075 — Farmland — — — — 36,340 36,340 — Multi-family — — — — 189,917 189,917 — Construction loans secured by 1-4 family dwellings — — — — 7,786 7,786 — Construction loans secured by other real estate — — — — 73,652 73,652 — Residential real estate: Secured by senior liens on 1-4 family dwellings 81 — 79 160 269,662 269,822 39 Secured by junior liens on 1-4 family dwellings — — — — 10,197 10,197 — Home equity line-of-credit loans — — — — 26,109 26,109 — Consumer 117 3 — 120 28,294 28,414 — Agricultural — — — — 10,073 10,073 — Other 81 — — 81 — 81 — Total $ 279 3 79 361 1,400,917 1,401,278 39 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. One modification was granted to a borrower experiencing financial difficulties during the twelve months ended December 31, 2023. The modification was made on a residential real estate loan secured by a senior lien on a single-family home with an outstanding balance of $325,000 at June 30, 2023 and involved a delay of monthly payments for a period of time. This loan was paid in full during the third quarter 2023. No loans meeting the above specifications were modified during the twelve months ended December 31, 2022. LCNB is not committed to lend additional funds to borrowers whose loan terms were modified. There were no modified loans that experienced a payment default within twelve months of the restructuring date during the years ended December 31, 2023, 2022, or 2021. Mortgage loans sold to and serviced for the Federal Home Loan Mortgage Corporation and other investors are not included in the accompanying Consolidated Balance Sheets. The unpaid principal balances of those loans at December 31, 2023 and 2022 were approximately $391,800,000 and $148,412,000, respectively. |
