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 endedDecember 31, 2021 , as well as its other filings with theSEC , for a more detailed discussion of risks, uncertainties and factors that could cause actual results to differ from those discussed in the forward-looking statements. These forward-looking statements reflect management's current expectations based on all information available to management and its knowledge of LCNB's business and operations. Additionally, LCNB's financial condition, results of operations, plans, objectives, future performance and business are subject to risks and uncertainties that may cause actual results to differ materially. These factors include, but are not limited to: 1.the success, impact, and timing of the implementation of LCNB's business strategies; 2.the significant risks and uncertainties for LCNB's business, results of operations and financial condition, as well as its regulatory capital and liquidity ratios and other regulatory requirements, caused by the COVID-19 pandemic, which will depend on several factors, including the scope and duration of the pandemic, its influence on financial markets, the effectiveness of LCNB's work from home arrangements and staffing levels in operational facilities, the impact of market participants on which LCNB relies and actions taken by governmental authorities and other third parties in response to the pandemic; 3.the disruption of global, national, state, and local economies associated with the COVID-19 pandemic and theRussia /Ukraine conflict, which could affect LCNB's liquidity and capital positions, impair the ability of our borrowers to repay outstanding loans, impair collateral values, and further increase the allowance for credit losses; 4.LCNB's ability to integrate future acquisitions may be unsuccessful or may be more difficult, time-consuming, or costly than expected; 5.LCNB may incur increased loan charge-offs in the future; 6.LCNB may face competitive loss of customers; 7.changes in the interest rate environment, which may include continued interest rate increases, may have results on LCNB's operations materially different from those anticipated by LCNB's market risk management functions; 8.changes in general economic conditions and increased competition could adversely affect LCNB's operating results; 9.changes in regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact LCNB's operating results; 10.LCNB may experience difficulties growing loan and deposit balances; 11.United States trade relations with foreign countries could negatively impact the financial condition of LCNB's customers, which could adversely affect LCNB 's operating results and financial condition; 12.deterioration in the financial condition of theU.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 theU.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, theConsumer Financial Protection Bureau , the capital ratios of Basel III as adopted by the federal banking authorities, and the Tax Cuts and Jobs Act. Forward-looking statements made herein reflect management's expectations as of the date such statements are made. Such information is provided to assist shareholders and potential investors in understanding current and anticipated financial operations of LCNB and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. LCNB undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise after the date such statements are made. 35
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LCNB CORP. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Coronavirus Update/Status The COVID-19 pandemic has continued to disrupt the global economy and the lives of individuals throughout the world. Governments, businesses, and the public have taken and are taking actions to contain the spread of COVID-19 and to mitigate its effects. While the effects of COVID-19 are 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 continue, the future affects from the pandemic, including the potential scope of recovery, are not fully known. 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 theDepartment 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 atMarch 31, 2022 andDecember 31, 2021 totaled$1,415,000 and$6,935,000 , respectively, and unrecognized fees at those dates totaled$66,000 and$272,000 , respectively. LCNB continues to closely monitor the COVID-19 pandemic and its impact on its business, customers, employees, vendors, and service providers and expects to make future changes to respond to the pandemic as this situation continues to evolve.
Critical accounting estimates
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb inherent losses in the loan portfolio, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of specific and general components. The specific component typically relates to loans that are classified as doubtful, substandard, or special mention. For such loans an allowance is established when the discounted cash flows or collateral value is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors, which include trends in underperforming loans, trends in the volume and terms of loans, economic trends and conditions, concentrations of credit, trends in the quality of loans, and borrower financial statement exceptions.
Based on management’s assessments, the allowance for loan losses will be sufficient to absorb the 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.
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LCNB CORP. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Accounting for Intangibles. LCNB's intangible assets atMarch 31, 2022 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 ofEaton National Bank & Trust Co. andColumbus 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 forDebt 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 forU.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.
Operating results
Net income for the three months endedMarch 31, 2022 was$4,523,000 (total basic and diluted earnings per share of$0.38 ). This compares to net income of$5,240,000 (total basic and diluted earnings per share of$0.41 ) for the same three month period in 2021. Net interest income for the three months endedMarch 31, 2022 was$14,223,000 , compared to$14,372,000 for the same period in 2021. The decrease was primarily due to a decrease in the average rate earned on the loan portfolio, partially offset by an increase in average loan and taxable debt security balances. A decrease in fees recognized from PPP loans contributed to the decrease in average loan rates. An increase in the provision for loan losses negatively affected earnings during the 2022 period. LCNB recorded a provision of$49,000 for the three months endedMarch 31, 2022 , compared to a credit of$52,000 for the same three month period in 2021. Non-interest income for the three months endedMarch 31, 2022 was$3,550,000 . This compares to$3,465,000 for the same period in 2021. The increase was primarily due to increases in fiduciary income, service charges and fees on deposit accounts, and gains from sales of loans. These increases were partially offset by a decrease in other operating income, primarily due to a decrease in market values for LCNB's equity investments portfolio. Non-interest expense for the three months endedMarch 31, 2022 was$12,250,000 , compared to$11,492,000 for the same three month period in 2021. The increase was primarily due to a an increase in salaries and employee benefits. 37
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LCNB CORP. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Net Interest Income Three Months EndedMarch 31, 2022 vs.March 31, 2021 LCNB's primary source of earnings is net interest income, which is the difference between earnings from loans and other investments and interest paid on deposits and other liabilities. The following table presents, for the three months endedMarch 31, 2022 andMarch 31, 2021 , average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resulting average yields earned or rates paid. Three Months Ended March 31, 2022 2021 Average Interest Average Average Interest Average Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate (Dollars in thousands) Loans (1)$ 1,376,926 13,786 4.06 %$ 1,313,803 14,535 4.49 % Interest-bearing demand deposits 9,743 9 0.37 % 15,632 13
0.34 % Federal Reserve Bank stock 4,652 - - % 4,652 - - % Federal Home Loan Bank stock 5,203 26 2.03 % 5,203 26 2.03 % Investment securities: Equity securities 4,611 17 1.50 % 4,500 19 1.71 % Debt securities, taxable 298,152 1,095 1.49 % 211,618 718 1.38 % Debt securities, non-taxable (2) 28,048 239 3.46 % 34,174 284 3.37 % Total earnings assets 1,727,335 15,172 3.56 % 1,589,582 15,595 3.98 % Non-earning assets 195,394 191,287 Allowance for loan losses (5,503) (5,715) Total assets$ 1,917,226 $ 1,775,154 NOW and money fund deposits$ 511,250
147 0.12 %$ 419,832 132 0.13 % Savings deposits 444,243 147 0.13 % 375,194 148 0.16 % IRA and time certificates 189,305 445 0.95 % 234,134 748 1.30 % Short-term borrowings 12,503 86 2.79 % 342 1 1.19 % Long-term debt 10,000 74 3.00 % 19,689 134 2.76 % Total interest-bearing liabilities 1,167,301 899 0.31 % 1,049,191 1,163 0.45 % Demand deposits 501,829 458,996 Other liabilities 22,371 25,450 Capital 225,725 241,517 Total liabilities and capital$ 1,917,226 $ 1,775,154 Net interest rate spread (3) 3.25 % 3.53 % Net interest income and net interest margin on a taxable-equivalent basis (4) 14,273 3.35 % 14,432 3.68 % Ratio of interest-earning assets to interest-bearing liabilities 147.98 % 151.51 %
(1) Includes outstanding loans. (2) Income from tax-exempt securities is included in interest income on a tax equivalent basis. Interest income has been split
by a factor comprised of the complement of the incremental tax rate of 21%. (3)The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities. (4)The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets. 38
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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 endedMarch 31, 2022 as compared to the same period in 2021. Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each. Three Months Ended March 31, 2022 vs. 2021 Increase (decrease) attributable to: Volume Rate Total (In thousands) Interest-earning Assets: Loans $ 676 (1,425) (749) Interest-bearing demand deposits (5) 1 (4) Federal Reserve Bank stock - - - Federal Home Loan Bank stock - - - Investment securities: Equity securities - (2) (2) Debt securities, taxable 314 63 377 Debt securities, non-taxable (52) 7 (45) Total interest income 933 (1,356) (423) Interest-bearing Liabilities: NOW and money fund deposits 27 (12) 15 Savings deposits 25 (26) (1) IRA and time certificates (127) (176) (303) Short-term borrowings 82 3 85 Long-term debt (71) 11 (60) Total interest expense (64) (200) (264) Net interest income $ 997 (1,156) (159) Net interest income on a fully taxable-equivalent basis for the three months endedMarch 31, 2022 totaled$14,273,000 , a decrease of$159,000 from the comparable period in 2021. Total interest income decreased$423,000 , which was partially offset by a$264,000 decrease in total interest expense. The$423,000 decrease in total interest income was due primarily to a$749,000 decrease in loan interest income, which was partially offset by a$377,000 increase in interest income from taxable debt securities. The decrease in loan interest income was primarily due to a 43 basis point (a basis point equals 0.01%) decrease in the average rate earned on loans, partially offset by a$63.1 million increase in the average balance of LCNB's loan portfolio. Loan interest income for the first quarter 2022 included$248,000 of PPP loan fees recognized, as compared to$523,000 of PPP fees recognized during the first quarter 2021. The increase in interest income from taxable debt securities was due to an$86.5 million increase in average securities and to an 11 basis point increase in the average rate earned on these securities. The decrease in average rates for loans was primarily due to market conditions and also reflected the decrease in PPP fees recognized. 39
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LCNB CORP. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The$264,000 decrease in total interest expense was due to a$303,000 decrease in interest expense for IRA and time certificates and a$60,000 decrease in interest expense for long-term debt, partially offset by an$85,000 increase in interest expense for short-term borrowings. Interest expense for IRA and time certificates decreased due to a 34 basis point decrease in the average rate paid for these deposits and to an$44.8 million decrease in the average balance of these deposits. Management believes the decrease reflects customer preferences for liquidity during uncertain economic periods. Balances in demand deposits, NOW and money fund deposits, and savings deposits have grown, while balances in IRA and time deposits have decreased. Interest expense for long-term debt decreased due to a$9.7 million decrease in average debt outstanding, slightly offset by a 24 basis point increase in the average rate paid. Interest expense for short-term borrowings increased primarily because of a$12.2 million increase in average borrowings outstanding.
Allowance and provision 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 provision for loan losses for the three months endedMarch 31, 2022 was$49,000 , compared to a credit of$52,000 for the same period in 2021. 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 charges for the three months ended
Non-interest income
A comparison of non-interest income for the three months ended
and
Three Months Ended
March 31,
2022 2021 Difference
Fiduciary income $ 1,695 1,529 166
Service charges and fees on deposit accounts 1,406 1,366 40
Bank owned life insurance income 265 267 (2)
Gains from sales of loans 124 43 81
Other operating income 60 260 (200)
Total non-interest income $ 3,550 3,465 85
Reasons for changes include:
•Fiduciary income increased due to a combination of new accounts and increases
in the fair value of trust and brokerage assets managed.
•Gains from sales of loans increased primarily due to a higher volume of
residential real estate loan sales.
•Other operating income decreased primarily due to a decrease in unrealized net
gains or losses recognized on equity securities.
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LCNB CORP. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Non-Interest Expense
A comparison of non-interest expenses for the three months ended
and
Three Months Ended
March 31 ,
2022 2021 Difference
Salaries and employee benefits$ 7,215 6,433 782 Equipment expenses 408 368 40 Occupancy expense, net 775 794 (19) State financial institutions tax 436 444 (8) Marketing 262 268 (6) Amortization of intangibles 140 257 (117) FDIC insurance premiums, net 126 113 13 Contracted services 610 540 70 Other non-interest expense 2,278 2,275 3 Total non-interest expense$ 12,250 11,492 758 Reasons for changes include: •Salaries and employee benefits increased primarily due to increases in salaries and wages, increased bonus expense accruals, increased compensation expense for restricted stock grants, increased FICA matching expense, and to a higher percentage of personnel expenses deferred in 2021 attributable to the high volume of PPP loans originated in that period. •Amortization of intangibles decreased because the core deposit intangibles from the First Capital Bancshares, Inc. andEaton National Bank & Trust Co. acquisitions amortized in full during the first quarter 2022.
Income taxes
LCNB's effective tax rate for the three months endedMarch 31, 2022 was 17.4%, compared to 18.1% for the three months endedMarch 31, 2021 . The difference between the statutory rate of 21% and the effective tax rates is primarily due to tax-exempt interest income from municipal securities, tax-exempt earnings from bank owned life insurance, tax-exempt earnings fromLCNB Risk Management, Inc. , and tax credits and losses related to investments in affordable housing tax credit limited partnerships. 41
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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 items to
is as follows (in thousands of dollars):
March 31, 2022 December 31, 2021 Difference $ Difference %
ASSETS:
Total cash and cash equivalents $ 19,941 18,136 1,805
9.95%
Investment securities: Equity securities whose fair value is easily determinable, at fair value
2,424 2,546 (122)
(4.79)% Equity securities with no easily determinable fair value, at cost
2,099 2,099 - - % Debt securities, available-for-sale, at fair value 293,464 308,177 (14,713) (4.77) % Debt securities, held-to-maturity, at cost 22,873 22,972 (99) (0.43) % Federal Reserve Bank stock, at cost 4,652 4,652 - - % Federal Home Loan Bank stock, at cost 5,203 5,203 - - % Loans, net 1,373,991 1,363,939 10,052 0.74 % Premises and equipment, net 34,940 35,385 (445) (1.26) % Operating lease right-of-use assets 6,191 6,357 (166) (2.61) % Goodwill 59,221 59,221 - - % Core deposit and other intangibles 2,328 2,473 (145) (5.86) % Bank owned life insurance 43,488 43,224 264 0.61 % Interest receivable 8,364 7,999 365 4.56 % Other assets 20,451 21,246 (795) (3.74) % Total assets$ 1,899,630 1,903,629 (3,999) (0.21) % LIABILITIES: Deposits: Non-interest-bearing$ 517,621 501,531 16,090 3.21 % Interest-bearing 1,118,985 1,127,288 (8,303) (0.74) % Total deposits 1,636,606 1,628,819 7,787 0.48 % Short-term borrowings 24,746 - 24,746 N/A Long-term debt 10,000 10,000 - - % Operating lease liabilities 6,337 6,473 (136) (2.10) % Accrued interest and other liabilities 15,066 19,733 (4,667) (23.65) % Total liabilities 1,692,755 1,665,025 27,730 1.67 % SHAREHOLDERS' EQUITY: Common shares 143,432 143,130 302 0.21 % Retained earnings 128,555 126,312 2,243 1.78 % Treasury shares at cost (50,115) (29,029) (21,086)
72.64%
Accumulated other comprehensive loss, net of taxes (14,997) (1,809) (13,188)
729.02%
Total shareholders' equity 206,875 238,604 (31,729)
(13.30)%
Total liabilities and shareholders' equity$ 1,899,630 1,903,629 (3,999) (0.21) % Reasons for changes include: •Debt securities, available-for-sale, decreased due to maturities and calls of securities totaling$9.8 million and decreases in market value totaling$16.7 million , largely offset by purchases of additional securities totaling$12.1 million . •Net loans increased due to organic growth in the loan portfolio. Most of the growth occurred in the commercial real estate and commercial and industrial portfolios, partially offset by decreases in the residential real estate and agricultural loan portfolios. 42
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LCNB CORP. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) •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 three months of 2022. 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. Interest-bearing deposits show a decrease because of a$29.5 million decrease in ICS® Demand Reciprocal deposit balances. •Short-term borrowings increased due to a$20 million one-year revolving line of credit obtained during the first quarter 2022. The borrowing was used to finance the repurchase of 1,051,688 shares of LCNB common stock. •Accrued interest and other liabilities decreased due to a combination of decreases in accrued bonuses caused by the payment of annual bonuses in January, a decrease in LIHTC liabilities due to funding payments made during the first quarter, and net deferred federal income taxes being categorized as an asset atMarch 31, 2022 vs. being categorized as a liability atDecember 31, 2021 . •Treasury shares increased because of the purchase referred to above. •Accumulated other comprehensive loss, net of taxes increased because of market-driven decreases in the fair value of LCNB's debt security investments.
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 categorized based on capital adequacy:
Minimum Requirement
with Capital To Be Considered
Minimum Requirement Conservation Buffer 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 8.0 % 10.5 % 10.0 %
risk-weighted assets
Leverage Ratio (Tier 1 Capital to adjusted quarterly average 4.0 % N/A 5.0 %
total assets)
According to the most recent notification from their regulators, the Bank and LCNB have been classified as “well capitalized” under the regulatory framework for prompt corrective action. It is management’s opinion that no condition or event has occurred since the last notification that would change the category of the Bank or LCNB.
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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):
March 31, 2022 December 31, 2021
Regulatory Capital:
Shareholders' equity $ 222,813 234,451
Goodwill and other intangibles (60,516) (60,655)
Accumulated other comprehensive (income) loss 14,997 1,809
Tier 1 risk-based capital 177,294 175,605
Eligible allowance for loan losses 5,530 5,506
Total risk-based capital $ 182,824 181,111
Capital ratios:
Common Equity Tier 1 Capital to risk-weighted assets 12.05 % 12.25 %
Tier 1 Capital to risk-weighted assets 12.05 % 12.25 %
Total Capital to risk-weighted assets 12.42 % 12.64 %
Leverage 9.54 % 9.58 %
On September 17, 2019 , the FDIC finalized a rule that introduced an optional
simplified measure of capital adequacy for qualifying community banking
organizations, as required by the Economic Growth, Regulatory Relief and
Consumer Protection Act. The simplified rule was designed to reduce burden by
removing the requirements for calculating and reporting risk-based capital
ratios for qualifying community banking organizations that opt into the
framework. Its use was permitted beginning with the March 31, 2020 Call Report.
Qualifications to use the simplified approach include having a tier 1 leverage
ratio of greater than 9%, less than $10 billion in total consolidated assets,
and limited amounts of off-balance-sheet exposures and trading assets and
liabilities. A qualifying community banking organization that opts into the
Community Bank Leverage Ratio framework and meets all requirements under the
framework will be considered to have met the well-capitalized ratio requirements
under the Prompt Corrective Action regulations and will not be required to
report or calculate risk-based capital. LCNB qualifies to use the simplified
measure, but did not opt in for the March 31, 2022 regulatory capital
calculations.
Liquidity
LCNB depends on dividends from the Bank for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders. National banking law limits the amount of dividends the Bank may pay to the sum of retained net income for the current year plus retained net income for the previous two years. Prior approval from the OCC, the Bank's primary regulator, is necessary for the Bank to pay dividends in excess of this amount. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines. Management believes the Bank will be able to pay anticipated dividends to LCNB without needing to request approval. The Bank is not aware of any reasons why it would not receive such approval, if required. Effective liquidity management ensures that cash is available to meet the cash flow needs of borrowers and depositors, as well as meeting LCNB's operating cash needs. Primary funding sources include customer deposits with the Bank, short-term and long-term borrowings from theFederal 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 theFederal Home Loan Bank atMarch 31, 2022 was approximately$225.5 million . In addition, additional borrowings of approximately$50.3 million were available through the line of credit arrangements atMarch 31, 2022 . Management closely monitors the level of liquid assets available to meet ongoing funding needs. It is management's intent to maintain adequate liquidity so that sufficient funds are readily available at a reasonable cost. LCNB experienced no liquidity or operational problems as a result of current liquidity levels. 44
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