Report of Independent Registered Public Accounting Firm
To the Shareholders, Board of Directors and Audit Committee
LCNB Corp.
Lebanon, Ohio
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of LCNB Corp. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
LCNB CORP. AND SUBSIDIARIES
Allowance for Loan Losses
As described in Note 3 to the consolidated financial statements, the Company’s consolidated allowance for loan losses (ALL) was $5.5 million at December 31, 2021. The Company also describes in Note 1 of the consolidated financial statements the “Allowance for Loan Losses” accounting policy around this estimate. The ALL is an estimate of losses inherent in the loan portfolio. The determination of the reserve requires significant judgment reflecting the Company’s best estimate of probable 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 collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The determination of the ALL consists of general reserves on loans collectively evaluated for impairment and specific reserves on loans individually evaluated for impairment.
Historical loss rates are analyzed by segment and applied to loans collectively evaluated. Historical loss rates are adjusted for significant qualitative factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition. Current methodology used by management to estimate the allowance for loan losses takes into consideration such qualitative factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, historic categorical trends, current delinquency levels as related to historical levels, portfolio growth rates, changes in composition of the portfolio, the current economic environment, as well as current allowance adequacy in relation to the portfolio. The Company considers all of these factors prior to making any adjustments to the allowance due to the subjectivity and imprecision involved in allocation methodology. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The primary reason for our determination that the allowance for loan losses is a critical audit matter is that auditing the estimated allowance for loan losses involved significant judgment and complex review. There is a high degree of subjectivity in evaluating management’s estimate, such as evaluating management’s assessment of economic conditions and other environmental factors including the impact of the COVID-19 pandemic on the loan portfolio, evaluating the adequacy of specific allowances associated with impaired loans and assessing the appropriateness of loan grades.
Our audit procedures related to the estimated allowance for loan losses included:
•Testing the clerical and computational accuracy of the formulas and information utilized within the ALL model.
•Computing an independent calculation of an acceptable range and comparing it to the Company’s estimate.
•Evaluating the qualitative and environmental adjustment to the historical loss rates, including assessing the basis for the adjustments and the reasonableness of the significant assumptions.
•Evaluating the relevance and reliability of data and assumptions.
•Testing of the loan review function and the accuracy of how loan grades are determined. Specifically, evaluating the appropriateness of loan grades and to assess the reasonableness of specific impairments on loans.
•Evaluating the overall reasonableness of qualitative factors and the appropriateness of their direction and magnitude and the Company’s support for the direction and magnitude compared to previous years.
•Evaluating credit quality indicators such as trends in delinquencies, nonaccruals, and charge-offs.
LCNB CORP. AND SUBSIDIARIES
•Evaluating the accuracy and completeness of disclosures in the consolidated financial statements.
| | | | | | | | | | | |
/s/ BKD, LLP | | | |
BKD, LLP | | | |
| | | |
We have served as the Company's auditor since 2014. |
| | | |
Cincinnati, Ohio | | | |
March 9, 2022 | | | |
LCNB CORP. AND SUBSIDIARIES
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At December 31,
(Dollars in thousands)
| | | | | | | | | | | |
| 2021 | | 2020 |
ASSETS: | | | |
Cash and due from banks | $ | 16,810 | | | 17,383 | |
Interest-bearing demand deposits | 1,326 | | | 14,347 | |
Total cash and cash equivalents | 18,136 | | | 31,730 | |
| | | |
| | | |
Investment securities: | | | |
Equity securities with a readily determinable fair value, at fair value | 2,546 | | | 2,389 | |
Equity securities without a readily determinable fair value, at cost | 2,099 | | | 2,099 | |
Debt securities, available-for-sale, at fair value | 308,177 | | | 209,471 | |
Debt securities, held-to-maturity, at cost | 22,972 | | | 24,810 | |
Federal Reserve Bank stock, at cost | 4,652 | | | 4,652 | |
Federal Home Loan Bank stock, at cost | 5,203 | | | 5,203 | |
Loans, net | 1,363,939 | | | 1,293,693 | |
Premises and equipment, net | 35,385 | | | 35,376 | |
Operating lease right-of-use assets | 6,357 | | | 6,274 | |
Goodwill | 59,221 | | | 59,221 | |
Core deposit and other intangibles, net | 2,473 | | | 3,453 | |
Bank owned life insurance | 43,224 | | | 42,149 | |
Interest receivable | 7,999 | | | 8,337 | |
Other assets, net | 21,246 | | | 17,027 | |
TOTAL ASSETS | $ | 1,903,629 | | | 1,745,884 | |
| | | |
LIABILITIES: | | | |
Deposits: | | | |
Non-interest-bearing | $ | 501,531 | | | 455,073 | |
Interest-bearing | 1,127,288 | | | 1,000,350 | |
Total deposits | 1,628,819 | | | 1,455,423 | |
| | | |
Long-term debt | 10,000 | | | 22,000 | |
Operating lease liabilities | 6,473 | | | 6,371 | |
Accrued interest and other liabilities | 19,733 | | | 21,265 | |
TOTAL LIABILITIES | 1,665,025 | | | 1,505,059 | |
| | | |
COMMITMENTS AND CONTINGENT LIABILITIES | — | | | — | |
| | | |
SHAREHOLDERS' EQUITY: | | | |
Preferred shares - no par value, authorized 1,000,000 shares, none outstanding | — | | | — | |
Common shares - no par value; authorized 19,000,000 shares at December 31, 2021 and 2020; issued 14,213,792 and 14,163,904 shares at December 31, 2021 and 2020, respectively; outstanding 12,414,956 and 12,858,325 at December 31, 2021 and 2020, respectively | 143,130 | | | 142,443 | |
Retained earnings | 126,312 | | | 115,058 | |
Treasury shares at cost, 1,798,836 and 1,305,579 shares at December 31, 2021 and 2020, respectively | (29,029) | | | (20,719) | |
Accumulated other comprehensive income (loss), net of taxes | (1,809) | | | 4,043 | |
TOTAL SHAREHOLDERS' EQUITY | 238,604 | | | 240,825 | |
| | | |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 1,903,629 | | | 1,745,884 | |
The accompanying notes to consolidated financial statements are an integral part of these statements.
LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
(Dollars in thousands, except per share data)
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
INTEREST INCOME: | | | | | |
Interest and fees on loans | $ | 56,142 | | | 59,267 | | | 59,009 | |
Dividends on equity securities: | | | | | |
With a readily determinable fair value | 51 | | | 54 | | | 62 | |
Without a readily determinable fair value | 21 | | | 37 | | | 65 | |
Interest on debt securities: | | | | | |
Taxable | 3,668 | | | 2,916 | | | 3,601 | |
Non-taxable | 864 | | | 1,027 | | | 1,677 | |
Interest on interest-bearing time deposits | — | | | — | | | 11 | |
Other investments | 431 | | | 479 | | | 769 | |
TOTAL INTEREST INCOME | 61,177 | | | 63,780 | | | 65,194 | |
| | | | | |
INTEREST EXPENSE: | | | | | |
Interest on deposits | 3,578 | | | 6,634 | | | 9,526 | |
Interest on short-term borrowings | 6 | | | 7 | | | 227 | |
Interest on long-term debt | 469 | | | 921 | | | 1,035 | |
TOTAL INTEREST EXPENSE | 4,053 | | | 7,562 | | | 10,788 | |
NET INTEREST INCOME | 57,124 | | | 56,218 | | | 54,406 | |
PROVISION (CREDIT) FOR LOAN LOSSES | (269) | | | 2,014 | | | 207 | |
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES | 57,393 | | | 54,204 | | | 54,199 | |
| | | | | |
NON-INTEREST INCOME: | | | | | |
Fiduciary income | 6,674 | | | 5,009 | | | 4,354 | |
Service charges and fees on deposit accounts | 6,036 | | | 5,482 | | | 5,875 | |
Net gains (losses) on sales of debt securities | 303 | | | 221 | | | (41) | |
Bank owned life insurance income | 1,074 | | | 1,441 | | | 943 | |
Net gains from sales of loans | 852 | | | 2,297 | | | 328 | |
Other operating income | 1,293 | | | 1,291 | | | 889 | |
TOTAL NON-INTEREST INCOME | 16,232 | | | 15,741 | | | 12,348 | |
| | | | | |
NON-INTEREST EXPENSE: | | | | | |
Salaries and employee benefits | 27,616 | | | 27,178 | | | 25,320 | |
Equipment expenses | 1,678 | | | 1,377 | | | 1,209 | |
Occupancy expense, net | 2,949 | | | 2,875 | | | 2,961 | |
State financial institutions tax | 1,758 | | | 1,708 | | | 1,669 | |
Marketing | 1,239 | | | 1,254 | | | 1,319 | |
Amortization of intangibles | 1,043 | | | 1,046 | | | 1,043 | |
FDIC insurance premiums, net | 492 | | | 256 | | | 225 | |
ATM expense | 1,416 | | | 1,028 | | | 580 | |
Computer maintenance and supplies | 1,213 | | | 1,107 | | | 1,094 | |
Telephone expense | 420 | | | 706 | | | 707 | |
Contracted services | 2,430 | | | 1,821 | | | 1,865 | |
| | | | | |
Merger-related expenses | — | | | — | | | 114 | |
Other non-interest expense | 5,786 | | | 5,429 | | | 5,416 | |
TOTAL NON-INTEREST EXPENSE | 48,040 | | | 45,785 | | | 43,522 | |
| | | | | |
INCOME BEFORE INCOME TAXES | 25,585 | | | 24,160 | | | 23,025 | |
PROVISION FOR INCOME TAXES | 4,611 | | | 4,085 | | | 4,113 | |
NET INCOME | $ | 20,974 | | | 20,075 | | | 18,912 | |
| | | | | |
Earnings per common share: | | | | | |
Basic | $ | 1.66 | | | 1.55 | | | 1.44 | |
Diluted | 1.66 | | | 1.55 | | | 1.44 | |
Weighted average common shares outstanding: | | | | | |
Basic | 12,589,605 | | | 12,914,277 | | | 13,078,920 | |
Diluted | 12,589,613 | | | 12,914,584 | | | 13,082,893 | |
The accompanying notes to consolidated financial statements are an integral part of these statements.
LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31,
(Dollars in thousands)
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Net income | $ | 20,974 | | | 20,075 | | | 18,912 | |
| | | | | |
Other comprehensive income (loss): | | | | | |
| | | | | |
Net unrealized gain (loss) on available-for-sale securities (net of taxes of $(1,501), $975, and $1,450 for 2021, 2020, and 2019, respectively) | (5,645) | | | 3,666 | | | 5,456 | |
| | | | | |
Reclassification adjustment for net realized (gain) loss on sale of available-for-sale securities included in net income (net of taxes of $64, $46, and $(9) for 2021, 2020 and 2019, respectively) | (239) | | | (175) | | | 32 | |
| | | | | |
Change in nonqualified pension plan unrecognized net gain (loss) and unrecognized prior service cost (net of taxes of $9, $(33), and $(26) for 2021, 2020, and 2019, respectively) | 32 | | | (121) | | | (96) | |
| | | | | |
Other comprehensive income (loss) | (5,852) | | | 3,370 | | | 5,392 | |
| | | | | |
TOTAL COMPREHENSIVE INCOME | $ | 15,122 | | | 23,445 | | | 24,304 | |
| | | | | |
| | | | | |
SUPPLEMENTAL INFORMATION: | | | | | |
COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX, AS OF YEAR-END: | | | | | |
Net unrealized gain (loss) on securities available-for-sale | $ | (1,536) | | | 4,348 | | | 857 | |
Net unfunded liability for nonqualified pension plan | (273) | | | (305) | | | (184) | |
Balance at year-end | $ | (1,809) | | | 4,043 | | | 673 | |
The accompanying notes to consolidated financial statements are an integral part of these statements.
LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the years ended December 31,
(Dollars in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares Outstanding | | Common Shares | | Retained Earnings | | Treasury Shares | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders' Equity |
Balance, December 31, 2018 | 13,295,276 | | | $ | 141,170 | | | 94,547 | | | (12,013) | | | (4,719) | | | 218,985 | |
Net income | — | | | — | | | 18,912 | | | — | | | — | | | 18,912 | |
Other comprehensive income, net of taxes | — | | | — | | | — | | | — | | | 5,392 | | | 5,392 | |
Dividend Reinvestment and Stock Purchase Plan | 25,629 | | | 446 | | | — | | | — | | | — | | | 446 | |
| | | | | | | | | | | |
Exercise of stock options | 3,374 | | | 41 | | | — | | | — | | | — | | | 41 | |
Repurchase of common stock | (400,000) | | | — | | | — | | | (6,834) | | | — | | | (6,834) | |
Compensation expense relating to restricted stock | 12,504 | | | 134 | | | — | | | — | | | — | | | 134 | |
Common stock dividends, $0.69 per share | — | | | — | | | (9,028) | | | — | | | — | | | (9,028) | |
Balance, December 31, 2019 | 12,936,783 | | | 141,791 | | | 104,431 | | | (18,847) | | | 673 | | | 228,048 | |
| | | | | | | | | | | |
Net income | — | | | — | | | 20,075 | | | — | | | — | | | 20,075 | |
Other comprehensive income, net of taxes | — | | | — | | | — | | | — | | | 3,370 | | | 3,370 | |
Dividend Reinvestment and Stock Purchase Plan | 26,840 | | | 401 | | | — | | | — | | | — | | | 401 | |
| | | | | | | | | | | |
Exercise of stock options | 9,593 | | | 114 | | | — | | | — | | | — | | | 114 | |
Repurchase of common stock | (130,552) | | | — | | | — | | | (1,872) | | | — | | | (1,872) | |
Compensation expense relating to restricted stock | 15,661 | | | 137 | | | — | | | — | | | — | | | 137 | |
Common stock dividends, $0.73 per share | — | | | — | | | (9,448) | | | — | | | — | | | (9,448) | |
Balance, December 31, 2020 | 12,858,325 | | | 142,443 | | | 115,058 | | | (20,719) | | | 4,043 | | | 240,825 | |
| | | | | | | | | | | |
Net income | — | | | — | | | 20,974 | | | — | | | — | | | 20,974 | |
Other comprehensive loss, net of taxes | — | | | — | | | — | | | — | | | (5,852) | | | (5,852) | |
Dividend Reinvestment and Stock Purchase Plan | 24,012 | | | 434 | | | — | | | — | | | — | | | 434 | |
| | | | | | | | | | | |
Exercise of stock options | 311 | | | 4 | | | — | | | — | | | — | | | 4 | |
Repurchase of common stock | (493,257) | | | — | | | — | | | (8,310) | | | — | | | (8,310) | |
Compensation expense relating to restricted stock | 25,565 | | | 249 | | | — | | | — | | | — | | | 249 | |
Common stock dividends, $0.77 per share | — | | | — | | | (9,720) | | | — | | | — | | | (9,720) | |
Balance, December 31, 2021 | 12,414,956 | | | $ | 143,130 | | | 126,312 | | | (29,029) | | | (1,809) | | | 238,604 | |
The accompanying notes to consolidated financial statements are an integral part of these statements.
LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(Dollars in thousands)
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net income | $ | 20,974 | | | 20,075 | | | 18,912 | |
Adjustments to reconcile net income to net cash flows from operating activities- | | | | | |
Depreciation, amortization and accretion | 2,612 | | | 2,234 | | | 3,244 | |
Provision (credit) for loan losses | (269) | | | 2,014 | | | 207 | |
| | | | | |
Deferred income tax provision | 294 | | | 134 | | | 419 | |
| | | | | |
Increase in cash surrender value of bank owned life insurance | (1,074) | | | (1,124) | | | (943) | |
Bank owned life insurance death benefits in excess of cash surrender value | — | | | (317) | | | — | |
Realized and unrealized gains from equity securities, net | (141) | | | (675) | | | (264) | |
Realized (gain) loss from sales of debt securities available-for-sale | (303) | | | (221) | | | 41 | |
Realized gain from sales of premises and equipment, net | (6) | | | (53) | | | (1) | |
Realized (gain) loss from sale and impairment of other real estate owned and repossessed assets | — | | | (11) | | | 44 | |
Origination of mortgage loans for sale | (33,824) | | | (65,890) | | | (16,418) | |
Realized gains from sales of loans | (852) | | | (2,297) | | | (328) | |
Proceeds from sales of loans | 34,268 | | | 67,467 | | | 16,590 | |
| | | | | |
| | | | | |
Compensation expense related to restricted stock | 249 | | | 137 | | | 134 | |
Changes in: | | | | | |
Accrued income receivable | 338 | | | (4,573) | | | 230 | |
Other assets | (4,208) | | | (6,795) | | | (1,373) | |
Other liabilities | (237) | | | 3,573 | | | 1,474 | |
TOTAL ADJUSTMENTS | (3,153) | | | (6,397) | | | 3,056 | |
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES | 17,821 | | | 13,678 | | | 21,968 | |
| | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
Proceeds from sales of equity securities | — | | | 967 | | | 398 | |
Proceeds from sales of debt securities, available-for-sale | 21,235 | | | 8,786 | | | 84,521 | |
Proceeds from maturities and calls of debt securities: | | | | | |
Available-for-sale | 33,093 | | | 66,170 | | | 28,942 | |
Held-to-maturity | 4,285 | | | 5,297 | | | 10,766 | |
Purchases of equity securities | (16) | | | (369) | | | (367) | |
Purchases of debt securities: | | | | | |
Available-for-sale | (161,786) | | | (102,920) | | | (47,270) | |
Held-to-maturity | (2,447) | | | (2,582) | | | (8,570) | |
Proceeds from maturities of interest-bearing time deposits | — | | | — | | | 996 | |
Proceeds from redemption of Federal Reserve Bank stock | — | | | — | | | 1 | |
| | | | | |
Purchase of Federal Home Loan Bank stock | — | | | — | | | (358) | |
| | | | | |
Net increase in loans | (67,649) | | | (54,196) | | | (44,093) | |
Purchase of bank owned life insurance | — | | | — | | | (12,000) | |
Proceeds from bank owned life insurance mortality benefits | — | | | 958 | | | — | |
| | | | | |
Proceeds from sales of other real estate owned and repossessed assets | — | | | 208 | | | 19 | |
| | | | | |
Purchases of premises and equipment | (1,940) | | | (2,791) | | | (3,934) | |
Proceeds from sales of premises and equipment | 6 | | | 421 | | | 5 | |
| | | | | |
| | | | | |
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES | (175,219) | | | (80,051) | | | 9,056 | |
| | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
Net increase in deposits | 173,396 | | | 107,143 | | | 47,361 | |
Net decrease in short-term borrowings | — | | | — | | | (56,230) | |
| | | | | |
Principal payments on long-term debt | (12,000) | | | (19,000) | | | (6,055) | |
| | | | | |
Proceeds from issuance of common stock | 434 | | | 401 | | | 446 | |
Repurchase of common stock | (8,310) | | | (1,872) | | | (6,834) | |
| | | | | |
Proceeds from exercise of stock options | 4 | | | 114 | | | 41 | |
| | | | | |
Cash dividends paid on common stock | (9,720) | | | (9,448) | | | (9,028) | |
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES | 143,804 | | | 77,338 | | | (30,299) | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | (13,594) | | | 10,965 | | | 725 | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 31,730 | | | 20,765 | | | 20,040 | |
CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 18,136 | | | 31,730 | | | 20,765 | |
| | | | | |
LCNB CORP. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) |
For the years ended December 31, |
(Dollars in thousands) |
| | | | | |
| 2021 | | 2020 | | 2019 |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | |
CASH PAID DURING THE YEAR FOR: | | | | | |
Interest | $ | 4,228 | | | 7,809 | | | 10,480 | |
Income taxes | 3,665 | | | 3,811 | | | 3,471 | |
| | | | | |
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITY: | | | | | |
Transfer from loans to other real estate owned and repossessed assets | — | | | — | | | 17 | |
Right-of-use assets obtained in exchange for lease obligations | 801 | | | 1,388 | | | 5,775 | |
The accompanying notes to consolidated financial statements are an integral part of these statements.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LCNB Corp. (the "Company" or “LCNB”), an Ohio corporation formed in December 1998, is a financial holding company whose principal activity is the ownership of LCNB National Bank (the "Bank"). The Bank was founded in 1877 and provides full banking services, including Wealth Management and Investment services, to customers primarily in Southwestern Ohio and Franklin County Ohio and contiguous areas.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions are eliminated in consolidation. The accounting and reporting policies of the Company conform with U.S. generally accepted accounting principles and with general practices in the banking industry.
Certain prior period data presented in the consolidated financial statements have been reclassified to conform with the current year presentation. These reclassifications had no effect on net income or shareholders' equity.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates that management has determined to be critical accounting estimates are more fully described in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash, balances due from banks, federal funds sold, and interest-bearing demand deposits with original maturities of twelve months or less. Deposits with other banks routinely have balances greater than FDIC insured limits. Management considers the risk of loss to be very low with respect to such deposits.
INVESTMENT SECURITIES
Certain municipal debt securities that management has the positive intent and ability to hold to maturity are classified as “held-to-maturity” and recorded at amortized cost. Debt securities not classified as held-to-maturity are classified as “available-for-sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, a separate component of shareholders’ equity. Amortization of premiums and accretion of discounts are recognized as adjustments to interest income using the level-yield method. Realized gains or losses from the sale of securities are recorded on the trade date and are computed using the specific identification method.
Declines in the fair value of debt securities below their cost that are deemed to be other-than-temporarily impaired, and for which the Company does not intend to sell the securities and it is not more likely than not that the securities will be sold before the anticipated recovery of the impairment, are separated into losses related to credit factors and losses related to other factors. The losses related to credit factors are recognized in earnings and losses related to other factors are recognized in other comprehensive income. In estimating other than temporary impairment losses, management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Management determined that no such impairment adjustment was required to be made in the Company's Consolidated Statements of Income as of December 31, 2021, 2020, and 2019.
Equity securities with a readily determinable fair value are measured at fair value with changes in fair value recognized in net income.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Federal Home Loan Bank ("FHLB") stock is an equity interest in the Federal Home Loan Bank of Cincinnati. It can be sold only at its par value of $100 per share and only to the FHLB or to another member institution. In addition, the equity ownership rights are more limited than would be the case for a public company because of the oversight role exercised by the Federal Housing Finance Agency in the process of budgeting and approving dividends. Federal Reserve Bank stock is similarly restricted in marketability and value. Both investments are carried at cost, which is their par value.
FHLB and Federal Reserve Bank stock are both subject to minimum ownership requirements by member banks. The required investments in common stock are based on predetermined formulas.
LOANS
The Company’s loan portfolio includes most types of commercial and industrial loans, commercial loans secured by real estate, residential real estate loans, consumer loans, agricultural loans and other types of loans. Most of the properties collateralizing the loan portfolio are located within the Company’s market area.
Loans are stated at the principal amount outstanding, net of unearned income, deferred origination fees and costs, and the allowance for loan losses. Interest income is accrued on the unpaid principal balance. The delinquency status of a loan is based on contractual terms and not on how recently payments have been received. Generally, a loan is placed on non-accrual status when it is classified as impaired or there is an indication that the borrower’s cash flow may not be sufficient to make payments as they come due, unless the loan is well secured and in the process of collection. Subsequent cash receipts on non-accrual loans are recorded as a reduction of principal and interest income is recorded once principal recovery is reasonably assured. The current year's accrued interest on loans placed on non-accrual status is charged against earnings. Previous years' accrued interest is charged against the allowance for loan losses. Non-accrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer a reasonable doubt as to the timely collection of interest or principal.
Loan origination fees and certain direct loan origination costs are deferred and the net amount amortized as an adjustment of loan yields. These amounts are being amortized over the lives of the related loans.
In the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for loan losses.
Loans acquired from mergers are recorded at fair value with no carryover of the acquired entity's previously established allowance for loan losses. The excess of expected cash flows over the estimated fair value of acquired loans is recognized as interest income over the remaining contractual lives of the loans using the level yield method. Subsequent decreases in expected cash flows will require additions to the allowance for loan losses. Subsequent improvements in expected cash flows result in the recognition of additional interest income over the then-remaining contractual lives of the loans. Management estimates the cash flows expected to be collected at acquisition using a third-party risk model, which incorporates the estimate of key assumptions, such as default rates, severity, and prepayment speeds.
Impaired loans acquired are accounted for under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") No. 310-30. Factors considered in evaluating whether an acquired loan was impaired include delinquency status and history, updated borrower credit status, collateral information, and current loan-to-value information. The difference between contractually required payments at the time of acquisition and the cash flows expected to be collected is referred to as the nonaccretable difference. The interest component of the cash flows expected to be collected is referred to as the accretable yield and is recognized as interest income over the remaining contractual life of the loan using the level yield method. Subsequent decreases in expected cash flows will require additions to the allowance for loan losses. Subsequent improvements in expected cash flows will result in a reclassification from the nonaccretable difference to the accretable yield.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 collectability of the principal is unlikely. Consumer loans are charged off when they reach 120 days past due. Subsequent recoveries, if any, are credited to the allowance.
The provision for loan losses is determined by management based upon its evaluation of the amount needed to maintain the allowance for loan losses at a level considered appropriate in relation to the estimated risk of losses inherent in the portfolio. Current methodology used by management to estimate the allowance takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, historic categorical trends, current delinquency levels as related to historical levels, portfolio growth rates, changes in composition of the portfolio, the current economic environment, as well as current allowance adequacy in relation to the portfolio. Management is cognizant that reliance on historical information coupled with the cyclical nature of the economy, including credit cycles, affects the allowance. Management considers all of these factors prior to making any adjustments to the allowance due to the subjectivity and imprecision involved in allocation methodology. 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 relates to loans that are specifically reviewed for impairment. For such loans, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers loans not specifically reviewed for impairment and homogeneous loan pools, such as residential real estate and consumer loans. The general component is measured for each loan category separately based on each category’s average of historical loss experience over a trailing sixty month period, adjusted for qualitative factors. Such qualitative factors may include current economic conditions if different from the five-year historical loss period, trends in underperforming loans, trends in volume and terms of loan categories, concentrations of credit, and trends in loan quality.
A loan is considered impaired when management believes, based on current information and events, it is probable that the Bank will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement. An impaired loan is measured by the present value of expected future cash flows using the loan's effective interest rate. An impaired collateral-dependent loan may be measured based on collateral value. Smaller-balance homogeneous loans, including residential mortgage and consumer installment loans, which are not evaluated individually are collectively evaluated for impairment.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation. Land is stated at cost. Depreciation is computed on both the straight-line and accelerated methods over the estimated useful lives of the assets, generally 15 to 40 years for premises and 3 to 10 years for equipment. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Costs incurred for maintenance and repairs are expensed as incurred. Premises and equipment are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of a particular asset may not be recoverable.
LEASES
FASB Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)," requires a lessee to recognize in the statement of financial position a liability to make lease payments ("the lease liability") and a right-of-use asset representing its right to use the underlying asset for the lease term, initially measured at the present value of the lease payments. When measuring assets and liabilities arising from a lease, the lessee should include payments to be made in optional periods only if the lessee is reasonably certain, as defined, to exercise an option to the lease or not to exercise an option to terminate the lease. Optional payments to purchase the underlying asset should be included if the lessee is reasonably certain it will exercise the purchase option. Most variable lease payments should be excluded except for those that depend on an index or a rate or are in substance fixed payments.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
A lessee shall classify a lease as a finance lease if it meets any of five designated criteria. If the lease does not meet any of the five criteria, the lessee shall classify it as an operating lease. All leases entered into by LCNB through December 31, 2021 and 2020 are classified as operating leases. Lessees shall recognize a single lease cost on a straight-line basis over the lease term for operating leases. LCNB has adopted an accounting policy election to not recognize lease assets and lease liabilities for leases with a term of 12 months or less. Lease expense for such leases will generally be recognized on a straight-line basis over the lease term.
OTHER REAL ESTATE OWNED
Other real estate owned includes properties acquired through foreclosure. Such property is held for sale and is initially recorded at fair value, less costs to sell, establishing a new cost basis. Fair value is primarily based on a property appraisal obtained at the time of transfer and any periodic updates that may be obtained thereafter. The allowance for loan losses is charged for any write down of the loan’s carrying value to fair value at the date of transfer. Any subsequent reductions in fair value and expenses incurred from holding other real estate owned are charged to other non-interest expense. Costs, excluding interest, relating to the improvement of other real estate owned are capitalized. Gains and losses from the sale of other real estate owned are included in other non-interest expense.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. Goodwill is not amortized, but is instead subject to an annual review for impairment. A review for impairment may be conducted more frequently than annually if circumstances indicate a possible impairment. Impairment indicators that may be considered include the condition of the economy and banking industry; estimated future cash flows; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of LCNB’s stock, and other relevant events. These and other factors could lead to a conclusion that goodwill is impaired, which would require LCNB to write off the difference between the estimated fair value of the company and the carrying value.
Mortgage servicing rights on originated mortgage loans that have been sold are initially recorded at their estimated fair values. Mortgage servicing rights are amortized to loan servicing income in proportion to and over the period of estimated servicing income. Such assets are periodically evaluated as to the recoverability of their carrying value.
The Company’s other intangible assets relate to core deposits acquired from business combinations. These intangible assets are amortized on a straight-line basis over their estimated useful lives. Management evaluates whether events or circumstances have occurred that indicate the remaining useful life or carrying value of the amortizing intangible should be revised.
BANK OWNED LIFE INSURANCE
The Company has purchased life insurance policies on certain officers of the Company. The Company is the beneficiary of these policies and has recorded the estimated cash surrender value in the Consolidated Balance Sheets. Income on the policies, based on the increase in cash surrender value and any incremental death benefits, is included in non-interest income in the Consolidated Statements of Income.
AFFORDABLE HOUSING TAX CREDIT LIMITED PARTNERSHIP
LCNB has elected to account for its investment in an affordable housing tax credit limited partnership using the proportional amortization method described in "ASU 2014-01, "Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (A Consensus of the FASB Emerging Issues Task Force)." Under the proportional amortization method, an investor amortizes the initial cost of the investment to income tax expense in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. The investment in the limited partnership is included in other assets and the unfunded amount is included in accrued interest and other liabilities in LCNB's Consolidated Balance Sheets.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
FAIR VALUE MEASUREMENTS
Accounting guidance establishes a fair value hierarchy to prioritize the inputs to valuation techniques used to measure fair value. A financial instrument’s level within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. The three broad input levels are:
•Level 1 – quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the reporting date;
•Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly; and
•Level 3 - inputs that are unobservable for the asset or liability.
Accounting guidance permits, but does not require, companies to measure many financial instruments and certain other items, including loans and debt securities, at fair value. The decision to elect the fair value option is made individually for each instrument and is irrevocable once made. Changes in fair value for the selected instruments are recorded in earnings. The Company did not select any financial instruments for the fair value election in 2021 or 2020.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred and are recorded as a marketing expense, a component of non-interest expense.
PENSION PLANS
Eligible employees of the Company hired before 2009 participate in a multiple-employer qualified noncontributory defined benefit retirement plan. This plan is accounted for as a multi-employer plan because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer.
Citizens National had a qualified noncontributory, defined benefit pension plan, which has been assumed by the Company, that covers eligible employees hired before May 1, 2005. This is a single employer plan.
TREASURY STOCK
Common shares repurchased are recorded at cost. Cost of shares retired or reissued is determined using the weighted average method.
STOCK OPTIONS AND RESTRICTED STOCK AWARD PLANS
The cost of employee services received in exchange for stock option grants is the grant-date fair value of the award estimated using an option-pricing model. The compensation cost for restricted stock awards is based on the market price of the Company's common stock at the date of grant multiplied by the number of shares granted that are expected to vest. The estimated cost is recognized on a straight-line basis over the period the employee is required to provide services in exchange for the award, usually the vesting period. The Company uses a Black-Scholes pricing model and related assumptions for estimating the fair value of stock option grants and a five-year vesting period for stock options and restricted stock.
REVENUE RECOGNITION
FASB ASC No. 606, "Revenue from Contracts with Customers" ("ASC No. 606") provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance enumerates five steps that entities should follow in achieving this core principle. Revenue generated from financial instruments, including loans and investment securities, are not included in the scope of ASC No. 606. The adoption of ASC No. 606 did not result in a change to the accounting for any of LCNB's revenue streams that are within the scope of the amendments. Revenue-generating activities that are within the scope of ASC 606 and that are presented as non-interest income in LCNB's Consolidated Statements of Income include:
•Fiduciary income - this includes periodic fees due from Wealth Management and Investment Services customers for managing the customers' financial assets. Fees are generally charged on a quarterly or annual basis and are recognized ratably throughout the period, as the services are provided on an ongoing basis.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
•Service charges and fees on deposit accounts - these include general service fees charged for deposit account maintenance and activity and transaction-based fees charged for certain services, such as debit card, wire transfer, or overdraft activities. Revenue is recognized when the performance obligation is completed, which is generally after a transaction is completed or monthly for account maintenance services.
INCOME TAXES
Deferred income taxes are determined using the asset and liability method of accounting. Under this method, the net deferred tax asset or liability is determined based on the tax effects of temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
Management analyzes material tax positions taken in any income tax return for any tax jurisdiction and determines the likelihood of the positions being sustained in a tax examination. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
EARNINGS PER SHARE
Basic earnings per share allocated to common shareholders is calculated using the two-class method and is computed by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is adjusted for the dilutive effects of stock based compensation and is calculated using the two-class method or the treasury stock method. The diluted average number of common shares outstanding has been increased for the assumed exercise of stock based compensation with the proceeds used to purchase treasury shares at the average market price for the period.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment"
ASU No. 2017-04 was issued in January 2017 and was adopted by LCNB as of January 1, 2020. It applies to public and other entities that have goodwill reported in their financial statements. To simplify the subsequent measurement of goodwill, this ASU eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Adoption of ASU No. 2017-04 did not have a material impact on LCNB's results of consolidated operations or financial position.
ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement"
ASU No. 2018-13 was issued in August 2018 and was adopted by LCNB as of January 1, 2020. It applies to all entities that are required to make disclosures about recurring or nonrecurring fair value measurements. The amendments in this update modify fair value disclosure requirements, including the deletion, modification, and addition of certain targeted disclosures. Adoption of ASU No. 2018-13 did not have a material impact on LCNB's results of consolidated operations or financial position.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract"
ASU No. 2018-15 was issued in August 2018 and was adopted by LCNB on January 1, 2020. It applies to entities that are a customer in a hosting arrangement, as defined, that is accounted for as a service contract. The amendments in this update require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Capitalized implementation costs are to be expensed over the term of the hosting arrangement. Adoption of ASU No. 2018-15 did not have a material impact on LCNB's results of consolidated operations or financial position.
ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting"
ASU No. 2020-04 was issued in March 2020 and provides optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying generally accepted accounting principles ("GAAP") to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. LCNB does not expect the guidance in ASU No. 2020-04 will have a material impact on its results of consolidated operations or financial position.
ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans"
ASU No. 2018-14 was issued in August 2018 and was adopted by LCNB on January 1, 2021. The amendments in this update modify disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans, including the deletion, modification, and addition of certain targeted disclosures. The amendments are to be applied on a retrospective basis to all periods presented upon adoption. Adoption of ASU No. 2018-14 did not have a material impact on LCNB's results of consolidated operations or financial position.
ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes"
ASU No. 2019-12 was issued in December 2019 and adopted by LCNB on January 1, 2021. It simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifies and amends certain other guidance. Adoption of ASU No. 2019-12 did not have a material impact on LCNB's results of consolidated operations or financial position.
RECENT ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE
From time to time the FASB issues an ASU to communicate changes to U.S. GAAP. The following information provides brief summaries of newly issued but not yet effective ASUs that could have an effect on LCNB’s financial position or results of consolidated operations:
ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments"
ASU No. 2016-13 was issued in June 2016 and, once effective, will significantly change current guidance for recognizing impairment of financial instruments. Current guidance requires an "incurred loss" methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. ASU No. 2016-13 replaces the incurred loss impairment methodology with a new current expected credit loss ("CECL") methodology that reflects expected credit losses over the lives of the loans and requires consideration of a broader range of information to inform credit loss estimates. The ASU requires an organization to estimate all expected credit losses for financial assets measured at amortized cost, including loans and held-to-maturity debt securities, based on historical experience, current conditions, and reasonable and supportable forecasts. Additional disclosures are required.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ASU No. 2016-13 also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. Under the new guidance, entities will determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. Any credit loss will be recognized as an allowance for credit losses on available-for-sale debt securities rather than as a direct reduction of the amortized cost basis of the investment, as is currently required. As a result, entities will recognize improvements to estimated credit losses on available-for-sale debt securities immediately in earnings rather than as interest income over time, as currently required.
ASU No. 2016-13 eliminates the current accounting model for purchased credit impaired loans and debt securities. Instead, purchased financial assets with credit deterioration will be recorded gross of estimated credit losses as of the date of acquisition and the estimated credit losses amounts will be added to the allowance for credit losses. Thereafter, entities will account for additional impairment of such purchased assets using the models listed above.
Originally, ASU No. 2016-13 would have taken effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. At their meeting on October 16, 2019, FASB approved a final ASU delaying the effective date for several major standards, including ASU No. 2016-13, if certain qualifications are met. The new effective date for SEC filers eligible to be smaller reporting companies ("SRC"), as defined, will be fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. As an SRC, LCNB intends to adopt ASU No. 2016-13 for the fiscal year, and interim periods within the fiscal year, beginning after December 15, 2022.
LCNB has created a cross-functional CECL Committee, which reports to the Audit Committee, composed of members from the lending, Wealth Management, and finance departments. During 2017, the CECL Committee selected a vendor to assist in implementation of and ongoing compliance with the new requirements. It has completed analyzing its data collection efforts, selected a calculation model, analyzed its pool segmentation and reporting mechanisms, and has finished back testing in preparation for adoption of the new methodology. While the committee and management expect that implementation of ASU No. 2016-13 will increase the balance of the allowance for loan losses, they continue to analyze modeling after studying the impacts that the most recent economic conditions presented due to the pandemic. As they adjust and finalize appropriate modeling, they are continuing to evaluate the modeling and its potential impact on LCNB's results of consolidated operations and financial position. The consolidated financial statement impact of this new standard cannot be reasonably estimated at this time; however, it is anticipated during 2022 that modeling adjustments should be complete after finalizing review of prepayment, curtailment, and forecasting assessments.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of equity and debt securities at December 31 are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
2021 | | | | | | | |
Debt Securities Available-for-Sale: | | | | | | | |
U.S. Treasury notes | $ | 75,443 | | | 57 | | | 756 | | | 74,744 | |
U.S. Agency notes | 89,293 | | | 45 | | | 2,092 | | | 87,246 | |
Corporate Bonds | 5,200 | | | 70 | | | 118 | | | 5,152 | |
U.S. Agency mortgage-backed securities | 96,018 | | | 1,350 | | | 692 | | | 96,676 | |
| | | | | | | |
Municipal securities: | | | | | | | |
Non-taxable | 8,959 | | | 125 | | | 18 | | | 9,066 | |
Taxable | 35,208 | | | 531 | | | 446 | | | 35,293 | |
| $ | 310,121 | | | 2,178 | | | 4,122 | | | 308,177 | |
| | | | | | | |
Debt Securities Held-to-Maturity: | | | | | | | |
Municipal securities: | | | | | | | |
Non-taxable | $ | 19,403 | | | 98 | | | — | | | 19,501 | |
Taxable | 3,569 | | | 21 | | | 4 | | | 3,586 | |
| $ | 22,972 | | | 119 | | | 4 | | | 23,087 | |
| | | | | | | |
2020 | | | | | | | |
Debt Securities Available-for-Sale: | | | | | | | |
U.S. Treasury notes | $ | 2,268 | | | 120 | | | — | | | 2,388 | |
U.S. Agency notes | 66,983 | | | 950 | | | 33 | | | 67,900 | |
Corporate Bonds | 1,200 | | | — | | | 21 | | | 1,179 | |
U.S. Agency mortgage-backed securities | 88,455 | | | 3,180 | | | 1 | | | 91,634 | |
| | | | | | | |
Municipal securities: | | | | | | | |
Non-taxable | 12,651 | | | 282 | | | — | | | 12,933 | |
Taxable | 32,409 | | | 1,031 | | | 3 | | | 33,437 | |
| $ | 203,966 | | | 5,563 | | | 58 | | | 209,471 | |
| | | | | | | |
Debt Securities Held-to-Maturity: | | | | | | | |
Municipal securities: | | | | | | | |
Non-taxable | $ | 21,408 | | | 181 | | | — | | | 21,589 | |
Taxable | 3,402 | | | 6 | | | 37 | | | 3,371 | |
| $ | 24,810 | | | 187 | | | 37 | | | 24,960 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 2 - INVESTMENT SECURITIES (Continued)
Information concerning debt securities with gross unrealized losses at December 31, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Less Than Twelve Months | | Twelve Months or More |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
2021 | | | | | | | |
Available-for-Sale: | | | | | | | |
U.S. Treasury notes | $ | 66,891 | | | 756 | | | | | — | |
U.S. Agency notes | 58,648 | | | 1,257 | | | 20,289 | | | 835 | |
Corporate Bonds | 3,898 | | | 102 | | | 484 | | | 16 | |
U.S. Agency mortgage-backed securities | 49,813 | | | 692 | | | — | | | — | |
Municipal securities: | | | | | | | |
Non-taxable | 1,020 | | | 18 | | | — | | | — | |
Taxable | 18,434 | | | 322 | | | 3,535 | | | 124 | |
| $ | 198,704 | | | 3,147 | | | 24,308 | | | 975 | |
| | | | | | | |
Held-to-Maturity: | | | | | | | |
Municipal securities: | | | | | | | |
Non-taxable | $ | 46 | | | — | | | — | | | — | |
Taxable | 271 | | | 4 | | | — | | | — | |
| $ | 317 | | | 4 | | | — | | | — | |
| | | | | | | |
2020 | | | | | | | |
Available-for-Sale: | | | | | | | |
| | | | | | | |
U.S. Agency notes | $ | 10,674 | | | 33 | | | — | | | — | |
Corporate Bonds | 679 | | | 21 | | | — | | | — | |
U.S. Agency mortgage-backed securities | 290 | | | 1 | | | — | | | — | |
Municipal securities: | | | | | | | |
Non-taxable | 38 | | | — | | | — | | | — | |
Taxable | 3,063 | | | 3 | | | — | | | — | |
| $ | 14,744 | | | 58 | | | — | | | — | |
| | | | | | | |
Held-to-Maturity: | | | | | | | |
Municipal securities: | | | | | | | |
Non-taxable | $ | 1 | | | — | | | — | | | — | |
Taxable | 3,113 | | | 37 | | | — | | | — | |
| $ | 3,114 | | | 37 | | | — | | | — | |
Management has determined that the unrealized losses at December 31, 2021 are primarily due to fluctuations in market interest rates and do not reflect credit quality deterioration of the securities. Because the Company does not have the intent to sell the investments and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost, the Company does not consider these investments to be other-than-temporarily impaired.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 2 - INVESTMENT SECURITIES (Continued)
Contractual maturities of debt securities at December 31, 2021 were as follows (in thousands). Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations.
| | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-Sale | | Held-to-Maturity |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Due within one year | $ | 5,971 | | | 5,993 | | | 1,867 | | | 1,876 | |
Due from one to five years | 80,780 | | | 80,181 | | | 4,960 | | | 4,969 | |
Due from five to ten years | 126,622 | | | 124,594 | | | 2,894 | | | 2,904 | |
Due after ten years | 730 | | | 733 | | | 13,251 | | | 13,338 | |
| 214,103 | | | 211,501 | | | 22,972 | | | 23,087 | |
U.S. Agency mortgage-backed securities | 96,018 | | | 96,676 | | | — | | | — | |
| $ | 310,121 | | | 308,177 | | | 22,972 | | | 23,087 | |
Debt securities with a market value of $128,426,000 and $118,599,000 at December 31, 2021 and 2020, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.
Certain information concerning the sale of debt securities available-for-sale for the years ended December 31 was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Proceeds from sales | $ | 21,235 | | | 8,786 | | | 84,521 | |
Gross realized gains | 365 | | | 221 | | | 228 | |
Gross realized losses | 62 | | | — | | | 269 | |
Realized gains or losses from the sale of securities are computed using the specific identification method.
Equity securities with a readily determinable fair value are carried at fair value, with changes in fair value recognized in other operating income in the Consolidated Statements of Income. Equity securities without a readily determinable fair value are measured at cost minus impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions, as defined, for identical or similar investments of the same issuer. LCNB was not aware of any impairment or observable price change adjustments that needed to be made at December 31, 2021 on its investments in equity securities without a readily determinable fair value.
The amortized cost and estimated fair value of equity securities with a readily determinable fair value at December 31 are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Mutual funds | $ | 1,410 | | | 1,379 | | | 1,395 | | | 1,402 | |
Equity securities | 778 | | | 1,167 | | | 778 | | | 987 | |
Total equity securities with a readily determinable fair value | $ | 2,188 | | | 2,546 | | | 2,173 | | | 2,389 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 2 - INVESTMENT SECURITIES (Continued)
Certain information concerning changes in fair value of equity securities with a readily determinable fair value for the years ended December 31 was as follows (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
Net gains recognized | $ | 141 | | | 675 | |
Less net realized gains on equity securities sold | — | | | 658 | |
Unrealized gains recognized and still held at period end | $ | 141 | | | 17 | |
NOTE 3 - LOANS
Major classifications of loans at December 31 were as follows (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
Commercial and industrial | $ | 101,598 | | | 99,596 | |
Commercial, secured by real estate | 887,679 | | | 842,209 | |
Residential real estate | 335,106 | | | 310,085 | |
Consumer | 34,291 | | | 37,052 | |
Agricultural | 10,649 | | | 10,116 | |
Other loans, including deposit overdrafts | 122 | | | 363 | |
| 1,369,445 | | | 1,299,421 | |
Less allowance for loan losses | 5,506 | | | 5,728 | |
Loans-net | $ | 1,363,939 | | | 1,293,693 | |
Loans in the above table are shown net of deferred origination fees and costs. Deferred origination fees, net of related costs, were $961,000 and $1,135,000 at December 31, 2021 and 2020, respectively.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 3 - LOANS (Continued)
Non-accrual, past-due, and accruing restructured loans at December 31 were as follows (dollars in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
Non-accrual loans: | | | |
| | | |
Commercial, secured by real estate | $ | 1,182 | | | 2,458 | |
Residential real estate | 299 | | | 1,260 | |
| | | |
Total non-accrual loans | 1,481 | | | 3,718 | |
Past-due 90 days or more and still accruing | 56 | | | — | |
Total non-accrual and past-due 90 days or more and still accruing | 1,537 | | | 3,718 | |
Accruing restructured loans | 2,622 | | | 5,176 | |
Total | $ | 4,159 | | | 8,894 | |
| | | |
Ratio of total non-accrual loans to total loans | 0.11 | % | | 0.29 | % |
| | | |
Ratio of total non-accrual loans, past-due 90 days or more and still accruing, and accruing restructured loans to total loans | 0.30 | % | | 0.68 | % |
Interest income that would have been recorded during 2021 and 2020 if loans on non-accrual status at December 31, 2021 and 2020 had been current and in accordance with their original terms was approximately $31,000 and $134,000, respectively.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 3 - LOANS (Continued)
The allowance for loan losses and recorded investment in loans for the years ended December 31 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial & Industrial | | Commercial, Secured by Real Estate | | Residential Real Estate | | Consumer | | Agricultural | | Other | | Total |
2021 | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | |
Balance, beginning of year | $ | 816 | | | 3,903 | | | 837 | | | 153 | | | 28 | | | (9) | | | 5,728 | |
Provision (credit) charged to expenses | 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 | |
Acquired credit impaired loans | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Balance, end of year | $ | 1,095 | | | 3,607 | | | 665 | | | 105 | | | 30 | | | 4 | | | 5,506 | |
| | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 155 | | | 2,945 | | | 559 | | | — | | | — | | | — | | | 3,659 | |
Collectively evaluated for impairment | 101,355 | | | 883,122 | | | 333,384 | | | 34,291 | | | 10,649 | | | 122 | | | 1,362,923 | |
Acquired credit impaired loans | 88 | | | 1,612 | | | 1,163 | | | — | | | — | | | — | | | 2,863 | |
Balance, end of year | $ | 101,598 | | | 887,679 | | | 335,106 | | | 34,291 | | | 10,649 | | | 122 | | | 1,369,445 | |
| | | | | | | | | | | | | |
Ratio of net charge-offs to average loans | — | % | | (0.01) | % | | (0.01) | % | | 0.01 | % | | — | % | | 16.24 | % | | — | % |
| | | | | | | | | | | | | |
2020 | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | |
Balance, beginning of year | $ | 456 | | | 2,924 | | | 528 | | | 99 | | | 34 | | | 4 | | | 4,045 | |
Provision (credit) charged to expenses | 342 | | | 1,332 | | | 239 | | | 62 | | | (6) | | | 45 | | | 2,014 | |
Losses charged off | (13) | | | (353) | | | (5) | | | (30) | | | — | | | (140) | | | (541) | |
Recoveries | 31 | | | — | | | 75 | | | 22 | | | — | | | 82 | | | 210 | |
Balance, end of year | $ | 816 | | | 3,903 | | | 837 | | | 153 | | | 28 | | | (9) | | | 5,728 | |
| | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 8 | | | 17 | | | 27 | | | — | | | — | | | — | | | 52 | |
Collectively evaluated for impairment | 808 | | | 3,886 | | | 810 | | | 153 | | | 28 | | | (9) | | | 5,676 | |
Acquired credit impaired loans | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Balance, end of year | $ | 816 | | | 3,903 | | | 837 | | | 153 | | | 28 | | | (9) | | | 5,728 | |
| | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 194 | | | 6,613 | | | 1,641 | | | 5 | | | — | | | — | | | 8,453 | |
Collectively evaluated for impairment | 99,040 | | | 833,548 | | | 306,138 | | | 37,047 | | | 10,116 | | | 179 | | | 1,286,068 | |
Acquired credit impaired loans | 362 | | | 2,048 | | | 2,306 | | | — | | | — | | | 184 | | | 4,900 | |
Balance, end of year | $ | 99,596 | | | 842,209 | | | 310,085 | | | 37,052 | | | 10,116 | | | 363 | | | 1,299,421 | |
| | | | | | | | | | | | | |
Ratio of net charge-offs to average loans | (0.02) | % | | 0.04 | % | | (0.02) | % | | 0.02 | % | | — | % | | 10.83 | % | | 0.03 | % |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 3 - LOANS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial & Industrial | | Commercial, Secured by Real Estate | | Residential Real Estate | | Consumer | | Agricultural | | Other | | Total |
2019 | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | |
Balance, beginning of year | $ | 400 | | | 2,745 | | | 767 | | | 87 | | | 46 | | | 1 | | | 4,046 | |
Provision (credit) charged to expenses | 103 | | | 266 | | | (264) | | | 4 | | | (12) | | | 110 | | | 207 | |
Losses charged off | (47) | | | (143) | | | (272) | | | (24) | | | — | | | (181) | | | (667) | |
Recoveries | — | | | 56 | | | 297 | | | 32 | | | — | | | 74 | | | 459 | |
Balance, end of year | $ | 456 | | | 2,924 | | | 528 | | | 99 | | | 34 | | | 4 | | | 4,045 | |
| | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 6 | | | 272 | | | 17 | | | — | | | — | | | — | | | 295 | |
Collectively evaluated for impairment | 450 | | | 2,652 | | | 511 | | | 99 | | | 34 | | | 4 | | | 3,750 | |
Acquired credit impaired loans | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Balance, end of year | $ | 456 | | | 2,924 | | | 528 | | | 99 | | | 34 | | | 4 | | | 4,045 | |
| | | | | | | | | | | | | |
Ratio of net charge-offs to average loans | 0.06 | % | | 0.01 | % | | (0.01) | % | | (0.04) | % | | — | % | | 18.57 | % | | 0.02 | % |
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 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 to ten years. Commercial & industrial loans are offered to businesses and professionals for short and medium terms on both a collateralized and uncollateralized basis. Commercial & industrial loans typically are underwritten on the basis of the borrower’s ability to make repayment from the cash flow of the business. Collateral, when obtained, may include liens on furniture, fixtures, equipment, inventory, receivables, or other assets. As a result, such loans involve complexities, variables, and risks that require thorough underwriting and more robust servicing than other types of loans.
This category includes PPP loans that were authorized under the CARES Act and updated by the Economic Aid Act. The PPP was implemented by the SBA with support from the Department of the Treasury and provided small businesses that were negatively impacted by the COVID-19 pandemic with government guaranteed and potentially forgivable loans that could be used to pay up to eight or twenty-four weeks, depending on the date of the loan, of payroll costs including benefits. Funds could also be used to pay interest on mortgages, rent, utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures. Eligible borrowers could apply for a First Draw or a Second Draw PPP Loan prior to the program ending on May 31, 2021. PPP loans made by LCNB have a maturity of two years if issued prior to June 5, 2020 and five years if issued on or after June 5, 2020. The loans have an interest rate of 1%. In addition, the SBA paid originating lenders processing fees based on the size of the loan. A borrower who meets certain requirements can request loan forgiveness from the SBA. If loan forgiveness is granted, the SBA will forward the forgiveness amount to the lender. LCNB originated 316 PPP loans with original balances totaling $45.5 million during 2020 and originated an additional 358 loans with original balances totaling $38.3 million during the first half of 2021. The outstanding balance at December 31, 2021 was $6.9 million.
Commercial, Secured by Real Estate Loans. Commercial real estate loans include loans secured by a variety of commercial, retail and office buildings, religious facilities, hotels, multifamily (more than four-family) residential properties, construction and land development loans, and other land loans. Mortgage loans secured by owner-occupied agricultural property are included in this category. Commercial real estate loan products generally amortize over five to twenty-five years and are payable in monthly principal and interest installments. Some have balloon payments due within one to ten years after the origination date. The majority have adjustable interest rates with adjustment periods ranging from one to ten years, some of which are subject to established “floor” interest rates.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 3 - LOANS (Continued)
Commercial real estate loans are underwritten based on the ability of the property, in the case of income producing property, or the borrower’s business to generate sufficient cash flow to amortize the debt. Secondary emphasis is placed upon global debt service, collateral value, financial strength and liquidity of any and all guarantors, and other factors. Commercial real estate loans are generally originated with a 75% to 85% maximum loan to appraised value ratio, depending upon borrower occupancy.
Residential Real Estate Loans. Residential real estate loans include loans secured by first or second mortgage liens on one to four-family residential properties. Home equity lines of credit are included in this category. First and second mortgage loans are generally amortized over five to thirty years with monthly principal and interest payments. Home equity lines of credit generally have a five year or less draw period with interest only payments followed by a repayment period with monthly payments based on the amount outstanding. LCNB offers both fixed and adjustable rate mortgage loans. Adjustable rate loans are available with adjustment periods ranging between one to ten years and adjust according to an established index plus a margin, subject to certain floor and ceiling rates. Home equity lines of credit have a variable rate based on the Wall Street Journal prime rate plus a margin.
Residential real estate loans are underwritten primarily based on the borrower’s ability to repay, prior credit history, and the value of the collateral. LCNB requires private mortgage insurance for first mortgage loans that have a loan to appraised value ratio of greater than 80%.
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.
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.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 3 - LOANS (Continued)
An analysis of the Company’s loan portfolio by credit quality indicators at December 31 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | OAEM | | Substandard | | Doubtful | | Total |
2021 | | | | | | | | | |
Commercial & industrial | $ | 98,694 | | | 2,757 | | | 147 | | | — | | | 101,598 | |
Commercial, secured by real estate | 851,709 | | | 22,336 | | | 13,634 | | | — | | | 887,679 | |
Residential real estate | 332,962 | | | — | | | 2,144 | | | — | | | 335,106 | |
Consumer | 34,281 | | | — | | | 10 | | | — | | | 34,291 | |
Agricultural | 10,649 | | | — | | | — | | | — | | | 10,649 | |
Other | 122 | | | — | | | — | | | — | | | 122 | |
Total | $ | 1,328,417 | | | 25,093 | | | 15,935 | | | — | | | 1,369,445 | |
| | | | | | | | | |
2020 | | | | | | | | | |
Commercial & industrial | $ | 97,391 | | | — | | | 2,205 | | | — | | | 99,596 | |
Commercial, secured by real estate | 811,558 | | | 9,279 | | | 21,372 | | | — | | | 842,209 | |
Residential real estate | 306,092 | | | 1,005 | | | 2,988 | | | — | | | 310,085 | |
Consumer | 37,050 | | | — | | | 2 | | | — | | | 37,052 | |
Agricultural | 10,116 | | | — | | | — | | | — | | | 10,116 | |
Other | 363 | | | — | | | — | | | — | | | 363 | |
Total | $ | 1,262,570 | | | 10,284 | | | 26,567 | | | — | | | 1,299,421 | |
LCNB 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.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 3 - LOANS (Continued)
A loan portfolio aging analysis at December 31 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 30-59 Days Past Due | | 60-89 Days Past Due | | Greater Than 90 Days | | Total Past Due | | Current | | Total Loans Receivable | | Total Loans Greater Than 90 Days and Accruing |
2021 | | | | | | | | | | | | | |
Commercial & industrial | $ | — | | | — | | | — | | | — | | | 101,598 | | | 101,598 | | | — | |
Commercial, secured by real estate | 181 | | | — | | | 784 | | | 965 | | | 886,714 | | | 887,679 | | | — | |
Residential real estate | 1,130 | | | 1 | | | 109 | | | 1,240 | | | 333,866 | | | 335,106 | | | 51 | |
Consumer | 22 | | | 5 | | | 5 | | | 32 | | | 34,259 | | | 34,291 | | | 5 | |
Agricultural | — | | | — | | | — | | | — | | | 10,649 | | | 10,649 | | | — | |
Other | 122 | | | — | | | — | | | 122 | | | — | | | 122 | | | — | |
Total | $ | 1,455 | | | 6 | | | 898 | | | 2,359 | | | 1,367,086 | | | 1,369,445 | | | 56 | |
| | | | | | | | | | | | | |
2020 | | | | | | | | | | | | | |
Commercial & industrial | $ | — | | | — | | | — | | | — | | | 99,596 | | | 99,596 | | | — | |
Commercial, secured by real estate | 16 | | | — | | | 1,476 | | | 1,492 | | | 840,717 | | | 842,209 | | | — | |
Residential real estate | 497 | | | 219 | | | 675 | | | 1,391 | | | 308,694 | | | 310,085 | | | — | |
Consumer | 4 | | | 1 | | | — | | | 5 | | | 37,047 | | | 37,052 | | | — | |
Agricultural | — | | | — | | | — | | | — | | | 10,116 | | | 10,116 | | | — | |
Other | 60 | | | — | | | — | | | 60 | | | 303 | | | 363 | | | — | |
Total | $ | 577 | | | 220 | | | 2,151 | | | 2,948 | | | 1,296,473 | | | 1,299,421 | | | — | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 3 - LOANS (Continued)
Impaired loans, including acquired credit impaired loans, for the years ended December 31 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized |
2021 | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | |
Commercial & industrial | $ | 88 | | | 316 | | | — | | | 236 | | | 83 | |
Commercial, secured by real estate | 3,897 | | | 4,736 | | | — | | | 5,978 | | | 411 | |
Residential real estate | 1,501 | | | 1,857 | | | — | | | 2,553 | | | 227 | |
Consumer | — | | | — | | | — | | | 1 | | | — | |
Agricultural | — | | | — | | | — | | | — | | | — | |
Other | — | | | — | | | — | | | 144 | | | 127 | |
Total | $ | 5,486 | | | 6,909 | | | — | | | 8,912 | | | 848 | |
| | | | | | | | | |
With an allowance recorded: | | | | | | | | | |
Commercial & industrial | $ | 155 | | | 160 | | | 5 | | | 175 | | | 10 | |
Commercial, secured by real estate | 660 | | | 660 | | | 11 | | | 674 | | | 36 | |
Residential real estate | 221 | | | 221 | | | 9 | | | 230 | | | 13 | |
Consumer | — | | | — | | | — | | | — | | | — | |
Agricultural | — | | | — | | | — | | | — | | | — | |
Other | — | | | — | | | — | | | — | | | — | |
Total | $ | 1,036 | | | 1,041 | | | 25 | | | 1,079 | | | 59 | |
| | | | | | | | | |
Total: | | | | | | | | | |
Commercial & industrial | $ | 243 | | | 476 | | | 5 | | | 411 | | | 93 | |
Commercial, secured by real estate | 4,557 | | | 5,396 | | | 11 | | | 6,652 | | | 447 | |
Residential real estate | 1,722 | | | 2,078 | | | 9 | | | 2,783 | | | 240 | |
Consumer | — | | | — | | | — | | | 1 | | | — | |
Agricultural | — | | | — | | | — | | | — | | | — | |
Other | — | | | — | | | — | | | 144 | | | 127 | |
Total | $ | 6,522 | | | 7,950 | | | 25 | | | 9,991 | | | 907 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 3 - LOANS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized |
2020 | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | |
Commercial & industrial | $ | 362 | | | 646 | | | — | | | 1,044 | | | 335 | |
Commercial, secured by real estate | 6,050 | | | 6,735 | | | — | | | 7,070 | | | 731 | |
Residential real estate | 3,261 | | | 3,695 | | | — | | | 3,290 | | | 316 | |
Consumer | 4 | | | 4 | | | — | | | 10 | | | 1 | |
Agricultural | — | | | — | | | — | | | — | | | — | |
Other | 184 | | | 297 | | | — | | | 234 | | | 36 | |
Total | $ | 9,861 | | | 11,377 | | | — | | | 11,648 | | | 1,419 | |
| | | | | | | | | |
With an allowance recorded: | | | | | | | | | |
Commercial & industrial | $ | 194 | | | 199 | | | 8 | | | 212 | | | 12 | |
Commercial, secured by real estate | 2,611 | | | 2,908 | | | 17 | | | 1,517 | | | 18 | |
Residential real estate | 686 | | | 687 | | | 27 | | | 404 | | | 18 | |
Consumer | 1 | | | 1 | | | — | | | 3 | | | — | |
Agricultural | — | | | — | | | — | | | — | | | — | |
Other | — | | | — | | | — | | | — | | | — | |
Total | $ | 3,492 | | | 3,795 | | | 52 | | | 2,136 | | | 48 | |
| | | | | | | | | |
Total: | | | | | | | | | |
Commercial & industrial | $ | 556 | | | 845 | | | 8 | | | 1,256 | | | 347 | |
Commercial, secured by real estate | 8,661 | | | 9,643 | | | 17 | | | 8,587 | | | 749 | |
Residential real estate | 3,947 | | | 4,382 | | | 27 | | | 3,694 | | | 334 | |
Consumer | 5 | | | 5 | | | — | | | 13 | | | 1 | |
Agricultural | — | | | — | | | — | | | — | | | — | |
Other | 184 | | | 297 | | | — | | | 234 | | | 36 | |
Total | $ | 13,353 | | | 15,172 | | | 52 | | | 13,784 | | | 1,467 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 3 - LOANS (Continued)
| | | | | | | | | | | | | | | | | |
| | | | | | | Average Recorded Investment | | Interest Income Recognized |
2019 | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | |
Commercial & industrial | | | | | | | $ | 836 | | | 83 | |
Commercial, secured by real estate | | | | | | | 12,748 | | | 1,213 | |
Residential real estate | | | | | | | 3,704 | | | 311 | |
Consumer | | | | | | | 12 | | | 1 | |
Agricultural | | | | | | | — | | | — | |
Other | | | | | | | 310 | | | 35 | |
Total | | | | | | | $ | 17,610 | | | 1,643 | |
| | | | | | | | | |
With an allowance recorded: | | | | | | | | | |
Commercial & industrial | | | | | | | $ | 247 | | | 15 | |
Commercial, secured by real estate | | | | | | | 2,513 | | | 64 | |
Residential real estate | | | | | | | 528 | | | 35 | |
Consumer | | | | | | | 20 | | | 1 | |
Agricultural | | | | | | | — | | | — | |
Other | | | | | | | — | | | — | |
Total | | | | | | | $ | 3,308 | | | 115 | |
| | | | | | | | | |
Total: | | | | | | | | | |
Commercial & industrial | | | | | | | $ | 1,083 | | | 98 | |
Commercial, secured by real estate | | | | | | | 15,261 | | | 1,277 | |
Residential real estate | | | | | | | 4,232 | | | 346 | |
Consumer | | | | | | | 32 | | | 2 | |
Agricultural | | | | | | | — | | | — | |
Other | | | | | | | 310 | | | 35 | |
Total | | | | | | | $ | 20,918 | | | 1,758 | |
Of the interest income recognized on impaired loans during 2021, 2020, and 2019, approximately $37,000, $34,000, and $42,000, respectively, were recognized on a cash basis. The Company continued to accrue interest on certain loans classified as impaired during 2021, 2020, and 2019 because they were restructured or considered well secured and in the process of collection.
From time to time, the terms of certain loans are modified as troubled debt restructurings ("TDRs") where concessions are granted to borrowers experiencing financial difficulties. 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.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 3 - LOANS (Continued)
Loan modifications that were classified as troubled debt restructurings during the years ended December 31 were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
| Number of Loans | | Pre-Modification Recorded Balance | | Post-Modification Recorded Balance | | Number of Loans | | Pre-Modification Recorded Balance | | Post-Modification Recorded Balance |
Commercial and industrial | — | | | $ | — | | | $ | — | | | 1 | | | $ | 5 | | | $ | 4 | |
Commercial, secured by real estate | — | | | — | | | — | | | 1 | | | 1,525 | | | 1,525 | |
Residential real estate | 3 | | | 97 | | | 101 | | | 1 | | | 14 | | | 14 | |
Consumer | — | | | — | | | — | | | — | | | — | | | — | |
Totals | 3 | | | $ | 97 | | | $ | 101 | | | 3 | | | $ | 1,544 | | | $ | 1,543 | |
Post-modification balances of newly restructured troubled debt by type of modification for the years ended December 31 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Modification | | Rate Modification | | Interest Only | | Principal Forgiveness | | Combination | | Total Modifications |
2021 | | | | | | | | | | | |
Commercial & industrial | $ | — | | | — | | | — | | | — | | | — | | | — | |
Commercial, secured by real estate | — | | | — | | | — | | | — | | | — | | | — | |
Residential real estate | 32 | | | — | | | — | | | — | | | 69 | | | 101 | |
Consumer | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | 32 | | | — | | | — | | | — | | | 69 | | | 101 | |
| | | | | | | | | | | |
2020 | | | | | | | | | | | |
Commercial & industrial | $ | — | | | — | | | — | | | — | | | 4 | | | 4 | |
Commercial, secured by real estate | — | | | — | | | — | | | — | | | 1,525 | | | 1,525 | |
Residential real estate | — | | | — | | | — | | | — | | | 14 | | | 14 | |
Consumer | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | — | | | — | | | — | | | — | | | 1,543 | | | 1,543 | |
LCNB is not committed to lend additional funds to borrowers whose loan terms were modified in a troubled debt restructuring.
There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the years ended December 31, 2021, 2020, or 2019.
All troubled debt restructurings are considered impaired loans. The allowance for loan loss on such restructured loans is based on the present value of future expected cash flows.
Information concerning the post-modification balances of loans that were modified during the year ended December 31 and that were determined to be troubled debt restructurings follows (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
Impaired loans without a valuation allowance at the end of the period | 101 | | | 4 | |
Impaired loans with a valuation allowance at the end of the period | — | | | 1,539 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 3 - LOANS (Continued)
The CARES Act includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances (“Section 4013”). To be eligible under Section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. The Consolidated Appropriations Act, 2021 was signed into law on December 20, 2020 and, among other provisions, extended the provisions in Section 4013 to January 1, 2022.
In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement on April 7, 2020 that, in consultation with the FASB, confirmed that, for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under ASC Subtopic 310-40. This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.
No loans remained on modified terms under the guidance of Section 4013 at December 31, 2021 and the carrying value of such loans was $19,023,000 at December 31, 2020. No loans remained on modified terms under the guidance of the revised interagency statement at December 31, 2021 and such loans totaled $1,553,000 at December 31, 2020.
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, 2021 and 2020 were approximately $149,382,000 and $137,188,000, respectively.
Mortgage servicing right assets are included in core deposit and other intangibles in the Consolidated Balance Sheets. Amortization of mortgage servicing rights is an adjustment to loan servicing income, which is included with other operating income in the Consolidated Statements of Income. Activity in the mortgage servicing rights portfolio during the years ended December 31 was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Balance, beginning of year | $ | 976 | | | 483 | | | 475 | |
| | | | | |
Amount capitalized to mortgage servicing rights | 409 | | | 719 | | | 156 | |
Amortization of mortgage servicing rights | (346) | | | (226) | | | (148) | |
Balance, end of year | $ | 1,039 | | | 976 | | | 483 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 4 - ACQUIRED CREDIT IMPAIRED LOANS
The following table provides, as of December 31, the major classifications of loans acquired that are accounted for in accordance with FASB ASC 310-30 (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
Acquired from First Capital Bancshares, Inc. | | | |
Commercial & industrial | $ | 1 | | | 1 | |
Commercial, secured by real estate | — | | | — | |
Residential real estate | 398 | | | 449 | |
Other loans, including deposit overdrafts | — | | | — | |
Total | $ | 399 | | | 450 | |
| | | |
Acquired from Eaton National Bank & Trust Co. | | | |
Commercial & industrial | $ | — | | | 249 | |
Commercial, secured by real estate | 310 | | | 601 | |
Residential real estate | 463 | | | 595 | |
Other loans, including deposit overdrafts | — | | | 184 | |
Total | $ | 773 | | | 1,629 | |
| | | |
Acquired from BNB Bancorp, Inc. | | | |
Commercial & industrial | $ | — | | | — | |
Commercial, secured by real estate | 688 | | | 780 | |
Residential real estate | 51 | | | 85 | |
Other loans, including deposit overdrafts | — | | | — | |
Total | $ | 739 | | | 865 | |
| | | |
Acquired from Columbus First Bancorp, Inc. | | | |
Commercial & industrial | $ | 87 | | | 112 | |
Commercial, secured by real estate | 614 | | | 667 | |
Residential real estate | 251 | | | 1,177 | |
Other loans, including deposit overdrafts | — | | | — | |
Total | $ | 952 | | | 1,956 | |
| | | |
Total | | | |
Commercial & industrial | $ | 88 | | | 362 | |
Commercial, secured by real estate | 1,612 | | | 2,048 | |
Residential real estate | 1,163 | | | 2,306 | |
Other loans, including deposit overdrafts | — | | | 184 | |
Total | $ | 2,863 | | | 4,900 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 4 - ACQUIRED CREDIT IMPAIRED LOANS (continued)
The following table provides the outstanding balance and related carrying amount for acquired impaired loans at December 31 (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
Outstanding balance | $ | 3,769 | | | 6,128 | |
Carrying amount | 2,863 | | | 4,900 | |
Activity during 2021 and 2020 for the accretable discount related to acquired impaired loans is as follows (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
Accretable discount, beginning of year | $ | 182 | | | 480 | |
| | | |
Reclass from nonaccretable discount to accretable discount | 266 | | | 401 | |
| | | |
Less accretion | (332) | | | (699) | |
Accretable discount, end of year | $ | 116 | | | 182 | |
NOTE 5 – OTHER REAL ESTATE OWNED
Other real estate owned includes property acquired through foreclosure or deed-in-lieu of foreclosure and are included in other assets in the Consolidated Balance Sheets. Changes in other real estate owned were as follows (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
Balance, beginning of year | $ | — | | | 197 | |
| | | |
| | | |
Reductions due to sales | — | | | (197) | |
| | | |
Balance, end of year | $ | — | | | — | |
The total recorded investment in residential consumer mortgage loans secured by residential real estate that was in the process of foreclosure at December 31, 2021 was $58,000.
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
Land | $ | 8,512 | | | 7,933 | |
Buildings | 31,296 | | | 30,789 | |
Equipment | 17,272 | | | 16,431 | |
Construction in progress | 4,100 | | | 4,421 | |
Total | 61,180 | | | 59,574 | |
Less accumulated depreciation | 25,795 | | | 24,198 | |
Premises and equipment, net | $ | 35,385 | | | 35,376 | |
Depreciation charged to expense was $1,931,000 in 2021, $1,834,000 in 2020, and $1,770,000 in 2019.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 7 - LEASES
LCNB has capitalized operating leases for its Union Village, Barron Street, and Worthington offices, for the land at its Oxford and Oakwood offices, for certain office equipment, and for its ATMs. The Oakwood lease has a remaining term of fifteen years with options to renew for six additional periods of five years each. The Oxford lease has a remaining term of thirty-eight years with no renewal options. The other leases have remaining terms of less than one year up to nine years, some of which contain options to renew the leases for additional five years periods.
Right-of-use assets represent LCNB's right to use the underlying assets for their lease terms and lease liabilities represent the obligation to make lease payments. They are recognized using the present value of lease payments over the lease terms. The discount rate is LCNB's incremental borrowing rate for periods similar to the respective lease terms. LCNB management is reasonably certain that it will exercise the renewal options for the offices named above and these additional terms have been included in the calculation of the right-of-use assets and the lease liabilities. The lease for the Fairfield office is for a period of one year and LCNB management has elected the short-term measurement and recognition exception permitted by ASC 842 and has not calculated a right-of-use asset or lease liability for this office.
Lease expenses for offices are included in the Consolidated Statements of Income in occupancy expense, net and lease expenses for equipment and ATMs are included in equipment expenses. Components of lease expense for the years ended December 31 are as follows (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
Operating lease expense | $ | 840 | | | 666 | |
Short-term lease expense | 48 | | | 48 | |
Variable lease expense | 4 | | | 10 | |
Other | 10 | | | 7 | |
Total lease expense | $ | 902 | | | 731 | |
Other information related to leases at December 31, 2021 were as follows (dollars in thousands):
| | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 757 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 801 | |
Weighted average remaining lease term in years for operating leases | 32.9 |
Weighted average discount rate for operating leases | 3.4 | % |
Future payments due under operating leases as of December 31, 2021 are as follows (in thousands):
| | | | | |
2022 | $ | 598 | |
2023 | 574 | |
2024 | 577 | |
2025 | 398 | |
2026 | 256 | |
Thereafter | 10,226 | |
| 12,629 | |
Less effects of discounting | 6,156 | |
Operating lease liabilities recognized | $ | 6,473 | |
Rental expense for all leased branches and equipment was approximately $902,000 in 2021, $731,000 in 2020, and $627,000 in 2019.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows the changes in the carrying amount of goodwill for the years ended December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
Balance, beginning of year | $ | 59,221 | | | 59,221 | |
Additions from acquisitions | — | | | — | |
Balance, end of year | $ | 59,221 | | | 59,221 | |
LCNB performs an impairment test of the carrying value of goodwill annually in the fourth quarter or sooner if circumstances indicate a possible impairment. Impairment indicators that may be considered include the condition of the economy and banking industry; estimated future cash flows; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of LCNB’s stock and other relevant events. These and other factors could lead to a conclusion that goodwill is impaired, which would require LCNB to write off the difference between the estimated fair value of the company and the carrying value. Given the current economic environment resulting from the COVID-19 pandemic, the probability of such impairments has increased. Specifically, the market price of LCNB's common stock decreased, similar to decreases experienced by other financial institutions. Accordingly, an interim impairment test was conducted as of June 30, 2020. At the conclusion of the assessment, management determined that fair value exceeded carrying value and that an impairment charge was not necessary at that time. Management will continue to monitor developments regarding the COVID-19 pandemic and measures implemented in response to the pandemic, market capitalization, overall economic conditions and any other triggering events or circumstances that may indicate an impairment of goodwill in the future.
Other intangible assets in the Consolidated Balance Sheets at December 31 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
| Gross Intangible Assets | | Accumulated Amortization | | Net Intangible Assets | | Gross Intangible Assets | | Accumulated Amortization | | Net Intangible Assets |
Core deposit intangibles | $ | 8,544 | | | 7,110 | | | 1,434 | | | 8,544 | | | 6,067 | | | 2,477 | |
Mortgage servicing rights | 2,323 | | | 1,284 | | | 1,039 | | | 1,938 | | | 962 | | | 976 | |
Total | $ | 10,867 | | | 8,394 | | | 2,473 | | | 10,482 | | | 7,029 | | | 3,453 | |
The estimated aggregate future amortization expense for each of the next five years for intangible assets remaining as of December 31, 2021 is as follows (in thousands):
| | | | | |
2022 | $ | 597 | |
2023 | 544 | |
2024 | 422 | |
2025 | 222 | |
2026 | 46 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 9 - AFFORDABLE HOUSING TAX CREDIT LIMITED PARTNERSHIPS
LCNB is a limited partner in limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (LIHTC) pursuant to Section 42 of the Internal Revenue Code. The purpose of the investments is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants.
The following table presents the balances of LCNB's affordable housing tax credit investment and related unfunded commitment at December 31 (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
Affordable housing tax credit investment | $ | 14,950 | | | 12,000 | |
Less amortization | 2,126 | | | 1,320 | |
Net affordable housing tax credit investment | $ | 12,824 | | | 10,680 | |
| | | |
Unfunded commitment | $ | 8,655 | | | 8,237 | |
The net affordable housing tax credit investment is included in other assets and the unfunded commitment is included in accrued interest and other liabilities in the Consolidated Balance Sheets.
LCNB expects to fund the unfunded commitment over thirteen years.
The following table presents other information relating to LCNB's affordable housing tax credit investment for the years indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2021 | | 2020 | | 2019 |
Tax credits and other tax benefits recognized | $ | 995 | | | 612 | | | 387 | |
Tax credit amortization expense included in provision for income taxes | 806 | | | 510 | | | 318 | |
NOTE 10 - TIME DEPOSITS
Contractual maturities of time deposits at December 31, 2021 were as follows (in thousands):
| | | | | |
2022 | $ | 121,807 | |
2023 | 43,286 | |
2024 | 4,484 | |
2025 | 7,956 | |
2026 | 9,045 | |
Thereafter | 6,864 | |
| $ | 193,442 | |
The aggregate amount of time deposits in denominations of $250,000 or more at December 31, 2021 and 2020 was $25,123,000 and $35,584,000, respectively.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 11 - BORROWINGS
Funds borrowed from the FHLB at December 31 by year of maturity were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
| Outstanding Balance | | Average Rate | | Outstanding Balance | | Average Rate |
Maturing within one year | 5,000 | | | 2.97 | % | | 12,000 | | | 2.42 | % |
Maturing one year through two years | 5,000 | | | 3.02 | % | | 5,000 | | | 2.97 | % |
Maturing two years through three years | — | | | — | % | | 5,000 | | | 3.02 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total | $ | 10,000 | | | 3.00 | % | | $ | 22,000 | | | 2.68 | % |
All advances from the FHLB are secured by a blanket pledge of the Company’s 1-4 family first lien mortgage loans in the amount of approximately $303 million and $276 million at December 31, 2021 and 2020, respectively. Total remaining borrowing capacity, including short-term borrowing arrangements, at December 31, 2021 was approximately $186.6 million.
At December 31, 2021, the Company had short-term borrowing arrangements with two financial institutions and the FHLB of Cincinnati. The first arrangement is a short-term line of credit for a maximum amount of $25 million at the interest rate in effect at the time of the borrowing. The second arrangement is a short-term line of credit for a maximum amount of $30 million at an interest rate equal to the lending institution’s federal funds rate plus a spread of 50 basis points. There were no outstanding short-term borrowings as of December 31, 2021 or 2020.
Under the terms of a REPO Based Advance program with the FHLB, the Company can borrow up to $81.8 million in short-term advances, subject to total remaining borrowing capacity limitations. The Company can select terms ranging from one day to one year. The interest rate is the published rate in effect at the time of the advance. This agreement expired on February 11, 2022 and was renewed for another year.
NOTE 12 - INCOME TAXES
The provision for federal income taxes consists of (in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Income taxes currently payable | $ | 4,317 | | | 3,951 | | | 3,694 | |
| | | | | |
Deferred income tax provision | 294 | | | 134 | | | 419 | |
Provision for income taxes | $ | 4,611 | | | 4,085 | | | 4,113 | |
A reconciliation between the statutory income tax and the Company's effective tax rate follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Statutory tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
Increase (decrease) resulting from - | | | | | |
Tax exempt interest | (0.7) | % | | (0.9) | % | | (1.4) | % |
Tax exempt income on bank owned life insurance | (0.9) | % | | (1.3) | % | | (0.9) | % |
| | | | | |
Captive insurance premium income | (0.8) | % | | (0.8) | % | | (0.8) | % |
Tax benefit from certain provisions of the CARES Act | — | % | | (0.8) | % | | — | % |
Other – net | (0.6) | % | | (0.3) | % | | — | % |
Effective tax rate | 18.0 | % | | 16.9 | % | | 17.9 | % |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 12 - INCOME TAXES (continued)
Deferred tax assets and liabilities, included in the Consolidated Balance Sheets with accrued interest and other liabilities in 2021 and 2020, consist of the following at December 31 (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
Deferred tax assets: | | | |
Allowance for loan losses | $ | 1,156 | | | 1,203 | |
Net unrealized losses on investment securities available-for-sale | 408 | | | — | |
Fair value adjustment on loans acquired from mergers | 103 | | | 196 | |
| | | |
Deferred compensation | 630 | | | 667 | |
Minimum pension liability | 73 | | | 81 | |
Operating lease right-of-use assets | 1,359 | | | 1,338 | |
Other | 96 | | | 245 | |
| 3,825 | | | 3,730 | |
Deferred tax liabilities: | | | |
Depreciation of premises and equipment | (1,595) | | | (1,673) | |
Net unrealized gains on investment securities available-for-sale | — | | | (1,156) | |
Amortization of intangibles | (1,518) | | | (1,512) | |
Prepaid expenses | (323) | | | (283) | |
| | | |
FHLB stock dividends | (216) | | | (216) | |
Operating lease liabilities | (1,359) | | | (1,338) | |
| | | |
| (5,011) | | | (6,178) | |
Net deferred tax liabilities | $ | (1,186) | | | (2,448) | |
As of December 31, 2021 and 2020 there were no unrecognized tax benefits and the Company does not anticipate the total amount of unrecognized tax benefits will significantly change within the next twelve months. There were no amounts recognized for interest and penalties in the Consolidated Statements of Income for the three-year period ended December 31, 2021.
The Company is no longer subject to examination by federal tax authorities for years before 2018.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES
LCNB is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. They involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contract amount of those instruments.
The Bounce Protection product, a customer deposit overdraft program, is offered as a service and does not constitute a contract between the customer and LCNB.
LCNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent off-balance-sheet credit risk at December 31 were as follows (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
Commitments to extend credit: | | | |
Commercial loans | $ | 82,578 | | | 24,581 | |
Other loans: | | | |
Fixed rate | 5,196 | | | 14,668 | |
Adjustable rate | 2,784 | | | 4,386 | |
Unused lines of credit: | | | |
Fixed rate | 32,655 | | | 24,205 | |
Adjustable rate | 150,746 | | | 133,073 | |
Unused overdraft protection amounts on demand and NOW accounts | 16,711 | | | 16,471 | |
Standby letters of credit | 5 | | | 243 | |
| $ | 290,675 | | | 217,627 | |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract or agreement. Unused lines of credit include amounts not drawn on line of credit loans. Commitments to extend credit and unused lines of credit generally have fixed expiration dates or other termination clauses.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees generally are fully secured and have varying maturities.
The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable; inventory; property, plant and equipment; residential realty; and income-producing commercial properties.
Capital expenditures include: the construction or acquisition of new office buildings; improvements to LCNB's offices; purchases of furniture and equipment; and additions or improvements to LCNB's information technology system. Commitments outstanding for capital expenditures as of December 31, 2021 were not material.
The Company and the Bank are parties to various claims and proceedings arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings and claims will not be material to LCNB's consolidated financial position or results of operations.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 14 - REGULATORY MATTERS AND IMPACT ON PAYMENT OF DIVIDENDS
The Federal Reserve Act requires depository institutions to maintain cash reserves with the Federal Reserve Bank. In 2021 and 2020, the Bank maintained average reserve balances of $15,121,000 and $20,907,000, respectively. The reserve balances at December 31, 2021 and 2020 were $2,482,000 and $16,153,000, respectively.
The principal source of income and funds for LCNB Corp. is dividends paid by the Bank. The payment of dividends is subject to restriction by regulatory authorities. For 2022, the restrictions generally limit dividends to the aggregate of net income for the year 2022 plus the net earnings retained for 2021 and 2020. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines. At December 31, 2021, approximately $16,145,000 of the Bank’s earnings retained was available for dividends in 2022 under this guideline. Dividends in excess of these limitations would require the prior approval of the Comptroller of the Currency.
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. 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% will be subject to increasingly stringent limitations on capital distributions as the buffer approaches zero.
For various regulatory purposes, financial institutions are classified into categories based upon capital adequacy:
| | | | | | | | | | | | | | | | | |
| Minimum Requirement | | Minimum Requirement with Capital Conservation Buffer | | To Be Considered Well-Capitalized |
Ratio of Common Equity Tier 1 Capital to risk-weighted assets | 4.5 | % | | 7.0 | % | | 6.5 | % |
Ratio of tier 1 capital to risk-weighted assets | 6.0 | % | | 8.5 | % | | 8.0 | % |
Ratio of total capital (tier 1 capital plus tier 2 capital) to risk-weighted assets | 8.0 | % | | 10.5 | % | | 10.0 | % |
Leverage ratio (tier 1 capital to adjusted quarterly average total assets) | 4.0 | % | | N/A | | 5.0 | % |
As of the most recent notification from its regulators, the Bank was categorized as "well-capitalized" under the regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since the last notification that would change the Bank's category.
On September 17, 2019, the FDIC finalized a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations, as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The simplified rule was designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. It could be used 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 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 December 31, 2021 or 2020 regulatory capital calculations.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 14 - REGULATORY MATTERS AND IMPACT ON PAYMENT OF DIVIDENDS (continued)
A summary of the regulatory capital of the Bank at December 31 follows (dollars in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
Regulatory Capital: | | | |
Shareholders' equity | $ | 234,451 | | | 234,092 | |
Goodwill and other intangible assets | (60,655) | | | (61,698) | |
Accumulated other comprehensive (income) loss | 1,809 | | | (4,043) | |
Tier 1 risk-based capital | 175,605 | | | 168,351 | |
Eligible allowance for loan losses | 5,506 | | | 5,728 | |
Total risk-based capital | $ | 181,111 | | | 174,079 | |
Capital Ratios: | | | |
Common Equity Tier 1 Capital to risk-weighted assets | 12.25 | % | | 12.48 | % |
Tier 1 capital to risk-weighted assets | 12.25 | % | | 12.48 | % |
Total capital (tier 1 capital plus tier 2 capital) to risk-weighted assets | 12.64 | % | | 12.91 | % |
Leverage ratio (tier 1 capital to adjusted quarterly average total assets) | 9.58 | % | | 10.06 | % |
NOTE 15 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in accumulated other comprehensive income (loss) for 2021 and 2020 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
| Unrealized Gains and Losses on Available-for-Sale Securities | | Changes in Pension Plan Assets and Benefit Obligations | | Total | | Unrealized Gains and Losses on Available-for-Sale Securities | | Changes in Pension Plan Assets and Benefit Obligations | | Total |
Balance at beginning of year | $ | 4,348 | | | (305) | | | 4,043 | | | 857 | | | (184) | | | 673 | |
Before reclassifications | (5,645) | | | 32 | | | (5,613) | | | 3,666 | | | (121) | | | 3,545 | |
Reclassifications | (239) | | | — | | | (239) | | | (175) | | | — | | | (175) | |
Balance at end of year | $ | (1,536) | | | (273) | | | (1,809) | | | 4,348 | | | (305) | | | 4,043 | |
Reclassifications out of accumulated other comprehensive income (loss) during 2021 and 2020 and the affected line items in the Consolidated Statements of Income were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | Affected Line Item in the Consolidated Statements of Income |
Net gains (losses) on sales of debt securities | $ | 303 | | | 221 | | | Net gains (losses) on sales of debt securities |
Less provision (benefit) for income taxes | 64 | | | 46 | | | Provision for income taxes |
Reclassification adjustment, net of taxes | $ | 239 | | | 175 | | | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 16 - RETIREMENT PLANS
Prior to January 1, 2009, the Company had a single-employer qualified noncontributory defined benefit retirement plan that covered substantially all regular full-time employees. Effective January 1, 2009, the Company redesigned the plan and merged it into a multiple-employer plan, which is accounted for as a multi-employer plan because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. Employees hired on or after January 1, 2009 are not eligible to participate in this plan.
Effective February 1, 2009, the Company amended the plan to reduce benefits for those whose age plus vesting service equaled less than 65 at that date. Also effective February 1, 2009, an enhanced 401(k) plan was made available to those hired on or after January 1, 2009 and to those who received benefit reductions from the amendments to the noncontributory defined benefit retirement plan. Employees hired on or after January 1, 2009 receive a 50% employer match on their contributions into the 401(k) plan, up to a maximum company contribution of 3% of each individual employee’s annual compensation. Employees who received a benefit reduction under the retirement plan amendments receive an automatic contribution of 5% or 7% of annual compensation, depending on the sum of an employee’s age and vesting service, into the 401(k) plan, regardless of the contributions made by the employees. This contribution is made annually and these employees do not receive any employer matches to their 401(k) contributions.
Certain information pertaining to the qualified noncontributory defined benefit retirement plan is as follows:
| | | | | | | | |
Legal name | | Pentegra Defined Benefit Plan for Financial Institutions |
Plan's employer identification number | | 13-5645888 |
Plan number | | 333 |
The plan is at least 80% funded as of July 1, 2021 and 2020. A funding improvement or rehabilitation plan has not been implemented, nor has a surcharge been paid to the plan. The Company’s contributions to the qualified noncontributory defined benefit retirement plan do not represent more than 5% of total contributions to the plan.
Funding and administrative costs of the qualified noncontributory defined benefit retirement plan and 401(k) plan charged to salaries and employee benefits in the Consolidated Statements of Income for the years ended December 31 were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Qualified noncontributory defined benefit retirement plan | $ | 1,178 | | | 1,111 | | | 1,039 | |
401(k) plan | 610 | | | 590 | | | 524 | |
The Company expects a minimum contribution of $187,000 to the qualified noncontributory defined benefit retirement plan in 2022.
Citizens National had a qualified noncontributory defined benefit pension plan which covered employees hired before May 1, 2005. The Company assumed this plan at the time of the merger. At December 31, 2021 and 2020, the amount of the liability for this plan was, respectively, $128,000 and $182,000, representing the funded status of the plan.
The Bank has a benefit plan which permits eligible officers to defer a portion of their compensation. The deferred compensation balance, which accrues interest at 8% annually, is distributable in cash after retirement or termination of employment. The amount of such deferred compensation liability at December 31, 2021 and 2020 was $3,002,000 and $3,176,000, respectively.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 16 - RETIREMENT PLANS (continued)
The Bank also has supplemental income plans which provide certain employees an amount based on a percentage of average compensation, payable in accordance with individually defined schedules upon retirement. The projected benefit obligation included in other liabilities for the supplemental income plans at December 31, 2021 and 2020 is $798,000 and $901,000, respectively. The average discount rate used to determine the present value of the obligations was approximately 5.0% in 2021 and 5.2% in 2020. There were no service costs associated with the plans for 2021, 2020, or 2019. Interest costs were $42,000, $48,000, and $52,000 for 2021, 2020, and 2019, respectively.
The deferred compensation plan and supplemental income plans are nonqualified and unfunded. Participation in each plan is limited to a select group of management.
Effective February 1, 2009, the Company established a nonqualified defined benefit retirement plan, which is also unfunded, for certain highly compensated employees. The nonqualified plan ensures that participants receive the full amount of benefits to which they would have been entitled under the noncontributory defined benefit retirement plan in the absence of limits on benefit levels imposed by certain sections of the Internal Revenue Code.
The components of net periodic pension cost of the nonqualified defined benefit retirement plan for the years ended December 31 are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Service cost | $ | — | | | — | | | — | |
Interest cost | 52 | | | 63 | | | 77 | |
Amortization of unrecognized (gain) loss | 8 | | | 2 | | | — | |
| | | | | |
Net periodic pension cost | $ | 60 | | | 65 | | | 77 | |
A reconciliation of changes in the projected benefit obligation of the nonqualified defined benefit retirement plan at December 31 follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Projected benefit obligation at beginning of year | $ | 2,124 | | | 2,045 | | | 1,900 | |
Service cost | — | | | — | | | — | |
Interest cost | 52 | | | 63 | | | 77 | |
Actuarial (gain) or loss | (33) | | | 155 | | | 122 | |
Benefits paid | (144) | | | (139) | | | (54) | |
| | | | | |
| | | | | |
Projected benefit obligation at end of year | $ | 1,999 | | | 2,124 | | | 2,045 | |
Projected benefit obligations for the nonqualified defined benefit retirement plan are included in other liabilities in the Consolidated Balance Sheets.
The accumulated benefit obligation for the nonqualified defined benefit retirement plan at December 31, 2021 and 2020 was $1,999,000 and $2,124,000, respectively.
Amounts recognized in accumulated other comprehensive income (loss), net of tax, at December 31 for the nonqualified defined benefit retirement plan consists of (in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Net actuarial (gain) or loss | $ | (32) | | | 122 | | | 184 | |
| | | | | |
| | | | | |
The estimated unrecognized net actuarial gain that will be amortized from accumulated other comprehensive income into net periodic benefit cost during 2022 for the nonqualified defined benefit retirement plan is $8,000.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 16 - RETIREMENT PLANS (continued)
Key weighted-average assumptions used to determine the benefit obligation and net periodic pension costs for the nonqualified defined benefit retirement plan for the years ended December 31 were as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Benefit obligation: | | | | | |
Discount rate | 2.83 | % | | 2.52 | % | | 3.22 | % |
Salary increase rate | — | % | | — | % | | — | % |
| | | | | |
Net periodic pension cost: | | | | | |
Discount rate | 2.52 | % | | 3.22 | % | | 4.22 | % |
Salary increase rate | — | % | | — | % | | 2.00 | % |
Amortization period in years | 20.16 | | 21.24 | | 1.00 |
The nonqualified defined benefit retirement plan is not funded. Therefore no contributions will be made in 2022. Estimated future benefit payments reflecting expected future service for the years ended after December 31, 2021 are (in thousands):
| | | | | |
2022 | $ | 144 | |
2023 | 144 | |
2024 | 144 | |
2025 | 144 | |
2026 | 143 | |
2027-2031 | 669 | |
NOTE 17 - STOCK-BASED COMPENSATION
LCNB established an Ownership Incentive Plan (the "2002 Plan") during 2002 that allowed for stock-based awards to eligible employees, as determined by the Board of Directors. The awards were in the form of stock options, share awards, and/or appreciation rights. The 2002 Plan provided for the issuance of up to 200,000 shares. The 2002 Plan expired on April 16, 2012. Any outstanding unexercised options, however, continued to be exercisable in accordance with their terms and the last of the options were exercised during 2021.
The 2015 Ownership Incentive Plan (the "2015 Plan") was approved by LCNB's shareholders at the annual meeting on April 28, 2015 and allows for stock-based awards to eligible employees, as determined by the Compensation Committee of LCNB's Board of Directors ("Compensation Committee"). Awards may be made in the form of stock options, appreciation rights, restricted shares, and/or restricted share units. The 2015 Plan provides for the issuance of up to 450,000 shares of common stock. The 2015 Plan will terminate on April 28, 2025 and is subject to earlier termination by the Compensation Committee.
Stock-based awards may be in the form of treasury shares or newly issued shares.
LCNB has not granted stock options since 2012.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 17 - STOCK-BASED COMPENSATION (continued)
The following table summarizes stock option activity for the years indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value (in thousands) (1) | | Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value (in thousands) (1) | | Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value (in thousands) (1) |
Outstanding at January 1, | 311 | | | $ | 12.60 | | | | | 9,904 | | | $ | 11.96 | | | | | 13,278 | | | $ | 11.98 | | | |
| | | | | | | | | | | | | | | | | |
Exercised | (311) | | | 12.60 | | | | | (9,593) | | | 11.94 | | | | | (3,374) | | | 12.05 | | | |
Expired | — | | | — | | | | | — | | | — | | | | | — | | | — | | | |
Outstanding at December 31, | — | | | $ | — | | | $ | — | | | 311 | | | $ | 12.60 | | | $ | — | | | 9,904 | | | $ | 11.96 | | | $ | 73 | |
Exercisable at December 31, | — | | | $ | — | | | $ | — | | | 311 | | | $ | 12.60 | | | $ | — | | | 9,904 | | | $ | 11.96 | | | $ | 73 | |
(1) Aggregate Intrinsic Value is defined as the amount by which the current market value of the underlying stock exceeds the exercise price of the option. |
The following table provides information related to stock options exercised during the years indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Intrinsic value of options exercised | $ | 1 | | | 46 | | | 20 | |
Cash received from options exercised | 4 | | | 114 | | | 41 | |
Tax benefit realized from options exercised | — | | | 5 | | | 3 | |
Compensation costs related to option awards were recognized in full during the first quarter 2017.
Restricted stock awards granted under the 2015 Plan were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
Outstanding at January 1, | 28,596 | | | $ | 17.42 | | | 17,752 | | | $ | 18.03 | | | 16,958 | | | $ | 18.94 | |
Granted | 26,321 | | | 16.85 | | | 19,211 | | | 16.87 | | | 12,504 | | | 16.95 | |
Vested | (9,649) | | | 17.49 | | | (4,817) | | | 17.83 | | | (11,710) | | | 18.19 | |
Forfeited | (756) | | | 16.86 | | | (3,550) | | | 16.9 | | | — | | | — | |
Outstanding at December 31, | 44,512 | | | $ | 17.08 | | | 28,596 | | | $ | 17.42 | | | 17,752 | | | $ | 18.03 | |
Total expense related to restricted stock awards included in salaries and wages in the Consolidated Statements of Income for the years ended December 31, 2021, 2020, and 2019 was $249,000, $137,000, and $134,000 respectively. The related tax benefit for the years ended December 31, 2021, 2020, and 2019 was $52,000, $29,000, and $28,000, respectively. Unrecognized compensation expense for restricted stock awards was $605,000 at December 31, 2021 and is expected to be recognized over a period of 4.2 years.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 18 - EARNINGS PER SHARE
LCNB has granted restricted stock awards with non-forfeitable dividend rights, which are considered participating securities. Accordingly, earnings per share is computed using the two-class method as required by FASB ASC 260-10-45. Basic earnings per common share is calculated by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period, which excludes the participating securities. Diluted earnings per common share is adjusted for the dilutive effects of stock options, warrants, and restricted stock. The diluted average number of common shares outstanding has been increased for the assumed exercise of stock options with proceeds used to purchase treasury shares at the average market price for the period.
Earnings per share for the years ended December 31 were calculated as follows (in thousands, except share and per share data):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Net income | $ | 20,974 | | | 20,075 | | | 18,912 | |
Less allocation of earnings and dividends to participating securities | 75 | | | 45 | | | 31 | |
Net income allocated to common shareholders | $ | 20,899 | | | 20,030 | | | 18,881 | |
| | | | | |
Weighted average common shares outstanding, gross | 12,635,013 | | | 12,943,622 | | | 13,100,161 | |
Less average participating securities | 45,408 | | | 29,345 | | | 21,241 | |
Weighted average number of shares outstanding used in the calculation of basic earnings per common share | 12,589,605 | | | 12,914,277 | | | 13,078,920 | |
Add dilutive effect of: | | | | | |
Stock options | 8 | | | 307 | | | 3,973 | |
| | | | | |
Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share | 12,589,613 | | | 12,914,584 | | | 13,082,893 | |
| | | | | |
Earnings per common share: | | | | | |
Basic | $ | 1.66 | | | 1.55 | | | 1.44 | |
Diluted | 1.66 | | | 1.55 | | | 1.44 | |
There were no anti-dilutive stock options outstanding at December 31, 2021 or 2020.
NOTE 19 - RELATED PARTY TRANSACTIONS
LCNB has entered into related party transactions with various directors and executive officers. Management believes these transactions do not involve more than a normal risk of collectability or present other unfavorable features. The following table provides a summary of the loan activity for these officers and directors for the years ended December 31 (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
Beginning balance | $ | 2,929 | | | 2,380 | |
New loans and advances | 250 | | | 1,139 | |
Change in composition of related parties | (413) | | | — | |
Reductions | (641) | | | (590) | |
Ending Balance | $ | 2,125 | | | 2,929 | |
Deposits from executive officers, directors and related interests of such persons held by the Company at December 31, 2021 and 2020 amounted to $3,373,000 and $3,526,000, respectively.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS
LCNB measures certain assets at fair value using various valuation techniques and assumptions, depending on the nature of the asset. Fair value is defined as the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date.
The inputs to the valuation techniques used to measure fair value are assigned to one of three broad levels:
•Level 1 – quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the reporting date.
•Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly. Level 2 inputs may include quoted prices for similar assets in active markets, quoted prices for identical assets or liabilities in markets that are not active, inputs other than quoted prices (such as interest rates or yield curves) that are observable for the asset or liability, and inputs that are derived from or corroborated by observable market data.
•Level 3 – inputs that are unobservable for the asset or liability.
Equity Securities with a Readily Determinable Fair Value
Equity securities with a readily determinable fair value are reported at fair value with changes in fair value reported in other operating income in the Consolidated Statements of Income. Fair values for equity securities are determined based on market quotations (level 1). LCNB has invested in two mutual funds that are traded in active markets and their fair values are based on market quotations (level 1). Investments in another two mutual funds are measured at fair value using net asset values ("NAV") and are considered level 1 because the NAVs are determined and published and are the basis for current transactions.
Debt Securities, Available-for-Sale
The majority of LCNB's financial debt securities are classified as available-for-sale. The securities are reported at fair value with unrealized holding gains and losses reported net of income taxes in accumulated other comprehensive income (loss). LCNB utilizes a pricing service for determining the fair values of its debt securities. Methods and significant assumptions used to estimate fair value are as follows:
•Fair value for U.S. Treasury notes are determined based on market quotations (level 1).
•Fair values for the other debt securities are calculated using the discounted cash flow method for each security. The discount rates for these cash flows are estimated by the pricing service using rates observed in the market (level 2). Cash flow streams are dependent on estimated prepayment speeds and the overall structure of the securities given existing market conditions.
Assets Recorded at Fair Value on a Nonrecurring Basis
Assets that may be recorded at fair value on a nonrecurring basis include impaired loans.
A loan is considered impaired when management believes it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impaired loans are carried at the present value of estimated future cash flows using the loan's existing rate or the fair value of collateral if the loan is collateral dependent, if this value is less than the loan balance. These inputs are considered to be level 3.
Other real estate owned is adjusted to fair value, less costs to sell, upon transfer of the loan to foreclosed assets, usually based on an appraisal of the property. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Other repossessed assets are valued at estimated sales prices, less costs to sell. The inputs for real estate owned and other repossessed assets are considered to be level 3.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The following table summarizes the valuation of LCNB’s assets recorded at fair value by input levels as of December 31 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at the End of the Reporting Period Using |
| | Fair Value Measurements | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
2021 | | | | | | | |
Recurring fair value measurements: | | | | | | | |
Equity securities with a readily determinable fair value: | | | | | | | |
| | | | | | | |
Equity securities | $ | 1,167 | | | 1,167 | | | — | | | — | |
Mutual funds | 51 | | | 51 | | | — | | | — | |
Mutual funds measured at net asset value | 1,328 | | | 1,328 | | | — | | | — | |
| | | | | | | |
Debt securities available-for-sale: | | | | | | | |
U.S. Treasury notes | 74,744 | | | 74,744 | | | — | | | — | |
U.S. Agency notes | 87,246 | | | — | | | 87,246 | | | — | |
Corporate bonds | 5,152 | | | — | | | 5,152 | | | — | |
U.S. Agency mortgage-backed securities | 96,676 | | | — | | | 96,676 | | | — | |
| | | | | | | |
Municipal securities: | | | | | | | |
Non-taxable | 9,066 | | | — | | | 9,066 | | | — | |
Taxable | 35,293 | | | — | | | 35,293 | | | — | |
Total recurring fair value measurements | $ | 310,723 | | | 77,290 | | | 233,433 | | | — | |
| | | | | | | | |
Nonrecurring fair value measurements: | | | | | | | |
Impaired loans | $ | 1,011 | | | — | | | — | | | 1,011 | |
| | | | | | | |
Total nonrecurring fair value measurements | $ | 1,011 | | | — | | | — | | | 1,011 | |
| | | | | | | | |
2020 | | | | | | | |
Recurring fair value measurement: | | | | | | | |
Equity securities with a readily determinable fair value: | | | | | | | |
| | | | | | | |
Equity securities | $ | 987 | | | 987 | | | — | | | — | |
Mutual funds | 50 | | | 50 | | | — | | | — | |
Mutual funds measured at net asset value | 1,352 | | | 1,352 | | | — | | | — | |
| | | | | | | |
Debt securities available-for-sale: | | | | | | | |
U.S. Treasury notes | 2,388 | | | 2,388 | | | — | | | — | |
U.S. Agency notes | 67,900 | | | — | | | 67,900 | | | — | |
Corporate bonds | 1,179 | | | — | | | 1,179 | | | — | |
U.S. Agency mortgage-backed securities | 91,634 | | | — | | | 91,634 | | | — | |
| | | | | | | |
Municipal securities: | | | | | | | |
Non-taxable | 12,933 | | | — | | | 12,933 | | | — | |
Taxable | 33,437 | | | — | | | 33,437 | | | — | |
Total recurring fair value measurements | $ | 211,860 | | | 4,777 | | | 207,083 | | | — | |
| | | | | | | | |
Nonrecurring fair value measurements: | | | | | | | |
Impaired loans | $ | 3,439 | | | — | | | — | | | 3,439 | |
| | | | | | | |
Total nonrecurring fair value measurements | $ | 3,439 | | | — | | | — | | | 3,439 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The following table presents quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements at December 31, 2021 and 2020 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Range |
| | Fair Value | | Valuation Technique | | Unobservable Inputs | | High | | Low | | Weighted Average |
2021 | | | | | | | | | | | | |
Impaired loans | | $ | — | | | Estimated sales price | | Adjustments for comparable properties, discounts to reflect current market conditions | | Not applicable |
| | 1,011 | | | Discounted cash flows | | Discount rate | | 8.25 | % | | 4.00 | % | | 6.07 | % |
| | | | | | | | |
| | | | | | | | | | | | |
2020 | | | | | | | | | | | | |
Impaired loans | | $ | 1,352 | | | Estimated sales price | | Adjustments for comparable properties, discounts to reflect current market conditions | | Not applicable |
| | 2,087 | | | Discounted cash flows | | Discount rate | | 8.25 | % | | 4.00 | % | | 4.74 | % |
| | | | | | | | | | | | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Carrying amounts and estimated fair values of financial instruments as of December 31 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at the End of the Reporting Period Using |
| Carrying Amount | | Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
2021 | | | | | | | | | |
FINANCIAL ASSETS: | | | | | | | | | |
Cash and cash equivalents | $ | 18,136 | | | 18,136 | | | 18,136 | | | — | | | — | |
Debt securities, held-to-maturity | 22,972 | | | 23,087 | | | — | | | — | | | 23,087 | |
Federal Reserve Bank stock | 4,652 | | | 4,652 | | | 4,652 | | | — | | | — | |
Federal Home Loan Bank stock | 5,203 | | | 5,203 | | | 5,203 | | | — | | | — | |
Loans, net | 1,363,939 | | | 1,333,840 | | | — | | | — | | | 1,333,840 | |
Accrued interest receivable | 7,999 | | | 7,999 | | | — | | | 7,999 | | | — | |
| | | | | | | | | |
FINANCIAL LIABILITIES: | | | | | | | | | |
Deposits | 1,628,819 | | | 1,630,158 | | | 1,435,487 | | | 194,671 | | | — | |
| | | | | | | | | |
Long-term debt | 10,000 | | | 10,292 | | | — | | | 10,292 | | | — | |
Accrued interest payable | 277 | | | 277 | | | — | | | 277 | | | — | |
| | | | | | | | | |
2020 | | | | | | | | | |
FINANCIAL ASSETS: | | | | | | | | | |
Cash and cash equivalents | $ | 31,730 | | | 31,730 | | | 31,730 | | | — | | | — | |
Debt securities, held-to-maturity | 24,810 | | | 24,960 | | | — | | | — | | | 24,960 | |
Federal Reserve Bank stock | 4,652 | | | 4,652 | | | 4,652 | | | — | | | — | |
Federal Home Loan Bank stock | 5,203 | | | 5,203 | | | 5,203 | | | — | | | — | |
Loans, net | 1,293,693 | | | 1,252,642 | | | — | | | — | | | 1,252,642 | |
Accrued interest receivable | 8,337 | | | 8,337 | | | — | | | 8,337 | | | — | |
| | | | | | | | | |
FINANCIAL LIABILITIES: | | | | | | | | | |
Deposits | 1,455,423 | | | 1,458,413 | | | 1,212,903 | | | 245,510 | | | — | |
| | | | | | | | | |
Long-term debt | 22,000 | | | 22,595 | | | — | | | 22,595 | | | — | |
Accrued interest payable | 452 | | | 452 | | | — | | | 452 | | | — | |
The fair values of off-balance-sheet financial instruments such as loan commitments and letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of such instruments were not material at December 31, 2021 and 2020.
Fair values of financial instruments are based on various assumptions, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in actual transactions. In addition, because the required disclosures exclude certain financial instruments and all nonfinancial instruments, any aggregation of the fair value amounts presented would not represent the underlying value of the Company.
.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 21 - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for LCNB Corp., parent company only, follows (in thousands):
| | | | | | | | | | | |
Condensed Balance Sheets: | | | |
December 31, | 2021 | | 2020 |
Assets: | | | |
Cash on deposit with subsidiary | $ | 657 | | | 3,648 | |
Cash on deposit with unrelated depository institution | 451 | | | 175 | |
Equity securities, at fair value | 1,156 | | | 1,001 | |
Investment in subsidiaries | 236,401 | | | 235,857 | |
Other assets | 180 | | | 164 | |
Total assets | $ | 238,845 | | | 240,845 | |
| | | |
Liabilities | $ | 241 | | | 20 | |
| | | |
Shareholders' equity | 238,604 | | | 240,825 | |
Total liabilities and shareholders' equity | $ | 238,845 | | | 240,845 | |
| | | | | | | | | | | | | | | | | |
Condensed Statements of Income | | | | | |
Year ended December 31, | 2021 | | 2020 | | 2019 |
Income: | | | | | |
Dividends from subsidiaries | $ | 15,820 | | | 12,070 | | | 18,300 | |
Interest and dividends | 34 | | | 29 | | | 31 | |
| | | | | |
Other income | 155 | | | 147 | | | 215 | |
Total income | 16,009 | | | 12,246 | | | 18,546 | |
| | | | | |
Total expenses | 1,764 | | | 1,326 | | | 1,369 | |
| | | | | |
Income before income tax expense/benefit and equity in undistributed income of subsidiaries | 14,245 | | | 10,920 | | | 17,177 | |
Income tax benefit | (333) | | | (404) | | | (222) | |
Equity in undistributed income of subsidiaries | 6,396 | | | 8,751 | | | 1,513 | |
Net income | $ | 20,974 | | | 20,075 | | | 18,912 | |
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Continued)
NOTE 21 - PARENT COMPANY FINANCIAL INFORMATION (continued)
| | | | | | | | | | | | | | | | | |
Condensed Statements of Cash Flows | | | | | |
Year ended December 31, | 2021 | | 2020 | | 2019 |
Cash flows from operating activities: | | | | | |
Net income | $ | 20,974 | | | 20,075 | | | 18,912 | |
Adjustments for non-cash items - | | | | | |
Increase in undistributed income of subsidiaries | (6,396) | | | (8,751) | | | (1,513) | |
Other, net | 299 | | | (88) | | | 476 | |
Net cash flows provided by operating activities | 14,877 | | | 11,236 | | | 17,875 | |
| | | | | |
Cash flows from investing activities: | | | | | |
Purchases of equity securities | — | | | (346) | | | (337) | |
| | | | | |
Proceeds from sales of equity securities | — | | | 463 | | | 397 | |
| | | | | |
| | | | | |
Net cash flows provided by (used in) investing activities | — | | | 117 | | | 60 | |
| | | | | |
Cash flows from financing activities: | | | | | |
| | | | | |
Proceeds from issuance of common stock | 434 | | | 401 | | | 446 | |
Payments to repurchase common stock | (8,310) | | | (1,872) | | | (6,834) | |
| | | | | |
Cash dividends paid on common stock | (9,720) | | | (9,448) | | | (9,028) | |
Other | 4 | | | 114 | | | 41 | |
Net cash flows used in financing activities | (17,592) | | | (10,805) | | | (15,375) | |
Net change in cash | (2,715) | | | 548 | | | 2,560 | |
Cash at beginning of year | 3,823 | | | 3,275 | | | 715 | |
Cash at end of year | $ | 1,108 | | | 3,823 | | | 3,275 | |
NOTE 22 - SUBSEQUENT EVENTS
On February 8, 2022, the Board of Directors of LCNB Corp. approved, and LCNB Corp. entered into, a revolving line of credit pursuant to a Business Loan Agreement, dated February 8, 2022 (the “Business Loan Agreement”) with Bankers’ Bank (“Lender”), pursuant to which Lender agreed to lend up to $20,000,000 through a revolving line of credit (the “Line of Credit”). The Line of Credit is unsecured, has a 12 month term, and a maturity date of February 8, 2023. Amounts outstanding on the Line of Credit bear interest at a per annum rate equal to the Wall Street Journal Prime Rate minus 0.25%. There is no prepayment penalty associated with the Line of Credit.
LCNB CORP. AND SUBSIDIARIES