LCNB Corp: Form 10-Q for the period ended Sep 30, 2025

The following table presents the changes in taxable-equivalent basis interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the nine months ended September 30, 2025 as compared to the same period in 2024. Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each.

(In thousands)

Net interest income on a fully taxable-equivalent basis for the nine months ended September 30, 2025 totaled $52.1 million, an increase of $7.9 million from the comparable period in 2024. Total interest income decreased $557 thousand and total interest expense decreased $8.4 million.

The $557 thousand decrease in total interest income was primarily due to a $678 thousand decrease in loan interest income. The decrease in loan interest income was primarily due to a $54.7 million decrease in average loan balances, partially offset by a 13 basis point increase in the average rate earned on the loan portfolio.

The $8.4 million decrease in total interest expense was primarily due to a $104.1 million decrease in average interest-bearing liabilities and to a 54 basis point decrease in the average rate paid for these liabilities.

Provision and Allowance For Credit Losses

LCNB continuously reviews the loan portfolio for credit risk through the use of its lending and loan review functions. Independent loan reviews analyze specific loans, providing validation that credit risks are appropriately identified, graded, and reported to the Loan Committee, Board of Directors, and the Audit Committee of the Board of Directors. New credits meeting specific criteria are analyzed prior to origination and are reviewed by the Loan Committee, the Loan Committee of the Board of Directors, and the Board of Directors.

The total provision for credit losses is determined based upon management's evaluation as to the amount needed to maintain the allowance for credit losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio. For analysis purposes, the loan portfolio is separated into pools of similar loans. These pools include commercial and industrial loans, owner occupied commercial real estate loans, non-owner occupied commercial real estate loans, real estate loans secured by farms, real estate loans secured by multi-family dwellings, residential real estate loans secured by senior liens on 1-4 family dwellings, residential real estate loans secured by junior liens on 1-4 family dwellings, home equity line of credit loans, consumer loans, loans for agricultural purposes not secured by real estate, construction loans secured by 1-4 family dwellings, construction loans secured by other real estate, and several smaller classifications. Within each pool of loans, LCNB examines a variety of factors to determine the adequacy of the allowance for credit losses, including historic charge-off percentages, overall pool quality, a review of specific problem loans, current economic trends and conditions that may affect borrowers' ability to pay, and the nature, volume, and consistency of the loan pool.

LCNB recorded a provision for credit losses of $211 thousand for the third quarter of 2025, compared to $660 thousand for the comparable period in 2024. The provision for the 2025 period included a provision for credit losses on loans of $231 thousand and a recovery on off-balance-sheet credit exposures of $26 thousand. The provision for the 2024 period included a provision for credit losses on loans of $681 thousand and a net recovery for off-balance-sheet credit exposures of $21 thousand. For the nine months ended September 30, 2025, LCNB recorded a provision for credit losses of $426 thousand, compared to a provision of $1.3 million for the comparable period in 2024. The provision for the nine months ended September 30, 2025 included a provision for credit losses on loans of $457 thousand and a recovery on off-balance-sheet credit exposures of $37 thousand. The provision for the 2024 nine-month period included a provision for credit losses on loans of $1.3 million and a provision for off-balance-sheet credit exposures of $11 thousand.

The provisions for credit losses on loans during the nine-month 2024 period included $763,000 recognized on non-PCD loans acquired through the EFBI merger and a $1.2 million increase for a commercial real estate, non-owner occupied loan that was individually evaluated for the first time during the first quarter 2024. These increases were largely offset by a recovery of credit losses in the pooled real estate mortgage loan category due to a decrease in loss rates and a decrease in loan balances caused by a transfer to the loans held-for-sale category.

Calculating an appropriate level for the allowance and provision for credit losses involves a high degree of management judgment and is, by its nature, imprecise. Revisions may be necessary as more information becomes available or if market conditions change.

Net charge-offs for the three and nine months ended September 30, 2025 totaled $169 thousand and $287 thousand, respectively, compared to net charge-offs of $84 thousand and $147 thousand for the same respective periods in 2024.

Market risk for LCNB is primarily due to interest rate risk. LCNB attempts to mitigate this risk through asset/liability management strategies designed to decrease the vulnerability of its earnings to material and prolonged changes in interest rates. LCNB does not use derivatives such as interest rate swaps, caps, or floors to hedge this risk. LCNB has not entered into any market risk instruments for trading purposes.

The Bank's Asset and Liability Management Committee primarily uses a combination of Interest Rate Sensitivity Analysis ("IRSA") and Economic Value of Equity ("EVE") analysis for measuring and managing interest rate risk. IRSA is used to estimate the effect on net interest income ("NII") during a one-year period of instantaneous and sustained movements in interest rates, also called interest rate shocks, of 100, 200, and 300 basis points. The annual base projection uses a current interest rate scenario. As shown below, the September 30, 2025 IRSA indicates that an increase in interest rates would have a negative effect on NII, while a decrease in interest rates would have a positive effect on NII. The changes in NII for all rate shock scenarios are within LCNB's acceptable ranges.

(Dollars in thousands)

The IRSA shows the effect on NII during a one-year period only. A longer-range model is the EVE analysis, which shows, accounting for the same rate shocks, the estimated present value of future cash inflows from interest-earning assets less the present value of future cash outflows for interest-bearing liabilities for the same rate shocks. As shown below, the September 30, 2025 EVE analysis indicates that an increase in interest rates will have a negative effect on the EVE and a decrease in interest rates will have a positive effect on the EVE. The changes in EVE for all rate shock scenarios are within LCNB's acceptable ranges.

(Dollars in thousands)

The IRSA and EVE simulations discussed above are not projections of future income or equity and should not be relied on as being indicative of future operating results. Assumptions used, including the nature and timing of interest rate levels, yield curve conditions, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment or replacement of asset and liability cash flows, are inherently uncertain and, as a result, the models cannot precisely measure future NII or equity. Furthermore, the models do not reflect actions that borrowers, depositors, and management may take in response to changing economic conditions and interest rate levels.

a) Disclosure controls and procedures. The Chief Executive Officer and the Chief Financial Officer have carried out an evaluation of the effectiveness of LCNB's disclosure controls and procedures that ensure that information relating to LCNB required to be disclosed by LCNB in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to LCNB's management, including its principal executive officer and principal financial officer, as appropriate, in order to allow timely decisions to be made regarding required disclosures. Based upon this evaluation, these officers have concluded that, as of September 30, 2025, LCNB's disclosure controls and procedures were effective.

b) Changes in internal control over financial reporting. During the period covered by this report, there were no changes in LCNB's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, LCNB's internal control over financial reporting.

Readers should carefully consider the risk factors previously disclosed in Part I, Item 1A. Risk Factors in LCNB's Form 10-K for the year ended December 31, 2024.