LCNB Corp: Form 10-Q for the period ended Jun 30, 2026

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 six months ended June 30, 2026 as compared to the same period in 2025. 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 six months ended June 30, 2026 totaled $38.7 million, an increase of $4.8 million from the comparable period in 2025. Total interest income increased $502 thousand and total interest expense decreased $4.3 million.

The $502 thousand increase in total interest income was primarily due to a $759 thousand increase in loan interest income. This increase was primarily due to a 13 basis point increase in the average rate earned on the loan portfolio, partially offset by a $13.2 million decrease in average loan balances. Included in the increase in the average loan yield was an $83 thousand increase in accretion income recognized on acquired loans compared to the prior year period. Excluding accretion income in both periods, the average loan yield increased 12 basis points from the prior year period.

The $4.3 million decrease in total interest expense was primarily due to a $4.2 million decrease in interest expense for IRA and time certificates. This decrease was primarily due to a $134.3 million decrease in average IRA and time certificates and to an 87 basis point decrease in the average rate paid for these certificates. This decrease reflects the strategic runoff of higher-cost certificates and IRA balances as part of LCNB's funding optimization strategy.

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. New credits meeting specific criteria are analyzed prior to origination and are reviewed by the Loan Committee 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. 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.

LCNB recorded a provision for credit losses of $276 thousand and $2.6 million for the three and six months ended June 30, 2026, compared to $18 thousand and $215 thousand for the same respective periods in 2025. The provision for the three-month period in 2026 included a provision for credit losses on loans of $233 thousand and a provision for off-balance-sheet credit exposures of $43 thousand. The provision for the six-month period in 2026 included a provision for credit losses on loans of $2.6 million and a recovery on off-balance-sheet credit exposures of $16 thousand. The provision for the three-month period in 2025 period included a provision for credit losses on loans of $63 thousand and a recovery on off-balance-sheet credit exposures of $45 thousand and the provision for the six-month period in 2025 included a provision for credit losses on loans of $226 thousand and a recovery on off-balance-sheet credit exposures of $11 thousand. The provision expense for the six month period in 2026 was primarily driven by credit deterioration identified in four commercial credits during the first quarter of 2026. Specifically, LCNB recorded charge-offs related to two participated logistics-sector loans and established specific reserves on two additional commercial and industrial loans in other industries. While certain borrower-specific challenges affecting the reserved commercial and industrial credits were influenced by global trade uncertainty and geopolitical conditions, management believes those impacts were isolated to the affected borrowers and are not indicative of broader deterioration within the commercial and industrial portfolio. Although management continues to monitor economic, geopolitical and industry-specific developments, current portfolio performance metrics, risk rating trends and other credit quality indicators do not support the need for additional segment-level reserve adjustments beyond those already reflected in the allowance for credit losses. The loan portfolio's overall asset quality remains strong, with nonperforming loans to total loans of 0.34% at June 30, 2026, compared to 0.28% at June 30, 2025.

Net recoveries for the three months ended June 30, 2026 totaled $1 thousand and net charge-offs for the six months ended June 30, 2026 totaled $2.7 million, compared to net charge-offs of $79 thousand and $118 thousand for the same respective periods in 2025. Net charge-offs during the six months ended June 30, 2026 primarily reflected the resolution of two unrelated participated loans within the logistics sector. Loans to one borrower, which carried a specific reserve of approximately $1.4 million at December 31, 2025, were charged off during the first quarter with no additional impact to earnings. In addition, LCNB recognized an approximately $1.3 million charge-off during the first quarter of 2026 related to a separate logistics-sector borrower after significant adverse developments arose subsequent to year-end, including the withdrawal of the borrower's sponsor from restructuring discussions and the acceptance by the lending group of a discounted debt-repurchase proposal. The specific reserves discussed above relate to two separate commercial and industrial credits that remained outstanding at June 30, 2026.

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 June 30, 2026 IRSA indicates that either an increase or 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 June 30, 2026 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. 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 June 30, 2026, 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, 2025.