LCNB 10-K & 10-Q changes, risk factors and insider trading

LCNB’s success depends, in part, on economic and political conditions, local and national, as well as governmental fiscal and monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy, prolonged government shutdown, tariffs and trade policy,policy including impositions of retaliatory tariffs, and other factors beyond LCNB’s control may affect its deposit levels and composition, demand for loans, the ability of borrowers to repay their loans, and the value of the collateral securing the loans it makes. Economic turmoil in different regions of the world affect the economy and stock prices in the United States, which can affect LCNB’s earnings and capital and the ability of its customers to repay loans. Due to LCNB’s volume of real estate loans, declining real estate values could affect the value of property used as collateral as well as LCNB’s ability to sell the collateral upon foreclosure. In 2025, the federal government was shut down from October 1, 2025 to November 12, 2025. The economic impact of a future long-spanning government shutdown is inherently uncertain and could have a material effect on LCNB’s business, financial condition, and operations.

LCNB offers a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer, and other loans. Many loans are secured by real estate (both residential and commercial) within LCNB's market area. A major change in the real estate market, such as deterioration in the value of collateral or in the local or national economy, could affect LCNB's ability to liquidate foreclosed property, which in turn could impact LCNB's results of operations and financial condition. Additionally, increases in unemployment may also may affect the ability of certain clients to repay loans and the financial results of commercial clients in localities with higher unemployment may result in loan defaults and foreclosures and may impair the value of loan collateral. Loan defaults and foreclosures are unavoidable in the banking industry. LCNB cannot fully eliminate credit risk and, as a result, credit losses may increase in the future.

LCNB relies heavily on electronic communications and information systems to conduct its business. Although significant resources are devoted to maintaining and regularly updating LCNB’s data systems, there can be no assurance that these security measures will provide absolute security. Any failure, interruption, cyberattack, email phishing scam, or other breach in security of these systems could result in failures or disruptions in LCNB’s customer relationship management, general ledger, deposit, loan, and other systems. Emerging technologies, such as artificial intelligence, may further increase the risk of a cyber-attack. While LCNB has policies and procedures designed to prevent or limit the effect of the failure, interruption, cyberattack, or other security breach of its information systems, there can be no assurance that any such occurrences will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions, cyberattacks, phishing scams, or other security breaches of LCNB’s information systems could significantly disrupt LCNB's operations, allow misappropriation of LCNB’s confidential information, allow misappropriation of customer confidential information, damage LCNB’s reputation, result in a loss of customer business, subject LCNB to additional regulatory scrutiny, or expose LCNB to significant civil litigation and possible financial liability, any of which could have a material adverse effect on its financial condition and results of operations.

LCNB’s success depends, in large part, on its ability to attract, retain, motivate, and develop key employees. Competition for key employees is ongoing and LCNB may not be able to attract, retain, or hire the key employees who are wanted or needed, which may also negatively impact its ability to execute identified business strategies. Because LCNB operates primarily in Southwestern and South Central Ohio and Northern Kentucky,Ohio, its hiring pool is also limited by those markets. Competition for key employees may require LCNB to offer higher compensation to attract or retain key employees, which may adversely affect salaries and employee benefit costs.

LCNB’s financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services that LCNB offers, is highly dependent upon the business environment in the markets where LCNB operates and in the United States as a whole. Recessions, periods of unemployment, changes in interest rates, inflationary pressures, money supply, tariffs and trade policy,policy including retaliatory tariffs, and other factors beyond LCNB’s control may adversely affect its asset quality, deposit levels, loan demand, and earnings. Inflationary pressures directly affect the level of interest rates earned from loans and investments and paid for deposits and borrowings. In addition, salaries and employee benefits and other non-interest expenses tend to increase during periods of inflation.

Fluctuations in interest rates may negatively impact LCNB’s profitability. A primary source of income from operations is net interest income, which is equal to the difference between interest income earned on loans and investment securities and the interest paid for deposits and other borrowings. These rates are highly sensitive to many factors beyond LCNB’s control, including general economic conditions, the slope of the yield curve (that is, the relationship between short and long-term interest rates), and the monetary and fiscal policies of the United States Federal government. For example, the existing Chair of the Federal Reserve’s term ends on May 15, 2026 and recent political commentary has introduced additional uncertainty about how interest rate policy may evolve under the new leadership of the Board of Governors later in 2026.

The banking industry and related financial service providers operate in a highly competitive market. LCNB competes with financial service providers such as other commercial banks, savings and loan associations, credit unions, mortgage banking firms, Financial Technology or “FinTech” companies,companies including decentralized finance and cryptocurrency, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds, and other financial intermediaries.

Most of LCNB’s investment securities portfolio is designated as available-for-sale. Accordingly, unrealized gains and losses, net of tax, in the estimated fair value of the available-for-sale portfolio is recorded as other comprehensive income,income (loss), a separate component of shareholders’ equity. The fair value of LCNB’s investment portfolio may decline, causing a corresponding decline in shareholders’ equity. Management believes that several factors will affect the fair values of the investment portfolio including, but not limited to, changes in interest rates or expectations of changes, the degree of volatility in the securities markets, inflation rates or expectations of inflation, and the slope of the interest rate yield curve. These and other factors may impact specific categories of the portfolio differently and the effect any of these factors may have on any specific category of the portfolio cannot be predicted.

Many stateState and local governmental authorities havemay experiencedexperience deterioration of financial condition in recent years due to declining tax revenues, increased demand for services, and various other factors. To the extent LCNB has any municipal securities in its portfolio from issuers who are experiencing deterioration of financial condition or who may experience future deterioration of financial condition, the value of such securities may decline and could result in other-than-temporary impairment charges, which could have an adverse effect on LCNB’s financial condition and results of operations. Additionally, a general, industry-wide decline in the fair value of municipal securities could significantly affect LCNB’s financial condition and results of operations.

The banking industry is highly regulated.regulated and is thus subject to larger impacts due to regulatory uncertainty.

LCNB is subject to regulation, supervision, and examination by the Federal Reserve Board and the Bank is subject to regulation, supervision, and examination by the OCC. LCNB and the Bank are also subject to regulation and examination by the FDIC as the deposit insurer. The CFPB is responsible for most consumer protection laws and has historically had broad authority, with certain exceptions, to regulate financial products offered by banks. Federal and state laws and regulations govern numerous matters including, but not limited to, changes in the ownership or control of banks, maintenance of adequate capital, permissible business operations, maintenance of deposit insurance, protection of customer financial privacy, the level of reserves held against deposits, restrictions on dividend payments, the making of loans, and the acceptance of deposits. See the previous section titled “Supervision and Regulation” for more information on this subject.

Proposals to change the laws governing financial institutions are periodically introduced in Congress and proposals to change regulations are periodically considered by the regulatory bodies. Furthermore, depending on presidential administrative priorities, there may be widespread initiatives to either regulate or deregulate financial institutions, which can lead to uncertainty for financial institutions as they navigate changes on a relatively frequent basis. Such future legislation and/or changes in regulations could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The likelihood of any major changes in the future and their effects are impossible to predict.indeterminable.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services.services, including the emergence of artificial intelligence. LCNB’s future success depends, in part, upon its ability to address customer needs by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in LCNB’s operations. LCNB has implemented technologies that utilize artificial intelligence in connection with LCNB’s business and operations in order to scale its business, but the outcome of implementation may not realize all the benefits LCNB is hoping to scale. LCNB may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers.customers, or customers may be averse to the adoption of new technologies. Failure to successfully keep pace with technological change affecting the financial services industry could negatively affect LCNB’s growth, revenue and profit.

20242025 vs. 2023.2024. Net interest income on a fully tax-equivalent basis for 20242025 totaled $60,956,000,$70.4 million, an increase of $4,424,000$9.4 million from 2023.2024. The increase resulted from ana increasedecrease in total interest expense of $11.7 million, partially offset by a decrease in total taxable-equivalent interest income of $25,394,000,$2.3 which was partially offset by an increase in total interest expense of $20,970,000.million.

The increasedecrease in total interest income was due primarily to a $24,583,000$2.2 increasemillion decrease in interest income from loans due to a $297.7$60.2 million increasedecrease in average loansloans, andpartially tooffset by a 567 basis point increase in the average rate earned. Average loans increased due to organic growth in the portfolio in addition to loans acquired through mergers with CNNB in quarter four of 2023 and EFBI in quarter two of 2024.

The increasedecrease in total interest expense was primarily due to a $13,937,000$5.3 increasemillion decrease in interest paid on IRA and time certificates and to a $3.2 million decrease in interest paid on interest-bearing demand and money market deposit accounts. Interest on IRA and time certificates decreased due to a $247.9$43.6 million increasedecrease in average balances and to a 11375 basis point increasedecrease in the average rate paid. Interest paid on interest-bearing demand and money market deposit accounts increaseddecreased due to a $71.353 basis point decrease in the average rate paid, partially offset by $2.5 million increase in average deposit balancesbalances. andIn toaddition, a 66 basis point increase in the average rate paid. Interestinterest paid on short-term borrowings and long-term debt increaseddecreased due to a $99.9 million increasedecreases in average balances outstanding. The decrease in average IRA and totime certificate balances and the corresponding decrease in average rates reflects a 3strategic basis point increasereduction in thehigher-cost averagecertificates rateof paid.deposit and IRA balances as part of LCNB's funding optimization strategy.

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.Committee. 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,Directors and the Board of Directors.

LCNB recorded provisions for credit losses and unfunded commitments totaling $1,962,000 for 2024, compared to a $2,077,000 provision for 2023 and a $250,000 provision for 2022. Included in the provision for credit losses for 2024 and 2023 were $763,000 and a $1,722,000, respectively, related to non-PCD loans acquired through the EFBI and CNNB acquisitions. 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.

Net charge-offs for 2025, 2024, 2023, and 20222023 totaled $741,000,$273 $185,000,thousand, $741 thousand, and $110,000,$185 thousand, respectively. Charge-offs during 2024 were greater because of a $589,000$589 thousand charge-off on a commercial & industrial loan.

LCNB's effective tax rates for the years ended December 31, 2025, 2024, 2023, and 20222023 were 17.9%, 15.5%, 17.2%, and 17.9%,17.2%, respectively. The difference between the statutory rate of 21% and the effective tax rate is primarily due to tax-exempt interest income from municipal securities, tax-exempt earnings from bank owned life insurance, tax-exempt earnings from LCNB Risk Management, Inc.Inc., and tax credits and losses related to investments in affordable housing tax credit limited partnerships netted with the net impact of non-deductible merger costs for 2023 and 2024.partnerships. The effective tax rate for 2024 was lower due to tax-exempt items not decreasing in proportion to the overall decrease in earnings.earnings, partially offset by the tax effect of non-deductible merger-related expenses.

The 2015 Ownership Incentive2025 Plan (the "2015 Plan") was approved by LCNB's shareholders at the annual meeting on May 19, 2025 and superseded the 2015 Ownership Incentive Plan, which terminated on April 28, 20152025. andBoth plans allows for stock-based awards to eligible employees, as determined by the Compensation Committee of the Board of Directors. Awards may be made in the form of stock options, appreciation rights, restricted shares, and/or restricted share units. The 20152025 Plan provides for the issuance of up to 450,000600 thousand shares. The 20152025 Plan will terminate on AprilMay 28,19, 20252035 and is subject to earlier termination by the Compensation Committee.

Accounting rules require LCNB to determine the fair value of all the assets and liabilities of an acquired entity, and to record their fair value on the date of acquisition. LCNB employs a variety of means in determining fair value, including the use of discounted cash flow analysis, market comparisonscomparisons, and projected future revenue streams. For those items for which management concludes that LCNB has the appropriate expertise to determine fair value, management may choose to use its own calculation of fair value. In other cases, where the fair value is not readily determined, consultation with outside parties is used to determine fair value. Once valuations have been determined, the net difference between the price paid for the acquired entity and the fair value of the balance sheet is recorded as goodwill. Goodwill is assessed at least annually for impairment, with any such impairment recognized in the period identified. A more frequent assessment is performed if there are material changes in the market place or within the organizational structure.

Loans Held-For-Sale. Loans held-for-sale (“LHFS”) represent mortgage loans intended to be sold in the secondary market and other loans that management has an active plan to sell. LHFS are carried at the lower-of-cost-or-fairlower of cost or fair value as determined on an aggregate basis by type of loan. Any writedowns to fair value upon the transfer of loans to LHFS are reflected in loan charge-offs. Any further decreases are recognized in non-interest income and increases in fair value above the loan cost basis are not recognized until the loans are sold.

Net income for the three and six months ended MarchJune 31,30, 2026 was $4.4$7.5 million and $11.9 million, respectively (total basic and diluted earnings per share of $0.53 and $0.84, respectively). This compares to net income of $5.9 million and $10.5 million (total basic and diluted earnings per share of $0.31). This compares to net income of $4.6 million (total basic$0.41 and diluted earnings per share of $0.33$0.74) for the same three-monthrespective three and six-month periods in 2025.

Net interest income for the three and six months ended MarchJune 31,30, 2026 was $18.8$19.8 million and $38.6 million, comparedrespectively. This compares to net interest income of $16.3$17.5 million and $33.8 million for the same three-monthrespective three and six-month periods in 2025. The growth in net interest income was primarily due to an increase in the average yield on earning assets, a reduction in interest-bearing liabilities, and a decrease onin the average rate paid on interest-bearing liabilities and a decrease in the average balances of these liabilities, along with an increase in the average rate earned on LCNB's loan portfolio.liabilities. LCNB's tax equivalent net interest margin for the first three monthsand ofsix-months ended June 30, 2026 was 3.83%,3.99% and 3.91%, respectively, compared to 3.25%3.47% and 3.36% for the same periodrespective lastperiods year.in 2025.

Non-interest income for the three and six months ended MarchJune 31,30, 2026 was $4.7$5.4 million and $10.0 million, comparedrespectively. This compares to non-interest income of $5.2 million and $10.5 million for the same periodrespective periods in 2025. The decrease during the six-month period was primarily due to lower net gains from sales of loans and lower service charges and fees recognized on deposit accounts, partially offset by higher fiduciary income.

Non-interest expense for the three and six months ended MarchJune 31,30, 2026 was $15.9$15.7 million and $31.6 million, comparedrespectively. This compares to non-interest expense of $15.8$15.6 million and $31.4 million for the same three-monthrespective periodthree and six-month periods in 2025. SalariesThe increase was primarily due to higher salaries and employee benefitsbenefits, increasedcomputer duringmaintenance theand 2026supplies, period,and contracted services expenses, largely offset by alower decreaseintangible inasset amortization, reduced merger-related expenses, and lower FDIC insurance premiums.

Three Months Ended MarchJune 31,30, 2026 vs. MarchJune 31,30, 2025

LCNB's primary source of earnings is net interest income, which is the difference between earnings from loans and other investments and interest paid on deposits and other liabilities. The following table presents, for the three months ended MarchJune 31,30, 2026 and MarchJune 31,30, 2025, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resulting average yields earned or rates paid.

The following table presents the changes in taxable-equivalent basis interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the three months ended MarchJune 31,30, 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.

Net interest income on a fully taxable-equivalent basis for the three months ended MarchJune 31,30, 2026 totaled $18.9$19.8 million, an increase of $2.6$2.2 million from the comparable period in 2025. Total interest expense decreased $2.4$1.9 million, with interest income increasing $114$388 thousand.

The $114$388 thousand increase in total interest income was primarily due to a 1016 basis point (a basis point equals 0.01%) increase in the average rate earned on the loan portfolio, partially offset by a $13.9$12.4 million decrease in average loan balances. The increase in the average loan yield included a $120 thousand increase in accretion income on acquired loans compared to the prior year period. Excluding accretion income in both periods, the average loan yield increased 13 basis points year over year.

The $2.4$1.9 million decrease in total interest expense was primarily due to a $154.1$114.8 million decrease in average IRA and time certificate deposits and to a 10271 basis point decrease in the average rate paid for these deposits. This decrease reflects the strategic runoff of higher-cost certificates and IRA balances as part of LCNB's funding optimization strategy.

Net charge-offsrecoveries for the three months ended MarchJune 31,30, 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 $39$79 thousand and $118 thousand for the same periodrespective periods in 2025. Net charge‑offscharge-offs during the firstsix quartermonths ofended June 30, 2026 primarily reflected the resolution of participation loans to two unrelated borrowersparticipated loans within the logistics sector. Loans to one of the borrowers,borrower, which carried a specific reserve of approximately $1.4 million at December 31, 2025, waswere charged off during the first quarter with no additional impact to earnings, consistent with LCNB's prior disclosures.earnings. In addition, LCNB recognized an additionalapproximately charge‑off$1.3 million charge-off during the first quarter 2026 of approximately $1.3 million2026 related to a separate logistics‑sectorlogistics-sector borrower after significant adverse developments arose subsequent to year‑end,year-end, including the withdrawal of the borrower’sborrower's sponsor from restructuring discussions and the acceptance by the lending group of a discounted debt‑repurchasedebt-repurchase proposal. The specific reserves discussed above relate to two separate commercial and industrial credits that remained outstanding at June 30, 2026.

A comparison of non-interest income for the three and six months ended MarchJune 31,30, 2026 and MarchJune 31,30, 2025 is as follows (in thousands):

A comparison of non-interest expense for the three and six months ended MarchJune 31,30, 2026 and MarchJune 31,30, 2025 is as follows (in thousands):

LCNB's effective tax rate for the three and six months ended MarchJune 31,30, 2026 was 16.5%,18.5% and 17.7%, respectively, compared to 16.4%17.8% and 17.2% for the same periodrespective periods in 2025. The difference between the statutory rate of 21% and the effective tax rates is primarily due to tax-exempt interest income from municipal securities, tax-exempt earnings from bank-owned life insurance, tax-exempt earnings from LCNB Risk Management, Inc., and tax credits and losses related to investments in affordable housing tax credit limited partnerships.

A comparison of balance sheet line items at MarchJune 31,30, 2026 and December 31, 2025 is as follows (dollars in thousands):

LCNB's loan portfolio represents its largest asset category and is its most significant source of interest income. Loan classifications have been identified as Commercial & Industrial, Commercial Real Estate, Residential Real Estate, Consumer, Agricultural, and Other. Commercial real estate is the largest classification in LCNB's loan portfolio, comprising about 64.1%64.2% of total loans at MarchJune 31,30, 2026.

The following table provides a breakdown of amortized cost of commercial real estate loans by property-type classification as of MarchJune 31,30, 2026, excluding loans which are junior in lien or covered by collateral secured with varying classes of assets (dollars in thousands):

Most of LCNB's commercial real estate loans are made within its general market area of Southwest and Central Ohio and Northern Kentucky. The following table provides a breakdown of amortized cost of commercial real estate loans by real estate collateral location as of MarchJune 31,30, 2026, excluding loans which are junior in lien or covered by collateral secured with varying classes of assets (dollars in thousands):

Qualifications for community banking organizations to use a simplified measure of capital adequacy approach include having a tierTier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the Community Bank Leverage Ratio framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. LCNB qualified to use the simplified measure for the June 30, 2026 regulatory capital calculations, but opted not to use this approach. LCNB did not qualify to use the simplified measure for the March 31, 2026 or December 31, 2025 regulatory capital calculations.

Total remaining borrowing capacity with the FHLB at MarchJune 31,30, 2026 was approximately $154.1$159.1 million. Additional borrowings of approximately $115.0 million were available through line of credit arrangements with correspondent banks.

Commitments to extend credit at MarchJune 31,30, 2026 totaled $288.7$305.4 million and are more fully described in Note 10 - Commitments and Contingent Liabilities to LCNB's condensed consolidated financial statements. Since many commitments to extend credit may expire without being drawn upon, the total commitment amount does not necessarily represent future cash required to satisfy the commitment reported prior to its expiration.requirements.