Executive Summary / Key Takeaways

• LCNB Corp. is executing a multi-year growth strategy centered on integrating recent acquisitions, which contributed to a significant increase in net income and EPS in Q1 2025 compared to the prior year period.
• Profitability was notably enhanced by improved net interest margin (NIM), driven by proactive balance sheet management that reduced funding costs and increased loan yields.
• Non-interest income saw substantial growth, reflecting strength in areas like loan sales, fiduciary services, and deposit account fees, partially offsetting increased operating expenses related to integration and strategic investments.
• The company maintains a strong capital position and ample liquidity, providing a solid foundation despite facing competitive pressures from larger, more technologically advanced regional banks and fintechs.
• Key areas for investors to monitor include the continued success of acquisition integration, trends in credit quality (particularly within the significant commercial real estate portfolio), and the company's ability to compete effectively in an increasingly digital banking environment.

LCNB Corp., an Ohio-based financial holding company with roots tracing back to 1877, operates primarily through its subsidiary, LCNB National Bank. Serving communities across Southwest and South-Central Ohio and Northern Kentucky, the company offers a comprehensive suite of banking services, including traditional deposit and lending products, alongside specialized offerings like trust administration, investment management, and brokerage services. LCNB's strategic trajectory has recently been defined by a deliberate multi-year growth plan, significantly accelerated by key acquisitions. The integration of Cincinnati Bancorp, Inc. in late 2023 and Eagle Financial Bancorp, Inc. (EFBI) in April 2024 has been central to this strategy, notably expanding LCNB's footprint and market presence in the crucial Cincinnati area, bringing additional branches and customer relationships into the fold. This period of inorganic growth sets the stage for the company's current focus on operational integration and balance sheet optimization.

Within the competitive Midwest banking landscape, LCNB operates as a regional and community bank, positioning itself against both larger, more established regional players like Huntington Bancshares (HBAN), Fifth Third Bancorp (FITB), KeyCorp (KEY), and PNC Financial Services Group (PNC), as well as agile indirect competitors in the fintech space. While LCNB provides essential digital banking services such as online and mobile banking, its larger peers often possess more advanced, quantifiable technological capabilities, such as AI-driven underwriting or faster transaction processing systems. LCNB's competitive edge, therefore, leans heavily on its deep-rooted community relationships, personalized service model, and expertise in niche markets like agricultural lending and local commercial real estate. However, the scale and technological advantages of larger banks pose challenges related to efficiency and the ability to attract digitally-native customers, while fintechs threaten market share in price-sensitive segments. LCNB's strategy of integrating acquisitions aims to build necessary scale, while its focus on relationship banking and specific service lines seeks to differentiate it from competitors whose models may be more commoditized or less locally focused.

Q1 2025 Performance: A Story of Margin Expansion and Non-Interest Growth

The first quarter of 2025 demonstrated a notable improvement in LCNB's financial performance, reflecting the initial benefits of strategic initiatives and favorable balance sheet dynamics. Net income for the three months ended March 31, 2025, surged to $4.609 million, or $0.33 per basic and diluted share, a significant increase compared to $1.915 million, or $0.15 per basic and diluted share, in the same period of 2024.

A primary driver of this enhanced profitability was the expansion of the net interest margin (NIM). Net interest income rose to $16.299 million in Q1 2025 from $13.895 million in Q1 2024. This improvement was largely attributable to effective balance sheet management in the prevailing interest rate environment. LCNB successfully reduced the average interest rate paid on interest-bearing liabilities by 79 basis points compared to the prior year period, while simultaneously increasing the average rate earned on the loan portfolio by 16 basis points. The strategic payoff of $50 million in higher-cost Federal Home Loan Bank (FHLB) advances during the quarter, funded partly by an increase in lower-cost Insured Cash Sweep (ICS) deposits, contributed to a decrease in overall funding costs and a lower weighted average interest rate on long-term debt. The tax-equivalent net interest margin consequently improved to 3.25% for the first quarter of 2025, up from 2.72% in the comparable period of 2024.

Complementing the strength in net interest income, non-interest income experienced substantial growth, increasing by $1.293 million, or 32.9%, to $5.222 million in Q1 2025 from $3.929 million in Q1 2024. This growth was broad-based, with key contributions from higher net gains on the sale of loans (driven by increased volume in residential real estate loan sales), a rise in fiduciary income (benefiting from growth in Wealth Management customer accounts and asset values), and increased service charges and fees on deposit accounts (attributable to higher fee income from the ICS product and overdraft fees). Other operating income also saw an increase, primarily due to reduced amortization of capitalized mortgage servicing rights.

Non-interest expense saw a more modest increase of $337 thousand, totaling $15.809 million in Q1 2025 compared to $15.472 million in Q1 2024. This increase reflects higher operating costs associated with integrating the Eagle acquisition and increased marketing expenditures related to a new brand awareness campaign. However, the absence of $775 thousand in one-time merger-related expenses incurred in the first quarter of 2024 largely offset these increases. Salaries and employee benefits rose due to wage and benefit increases and the expanded employee base from the EFBI acquisition. An impairment charge of $73 thousand on a closed office also contributed to other non-interest expense in the quarter. Management anticipates marketing expenses will normalize over the remainder of the year.

The effective tax rate for the first quarter of 2025 was 16.40%, higher than the 14.00% rate in Q1 2024. The difference from the statutory rate of 21.00% in both periods is primarily due to tax-exempt income from municipal securities, bank-owned life insurance, captive insurance premium income, and affordable housing tax credit investments. The lower rate in 2024 was attributed to these tax-exempt items representing a larger proportion of lower overall earnings in that period.

Balance Sheet Dynamics and Credit Quality

LCNB's balance sheet at March 31, 2025, remained relatively stable in total assets at $2.30 billion compared to $2.31 billion at December 31, 2024. However, underlying shifts reflect active management and strategic priorities. Total deposits increased by $39.357 million to $1.92 billion, primarily driven by growth in interest-bearing deposits, notably through the ICS service. This deposit growth provided funding for the early payoff of $50 million in FHLB advances, contributing to a significant decrease in long-term debt from $155.153 million at year-end 2024 to $104.637 million at March 31, 2025.

The loan portfolio, LCNB's largest asset category and primary income source, saw a slight increase to $1.71 billion net of allowance for credit losses. Commercial real estate loans constitute the largest segment, representing approximately 65% of total loans at March 31, 2025. This concentration is actively monitored, with detailed tracking by property type (including multi-family, retail, office, mixed-use, and hotel/motel) and geographic location within LCNB's market area, including significant exposures in Franklin, Hamilton, and Montgomery counties in Ohio.

Credit quality remains a critical focus. LCNB utilizes a Current Expected Credit Losses (CECL) methodology, primarily employing a Discounted Cash Flow (DCF) model to estimate the Allowance for Credit Losses (ACL). This model incorporates historical loss experience, current conditions, and reasonable and supportable economic forecasts. As of March 31, 2025, the economic forecast used included projected unemployment between 4.66% and 5.57%, and changes in commercial real estate price indexes between -8.90% and -2.30%. Management believes the resulting quantitative reserve appropriately balances these economic indicators with identified risks. Qualitative factors, such as changes in economic conditions and lending policies, are also considered.

The provision for credit losses for the quarter was $197 thousand, reflecting management's assessment of the required ACL level. Net charge-offs remained low at $39 thousand for Q1 2025, slightly down from $45 thousand in Q1 2024. Non-accrual loans totaled $4.710 million at March 31, 2025, representing 0.27% of total loans, a minor increase from 0.26% at December 31, 2024. Loans rated Other Assets Especially Mentioned (OAEM) or worse, particularly in the commercial real estate portfolio, are reviewed at least quarterly for credit deterioration. While loan modifications for borrowers experiencing financial difficulty are undertaken, LCNB monitors their performance. A specific instance noted was a $27 thousand amortized cost basis of consumer loans modified in Q2 2024 that defaulted in Q3 2024 and remained in default at the end of Q1 2025.

LCNB maintains robust liquidity, supported by customer deposits, available FHLB borrowing capacity of approximately $144.3 million, and correspondent bank lines of credit totaling approximately $115 million at March 31, 2025. Additionally, approximately $108 million in off-balance sheet insured cash sweeps provide immediate liquidity. Management assesses liquidity as sufficient to meet commitments. Capital levels remain strong, with the Bank and LCNB categorized as well-capitalized under regulatory frameworks, exceeding minimum requirements across all ratios, including a Common Equity Tier 1 capital ratio of 9.98% for the Bank at March 31, 2025. LCNB did not qualify for the simplified Community Bank Leverage Ratio framework.

Competitive Realities and Strategic Outlook

LCNB operates in a highly competitive environment where scale, efficiency, and technological capability are increasingly important. While larger regional banks like HBAN, FITB, KEY, and PNC benefit from greater resources, extensive branch networks, and more advanced digital platforms, LCNB leverages its community bank model to foster strong local relationships and customer loyalty, particularly effective in its core and niche markets. While LCNB offers standard digital services, it may lag larger peers in deploying cutting-edge, quantifiable technological solutions that enhance efficiency or customer experience in ways that are measurable (e.g., faster processing times, AI-driven tools). This potential technology gap, coupled with the inherent cost advantages of larger scale, presents a challenge to LCNB's operational efficiency compared to some rivals. Furthermore, the rise of fintech companies offering streamlined, low-cost digital alternatives poses a threat, particularly in attracting younger or price-sensitive customers, a dynamic that may favor larger banks capable of partnering with or acquiring such technologies.

LCNB's strategic response is multifaceted. The recent acquisitions are intended to build scale and expand market reach, directly addressing the size disparity with larger competitors. The focus on integrating these operations is crucial for realizing expected synergies and improving overall efficiency. Simultaneously, LCNB leans into its strengths: cultivating deep community ties, providing personalized service, and maintaining expertise in specific lending areas like commercial real estate and agriculture, where local knowledge and relationships are paramount. The strong growth in non-interest income, particularly in fiduciary services and fee-based products like ICS, indicates success in diversifying revenue streams beyond traditional spread income, a strategic imperative in a volatile rate environment.

Looking ahead, LCNB's outlook is tied to the successful execution of its integration strategy, the ability to sustain margin performance in a potentially changing rate environment, and effective management of credit risk. While Q1 2025 results show positive momentum, they are not necessarily indicative of the full year. Management anticipates some normalization in specific expense categories, such as marketing, but overall profitability will depend on continued net interest income strength and non-interest income growth.

Key risks include the potential for integration challenges from recent acquisitions, sensitivity to interest rate fluctuations (though current modeling suggests impacts are within acceptable limits), and credit risk, particularly within the concentrated commercial real estate portfolio, which is subject to broader economic conditions and local market dynamics. The competitive landscape, marked by larger, more technologically advanced institutions and disruptive fintechs, remains a persistent challenge, requiring LCNB to continuously evaluate its service delivery and operational efficiency.

Conclusion

LCNB Corp. is navigating a period of strategic transformation marked by significant acquisitions aimed at driving growth and enhancing its market position. The first quarter of 2025 demonstrated tangible progress, with strong profitability growth fueled by improved net interest margin and robust non-interest income performance. This reflects effective balance sheet management and successful execution in key business lines. While LCNB benefits from a solid capital base, ample liquidity, and deep community roots that foster customer loyalty, it faces inherent competitive challenges from larger banks with scale advantages and more advanced technological capabilities, as well as disruption from fintech alternatives. The company's ability to successfully integrate its recent acquisitions, maintain disciplined credit quality amidst evolving economic conditions, and strategically leverage its relationship-based model to compete in an increasingly digital financial landscape will be critical determinants of its long-term investment appeal. Investors should closely monitor these factors as LCNB continues to execute its multi-year growth strategy.