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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549

FORM 10-Q

(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                                        to                                                      

Commission File Number 001-35292
LCNB Corp.
(Exact name of registrant as specified in its charter)
Ohio  31-1626393
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)

2 North Broadway, Lebanon, Ohio 45036
(Address of principal executive offices, including Zip Code)

(513) 932-1414
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, No Par ValueLCNBNASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
            ☒ Yes         ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
            ☒ Yes         ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐                            Accelerated filer ☐
Non-accelerated filer ☒                             Smaller reporting company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
            ☐ Yes         ☒ No
The number of shares outstanding of the issuer's common stock, without par value, as of November 6, 2020 was 12,878,670 shares.

Table of Contents


LCNB CORP. AND SUBSIDIARIES

TABLE OF CONTENTS
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
1
Table of Contents


PART I – FINANCIAL INFORMATION
 
Item 1.Financial Statements

LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share data)
September 30, 2020December 31,
2019
(Unaudited)
ASSETS:
Cash and due from banks$16,151 17,019 
Interest-bearing demand deposits8,334 3,746 
Total cash and cash equivalents24,485 20,765 
Investment securities:  
Equity securities with a readily determinable fair value, at fair value2,213 2,312 
Equity securities without a readily determinable fair value, at cost2,099 2,099 
Debt securities, available-for-sale, at fair value157,936 178,000 
Debt securities, held-to-maturity, at cost26,941 27,525 
Federal Reserve Bank stock, at cost4,652 4,652 
Federal Home Loan Bank stock, at cost5,203 5,203 
Loans, net1,334,186 1,239,406 
Premises and equipment, net35,309 34,787 
Operating lease right-of-use assets5,729 5,444 
Goodwill59,221 59,221 
Core deposit and other intangibles, net3,539 4,006 
Bank owned life insurance41,871 41,667 
Interest receivable9,559 3,926 
Other assets12,672 10,295 
TOTAL ASSETS$1,725,615 1,639,308 
LIABILITIES:  
Deposits:  
Noninterest-bearing$426,989 354,391 
Interest-bearing1,003,405 993,889 
Total deposits1,430,394 1,348,280 
Long-term debt31,999 40,994 
Operating lease liabilities5,790 5,446 
Accrued interest and other liabilities18,847 16,540 
TOTAL LIABILITIES1,487,030 1,411,260 
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; issued 14,157,303 and 14,111,810 shares at September 30, 2020 and December 31, 2019, respectively; outstanding 12,926,686 and 12,936,783 shares at September 30, 2020 and December 31, 2019, respectively142,310 141,791 
Retained earnings111,760 104,431 
Treasury shares at cost, 1,230,617 and 1,175,027 shares at September 30, 2020 and December 31, 2019, respectively(19,639)(18,847)
Accumulated other comprehensive income, net of taxes4,154 673 
TOTAL SHAREHOLDERS' EQUITY238,585 228,048 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY$1,725,615 1,639,308 

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.

The consolidated condensed balance sheet as of December 31, 2019 has been derived from the audited consolidated balance sheet as of that date.
2
Table of Contents


LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended
September 30,		Nine Months Ended 
September 30,
 2020201920202019
INTEREST INCOME:
Interest and fees on loans$14,379 14,872 $44,428 44,072 
Dividends on equity securities:
With a readily determinable fair value13 15 40 47 
Without a readily determinable fair value5 16 33 48 
Interest on debt securities:
Taxable633 918 2,250 2,720 
Non-taxable249 379 788 1,340 
Interest on interest-bearing time deposits— 3 — 11 
Other investments43 126 296 532 
TOTAL INTEREST INCOME15,322 16,329 47,835 48,770 
INTEREST EXPENSE:    
Interest on deposits1,567 2,475 5,416 7,225 
Interest on short-term borrowings— 3 7 224 
Interest on long-term debt226 273 707 762 
TOTAL INTEREST EXPENSE1,793 2,751 6,130 8,211 
NET INTEREST INCOME13,529 13,578 41,705 40,559 
PROVISION FOR LOAN LOSSES976 264 2,165 213 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES12,553 13,314 39,540 40,346 
NON-INTEREST INCOME:    
Fiduciary income1,275 1,123 3,579 3,215 
Service charges and fees on deposit accounts1,506 1,616 4,038 4,421 
Net gains (losses) from sales of debt securities, available-for-sale— (20)221 (37)
Bank owned life insurance income275 289 1,163 654 
Gains from sales of loans999 114 1,436 207 
Other operating income223 234 999 666 
TOTAL NON-INTEREST INCOME4,278 3,356 11,436 9,126 
NON-INTEREST EXPENSE:    
Salaries and employee benefits6,863 6,403 20,279 18,808 
Equipment expenses341 322 917 866 
Occupancy expense, net740 751 2,145 2,258 
State financial institutions tax424 433 1,280 1,307 
Marketing471 410 906 1,009 
Amortization of intangibles263 263 783 780 
FDIC insurance premiums (credit), net112 (13)142 225 
Contracted services435 455 1,312 1,394 
Other real estate owned2 1 (7)52 
Merger-related expenses— 27 — 114 
Other non-interest expense2,002 1,930 6,084 5,702 
TOTAL NON-INTEREST EXPENSE11,653 10,982 33,841 32,515 
INCOME BEFORE INCOME TAXES5,178 5,688 17,135 16,957 
PROVISION FOR INCOME TAXES928 961 2,802 2,875 
NET INCOME$4,250 4,727 $14,333 14,082 
Dividends declared per common share$0.18 0.17 $0.54 0.51 
Earnings per common share:    
Basic$0.33 0.36 $1.11 1.07 
Diluted0.33 0.36 1.11 1.07 
Weighted average common shares outstanding:    
Basic12,937,865 12,932,950 12,934,987 13,135,134 
Diluted12,937,901 12,937,145 12,935,388 13,139,100 

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
3
Table of Contents


LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended
September 30,		Nine Months Ended 
September 30,
 2020201920202019
Net income$4,250 4,727 $14,333 14,082 
Other comprehensive income:    
Net unrealized gains on available-for-sale debt securities (net of taxes of $76 and $221 for the three months ended September 30, 2020 and 2019, respectively, and $972 and $1,457 for the nine months ended September 30, 2020 and 2019, respectively)286 829 3,655 5,482 
Reclassification adjustment for net realized (gains) losses on sales of available-for-sale debt securities included in net income (net of taxes of $- and $4 for the three months ended September 30, 2020 and 2019, respectively, and $46 and $8 for the nine months ended September 30, 2020 and 2019, respectively)— 16 (175)29 
Change in nonqualified pension plan unrecognized net loss and unrecognized prior service cost (net of taxes of $- and $- for the three and nine months ended September 30, 2020, respectively)— — 1 — 
  Other comprehensive income, net of tax286 845 3,481 5,511 
TOTAL COMPREHENSIVE INCOME$4,536 5,572 $17,814 19,593 

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.

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LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
(Unaudited)
 Common Shares OutstandingCommon StockRetained
Earnings		Treasury
Shares		Accumulated
Other
Comprehensive
Income (Loss)		Total Shareholders'
Equity
Three Months Ended September 30, 2020
Balance at June 30, 202012,975,879 $142,181 109,845 (18,847)3,868 237,047 
Net income  4,250   4,250 
Other comprehensive income, net of taxes   286 286 
Dividend Reinvestment and Stock Purchase Plan6,397 94   94 
Repurchase of common stock(55,590)(792)(792)
Compensation expense relating to restricted stock— 35 35 
Common stock dividends, $0.18 per share  (2,335)  (2,335)
Balance at September 30, 202012,926,686 $142,310 111,760 (19,639)4,154 238,585 
Nine Months Ended September 30, 2020
Balance at December 31, 201912,936,783 $141,791 104,431 (18,847)673 228,048 
Net income  14,333   14,333 
Other comprehensive income, net of taxes   3,481 3,481 
Dividend Reinvestment and Stock Purchase Plan20,239 302   302 
Repurchase of common stock(55,590)(792)(792)
Exercise of stock options9,593 115 115 
Compensation expense relating to restricted stock15,661 102 102 
Common stock dividends, $0.54 per share  (7,004)  (7,004)
Balance at September 30, 202012,926,686 $142,310 111,760 (19,639)4,154 238,585 
Three Months Ended September 30, 2019
Balance at June 30, 201912,978,554 $141,479 99,400 (17,854)(53)222,972 
Net income  4,727   4,727 
Other comprehensive income, net of taxes    845 845 
Dividend Reinvestment and Stock Purchase Plan6,824 118    118 
Repurchase of common stock(57,915)(993)(993)
Compensation expense relating to restricted stock— 21 21 
Common stock dividends, $0.17 per share  (2,198)  (2,198)
Balance at September 30, 201912,927,463 $141,618 101,929 (18,847)792 225,492 
Nine Months Ended September 30, 2019
Balance at December 31, 201813,295,276 $141,170 94,547 (12,013)(4,719)218,985 
Net income  14,082   14,082 
Other comprehensive income, net of taxes    5,511 5,511 
Dividend Reinvestment and Stock Purchase Plan19,683 336    336 
Repurchase of common stock(400,000)(6,834)(6,834)
Compensation expense relating to restricted stock12,504 112 112 
Common stock dividends, $0.51 per share  (6,700)  (6,700)
Balance at September 30, 201912,927,463 $141,618 101,929 (18,847)792 225,492 

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
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LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended 
September 30,
 20202019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income$14,333 14,082 
Adjustments to reconcile net income to net cash flows from operating activities:  
Depreciation, amortization, and accretion1,960 2,438 
Provision for loan losses2,165 213 
Deferred income tax provision (benefit)(19)225 
Increase in cash surrender value of bank owned life insurance(846)(654)
Bank owned life insurance mortality benefits in excess of cash surrender value(317)— 
Realized gain from equity securities(504)(207)
Realized (gain) loss from sales of debt securities, available-for-sale(221)37 
Realized gain from sales of premises and equipment(62)(1)
Realized (gain) loss from sales and impairment of other real estate owned and repossessed assets(11)47 
Origination of mortgage loans for sale(42,208)(10,449)
Realized gains from sales of loans(1,436)(207)
Proceeds from sales of mortgage loans43,175 10,561 
Compensation expense related to restricted stock102 112 
Changes in:  
Accrued income receivable(5,783)(752)
Other assets(2,421)(1,839)
Other liabilities1,401 1,243 
TOTAL ADJUSTMENTS(5,025)767 
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES9,308 14,849 
CASH FLOWS FROM INVESTING ACTIVITIES:  
Proceeds from sales of equity securities967 380 
Proceeds from sales of debt securities, available-for-sale8,786 75,407 
Proceeds from maturities and calls of debt securities:
Available-for-sale48,572 16,012 
Held-to-maturity2,069 2,542 
Purchases of equity securities(364)(360)
Purchases of debt securities:
Available-for-sale(33,426)(38,114)
Held-to-maturity(1,485)(6,852)
Proceeds from maturities of interest-bearing time deposits— 747 
Proceeds from redemption of Federal Reserve Bank stock— 1 
Purchase of Federal Home Loan Bank stock— (358)
Net increase in loans(95,858)(26,753)
Purchase of bank owned life insurance— (12,000)
Proceeds from bank owned life insurance mortality benefits958 — 
Proceeds from sale of other real estate owned and repossessed assets208 — 
Purchases of premises and equipment(2,169)(2,701)
Proceeds from sale of premises and equipment419 5 
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES(71,323)7,956 
CASH FLOWS FROM FINANCING ACTIVITIES:  
Net increase in deposits82,114 54,464 
Net decrease in short-term borrowings— (56,230)
Principal payments on long-term debt(9,000)(5,055)
Proceeds from issuance of common stock45 58 
Repurchase of common stock(792)(6,834)
Proceeds from exercise of stock options115 — 
Cash dividends paid on common stock(6,747)(6,422)
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES65,735 (20,019)
NET CHANGE IN CASH AND CASH EQUIVALENTS3,720 2,786 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD20,765 20,040 
CASH AND CASH EQUIVALENTS AT END OF PERIOD$24,485 22,826 
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Nine Months Ended 
September 30,
2020
2019
SUPPLEMENTAL CASH FLOW INFORMATION:  
Interest paid6,315 7,896 
Income taxes paid2,225 1,901 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:  
Transfer from loans to other real estate owned and repossessed assets— 17 

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.

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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

Note 1 - Basis of Presentation
 
Basis of Presentation
The accompanying unaudited interim consolidated condensed financial statements include LCNB Corp. ("LCNB") and its wholly-owned subsidiaries: LCNB National Bank (the "Bank") and LCNB Risk Management, Inc., its captive insurance company. All material intercompany transactions and balances are eliminated in consolidation.

The unaudited interim consolidated condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and regulations of the Securities and Exchange Commission (the "SEC").  Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations.  In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of financial position, results of consolidated operations, and cash flows for the interim periods, as required by Regulation S-X, Rule 10-01.

The consolidated condensed balance sheet as of December 31, 2019 has been derived from the audited consolidated balance sheet as of that date.

Certain prior period data presented in the consolidated financial statements have been reclassified to conform with the current year presentation.

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, the 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.

Results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year ending December 31, 2020.  These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies, and financial notes thereto included in LCNB's 2019 Annual Report on Form 10-K filed with the SEC.

Accounting Changes

Financial Accounting Standards Board ("FASB) Accounting Standards Update ("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.

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LCNB CORP. AND SUBSIDIARIES
(Continued)



Note 2 - Investment Securities
 
The amortized cost and estimated fair value of equity and debt securities at September 30, 2020 and December 31, 2019 are summarized as follows (in thousands):
 Amortized
Cost		Unrealized
Gains		Unrealized
Losses		Fair
Value
September 30, 2020
Debt Securities, Available-for-Sale:
U.S. Treasury notes$2,269 130 — 2,399 
U.S. Agency notes28,328 940 — 29,268 
Corporate bonds700 — 15 685 
U.S. Agency mortgage-backed securities86,497 3,166 3 89,660 
Municipal securities:    
Non-taxable12,823 272 12 13,083 
Taxable21,826 1,015 — 22,841 
 $152,443 5,523 30 157,936 
Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable$23,436 447 — 23,883 
Taxable3,505 1 112 3,394 
$26,941 448 112 27,277 
December 31, 2019
Debt Securities, Available-for-Sale:
U.S. Treasury notes$2,273 36 — 2,309 
U.S. Agency notes48,745 273 34 48,984 
U.S. Agency mortgage-backed securities83,977 672 243 84,406 
Municipal securities:    
Non-taxable22,174 161 14 22,321 
Taxable19,746 269 35 19,980 
 $176,915 1,411 326 178,000 
Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable$24,300 343 5 24,638 
Taxable3,225 25 — 3,250 
$27,525 368 5 27,888 
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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 2 - Investment Securities (continued)

Information concerning debt securities with gross unrealized losses at September 30, 2020 and December 31, 2019, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (dollars in thousands):
 Less than Twelve MonthsTwelve Months or Greater
 Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
September 30, 2020
Available-for-Sale:
Corporate bonds$685 15 — — 
U.S. Agency mortgage-backed securities1,047 3 — — 
Municipal securities:  
Non-taxable762 12 — — 
 $2,494 30 — — 
Held-to-Maturity:
Municipal securities:
  Non-taxable$1,915 — — — 
  Taxable3,113 112 — — 
$5,028 112 — — 
December 31, 2019
Available-for-Sale:
U.S. Agency notes$3,586 11 11,939 23 
U.S. Agency mortgage-backed securities10,555 10 19,233 233 
Municipal securities:   
Non-taxable2,631 2 1,257 12 
Taxable5,067 35 450 — 
 $21,839 58 32,879 268 
Held-to-Maturity:
Municipal securities:
  Non-taxable$54 — 2,660 5 
$54 — 2,660 5 

Management has determined that the unrealized losses at September 30, 2020 are primarily due to fluctuations in market interest rates and do not reflect credit quality deterioration of the securities.   Because LCNB does not have the intent to sell the investments and it is more likely than not that LCNB will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, LCNB does not consider these investments to be other-than-temporarily impaired.








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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 2 - Investment Securities (continued)

Contractual maturities of debt securities at September 30, 2020 were as follows (in thousands).  Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations.
 Available-for-SaleHeld-to-Maturity
Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
Due within one year$10,287 10,327 2,220 2,227 
Due from one to five years33,261 34,293 7,223 7,268 
Due from five to ten years21,669 22,939 2,090 2,109 
Due after ten years729 717 15,408 15,673 
 65,946 68,276 26,941 27,277 
U.S. Agency mortgage-backed securities86,497 89,660 — — 
 $152,443 157,936 26,941 27,277 

Debt securities with a market value of $135,819,000 and $123,009,000 at September 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits and for other purposes required or as permitted by law.

Certain information concerning the sale of debt securities, available-for-sale, for the three and nine months ended September 30, 2020 and 2019 was as follows (in thousands):
 Three Months Ended
September 30,		Nine Months Ended 
September 30,
 2020201920202019
Proceeds from sales$— 25,105 8,786 75,407 
Gross realized gains— 84 221 212 
Gross realized losses— 104 — 249 

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 condensed 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 September 30, 2020 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 September 30, 2020 and December 31, 2019 are summarized as follows (in thousands):
September 30, 2020December 31, 2019
 Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
Mutual funds$1,390 1,393 1,371 1,345 
Equity securities778 820 741 967 
Total equity securities with a readily determinable fair value$2,168 2,213 2,112 2,312 




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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 2 - Investment Securities (continued)

Certain information concerning changes in fair value of equity securities with a readily determinable fair value for the nine months ended September 30, 2020 and 2019 is as follows (in thousands):
Three Months Ended September 30,Nine Months Ended 
September 30,
2020201920202019
Net gains recognized$51 60 504 207 
Less net realized gains on equity securities sold99 23 658 17 
Net unrealized gains (losses) recognized and still held at period end$(48)37 (154)190 


Note 3 - Loans
 
Major classifications of loans at September 30, 2020 and December 31, 2019 were as follows (in thousands):
September 30, 2020December 31, 2019
Commercial and industrial$124,628 78,306 
Commercial, secured by real estate843,943 804,953 
Residential real estate327,689 322,533 
Consumer36,504 25,232 
Agricultural8,920 11,509 
Other loans, including deposit overdrafts403 1,193 
  Loans, gross1,342,087 1,243,726 
Deferred origination fees, net(1,927)(275)
  Loans, net of deferred origination fees1,340,160 1,243,451 
Less allowance for loan losses5,974 4,045 
Loans, net$1,334,186 1,239,406 

Non-accrual, past-due, and accruing restructured loans as of September 30, 2020 and December 31, 2019 were as follows (in thousands):
September 30, 2020December 31, 2019
Non-accrual loans:
Commercial and industrial$444 — 
Commercial, secured by real estate2,621 2,467 
Residential real estate1,045 743 
Total non-accrual loans4,110 3,210 
Past-due 90 days or more and still accruing94 — 
Total non-accrual and past-due 90 days or more and still accruing4,204 3,210 
Accruing restructured loans3,700 6,609 
Total$7,904 9,819 



.

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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

The allowance for loan losses for the three and nine months ended September 30, 2020 and 2019 were as follows (in thousands):
 Commercial
& Industrial		Commercial, Secured by
Real Estate		Residential
Real Estate		ConsumerAgriculturalOtherTotal
Three Months Ended September 30, 2020
Balance, beginning of period$691 3,465 697 133 26 4 5,016 
Provision (credit) charged to expenses114 466 353 32 (1)12 976 
Losses charged off— — (3)(5)— (30)(38)
Recoveries— — 1 3 — 16 20 
Balance, end of period$805 3,931 1,048 163 25 2 5,974 
Nine Months Ended September 30, 2020
Balance, beginning of year$456 2,924 528 99 34 4 4,045 
Provision (credit) charged to expenses345 1,277 452 63 (9)37 2,165 
Losses charged off(14)(270)(6)(20)— (93)(403)
Recoveries18 — 74 21 — 54 167 
Balance, end of period$805 3,931 1,048 163 25 2 5,974 
Three Months Ended September 30, 2019
Balance, beginning of period$497 2,720 773 81 38 3 4,112 
Provision (credit) charged to expenses(50)372 (101)10 1 32 264 
Losses charged off(47)— (204)(5)— (52)(308)
Recoveries— — 73 4 — 22 99 
Balance, end of period$400 3,092 541 90 39 5 4,167 
Nine Months Ended September 30, 2019
Balance, beginning of year$400 2,745 767 87 46 1 4,046 
Provision (credit) charged to expenses47 298 (189)(12)(7)76 213 
Losses charged off(47)(7)(272)(15)— (126)(467)
Recoveries— 56 235 30 — 54 375 
Balance, end of period$400 3,092 541 90 39 5 4,167 
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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

A breakdown of the allowance for loan losses and the loan portfolio by loan segment at September 30, 2020 and December 31, 2019 were as follows (in thousands):
 Commercial
& Industrial		Commercial, Secured by
Real Estate		Residential
Real Estate		ConsumerAgriculturalOtherTotal
September 30, 2020
Allowance for loan losses:
Individually evaluated for impairment$9 83 102 — — — 194 
Collectively evaluated for impairment796 3,848 946 163 25 2 5,780 
Acquired credit impaired loans— — — — — — — 
Balance, end of period$805 3,931 1,048 163 25 2 5,974 
Loans:
Individually evaluated for impairment$647 5,274 1,421 8 — — 7,350 
Collectively evaluated for impairment121,863 835,528 324,335 36,640 8,938 173 1,327,477 
Acquired credit impaired loans675 2,104 2,324 — — 230 5,333 
Balance, end of period$123,185 842,906 328,080 36,648 8,938 403 1,340,160 
December 31, 2019
Allowance for loan losses:
Individually evaluated for impairment$6 272 17 — — — 295 
Collectively evaluated for impairment450 2,652 511 99 34 4 3,750 
Acquired credit impaired loans— — — — — — — 
Balance, end of period$456 2,924 528 99 34 4 4,045 
Loans:
Individually evaluated for impairment$230 7,432 949 27 — — 8,638 
Collectively evaluated for impairment77,430 793,191 319,188 25,328 11,523 930 1,227,590 
Acquired credit impaired loans711 3,531 2,718 — — 263 7,223 
Balance, end of period$78,371 804,154 322,855 25,355 11,523 1,193 1,243,451 

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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

The risk characteristics of LCNB's material loan portfolio segments were as follows:

Commercial and 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 and industrial loans can have a fixed or variable rate, with maturities ranging from one to ten years.  Commercial and industrial loans are offered to businesses and professionals for short and medium terms on both a collateralized and uncollateralized basis. Commercial and 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 Paycheck Protection Program ("PPP") loans that were authorized under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP was implemented by the Small Business Administration ("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, and utilities. PPP loans made by LCNB have a maturity of two years and an interest rate of 1%. In addition, the SBA pays originating lenders processing fees based on the size of the loan, ranging from 1% to 5% of the loan amount. 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.

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. 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.

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 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 and mortgage loans secured by owner-occupied agricultural property 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.

LCNB does not originate reverse mortgage loans or residential real estate loans generally considered to be “subprime.”

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 generally 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.
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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

Consumer loans generally have higher interest rates, but pose additional risks of collectibility 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 and 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.
 
A breakdown of the loan portfolio by credit quality indicators at September 30, 2020 and December 31, 2019 is as follows (in thousands):
 PassOAEMSubstandardDoubtfulTotal
September 30, 2020
Commercial & industrial$122,186 — 999 — 123,185 
Commercial, secured by real estate821,099 9,333 12,474 — 842,906 
Residential real estate322,572 2,079 3,429 — 328,080 
Consumer36,646 — 2 — 36,648 
Agricultural8,925 — 13 — 8,938 
Other403 — — — 403 
Total$1,311,831 11,412 16,917 — 1,340,160 
December 31, 2019     
Commercial & industrial$76,236 233 1,902 — 78,371 
Commercial, secured by real estate789,319 3,007 11,828 — 804,154 
Residential real estate319,075 267 3,513 — 322,855 
Consumer25,342 — 13 — 25,355 
Agricultural11,523 — — — 11,523 
Other1,193 — — — 1,193 
Total$1,222,688 3,507 17,256 — 1,243,451 





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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

A loan portfolio aging analysis at September 30, 2020 and December 31, 2019 is as follows (in thousands):
 30-59 Days
Past Due		60-89 Days
Past Due		Greater Than
90 Days
Past Due		Total
Past Due		CurrentTotal Loans
Receivable		Total Loans Greater Than
90 Days and
Accruing
September 30, 2020
Commercial & industrial$— 76 — 76 123,109 123,185 — 
Commercial, secured by real estate— 224 1,584 1,808 841,098 842,906 — 
Residential real estate343 534 1,055 1,932 326,148 328,080 94 
Consumer7 9 — 16 36,632 36,648 — 
Agricultural— — — — 8,938 8,938 — 
Other55 — — 55 348 403 — 
Total$405 843 2,639 3,887 1,336,273 1,340,160 94 
December 31, 2019       
Commercial & industrial$283 — — 283 78,088 78,371 — 
Commercial, secured by real estate339 — 1,171 1,510 802,644 804,154 — 
Residential real estate1,573 260 423 2,256 320,599 322,855 — 
Consumer27 9 — 36 25,319 25,355 — 
Agricultural— — — — 11,523 11,523 — 
Other930 — — 930 263 1,193 — 
Total$3,152 269 1,594 5,015 1,238,436 1,243,451 — 

Impaired loans, including acquired credit impaired loans, at September 30, 2020 and December 31, 2019 were as follows (in thousands):
September 30, 2020December 31, 2019
 Recorded InvestmentUnpaid Principal BalanceRelated AllowanceRecorded InvestmentUnpaid Principal BalanceRelated Allowance
With no related allowance recorded:
Commercial & industrial$1,119 1,449 — 711 1,253 — 
Commercial, secured by real estate6,209 6,859 — 8,625 9,373 — 
Residential real estate2,740 3,185 — 3,118 3,651 — 
Consumer6 6 — 10 10 — 
Agricultural— — — — — — 
Other230 348 — 263 392 — 
Total$10,304 11,847 — 12,727 14,679 — 
With an allowance recorded:   
Commercial & industrial$203 208 9 230 235 6 
Commercial, secured by real estate1,169 1,384 83 2,338 2,485 272 
Residential real estate1,005 1,006 102 549 549 17 
Consumer2 2 — 17 17 — 
Agricultural— — — — — — 
Other— — — — — — 
Total$2,379 2,600 194 3,134 3,286 295 
Total:   
Commercial & industrial$1,322 1,657 9 941 1,488 6 
Commercial, secured by real estate7,378 8,243 83 10,963 11,858 272 
Residential real estate3,745 4,191 102 3,667 4,200 17 
Consumer8 8 — 27 27 — 
Agricultural— — — — — — 
Other230 348 — 263 392 — 
Total$12,683 14,447 194 15,861 17,965 295 
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

The following presents information related to the average recorded investment and interest income recognized on impaired loans, including acquired credit impaired loans, for the three and nine months ended September 30, 2020 and 2019 (in thousands):
20202019
 Average Recorded InvestmentInterest Income RecognizedAverage Recorded InvestmentInterest Income Recognized
Three Months Ended September 30,
With no related allowance recorded:
Commercial & industrial$1,192 25 960 11 
Commercial, secured by real estate6,258 61 11,409 290 
Residential real estate2,862 68 3,600 51 
Consumer7 — 12 — 
Agricultural— — — — 
Other227 6 304 8 
Total$10,546 160 16,285 360 
With an allowance recorded:
Commercial & industrial$207 2 244 4 
Commercial, secured by real estate1,174 2 2,514 13 
Residential real estate827 4 741 12 
Consumer2 — 19 — 
Agricultural— — — — 
Other— — — — 
Total$2,210 8 3,518 29 
Total:
Commercial & industrial$1,399 27 1,204 15 
Commercial, secured by real estate7,432 63 13,923 303 
Residential real estate3,689 72 4,341 63 
Consumer9 — 31 — 
Agricultural— — — — 
Other227 6 304 8 
Total$12,756 168 19,803 389 
Nine Months Ended September 30,
With no related allowance recorded:
Commercial & industrial$1,240 314 866 20 
Commercial, secured by real estate7,343 609 13,891 787 
Residential real estate3,057 217 3,724 161 
Consumer11 1 12 1 
Agricultural— — — — 
Other247 21 322 26 
Total$11,898 1,162 18,815 995 
With an allowance recorded:    
Commercial & industrial$216 10 253 11 
Commercial, secured by real estate1,190 6 2,563 47 
Residential real estate522 28 725 34 
Consumer4 — 21 1 
Agricultural— — — — 
Other— — — — 
Total$1,932 44 3,562 93 
Total:    
Commercial & industrial$1,456 324 1,119 31 
Commercial, secured by real estate8,533 615 16,454 834 
Residential real estate3,579 245 4,449 195 
Consumer15 1 33 2 
Agricultural— — — — 
Other247 21 322 26 
Total$13,830 1,206 22,377 1,088 

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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

Of the interest income recognized on impaired loans during the nine months ended September 30, 2020 and 2019, approximately $25,000 and $47,000, respectively, were recognized on a cash basis.

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.

Loan modifications that were classified as TDRs during the three and nine months ended September 30, 2020 and 2019 were as follows (dollars in thousands):
 20202019
 Number
of
Loans		Pre-Modification Recorded BalancePost-Modification Recorded BalanceNumber of LoansPre-Modification Recorded BalancePost-Modification Recorded Balance
Three Months Ended September 30,
Commercial and industrial— $— — — $— — 
Commercial, secured by real estate— — — — — — 
Residential real estate1 14 14 1 66 66 
Consumer— — — — — — 
Total1 $14 14 1 $66 66 
Nine Months Ended September 30,    
Commercial and industrial1 $4 $5 — $— $— 
Commercial, secured by real estate— — — 2 258 258 
Residential real estate1 14 14 3 120 120 
Consumer— — — — — — 
Total2 $18 $19 5 $378 $378 
There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the nine months ended September 30, 2020. One troubled debt restructuring with a balance of $22,000 defaulted within twelve months of the restructuring date during the third quarter 2019.

Information concerning loans that were modified during the nine months ended September 30, 2020 and 2019 and that were determined to be troubled debt restructurings follows (in thousands):
20202019
Impaired loans without a valuation allowance$5 282 
Impaired loans with a valuation allowance14 96 

The CARES Act includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under FASB Accounting Standards Codification ("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.
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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 – Loans (continued)

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 Financial Accounting Standards Board, 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.

As of September 30, 2020, no loans had been modified under the provisions of Section 4013. From the beginning of the pandemic through September 30, 2020, deferments were granted to loans totaling approximately $407.4 million using the guidance provided in the revised interagency statement. Most of these loans have returned to full payment status. The unpaid principal balance of modified loans with active deferrals totaled $29.4 million at September 30, 2020.

Mortgage loans sold to and serviced for investors are not included in the accompanying consolidated condensed balance sheets.  The unpaid principal balances of those loans at September 30, 2020 and December 31, 2019 were approximately $120,546,000 and $93,596,000, respectively.

The total recorded investment in residential consumer mortgage loans secured by residential real estate that were in the process of foreclosure at September 30, 2020 was $36,000.



Note 4 - Acquired Credit Impaired Loans

Loans acquired through 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.

Impaired loans acquired are accounted for under ASC 310-30.  Factors considered in evaluating whether an acquired loan was impaired include delinquency status and history, updated borrower credit status, collateral information, and updated 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.


20
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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 4 – Acquired Credit Impaired Loans (continued)

The following table provides at September 30, 2020 and December 31, 2019 the major classifications of acquired credit impaired loans that are accounted for in accordance with ASC 310-30 (in thousands):
September 30, 2020December 31, 2019
Acquired from First Capital Bancshares, Inc.
Commercial & industrial$2 5 
Commercial, secured by real estate— 792 
Residential real estate453 551 
Other loans, including deposit overdrafts— — 
  Loans, gross455 1,348 
Less allowance for loan losses— — 
  Loans, net$455 1,348 
Acquired from Eaton National Bank & Trust Co.
Commercial & industrial$547 423 
Commercial, secured by real estate622 815 
Residential real estate606 685 
Other loans, including deposit overdrafts230 263 
  Loans, gross2,005 2,186 
Less allowance for loan losses— — 
  Loans, net$2,005 2,186 
Acquired from BNB Bancorp, Inc.
Commercial & industrial$— — 
Commercial, secured by real estate802 1,219 
Residential real estate87 100 
Other loans, including deposit overdrafts— — 
  Loans, gross889 1,319 
Less allowance for loan losses— — 
  Loans, net$889 1,319 
Acquired from Columbus First Bancorp, Inc.
Commercial & industrial$126 283 
Commercial, secured by real estate680 705 
Residential real estate1,178 1,382 
Other loans, including deposit overdrafts— — 
  Loans, gross1,984 2,370 
Less allowance for loan losses— — 
  Loans, net$1,984 2,370 
Total
Commercial & industrial$675 711 
Commercial, secured by real estate2,104 3,531 
Residential real estate2,324 2,718 
Other loans, including deposit overdrafts230 263 
Loans, gross5,333 7,223 
Less allowance for loan losses— — 
  Loans, net$5,333 7,223 
21
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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 4 – Acquired Credit Impaired Loans (continued)

The following table provides the outstanding balance and related carrying amount for acquired credit impaired loans at the dates indicated (in thousands):
September 30, 2020December 31, 2019
Outstanding balance$6,590 9,139 
Carrying amount5,333 7,223 

Activity during the three and nine months ended September 30, 2020 and 2019 for the accretable discount related to acquired credit impaired loans is as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Accretable discount at beginning of period$204 626 480 743 
Reclassification from nonaccretable discount to accretable discount6 136 368 195 
Disposals— — — 1 
Accretion(27)(131)(665)(308)
Accretable discount at end of period$183 631 183 631 


Note 5 - Affordable Housing Tax Credit Limited Partnership

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 investments and related unfunded commitments at September 30, 2020 and December 31, 2019 (in thousands):
 September 30,
2020		December 31,
2019
Affordable housing tax credit investment$10,000 7,000 
Less amortization1,203 810 
Net affordable housing tax credit investment$8,797 6,190 
Unfunded commitment$6,864 4,596 

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 condensed balance sheets.

LCNB expects to fund the unfunded commitment over 10.25 years.






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LCNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 5 – Affordable Housing Tax Credit Limited Partnership (continued)
The following table presents other information relating to LCNB's affordable housing tax credit investments for the three and nine months ended September 30, 2020 and 2019 (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Tax credits and other tax benefits recognized$264 94 802 262 
Tax credit amortization expense included in provision for income taxes130 33 393 124 


Note 6 – Borrowings

Borrowings at September 30, 2020 and December 31, 2019 were as follows (dollars in thousands):
September 30, 2020December 31, 2019
AmountRateAmountRate
FHLB long-term advances$31,999 2.75 %$40,994 2.55 %
$31,999 2.75 %$40,994 2.55 %

All advances from the Federal Home Loan Bank ("FHLB") of Cincinnati, both long-term and short-term, are secured by a blanket pledge of LCNB's 1-4 family first lien mortgage loans in the amount of approximately $290 million and $283 million at September 30, 2020 and December 31, 2019, respectively.  Additionally, LCNB is required to hold minimum levels of FHLB stock, based on the outstanding borrowings. Total remaining borrowing capacity at September 30, 2020 was approximately $167.5 million. One of the factors limiting remaining borrowing capacity is ownership of FHLB stock. LCNB could increase its remaining borrowing capacity by purchasing additional FHLB stock.


Note 7 - Leases

Lease expenses for offices are included in the consolidated condensed statements of income in net occupancy expense and lease expenses for equipment and ATMs are included in equipment expense. Components of lease expense for the three and nine months ended September 30, 2020 were as follows (in thousands):
Three Months Ended
September 30,		Nine Months Ended 
September 30,
2020201920202019
Operating lease expense$168 140 469 420 
Short-term lease expense12 11 39 37 
Variable lease expense1 3 8 8 
Other1 1 7 4 
Total lease expense$182 155 523 469 

Other information related to leases at September 30, 2020 were as follows (dollars in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$420 
Right-of-use assets obtained in exchange for new operating lease liabilities$653 
Weighted average remaining lease term in years for operating leases36.2
Weighted average discount rate for operating leases3.57 %
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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)



Note 8 – Income Taxes

A reconciliation between the statutory income tax and LCNB's effective tax rate on income from continuing operations follows:
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Statutory tax rate21.0 %21.0 %21.0 %21.0 %
Increase (decrease) resulting from:    
Tax exempt interest(1.0)%(1.3)%(0.9)%(1.6)%
Tax exempt income on bank owned life insurance(1.1)%(1.1)%(1.4)%(0.8)%
Captive insurance premium income(0.7)%(0.7)%(0.8)%(0.8)%
Tax benefit from certain provisions of the CARES Act— %— %(1.1)%— %
Other, net(0.3)%(1.0)%(0.4)%(0.8)%
Effective tax rate17.9 %16.9 %16.4 %17.0 %


Note 9 - 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.  Exposure to credit loss in the event of nonperformance by the other parties to financial instruments 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 September 30, 2020 and December 31, 2019 were as follows (in thousands):
September 30, 2020December 31, 2019
Commitments to extend credit:
Commercial loans$27,406 50,235 
Other loans  
Fixed rate16,862 4,431 
Adjustable rate2,060 1,199 
Unused lines of credit:  
Fixed rate25,642 28,796 
Adjustable rate147,569 174,577 
Unused overdraft protection amounts on demand and NOW accounts16,466 16,304 
Standby letters of credit243 883 
Total commitments$236,248 276,425 

24
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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 9 – Commitments and Contingent Liabilities (continued)

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.  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.

LCNB evaluates each customer's credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the borrower.  Collateral held varies, but may include accounts receivable, inventory, residential realty, income-producing commercial property, agricultural property, and property, plant, and equipment.

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.  

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 September 30, 2020 totaled approximately $963,000.

Management believes that LCNB has sufficient liquidity to fund its lending and capital expenditure commitments.

LCNB and its subsidiaries 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 the consolidated financial position or results of operations.


Note 10 – Accumulated Other Comprehensive Income (Loss)
 
Changes in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019 were as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
 Unrealized Gains on Available-for-Sale SecuritiesChanges in Pension Plan Assets and Benefit ObligationsTotalUnrealized Gains and Losses on Available-for-Sale SecuritiesChanges in Pension Plan Assets and Benefit ObligationsTotal
2020
Balance at beginning of period$4,051 (183)3,868 857 (184)673 
Before reclassifications286 — 286 3,655 1 3,656 
Reclassifications— — — (175)— (175)
Balance at end of period$4,337 (183)4,154 4,337 (183)4,154 
2019   
Balance at beginning of period$35 (88)(53)(4,631)(88)(4,719)
Before reclassifications829 — 829 5,482 — 5,482 
Reclassifications16 — 16 29 — 29 
Balance at end of period$880 (88)792 880 (88)792 





25
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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 10 – Accumulated Other Comprehensive Income (Loss), continued
 


Reclassifications out of accumulated other comprehensive income (loss) during the three and nine months ended September 30, 2020 and 2019 and the affected line items in the consolidated condensed statements of income were as follows (in thousands):
Three Months Ended
September 30,		Nine Months Ended 
September 30,		Affected Line Item in the Consolidated Condensed Statements of Income
 2020201920202019
Realized gains (losses) from sales of debt securities, available-for-sale$— (20)221 (37)Net gains (losses) from sales of debt securities, available-for-sale
Income tax expense (benefit)— (4)46 (8)Provision for income taxes
Reclassification adjustment, net of taxes$— (16)175 (29)


Note 11 – Retirement Plans
 
LCNB participates in a noncontributory defined benefit multi-employer retirement plan that covers substantially all regular full-time employees hired before January 1, 2009. Employees hired before this date who received a benefit reduction under certain amendments to the defined benefit retirement plan receive an automatic contribution of 5% or 7% of their annual compensation, depending on the sum of an employee's age and vesting service, into their defined contribution plans (401(k) plans), regardless of the contributions made by the employees.  These contributions are made annually and these employees do not receive any employer matches to their 401(k) contributions.

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 LCNB contribution of 3% of each individual employee's annual compensation.

Funding and administrative costs of the qualified noncontributory defined benefit retirement plan and 401(k) plan charged to pension and other employee benefits in the consolidated condensed statements of income for the three and nine-month period ended September 30, 2020 and 2019 were as follows (in thousands):
Three Months Ended
September 30,		Nine Months Ended 
September 30,
 2020201920202019
Qualified noncontributory defined benefit retirement plan$273 215 814 730 
401(k) plan140 131 452 395 

Certain highly compensated former employees participate in a nonqualified defined benefit retirement plan.  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. This plan is limited to the original participants and no new participants have been added.

26
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)


Note 11 – Retirement Plans (continued)

The components of net periodic pension cost of the nonqualified defined benefit retirement plan for the three and nine months ended September 30, 2020 and 2019 are summarized as follows (in thousands):
 Three Months Ended
September 30,		Nine Months Ended 
September 30,
 2020201920202019
Service cost$— — — — 
Interest cost17 20 49 57 
Amortization of unrecognized net loss— — — — 
Net periodic pension cost$17 20 49 57 

Amounts recognized in accumulated other comprehensive income, net of tax, at September 30, 2020 and December 31, 2019 for the nonqualified defined benefit retirement plan consists of (in thousands):
September 30, 2020December 31, 2019
Net actuarial loss$184 184 
Past service cost— — 
  Total recognized, net of tax$184 184 


Note 12 – 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 made 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 of common stock. The 2002 Plan expired on April 16, 2012. Any outstanding unexercised options, however, continue to be exercisable in accordance with their terms.

The 2015 Ownership Incentive Plan (the "2015 Plan") was ratified 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 the Board of Directors. 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 option awards since 2012. Options granted to date under the 2002 Plan vest ratably over a five-year period and expire ten years after the date of grant. Stock options outstanding at September 30, 2020 were as follows:
Outstanding Stock OptionsExercisable Stock Options
Exercise Price RangeNumberWeighted Average
Exercise
Price		Weighted Average Remaining Contractual
Life (Years)		NumberWeighted Average Exercise PriceWeighted Average Remaining Contractual
Life (Years)
$11.00 - $12.99311 $12.60 1.4311 $12.60 1.4

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 12 – Stock Based Compensation (continued)
The following table summarizes stock option activity for the periods indicated:
Nine Months Ended September 30,
 20202019
 OptionsWeighted Average Exercise
Price		Aggregate Intrinsic Value (in thousands) (1)OptionsWeighted Average Exercise
Price		Aggregate Intrinsic Value (in thousands) (1)
Outstanding, January 1,9,904 $11.96 13,278 $11.98 
Granted— — — — 
Exercised(9,593)11.94 — — 
Expired— — — — 
Outstanding, September 30,311 12.60 — 13,278 11.98 76 
Exercisable, September 30,311 12.60 — 13,278 11.98 76 
(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 periods indicated (in thousands):
Nine Months Ended September 30,
 20202019
Intrinsic value of options exercised$46 — 
Cash received from options exercised115 — 
Tax benefit realized from options exercised5 — 

No compensation costs related to option awards were recognized during 2020 or 2019.

Restricted stock awards granted under the 2015 Plan were as follows:
20202019
  
 
Shares		Weighted Average Grant Date Fair Value 
 
Shares		Weighted Average Grant Date Fair Value
Outstanding, January 1,17,752 $18.03 16,958 $18.94 
Granted19,211 16.87 12,504 16.95 
Vested(3,818)18.45 (10,711)18.44 
Forfeited(3,550)16.90 — — 
Outstanding, September 30,29,595 $17.37 18,751 $17.90 

The following table presents expense recorded in salaries and employee benefits for restricted stock awards and the related tax information for the three and nine months ended September 30, 2020 and 2019 (in thousands):
 Three Months Ended
September 30,		Nine Months Ended 
September 30,
2020201920202019
Restricted stock expense$34 21 102 112 
Tax effect7 5 21 24 
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 12 – Stock Based Compensation (continued)
Unrecognized compensation expense for restricted stock awards was $445,000 at September 30, 2020 and is expected to be recognized over a period of 4.4 years.


Note 13 – Earnings per Common 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 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 and warrants with proceeds used to purchase treasury shares at the average market price for the period.  

Earnings per share for the three and nine months ended September 30, 2020 and 2019 were calculated as follows (dollars in thousands, except share and per share data):
Three Months Ended
September 30,		Nine Months Ended 
September 30,
 2020201920202019
Net income$4,250 4,727 14,333 14,082 
Less allocation of earnings and dividends to participating securities10 7 33 24 
Net income allocated to common shareholders$4,240 4,720 14,300 14,058 
Weighted average common shares outstanding, gross12,967,460 12,951,701 12,964,582 13,157,538 
Less average participating securities29,595 18,751 29,595 22,404 
Weighted average number of shares outstanding used in the calculation of basic earnings per common share12,937,865 12,932,950 12,934,987 13,135,134 
Add dilutive effect of:    
Stock options36 4,195 401 3,966 
Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share12,937,901 12,937,145 12,935,388 13,139,100 
Earnings per common share:    
Basic$0.33 0.36 1.11 1.07 
Diluted0.33 0.36 1.11 1.07 

There were no anti-dilutive stock options outstanding at September 30, 2020 or 2019.


Note 14 - Fair Value Measurements
 
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.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 14 - Fair Value Measurements (continued)
•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 condensed 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 were 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, other real estate owned, and other repossessed assets.

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.













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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 14 - Fair Value Measurements (continued)
The following table summarizes the valuation of LCNB's assets recorded at fair value by input levels as of September 30, 2020 and December 31, 2019 (in thousands):
Fair Value Measurements at the End of
the Reporting Period Using
 Fair Value MeasurementsQuoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs
(Level 2)		Significant Unobservable Inputs
(Level 3)
September 30, 2020
Recurring fair value measurements:
Equity securities with a readily determinable fair value:
     Equity securities$820 820 — — 
     Mutual funds42 42 — — 
     Mutual funds measured at net asset value1,351 1,351 — — 
Debt securities, available-for-sale:
     U.S. Treasury notes2,399 2,399 — — 
     U.S. Agency notes29,268 — 29,268 — 
     Corporate bonds685 — 685 — 
     U.S. Agency mortgage-backed securities89,660 — 89,660 — 
     Municipal securities:    
          Non-taxable13,083 — 13,083 — 
          Taxable22,841 — 22,841 — 
Total recurring fair value measurements$160,149 4,612 155,537 — 
Nonrecurring fair value measurements:   
Impaired loans$2,186 — — 2,186 
     Total nonrecurring fair value measurements$2,186 — — 2,186 
December 31, 2019    
Recurring fair value measurements:    
Equity securities with a readily determinable fair value:
     Equity securities$967 967 — — 
     Mutual funds45 45 — — 
     Mutual funds measured at net asset value1,300 1,300 — — 
Debt securities, available-for-sale:    
     U.S. Treasury notes2,309 2,309 — — 
     U.S. Agency notes48,984 — 48,984 — 
     U.S. Agency mortgage-backed securities84,406 — 84,406 — 
     Municipal securities:    
          Non-taxable22,321 — 22,321 — 
          Taxable19,980 — 19,980 — 
Total recurring fair value measurements$180,312 4,621 175,691 — 
Nonrecurring fair value measurements:    
Impaired loans$2,840 — — 2,840 
Other real estate owned and repossessed assets197 — — 197 
     Total nonrecurring fair value measurements$3,037 — — 3,037 

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 14 - Fair Value Measurements (continued)
The following table presents quantitative information about unobservable inputs used in nonrecurring level 3 fair value measurements at September 30, 2020 and December 31, 2019 (dollars in thousands):
Range
Fair ValueValuation TechniqueUnobservable InputsHighLowWeighted Average
September 30, 2020
Impaired loans$1,591 Estimated sales priceAdjustments for comparable properties, discounts to reflect current market conditionsNot applicable
595 Discounted cash flowsDiscount rate8.25 %4.50 %6.61 %
December 31, 2019
Impaired loans$1,931 Estimated sales priceAdjustments for comparable properties, discounts to reflect current market conditionsNot applicable
909 Discounted cash flowsDiscount rate8.25 %4.50 %6.83 %
Other real estate owned197 Estimated sales priceAdjustments for comparable properties, discounts to reflect current market conditionsNot applicable























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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 14 - Fair Value Measurements (continued)
Carrying amounts and estimated fair values of financial instruments as of September 30, 2020 and December 31, 2019 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)
September 30, 2020
FINANCIAL ASSETS:
Cash and cash equivalents$24,485 24,485 24,485 — — 
Debt securities, held-to-maturity26,941 27,277 — — 27,277 
Federal Reserve Bank stock4,652 4,652 4,652 — — 
Federal Home Loan Bank stock5,203 5,203 5,203 — — 
Loans, net1,334,186 1,286,554 — — 1,286,554 
  Accrued interest receivable9,559 9,559 — 9,559 — 
FINANCIAL LIABILITIES:  
Deposits1,430,394 1,433,857 1,162,096 271,761 — 
Long-term debt31,999 32,727 — 32,727 — 
  Accrued interest payable514 514 — 514 — 
December 31, 2019
FINANCIAL ASSETS:
Cash and cash equivalents$20,765 20,765 20,765 — — 
Debt securities, held-to-maturity27,525 27,888 — — 27,888 
Federal Reserve Bank stock4,652 4,652 4,652 — — 
Federal Home Loan Bank stock5,203 5,203 5,203 — — 
Loans, net1,239,406 1,252,156 — — 1,252,156 
  Accrued interest receivable3,911 3,911 — 3,911 — 
FINANCIAL LIABILITIES:  
Deposits1,348,280 1,352,061 1,004,057 348,004 — 
Long-term debt40,994 41,487 — 41,487 — 
Accrued interest payable705 705 — 705 — 

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 September 30, 2020 and December 31, 2019.

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 LCNB.  The following methods and assumptions were used to estimate the fair value of certain financial instruments:
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 14 - Fair Value Measurements (continued)
Cash and cash equivalents
The carrying amounts presented are deemed to approximate fair value.

Equity securities without a readily determinable fair value
Equity securities without a readily determinable fair value are measured at cost, less impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

Debt securities, held-to-maturity
Fair values for debt securities, held-to-maturity are based on quoted market prices for similar securities and/or discounted cash flow analysis or other methods.  

Federal Home Loan Bank stock and Federal Reserve Bank stock
The carrying value of Federal Home Loan Bank and Federal Reserve Bank stock approximates fair value based on the respective redemptive provisions.

Loans
The estimated fair value of loans follows the guidance in ASU 2016-01, which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments. The fair value calculation discounts estimated future cash flows using rates that incorporated discounts for credit, liquidity, and marketability factors.

Deposits
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date.  The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities, which approximates market rates.

Borrowings
The carrying amounts of federal funds purchased, repurchase agreements, and U.S. Treasury demand note borrowings are deemed to approximate fair value of short-term borrowings.  For long-term debt, fair values are estimated based on the discounted value of expected net cash flows using current interest rates.

Accrued interest receivable and accrued interest payable
Carrying amount approximates fair value.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)



Note 15 – Recent Accounting Pronouncements

From time to time the FASB issues an ASU to communicate changes to U.S. generally accepted accounting principles. 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.

ASU No. 2016-13 also amends the accounting for credit losses on debt securities, available-for-sale, 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 debt securities, available-for-sale, 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 debt securities, available-for-sale, 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, trust, and finance departments. The CECL Committee has 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, and is currently analyzing its pool segmentation and reporting mechanisms for adoption of the new methodology. While the committee and management expect that the implementation of ASU No. 2016-13 will increase the balance of the allowance for loan losses, they are continuing to evaluate the potential impact on LCNB's results of consolidated operations and financial position. The financial statement impact of this new standard cannot be reasonably estimated at this time.









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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 15 – Recent Accounting Pronouncements (continued)
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. 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 effective for public business entities for fiscal years beginning after December 15, 2020. Early adoption is permitted. The amendments are to be applied on a retrospective basis to all periods presented upon adoption. Adoption of ASU No. 2018-14 will 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 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifies and amends certain other guidance. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. Adoption of ASU No. 2019-12 is not expected to have a material impact on LCNB's results of consoloidated operations or financial position.
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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

Certain statements made in this document regarding LCNB’s financial condition, results of operations, plans, objectives, future performance and business, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by the fact they are not historical facts and include words such as “anticipate”, “could”, “may”, “feel”, “expect”, “believe”, “plan”, and similar expressions. Please refer to LCNB’s Annual Report on Form 10-K for the year ended December 31, 2019, as well as its other filings with the SEC, for a more detailed discussion of risks, uncertainties and factors that could cause actual results to differ from those discussed in the forward-looking statements.

These forward-looking statements reflect management's current expectations based on all information available to management and its knowledge of LCNB’s business and operations. Additionally, LCNB’s financial condition, results of operations, plans, objectives, future performance and business are subject to risks and uncertainties that may cause actual results to differ materially. These factors include, but are not limited to:

1.the success, impact, and timing of the implementation of LCNB’s business strategies;
2.the significant risks and uncertainties for LCNB's business, results of operations and financial condition, as well as its regulatory capital and liquidity ratios and other regulatory requirements, caused by the COVID-19 pandemic, which will depend on several factors, including the scope and duration of the pandemic, its influence on financial markets, the effectiveness of LCNB's work from home arrangements and staffing levels in operational facilities, the impact of market participants on which LCNB relies and actions taken by governmental authorities and other third parties in response to the pandemic;
3.LCNB’s ability to integrate recent and any future acquisitions may be unsuccessful or may be more difficult, time-consuming, or costly than expected;
4.LCNB may incur increased loan charge-offs in the future;
5.LCNB may face competitive loss of customers;
6.changes in the interest rate environment may have results on LCNB’s operations materially different from those anticipated by LCNB’s market risk management functions;
7.changes in general economic conditions and increased competition could adversely affect LCNB’s operating results;
8.changes in regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact LCNB’s operating results;
9.LCNB may experience difficulties growing loan and deposit balances;
10.United States trade relations with foreign countries could negatively impact the financial condition of LCNB's
customers, which could adversely affect LCNB 's operating results and financial condition;
11.deterioration in the financial condition of the U.S. banking system may impact the valuations of investments LCNB has made in the securities of other financial institutions resulting in either actual losses or other-than-temporary impairments on such investments;
12.difficulties with technology or data security breaches, including cyberattacks, that could negatively affect LCNB's ability to conduct business and its relationships with customers, vendors, and others;
13.adverse weather events and natural disasters and global and/or national epidemics; and
14.government intervention in the U.S. financial system, including the effects of legislative, tax, accounting, and regulatory actions and reforms, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau, the capital ratios of Basel III as adopted by the federal banking authorities, and the Tax Cuts and Jobs Act. 

Forward-looking statements made herein reflect management's expectations as of the date such statements are made. Such information is provided to assist shareholders and potential investors in understanding current and anticipated financial operations of LCNB and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. LCNB undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise after the date such statements are made. 
 
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Coronavirus Update/Status

The coronavirus (COVID-19) pandemic has created unprecedented challenges throughout the communities LCNB serves, the state of Ohio, the United States and the entire world. LCNB has implemented a number of procedures in response to the pandemic to support the safety and well-being of our employees, customers, and shareholders that continue through the date of this report, including the following:
•We addressed the safety of our 33 branches, following the guidelines of the Center for Disease Control, by temporarily closing our lobbies from March through May 2020 in an effort to encourage use of mobile banking applications and our drive-thru facilities, while allowing access to the lobbies by appointment only and only when necessary;
•We re-opened most lobbies during June and July 2020 and introduced various safety measures including the installation of clear barriers at the teller windows, placing markers on the floor to properly space customers as they wait, enhancing our cleaning procedures, and requiring the wearing of masks;
•We hold frequent executive management meetings to address issues that change rapidly;
•We have encouraged non customer service employees to work remotely from home as much as possible and have adopted technological improvements to make this possible;
•We moved our Annual Shareholders’ Meeting, held on April 21, 2020, from a physical meeting to a virtual meeting;
•We provided COVID-19 related payment deferrals to 596 loan customers with aggregate loan balances at the various times of deferral totaling approximately $407.4 million; and
•We chose to participate in the CARES Act Paycheck Protection Program ("PPP") that provided government guaranteed and potentially forgivable loans to applicants. The PPP was implemented by the Small Business Administration with support from the Department of the Treasury and provided small businesses with funds 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, and utilities. Through September 30, 2020, we were able to assist 316 small businesses and had funded $45.5 million of such loans. We believe these loans and our participation in the program is good for our customers, the employees who work for these companies, and the communities we serve.

LCNB continues to closely monitor this pandemic and expects to make future changes to respond to the pandemic as this situation continues to evolve.

Critical Accounting Policies

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 collectibility of the principal is unlikely.  Subsequent recoveries, if any, are credited to the allowance.  The allowance is an amount that management believes will be adequate to absorb inherent losses in the loan portfolio, based on evaluations of the collectibility of loans and prior loan loss experience.  The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay.  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 typically relates to loans that are classified as doubtful, substandard, or special mention.  For such loans an allowance is established when the discounted cash flows or collateral value is lower than the carrying value of that loan.  The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors, which include trends in underperforming loans, trends in the volume and terms of loans, economic trends and conditions, concentrations of credit, trends in the quality of loans, and borrower financial statement exceptions.

Based on its evaluations, management believes that the allowance for loan losses will be adequate to absorb estimated losses inherent in the current loan portfolio.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Acquired Credit Impaired Loans. LCNB accounts for acquisitions using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be measured at their fair values at the acquisition date. Acquired loans are reviewed to determine if there is evidence of deterioration in credit quality since inception and if it is probable that LCNB will be unable to collect all amounts due under the contractual loan agreements. The analysis includes expected prepayments and estimated cash flows including principal and interest payments at the date of acquisition. The amount in excess of the estimated future cash flows is not accreted into earnings. The amount in excess of the estimated future cash flows over the book value of the loan is accreted into interest income over the remaining life of the loan (accretable yield). LCNB records these loans on the acquisition date at their fair values. Thus, an allowance for estimated future losses is not established on the acquisition date. Subsequent to the date of acquisition, expected future cash flows on loans acquired are updated and any losses or reductions in estimated cash flows which arise subsequent to the date of acquisition are reflected as a charge through the provision for loan losses. An increase in the expected cash flows adjusts the level of the accretable yield recognized on a prospective basis over the remaining life of the loan. Due to the number, size, and complexity of loans within the acquired loan portfolio, there is always a possibility of inherent undetected losses.

Accounting for Intangibles.  LCNB’s intangible assets at September 30, 2020 are composed primarily of goodwill and core deposit intangibles related to acquisitions of other financial institutions. It also includes mortgage servicing rights recorded from sales of mortgage loans to the Federal Home Loan Mortgage Corporation and mortgage servicing rights acquired through the acquisition of Eaton National Bank & Trust Co. and Columbus First Bancorp, Inc. Goodwill is not subject to amortization, but is reviewed annually for impairment or sooner if circumstances indicate a possible impairment.  Core deposit intangibles are being amortized on a straight line basis over their respective estimated weighted average lives.  Mortgage servicing rights are capitalized by allocating the total cost of loans between mortgage servicing rights and the loans based on their estimated fair values.  Capitalized mortgage servicing rights are amortized to loan servicing income in proportion to and over the period of estimated servicing income, subject to periodic review for impairment.

Fair Value Accounting for Debt Securities. Debt securities classified as available-for-sale are carried at estimated fair value. Unrealized gains and losses, net of taxes, are reported as accumulated other comprehensive income or loss in shareholders' equity. Fair value is estimated using market quotations for U.S. Treasury investments. Fair value for the majority of the remaining available-for-sale securities is estimated using the discounted cash flow method for each security with discount rates based on rates observed in the market.

Results of Operations

Net income for the three and nine months ended September 30, 2020 was $4,250,000 (total basic and diluted earnings per share of $0.33) and $14,333,000 (total basic and diluted earnings per share of $1.11), respectively. This compares to net income of $4,727,000 (total basic and diluted earnings per share of $0.36) and $14,082,000 (total basic and diluted earnings per share of $1.07) for the same three and nine month periods in 2019.

Increases in the provision for loan losses, partially due to adjustments for estimated impacts from the economic downturn caused by the COVID-19 pandemic, negatively affected earnings during the 2020 periods. The provision for the three and nine months ended September 30, 2020 was $976,000 and $2,165,000, respectively, compared to $264,000 and $213,000 for the same three and nine month periods in 2019.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Net Interest Income

Three Months Ended September 30, 2020 vs. September 30, 2019
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 September 30, 2020 and September 30, 2019, 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.
 Three Months Ended September 30,
 20202019
Average
Outstanding
Balance		Interest
Earned/
Paid		Average
Yield/
Rate		Average
Outstanding
Balance		Interest
Earned/
Paid		Average
Yield/
Rate
 (Dollars in thousands)
Loans (1)$1,339,608 14,379 4.27 %$1,227,806 14,872 4.81 %
Interest-bearing demand deposits21,490 17 0.31 %8,737 68 3.09 %
Interest-bearing time deposits— — — %268 3 4.44 %
Federal Reserve Bank stock4,652 — — %4,652 — — %
Federal Home Loan Bank stock5,203 26 1.99 %5,203 58 4.42 %
Investment securities:
Equity securities4,329 18 1.65 %4,343 31 2.83 %
Debt securities, taxable146,847 633 1.71 %163,385 918 2.23 %
Debt securities, non-taxable (2)36,757 315 3.41 %65,702 480 2.90 %
Total earnings assets1,558,886 15,388 3.93 %1,480,096 16,430 4.40 %
Non-earning assets188,362   177,924   
Allowance for loan losses(5,250)  (3,986)  
Total assets$1,741,998   $1,654,034   
Savings deposits$730,858 348 0.19 %$695,449 651 0.37 %
IRA and time certificates281,586 1,219 1.72 %336,678 1,824 2.15 %
Short-term borrowings— — — %468 3 2.54 %
Long-term debt33,020 226 2.72 %41,988 273 2.58 %
Total interest-bearing liabilities1,045,464 1,793 0.68 %1,074,583 2,751 1.02 %
Demand deposits433,129   333,575  
Other liabilities24,415   20,660   
Capital238,990   225,216   
Total liabilities and capital$1,741,998   $1,654,034   
Net interest rate spread (3)  3.25 %  3.38 %
Net interest income and net interest margin on a taxable-equivalent basis (4) 13,595 3.47 % 13,679 3.67 %
Ratio of interest-earning assets to interest-bearing liabilities149.11 %  137.74 %  
(1)Includes non-accrual loans.
(2)Income from tax-exempt securities is included in interest income on a taxable-equivalent basis.  Interest income has been divided
    by a factor comprised of the complement of the incremental tax rate of 21%.
(3)The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities.
(4)The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets.




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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
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 September 30, 2020 as compared to the same period in 2019.  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.
Three Months Ended September 30, 2020 vs. 2019 Increase (decrease) due to:
 VolumeRateTotal
 (In thousands)
Interest-earning Assets:
Loans$1,286 (1,779)(493)
Interest-bearing demand deposits44 (95)(51)
Interest-bearing time deposits(3)— (3)
Federal Reserve Bank stock— — — 
Federal Home Loan Bank stock— (32)(32)
Investment securities: 
Equity securities— (13)(13)
Debt securities, taxable(86)(199)(285)
Debt securities, non-taxable(238)73 (165)
Total interest income1,003 (2,045)(1,042)
Interest-bearing Liabilities:  
Savings deposits32 (335)(303)
IRA and time certificates(272)(333)(605)
Short-term borrowings(3)— (3)
Long-term debt(61)14 (47)
Total interest expense(304)(654)(958)
Net interest income$1,307 (1,391)(84)

Net interest income on a fully taxable-equivalent basis for the three months ended September 30, 2020 totaled $13,595,000, a decrease of $84,000 from the comparable period in 2019.  Total interest income decreased $1,042,000, substantially offset by a $958,000 decrease in total interest expense.

The $1,042,000 decrease in total interest income was due primarily to a $493,000 decrease in loan interest income and a $450,000 total decrease in interest income from taxable and non-taxable debt securities. The decrease in loan interest income was primarily due to a 54 basis point (a basis point equals 0.01%) decrease in the average rate earned on loans, partially offset by a $111.8 million increase in the average balance of LCNB's loan portfolio. The decrease in interest income from taxable and non-taxable debt securities was due to a $45.5 million combined decrease in average debt securities and to a 52 basis point decrease in the average rate earned on taxable debt securities. Decreases in debt securities were invested in the loan portfolio and were also used to enhance liquidity.

The $958,000 decrease in total interest expense was due to a $303,000 decrease in interest expense for savings deposits and a $605,000 decrease in interest expense for IRA and time certificates. Interest expense for savings deposits decreased primarily due to an 18 basis point market-driven decrease in the average rate paid for these deposits, slightly offset by a $35.4 million increase in the average balance of these deposits. Interest expense for IRA and time certificates decreased primarily due to a 43 basis point decrease in the average rate paid for these deposits and secondarily to a $55.1 million decrease in the average balance of these deposits. Interest expense for long-term debt decreased due to a $9.0 million decrease in average debt outstanding, slightly offset by a 14 basis point increase in the average rate paid.



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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Nine Months Ended September 30, 2020 vs. September 30, 2019
The following table presents, for the nine months ended September 30, 2020 and September 30, 2019, 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.
 Nine Months Ended September 30,
 20202019
Average
Outstanding
Balance		Interest
Earned/
Paid		Average
Yield/
Rate		Average
Outstanding
Balance		Interest
Earned/
Paid		Average
Yield/
Rate
 (Dollars in thousands)
Loans (1)$1,303,770 44,428 4.55 %$1,218,183 44,072 4.84 %
Interest-bearing demand deposits18,164 65 0.48 %8,687 195 3.00 %
Interest-bearing time deposits— — — %608 11 2.42 %
Federal Reserve Bank stock4,652 140 4.02 %4,652 140 4.02 %
Federal Home Loan Bank stock5,203 91 2.34 %5,076 197 5.19 %
Investment securities:
Equity securities4,283 73 2.28 %4,285 95 2.96 %
Debt securities, taxable141,625 2,250 2.12 %158,816 2,720 2.29 %
Debt securities, non-taxable (2)39,270 997 3.39 %79,676 1,696 2.85 %
Total earnings assets1,516,967 48,044 4.23 %1,479,983 49,126 4.44 %
Non-earning assets182,866   166,252   
Allowance for loan losses(4,730)  (4,049)  
Total assets$1,695,103   $1,642,186   
Savings deposits$704,708 1,141 0.22 %$693,776 1,913 0.37 %
IRA and time certificates302,431 4,275 1.89 %326,282 5,312 2.18 %
Short-term borrowings497 7 1.88 %7,898 224 3.79 %
Long-term debt35,427 707 2.67 %43,067 762 2.37 %
Total interest-bearing liabilities1,043,063 6,130 0.79 %1,071,023 8,211 1.03 %
Demand deposits394,497   330,620  
Other liabilities22,318   16,899   
Capital235,225   223,644   
Total liabilities and capital$1,695,103   $1,642,186   
Net interest rate spread (3)  3.44 %  3.41 %
Net interest income and net interest margin on a taxable-equivalent basis (4) 41,914 3.69 % 40,915 3.70 %
Ratio of interest-earning assets to interest-bearing liabilities145.43 %  138.18 %  
(1)Includes non-accrual loans.
(2)Income from tax-exempt securities is included in interest income on a taxable-equivalent basis.  Interest income has been divided
    by a factor comprised of the complement of the incremental tax rate of 21%.
(3)The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities.
(4)The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets.










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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
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, 2020 as compared to the same period in 2019.  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.
Nine Months Ended
September 30, 2020 vs. 2019
Increase (decrease) due to:
 VolumeRateTotal
 (In thousands)
Interest-earning Assets:
Loans$2,998 (2,642)356 
Federal funds sold— — — 
Interest-bearing demand deposits112 (242)(130)
Interest-bearing time deposits(11)— (11)
Federal Reserve Bank stock— — — 
Federal Home Loan Bank stock5 (111)(106)
Investment securities: 
Equity securities— (22)(22)
Debt securities, taxable(282)(188)(470)
Debt securities, non-taxable(980)281 (699)
Total interest income1,842 (2,924)(1,082)
Interest-bearing Liabilities:   
Savings deposits30 (802)(772)
IRA and time certificates(370)(667)(1,037)
Short-term borrowings(141)(76)(217)
Long-term debt(145)90 (55)
interest income from non-taxable debt securities(626)(1,455)(2,081)
Net interest income$2,468 (1,469)999 

Net interest income on a fully taxable-equivalent basis for the nine months ended September 30, 2020 totaled $41,914,000, an increase of $999,000 from the comparable period in 2019.  Total interest income decreased $1,082,000 and total interest expense decreased $2,081,000.

The $1,082,000 decrease in total interest income was due primarily to a $1,169,000 total decrease in interest income from taxable and non-taxable debt securities and several smaller decreases in other line items, partially offset by a $356,000 increase in loan interest income. The decrease in interest income from taxable and non-taxable debt securities was due to a $57.6 million combined decrease in average debt securities, partially offset by a 54 basis point increase in the average rate earned on non-taxable debt securities. Decreases in debt securities were invested in the loan portfolio and used to pay down short-term borrowings and long-term debt. The increase in loan interest income was caused by a $85.6 million increase in the average balance of LCNB's loan portfolio, partially offset by a 29 basis point decrease in the average rate earned on loans.

The $2,081,000 decrease in total interest expense was due to a $772,000 decrease in interest expense for savings deposits, a $1,037,000 decrease in interest expense for IRA and time certificates, and a $217,000 decrease in interest expense for short-term borrowings. Interest expense for savings deposits and IRA and time certificates decreased primarily due to, respectively, a 15 basis point and a 29 basis point market-driven decrease in the average rates paid for these deposits and secondarily to a $23.9 million total decrease in the average balance of IRA and time certificates. Interest expense for short-term borrowings decreased due to a $7.4 million decrease in average debt outstanding and to a 191 basis point decrease in the average rate paid.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Provision and Allowance For Loan Losses

The total provision for loan losses is determined based upon management's evaluation as to the amount needed to maintain the allowance for loan 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 loan 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.

The provision for loan losses for the three and nine months ended September 30, 2020 was, respectively, $712,000 and $1,952,000 greater than the comparable periods in 2019. The 2020 periods included qualitative adjustments for estimated impacts from the economic downturn caused by the COVID-19 pandemic. Calculating an appropriate level for the allowance and provision for loan 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 the three and nine months ended September 30, 2020 were, respectively, $18,000 and $236,000, as compared to respective net charge-offs of $209,000 and $92,000 for the same three and nine month periods in 2019.

Non-Interest Income

A comparison of non-interest income for the three and nine months ended September 30, 2020 and September 30, 2019 is as follows (in thousands):
Three Months Ended
September 30,		Nine Months Ended 
September 30,
 20202019Difference20202019Difference
Fiduciary income$1,275 1,123 152 3,579 3,215 364 
Service charges and fees on deposit accounts1,506 1,616 (110)4,038 4,421 (383)
Net gains (losses) from sales of debt securities, available-for-sale— (20)20 221 (37)258 
Bank owned life insurance income275 289 (14)1,163 654 509 
Gains from sales of loans999 114 885 1,436 207 1,229 
Other operating income223 234 (11)999 666 333 
Total non-interest income$4,278 3,356 922 11,436 9,126 2,310 

Reasons for changes include:
•Fiduciary income increased primarily due to growth in the market value of assets serviced.
•Service charges and fees on deposit accounts decreased primarily due to decreases in overdraft fees and fee income recognized on Insured Cash Sweep ("ICS") deposit products, partially offset by increases in check card income.
•Net gains (losses) from sales of available-for-sale debt securities for the nine month period increased due to market valuations at the times of sales, as the volume of debt securities sold during the 2020 period was less than that for the 2019 period.
•Bank owned life insurance income increased during the nine month period due to $12.0 million of new policies purchased at the beginning of the third quarter 2019 and to a mortality benefit recognized during the first quarter 2020.
•Gains from sales of loans increased primarily due to a greater volume of residential real estate loan sales; approximately $42.2 million of loans were sold during the nine months ended September 30, 2020 compared to $10.4 million of loan sales during the same period in 2019.
•Other operating income increased during the nine month period primarily due to net gains realized from the sale of equity security investments, partially offset by unrealized net losses from equity securities held in the portfolio.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Non-Interest Expense

A comparison of non-interest expense for the three and nine months ended September 30, 2020 and September 30, 2019 is as follows (in thousands):
Three Months Ended
September 30,		Nine Months Ended 
September 30,
 20202019Difference20202019Difference
Salaries and employee benefits$6,863 6,403 460 20,279 18,808 1,471 
Equipment expenses341 322 19 917 866 51 
Occupancy expense, net740 751 (11)2,145 2,258 (113)
State financial institutions tax424 433 (9)1,280 1,307 (27)
Marketing471 410 61 906 1,009 (103)
Amortization of intangibles263 263 — 783 780 3 
FDIC insurance premiums112 (13)125 142 225 (83)
Contracted services435 455 (20)1,312 1,394 (82)
Other real estate owned2 1 1 (7)52 (59)
Merger-related expenses— 27 (27)— 114 (114)
Other non-interest expense2,002 1,930 72 6,084 5,702 382 
Total non-interest expense$11,653 10,982 671 33,841 32,515 1,326 

Reasons for changes include:
•Salaries and employee benefits increased 7.2% and 7.8% for the respective three and nine month periods primarily due to salary and wage increases and newly hired employees, including additional business development positions. An increase in health insurance costs also contributed to the increase in salaries and employee benefits.
•Occupancy expense decreased during the nine month period primarily due to decreases in facility repair and maintenance costs.
•Marketing decreased during the nine month period primarily due to a realignment of LCNB's marketing strategy.
•FDIC insurance premiums for the nine month period of 2020 reflects Small Bank Assessment Credits received from the FDIC during the first and second quarters 2020 because the Deposit Insurance Fund was above the mandated 1.35% level. LCNB has received the full amount of the credit during the first two quarters of 2020 and the third quarter premium payment was at its normal level.
•Other non-interest expense increased partially due to a strategic decision to outsource LCNB's ATM operations to a third-party vendor, relieving LCNB branch personnel from various ATM maintenance responsibilities
.
Income Taxes

LCNB's effective tax rate for the three and nine months ended September 30, 2020 was 17.9% and 16.4%, respectively, compared to 16.9% and 17.0% for the respective three and nine months ended September 30, 2019.  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 one-time tax benefit recognized as a result of certain provisions in the Coronavirus Aid, Relief, & Economic Security ("CARES") Act passed by Congress and signed by President Trump during the first quarter 2020 also contributed to the difference during the 2020 nine month period.











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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Financial Condition

A comparison of balance sheet line items at September 30, 2020 and December 31, 2019 is as follows (dollars in thousands):
 September 30, 2020December 31, 2019Difference $Difference %
ASSETS:
Total cash and cash equivalents$24,485 20,765 3,720 17.91 %
Investment securities:
Equity securities with a readily determinable fair value, at fair value2,213 2,312 (99)(4.28)%
Equity securities without a readily determinable fair value, at cost2,099 2,099 — — %
Debt securities, available-for-sale, at fair value157,936 178,000 (20,064)(11.27)%
Debt securities, held-to-maturity, at cost26,941 27,525 (584)(2.12)%
Federal Reserve Bank stock, at cost4,652 4,652 — — %
Federal Home Loan Bank stock, at cost5,203 5,203 — — %
Loans, net1,334,186 1,239,406 94,780 7.65 %
Premises and equipment, net35,309 34,787 522 1.50 %
Operating lease right-of-use assets5,729 5,444 285 5.24 %
Goodwill59,221 59,221 — — %
Core deposit and other intangibles3,539 4,006 (467)(11.66)%
Bank owned life insurance41,871 41,667 204 0.49 %
Interest receivable9,559 3,926 5,633 143.48 %
Other assets12,672 10,295 2,377 23.09 %
Total assets$1,725,615 1,639,308 86,307 5.26 %
LIABILITIES:
Deposits:
Non-interest-bearing$426,989 354,391 72,598 20.49 %
Interest-bearing1,003,405 993,889 9,516 0.96 %
Total deposits1,430,394 1,348,280 82,114 6.09 %
Long-term debt31,999 40,994 (8,995)(21.94)%
Operating lease liabilities5,790 5,446 344 6.32 %
Accrued interest and other liabilities18,847 16,540 2,307 13.95 %
Total liabilities1,487,030 1,411,260 75,770 5.37 %
TOTAL SHAREHOLDERS' EQUITY238,585 228,048 10,537 4.62 %
Total liabilities and shareholders' equity$1,725,615 1,639,308 86,307 5.26 %

Reasons for changes include:
•Debt securities, available-for-sale, decreased due to sales of securities with a total book value of $8.6 million and maturities and calls of securities totaling $48.6 million. These decreases were partially offset by purchases totaling $33.4 million and by a net increase in fair values totaling $4.4 million. The net funds received were invested in the loan portfolio, used to help pay down long-term debt, and used to increase liquidity.
•Net loans increased due to organic growth in the loan portfolio, including PPP loans with carrying value of $45.3 million at September 30, 2020. Most of the growth occurred in the commercial and industrial and commercial real estate portfolios.
•Premises and equipment, net increased due primarily to Main Office remodeling costs, partially offset by depreciation expense.
•Operating lease right-of-use assets and operating lease liabilities increased due to the replacement of previously owned ATMs with outsourced ATMs.
•Core deposit and other intangibles decreased due to amortization of core deposit intangibles.
•Interest receivable increased primarily due to interest accrued on COVID-19 related loan payment deferrals.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
•Other assets increased primarily due to a $3.0 million affordable housing tax credit investment made during the second quarter 2020.
•Non-interest-bearing deposits and interest-bearing deposits have grown substantially since the start of the COVID-19 pandemic. Management believes the growth reflects customer preferences for liquidity during uncertain economic periods. Balances in demand deposits and NOW and savings accounts have grown, while balances in IRA and time deposits have decreased.
•Long-term debt decreased due to payoffs of matured debt. There were no new borrowings during 2020.
•Accrued interest and other liabilities increased primarily due to payables connected with the $3.0 million affordable housing tax credit investment mentioned above.
•Total shareholders' equity increased primarily due to earnings retained during the first nine months of 2020 and to a $3.5 million increase in accumulated other comprehensive income, net of taxes caused by market-driven increases in the fair value of LCNB's debt security investments. These increases were partially offset by dividends paid to shareholders.

Goodwill

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. After reviewing developments during the third quarter 2020, management determined that an impairment test was not necessary at September 30, 2020. 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.

Regulatory Capital

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. LCNB’s and 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 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% is 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 RequirementMinimum Requirement with Capital Conservation BufferTo Be Considered
Well-Capitalized
Ratio of Common Equity Tier 1 Capital to risk-weighted assets4.5 %7.0 %6.5 %
Ratio of Tier 1 Capital to risk-weighted assets6.0 %8.5 %8.0 %
Ratio of Total Capital (Tier 1 Capital plus Tier 2 Capital) to risk-weighted assets8.0 %10.5 %10.0 %
Leverage Ratio (Tier 1 Capital to adjusted quarterly average total assets)4.0 %N/A5.0 %
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
As of the most recent notification from their regulators, the Bank and LCNB were 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 or LCNB'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 may 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 CBLR 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 September 30, 2020 regulatory capital calculations.

A summary of the Bank's regulatory capital and capital ratios follows (dollars in thousands):
September 30, 2020December 31, 2019
Regulatory Capital:
Shareholders' equity$235,371 222,065 
Goodwill and other intangibles(61,961)(62,744)
Accumulated other comprehensive (income) loss(4,155)(673)
Tier 1 risk-based capital169,255 158,648 
Eligible allowance for loan losses5,974 4,045 
Total risk-based capital$175,229 162,693 
Capital ratios:  
Common Equity Tier 1 Capital to risk-weighted assets12.28 %12.21 %
Tier 1 Capital to risk-weighted assets12.28 %12.21 %
Total Capital to risk-weighted assets12.72 %12.52 %
Leverage10.12 %10.06 %

Liquidity

LCNB depends on dividends from the Bank for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders.  National banking law limits the amount of dividends the Bank may pay to the sum of retained net income for the current year plus retained net income for the previous two years.  Prior approval from the Office of the Comptroller of the Currency, the Bank's primary regulator, is necessary for the Bank to pay dividends in excess of this amount. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines.  Management believes the Bank will be able to pay anticipated dividends to LCNB without needing to request approval.  The Bank is not aware of any reasons why it would not receive such approval, if required.

Effective liquidity management ensures that cash is available to meet the cash flow needs of borrowers and depositors, as well as meeting LCNB's operating cash needs. Primary funding sources include customer deposits with the Bank, short-term and long-term borrowings from the Federal Home Loan Bank, short-term line of credit arrangements with two correspondent banks, and interest and repayments received from LCNB's loan and investment portfolios.

Total remaining borrowing capacity with the Federal Home Loan Bank at September 30, 2020 was approximately $167.5 million. One of the factors limiting remaining borrowing capacity is ownership of FHLB stock. LCNB could increase its borrowing capacity by purchasing additional FHLB stock. In addition, additional borrowings of approximately $55.0 million were available through the line of credit arrangements at September 30, 2020.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
On April 9, 2020, the Federal Reserve established the Paycheck Protection Program Liquidity Facility ("PPPLF") to bolster the effectiveness of the Small Business Administration’s Paycheck Protection Program ("PPP"). The PPPLF will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. LCNB management has decided not to currently use the PPPLF as a source of liquidity, as other sources of liquidity are believed to be adequate at this time.

Management closely monitors the level of liquid assets available to meet ongoing funding needs.  It is management's intent to maintain adequate liquidity so that sufficient funds are readily available at a reasonable cost.  LCNB experienced no liquidity or operational problems as a result of current liquidity levels.
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Item 3.Quantitative and Qualitative Disclosures about Market Risk

Market risk for LCNB is primarily 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 ("ALCO") 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, 300, and 400 basis points.  Management considers the results of any significant downward scenarios of more than 100 basis points to not be meaningful in the current interest rate environment.  The base projection uses a current interest rate scenario.  As shown below, the September 30, 2020 IRSA indicates that an increase in interest rates of 200 basis points or more will have a positive effect on NII and a 100 basis point decrease or decrease in interest rates will have a negative effect on NII. The changes in NII for all rate assumptions are within LCNB's acceptable ranges.
Rate Shock Scenario in Basis PointsAmount$ Change in
NII		% Change in
NII
 (Dollars in thousands)
Up 400$61,192 3,195 5.51 %
Up 30060,092 2,095 3.61 %
Up 20059,002 1,005 1.73 %
Up 10057,877 (120)(0.21)%
Base57,997 — — %
Down 10056,277 (1,720)(2.97)%

IRSA shows the effect on NII during a one-year period only.  A more long-range model is the EVE analysis, which shows 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, 2020 EVE analysis indicates that an increase in interest rates will have a negative effect on the EVE and a 100 basis point decrease in interest rates will have a positive effect on the EVE.  The changes in the EVE for all rate assumptions are within LCNB's acceptable ranges.
Rate Shock Scenario in Basis PointsAmount$ Change in
EVE		% Change in
EVE
 (Dollars in thousands)
Up 400$197,998 (31,180)(13.61)%
Up 300206,277 (22,901)(9.99)%
Up 200213,969 (15,209)(6.64)%
Up 100220,726 (8,452)(3.69)%
Base229,178 — — %
Down 100271,658 42,480 18.54 %

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 shape, 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 net interest income 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.

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Item 4.Controls and Procedures

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, 2020, 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.
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PART II.  OTHER INFORMATION

LCNB CORP. AND SUBSIDIARIES
 
Item 1.Legal Proceedings

Except for routine litigation incidental to its business, LCNB is not a party to any material pending legal proceedings and none of its property is the subject of any material proceedings.

Item 1A.Risk Factors

The disclosures below supplement the risk factors previously disclosed under Item 1A. of LCNB’s 2019 Annual Report on Form 10-K.

The ultimate long-term impact on LCNB's business and financial results from the COVID-19 pandemic will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic is creating extensive disruptions to the global economy and to the lives of individuals throughout the world. Governments, businesses, and the public have taken and are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of or restrictions on the operations of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our Form 10-K could be exacerbated and such effects could have a material adverse impact on us in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk, human capital and self-insurance.

Ohio Governor Mike DeWine issued a Stay-at-Home Order, effective 11:59 p.m. on March 23, 2020, in the interest of protecting the state's citizens and ordered non-essential businesses to close. After several extensions, the Stay-at-Home Order lapsed on May 29, 2020 and was replaced with an Urgent Health Advisory. Banks were a designated essential business and LCNB continued operations. As a result of the Stay-at-Home Order and the Urgent Health Advisory, many of LCNB's commercial borrowers were required to cease or curtail operations or may be facing operational issues, such as supply chain disruptions and decreased sales.   Some businesses may not be able to survive.  Many home mortgage and consumer borrowers were suddenly unemployed or working reduced hours. LCNB has made and expects that it will need to continue to make short-term modifications to a number of loans to help borrowers through this period, but the eventual number of modifications that will be required or their impact on LCNB's financial results cannot be estimated at this time.  Likewise, the pandemic’s effect on LCNB’s allowance for loan losses and provision for loan losses cannot be estimated at this time.

During March 2020, the Federal Reserve's Open Market Committee reduced its benchmark federal funds rate by a total of 150 basis points in response to the risks the pandemic poses to the economy. This rate influences other rates, including the prime rate and rates charged for home mortgage loans. Many of LCNB's commercial loans and most of its home equity loans are indexed to the prime rate. The future effect these reductions will have on LCNB's loan interest income cannot be estimated at this time.

Economic turmoil associated with the pandemic has had wide-ranging and severe impacts upon financial markets, including stock and bond markets. Fees for trust and brokerage accounts serviced for clients is predominantly based on the market value of such funds. A general decline in market valuations will decrease the fees LCNB collects for servicing these accounts. In addition, LCNB's investments in equity securities are carried at fair value, with changes in fair value recognized in other operating income in the consolidated statements of income. Debt securities classified as "available-for-sale" are carried at fair value, with changes in fair value recorded in other comprehensive income, a separate component of shareholders' equity. Future pandemic effects on trust and brokerage accounts, LCNB's equity and debt investments, and the resulting effects on LCNB's income and equity cannot be estimated at this time.




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Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of COVID-19’s effects on our business, operations, or the U.S. economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements, third party providers’ ability to support our operation, and any actions taken by governmental authorities and other third parties in response to the pandemic. The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity, and capital levels.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

During the period covered by this report, LCNB did not sell any of its securities that were not registered under the Securities Act.

On August 24, 2020, LCNB's Board of Directors authorized a share repurchase program (the “Program”). Under the terms of the Program, LCNB is authorized to repurchase up to 645,000 of its outstanding common shares. The Program is authorized to last no longer than five years. The Program replaced and superseded LCNB’s prior share repurchase program, which was adopted in April 2019.

Under the Program, LCNB may purchase common shares through various means such as open market transactions, including block purchases, and privately negotiated transactions. The number of shares repurchased and the timing, manner, price and amount of any repurchases will be determined at LCNB's discretion. Factors include, but are not limited to, share price, trading volume, and general market conditions, along with LCNB’s general business conditions. The Program may be suspended or discontinued at any time and does not obligate LCNB to acquire any specific number of its common shares.

As part of the Program, LCNB entered into a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The 10b5-1 trading plan permits common shares to be repurchased at times that LCNB might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. The 10b5-1 trading plan is administered by an independent broker and is subject to price, market volume, and timing restrictions.

The following table sets forth information relating to repurchases made under the Program during the three months ended September 30, 2020:
PeriodTotal Number of Shares PurchasedAverage Price Paid Per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
August 20207,980$14.83 7,980637,020
September 202047,610$14.13 47,610589,410

Item 3.Defaults Upon Senior Securities

None.

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

None.
 
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Item 6.Exhibits
Exhibit No.Exhibit Description
2.1
3.1
  
3.2
10.1
10.2
  
10.3
  
10.4
10.5
  
31.1
  
31.2
  
32
  
101The following financial information from LCNB Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 is formatted in Extensible Business Reporting Language:  (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Income, (iii) the Consolidated Condensed Statements of Comprehensive Income, (iv) the Consolidated Condensed Statements of Shareholders' Equity, (v) the Consolidated Condensed Statements of Cash Flows, and (vi) the Notes to Consolidated Condensed Financial Statements.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 LCNB Corp. 
   
November 9, 2020/s/ Eric J. Meilstrup 
 Eric J. Meilstrup 
 Chief Executive Officer and President 
   
November 9, 2020/s/ Robert C. Haines, II 
 Robert C. Haines, II 
 Executive Vice President and Chief Financial Officer
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