Loans

Major classifications of loans at March 31, 2020 and December 31, 2019 were as follows (in thousands):



	March 31, 2020			December 31, 2019
Commercial and industrial	$	85,356		78,306
Commercial, secured by real estate	829,461			804,953
Residential real estate	318,009			322,533
Consumer	28,955			25,232
Agricultural	10,519			11,509
Other loans, including deposit overdrafts	436			1,193
Loans, gross	1,272,736			1,243,726
Deferred origination fees, net	(349		)	(275	)
Loans, net of deferred origination fees	1,272,387			1,243,451
Less allowance for loan losses	5,008			4,045
Loans, net	$	1,267,379		1,239,406

Non-accrual, past-due, and accruing restructured loans as of March 31, 2020 and December 31, 2019 were as follows (in thousands):



	March 31, 2020		December 31, 2019
Non-accrual loans:
Commercial, secured by real estate	$	2,172	2,467
Residential real estate	657		743
Total non-accrual loans	2,829		3,210
Past-due 90 days or more and still accruing	39		—
Total non-accrual and past-due 90 days or more and still accruing	2,868		3,210
Accruing restructured loans	4,126		6,609
Total	$	6,994	9,819

The allowance for loan losses for the three months ended March 31, 2020 and 2019 were as follows (in thousands):



	Commercial & Industrial		Commercial, Secured by Real Estate		Residential Real Estate		Consumer		Agricultural		Other		Total
Three Months Ended March 31, 2020
Balance, beginning of year	$	456	2,924		528		99		34		4		4,045
Provision charged to expenses	159		920		31		41		5		17		1,173
Losses charged off	—		(270	)	(3	)	(12	)	—		(36	)	(321	)
Recoveries	18		—		73		1		—		19		111
Balance, end of period	$	633	3,574		629		129		39		4		5,008

Three Months Ended March 31, 2019
Balance, beginning of year	$	400	2,745		767		87		46		1		4,046
Provision (credit) charged to expenses	51		57		(195	)	(31	)	(5	)	18		(105	)
Losses charged off	—		—		(33	)	—		—		(31	)	(64	)
Recoveries	—		56		154		21		—		18		249
Balance, end of period	$	451	2,858		693		77		41		6		4,126

A breakdown of the allowance for loan losses and the loan portfolio by loan segment at March 31, 2020 and December 31, 2019 were as follows (in thousands):



	Commercial & Industrial		Commercial, Secured by Real Estate	Residential Real Estate	Consumer	Agricultural	Other	Total
March 31, 2020
Allowance for loan losses:
Individually evaluated for impairment	$	22	—	12	—	—	—	34
Collectively evaluated for impairment	611		3,574	617	129	39	4	4,974
Acquired credit impaired loans	—		—	—	—	—	—	—
Balance, end of period	$	633	3,574	629	129	39	4	5,008

Loans:
Individually evaluated for impairment	$	956	5,355	924	13	—	—	7,248
Collectively evaluated for impairment	83,916		820,535	314,802	29,070	10,535	166	1,259,024
Acquired credit impaired loans	562		2,690	2,593	—	—	270	6,115
Balance, end of period	$	85,434	828,580	318,319	29,083	10,535	436	1,272,387

December 31, 2019
Allowance for loan losses:
Individually evaluated for impairment	$	6	272	17	—	—	—	295
Collectively evaluated for impairment	450		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 impairment	77,430		793,191	319,188	25,328	11,523	930	1,227,590
Acquired credit impaired loans	711		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

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. Most commercial and industrial loans have a fixed 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.

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.

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 March 31, 2020 and December 31, 2019 is as follows (in thousands):



	Pass		OAEM	Substandard	Doubtful	Total
March 31, 2020
Commercial & industrial	$	83,816	—	1,618	—	85,434
Commercial, secured by real estate	815,998		2,467	10,115	—	828,580
Residential real estate	313,270		1,795	3,254	—	318,319
Consumer	29,078		—	5	—	29,083
Agricultural	10,513		—	22	—	10,535
Other	436		—	—	—	436
Total	$	1,253,111	4,262	15,014	—	1,272,387

December 31, 2019
Commercial & industrial	$	76,236	233	1,902	—	78,371
Commercial, secured by real estate	789,319		3,007	11,828	—	804,154
Residential real estate	319,075		267	3,513	—	322,855
Consumer	25,342		—	13	—	25,355
Agricultural	11,523		—	—	—	11,523
Other	1,193		—	—	—	1,193
Total	$	1,222,688	3,507	17,256	—	1,243,451

A loan portfolio aging analysis at March 31, 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	Current	Total Loans Receivable	Total Loans Greater Than 90 Days and Accruing
March 31, 2020
Commercial & industrial	$	1,465	—	—	1,465	83,969	85,434	—
Commercial, secured by real estate	261		511	1,092	1,864	826,716	828,580	—
Residential real estate	2,398		23	461	2,882	315,437	318,319	39
Consumer	19		1	—	20	29,063	29,083	—
Agricultural	22		—	—	22	10,513	10,535	—
Other	67		—	—	67	369	436	—
Total	$	4,232	535	1,553	6,320	1,266,067	1,272,387	39

December 31, 2019
Commercial & industrial	$	283	—	—	283	78,088	78,371	—
Commercial, secured by real estate	339		—	1,171	1,510	802,644	804,154	—
Residential real estate	1,573		260	423	2,256	320,599	322,855	—
Consumer	27		9	—	36	25,319	25,355	—
Agricultural	—		—	—	—	11,523	11,523	—
Other	930		—	—	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 March 31, 2020 and December 31, 2019 were as follows (in thousands):



	March 31, 2020				December 31, 2019
	Recorded Investment		Unpaid Principal Balance	Related Allowance	Recorded Investment	Unpaid Principal Balance	Related Allowance
With no related allowance recorded:
Commercial & industrial	$	562	862	—	711	1,253	—
Commercial, secured by real estate	7,951		8,459	—	8,625	9,373	—
Residential real estate	3,185		3,655	—	3,118	3,651	—
Consumer	9		9	—	10	10	—
Agricultural	—		—	—	—	—	—
Other	270		391	—	263	392	—
Total	$	11,977	13,376	—	12,727	14,679	—

With an allowance recorded:
Commercial & industrial	$	956	956	22	230	235	6
Commercial, secured by real estate	94		95	—	2,338	2,485	272
Residential real estate	332		332	12	549	549	17
Consumer	4		4	—	17	17	—
Agricultural	—		—	—	—	—	—
Other	—		—	—	—	—	—
Total	$	1,386	1,387	34	3,134	3,286	295

Total:
Commercial & industrial	$	1,518	1,818	22	941	1,488	6
Commercial, secured by real estate	8,045		8,554	—	10,963	11,858	272
Residential real estate	3,517		3,987	12	3,667	4,200	17
Consumer	13		13	—	27	27	—
Agricultural	—		—	—	—	—	—
Other	270		391	—	263	392	—
Total	$	13,363	14,763	34	15,861	17,965	295

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 months ended March 31, 2020 and 2019 (in thousands):



	2020			2019
	Average Recorded Investment		Interest Income Recognized	Average Recorded Investment	Interest Income Recognized
Three Months Ended March 31,
With no related allowance recorded:
Commercial & industrial	$	637	264	767	7
Commercial, secured by real estate	9,823		344	18,302	199
Residential real estate	3,289		92	3,916	47
Consumer	18		—	13	—
Agricultural	—		—	—	—
Other	266		7	340	9
Total	$	14,033	707	23,338	262

With an allowance recorded:
Commercial & industrial	$	839	10	259	4
Commercial, secured by real estate	95		2	244	12
Residential real estate	339		5	622	8
Consumer	5		—	22	—
Agricultural	—		—	—	—
Other	—		—	—	—
Total	$	1,278	17	1,147	24

Total:
Commercial & industrial	$	1,476	274	1,026	11
Commercial, secured by real estate	9,918		346	18,546	211
Residential real estate	3,628		97	4,538	55
Consumer	23		—	35	—
Agricultural	—		—	—	—
Other	266		7	340	9
Total	$	15,311	724	24,485	286

Of the interest income recognized on impaired loans during the three months ended March 31, 2020 and 2019, approximately $10,000 and $0, 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 months ended March 31, 2020 and 2019 were as follows (dollars in thousands):



	2020					2019
	Number of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance		Number of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance
Three Months Ended March 31,
Commercial and industrial	1	$	4	$	5	—	$	—	$	—
Commercial, secured by real estate	—	—		—		2	258		258
Residential real estate	—	—		—		2	54		54
Total	1	$	4	$	5	4	$	312	$	312

Post-modification balances, at the dates of modification, of newly restructured troubled debt by type of modification for the three months ended March 31, 2020 and 2019 were as follows (in thousands):




	Term Modification		Rate Modification	Interest Only	Principal Forgiveness	Combination	Total Modifications
Three Months Ended March 31, 2020
Commercial & industrial	$	—	—	—	—	5	5
Total	$	—	—	—	—	5	5

Three Months Ended March 31, 2019
Commercial, secured by real estate	$	—	—	—	—	258	258
Residential real estate	54		—	—	—	—	54
Total	$	54	—	—	—	258	312

There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the three months ended March 31, 2020 and 2019 and that remained in default at period end.

Information concerning loans that were modified during the three months ended March 31, 2020 and 2019 and that were determined to be troubled debt restructurings follows (in thousands):

The CARES Act includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under 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. As of March 31, 2020, LCNB has not made the election under the CARES Act.

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.

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 March 31, 2020 and December 31, 2019 were approximately $94,805,000 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 March 31, 2020 was $224,000.

Impaired loans without a valuation allowance

Impaired loans with a valuation allowance