Loans | Loans Major classifications of loans at June 30, 2015 and December 31, 2014 are as follows (in thousands): June 30, 2015 December 31, 2014 Commercial and industrial 47,958 35,424 Commercial, secured by real estate 399,551 379,141 Residential real estate 273,249 254,087 Consumer 19,718 18,006 Agricultural 13,434 11,472 Other loans, including deposit overdrafts 638 680 754,548 698,810 Deferred net origination costs (fees) 188 146 754,736 698,956 Less allowance for loan losses 2,879 3,121 Loans, net 751,857 695,835 All advances from the Federal Home Loan Bank of Cincinnati are secured by a blanket pledge of LCNB's 1-4 family first lien mortgage loans in the amount of approximately $232 million and $212 million at June 30, 2015 and December 31, 2014 , respectively. Additionally, LCNB is required to hold minimum levels of FHLB stock, based on the outstanding borrowings. 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 FASB 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. The following table provides certain information at the acquisition date on loans acquired from BNB on April 30, 2015 and Eaton National on January 24, 2014, not including loans considered to be impaired (in thousands): BNB Eaton National Contractually required principal at acquisition $ 32,174 102,483 Less fair value adjustment 199 1,347 Fair value of acquired loans $ 31,975 101,136 Contractual cash flows not expected to be collected $ 195 1,702 The following table provides details on acquired impaired loans obtained through the mergers with BNB and Eaton National that are accounted for in accordance with FASB ASC 310-30 (in thousands): BNB Eaton National Contractually required principal at acquisition $ 3,511 23,414 Contractual cash flows not expected to be collected (nonaccretable difference) (404 ) (6,088 ) Expected cash flows at acquisition 3,107 17,326 Interest component of expected cash flows (accretable discount) (413 ) (2,163 ) Fair value of acquired impaired loans $ 2,694 15,163 Non-accrual, past-due, and accruing restructured loans as of June 30, 2015 and December 31, 2014 are as follows (in thousands): June 30, 2015 December 31, 2014 Non-accrual loans: Commercial and industrial $ — — Commercial, secured by real estate 883 4,277 Agricultural 34 70 Residential real estate 1,044 1,252 Total non-accrual loans 1,961 5,599 Past-due 90 days or more and still accruing 128 203 Total non-accrual and past-due 90 days or more and still accruing 2,089 5,802 Accruing restructured loans 14,041 14,269 Total $ 16,130 20,071 LCNB sold impaired loans with a carrying value of approximately $4.5 million during the second quarter 2015. The decrease in non-accrual loans at June 30, 2015 as compared to December 31, 2014 is primarily due to this sale. The allowance for loan losses for the three and six months ended June 30, 2015 and 2014 are as follows (in thousands): Commercial & Industrial Commercial, Secured by Real Estate Residential Real Estate Consumer Agricultural Other Total Three Months Ended June 30, 2015 Allowance for loan losses: Balance, beginning of period $ 131 1,640 934 54 77 1 2,837 Provision charged to expenses 41 552 53 16 6 9 677 Losses charged off (11 ) (633 ) (115 ) (18 ) (67 ) (12 ) (856 ) Recoveries 1 96 42 10 67 5 221 Balance, end of period $ 162 1,655 914 62 83 3 2,879 Six Months Ended June 30, 2015 Allowance for loan losses: Balance, beginning of year $ 129 1,990 926 63 11 2 3,121 Provision charged to expenses 42 515 117 (13 ) 72 13 746 Losses charged off (11 ) (946 ) (197 ) (29 ) (67 ) (26 ) (1,276 ) Recoveries 2 96 68 41 67 14 288 Balance, end of period $ 162 1,655 914 62 83 3 2,879 Three Months Ended June 30, 2014 Allowance for loan losses: Balance, beginning of period $ 72 2,530 703 64 — 1 3,370 Provision charged to expenses 255 (294 ) 264 17 8 5 255 Losses charged off — (168 ) (56 ) (38 ) — (15 ) (277 ) Recoveries 4 — 5 26 — 11 46 Balance, end of period $ 331 2,068 916 69 8 2 3,394 Six Months Ended June 30, 2014 Allowance for loan losses: Balance, beginning of year $ 175 2,520 826 66 — 1 3,588 Provision charged to expenses 146 (81 ) 239 14 8 10 336 Losses charged off — (371 ) (175 ) (61 ) — (33 ) (640 ) Recoveries 10 — 26 50 — 24 110 Balance, end of period $ 331 2,068 916 69 8 2 3,394 A breakdown of the allowance for loan losses and the loan portfolio by loan segment at June 30, 2015 and December 31, 2014 are as follows (in thousands): Commercial Commercial, Secured by Residential Consumer Agricultural Other Total June 30, 2015 Allowance for loan losses: Individually evaluated for impairment $ 10 299 64 — — — 373 Collectively evaluated for impairment 152 1,356 850 62 83 3 2,506 Acquired credit impaired loans — — — — — — — Balance, end of period $ 162 1,655 914 62 83 3 2,879 Loans: Individually evaluated for impairment $ 385 12,561 1,648 51 — — 14,645 Collectively evaluated for impairment 45,709 378,388 268,752 19,695 13,404 138 726,086 Acquired credit impaired loans 1,881 8,281 3,247 57 39 500 14,005 Balance, end of period $ 47,975 399,230 273,647 19,803 13,443 638 754,736 December 31, 2014 Allowance for loan losses: Individually evaluated for impairment $ 10 415 89 — — — 514 Collectively evaluated for impairment 119 1,273 836 63 11 2 2,304 Acquired credit impaired loans — 302 1 — — — 303 Balance, end of period $ 129 1,990 926 63 11 2 3,121 Loans: Individually evaluated for impairment $ 401 13,022 1,701 55 — — 15,179 Collectively evaluated for impairment 33,941 352,774 249,374 17,954 11,371 167 665,581 Acquired credit impaired loans 1,092 12,984 3,425 81 101 513 18,196 Balance, end of period $ 35,434 378,780 254,500 18,090 11,472 680 698,956 The risk characteristics of LCNB's material loan portfolio segments are 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 variable rate, with adjustments occurring monthly, annually, every three years, or every five years. Adjustments are generally based on a publicly available index rate plus a margin. The margin varies based on the terms and collateral securing the loan. 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, multifamily (more than two-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. Many 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 guarantors, and other factors. Commercial real estate loans are generally originated with a 75% maximum loan to appraised value ratio. Residential Real Estate Loans. Residential real estate loans include loans secured by first or second mortgage liens on one to two-family residential property. 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 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 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 collectability 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 or 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 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 June 30, 2015 and December 31, 2014 is as follows (in thousands): Pass OAEM Substandard Doubtful Total June 30, 2015 Commercial & industrial $ 46,303 797 875 — 47,975 Commercial, secured by real estate 378,598 6,619 14,013 — 399,230 Residential real estate 267,972 1,386 4,289 — 273,647 Consumer 19,727 — 76 — 19,803 Agricultural 13,063 — 380 — 13,443 Other 638 — — — 638 Total $ 726,301 8,802 19,633 — 754,736 December 31, 2014 Commercial & industrial $ 34,322 — 1,112 — 35,434 Commercial, secured by real estate 353,957 6,421 18,402 — 378,780 Residential real estate 246,335 920 7,245 — 254,500 Consumer 17,979 — 111 — 18,090 Agricultural 11,273 — 199 — 11,472 Other 680 — — — 680 Total $ 664,546 7,341 27,069 — 698,956 A loan portfolio aging analysis at June 30, 2015 and December 31, 2014 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 June 30, 2015 Commercial & industrial $ 484 — — 484 47,491 47,975 — Commercial, secured by real estate 632 78 991 1,701 397,529 399,230 — Residential real estate 290 84 891 1,265 272,382 273,647 95 Consumer 62 14 33 109 19,694 19,803 33 Agricultural — — — — 13,443 13,443 — Other 64 — — 64 574 638 — Total $ 1,532 176 1,915 3,623 751,113 754,736 128 December 31, 2014 Commercial & industrial $ 4 — — 4 35,430 35,434 — Commercial, secured by real estate 1,000 83 3,179 4,262 374,518 378,780 9 Residential real estate 648 297 1,289 2,234 252,266 254,500 177 Consumer 59 28 17 104 17,986 18,090 17 Agricultural 73 70 — 143 11,329 11,472 — Other 106 — — 106 574 680 — Total $ 1,890 478 4,485 6,853 692,103 698,956 203 Impaired loans, including acquired credit impaired loans, at June 30, 2015 and December 31, 2014 are as follows (in thousands): Recorded Investment Unpaid Principal Balance Related Allowance June 30, 2015 With no related allowance recorded: Commercial & industrial $ 1,882 2,196 — Commercial, secured by real estate 17,057 19,555 — Residential real estate 3,990 5,320 — Consumer 91 159 — Agricultural 38 161 — Other 500 712 — Total $ 23,558 28,103 — With an allowance recorded: Commercial & industrial $ 385 385 10 Commercial, secured by real estate 3,785 3,915 299 Residential real estate 904 972 64 Consumer 18 18 — Agricultural — — — Other — — — Total $ 5,092 5,290 373 Total: Commercial & industrial $ 2,267 2,581 10 Commercial, secured by real estate 20,842 23,470 299 Residential real estate 4,894 6,292 64 Consumer 109 177 — Agricultural 38 161 — Other 500 712 — Total $ 28,650 33,393 373 December 31, 2014 With no related allowance recorded: Commercial & industrial $ 1,092 2,077 — Commercial, secured by real estate 21,822 26,715 — Residential real estate 4,057 5,549 — Consumer 117 178 — Agricultural 101 619 — Other 513 744 — Total $ 27,702 35,882 — With an allowance recorded: Commercial & industrial $ 401 406 10 Commercial, secured by real estate 4,184 4,538 717 Residential real estate 1,069 1,265 90 Consumer 19 20 — Total $ 5,673 6,229 817 Total: Commercial & industrial $ 1,493 2,483 10 Commercial, secured by real estate 26,006 31,253 717 Residential real estate 5,126 6,814 90 Consumer 136 198 — Agricultural 101 619 — Other 513 744 — Total $ 33,375 42,111 817 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 six months ended June 30, 2015 and 2014 (in thousands): 2015 2014 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Three Months Ended June 30, With no related allowance recorded: Commercial & industrial $ 1,609 60 2,057 38 Commercial, secured by real estate 19,259 742 23,282 327 Residential real estate 4,175 138 4,528 101 Consumer 93 3 234 2 Agricultural 110 35 118 7 Other 516 20 560 10 Total $ 25,762 998 30,779 485 With an allowance recorded: Commercial & industrial $ 389 6 494 2 Commercial, secured by real estate 3,746 29 4,344 — Residential real estate 884 10 1,352 11 Consumer 18 — — — Agricultural — — — — Other — — — — Total $ 5,037 45 6,190 13 Total: Commercial & industrial $ 1,998 66 2,551 40 Commercial, secured by real estate 23,005 771 27,626 327 Residential real estate 5,059 148 5,880 112 Consumer 111 3 234 2 Agricultural 110 35 118 7 Other 516 20 560 10 Total $ 30,799 1,043 36,969 498 Six Months Ended June 30, With no related allowance recorded: Commercial & industrial $ 1,437 82 2,088 70 Commercial, secured by real estate 20,317 1,099 23,839 616 Residential real estate 4,305 221 4,682 177 Consumer 101 7 246 9 Agricultural 107 132 129 9 Other 515 39 564 17 Total $ 26,782 1,580 31,548 898 With an allowance recorded: Commercial & industrial $ 393 11 291 13 Commercial, secured by real estate 3,694 56 4,228 50 Residential real estate 862 20 1,296 23 Consumer 18 1 — — Agricultural — — — — Other — — — — Total $ 4,967 88 5,815 86 Total: Commercial & industrial $ 1,830 93 2,379 83 Commercial, secured by real estate 24,011 1,155 28,067 666 Residential real estate 5,167 241 5,978 200 Consumer 119 8 246 9 Agricultural 107 132 129 9 Other 515 39 564 17 Total $ 31,749 1,668 37,363 984 Of the interest income recognized on impaired loans during the six months ended June 30, 2015 and 2014 , approximately $81,000 and $0 , respectively, were recognized on a cash basis. Loan modifications that were classified as troubled debt restructurings during the three and six months ended June 30, 2015 and 2014 are as follows (dollars in thousands): 2015 2014 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 June 30, Commercial & industrial 1 $ 72 74 6 $ 628 628 Commercial, secured by real estate — — — 1 818 818 Residential real estate 1 50 50 1 78 78 Consumer — — — — — — Total 2 $ 122 124 8 $ 1,524 1,524 Six Months Ended June 30, Commercial & industrial 1 $ 72 74 7 $ 638 628 Commercial, secured by real estate — — — 1 818 818 Residential real estate 4 137 137 1 78 78 Consumer — — — 1 2 2 Total 5 $ 209 211 10 $ 1,536 1,526 Each restructured loan is separately negotiated with the borrower and includes terms and conditions that reflect the borrower's ability to pay the debt as modified. Modifications may include interest only payments for a period of time, temporary or permanent reduction of the loan's interest rate, capitalization of delinquent interest, or extensions of the maturity date. LCNB is not committed to lend additional funds to borrowers whose loan terms were modified in a troubled debt restructuring. A restructured commercial real estate loan with a recorded balance of $77,000 was classified as non-accrual at June 30, 2015, which was within twelve months of the loan's modification date. There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the six months ended June 30, 2014. |