Loans | Loans Major classifications of loans at March 31, 2018 and December 31, 2017 are as follows (in thousands): March 31, 2018 December 31, 2017 Commercial and industrial $ 37,118 $ 36,057 Commercial, secured by real estate 542,890 527,947 Residential real estate 246,487 251,582 Consumer 17,176 17,450 Agricultural 12,217 15,194 Other loans, including deposit overdrafts 506 539 856,394 848,769 Deferred origination costs, net 263 291 856,657 849,060 Less allowance for loan losses 3,529 3,403 Loans, net $ 853,128 $ 845,657 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 Accounting Standards Codification ("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. Non-accrual, past-due, and accruing restructured loans as of March 31, 2018 and December 31, 2017 are as follows (in thousands): March 31, 2018 December 31, 2017 Non-accrual loans: Commercial and industrial $ — $ — Commercial, secured by real estate 1,876 2,183 Residential real estate 691 604 Consumer — — Agricultural 177 178 Total non-accrual loans 2,744 2,965 Past-due 90 days or more and still accruing 146 — Total non-accrual and past-due 90 days or more and still accruing 2,890 2,965 Accruing restructured loans 10,366 10,469 Total $ 13,256 $ 13,434 The allowance for loan losses for the three months ended March 31, 2018 and 2017 are as follows (in thousands): Commercial & Industrial Commercial, Secured by Real Estate Residential Real Estate Consumer Agricultural Other Total Three Months Ended March 31, 2018 Balance, beginning of year $ 378 $ 2,178 $ 717 $ 76 $ 53 $ 1 $ 3,403 Provision charged to expenses 15 (131 ) 186 8 (9 ) 10 79 Losses charged off — (29 ) (35 ) (11 ) — (31 ) (106 ) Recoveries — 125 1 5 — 22 153 Balance, end of period $ 393 $ 2,143 $ 869 $ 78 $ 44 $ 2 $ 3,529 Three Months Ended March 31, 2017 Balance, beginning of year $ 350 $ 2,179 $ 885 $ 96 $ 60 $ 5 3,575 Provision charged to expenses (2 ) 90 (107 ) 23 6 5 15 Losses charged off — (262 ) (17 ) (45 ) — (30 ) (354 ) Recoveries 5 — 48 17 — 22 92 Balance, end of period $ 353 $ 2,007 $ 809 $ 91 $ 66 $ 2 $ 3,328 A breakdown of the allowance for loan losses and the loan portfolio by loan segment at March 31, 2018 and December 31, 2017 are as follows (in thousands): Commercial Commercial, Secured by Residential Consumer Agricultural Other Total March 31, 2018 Allowance for loan losses: Individually evaluated for impairment $ 11 $ 4 $ 189 $ 12 $ — $ — $ 216 Collectively evaluated for impairment 382 2,139 680 66 44 2 3,313 Acquired credit impaired loans — — — — — — — Balance, end of period $ 393 $ 2,143 $ 869 $ 78 $ 44 $ 2 $ 3,529 Loans: Individually evaluated for impairment $ 294 $ 10,879 $ 1,468 $ 46 $ 178 $ — $ 12,865 Collectively evaluated for impairment 36,603 527,656 243,526 17,240 12,053 94 837,172 Acquired credit impaired loans 258 3,989 1,961 — — 412 6,620 Balance, end of period $ 37,155 $ 542,524 $ 246,955 $ 17,286 $ 12,231 $ 506 $ 856,657 December 31, 2017 Allowance for loan losses: Individually evaluated for impairment $ 8 $ 146 $ 29 $ 8 $ — $ — $ 191 Collectively evaluated for impairment 370 2,032 688 68 53 1 3,212 Acquired credit impaired loans — — — — — — — Balance, end of period $ 378 $ 2,178 $ 717 $ 76 $ 53 $ 1 $ 3,403 Loans: Individually evaluated for impairment $ 303 $ 11,289 $ 1,351 $ 47 $ 177 $ — $ 13,167 Collectively evaluated for impairment 34,792 512,259 248,674 17,516 15,033 137 828,411 Acquired credit impaired loans 1,008 4,048 2,024 — — 402 7,482 Balance, end of period $ 36,103 $ 527,596 $ 252,049 $ 17,563 $ 15,210 $ 539 $ 849,060 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 adjustment periods ranging from one month to 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% to 80% 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 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 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 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 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, 2018 and December 31, 2017 is as follows (in thousands): Pass OAEM Substandard Doubtful Total March 31, 2018 Commercial & industrial $ 36,716 $ 155 $ 284 $ — $ 37,155 Commercial, secured by real estate 523,298 796 18,430 — 542,524 Residential real estate 244,998 — 1,957 — 246,955 Consumer 17,252 — 34 — 17,286 Agricultural 11,669 — 562 — 12,231 Other 506 — — — 506 Total $ 834,439 $ 951 $ 21,267 $ — $ 856,657 December 31, 2017 Commercial & industrial $ 35,683 $ 176 $ 244 $ — $ 36,103 Commercial, secured by real estate 506,833 2,180 18,583 — 527,596 Residential real estate 250,039 — 2,010 — 252,049 Consumer 17,522 — 41 — 17,563 Agricultural 14,233 — 977 — 15,210 Other 539 — — — 539 Total $ 824,849 $ 2,356 $ 21,855 $ — $ 849,060 A loan portfolio aging analysis at March 31, 2018 and December 31, 2017 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, 2018 Commercial & industrial $ 6 $ — $ — $ 6 $ 37,149 $ 37,155 $ — Commercial, secured by real estate 59 — 335 394 542,130 542,524 — Residential real estate 420 77 576 1,073 245,882 246,955 146 Consumer 30 8 — 38 17,248 17,286 — Agricultural 185 — 177 362 11,869 12,231 — Other 42 — — 42 464 506 — Total $ 742 $ 85 $ 1,088 $ 1,915 $ 854,742 $ 856,657 $ 146 December 31, 2017 Commercial & industrial $ — $ — $ — $ — $ 36,103 $ 36,103 $ — Commercial, secured by real estate 124 — 598 722 526,874 527,596 — Residential real estate 362 135 496 993 251,056 252,049 — Consumer 29 2 — 31 17,532 17,563 — Agricultural — — 177 177 15,033 15,210 — Other 82 — — 82 457 539 — Total $ 597 $ 137 $ 1,271 $ 2,005 $ 847,055 $ 849,060 $ — Impaired loans, including acquired credit impaired loans, at March 31, 2018 and December 31, 2017 are as follows (in thousands): March 31, 2018 December 31, 2017 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Commercial & industrial $ 264 $ 348 $ — $ 1,015 $ 1,100 $ — Commercial, secured by real estate 14,713 15,504 — 12,677 13,608 — Residential real estate 2,688 3,413 — 2,822 3,516 — Consumer 6 6 — 6 6 — Agricultural 178 178 — 177 177 — Other 412 553 — 402 554 — Total $ 18,261 $ 20,002 $ — $ 17,099 $ 18,961 $ — With an allowance recorded: Commercial & industrial $ 288 $ 288 $ 11 $ 296 $ 301 $ 8 Commercial, secured by real estate 155 155 4 2,660 2,660 146 Residential real estate 741 772 189 553 572 29 Consumer 40 40 12 41 41 8 Agricultural — — — — — — Other — — — — — — Total $ 1,224 $ 1,255 $ 216 $ 3,550 $ 3,574 $ 191 Total: Commercial & industrial $ 552 $ 636 $ 11 $ 1,311 $ 1,401 $ 8 Commercial, secured by real estate 14,868 15,659 4 15,337 16,268 146 Residential real estate 3,429 4,185 189 3,375 4,088 29 Consumer 46 46 12 47 47 8 Agricultural 178 178 — 177 177 — Other 412 553 — 402 554 — Total $ 19,485 $ 21,257 $ 216 $ 20,649 $ 22,535 $ 191 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, 2018 and 2017 (in thousands): 2018 2017 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial & industrial $ 639 $ 11 $ 261 $ 26 Commercial, secured by real estate 14,991 196 15,859 186 Residential real estate 2,791 45 3,219 89 Consumer 6 — 21 — Agricultural 177 — 334 — Other 407 11 463 18 Total $ 19,011 $ 263 $ 20,157 $ 319 With an allowance recorded: Commercial & industrial $ 291 $ 4 $ 322 $ 4 Commercial, secured by real estate 157 3 1,931 24 Residential real estate 755 9 704 8 Consumer 41 1 52 1 Agricultural — — — — Other — — — — Total $ 1,244 $ 17 $ 3,009 $ 37 Total: Commercial & industrial $ 930 $ 15 $ 583 $ 30 Commercial, secured by real estate 15,148 199 17,790 210 Residential real estate 3,546 54 3,923 97 Consumer 47 1 73 1 Agricultural 177 — 334 — Other 407 11 463 18 Total $ 20,255 280 $ 23,166 $ 356 Of the interest income recognized on impaired loans during the three months ended March 31, 2018 and 2017 , approximately $20,000 and $0 , respectively, were recognized on a cash basis. Loan modifications that were classified as troubled debt restructurings during the three months ended March 31, 2018 and 2017 are as follows (dollars in thousands): 2018 2017 Number of Loans Pre-Modification Recorded Balance Post-Modification Recorded Balance Number of Loans Pre-Modification Recorded Balance Post-Modification Recorded Balance Commercial & industrial — $ — $ — — $ — $ — Commercial, secured by real estate — — — — — — Residential real estate — — — 1 18 9 Consumer — — — 1 14 14 Total — $ — $ — 2 $ 32 $ 23 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, forgiveness of principal, or extensions of the maturity date. Post-modification balances of newly restructured troubled debt by type of modification for the three months ended March 31, 2018 and 2017 were as follows (in thousands): Term Modification Rate Modification Interest Only Principal Forgiveness Combination Total Modifications Three Months Ended March 31, 2018 Commercial & industrial $ — $ — $ — $ — $ — $ — Commercial, secured by real estate — — — — — — Residential real estate — — — — — — Consumer — — — — — — Total $ — $ — $ — $ — $ — $ — Three Months Ended March 31, 2017 Commercial & industrial $ — $ — $ — $ — $ — $ — Commercial, secured by real estate — — — — — — Residential real estate — — — 9 — 9 Consumer 14 — — — — 14 Total $ 14 $ — $ — $ 9 $ — $ 23 LCNB is not committed to lend additional funds to borrowers whose loan terms were modified in a troubled debt restructuring. Two commercial, secured by real estate loans to the same borrower totaling $1,236,000 that were modified during the fourth quarter 2016 subsequently defaulted in February 2017. There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the three months ended March 31, 2018 and that remained in default at period end. No impaired loans without a valuation allowance and no impaired loans with a valuation allowance at March 31, 2018 consisted of loans that were modified during the three months ended March 31, 2018 and were determined to be troubled debt restructurings. Approximately $23,000 of impaired loans without a valuation allowance and $0 of impaired loans with a valuation allowance at March 31, 2017 consisted of loans that were modified during the three months ended March 31, 2017 and were determined to be troubled debt restructurings. Mortgage loans sold to and serviced for the Federal Home Loan Mortgage Corporation and other investors are not included in the accompanying consolidated condensed balance sheets. The unpaid principal balances of those loans at March 31, 2018 and December 31, 2017 were approximately $90,630,000 and $92,818,000 , 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, 2018 was $335,000 . |