Loans | Loans Major classifications of loans at September 30, 2018 and December 31, 2017 are as follows (in thousands): September 30, 2018 December 31, 2017 Commercial and industrial $ 78,002 $ 36,057 Commercial, secured by real estate 704,987 527,947 Residential real estate 347,920 251,582 Consumer 17,505 17,450 Agricultural 13,280 15,194 Other loans, including deposit overdrafts 498 539 Loans, gross 1,162,192 848,769 Deferred origination costs, net 133 291 Loans, net of deferred origination costs 1,162,325 849,060 Less allowance for loan losses 4,016 3,403 Loans, net $ 1,158,309 $ 845,657 Non-accrual, past-due, and accruing restructured loans as of September 30, 2018 and December 31, 2017 are as follows (in thousands): September 30, 2018 December 31, 2017 Non-accrual loans: Commercial and industrial $ — $ — Commercial, secured by real estate 1,785 2,183 Residential real estate 627 604 Consumer 14 — Agricultural 177 178 Total non-accrual loans 2,603 2,965 Past-due 90 days or more and still accruing 1 — Total non-accrual and past-due 90 days or more and still accruing 2,604 2,965 Accruing restructured loans 10,307 10,469 Total $ 12,911 $ 13,434 The allowance for loan losses for the three and nine months ended September 30, 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 September 30, 2018 Balance, beginning of period $ 407 $ 2,383 $ 690 $ 70 $ 52 $ 1 $ 3,603 Provision charged to expenses (3 ) 488 25 95 2 52 659 Losses charged off — (116 ) — (88 ) — (81 ) (285 ) Recoveries — 3 — 4 — 32 39 Balance, end of period $ 404 $ 2,758 $ 715 $ 81 $ 54 $ 4 $ 4,016 Nine Months Ended September 30, 2018 Balance, beginning of year $ 378 $ 2,178 $ 717 $ 76 $ 53 $ 1 $ 3,403 Provision charged to expenses 26 546 211 102 1 76 962 Losses charged off — (145 ) (227 ) (109 ) — (142 ) (623 ) Recoveries — 179 14 12 — 69 274 Balance, end of period $ 404 $ 2,758 $ 715 $ 81 $ 54 $ 4 $ 4,016 Three Months Ended September 30, 2017 Balance, beginning of period $ 273 $ 2,136 $ 822 $ 86 $ 61 $ 4 $ 3,382 Provision charged to expenses 8 (9 ) (139 ) (6 ) 113 21 (12 ) Losses charged off — (118 ) — (30 ) — (37 ) (185 ) Recoveries 19 106 38 44 — 15 222 Balance, end of period $ 300 $ 2,115 $ 721 $ 94 $ 174 $ 3 $ 3,407 Nine Months Ended September 30, 2017 Balance, beginning of year $ 350 $ 2,179 $ 885 $ 96 $ 60 $ 5 3,575 Provision charged to expenses (84 ) 287 (137 ) (3 ) 114 48 225 Losses charged off — (462 ) (135 ) (84 ) — (98 ) (779 ) Recoveries 34 111 108 85 — 48 386 Balance, end of period $ 300 $ 2,115 $ 721 $ 94 $ 174 $ 3 $ 3,407 A breakdown of the allowance for loan losses and the loan portfolio by loan segment at September 30, 2018 and December 31, 2017 are as follows (in thousands): Commercial Commercial, Secured by Residential Consumer Agricultural Other Total September 30, 2018 Allowance for loan losses: Individually evaluated for impairment $ 10 $ 3 $ 26 $ — $ — $ — $ 39 Collectively evaluated for impairment 394 2,755 689 81 54 4 3,977 Acquired credit impaired loans — — — — — — — Balance, end of period $ 404 $ 2,758 $ 715 $ 81 $ 54 $ 4 $ 4,016 Loans: Individually evaluated for impairment $ 276 $ 10,529 $ 1,151 $ 50 $ 177 $ — $ 12,183 Collectively evaluated for impairment 76,643 686,654 343,912 17,566 13,120 119 1,138,014 Acquired credit impaired loans 1,136 7,352 3,261 — — 379 12,128 Balance, end of period $ 78,055 $ 704,535 $ 348,324 $ 17,616 $ 13,297 $ 498 $ 1,162,325 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 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 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 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, 2018 and December 31, 2017 is as follows (in thousands): Pass OAEM Substandard Doubtful Total September 30, 2018 Commercial & industrial $ 74,748 $ 1,417 $ 1,890 $ — $ 78,055 Commercial, secured by real estate 683,230 1,549 19,756 — 704,535 Residential real estate 345,478 — 2,846 — 348,324 Consumer 17,567 — 49 — 17,616 Agricultural 13,120 — 177 — 13,297 Other 498 — — — 498 Total $ 1,134,641 $ 2,966 $ 24,718 $ — $ 1,162,325 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 September 30, 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 September 30, 2018 Commercial & industrial $ 1 $ — $ — $ 1 $ 78,054 $ 78,055 $ — Commercial, secured by real estate 569 139 309 1,017 703,518 704,535 — Residential real estate 878 303 354 1,535 346,789 348,324 — Consumer 9 10 15 34 17,582 17,616 1 Agricultural — — 177 177 13,120 13,297 — Other 69 — — 69 429 498 — Total $ 1,526 $ 452 $ 855 $ 2,833 $ 1,159,492 $ 1,162,325 $ 1 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 September 30, 2018 and December 31, 2017 are as follows (in thousands): September 30, 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 $ 1,141 $ 1,667 $ — $ 1,015 $ 1,100 $ — Commercial, secured by real estate 17,730 19,082 — 12,677 13,608 — Residential real estate 3,854 4,621 — 2,822 3,516 — Consumer 28 28 — 6 6 — Agricultural 177 177 — 177 177 — Other 379 515 — 402 554 — Total $ 23,309 $ 26,090 $ — $ 17,099 $ 18,961 $ — With an allowance recorded: Commercial & industrial $ 271 $ 277 $ 10 $ 296 $ 301 $ 8 Commercial, secured by real estate 151 151 3 2,660 2,660 146 Residential real estate 558 601 26 553 572 29 Consumer 22 22 — 41 41 8 Agricultural — — — — — — Other — — — — — — Total $ 1,002 $ 1,051 $ 39 $ 3,550 $ 3,574 $ 191 Total: Commercial & industrial $ 1,412 $ 1,944 $ 10 $ 1,311 $ 1,401 $ 8 Commercial, secured by real estate 17,881 19,233 3 15,337 16,268 146 Residential real estate 4,412 5,222 26 3,375 4,088 29 Consumer 50 50 — 47 47 8 Agricultural 177 177 — 177 177 — Other 379 515 — 402 554 — Total $ 24,311 $ 27,141 $ 39 $ 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 and nine months ended September 30, 2018 and 2017 (in thousands): 2018 2017 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Three Months Ended September 30, With no related allowance recorded: Commercial & industrial $ 1,261 $ 35 $ 945 $ 10 Commercial, secured by real estate 17,364 269 13,671 184 Residential real estate 3,935 77 3,268 45 Consumer 68 1 16 — Agricultural 177 — 142 — Other 374 10 438 12 Total $ 23,179 $ 392 $ 18,480 $ 251 With an allowance recorded: Commercial & industrial $ 276 $ 4 $ 306 $ 4 Commercial, secured by real estate 152 3 2,970 11 Residential real estate 573 8 604 7 Consumer 23 — 43 1 Agricultural — — 178 — Other — — — — Total $ 1,024 $ 15 $ 4,101 $ 23 Total: Commercial & industrial $ 1,537 $ 39 $ 1,251 $ 14 Commercial, secured by real estate 17,516 272 16,641 195 Residential real estate 4,508 85 3,872 52 Consumer 91 1 59 1 Agricultural 177 — 320 — Other 374 10 438 12 Total $ 24,203 $ 407 $ 22,581 $ 274 Nine Months Ended September 30, With no related allowance recorded: Commercial & industrial $ 950 $ 56 $ 603 $ 46 Commercial, secured by real estate 16,143 657 14,099 685 Residential real estate 3,420 174 3,280 180 Consumer 37 2 24 2 Agricultural 177 — 57 — Other 390 31 450 43 Total $ 21,117 $ 920 $ 18,513 $ 956 With an allowance recorded: Commercial & industrial $ 283 $ 13 $ 314 $ 13 Commercial, secured by real estate 154 9 3,085 35 Residential real estate 577 23 634 23 Consumer 24 1 43 2 Agricultural — — 240 — Other — — — — Total $ 1,038 $ 46 $ 4,316 $ 73 Total: Commercial & industrial $ 1,233 $ 69 $ 917 $ 59 Commercial, secured by real estate 16,297 666 17,184 720 Residential real estate 3,997 197 3,914 203 Consumer 61 3 67 4 Agricultural 177 — 297 — Other 390 31 450 43 Total $ 22,155 966 $ 22,829 $ 1,029 Of the interest income recognized on impaired loans during the nine months ended September 30, 2018 and 2017 , approximately $85,000 and $3,000 , 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, 2018 and 2017 were as follows: 2018 2017 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 September 30, Commercial and industrial 0 $ — — 0 $ — — Commercial, secured by real estate 0 — — 0 — — Residential real estate 1 199 199 0 — — Consumer 0 — — 0 — — Total 1 $ 199 199 0 $ — — Nine Months Ended September 30, Commercial and industrial 0 $ — — 0 $ — — Commercial, secured by real estate 0 — — 0 — — Residential real estate 1 199 199 1 18 9 Consumer 0 — — 1 14 14 Total 1 $ 199 199 2 $ 32 23 Post-modification balances of newly restructured troubled debt by type of modification for the three and nine months ended September 30, 2018 and 2017 were as follows (in thousands): Term Modification Rate Modification Interest Only Principal Forgiveness Combination Total Modifications Three Months Ended September 30, 2018 Commercial & industrial $ — $ — $ — $ — $ — $ — Commercial, secured by real estate — — — — — — Residential real estate 199 — — — — 199 Consumer — — — — — — Total $ 199 $ — $ — $ — $ — $ 199 Nine Months Ended September 30, 2018 Commercial & industrial $ — $ — $ — $ — $ — $ — Commercial, secured by real estate — — — — — — Residential real estate 199 — — — — 199 Consumer — — — — — — Total $ 199 $ — $ — $ — $ — $ 199 Three Months Ended September 30, 2017 Commercial & industrial $ — $ — $ — $ — $ — $ — Commercial, secured by real estate — — — — — — Residential real estate — — — — — — Consumer — — — — — — Total $ — $ — $ — $ — $ — $ — Nine Months Ended September 30, 2017 Commercial & industrial $ — $ — $ — $ — $ — $ — Commercial, secured by real estate — — — — — — Residential real estate — — — 9 — 9 Consumer 14 — — — — 14 Total $ 14 $ — $ — $ 9 $ — $ 23 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 nine months ended September 30, 2018 and that remained in default at period end. Information concerning loans that were modified during the nine months ended September 30, 2018 and 2017 and that were determined to be troubled debt restructurings follows (in thousands): Modified During the Nine Months Ended September 30, 2018 2017 Impaired loans without a valuation allowance at the end of the period 199 0 Impaired loans with a valuation allowance at the end of the period 0 23 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, 2018 and December 31, 2017 were approximately $115,647,000 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 September 30, 2018 was $392,000 . |