Loans | Loans Major classifications of loans at September 30, 2019 and December 31, 2018 are as follows (in thousands): September 30, 2019 December 31, 2018 Commercial and industrial $ 71,576 77,740 Commercial, secured by real estate 797,842 740,647 Residential real estate 320,703 349,127 Consumer 23,918 17,283 Agricultural 11,525 13,297 Other loans, including deposit overdrafts 456 450 Loans, gross 1,226,020 1,198,544 Deferred origination costs (fees), net (128 ) 79 Loans, net of deferred origination costs (fees) 1,225,892 1,198,623 Less allowance for loan losses 4,167 4,046 Loans, net $ 1,221,725 1,194,577 Non-accrual, past-due, and accruing restructured loans as of September 30, 2019 and December 31, 2018 are as follows (in thousands): September 30, 2019 December 31, 2018 Non-accrual loans: Commercial and industrial $ — — Commercial, secured by real estate 2,624 1,767 Residential real estate 899 1,007 Consumer — — Agricultural — 177 Total non-accrual loans 3,523 2,951 Past-due 90 days or more and still accruing — 149 Total non-accrual and past-due 90 days or more and still accruing 3,523 3,100 Accruing restructured loans 6,784 10,516 Total $ 10,307 13,616 The allowance for loan losses for the three and nine months ended September 30, 2019 and 2018 are as follows (in thousands): Commercial & Industrial Commercial, Secured by Real Estate Residential Real Estate Consumer Agricultural Other Total 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 expenses 47 298 (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 Three Months Ended September 30, 2018 Balance, beginning of period $ 407 2,383 690 70 52 1 3,603 Provision (credit) 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 (credit) 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 A breakdown of the allowance for loan losses and the loan portfolio by loan segment at September 30, 2019 and December 31, 2018 are as follows (in thousands): Commercial Commercial, Secured by Residential Consumer Agricultural Other Total September 30, 2019 Allowance for loan losses: Individually evaluated for impairment $ 7 346 28 — — — 381 Collectively evaluated for impairment 393 2,746 513 90 39 5 3,786 Acquired credit impaired loans — — — — — — — Balance, end of period $ 400 3,092 541 90 39 5 4,167 Loans: Individually evaluated for impairment $ 239 7,650 1,438 29 — — 9,356 Collectively evaluated for impairment 70,575 784,453 316,772 24,010 11,540 148 1,207,498 Acquired credit impaired loans 817 5,032 2,881 — — 308 9,038 Balance, end of period $ 71,631 797,135 321,091 24,039 11,540 456 1,225,892 December 31, 2018 Allowance for loan losses: Individually evaluated for impairment $ 10 3 49 — — — 62 Collectively evaluated for impairment 390 2,742 718 87 46 1 3,984 Acquired credit impaired loans — — — — — — — Balance, end of period $ 400 2,745 767 87 46 1 4,046 Loans: Individually evaluated for impairment $ 268 15,101 1,558 36 177 — 17,140 Collectively evaluated for impairment 76,609 718,709 344,751 17,363 13,135 114 1,170,681 Acquired credit impaired loans 922 6,315 3,229 — — 336 10,802 Balance, end of period $ 77,799 740,125 349,538 17,399 13,312 450 1,198,623 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 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, 2019 and December 31, 2018 is as follows (in thousands): Pass OAEM Substandard Doubtful Total September 30, 2019 Commercial & industrial $ 69,725 161 1,745 — 71,631 Commercial, secured by real estate 782,232 986 13,917 — 797,135 Residential real estate 319,128 99 1,864 — 321,091 Consumer 24,022 — 17 — 24,039 Agricultural 11,513 — 27 — 11,540 Other 456 — — — 456 Total $ 1,207,076 1,246 17,570 — 1,225,892 December 31, 2018 Commercial & industrial $ 74,530 89 3,180 — 77,799 Commercial, secured by real estate 718,233 768 21,124 — 740,125 Residential real estate 344,432 — 5,106 — 349,538 Consumer 17,381 — 18 — 17,399 Agricultural 13,116 — 196 — 13,312 Other 450 — — — 450 Total $ 1,168,142 857 29,624 — 1,198,623 A loan portfolio aging analysis at September 30, 2019 and December 31, 2018 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, 2019 Commercial & industrial $ 59 30 — 89 71,542 71,631 — Commercial, secured by real estate 54 46 — 100 797,035 797,135 — Residential real estate 411 201 528 1,140 319,951 321,091 — Consumer 16 11 — 27 24,012 24,039 — Agricultural 27 — — 27 11,513 11,540 — Other 148 — — 148 308 456 — Total $ 715 288 528 1,531 1,224,361 1,225,892 — December 31, 2018 Commercial & industrial $ 626 173 — 799 77,000 77,799 — Commercial, secured by real estate 347 141 347 835 739,290 740,125 — Residential real estate 905 536 1,046 2,487 347,051 349,538 149 Consumer 14 — — 14 17,385 17,399 — Agricultural 19 — 178 197 13,115 13,312 — Other 114 — — 114 336 450 — Total $ 2,025 850 1,571 4,446 1,194,177 1,198,623 149 Impaired loans, including acquired credit impaired loans, at September 30, 2019 and December 31, 2018 are as follows (in thousands): September 30, 2019 December 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Commercial & industrial $ 817 1,358 — 926 1,457 — Commercial, secured by real estate 10,186 11,065 — 21,266 22,451 — Residential real estate 3,569 4,135 — 4,122 4,872 — Consumer 11 11 — 13 13 — Agricultural — — — 177 177 — Other 308 434 — 336 475 — Total $ 14,891 17,003 — 26,840 29,445 — With an allowance recorded: Commercial & industrial $ 239 245 7 264 269 10 Commercial, secured by real estate 2,496 2,496 346 150 150 3 Residential real estate 750 751 28 665 684 49 Consumer 18 18 — 23 23 — Agricultural — — — — — — Other — — — — — — Total $ 3,503 3,510 381 1,102 1,126 62 Total: Commercial & industrial $ 1,056 1,603 7 1,190 1,726 10 Commercial, secured by real estate 12,682 13,561 346 21,416 22,601 3 Residential real estate 4,319 4,886 28 4,787 5,556 49 Consumer 29 29 — 36 36 — Agricultural — — — 177 177 — Other 308 434 — 336 475 — Total $ 18,394 20,513 381 27,942 30,571 62 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, 2019 and 2018 (in thousands): 2019 2018 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Three Months Ended September 30, With no related allowance recorded: Commercial & industrial $ 960 11 1,261 35 Commercial, secured by real estate 11,409 290 17,364 269 Residential real estate 3,600 51 3,935 77 Consumer 12 — 68 1 Agricultural — — 177 — Other 304 8 374 10 Total $ 16,285 360 23,179 392 With an allowance recorded: Commercial & industrial $ 244 4 276 4 Commercial, secured by real estate 2,514 13 152 3 Residential real estate 741 12 573 8 Consumer 19 — 23 — Agricultural — — — — Other — — — — Total $ 3,518 29 1,024 15 Total: Commercial & industrial $ 1,204 15 1,537 39 Commercial, secured by real estate 13,923 303 17,516 272 Residential real estate 4,341 63 4,508 85 Consumer 31 — 91 1 Agricultural — — 177 — Other 304 8 374 10 Total $ 19,803 389 24,203 407 Nine Months Ended September 30, With no related allowance recorded: Commercial & industrial $ 866 20 950 56 Commercial, secured by real estate 13,891 787 16,143 657 Residential real estate 3,724 161 3,420 174 Consumer 12 1 37 2 Agricultural — — 177 — Other 322 26 390 31 Total $ 18,815 995 21,117 920 With an allowance recorded: Commercial & industrial $ 253 11 283 13 Commercial, secured by real estate 2,563 47 154 9 Residential real estate 725 34 577 23 Consumer 21 1 24 1 Agricultural — — — — Other — — — — Total $ 3,562 93 1,038 46 Total: Commercial & industrial $ 1,119 31 1,233 69 Commercial, secured by real estate 16,454 834 16,297 666 Residential real estate 4,449 195 3,997 197 Consumer 33 2 61 3 Agricultural — — 177 — Other 322 26 390 31 Total $ 22,377 1,088 22,155 966 Of the interest income recognized on impaired loans during the nine months ended September 30, 2019 and 2018 , approximately $47,000 and $85,000 , 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, 2019 and 2018 were as follows (dollars in thousands): 2019 2018 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 — $ — — — $ — — Commercial, secured by real estate — — — — — — Residential real estate 1 66 66 1 199 199 Consumer — — — — — — Total 1 $ 66 66 1 $ 199 199 Nine Months Ended September 30, Commercial and industrial $ — — — $ — — Commercial, secured by real estate 2 258 258 — — — Residential real estate 3 120 120 1 199 199 Consumer — — — — — — Total 5 $ 378 378 1 $ 199 199 Post-modification balances, at the dates of modification, of newly restructured troubled debt by type of modification for the three and nine months ended September 30, 2019 and 2018 were as follows (in thousands): Term Modification Rate Modification Interest Only Principal Forgiveness Combination Total Modifications Three Months Ended September 30, 2019 Commercial & industrial $ — — — — — — Commercial, secured by real estate — — — — — — Residential real estate 66 — — — — 66 Consumer — — — — — — Total $ 66 — — — — 66 Nine Months Ended September 30, 2019 Commercial & industrial $ — — — — — — Commercial, secured by real estate — — — — 258 258 Residential real estate 120 — — — — 120 Consumer — — — — — — Total $ 120 — — — 258 378 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 One troubled debt restructuring with a current balance of $22,000 defaulted within twelve months of the restructuring date during the third quarter 2019. There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the nine months ended September 30, 2018 . Information concerning loans that were modified during the nine months ended September 30, 2019 and 2018 and that were determined to be troubled debt restructurings follows (in thousands): 2019 2018 Impaired loans without a valuation allowance $ 282 199 Impaired loans with a valuation allowance 96 — 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, 2019 and December 31, 2018 were approximately $90,784,000 and $97,685,000 , 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, 2019 was $415,000 . |