Loans | Loans Major classifications of loans at June 30, 2020 and December 31, 2019 were as follows (in thousands): June 30, 2020 December 31, 2019 Commercial and industrial $ 125,492 78,306 Commercial, secured by real estate 833,286 804,953 Residential real estate 334,349 322,533 Consumer 32,859 25,232 Agricultural 11,071 11,509 Other loans, including deposit overdrafts 283 1,193 Loans, gross 1,337,340 1,243,726 Deferred origination fees, net (1,902) (275) Loans, net of deferred origination fees 1,335,438 1,243,451 Less allowance for loan losses 5,016 4,045 Loans, net $ 1,330,422 1,239,406 Non-accrual, past-due, and accruing restructured loans as of June 30, 2020 and December 31, 2019 were as follows (in thousands): June 30, 2020 December 31, 2019 Non-accrual loans: Commercial and industrial $ 702 — Commercial, secured by real estate $ 2,659 2,467 Residential real estate — 743 Agricultural 515 — Total non-accrual loans 3,876 3,210 Past-due 90 days or more and still accruing 38 — Total non-accrual and past-due 90 days or more and still accruing 3,914 3,210 Accruing restructured loans 3,738 6,609 Total $ 7,652 9,819 . The allowance for loan losses for the three and six months ended June 30, 2020 and 2019 were as follows (in thousands): Commercial Commercial, Secured by Residential Consumer Agricultural Other Total Three Months Ended June 30, 2020 Balance, beginning of period $ 633 3,574 629 129 39 4 5,008 Provision (credit) charged to expenses 72 (109) 68 (10) (13) 8 16 Losses charged off (14) — — (3) — (27) (44) Recoveries — — — 17 — 19 36 Balance, end of period $ 691 3,465 697 133 26 4 5,016 Six Months Ended June 30, 2020 Balance, beginning of year $ 456 2,924 528 99 34 4 4,045 Provision (credit) charged to expenses 231 811 99 31 (8) 25 1,189 Losses charged off (14) (270) (3) (15) — (63) (365) Recoveries 18 — 73 18 — 38 147 Balance, end of period $ 691 3,465 697 133 26 4 5,016 Three Months Ended June 30, 2019 Balance, beginning of period $ 451 2,858 693 77 41 6 4,126 Provision (credit) charged to expenses 46 (131) 107 9 (3) 26 54 Losses charged off — (7) (35) (10) — (43) (95) Recoveries — — 8 5 — 14 27 Balance, end of period $ 497 2,720 773 81 38 3 4,112 Six Months Ended June 30, 2019 Balance, beginning of year $ 400 2,745 767 87 46 1 4,046 Provision (credit) charged to expenses 97 (74) (88) (22) (8) 44 (51) Losses charged off — (7) (68) (10) — (74) (159) Recoveries — 56 162 26 — 32 276 Balance, end of period $ 497 2,720 773 81 38 3 4,112 A breakdown of the allowance for loan losses and the loan portfolio by loan segment at June 30, 2020 and December 31, 2019 were as follows (in thousands): Commercial Commercial, Secured by Residential Consumer Agricultural Other Total June 30, 2020 Allowance for loan losses: Individually evaluated for impairment $ 9 8 12 — — — 29 Collectively evaluated for impairment 682 3,457 685 133 26 4 4,987 Acquired credit impaired loans — — — — — — — Balance, end of period $ 691 3,465 697 133 26 4 5,016 Loans: Individually evaluated for impairment $ 914 5,327 704 10 — — 6,955 Collectively evaluated for impairment 122,682 824,816 331,446 32,986 11,091 59 1,323,080 Acquired credit impaired loans 440 2,162 2,577 — — 224 5,403 Balance, end of period $ 124,036 832,305 334,727 32,996 11,091 283 1,335,438 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. Commercial and industrial loans can have a fixed or variable rate, with maturities ranging from one 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 twenty-five one ten one ten 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 thirty five one ten 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 June 30, 2020 and December 31, 2019 is as follows (in thousands): Pass OAEM Substandard Doubtful Total June 30, 2020 Commercial & industrial $ 122,460 — 1,576 — 124,036 Commercial, secured by real estate 812,165 2,531 17,609 — 832,305 Residential real estate 329,927 2,094 2,706 — 334,727 Consumer 32,993 — 3 — 32,996 Agricultural 11,073 — 18 — 11,091 Other 283 — — — 283 Total $ 1,308,901 4,625 21,912 — 1,335,438 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 June 30, 2020 and December 31, 2019 is as follows (in thousands): 30-59 Days 60-89 Days Greater Than Total Current Total Loans Total Loans Greater Than June 30, 2020 Commercial & industrial $ — — — — 124,036 124,036 — Commercial, secured by real estate 1 — 1,600 1,601 830,704 832,305 — Residential real estate 302 169 341 812 333,915 334,727 38 Consumer 2 1 — 3 32,993 32,996 — Agricultural — — — — 11,091 11,091 — Other 59 — — 59 224 283 — Total $ 364 170 1,941 2,475 1,332,963 1,335,438 38 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 June 30, 2020 and December 31, 2019 were as follows (in thousands): June 30, 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 $ 1,142 1,460 — 711 1,253 — Commercial, secured by real estate 5,703 6,352 — 8,625 9,373 — Residential real estate 2,963 3,418 — 3,118 3,651 — Consumer 7 7 — 10 10 — Agricultural — — — — — — Other 224 349 — 263 392 — Total $ 10,039 11,586 — 12,727 14,679 — With an allowance recorded: Commercial & industrial $ 212 212 8 230 235 6 Commercial, secured by real estate 1,786 2,001 8 2,338 2,485 272 Residential real estate 318 318 12 549 549 17 Consumer 3 3 — 17 17 — Agricultural — — — — — — Other — — — — — — Total $ 2,319 2,534 28 3,134 3,286 295 Total: Commercial & industrial $ 1,354 1,672 8 941 1,488 6 Commercial, secured by real estate 7,489 8,353 8 10,963 11,858 272 Residential real estate 3,281 3,736 12 3,667 4,200 17 Consumer 10 10 — 27 27 — Agricultural — — — — — — Other 224 349 — 263 392 — Total $ 12,358 14,120 28 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 and six months ended June 30, 2020 and 2019 (in thousands): 2020 2019 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Three Months Ended June 30, With no related allowance recorded: Commercial & industrial $ 1,219 18 851 8 Commercial, secured by real estate 5,981 196 17,250 330 Residential real estate 3,026 56 3,652 52 Consumer 8 — 12 — Agricultural — — — — Other 247 7 322 9 Total $ 10,481 277 22,087 399 With an allowance recorded: Commercial & industrial $ 216 5 267 4 Commercial, secured by real estate 1,786 11 144 2 Residential real estate 323 5 796 — Consumer 3 — 21 — Agricultural — — — — Other — — — — Total $ 2,328 21 1,228 6 Total: Commercial & industrial $ 1,435 23 1,118 12 Commercial, secured by real estate 7,767 207 17,394 332 Residential real estate 3,349 61 4,448 52 Consumer 11 — 33 — Agricultural — — — — Other 247 7 322 9 Total $ 12,809 298 23,315 405 Six Months Ended June 30, With no related allowance recorded: Commercial & industrial $ 1,227 289 876 9 Commercial, secured by real estate 7,172 530 17,830 527 Residential real estate 3,162 149 3,719 108 Consumer 14 1 13 1 Agricultural — — — — Other 252 15 327 18 Total $ 11,827 984 22,765 663 With an allowance recorded: Commercial & industrial $ 221 8 264 8 Commercial, secured by real estate 1,799 21 147 3 Residential real estate 327 10 762 10 Consumer 4 — 21 — Agricultural — — — — Other — — — — Total $ 2,351 39 1,194 21 Total: Commercial & industrial $ 1,448 297 1,140 17 Commercial, secured by real estate 8,971 551 17,977 530 Residential real estate 3,489 159 4,481 118 Consumer 18 1 34 1 Agricultural — — — — Other 252 15 327 18 Total $ 14,178 1,023 23,959 684 Of the interest income recognized on impaired loans during the six months ended June 30, 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 and six months ended June 30, 2020 and 2019 were as follows (dollars in thousands): 2020 2019 Number 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 and industrial — $ — — — $ — — Commercial, secured by real estate — — — — — — Residential real estate — — — — — — Consumer — — — — — — Total — $ — — — $ — — Six Months Ended June 30, Commercial and industrial 1 $ 4 $ 5 — $ — $ — Commercial, secured by real estate — — — 2 258 258 Residential real estate — — — 2 54 54 Consumer — — — — — — Total 1 $ 4 $ 5 4 $ 312 $ 312 There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the six months ended June 30, 2020 and 2019 and that remained in default at period end. Information concerning loans that were modified during the six months ended June 30, 2020 and 2019 and that were determined to be troubled debt restructurings follows (in thousands): 2020 2019 Impaired loans without a valuation allowance $ 3 312 Impaired loans with a valuation allowance — — The CARES Act includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under FASB Accounting Standards Codification ("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 June 30, 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. As of June 30, 2020, the unpaid principal balance of loans modified using the guidance in the interagency statement totaled $384,324,000. 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 June 30, 2020 and December 31, 2019 were approximately $100,189,000 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 June 30, 2020 was $231,000. |