LOANS

Major classifications of loans at December 31 were as follows (in thousands):



			2013
	Acquired Credit Impaired		Other		Total		2012
Commercial and industrial	$	332	29,005		29,337		26,236
Commercial, secured by real estate	4,363		309,889		314,252		230,256
Residential real estate	1,332		214,255		215,587		183,132
Consumer	—		12,643		12,643		10,554
Agricultural	—		2,472		2,472		1,668
Other loans, including deposit overdrafts	—		91		91		1,875
	6,027		568,355		574,382		453,721
Deferred origination costs (fees), net	—		(28	)	(28	)	62
	6,027		568,327		574,354		453,783
Less allowance for loan losses	—		3,588		3,588		3,437
Loans-net	$	6,027	564,739		570,766		450,346

The following table provides certain information at the acquisition date on loans acquired from First Capital, not including loans considered to be impaired (in thousands):



Contractually required principal at acquisition	$	91,614
Less fair value adjustment	(1,908		)
Fair value of acquired loans	$	89,706

Contractual cash flows not expected to be collected	$	2,149

The following table provides details on acquired impaired loans that are accounted for in accordance with FASB ASC 310-30 (in thousands):



Contractually required principal at acquisition	$	11,460
Contractual cash flows not expected to be collected (nonaccretable difference)	(1,260		)
Expected cash flows at acquisition	10,200
Interest component of expected cash flows (accretable discount)	(1,389		)
Fair value of acquired impaired loans	$	8,811

The following table provides the outstanding balance and related carrying amount for acquired impaired loans at the dates indicated (in thousands):



	December 31, 2013		January 11, 2013
Outstanding balance	$	8,220	11,460
Carrying amount	6,027		8,811

Activity during 2013 for the accretable discount related to acquired impaired loans is as follows (in thousands):



Accretable discount at January 11, 2013	$	1,389
Reclass from nonaccretable discount to accretable discount	157
Less transferred to other real estate owned	(23		)
Less accretion	(416		)
Accretable discount at December 31, 2013	$	1,107

Non-accrual, past-due, and accruing restructured loans at December 31 were as follows (in thousands):



			2013
	Acquired Credit Impaired		Other	Total		2012
Non-accrual loans:
Commercial and industrial	$	—	144	144		264
Commercial, secured by real estate	370		1,048	1,418		788
Residential real estate	143		1,256	1,399		1,231
Total non-accrual loans	513		2,448	2,961		2,283
Past-due 90 days or more and still accruing	—		250	250		128
Total non-accrual and past-due 90 days or more and still accruing	513		2,698	3,211		2,411
Accruing restructured loans	670		14,481	15,151		13,343
Total	$	1,183	17,179	18,362		15,754

Percentage of total non-accrual and past-due 90 days or more and still accruing to total loans				0.56	%	0.53	%

Percentage of total non-accrual, past-due 90 days or more and still accruing, and accruing restructured loans to total loans				3.20	%	3.47	%

Interest income that would have been recorded during 2013 and 2012 if loans on non-accrual status at December 31, 2013 and 2012 had been current and in accordance with their original terms was approximately $229,000 and $235,000, respectively.

The Company is not committed to lend additional funds to debtors whose loans have been modified to provide a reduction or deferral of principal or interest because of deterioration in the financial position of the borrower.

The allowance for loan losses and recorded investment in loans for the years ended December 31 were as follows (in thousands):



	Commercial & Industrial			Commercial, Secured by Real Estate		Residential Real Estate		Consumer		Agricultural	Other		Total
December 31, 2013
Allowance for loan losses:
Balance, beginning of year	$	320		2,296		712		108		—	1		3,437
Provision charged to expenses	(30		)	256		327		12		—	23		588
Losses charged off:
Acquired credit impaired loans	—			—		(5	)	—		—	—		(5	)
Other loans	(119		)	(58	)	(239	)	(181	)	—	(67	)	(664	)
Recoveries	4			26		31		127		—	44		232
Balance, end of year	$	175		2,520		826		66		—	1		3,588

Individually evaluated for impairment	$	2		760		270		—		—	—		1,032
Collectively evaluated for impairment	173			1,760		556		66		—	1		2,556
Acquired credit impaired loans	—			—		—		—		—	—		—
Balance, end of year	$	175		2,520		826		66		—	1		3,588

Loans:
Individually evaluated for impairment	$	165		14,522		2,132		27		—	—		16,846
Collectively evaluated for impairment	28,809			295,028		212,378		12,703		2,472	91		551,481
Acquired credit impaired loans	332			4,363		1,332		—		—	—		6,027
Balance, end of year	$	29,306		313,913		215,842		12,730		2,472	91		574,354

December 31, 2012
Allowance for loan losses:
Balance, beginning of year	$	162		1,941		656		166		—	6		2,931
Change in classification	18			(18	)	—		—		—	—		—
Provision charged to expenses	299			536		535		(47	)	—	28		1,351
Losses charged off	(159		)	(234	)	(486	)	(134	)	—	(85	)	(1,098	)
Recoveries	—			71		7		123		—	52		253
Balance, end of year	$	320		2,296		712		108		—	1		3,437

Individually evaluated for impairment	$	159		607		138		—		—	—		904
Collectively evaluated for impairment	161			1,689		574		108		—	1		2,533
Balance, end of year	$	320		2,296		712		108		—	1		3,437

Loans:
Individually evaluated for impairment	$	264		9,851		5,023		7		—	—		15,145
Collectively evaluated for impairment	25,946			220,177		178,347		10,624		1,668	1,876		438,638
Balance, end of year	$	26,210		230,028		183,370		10,631		1,668	1,876		453,783



	Commercial & Industrial			Commercial, Secured by Real Estate		Residential Real Estate		Consumer		Agricultural	Other		Total
December 31, 2011
Allowance for loan losses:
Balance, beginning of year	$	305		1,625		459		246		—	6		2,641
Provision charged to expenses	438			884		678		50		—	39		2,089
Losses charged off	(581		)	(598	)	(512	)	(252	)	—	(127	)	(2,070	)
Recoveries	—			30		31		122		—	88		271
Balance, end of year	$	162		1,941		656		166		—	6		2,931

Individually evaluated for impairment	$	—		257		142		—		—	—		399
Collectively evaluated for impairment	162			1,684		514		166		—	6		2,532
Balance, end of year	$	162		1,941		656		166		—	6		2,931

Loans:
Individually evaluated for impairment	$	3,058		14,493		596		10		—	—		18,157
Collectively evaluated for impairment	27,915			204,569		186,552		14,680		2,835	6,554		443,105
Balance, end of year	$	30,973		219,062		187,148		14,690		2,835	6,554		461,262

The Company 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 the Company 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.

An analysis of the Company’s loan portfolio by credit quality indicators at December 31is as follows (in thousands):



	Pass		OAEM	Substandard	Doubtful	Total
December 31, 2013
Acquired credit impaired:
Commercial & industrial	$	—	—	332	—	332
Commercial, secured by real estate	—		761	3,602	—	4,363
Residential real estate	—		—	1,332	—	1,332
Consumer	—		—	—	—	—
Agricultural	—		—	—	—	—
Other	—		—	—	—	—
Total	$	—	761	5,266	—	6,027

Other:
Commercial & industrial	$	27,563	44	1,367	—	28,974
Commercial, secured by real estate	295,189		3,206	11,155	—	309,550
Residential real estate	208,881		1,136	4,493	—	214,510
Consumer	12,681		—	49	—	12,730
Agricultural	2,472		—	—	—	2,472
Other	91		—	—	—	91
Total	$	546,877	4,386	17,064	—	568,327

Total:
Commercial & industrial	$	27,563	44	1,699	—	29,306
Commercial, secured by real estate	295,189		3,967	14,757	—	313,913
Residential real estate	208,881		1,136	5,825	—	215,842
Consumer	12,681		—	49	—	12,730
Agricultural	2,472		—	—	—	2,472
Other	91		—	—	—	91
Total	$	546,877	5,147	22,330	—	574,354

December 31, 2012
Commercial & industrial	$	22,965	1,804	1,177	264	26,210
Commercial, secured by real estate	218,246		2,653	9,022	107	230,028
Residential real estate	172,589		2,353	8,130	298	183,370
Consumer	10,549		—	62	20	10,631
Agricultural	1,665		—	3	—	1,668
Other	1,876		—	—	—	1,876
Total	$	427,890	6,810	18,394	689	453,783

A loan portfolio aging analysis at December 31 is as follows (in thousands):



	30-59 Days Past Due		60-89 Days Past Due	Greater Than 90 Days	Total Past Due	Current	Total Loans Receivable	Total Loans Greater Than 90 Days and Accruing
December 31, 2013
Acquired credit impaired:
Commercial & industrial	$	273	—	—	273	59	332	—
Commercial, secured by real estate	729		—	126	855	3,508	4,363	—
Residential real estate	—		41	143	184	1,148	1,332	—
Consumer	—		—	—	—	—	—	—
Agricultural	—		—	—	—	—	—	—
Other	—		—	—	—	—	—	—
Total	$	1,002	41	269	1,312	4,715	6,027	—

Other:
Commercial & industrial	$	4	—	144	148	28,826	28,974	—
Commercial, secured by real estate	222		582	1,048	1,852	307,698	309,550	—
Residential real estate	1,131		258	1,461	2,850	211,660	214,510	236
Consumer	38		35	13	86	12,644	12,730	14
Agricultural	—		—	—	—	2,472	2,472	—
Other	91		—	—	91	—	91	—
Total	$	1,486	875	2,666	5,027	563,300	568,327	250

Total:
Commercial & industrial	$	277	—	144	421	28,885	29,306	—
Commercial, secured by real estate	951		582	1,174	2,707	311,206	313,913	—
Residential real estate	1,131		299	1,604	3,034	212,808	215,842	236
Consumer	38		35	13	86	12,644	12,730	14
Agricultural	—		—	—	—	2,472	2,472	—
Other	91		—	—	91	—	91	—
Total	$	2,488	916	2,935	6,339	568,015	574,354	250

December 31, 2012
Commercial & industrial	$	—	1	264	265	25,945	26,210	—
Commercial, secured by real estate	346		79	788	1,213	228,815	230,028	—
Residential real estate	791		212	1,172	2,175	181,195	183,370	103
Consumer	61		57	25	143	10,488	10,631	25
Agricultural	—		—	—	—	1,668	1,668	—
Other	72		—	—	72	1,804	1,876	—
Total	$	1,270	349	2,249	3,868	449,915	453,783	128

Impaired loans, excluding acquired credit impaired loans, for the years ended December 31 were as follows (in thousands):



	Recorded Investment		Unpaid Principal Balance	Related Allowance	Average Recorded Investment	Interest Income Recognized
December 31, 2013
With no related allowance recorded:
Commercial & industrial	$	—	—	—	—	—
Commercial, secured by real estate	6,797		6,810	—	6,809	241
Residential real estate	487		763	—	520	21
Consumer	—		—	—	7	—
Total	$	7,284	7,573	—	7,336	262

With an allowance recorded:
Commercial & industrial	$	165	270	2	186	2
Commercial, secured by real estate	7,725		7,725	760	7,368	252
Residential real estate	1,645		1,663	270	1,123	44
Consumer	27		27	—	17	2
Total	$	9,562	9,685	1,032	8,694	300

Total:
Commercial & industrial	$	165	270	2	186	2
Commercial, secured by real estate	14,522		14,535	760	14,177	493
Residential real estate	2,132		2,426	270	1,643	65
Consumer	27		27	—	24	2
Total	$	16,846	17,258	1,032	16,030	562



	Recorded Investment		Unpaid Principal Balance	Related Allowance	Average Recorded Investment	Interest Income Recognized
December 31, 2012
With no related allowance recorded:
Commercial & industrial	$	—	—	—	975	43
Commercial, secured by real estate	9,541		9,936	—	9,310	350
Residential real estate	417		417	—	397	5
Consumer	20		20	—	23	2
Total	$	9,978	10,373	—	10,705	400

With an allowance recorded:
Commercial & industrial	$	264	822	159	374	—
Commercial, secured by real estate	4,258		4,360	660	4,765	171
Residential real estate	658		853	85	707	2
Consumer	—		—	—	4	—
Total	$	5,180	6,035	904	5,850	173

Total:
Commercial & industrial	$	264	822	159	1,349	43
Commercial, secured by real estate	13,799		14,296	660	14,075	521
Residential real estate	1,075		1,270	85	1,104	7
Consumer	20		20	—	27	2
Total	$	15,158	16,408	904	16,555	573

Of the $562,000 and $573,000 of interest income recognized on impaired loans during 2013 and 2012, respectively, none was recognized on a cash basis. During 2011, the Company recognized $750,000 of interest income on impaired loans, $8,000 of which was recognized on a cash basis. The Company continued to accrue interest on certain loans classified as impaired during 2013, 2012, and 2011 because they were restructured or considered well secured and in the process of collection.

Loan modifications that were classified as troubled debt restructurings during the years ended December 31 were as follows (dollars in thousands):



	2013			2012
	Number of Loans	Balance at Modification		Number of Loans	Balance at Modification
Commercial and industrial	1	$	22	—	$	—
Commercial, secured by real estate:
Acquired credit impaired	1	670		—	—
Other	2	924		—	—
Residential real estate	6	508		6	449
Consumer	2	27		2	20
	12	$	2,151	8	$	469

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.

Troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date during the years ended December 31, 2013 and 2012 were not material.

Approximately $327,000 of impaired loans, excluding acquired credit impaired loans, without a valuation allowance and $1,141,000 of impaired loans, excluding acquired credit impaired loans, with a valuation allowance at December 31, 2013 consisted of loans that were modified during 2013 and were determined to be troubled debt restructurings. Approximately $200,000 of impaired loans without a valuation allowance and $258,000 of impaired loans with a valuation allowance at December 31, 2012 consisted of loans that were modified during 2012 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 balance sheets. The unpaid principal balances of those loans at December 31, 2013, 2012 and 2011 were approximately $90,343,000, $71,568,000, and $67,410,000 respectively.

Mortgage servicing right assets are included in other assets in the consolidated balance sheets. Amortization of mortgage servicing rights is an adjustment to loan servicing income, which is included with other operating income in the consolidated statements of income. Activity in the mortgage servicing rights portfolio during the years ended December 31 was as follows (in thousands):



	2013			2012		2011
Balance, beginning of year	$	475		418		474
Amount capitalized to mortgage servicing rights	191			283		99
Amortization of mortgage servicing rights	(168		)	(226	)	(155	)
Balance, end of year	$	498		475		418