Loans

Major classifications of loans at March 31, 2019 and December 31, 2018 are as follows (in thousands):



	March 31, 2019		December 31, 2018
Commercial and industrial	$	79,725	77,740
Commercial, secured by real estate	764,424		740,647
Residential real estate	334,227		349,127
Consumer	17,409		17,283
Agricultural	10,900		13,297
Other loans, including deposit overdrafts	409		450
Loans, gross	1,207,094		1,198,544
Deferred origination costs, net	40		79
Loans, net of deferred origination costs	1,207,134		1,198,623
Less allowance for loan losses	4,126		4,046
Loans, net	$	1,203,008	1,194,577

Non-accrual, past-due, and accruing restructured loans as of March 31, 2019 and December 31, 2018 are as follows (in thousands):



	March 31, 2019		December 31, 2018
Non-accrual loans:
Commercial and industrial	$	—	—
Commercial, secured by real estate	1,983		1,767
Residential real estate	862		1,007
Consumer	—		—
Agricultural	—		177
Total non-accrual loans	2,845		2,951
Past-due 90 days or more and still accruing	177		149
Total non-accrual and past-due 90 days or more and still accruing	3,022		3,100
Accruing restructured loans	8,136		10,516
Total	$	11,158	13,616

The allowance for loan losses for the three months ended March 31, 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 March 31, 2019
Balance, beginning of year	$	400	2,745		767		87		46		1		4,046
(Credit) provision charged to expenses	51		57		(195	)	(31	)	(5	)	18		(105	)
Losses charged off	—		—		(33	)	—		—		(31	)	(64	)
Recoveries	—		56		154		21		—		18		249
Balance, end of period	$	451	2,858		693		77		41		6		4,126

Three Months Ended March 31, 2018
Balance, beginning of year	$	378	2,178		717		76		53		1		3,403
(Credit) 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

A breakdown of the allowance for loan losses and the loan portfolio by loan segment at March 31, 2019 and December 31, 2018 are as follows (in thousands):



	Commercial & Industrial		Commercial, Secured by Real Estate	Residential Real Estate	Consumer	Agricultural	Other	Total
March 31, 2019
Allowance for loan losses:
Individually evaluated for impairment	$	9	2	29	—	—	—	40
Collectively evaluated for impairment	442		2,849	664	77	41	6	4,079
Acquired credit impaired loans	—		7	—	—	—	—	7
Balance, end of period	$	451	2,858	693	77	41	6	4,126

Loans:
Individually evaluated for impairment	$	258	11,487	1,305	34	—	—	13,084
Collectively evaluated for impairment	78,919		746,161	330,138	17,492	10,914	65	1,183,689
Acquired credit impaired loans	605		6,219	3,193	—	—	344	10,361
Balance, end of period	$	79,782	763,867	334,636	17,526	10,914	409	1,207,134

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 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, 2019 and December 31, 2018 is as follows (in thousands):



	Pass		OAEM	Substandard	Doubtful	Total
March 31, 2019
Commercial & industrial	$	78,062	192	1,528	—	79,782
Commercial, secured by real estate	743,661		758	19,448	—	763,867
Residential real estate	331,823		—	2,813	—	334,636
Consumer	17,504		—	22	—	17,526
Agricultural	10,883		—	31	—	10,914
Other	409		—	—	—	409
Total	$	1,182,342	950	23,842	—	1,207,134

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 March 31, 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
March 31, 2019
Commercial & industrial	$	45	—	—	45	79,737	79,782	—
Commercial, secured by real estate	—		189	236	425	763,442	763,867	140
Residential real estate	631		34	555	1,220	333,416	334,636	37
Consumer	3		14	—	17	17,509	17,526	—
Agricultural	31		—	—	31	10,883	10,914	—
Other	65		—	—	65	344	409	—
Total	$	775	237	791	1,803	1,205,331	1,207,134	177

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 March 31, 2019 and December 31, 2018 are as follows (in thousands):



	March 31, 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	$	608	1,143	—	926	1,457	—
Commercial, secured by real estate	17,465		18,459	—	21,266	22,451	—
Residential real estate	3,886		4,583	—	4,122	4,872	—
Consumer	13		13	—	13	13	—
Agricultural	—		—	—	177	177	—
Other	344		475	—	336	475	—
Total	$	22,316	24,673	—	26,840	29,445	—

With an allowance recorded:
Commercial & industrial	$	255	261	9	264	269	10
Commercial, secured by real estate	241		427	9	150	150	3
Residential real estate	612		637	29	665	684	49
Consumer	21		21	—	23	23	—
Agricultural	—		—	—	—	—	—
Other	—		—	—	—	—	—
Total	$	1,129	1,346	47	1,102	1,126	62

Total:
Commercial & industrial	$	863	1,404	9	1,190	1,726	10
Commercial, secured by real estate	17,706		18,886	9	21,416	22,601	3
Residential real estate	4,498		5,220	29	4,787	5,556	49
Consumer	34		34	—	36	36	—
Agricultural	—		—	—	177	177	—
Other	344		475	—	336	475	—
Total	$	23,445	26,019	47	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 months ended March 31, 2019 and 2018 (in thousands):



	2019			2018
	Average Recorded Investment		Interest Income Recognized	Average Recorded Investment	Interest Income Recognized
Three Months Ended March 31,
With no related allowance recorded:
Commercial & industrial	$	767	7	639	11
Commercial, secured by real estate	18,302		199	14,991	196
Residential real estate	3,916		47	2,791	45
Consumer	13		—	6	—
Agricultural	—		—	177	—
Other	340		9	407	11
Total	$	23,338	262	19,011	263

With an allowance recorded:
Commercial & industrial	$	259	4	291	4
Commercial, secured by real estate	244		12	157	3
Residential real estate	622		8	755	9
Consumer	22		—	41	1
Agricultural	—		—	—	—
Other	—		—	—	—
Total	$	1,147	24	1,244	17

Total:
Commercial & industrial	$	1,026	11	930	15
Commercial, secured by real estate	18,546		211	15,148	199
Residential real estate	4,538		55	3,546	54
Consumer	35		—	47	1
Agricultural	—		—	177	—
Other	340		9	407	11
Total	$	24,485	286	20,255	280

Of the interest income recognized on impaired loans during the three months ended March 31, 2019 and 2018, approximately $0 and $20,000, 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 months ended March 31, 2019 and 2018 were as follows:



	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 March 31,
Commercial and industrial	—	$	—	—	—	$	—	—
Commercial, secured by real estate	2	258		258	—	—		—
Residential real estate	2	54		54	—	—		—
Consumer	—	—		—	—	—		—
Total	4	$	312	312	—	$	—	—

Post-modification balances of newly restructured troubled debt by type of modification for the three months ended March 31, 2019 and 2018 were as follows (in thousands):



	Term Modification		Rate Modification	Interest Only	Principal Forgiveness	Combination	Total Modifications
Three Months Ended March 31, 2019
Commercial & industrial	$	—	—	—	—	—	—
Commercial, secured by real estate	—		—	—	—	258	258
Residential real estate	54		—	—	—	—	54
Consumer	—		—	—	—	—	—
Total	$	54	—	—	—	258	312

Three Months Ended March 31, 2018
Commercial & industrial	$	—	—	—	—	—	—
Commercial, secured by real estate	—		—	—	—	—	—
Residential real estate	—		—	—	—	—	—
Consumer	—		—	—	—	—	—
Total	$	—	—	—	—	—	—

There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the three months ended March 31, 2019 and 2018 and that remained in default at period end.

Information concerning loans that were modified during the three months ended March 31, 2019 and 2018 and that were determined to be troubled debt restructurings follows (in thousands):

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 March 31, 2019 and December 31, 2018 were approximately $89,049,000 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 March 31, 2019 was $197,000.

Impaired loans without a valuation allowance at the end of the period

Impaired loans with a valuation allowance at the end of the period