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 & Industrial		Commercial, Secured by Real Estate	Residential Real Estate	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):

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.

Impaired loans without a valuation allowance

Impaired loans with a valuation allowance