UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.   20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________                           

Commission File Number  000-26121

LCNB Corp.

(Exact name of registrant as specified in its charter)

Ohio	31-1626393
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

2 North Broadway, Lebanon, Ohio   45036

(Address of principal executive offices, including Zip Code)

(513) 932-1414

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes         o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x Yes         o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

o Yes          x No

The number of shares outstanding of the issuer's common stock, without par value, as of November 5, 2012 was 6,726,719 shares.

LCNB CORP. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION		2
	Item 1.  Financial Statements	2
	CONSOLIDATED BALANCE SHEETS	2
	CONSOLIDATED STATEMENTS OF INCOME	3
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	4
	CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY	5
	CONSOLIDATED STATEMENTS OF CASH FLOWS	6
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	7
	REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	35
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of  Operations	36
	Item 3.  Quantitative and Qualitative Disclosures about Market Risks	46
	Item 4.  Controls and Procedures	47
PART II.  OTHER INFORMATION		48
	Item 1.   Legal Proceedings	48
	Item 1A.  Risk Factors	48
	Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds	48
	Item 3.   Defaults Upon Senior Securities	48
	Item 4.   Mine Safety Disclosures	48
	Item 5.   Other Information	48
	Item 6.   Exhibits	49
SIGNATURES		50

1

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

	September 30,			December 31,
	2012			2011
	(Unaudited)
ASSETS:
Cash and due from banks	$	15,166			12,449
Interest-bearing demand deposits		17,908			7,086
Total cash and cash equivalents		33,074			19,535
Investment securities:
Available-for-sale, at fair value		265,737			254,006
Held-to-maturity, at cost		12,503			10,734
Federal Reserve Bank stock, at cost		949			940
Federal Home Loan Bank stock, at cost		2,091			2,091
Loans, net		454,541			458,331
Premises and equipment, net		16,820			17,346
Goodwill		5,915			5,915
Bank owned life insurance		16,770			14,837
Other assets		8,792			7,835
TOTAL ASSETS	$	817,192			791,570
LIABILITIES:
Deposits:
Noninterest-bearing	$	116,489			106,793
Interest-bearing		584,591			556,769
Total deposits		701,080			663,562
Short-term borrowings		12,076			21,596
Long-term debt		14,049			21,373
Accrued interest and other liabilities		7,856			7,079
TOTAL LIABILITIES		735,061			713,610
SHAREHOLDERS’ EQUITY:
Preferred shares – no par value, authorized 1,000,000 shares, none outstanding		-			-
Common shares – no par value, authorized 12,000,000 shares, issued 7,480,134 and 7,460,494  shares at September 30, 2012 and December 31, 2011, respectively		27,040			26,753
Retained earnings		60,760			57,877
Treasury shares at cost, 753,627 and 755,771 shares at September 30, 2012 and December 31, 2011, respectively		(11,665	)		(11,698	)
Accumulated other comprehensive income, net of taxes		5,996			5,028
TOTAL SHAREHOLDERS’ EQUITY		82,131			77,960
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	817,192			791,570

The accompanying notes to consolidated financial statements are an integral part of these statements.

2

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
INTEREST INCOME:
Interest and fees on loans	$	5,822		6,294		17,950		19,289
Interest on investment securities –
Taxable		941		1,036		2,810		2,826
Non-taxable		615		619		1,831		1,966
Other short-term investments		26		27		115		124
TOTAL INTEREST INCOME		7,404		7,976		22,706		24,205
INTEREST EXPENSE:
Interest on deposits		1,050		1,371		3,332		4,454
Interest on short-term borrowings		4		6		12		23
Interest on long-term debt		136		160		440		499
TOTAL INTEREST EXPENSE		1,190		1,537		3,784		4,976
NET INTEREST INCOME		6,214		6,439		18,922		19,229
PROVISION FOR LOAN LOSSES		436		588		742		1,476
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		5,778		5,851		18,180		17,753
NON-INTEREST INCOME:
Trust income		530		553		1,769		1,572
Service charges and fees on deposit accounts		911		957		2,698		2,810
Net gain on sales of securities		427		273		886		692
Bank owned life insurance income		145		153		432		447
Gains from sales of mortgage loans		151		35		360		92
Other operating income		41		62		151		170
TOTAL NON-INTEREST INCOME		2,205		2,033		6,296		5,783
NON-INTEREST EXPENSE:
Salaries and employee benefits		3,059		2,983		9,004		8,990
Equipment expenses		263		288		789		745
Occupancy expense, net		445		443		1,242		1,305
State franchise tax		193		190		595		582
Marketing		129		145		409		370
FDIC insurance premiums		83		95		298		563
Other non-interest expense		1,392		1,292		4,005		3,973
TOTAL NON-INTEREST EXPENSE		5,564		5,436		16,342		16,528
INCOME BEFORE INCOME TAXES		2,419		2,448		8,134		7,008
PROVISION FOR INCOME TAXES		572		581		2,023		1,640
INCOME FROM CONTINUING OPERATIONS		1,847		1,867		6,111		5,368
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX		-		-		-		793
NET INCOME	$	1,847		1,867		6,111		6,161
Dividends declared per common share	$	0.16		0.16		0.48		0.48
Basic earnings per common share:
Continuing operations	$	0.27		0.28		0.91		0.80
Discontinued operations		-		-		-		0.12
Diluted earnings per common share:
Continuing operations	$	0.27		0.28		0.90		0.80
Discontinued operations		-		-		-		0.12
Weighted average common shares outstanding:
Basic		6,721,699		6,690,963		6,713,959		6,690,157
Diluted		6,797,675		6,750,807		6,787,000		6,746,568

The accompanying notes to consolidated financial statements are an integral part of these statements.

3

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Net Income	$	1,847			1,867			6,111			6,161
Other comprehensive income:
Net unrealized gain on available-for-sale securities (net of taxes of $556 and $1,348 for the three months ended September 30, 2012 and 2011, respectively, and $787 and $2,054 for the nine months ended September 30, 2012 and 2011, respectively)		1,080			2,618			1,529			3,969
Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of taxes of $145 and $92 for the three months ended September 30, 2012 and 2011, respectively, and $300 and $235 for the nine months ended September 30, 2012 and 2011, respectively)		(282	)		(181	)		(586	)		(457	)
Change in nonqualified pension plan unrecognized net loss and unrecognized prior service cost (net of taxes of $4 and $- for the three months ended September 30, 2012 and 2011, respectively, and $12 and $2 for the nine months ended September 30, 2012 and 2011, respectively)		9			-			25			4
Nonqualified pension plan curtailment (net of taxes of $80)		-			-			-			155
TOTAL COMPREHENSIVE INCOME	$	2,654			4,304			7,079			9,832

The accompanying notes to consolidated financial statements are an integral part of these statements.

4

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Dollars in thousands, except per share amounts)

(Unaudited)

	Common Shares Outstanding		Common Stock		Retained Earnings			Treasury Shares			Accumulated Other Comprehensive Income			Total Shareholders’ Equity
Balance December 31, 2010		6,689,743	$	26,515		54,045			(11,698	)		1,845			70,707
Net income						6,161									6,161
Net unrealized gain on available-for-sale securities, net of taxes												3,969			3,969
Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income, net of taxes												(457	)		(457	)
Change in nonqualified pension plan unrecognized net loss and unrecognized prior service cost, net of taxes												4			4
Nonqualified pension plan curtailment entry, net of taxes												155			155
Dividend Reinvestment and Stock Purchase Plan		7,659		97											97
Compensation expense relating to stock options				35											35
Common stock dividends, $0.48 per share						(3,211	)								(3,211	)
Balance September 30, 2011		6,697,402	$	26,647		56,995			(11,698	)		5,516			77,460
Balance December 31, 2011		6,704,723	$	26,753		57,877			(11,698	)		5,028			77,960
Net income						6,111									6,111
Net unrealized gain on available-for-sale securities, net of taxes												1,529			1,529
Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income, net of taxes												(586	)		(586	)
Change in nonqualified pension plan unrecognized net loss and unrecognized prior service cost, net of taxes												25			25
Dividend Reinvestment and Stock Purchase Plan		19,640		257											257
Exercise of stock options		2,144				(5	)		33						28
Compensation expense relating to stock options				30											30
Common stock dividends, $0.48 per share						(3,223	)								(3,223	)
Balance September 30, 2012		6,726,507	$	27,040		60,760			(11,665	)		5,996			82,131

The accompanying notes to consolidated financial statements are an integral part of these statements.

5

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

	Nine Months Ended
	September 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	6,111			6,161
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation, amortization, and accretion		2,339			2,137
Provision for loan losses		742			1,476
Curtailment charge for nonqualified defined benefit retirement plan		-			191
Increase in cash surrender value of bank owned life insurance		(432	)		(447	)
Realized (gain) loss from sales of securities available-for-sale		(886	)		(692	)
Realized (gain) loss from sales of premises and equipment		(10	)		(6	)
Realized gain from sale of insurance agency		-			(1,503	)
Realized (gain) loss from sales and write-downs of other real estate owned and repossessed assets		80			(48	)
Origination of mortgage loans for sale		(19,328	)		(4,871	)
Realized gains from sales of mortgage loans		(360	)		(92	)
Proceeds from sales of mortgage loans		19,492			4,911
Compensation expense related to stock options		30			35
Changes in:
Accrued income receivable		(650	)		(458	)
Other assets		358			31
Other liabilities		314			(119	)
TOTAL ADJUSTMENTS		1,689			545
NET CASH FLOWS FROM OPERATING ACTIVITIES		7,800			6,706
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities available-for-sale		64,002			28,470
Proceeds from maturities and calls of investment securities:
Available-for-sale		22,759			43,123
Held-to-maturity		1,563			3,658
Purchases of investment securities:
Available-for-sale		(97,344	)		(98,750	)
Held-to-maturity		(3,332	)		(2,650	)
Purchase of Federal Reserve Bank stock		(8	)		(2	)
Net (increase) decrease in loans		2,248			4,255
Purchase of bank owned life insurance		(1,500	)		-
Proceeds from sale of other real estate owned and repossessed assets		20			295
Additions to other real estate owned		(16	)		-
Purchases of premises and equipment		(403	)		(2,323	)
Proceeds from sales of premises and equipment		13			16
Proceeds from sale of insurance agency, net of cash disposed		-			1,523
NET CASH FLOWS FROM INVESTING ACTIVITIES		(11,998	)		(22,385	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		37,518			51,158
Net increase (decrease) in short-term borrowings		(9,520	)		(9,305	)
Proceeds from long-term debt		-			5,000
Principal payments on long-term debt		(7,324	)		(6,402	)
Proceeds from issuance of common stock		41			97
Proceeds from exercise of stock options		28			-
Cash dividends paid on common stock		(3,006	)		(3,211	)
NET CASH FLOWS FROM FINANCING ACTIVITIES		17,737			37,337
NET CHANGE IN CASH AND CASH EQUIVALENTS		13,539			21,658
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		19,535			10,999
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	33,074			32,657
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	3,857			5,096
Income taxes paid		1,735			2,844
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Transfer from loans to other real estate owned and repossessed assets		755			229

The accompanying notes to consolidated financial statements are an integral part of these statements.

6

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of Presentation

Substantially all of the assets, liabilities and operations of LCNB Corp. ("LCNB") are attributable to its wholly-owned subsidiary, LCNB National Bank (the "Bank").  The accompanying unaudited consolidated financial statements include the accounts of LCNB and the Bank.  LCNB completed the sale of its subsidiary, Dakin Insurance Agency, Inc. (“Dakin”) on March 23, 2011.  The financial results of Dakin are included as income from discontinued operations, net of tax, in the accompanying unaudited consolidated financial statements through the date of sale.

The unaudited interim consolidated financial statements, which have been reviewed by J.D. Cloud & Co. L.L.P., LCNB’s independent registered public accounting firm, in accordance with standards established by the Public Company Accounting Oversight Board, as indicated by their report included herein and which does not express an opinion on those statements, have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of financial position, results of operations, and cash flows for the interim periods, as required by Regulation S-X, Rule 10-01.

Certain prior period data presented in the financial statements have been reclassified to conform with the current year presentation.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.  These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies, and financial notes thereto included in LCNB's 2011 Annual Report on Form 10-K filed with the SEC.

7

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 2 - Investment Securities

The amortized cost and estimated fair value of available-for-sale investment securities at September 30, 2012 and December 31, 2011 are summarized as follows (in thousands):

	September 30, 2012
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
U.S. Treasury notes	$	18,512		294		-		18,806
U.S. Agency notes		91,148		2,004		-		93,152
U.S. Agency mortgage-backed securities		50,127		1,774		-		51,901
Corporate securities		3,036		45		-		3,081
Municipal securities:
Non-taxable		70,042		3,694		8		73,728
Taxable		19,980		1,326		-		21,306
Mutual funds		2,125		44		-		2,169
Trust preferred securities		299		8		3		304
Equity securities		1,190		117		17		1,290
	$	256,459		9,306		28		265,737

	December 31, 2011
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
U.S. Treasury notes	$	17,385		165		-		17,550
U.S. Agency notes		81,415		1,517		5		82,927
U.S. Agency mortgage-backed securities		50,923		1,475		111		52,287
Corporate securities		6,334		47		16		6,365
Municipal securities:
Non-taxable		65,896		3,827		20		69,703
Taxable		21,027		894		14		21,907
Mutual funds		2,103		22		-		2,125
Trust preferred securities		549		37		22		564
Equity securities		526		57		5		578
	$	246,158		8,041		193		254,006

The fair value of held-to-maturity investment securities, consisting of taxable and non-taxable municipal securities, approximates amortized cost at September 30, 2012 and December 31, 2011.

8

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 2 - Investment Securities (continued)

Information concerning available-for-sale investment securities with gross unrealized losses at September 30, 2012, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (in thousands):

	Less than Twelve Months				Twelve Months or Greater
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury notes	$	-		-		-		-
U.S. Agency notes		-		-		-		-
U.S. Agency mortgage- backed securities		-		-		-		-
Corporate securities		-		-		-		-
Municipal securities:
Non-taxable		557		6		459		2
Taxable		-		-		-		-
Mutual funds		-		-		-		-
Trust preferred securities		147		3		49		-
Equity securities		208		11		58		6
	$	912		20		566		8

Management has determined that the unrealized losses at September 30, 2012 are primarily due to fluctuations in market interest rates and do not reflect credit quality deterioration of the securities.   Because LCNB does not have the intent to sell the investments and it is more likely than not that LCNB will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, LCNB does not consider these investments to be other-than-temporarily impaired.

9

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 - Loans

Major classifications of loans at September 30, 2012 and December 31, 2011 are as follows (in thousands):

	September 30,		December 31,
	2012		2011
Commercial and industrial	$	25,749		30,990
Commercial, secured by real estate		230,768		219,188
Residential real estate		184,256		186,904
Consumer		11,478		14,562
Agricultural		2,061		2,835
Other loans, including deposit overdrafts		2,993		6,554
		457,305		461,033
Deferred net origination costs		102		229
		457,407		461,262
Less allowance for loan losses		2,866		2,931
Loans, net	$	454,541		458,331

10

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

Non-accrual, past-due, and accruing restructured loans as of September 30, 2012 and December 31, 2011 are as follows (in thousands):

	September 30,			December 31,
	2012			2011
Non-accrual loans:
Commercial and industrial	$	264			495
Commercial, secured by real estate		1,083			1,950
Residential real estate		1,430			1,223
Total non-accrual loans		2,777			3,668
Past-due 90 days or more and still accruing		22			39
Total non-accrual and past-due 90 days  or more and still accruing		2,799			3,707
Accruing restructured loans		13,356			14,739
Total	$	16,155			18,446
Percentage of total non-accrual and past-due 90  days or more and still accruing to total loans		0.61	%		0.80	%
Percentage of total non-accrual, past-due 90 days  or more and still accruing, and accruing  restructured loans to total loans		3.53	%		4.00	%

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 September 30, 2012 and December 31, 2011 are $70,208,000 and $67,410,000, respectively.  Loans sold to the Federal Home Loan Mortgage Corporation during the three months ended September 30, 2012 and 2011 totaled $7,934,000 and $2,173,000, respectively, and $19,328,000 and $4,871,000 during the nine months ended September 30, 2012 and 2011, respectively.

11

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

The allowance for loan losses and recorded investment in loans for the nine months ended September 30 are as follows (in thousands):

	Commercial & Industrial			Commercial Real Estate			Residential Real Estate			Consumer			Agricultural		Other			Total
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		163			(24	)		632			(49	)		-		20			742
Losses charged off		(159	)		(234	)		(479	)		(84	)		-		(64	)		(1,020	)
Recoveries		-			71			7			95			-		40			213
Balance, end of period	$	184			1,736			816			128			-		2			2,866
Individually evaluated for impairment	$	21			41			227			-			-		-			289
Collectively evaluated for impairment		163			1,695			589			128			-		2			2,577
Balance, end of period	$	184			1,736			816			128			-		2			2,866
Loans:
Individually evaluated for impairment	$	264			9,942			5,110			13			-		-			15,329
Collectively evaluated for impairment		25,462			220,622			179,390			11,550			2,061		2,993			442,078
Balance, end of period	$	25,726			230,564			184,500			11,563			2,061		2,993			457,407
2011
Allowance for loan losses:
Balance, beginning of year	$	305			1,625			459			246			-		6			2,641
Provision charged to expenses		499			409			501			36			-		31			1,476
Losses charged off		(251	)		(203	)		(371	)		(183	)		-		(100	)		(1,108	)
Recoveries		-			30			28			105			-		69			232
Balance, end of period	$	553			1,861			617			204			-		6			3,241
Individually evaluated for impairment	$	337			303			93			-			-		-			733
Collectively evaluated for impairment		216			1,558			524			204			-		6			2,508
Balance, end of period	$	553			1,861			617			204			-		6			3,241
Loans:
Individually evaluated for impairment	$	904			11,618			596			10			-		-			13,128
Collectively evaluated for impairment		31,236			192,453			183,532			16,183			3,245		9,759			436,408
Balance, end of period	$	32,140			204,071			184,128			16,193			3,245		9,759			449,536

12

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

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 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.

13

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

A breakdown of the loan portfolio by credit quality indicators at September 30, 2012 and December 31, 2011 is as follows (in thousands):

	Pass		OAEM		Substandard		Doubtful		Total
September 30, 2012
Commercial & industrial	$	22,452		2,646		447		181		25,726
Commercial, secured by real estate		218,963		2,412		9,189		-		230,564
Residential real estate		174,759		2,593		7,148		-		184,500
Consumer		11,458		-		100		5		11,563
Agricultural		2,057		-		4		-		2,061
Other		2,993		-		-		-		2,993
Total	$	432,682		7,651		16,888		186		457,407
December 31, 2011
Commercial & industrial	$	26,099		1,700		2,804		370		30,973
Commercial, secured by real estate		206,728		2,133		9,633		568		219,062
Residential real estate		182,409		1,681		2,682		376		187,148
Consumer		14,601		-		50		39		14,690
Agricultural		1,430		-		1,405		-		2,835
Other		6,554		-		-		-		6,554
Total	$	437,821		5,514		16,574		1,353		461,262

14

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

A loan portfolio aging analysis at September 30, 2012 and December 31, 2011 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
September 30, 2012
Commercial & industrial	$	-		-		264		264		25,462		25,726		-
Commercial, secured by real estate		172		80		1,083		1,335		229,229		230,564		-
Residential real estate		900		74		1,346		2,320		182,180		184,500		-
Consumer		66		44		22		132		11,431		11,563		22
Agricultural		-		-		-		-		2,061		2,061		-
Other		44		-		-		44		2,949		2,993		-
Total	$	1,182		198		2,715		4,095		453,312		457,407		22
December 31, 2011
Commercial & industrial	$	2		-		495		497		30,476		30,973		-
Commercial, secured by real estate		-		83		1,769		1,852		217,210		219,062		-
Residential real estate		1,132		22		1,202		2,356		184,792		187,148		-
Consumer		82		37		39		158		14,532		14,690		39
Agricultural		-		-		-		-		2,835		2,835		-
Other		59		-		-		59		6,495		6,554		-
Total	$	1,275		142		3,505		4,922		456,340		461,262		39

15

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

Impaired loans at September 30, 2012 and December 31, 2011 are as follows (in thousands):

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
September 30, 2012
With no related allowance recorded:
Commercial & industrial	$	83		572		-		1,494		43
Commercial real estate		12,827		13,270		-		12,486		348
Residential real estate		474		474		-		389		3
Consumer		22		22		-		23		1
Total	$	13,406		14,338		-		14,392		395
With an allowance recorded:
Commercial & industrial	$	181		250		21		181		-
Commercial real estate		1,168		1,222		98		1,643		43
Residential real estate		583