Note 3 - Loans

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

	March 31,		December 31,
		2012		2011

Commercial and industrial	$	30,675		30,990
Commercial, secured by real estate		218,638		219,188
Residential real estate		186,765		186,904
Consumer		13,273		14,562
Agricultural		2,357		2,835
Other loans, including deposit overdrafts		5,074		6,554
		456,782		461,033
Deferred net origination costs		199		229
		456,981		461,262
Less allowance for loan losses		2,890		2,931
Loans, net	$	454,091		458,331

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

	March 31,		December 31,
		2012		2011

Non-accrual loans:
Commercial and industrial	$	322		495
Commercial, secured by real estate		1,152		1,950
Residential real estate		1,665		1,223
Total non-accrual loans		3,139		3,668
Past-due 90 days or more and still accruing		35		39
Total non-accrual and past-due 90 days or more and still accruing		3,174		3,707
Accruing restructured loans		14,572		14,739
Total	$	17,746		18,446

Percentage of total non-accrual and past-due 90 days or more and still accruing to total loans		0.69%		0.80%

Percentage of total non-accrual, past-due 90 days or more and still accruing, and accruing restructured loans to total loans		3.88%		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 March 31, 2012 and December 31, 2011 were $68,250,000 and $67,410,000, respectively. Loans sold to the Federal Home Loan Mortgage Corporation during the three months ended March 31, 2012 and 2011 totaled $5,866,000 and $1,722,000, respectively.

The allowance for loan losses and recorded investment in loans for the three months ended March 31 are as follows (000's):

	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
Provision charged to expenses		7			61			155			(6	)		-		(2	)		215
Losses charged off		-			(205	)		(117	)		(46	)		-		(20	)		(388	)
Recoveries		-			70			7			38			-		17			132
Balance, end of period	$	169			1,867			701			152			-		1			2,890

Ending balance:
Individually evaluated for impairment	$	-			263			150			-			-		-			413
Collectively evaluated for impairment		169			1,604			551			152			-		1			2,477

Loans:
Ending balance:
Individually evaluated for impairment	$	2,922			13,900			629			9			-		-			17,460
Collectively evaluated for impairment		27,735			204,602			186,378			13,375			2,357		5,074			439,521
Totals	$	30,657			218,502			187,007			13,384			2,357		5,074			456,981

2011
Allowance for loan losses:
Balance, beginning of year	$	305			1,625			459			246			-		6			2,641
Provision charged to expenses		284			200			141			34			-		5			664
Losses charged off		(251	)		-			(100	)		(91	)		-		(30	)		(472	)
Recoveries		-			30			1			42			-		25			98
Balance, end of period	$	338			1,855			501			231			-		6			2,931

Ending balance:
Individually evaluated for impairment	$	100			336			-			-			-		-			436
Collectively evaluated for impairment		238			1,519			501			231			-		6			2,495

Loans:
Ending balance:
Individually evaluated for impairment	$	833			12,022			533			-			-		-			13,388
Collectively evaluated for impairment		34,533			197,837			187,613			18,420			2,260		9,402			450,065
Totals		35,366			209,859			188,146			18,420			2,260		9,402			463,453

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 March 31, 2012 and December 31, 2011 is as follows (000's):

	Pass		OAEM		Substandard		Doubtful		Total
March 31, 2012
Commercial & industrial	$	25,777		1,676		3,204		-		30,657
Commercial, secured by real estate		207,101		2,115		9,248		38		218,502
Residential real estate		181,376		1,767		3,838		26		187,007
Consumer		13,336		-		48		-		13,384
Agricultural		952		-		1,405		-		2,357
Other		5,074		-		-		-		5,074
Total	$	433,616		5,558		17,743		64		456,981

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

A loan portfolio aging analysis at March 31, 2012 and December 31, 2011 is as follows (000's):

	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, 2012
Commercial & industrial	$	1		-		322		323		30,334		30,657		-
Commercial, secured by real estate		-		301		933		1,234		217,268		218,502		-
Residential real estate		813		1,029		1,489		3,331		183,676		187,007		35
Consumer		68		23		-		91		13,293		13,384		-
Agricultural		-		-		-		-		2,357		2,357		-
Other		35		-		-		35		5,039		5,074		-
Total	$	917		1,353		2,744		5,014		451,967		456,981		35

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

Impaired loans at March 31, 2012 and December 31, 2011 are as follows (000's):

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2012
With no related allowance recorded:
Commercial & industrial	$	2,922		3,252		-		2,958		33
Commercial real estate		12,085		12,597		-		12,268		111
Residential real estate		332		332		-		332		-
Consumer		8		8		-		8		-
Total	$	15,347		16,189		-		15,566		144

With an allowance recorded:
Commercial & industrial		-		-		-		-		-
Commercial real estate	$	1,815		1,835		263		2,311		21
Residential real estate		297		297		150		272		-
Consumer		1		1		-		1		-
Total	$	2,113		2,133		413		2,584		21

Total:
Commercial & industrial	$	2,922		3,252		-		2,958		33
Commercial real estate		13,900		14,432		263		14,579		132
Residential real estate		629		629		150		604		-
Consumer		9		9		-		9		-
Total	$	17,460		18,322		413		18,150		165

December 31, 2011
With no related allowance recorded:
Commercial & industrial	$	2,881		3,211		-		3,015		139
Commercial real estate		12,373		12,587		-		12,686		529
Residential real estate		332		332		-		332		-
Consumer		8		8		-		5		1
Total	$	15,594		16,138		-		16,038		669

With an allowance recorded:
Commercial & industrial	$	177		177		-		330		14
Commercial real estate		2,120		3,136		257		2,514		67
Residential real estate		264		264		142		257		-
Consumer		2		2		-		1		-
Total	$	2,563		3,579		399		3,102		81

Total:
Commercial & industrial	$	3,058		3,388		-		3,345		153
Commercial real estate		14,493		15,723		257		15,200		596
Residential real estate		596		596		142		589		-
Consumer		10		10		-		6		1
Total	$	18,157		19,717		399		19,140		750

Loan modifications that were classified as troubled debt restructurings during the three months ended March 31, 2012 and 2011 are as follows (dollars in thousands):

	Three Months Ended March 31,
	2012				2011
	Number of Loans		Balance at Modification		Number of Loans		Balance at Modification

Commercial and industrial		-	$	-		1	$	204
Commercial, secured by real estate		-		-		2		625
Residential real estate		1		30		-		-
Consumer		-		-		1		2
		1	$	30		4	$	831

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.

There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the three months ended March 31, 2012 and 2011.