Note 4 - Loans

Major classifications of loans at March 31, 2013 and December 31, 2012 are as follows (in thousands):

	March 31,			December 31,
	2013			2012

Commercial and industrial	$	35,452			26,236
Commercial, secured by real estate		283,144			230,256
Residential real estate		214,282			183,132
Consumer		13,860			10,554
Agricultural		1,805			1,668
Other loans, including deposit overdrafts		1,146			1,875
		549,689			453,721
Deferred net origination (fees) costs		(22	)		62
		549,667			453,783
Less allowance for loan losses		3,404			3,437
Loans, net	$	546,263			450,346

Non-accrual, past-due, and accruing restructured loans as of March 31, 2013 and December 31, 2012 are as follows (in thousands):

	March 31,			December 31,
	2013			2012

Non-accrual loans:
Commercial and industrial	$	181			264
Commercial, secured by real estate		1,414			788
Residential real estate		1,578			1,231
Total non-accrual loans		3,173			2,283
Past-due 90 days or more and still accruing		180			128
Total non-accrual and past-due 90 days or more and still accruing		3,353			2,411
Accruing restructured loans		13,693			13,343
Total	$	17,046			15,754

Percentage of total non-accrual and past-due 90 days or more and still accruing to total loans		0.61	%		0.53	%

Percentage of total non-accrual, past-due 90 days or more and still accruing, and accruing restructured loans to total loans		3.10	%		3.47	%

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, 2013 and December 31, 2012 were $87,710,000 and $71,568,000, respectively. Loans sold during the three months ended March 31, 2013 and 2012 totaled $7,175,000 and $5,866,000, respectively.

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

	Commercial & Industrial			Commercial Real Estate			Residential Real Estate			Consumer			Agricultural		Other			Total
2013
Allowance for loan losses:
Balance, beginning of year	$	320			2,296			712			108			-		1			3,437
Provision charged to expenses		20			87			14			22			-		6			149
Losses charged off		(83	)		(30	)		(27	)		(63	)		-		(16	)		(219	)
Recoveries		-			-			5			23			-		9			37
Balance, end of period	$	257			2,353			704			90			-		-			3,404

Individually evaluated for impairment	$	71			657			157			-			-		-			885
Collectively evaluated for impairment		186			1,696			547			90			-		-			2,519
Balance, end of period	$	257			2,353			704			90			-		-			3,404

Loans:
Individually evaluated for impairment	$	181			14,006			1,294			7			-		-			15,488
Collectively evaluated for impairment		35,234			268,838			213,190			13,966			1,805		1,146			534,179
Balance, end of period	$	35,415			282,844			214,484			13,973			1,805		1,146			549,667

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

Individually evaluated for impairment	$	-			263			150			-			-		-			413
Collectively evaluated for impairment		169			1,604			551			152			-		1			2,477
Balance, end of period	$	169			1,867			701			152			-		1			2,890

Loans:
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
Balance, end of period	$	30,657			218,502			187,007			13,384			2,357		5,074			456,981

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, 2013 and December 31, 2012 is as follows (in thousands):

	Pass		OAEM		Substandard		Doubtful		Total
March 31, 2013
Commercial & industrial	$	31,083		1,793		2,358		181		35,415
Commercial, secured by real estate		262,682		1,797		18,365		-		282,844
Residential real estate		206,546		2,322		5,616		-		214,484
Consumer		13,931		-		42		-		13,973
Agricultural		1,771		-		34		-		1,805
Other		1,146		-		-		-		1,146
Total	$	517,159		5,912		26,415		181		549,667

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 March 31, 2013 and December 31, 2012 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, 2013
Commercial & industrial	$	-		-		181		181		35,234		35,415		-
Commercial, secured by real estate		378		-		1,301		1,679		281,165		282,844		127
Residential real estate		945		223		1,376		2,544		211,940		214,484		49
Consumer		60		11		4		75		13,898		13,973		4
Agricultural		-		-		-		-		1,805		1,805		-
Other		63		-		-		63		1,083		1,146		-
Total	$	1,446		234		2,862		4,542		545,125		549,667		180

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 at March 31, 2013 and December 31, 2012 are as follows (in thousands):

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2013
With no related allowance recorded:
Commercial & industrial	$	-		-		-		-		-
Commercial real estate		9,480		9,875		-		9,516		89
Residential real estate		534		727		-		591		3
Consumer		-		-		-		3		-
Total	$	10,014		10,602		-		10,110		92

With an allowance recorded:
Commercial & industrial	$	181		249		71		202		-
Commercial real estate		4,526		4,654		657		4,548		32
Residential real estate		760		786		157		764		3
Consumer		7		7		-		7		-
Total	$	5,474		5,696		885		5,521		35

Total:
Commercial & industrial	$	181		249		71		202		-
Commercial real estate		14,006		14,529		657		14,064		121
Residential real estate		1,294		1,513		157		1,355		6
Consumer		7		7		-		10		-
Total	$	15,488		16,298		885		15,631		127

December 31, 2012
With no related allowance recorded:
Commercial & industrial	$	-		-		-		975		43
Commercial 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 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 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

One residential real estate loan was modified and classified as a troubled debt restructuring in each of the three-month periods ended March 31, 2013 and 2012 with a balance of $80,000 and $30,000, respectively, at the date of modification.

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.

A restructured automobile loan with a balance of $13,000 was charged off during the first quarter 2013, which was within twelve months of the loan's modification date. There were no other troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the three months ended March 31, 2013 and 2012.