UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)



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

For the fiscal year ended December 31, ~~2019~~2020



☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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)

Securities registered pursuant to Section 12(b) of the Exchange Act:



Title of Each Class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, No Par Value	LCNB	NASDAQ ~~Capital Market~~

Securities registered pursuant to 12(g) of the Exchange Act:

___None___

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

☐ Yes ☒ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

☐ Yes ☒ No

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. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

☒ Yes ☐ 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, or an emerging growth company. See the definitions of ~~“large~~"large accelerated filer, ~~“accelerated filer”~~" "accelerated filer," "smaller reporting company," and ~~“smaller reporting company”~~"emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated filer ☐ Accelerated filer ☐



☐ ~~Large accelerated filer~~	Non-accelerated filer ☒ Smaller reporting company ☒~~Accelerated filer~~
☐ ~~Non-accelerated filer~~	☐ ~~Smaller reporting company~~
	~~☐ Emerging growth company~~

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No

The aggregate market value of the registrant’s outstanding voting common stock held by nonaffiliates on June 30, ~~2019,~~2020, determined using a per share closing price on that date of ~~$19.00~~$15.96 as quoted on the NASDAQ Capital Market, was ~~$234,015,000.00.~~$195,144,851.

As of March ~~3, 2019, 12,947,015~~9, 2021, 12,814,987 common shares were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement included in the Notice of Annual Meeting of Shareholders to be held April ~~21, 2020,~~20, 2021, which Proxy Statement will be mailed to shareholders within 120 days from the end of the fiscal year ended December 31, ~~2019~~2020 are incorporated by reference into Part III.

LCNB CORP.

For the Year Ended December 31, ~~2019~~2020

TABLE OF CONTENTS



PART I		4
Item 1. Business		4
Item 1A. Risk Factors		2021
Item 1B. Unresolved Staff Comments		2427
Item 2. Properties		2527
Item 3. Legal Proceedings		2527
Item 4. Mine Safety Disclosures		2527

PART II		2628
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.		2628
Item 6. Selected Financial Data		2830
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations		2931
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		4244
Item 8. Financial Statements and Supplementary Data		4345
~~REPORT OF MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING~~		43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	4445
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		4748
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures		~~103~~98
Item 9A. Controls and Procedures		~~103~~98
Item 9B. Other Information		~~103~~98

PART III		~~104~~99
Item 10. Directors, Executive Officers and Corporate Governance		~~104~~99
Item 11. Executive Compensation		~~104~~99
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.		~~105~~99
Item 13. Certain Relationships and Related Transactions, and Director Independence		~~105~~100
Item 14. Principal ~~Accounting~~Account ant Fees and Services		~~105~~100

PART IV		~~106~~101
Item 15. ~~Exhibits,~~Exhibit and Financial Statement Schedules		~~106~~101

SIGNATURES		~~108~~103

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PART I

Glossary of Abbreviations and Acronyms

ASC Accounting Standards Codification

ASU Accounting Standards Update

Bank LCNB National Bank

BNB BNB Bancorp, Inc.

Brookville National Brookville National Bank

BSA Bank Secrecy Act

CARES Act Coronavirus Aid, Relief, and Economic Security Act

CEO Chief Executive Officer

CFO ` Chief Financial Officer

CFPB Consumer Financial Protection Bureau

Citizens National Citizens National Bank

CFB Columbus First Bancorp, Inc.

Columbus First Columbus First Bank

Company LCNB Corp. and its consolidated subsidiaries as a whole

CRA Community Reinvestment Act of 1977

DEI Diversity, Equity, and Inclusion

DIF Deposit Insurance Fund

Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer Protection Act

Eaton National Eaton National Bank & Trust Co.

FASB Financial Accounting Standards Board

FDIC Federal Deposit Insurance Corporation

FHLB Federal Home Loan Bank

First Capital First Capital Bancshares, Inc.

ICS Insured Cash Sweep

LCNB LCNB Corp. and its consolidated subsidiaries as a whole

OCC Office of the Comptroller of the Currency

PPP Paycheck Protection Program

PPPLF Paycheck Protection Program Liquidity Facility

SBA Small Business Administration

SEC Securities and Exchange Commission

SVP Senior Vice President

Item 1. Business

FORWARD-LOOKING STATEMENTS

Certain statements made in this document regarding ~~LCNB Corp.’s ("LCNB" or the "company")~~LCNB’s financial condition, results of operations, plans, objectives, future performance and business, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by the fact they are not historical facts and include words such as “anticipate”, “could”, “may”, “feel”, “expect”, “believe”, “plan”, and similar expressions.

These forward-looking statements reflect management's current expectations based on all information available to management and its knowledge of LCNB’s business and operations. Additionally, LCNB’s financial condition, results of operations, plans, objectives, future performance and business are subject to risks and uncertainties that may cause actual results to differ materially. These factors include, but are not limited to:


1.	~~the success, impact, and timing of the implementation of LCNB’s business strategies;~~


2.	~~LCNB’s ability to integrate recent and future acquisitions may be unsuccessful, or may be more difficult, time-consuming or costly than expected;~~


3.	~~LCNB may incur increased loan charge-offs in the future;~~


4.	~~LCNB may face competitive loss of customers;~~


5.	~~changes in the interest rate environment may have results on LCNB’s operations materially different from those anticipated by LCNB’s market risk management functions;~~


6.	~~changes in general economic conditions and increased competition could adversely affect LCNB’s operating results;~~


7.	~~changes in regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact LCNB’s operating results;~~


8.	~~LCNB may experience difficulties growing loan and deposit balances;~~


9.	United States trade relations with foreign countries could negatively impact the financial condition of LCNB's customers, which could adversely affect LCNB 's operating results and financial condition;


~~10.~~	deterioration in the financial condition of the U.S. banking system may impact the valuations of investments LCNB has made in the securities of other financial institutions resulting in either actual losses or other than temporary impairments on such investments;


~~11.~~	difficulties with technology or data security breaches, including cyberattacks, that could negatively affect LCNB's ability to conduct business and its relationships with customers, vendors, and others;


~~12.~~	~~adverse weather events and natural disasters and global and/or national epidemics; and~~

~~13.~~

government intervention in the U.S. financial system, including the effects of recent legislative, tax, accounting and regulatory actions and reforms, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau, the capital ratios of Basel III as adopted by the federal banking authorities, and the Tax Cuts and Jobs Act.

1.the success, impact, and timing of the implementation of LCNB’s business strategies;

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2.the significant risks and uncertainties for LCNB's business, results of operations and financial condition, as well as its regulatory capital and liquidity ratios and other regulatory requirements, caused by the COVID-19 pandemic, which will depend on several factors, including the scope and duration of the pandemic, its influence on financial markets, the effectiveness of LCNB's work from home arrangements and staffing levels in operational facilities, the impact of market participants on which LCNB relies, and actions taken by governmental authorities and other third parties in response to the pandemic;

3.the disruption of global, national, state, and local economies associated with the COVID-19 pandemic, which could effect LCNB's liquidity and capital positions, impair the ability of our borrowers to repay outstanding loans, impair collateral values, and further increase the allowance for credit losses;

4.LCNB’s ability to integrate recent and any future acquisitions may be unsuccessful, or may be more difficult, time-consuming, or costly than expected;

5.LCNB may incur increased loan charge-offs in the future;

6.LCNB may face competitive loss of customers;

7.changes in the interest rate environment may have results on LCNB’s operations materially different from those anticipated by LCNB’s market risk management functions;

8.changes in general economic conditions and increased competition could adversely affect LCNB’s operating results;

9.changes in regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact LCNB’s operating results;

10.LCNB may experience difficulties growing loan and deposit balances;

11.United States trade relations with foreign countries could negatively impact the financial condition of LCNB's customers, which could adversely affect LCNB 's operating results and financial condition;

12.deterioration in the financial condition of the U.S. banking system may impact the valuations of investments LCNB has made in the securities of other financial institutions resulting in either actual losses or other than temporary impairments on such investments;

13.difficulties with technology or data security breaches, including cyberattacks, that could negatively affect LCNB's ability to conduct business and its relationships with customers, vendors, and others;

14.adverse weather events and natural disasters and global and/or national epidemics; and

15.government intervention in the U.S. financial system, including the effects of recent legislative, tax, accounting and regulatory actions and reforms, including the CARES Act, the Dodd-Frank Act, the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau, the capital ratios of Basel III as adopted by the federal banking authorities, and the Tax Cuts and Jobs Act.

Forward-looking statements made herein reflect management's expectations as of the date such statements are made. Such information is provided to assist shareholders and potential investors in understanding current and anticipated financial operations of LCNB and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. LCNB undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise after the date such statements are made.

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DESCRIPTION OF ~~LCNB CORP.'S~~LCNB'S BUSINESS

General Description

LCNB Corp., an Ohio corporation formed in December 1998, is a financial holding company headquartered in Lebanon, Ohio. Substantially all of the assets, liabilities and operations of LCNB Corp. are attributable to its wholly-owned subsidiary, LCNB National ~~Bank (the "Bank").~~Bank. LCNB Risk Management, Inc., a captive insurance agency, was incorporated in Nevada by LCNB Corp. during the second quarter 2017. ~~LCNB Corp. and its subsidiaries are herein collectively referred to as “LCNB.”~~ The predecessor of LCNB Corp., the Bank, was formed as a national banking association in 1877. On May 19, 1999, the Bank became a wholly-owned subsidiary of LCNB Corp.

On January 11, 2013, LCNB consummated a merger with First Capital Bancshares, Inc. (“First Capital”) in a stock and cash transaction valued at approximately $20.2 million. Immediately following the merger of First Capital into LCNB, Citizens National Bank (“Citizens National”), a wholly-owned subsidiary of First Capital, was merged into the Bank. At that time, Citizens National’s six full–service offices became offices of LCNB. Three of these offices are located in Chillicothe, Ohio and one office is located in each of Frankfort, Ohio, Clarksburg, Ohio, and Washington Court House, Ohio. The office in Clarksburg, Ohio was closed on January 24, 2017.

On January 24, 2014, LCNB purchased all of the outstanding stock of Eaton National Bank & Trust Co. ("Eaton National") from its holding company, Colonial Banc Corp., in a cash transaction totaling $24.75 million. Upon consummation of the transaction, Eaton National was merged into the Bank and its five offices became offices of the Bank. Two of these offices are located in Eaton, Ohio and one office is located in each of New Paris, Ohio, Lewisburg, Ohio, and West Alexandria, Ohio.

On April 30, 2015, LCNB consummated a merger with BNB Bancorp, Inc. (“BNB”) in a stock and cash transaction valued at approximately $13.5 million. Immediately following the merger of BNB into LCNB, Brookville National Bank ("Brookville National"), a wholly-owned subsidiary of BNB, was merged into the Bank. At that time, Brookville National's two offices, both located in Brookville, Ohio, became offices of the Bank. The office located on Hay Avenue in Brookville was closed on November 10, 2017.

On May 31, 2018, LCNB consummated a merger with Columbus First Bancorp, Inc. (“CFB”) in a stock transaction valued at approximately $64.4 million. Immediately following the merger of CFB into LCNB, Columbus First Bank (“Columbus First”), a wholly-owned subsidiary of CFB, was merged into the Bank. At that time, Columbus First's sole office, located in Worthington, Ohio, became an office of the Bank.

The Bank is a full service community bank offering a wide range of commercial and personal banking services. Deposit services include checking accounts, NOW accounts, savings accounts, Christmas and vacation club accounts, money market deposit accounts, Lifetime Checking accounts (a senior citizen program), individual retirement accounts, and certificates of deposit. Additional supportive services include online banking, bill pay, mobile banking and telephone banking. Commercial customers also have both cash management and remote deposit capture products as potential options. Deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation (the “FDIC”).

Loan products offered include commercial and industrial loans, commercial and residential real estate loans, agricultural loans, construction loans, various types of consumer loans, and Small Business Administration loans. The Bank's residential mortgage lending activities consist primarily of loans for purchasing or refinancing personal residences, home equity lines of credit, and loans for commercial or consumer purposes secured by residential mortgages. Most longer term, fixed-rate residential real estate loans are sold to the Federal Home Loan Mortgage Corporation with servicing retained. Consumer lending activities include automobile, boat, home improvement and personal loans.

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The ~~Trust and Investment~~Wealth Management Division of the Bank provides complete trust administration, estate settlement, and fiduciary services and also offers investment management of trusts, agency accounts, individual retirement accounts, and foundations/endowments.

Security brokerage services are offered by the Bank through arrangements with LPL Financial LLC, a registered broker/dealer. Licensed brokers offer a full range of investment services and products, including financial needs analysis, mutual funds, securities trading, annuities, and life insurance.

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Other services offered include safe deposit boxes, night depositories, cashier's checks, bank-by-mail, ATMs, cash and transaction services, debit cards, wire transfers, electronic funds transfer, utility bill collections, notary public service, ~~personal computer-based~~ cash management services, 24-hour telephone banking, PC Internet banking, mobile banking, and other services tailored for both individuals and businesses.

The Bank is not dependent upon any one significant customer or specific industry. Business is not seasonal to any material degree.

The address of the main office of the Bank is 2 North Broadway, Lebanon, Ohio 45036; telephone (513) 932-1414.

Primary Market Area

The Bank considers its primary market area to consist of counties where it has a physical presence and neighboring counties, which includes Southwestern and South Central Ohio. At December 31, ~~2019,~~2020, the Bank had:

35•33 offices, including a main office in Warren County, Ohio and branch offices in Warren, Butler, Clinton, Clermont, Fayette, Franklin, Hamilton, Montgomery, Preble, and Ross Counties, Ohio,

•an Operations Center in Warren County, Ohio,

•and 3836 ATMs.

Competition

The Bank faces strong competition both in making loans and attracting deposits. The deregulation of the banking industry and the wide spread enactment of state laws that permit multi-bank holding companies as well as the availability of nationwide interstate banking has created a highly competitive environment for financial services providers. The Bank competes with other national and state banks, savings and loan associations, credit unions, finance companies, mortgage brokerage firms, realty companies with captive mortgage brokerage firms, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries operating in its market and elsewhere, many of whom have substantially larger financial and managerial resources.

The Bank seeks to minimize the competitive effect of other financial institutions through a community banking approach that emphasizes direct customer access to the Bank's CEO and other officers in an environment conducive to friendly, informed, and courteous personal services. Management believes that the Bank is well positioned to compete successfully in its primary market area. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality and scope of the services rendered, the convenience of the banking facilities, and, in the case of loans to commercial borrowers, relative lending limits.

The ability to access and use technology is an increasingly competitive factor in the financial services industry. Technology relating to the delivery of financial services, the security and privacy of customer information, and the processing of information is evolving rapidly. LCNB must continually make technology investments to remain competitive in the financial services industry.

Management believes the commitment of the Bank to personal service, innovation, and involvement in the communities and primary market areas it serves, as well as its commitment to quality community banking service, are factors that contribute to its competitive advantage.

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Supervision and Regulation

Both federal and state laws extensively regulate bank holding companies, financial holding companies and banks. These laws (and the regulations promulgated thereunder) are primarily intended to protect depositors and the ~~deposit insurance fund (the “DIF”)~~DIF of the ~~Federal Deposit Insurance Corporation (the "FDIC").~~FDIC. The following information describes particular laws and regulatory provisions relating to financial holding companies and banks. This discussion is qualified in its entirety by reference to the particular laws and regulatory provisions. A change in any of these laws or regulations may have a material effect on our business and the business of our subsidiaries.

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Bank Holding Companies and Financial Holding Companies

Historically, the activities of bank holding companies were limited to the business of banking and activities closely related or incidental to banking. Bank holding companies were generally prohibited from acquiring control of any company that was not a bank and from engaging in any business other than the business of banking or managing and controlling banks. The Gramm-Leach-Bliley Act, which took effect on March 12, 2000, dismantled many Depression-era restrictions against affiliations between banking, securities, and insurance firms by permitting bank holding companies to engage in a broader range of financial activities, so long as certain safeguards are observed. Specifically, bank holding companies may elect to become “financial holding companies” that may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental to a financial activity. Thus, with the enactment of the Gramm-Leach-Bliley Act, banks, security firms, and insurance companies find it easier to acquire or affiliate with each other and cross-sell financial products. The Gramm-Leach-Bliley Act permits a single financial services organization to offer a more complete array of financial products and services than historically was permitted.

A financial holding company is essentially a bank holding company with significantly expanded powers. Under the Gramm-Leach-Bliley Act, in addition to traditional lending activities, the following activities are among those that are deemed “financial in nature” for financial holding companies: securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, activities which the Federal Reserve Board determines to be closely related to banking, and certain merchant banking activities.

LCNB elected to become a financial holding company on April 11, 2000. As a financial holding company, LCNB has very broad discretion to affiliate with securities firms and insurance companies, provide merchant banking services, and engage in other activities that the Federal Reserve Board has deemed financial in nature. In order to continue as a financial holding company, LCNB must continue to be well-capitalized, well-managed, and maintain compliance with the Community Reinvestment Act. Depending on the types of financial activities that LCNB may elect to engage in, under the Gramm-Leach-Bliley Act’s functional regulation principles, it may become subject to supervision by additional government agencies. The election to be treated as a financial holding company increases LCNB's ability to offer financial products and services that historically it was either unable to provide or was only able to provide on a limited basis. As a result, LCNB will face increased competition in the markets for any new financial products and services that it may offer. Likewise, an increased amount of consolidation among banks and securities firms or banks and insurance firms could result in a growing number of large financial institutions that could compete aggressively with LCNB.

The Bank is subject to the provisions of the National Bank Act. The Bank is subject to primary supervision, regulation and examination by the ~~Office of the Comptroller of the Currency (the “OCC”).~~OCC. The Bank is also subject to the rules and regulations of the Board of Governors of the Federal Reserve System and the FDIC.

Banking Operations.

LCNB Corp. and the Bank are subject to an extensive array of banking laws and regulations that are intended primarily for the protection of the Bank’s customers and depositors. These laws and regulations govern such areas as permissible activities, loans and investments, and rates of interest that can be charged on loans and reserves. LCNB Corp. and the Bank also are subject to general U.S. federal laws and regulations and to the laws and regulations of the State of Ohio. Set forth below are brief descriptions of selected laws and regulations applicable to LCNB Corp. and the Bank.

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Safe and Sound Banking Practices.

Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserve Board’s Regulation Y, for example, generally requires a holding company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the bank holding company’s consolidated net worth. The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Depending upon the circumstances, the Federal Reserve Board could take the position that paying a dividend would constitute an unsafe or unsound banking practice.

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The Federal Reserve Board has broad authority to prohibit activities of bank holding companies and their nonbanking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1.0 million for each day the activity continues.

Deposit Insurance Coverage and Assessments

The Bank is FDIC insured. Through the DIF, the FDIC provides deposit insurance protection that covers all deposit accounts in FDIC-insured depository institutions up to applicable limits (currently ~~$250,0000~~$250,000 per depositor).

The Bank must pay assessments to the FDIC under a risk-based assessment system for this federal deposit insurance protection. FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification. Institutions assigned to higher risk classifications (i.e., institutions that pose a greater risk of loss to the DIF) pay assessments at higher rates than institutions assigned to lower risk classifications. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to bank regulators. Through December 31, ~~2019,~~2020, the assessment rate for the Bank was at the lowest risk-based premium available, which was 3.00% of the assessment base per annum. In addition, the FDIC can impose special assessments to cover shortages in the DIF and has imposed special assessments in the past.

In October 2010, the FDIC adopted a new Restoration Plan for the DIF to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. On April 26, 2016, the FDIC adopted a rule amending pricing for deposit insurance for institutions with less than $10 billion in assets, effective the quarter after the fund reserve ratio reached 1.15%. The fund reserve ratio reached 1.15% effective as of June 30, 2016. As a result, the Bank’s assessment rate was decreased to the rate stated above effective July 1, 2016. The Dodd-Frank Act also eliminated the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds.

The Dodd-Frank Act required the FDIC to offset the effect of increasing the reserve ratio on insured depository institutions with total consolidated assets of less than $10 billion, such as the Bank. In September 2018, the reserve ratio reached 1.36% at which time banks with assets of less than $10 billion were awarded assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35%. ~~When the reserve ratio reached 1.40% in June 2019, the FDIC applied these credits to the September 30, 2019 assessment invoice and then again to the December 31, 2019 assessment invoice.~~ The Bank’s assessment credit totaled $413,000 of which ~~$111,000 and $112,000, respectively, were used to zero out~~$223,000 was applied against the September 30, 2019 and December 31, 2019 assessment ~~invoices. As of December 31, 2019,~~invoices and $190,000 ~~remains in available credits, which the Bank expects to be~~was applied toagainst the March 31, 2020 and June 30, 2020 assessment invoices.

As required by the Dodd-Frank Act, the FDIC also revised the deposit insurance assessment system, effective April 1, 2011, to base assessments on the average total consolidated assets of insured depository institutions during the assessment period, less the average tangible equity of the institution during the assessment period, as opposed to solely bank deposits at an institution. This base assessment change necessitated that the FDIC adjust the assessment rates to ensure that the revenue collected under the new assessment system will approximately equal that under the existing assessment system.

Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), an FDIC-insured depository institution can be held liable for any losses incurred by the FDIC in connection with (1) the “default” of one of its FDIC-insured subsidiaries or (2) any assistance provided by the FDIC to one of its FDIC-receivers. “In danger of default” is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance.

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Dividends

LCNB Corp. is a legal entity separate and distinct from the Bank. LCNB Corp. receives most of its revenue from dividends paid to it by the Bank. Described below are some of the laws and regulations that apply when either LCNB Corp. or the Bank pay or paid dividends.

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The Federal Reserve Board and the OCC have issued policy statements that recommend that bank holding companies and insured banks should generally only pay dividends to the extent net income is sufficient to cover both cash dividends and a rate of earnings retention consistent with capital needs, asset quality, and overall financial condition. Further, the Federal Reserve Board’s policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries. In addition, the Federal Reserve Board has indicated that each bank holding company should carefully review its dividend policy and has discouraged payment ratios that are at maximum allowable levels, which is the maximum dividend amount that may be issued and allow the ~~company~~Company to still maintain its target Tier 1 capital ratio, unless both asset quality and capital are very strong.

To pay dividends, the Bank must maintain adequate capital above regulatory guidelines. Under federal law, the Bank cannot pay a dividend if, after paying the dividend, the ~~bank~~Bank would be “undercapitalized.” In addition, national banks are required by federal law to obtain the prior approval of the OCC in order to declare and pay dividends if the total of all dividends declared in any calendar year would exceed the total of (1) such bank’s net profits (as defined and interpreted by regulation) for that year plus (2) its retained net profits (as defined and interpreted by regulation) for the preceding two calendar years, less any required transfers to surplus. In addition, these banks may only pay dividends to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts (as defined by regulation).

The Bank paid aggregate dividends to LCNB of $17,625,000 in 2019 and $10,383,000 in 2018. Under the dividend restrictions discussed above, as of December 31, 2019, the Bank could have declared in the aggregate additional dividends of approximately $14,598,000 from retained net profits, without obtaining regulatory approvals.

Affiliate Transactions

The Company and the Bank and other subsidiaries are "affiliates" within the meaning of the Federal Reserve Act. The Federal Reserve Act imposes limitations on a bank with respect to extensions of credit to, investments in, and certain other transactions with, its parent bank holding company and the holding company’s other subsidiaries. Loans and extensions of credit from the ~~bank~~Bank to its affiliates are also subject to various collateral requirements. Further, the Bank's authority to extend credit to the Company's directors, executive officers and principal shareholders, including their immediate family members, corporations and other entities that they control, is subject to the restrictions and additional requirements of the Federal Reserve Act and Regulation O promulgated thereafter. These statutes and regulations impose specific limits on the amount of loans the Bank may make to directors and other insiders, and specify approval procedures that must be followed in making loans that exceed certain amounts.

Capital

LCNB and the Bank are each required to comply with applicable capital adequacy standards established by the Federal Reserve Board and the OCC, respectively. The current risk-based capital standards applicable to LCNB and the Bank are based on the December 2010 final capital framework for strengthening international capital standards, known as Basel III.

In July 2013, the federal bank regulators approved final rules (the “Basel III Rules”) implementing the Basel III framework as well as certain provisions of the Dodd-Frank Act. The Basel III Rules substantially revised the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries. The Basel III Rules became effective for LCNB and the Bank on January 1, 2015 (subject to a phase-in period for certain provisions).

The Basel III Rules established three components of regulatory capital: (1) common equity tier 1 capital (“CET1”), (2) additional tier 1 capital, and (3) tier 2 capital. Tier 1 capital is the sum of CET1 and additional tier 1 capital instruments meeting certain revised requirements. Total capital is the sum of tier 1 capital and tier 2 capital. Under the Basel III Rules, for most banking organizations, the most common form of additional tier 1 capital is non-cumulative perpetual preferred stock and the most common form of tier 2 capital is subordinated notes and a portion of the allocation for loan and lease losses, in each case, subject to the Basel III Rules’ specific requirements. LCNB Corp. does not have any non-cumulative perpetual preferred stock or subordinated notes.

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LCNB CORP. AND SUBSIDIARIES

Under the Basel III Rules, the minimum capital ratios effective as of January 1, 2015 are: (i) 4.5% CET1 to risk-weighted assets; (ii) 6.0% tier 1 capital to risk-weighted assets; (iii) 8.0% total capital to risk-weighted assets; and (iv) 4.0% tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”). The Basel III Rules established a “capital conservation buffer” of 2.5% above the new regulatory minimum risk-based capital requirements.

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~~LCNB CORP. AND SUBSIDIARIES~~

The conservation buffer, when added to the capital requirements, resulted in the following minimum ratios: (i) a CET1 risk-based capital ratio of 7.0%, (ii) a tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The new capital conservation buffer requirement began being phased in beginning in January 2016 at 0.625% of risk-weighted assets and increased by that amount each year until fully implemented in January 2019. At December 31, 2019, the required capital conservation buffer was 2.5%. An institution is subject to limitations on certain activities including payment of dividends, share repurchases, and discretionary bonuses to executive officers if its capital level is below the buffer amount.

With respect to the Bank, the Basel III Rules also revised the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as discussed below under “Prompt Corrective Action.”

As of December 31, ~~2019,~~2020, LCNB had a total risk-based capital ratio of ~~12.21%~~12.48%, a tier 1 capital to risk-weighted asset ratio of ~~12.21%~~12.48%, a CET1 to risk-weighted assets ratio of ~~12.52%~~12.91% and a leverage ratio of 10.06%. These regulatory capital ratios were calculated under the Basel III Rules.

In November 2019, the federal banking regulators published final rules implementing a simplified measure of capital adequacy for certain banking organizations that have less than $10 billion in total consolidated assets. Under the final rules, which went into effect on January 1, 2020, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, off-balance-sheet exposures of 25% or less of total consolidated assets, and trading assets plus trading liabilities of 5% or less of total consolidated assets, are deemed “qualifying community banking organizations” and are eligible to opt into the “community bank leverage ratio framework.” A qualifying community banking organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% is considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III Rules and, if applicable, is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules, discussed below. The final rules include a two-quarter grace period during which a qualifying community banking organization that temporarily fails to meet any of the qualifying criteria, including the greater- than-9% leverage capital ratio requirement, is generally still deemed “well capitalized” so long as the banking organization maintains a leverage capital ratio greater than 8%. A banking organization that fails to maintain a leverage capital ratio greater than 8% is not permitted to use the grace period and must comply with the generally applicable requirements under the Basel III Rules and file the appropriate regulatory reports. LCNB Corp. and the Bank dohave not ~~have any immediate plans to elect~~opted to use the community bank leverage ratio framework, but may make such an election in the future.

Prompt Corrective ~~Action.~~Action

A banking organization’s capital plays an important role in connection with regulatory enforcement as well. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate that the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.

Under current regulations, the Bank was “well capitalized” as of December 31, ~~2019.~~2020.

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-33-

Years ended December 31,
2019 2018 2017

Average
Outstanding
Balance

Interest
Earned/
Paid

Average
Yield/
Rate

Average
Outstanding
Balance

Interest
Earned/
Paid

Average
Yield/
Rate

Average
Outstanding
Balance

Interest
Earned/
Paid

Average
Yield/
Rate
(Dollars in thousands)
Loans (1) $ 1,221,375
59,009
4.83 % $ 1,038,159
47,489
4.57 % $ 822,452
36,571
4.45 %
Interest-bearing demand deposits 8,389
241
2.87 % 5,164
136
2.63 % 7,972
88
1.10 %
Interest-bearing time deposits 488
11
2.25 % 4,008
58
1.45 % —
—
— %
Federal Reserve Bank stock 4,652
279
6.00 % 3,268
196
6.00 % 2,732
164
6.00 %
Federal Home Loan Bank stock 5,108
249
4.87 % 4,346
259
5.96 % 3,638
182
5.00 %
Investment securities:

Equity securities 4,310
127
2.95 % 3,782
104
2.75 % 3,249
89
2.74 %
Debt securities, taxable 159,377
3,601
2.26 % 165,300
3,666
2.22 % 205,669
4,239
2.06 %
Debt securities, non-taxable (2) 73,634
2,123
2.88 % 123,135
3,400
2.76 % 143,394
4,815
3.36 %
Total earning assets 1,477,333
65,640
4.44 % 1,347,162
55,308
4.11 % 1,189,106
46,148
3.88 %
Non-earning assets 169,314

145,601

123,800

Allowance for loan losses (4,056 )

(3,822 )

(3,405 )

Total assets $ 1,642,591

$ 1,488,941

$ 1,309,501

Savings deposits $ 687,458
2,446
0.36 % $ 689,322
1,332
0.19 % $ 645,471
594
0.09 %
IRA and time certificates 327,321
7,080
2.16 % 253,524
4,421
1.74 % 205,540
2,784
1.35 %
Short-term borrowings 6,064
227
3.74 % 13,967
311
2.23 % 23,976
209
0.87 %
Long-term debt 42,733
1,035
2.42 % 16,789
361
2.15 % 421
12
2.85 %
Total interest-bearing liabilities 1,063,576
10,788
1.01 % 973,602
6,425
0.66 % 875,408
3,599
0.41 %
Demand deposits 336,257

315,229

274,855

Other liabilities 18,119

12,195

10,795

Capital 224,639

187,915

148,443

Total liabilities and capital $ 1,642,591

$ 1,488,941

$ 1,309,501

Net interest rate spread (3)

3.43 %

3.45 %

3.47 %
Net interest income and net interest margin on a tax equivalent basis (4)
54,852
3.71 %
48,883
3.63 %
42,549
3.58 %
Ratio of interest-earning assets to interest-bearing liabilities 138.90 %

138.37 %

135.83 %


~~(1)~~	~~Includes non-accrual loans if any.~~


~~(2)~~	Income from tax-exempt securities is included in interest income on a taxable-equivalent basis. Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 21% for 2019 and 2018 and 34% for 2017.


~~(3)~~	~~The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities.~~


~~(4)~~	~~The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets.~~

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LCNB CORP. AND SUBSIDIARIES

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

The following table presents the changes in interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the years indicated. Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each.


	For the years ended December 31,
	2020 vs. 2019				2019 vs. 2018
	Increase (decrease) due to				Increase (decrease) due to
	Volume		Rate	Total	Volume	Rate	Total
	(In thousands)
Interest income attributable to:
Loans (1)	$	3,970	(3,712)	258	8,738	2,782	11,520

Interest-bearing demand deposits	163		(321)	(158)	92	13	105
Interest-bearing time deposits	(11)		—	(11)	(68)	21	(47)
Federal Reserve Bank stock	—		—	—	83	—	83
Federal Home Loan Bank stock	5		(137)	(132)	41	(51)	(10)
Investment securities:
Equity securities	—		(36)	(36)	15	8	23
Debt securities, taxable	(237)		(448)	(685)	(133)	68	(65)
Debt securities, non-taxable (2)	(1,144)		321	(823)	(1,421)	144	(1,277)
Total interest income	2,746		(4,333)	(1,587)	7,347	2,985	10,332
Interest expense attributable to:
Savings deposits	96		(1,109)	(1,013)	(4)	1,118	1,114
IRA and time certificates	(756)		(1,123)	(1,879)	1,456	1,203	2,659
Short-term borrowings	(144)		(76)	(220)	(230)	146	(84)
Long-term debt	(220)		106	(114)	623	51	674
Total interest expense	(1,024)		(2,202)	(3,226)	1,845	2,518	4,363
Net interest income	$	3,770	(2,131)	1,639	5,502	467	5,969

(1)Non-accrual loans, if any, are included in average loan balances.

(2)Change in interest income from non-taxable investment securities is computed based on interest income determined on a taxable-equivalent yield basis. Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 21%.

2020 vs. 2019. Net interest income on a fully tax-equivalent basis for 2020 totaled $56,491,000, an increase of $1,639,000 from 2019. The increase resulted from a decrease in total interest expense of $3,226,000, partially offset by a decrease in total taxable-equivalent interest income of $1,587,000.

The decrease in total interest income was due primarily to a $685,000 decrease in interest income from taxable debt securities and an $823,000 decrease from taxable-equivalent interest income from non-taxable debt securities. Interest income from taxable debt securities decreased due to an $11.0 million decrease in average securities and to a 30 basis point decrease in the average rate earned on these securities. Interest income from non-taxable debt securities decreased due to a $35.2 million decrease in average securities, partially offset by a 50 basis point increase in the average rate earned on these securities. The decreases in debt securities were invested in the loan portfolio and used to pay down short-term borrowings and long-term debt.

Loan interest income increased by $258,000 due to an $84.9 million increase in average loans, largely offset by a 29 basis point decrease in the average rate earned on loans.

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LCNB CORP. AND SUBSIDIARIES

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

For the years ended December 31,
2019 vs. 2018 2018 vs. 2017
Increase (decrease) due to Increase (decrease) due to
Volume Rate Total Volume Rate Total
(In thousands)
Interest income attributable to:
Loans (1) $ 8,738
2,782
11,520
9,840
1,078
10,918
Interest-bearing demand deposits 92
13
105
(40 ) 88
48
Interest-bearing time deposits (68 ) 21
(47 ) 58
—
58
Federal Reserve Bank stock 83
—
83
32
—
32
Federal Home Loan Bank stock 41
(51 ) (10 ) 39
38
77
Investment securities:

Equity securities 15
8
23
15
—
15
Debt securities, taxable (133 ) 68
(65 ) (878 ) 305
(573 )
Debt securities, non-taxable (2) (1,421 ) 144
(1,277 ) (627 ) (788 ) (1,415 )
Total interest income 7,347
2,985
10,332
8,439
721
9,160
Interest expense attributable to:

Savings deposits (4 ) 1,118
1,114
43
695
738
IRA and time certificates 1,456
1,203
2,659
734
903
1,637
Short-term borrowings (230 ) 146
(84 ) (116 ) 218
102
Long-term debt 623
51
674
353
(4 ) 349
Total interest expense 1,845
2,518
4,363
1,014
1,812
2,826
Net interest income $ 5,502
467
5,969
7,425
(1,091 ) 6,334


~~(1)~~	~~Non-accrual loans, if any, are included in average loan balances.~~


~~(2)~~	Change in interest income from non-taxable investment securities is computed based on interest income determined on a taxable-equivalent yield basis. Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 21% for 2019 and 2018 and 34% for 2017.

The decrease in total interest expense was primarily due to a $1,013,000 decrease in interest paid on savings deposits and a $1,879,000 decrease in interest paid on IRA and time certificates. Interest paid on savings deposits decreased primarily due to a 16 basis point decrease in the average rate paid, slightly offset by a $27.9 million increase in average deposit balances. Interest paid on IRA and time certificates decreased due to a 37 basis point decrease in the average rate paid and to a $37.5 million decrease in average deposit balances. Decreases in average rates paid for savings deposits and IRA and time certificates were primarily due to decreases in market rates.

2019 vs. 2018. Net interest income on a fully tax-equivalent basis for 2019 totaled $54,852,000, an increase of $5,969,000 from 2018. The increase resulted from an increase in total taxable-equivalent interest income of $10,332,000, partially offset by an increase in total interest expense of $4,363,000.

The increase in total interest income was due primarily to a $11,520,000 increase in loan interest income caused by a $183.2 million increase in average loans and secondarily to a 26 basis point ~~(a basis point equals 0.01%)~~ increase in the average rate earned on loans. Loans obtained through the merger with CFB were a significant component of the increase in average loans. Partially offsetting the increase in loan interest income was a $1,277,000 decrease in taxable-equivalent interest income from non-taxable debt securities. Interest income from non-taxable investment securities decreased due to a $49.5 million decrease in average non-taxable debt securities, slightly offset by a 12 basis point increase in the average rate earned on these securities. The decrease in non-taxable debt securities were invested in the loan portfolio and used to pay down short-term borrowings.

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~~LCNB CORP. AND SUBSIDIARIES~~

~~Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

The increase in total interest expense was primarily due to a $1,114,000 increase in interest paid on savings deposits, a $2,659,000 increase in interest paid on IRA and time certificates, and a $674,000 increase in interest paid on long-term debt. Interest paid on savings deposits increased primarily due to a 17 basis point increase in the average rate paid. Interest paid on IRA and time certificates increased due to a $73.8 million increase in the average balance and to a 42 basis point increase in the average rate paid. Increases in average rates paid for savings deposits and IRA and time certificates were primarily due to increases in market rates. Deposits obtained through the merger with CFB were a significant component of the increases in savings deposits and IRA and time certificates. Interest paid on long-term debt increased primarily due to a $25.9 million increase in the average balance and secondarily to a 27 basis point increase in the average rate paid. The average balance on long-term debt increased due to $25.0 million in new borrowings obtained in December 2018 and to borrowings obtained through the merger with CFB, partially offset by borrowings that matured.

~~2018 vs. 2017.~~ Net interest income on a fully tax-equivalent basis for 2018 totaled $48,883,000, an increase of $6,334,000 from 2017. The increase resulted from an increase in total taxable-equivalent interest income of $9,160,000, partially offset by an increase in total interest expense of $2,826,000.

The increase in total interest income was due primarily to a $10,918,000 increase in loan interest income caused by a $215.7 million increase in average loans and secondarily to a 12 basis point increase in the average rate earned on loans. Loans obtained through the merger with CFB were a significant component of the increase in average loans. Partially offsetting the increase in loan interest income was a $573,000 decrease in interest income from taxable debt securities and a $1,415,000 decrease in taxable-equivalent interest income from non-taxable debt securities. Interest income from taxable investment securities decreased due to a $40.4 million decrease in average taxable investment securities, partially offset by a 16 basis point increase in the average rate earned on these securities. Interest income from non-taxable investment securities decreased due to a $20.3 million decrease in average non-taxable debt securities and to a 60 basis point decrease in the average rate earned on these securities. One of the reasons for the 60 basis point decrease in the average rate earned on non-taxable debt securities was the decrease in the federal corporate tax rate to 21%, which decreased the effective yield earned on these securities. Decreases in debt securities were invested in the loan portfolio and used to pay down short-term borrowings.

The increase in total interest expense was primarily due to a $738,000 increase in interest paid on savings deposits and to a $1,637,000 increase in interest paid on IRA and time certificates. Interest paid on savings deposits increased due to a 10 basis point increase in the average rate paid and to a $43.8 million increase in average balances outstanding. Interest paid on IRA and time certificates increased due to a 39 basis point increase in the average rate paid and to a $48.0 million increase in average balances outstanding. Increases in average rates paid was primarily due to increases in market rates. Deposits obtained through the merger with CFB were a significant component of the increases in savings deposits and IRA and time certificates.

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LCNB CORP. AND SUBSIDIARIES

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Provisions and Allowance for Loan Losses

The following table presents the total loan loss provision and the other changes in the allowance for loan losses for the years ~~2015~~2016 through ~~2019:~~2020:


	2020			2019		2018		2017		2016
	(Dollars in thousands)
Balance – Beginning of year	$	4,045		4,046		3,403		3,575		3,129

Loans charged off:
Commercial and industrial	13			47		—		—		234
Commercial, secured by real estate	353			143		145		462		185
Residential real estate	5			272		234		225		127
Consumer	30			24		135		90		85
Agricultural	—			—		—		—		—
Other loans, including deposit overdrafts	140			181		179		138		119
Total loans charged off	541			667		693		915		750

Recoveries:
Commercial and industrial	31			—		1		99		26
Commercial, secured by real estate	—			56		239		113		98
Residential real estate	75			297		71		140		52
Consumer	22			32		13		114		53
Agricultural	—			—		—		—		—
Other loans, including deposit overdrafts	82			74		89		62		54
Total recoveries	210			459		413		528		283
Net charge offs	331			208		280		387		467

Provision charged to operations	2,014			207		923		215		913
Balance - End of year	$	5,728		4,045		4,046		3,403		3,575

Ratio of net charge-offs during the period to average loans outstanding	0.03		%	0.02	%	0.03	%	0.05	%	0.06	%

Ratio of allowance for loan losses to total loans at year-end	0.44		%	0.33	%	0.34	%	0.40	%	0.44	%

2019 2018 2017 2016 2015
(Dollars in thousands)
Balance – Beginning of year $ 4,046
3,403
3,575
3,129
3,121

Loans charged off:

Commercial and industrial 47
—
—
234
100
Commercial, secured by real estate 143
145
462
185
1,133
Residential real estate 272
234
225
127
304
Consumer 24
135
90
85
52
Agricultural —
—
—
—
67
Other loans, including deposit overdrafts 181
179
138
119
74
Total loans charged off 667
693
915
750
1,730

Recoveries:

Commercial and industrial —
1
99
26
7
Commercial, secured by real estate 56
239
113
98
96
Residential real estate 297
71
140
52
107
Consumer 32
13
114
53
60
Agricultural —
—
—
—
67
Other loans, including deposit overdrafts 74
89
62
54
35
Total recoveries 459
413
528
283
372
Net charge offs 208
280
387
467
1,358

Provision charged to operations 207
923
215
913
1,366
Balance - End of year $ 4,045
4,046
3,403
3,575
3,129

Ratio of net charge-offs during the period to average loans outstanding 0.02 % 0.03 % 0.05 % 0.06 % 0.18 %

Ratio of allowance for loan losses to total loans at year-end 0.33 % 0.34 % 0.40 % 0.44 % 0.41 %

~~Charge-offs for the commercial, secured by real estate category had an elevated balance during 2015 due to the sale of impaired loans.~~

Charge-offs and recoveries classified as “Other” include charge-offs and recoveries on checking and NOW account overdrafts. LCNB charges off such overdrafts when considered uncollectible, but no later than 60 days from the date first overdrawn.

LCNB continuously reviews the loan portfolio for credit risk through the use of its lending and loan review functions. Independent loan reviews analyze specific loans, providing validation that credit risks are appropriately identified, graded, and reported to the Loan Committee, Board of Directors, and the Audit Committee of the Board of Directors. ~~In addition, the Board of Directors’ Audit Committee receives loan review reports throughout each year.~~ New credits meeting specific criteria are analyzed prior to origination and are reviewed by the Loan Committee, the Loan Committee of the Board of Directors, and the Board of Directors.

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LCNB CORP. AND SUBSIDIARIES

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

~~Inputs from all~~The total provision for loan losses is determined based upon management's evaluation as to the amount needed to maintain the allowance for loan losses at a level considered appropriate in relation to the risk of losses inherent in the ~~Bank’s~~portfolio. For analysis purposes, the loan portfolio is separated into pools of similar loans. These pools include commercial and industrial loans, owner occupied commercial real estate loans, non-owner occupied commercial real estate loans, real estate loans secured by farms, real estate loans secured by multi-family dwellings, residential real estate loans secured by senior liens on 1-4 family dwellings, residential real estate loans secured by junior liens on 1-4 family dwellings, home equity line of credit ~~risk identification processes are used~~loans, consumer loans, loans for agricultural purposes not secured by ~~management~~real estate, construction loans secured by 1-4 family dwellings, construction loans secured by other real estate, and several smaller classifications. Within each pool of loans, LCNB examines a variety of factors to ~~analyze and validate~~determine the adequacy ~~and methodology~~ of the allowance ~~quarterly.~~ for loan losses, including historic charge-off percentages, overall pool quality, a review of specific problem loans, current economic trends and conditions that may affect borrowers' ability to pay, and the nature, volume, and consistency of the loan pool.

The ~~analysis includes two basic components: specific allocations~~provision for ~~individual loans~~loan losses for 2020 was $2,014,000, compared to $207,000 for 2019 and ~~general loss allocations~~$923,000 for ~~pools of loans based on average historic loss ratios~~2018. The 2020 period included qualitative adjustments for estimated impacts from the economic downturn caused by the COVID-19 pandemic. Calculating an appropriate level for the ~~sixty preceding months adjusted~~allowance and provision for ~~identified economic~~loan losses involves a high degree of management judgment and ~~other risk factors. Due to the number, size, and complexity of loans within the loan portfolio, there~~ is, ~~always a possibility of inherent undetected losses.~~by its nature, imprecise. Revisions may be necessary as more information becomes available.

Non-Interest Income

A comparison of non-interest income for 2020, 2019, ~~2018,~~ and ~~2017~~2018 is as follows:


					Increase (Decrease)
	2020		2019	2018	2020 vs. 2019	2019 vs. 2018
	(In thousands)
Fiduciary income	$	5,009	4,354	3,958	655	396
Service charges and fees on deposit accounts	5,482		5,875	5,590	(393)	285
Net gains (losses) on sales of securities	221		(41)	(8)	262	(33)
Bank owned life insurance income	1,441		943	738	498	205
Net gains from sales of loans	2,297		328	223	1,969	105
Other operating income	1,291		889	549	402	340
Total non-interest income	$	15,741	12,348	11,050	3,393	1,298

Increase (Decrease)
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
(In thousands)
Fiduciary income $ 4,354
3,958
3,473
396
485
Service charges and fees on deposit accounts 5,875
5,590
5,236
285
354
Net gains (losses) on sales of securities (41 ) (8 ) 233
(33 ) (241 )
Bank owned life insurance income 943
738
867
205
(129 )
Net gains from sales of loans 328
223
166
105
57
Other operating income 889
549
483
340
66
Total non-interest income 12,348
11,050
10,458
1,298
592

Reasons for changes include:

•Fiduciary income increased during ~~2019~~2020 and ~~2018~~2019 due to increases in the fair value of trust and brokerage assets managed.

•Service charges and fees on deposit accounts decreased during 2020 primarily due to decreases in fee income recognized on the ICS deposit program, overdraft fees, and smaller decreases in other fee accounts, partially offset by an increase in fees received from debit card usage. Service charges and fees increased during 2019 due to fee income recognized on the ~~Insured Cash Sweep ("ICS")~~ICS deposit program, fees received from debit card usage, and incentive income received on co-branded Mastercards. These increases were partially offset by decreases in service charges on deposit accounts, ATM surcharge fees, and overdraft fees. The increase during 2018 was primarily due to fees earned from the ICS deposit program that was introduced during the second quarter 2017 and from an increase in debit card income. Debit card income benefited from more cards outstanding due to the merger with CFB and greater depositor utilization of the cards.

•Net gains (losses) on sales of securities were ~~less~~greater during 2020 as compared to 2019 and 2018 ~~as compared to 2017~~ primarily due to market pricing at the times of the sales. ~~Dollar volume~~The book value of sales for 2020, 2019, ~~2018,~~ and ~~2017~~2018 were, respectively, $8.6 million, $84.6 million, and $8.6 ~~million, and $43.0~~ million.

•Bank owned life insurance income was greater ~~during 2019 primarily~~in 2020 partially due to $12.0 million of new policies purchased at the beginning of the third quarter ~~2019.~~2019 and partially due to a mortality benefit received during the first quarter 2020. Income ~~decreased in 2018 as compared to 2017~~increased during 2019 primarily due to the ~~absence~~new policies previously mentioned.

•Net gains from sales of ~~mortality benefits recognized~~loans was greater during ~~2017. No mortality benefits were received in~~2020 as compared to 2019 ~~or 2018.~~and 2018 primarily due to the volume of loans sold.

•Other operating income ~~was higher~~increased in ~~2019~~2020 primarily due to ~~an increase~~gains recognized on the sale of equity securities, partially offset by decreases in the fair value of equity security investments. Other operating income increased in 2019 primarily due to increases in the fair value of equity security investments.

~~-34-~~

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LCNB CORP. AND SUBSIDIARIES

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Non-Interest Expense

A comparison of non-interest expense for 2020, 2019, ~~2018,~~ and ~~2017~~2018 is as follows:


					Increase (Decrease)
	2020		2019	2018	2020 vs. 2019	2019 vs. 2018
	(In thousands)
Salaries and employee benefits	$	27,178	25,320	21,279	1,858	4,041
Equipment expenses	1,377		1,209	1,138	168	71
Occupancy expense, net	2,875		2,961	2,861	(86)	100
State financial institutions tax	1,708		1,669	1,197	39	472
Marketing	1,254		1,319	1,119	(65)	200
Amortization of intangibles	1,046		1,043	922	3	121
FDIC premiums	256		225	419	31	(194)
ATM expense	1,028		580	580	448	—
Computer maintenance and supplies	1,107		1,094	990	13	104
Telephone expense	706		707	649	(1)	58
Contracted services	1,821		1,865	1,547	(44)	318
Merger-related expenses	—		114	2,123	(114)	(2,009)
Other non-interest expense	5,429		5,416	5,678	13	(262)
Total non-interest expense	$	45,785	43,522	40,502	2,263	3,020

Increase (Decrease)
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
(In thousands)
Salaries and employee benefits $ 25,320
21,279
18,585
4,041
2,694
Equipment expenses 1,209
1,138
1,172
71
(34 )
Occupancy expense, net 2,961
2,861
2,613
100
248
State financial institutions tax 1,669
1,197
1,137
472
60
Marketing 1,319
1,119
873
200
246
Amortization of intangibles 1,043
922
751
121
171
FDIC premiums 225
419
423
(194 ) (4 )
ATM expense 580
580
572
—
8
Computer maintenance and supplies 1,094
990
882
104
108
Telephone expense 707
649
735
58
(86 )
Contracted services 1,865
1,547
1,255
318
292
Other real estate owned 53
20
10
33
10
Merger-related expenses 114
2,123
118
(2,009 ) 2,005
Other non-interest expense 5,363
5,658
4,737
(295 ) 921
Total non-interest expense 43,522
40,502
33,863
3,020
6,639

Reasons for changes include:

•Salaries and employee benefits were 7.3% greater in 2020 than in 2019 and 19.0% greater in 2019 than in ~~2018 and 14.5% greater in 2018 than in 2017.~~2018. The increases for both years were primarily due to salary and wage increases, incentive payment increases, and newly hired employees, including additional business development ~~positions and CFB employees retained. An increase~~positions. Increases in health insurance costs also contributed to the ~~increase. The number of full-time equivalent employees was 332 at December 31, 2019, 325 at December 31, 2018,~~increases for both years.

•Equipment expenses increased during 2020 primarily due to increased depreciation charges for furniture and ~~310 at December 31, 2017.~~equipment and increased equipment rental costs. During 2020, LCNB replaced ATMs that it had previously owned with new ATMs obtained through an outsourcing arrangement.

•Occupancy expense decreased during 2020 primarily due to decreased costs for facility maintenance and repairs and smaller decreases in utility costs and depreciation charges for bank premises, partially offset by higher janitorial costs. Occupancy expense for 2019 increased primarily due to increased branch rental expense and increased charges for maintenance and repairs. ~~Occupancy expense for 2018 increased primarily due to increased branch rental expense and increased depreciation of bank premises.~~ The increase in branch rental expense primarily reflects rent paid for the new Worthington Office, previously the CFB Office.

•State financial institutions tax expense increased in 2019 due to a larger capital base (Ohio financial institutions tax is based on capital, not income), largely due to stock issued to CFB stockholders during 2018 as merger consideration.

•Marketing expense increased in 2019 ~~and 2018~~ primarily due to promotion costs for new checking products introduced in 2018, increased marketing activities in the Columbus area, and expanded use of television, radio, and digital media.

•FDIC premiums were lower in 2020 and 2019 as compared to 2018 ~~and 2017~~ due to small bank assessment credits received from the FDIC during 2020 and 2019 because the ~~Deposit Insurance Fund~~DIF was above the mandated level of 1.35%. LCNB has received the full amount of the credit and quarterly premium payments have returned to their normal amounts.

•ATM expense increased during 2020 partially due to a strategic decision to outsource LCNB's ATM operations to a third-party vendor, relieving LCNB branch personnel from various ATM maintenance responsibilities.

•Computer maintenance and supplies increased in 2019 ~~and 2018~~ due to increased technology and software related expenditures designed to offer technological convenience to customers, to protect the integrity of LCNB's data systems and software, and to protect the confidentiality of customer information.

•Contracted services increased in 2019 ~~and 2018~~ due to additional fees paid for loan and deposit system upgrades and improvements and to general price increases on other contracted services.

•Merger-related expenses for 2019 and 2018 ~~and 2017 are~~were due to the acquisition of CFB and ~~are~~were primarily comprised of various professional fees, costs to prepare and distribute the proxy statement/prospectus, and costs to merge CFB's data system into LCNB's system.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

•Other non-interest expense for 2018 included $575,000 in net losses from sales of fixed assets, primarily due to the sale of two office buildings. Other non-interest expense for 2017 included $154,000 in organizational costs for LCNB Risk Management, Inc. and $113,000 in losses from sales of fixed assets, primarily due to the sale of a closed office building.

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~~LCNB CORP. AND SUBSIDIARIES~~

~~Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

Income Taxes

LCNB's effective tax rates for the years ended December 31, 2020, 2019, and 2018 ~~and 2017~~ were 16.9%, 17.9%, ~~16.6%,~~ and ~~24.8%~~16.6%, respectively. The difference between the statutory rate of 21% ~~for 2019 and 2018~~ and the effective tax rate is primarily due to tax-exempt interest income from municipal securities, tax-exempt earnings from bank owned life insurance, tax-exempt earnings from LCNB Risk Management, Inc., and tax credits and losses related to investments in affordable housing tax credit limited partnerships. ~~The difference between the statutory rate of 34% in 2017 and the effective~~A one-time tax ~~rate is primarily due to the same reasons noted above.~~

Asbenefit recognized as a result of certain provisions in the ~~Tax Cuts and Jobs~~CARES Act ~~that was signed into law on December 22, 2017, LCNB revalued its net deferred tax liability position~~also contributed to ~~reflect~~ the ~~reduction in its federal corporate income tax rate from 34% to 21%. This revaluation resulted in a one-time income tax benefit~~difference during 2020.

Financial Condition

A comparison of ~~approximately $224,000, or $0.02 of basic and diluted earnings per common share, for the year ended~~balance sheet line items at December 31, ~~2017.~~2020 and 2019 is as follows (in thousands):


	December 31, 2020	December 31, 2019	Difference $	Difference %
ASSETS:
Total cash and cash equivalents	31,730	20,765	10,965	52.81	%

Investment securities:
Equity securities with a readily determinable fair value, at fair value	2,389	2,312	77	3.33	%
Equity securities without a readily determinable fair value, at cost	2,099	2,099	—	—	%
Debt securities, available-for-sale, at fair value	209,471	178,000	31,471	17.68	%
Debt securities, held-to-maturity, at cost	24,810	27,525	(2,715)	(9.86)	%
Federal Reserve Bank stock, at cost	4,652	4,652	—	—	%
Federal Home Loan Bank stock, at cost	5,203	5,203	—	—	%
Loans, net	1,293,693	1,239,406	54,287	4.38	%
Premises and equipment, net	35,376	34,787	589	1.69	%
Operating lease right-of-use assets	6,274	5,444	830	15.25	%
Goodwill	59,221	59,221	—	—	%
Core deposit and other intangibles, net	3,453	4,006	(553)	(13.80)	%
Bank owned life insurance	42,149	41,667	482	1.16	%
Interest receivable	8,337	3,926	4,411	112.35	%
Other assets, net	17,027	10,295	6,732	65.39	%
Total assets	1,745,884	1,639,308	106,576	6.50	%

LIABILITIES:
Deposits:
Non-interest-bearing	455,073	354,391	100,682	28.41	%
Interest-bearing	1,000,350	993,889	6,461	0.65	%
Total deposits	1,455,423	1,348,280	107,143	7.95	%

Long-term debt	22,000	40,994	(18,994)	(46.33)	%
Operating leases liability	6,371	5,446	925	16.98	%
Accrued interest and other liabilities	21,265	16,540	4,725	28.57	%
Total liabilities	1,505,059	1,411,260	93,799	6.65	%

TOTAL SHAREHOLDERS' EQUITY	240,825	228,048	12,777	5.60	%
Total liabilities and shareholders' equity	1,745,884	1,639,308	106,576	6.50	%

~~-36-~~

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LCNB CORP. AND SUBSIDIARIES

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

~~Financial Condition~~

~~A comparison of balance sheet line items at December 31, 2019 and 2018 is as follows (in thousands):~~

December 31, 2019 December 31, 2018 Difference $ Difference %
ASSETS:
Total cash and cash equivalents 20,765
20,040
725
3.62 %
Interest-bearing time deposits —
996
(996 ) (100.00 )%
Investment securities:
Equity securities with a readily determinable fair value, at fair value 2,312
2,078
234
11.26 %
Equity securities without a readily determinable fair value, at cost 2,099
2,099
—
— %
Debt securities, available-for-sale, at fair value 178,000
238,421
(60,421 ) (25.34 )%
Debt securities, held-to-maturity, at cost 27,525
29,721
(2,196 ) (7.39 )%
Federal Reserve Bank stock, at cost 4,652
4,653
(1 ) (0.02 )%
Federal Home Loan Bank stock, at cost 5,203
4,845
358
7.39 %
Loans, net 1,239,406
1,194,577
44,829
3.75 %
Premises and equipment, net 34,787
32,627
2,160
6.62 %
Operating lease right-of-use assets 5,444
—
5,444
— %
Goodwill 59,221
59,221
—
— %
Core deposit and other intangibles 4,006
5,042
(1,036 ) (20.55 )%
Bank owned life insurance 41,667
28,723
12,944
45.06 %
Other assets 14,221
13,884
337
2.43 %
Total assets 1,639,308
1,636,927
2,381
0.15 %

LIABILITIES:
Deposits:
Non-interest-bearing 354,391
322,571
31,820
9.86 %
Interest-bearing 993,889
978,348
15,541
1.59 %
Total deposits 1,348,280
1,300,919
47,361
3.64 %
Short-term borrowings —
56,230
(56,230 ) (100.00 )%
Long-term debt 40,994
47,032
(6,038 ) (12.84 )%
Operating leases liability 5,446
—
5,446
— %
Accrued interest and other liabilities 16,540
13,761
2,779
20.19 %
Total liabilities 1,411,260
1,417,942
(6,682 ) (0.47 )%

TOTAL SHAREHOLDERS' EQUITY 228,048
218,985
9,063
4.14 %
Total liabilities and shareholders' equity 1,639,308
1,636,927
2,381
0.15 %

Reasons for changes include:

Interest-bearing time deposits were obtained through the merger with CFB. This line item represents certificates of deposit with individual balances of less than $250,000 invested in various financial institutions. Management decided not to renew matured certificates.

•Debt securities, available-for-sale, ~~decreased~~increased due to ~~sales of securities with a total book value of $84.6 million and maturities and calls of securities totaling $17.2 million. These decreases were partially offset by the~~ purchase of new securities totaling ~~$47.3~~$102.9 million and by a net increase in fair values totaling ~~$6.9~~$4.4 million. ~~The net funds received~~These increases were ~~invested in the loan portfolio~~partially offset by sales of securities with a total book value of $8.6 million and ~~used to help pay down short-term borrowings~~maturities and ~~long-term debt.~~calls of securities totaling $66.2 million.

~~Federal Home Loan Bank stock increased due to the purchase of additional shares.~~

•Net loans increased due to organic growth in the loan ~~portfolio.~~portfolio, including PPP loans with a carrying value of $21.1 million at December 31, 2020. Most of the growth occurred in the commercial and industrial and commercial real estate portfolios.

•Premises and equipment, net increased primarily due to Main Office remodeling costs and construction costs for a new Union Village Office, partially offset by depreciation expense.

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~~LCNB CORP. AND SUBSIDIARIES~~

~~Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

~~LCNB adopted ASU No. 2016-02, "Leases (Topic 842)" on January 1, 2019 and recorded operating~~•Operating lease right-of-use assets ~~representing its right~~and operating lease liabilities increased due to ~~use~~ the ~~underlying assets for the terms~~replacement of ~~the leases and an operating leases liability representing its liability to make lease payments. See Note 1 -Basis of Presentation - Accounting Changes and Note 8 - Leases for more information.~~previously owned ATMs with outsourced ATMs.

•Core deposit and other intangibles decreased due to amortization of core deposit intangibles.

~~Bank owned life insurance~~•Interest receivable increased primarily due to interest accrued on COVID-19 related loan payment deferrals.

•Other assets increased primarily due to additional investments in affordable housing tax credit funds totaling $5.0 million.

•Non-interest-bearing deposits and interest-bearing deposits have grown substantially since the ~~purchase of $12.0 million in new policies at the beginning~~start of the ~~third quarter 2019.~~

~~Total~~COVID-19 pandemic. Management believes the growth reflects customer preferences for liquidity during uncertain economic periods. Balances in demand deposits ~~increased partially due to a $28.8 million increase~~and NOW and savings accounts have grown, while balances in ~~public fund~~IRA and time deposits by local government entities and partially due to organic growth. Public fund deposits can be relatively volatile due to seasonal tax collections and the financial needs of the local entities. Historically, these deposits tend to be at their lowest balances at year-ends. This increase washave decreased. These increases were partially offset by a decline in ICS reciprocal accounts deposited with LCNB. The reciprocal deposits were allowed to decrease because management utilized other sources of ~~liquidity, including the decrease in debt securities, available-for-sale.~~liquidity.

~~The decrease in short-term borrowings was funded primarily by the increase in total deposits and the decrease in debt securities, available-for-sale.~~

•Long-term debt decreased due to payoffs of matured debt. There were no new borrowings during ~~2019.~~2020.

��Accrued interest and other liabilities increased primarily due to payables connected with the $5.0 million in new affordable housing tax credit investments mentioned above.

•Total shareholders' equity increased primarily due to earnings retained during ~~2019~~2020 and to a ~~$5.5~~$3.5 million increase in accumulated other comprehensive income, ~~(loss),~~ net of taxes caused by market-driven increases in the fair value of LCNB's debt security investments. These increases were partially offset by common stock repurchased and dividends paid to shareholders.

Liquidity

LCNB Corp. depends on dividends from the Bank for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders. Federal banking law limits the amount of dividends the Bank may pay to the sum of retained net income for the current year plus retained net income for the previous two years. Prior approval from the OCC, the Bank's primary regulator, is necessary for the Bank to pay dividends in excess of this amount. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines. Management believes the Bank will be able to pay anticipated dividends to LCNB without needing to request approval. The Bank is not aware of any reasons why it would not receive such approval, if required.

Effective liquidity management ensures that cash is available to meet the cash flow needs of borrowers and depositors, ~~as well as meeting~~pay dividends to shareholders, and meet LCNB's operating cash needs. Primary funding sources include customer deposits with the Bank, short-term and long-term borrowings from the Federal Home Loan Bank, short-term line of credit arrangements totaling ~~$55.5~~$55.0 million with two correspondent banks, and interest and repayments received from LCNB's loan and investment portfolios.

Total remaining borrowing capacity with the Federal Home Loan Bank at December 31, ~~2019~~2020 was approximately ~~$88.4~~$178.3 million. ~~One of the factors limiting remaining borrowing capacity is ownership of FHLB stock. LCNB could increase its borrowing capacity by purchasing additional FHLB stock.~~ Additional borrowings of approximately ~~$55.5~~$55.0 million were available through the line of credit arrangements at year-end.

On April 9, 2020, the Federal Reserve established the PPPLF to bolster the effectiveness of the PPP. The PPPLF will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. LCNB management has decided not to currently use the PPPLF as a source of liquidity, as other sources of liquidity are believed to be adequate at this time.

Management closely monitors the level of liquid assets available to meet ongoing funding needs. It is management's intent to maintain adequate liquidity so that sufficient funds are readily available at a reasonable cost. LCNB experienced no liquidity or operational problems as a result of current liquidity levels.

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LCNB CORP. AND SUBSIDIARIES

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Commitments to extend credit at December 31, ~~2019~~2020 totaled ~~$276.4~~$217.6 million, including standby letters of credit totaling ~~$883,000,~~$243,000, and are more fully described in Note 1413 - Commitments and Contingent Liabilities to LCNB's consolidated financial statements. Since many commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

~~-38-~~

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~~LCNB CORP. AND SUBSIDIARIES~~

~~Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

The following table provides information concerning LCNB's contractual obligations at December 31, ~~2019:~~2020:


			Payments due by period
	Total		1 year or less	Over 1 through 3 years	Over 3 through 5 years	More than 5 years
	(In thousands)

Long-term debt obligations	$	22,000	12,000	10,000	—	—
Operating lease obligations	12,504		686	1,073	875	9,870
Estimated pension plan contribution for 2021	248		248	—	—	—

Funding commitments for affordable housing tax credit limited partnerships	8,237		2,726	4,003	754	754
Estimated capital expenditure obligations	966		966	—	—	—
Certificates of deposit:
$100,000 and over	113,367		77,002	31,086	3,193	2,086
Other time certificates	129,303		74,981	42,137	8,936	3,249
Total	$	286,625	168,609	88,299	13,758	15,959

Payments due by period
Total
1 year
or less

Over 1
through 3
years

Over 3
through 5
years

More than
5 years
(In thousands)
Short-term borrowings $ —
—
—
—
—
Long-term debt obligations 40,994
18,998
16,996
5,000
—
Operating lease obligations 11,683
458
654
472
10,099
Estimated pension plan contribution for 2019 205
205
—
—
—
Funding commitments for affordable housing tax credit limited partnerships 4,596
1,396
2,197
418
585
Estimated capital expenditure obligations 1,820
1,820
—
—
—
Certificates of deposit:

$100,000 and over 157,591
104,588
36,917
15,819
267
Other time certificates 166,537
99,955
47,076
18,511
995
Total $ 383,426
227,420
103,840
40,220
11,946

The following table provides information concerning LCNB's commitments at December 31, ~~2019:~~2020:


			Amount of Commitment Expiration Per Period
	Total Amounts Committed		1 year or less	Over 1 through 3 years	Over 3 through 5 years	More than 5 years
	(In thousands)
Commitments to extend credit	$	43,635	43,635	—	—	—
Unused lines of credit	173,749		82,933	43,993	15,186	31,637
Standby letters of credit	243		243	—	—	—
Total	$	217,627	126,811	43,993	15,186	31,637

Amount of Commitment Expiration Per Period

Total
Amounts
Committed

1 year
or less

Over 1
through 3
years

Over 3
through 5
years

More than
5 years
(In thousands)
Commitments to extend credit $ 55,865
55,865
—
—
—
Unused lines of credit 219,677
68,621
102,795
20,849
27,412
Standby letters of credit 883
883
—
—
—
Total $ 276,425
125,369
102,795
20,849
27,412

Capital Resources

LCNB and the Bank are required by banking regulators to meet certain minimum levels of capital adequacy. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on LCNB's and the Bank's financial statements. These minimum levels are expressed in the form of certain ratios. Capital is separated into Tier 1 capital (essentially shareholders' equity less goodwill and other intangibles) and Tier 2 capital (essentially the allowance for loan losses limited to 1.25% of risk-weighted assets). Common Equity Tier 1 Capital is the sum of common stock, related surplus, and retained earnings, net of treasury stock, accumulated other comprehensive income, and other adjustments. The first three ratios, which are based on the degree of credit risk in the Bank's assets, provide for weighting assets based on assigned risk factors and include off-balance sheet items such as loan commitments and stand-by letters of credit. Information summarizing the regulatory capital of the Bank at December 31, ~~2019~~2020 and ~~2018~~2019 and corresponding regulatory minimum requirements is included in Note 1514 - Regulatory Matters of the consolidated financial statements.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

The FDIC, the insurer of deposits in financial institutions, has adopted a risk-based insurance premium system based in part on an institution's capital adequacy. Under this system, a depository institution is required to pay successively higher premiums depending on its capital levels and its supervisory rating by its primary regulator. It is management's intention to maintain sufficient capital to permit the Bank to maintain a "well capitalized" designation, which is the FDIC's highest rating.

~~-39-~~

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~~LCNB CORP. AND SUBSIDIARIES~~

~~Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

On ~~April~~August 24, ~~2019,~~2020, LCNB's Board of Directors authorized a share repurchase program (the “Program”). Under the terms of

the Program, LCNB is authorized to repurchase up to ~~500,000~~645,000 of its outstanding common shares. The Program is authorized to

last no longer than five years. The Program replaced and superseded LCNB’s prior share repurchase ~~programs, the “Market Repurchase Program” and the “Private Sale Repurchase Program,”~~program, which ~~were~~ was

adopted in April ~~2001.~~2019.

Under the Program, LCNB may purchase common shares through various means such as open market transactions, including

block purchases, and privately negotiated transactions. The number of shares repurchased and the timing, manner, price and

amount of any repurchases will be determined at LCNB's discretion. Factors include, but are not limited to, share price, trading

volume, and general market conditions, along with LCNB’s general business conditions. The Program may be suspended or

discontinued at any time and does not obligate LCNB to acquire any specific number of its common shares.

As part of the Program, LCNB entered into a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The 10b5-1 trading plan permits common shares to be repurchased at times that LCNB might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. The 10b5-1 trading plan is administered by an independent broker and is subject to price, market volume and timing restrictions.

LCNB established an Ownership Incentive Plan during 2002 that allowed for stock-based awards to eligible employees. Under the plan, awards could be in the form of stock options, share awards, and/or appreciation rights. The plan provided for the issuance of up to 200,000 shares, as restated for a stock dividend. The plan expired on April 16, 2012. Any outstanding unexercised options, however, continue to be exercisable in accordance with their terms.

The 2015 Ownership Incentive Plan (the "2015 Plan") was approved by LCNB's shareholders at the annual meeting on April 28, 2015 and allows for stock-based awards to eligible employees, as determined by the Compensation Committee of the Board of Directors. Awards may be made in the form of stock options, appreciation rights, restricted shares, and/or restricted share units. The 2015 Plan provides for the issuance of up to 450,000 shares. The 2015 Plan will terminate on April 28, 2025 and is subject to earlier termination by the Compensation Committee.

Critical Accounting Policies

The accounting policies of LCNB conform to U.S. generally accepted accounting principles and require management to make estimates and develop assumptions that affect the amounts reported in the financial statements and related footnotes. These estimates and assumptions are based on information available to management as of the date of the financial statements. Actual results could differ significantly from management’s estimates. As this information changes, management’s estimates and assumptions used to prepare LCNB’s financial statements and related disclosures may also change. The most significant accounting policies followed by LCNB are presented in Note One of the Notes to Consolidated Financial Statements included herein. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified ~~(i)~~ the ~~determination of the allowance for loan losses and (ii) income taxes~~items described below to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new information becomes available.

Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb inherent losses in the loan portfolio, based on evaluations of the collectability of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard, or special mention. For such loans an allowance is established when the discounted cash flows or collateral value is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors, which include trends in underperforming loans, trends in the volume and terms of loans, economic trends and conditions, concentrations of credit, trends in the quality of loans, and borrower financial statement exceptions.

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~~LCNB CORP. AND SUBSIDIARIES~~

~~Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

Based on its evaluations, management believes that the allowance for loan losses will be adequate to absorb estimated losses inherent in the current loan portfolio.

Acquired Credit Impaired Loans. LCNB accounts for acquisitions using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be measured at their fair values at the acquisition date. Acquired loans are reviewed to determine if there is evidence of deterioration in credit quality since inception and if it is probable that LCNB will be unable to collect all amounts due under the contractual loan agreements. The analysis includes expected prepayments and estimated cash flows including principal and interest payments at the date of acquisition. The amount in excess of the estimated future cash flows is not accreted into earnings. The amount in excess of the estimated future cash flows over the book value of the loan is accreted into interest income over the remaining life of the loan (accretable yield). LCNB records these loans on the acquisition date at their ~~net realizable value.~~fair values. Thus, an allowance for estimated future losses is not established on the acquisition date. Subsequent to the date of acquisition, expected future cash flows on loans acquired are updated and any losses or reductions in estimated cash flows which arise subsequent to the date of acquisition are reflected as a charge through the provision for loan losses. An increase in the expected cash flows adjusts the level of the accretable yield recognized on a prospective basis over the remaining life of the loan. Due to the number, size, and complexity of loans within the acquired loan portfolio, there is always a possibility of inherent undetected losses.

Accounting for Intangibles. LCNB’s intangible assets at December 31, ~~2019~~2020 are composed primarily of goodwill and core deposit intangibles related to acquisitions of other financial institutions. It also includes mortgage servicing rights recorded from sales of ~~fixed-rate~~ mortgage loans to the Federal Home Loan Mortgage Corporation and mortgage servicing rights acquired through the acquisition of Eaton National and CFB.

Goodwill is not subject to amortization, but is reviewed annually for impairment. A review for impairment may be conducted more frequently than annually if circumstances indicate a possible impairment. Impairment indicators that may be considered include the condition of the economy and banking industry; estimated future cash flows; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of LCNB’s stock; and other relevant events. These and other factors could lead to a conclusion that goodwill is impaired, which would require LCNB to write off the difference between the estimated fair value of the Company and the carrying value.

Core deposit intangibles are being amortized on a straight line basis over their respective estimated weighted average lives.

Mortgage servicing rights are capitalized by allocating the total cost of loans between mortgage servicing rights and the loans based on their estimated fair values. Capitalized mortgage servicing rights are amortized to loan servicing income in proportion to and over the period of estimated servicing income, subject to periodic review for impairment.

Fair Value Accounting for Debt Securities. Debt securities classified as available-for-sale are carried at estimated fair value. Unrealized gains and losses, net of taxes, are reported as accumulated other comprehensive income or loss in shareholders’ equity. Fair value is estimated using market quotations for U.S. Treasury investments. Fair value for the majority of the remaining available-for-sale securities is estimated using the discounted cash flow method for each security with discount rates based on rates observed in the market.

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LCNB CORP. AND SUBSIDIARIES

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market risk for LCNB is primarily interest rate risk. LCNB attempts to mitigate this risk through asset/liability management strategies designed to decrease the vulnerability of its earnings to material and prolonged changes in interest rates. LCNB does not use derivatives such as interest rate swaps, caps or floors to hedge this risk. LCNB has not entered into any market risk instruments for trading purposes.

The Bank's Asset and Liability Management Committee ("ALCO") primarily uses a combination of Interest Rate Sensitivity Analysis (IRSA) and Economic Value of Equity (EVE) analysis for measuring and managing interest rate risk. The IRSA model is used to estimate the effect on net interest income during a one-year period of instantaneous and sustained movements in interest rates, also called interest rate shocks, of 100, 200, 300, and 400 basis points. Management considers the results of any downward scenarios of more than ~~200~~100 basis points to not be meaningful in the current interest rate environment. The base projection uses a current interest rate scenario. As shown below, the December 31, ~~2019~~2020 IRSA indicates that an increase in interest rates at all shock levels will have a positive effect on net interest income and a 100 basis point decrease in interest rates ~~at all shock levels~~ will ~~also~~ have a ~~positive~~negative effect on net interest income. The changes in net interest income for all rate assumptions are within LCNB’s acceptable ranges.


Rate Shock Scenario in Basis Points	Amount (In thousands)		$ Change in Net Interest Income	% Change in Net Interest Income
Up 400	$	60,422	3,320	5.81	%
Up 300	59,312		2,210	3.87	%
Up 200	58,215		1,113	1.95	%
Up 100	57,110		8	0.01	%
Base	57,102		—	—	%
Down 100	55,437		(1,665)	(2.92)	%

Rate Shock Scenario in
Basis Points

Amount
(In thousands)

$ Change in
Net Interest
Income

% Change in
Net Interest
Income
Up 400 $ 60,688
1,947
3.31 %
Up 300 60,203
1,462
2.49 %
Up 200 59,709
968
1.65 %
Up 100 59,208
467
0.80 %
Base 58,741
—
— %
Down 100 58,845
104
0.18 %
Down 200 59,028
287
0.49 %

IRSA shows the effect on net interest income during a one-year period only. A more long-range model is the EVE analysis, which shows the estimated present value of future cash inflows from interest-earning assets less the present value of future cash outflows for interest-bearing liabilities for the same rate shocks. As shown below, the December 31, ~~2019~~2020 EVE analysis indicates that an increase orin interest rates would have a negative effect on the EVE for all shock levels and a 100 basis point decrease in interest rates would have a positive ~~effect on the EVE for all shock levels.~~effect. The changes in the EVE for all rate assumptions are within LCNB’s acceptable ranges.


Rate Shock Scenario in Basis Points	Amount (In thousands)		$ Change in EVE	% Change in EVE
Up 400	$	194,790	(36,943)	(15.94)	%
Up 300	204,177		(27,556)	(11.89)	%
Up 200	213,030		(18,703)	(8.07)	%
Up 100	220,971		(10,762)	(4.64)	%
Base	231,733		—	—	%
Down 100	275,754		44,021	19.00	%

Rate Shock Scenario in
Basis Points

Amount
(In thousands)

$ Change in
EVE

% Change in
EVE
Up 400 $ 246,911
5,169
2.14 %
Up 300 247,498
5,756
2.38 %
Up 200 246,705
4,963
2.05 %
Up 100 243,619
1,877
0.78 %
Base 241,742
—
— %
Down 100 247,533
5,791
2.40 %
Down 200 264,576
22,834
9.45 %

The IRSA and EVE simulations discussed above are not projections of future income or equity and should not be relied on as being indicative of future operating results. Assumptions used, including the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment or replacement of asset and liability cash flows, are inherently uncertain and, as a result, the models cannot precisely measure future net interest income or equity. Furthermore, the models do not reflect actions that borrowers, depositors, and management may take in response to changing economic conditions and interest rate levels.

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LCNB CORP. AND SUBSIDIARIES

Item 8. Financial Statements and Supplementary Data

~~REPORT OF MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING~~

LCNB Corp. (“LCNB”) is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual report. Management of LCNB and its subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15f. LCNB’s internal control over financial reporting is a process designed under the supervision of LCNB’s Chief Executive Officer and the Chief Financial Officer. The purpose is to provide reasonable assurance to the Board of Directors regarding the reliability of financial reporting and the preparation of LCNB’s consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Management maintains internal controls over financial reporting. The internal controls contain control processes and actions are taken to correct deficiencies as they are identified. The internal controls are evaluated on an ongoing basis by LCNB’s management and Audit Committee. Even effective internal controls, no matter how well designed, have inherent limitations – including the possibility of circumvention or overriding of controls – and therefore can provide only reasonable assurance with respect to financial statement preparation. Also, because of changes in conditions, internal control effectiveness may vary over time.

Management assessed LCNB’s internal controls as of December 31, 2019, in relation to criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2019, LCNB’s internal control over financial reporting met the criteria.

~~BKD LLP, an independent registered public accounting firm, has issued an attestation report on the effectiveness of LCNB’s internal control over financial reporting as of December 31, 2019.~~

~~Submitted by:~~

~~LCNB Corp.~~



~~/s/ Eric J. Meilstrup~~		~~/s/ Robert C. Haines II~~
~~Eric J. Meilstrup~~		~~Robert C. Haines II~~
~~President & Chief Executive Officer~~		~~Executive Vice President &~~
~~March 4, 2020~~		~~Chief Financial Officer~~
		~~March 4, 2020~~

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~~LCNB CORP. AND SUBSIDIARIES~~

Report of Independent Registered Public Accounting Firm

To the Shareholders, Board of Directors and Audit Committee

LCNB Corp.

Lebanon, Ohio

Opinion on the ~~Internal Control Over~~ Financial ~~Reporting~~Statements

We have audited the accompanying consolidated balance sheets of LCNB Corp.’s (the "Company") ~~internal control over financial reporting~~ as of December 31, 2020 and 2019, ~~based on criteria established in~~ ~~Internal Control - Integrated Framework: (2013)~~ ~~issued by~~ the ~~Committee~~related consolidated statements of ~~Sponsoring Organizations~~income, comprehensive income, shareholders' equity and cash flows for each of the ~~Treadway Commission (COSO)~~years in the three-year period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements").

In our opinion, the ~~Company maintained,~~consolidated financial statements referred to above present fairly, in all material respects, ~~effective internal control over~~the financial ~~reporting~~position of the Company as of December 31, 2020 and 2019, ~~based on criteria established in~~ ~~Internal Control - Integrated Framework: (2013)~~ ~~issued by COSO.~~

~~We also have audited, in accordance with~~and the ~~standards~~results of its operations and its cash flows for each of the ~~Public Company Accounting Oversight Board (United States) (“PCAOB”),~~years in the ~~consolidated financial statements~~three-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of ~~the Company and our report dated March 4, 2020, expressed an unqualified opinion thereon.~~America.

Basis for Opinion

~~The Company’s management is responsible for maintaining effective internal control over~~

These financial ~~reporting and for its assessment~~statements are the responsibility of the ~~effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting.~~Company's management. Our responsibility is to express an opinion on the ~~Company’s internal control over~~Company's financial ~~reporting~~statements based on our ~~audit.~~audits.

We are a public accounting firm registered with the ~~PCAOB~~Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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~~LCNB CORP. AND SUBSIDIARIES~~

~~Definitions and Limitations of Internal Control Over Financial Reporting~~

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.



~~/s/ BKD, LLP~~
~~BKD,~~ ~~LLP~~

~~Cincinnati, Ohio~~
~~March 4, 2020~~

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~~LCNB CORP. AND SUBSIDIARIES~~

~~Report of Independent Registered Public Accounting Firm~~

~~To the Shareholders, Board of Directors and Audit Committee~~

~~LCNB Corp.~~

~~Lebanon, Ohio~~

~~Opinion on the Financial Statements~~

We have audited the accompanying consolidated balance sheets of LCNB Corp. (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in ~~Internal Control - Integrated Framework (2013)~~ issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 4, 2020, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

~~Basis for Opinion~~

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the ~~audits~~audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

-45-



~~/s/ BKD, LLP~~
~~BKD,~~ ~~LLP~~

~~We have served as the Company’s auditor since 2014.~~

~~Cincinnati, Ohio~~
~~March 4, 2020~~

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LCNB CORP. AND SUBSIDIARIES

Allowance for Loan Losses

As described in Note 3 to the consolidated financial statements, the Company’s consolidated allowance for loan losses (ALL) was $5.7 million at December 31, 2020. The Company also describes in Note 1 of the consolidated financial statements the "Allowance for Loan Losses" accounting policy around this estimate. The ALL is an estimate of losses inherent in the loan portfolio. The determination of the reserve requires significant judgment reflecting the Company’s best estimate of probable loan losses.

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

Current methodology used by management to estimate the allowance for loan losses takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, historic categorical trends, current delinquency levels as related to historical levels, portfolio growth rates, changes in composition of the portfolio, the current economic environment, as well as current allowance adequacy in relation to the portfolio. The Company considers all of these factors prior to making any adjustments to the allowance due to the subjectivity and imprecision involved in allocation methodology. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The primary reason for our determination that the allowance for loan losses is a critical audit matter is that auditing the estimated allowance for loan losses involved significant judgment and complex review. There is a high degree of subjectivity in evaluating management’s estimate, such as evaluating management's assessment of economic conditions and other environmental factors including the impact of the COVID-19 pandemic on the loan portfolio, evaluating the adequacy of specific allowances associated with impaired loans and assessing the appropriateness of loan grades.

Our audit procedures related to the estimated allowance for loan losses included:

•Testing the clerical and computational accuracy of the formulas and information utilized within the ALL model.

•Computing an independent calculation of an acceptable range and comparing it to the Company's estimate.

•Evaluating the qualitative and environmental adjustment to the historical loss rates, including assessing the basis for the adjustments and the reasonableness of the significant assumptions.

•Evaluating the relevance and reliability of data and assumptions.

•Testing of the loan review function and the accuracy of loan grades determined.Specifically, evaluating the appropriateness of loan grades and to assess the reasonableness of specific impairments on loans.

•Evaluating the overall reasonableness of qualitative factors and the appropriateness of their direction and magnitude and the Company’s support for the direction and magnitude compared to previous years.

•Evaluating credit quality indicators such as trends in delinquencies, nonaccruals, and charge-offs.

•Evaluating the accuracy and completeness of disclosures in the consolidated financial statements.

Goodwill Impairment Analysis

The Company’s goodwill totaled $59.2 million at December 31, 2020. As discussed in Note 1 to the consolidated financial statements, goodwill is tested for impairment at the reporting segment level on an annual basis, or sooner if a goodwill impairment indicator is identified. Because of the volatile market conditions, the Company utilized a third-party valuation specialist in a quantitative assessment during the second quarter of 2020. Additionally, the Company performed qualitative assessments as of March 31, 2020, September 30, 2020 and December 31, 2020. Based on these assessments, it was determined that the Company’s reporting unit’s fair value exceeded its carrying value and no goodwill impairment was recorded.

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LCNB CORP. AND SUBSIDIARIES

We identified the valuation of goodwill as a critical audit matter due to the subjective nature of the assumptions used to estimate the reporting unit’s fair value. In particular, the fair value estimate was sensitive to significant assumptions, such as changes in the Company's forecasted cash flows, capitalization rate and terminal value, which are affected by expectations about future market or economic conditions, including uncertainty resulting from the COVID-19 pandemic.

Our audit procedures related to goodwill impairment analysis included:

•Testing the estimated fair value of the Company's reporting unit, with the support of our internal valuation specialists, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis.

•Testing the accuracy of the underlying data used by the Company in its analysis.

•Comparing the significant assumptions used by management to current industry and economic trends.

•Performing sensitivity analyses of significant assumptions to evaluate changes in the fair value estimate of the reporting unit resulting from changes in the assumptions.

•Testing management's reconciliation of the fair value of the reporting unit to the market capitalization of the Company.


/s/ BKD, LLP
BKD, LLP

We have served as the Company's auditor since 2014.

Cincinnati, Ohio
March 10, 2021

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LCNB CORP. AND SUBSIDIARIES

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

At December 31,

(Dollars in thousands)


	2020		2019
ASSETS:
Cash and due from banks	$	17,383	17,019
Interest-bearing demand deposits	14,347		3,746
Total cash and cash equivalents	31,730		20,765


Investment securities:
Equity securities with a readily determinable fair value, at fair value	2,389		2,312
Equity securities without a readily determinable fair value, at cost	2,099		2,099
Debt securities, available-for-sale, at fair value	209,471		178,000
Debt securities, held-to-maturity, at cost	24,810		27,525
Federal Reserve Bank stock, at cost	4,652		4,652
Federal Home Loan Bank stock, at cost	5,203		5,203
Loans, net	1,293,693		1,239,406
Premises and equipment, net	35,376		34,787
Operating lease right-of-use assets	6,274		5,444
Goodwill	59,221		59,221
Core deposit and other intangibles, net	3,453		4,006
Bank owned life insurance	42,149		41,667
Interest receivable	8,337		3,926
Other assets, net	17,027		10,295
TOTAL ASSETS	$	1,745,884	1,639,308

LIABILITIES:
Deposits:
Non-interest-bearing	$	455,073	354,391
Interest-bearing	1,000,350		993,889
Total deposits	1,455,423		1,348,280

Long-term debt	22,000		40,994
Operating lease liabilities	6,371		5,446
Accrued interest and other liabilities	21,265		16,540
TOTAL LIABILITIES	1,505,059		1,411,260

COMMITMENTS AND CONTINGENT LIABILITIES	0		0

SHAREHOLDERS' EQUITY:
Preferred shares - no par value, authorized 1,000,000 shares, NaN outstanding	0		0
Common shares - no par value; authorized 19,000,000 shares at December 31, 2020 and 2019; issued 14,163,904 and 14,111,810 shares at December 31, 2020 and 2019, respectively; outstanding 12,858,325 and 12,936,783 at December 31, 2020 and 2019,respectively	142,443		141,791
Retained earnings	115,058		104,431
Treasury shares at cost, 1,305,579 and 1,175,027 shares at December 31, 2020 and 2019, respectively	(20,719)		(18,847)
Accumulated other comprehensive income, net of taxes	4,043		673
TOTAL SHAREHOLDERS' EQUITY	240,825		228,048

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,745,884	1,639,308

2019 2018
ASSETS:
Cash and due from banks $ 17,019
18,310
Interest-bearing demand deposits 3,746
1,730
Total cash and cash equivalents 20,765
20,040

Interest-bearing time deposits —
996
Investment securities:
Equity securities with a readily determinable fair value, at fair value 2,312
2,078
Equity securities without a readily determinable fair value, at cost 2,099
2,099
Debt securities, available-for-sale, at fair value 178,000
238,421
Debt securities, held-to-maturity, at cost 27,525
29,721
Federal Reserve Bank stock, at cost 4,652
4,653
Federal Home Loan Bank stock, at cost 5,203
4,845
Loans, net 1,239,406
1,194,577
Premises and equipment, net 34,787
32,627
Operating lease right-of-use assets 5,444
—
Goodwill 59,221
59,221
Core deposit and other intangibles 4,006
5,042
Bank owned life insurance 41,667
28,723
Other assets 14,221
13,884
TOTAL ASSETS $ 1,639,308
1,636,927

LIABILITIES:
Deposits:
Non-interest-bearing $ 354,391
322,571
Interest-bearing 993,889
978,348
Total deposits 1,348,280
1,300,919
Short-term borrowings —
56,230
Long-term debt 40,994
47,032
Operating lease liabilities 5,446
—
Accrued interest and other liabilities 16,540
13,761
TOTAL LIABILITIES 1,411,260
1,417,942

COMMITMENTS AND CONTINGENT LIABILITIES —
—

SHAREHOLDERS' EQUITY:
Preferred shares - no par value, authorized 1,000,000 shares, none outstanding —
—
Common shares - no par value; authorized 19,000,000 shares at December 31, 2019 and 2018; issued 14,111,810 and 14,070,303 shares at December 31, 2019 and 2018, respectively 141,791
141,170
Retained earnings 104,431
94,547
Treasury shares at cost, 1,175,027 and 775,027 shares at December 31, 2019 and 2018, respectively (18,847 ) (12,013 )
Accumulated other comprehensive income (loss), net of taxes 673
(4,719 )
TOTAL SHAREHOLDERS' EQUITY 228,048
218,985

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,639,308
1,636,927

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

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LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the years ended December 31,

(Dollars in thousands, except per share data)


	2020		2019	2018
INTEREST INCOME:
Interest and fees on loans	$	59,267	59,009	47,489
Dividends on equity securities:
With a readily determinable fair value	54		62	65
Without a readily determinable fair value	37		65	39
Interest on debt securities:
Taxable	2,916		3,601	3,666
Non-taxable	1,027		1,677	2,686
Interest on interest-bearing time deposits	0		11	58
Other investments	479		769	591
TOTAL INTEREST INCOME	63,780		65,194	54,594

INTEREST EXPENSE:
Interest on deposits	6,634		9,526	5,753
Interest on short-term borrowings	7		227	311
Interest on long-term debt	921		1,035	361
TOTAL INTEREST EXPENSE	7,562		10,788	6,425
NET INTEREST INCOME	56,218		54,406	48,169
PROVISION FOR LOAN LOSSES	2,014		207	923
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	54,204		54,199	47,246

NON-INTEREST INCOME:
Fiduciary income	5,009		4,354	3,958
Service charges and fees on deposit accounts	5,482		5,875	5,590
Net gains (losses) on sales of debt securities	221		(41)	(8)
Bank owned life insurance income	1,441		943	738
Net gains from sales of loans	2,297		328	223
Other operating income	1,291		889	549
TOTAL NON-INTEREST INCOME	15,741		12,348	11,050

NON-INTEREST EXPENSE:
Salaries and employee benefits	27,178		25,320	21,279
Equipment expenses	1,377		1,209	1,138
Occupancy expense, net	2,875		2,961	2,861
State financial institutions tax	1,708		1,669	1,197
Marketing	1,254		1,319	1,119
Amortization of intangibles	1,046		1,043	922
FDIC insurance premiums, net	256		225	419
ATM expense	1,028		580	580
Computer maintenance and supplies	1,107		1,094	990
Telephone expense	706		707	649
Contracted services	1,821		1,865	1,547

Merger-related expenses	0		114	2,123
Other non-interest expense	5,429		5,416	5,678
TOTAL NON-INTEREST EXPENSE	45,785		43,522	40,502

INCOME BEFORE INCOME TAXES	24,160		23,025	17,794
PROVISION FOR INCOME TAXES	4,085		4,113	2,949
NET INCOME	$	20,075	18,912	14,845

Earnings per common share:
Basic	$	1.55	1.44	1.24
Diluted	1.55		1.44	1.24
Weighted average common shares outstanding:
Basic	12,914,277		13,078,920	11,935,350
Diluted	12,914,584		13,082,893	11,942,253

2019 2018 2017
INTEREST INCOME:
Interest and fees on loans $ 59,009
47,489
36,571
Dividends on equity securities:
With a readily determinable fair value 62
65
63
Without a readily determinable fair value 65
39
26
Interest on debt securities:

Taxable 3,601
3,666
4,239
Non-taxable 1,677
2,686
3,130
Interest on interest-bearing time deposits 11
58
—
Other investments 769
591
434
TOTAL INTEREST INCOME 65,194
54,594
44,463

INTEREST EXPENSE:

Interest on deposits 9,526
5,753
3,378
Interest on short-term borrowings 227
311
209
Interest on long-term debt 1,035
361
12
TOTAL INTEREST EXPENSE 10,788
6,425
3,599
NET INTEREST INCOME 54,406
48,169
40,864
PROVISION FOR LOAN LOSSES 207
923
215
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 54,199
47,246
40,649

NON-INTEREST INCOME:

Fiduciary income 4,354
3,958
3,473
Service charges and fees on deposit accounts 5,875
5,590
5,236
Net gains (losses) on sales of securities (41 ) (8 ) 233
Bank owned life insurance income 943
738
867
Net gains from sales of loans 328
223
166
Other operating income 889
549
483
TOTAL NON-INTEREST INCOME 12,348
11,050
10,458

NON-INTEREST EXPENSE:

Salaries and employee benefits 25,320
21,279
18,585
Equipment expenses 1,209
1,138
1,172
Occupancy expense, net 2,961
2,861
2,613
State financial institutions tax 1,669
1,197
1,137
Marketing 1,319
1,119
873
Amortization of intangibles 1,043
922
751
FDIC premiums 225
419
423
ATM expense 580
580
572
Computer maintenance and supplies 1,094
990
882
Telephone expense 707
649
735
Contracted services 1,865
1,547
1,255
Other real estate owned 53
20
10
Merger-related expenses 114
2,123
118
Other non-interest expense 5,363
5,658
4,737
TOTAL NON-INTEREST EXPENSE 43,522
40,502
33,863

INCOME BEFORE INCOME TAXES 23,025
17,794
17,244
PROVISION FOR INCOME TAXES 4,113
2,949
4,272
NET INCOME $ 18,912
14,845
12,972

Earnings per common share:

Basic $ 1.44
1.24
1.30
Diluted 1.44
1.24
1.29
Weighted average common shares outstanding:

Basic 13,078,920
11,935,350
10,005,575
Diluted 13,082,893
11,942,253
10,012,511

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

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Table of Contents

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the years ended December 31,

(Dollars in thousands)


	2020		2019	2018
Net income	$	20,075	18,912	14,845

Other comprehensive income (loss):

Net unrealized gain (loss) on available-for-sale securities (net of taxes of $975, $1,450, and $(516) for 2020, 2019, and 2018, respectively)	3,666		5,456	(1,939)

Reclassification adjustment for net realized (gain) loss on sale of available-for-sale securities included in net income (net of taxes of $46, $(9), and $(2) for 2020, 2019 and 2018, respectively)	(175)		32	6

Change in nonqualified pension plan unrecognized net gain (loss) and unrecognized prior service cost (net of taxes of $(33), $(26), and $21 for 2020, 2019, and 2018, respectively)	(121)		(96)	81

Other comprehensive income (loss)	3,370		5,392	(1,852)

TOTAL COMPREHENSIVE INCOME	$	23,445	24,304	12,993


SUPPLEMENTAL INFORMATION:
COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX, AS OF YEAR-END:
Net unrealized gain (loss) on securities available-for-sale	$	4,349	857	(4,631)
Net unfunded liability for nonqualified pension plan	(306)		(184)	(88)
Balance at year-end	$	4,043	673	(4,719)

2019 2018 2017
Net income $ 18,912
14,845
12,972

Other comprehensive income (loss):

Net unrealized gain (loss) on available-for-sale securities (net of taxes of $1,450, $(516), and $285 for 2019, 2018, and 2017, respectively) 5,456
(1,939 ) 585

Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of taxes of $(9), $(2), and $81 for 2019, 2018 and 2017, respectively) 32
6
(152 )

Change in nonqualified pension plan unrecognized net gain (loss) and unrecognized prior service cost (net of taxes of $(26), $21, and $(53) for 2019, 2018, and 2017, respectively) (96 ) 81
(158 )

Other comprehensive income (loss) 5,392
(1,852 ) 275

TOTAL COMPREHENSIVE INCOME $ 24,304
12,993
13,247

SUPPLEMENTAL INFORMATION:

COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX, AS OF YEAR-END:

Net unrealized gain (loss) on securities available-for-sale $ 857
(4,631 ) (2,200 )
Net unfunded liability for nonqualified pension plan (184 ) (88 ) (142 )
Balance at year-end $ 673
(4,719 ) (2,342 )

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

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Table of Contents

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the years ended December 31,

(Dollars in thousands, except share data)


	Common Shares Outstanding	Common Shares		Retained Earnings	Treasury Shares	Accumulated Other Comprehensive Income (Loss)	Total Shareholders' Equity
Balance, December 31, 2017	10,023,059	$	76,977	87,301	(11,665)	(2,342)	150,271
Cumulative effect of changes in accounting principles (1)	—	0		525	0	(525)	0
Balance at December 31, 2017, as adjusted	10,023,059	76,977		87,826	(11,665)	(2,867)	150,271
Net income	—	0		14,845	0	0	14,845
Other comprehensive loss, net of taxes	—	0		0	0	(1,852)	(1,852)
Dividend Reinvestment and Stock Purchase Plan	22,936	416		0	0	0	416
Stock issued for acquisition of Columbus First Bancorp, Inc.	3,253,060	63,598		0	0	0	63,598
Exercise of stock options	6,987	72		0	0	0	72
Repurchase of common stock	(21,400)	0		0	(348)	0	(348)
Compensation expense relating to restricted stock	10,634	107		0	0	0	107
Common stock dividends, $0.65 per share	0	0		(8,124)	0	0	(8,124)
Balance, December 31, 2018	13,295,276	141,170		94,547	(12,013)	(4,719)	218,985

Net income	—	0		18,912	0	0	18,912
Other comprehensive income, net of taxes	—	0		0	0	5,392	5,392
Dividend Reinvestment and Stock Purchase Plan	25,629	446		0	0	0	446

Exercise of stock options	3,374	41		0	0	0	41
Repurchase of common stock	(400,000)	0		0	(6,834)	0	(6,834)
Compensation expense relating to restricted stock	12,504	134		0	0	0	134
Common stock dividends, $0.69 per share	0	0		(9,028)	0	0	(9,028)
Balance, December 31, 2019	12,936,783	141,791		104,431	(18,847)	673	228,048

Net income	—	0		20,075	0	0	20,075
Other comprehensive income, net of taxes	—	0		0	0	3,370	3,370
Dividend Reinvestment and Stock Purchase Plan	26,840	401		0	0	0	401

Exercise of stock options	9,593	114		0	0	0	114
Repurchase of common stock	(130,552)	0		0	(1,872)	0	(1,872)
Compensation expense relating to restricted stock	15,661	137		0	0	0	137
Common stock dividends, $0.73 per share	0	0		(9,448)	0	0	(9,448)
Balance, December 31, 2020	12,858,325	$	142,443	115,058	(20,719)	4,043	240,825

Common
Shares
Outstanding

Common
Shares

Retained
Earnings

Treasury
Shares

Accumulated
Other
Comprehensive
Income (Loss)

Total
Shareholders'
Equity

Balance, December 31, 2016 9,998,025
$ 76,490
80,736
(11,665 ) (2,617 ) 142,944
Net income

12,972

12,972
Other comprehensive loss, net of taxes

275
275
Dividend Reinvestment and Stock Purchase Plan 17,609
360

360
Exercise of stock options 3,398
51
51
Compensation expense relating to stock options
1

1
Compensation expense relating to restricted stock 4,027
75
75
Common stock dividends, $0.64 per share

(6,407 )

(6,407 )
Balance, December 31, 2017 10,023,059
76,977
87,301
(11,665 ) (2,342 ) 150,271

Cumulative effect of changes in accounting principles (1) 525
(525 ) —
Balance at December 31, 2017, as adjusted 10,023,059
76,977
87,826
(11,665 ) (2,867 ) 150,271
Net income

14,845

14,845
Other comprehensive income, net of taxes

(1,852 ) (1,852 )
Dividend Reinvestment and Stock Purchase Plan 22,936
416

416
Stock issued for acquisition of Columbus First Bancorp, Inc. 3,253,060
63,598
63,598
Exercise of stock options 6,987
72
72
Repurchase of common stock (21,400 ) (348 ) (348 )
Compensation expense relating to restricted stock 10,634
107
107
Common stock dividends, $0.65 per share

(8,124 )

(8,124 )
Balance, December 31, 2018 13,295,276
141,170
94,547
(12,013 ) (4,719 ) 218,985

Net income

18,912

18,912
Other comprehensive loss, net of taxes

5,392
5,392
Dividend Reinvestment and Stock Purchase Plan 25,629
446

446
Exercise of stock options 3,374
41
41
Repurchase of common stock (400,000 ) (6,834 ) (6,834 )
Compensation expense relating to restricted stock 12,504
134
134
Common stock dividends, $0.69 per share

(9,028 )

(9,028 )
Balance, December 31, 2019 12,936,783
$ 141,791
104,431
(18,847 ) 673
228,048

(1) Represents the impact of adopting Accounting Standards Update No. 2018-02 and No. 2016-01. See Note 1 of the consolidated financial statements for more information.

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

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Table of Contents

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31,

(Dollars in thousands)


	2019			2018		2017			2020		2019	2018
CASH FLOWS FROM OPERATING ACTIVITIES:								CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	18,912		14,845		12,972		Net income	$	20,075	18,912	14,845
Adjustments to reconcile net income to net cash flows from operating activities-								Adjustments to reconcile net income to net cash flows from operating activities-
Depreciation, amortization and accretion	3,244			4,073		3,308		Depreciation, amortization and accretion	2,234		3,244	4,073
Provision for loan losses	207			923		215		Provision for loan losses	2,014		207	923
Impact of Tax Cuts and Jobs Act on Accumulated Other Comprehensive Income	—			—		486

Deferred income tax provision	419			228		1,478		Deferred income tax provision	134		419	228

Increase in cash surrender value of bank owned life insurance	(943		)	(738	)	(760	)	Increase in cash surrender value of bank owned life insurance	(1,124)		(943)	(738)
Bank owned life insurance death benefits in excess of cash surrender value	—			—		(107	)	Bank owned life insurance death benefits in excess of cash surrender value	(317)		0	0
Realized (gain) loss from equity securities	(264		)	73		(15	)	Realized (gain) loss from equity securities	(675)		(264)	73
Realized (gain) loss from sales of debt securities available-for-sale	41			8		(218	)	Realized (gain) loss from sales of debt securities available-for-sale	(221)		41	8
Realized (gain) loss from sale of premises and equipment	(1		)	575		113		Realized (gain) loss from sale of premises and equipment	(53)		(1)	575
Realized loss from sale and impairment of other real estate owned and repossessed assets	44			14		3
Realized (gain) loss from sale and impairment of other real estate owned and repossessed assets								Realized (gain) loss from sale and impairment of other real estate owned and repossessed assets	(11)		44	14
Origination of mortgage loans for sale	(16,418		)	(8,924	)	(7,513	)	Origination of mortgage loans for sale	(65,890)		(16,418)	(8,924)
Realized gains from sales of loans	(328		)	(223	)	(166	)	Realized gains from sales of loans	(2,297)		(328)	(223)
Proceeds from sales of loans	16,590			9,033		7,588		Proceeds from sales of loans	67,467		16,590	9,033
Compensation expense related to stock options	—			—		1

Compensation expense related to restricted stock	134			107		75		Compensation expense related to restricted stock	137		134	107
Changes in:								Changes in:
Accrued income receivable	230			215		(4	)	Accrued income receivable	(4,573)		230	215
Other assets	(1,373		)	(1,811	)	(269	)	Other assets	(6,795)		(1,373)	(1,811)
Other liabilities	1,474			1,344		948		Other liabilities	3,573		1,474	1,344
TOTAL ADJUSTMENTS	3,056			4,897		5,163		TOTAL ADJUSTMENTS	(6,397)		3,056	4,897
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES	21,968			19,742		18,135		NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES	13,678		21,968	19,742

CASH FLOWS FROM INVESTING ACTIVITIES:								CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of equity securities	398			127		43		Proceeds from sales of equity securities	967		398	127
Proceeds from sales of debt securities available-for-sale	84,521			8,545		43,203		Proceeds from sales of debt securities available-for-sale	8,786		84,521	8,545
Proceeds from maturities and calls of debt securities:								Proceeds from maturities and calls of debt securities:
Available-for-sale	28,942			24,249		25,012		Available-for-sale	66,170		28,942	24,249
Held-to-maturity	10,766			6,281		14,057		Held-to-maturity	5,297		10,766	6,281
Purchases of equity securities	(367		)	(1,118	)	(80	)	Purchases of equity securities	(369)		(367)	(1,118)
Purchases of debt securities:								Purchases of debt securities:
Available-for-sale	(47,270		)	—		(26,932	)	Available-for-sale	(102,920)		(47,270)	0
Held-to-maturity	(8,570		)	(3,431	)	(5,625	)	Held-to-maturity	(2,582)		(8,570)	(3,431)
Proceeds from maturities of interest-bearing time deposits	996			9,354		—		Proceeds from maturities of interest-bearing time deposits	0		996	9,354
Proceeds from redemption of Federal Reserve Bank stock	1			—		—		Proceeds from redemption of Federal Reserve Bank stock	0		1	0
Purchase of Federal Reserve Bank stock	—			(1,921	)	—		Purchase of Federal Reserve Bank stock	0		0	(1,921)
Purchase of Federal Home Loan Bank stock	(358		)	—		—		Purchase of Federal Home Loan Bank stock	0		(358)	0

Net increase in loans	(44,093		)	(65,842	)	(29,692	)	Net increase in loans	(54,196)		(44,093)	(65,842)
Purchase of bank owned life insurance	(12,000		)	—		—		Purchase of bank owned life insurance	0		(12,000)	0
Proceeds from bank owned life insurance mortality benefits	—			—		189		Proceeds from bank owned life insurance mortality benefits	958		0	0

Proceeds from sales of other real estate owned and repossessed assets	19			21		971		Proceeds from sales of other real estate owned and repossessed assets	208		19	21

Purchases of premises and equipment	(3,934		)	(600	)	(6,617	)	Purchases of premises and equipment	(2,791)		(3,934)	(600)
Proceeds from sales of premises and equipment	5			651		272		Proceeds from sales of premises and equipment	421		5	651

Net cash received from acquisition of Columbus First Bancorp, Inc.	—			12,896		—		Net cash received from acquisition of Columbus First Bancorp, Inc.	0		0	12,896
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES	9,056			(10,788	)	14,801		NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES	(80,051)		9,056	(10,788)

CASH FLOWS FROM FINANCING ACTIVITIES:								CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits	47,361			(29,332	)	(25,084	)	Net increase (decrease) in deposits	107,143		47,361	(29,332)
Net increase (decrease) in short-term borrowings	(56,230		)	(770	)	4,960
Net decrease in short-term borrowings								Net decrease in short-term borrowings	0		(56,230)	(770)
Proceeds from long-term debt	—			31,000		—		Proceeds from long-term debt	0		0	31,000
Principal payments on long-term debt	(6,055		)	(7,214	)	(295	)	Principal payments on long-term debt	(19,000)		(6,055)	(7,214)

Proceeds from issuance of common stock	76			65		41		Proceeds from issuance of common stock	54		76	65
Repurchase of common stock	(6,834		)	(348	)	—		Repurchase of common stock	(1,872)		(6,834)	(348)

Proceeds from exercise of stock options	41			72		51		Proceeds from exercise of stock options	114		41	72

Cash dividends paid on common stock	(8,658		)	(7,773	)	(6,088	)	Cash dividends paid on common stock	(9,101)		(8,658)	(7,773)
NET CASH FLOWS USED IN FINANCING ACTIVITIES	(30,299		)	(14,300	)	(26,415	)
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES								NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES	77,338		(30,299)	(14,300)
NET CHANGE IN CASH AND CASH EQUIVALENTS	725			(5,346	)	6,521		NET CHANGE IN CASH AND CASH EQUIVALENTS	10,965		725	(5,346)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	20,040			25,386		18,865		CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	20,765		20,040	25,386
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	20,765		20,040		25,386		CASH AND CASH EQUIVALENTS AT END OF YEAR	$	31,730	20,765	20,040

LCNB CORP. AND SUBSIDIARIES	LCNB CORP. AND SUBSIDIARIES							LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)	CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)							CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the years ended December 31,	For the years ended December 31,							For the years ended December 31,
(Dollars in thousands)	(Dollars in thousands)							(Dollars in thousands)

	2019			2018		2017			2020		2019	2018
SUPPLEMENTAL CASH FLOW INFORMATION:								SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:								CASH PAID DURING THE YEAR FOR:
Interest	$	10,480		5,908		3,577		Interest	$	7,809	10,480	5,908
Income taxes	3,471			1,950		2,185		Income taxes	3,811		3,471	1,950

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITY:								SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITY:
Transfer from loans to other real estate owned and repossessed assets	17			244		974		Transfer from loans to other real estate owned and repossessed assets	0		17	244
Right-of-use assets obtained in exchange for lease obligations	5,775			—		—		Right-of-use assets obtained in exchange for lease obligations	1,388		5,775	0

LCNB purchased all of the common stock of Columbus First Bancorp, Inc. on May 31, 2018. In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired				342,256
Less common stock issued				63,598
Less cash paid for the common stock				783
Liabilities assumed				277,875

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

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Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, ~~2019~~2020

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

LCNB Corp. (the "Company" or “LCNB”), an Ohio corporation formed in December 1998, is a financial holding company whose principal activity is the ownership of LCNB National Bank (the "Bank"). The Bank was founded in 1877 and provides full banking services, including ~~trust~~Wealth Management and ~~brokerage~~Investment services, to customers primarily in Southwestern Ohio and Franklin County Ohio and contiguous areas.

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions are eliminated in consolidation. The accounting and reporting policies of the Company conform with U.S. generally accepted accounting principles and with general practices in the banking industry.

Certain prior period data presented in the consolidated financial statements have been reclassified to conform with the current year presentation. These reclassifications had no effect on net income.

USE OF ESTIMATES

The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

For purposes of reporting cash flows, cash and cash equivalents include cash, balances due from banks, federal funds sold, and interest-bearing demand deposits with original maturities of twelve months or less. Deposits with other banks routinely have balances greater than FDIC insured limits. Management considers the risk of loss to be very low with respect to such deposits.

INVESTMENT SECURITIES

Certain municipal debt securities that management has the positive intent and ability to hold to maturity are classified as “held-to-maturity” and recorded at amortized cost. Debt securities not classified as held-to-maturity are classified as “available-for-sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, a separate component of shareholders’ equity. Amortization of premiums and accretion of discounts are recognized as adjustments to interest income using the level-yield method. Realized gains or losses from the sale of securities are recorded on the trade date and are computed using the specific identification method.

Declines in the fair value of debt securities below their cost that are deemed to be other-than-temporarily impaired, and for which the Company does not intend to sell the securities and it is not more likely than not that the securities will be sold before the anticipated recovery of the impairment, are separated into losses related to credit factors and losses related to other factors. The losses related to credit factors are recognized in earnings and losses related to other factors are recognized in other comprehensive income. In estimating other than temporary impairment losses, management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Management determined that no such impairment adjustment was required to be made in the Company's ~~consolidated statements~~Consolidated Statements of ~~income~~Income as of December 31, 2020, 2019, ~~2018,~~ and ~~2017.~~2018.

~~Beginning January 1, 2018, equity~~Equity securities are measured at fair value with changes in fair value recognized in net income.

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Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020

(Continued)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Federal Home Loan Bank ("FHLB") stock is an equity interest in the Federal Home Loan Bank of Cincinnati. It can be sold only at its par value of $100 per share and only to the FHLB or to another member institution. In addition, the equity ownership rights are more limited than would be the case for a public company because of the oversight role exercised by the Federal Housing Finance Agency in the process of budgeting and approving dividends. Federal Reserve Bank stock is similarly restricted in marketability and value. Both investments are carried at cost, which is their par value.

~~-52-~~

~~Table of Contents~~

~~LCNB CORP. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~December 31, 2019~~

~~(Continued)~~

~~NOTE 1 -~~ ~~SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~ ~~(continued)~~

FHLB and Federal Reserve Bank stock are both subject to minimum ownership requirements by member banks. The required investments in common stock are based on predetermined formulas.

LOANS

The Company’s loan portfolio includes most types of commercial and industrial loans, commercial loans secured by real estate, residential real estate loans, consumer loans, agricultural loans and other types of loans. Most of the properties collateralizing the loan portfolio are located within the Company’s market area.

Loans are stated at the principal amount outstanding, net of unearned income, deferred origination fees and costs, and the allowance for loan losses. Interest income is accrued on the unpaid principal balance. The delinquency status of a loan is based on contractual terms and not on how recently payments have been received. Generally, a loan is placed on non-accrual status when it is classified as impaired or there is an indication that the borrower’s cash flow may not be sufficient to make payments as they come due, unless the loan is well secured and in the process of collection. Subsequent cash receipts on non-accrual loans are recorded as a reduction of principal and interest income is recorded once principal recovery is reasonably assured. The current year's accrued interest on loans placed on non-accrual status is charged against earnings. Previous years' accrued interest is charged against the allowance for loan losses. Non-accrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer a reasonable doubt as to the timely collection of interest or principal.

Loan origination fees and certain direct loan origination costs are deferred and the net amount amortized as an adjustment of loan yields. These amounts are being amortized over the lives of the related loans.

In the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for loan losses.

Loans acquired from mergers are recorded at fair value with no carryover of the acquired entity's previously established allowance for loan losses. The excess of expected cash flows over the estimated fair value of acquired loans is recognized as interest income over the remaining contractual lives of the loans using the level yield method. Subsequent decreases in expected cash flows will require additions to the allowance for loan losses. Subsequent improvements in expected cash flows result in the recognition of additional interest income over the then-remaining contractual lives of the loans. Management estimates the cash flows expected to be collected at acquisition using a third-party risk model, which incorporates the estimate of key assumptions, such as default rates, severity, and prepayment speeds.

Impaired loans acquired are accounted for under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") No. 310-30. Factors considered in evaluating whether an acquired loan was impaired include delinquency status and history, updated borrower credit status, collateral information, and current loan-to-value information. The difference between contractually required payments at the time of acquisition and the cash flows expected to be collected is referred to as the nonaccretable difference. The interest component of the cash flows expected to be collected is referred to as the accretable yield and is recognized as interest income over the remaining contractual life of the loan using the level yield method. Subsequent decreases in expected cash flows will require additions to the allowance for loan losses. Subsequent improvements in expected cash flows will result in a reclassification from the nonaccretable difference to the accretable yield.

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Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020

(Continued)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Consumer loans are charged off when they reach 120 days past due. Subsequent recoveries, if any, are credited to the allowance.

~~-53-~~

~~Table of Contents~~

~~LCNB CORP. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~December 31, 2019~~

~~(Continued)~~

~~NOTE 1 -~~ ~~SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~ ~~(continued)~~

The provision for loan losses is determined by management based upon its evaluation of the amount needed to maintain the allowance for loan losses at a level considered appropriate in relation to the estimated risk of losses inherent in the portfolio. Current methodology used by management to estimate the allowance takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, historic categorical trends, current delinquency levels as related to historical levels, portfolio growth rates, changes in composition of the portfolio, the current economic environment, as well as current allowance adequacy in relation to the portfolio. Management is cognizant that reliance on historical information coupled with the cyclical nature of the economy, including credit cycles, affects the allowance. Management considers all of these factors prior to making any adjustments to the allowance due to the subjectivity and imprecision involved in allocation methodology. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are specifically reviewed for impairment. For such loans, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers loans not specifically reviewed for impairment and homogeneous loan pools, such as residential real estate and consumer loans. The general component is measured for each loan category separately based on each category’s average of historical loss experience over a trailing sixty month period, adjusted for qualitative factors. Such qualitative factors may include current economic conditions if different from the five-year historical loss period, trends in underperforming loans, trends in volume and terms of loan categories, concentrations of credit, and trends in loan quality.

A loan is considered impaired when management believes, based on current information and events, it is probable that the Bank will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement. An impaired loan is measured by the present value of expected future cash flows using the loan's effective interest rate. An impaired collateral-dependent loan may be measured based on collateral value. Smaller-balance homogeneous loans, including residential mortgage and consumer installment loans, which are not evaluated individually are collectively evaluated for impairment.

PREMISES AND EQUIPMENT

Premises and equipment are stated at cost less accumulated depreciation. Land is stated at cost. Depreciation is computed on both the straight-line and accelerated methods over the estimated useful lives of the assets, generally 15 to 40 years for premises and 3 to 10 years for equipment. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Costs incurred for maintenance and repairs are expensed as incurred. Premises and equipment are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of a particular asset may not be recoverable.

~~OTHER REAL ESTATE OWNED~~

Other real estate owned includes properties acquired through foreclosure. Such property is held for sale and is initially recorded at fair value, less costs to sell, establishing a new cost basis. Fair value is primarily based on a property appraisal obtained at the time of transfer and any periodic updates that may be obtained thereafter. The allowance for loan losses is charged for any write down of the loan’s carrying value to fair value at the date of transfer. Any subsequent reductions in fair value and expenses incurred from holding other real estate owned are charged to other non-interest expense. Costs, excluding interest, relating to the improvement of other real estate owned are capitalized. Gains and losses from the sale of other real estate owned are included in other non-interest expense.

~~GOODWILL AND OTHER INTANGIBLE ASSETS~~

Mortgage servicing rights on originated mortgage loans that have been sold are initially recorded at their estimated fair values. Mortgage servicing rights are amortized to loan servicing income in proportion to and over the period of estimated servicing income. Such assets are periodically evaluated as to the recoverability of their carrying value.

~~-54-~~

~~Table of Contents~~

~~LCNB CORP. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~December 31, 2019~~

~~(Continued)~~

~~NOTE 1 -~~ ~~SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~ ~~(continued)~~

The Company’s other intangible assets relate to core deposits acquired from business combinations. These intangible assets are amortized on a straight-line basis over their estimated useful lives. Management evaluates whether events or circumstances have occurred that indicate the remaining useful life or carrying value of the amortizing intangible should be revised.

~~BANK OWNED LIFE INSURANCE~~

The Company has purchased life insurance policies on certain officers of the Company. The Company is the beneficiary of these policies and has recorded the estimated cash surrender value in other assets in the consolidated balance sheets. Income on the policies, based on the increase in cash surrender value and any incremental death benefits, is included in non-interest income in the consolidated statements of income.

~~AFFORDABLE HOUSING TAX CREDIT LIMITED PARTNERSHIP~~

LCNB has elected to account for its investment in an affordable housing tax credit limited partnership using the proportional amortization method described in FASB Accounting Standards Update ("ASU") 2014-01, "Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (A Consensus of the FASB Emerging Issues Task Force)." Under the proportional amortization method, an investor amortizes the initial cost of the investment to income tax expense in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. The investment in the limited partnership is included in other assets and the unfunded amount is included in accrued interest and other liabilities in LCNB's consolidated balance sheets.

~~FAIR VALUE MEASUREMENTS~~

Accounting guidance establishes a fair value hierarchy to prioritize the inputs to valuation techniques used to measure fair value. A financial instrument’s level within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. The three broad input levels are:

~~Level 1 – quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the reporting date;~~

~~Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly; and~~

~~Level 3 - inputs that are unobservable for the asset or liability.~~

Accounting guidance permits, but does not require, companies to measure many financial instruments and certain other items, including loans and debt securities, at fair value. The decision to elect the fair value option is made individually for each instrument and is irrevocable once made. Changes in fair value for the selected instruments are recorded in earnings. The Company did not select any financial instruments for the fair value election in 2019 or 2018.

~~Beginning January 1, 2018, equity securities are required to be measured at fair value with changes in fair value recognized in net income.~~

~~ADVERTISING EXPENSE~~

~~Advertising costs are expensed as incurred and are recorded as a marketing expense, a component of non-interest expense.~~

~~PENSION PLANS~~

Eligible employees of the Company hired before 2009 participate in a multiple-employer qualified noncontributory defined benefit retirement plan. This plan is accounted for as a multi-employer plan because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer.

Citizens National had a qualified noncontributory, defined benefit pension plan, which has been assumed by the Company, that covers eligible employees hired before May 1, 2005. This is a single employer plan.

~~TREASURY STOCK~~

~~Common shares repurchased are recorded at cost. Cost of shares retired or reissued is determined using the weighted average method.~~

~~-55-~~

~~Table of Contents~~

~~LCNB CORP. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~December 31, 2019~~

~~(Continued)~~

~~NOTE 1 -~~ ~~SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~ ~~(continued)~~

~~STOCK OPTIONS AND RESTRICTED STOCK AWARD PLANS~~

The cost of employee services received in exchange for stock option grants is the grant-date fair value of the award estimated using an option-pricing model. The compensation cost for restricted stock awards is based on the market price of the Company's common stock at the date of grant multiplied by the number of shares granted that are expected to vest. The estimated cost is recognized on a straight-line basis over the period the employee is required to provide services in exchange for the award, usually the vesting period. The Company uses a Black-Scholes pricing model and related assumptions for estimating the fair value of stock option grants and a five-year vesting period for stock options and restricted stock.

~~REVENUE RECOGNITION~~

FASB ASC No. 606, "Revenue from Contracts with Customers" ("ASC No. 606") provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance enumerates five steps that entities should follow in achieving this core principle. Revenue generated from financial instruments, including loans and investment securities, are not included in the scope of ASC No. 606. The adoption of ASC No. 606 did not result in a change to the accounting for any of LCNB's revenue streams that are within the scope of the amendments. Revenue-generating activities that are within the scope of ASC 606 and that are presented as non-interest income in LCNB's consolidated statements of income include:

Fiduciary income - this includes periodic fees due from trust and investment services customers for managing the customers' financial assets. Fees are generally charged on a quarterly or annual basis and are recognized ratably throughout the period, as the services are provided on an ongoing basis.

Service charges and fees on deposit accounts - these include general service fees charged for deposit account maintenance and activity and transaction-based fees charged for certain services, such as debit card, wire transfer, or overdraft activities. Revenue is recognized when the performance obligation is completed, which is generally after a transaction is completed or monthly for account maintenance services.

~~INCOME TAXES~~

Deferred income taxes are determined using the asset and liability method of accounting. ��Under this method, the net deferred tax asset or liability is determined based on the tax effects of temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

Management analyzes material tax positions taken in any income tax return for any tax jurisdiction and determines the likelihood of the positions being sustained in a tax examination. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

~~EARNINGS PER SHARE~~

Basic earnings per share allocated to common shareholders is calculated using the two-class method and is computed by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is adjusted for the dilutive effects of stock based compensation and is calculated using the two-class method or the treasury stock method. The diluted average number of common shares outstanding has been increased for the assumed exercise of stock based compensation with the proceeds used to purchase treasury shares at the average market price for the period.

~~-56-~~

~~Table of Contents~~

~~LCNB CORP. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~December 31, 2019~~

~~(Continued)~~

~~NOTE 1 -~~ ~~SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~ ~~(continued)~~

~~ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS~~

LEASES

FASB Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842),"

~~ASU No. 2016-02 was issued in February 2016 and~~ was adopted by LCNB as of January 1, 2019. It requires a lessee to recognize in the statement of financial position a liability to make lease payments ("the lease liability") and a right-of-use asset representing its right to use the underlying asset for the lease term, initially measured at the present value of the lease payments. When measuring assets and liabilities arising from a lease, the lessee should include payments to be made in optional periods only if the lessee is reasonably certain, as defined, to exercise an option to the lease or not to exercise an option to terminate the lease. Optional payments to purchase the underlying asset should be included if the lessee is reasonably certain it will exercise the purchase option. Most variable lease payments should be excluded except for those that depend on an index or a rate or are in substance fixed payments.

-55-

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020

(Continued)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

A lessee shall classify a lease as a finance lease if it meets any of five ~~listed criteria:~~


1.	~~The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.~~


2.	~~The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.~~


3.	~~The lease term is for the major part of the remaining economic life of the underlying asset.~~


4.	~~The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset.~~


5.	~~The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.~~

For finance leases, a lessee shall recognize in the statement of income interest on the lease liability separately from amortization of the right-of-use asset. Amortization of the right-of-use asset shall be on a straight-line basis, unless another basis is more representative of the pattern in which the lessee expects to consume the right-of-use asset’s future economic benefits.designated criteria. If the lease does not meet any of the five criteria, the lessee shall classify it as an operating ~~lease and~~lease. All leases entered into by LCNB through December 31, 2020 are classified as operating leases. Lessees shall recognize a single lease cost on a straight-line basis over the lease ~~term.~~

~~LCNB adopted this update using a modified retrospective approach, as defined, and elected not to restate comparable prior periods. The update provides~~term for a number of practical expedients that can be used to simplify the transition to the new standard. LCNB elected a package of practical expedients that allowed it to not reassess whether an existing contract is or contains a lease, to not reassess previous lease classifications, and to not reassess initial direct costs. LCNB also elected a practical expedient that allowed it to use hindsight when determining lease terms. LCNB did not elect a practical expedient that would have allowed it to not reassess certain land easements, as this expedient was not applicable to it.

operating leases. LCNB has adopted an accounting policy election to not recognize lease assets and lease liabilities for leases with a term of 12 months or less. Lease expense for such leases will generally be recognized on a straight-line basis over the lease term.

~~ASU~~OTHER REAL ESTATE OWNED

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. Goodwill is not amortized, but is instead subject to an annual review for impairment. A review for impairment may be conducted more frequently than annually if circumstances indicate a possible impairment. Impairment indicators that may be considered include the condition of the economy and banking industry; estimated future cash flows; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of LCNB’s stock, and other relevant events. These and other factors could lead to a conclusion that goodwill is impaired, which would require LCNB to write off the difference between the estimated fair value of the company and the carrying value.

BANK OWNED LIFE INSURANCE

The Company has purchased life insurance policies on certain officers of the Company. The Company is the beneficiary of these policies and has recorded the estimated cash surrender value in other assets in the Consolidated Balance Sheets. Income on the policies, based on the increase in cash surrender value and any incremental death benefits, is included in non-interest income in the Consolidated Statements of Income.

AFFORDABLE HOUSING TAX CREDIT LIMITED PARTNERSHIP

LCNB has elected to account for its investment in an affordable housing tax credit limited partnership using the proportional amortization method described in "ASU 2014-01, "Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (A Consensus of the FASB Emerging Issues Task Force)." Under the proportional amortization method, an investor amortizes the initial cost of the investment to income tax expense in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. The investment in the limited partnership is included in other assets and the unfunded amount is included in accrued interest and other liabilities in LCNB's Consolidated Balance Sheets.

-56-

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020

(Continued)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

FAIR VALUE MEASUREMENTS

•Level 1 – quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the reporting date;

•Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly; and

•Level 3 - inputs that are unobservable for the asset or liability.

ADVERTISING EXPENSE

Advertising costs are expensed as incurred and are recorded as a marketing expense, a component of non-interest expense.

PENSION PLANS

TREASURY STOCK

Common shares repurchased are recorded at cost. Cost of shares retired or reissued is determined using the weighted average method.

STOCK OPTIONS AND RESTRICTED STOCK AWARD PLANS

REVENUE RECOGNITION

FASB ASC No. ~~2014-09,~~606, "Revenue from Contracts with ~~Customers (Topic 606)"~~

~~ASU~~Customers" ("ASC No. 2014-09 was issued in May 2014 and was adopted by LCNB as of January 1, 2018. It supersedes most current revenue recognition guidance for contracts to transfer goods or services or other nonfinancial assets. Lease contracts, insurance contracts, and most financial instruments are not included in the scope of this update. ASU No. 2014-09606") provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance enumerates five steps that entities should follow in achieving this core principle. ~~Additional disclosures providing information about contracts with customers~~Revenue generated from financial instruments, including loans and investment securities, are ~~required. Adoption~~not included in the scope of ASC No. 606. The adoption of ASC No. 606 did not ~~have~~result in a ~~material impact~~change to the accounting for any of LCNB's revenue streams that are within the scope of the amendments. Revenue-generating activities that are within the scope of ASC 606 and that are presented as non-interest income in LCNB's Consolidated Statements of Income include:

•Fiduciary income - this includes periodic fees due from Wealth Management and Investment Services customers for managing the customers' financial assets. Fees are generally charged on ~~LCNB's results of operations~~a quarterly or ~~financial position.~~annual basis and are recognized ratably throughout the period, as the services are provided on an ongoing basis.

~~ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities"~~

ASU No. 2016-01 was issued in January 2016 and was adopted by LCNB as of January 1, 2018. It applies to all entities that hold financial assets or owe financial liabilities. It makes targeted changes to generally accepted accounting principles for public companies as follows:


1.	~~Requires most equity investments to be measured at fair value with changes in fair value recognized in net income.~~

-57-


	At December 31,
	2020		2019	2018
	(In thousands)
Debt securities available-for-sale:
U.S. Treasury notes	$	2,388	2,309	2,235
U.S. Agency notes	67,900		48,984	78,340
U.S. Agency mortgage-backed securities	91,634		84,406	55,610
Corporate securities	1,179		—	—

Municipal securities	46,370		42,301	102,236
Total debt securities available-for-sale	209,471		178,000	238,421

Debt securities held-to-maturity:
Municipal securities	24,810		27,525	29,721

Equity securities with a readily determinable fair value:
Mutual funds	1,402		1,345	1,559

Equity securities	987		967	519
Equity securities without a readily determinable fair value:
Mutual funds	2,000		2,000	2,000
Equity securities	99		99	99
Federal Reserve Bank stock	4,652		4,652	4,653
Federal Home Loan Bank stock	5,203		5,203	4,845
Total securities	$	248,624	219,791	281,817



	At December 31,
	2019		2018	2017
	(In thousands)
Securities available-for-sale:
U.S. Treasury notes	$	2,309	2,235	2,259
U.S. Agency notes	48,984		78,340	83,261
U.S. Agency mortgage-backed securities	84,406		55,610	67,153
Municipal securities	42,301		102,236	122,540
Total securities available-for-sale	178,000		238,421	275,213

Securities held-to-maturity:
Municipal securities	27,525		29,721	32,571

Equity securities with a readily determinable fair value:
Mutual funds	1,345		1,559	1,542
Trust preferred securities	—		—	50
Equity securities	967		519	568
Equity securities without a readily determinable fair value:
Mutual funds	2,000		2,000	1,000
Equity securities	99		99	99
Federal Reserve Bank stock	4,652		4,653	2,732
Federal Home Loan Bank stock	5,203		4,845	3,638
Total securities	$	219,791	281,817	317,413


	Available-for-Sale					Held-to-Maturity						Available-for-Sale					Held-to-Maturity
	Amortized Cost		Fair Value	Yield		Amortized Cost		Fair Value	Yield			Amortized Cost		Fair Value	Yield		Amortized Cost		Fair Value	Yield
	(Dollars in thousands)											(Dollars in thousands)
U.S. Treasury notes:											U.S. Treasury notes:
Within one year	$	—	—	—	%	$	—	—	—	%	Within one year	$	—	—	—	%	$	—	—	—	%
One to five years	2,273		2,309	2.07	%	—		—	—	%	One to five years	2,268		2,388	2.07	%	—		—	—	%
Five to ten years	—		—	—	%	—		—	—	%	Five to ten years	—		—	—	%	—		—	—	%
After ten years	—		—	—	%	—		—	—	%	After ten years	—		—	—	%	—		—	—	%
Total U.S. Treasury notes	2,273		2,309	2.07	%	—		—	—	%	Total U.S. Treasury notes	2,268		2,388	2.07	%	—		—	—	%

U.S. Agency notes:											U.S. Agency notes:
Within one year	4,999		4,996	1.52	%	—		—	—	%	Within one year	—		—	—	%	—		—	—	%
One to five years	35,468		35,577	1.99	%	—		—	—	%	One to five years	28,703		29,049	0.88	%	—		—	—	%
Five to ten years	8,278		8,411	2.39	%	—		—	—	%	Five to ten years	38,280		38,851	1.11	%	—		—	—	%
After ten years	—		—	—	%	—		—	—	%	After ten years	—		—	—	%	—		—	—	%
Total U.S. Agency notes	48,745		48,984	2.01	%	—		—	—	%	Total U.S. Agency notes	66,983		67,900	1.01	%	—		—	—	%

Corporate bonds:											Corporate bonds:
Within one year											Within one year	—		—	—	%	—		—	—	%
One to five years											One to five years	—		—	—	%	—		—	—	%
Five to ten years											Five to ten years	1,200		1,179	4.29	%	—		—	—	%
After ten years											After ten years	—		—	—	%	—		—	—	%
Total corporate bonds											Total corporate bonds	1,200		1,179	4.29	%	—		—	—	%

Municipal securities (1):											Municipal securities (1):
Within one year	6,466		6,477	2.38	%	2,435		2,438	3.82	%	Within one year	3,795		3,846	2.56	%	2,135		2,144	2.06	%
One to five years	17,075		17,255	3.02	%	7,404		7,432	2.77	%	One to five years	16,728		17,401	2.56	%	5,676		5,758	2.40	%
Five to ten years	18,379		18,569	2.69	%	1,980		2,007	5.63	%	Five to ten years	23,808		24,387	1.73	%	2,055		2,097	3.66	%
After ten years	—		—	—	%	15,706		16,011	5.75	%	After ten years	729		736	3.77	%	14,944		14,961	5.05	%
Total Municipal securities	41,920		42,301	2.78	%	27,525		27,888	4.77	%	Total Municipal securities	45,060		46,370	2.14	%	24,810		24,960	4.07	%

U.S. Agency mortgage-backed securities	83,977		84,406	2.28	%	—		—	—	%	U.S. Agency mortgage-backed securities	88,455		91,634	1.87	%	—		—	—	%

Totals	$	176,915	178,000	2.32	%	27,525		27,888	4.77	%	Totals	$	203,966	209,471	1.66	%	24,810		24,960	4.07	%

(1) Yields on tax-exempt obligations are computed on a taxable-equivalent basis based upon a 21.0% statutory Federal income tax rate.	(1) Yields on tax-exempt obligations are computed on a taxable-equivalent basis based upon a 21.0% statutory Federal income tax rate.										(1) Yields on tax-exempt obligations are computed on a taxable-equivalent basis based upon a 21.0% statutory Federal income tax rate.


	At December 31,																						At December 31,
	2019					2018				2017				2016				2015					2020				2019				2018				2017				2016
	Amount			%		Amount		%		Amount		%		Amount		%		Amount		%			Amount		%		Amount		%		Amount		%		Amount		%		Amount		%
	(Dollars in thousands)																						(Dollars in thousands)
Commercial and industrial	$	78,306		6.3	%	$	77,740	6.5	%	$	36,057	4.2	%	$	41,878	5.1	%	$	45,275	5.9	%	Commercial and industrial	$	100,254	7.7	%	$	78,306	6.3	%	$	77,740	6.5	%	$	36,057	4.2	%	$	41,878	5.1	%
Commercial, secured by real estate	804,953			64.7	%	740,647		61.8	%	527,947		62.2	%	477,275		58.2	%	419,633		54.5	%	Commercial, secured by real estate	843,230		64.9	%	804,953		64.7	%	740,647		61.8	%	527,947		62.2	%	477,275		58.2	%
Residential real estate	322,533			26.0	%	349,127		29.1	%	251,582		29.6	%	265,788		32.5	%	273,139		35.4	%	Residential real estate	309,692		23.8	%	322,533		26.0	%	349,127		29.1	%	251,582		29.6	%	265,788		32.5	%
Consumer	25,232			2.0	%	17,283		1.5	%	17,450		2.1	%	19,173		2.3	%	18,510		2.4	%	Consumer	36,917		2.8	%	25,232		2.0	%	17,283		1.5	%	17,450		2.1	%	19,173		2.3	%
Agricultural	11,509			0.9	%	13,297		1.1	%	15,194		1.8	%	14,802		1.8	%	13,479		1.7	%	Agricultural	10,100		0.8	%	11,509		0.9	%	13,297		1.1	%	15,194		1.8	%	14,802		1.8	%
Other loans, including deposit overdrafts	1,193			0.1	%	450		—	%	539		0.1	%	633		0.1	%	665		0.1	%	Other loans, including deposit overdrafts	363		—	%	1,193		0.1	%	450		—	%	539		0.1	%	633		0.1	%
	1,243,726			100.0	%	1,198,544		100.0	%	848,769		100.0	%	819,549		100.0	%	770,701		100.0	%		1,300,556		100.0	%	1,243,726		100.0	%	1,198,544		100.0	%	848,769		100.0	%	819,549		100.0	%
Deferred origination costs (fees), net	(275		)			79				291				254				237				Deferred origination costs (fees), net	(1,135)				(275)				79				291				254
Total loans	1,243,451					1,198,623				849,060				819,803				770,938				Total loans	1,299,421				1,243,451				1,198,623				849,060				819,803
Less allowance for loan losses	4,045					4,046				3,403				3,575				3,129				Less allowance for loan losses	5,728				4,045				4,046				3,403				3,575
Loans, net	$	1,239,406				$	1,194,577			$	845,657			$	816,228			$	767,809			Loans, net	$	1,293,693			$	1,239,406			$	1,194,577			$	845,657			$	816,228


	(In thousands)
Maturing in one year or less	$	48,315
Maturing after one year, but within five years	151,043
Maturing beyond five years	754,226
Total commercial and agricultural loans	$	953,584

Loans maturing beyond one year:
Fixed rate	$	352,187
Variable rate	553,082
Total	$	905,269



	(In thousands)
Maturing in one year or less	$	54,161
Maturing after one year, but within five years	118,689
Maturing beyond five years	721,918
Total commercial and agricultural loans	$	894,768

Loans maturing beyond one year:
Fixed rate	$	329,672
Variable rate	510,935
Total	$	840,607



	(In thousands)
Maturity within 3 months	$	25,164
After 3 but within 6 months	29,718
After 6 but within 12 months	49,706
After 12 months	53,003
	$	157,591


	(In thousands)
Maturity within 3 months	$	28,500
After 3 but within 6 months	17,694
After 6 but within 12 months	30,808
After 12 months	36,365
	$	113,367


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 2020	37,884	$	14.0814	37,884	551,526
November 2020	20,605	$	14.6291	20,605	530,921
December 2020	16,473	$	14.8922	16,473	514,448



~~Period~~	~~Total Number of Shares Purchased~~	~~Average Price Paid Per Share~~	~~Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs~~	~~Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs~~
~~October 2019~~	—	—	—	~~100,000~~
~~November 2019~~	—	—	—	~~100,000~~
~~December 2019~~	—	—	—	~~100,000~~


			Period Ending
Index	12/31/2015		12/31/2016	12/31/2017	12/31/2018	12/31/2019	12/31/2020
LCNB Corp.	$	100.00	147.35	133.73	102.64	136.12	108.63
NASDAQ Composite Index	$	100.00	108.87	141.13	137.12	187.44	271.64
SNL Midwest Bank index	$	100.00	133.61	143.58	122.61	159.51	136.96

Source: S&P Global Market Intelligence
© 2021



			Period Ending
Index	12/31/2014		12/31/2015	12/31/2016	12/31/2017	12/31/2018	12/31/2019
LCNB Corp.	$	100.00	112.99	166.46	151.10	116.02	153.79
NASDAQ Composite Index	$	100.00	106.96	116.45	150.96	146.67	200.49
SNL Midwest Bank index	$	100.00	101.52	135.64	145.76	124.47	161.94

Source: S&P Global Market Intelligence
© 2020


	At Time of Deferral		At December 31, 2020
Commercial and industrial	$	33,683	—
Commercial, secured by real estate	337,263		20,231
Residential real estate	48,903		324
Consumer	868		21
	$	420,717	20,576


	Years ended December 31,
	2020							2019							2018
	Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate		Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate		Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate
	(Dollars in thousands)
Loans (1)	$	1,306,314		$	59,267	4.54	%	$	1,221,375		$	59,009	4.83	%	$	1,038,159		$	47,489	4.57	%

Interest-bearing demand deposits	20,808			83		0.40	%	8,389			241		2.87	%	5,164			136		2.63	%
Interest-bearing time deposits	—			—		—	%	488			11		2.25	%	4,008			58		1.45	%
Federal Reserve Bank stock	4,652			279		6.00	%	4,652			279		6.00	%	3,268			196		6.00	%
Federal Home Loan Bank stock	5,203			117		2.25	%	5,108			249		4.87	%	4,346			259		5.96	%
Investment securities:
Equity securities	4,303			91		2.11	%	4,310			127		2.95	%	3,782			104		2.75	%
Debt securities, taxable	148,415			2,916		1.96	%	159,377			3,601		2.26	%	165,300			3,666		2.22	%
Debt securities, non-taxable (2)	38,439			1,300		3.38	%	73,634			2,123		2.88	%	123,135			3,400		2.76	%
Total earning assets	1,528,134			64,053		4.19	%	1,477,333			65,640		4.44	%	1,347,162			55,308		4.11	%
Non-earning assets	183,819							169,314							145,601
Allowance for loan losses	(5,029)							(4,056)							(3,822)
Total assets	$	1,706,924						$	1,642,591						$	1,488,941

Savings deposits	$	715,357		1,433		0.20	%	$	687,458		2,446		0.36	%	$	689,322		1,332		0.19	%
IRA and time certificates	289,775			5,201		1.79	%	327,321			7,080		2.16	%	253,524			4,421		1.74	%
Short-term borrowings	372			7		1.88	%	6,064			227		3.74	%	13,967			311		2.23	%
Long-term debt	34,265			921		2.69	%	42,733			1,035		2.42	%	16,789			361		2.15	%
Total interest-bearing liabilities	1,039,769			7,562		0.73	%	1,063,576			10,788		1.01	%	973,602			6,425		0.66	%
Demand deposits	407,961							336,257							315,229
Other liabilities	22,798							18,119							12,195
Capital	236,396							224,639							187,915
Total liabilities and capital	$	1,706,924						$	1,642,591						$	1,488,941
Net interest rate spread (3)						3.46	%						3.43	%						3.45	%
Net interest income and net interest margin on a tax equivalent basis (4)				$	56,491	3.70	%				$	54,852	3.71	%				$	48,883	3.63	%
Ratio of interest-earning assets to interest-bearing liabilities	146.97		%					138.90		%					138.37		%



	For the years ended December 31,
	2019 vs. 2018							2018 vs. 2017
	Increase (decrease) due to							Increase (decrease) due to
	Volume			Rate		Total		Volume		Rate		Total
	(In thousands)
Interest income attributable to:
Loans (1)	$	8,738		2,782		11,520		9,840		1,078		10,918
Interest-bearing demand deposits	92			13		105		(40	)	88		48
Interest-bearing time deposits	(68		)	21		(47	)	58		—		58
Federal Reserve Bank stock	83			—		83		32		—		32
Federal Home Loan Bank stock	41			(51	)	(10	)	39		38		77
Investment securities:
Equity securities	15			8		23		15		—		15
Debt securities, taxable	(133		)	68		(65	)	(878	)	305		(573	)
Debt securities, non-taxable (2)	(1,421		)	144		(1,277	)	(627	)	(788	)	(1,415	)
Total interest income	7,347			2,985		10,332		8,439		721		9,160
Interest expense attributable to:
Savings deposits	(4		)	1,118		1,114		43		695		738
IRA and time certificates	1,456			1,203		2,659		734		903		1,637
Short-term borrowings	(230		)	146		(84	)	(116	)	218		102
Long-term debt	623			51		674		353		(4	)	349
Total interest expense	1,845			2,518		4,363		1,014		1,812		2,826
Net interest income	$	5,502		467		5,969		7,425		(1,091	)	6,334


	At December 31,												At December 31,
	2019			2018		2017		2016		2015			2020			2019		2018		2017		2016
	(Dollars in thousands)												(Dollars in thousands)
Non-accrual loans	$	3,210		2,951		2,965		5,725		1,723		Non-accrual loans	$	3,718		3,210		2,951		2,965		5,725
Past-due 90 days or more and still accruing	—			149		—		23		559		Past-due 90 days or more and still accruing	—			—		149		—		23
Accruing restructured loans	6,609			10,516		10,469		11,731		13,723		Accruing restructured loans	5,176			6,609		10,516		10,469		11,731
Total	$	9,819		13,616		13,434		17,479		16,005		Total	$	8,894		9,819		13,616		13,434		17,479
Percent to total loans	0.79		%	1.14	%	1.58	%	2.13	%	2.08	%	Percent to total loans	0.68		%	0.79	%	1.14	%	1.58	%	2.13	%



	December 31, 2019	December 31, 2018	Difference $		Difference %
ASSETS:
Total cash and cash equivalents	20,765	20,040	725		3.62	%
Interest-bearing time deposits	—	996	(996	)	(100.00	)%
Investment securities:
Equity securities with a readily determinable fair value, at fair value	2,312	2,078	234		11.26	%
Equity securities without a readily determinable fair value, at cost	2,099	2,099	—		—	%
Debt securities, available-for-sale, at fair value	178,000	238,421	(60,421	)	(25.34	)%
Debt securities, held-to-maturity, at cost	27,525	29,721	(2,196	)	(7.39	)%
Federal Reserve Bank stock, at cost	4,652	4,653	(1	)	(0.02	)%
Federal Home Loan Bank stock, at cost	5,203	4,845	358		7.39	%
Loans, net	1,239,406	1,194,577	44,829		3.75	%
Premises and equipment, net	34,787	32,627	2,160		6.62	%
Operating lease right-of-use assets	5,444	—	5,444		—	%
Goodwill	59,221	59,221	—		—	%
Core deposit and other intangibles	4,006	5,042	(1,036	)	(20.55	)%
Bank owned life insurance	41,667	28,723	12,944		45.06	%
Other assets	14,221	13,884	337		2.43	%
Total assets	1,639,308	1,636,927	2,381		0.15	%

LIABILITIES:
Deposits:
Non-interest-bearing	354,391	322,571	31,820		9.86	%
Interest-bearing	993,889	978,348	15,541		1.59	%
Total deposits	1,348,280	1,300,919	47,361		3.64	%
Short-term borrowings	—	56,230	(56,230	)	(100.00	)%
Long-term debt	40,994	47,032	(6,038	)	(12.84	)%
Operating leases liability	5,446	—	5,446		—	%
Accrued interest and other liabilities	16,540	13,761	2,779		20.19	%
Total liabilities	1,411,260	1,417,942	(6,682	)	(0.47	)%

TOTAL SHAREHOLDERS' EQUITY	228,048	218,985	9,063		4.14	%
Total liabilities and shareholders' equity	1,639,308	1,636,927	2,381		0.15	%


2.	Simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value.


3.	Eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.


4.	~~Requires use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes.~~


5.	Requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.


6.	Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.


7.	Clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.



	June 30, 2018	Fair Value Adjustments		December 31, 2018
Consideration Paid:
Common shares issued (3,253,060 shares issued at $19.55 per share)	63,598	—		63,598
Cash paid to cancel share based payment awards	783	—		783
	64,381	—		64,381

Identifiable Assets Acquired:
Cash and cash equivalents	13,679	—		13,679
Interest-bearing time deposits	10,350	—		10,350
Federal Home Loan Bank stock	1,207	—		1,207
Loans, net	282,748	(615	)	282,133
Loans held for sale, net	1,819	—		1,819
Premises and equipment	102	—		102
Core deposit intangible	2,089	88		2,177
Other real estate owned	35	—		35
Deferred income taxes	—	352		352
Other assets	2,022	(658	)	1,364
Total identifiable assets acquired	314,051	(833	)	313,218

Liabilities Assumed:
Deposits	245,036	(606	)	244,430
Short-term borrowings	10,000	—		10,000
Long-term debt	22,920	23		22,943
Deferred income taxes	200	(200	)	—
Other liabilities	491	11		502
Total liabilities assumed	278,647	(772	)	277,875

Total Identifiable Net Assets Acquired	35,404	(61	)	35,343

Goodwill resulting from merger	28,977	61		29,038


							Amortized Cost		Unrealized Gains	Unrealized Losses	Fair Value
	Amortized Cost		Unrealized Gains	Unrealized Losses	Fair Value
2019
2020						2020
Debt Securities Available-for-Sale:						Debt Securities Available-for-Sale:
U.S. Treasury notes	$	2,273	36	—	2,309	U.S. Treasury notes	$	2,268	120	0	2,388
U.S. Agency notes	48,745		273	34	48,984	U.S. Agency notes	66,983		950	33	67,900
Corporate Bonds						Corporate Bonds	1,200		0	21	1,179
U.S. Agency mortgage-backed securities	83,977		672	243	84,406	U.S. Agency mortgage-backed securities	88,455		3,180	1	91,634

Municipal securities:						Municipal securities:
Non-taxable	22,174		161	14	22,321	Non-taxable	12,651		282	0	12,933
Taxable	19,746		269	35	19,980	Taxable	32,409		1,031	3	33,437
	$	176,915	1,411	326	178,000		$	203,966	5,563	58	209,471

Debt Securities Held-to-Maturity:						Debt Securities Held-to-Maturity:
Municipal securities:						Municipal securities:
Non-taxable	$	24,300	343	5	24,638	Non-taxable	$	21,408	181	0	21,589
Taxable	3,225		25	—	3,250	Taxable	3,402		6	37	3,371
	$	27,525	368	5	27,888		$	24,810	187	37	24,960

2018
2019						2019
Debt Securities Available-for-Sale:						Debt Securities Available-for-Sale:
U.S. Treasury notes	$	2,278	—	43	2,235	U.S. Treasury notes	$	2,273	36	0	2,309
U.S. Agency notes	80,708		—	2,368	78,340	U.S. Agency notes	48,745		273	34	48,984
U.S. Agency mortgage-backed securities	57,584		7	1,981	55,610	U.S. Agency mortgage-backed securities	83,977		672	243	84,406

Municipal securities:						Municipal securities:
Non-taxable	86,059		77	1,422	84,714	Non-taxable	22,174		161	14	22,321
Taxable	17,654		102	234	17,522	Taxable	19,746		269	35	19,980
	$	244,283	186	6,048	238,421		$	176,915	1,411	326	178,000

Debt Securities Held-to-Maturity:						Debt Securities Held-to-Maturity:
Municipal securities:						Municipal securities:
Non-taxable	$	26,021	84	635	25,470	Non-taxable	$	24,300	343	5	24,638
Taxable	3,700		—	146	3,554	Taxable	3,225		25	0	3,250
	$	29,721	84	781	29,024		$	27,525	368	5	27,888


							Less Than Twelve Months			Twelve Months or More
							Fair Value		Unrealized Losses	Fair Value	Unrealized Losses
2020						2020
Available-for-Sale:						Available-for-Sale:

U.S. Agency notes						U.S. Agency notes	$	10,674	33	0	0
Corporate Bonds						Corporate Bonds	679		21	0	0
U.S. Agency mortgage-backed securities						U.S. Agency mortgage-backed securities	290		1	0	0
Municipal securities:						Municipal securities:
Non-taxable						Non-taxable	38		0	0	0
Taxable						Taxable	3,063		3	0	0
							$	14,744	58	0	0

Held-to-Maturity:						Held-to-Maturity:
Municipal securities:						Municipal securities:
Non-taxable						Non-taxable	$	1	0	0	0
Taxable						Taxable	3,113		37	0	0
	Less Than Twelve Months			Twelve Months or More			$	3,114	37	0	0
	Fair Value		Unrealized Losses	Fair Value	Unrealized Losses
2019						2019
Available-for-Sale:						Available-for-Sale:
U.S. Treasury notes	$	—	—	—	—

U.S. Agency notes	3,586		11	11,939	23	U.S. Agency notes	$	3,586	11	11,939	23
U.S. Agency mortgage-backed securities	10,555		10	19,233	233	U.S. Agency mortgage-backed securities	10,555		10	19,233	233
Municipal securities:						Municipal securities:
Non-taxable	2,631		2	1,257	12	Non-taxable	2,631		2	1,257	12
Taxable	5,067		35	450	—	Taxable	5,067		35	450	0
	$	21,839	58	32,879	268		$	21,839	58	32,879	268

Held-to-Maturity:						Held-to-Maturity:
Municipal securities:						Municipal securities:
Non-taxable	$	54	—	2,660	5	Non-taxable	$	54	0	2,660	5
Taxable	—		—	—	—	Taxable	0		0	0	0
	$	54	—	2,660	5		$	54	0	2,660	5

2018
Available-for-Sale:
U.S. Treasury notes	$	—	—	2,235	43
U.S. Agency notes	4,988		7	73,351	2,361
U.S. Agency mortgage-backed securities	137		—	55,217	1,981
Municipal securities:
Non-taxable	14,264		49	58,211	1,373
Taxable	—		—	14,407	234
	$	19,389	56	203,421	5,992

Held-to-Maturity:
Municipal securities:
Non-taxable	$	366	1	18,588	634
Taxable	400		1	3,154	145
	$	766	2	21,742	779


	2020		2019
Net gains recognized	$	675	264
Less net realized gains on equity securities sold	658		21
Unrealized gains recognized and still held at period end	$	17	243



	2019		2018
Net gains (losses) recognized	$	264	(73	)
Less net realized gains on equity securities sold	21		20
Unrealized gains (losses) recognized and still held at period end	$	285	(93	)


	2020			2019
Non-accrual loans:
Commercial and industrial	$	0		0
Commercial, secured by real estate	2,458			2,467
Residential real estate	1,260			743
Agricultural	0			0
Total non-accrual loans	3,718			3,210
Past-due 90 days or more and still accruing	0			0
Total non-accrual and past-due 90 days or more and still accruing	3,718			3,210
Accruing restructured loans	5,176			6,609
Total	$	8,894		9,819

Percentage of total non-accrual and past-due 90 days or more and still accruing to total loans	0.29		%	0.26	%

Percentage of total non-accrual, past-due 90 days or more and still accruing, and accruing restructured loans to total loans	0.68		%	0.79	%


																	Commercial & Industrial		Commercial, Secured by Real Estate	Residential Real Estate	Consumer	Agricultural	Other	Total
2020																2020
Allowance for loan losses:																Allowance for loan losses:
Balance, beginning of year																Balance, beginning of year	$	456	2,924	528	99	34	4	4,045
Provision charged to expenses																Provision charged to expenses	342		1,332	239	62	(6)	45	2,014
Losses charged off																Losses charged off	(13)		(353)	(5)	(30)	0	(140)	(541)
Recoveries																Recoveries	31		0	75	22	0	82	210
Balance, end of year																Balance, end of year	$	816	3,903	837	153	28	(9)	5,728

Individually evaluated for impairment																Individually evaluated for impairment	$	8	17	27	0	0	0	52
Collectively evaluated for impairment																Collectively evaluated for impairment	808		3,886	810	153	28	(9)	5,676
Acquired credit impaired loans																Acquired credit impaired loans	0		0	0	0	0	0	0
Balance, end of year																Balance, end of year	$	816	3,903	837	153	28	(9)	5,728

Loans:																Loans:
Individually evaluated for impairment																Individually evaluated for impairment	$	194	6,613	1,641	5	0	0	8,453
Collectively evaluated for impairment																Collectively evaluated for impairment	99,040		833,548	306,138	37,047	10,116	179	1,286,068
Acquired credit impaired loans																Acquired credit impaired loans	362		2,048	2,306	0	0	184	4,900
Balance, end of year																Balance, end of year	$	99,596	842,209	310,085	37,052	10,116	363	1,299,421
	Commercial & Industrial			Commercial, Secured by Real Estate		Residential Real Estate		Consumer		Agricultural		Other		Total
2019																2019
Allowance for loan losses:																Allowance for loan losses:
Balance, beginning of year	$	400		2,745		767		87		46		1		4,046		Balance, beginning of year	$	400	2,745	767	87	46	1	4,046
Provision charged to expenses	103			266		(264	)	4		(12	)	110		207		Provision charged to expenses	103		266	(264)	4	(12)	110	207
Losses charged off	(47		)	(143	)	(272	)	(24	)	—		(181	)	(667	)	Losses charged off	(47)		(143)	(272)	(24)	0	(181)	(667)
Recoveries	—			56		297		32		—		74		459		Recoveries	0		56	297	32	0	74	459
Balance, end of year	$	456		2,924		528		99		34		4		4,045		Balance, end of year	$	456	2,924	528	99	34	4	4,045

Individually evaluated for impairment	$	6		272		17		—		—		—		295		Individually evaluated for impairment	$	6	272	17	0	0	0	295
Collectively evaluated for impairment	450			2,652		511		99		34		4		3,750		Collectively evaluated for impairment	450		2,652	511	99	34	4	3,750
Acquired credit impaired loans	—			—		—		—		—		—		—		Acquired credit impaired loans	0		0	0	0	0	0	0
Balance, end of year	$	456		2,924		528		99		34		4		4,045		Balance, end of year	$	456	2,924	528	99	34	4	4,045

Loans:																Loans:
Individually evaluated for impairment	$	230		7,432		949		27		—		—		8,638		Individually evaluated for impairment	$	230	7,432	949	27	0	0	8,638
Collectively evaluated for impairment	77,430			793,191		319,188		25,328		11,523		930		1,227,590		Collectively evaluated for impairment	77,430		793,191	319,188	25,328	11,523	930	1,227,590
Acquired credit impaired loans	711			3,531		2,718		—		—		263		7,223		Acquired credit impaired loans	711		3,531	2,718	0	0	263	7,223
Balance, end of year	$	78,371		804,154		322,855		25,355		11,523		1,193		1,243,451		Balance, end of year	$	78,371	804,154	322,855	25,355	11,523	1,193	1,243,451

2018
Allowance for loan losses:
Balance, beginning of year	$	378		2,178		717		76		53		1		3,403
Provision charged to expenses	21			473		213		133		(7	)	90		923
Losses charged off	—			(145	)	(234	)	(135	)	—		(179	)	(693	)
Recoveries	1			239		71		13		—		89		413
Balance, end of year	$	400		2,745		767		87		46		1		4,046

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 year	$	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 year	$	77,799		740,125		349,538		17,399		13,312		450		1,198,623


	Pass		OAEM	Substandard	Doubtful	Total
2020
Commercial & industrial	$	97,391	0	2,205	0	99,596
Commercial, secured by real estate	811,558		9,279	21,372	0	842,209
Residential real estate	306,092		1,005	2,988	0	310,085
Consumer	37,050		0	2	0	37,052
Agricultural	10,116		0	0	0	10,116
Other	363		0	0	0	363
Total	$	1,262,570	10,284	26,567	0	1,299,421

2019
Commercial & industrial	$	76,236	233	1,902	0	78,371
Commercial, secured by real estate	789,319		3,007	11,828	0	804,154
Residential real estate	319,075		267	3,513	0	322,855
Consumer	25,342		0	13	0	25,355
Agricultural	11,523		0	0	0	11,523
Other	1,193		0	0	0	1,193
Total	$	1,222,688	3,507	17,256	0	1,243,451


										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
2020									2020
Commercial & industrial									Commercial & industrial	$	0	0	0	0	99,596	99,596	0
Commercial, secured by real estate									Commercial, secured by real estate	16		0	1,476	1,492	840,717	842,209	0
Residential real estate									Residential real estate	497		219	675	1,391	308,694	310,085	0
Consumer									Consumer	4		1	0	5	37,047	37,052	0
Agricultural									Agricultural	0		0	0	0	10,116	10,116	0
Other									Other	60		0	0	60	303	363	0
Total									Total	$	577	220	2,151	2,948	1,296,473	1,299,421	0
	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
2019									2019
Commercial & industrial	$	283	—	—	283	78,088	78,371	—	Commercial & industrial	$	283	0	0	283	78,088	78,371	0
Commercial, secured by real estate	339		—	1,171	1,510	802,644	804,154	—	Commercial, secured by real estate	339		0	1,171	1,510	802,644	804,154	0
Residential real estate	1,573		260	423	2,256	320,599	322,855	—	Residential real estate	1,573		260	423	2,256	320,599	322,855	0
Consumer	27		9	—	36	25,319	25,355	—	Consumer	27		9	0	36	25,319	25,355	0
Agricultural	—		—	—	—	11,523	11,523	—	Agricultural	0		0	0	0	11,523	11,523	0
Other	930		—	—	930	263	1,193	—	Other	930		0	0	930	263	1,193	0
Total	$	3,152	269	1,594	5,015	1,238,436	1,243,451	—	Total	$	3,152	269	1,594	5,015	1,238,436	1,243,451	0

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


								Recorded Investment		Unpaid Principal Balance	Related Allowance	Average Recorded Investment	Interest Income Recognized
	Recorded Investment		Unpaid Principal Balance	Related Allowance	Average Recorded Investment	Interest Income Recognized
2019
2020							2020
With no related allowance recorded:							With no related allowance recorded:
Commercial & industrial	$	711	1,253	—	836	83	Commercial & industrial	$	362	646	—	1,044	335
Commercial, secured by real estate	8,625		9,373	—	12,748	1,213	Commercial, secured by real estate	6,050		6,735	—	7,070	731
Residential real estate	3,118		3,651	—	3,704	311	Residential real estate	3,261		3,695	—	3,290	316
Consumer	10		10	—	12	1	Consumer	4		4	—	10	1
Agricultural	—		—	—	—	—	Agricultural	0		0	—	0	0
Other	263		392	—	310	35	Other	184		297	—	234	36
Total	$	12,727	14,679	—	17,610	1,643	Total	$	9,861	11,377	—	11,648	1,419

With an allowance recorded:							With an allowance recorded:
Commercial & industrial	$	230	235	6	247	15	Commercial & industrial	$	194	199	8	212	12
Commercial, secured by real estate	2,338		2,485	272	2,513	64	Commercial, secured by real estate	2,611		2,908	17	1,517	18
Residential real estate	549		549	17	528	35	Residential real estate	686		687	27	404	18
Consumer	17		17	—	20	1	Consumer	1		1	0	3	0
Agricultural	—		—	—	—	—	Agricultural	0		0	0	0	0
Other	—		—	—	—	—	Other	0		0	0	0	0
Total	$	3,134	3,286	295	3,308	115	Total	$	3,492	3,795	52	2,136	48

Total:							Total:
Commercial & industrial	$	941	1,488	6	1,083	98	Commercial & industrial	$	556	845	8	1,256	347
Commercial, secured by real estate	10,963		11,858	272	15,261	1,277	Commercial, secured by real estate	8,661		9,643	17	8,587	749
Residential real estate	3,667		4,200	17	4,232	346	Residential real estate	3,947		4,382	27	3,694	334
Consumer	27		27	—	32	2	Consumer	5		5	0	13	1
Agricultural	—		—	—	—	—	Agricultural	0		0	0	0	0
Other	263		392	—	310	35	Other	184		297	0	234	36
Total	$	15,861	17,965	295	20,918	1,758	Total	$	13,353	15,172	52	13,784	1,467


	2020					2019
	Number of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance		Number of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance
Commercial and industrial	1	$	5	$	4	0	$	0	$	0
Commercial, secured by real estate	1	1,525		1,525		2	258		258
Residential real estate	1	14		14		3	120		120
Consumer	0	0		0		0	0		0
Totals	3	$	1,544	$	1,543	5	$	378	$	378


									Term Modification		Rate Modification	Interest Only	Principal Forgiveness	Combination	Total Modifications
2020								2020
Commercial & industrial								Commercial & industrial	$	0	0	0	0	4	4
Commercial, secured by real estate								Commercial, secured by real estate	0		0	0	0	1,525	1,525
Residential real estate								Residential real estate	0		0	0	0	14	14
Consumer								Consumer	0		0	0	0	0	0
Total								Total	$	0	0	0	0	1,543	1,543
	Term Modification		Rate Modification	Interest Only	Principal Forgiveness	Combination	Total Modifications
2019								2019
Commercial & industrial	$	—	—	—	—	—	—	Commercial & industrial	$	0	0	0	0	0	0
Commercial, secured by real estate	—		—	—	—	258	258	Commercial, secured by real estate	0		0	0	0	258	258
Residential real estate	120		—	—	—	—	120	Residential real estate	120		0	0	0	0	120
Consumer	—		—	—	—	—	—	Consumer	0		0	0	0	0	0
Total	$	120	—	—	—	258	378	Total	$	120	0	0	0	258	378

2018
Commercial & industrial	$	—	—	—	—	—	—
Commercial, secured by real estate	—		—	—	—	—	—
Residential real estate	380		—	—	—	125	505
Consumer	—		—	—	—	1	1
Total	$	380	—	—	—	126	506



~~Contractually required principal at acquisition~~	~~281,639~~
~~Less fair value adjustment~~	~~1,801~~
~~Fair value of acquired loans~~	~~279,838~~

~~Contractual cash flows not expected to be collected~~	~~1,905~~