UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended March 31, ~~2020~~

2021



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

For the transition period fromto

Commission File Number 001-35292

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 Act:



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

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

☒ Yes ☐ No

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



~~Large accelerated filer~~ ☐	~~Accelerated filer~~ ☒
~~Non-accelerated filer~~ ☐ ~~(Do not check if a smaller reporting company)~~	~~Smaller reporting company~~ ☒
~~Emerging growth company ☐~~

Large accelerated filer ☐ Accelerated filer ☐

Non-accelerated filer ☒ Smaller reporting 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 is a shell company (as defined in Rule 12b-2 of the Act).

☐ Yes ☒ No

The number of shares outstanding of the issuer's common stock, without par value, as of May ~~6, 2020~~4, 2021 was ~~12,969,806~~12,969,213 shares.

Table of Contents

LCNB CORP. AND SUBSIDIARIES

TABLE OF CONTENTS



PART I – FINANCIAL INFORMATION			23

Item 1. Financial Statements			23

CONSOLIDATED CONDENSED BALANCE SHEETS			23

CONSOLIDATED CONDENSED STATEMENTS OF INCOME			34

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME			45

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY			56

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS			67

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS			78

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			3736

Item 3. Quantitative and Qualitative Disclosures about Market Risks			4846

Item 4. Controls and Procedures			4947

PART II. OTHER INFORMATION			5048

Item 1. Legal Proceedings			5048

Item 1A. Risk Factors			5048

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			5148

Item 3. Defaults Upon Senior Securities			5148

Item 4. Mine Safety Disclosures			5148

Item 5. Other Information			5148

Item 6. Exhibits			5249

SIGNATURES			5350

Table of Contents

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.

Economic Aid Act Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act

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

LIHTC Low Income Housing Tax Credit

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

Table of Contents

PART I – FINANCIAL INFORMATION



Item 1.			Financial Statements

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in thousands, except per share data)


	March 31, 2021		December 31, 2020
	(Unaudited)
ASSETS:
Cash and due from banks	$	18,201	17,383
Interest-bearing demand deposits	22,943		14,347
Total cash and cash equivalents	41,144		31,730

Investment securities:
Equity securities with a readily determinable fair value, at fair value	2,506		2,389
Equity securities without a readily determinable fair value, at cost	2,099		2,099
Debt securities, available-for-sale, at fair value	237,619		209,471
Debt securities, held-to-maturity, at cost	24,695		24,810
Federal Reserve Bank stock, at cost	4,652		4,652
Federal Home Loan Bank stock, at cost	5,203		5,203
Loans, net	1,329,422		1,293,693
Premises and equipment, net	35,243		35,376

Operating lease right-of-use assets	6,865		6,274
Goodwill	59,221		59,221
Core deposit and other intangibles, net	3,108		3,453
Bank owned life insurance	42,416		42,149
Interest receivable	8,665		8,337
Other assets	15,463		17,027
TOTAL ASSETS	$	1,818,321	1,745,884

LIABILITIES:
Deposits:
Noninterest-bearing	$	475,127	455,073
Interest-bearing	1,061,989		1,000,350
Total deposits	1,537,116		1,455,423

Long-term debt	17,000		22,000
Operating lease liabilities	6,998		6,371
Accrued interest and other liabilities	17,961		21,265
TOTAL LIABILITIES	1,579,075		1,505,059

COMMITMENTS AND CONTINGENT LIABILITIES	0		0

SHAREHOLDERS' EQUITY:
Preferred shares – 0 par value, authorized 1,000,000 shares, NaN outstanding	0		0
Common shares – 0 par value; authorized 19,000,000 shares; issued 14,196,008 and 14,163,904 shares at March 31, 2021 and December 31, 2020, respectively; outstanding 12,820,108 and 12,858,325 shares at March 31, 2021 and December 31, 2020, respectively	142,639		142,443
Retained earnings	117,863		115,058
Treasury shares at cost, 1,375,900 and 1,305,579 shares at March 31, 2021 and December 31, 2020, respectively	(21,859)		(20,719)
Accumulated other comprehensive income, net of taxes	603		4,043
TOTAL SHAREHOLDERS' EQUITY	239,246		240,825
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,818,321	1,745,884

March 31, 2020 December 31,
2019
(Unaudited)
ASSETS:
Cash and due from banks $ 17,820
17,019
Interest-bearing demand deposits 6,975
3,746
Total cash and cash equivalents 24,795
20,765
Investment securities:

Equity securities with a readily determinable fair value, at fair value 2,036
2,312
Equity securities without a readily determinable fair value, at cost 2,099
2,099
Debt securities, available-for-sale, at fair value 141,439
178,000
Debt securities, held-to-maturity, at cost 27,694
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 1,267,379
1,239,406
Premises and equipment, net 35,017
34,787
Operating lease right-of-use assets 5,621
5,444
Goodwill 59,221
59,221
Core deposit and other intangibles, net 3,751
4,006
Bank owned life insurance 41,309
41,667
Other assets 16,064
14,221
TOTAL ASSETS $ 1,636,280
1,639,308

LIABILITIES:

Deposits:

Noninterest-bearing $ 342,442
354,391
Interest-bearing 1,003,430
993,889
Total deposits 1,345,872
1,348,280
Long-term debt 35,996
40,994
Operating lease liabilities 5,659
5,446
Accrued interest and other liabilities 15,275
16,540
TOTAL LIABILITIES 1,402,802
1,411,260

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; issued 14,144,103 and 14,111,810 shares at March 31, 2020 and December 31, 2019, respectively 142,046
141,791
Retained earnings 107,123
104,431
Treasury shares at cost, 1,175,027 shares at March 31, 2020 and December 31, 2019 (18,847 ) (18,847 )
Accumulated other comprehensive income, net of taxes 3,156
673
TOTAL SHAREHOLDERS' EQUITY 233,478
228,048
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,636,280
1,639,308

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

~~The consolidated condensed balance sheet as of December 31, 2019 has been derived from the audited consolidated balance sheet as of that date.~~

Table of Contents

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)


	Three Months Ended March 31,
		2021		2020
INTEREST INCOME:
Interest and fees on loans		$	14,535	15,227
Dividends on equity securities:
With a readily determinable fair value		13		14
Without a readily determinable fair value		6		16
Interest on debt securities:
Taxable		718		950
Non-taxable		224		285

Other investments		39		64
TOTAL INTEREST INCOME		15,535		16,556

INTEREST EXPENSE:
Interest on deposits		1,028		2,117
Interest on short-term borrowings		1		7
Interest on long-term debt		134		254
TOTAL INTEREST EXPENSE		1,163		2,378
NET INTEREST INCOME		14,372		14,178
(CREDIT) PROVISION FOR LOAN LOSSES		(52)		1,173
NET INTEREST INCOME AFTER (CREDIT) PROVISION FOR LOAN LOSSES		14,424		13,005

NON-INTEREST INCOME:
Fiduciary income		1,529		1,103
Service charges and fees on deposit accounts		1,366		1,295
Net gains from sales of debt securities, available-for-sale		0		221
Bank owned life insurance income		267		601
Gains from sales of loans		43		120
Other operating income		260		499
TOTAL NON-INTEREST INCOME		3,465		3,839

NON-INTEREST EXPENSE:
Salaries and employee benefits		6,433		6,768
Equipment expenses		368		287
Occupancy expense, net		794		682
State financial institutions tax		444		436
Marketing		268		177
Amortization of intangibles		257		260
FDIC insurance premiums (credit), net		113		(1)
Contracted services		540		402



Other non-interest expense		2,275		2,061
TOTAL NON-INTEREST EXPENSE		11,492		11,072
INCOME BEFORE INCOME TAXES		6,397		5,772
PROVISION FOR INCOME TAXES		1,157		746
NET INCOME		$	5,240	5,026

Dividends declared per common share		$	0.19	0.18
Earnings per common share:
Basic		$	0.41	0.39
Diluted		0.41		0.39
Weighted average common shares outstanding:
Basic		12,794,824		12,926,077
Diluted		12,794,852		12,927,666

Three Months Ended
March 31,
2020 2019
INTEREST INCOME:
Interest and fees on loans $ 15,227
14,538
Dividends on equity securities:
With a readily determinable fair value 14
17
Without a readily determinable fair value 16
16
Interest on debt securities:
Taxable 950
869
Non-taxable 285
544
Interest on interest-bearing time deposits —
5
Other investments 64
124
TOTAL INTEREST INCOME 16,556
16,113

INTEREST EXPENSE:

Interest on deposits 2,117
2,286
Interest on short-term borrowings 7
219
Interest on long-term debt 254
217
TOTAL INTEREST EXPENSE 2,378
2,722
NET INTEREST INCOME 14,178
13,391
PROVISION (CREDIT) FOR LOAN LOSSES 1,173
(105 )
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES 13,005
13,496

NON-INTEREST INCOME:

Fiduciary income 1,103
1,034
Service charges and fees on deposit accounts 1,295
1,308
Net gains (losses) from sales of debt securities, available-for-sale 221
(18 )
Bank owned life insurance income 601
182
Gains from sales of loans 120
29
Other operating income 499
237
TOTAL NON-INTEREST INCOME 3,839
2,772

NON-INTEREST EXPENSE:

Salaries and employee benefits 6,768
6,162
Equipment expenses 287
266
Occupancy expense, net 682
763
State financial institutions tax 436
438
Marketing 177
302
Amortization of intangibles 260
257
FDIC insurance premiums (credit), net (1 ) 126
Contracted services 402
464
Merger-related expenses —
67
Other non-interest expense 2,061
1,855
TOTAL NON-INTEREST EXPENSE 11,072
10,700
INCOME BEFORE INCOME TAXES 5,772
5,568
PROVISION FOR INCOME TAXES 746
941
NET INCOME $ 5,026
4,627

Dividends declared per common share $ 0.18
0.17
Earnings per common share:

Basic $ 0.39
0.35
Diluted 0.39
0.35
Weighted average common shares outstanding:

Basic 12,926,077
13,283,634
Diluted 12,927,666
13,287,338

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

Table of Contents

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


	Three Months Ended March 31,
		2021		2020
Net income		$	5,240	5,026
Other comprehensive income:
Net unrealized (losses) gains on available-for-sale debt securities (net of taxes of $915 and $(706) for the three months ended March 31, 2021 and 2020, respectively)		(3,441)		2,658
Reclassification adjustment for net realized gains on sales of available-for-sale debt securities included in net income (net of taxes of $46 for the three months ended March 31, 2020)		0		(175)
Change in nonqualified pension plan unrecognized net gain and unrecognized prior service cost (net of taxes of $0 for the three months ended March 31, 2021)		1		0
Other comprehensive (loss) income, net of tax		(3,440)		2,483
TOTAL COMPREHENSIVE INCOME		$	1,800	7,509

Three Months Ended
March 31,
2020 2019
Net income $ 5,026
4,627
Other comprehensive income:

Net unrealized gains on available-for-sale debt securities (net of taxes of $706 and $659 for the three months ended March 31, 2020 and 2019, respectively) 2,658
2,475
Reclassification adjustment for net realized (gains) losses on sales of available-for-sale debt securities included in net income (net of taxes of $46 and $4 for the three months ended March 31, 2020 and 2019, respectively) (175 ) 14
Other comprehensive income, net of tax 2,483
2,489
TOTAL COMPREHENSIVE INCOME $ 7,509
7,116

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

Table of Contents

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY

(Dollars in thousands, except per share data)

(Unaudited)


	Common Shares Outstanding	Common Stock		Retained Earnings	Treasury Shares	Accumulated Other Comprehensive Income	Total Shareholders' Equity












Three Months Ended March 31, 2021
Balance at December 31, 2020	12,858,325	$	142,443	115,058	(20,719)	4,043	240,825
Net income				5,240			5,240
Other comprehensive loss, net of taxes						(3,440)	(3,440)
Dividend Reinvestment and Stock Purchase Plan	5,472	99					99

Repurchase of common stock	(70,321)				(1,140)		(1,140)
Exercise of stock options	311	4					4
Compensation expense relating to restricted stock	26,321	93					93
Common stock dividends, $0.19 per share				(2,435)			(2,435)
Balance at March 31, 2021	12,820,108	$	142,639	117,863	(21,859)	603	239,246













Three Months Ended March 31, 2020
Balance at December 31, 2019	12,936,783	$	141,791	104,431	(18,847)	673	228,048
Net income				5,026			5,026
Other comprehensive income, net of taxes						2,483	2,483
Dividend Reinvestment and Stock Purchase Plan	7,039	107					107


Exercise of stock options	9,593	115					115
Compensation expense relating to restricted stock	15,661	33					33
Common stock dividends, $0.18 per share				(2,334)			(2,334)
Balance at March 31, 2020	12,969,076	$	142,046	107,123	(18,847)	3,156	233,478

Common Shares Outstanding Common Stock
Retained
Earnings

Treasury
Shares

Accumulated
Other
Comprehensive
Income (Loss)

Total Shareholders'
Equity
Three Months Ended March 31, 2020
Balance at December 31, 2019 12,936,783
$ 141,791
104,431
(18,847 ) 673
228,048
Net income

5,026

5,026
Other comprehensive income, net of taxes

2,483
2,483
Dividend Reinvestment and Stock Purchase Plan 7,039
107

107
Exercise of stock options 9,593
115
115
Compensation expense relating to restricted stock 15,661
33
33
Common stock dividends, $0.18 per share

(2,334 )

(2,334 )
Balance at March 31, 2020 12,969,076
$ 142,046
107,123
(18,847 ) 3,156
233,478

Three Months Ended March 31, 2019
Balance at December 31, 2018 13,295,276
$ 141,170
94,547
(12,013 ) (4,719 ) 218,985
Net income

4,627

4,627
Other comprehensive income, net of taxes

2,489
2,489
Dividend Reinvestment and Stock Purchase Plan 6,368
109

109
Compensation expense relating to restricted stock 12,504
70
70
Common stock dividends, $0.17 per share

(2,262 )

(2,262 )
Balance at March 31, 2019 13,314,148
$ 141,349
96,912
(12,013 ) (2,230 ) 224,018

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

Table of Contents

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended March 31,						Three Months Ended March 31,
	2020			2019			2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:						CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	5,026		4,627		Net income	$	5,240	5,026
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	248			747		Depreciation, amortization, and accretion	308		248
Provision (credit) for loan losses	1,173			(105	)	Provision (credit) for loan losses	(52)		1,173
Deferred income tax provision	28			51
Deferred income tax provision (benefit)						Deferred income tax provision (benefit)	74		28
Increase in cash surrender value of bank owned life insurance	(284		)	(182	)	Increase in cash surrender value of bank owned life insurance	(267)		(284)
Bank owned life insurance mortality benefits in excess of cash surrender value	(316		)	—		Bank owned life insurance mortality benefits in excess of cash surrender value	0		(316)
Realized (gain) loss from equity securities	(333		)	(93	)
Realized (gain) loss from sales of debt securities, available-for-sale	(221		)	18
Realized (gain) loss from sales of premises and equipment	(1		)	—
Realized (gain) loss from sales and impairment of other real estate owned and repossessed assets	(11		)	—
Gain from equity securities						Gain from equity securities	(112)		(333)
Realized gain from sales of debt securities, available-for-sale						Realized gain from sales of debt securities, available-for-sale	0		(221)
Realized gain from sales of premises and equipment						Realized gain from sales of premises and equipment	(5)		(1)

Realized gain from sales and impairment of other real estate owned and repossessed assets						Realized gain from sales and impairment of other real estate owned and repossessed assets	0		(11)
Origination of mortgage loans for sale	(4,890		)	(1,263	)	Origination of mortgage loans for sale	(1,354)		(4,890)
Realized gains from sales of loans	(120		)	(29	)	Realized gains from sales of loans	(43)		(120)
Proceeds from sales of mortgage loans	4,964			1,280		Proceeds from sales of mortgage loans	1,381		4,964
Compensation expense related to restricted stock	33			70		Compensation expense related to restricted stock	93		33
Changes in:						Changes in:
Accrued income receivable	(546		)	(1,072	)
Accrued interest receivable						Accrued interest receivable	(328)		(544)
Other assets	(1,492		)	(129	)	Other assets	1,565		(1,494)
Other liabilities	(1,953		)	(1,597	)	Other liabilities	(2,461)		(1,953)
TOTAL ADJUSTMENTS	(3,721		)	(2,304	)	TOTAL ADJUSTMENTS	(1,201)		(3,721)
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES	1,305			2,323		NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES	4,039		1,305
CASH FLOWS FROM INVESTING ACTIVITIES:						CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of equity securities	646			331		Proceeds from sales of equity securities	0		646
Proceeds from sales of debt securities, available-for-sale	8,786			21,806		Proceeds from sales of debt securities, available-for-sale	0		8,786
Proceeds from maturities and calls of debt securities:						Proceeds from maturities and calls of debt securities:
Available-for-sale	31,022			1,790		Available-for-sale	7,833		31,022
Held-to-maturity	111			506		Held-to-maturity	115		111
Purchases of equity securities	(37		)	(345	)	Purchases of equity securities	(5)		(37)
Purchases of debt securities:						Purchases of debt securities:
Available-for-sale						Available-for-sale	(40,759)		0
Held-to-maturity	(280		)	(3,148	)	Held-to-maturity	0		(280)
Proceeds from maturities of interest-bearing time deposits	—			249
Proceeds from redemption of Federal Reserve Bank stock	—			1

Net increase in loans	(28,523		)	(8,191	)	Net increase in loans	(34,733)		(28,523)

Proceeds from bank owned life insurance mortality benefits	958			—		Proceeds from bank owned life insurance mortality benefits	0		958
Proceeds from sale of other real estate owned and repossessed assets	208			—		Proceeds from sale of other real estate owned and repossessed assets	0		208
Purchases of premises and equipment	(647		)	(335	)	Purchases of premises and equipment	(302)		(647)
Proceeds from sale of premises and equipment	1			—		Proceeds from sale of premises and equipment	5		1
NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES	12,245			12,664

NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES						NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES	(67,846)		12,245
CASH FLOWS FROM FINANCING ACTIVITIES:						CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits	(2,408		)	46,938		Net increase (decrease) in deposits	81,693		(2,408)
Net decrease in short-term borrowings	—			(56,230	)

Principal payments on long-term debt	(5,001		)	(4,055	)	Principal payments on long-term debt	(5,000)		(5,001)
Proceeds from issuance of common stock	21			14		Proceeds from issuance of common stock	8		21
Repurchase of common stock						Repurchase of common stock	(1,140)		0
Proceeds from exercise of stock options	115			—		Proceeds from exercise of stock options	4		115
Cash dividends paid on common stock	(2,247		)	(2,167	)	Cash dividends paid on common stock	(2,344)		(2,247)
NET CASH FLOWS USED IN FINANCING ACTIVITIES	(9,520		)	(15,500	)
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES						NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES	73,221		(9,520)
NET CHANGE IN CASH AND CASH EQUIVALENTS	4,030			(513	)	NET CHANGE IN CASH AND CASH EQUIVALENTS	9,414		4,030
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	20,765			20,040		CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	31,730		20,765
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	24,795		19,527		CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	41,144	24,795

SUPPLEMENTAL CASH FLOW INFORMATION:						SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	2,418			2,607		Interest paid	1,265		2,418

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:						SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:

Right-of-use assets obtained in exchange for lease obligations						Right-of-use assets obtained in exchange for lease obligations	801		0

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

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of Presentation

Basis of Presentation

The accompanying unaudited interim consolidated condensed financial statements include LCNB Corp. ~~("LCNB")~~ and its wholly-owned subsidiaries: LCNB National Bank ~~(the "Bank")~~ and LCNB Risk Management, Inc., its captive insurance company. All material intercompany transactions and balances are eliminated in consolidation.

The unaudited interim consolidated condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and regulations of the ~~Securities and Exchange Commission (the "SEC").~~SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of financial position, results of consolidated operations, and cash flows for the interim periods, as required by Regulation S-X, Rule 10-01.

The consolidated condensed balance sheet as of December 31, ~~2019~~2020 has been derived from the audited consolidated balance sheet as of that date.

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

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, the 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.

Results of operations for the three months ended March 31, ~~2020~~2021 are not necessarily indicative of the results to be expected for the full year ending December 31, ~~2020.~~2021. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies, and financial notes thereto included in LCNB's ~~2019~~2020 Annual Report on Form 10-K filed with the SEC.

Accounting Changes

Financial Accounting Standards ~~Board ("FASB)~~(“FASB”) Accounting Standards Update ~~("ASU"~~(“ASU”) No. ~~2017-04, "Intangibles - Goodwill and Other~~2020-04, "Reference Rate Reform (Topic ~~350)~~848): ~~Simplifying~~Facilitation of the ~~Test for Goodwill Impairment"~~Effects of Reference Rate Reform on Financial Reporting"

ASU No. ~~2017-04~~2020-04 was issued in ~~January 2017~~March 2020 and provides optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying generally accepted accounting principles ("GAAP") to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. LCNB does not expect the guidance in ASU No. 2020-04 will have a material impact on its results of consolidated operations or financial position.

ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans"

ASU No. 2018-14 was issued in August 2018 and was adopted by LCNB ~~as of~~on January 1, 2020. It applies to public and other entities that have goodwill reported in their financial statements. To simplify the subsequent measurement of goodwill, this ASU eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the2021. The amendments in this update ~~an entity should perform its annual,~~modify disclosure requirements for employers that sponsor defined benefit pension or ~~interim, goodwill impairment test by comparing~~other postretirement plans, including the ~~fair value~~deletion, modification, and addition of certain targeted disclosures. The amendments are to be applied on a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocatedretrospective basis to ~~that reporting unit.~~all periods presented upon adoption. Adoption of ASU No. ~~2017-04~~2018-14 did not have a material impact on LCNB's results of consolidated operations or financial position.

ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes"

ASU No. ~~2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement"~~

~~ASU No. 2018-13~~2019-12 was issued in ~~August 2018~~December 2019 and ~~was~~ adopted by LCNB ~~as of~~on January 1, ~~2020.~~2021. It ~~applies~~simplifies the accounting for income taxes by removing certain exceptions to ~~all entities that are required to make disclosures about recurring or nonrecurring fair value measurements. The amendments~~the general principles in ~~this update modify fair value disclosure requirements, including the deletion, modification,~~Topic 740 and ~~addition of~~clarifies and amends certain ~~targeted disclosures.~~other guidance. Adoption of ASU No. ~~2018-13~~2019-12 did not have a material impact on LCNB's results of consolidated operations or financial position.

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 2 - Investment Securities

The amortized cost and estimated fair value of equity and debt securities at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 are summarized as follows (in thousands):


							Amortized Cost		Unrealized Gains	Unrealized Losses	Fair Value
	Amortized Cost		Unrealized Gains	Unrealized Losses	Fair Value
March 31, 2020
March 31, 2021						March 31, 2021
Debt Securities, Available-for-Sale:						Debt Securities, Available-for-Sale:
U.S. Treasury notes	$	2,272	137	—	2,409	U.S. Treasury notes	$	16,186	108	78	16,216
U.S. Agency notes	21,882		821	—	22,703	U.S. Agency notes	75,912		597	1,372	75,137
Corporate bonds						Corporate bonds	1,900		7	14	1,893
U.S. Agency mortgage-backed securities	80,072		2,613	—	82,685	U.S. Agency mortgage-backed securities	95,089		2,244	730	96,603
Municipal securities:						Municipal securities:
Non-taxable	13,254		118	4	13,368	Non-taxable	12,263		202	32	12,433
Taxable	19,732		550	8	20,274	Taxable	35,120		775	558	35,337
	$	137,212	4,239	12	141,439		$	236,470	3,933	2,784	237,619

Debt Securities, Held-to-Maturity:						Debt Securities, Held-to-Maturity:
Municipal securities:						Municipal securities:
Non-taxable	$	24,189	480	21	24,648	Non-taxable	$	21,293	169	0	21,462
Taxable	3,505		2	136	3,371	Taxable	3,402		6	42	3,366
	$	27,694	482	157	28,019		$	24,695	175	42	24,828

December 31, 2019
December 31, 2020						December 31, 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

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 2 - Investment Securities (continued)

Information concerning debt securities with gross unrealized losses at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (dollars in thousands):


	Less than Twelve Months			Twelve Months or Greater
	Fair Value		Unrealized Losses	Fair Value	Unrealized Losses
March 31, 2021
Available-for-Sale:
U.S. Treasury notes	$	8,924	78	0	0
U.S. Agency notes	52,785		1,372	0	0
Corporate bonds	1,186		14	0	0
U.S. Agency mortgage-backed securities	41,801		730	0	0
Municipal securities:
Non-taxable	1,758		32	0	0
Taxable	18,537		558	0	0
	$	124,991	2,784	0	0

Held-to-Maturity:
Municipal securities:
Non-taxable	$	0	0	0	0
Taxable	3,108		42	0	0
	$	3,108	42	0	0

December 31, 2020
Available-for-Sale:
U.S. Treasury notes	$	0	0	0	0
U.S. Agency notes	10,674		33	0	0
Corporate Bonds	679		21	0	0
U.S. Agency mortgage-backed securities	290		1	0	0
Municipal securities:
Non-taxable	38		0	0	0
Taxable	3,063		3	0	0
	$	14,744	58	0	0

Held-to-Maturity:
Municipal securities:
Non-taxable	$	1	0	0	0
Taxable	3,113		37	0	0
	$	3,114	37	0	0

Less than Twelve Months Twelve Months or Greater

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses
March 31, 2020
Available-for-Sale:
U.S. Agency mortgage-backed securities $ —
—
60
—
Municipal securities:

Non-taxable 646
4
—
—
Taxable 868
8
—
—
$ 1,514
12
60
—

Held-to-Maturity:
Municipal securities:
  Non-taxable $ 2,142
16
1,790
5
  Taxable 3,089
136
—
—
$ 5,231
152
1,790
5

December 31, 2019
Available-for-Sale:
U.S. Agency notes $ 3,586
11
11,939
23
U.S. Agency mortgage-backed securities 10,555
10
19,233
233
Municipal securities:

Non-taxable 2,631
2
1,257
12
Taxable 5,067
35
450
—
$ 21,839
58
32,879
268

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

Management has determined that the unrealized losses at March 31, ~~2020~~2021 are primarily due to fluctuations in market interest rates and do not reflect credit quality deterioration of the securities. Because LCNB does not have the intent to sell the investments and it is more likely than not that LCNB will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, LCNB does not consider these investments to be other-than-temporarily impaired.

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 2 - Investment Securities (continued)

Contractual maturities of debt securities at March 31, ~~2020~~2021 were as follows (in thousands). Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations.


	Available-for-Sale			Held-to-Maturity
	Amortized Cost		Fair Value	Amortized Cost	Fair Value
Due within one year	$	8,811	8,932	2,116	2,122
Due from one to five years	42,243		42,853	5,676	5,739
Due from five to ten years	89,298		88,238	2,055	2,089
Due after ten years	1,029		993	14,848	14,878
	141,381		141,016	24,695	24,828
U.S. Agency mortgage-backed securities	95,089		96,603	0	0
	$	236,470	237,619	24,695	24,828

Available-for-Sale Held-to-Maturity

Amortized
Cost

Fair
Value

Amortized
Cost

Fair
Value
Due within one year $ 11,145
11,198
2,472
2,473
Due from one to five years 26,964
27,677
7,349
7,365
Due from five to ten years 19,031
19,879
2,260
2,282
Due after ten years —
—
15,613
15,899
57,140
58,754
27,694
28,019
U.S. Agency mortgage-backed securities 80,072
82,685
—
—
$ 137,212
141,439
27,694
28,019

Debt securities with a market value of ~~$124,314,000~~$192,973,000 and ~~$123,009,000~~$118,599,000 at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, were pledged to secure public deposits and for other purposes required or as permitted by law.

Certain information concerning the sale of debt securities, available-for-sale, for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 was as follows (in thousands):


	Three Months Ended March 31,
		2021		2020
Proceeds from sales		$	0	8,786
Gross realized gains		0		221
Gross realized losses		0		0

Three Months Ended
March 31,
2020 2019
Proceeds from sales 8,786
21,806
Gross realized gains 221
58
Gross realized losses —
76

Realized gains or losses from the sale of securities are computed using the specific identification method.

Equity securities with a readily determinable fair value are carried at fair value, with changes in fair value recognized in other operating income in the consolidated condensed statements of income. Equity securities without a readily determinable fair value are measured at cost minus impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions, as defined, for identical or similar investments of the same issuer. LCNB was not aware of any impairment or observable price change adjustments that needed to be made at March 31, ~~2020~~2021 on its investments in equity securities without a readily determinable fair value.

The amortized cost and estimated fair value of equity securities with a readily determinable fair value at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 are summarized as follows (in thousands):


	March 31, 2020			December 31, 2019			March 31, 2021			December 31, 2020
	Amortized Cost		Fair Value	Amortized Cost	Fair Value		Amortized Cost		Fair Value	Amortized Cost	Fair Value
Mutual funds	$	1,378	1,361	1,371	1,345	Mutual funds	$	1,399	1,385	1,395	1,402
Equity securities	685		675	741	967	Equity securities	778		1,121	778	987
Total equity securities with a readily determinable fair value	$	2,063	2,036	2,112	2,312	Total equity securities with a readily determinable fair value	$	2,177	2,506	2,173	2,389

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 2 - Investment Securities (continued)

Certain information concerning changes in fair value of equity securities with a readily determinable fair value for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 is as follows (in thousands):


	Three Months Ended March 31,
		2021		2020
Net gains recognized		$	112	333
Less net realized gains on equity securities sold		0		559
Net unrealized gains (losses) recognized and still held at period end		$	112	(226)

Three Months Ended
March 31,
2020 2019
Net gains recognized $ 333
93
Net realized gains (losses) on equity securities sold 559
(6 )
Unrealized gains (losses) recognized and still held at period end $ (226 ) 99

Note 3 - Loans

Major classifications of loans at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows (in thousands):


	March 31, 2021		December 31, 2020
Commercial & industrial	$	107,630	100,254
Commercial, secured by real estate	855,894		843,230
Residential real estate	328,265		309,692
Consumer	35,799		36,917
Agricultural	8,698		10,100
Other loans, including deposit overdrafts	346		363
Loans, gross	1,336,632		1,300,556
Deferred origination fees, net	(1,531)		(1,135)
Loans, net of deferred origination fees	1,335,101		1,299,421
Less allowance for loan losses	5,679		5,728
Loans, net	$	1,329,422	1,293,693

March 31, 2020 December 31, 2019
Commercial and industrial $ 85,356
78,306
Commercial, secured by real estate 829,461
804,953
Residential real estate 318,009
322,533
Consumer 28,955
25,232
Agricultural 10,519
11,509
Other loans, including deposit overdrafts 436
1,193
Loans, gross 1,272,736
1,243,726
Deferred origination fees, net (349 ) (275 )
Loans, net of deferred origination fees 1,272,387
1,243,451
Less allowance for loan losses 5,008
4,045
Loans, net $ 1,267,379
1,239,406

Non-accrual, past-due, and accruing restructured loans as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows (in thousands):


	March 31, 2021		December 31, 2020
Non-accrual loans:

Commercial, secured by real estate	$	2,113	2,458
Residential real estate	1,252		1,260


Total non-accrual loans	3,365		3,718
Past-due 90 days or more and still accruing	0		0
Total non-accrual and past-due 90 days or more and still accruing	3,365		3,718
Accruing restructured loans	4,992		5,176
Total	$	8,357	8,894

March 31, 2020 December 31, 2019
Non-accrual loans:
Commercial, secured by real estate $ 2,172
2,467
Residential real estate 657
743
Total non-accrual loans 2,829
3,210
Past-due 90 days or more and still accruing 39
—
Total non-accrual and past-due 90 days or more and still accruing 2,868
3,210
Accruing restructured loans 4,126
6,609
Total $ 6,994
9,819

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

The allowance for loan losses for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 were as follows (in thousands):


																Commercial & Industrial		Commercial, Secured by Real Estate	Residential Real Estate	Consumer	Agricultural	Other	Total

Three Months Ended March 31, 2021															Three Months Ended March 31, 2021
Balance, beginning of year															Balance, beginning of year	$	816	3,903	837	153	28	(9)	5,728
Provision (credit) charged to expenses															Provision (credit) charged to expenses	141		(267)	71	(20)	11	12	(52)
Losses charged off															Losses charged off	0		(2)	(16)	(3)	0	(21)	(42)
Recoveries															Recoveries	0		0	27	1	0	17	45
Balance, end of period															Balance, end of period	$	957	3,634	919	131	39	(1)	5,679

	Commercial & Industrial		Commercial, Secured by Real Estate		Residential Real Estate		Consumer		Agricultural		Other		Total
Three Months Ended March 31, 2020	Three Months Ended March 31, 2020														Three Months Ended March 31, 2020
Balance, beginning of year	$	456	2,924		528		99		34		4		4,045		Balance, beginning of year	$	456	2,924	528	99	34	4	4,045
Provision charged to expenses	159		920		31		41		5		17		1,173
Losses charged off	—		(270	)	(3	)	(12	)	—		(36	)	(321	)
Recoveries	18		—		73		1		—		19		111
Balance, end of period	$	633	3,574		629		129		39		4		5,008

Three Months Ended March 31, 2019
Balance, beginning of year	$	400	2,745		767		87		46		1		4,046
Provision (credit) charged to expenses	51		57		(195	)	(31	)	(5	)	18		(105	)	Provision (credit) charged to expenses	159		920	31	41	5	17	1,173
Losses charged off	—		—		(33	)	—		—		(31	)	(64	)	Losses charged off	0		(270)	(3)	(12)	0	(36)	(321)
Recoveries	—		56		154		21		—		18		249		Recoveries	18		0	73	1	0	19	111
Balance, end of period	$	451	2,858		693		77		41		6		4,126		Balance, end of period	$	633	3,574	629	129	39	4	5,008

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

A breakdown of the allowance for loan losses and the loan portfolio by loan segment at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows (in thousands):


	Commercial & Industrial		Commercial, Secured by Real Estate	Residential Real Estate	Consumer	Agricultural	Other	Total
March 31, 2021
Allowance for loan losses:
Individually evaluated for impairment	$	8	8	11	0	0	0	27
Collectively evaluated for impairment	949		3,626	908	131	39	(1)	5,652
Acquired credit impaired loans	0		0	0	0	0	0	0
Balance, end of period	$	957	3,634	919	131	39	(1)	5,679

Loans:
Individually evaluated for impairment	$	184	6,089	1,606	2	0	0	7,881
Collectively evaluated for impairment	106,449		846,583	325,247	35,922	8,644	147	1,322,992
Acquired credit impaired loans	107		1,999	1,923	0	0	199	4,228
Balance, end of period	$	106,740	854,671	328,776	35,924	8,644	346	1,335,101

December 31, 2020
Allowance for loan losses:
Individually evaluated for impairment	$	8	17	27	0	0	0	52
Collectively evaluated for impairment	808		3,886	810	153	28	(9)	5,676
Acquired credit impaired loans	0		0	0	0	0	0	0
Balance, end of period	$	816	3,903	837	153	28	(9)	5,728

Loans:
Individually evaluated for impairment	$	194	6,613	1,641	5	0	0	8,453
Collectively evaluated for impairment	99,040		833,548	306,138	37,047	10,116	179	1,286,068
Acquired credit impaired loans	362		2,048	2,306	0	0	184	4,900
Balance, end of period	$	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
March 31, 2020
Allowance for loan losses:
Individually evaluated for impairment $ 22
—
12
—
—
—
34
Collectively evaluated for impairment 611
3,574
617
129
39
4
4,974
Acquired credit impaired loans —
—
—
—
—
—
—
Balance, end of period $ 633
3,574
629
129
39
4
5,008

Loans:
Individually evaluated for impairment $ 956
5,355
924
13
—
—
7,248
Collectively evaluated for impairment 83,916
820,535
314,802
29,070
10,535
166
1,259,024
Acquired credit impaired loans 562
2,690
2,593
—
—
270
6,115
Balance, end of period $ 85,434
828,580
318,319
29,083
10,535
436
1,272,387

December 31, 2019
Allowance for loan losses:
Individually evaluated for impairment $ 6
272
17
—
—
—
295
Collectively evaluated for impairment 450
2,652
511
99
34
4
3,750
Acquired credit impaired loans —
—
—
—
—
—
—
Balance, end of period $ 456
2,924
528
99
34
4
4,045

Loans:
Individually evaluated for impairment $ 230
7,432
949
27
—
—
8,638
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
Balance, end of period $ 78,371
804,154
322,855
25,355
11,523
1,193
1,243,451

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

The risk characteristics of LCNB's material loan portfolio segments were as follows:

Commercial ~~and~~& Industrial Loans. LCNB’s commercial ~~and~~& industrial loan portfolio consists of loans for various purposes, including loans to fund working capital requirements (such as inventory and receivables financing) and purchases of machinery and equipment. LCNB offers a variety of commercial ~~and~~& industrial loan arrangements, including term loans, balloon loans, and lines of credit. ~~Most commercial and~~Commercial & industrial loans can have a fixed or variable rate, with maturities ranging from one to ten years. Commercial ~~and~~& industrial loans are offered to businesses and professionals for short and medium terms on both a collateralized and uncollateralized basis. Commercial ~~and~~& industrial loans typically are underwritten on the basis of the borrower’s ability to make repayment from the cash flow of the business. Collateral, when obtained, may include liens on furniture, fixtures, equipment, inventory, receivables, or other assets. As a result, such loans involve complexities, variables, and risks that require thorough underwriting and more robust servicing than other types of loans.

This category includes PPP loans that were authorized under the CARES Act and updated by the Economic Aid Act. The PPP was implemented by the SBA with support from the Department of the Treasury and provided small businesses that were negatively impacted by the COVID-19 pandemic with government guaranteed and potentially forgivable loans that could be used to pay up to eight or twenty-four weeks, depending on the date of the loan, of payroll costs including benefits. Funds could also be used to pay interest on mortgages, rent, utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures. Eligible borrowers can apply for a First Draw or a Second Draw PPP Loan. PPP loans made by LCNB have a maturity of two years if issued prior to June 5, 2020 and five years if issued after June 5, 2020. The loans have an interest rate of 1%. In addition, the SBA pays originating lenders processing fees based on the size of the loan. A borrower who meets certain requirements can request loan forgiveness from the SBA. If loan forgiveness is granted, the SBA will forward the forgiveness amount to the lender. LCNB originated 316 PPP loans with original balances totaling $45.5 million during 2020 and originated an additional 345 loans with original balances totaling $23.6 million during the first quarter 2021. The outstanding balance at March 31, 2021 was $33.3 million.

Commercial, Secured by Real Estate Loans. Commercial real estate loans include loans secured by a variety of commercial, retail, and office buildings, religious facilities, hotels, multifamily (more than four-family) residential properties, construction and land development loans, and other land loans. Commercial real estate loan products generally amortize over five to twenty-five years and are payable in monthly principal and interest installments. Some have balloon payments due within one to ten years after the origination date. The majority have adjustable interest rates with adjustment periods ranging from one to ten years, some of which are subject to established “floor” interest rates.

Commercial real estate loans are underwritten based on the ability of the property, in the case of income producing property, or the borrower’s business to generate sufficient cash flow to amortize the debt. Secondary emphasis is placed upon global debt service, collateral value, financial strength of any and all guarantors, and other factors. Commercial real estate loans are generally originated with a 75% to 85% maximum loan to appraised value ratio, depending upon borrower occupancy.

Residential Real Estate Loans. Residential real estate loans include loans secured by first or second mortgage liens on one to four-family residential properties. Home equity lines of credit and mortgage loans secured by owner-occupied agricultural property are included in this category. First and second mortgage loans are generally amortized over five to thirty years with monthly principal and interest payments. Home equity lines of credit generally have a five year or less draw period with interest only payments followed by a repayment period with monthly payments based on the amount outstanding. LCNB offers both fixed and adjustable rate mortgage loans. Adjustable rate loans are available with adjustment periods ranging between one to ten years and adjust according to an established index plus a margin, subject to certain floor and ceiling rates. Home equity lines of credit have a variable rate based on the Wall Street Journal prime rate plus a margin.

~~LCNB does not originate reverse mortgage loans or residential real estate loans generally considered to be “subprime.”~~

Residential real estate loans are underwritten primarily based on the borrower’s ability to repay, prior credit history, and the value of the collateral. LCNB generally requires private mortgage insurance for first mortgage loans that have a loan to appraised value ratio of greater than 80%.

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

Consumer Loans. LCNB’s portfolio of consumer loans generally includes secured and unsecured loans to individuals for household, family and other personal expenditures. Secured loans include loans to fund the purchase of automobiles, recreational vehicles, boats, and similar acquisitions. Consumer loans made by LCNB generally have fixed rates and terms ranging up to 72 months, depending upon the nature of the collateral, size of the loan, and other relevant factors.

Consumer loans generally have higher interest rates, but pose additional risks of collectibility and loss when compared to certain other types of loans. Collateral, if present, is generally subject to damage, wear, and depreciation. The borrower’s ability to repay is of primary importance in the underwriting of consumer loans.

Agricultural Loans. LCNB’s portfolio of agricultural loans includes loans for financing agricultural production and for financing the purchase of equipment used in the production of agricultural products. LCNB’s agricultural loans are generally secured by farm machinery, livestock, crops, vehicles, or other agricultural-related collateral.

~~Table of Contents~~

~~LCNB CORP. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(Continued)~~

~~Note 3 – Loans (continued)~~

LCNB uses a risk-rating system to quantify loan quality. A loan is assigned to a risk category based on relevant information about the ability of the borrower to service the debt including, but not limited to, current financial information, historical payment experience, credit documentation, public information, and current economic trends. The categories used are:

•Pass – loans categorized in this category are higher quality loans that do not fit any of the other categories described below.

•Other Assets Especially Mentioned ("OAEM") – loans in this category are currently protected but are potentially weak. These loans constitute a risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitute an undue risk in light of the circumstances surrounding a specific asset.

•Substandard – loans in this category are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the possibility that LCNB will sustain some loss if the deficiencies are not corrected.

•Doubtful – loans classified in this category have all the weaknesses inherent in loans classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

A breakdown of the loan portfolio by credit quality indicators at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 is as follows (in thousands):


	Pass		OAEM	Substandard	Doubtful	Total
March 31, 2021
Commercial & industrial	$	105,070	0	1,670	0	106,740
Commercial, secured by real estate	826,296		8,999	19,376	0	854,671
Residential real estate	325,284		597	2,895	0	328,776
Consumer	35,924		0	0	0	35,924
Agricultural	8,644		0	0	0	8,644
Other	346		0	0	0	346
Total	$	1,301,564	9,596	23,941��	0	1,335,101

December 31, 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

Pass OAEM Substandard Doubtful Total
March 31, 2020
Commercial & industrial $ 83,816
—
1,618
—
85,434
Commercial, secured by real estate 815,998
2,467
10,115
—
828,580
Residential real estate 313,270
1,795
3,254
—
318,319
Consumer 29,078
—
5
—
29,083
Agricultural 10,513
—
22
—
10,535
Other 436
—
—
—
436
Total $ 1,253,111
4,262
15,014
—
1,272,387

December 31, 2019

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

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

A loan portfolio aging analysis at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 is as follows (in thousands):


	30-59 Days Past Due		60-89 Days Past Due	Greater Than 90 Days Past Due	Total Past Due	Current	Total Loans Receivable	Total Loans Greater Than 90 Days and Accruing
March 31, 2021
Commercial & industrial	$	0	0	0	0	106,740	106,740	0
Commercial, secured by real estate	834		0	901	1,735	852,936	854,671	0
Residential real estate	586		0	532	1,118	327,658	328,776	0
Consumer	3		0	0	3	35,921	35,924	0
Agricultural	0		0	0	0	8,644	8,644	0
Other	28		0	0	28	318	346	0
Total	$	1,451	0	1,433	2,884	1,332,217	1,335,101	0

December 31, 2020
Commercial & industrial	$	0	0	0	0	99,596	99,596	0
Commercial, secured by real estate	16		0	1,476	1,492	840,717	842,209	0
Residential real estate	497		219	675	1,391	308,694	310,085	0
Consumer	4		1	0	5	37,047	37,052	0
Agricultural	0		0	0	0	10,116	10,116	0
Other	60		0	0	60	303	363	0
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
Past Due

Total
Past Due
Current
Total Loans
Receivable

Total Loans Greater Than
90 Days and
Accruing
March 31, 2020
Commercial & industrial $ 1,465
—
—
1,465
83,969
85,434
—
Commercial, secured by real estate 261
511
1,092
1,864
826,716
828,580
—
Residential real estate 2,398
23
461
2,882
315,437
318,319
39
Consumer 19
1
—
20
29,063
29,083
—
Agricultural 22
—
—
22
10,513
10,535
—
Other 67
—
—
67
369
436
—
Total $ 4,232
535
1,553
6,320
1,266,067
1,272,387
39

December 31, 2019

Commercial & industrial $ 283
—
—
283
78,088
78,371
—
Commercial, secured by real estate 339
—
1,171
1,510
802,644
804,154
—
Residential real estate 1,573
260
423
2,256
320,599
322,855
—
Consumer 27
9
—
36
25,319
25,355
—
Agricultural —
—
—
—
11,523
11,523
—
Other 930
—
—
930
263
1,193
—
Total $ 3,152
269
1,594
5,015
1,238,436
1,243,451
—

Impaired loans, including acquired credit impaired loans, at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows (in thousands):


	March 31, 2020				December 31, 2019				March 31, 2021				December 31, 2020
	Recorded Investment		Unpaid Principal Balance	Related Allowance	Recorded Investment	Unpaid Principal Balance	Related Allowance		Recorded Investment		Unpaid Principal Balance	Related Allowance	Recorded Investment	Unpaid Principal Balance	Related Allowance
With no related allowance recorded:								With no related allowance recorded:
Commercial & industrial	$	562	862	—	711	1,253	—	Commercial & industrial	$	107	373		362	646
Commercial, secured by real estate	7,951		8,459	—	8,625	9,373	—	Commercial, secured by real estate	6,471		7,476		6,050	6,735
Residential real estate	3,185		3,655	—	3,118	3,651	—	Residential real estate	3,225		3,658		3,261	3,695
Consumer	9		9	—	10	10	—	Consumer	2		2		4	4
Agricultural	—		—	—	—	—	—	Agricultural	0		0		0	0
Other	270		391	—	263	392	—	Other	199		297		184	297
Total	$	11,977	13,376	—	12,727	14,679	—	Total	$	10,004	11,806		9,861	11,377

With an allowance recorded:								With an allowance recorded:
Commercial & industrial	$	956	956	22	230	235	6	Commercial & industrial	$	184	190	8	194	199	8
Commercial, secured by real estate	94		95	—	2,338	2,485	272	Commercial, secured by real estate	1,617		1,617	8	2,611	2,908	17
Residential real estate	332		332	12	549	549	17	Residential real estate	304		304	11	686	687	27
Consumer	4		4	—	17	17	—	Consumer	0		0	0	1	1	0
Agricultural	—		—	—	—	—	—	Agricultural	0		0	0	0	0	0
Other	—		—	—	—	—	—	Other	0		0	0	0	0	0
Total	$	1,386	1,387	34	3,134	3,286	295	Total	$	2,105	2,111	27	3,492	3,795	52

Total:								Total:
Commercial & industrial	$	1,518	1,818	22	941	1,488	6	Commercial & industrial	$	291	563	8	556	845	8
Commercial, secured by real estate	8,045		8,554	—	10,963	11,858	272	Commercial, secured by real estate	8,088		9,093	8	8,661	9,643	17
Residential real estate	3,517		3,987	12	3,667	4,200	17	Residential real estate	3,529		3,962	11	3,947	4,382	27
Consumer	13		13	—	27	27	—	Consumer	2		2	0	5	5	0
Agricultural	—		—	—	—	—	—	Agricultural	0		0	0	0	0	0
Other	270		391	—	263	392	—	Other	199		297	0	184	297	0
Total	$	13,363	14,763	34	15,861	17,965	295	Total	$	12,109	13,917	27	13,353	15,172	52

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

The following presents information related to the average recorded investment and interest income recognized on impaired loans, including acquired credit impaired loans, for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 (in thousands):


							2021			2020
							Average Recorded Investment		Interest Income Recognized	Average Recorded Investment	Interest Income Recognized

	2020			2019
	Average Recorded Investment		Interest Income Recognized	Average Recorded Investment	Interest Income Recognized
Three Months Ended March 31,						Three Months Ended March 31,
With no related allowance recorded:						With no related allowance recorded:
Commercial & industrial	$	637	264	767	7	Commercial & industrial	$	235	25	637	264
Commercial, secured by real estate	9,823		344	18,302	199	Commercial, secured by real estate	6,794		119	9,823	344
Residential real estate	3,289		92	3,916	47	Residential real estate	3,448		66	3,289	92
Consumer	18		—	13	—	Consumer	4		0	18	0
Agricultural	—		—	—	—	Agricultural	0		0	0	0
Other	266		7	340	9	Other	191		15	266	7
Total	$	14,033	707	23,338	262	Total	$	10,672	225	14,033	707

With an allowance recorded:						With an allowance recorded:
Commercial & industrial	$	839	10	259	4	Commercial & industrial	$	189	3	839	10
Commercial, secured by real estate	95		2	244	12	Commercial, secured by real estate	1,617		17	95	2
Residential real estate	339		5	622	8	Residential real estate	307		4	339	5
Consumer	5		—	22	—	Consumer	0		0	5	0
Agricultural	—		—	—	—	Agricultural	0		0	0	0
Other	—		—	—	—	Other	0		0	0	0
Total	$	1,278	17	1,147	24	Total	$	2,113	24	1,278	17

Total:						Total:
Commercial & industrial	$	1,476	274	1,026	11	Commercial & industrial	$	424	28	1,476	274
Commercial, secured by real estate	9,918		346	18,546	211	Commercial, secured by real estate	8,411		136	9,918	346
Residential real estate	3,628		97	4,538	55	Residential real estate	3,755		70	3,628	97
Consumer	23		—	35	—	Consumer	4		0	23	0
Agricultural	—		—	—	—	Agricultural	0		0	0	0
Other	266		7	340	9	Other	191		15	266	7
Total	$	15,311	724	24,485	286	Total	$	12,785	249	15,311	724

Of the interest income recognized on impaired loans during the three months ended March 31, 2021 and 2020, approximately $0 and ~~2019, approximately~~ $10,000, ~~and $0,~~ respectively, were recognized on a cash basis.

From time to time, the terms of certain loans are modified as troubled debt restructurings ("TDRs") where concessions are granted to borrowers experiencing financial difficulties. The modification of the terms of such loans may have included one, or a combination of, the following: a temporary or permanent reduction of the stated interest rate of the loan, an increase in the stated rate of interest lower than the current market rate for new debt with similar risk, forgiveness of principal, an extension of the maturity date, or a change in the payment terms.

Loan modifications that were classified as TDRs during the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 were as follows (dollars in thousands):


												2021					2020
												Number of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance		Number of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance

	2020					2019
	Number of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance		Number of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance
Three Months Ended March 31,	Three Months Ended March 31,										Three Months Ended March 31,
Commercial and industrial	1	$	4	$	5	—	$	—	$	—
Commercial, secured by real estate	—	—		—		2	258		258
Commercial & industrial											Commercial & industrial	0	$	0	$	0	1	$	4	$	5

Residential real estate	—	—		—		2	54		54		Residential real estate	1	21		21		0	0		0

Total	1	$	4	$	5	4	$	312	$	312	Total	1	$	21	$	21	1	$	4	$	5

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

Post-modification balances, atas of the dates of modification, of newly restructured troubled debt by type of modification for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 were as follows (in thousands):



	Term Modification		Rate Modification	Interest Only	Principal Forgiveness	Combination	Total Modifications







Three Months Ended March 31, 2021


Residential real estate	$	0	0	0	0	21	21

Total	$	0	0	0	0	21	21








Three Months Ended March 31, 2020
Commercial & industrial	$	0	0	0	0	5	5



Total	$	0	0	0	0	5	5

Term Modification Rate Modification Interest Only Principal Forgiveness Combination Total Modifications
Three Months Ended March 31, 2020
Commercial & industrial $ —
—
—
—
5
5
Total $ —
—
—
—
5
5

Three Months Ended March 31, 2019
Commercial, secured by real estate $ —
—
—
—
258
258
Residential real estate 54
—
—
—
—
54
Total $ 54
—
—
—
258
312

LCNB is not committed to lend additional funds to borrowers whose loan terms were modified in a troubled debt restructuring.

There were no0 troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the three months ended March 31, ~~2020~~2021 and ~~2019 and that remained in default at period end.~~2020.

All troubled debt restructurings are considered impaired loans. The allowance for loan losses on such restructured loans is based on the present value of future expected cash flows.

Information concerning loans that were modified during the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 and that were determined to be troubled debt restructurings follows (in thousands):


	2021		2020
Impaired loans without a valuation allowance	$	21	5
Impaired loans with a valuation allowance	0		0

2020 2019
Impaired loans without a valuation allowance $ 5
312
Impaired loans with a valuation allowance —
—

The CARES Act includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances (“Section 4013”). To be eligible under Section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. ~~As of March 31,~~The Consolidated Appropriations Act, 2021 was signed into law on December 20, 2020 ~~LCNB has not made~~and, among other provisions, extended the ~~election under the CARES Act.~~provisions in Section 4013 to January 1, 2022.

In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement on April 7, 2020 that, in consultation with the ~~Financial Accounting Standards Board,~~FASB, confirmed that, for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under ASC Subtopic 310-40. This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.

The carrying value of loans that remain on modified terms under the guidance of Section 4013 totaled $18,857,000 and $19,023,000 at March 31, 2021 and December 31, 2020, respectively. The carrying value of loans that remain on modified terms under the guidance of the revised interagency statement totaled $781,000 and $1,553,000 at March 31, 2021 and December 31, 2020, respectively.

Mortgage loans sold to and serviced for investors are not included in the accompanying consolidated condensed balance sheets. The unpaid principal balances of those loans at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 were approximately ~~$94,805,000~~$127,290,000 and ~~$93,596,000,~~$137,188,000, respectively.

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

The total recorded investment in residential consumer mortgage loans secured by residential real estate that were in the process of foreclosure at March 31, ~~2020~~2021 was ~~$224,000.~~$481,000.

~~Table of Contents~~

~~LCNB CORP. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(Continued)~~

Note 4 - Acquired Credit Impaired Loans

Loans acquired through 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.

Impaired loans acquired are accounted for under ASC 310-30. Factors considered in evaluating whether an acquired loan was impaired include delinquency status and history, updated borrower credit status, collateral information, and updated 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.

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 4 – Acquired Credit Impaired Loans (continued)

The following table provides at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 the major classifications of acquired credit impaired loans that are accounted for in accordance with ASC 310-30 (in thousands):


	March 31, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Acquired from First Capital Bancshares, Inc.				Acquired from First Capital Bancshares, Inc.
Commercial & industrial	$	5	5	Commercial & industrial	$	0	1
Commercial, secured by real estate	—		792	Commercial, secured by real estate	0		0
Residential real estate	455		551	Residential real estate	442		449
Other loans, including deposit overdrafts	—		—	Other loans, including deposit overdrafts	0		0
Loans, gross	460		1,348	Loans, gross	442		450
Less allowance for loan losses	—		—	Less allowance for loan losses	0		0
Loans, net	$	460	1,348	Loans, net	$	442	450

Acquired from Eaton National Bank & Trust Co.				Acquired from Eaton National Bank & Trust Co.
Commercial & industrial	$	423	423	Commercial & industrial	$	0	249
Commercial, secured by real estate	796		815	Commercial, secured by real estate	587		601
Residential real estate	675		685	Residential real estate	540		595
Other loans, including deposit overdrafts	270		263	Other loans, including deposit overdrafts	199		184
Loans, gross	2,164		2,186	Loans, gross	1,326		1,629
Less allowance for loan losses	—		—	Less allowance for loan losses	0		0
Loans, net	$	2,164	2,186	Loans, net	$	1,326	1,629

Acquired from BNB Bancorp, Inc.				Acquired from BNB Bancorp, Inc.
Commercial & industrial	$	—	—	Commercial & industrial	$	0	0
Commercial, secured by real estate	1,205		1,219	Commercial, secured by real estate	758		780
Residential real estate	95		100	Residential real estate	83		85
Other loans, including deposit overdrafts	—		—	Other loans, including deposit overdrafts	0		0
Loans, gross	1,300		1,319	Loans, gross	841		865
Less allowance for loan losses	—		—	Less allowance for loan losses	0		0
Loans, net	$	1,300	1,319	Loans, net	$	841	865

Acquired from Columbus First Bancorp, Inc.				Acquired from Columbus First Bancorp, Inc.
Commercial & industrial	$	134	283	Commercial & industrial	$	107	112
Commercial, secured by real estate	689		705	Commercial, secured by real estate	654		667
Residential real estate	1,368		1,382	Residential real estate	858		1,177
Other loans, including deposit overdrafts	—		—	Other loans, including deposit overdrafts	0		0
Loans, gross	2,191		2,370	Loans, gross	1,619		1,956
Less allowance for loan losses	—		—	Less allowance for loan losses	0		0
Loans, net	$	2,191	2,370	Loans, net	$	1,619	1,956

Total				Total
Commercial & industrial	$	562	711	Commercial & industrial	$	107	362
Commercial, secured by real estate	2,690		3,531	Commercial, secured by real estate	1,999		2,048
Residential real estate	2,593		2,718	Residential real estate	1,923		2,306
Other loans, including deposit overdrafts	270		263	Other loans, including deposit overdrafts	199		184
Loans, gross	6,115		7,223	Loans, gross	4,228		4,900
Less allowance for loan losses	—		—	Less allowance for loan losses	0		0
Loans, net	$	6,115	7,223	Loans, net	$	4,228	4,900

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 4 – Acquired Credit Impaired Loans (continued)

The following table provides the outstanding balance and related carrying amount for acquired credit impaired loans at the dates indicated (in thousands):


	March 31, 2021		December 31, 2020
Outstanding balance	$	5,386	6,128
Carrying amount	4,228		4,900

March 31, 2020 December 31, 2019
Outstanding balance $ 7,537
9,139
Carrying amount 6,115
7,223

Activity during the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 for the accretable discount related to acquired credit impaired loans is as follows (in thousands):


	Three Months Ended March 31,
		2021		2020
Accretable discount at beginning of period		$	182	480

Reclassification from nonaccretable discount to accretable discount		12		333

Accretion		(71)		(495)
Accretable discount at end of period		$	123	318

Three Months Ended March 31,
2020 2019
Accretable discount at beginning of period 480
743
Reclassification from nonaccretable discount to accretable discount 333
—
Disposals —
1
Accretion (495 ) (25 )
Accretable discount at end of period 318
719

Note 5 - Affordable Housing Tax Credit Limited Partnership

LCNB is a limited partner in limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit ~~("LIHTC")~~ pursuant to Section 42 of the Internal Revenue Code. The purpose of the investments is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants.

The following table presents the balances of LCNB's affordable housing tax credit investments and related unfunded commitments at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 (in thousands):


	March 31, 2021		December 31, 2020
Affordable housing tax credit investment	$	11,950	12,000
Less amortization	1,538		1,320
Net affordable housing tax credit investment	$	10,412	10,680

Unfunded commitment	$	8,187	8,237

March 31,
2020 December 31,
2019
Affordable housing tax credit investment $ 7,000
7,000
Less amortization 936
810
Net affordable housing tax credit investment $ 6,064
6,190

Unfunded commitment $ 4,344
4,596

The net affordable housing tax credit investment is included in other assets and the unfunded commitment is included in accrued interest and other liabilities in the consolidated condensed balance sheets.

LCNB expects to fund the unfunded commitment over 1114 years.

Table of Contents

LCNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 5 – Affordable Housing Tax Credit Limited Partnership (continued)

The following table presents other information relating to LCNB's affordable housing tax credit investments for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 (in thousands):


	Three Months Ended March 31,
		2021		2020
Tax credits and other tax benefits recognized		$	260	159
Tax credit amortization expense included in provision for income taxes		217		126

2020 2019
Tax credits and other tax benefits recognized $ 159
84
Tax credit amortization expense included in provision for income taxes 126
45

Note 6 – Borrowings

Borrowings at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows (dollars in thousands):


	March 31, 2021				December 31, 2020
	Amount		Rate		Amount		Rate


FHLB long-term advances	$	17,000	2.81	%	$	22,000	2.68	%
	$	17,000	2.81	%	$	22,000	2.68	%

March 31, 2020 December 31, 2019
Amount Rate
Amount Rate
FHLB long-term advances 35,996
2.63 % 40,994
2.55 %
$ 35,996
2.63 % $ 40,994
2.55 %

All advances from the ~~Federal Home Loan Bank ("FHLB")~~FHLB of Cincinnati ~~both long-term and short-term,~~ are secured by a blanket pledge of LCNB's 1-4 family first lien mortgage loans in the amount of approximately ~~$280~~$296 million and ~~$283~~$276 million at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. ~~Additionally, LCNB is required to hold minimum levels of FHLB stock, based on the outstanding borrowings.~~ Total remaining borrowing capacity at March 31, ~~2020~~2021 was approximately ~~$93.4~~$172.6 million. ~~One of the factors limiting remaining borrowing capacity is ownership of FHLB stock. LCNB could increase its remaining borrowing capacity by purchasing additional FHLB stock.~~

Note 7 - Leases

~~LCNB has capitalized operating leases~~Lease expenses for ~~its Otterbein, Fairfield, Barron Street, and Worthington~~ offices for the land at its Oxford and Oakwood offices, and for certain office and ATM equipment. The Oakwood lease has a remaining term of seventeen years with options to renew for six additional periods of five years each. The Oxford lease has a remaining term of forty-one years with no renewal options. The other leases have remaining terms of less than one year up to six years, some of which contain options to renew the leases for additional five-year periods.

~~Right-of-use assets represent LCNB's right to use the underlying assets for their lease terms and lease liabilities represent the obligation to make lease payments. They~~ are recognized using the present value of lease payments over the lease terms. The discount rate is LCNB's incremental borrowing rate for periods similar to the respective lease terms. LCNB management is reasonably certain that it will exercise the renewal options for the offices named above and these additional terms have been included in the ~~calculation~~consolidated condensed statements of ~~the right-of-use assets~~income in net occupancy expense and ~~the~~ lease ~~liabilities. The~~expenses for equipment and ATMs are included in equipment expense. Components of lease expense for the Fairfield office is for a period of one year and LCNB management has elected the short-term measurement and recognition exception permitted by ASC 842 and has not calculated a right-of-use asset or lease liability for this office.three months ended March 31, 2021 were as follows (in thousands):


	Three Months Ended March 31,
		2021		2020
Operating lease expense		$	215	153
Short-term lease expense		14		12
Variable lease expense		1		3
Other		3		1
Total lease expense		$	233	169

Other information related to leases at March 31, 2021 were as follows (dollars in thousands):


Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	181
Right-of-use assets obtained in exchange for new operating lease liabilities	$	801
Weighted average remaining lease term in years for operating leases	31.6
Weighted average discount rate for operating leases	3.35		%

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

~~Note 7 – Leases (continued)~~

Lease expenses for offices are included in the consolidated condensed statements of income in occupancy expense, net and lease expenses for equipment and ATMs are included in equipment expenses. Components of lease expense for the three months ended March 31, 2020 were as follows (in thousands):

Three Months Ended March 31,
2020 2019
Operating lease expense $ 153
140
Short-term lease expense 12
12
Variable lease expense 3
2
Other 1
5
Total lease expense $ 169
159

~~Other information related to leases at March 31, 2020 were as follows (dollars in thousands):~~

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 120
Right-of-use assets obtained in exchange for new operating lease liabilities $ 313
Weighted average remaining lease term in years for operating leases 37.4
Weighted average discount rate for operating leases 3.65 %

Note 8 – Income Taxes

A reconciliation between the statutory income tax and LCNB's effective tax rate on income from continuing operations follows:


	Three Months Ended March 31,
		2021		2020
Statutory tax rate		21.0	%	21.0	%
Increase (decrease) resulting from:
Tax exempt interest		(0.7)	%	(1.0)	%
Tax exempt income on bank owned life insurance		(0.9)	%	(2.2)	%
Captive insurance premium income		(0.7)	%	(0.8)	%
Tax benefit from certain provisions of the CARES Act		0	%	(3.4)	%
Other, net		(0.6)	%	(0.7)	%
Effective tax rate		18.1	%	12.9	%

Three Months Ended March 31,
2020 2019
Statutory tax rate 21.0 % 21.0 %
Increase (decrease) resulting from:

Tax exempt interest (1.0 )% (1.9 )%
Tax exempt income on bank owned life insurance (2.2 )% (0.7 )%
Captive insurance premium income (0.8 )% (0.9 )%
Tax benefit from certain provisions of the CARES Act (3.4 )% — %
Other, net (0.7 )% (0.6 )%
Effective tax rate 12.9 % 16.9 %

Note 9 - Commitments and Contingent Liabilities

LCNB is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. They involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. Exposure to credit loss in the event of nonperformance by the other parties to financial instruments for commitments to extend credit is represented by the contract amount of those instruments.

The Bounce Protection product, a customer deposit overdraft program, is offered as a service and does not constitute a contract between the customer and LCNB.

~~Table of Contents~~

~~LCNB CORP. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(Continued)~~

~~Note 9 – Commitments and Contingent Liabilities (continued)~~

LCNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Financial instruments whose contract amounts represent off-balance-sheet credit risk at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows (in thousands):


	March 31, 2021		December 31, 2020
Commitments to extend credit:
Commercial loans	$	101,614	24,581
Other loans
Fixed rate	14,534		14,668
Adjustable rate	3,743		4,386
Unused lines of credit:
Fixed rate	28,440		24,205
Adjustable rate	134,773		133,073
Unused overdraft protection amounts on demand and NOW accounts	16,549		16,471
Standby letters of credit	55		243
Total commitments	$	299,708	217,627

March 31, 2020 December 31, 2019
Commitments to extend credit:
Commercial loans $ 99,330
50,235
Other loans

Fixed rate 24,518
4,431
Adjustable rate 9,360
1,199
Unused lines of credit:

Fixed rate 24,245
28,796
Adjustable rate 166,492
174,577
Unused overdraft protection amounts on demand and NOW accounts 16,288
16,304
Standby letters of credit 879
883
Total commitments $ 341,112
276,425

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 9 – Commitments and Contingent Liabilities (continued)

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Unused lines of credit include amounts not drawn on line of credit loans. Commitments to extend credit and unused lines of credit generally have fixed expiration dates or other termination clauses.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees generally are fully secured and have varying maturities.

LCNB evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, residential realty, income-producing commercial property, agricultural property, and property, plant, and equipment.

~~Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees generally are fully secured and have varying maturities.~~

Capital expenditures include the construction or acquisition of new office buildings, improvements to LCNB's offices, purchases of furniture and equipment, and additions or improvements to LCNB's information technology system. Commitments outstanding for capital expenditures as of March 31, ~~2020~~2021 totaled approximately ~~$1,780,000.~~$1,840,000.

Management believes that LCNB has sufficient liquidity to fund its lending and capital expenditure commitments.

LCNB and its subsidiaries are parties to various claims and proceedings arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings and claims will not be material to the consolidated financial position or results of operations.

~~Table of Contents~~

~~LCNB CORP. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(Continued)~~

Note 10 – Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 were as follows (in thousands):


	Three Months Ended March 31,
		Unrealized Gains and Losses on Available-for-Sale Securities		Changes in Pension Plan Assets and Benefit Obligations	Total
2021
Balance at beginning of period		$	4,349	(306)	4,043
Before reclassifications		(3,441)		1	(3,440)
Reclassifications		0		0	0
Balance at end of period		$	908	(305)	603

2020
Balance at beginning of period		$	857	(184)	673
Before reclassifications		2,658		0	2,658
Reclassifications		(175)		0	(175)
Balance at end of period		$	3,340	(184)	3,156

Three Months Ended March 31,
Unrealized Gains and Losses on Available-for-Sale Securities Changes in Pension Plan Assets and Benefit Obligations Total
2020
Balance at beginning of period $ 857
(184 ) 673
Before reclassifications 2,658
—
2,658
Reclassifications (175 ) —
(175 )
Balance at end of period $ 3,340
(184 ) 3,156

2019

Balance at beginning of period $ (4,631 ) (88 ) (4,719 )
Before reclassifications 2,475
—
2,475
Reclassifications 14
—
14
Balance at end of period $ (2,142 ) (88 ) (2,230 )

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 10 – Accumulated Other Comprehensive Income (Loss), continued

Reclassifications out of accumulated other comprehensive income (loss) during the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 and the affected line items in the consolidated condensed statements of income were as follows (in thousands):


	Three Months Ended March 31,			Affected Line Item in the Consolidated Condensed Statements of Income
		2021			2020
Realized gains from sales of debt securities, available-for-sale		$	0	221		Net gains from sales of debt securities, available-for-sale
Income tax expense		0		46		Provision for income taxes
Reclassification adjustment, net of taxes		$	0	175

Three Months Ended
March 31, Affected Line Item in the Consolidated Condensed Statements of Income
2020 2019
Realized gains (losses) from sales of debt securities, available-for-sale $ 221
(18 ) Net gains (losses) from sales of debt securities, available-for-sale
Income tax expense (benefit) 46
(4 ) Provision for income taxes
Reclassification adjustment, net of taxes $ 175
(14 )

Note 11 – Retirement Plans

LCNB participates in a noncontributory defined benefit multi-employer retirement plan that covers substantially all regular full-time employees hired before January 1, 2009. Employees hired before this date who received a benefit reduction under certain amendments to the defined benefit retirement plan receive an automatic contribution of 5% or 7% of their annual compensation, depending on the sum of an employee's age and vesting service, into their defined contribution plans (401(k) plans), regardless of the contributions made by the employees. These contributions are made annually and these employees do not receive any employer matches to their 401(k) contributions.

Employees hired on or after January 1, 2009 receive a 50% employer match on their contributions into the 401(k) plan, up to a maximum LCNB contribution of 3% of each individual employee's annual compensation.

~~LCNB CORP. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(Continued)~~

~~Note 11 – Retirement Plans (continued)~~

Funding and administrative costs of the qualified noncontributory defined benefit retirement plan and 401(k) plan charged to pension and other employee benefits in the consolidated condensed statements of income for the three-month period ended March 31, ~~2020~~2021 and ~~2019~~2020 were as follows (in thousands):


	Three Months Ended March 31,
		2021		2020
Qualified noncontributory defined benefit retirement plan		$	279	270
401(k) plan		160		165

Three Months Ended
March 31,
2020 2019
Qualified noncontributory defined benefit retirement plan $ 270
256
401(k) plan 165
143

Certain highly compensated former employees participate in a nonqualified defined benefit retirement plan. The nonqualified plan ensures that participants receive the full amount of benefits to which they would have been entitled under the noncontributory defined benefit retirement plan in the absence of limits on benefit levels imposed by certain sections of the Internal Revenue Code. This plan is limited to the original participants and no new participants have been added.

The components of net periodic pension cost of the nonqualified defined benefit retirement plan for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 are summarized as follows (in thousands):


	Three Months Ended March 31,
		2021		2020

Interest cost		$	13	16
Amortization of unrecognized net loss		2		0

Net periodic pension cost		$	15	16

Three Months Ended
March 31,
2020 2019
Service cost $ —
—
Interest cost 16
18
Amortization of unrecognized net loss —
—
Net periodic pension cost $ 16
18

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 11 – Retirement Plans (continued)

Amounts recognized in accumulated other comprehensive income, ~~(loss),~~ net of tax, at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 for the nonqualified defined benefit retirement plan consists of (in thousands):


	March 31, 2021		December 31, 2020
Net actuarial loss	$	304	306
Past service cost	0		0
Total recognized, net of tax	$	304	306

March 31, 2020 December 31, 2019
Net actuarial loss $ 184
184
Past service cost —
—
Total recognized, net of tax $ 184
184

Note 12 – Stock Based Compensation

LCNB established an Ownership Incentive Plan (the "2002 Plan") during 2002 that allowed for stock-based awards to eligible employees, as determined by the Board of Directors. The awards were made in the form of stock options, share awards, and/or appreciation rights. The 2002 Plan provided for the issuance of up to 200,000 shares of common stock. Options granted under the 2002 Plan vested ratably over a five-year period and expired ten years after the date of grant. The 2002 Plan expired on April 16, 2012. Any outstanding unexercised options, however, ~~continue~~continued to be exercisable in accordance with their terms.

The 2015 Ownership Incentive Plan (the "2015 Plan") was ratified 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 of common stock. The 2015 Plan will terminate on April 28, 2025 and is subject to earlier termination by the Compensation Committee.

Stock-based awards may be in the form of treasury shares or newly issued shares.

LCNB has not granted stock option awards since 2012.

The following table summarizes stock option activity for the periods indicated:


	Three Months Ended March 31,
	2021				2020
	Options	Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands) (1)	Options	Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands) (1)
Outstanding, January 1,	311	$	12.60		9,904	$	11.96
Granted	0	0			0	0
Exercised	(311)	12.60			(9,593)	11.94
Expired	0	0			0	0
Outstanding, March 31,	0	0		0	311	12.60		0
Exercisable, March 31,	0	0		0	311	12.60		0
(1) Aggregate Intrinsic Value is defined as the amount by which the current market value of the underlying stock exceeds the exercise price of the option.

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 12 – Stock Based Compensation (continued)

~~LCNB has not granted stock option awards since 2012. Options granted to date under the 2002 Plan vest ratably over a~~ ~~five-year period and expire~~ ~~ten~~ ~~years after the date of grant. Stock options outstanding at March 31, 2020 were as follows:~~

Outstanding Stock Options Exercisable Stock Options
Exercise Price Range Number
Weighted Average
Exercise
Price

Weighted Average Remaining Contractual
Life (Years)
Number Weighted Average Exercise Price
Weighted Average Remaining Contractual
Life (Years)
$11.00 - $12.99 311
$ 12.60
1.9 311
$ 12.60
1.9

~~The following table summarizes stock option activity for the periods indicated:~~

Three Months Ended March 31,
2020 2019
Options
Weighted Average Exercise
Price
Aggregate Intrinsic Value (in thousands) (1) Options
Weighted Average Exercise
Price
Aggregate Intrinsic Value (in thousands) (1)
Outstanding, January 1, 9,904
$ 11.96
13,278
$ 11.98

Granted —
—
—
—

Exercised (9,593 ) 11.94
—
—

Expired —
—
—
—

Outstanding, March 31, 311
12.60
—
13,278
11.98
68,593
Exercisable, March 31, 311
12.60
—
13,278
11.98
68,593
(1) Aggregate Intrinsic Value is defined as the amount by which the current market value of the underlying stock exceeds the exercise price of the option.

The following table provides information related to stock options exercised during the periods indicated (in thousands):


	Three Months Ended March 31,
	2021		2020
Intrinsic value of options exercised	$	1	46
Cash received from options exercised	4		115
Tax benefit realized from options exercised	0		5

Three Months Ended March 31,
2020 2019
Intrinsic value of options exercised $ 46
—
Cash received from options exercised 115
—
Tax benefit realized from options exercised 5
—

~~No compensation costs related to option awards were recognized during 2020 or 2019.~~

~~Table of Contents~~

~~LCNB CORP. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(Continued)~~

~~Note 12 – Stock Based Compensation (continued)~~

Restricted stock awards granted under the 2015 Plan were as follows:


	2021			2020
	Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value
Outstanding, January 1,	28,596	$	17.42	17,752	$	18.03
Granted	26,321	16.85		19,211	16.87
Vested	(8,817)	17.55		(3,818)	18.45
Forfeited	(122)	16.87		(3,550)	16.90
Outstanding, March 31,	45,978	$	17.07	29,595	$	17.37

2020 2019

Shares Weighted Average Grant Date Fair Value

Shares Weighted Average Grant Date Fair Value
Outstanding, January 1, 17,752
$ 18.03
16,958
$ 18.94
Granted 19,211
16.87
12,504
16.95
Vested (3,818 ) 18.45
(2,795 ) 20.01
Forfeited (3,550 ) 16.90
—
—
Outstanding, March 31, 29,595
$ 17.37
26,667
$ 17.89

The following table presents expense recorded in salaries and employee benefits for restricted stock awards and the related tax information for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 (in thousands):


	Three Months Ended March 31,
		2021		2020
Restricted stock expense		$	93	33
Tax effect		20		7

Three Months Ended
March 31,
2020 2019
Restricted stock expense $ 33
70
Tax effect 7
15

Unrecognized compensation expense for restricted stock awards was ~~$514,000~~$761,000 at March 31, ~~2020~~2021 and is expected to be recognized over a period of 4.9 years.

Note 13 – Earnings per Common Share

LCNB has granted restricted stock awards with non-forfeitable dividend rights, which are considered participating securities. Accordingly, earnings per share is computed using the two-class method as required by ASC 260-10-45. Basic earnings per common share is calculated by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period, which excludes the participating securities. Diluted earnings per common share is adjusted for the dilutive effects of stock options, warrants, and restricted stock. The diluted average number of common shares outstanding has been increased for the assumed exercise of stock options and warrants with proceeds used to purchase treasury shares at the average market price for the period.

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 13 – Earnings per Common Share (continued)

Earnings per share for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 were calculated as follows (dollars in thousands, except share and per share data):


	Three Months Ended March 31,
		2021		2020
Net income		$	5,240	5,026
Less allocation of earnings and dividends to participating securities		18		11
Net income allocated to common shareholders		$	5,222	5,015

Weighted average common shares outstanding, gross		12,840,782		12,955,672
Less average participating securities		45,958		29,595
Weighted average number of shares outstanding used in the calculation of basic earnings per common share		12,794,824		12,926,077
Add dilutive effect of:
Stock options		28		1,589
Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share		12,794,852		12,927,666

Earnings per common share:
Basic		$	0.41	0.39
Diluted		0.41		0.39

Three Months Ended
March 31,
2020 2019
Net income $ 5,026
4,627
Less allocation of earnings and dividends to participating securities 11
8
Net income allocated to common shareholders $ 5,015
4,619

Weighted average common shares outstanding, gross 12,955,672
13,307,865
Less average participating securities 29,595
24,231
Weighted average number of shares outstanding used in the calculation of basic earnings per common share 12,926,077
13,283,634
Add dilutive effect of:

Stock options 1,589
3,704
Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share 12,927,666
13,287,338

Earnings per common share:

Basic $ 0.39
0.35
Diluted 0.39
0.35

There were no0 anti-dilutive stock options outstanding at March 31, ~~2020~~2021 or ~~2019.~~2020.

Note 14 - Fair Value Measurements

LCNB measures certain assets at fair value using various valuation techniques and assumptions, depending on the nature of the asset. Fair value is defined as the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date.

The inputs to the valuation techniques used to measure fair value are assigned to one of three broad levels:

•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. Level 2 inputs may include quoted prices for similar assets in active markets, quoted prices for identical assets or liabilities in markets that are not active, inputs other than quoted prices (such as interest rates or yield curves) that are observable for the asset or liability, and inputs that are derived from or corroborated by observable market data.

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

~~Table of Contents~~

~~LCNB CORP. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(Continued)~~

~~Note 14 - Fair Value Measurements (continued)~~

Equity Securities With a Readily Determinable Fair Value

Equity securities with a readily determinable fair value are reported at fair value with changes in fair value reported in other operating income in the consolidated condensed statements of income. Fair values for equity securities are determined based on market quotations (level 1). LCNB has invested in two mutual funds that are traded in active markets and their fair values are based on market quotations (level 1). Investments in another two mutual funds are measured at fair value using net asset values ("NAV") and are considered level 1 because the NAVs are determined and published and are the basis for current transactions. ~~One~~

Table of ~~the mutual funds measured at fair value using its NAV was sold during the first quarter 2019.~~Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 14 - Fair Value Measurements (continued)

Debt Securities, Available-for-Sale

The majority of LCNB's financial debt securities are classified as available-for-sale. The securities are reported at fair value with unrealized holding gains and losses reported net of income taxes in accumulated other comprehensive income (loss). LCNB utilizes a pricing service for determining the fair values of its debt securities. Methods and significant assumptions used to estimate fair value were as follows:

•Fair value for U.S. Treasury notes are determined based on market quotations (level 1).

•Fair values for the other debt securities are calculated using the discounted cash flow method for each security. The discount rates for these cash flows are estimated by the pricing service using rates observed in the market (level 2). Cash flow streams are dependent on estimated prepayment speeds and the overall structure of the securities given existing market conditions.

Assets Recorded at Fair Value on a Nonrecurring Basis

Assets that may be recorded at fair value on a nonrecurring basis include impaired loans, other real estate owned, and other repossessed assets.

A loan is considered impaired when management believes it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impaired loans are carried at the present value of estimated future cash flows using the loan's existing rate or the fair value of collateral if the loan is collateral dependent, if this value is less than the loan balance. These inputs are considered to be level 3.

~~Other real estate owned is adjus~~ted to fair value, less costs to sell, upon transfer of the loan to foreclosed assets, usually based on an appraisal of the property. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Other repossessed assets are valued at estimated sales prices, less costs to sell. The inputs for real estate owned and other repossessed assets are considered to be level 3.

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 14 - Fair Value Measurements (continued)

The following table summarizes the valuation of LCNB's assets recorded at fair value by input levels as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 (in thousands):


											Fair Value Measurements at the End of the Reporting Period Using
				Fair Value Measurements at the End of the Reporting Period Using					Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
March 31, 2021							March 31, 2021
Recurring fair value measurements:							Recurring fair value measurements:
		Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)		Equity securities with a readily determinable fair value:
March 31, 2020
Recurring fair value measurements:
	Equity securities with a readily determinable fair value:							Equity securities	$	1,121	1,121	0	0
	Equity securities	$	675	675	—	—		Mutual funds	52		52	0	0
	Mutual funds	34		34	—	—		Mutual funds measured at net asset value	1,333		1,333	0	0
	Mutual funds measured at net asset value	1,327		1,327	—	—
								Debt securities, available-for-sale:
	Debt securities, available-for-sale:							U.S. Treasury notes	16,216		16,216	0	0
	U.S. Treasury notes	2,409		2,409	—	—		U.S. Agency notes	75,137		0	75,137	0
	U.S. Agency notes	22,703		—	22,703	—		Corporate bonds	1,893		0	1,893	0
	U.S. Agency mortgage-backed securities	82,685		—	82,685	—		U.S. Agency mortgage-backed securities	96,603		0	96,603	0
	Municipal securities:							Municipal securities:
	Non-taxable	13,368		—	13,368	—		Non-taxable	12,433		0	12,433	0
	Taxable	20,274		—	20,274	—		Taxable	35,337		0	35,337	0
	Total recurring fair value measurements	$	143,475	4,445	139,030	—		Total recurring fair value measurements	$	240,125	18,722	221,403	0

Nonrecurring fair value measurements:	Nonrecurring fair value measurements:						Nonrecurring fair value measurements:
	Impaired loans	$	1,352	—	—	1,352		Impaired loans	$	2,078	0	0	2,078
	Other real estate owned and repossessed assets	—		—	—	—
	Total nonrecurring fair value measurements	$	1,352	—	—	1,352		Total nonrecurring fair value measurements	$	2,078	0	0	2,078

December 31, 2019
December 31, 2020							December 31, 2020
Recurring fair value measurements:	Recurring fair value measurements:						Recurring fair value measurements:
								Equity securities with a readily determinable fair value:
	Equity securities with a readily determinable fair value:							Equity securities	$	987	987	0	0
	Equity securities	$	967	967	—	—		Mutual funds	50		50	0	0
	Mutual funds	45		45	—	—		Mutual funds measured at net asset value	1,352		1,352	0	0
	Mutual funds measured at net asset value	1,300		1,300	—	—
								Debt securities, available-for-sale:
	Debt securities, available-for-sale:							U.S. Treasury notes	2,388		2,388	0	0
	U.S. Treasury notes	2,309		2,309	—	—		U.S. Agency notes	67,900		0	67,900	0
	U.S. Agency notes	48,984		—	48,984	—		Corporate bonds	1,179		0	1,179	0
	U.S. Agency mortgage-backed securities	84,406		—	84,406	—		U.S. Agency mortgage-backed securities	91,634		0	91,634	0
	Municipal securities:							Municipal securities:
	Non-taxable	22,321		—	22,321	—		Non-taxable	12,933		0	12,933	0
	Taxable	19,980		—	19,980	—		Taxable	33,437		0	33,437	0
	Total recurring fair value measurements	$	180,312	4,621	175,691	—		Total recurring fair value measurements	$	211,860	4,777	207,083	0

Nonrecurring fair value measurements:	Nonrecurring fair value measurements:						Nonrecurring fair value measurements:
	Impaired loans	$	2,840	—	—	2,840		Impaired loans	$	3,439	0	0	3,439
	Other real estate owned and repossessed assets	197		—	—	197
	Total nonrecurring fair value measurements	$	3,037	—	—	3,037		Total nonrecurring fair value measurements	$	3,439	0	0	3,439

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 14 - Fair Value Measurements (continued)

The following table presents quantitative information about unobservable inputs used in nonrecurring level 3 fair value measurements at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 (dollars in thousands):

Range
Fair Value Valuation Technique Unobservable Inputs High Low Weighted Average
March 31, 2020
Impaired loans $ 728
Estimated sales price Adjustments for comparable properties, discounts to reflect current market conditions Not applicable
624
Discounted cash flows Discount rate 8.25 % 4.50 % 6.66 %
Other real estate owned —
Estimated sales price Adjustments for comparable properties, discounts to reflect current market conditions Not applicable

December 31, 2019
Impaired loans $ 1,931
Estimated sales price Adjustments for comparable properties, discounts to reflect current market conditions Not applicable
909
Discounted cash flows Discount rate 8.25 % 4.50 % 6.83 %
Other real estate owned 197
Estimated sales price Adjustments for comparable properties, discounts to reflect current market conditions Not applicable


					Range
	Fair Value		Valuation Technique	Unobservable Inputs	High		Low		Weighted Average
March 31, 2021

Impaired loans	$	2,078	Discounted cash flows	Discount rate	8.25	%	4.00	%	4.72	%


December 31, 2020
Impaired loans	$	1,352	Estimated sales price	Adjustments for comparable properties, discounts to reflect current market conditions	Not applicable
	2,087		Discounted cash flows	Discount rate	8.25	%	4.00	%	4.74	%

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 14 - Fair Value Measurements (continued)

Carrying amounts and estimated fair values of financial instruments as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows (in thousands):


											Fair Value Measurements at the End of the Reporting Period Using
				Fair Value Measurements at the End of the Reporting Period Using				Carrying Amount		Fair Value	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
	Carrying Amount		Fair Value	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
March 31, 2020
March 31, 2021							March 31, 2021
FINANCIAL ASSETS:							FINANCIAL ASSETS:
Cash and cash equivalents	$	24,795	24,795	24,795	—	—	Cash and cash equivalents	$	41,144	41,144	41,144	0	0

Debt securities, held-to-maturity	27,694		28,019	—	—	28,019	Debt securities, held-to-maturity	24,695		24,828	0	0	24,828
Federal Reserve Bank stock	4,652		4,652	4,652	—	—	Federal Reserve Bank stock	4,652		4,652	4,652	0	0
Federal Home Loan Bank stock	5,203		5,203	5,203	—	—	Federal Home Loan Bank stock	5,203		5,203	5,203	0	0
Loans, net	1,267,379		1,280,021	—	—	1,280,021	Loans, net	1,329,422		1,281,697	0	0	1,281,697
Accrued interest receivable	4,462		4,462	—	4,462	—	Accrued interest receivable	8,665		8,665	0	8,665	0

FINANCIAL LIABILITIES:							FINANCIAL LIABILITIES:
Deposits	1,345,872		1,351,382	1,028,564	322,818	—	Deposits	1,537,116		1,539,552	1,311,915	227,637	0
Short-term borrowings	—		—		—	—

Long-term debt	35,996		37,008	—	37,008	—	Long-term debt	17,000		17,510	0	17,510	0
Accrued interest payable	575		575	—	575	—	Accrued interest payable	349		349	0	349	0

December 31, 2019
December 31, 2020							December 31, 2020
FINANCIAL ASSETS:							FINANCIAL ASSETS:
Cash and cash equivalents	$	20,765	20,765	20,765	—	—	Cash and cash equivalents	$	31,730	31,730	31,730	0	0

Debt securities, held-to-maturity	27,525		27,888	—	—	27,888	Debt securities, held-to-maturity	24,810		24,960	0	0	24,960
Federal Reserve Bank stock	4,652		4,652	4,652	—	—	Federal Reserve Bank stock	4,652		4,652	4,652	0	0
Federal Home Loan Bank stock	5,203		5,203	5,203	—	—	Federal Home Loan Bank stock	5,203		5,203	5,203	0	0
Loans, net	1,239,406		1,252,156	—	—	1,252,156	Loans, net	1,293,693		1,252,642	0	0	1,252,642
Accrued interest receivable	3,911		3,911	—	3,911	—	Accrued interest receivable	8,337		8,337	0	8,337	0

FINANCIAL LIABILITIES:							FINANCIAL LIABILITIES:
Deposits	1,348,280		1,352,061	1,004,057	348,004	—	Deposits	1,455,423		1,458,413	1,212,903	245,510	0
Short-term borrowings	—		—	—	—	—

Long-term debt	40,994		41,487	—	41,487	—	Long-term debt	22,000		22,595	0	22,595	0
Accrued interest payable	705		705	—	705	—	Accrued interest payable	452		452	0	452	0

The fair values of off-balance-sheet financial instruments such as loan commitments and letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of such instruments were not material at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

~~Table of Contents~~

~~LCNB CORP. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(Continued)~~

~~Note 14 - Fair Value Measurements (continued)~~

Fair values of financial instruments are based on various assumptions, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in actual transactions. In addition, because the required disclosures exclude certain financial instruments and all nonfinancial instruments, any aggregation of the fair value amounts presented would not represent the underlying value of LCNB. The following methods and assumptions were used to estimate the fair value of certain financial instruments:

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 14 - Fair Value Measurements (continued)

Cash and cash equivalents

The carrying amounts presented are deemed to approximate fair value.

Equity securities without a readily determinable fair value

Equity securities without a readily determinable fair value are measured at cost, less impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

Debt securities, held-to-maturity

Fair values for debt securities, held-to-maturity are based on quoted market prices for similar securities and/or discounted cash flow analysis or other methods.

Federal Home Loan Bank stock and Federal Reserve Bank stock

The carrying value of Federal Home Loan Bank and Federal Reserve Bank stock approximates fair value based on the respective redemptive provisions.

Loans

The estimated fair value of loans follows the guidance in ASU 2016-01, which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments. The fair value calculation discounts estimated future cash flows using rates that incorporated discounts for credit, liquidity, and marketability factors.

Deposits

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities, which approximates market rates.

Borrowings

The carrying amounts of federal funds purchased, repurchase agreements, and U.S. Treasury demand note borrowings are deemed to approximate fair value of short-term borrowings. For long-term debt, fair values are estimated based on the discounted value of expected net cash flows using current interest rates.

Accrued interest receivable and accrued interest payable

Carrying amount approximates fair value.

~~Table of Contents~~

~~LCNB CORP. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(Continued)~~

Note 15 – Recent Accounting Pronouncements

From time to time the FASB issues an ASU to communicate changes to U.S. generally accepted accounting principles. The following information provides brief summaries of newly issued but not yet effective ASUs that could have an effect on LCNB’s financial position or results of consolidated operations:

ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments"

ASU No. 2016-13 was issued in June 2016 and, once effective, will significantly change current guidance for recognizing impairment of financial instruments. Current guidance requires an "incurred loss" methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. ASU No. 2016-13 replaces the incurred loss impairment methodology with a new current expected credit loss ("CECL") methodology that reflects expected credit losses over the lives of the loans and requires consideration of a broader range of information to inform credit loss estimates. The ASU requires an organization to estimate all expected credit losses for financial assets measured at amortized cost, including loans and held-to-maturity debt securities, based on historical experience, current conditions, and reasonable and supportable forecasts. Additional disclosures are required.

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 15 – Recent Accounting Pronouncements (continued)

ASU No. 2016-13 also amends the accounting for credit losses on debt securities, available-for-sale, and purchased financial assets with credit deterioration. Under the new guidance, entities will determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. Any credit loss will be recognized as an allowance for credit losses on debt securities, available-for-sale, rather than as a direct reduction of the amortized cost basis of the investment, as is currently required. As a result, entities will recognize improvements to estimated credit losses on debt securities, available-for-sale, immediately in earnings rather than as interest income over time, as currently required.

ASU No. 2016-13 eliminates the current accounting model for purchased credit impaired loans and debt securities. Instead, purchased financial assets with credit deterioration will be recorded gross of estimated credit losses as of the date of acquisition and the estimated credit losses amounts will be added to the allowance for credit losses. Thereafter, entities will account for additional impairment of such purchased assets using the models listed above.

Originally, ASU No. 2016-13 would have taken effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. At their meeting on October 16, 2019, FASB approved a final ASU delaying the effective date for several major standards, including ASU No. 2016-13, if certain qualifications are met. The new effective date for SEC filers eligible to be smaller reporting companies ("SRC"), as defined, will be fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. As an SRC, LCNB intends to adopt ASU No. 2016-13 for the fiscal year, and interim periods within the fiscal year, beginning after December 15, 2022.

LCNB has created a cross-functional CECL Committee, which reports to the Audit Committee, composed of members from the lending, ~~trust,~~Wealth Management, and finance departments. ~~The~~During 2017, the CECL Committee ~~has~~ selected a vendor to assist in implementation of and ongoing compliance with the new requirements. It has completed analyzing its data collection efforts, selected a calculation model, ~~and is currently analyzing~~analyzed its pool segmentation and reporting mechanisms, and has finished back testing in preparation for adoption of the new methodology. While the committee and management expect that the implementation of ASU No. 2016-13 will increase the balance of the allowance for loan losses, they are continuing to evaluate the potential impact on LCNB's results of consolidated operations and financial position. The consolidated financial statement impact of this new standard cannot be reasonably estimated at this time.

Table of Contents

LCNB CORP. AND SUBSIDIARIES

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(Continued)~~

~~Note 15 – Recent Accounting Pronouncements (continued)~~

~~ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans"~~

ASU No. 2018-14 was issued in August 2018. The amendments in this update modify disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans, including the deletion, modification, and addition of certain targeted disclosures. The amendments are effective for public business entities for fiscal years beginning after December 15, 2020. Early adoption is permitted. The amendments are to be applied on a retrospective basis to all periods presented upon adoption. Adoption of ASU No. 2018-14 will not have a material impact on LCNB's results of operations or financial position.

~~ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes"~~

ASU No. 2019-12 was issued in December 2019 and simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifies and amends certain other guidance. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. Adoption of ASU No. 2019-12 is not expected to have a material impact on LCNB's results of operations or financial position.

~~Table of Contents~~

~~LCNB CORP. AND SUBSIDIARIES~~



~~Item 2.~~	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

Certain statements made in this document regarding 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. Please refer to LCNB’s Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, as well as its other filings with the SEC, for a more detailed discussion of risks, uncertainties and factors that could cause actual results to differ from those discussed in the forward-looking statements.

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;~~

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


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


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


6.	~~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;~~


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


8.	~~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;~~


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


~~10.~~	~~United States trade relations with foreign countries could negatively impact the financial condition of LCNB's~~

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

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 affect 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;


~~11.~~	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;


~~12.~~	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;


~~13.~~	~~adverse weather events and natural disasters and global and/or national epidemics; and~~

~~14.~~

~~government intervention in the U.S. financial system, including the effects of legislative, tax, accounting, and regulatory actions and reforms, including the~~ ~~the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the~~ Dodd-Frank Wall Street Reform and Consumer Protection 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.

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 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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Table of Contents

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Coronavirus Update/Status

The ~~coronavirus (COVID-19)~~COVID-19 pandemic has ~~placed significant health,~~created extensive disruptions to the global economy and to the lives of individuals throughout the world. Governments, businesses, and the public have taken and are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of or restrictions on the operations of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. While vaccination efforts are underway, the pandemic has not yet been contained and economic activity has not yet returned to pre-pandemic levels.

On April 8, 2021, the Ohio Department of Health director signed an Amended Order for Social Distancing, Facial Coverings and Non-Congregating (the "Amended Order"). The Amended Order encourages Ohio residents to continue wearing masks in public, to wash their hands as frequently as possible or use hand sanitizer, to maintain social distancing when possible, and to avoid large gatherings. Businesses are required to post clearly visible signage at building entrances requiring all persons entering to wear facial coverings, have hand sanitizer available at entrances and throughout their facilities, maintain appropriate distancing in que lines through the use of signage or tape or other ~~major pressure throughout~~means, and routinely disinfect high-contact surfaces such as desks, workstations, restrooms, and equipment. The Amended Order remains in force until rescinded or modified by the ~~communities LCNB serves,~~Ohio Department of Health.

Because of the ~~state of Ohio,~~economic disruption caused by the ~~United States and the entire world.~~pandemic, LCNB has ~~implemented~~provided COVID-19 related payment deferrals, primarily agreements to accept interest only payments for a period of time or agreements to defer principal and interest payments for a period of time, on a number of ~~procedures in response to the pandemic to support the safety~~loans. Loans still on deferral at March 31, 2021 and ~~well-being of our employees, customers, and shareholders that continue through the date of this report:~~

We have addressed the safety of our 35 branches, following the guidelines of the Center for Disease Control, by closing our lobbies in an effort to encourage use of mobile banking applications and our drive-thru facilities, while allowing access to the lobbies by appointment only and only when necessary;

~~We hold daily executive meetings to address issues that change rapidly;~~

~~We moved our Annual Shareholders’ Meeting, held on April 21, 2020, from a physical meeting to a virtual meeting;~~

~~We provided payment deferrals to over 500 loan customers with loans totaling approximately $369 million who were affected by COVID-19, provided such customers were not 30 days past due at~~ December 31, ~~2019; and~~2020 are as follows (in thousands):


	March 31, 2021		December 31, 2020

Commercial, secured by real estate	$	19,611	20,231
Residential real estate	27		324
Consumer	—		21
	$	19,682	20,576

~~We have chosen to participate~~

LCNB participated in the CARES Act ~~Paycheck Protection Program ("PPP")~~PPP that ~~will provide~~provided government guaranteed and potentially forgivable loans to applicants. The PPP iswas implemented by the ~~Small Business Administration~~SBA with support from the Department of the Treasury and ~~provides~~provided small businesses with funds to pay up to eight or twenty-four weeks, depending on the date of the loan, of payroll costs including benefits. Funds ~~can~~could also be used to pay interest on mortgages, rent, utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and ~~utilities.~~ ~~Through April 30,~~covered worker protection expenditures. Outstanding PPP loans at March 31, 2021 and December 31, 2020 ~~we were able to assist over 300 small businesses~~totaled $33,263,000 and ~~had funding for over $46 million of such loans. We believe these loans~~$21,088,000, respectively and ~~our participation in the program is good for our customers, the employees who work for these companies,~~unrecognized fees at those dates totaled $1,044,000 and ~~the communities we serve.~~

$747,000, respectively.

LCNB continues to closely monitor ~~this~~the COVID-19 pandemic and expects to make future changes to respond to the pandemic as this situation continues to evolve.

Critical Accounting Policies

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 collectibility 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 collectibility 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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LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

The allowance consists of specific and general components. The specific component typically 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.

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.

~~Table of Contents~~

~~LCNB CORP. AND SUBSIDIARIES~~

~~Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

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 March 31, ~~2020~~2021 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 mortgage loans to the Federal Home Loan Mortgage Corporation and mortgage servicing rights acquired through the acquisition of Eaton National Bank & Trust Co. and Columbus First Bancorp, Inc. Goodwill is not subject to amortization, but is reviewed annually for impairment or sooner if circumstances indicate a possible impairment. 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.

Results of Operations

Net income for the three months ended March 31, ~~2020~~2021 was $5,240,000 (total basic and diluted earnings per share of $0.41). This compares to net income of $5,026,000 (total basic and diluted earnings per share of $0.39)~~. This compares to net income of $4,627,000 (total basic and diluted earnings per share of $0.35)~~ for the same three month period in ~~2019.~~2020.

Increases in the provision for loan losses, partially due to adjustments for estimated impacts from the economic downturn caused by the COVID-19 pandemic, negatively affected earnings during the 2020 period. LCNB recorded a $52,000 credit for loan losses for the 2021 period, compared to a provision of $1,173,000 for the first quarter 2020.

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LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Net Interest Income

Three Months Ended March 31, ~~2020~~2021 vs. ~~2019~~March 31, 2020

LCNB's primary source of earnings is net interest income, which is the difference between earnings from loans and other investments and interest paid on deposits and other liabilities. The following table presents, for the three months ended March 31, ~~2020~~2021 and ~~2019,~~March 31, 2020, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resulting average yields earned or rates paid.


	Three Months Ended March 31,
	2021						2020
	Average Outstanding Balance			Interest Earned/ Paid	Average Yield/ Rate		Average Outstanding Balance			Interest Earned/ Paid	Average Yield/ Rate
					(Dollars in thousands)
Loans (1)	$	1,313,803		14,535	4.49	%	$	1,252,554		15,227	4.89	%
Interest-bearing demand deposits	15,632			13	0.34	%	5,480			31	2.28	%

Federal Reserve Bank stock	4,652			—	—	%	4,652			—	—	%
Federal Home Loan Bank stock	5,203			26	2.03	%	5,203			33	2.55	%
Investment securities:
Equity securities	4,500			19	1.71	%	4,313			30	2.80	%
Debt securities, taxable	211,618			718	1.38	%	146,954			950	2.60	%
Debt securities, non-taxable (2)	34,174			284	3.37	%	43,790			361	3.32	%
Total earnings assets	1,589,582			15,595	3.98	%	1,462,946			16,632	4.57	%
Non-earning assets	191,287						179,478
Allowance for loan losses	(5,715)						(3,938)
Total assets	$	1,775,154					$	1,638,486

Savings deposits	$	795,026		280	0.14	%	$	679,092		486	0.29	%
IRA and time certificates	234,134			748	1.30	%	320,651			1,631	2.05	%
Short-term borrowings	342			1	1.19	%	1,415			7	1.99	%
Long-term debt	19,689			134	2.76	%	38,325			254	2.67	%
Total interest-bearing liabilities	1,049,191			1,163	0.45	%	1,039,483			2,378	0.92	%
Demand deposits	458,996						347,027
Other liabilities	25,450						20,918
Capital	241,517						231,058
Total liabilities and capital	$	1,775,154					$	1,638,486
Net interest rate spread (3)					3.53	%					3.65	%
Net interest income and net interest margin on a taxable-equivalent basis (4)				14,432	3.68	%				14,254	3.92	%
Ratio of interest-earning assets to interest-bearing liabilities	151.51		%				140.74		%

Three Months Ended March 31,
2020 2019

Average
Outstanding
Balance

Interest
Earned/
Paid

Average
Yield/
Rate

Average
Outstanding
Balance

Interest
Earned/
Paid

Average
Yield/
Rate
(Dollars in thousands)
Loans (1) $ 1,252,554
$ 15,227
4.89 % $ 1,208,809
$ 14,538
4.88 %
Interest-bearing demand deposits 5,480
31
2.28 % 5,744
51
3.60 %
Interest-bearing time deposits —
—
— % 963
5
2.11 %
Federal Reserve Bank stock 4,652
—
— % 4,652
—
— %
Federal Home Loan Bank stock 5,203
33
2.55 % 4,845
73
6.11 %
Investment securities:
Equity securities 4,313
30
2.80 % 4,220
33
3.17 %
Debt securities, taxable 146,954
950
2.60 % 151,633
869
2.32 %
Debt securities, non-taxable (2) 43,790
361
3.32 % 99,768
689
2.80 %
Total earnings assets 1,462,946
16,632
4.57 % 1,480,634
16,258
4.45 %
Non-earning assets 179,478

158,853

Allowance for loan losses (3,938 )

(4,074 )

Total assets $ 1,638,486

$ 1,635,413

Savings deposits $ 679,092
486
0.29 % $ 700,708
661
0.38 %
IRA and time certificates 320,651
1,631
2.05 % 310,668
1,625
2.12 %
Short-term borrowings 1,415
7
1.99 % 23,235
219
3.82 %
Long-term debt 38,325
254
2.67 % 44,676
217
1.97 %
Total interest-bearing liabilities 1,039,483
2,378
0.92 % 1,079,287
2,722
1.02 %
Demand deposits 347,027

332,153

Other liabilities 20,918

12,503

Capital 231,058

221,470

Total liabilities and capital $ 1,638,486

$ 1,645,413

Net interest rate spread (3)

3.65 %

3.43 %
Net interest income and net interest margin on a taxable-equivalent basis (4)
$ 14,254
3.92 %
$ 13,536
3.71 %
Ratio of interest-earning assets to interest-bearing liabilities 140.74 %

137.19 %

(1)Includes non-accrual loans.

(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%.

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

The following table presents the changes in taxable-equivalent basis 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 three months ended March 31, ~~2020~~2021 as compared to the same period in ~~2019.~~2020. 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.


	Three Months Ended March 31, 2021 vs. 2020
	Increase (decrease) due to:
	Volume		Rate	Total
	(In thousands)
Interest-earning Assets:
Loans	$	721	(1,413)	(692)

Interest-bearing demand deposits	24		(42)	(18)

Federal Reserve Bank stock	—		—	—
Federal Home Loan Bank stock	—		(7)	(7)
Investment securities:
Equity securities	1		(12)	(11)
Debt securities, taxable	323		(555)	(232)
Debt securities, non-taxable	(80)		3	(77)
Total interest income	989		(2,026)	(1,037)

Interest-bearing Liabilities:
Savings deposits	72		(278)	(206)
IRA and time certificates	(371)		(512)	(883)
Short-term borrowings	(4)		(2)	(6)
Long-term debt	(127)		7	(120)
Total interest expense	(430)		(785)	(1,215)
Net interest income	$	1,419	(1,241)	178

Three Months Ended
March 31, 2020 vs. 2019
Increase (decrease) due to:
Volume Rate Total
(In thousands)
Interest-earning Assets:
Loans $ 530
159
689
Interest-bearing demand deposits (2 ) (18 ) (20 )
Interest-bearing time deposits (5 ) —
(5 )
Federal Reserve Bank stock —
—
—
Federal Home Loan Bank stock 5
(45 ) (40 )
Investment securities:
Equity securities 1
(4 ) (3 )
Debt securities, taxable (27 ) 108
81
Debt securities, non-taxable (442 ) 114
(328 )
Total interest income 60
314
374

Interest-bearing Liabilities:

Savings deposits (20 ) (155 ) (175 )
IRA and time certificates 51
(45 ) 6
Short-term borrowings (141 ) (71 ) (212 )
Long-term debt (34 ) 71
37
Total interest expense (144 ) (200 ) (344 )
Net interest income $ 204
514
718

Net interest income on a fully taxable-equivalent basis for the three months ended March 31, ~~2020~~2021 totaled ~~$14,254,000,~~$14,432,000, an increase of ~~$718,000~~$178,000 from the comparable period in ~~2019.~~2020. Total ~~interest income increased $374,000 and total~~ interest expense decreased ~~$344,000.~~$1,215,000, partially offset by a $1,037,000 decrease in total interest income.

The ~~$374,000 increase~~$1,037,000 decrease in total interest income was due primarily to a ~~$689,000 increase~~$692,000 decrease in loan interest income ~~caused~~and a $309,000 total decrease in interest income from taxable and non-taxable debt securities. The decrease in loan interest income was primarily due to a 40 basis point (a basis point equals 0.01%) decrease in the average rate earned on loans, partially offset by a ~~$43.7~~$61.2 million increase in the average balance of LCNB's loan ~~portfolio and~~portfolio. The decrease in interest income from taxable debt securities was due to a 122 basis point decrease in the average rate earned on these securities, partially offset by a 1$64.7 million increase in average securities. The decrease in non-taxable debt securities was due to a $9.6 million decrease in average securities, partially offset by a 5 basis point ~~(a basis point equals 0.01%)~~ increase in the average rate earned on ~~loans. Partially offsetting the increase in loan interest income was a $328,000 decrease in interest income from non-taxable debt~~these securities. The net decrease ~~in interest income from non-taxable debt securities was due to a $56.0 million decrease in average non-taxable debt securities, partially offset by a 52 basis point increase~~ in the average ~~rate earned. Decreases in~~balance of taxable debt securities ~~were~~was invested in the loan portfolio and was also used to ~~pay down short-term borrowings and long-term debt.~~

enhance liquidity. The ~~$344,000~~ decrease in ~~total interest expense~~average rates was due to a $175,000 decrease in interest expense for savings deposits and a $212,000 decrease in interest expense for short-term borrowings. Interest expense for savings deposits decreased primarily due to a 9 basis point market-driven decrease in the average rate paid for these deposits and secondarily to a $21.6 million decrease in the average balance of these deposits. Interest expense for short-term borrowings decreased due to a $21.8 million decrease in average debt outstanding and to a 183 basis point decrease in the average rate paid.market conditions.

Table of Contents

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

The $1,215,000 decrease in total interest expense was due to a $206,000 decrease in interest expense for savings deposits, an $883,000 decrease in interest expense for IRA and time certificates, and a $120,000 decrease in interest expense for long-term debt. Interest expense for savings deposits decreased primarily due to a 15 basis point market-driven decrease in the average rate paid for these deposits, partially offset by a $115.9 million increase in the average balance of these deposits. Interest expense for IRA and time certificates decreased primarily due to a 75 basis point decrease in the average rate paid for these deposits and secondarily to an $86.5 million decrease in the average balance of these deposits. Interest expense for long-term debt decreased due to an $18.6 million decrease in average debt outstanding, slightly offset by a 9 basis point increase in the average rate paid.

Provision and Allowance For Loan Losses

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 portfolio. ~~In addition to historic charge-off percentages,~~For analysis purposes, the loan portfolio is separated into pools of similar loans. These pools include commercial & 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 loans, consumer loans, loans for agricultural purposes not secured by 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 ~~taken into consideration~~ to determine the adequacy of the allowance for loan losses, ~~include~~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 ~~portfolio, overall portfolio quality, a review of specific problem loans, and current economic conditions that may affect borrowers' ability to pay.~~ pool.

The provision for loan losses for the three months ended March 31, ~~2020~~2021 was ~~$1,173,000, an increase of $1,278,000 when compared to a credit of $105,000 for~~$1,225,000 less than the comparable period in ~~2019.~~2020. The ~~factors for current economic conditions for the~~ 2020 period ~~include~~included qualitative adjustments for estimated impacts from the economic downturn caused by the COVID-19 ~~pandemic, which accounted for about 67% of the increase.~~pandemic. Calculating an appropriate level for the allowance and provision for loan losses involves a high degree of management judgment and is, by its nature, imprecise. Revisions may be necessary as more information becomes available.

Net ~~charge-offs~~recoveries for the three months ended March 31, ~~2020 was $210,000,~~2021 were $3,000, as compared to a net ~~recovery~~charge-offs of ~~$185,000~~$210,000 for the ~~comparable~~same three-month period in ~~2019.~~2020.

Non-Interest Income

A comparison of non-interest income for the three months ended March 31, ~~2020~~2021 and ~~2019~~March 31, 2020 is as follows (in thousands):


	Three Months Ended March 31,
		2021		2020	Difference
Fiduciary income		$	1,529	1,103	426
Service charges and fees on deposit accounts		1,366		1,295	71
Net gains from sales of debt securities, available-for-sale		—		221	(221)
Bank owned life insurance income		267		601	(334)
Gains from sales of loans		43		120	(77)
Other operating income		260		499	(239)
Total non-interest income		$	3,465	3,839	(374)

Three Months Ended
March 31,
2020 2019 Difference
Fiduciary income $ 1,103
1,034
69
Service charges and fees on deposit accounts 1,295
1,308
(13 )
Net gains (losses) from sales of debt securities, available-for-sale 221
(18 ) 239
Bank owned life insurance income 601
182
419
Gains from sales of loans 120
29
91
Other operating income 499
237
262
Total non-interest income $ 3,839
2,772
1,067

Reasons for changes include:

Net gains (losses) from sales of available-for-sale debt securities increased due to market valuations at the times of sales, as the volume of debt securities sold during the 2020 period was less than that for the 2019 period.

Bank owned life insurance income increased due to $12.0 million of new policies purchased at the beginning of the third quarter 2019 and to a mortality benefit recognized during the first quarter 2020.

~~Other operating~~•Fiduciary income increased primarily due to ~~net~~growth in the market value of assets serviced.

•Service charges and fees on deposit accounts increased primarily due to increases in check card income, partially offset by decreases in overdraft fees and fee income recognized on Insured Cash Sweep ("ICS") deposit products.

•Net gains ~~realized~~ from sales of debt securities, available-for-sale, decreased due to the ~~sale~~absence of ~~equity~~ security ~~investments.~~

sales during the 2021 period.

Table of Contents

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

•Bank owned life insurance income for the three months ended March 31, 2020 included a mortality benefit, while no mortality benefits were recognized during the 2021 period.

•Gains from sales of loans decreased primarily due to a lower volume of residential real estate loan sales.

•Other operating income decreased primarily due to the absence of net gains realized from the sale of equity security investments during the 2021 period, partially offset by an increase in unrealized net gains from equity securities held in the portfolio.

Non-Interest Expense

A comparison of non-interest expense for the three months ended March 31, ~~2020~~2021 and ~~2019~~March 31, 2020 is as follows (in thousands):


	Three Months Ended March 31,
		2021		2020	Difference
Salaries and employee benefits		$	6,433	6,768	(335)
Equipment expenses		368		287	81
Occupancy expense, net		794		682	112
State financial institutions tax		444		436	8
Marketing		268		177	91
Amortization of intangibles		257		260	(3)
FDIC insurance premiums (credit), net		113		(1)	114
Contracted services		540		402	138

Other non-interest expense		2,275		2,061	214
Total non-interest expense		$	11,492	11,072	420

Three Months Ended
March 31,
2020 2019 Difference
Salaries and employee benefits $ 6,768
6,162
606
Equipment expenses 287
266
21
Occupancy expense, net 682
763
(81 )
State financial institutions tax 436
438
(2 )
Marketing 177
302
(125 )
Amortization of intangibles 260
257
3
FDIC insurance premiums (credit), net (1 ) 126
(127 )
Contracted services 402
464
(62 )
Other real estate owned (10 ) 3
(13 )
Merger-related expenses —
67
(67 )
Other non-interest expense 2,071
1,852
219
Total non-interest expense $ 11,072
10,700
372

Reasons for changes include:

•Salaries and employee benefits ~~increased 9.8%~~decreased primarily due to ~~salary and wage increases and newly hired employees, including additional business development positions. An increase in health insurance costs also contributed to the~~an increase in salaries and ~~employee benefits.~~benefits allocated to deferred costs on loans, reflecting a greater volume of originations during the 2021 period. The 2021 period included PPP loans, which were not a factor in the 2020 period.

~~Marketing decreased~~•Equipment expenses increased primarily due to ~~a realignment~~increased equipment rental costs and increased depreciation charges for furniture and equipment. During 2020, LCNB gradually replaced ATMs that it had previously owned with new ATMs obtained through an outsourcing arrangement.

•Occupancy expense increased primarily due to increased janitorial and cleaning costs and to increases in facility repair and maintenance costs.

•Marketing increased primarily due to expanded use of ~~the marketing strategy within LCNB.~~television, radio, and digital media.

•FDIC insurance premiums ~~(credit), net for the 2020 period reflects a Small Bank Assessment Credit~~increased in 2021 because LCNB received small bank assessment credits from the FDIC ~~because~~during the ~~Deposit Insurance Fund was above~~first and second quarters 2020. LCNB received the ~~mandated 1.35% level. LCNB has used the substantial portion~~full amount of the credit during the first two quarters of 2020 and ~~anticipates quarterly~~ premium payments ~~will resume~~returned to their normal levels thereafter.

•Contracted services increased due to increased usage of technology services and to price increases in ~~the second quarter 2020.~~general.

•Other non-interest expense increased partially due to ~~smaller net increases in~~ a ~~variety of accounts.~~strategic decision to outsource LCNB's ATM operations to a third-party vendor during 2020, relieving LCNB branch personnel from various ATM maintenance responsibilities.

Income Taxes

LCNB's effective tax rate for the three months ended March 31, ~~2020~~2021 was ~~12.9%~~18.1%, compared to ~~16.9%~~12.9% for the three months ended March 31, ~~2019.~~2020. The difference between the statutory rate of 21% and the effective tax rates 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. A one-time tax benefit recognized as a result of certain provisions in the ~~Coronavirus Aid, Relief, & Economic Security ("CARES")~~CARES Act passed by Congress and signed by President Trump during the first quarter 2020 also contributed to the difference during the 2020 period.

Table of Contents

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Financial Condition

A comparison of balance sheet line items at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 is as follows (dollars in thousands):


	March 31, 2020		December 31, 2019		Difference $			Difference %			March 31, 2021		December 31, 2020	Difference $	Difference %
ASSETS:										ASSETS:
Total cash and cash equivalents	$	24,795	$	20,765	$	4,030		19.41	%	Total cash and cash equivalents	$	41,144	31,730	9,414	29.67	%

Investment securities:										Investment securities:
Equity securities with a readily determinable fair value, at fair value	2,036		2,312		(276		)	(11.94	)%	Equity securities with a readily determinable fair value, at fair value	2,506		2,389	117	4.90	%
Equity securities without a readily determinable fair value, at cost	2,099		2,099		—			—	%	Equity securities without a readily determinable fair value, at cost	2,099		2,099	—	—	%
Debt securities, available-for-sale, at fair value	141,439		178,000		(36,561		)	(20.54	)%	Debt securities, available-for-sale, at fair value	237,619		209,471	28,148	13.44	%
Debt securities, held-to-maturity, at cost	27,694		27,525		169			0.61	%	Debt securities, held-to-maturity, at cost	24,695		24,810	(115)	(0.46)	%
Federal Reserve Bank stock, at cost	4,652		4,652		—			—	%	Federal Reserve Bank stock, at cost	4,652		4,652	—	—	%
Federal Home Loan Bank stock, at cost	5,203		5,203		—			—	%	Federal Home Loan Bank stock, at cost	5,203		5,203	—	—	%
Loans, net	1,267,379		1,239,406		27,973			2.26	%	Loans, net	1,329,422		1,293,693	35,729	2.76	%
Premises and equipment, net	35,017		34,787		230			0.66	%	Premises and equipment, net	35,243		35,376	(133)	(0.38)	%
Operating lease right-of-use assets	5,621		5,444		177			3.25	%	Operating lease right-of-use assets	6,865		6,274	591	9.42	%
Goodwill	59,221		59,221		—			—	%	Goodwill	59,221		59,221	—	—	%
Core deposit and other intangibles	3,751		4,006		(255		)	(6.37	)%	Core deposit and other intangibles	3,108		3,453	(345)	(9.99)	%
Bank owned life insurance	41,309		41,667		(358		)	(0.86	)%	Bank owned life insurance	42,416		42,149	267	0.63	%
Interest receivable										Interest receivable	8,665		8,337	328	3.93	%
Other assets	16,064		14,221		1,843			12.96	%	Other assets	15,463		17,027	(1,564)	(9.19)	%
Total assets	$	1,636,280	$	1,639,308	$	(3,028	)	(0.18	)%	Total assets	$	1,818,321	1,745,884	72,437	4.15	%

LIABILITIES:										LIABILITIES:
Deposits:										Deposits:
Non-interest-bearing	$	342,442	$	354,391	$	(11,949	)	(3.37	)%	Non-interest-bearing	$	475,127	455,073	20,054	4.41	%
Interest-bearing	1,003,430		993,889		9,541			0.96	%	Interest-bearing	1,061,989		1,000,350	61,639	6.16	%
Total deposits	1,345,872		1,348,280		(2,408		)	(0.18	)%	Total deposits	1,537,116		1,455,423	81,693	5.61	%

Long-term debt	35,996		40,994		(4,998		)	(12.19	)%	Long-term debt	17,000		22,000	(5,000)	(22.73)	%
Operating leases liability	5,659		5,446		213			3.91	%
Operating lease liabilities										Operating lease liabilities	6,998		6,371	627	9.84	%
Accrued interest and other liabilities	15,275		16,540		(1,265		)	(7.65	)%	Accrued interest and other liabilities	17,961		21,265	(3,304)	(15.54)	%
Total liabilities	1,402,802		1,411,260		(8,458		)	(0.60	)%	Total liabilities	1,579,075		1,505,059	74,016	4.92	%

TOTAL SHAREHOLDERS' EQUITY	233,478		228,048		5,430			2.38	%	TOTAL SHAREHOLDERS' EQUITY	239,246		240,825	(1,579)	(0.66)	%
Total liabilities and shareholders' equity	$	1,636,280	$	1,639,308	$	(3,028	)	(0.18	)%	Total liabilities and shareholders' equity	$	1,818,321	1,745,884	72,437	4.15	%

Reasons for changes include:

•Debt securities, available-for-sale, ~~decreased~~increased due to ~~sales~~purchases of additional securities ~~with a total book value of $8.6~~totaling $40.8 million, ~~and~~partially offset by maturities and calls of securities totaling ~~$31.0~~$7.8 million. ~~These decreases~~No securities were ~~partially offset by a net increase in fair values totaling $3.1 million. The net funds received were invested in~~sold during the ~~loan portfolio and used to help pay down long-term debt.~~first quarter 2021.

•Net loans increased due to organic growth in the loan ~~portfolio.~~portfolio, including a net increase in PPP loans of $12.2 million. Most of the growth occurred in the commercial ~~and~~& industrial, ~~and~~ commercial real estate, ~~portfolios, slightly offset by a decrease in the~~and residential real estate ~~portfolio.~~portfolios.

~~Premises~~•Operating lease right-of-use assets and ~~equipment, net~~operating lease liabilities increased due ~~primarily~~ to ~~Main Office remodeling costs, partially offset by depreciation expense.~~a new lease for the Union Village office and the renewal of a postage machine lease.

•Core deposit and other intangibles decreased due to amortization of core deposit ~~intangibles.~~intangibles and mortgage servicing rights.

~~Bank owned life insurance decreased~~•Interest receivable increased primarily due to ~~a mortality claim recognized during~~an increase in accrued interest on debt securities, partially due to the ~~first quarter 2020.~~

~~Non-interest-bearing deposits decreased~~increase in debt securities and partially due to timing of interest payment receipts. This increase was partially offset by a decrease in ~~business demand deposit accounts, slightly offset by an increase in personal demand deposit accounts.~~

accrued interest on COVID-19 related loan payment deferrals.

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LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

~~Interest-bearing~~•Non-interest-bearing deposits ~~increased primarily due to increases~~and interest-bearing deposits have grown substantially since the start of the COVID-19 pandemic and this trend continued during the first quarter 2021. Management believes the growth reflects customer preferences for liquidity during uncertain economic periods. Balances in demand deposits and NOW and savings accounts ~~partially offset by decreases~~have grown, while balances in IRA and time ~~certificates.~~deposits have decreased.

•Long-term debt decreased due to payoffs of matured debt. There were no new borrowings during ~~the three months ended March 31, 2020.~~2021.

•Total shareholders' equity ~~increased~~decreased primarily due to a $3.4 million decrease in accumulated other comprehensive income, net of taxes caused by market-driven decreases in the fair value of LCNB's debt security investments, dividends paid to shareholders, and treasury shares purchased. These decreases were partially offset by earnings retained during the first three months of 2020 and to a $2.5 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 dividends paid to shareholders.2021.

At each reporting date between annual goodwill impairment tests, LCNB management considers potential indicators of impairment. Given the current economic uncertainty and volatility surrounding COVID-19, management assessed whether the events and circumstances resulted in it being more likely than not that the fair value of any reporting unit was less than its carrying value. Impairment indicators considered included the condition of the economy and banking industry; 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. Management further considered the amount by which fair value exceeded book value in the most recent quantitative analysis and sensitivities performed. At the conclusion of the assessment, management determined that, as of March 31, 2020, it was more likely than not that fair value exceeded carrying value. Management will continue to monitor developments regarding the COVID-19 pandemic and measures implemented in response to the pandemic, market capitalization, overall economic conditions and any other triggering events or circumstances that may indicate an impairment of goodwill in the future.

Regulatory Capital

The Bank must meet certain minimum capital requirements set by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company's and Bank's financial statements. LCNB’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.

~~A rule requiring a Capital Conservation Buffer began phase-in on January 1, 2016 and was fully implemented at~~In addition to the ~~beginning of 2019. Under the fully-implemented rule,~~minimum capital requirements, a financial institution needs to maintain a Capital Conservation Buffer composed of Common Equity Tier 1 Capital of at least 2.5% above its minimum risk-weighted capital requirements to avoid limitations on its ability to make capital distributions, including dividend payments to shareholders and certain discretionary bonus payments to executive officers. A financial institution with a buffer below 2.5% is subject to increasingly stringent limitations on capital distributions as the buffer approaches zero.

For various regulatory purposes, financial institutions are classified into categories based upon capital adequacy:


	Minimum Requirement		Minimum Requirement with Capital Conservation Buffer		To Be Considered Well-Capitalized
Ratio of Common Equity Tier 1 Capital to risk-weighted assets	4.5	%	7.0	%	6.5	%
Ratio of Tier 1 Capital to risk-weighted assets	6.0	%	8.5	%	8.0	%
Ratio of Total Capital (Tier 1 Capital plus Tier 2 Capital) to risk-weighted assets	8.0	%	10.5	%	10.0	%
Leverage Ratio (Tier 1 Capital to adjusted quarterly average total assets)	4.0	%	N/A		5.0	%

As of the most recent notification from their regulators, the Bank and LCNB were categorized as "well-capitalized" under the regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since the last notification that would change the Bank's or LCNB's category.

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~~LCNB CORP. AND SUBSIDIARIES~~

~~Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

On September 17, 2019, the FDIC finalized a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations, as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The simplified rule was designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. ~~It may be used~~Its use was permitted beginning with the March 31, 2020 Call Report. Qualifications to use the simplified approach include having a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the ~~CBLR~~Community Bank Leverage Ratio framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. LCNB qualifies to use the simplified measure, but did not opt in for the March 31, ~~2020~~2021 regulatory capital calculations.

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LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

A summary of the Bank's regulatory capital and capital ratios follows (dollars in thousands):


	March 31, 2021			December 31, 2020
Regulatory Capital:
Shareholders' equity	$	234,430		234,092
Goodwill and other intangibles	(61,441)			(61,698)
Accumulated other comprehensive (income) loss	(603)			(4,043)
Tier 1 risk-based capital	172,386			168,351
Eligible allowance for loan losses	5,679			5,728
Total risk-based capital	$	178,065		174,079
Capital ratios:
Common Equity Tier 1 Capital to risk-weighted assets	12.48		%	12.48	%
Tier 1 Capital to risk-weighted assets	12.48		%	12.48	%
Total Capital to risk-weighted assets	12.89		%	12.91	%
Leverage	10.11		%	10.06	%

March 31, 2020 December 31, 2019
Regulatory Capital:
Shareholders' equity $ 229,573
$ 222,065
Goodwill and other intangibles (62,485 ) (62,744 )
Accumulated other comprehensive (income) loss (3,156 ) (673 )
Tier 1 risk-based capital 163,932
158,648
Eligible allowance for loan losses 5,008
4,045
Total risk-based capital $ 168,940
$ 162,693
Capital ratios:

Common Equity Tier 1 Capital to risk-weighted assets 12.44 % 12.21 %
Tier 1 Capital to risk-weighted assets 12.44 % 12.21 %
Total Capital to risk-weighted assets 12.82 % 12.52 %
Leverage 10.43 % 10.06 %

Liquidity

LCNB depends on dividends from the Bank for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders. National 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 Office of the Comptroller of the Currency, 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 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 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 March 31, ~~2020~~2021 was approximately ~~$93.4~~$172.6 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.~~ In addition, additional borrowings of approximately $55.0 million were available through the line of credit arrangements at March 31, ~~2020.~~2021.

On April 9, 2020, the Federal Reserve established the ~~Paycheck Protection Program Liquidity Facility ("PPPLF")~~PPPLF to bolster the effectiveness of the ~~Small Business Administration’s Paycheck Protection Program.~~SBA’s 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.

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~~LCNB CORP. AND SUBSIDIARIES~~

~~Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

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 3.			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. IRSA is used to estimate the effect on net interest income ("NII") 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 significant downward scenarios of more than 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 March 31, ~~2020~~2021 IRSA indicates that an increase in interest rates of 200 basis points or more will have a positive effect on NII and a 100 basis point increase or decrease in interest rates will ~~also~~ have a ~~positive~~negative effect on NII. The changes in NII for all rate assumptions are within LCNB's acceptable ranges.


Rate Shock Scenario in Basis Points	Amount		$ Change in NII	% Change in NII
	(Dollars in thousands)
Up 400	$	66,189	2,436	3.82	%
Up 300	65,300		1,547	2.43	%
Up 200	64,423		670	1.05	%
Up 100	63,562		(191)	(0.30)	%
Base	63,753		—	—	%
Down 100	62,201		(1,552)	(2.43)	%

Rate Shock Scenario in Basis Points Amount
$ Change in
NII

% Change in
NII
(Dollars in thousands)
Up 400 $ 58,229
2,204
3.93 %
Up 300 57,628
1,603
2.86 %
Up 200 57,066
1,041
1.86 %
Up 100 56,501
476
0.85 %
Base 56,025
—
— %
Down 100 56,144
119
0.21 %

IRSA shows the effect on NII 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 March 31, ~~2020~~2021 EVE analysis indicates that an increase in interest rates will have a negative effect on the EVE and a 100 basis point decrease in interest rates will have a positive effect on the EVE. The changes in the EVE for ~~all~~the upward rate assumptions are within LCNB's acceptable ranges. The changes in EVE for the down 100 basis points rate assumption is slightly outside the acceptable range of 20%.


Rate Shock Scenario in Basis Points	Amount		$ Change in EVE	% Change in EVE
	(Dollars in thousands)
Up 400	$	178,698	(47,877)	(21.13)	%
Up 300	189,273		(37,302)	(16.46)	%
Up 200	199,598		(26,977)	(11.91)	%
Up 100	209,872		(16,703)	(7.37)	%
Base	226,575		—	—	%
Down 100	275,007		48,432	21.38	%

Rate Shock Scenario in Basis Points Amount
$ Change in
EVE

% Change in
EVE
(Dollars in thousands)
Up 400 $ 192,424
(42,504 ) (18.09 )%
Up 300 202,506
(32,422 ) (13.80 )%
Up 200 212,718
(22,210 ) (9.45 )%
Up 100 221,568
(13,360 ) (5.69 )%
Base 234,928
—
— %
Down 100 266,165
31,237
13.30 %

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 4.			Controls and Procedures

a) Disclosure controls and procedures. The Chief Executive Officer and the Chief Financial Officer have carried out an evaluation of the effectiveness of LCNB's disclosure controls and procedures that ensure that information relating to LCNB required to be disclosed by LCNB in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to LCNB's management, including its principal executive officer and principal financial officer, as appropriate, in order to allow timely decisions to be made regarding required disclosures. Based upon this evaluation, these officers have concluded that, as of March 31, ~~2020,~~2021, LCNB's disclosure controls and procedures were effective.

b) Changes in internal control over financial reporting. During the period covered by this report, there were no changes in LCNB's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, LCNB's internal control over financial reporting.

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LCNB CORP. AND SUBSIDIARIES

PART II. OTHER INFORMATION

~~LCNB CORP. AND SUBSIDIARIES~~



Item 1.			Legal Proceedings

Except for routine litigation incidental to its business, LCNB is not a party to any material pending legal proceedings and none of its property is the subject of any material proceedings.



Item 1A.			Risk Factors

~~The disclosures below supplement~~There have been no material changes in the risk factors previously disclosed ~~under Item 1A. of LCNB’s 2019 Annual Report on~~in the December 31, 2020 Form 10-K.

The COVID-19 pandemic has adversely impacted our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic is creating extensive disruptions to the global economy and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects of

COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our Form 10-K could be exacerbated and such effects could have a material adverse impact on us in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk, human capital and self-insurance.

Further, Ohio Governor Mike DeWine issued a Stay-at-Home Order, effective 11:59 p.m. on March 23, 2020, in the interest of protecting the state's citizens and ordered non-essential businesses to close. Banks are a designated essential business and LCNB is continuing operations. As a result of the order though, many of LCNB's commercial borrowers have been required to cease or curtail operations or may be facing operational issues, such as supply chain disruptions and decreased sales. Some businesses may not be able to survive. Many home mortgage and consumer borrowers are suddenly unemployed or working reduced hours. LCNB expects that it will need to make short-term modifications to a number of loans to help borrowers through this period, but the eventual number of modifications that will be required or their impact on LCNB's financial results cannot be estimated at this time. Likewise, the pandemic’s effect on LCNB’s allowance for loan losses and provision for loan losses cannot be estimated at this time.

During March 2020, The Federal Reserve's Open Market Committee reduced its benchmark federal funds rate by a total of 150 basis points in response to the risks the pandemic poses to the economy. This rate influences other rates, including the prime rate and rates charged for home mortgage loans. Many of LCNB's commercial loans and most of its home equity loans are indexed to the prime rate. The future effect these reductions will have on LCNB's loan interest income cannot be estimated at this time.

Economic turmoil associated with the pandemic had wide-ranging and severe impacts upon financial markets, including stock and bond markets, during the first quarter 2020. Fees for trust and brokerage accounts serviced for clients is predominantly based on the market value of such funds. A general decline in market valuations will decrease the fees LCNB collects for servicing these accounts. In addition, LCNB's investments in equity securities are carried at fair value, with changes in fair value recognized in other operating income in the consolidated statements of income. Debt securities classified as "available-for-sale" are carried at fair value, with changes in fair value recorded in other comprehensive income, a separate component of shareholders' equity. Future pandemic effects on trust and brokerage accounts, LCNB's equity and debt investments, and the resulting effects on LCNB's income and equity cannot be estimated at this time.

~~Table of Contents~~

Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of COVID-19’s effects on our business, operations, or the U.S. economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements, third party providers’ ability to support our operation, and any actions taken by governmental authorities and other third parties in response to the pandemic. The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.



Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds

During the period covered by this report, LCNB did not sell any of its securities that were not registered under the Securities Act.

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

~~There were no~~The following table sets forth information relating to repurchases made under the Program during the three months ended March 31, ~~2020. A maximum number of 100,000 shares may yet be purchased under the Program.~~2021:


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
January 2021	14,532	$	14.85	14,532	499,916
February 2021	53,382	$	16.54	53,382	446,534
March 2021	2,407	$	16.98	2,407	444,127



Item 3.			Defaults Upon Senior Securities

None.



Item 4.			Mine Safety Disclosures

Not applicable.



Item 5.			Other Information

None.

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LCNB CORP. AND SUBSIDIARIES



Item 6.			Exhibits



Exhibit No.		Exhibit Description
2.1		Agreement and Plan of Merger dated as of December 20, 2017 by and between LCNB Corp. and Columbus First Bancorp, Inc. - incorporated by reference to the Registrant's Current Report on Form 8-K filed on December 21, 2017, Exhibit 2.1.

3.1		Amended and Restated Articles of Incorporation of LCNB Corp., as amended. (This document represents the Amended and Restated Articles of Incorporation of LCNB Corp. in compiled form incorporating all amendments. The compiled document has not been filed with the Ohio Secretary of State.) - incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, Exhibit 3.1.

3.2		Code of Regulations of LCNB Corp. – incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005, Exhibit 3(ii).

~~4.1~~10.1		~~Description of Registrant's Securities - incorporated by reference to Registrant's Form 10-K for the fiscal year ended December 31, 2019 Exhibit 4.1.~~

~~10.1~~	LCNB Corp. Ownership Incentive Plan – incorporated by reference to Registrant's Form DEF 14A Proxy Statement pursuant to Section 14(a), dated March 15, 2002, Exhibit A (000-26121).

10.2		LCNB Corp. 2015 Ownership Incentive Plan - incorporated by reference to Registrant's Form DEF 14A Proxy Statement pursuant to Section 14(a), dated March 13, 2015, Exhibit A (001-35292)

10.3		Form of Option Grant Agreement under the LCNB Corp. Ownership Incentive Plan – incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2005, Exhibit 10.2.

10.4		Nonqualified Executive Retirement Plan – incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2009, Exhibit 10.4.

10.5		Form of Restricted Share Grant Agreement under the LCNB Corp. 2015 Ownership Incentive Plan - incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2015, Exhibit 10.7.

31.1		Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002.

31.2		Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following financial information from LCNB Corp.'s Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2020~~2021 is formatted in Extensible Business Reporting Language: (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Income, (iii) the Consolidated Condensed Statements of Comprehensive Income, (iv) the Consolidated Condensed Statements of Shareholders' Equity, (v) the Consolidated Condensed Statements of Cash Flows, and (vi) the Notes to Consolidated Condensed Financial Statements.

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

Table of Contents

LCNB CORP. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



			LCNB Corp.

May ~~7, 2020~~5, 2021			/s/ Eric J. Meilstrup
			Eric J. Meilstrup
			Chief Executive Officer and President

May ~~7, 2020~~5, 2021			/s/ Robert C. Haines, II
			Robert C. Haines, II
			Executive Vice President and Chief Financial Officer

5350



	March 31, 2020			December 31, 2019
	(Unaudited)			December 31, 2019
ASSETS:
Cash and due from banks	$	17,820		17,019
Interest-bearing demand deposits	6,975			3,746
Total cash and cash equivalents	24,795			20,765
Investment securities:
Equity securities with a readily determinable fair value, at fair value	2,036			2,312
Equity securities without a readily determinable fair value, at cost	2,099			2,099
Debt securities, available-for-sale, at fair value	141,439			178,000
Debt securities, held-to-maturity, at cost	27,694			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	1,267,379			1,239,406
Premises and equipment, net	35,017			34,787
Operating lease right-of-use assets	5,621			5,444
Goodwill	59,221			59,221
Core deposit and other intangibles, net	3,751			4,006
Bank owned life insurance	41,309			41,667
Other assets	16,064			14,221
TOTAL ASSETS	$	1,636,280		1,639,308

LIABILITIES:
Deposits:
Noninterest-bearing	$	342,442		354,391
Interest-bearing	1,003,430			993,889
Total deposits	1,345,872			1,348,280
Long-term debt	35,996			40,994
Operating lease liabilities	5,659			5,446
Accrued interest and other liabilities	15,275			16,540
TOTAL LIABILITIES	1,402,802			1,411,260

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; issued 14,144,103 and 14,111,810 shares at March 31, 2020 and December 31, 2019, respectively	142,046			141,791
Retained earnings	107,123			104,431
Treasury shares at cost, 1,175,027 shares at March 31, 2020 and December 31, 2019	(18,847		)	(18,847	)
Accumulated other comprehensive income, net of taxes	3,156			673
TOTAL SHAREHOLDERS' EQUITY	233,478			228,048
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,636,280		1,639,308



	March 31, 2020		December 31, 2019
Affordable housing tax credit investment	$	7,000	7,000
Less amortization	936		810
Net affordable housing tax credit investment	$	6,064	6,190

Unfunded commitment	$	4,344	4,596



	Outstanding Stock Options				Exercisable Stock Options
Exercise Price Range	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
$11.00 - $12.99	311	$	12.60	1.9	311	$	12.60	1.9