LCNB (LCNB) 10-Q 2019 Q1 Quarterly report

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, 2019

☐ 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)

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 ☐

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 7, 2019 was 13,308,749 shares.

LCNB CORP. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION	2
Item 1.  Financial Statements	2
CONSOLIDATED CONDENSED BALANCE SHEETS	2
CONSOLIDATED CONDENSED STATEMENTS OF INCOME	3
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)	4
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY	5
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS	6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS	7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of  Operations	39
Item 3.  Quantitative and Qualitative Disclosures about Market Risks	48
Item 4.  Controls and Procedures	49
PART II.  OTHER INFORMATION	50
Item 1.   Legal Proceedings	50
Item 1A.  Risk Factors	50
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.   Defaults Upon Senior Securities	50
Item 4.   Mine Safety Disclosures	50
Item 5.   Other Information	50
Item 6.   Exhibits	51
SIGNATURES	52

1

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, 2019			December 31, 2018
	(Unaudited)
ASSETS:
Cash and due from banks	$	14,358		18,310
Interest-bearing demand deposits	5,169			1,730
Total cash and cash equivalents	19,527			20,040
Interest-bearing time deposits	747			996
Investment securities:
Equity securities with a readily determinable fair value, at fair value	2,185			2,078
Equity securities without a readily determinable fair value, at cost	2,099			2,099
Debt securities, available-for-sale, at fair value	217,668			238,421
Debt securities, held-to-maturity, at cost	32,363			29,721
Federal Reserve Bank stock, at cost	4,652			4,653
Federal Home Loan Bank stock, at cost	4,845			4,845
Loans, net	1,203,008			1,194,577
Premises and equipment, net	32,548			32,627
Operating lease right-of-use assets	5,348			—
Goodwill	59,221			59,221
Core deposit and other intangibles	4,760			5,042
Bank owned life insurance	28,905			28,723
Other assets	14,511			13,884
TOTAL ASSETS	$	1,632,387		1,636,927
LIABILITIES:
Deposits:
Noninterest-bearing	$	330,324		322,571
Interest-bearing	1,017,533			978,348
Total deposits	1,347,857			1,300,919
Short-term borrowings	—			56,230
Long-term debt	42,982			47,032
Operating lease liabilities	5,289			—
Accrued interest and other liabilities	12,241			13,761
TOTAL LIABILITIES	1,408,369			1,417,942
COMMITMENTS AND CONTINGENT LIABILITIES	—			—
SHAREHOLDERS' EQUITY:
Preferred shares – no par value, authorized 1,000,000 shares, none outstanding	—			—
Common shares – no par value; authorized 19,000,000 shares; issued 14,089,175 and 14,070,303 shares at March 31, 2019 and December 31, 2018, respectively	141,349			141,170
Retained earnings	96,912			94,547
Treasury shares at cost, 775,027 shares at March 31, 2019 and December 31, 2018	(12,013		)	(12,013	)
Accumulated other comprehensive loss, net of taxes	(2,230		)	(4,719	)
TOTAL SHAREHOLDERS' EQUITY	224,018			218,985
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,632,387		1,636,927

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

The consolidated condensed balance sheet as of December 31, 2018 has been derived from the audited consolidated balance sheet as of that day.

2

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)

	Three Months Ended   March 31,
	2019			2018
INTEREST INCOME:
Interest and fees on loans	$	14,538		9,413
Dividends on equity securities:
With a readily determinable fair value	17			15
Without a readily determinable fair value	16			7
Interest on debt securities:
Taxable	869			931
Non-taxable	544			704
Interest on interest-bearing time deposits	5			—
Other investments	124			72
TOTAL INTEREST INCOME	16,113			11,142
INTEREST EXPENSE:
Interest on deposits	2,286			871
Interest on short-term borrowings	219			69
Interest on long-term debt	217			14
TOTAL INTEREST EXPENSE	2,722			954
NET INTEREST INCOME	13,391			10,188
(CREDIT) PROVISION FOR LOAN LOSSES	(105		)	79
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	13,496			10,109
NON-INTEREST INCOME:
Fiduciary income	1,034			964
Service charges and fees on deposit accounts	1,308			1,305
Bank owned life insurance income	182			186
Gains from sales of loans	29			22
Other operating income	237			159
TOTAL NON-INTEREST INCOME	2,790			2,636
NON-INTEREST EXPENSE:
Salaries and employee benefits	6,162			4,977
Equipment expenses	266			253
Occupancy expense, net	763			727
State franchise tax	438			303
Marketing	302			132
Amortization of intangibles	257			185
FDIC insurance premiums	126			99
Contracted services	464			315
Net loss from sales of debt securities, available-for-sale	18			—
Other real estate owned	3			2
Merger-related expenses	67			758
Other non-interest expense	1,852			1,798
TOTAL NON-INTEREST EXPENSE	10,718			9,549
INCOME BEFORE INCOME TAXES	5,568			3,196
PROVISION FOR INCOME TAXES	941			483
NET INCOME	$	4,627		2,713
Dividends declared per common share	$	0.17		0.16
Earnings per common share:
Basic	$	0.35		0.27
Diluted	0.35			0.27
Weighted average common shares outstanding:
Basic	13,283,634			10,020,611
Diluted	13,287,338			10,028,588

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

3

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

	Three Months Ended   March 31,
	2019		2018
Net income	$	4,627	2,713
Other comprehensive income (loss):
Net unrealized gain (loss) on available-for-sale securities (net of taxes of $659 and $(792) for the three months ended March 31, 2019 and 2018, respectively)	2,475		(2,979	)
Reclassification adjustment for net realized loss on sale of available-for-sale securities included in net income (net of taxes of $4 for the three months ended March 31, 2019)	14		—
Change in nonqualified pension plan unrecognized net loss and unrecognized prior service cost (net of taxes of $1 for the three months ended March 31, 2018)	—		3
Other comprehensive income (loss), net of tax	2,489		(2,976	)
TOTAL COMPREHENSIVE INCOME	$	7,116	(263	)

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

4

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 (Loss)		Total Shareholders' Equity
For the Threee 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
For the Three Months Ended March 31, 2018
Balance at December 31, 2017	10,023,059	$	76,977	87,301		(11,665	)	(2,342	)	150,271
Cumulative effect of changes in accounting principles (1)				525				(525	)	—
Balance at December 31, 2017, as adjusted	10,023,059	$	76,977	87,826		(11,665	)	(2,867	)	150,271
Net income				2,713						2,713
Other comprehensive loss, net of taxes								(2,976	)	(2,976	)
Dividend Reinvestment and Stock Purchase Plan	4,828	93								93
Exercise of stock options	2,631	33								33
Compensation expense relating to restricted stock	10,634	56								56
Common stock dividends, $0.16 per share				(1,606	)					(1,606	)
Balance at March 31, 2018	10,041,152	$	77,159	88,933		(11,665	)	(5,843	)	148,584
(1) Represents the impact of adopting Accounting Standards Update No. 2018-02 and No. 2016-01.

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

5

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended   March 31,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,627		2,713
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation, amortization, and accretion	747			988
(Credit) provision for loan losses	(105		)	79
Deferred income tax provision (benefit)	51			(81	)
Increase in cash surrender value of bank owned life insurance	(182		)	(186	)
Realized (gain) loss from equity securities	(93		)	23
Realized loss from sales of debt securities, available-for-sale	18			—
Realized gain from sales of premises and equipment	—			(1	)
Origination of mortgage loans for sale	(1,263		)	(868	)
Realized gains from sales of loans	(29		)	(22	)
Proceeds from sales of mortgage loans	1,280			879
Compensation expense related to restricted stock	70			56
Changes in:
Accrued income receivable	(1,072		)	(692	)
Other assets	(129		)	(4	)
Other liabilities	(1,597		)	(1,468	)
TOTAL ADJUSTMENTS	(2,304		)	(1,297	)
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES	2,323			1,416
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of equity securities	331			65
Proceeds from sales of debt securities, available-for-sale	21,806			—
Proceeds from maturities and calls of debt securities:
Available-for-sale	1,790			3,124
Held-to-maturity	506			589
Purchases of equity securities	(345		)	(71	)
Purchases of debt securities:
Available-for-sale	—			—
Held-to-maturity	(3,148		)	(520	)
Proceeds from maturities of interest-bearing time deposits	249			—
Proceeds from redemption of Federal Reserve Bank stock	1			—
Net increase in loans	(8,191		)	(7,488	)
Purchases of premises and equipment	(335		)	(86	)
Proceeds from sale of premises and equipment	—			1
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES	12,664			(4,386	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	46,938			37,642
Net decrease in short-term borrowings	(56,230		)	(47,000	)
Proceeds from long-term debt	—			6,000
Principal payments on long-term debt	(4,055		)	(84	)
Proceeds from issuance of common stock	14			11
Proceeds from exercise of stock options	—			33
Cash dividends paid on common stock	(2,167		)	(1,524	)
NET CASH FLOWS USED IN FINANCING ACTIVITIES	(15,500		)	(4,922	)
NET CHANGE IN CASH AND CASH EQUIVALENTS	(513		)	(7,892	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	20,040			25,386
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	19,527		17,494
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	2,607		976

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

6

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").  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 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, 2018 has been derived from the audited consolidated balance sheet as of that day.

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

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

Results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019.  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 2018 Annual Report on Form 10-K filed with the SEC.

Accounting Changes

ASU No. 2016-02, "Leases (Topic 842)"

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

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

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

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

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

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

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

7

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 1 - Basis of Presentation (continued)

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

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

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

Revenue Recognition

Accounting Standards Codification 606, "Revenue from Contracts with Customers" ("ASC 606") provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance enumerates five steps that entities should follow in achieving this core principle. Revenue generated from financial instruments, including loans and investment securities, are not included in the scope of ASC 606. The adoption of ASC 606 did not result in a change to the accounting for any of LCNB's revenue streams that are within the scope of the amendments. Revenue-generating activities that are within the scope of ASC 606 and that are presented as non-interest income in LCNB's consolidated condensed statements of income include:

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

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

Note 2 – Acquisition

On December 20, 2017, LCNB and Columbus First Bancorp, Inc. (“CFB”) entered into an Agreement and Plan of Merger (“Merger Agreement”) pursuant to which CFB merged with and into LCNB on May 31, 2018. Immediately following the merger of CFB into LCNB, Columbus First Bank, a wholly-owned subsidiary of CFB, merged into the Bank. Columbus First Bank operated from one full-service office located in Worthington, Ohio. That office became a branch of the Bank after the merger.

Under the terms of the Merger Agreement, the shareholders of CFB received two shares of LCNB common stock for each outstanding CFB common share. Unexercised stock options of CFB were canceled in exchange for a cash payment.

8

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 2 – Acquisition (continued)

The merger with CFB was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at their estimated fair values as of the merger date. The estimated fair values reported in LCNB's Form 10-Q for the quarterly period ended June 30, 2018 were preliminary, as the pricing study had not been finalized at that time. The following table summarizes the preliminary balances at June 30, 2018, revisions to the preliminary balances, and the balances at December 31, 2018 (in thousands):

	June 30, 2018		Fair Value Adjustments		December 31, 2018
Consideration Paid:
Common shares issued (3,253,060 shares issued at $19.55 per share)	$	63,598	—		63,598
Cash paid to cancel share based payment awards	783		—		783
	64,381		—		64,381
Identifiable Assets Acquired:
Cash and cash equivalents	13,679		—		13,679
Interest-bearing time deposits	10,350		—		10,350
Federal Home Loan Bank stock	1,207		—		1,207
Loans, net	282,748		(615	)	282,133
Loans held for sale, net	1,819		—		1,819
Premises and equipment	102		—		102
Core deposit intangible	2,089		88		2,177
Other real estate owned	35		—		35
Deferred income taxes	—		352		352
Other assets	2,022		(658	)	1,364
Total identifiable assets acquired	314,051		(833	)	313,218
Liabilities Assumed:
Deposits	245,036		(606	)	244,430
Short-term borrowings	10,000		—		10,000
Long-term debt	22,920		23		22,943
Deferred income taxes	200		(200	)	—
Other liabilities	491		11		502
Total liabilities assumed	278,647		(772	)	277,875
Total Identifiable Net Assets Acquired	35,404		(61	)	35,343
Goodwill resulting from merger	$	28,977	61		29,038

As permitted by ASC No. 805-10-25, Business Combinations, the above estimated amounts may be adjusted up to one year after the closing date of the acquisition to reflect any new information obtained about facts and circumstances existing at the acquisition date. Any changes in the estimated fair values will be recognized in the period the adjustment is identified. There were no revisions during the first quarter 2019.

The amount of goodwill recorded reflects LCNB's expansion in the Columbus market and related synergies that are expected to result from the acquisition and represents the excess purchase price over the estimated fair value of the net assets acquired. The goodwill will not be amortizable on LCNB's financial records and will not be deductible for tax purposes. Goodwill will be subject to an annual test for impairment and the amount impaired, if any, will be charged to expense at the time of impairment.

9

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 2 – Acquisition (continued)

The core deposit intangible will be amortized over the estimated weighted average economic life of the various core deposit types.

Direct costs related to the acquisition were expensed as incurred and are recorded as a merger-related expense in the consolidated condensed statements of income.

CFB's results of operations are included in the consolidated condensed statements of income from May 31, 2018, the date of the merger.

Note 3 - Investment Securities

The amortized cost and estimated fair value of equity and debt securities at March 31, 2019 and December 31, 2018 are summarized as follows (in thousands):

	Amortized Cost		Unrealized Gains	Unrealized Losses	Fair Value
March 31, 2019
Debt Securities, Available-for-Sale:
U.S. Treasury notes	$	2,276	—	19	2,257
U.S. Agency notes	75,681		—	1,231	74,450
U.S. Agency mortgage-backed securities	55,718		9	1,161	54,566
Municipal securities:
Non-taxable	70,068		163	516	69,715
Taxable	16,635		133	88	16,680
	$	220,378	305	3,015	217,668
Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable	$	25,915	68	187	25,796
Taxable	6,448		36	53	6,431
	$	32,363	104	240	32,227
December 31, 2018
Debt Securities, Available-for-Sale:
U.S. Treasury notes	$	2,278	—	43	2,235
U.S. Agency notes	80,708		—	2,368	78,340
U.S. Agency mortgage-backed securities	57,584		7	1,981	55,610
Municipal securities:
Non-taxable	86,059		77	1,422	84,714
Taxable	17,654		102	234	17,522
	$	244,283	186	6,048	238,421
Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable	$	26,021	84	635	25,470
Taxable	3,700		—	146	3,554
	$	29,721	84	781	29,024

10

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 - Investment Securities (continued)

Information concerning debt securities with gross unrealized losses at March 31, 2019 and December 31, 2018, 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, 2019
Available-for-Sale:
U.S. Treasury notes	$	—	—	2,257	19
U.S. Agency notes	—		—	74,450	1,231
U.S. Agency mortgage-backed securities	111		—	54,245	1,161
Municipal securities:
Non-taxable	619		1	43,862	515
Taxable	—		—	13,001	88
	$	730	1	187,815	3,014
Held-to-Maturity:
Municipal securities:
Non-taxable	$	—	—	18,537	187
Taxable	—		—	3,247	53
	$	—	—	21,784	240
December 31, 2018
Available-for-Sale:
U.S. Treasury notes	$	—	—	2,235	43
U.S. Agency notes	4,988		7	73,351	2,361
U.S. Agency mortgage-backed securities	137		—	55,217	1,981
Municipal securities:
Non-taxable	14,264		49	58,211	1,373
Taxable	—		—	14,407	234
	$	19,389	56	203,421	5,992
Held-to-Maturity:
Municipal securities:
Non-taxable	$	366	1	18,588	634
Taxable	400		1	3,154	145
	$	766	2	21,742	779

Management has determined that the unrealized losses at March 31, 2019 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.

11

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 - Investment Securities (continued)

Contractual maturities of debt securities at March 31, 2019 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	$	15,455	15,425	2,800	2,799
Due from one to five years	98,030		97,128	6,274	6,270
Due from five to ten years	49,458		48,863	7,982	7,946
Due after ten years	1,717		1,686	15,307	15,212
	164,660		163,102	32,363	32,227
U.S. Agency mortgage-backed securities	55,718		54,566	—	—
	$	220,378	217,668	32,363	32,227

Debt securities with a market value of $168,251,000 and $106,568,000 at March 31, 2019 and December 31, 2018, 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, 2019 and 2018 was as follows (in thousands):

	Three Months Ended   March 31,
	2019	2018
Proceeds from sales	21,806	—
Gross realized gains	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, 2019 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, 2019 and December 31, 2018 are summarized as follows (in thousands):

	March 31, 2019			December 31, 2018
	Amortized Cost		Fair Value	Amortized Cost	Fair Value
Mutual funds	$	1,349	1,299	1,651	1,559
Equity securities	780		886	471	519
Total equity securities with a readily determinable fair value	$	2,129	2,185	2,122	2,078

12

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 - 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, 2019 was as follows (in thousands):

	Three Months Ended   March 31,
	2019			2018
Net gains (losses) recognized	$	93		(23	)
Less net realized gains (losses) on equity securities sold	(6		)	23
Unrealized gains (losses) recognized and still held at period end	$	99		(46	)

Note 4 - Loans

Major classifications of loans at March 31, 2019 and December 31, 2018 are as follows (in thousands):

	March 31, 2019		December 31, 2018
Commercial and industrial	$	79,725	77,740
Commercial, secured by real estate	764,424		740,647
Residential real estate	334,227		349,127
Consumer	17,409		17,283
Agricultural	10,900		13,297
Other loans, including deposit overdrafts	409		450
Loans, gross	1,207,094		1,198,544
Deferred origination costs, net	40		79
Loans, net of deferred origination costs	1,207,134		1,198,623
Less allowance for loan losses	4,126		4,046
Loans, net	$	1,203,008	1,194,577

Non-accrual, past-due, and accruing restructured loans as of March 31, 2019 and December 31, 2018 are as follows (in thousands):

	March 31, 2019		December 31, 2018
Non-accrual loans:
Commercial and industrial	$	—	—
Commercial, secured by real estate	1,983		1,767
Residential real estate	862		1,007
Consumer	—		—
Agricultural	—		177
Total non-accrual loans	2,845		2,951
Past-due 90 days or more and still accruing	177		149
Total non-accrual and past-due 90 days or more and still accruing	3,022		3,100
Accruing restructured loans	8,136		10,516
Total	$	11,158	13,616

13

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 4 – Loans (continued)

The allowance for loan losses for the three months ended March 31, 2019 and 2018 are as follows (in thousands):

	Commercial & Industrial		Commercial, Secured by Real Estate		Residential Real Estate		Consumer		Agricultural		Other		Total
Three Months Ended March 31, 2019
Balance, beginning of year	$	400	2,745		767		87		46		1		4,046
(Credit) provision charged to expenses	51		57		(195	)	(31	)	(5	)	18		(105	)
Losses charged off	—		—		(33	)	—		—		(31	)	(64	)
Recoveries	—		56		154		21		—		18		249
Balance, end of period	$	451	2,858		693		77		41		6		4,126
Three Months Ended March 31, 2018
Balance, beginning of year	$	378	2,178		717		76		53		1		3,403
(Credit) provision charged to expenses	15		(131	)	186		8		(9	)	10		79
Losses charged off	—		(29	)	(35	)	(11	)	—		(31	)	(106	)
Recoveries	—		125		1		5		—		22		153
Balance, end of period	$	393	2,143		869		78		44		2		3,529

14

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 4 – Loans (continued)

A breakdown of the allowance for loan losses and the loan portfolio by loan segment at March 31, 2019 and December 31, 2018 are as follows (in thousands):

	Commercial & Industrial		Commercial, Secured by Real Estate	Residential Real Estate	Consumer	Agricultural	Other	Total
March 31, 2019
Allowance for loan losses:
Individually evaluated for impairment	$	9	2	29	—	—	—	40
Collectively evaluated for impairment	442		2,849	664	77	41	6	4,079
Acquired credit impaired loans	—		7	—	—	—	—	7
Balance, end of period	$	451	2,858	693	77	41	6	4,126
Loans:
Individually evaluated for impairment	$	258	11,487	1,305	34	—	—	13,084
Collectively evaluated for impairment	78,919		746,161	330,138	17,492	10,914	65	1,183,689
Acquired credit impaired loans	605		6,219	3,193	—	—	344	10,361
Balance, end of period	$	79,782	763,867	334,636	17,526	10,914	409	1,207,134
December 31, 2018
Allowance for loan losses:
Individually evaluated for impairment	$	10	3	49	—	—	—	62
Collectively evaluated for impairment	390		2,742	718	87	46	1	3,984
Acquired credit impaired loans	—		—	—	—	—	—	—
Balance, end of period	$	400	2,745	767	87	46	1	4,046
Loans:
Individually evaluated for impairment	$	268	15,101	1,558	36	177	—	17,140
Collectively evaluated for impairment	76,609		718,709	344,751	17,363	13,135	114	1,170,681
Acquired credit impaired loans	922		6,315	3,229	—	—	336	10,802
Balance, end of period	$	77,799	740,125	349,538	17,399	13,312	450	1,198,623

15

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 4 – Loans (continued)

The risk characteristics of LCNB's material loan portfolio segments are 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 industrial loans have a fixed 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.

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%.

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 or 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.

16

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 4 – 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, 2019 and December 31, 2018 is as follows (in thousands):

	Pass		OAEM	Substandard	Doubtful	Total
March 31, 2019
Commercial & industrial	$	78,062	192	1,528	—	79,782
Commercial, secured by real estate	743,661		758	19,448	—	763,867
Residential real estate	331,823		—	2,813	—	334,636
Consumer	17,504		—	22	—	17,526
Agricultural	10,883		—	31	—	10,914
Other	409		—	—	—	409
Total	$	1,182,342	950	23,842	—	1,207,134
December 31, 2018
Commercial & industrial	$	74,530	89	3,180	—	77,799
Commercial, secured by real estate	718,233		768	21,124	—	740,125
Residential real estate	344,432		—	5,106	—	349,538
Consumer	17,381		—	18	—	17,399
Agricultural	13,116		—	196	—	13,312
Other	450		—	—	—	450
Total	$	1,168,142	857	29,624	—	1,198,623

17

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 4 – Loans (continued)

A loan portfolio aging analysis at March 31, 2019 and December 31, 2018 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, 2019
Commercial & industrial	$	45	—	—	45	79,737	79,782	—
Commercial, secured by real estate	—		189	236	425	763,442	763,867	140
Residential real estate	631		34	555	1,220	333,416	334,636	37
Consumer	3		14	—	17	17,509	17,526	—
Agricultural	31		—	—	31	10,883	10,914	—
Other	65		—	—	65	344	409	—
Total	$	775	237	791	1,803	1,205,331	1,207,134	177
December 31, 2018
Commercial & industrial	$	626	173	—	799	77,000	77,799	—
Commercial, secured by real estate	347		141	347	835	739,290	740,125	—
Residential real estate	905		536	1,046	2,487	347,051	349,538	149
Consumer	14		—	—	14	17,385	17,399	—
Agricultural	19		—	178	197	13,115	13,312	—
Other	114		—	—	114	336	450	—
Total	$	2,025	850	1,571	4,446	1,194,177	1,198,623	149

Impaired loans, including acquired credit impaired loans, at March 31, 2019 and December 31, 2018 are as follows (in thousands):

	March 31, 2019				December 31, 2018
	Recorded Investment		Unpaid Principal Balance	Related Allowance	Recorded Investment	Unpaid Principal Balance	Related Allowance
With no related allowance recorded:
Commercial & industrial	$	608	1,143	—	926	1,457	—
Commercial, secured by real estate	17,465		18,459	—	21,266	22,451	—
Residential real estate	3,886		4,583	—	4,122	4,872	—
Consumer	13		13	—	13	13	—
Agricultural	—		—	—	177	177	—
Other	344		475	—	336	475	—
Total	$	22,316	24,673	—	26,840	29,445	—
With an allowance recorded:
Commercial & industrial	$	255	261	9	264	269	10
Commercial, secured by real estate	241		427	9	150	150	3
Residential real estate	612		637	29	665	684	49
Consumer	21		21	—	23	23	—
Agricultural	—		—	—	—	—	—
Other	—		—	—	—	—	—
Total	$	1,129	1,346	47	1,102	1,126	62
Total:
Commercial & industrial	$	863	1,404	9	1,190	1,726	10
Commercial, secured by real estate	17,706		18,886	9	21,416	22,601	3
Residential real estate	4,498		5,220	29	4,787	5,556	49
Consumer	34		34	—	36	36	—
Agricultural	—		—	—	177	177	—
Other	344		475	—	336	475	—
Total	$	23,445	26,019	47	27,942	30,571	62

18

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 4 – 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, 2019 and 2018 (in thousands):

	2019			2018
	Average Recorded Investment		Interest Income Recognized	Average Recorded Investment	Interest Income Recognized
Three Months Ended March 31,
With no related allowance recorded:
Commercial & industrial	$	767	7	639	11
Commercial, secured by real estate	18,302		199	14,991	196
Residential real estate	3,916		47	2,791	45
Consumer	13		—	6	—
Agricultural	—		—	177	—
Other	340		9	407	11
Total	$	23,338	262	19,011	263
With an allowance recorded:
Commercial & industrial	$	259	4	291	4
Commercial, secured by real estate	244		12	157	3
Residential real estate	622		8	755	9
Consumer	22		—	41	1
Agricultural	—		—	—	—
Other	—		—	—	—
Total	$	1,147	24	1,244	17
Total:
Commercial & industrial	$	1,026	11	930	15
Commercial, secured by real estate	18,546		211	15,148	199
Residential real estate	4,538		55	3,546	54
Consumer	35		—	47	1
Agricultural	—		—	177	—
Other	340		9	407	11
Total	$	24,485	286	20,255	280

Of the interest income recognized on impaired loans during the three months ended March 31, 2019 and 2018, approximately $0 and $20,000, respectively, were recognized on a cash basis.

19

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 4 – Loans (continued)

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, 2019 and 2018 were as follows:

	2019				2018
	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,
Commercial and industrial	—	$	—	—	—	$	—	—
Commercial, secured by real estate	2	258		258	—	—		—
Residential real estate	2	54		54	—	—		—
Consumer	—	—		—	—	—		—
Total	4	$	312	312	—	$	—	—

Post-modification balances of newly restructured troubled debt by type of modification for the three months ended March 31, 2019 and 2018 were as follows (in thousands):

	Term Modification		Rate Modification	Interest Only	Principal Forgiveness	Combination	Total Modifications
Three Months Ended March 31, 2019
Commercial & industrial	$	—	—	—	—	—	—
Commercial, secured by real estate	—		—	—	—	258	258
Residential real estate	54		—	—	—	—	54
Consumer	—		—	—	—	—	—
Total	$	54	—	—	—	258	312
Three Months Ended March 31, 2018
Commercial & industrial	$	—	—	—	—	—	—
Commercial, secured by real estate	—		—	—	—	—	—
Residential real estate	—		—	—	—	—	—
Consumer	—		—	—	—	—	—
Total	$	—	—	—	—	—	—

There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the three months ended March 31, 2019 and 2018 and that remained in default at period end.

20

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 4 – Loans (continued)

Information concerning loans that were modified during the three months ended March 31, 2019 and 2018 and that were determined to be troubled debt restructurings follows (in thousands):

	2019		2018
Impaired loans without a valuation allowance at the end of the period	$	312	—
Impaired loans with a valuation allowance at the end of the period	—		—

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, 2019 and December 31, 2018 were approximately $89,049,000 and $97,685,000, respectively.

The total recorded investment in residential consumer mortgage loans secured by residential real estate that were in the process of foreclosure at March 31, 2019 was $197,000.

Note 5 - 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 FASB Accounting Standards Codification ("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.

21

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 5 – Acquired Credit Impaired Loans (continued)

The following table provides at March 31, 2019 and December 31, 2018 the major classifications of acquired credit impaired loans that are accounted for in accordance with FASB ASC 310-30 (in thousands):

	March 31, 2019		December 31, 2018
Acquired from First Capital Bancshares, Inc.
Commercial & industrial	$	11	13
Commercial, secured by real estate	809		818
Residential real estate	900		911
Other loans, including deposit overdrafts	—		—
Loans, gross	1,720		1,742
Less allowance for loan losses	—		—
Loans, net	$	1,720	1,742
Acquired from Eaton National Bank & Trust Co.
Commercial & industrial	$	229	503
Commercial, secured by real estate	1,513		1,547
Residential real estate	765		784
Other loans, including deposit overdrafts	344		336
Loans, gross	2,851		3,170
Less allowance for loan losses	—		—
Loans, net	$	2,851	3,170
Acquired from BNB Bancorp, Inc.
Commercial & industrial	$	—	—
Commercial, secured by real estate	1,375		1,396
Residential real estate	152		158
Other loans, including deposit overdrafts	—		—
Loans, gross	1,527		1,554
Less allowance for loan losses	—		—
Loans, net	$	1,527	1,554
Acquired from Columbus First Bancorp, Inc.
Commercial & industrial	$	365	406
Commercial, secured by real estate	2,522		2,554
Residential real estate	1,376		1,376
Other loans, including deposit overdrafts	—		—
Loans, gross	4,263		4,336
Less allowance for loan losses	7		—
Loans, net	$	4,256	4,336
Total
Commercial & industrial	$	605	922
Commercial, secured by real estate	6,219		6,315
Residential real estate	3,193		3,229
Other loans, including deposit overdrafts	344		336
Loans, gross	10,361		10,802
Less allowance for loan losses	7		—
Loans, net	$	10,354	10,802

22

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 5 – 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, 2019		December 31, 2018
Outstanding balance	$	12,860	13,371
Carrying amount	10,354		10,802

Activity during the three months ended March 31, 2019 and 2018 for the accretable discount related to acquired credit impaired loans is as follows (in thousands):

	Three Months Ended March 31,
	2019		2018
Accretable discount at beginning of period	743		669
Accretable discount acquired during period	—		—
Reclassification from nonaccretable discount to accretable discount	—		—
Disposals	1		—
Accretion	(25	)	(34	)
Accretable discount at end of period	719		635

Note 6 - 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, 2019 and December 31, 2018 (in thousands):

	March 31, 2019		December 31, 2018
Affordable housing tax credit investment	$	5,000	5,000
Less amortization	537		492
Net affordable housing tax credit investment	$	4,463	4,508
Unfunded commitment	$	3,151	3,372

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 11 years.

23

LCNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 6 – 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, 2019 and 2018 (in thousands):

	2019		2018
Tax credits and other tax benefits recognized	$	84	56
Tax credit amortization expense included in provision for income taxes	45		56

Note 7 – Borrowings

Borrowings at March 31, 2019 and December 31, 2018 are as follows (dollars in thousands):

	March 31, 2019				December 31, 2018
	Amount		Rate		Amount		Rate
Line of credit	$	—	—	%	$	4,230	3.00	%
FHLB short-term advances	—		—	%	52,000		2.48	%
FHLB long-term advances	42,982		2.52	%	47,032		2.45	%
	$	42,982	2.52	%	$	103,262	2.49	%

All advances from the Federal Home Loan Bank ("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 $290 million and $303 million at March 31, 2019 and December 31, 2018, respectively.  Additionally, LCNB is required to hold minimum levels of FHLB stock, based on the outstanding borrowings. Total remaining borrowing capacity at March 31, 2019 was approximately $101.8 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 8 - Leases

LCNB has operating leases for its Otterbein, Fairfield, Barron Street , and Worthington offices, for the land at its Oxford and Oakwood offices, and for certain office equipment. The Oakwood lease has a remaining term of about 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 of the right-of-use assets and the lease liabilities. The lease 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.

24

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 8 – Leases (continued)

Lease expenses for offices are included in the consolidated condensed statements of income in occupancy expense, net and lease expenses for equipment are included in equipment expenses. Components of lease expense for the three months ended March 31, 2019 are as follows (in thousands):

Operating lease expense	$	140
Short-term lease expense	12
Variable lease expense	2
Other	5
Total lease expense	$	159

Other information related to leases at March 31, 2019 were as follows (dollars in thousands):

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	106
Right-of-use assets obtained in exchange for new operating lease liabilities	$	5,364
Weighted average remaining lease term in years for operating leases	41 years
Weighted average discount rate for operating leases	3.63		%

As of March 31, 2019, LCNB had signed a new lease for its Barron Street office in Eaton, Ohio, which commenced April 1, 2019. The new lease is for five years and has an option to renew for one additional period of five years. The right-of-use asset and the lease liability for this new lease will be recognized on the date of commencement.

Note 9 – Income Taxes

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

	For the Three Months Ended March 31,
	2019		2018
Statutory tax rate	21.0	%	21.0	%
Increase (decrease) resulting from:
Tax exempt interest	(1.9	)%	(4.5	)%
Tax exempt income on bank owned life insurance	(0.7	)%	(1.2	)%
Captive insurance premium income	(0.9	)%	(0.6	)%
Other, net	(0.6	)%	0.4	%
Effective tax rate	16.9	%	15.1	%

Note 10 - 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.

25

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 10 – 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, 2019 and December 31, 2018 are as follows (in thousands):

	March 31, 2019		December 31, 2018
Commitments to extend credit:
Commercial loans	$	39,419	23,978
Other loans
Fixed rate	2,116		2,961
Adjustable rate	3,302		1,077
Unused lines of credit:
Fixed rate	18,441		31,446
Adjustable rate	153,974		169,031
Unused overdraft protection amounts on demand and NOW accounts	16,282		16,249
Standby letters of credit	883		1,080
Total commitments	$	234,417	245,822

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.

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, 2019 totaled approximately $4,565,000.

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.

26

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 11 – Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2019 and the year ended December 31, 2018 are as follows (in thousands):

	Unrealized Gains and Losses on Available-for-Sale Securities			Changes in Pension Plan Assets and Benefit Obligations		Total
Three Months Ended March 31, 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	)
Year Ended December 31, 2018:
Balance at beginning of period	$	(2,200	)	(142	)	(2,342	)
Cumulative effect of changes in accounting principles	(498		)	(27	)	(525	)
Balance at beginning of period, as adjusted	(2,698		)	(169	)	(2,867	)
Before reclassifications	(1,939		)	81		(1,858	)
Reclassifications	6			—		6
Balance at end of period	$	(4,631	)	(88	)	(4,719	)

Reclassifications out of accumulated other comprehensive income (loss) during the three months ended March 31, 2019 and 2018 and the affected line items in the consolidated condensed statements of income are as follows (in thousands):

	Three Months Ended March 31,			Affected Line Item in the Consolidated Condensed Statements of Income
	2019		2018
Realized loss on sale of debt securities	(18	)	—	Net loss from sales of debt securities, available-for-sale
Less provision for income taxes	(4	)	—	Provision for income taxes
Reclassification adjustment, net of taxes	(14	)	—

Note 12 – 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.  

27

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 12 – 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 periods ended March 31, 2019 and 2018 are as follows (in thousands):

	For the Three Months Ended March 31,
	2019	2018
Qualified noncontributory defined benefit retirement plan	256	$	261
401(k) plan	143	110

Certain highly compensated 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, 2019 and 2018 are summarized as follows (in thousands):

	Three Months Ended March 31,
	2019	2018
Service cost	—	—
Interest cost	18	17
Amortization of unrecognized net loss	—	4
Net periodic pension cost	18	21

Amounts recognized in accumulated other comprehensive income (loss), net of tax, at March 31, 2019 and December 31, 2018 for the nonqualified defined benefit retirement plan consists of (in thousands):

	March 31, 2019		December 31, 2018
Net actuarial (gain) loss	$	—	88
Past service cost	—		—
Total recognized, net of tax	$	—	88

Note 13 – 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. The 2002 Plan expired on April 16, 2012. Any outstanding unexercised options, however, continue to be exercisable in accordance with their terms.

The 2015 Ownership Incentive Plan (the "2015 Plan") was 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.

28

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 13 – 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, 2019 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	13,278	11.98	1.9	13,278	11.98	1.9

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

	Three Months Ended March 31,
	2019				2018
	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,	13,278	$	11.98		20,265		$	11.42
Granted	—	—			—		—
Exercised	—	—			(2,631	)	12.55
Expired	—	—			—		—
Outstanding, March 31,	13,278	11.98		68,593	17,634		11.25		137,000
Exercisable, March 31,	13,278	11.98		68,593	17,634		11.25		137,000
(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,
	2019		2018
Intrinsic value of options exercised	$	—	17
Cash received from options exercised	—		33
Tax benefit realized from options exercised	—		2

Compensation cost related to option awards was recognized in full during the first quarter 2017.

29

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 13 – Stock Based Compensation (continued)

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

	2019				2018
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Outstanding, January 1,	16,958		$	18.94	8,817		$	16.44
Granted	12,504		16.95		10,634		19.20
Vested	(2,795	)	20.01		(669	)	22.60
Forfeited	—		—		—		—
Outstanding, March 31,	26,667		$	17.89	18,782		$	17.78

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, 2019 and 2018 (in thousands):

	Three Months Ended   March 31,
	2019	2018
Restricted stock expense	70	56
Tax effect	15	12

Unrecognized compensation expense for restricted stock awards was $323,000 at March 31, 2019 and is expected to be recognized over a period of 5.0 years.

Note 14 – 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 FASB 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.  

30

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 14 – Earnings per Common Share (continued)

Earnings per share for the three months ended March 31, 2019 and 2018 were calculated as follows (dollars in thousands, except share and per share data):

	For the Three Months Ended March 31,
	2019		2018
Net income	4,627		2,713
Less allocation of earnings and dividends to participating securities	8		4
Net income allocated to common shareholders	4,619		2,709
Weighted average common shares outstanding, gross	13,307,865		10,035,871
Less average participating securities	24,231		15,260
Weighted average number of shares outstanding used in the calculation of basic earnings per common share	13,283,634		10,020,611
Add dilutive effect of:
Stock options	3,704		7,977
Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share	13,287,338		10,028,588
Earnings per common share:
Basic	$	0.35	0.27
Diluted	0.35		0.27

There were no anti-dilutive stock options outstanding at March 31, 2019 or 2018.

Note 15 - 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.

31

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 15 - 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 trust preferred and 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 of the mutual funds measured at fair value using its NAV was sold during the first quarter 2019.

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 are 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 adjusted 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.

32

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 15 - 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, 2019 and December 31, 2018 (in thousands):

				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, 2019
Recurring fair value measurements:
	Equity securities with a readily determinable fair value:
	Equity securities	$	886	886	—	—
	Mutual funds	43		43	—	—
	Mutual funds measured at net asset value	1,256		1,256	—	—
	Debt securities, available-for-sale:
	U.S. Treasury notes	2,257		2,257	—	—
	U.S. Agency notes	74,450		—	74,450	—
	U.S. Agency mortgage-backed securities	54,566		—	54,566	—
	Municipal securities:
	Non-taxable	69,715		—	69,715	—
	Taxable	16,680		—	16,680	—
	Total recurring fair value measurements	$	219,853	4,442	215,411	—
Nonrecurring fair value measurements:
	Impaired loans	$	1,083	—	—	1,083
	Other real estate owned and repossessed assets	244		—	—	244
	Total nonrecurring fair value measurements	$	1,327	—	—	1,327
December 31, 2018
Recurring fair value measurements:
	Equity securities with a readily determinable fair value:
	Equity securities	$	519	519	—	—
	Mutual funds	39		39	—	—
	Mutual funds measured at net asset value	1,520		1,520	—	—
	Debt securities, available-for-sale:
	U.S. Treasury notes	2,235		2,235	—	—
	U.S. Agency notes	78,340		—	78,340	—
	U.S. Agency mortgage-backed securities	55,610		—	55,610	—
	Municipal securities:
	Non-taxable	84,714		—	84,714	—
	Taxable	17,522		—	17,522	—
	Total recurring fair value measurements	$	240,499	4,313	236,186	—
Nonrecurring fair value measurements:
	Impaired loans	$	1,039	—	—	1,039
	Other real estate owned and repossessed assets	244		—	—	244
	Total nonrecurring fair value measurements	$	1,283	—	—	1,283

33

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 15 - Fair Value Measurements (continued)

The following table presents quantitative information about unobservable inputs used in nonrecurring level 3 fair value measurements at March 31, 2019 and December 31, 2018 (dollars in thousands):

					Range
	Fair Value		Valuation Technique	Unobservable Inputs	High		Low		Weighted Average
March 31, 2019
Impaired loans	$	129	Estimated sales price	Adjustments for comparable properties, discounts to reflect current market conditions	Not applicable
	954		Discounted cash flows	Discount rate	8.25	%	4.50	%	6.87	%
Other real estate owned	244		Estimated sales price	Adjustments for comparable properties, discounts to reflect current market conditions	Not applicable
December 31, 2018
Impaired loans	$	45	Estimated sales price	Adjustments for comparable properties, discounts to reflect current market conditions	Not applicable
	994		Discounted cash flows	Discount rate	8.25	%	4.50	%	6.86	%
Other real estate owned	244		Estimated sales price	Adjustments for comparable properties, discounts to reflect current market conditions	Not applicable

34

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 15 - Fair Value Measurements (continued)

Carrying amounts and estimated fair values of financial instruments as of March 31, 2019 and December 31, 2018 are as follows (in thousands):

				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)
March 31, 2019
FINANCIAL ASSETS:
Cash and cash equivalents	$	19,527	19,527	19,527	—	—
Debt securities, held-to-maturity	32,363		32,227	—	—	32,227
Federal Reserve Bank stock	4,652		4,652	4,652	—	—
Federal Home Loan Bank stock	4,845		4,845	4,845	—	—
Loans, net	1,203,008		1,204,720	—	—	1,204,720
Accrued interest receivable	5,302		5,302	—	5,302	—
FINANCIAL LIABILITIES:
Deposits	1,347,857		1,348,251	1,024,049	324,202	—
Long-term debt	42,982		44,099	—	44,099	—
Accrued interest payable	662		662	—	662	—
December 31, 2018
FINANCIAL ASSETS:
Cash and cash equivalents	$	20,040	20,040	20,040	—	—
Investment securities, held-to-maturity	29,721		29,024	—	—	29,024
Federal Reserve Bank stock	4,653		4,653	4,653	—	—
Federal Home Loan Bank stock	4,845		4,845	4,845	—	—
Loans, net	1,194,577		1,183,041	—	—	1,183,041
Accrued interest receivable	4,317		4,317	—	4,317	—
FINANCIAL LIABILITIES:
Deposits	1,300,919		1,301,298	1,004,057	297,241	—
Short-term borrowings	56,230		56,230	56,230	—	—
Long-term debt	47,032		48,255	—	48,255	—
Accrued interest payable	690		690	—	690	—

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, 2019 and December 31, 2018.

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:

35

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 15 - 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.

Investment securities, held-to-maturity

Fair values for investment 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.

Note 16 – 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 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 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.

36

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 16 – Recent Accounting Pronouncements (continued)

ASU No. 2016-13 also amends the accounting for credit losses on available-for-sale debt securities 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 available-for-sale debt securities 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 available-for-sale debt securities 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.

ASU No. 2016-13 will take effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. While LCNB's Loan Committee expects that the implementation of ASU No. 2016-13 will increase the balance of the allowance for loan losses, it is continuing to evaluate the potential impact on LCNB's results of operations and financial position. The Loan Committee has completed analyzing its data collection efforts and is currently analyzing its pool segmentation and reporting mechanisms to prepare for adoption of this ASU. The financial statement impact of this new standard cannot be reasonably estimated at this time.

ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment"

ASU No. 2017-04 was issued in January 2017 and 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 the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of 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 allocated to that reporting unit. A public business entity that is an SEC filer should adopt the amendments in this update on a prospective basis for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Adoption of ASU No. 2017-04 is not expected to have a material impact on LCNB's results of operations or financial position.

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

ASU No. 2018-13 was issued in August 2018 and applies to all entities that are required to make disclosures about recurring or nonrecurring fair value measurements. The amendments in this update modify fair value disclosure requirements, including the deletion, modification, and addition of certain targeted disclosures. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of the update and delay adoption of the additional disclosures until the effective date. The amendments are to be applied on a retrospective basis to all periods presented upon adoption, except for certain amendments described in the update that are to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. Adoption of ASU No. 2018-13 will not have a material impact on LCNB's results of 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. 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.

37

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 16 – Recent Accounting Pronouncements (continued)

ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract"

ASU No. 2018-15 was issued in August 2018 and applies to entities that are a customer in a hosting arrangement, as defined, that is accounted for as a service contract. The amendments in this update require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Capitalized implementation costs are to be expensed over the term of the hosting arrangement. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The amendments can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Adoption of ASU No. 2018-15 is not expected to have a material impact on LCNB's results of operations or financial position.

38

LCNB CORP. AND SUBSIDIARIES

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, 2018, 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. However, 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 from those expectations. These factors include, but are not limited to:

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

2. LCNB’s ability to integrate recent and future acquisitions, including the merger with Columbus First Bancorp, Inc., may be unsuccessful or may be more difficult, time-consuming, or costly than expected;

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

4. LCNB may face competitive loss of customers;

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

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

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

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

9. the current economic environment poses significant challenges for us and could adversely affect our financial condition and results of operations;

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

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

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

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. 

39

LCNB CORP. AND SUBSIDIARIES

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

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.

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.

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. 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, 2019 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.  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.

Results of Operations

Net income for the three months ended March 31, 2019 was $4,627,000 (total basic and diluted earnings per share of $0.35). This compares to net income of $2,713,000 (total basic and diluted earnings per share of $0.27) for the same three month period in 2018. The acquisition of CFB on May 31, 2018 significantly affected net income during the 2019 period.

40

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, 2019 vs. 2018

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, 2019 and 2018, 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,
	2019							2018
	Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate		Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate
						(Dollars in thousands)
Loans (1)	$	1,208,809		$	14,538	4.88	%	$	853,152		$	9,413	4.47	%
Interest-bearing demand deposits	5,744			51		3.60	%	3,867			19		1.99	%
Interest-bearing time deposits	963			5		2.11	%	—			—		—	%
Federal Reserve Bank stock	4,652			—		—	%	2,732			—		—	%
Federal Home Loan Bank stock	4,845			73		6.11	%	3,638			53		5.91	%
Investment securities:
Equity securities	4,220			33		3.17	%	3,255			22		2.74	%
Debt securities, taxable	151,633			869		2.32	%	173,586			931		2.18	%
Debt securities, non-taxable (2)	99,768			689		2.80	%	130,478			891		2.77	%
Total earnings assets	1,480,634			16,258		4.45	%	1,170,708			11,329		3.92	%
Non-earning assets	158,853							125,068
Allowance for loan losses	(4,074		)					(3,401		)
Total assets	$	1,635,413						$	1,292,375
Savings deposits	$	700,708		661		0.38	%	$	646,690		199		0.12	%
IRA and time certificates	310,668			1,625		2.12	%	189,322			672		1.44	%
Short-term borrowings	23,235			219		3.82	%	14,086			69		1.99	%
Long-term debt	44,676			217		1.97	%	2,255			14		2.52	%
Total interest-bearing liabilities	1,079,287			2,722		1.02	%	852,353			954		0.45	%
Demand deposits	322,153							278,967
Other liabilities	12,503							10,997
Capital	221,470							150,058
Total liabilities and capital	$	1,635,413						$	1,292,375
Net interest rate spread (3)						3.43	%						3.47	%
Net interest income and net interest margin on a taxable-equivalent basis (4)				$	13,536	3.71	%				$	10,375	3.59	%
Ratio of interest-earning assets to interest-bearing liabilities	137.19		%					137.35		%

(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.

41

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, 2019 as compared to the same period in 2018.  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, 2019 vs. 2018 Increase (decrease) due to:
	Volume			Rate		Total
	(In thousands)
Interest-earning Assets:
Loans	$	4,215		910		5,125
Interest-bearing demand deposits	12			20		32
Interest-bearing time deposits	5			—		5
Federal Reserve Bank stock	—			—		—
Federal Home Loan Bank stock	18			2		20
Investment securities:
Equity securities	7			4		11
Debt securities, taxable	(123		)	61		(62	)
Debt securities, non-taxable	(212		)	10		(202	)
Total interest income	3,922			1,007		4,929
Interest-bearing Liabilities:
Savings deposits	18			444		462
IRA and time certificates	548			405		953
Short-term borrowings	62			88		150
Long-term debt	207			(4	)	203
Total interest expense	835			933		1,768
Net interest income	$	3,087		74		3,161

Net interest income on a fully taxable-equivalent basis for the three months ended March 31, 2019 totaled $13,536,000, an increase of $3,161,000 from the comparable period in 2018.  Total interest income increased $4,929,000, partially offset by an increase in interest expense of $1,768,000.

The increase in total interest income was due primarily to a $5,125,000 increase in loan interest income caused by a $355.7 million increase in average loans and by a 41 basis point (a basis point equals 0.01%) increase in the average rate earned on loans. Loans obtained through the merger with CFB were a significant component of the increase in average loans. Slightly offsetting the increase in loan interest income were a $62,000 decrease in interest income from taxable debt securities and a $202,000 decrease in interest income from non-taxable debt securities. The decrease in interest income from taxable debt securities was caused by a $22.0 million decrease in average taxable debt securities, partially offset by a 14 basis point increase in the average rate earned on these securities. The decrease in interest income from non-taxable debt securities was due to a $30.7 million decrease in average non-taxable debt securities, partially offset by 3 basis point increase in the average rate earned. Decreases in debt securities were invested in the loan portfolio and used to pay down borrowings.

The increase in total interest expense was due to increases in all line items due to increases in average balances and market-driven increases in average rates paid. Total average interest-bearing liabilities increased $226.9 million and the average rate paid on total interest-bearing liabilities increased 57 basis points. Deposits and long-term debt obtained through the merger with CFB were a significant component of the increase in average total interest-bearing liabilities.

42

LCNB CORP. AND SUBSIDIARIES

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

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, factors taken into consideration to determine the adequacy of the allowance for loan losses include 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.  The credit for loan losses for the three months ended March 31, 2019 was $105,000, as compared to a provision of $79,000 for the same three month period in 2018. Net recoveries for the three months ended March 31, 2019 was $185,000, as compared to net recoveries of $47,000 for the comparable period in 2018.

Non-Interest Income

A comparison of non-interest income for the three months ended March 31, 2019 and 2018 is as follows (in thousands):

	Three Months Ended   March 31,
	2019	2018	Difference
Fiduciary income	1,034	964	70
Service charges and fees on deposit accounts	1,308	1,305	3
Bank owned life insurance income	182	186	(4	)
Gains from sales of loans	29	22	7
Other operating income	237	159	78
Total non-interest income	2,790	2,636	154

Reasons for material increases and decreases include:

• Fiduciary income increased due to an increase in trust and brokerage assets managed.

• Other operating income increased due to an increase in the fair value of equity security investments, partially offset by smaller decreases in various other accounts.

Non-Interest Expense

A comparison of non-interest expense for the three months ended March 31, 2019 and 2018 is as follows (in thousands):

	Three Months Ended   March 31,
	2019		2018		Difference
Salaries and employee benefits	$	6,162	$	4,977	$	1,185
Equipment expenses	266		253		13
Occupancy expense, net	763		727		36
State financial institutions tax	438		303		135
Marketing	302		132		170
Amortization of intangibles	257		185		72
FDIC insurance premiums	126		99		27
Contracted services	464		315		149
Net loss on sales of debt securities, available-for-sale	18		—		18
Other real estate owned	3		2		1
Merger-related expenses	67		758		(691		)
Other non-interest expense	1,852		1,798		54
Total non-interest expense	$	10,718	$	9,549	$	1,169

43

LCNB CORP. AND SUBSIDIARIES

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

Reasons for material increases and decreases include:

• Salaries and employee benefits increased 23.8% for the three months ended March 31, 2019 as compared to the same period in 2018. The increase was primarily due to salary and wage increases, newly hired employees, and CFB employees retained. Full-time equivalent employees at March 31, 2019 totaled 336, compared with 297 full-time equivalent employees at March 31, 2018.

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

• Marketing increased primarily due to promotion costs for new checking products introduced during 2018 and expanded use of broadcast and digital media.

• Amortization of intangibles increased due to amortization of the core deposit intangible recognized as part of the acquisition accounting for CFB.

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

• Merger-related expenses during the 2019 and 2018 periods are due to the acquisition of CFB.

Income Taxes

LCNB's effective tax rates for the three months ended March 31, 2019 was 16.9%, compared to 15.1% the three months ended March 31, 2018.  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.

44

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, 2019 and December 31, 2018 is as follows (in thousands):

	March 31, 2019	December 31, 2018	Difference $		Difference %
ASSETS:
Total cash and cash equivalents	19,527	20,040	(513	)	(2.56	)%
Interest -bearing time deposits	747	996	(249	)	(25.00	)%
Investment securities:
Equity securities with a readily determinable fair value, at fair value	2,185	2,078	107		5.15	%
Equity securities without a readily determinable fair value, at cost	2,099	2,099	—		—	%
Debt securities, available-for-sale, at fair value	217,668	238,421	(20,753	)	(8.70	)%
Debt securities, held-to-maturity, at cost	32,363	29,721	2,642		8.89	%
Federal Reserve Bank stock, at cost	4,652	4,653	(1	)	(0.02	)%
Federal Home Loan Bank stock, at cost	4,845	4,845	—		—	%
Loans, net	1,203,008	1,194,577	8,431		0.71	%
Premises and equipment, net	32,548	32,627	(79	)	(0.24	)%
Operating lease right-of-use assets	5,348	—	5,348		—	%
Goodwill	59,221	59,221	—		—	%
Core deposit and other intangibles	4,760	5,042	(282	)	(5.59	)%
Bank owned life insurance	28,905	28,723	182		0.63	%
Other assets	14,511	13,884	627		4.52	%
Total assets	1,632,387	1,636,927	(4,540	)	(0.28	)%
LIABILITIES:
Deposits:
Non-interest-bearing	330,324	322,571	7,753		2.40	%
Interest-bearing	1,017,533	978,348	39,185		4.01	%
Total deposits	1,347,857	1,300,919	46,938		3.61	%
Short-term borrowings	—	56,230	(56,230	)	(100.00	)%
Long-term debt	42,982	47,032	(4,050	)	(8.61	)%
Operating leases liability	5,289	—	5,289		—	%
Accrued interest and other liabilities	12,241	13,761	(1,520	)	(11.05	)%
Total liabilities	1,408,369	1,417,942	(9,573	)	(0.68	)%
TOTAL SHAREHOLDERS' EQUITY	224,018	218,985	5,033		2.30	%
Total liabilities and shareholders' equity	1,632,387	1,636,927	(4,540	)	(0.28	)%

Assets

Total assets at March 31, 2019 were $4.5 million less than at December 31, 2018 due to a $20.8 million decrease in debt securities, available-for-sale, partially offset by an $8.4 million increase in net loans, a $2.6 million increase in debt securities, held-to-maturity, and a $5.3 million operating lease right-of-use asset at March 31, 2019 that resulted from the adoption of ASU No. 2016-02 on January 1, 2019.

Available-for-sale debt securities decreased due to the sale of securities with a total book value of $21.8 million. The funds received were invested in the loan portfolio and used to help pay down short-term borrowings and long-term debt.

45

LCNB CORP. AND SUBSIDIARIES

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

Net loans at March 31, 2019 were $8.4 million greater than at December 31, 2018 due to organic growth in the loan portfolio.

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

Liabilities and Shareholders' Equity

Total deposits at March 31, 2019 were $46.9 million greater than at December 31, 2018. This increase was largely due to $35.1 million increase in public fund deposits by local government entities. Public fund deposits can be relatively volatile due to seasonal tax collections and the financial needs of the local entities. Historically, public fund deposits tend to be at their lowest balances at year-ends.

Short-term borrowings at March 31, 2019 were $56.2 million less than at December 31, 2018. The decrease was funded primarily by the increase in total deposits and the decrease in debt securities, available-for-sale.

Long-term debt at March 31, 2019 was $4.0 million less than at December 31, 2018 due to payoffs of matured debt. There were no new borrowings during the first quarter 2019.

Total shareholders' equity at March 31, 2019 was $5.0 million greater than at December 31, 2018 primarily due to earnings retained during the quarter and to a $2.5 million decrease in accumulated other comprehensive loss, net of taxes caused by a market-driven increase in the fair value of LCNB's debt security investments.

Regulatory Capital

LCNB (consolidated) and 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 the beginning of 2019. Under the fully-implemented rule, 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 for 2019		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.

46

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, 2019			December 31, 2018
Regulatory Capital:
Shareholders' equity	$	219,787		$	215,395
Goodwill and other intangibles	(63,531		)	(63,788		)
Accumulated other comprehensive loss	2,230			4,719
Tier 1 risk-based capital	158,486			156,326
Eligible allowance for loan losses	4,126			4,046
Total risk-based capital	$	162,612		$	160,372
Capital ratios:
Common Equity Tier 1 Capital to risk-weighted assets	12.77		%	12.65		%
Tier 1 Capital to risk-weighted assets	12.77		%	12.65		%
Total Capital to risk-weighted assets	13.10		%	12.98		%
Leverage	10.09		%	9.96		%

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 totaling $40.0 million with two correspondent banks, and interest and repayments received from LCNB's loan and investment portfolios.

Total remaining borrowing capacity with the Federal Home Loan Bank at March 31, 2019 was approximately $101.8 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 $40.0 million were available through the line of credit arrangements at quarter-end.

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.

47

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, 2019 IRSA indicates that an increase in interest rates will have a positive effect on NII and a 100 basis point decrease in interest rates will have a 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	$	59,416	2,427		4.26	%
Up 300	58,821		1,832		3.21	%
Up 200	58,215		1,226		2.15	%
Up 100	57,585		596		1.05	%
Base	56,989		—		—	%
Down 100	56,753		(236	)	(0.41	)%

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, 2019 EVE analysis indicates that both an increase and a 100 basis point decrease in interest rates will have a positive effect on the EVE.  The changes in EVE for all rate assumptions are within LCNB's acceptable ranges.

Rate Shock Scenario in Basis Points	Amount		$ Change in EVE	% Change in EVE
	(Dollars in thousands)
Up 400	$	238,894	8,342	3.62	%
Up 300	239,401		8,849	3.84	%
Up 200	238,610		8,058	3.50	%
Up 100	235,622		5,070	2.20	%
Base	230,552		—	—	%
Down 100	233,350		2,798	1.21	%

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.

48

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, 2019, 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.

49

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

No material changes.

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.

During the period covered by this report, LCNB did not purchase any shares of its equity securities.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

50

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).
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.
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, 2019 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.

51

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 8, 2019	/s/ Steve P. Foster
	Steve P. Foster
	Chief Executive Officer
May 8, 2019	/s/ Robert C. Haines, II
	Robert C. Haines, II
	Executive Vice President and Chief Financial Officer

52