LCNB (LCNB) 10-Q 2021 Q3 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 September 30, 2021

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

For the transition period from                                                        to                                                      

Commission File Number 001-35292

LCNB Corp.

(Exact name of registrant as specified in its charter)

Ohio	31-1626393
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

2 North Broadway, Lebanon, Ohio 45036

(Address of principal executive offices, including Zip Code)

(513) 932-1414

(Registrant's telephone number, including area code)

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

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

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 ☒                             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 November 2, 2021 was 14,208,222 shares.

LCNB CORP. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION	3
Item 1.  Financial Statements	3
CONSOLIDATED CONDENSED BALANCE SHEETS	3
CONSOLIDATED CONDENSED STATEMENTS OF INCOME	4
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME	5
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY	6
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS	7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of  Operations	35
Item 3.  Quantitative and Qualitative Disclosures about Market Risks	49
Item 4.  Controls and Procedures	50
PART II.  OTHER INFORMATION	51
Item 1.   Legal Proceedings	51
Item 1A.  Risk Factors	51
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.   Defaults Upon Senior Securities	51
Item 4.   Mine Safety Disclosures	51
Item 5.   Other Information	51
Item 6.   Exhibits	52
SIGNATURES	53

1

Glossary of Abbreviations and Acronyms

ASC	Accounting Standards Codification
ASU	Accounting Standards Update
Bank	LCNB National Bank
BSA	Bank Secrecy Act
CARES Act	Coronavirus Aid, Relief, and Economic Security Act
CEO	Chief Executive Officer
CFO	Chief Financial Officer
CFPB	Consumer Financial Protection Bureau
Company	LCNB Corp. and its consolidated subsidiaries as a whole
CRA	Community Reinvestment Act of 1977
DIF	Deposit Insurance Fund
Dodd-Frank Act	Dodd-Frank Wall Street Reform and Consumer Protection Act
Economic Aid Act	Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act
FASB	Financial Accounting Standards Board
FDIC	Federal Deposit Insurance Corporation
FHLB	Federal Home Loan Bank
GAAP	Generally Accepted Accounting Principles
ICS	Insured Cash Sweep
IRA	Individual Retirement Account
LCNB	LCNB Corp. and its consolidated subsidiaries as a whole
LIHTC	Low Income Housing Tax Credit
OCC	Office of the Comptroller of the Currency
PPP	Paycheck Protection Program
PPPLF	Paycheck Protection Program Liquidity Facility
SBA	Small Business Administration
SEC	Securities and Exchange Commission
SVP	Senior Vice President

    

2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in thousands, except per share data)

	September 30, 2021		December 31, 2020
	(Unaudited)
ASSETS:
Cash and due from banks	$	20,796	17,383
Interest-bearing demand deposits	3,056		14,347
Total cash and cash equivalents	23,852		31,730
Investment securities:
Equity securities with a readily determinable fair value, at fair value	2,478		2,389
Equity securities without a readily determinable fair value, at cost	2,099		2,099
Debt securities, available-for-sale, at fair value	313,214		209,471
Debt securities, held-to-maturity, at cost	24,420		24,810
Federal Reserve Bank stock, at cost	4,652		4,652
Federal Home Loan Bank stock, at cost	5,203		5,203
Loans, net	1,334,331		1,293,693
Premises and equipment, net	35,154		35,376
Operating lease right-of-use assets	6,608		6,274
Goodwill	59,221		59,221
Core deposit and other intangibles, net	2,671		3,453
Bank owned life insurance	42,954		42,149
Interest receivable	8,624		8,337
Other assets, net	18,771		17,027
TOTAL ASSETS	$	1,884,252	1,745,884
LIABILITIES:
Deposits:
Noninterest-bearing	$	483,920	455,073
Interest-bearing	1,119,283		1,000,350
Total deposits	1,603,203		1,455,423
Long-term debt	15,000		22,000
Operating lease liabilities	6,693		6,371
Accrued interest and other liabilities	20,937		21,265
TOTAL LIABILITIES	1,645,833		1,505,059
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 14,206,979 and 14,163,904 shares at September 30, 2021 and December 31, 2020, respectively; outstanding 12,433,328 and 12,858,325 shares at September 30, 2021 and December 31, 2020, respectively	142,946		142,443
Retained earnings	123,167		115,058
Treasury shares at cost, 1,773,651 and 1,305,579 shares at September 30, 2021 and December 31, 2020, respectively	(28,590)		(20,719)
Accumulated other comprehensive income, net of taxes	896		4,043
TOTAL SHAREHOLDERS' EQUITY	238,419		240,825
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,884,252	1,745,884

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

3

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,			Nine Months Ended  September 30,
	2021		2020	2021	2020
INTEREST INCOME:
Interest and fees on loans	$	13,729	14,379	42,372	44,428
Dividends on equity securities:
With a readily determinable fair value	12		13	38	40
Without a readily determinable fair value	5		5	16	33
Interest on debt securities:
Taxable	1,027		633	2,650	2,250
Non-taxable	214		249	656	788
Other investments	37		43	256	296
TOTAL INTEREST INCOME	15,024		15,322	45,988	47,835
INTEREST EXPENSE:
Interest on deposits	836		1,567	2,809	5,416
Interest on short-term borrowings	2		—	4	7
Interest on long-term debt	113		226	361	707
TOTAL INTEREST EXPENSE	951		1,793	3,174	6,130
NET INTEREST INCOME	14,073		13,529	42,814	41,705
PROVISION FOR LOAN LOSSES	306		976	239	2,165
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	13,767		12,553	42,575	39,540
NON-INTEREST INCOME:
Fiduciary income	1,695		1,275	4,959	3,579
Service charges and fees on deposit accounts	1,621		1,506	4,506	4,038
Net gains from sales of debt securities, available-for-sale	—		—	—	221
Bank owned life insurance income	269		275	805	1,163
Gains from sales of loans	366		999	560	1,436
Other operating income	155		223	1,055	999
TOTAL NON-INTEREST INCOME	4,106		4,278	11,885	11,436
NON-INTEREST EXPENSE:
Salaries and employee benefits	7,096		6,863	20,640	20,279
Equipment expenses	421		341	1,232	917
Occupancy expense, net	713		740	2,236	2,145
State financial institutions tax	437		424	1,318	1,280
Marketing	253		471	878	906
Amortization of intangibles	263		263	780	783
FDIC insurance premiums, net	129		112	365	142
Contracted services	655		435	1,818	1,312
Other non-interest expense	2,062		2,004	6,462	6,077
TOTAL NON-INTEREST EXPENSE	12,029		11,653	35,729	33,841
INCOME BEFORE INCOME TAXES	5,844		5,178	18,731	17,135
PROVISION FOR INCOME TAXES	1,027		928	3,384	2,802
NET INCOME	$	4,817	4,250	15,347	14,333
Dividends declared per common share	$	0.19	0.18	0.57	0.54
Earnings per common share:
Basic	$	0.39	0.33	1.21	1.11
Diluted	0.39		0.33	1.21	1.11
Weighted average common shares outstanding:
Basic	12,455,276		12,937,865	12,663,368	12,934,987
Diluted	12,455,276		12,937,901	12,663,378	12,935,388

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

4

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Three Months Ended September 30,			Nine Months Ended  September 30,
	2021		2020	2021	2020
Net income	$	4,817	4,250	15,347	14,333
Other comprehensive income (loss):
Net unrealized (losses) gains on available-for-sale debt securities (net of taxes of $(178) and $76 for the three months ended September 30, 2021 and 2020, respectively, and $(838) and $972 for the nine months ended September 30, 2021 and 2020, respectively)	(669)		286	(3,152)	3,655
Reclassification adjustment for net realized gains on sales of available-for-sale debt securities included in net income (net of taxes of $46 for the nine months ended September 30, 2020)	—		—	—	(175)
Change in nonqualified pension plan unrecognized net gain and unrecognized prior service cost (net of taxes of $— and $1 for the three and nine months ended September 30, 2021)	2		—	5	1
Other comprehensive (loss) income, net of tax	(667)		286	(3,147)	3,481
TOTAL COMPREHENSIVE INCOME	$	4,150	4,536	12,200	17,814

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

5

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY

(Dollars in thousands, except per share data)

(Unaudited)

	Common Shares Outstanding	Common Stock		Retained Earnings	Treasury Shares	Accumulated Other Comprehensive Income	Total Shareholders' Equity
Three Months Ended September 30, 2021
Balance at June 30, 2021	12,634,845	$	142,791	120,720	(25,122)	1,563	239,952
Net income				4,817			4,817
Other comprehensive loss, net of taxes						(667)	(667)
Dividend Reinvestment and Stock Purchase Plan	6,007	104					104
Repurchase of common stock	(206,768)				(3,468)		(3,468)
Compensation expense relating to restricted stock	(756)	51					51
Common stock dividends, $0.19 per share				(2,370)			(2,370)
Balance at September 30, 2021	12,433,328	$	142,946	123,167	(28,590)	896	238,419
Nine Months Ended September 30, 2021
Balance at December 31, 2020	12,858,325	$	142,443	115,058	(20,719)	4,043	240,825
Net income				15,347			15,347
Other comprehensive loss, net of taxes						(3,147)	(3,147)
Dividend Reinvestment and Stock Purchase Plan	17,199	303					303
Repurchase of common stock	(468,072)				(7,871)		(7,871)
Exercise of stock options	311	4					4
Compensation expense relating to restricted stock	25,565	196					196
Common stock dividends, $0.57 per share				(7,238)			(7,238)
Balance at September 30, 2021	12,433,328	$	142,946	123,167	(28,590)	896	238,419
Three Months Ended September 30, 2020
Balance at June 30, 2020	12,975,879	$	142,181	109,845	(18,847)	3,868	237,047
Net income				4,250			4,250
Other comprehensive income, net of taxes						286	286
Dividend Reinvestment and Stock Purchase Plan	6,397	94					94
Repurchase of common stock	(55,590)				(792)		(792)
Compensation expense relating to restricted stock	—	35					35
Common stock dividends, $0.18 per share				(2,335)			(2,335)
Balance at September 30, 2020	12,926,686	$	142,310	111,760	(19,639)	4,154	238,585
Nine Months Ended September 30, 2020
Balance at December 31, 2019	12,936,783	$	141,791	104,431	(18,847)	673	228,048
Net income				14,333			14,333
Other comprehensive income, net of taxes						3,481	3,481
Dividend Reinvestment and Stock Purchase Plan	20,239	302					302
Repurchase of common stock	(55,590)				(792)		(792)
Exercise of stock options	9,593	115					115
Compensation expense relating to restricted stock	15,661	102					102
Common stock dividends, $0.54 per share				(7,004)			(7,004)
Balance at September 30, 2020	12,926,686	$	142,310	111,760	(19,639)	4,154	238,585

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

6

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended  September 30,
	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	15,347	14,333
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation, amortization, and accretion	1,665		1,960
Provision for loan losses	239		2,165
Deferred income tax provision (benefit)	76		(19)
Increase in cash surrender value of bank owned life insurance	(805)		(846)
Bank owned life insurance mortality benefits in excess of cash surrender value	—		(317)
Gain from equity securities	(76)		(504)
Realized gain from sales of debt securities, available-for-sale	—		(221)
Realized gain from sales of premises and equipment	(6)		(62)
Realized gain from sales and impairment of other real estate owned and repossessed assets	—		(11)
Origination of mortgage loans for sale	(21,558)		(42,208)
Realized gains from sales of loans	(560)		(1,436)
Proceeds from sales of mortgage loans	21,860		43,175
Compensation expense related to restricted stock	196		102
Changes in:
Accrued interest receivable	(287)		(5,783)
Other assets	(1,740)		(2,421)
Other liabilities	438		1,401
TOTAL ADJUSTMENTS	(558)		(5,025)
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES	14,789		9,308
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of equity securities	—		967
Proceeds from sales of debt securities, available-for-sale	—		8,786
Proceeds from maturities and calls of debt securities:
Available-for-sale	23,464		48,572
Held-to-maturity	1,605		2,069
Purchases of equity securities	(13)		(364)
Purchases of debt securities:
Available-for-sale	(132,428)		(33,426)
Held-to-maturity	(1,215)		(1,485)
Net increase in loans	(38,861)		(95,858)
Proceeds from bank owned life insurance mortality benefits	—		958
Proceeds from sale of other real estate owned and repossessed assets	—		208
Purchases of premises and equipment	(1,203)		(2,169)
Proceeds from sale of premises and equipment	6		419
NET CASH FLOWS USED IN INVESTING ACTIVITIES	(148,645)		(71,323)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	147,780		82,114
Principal payments on long-term debt	(7,000)		(9,000)
Proceeds from issuance of common stock	28		45
Repurchase of common stock	(7,871)		(792)
Proceeds from exercise of stock options	4		115
Cash dividends paid on common stock	(6,963)		(6,747)
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES	125,978		65,735
NET CHANGE IN CASH AND CASH EQUIVALENTS	(7,878)		3,720
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	31,730		20,765
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	23,852	24,485
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	3,336		6,315
Income taxes paid	3,190		2,225
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Right-of-use assets obtained in exchange for lease obligations	801		—

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

7

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. and its wholly-owned subsidiaries: LCNB National 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. GAAP for interim financial information and the rules and regulations of the SEC.  Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations.  In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of financial position, results of consolidated operations, and cash flows for the interim periods, as required by Regulation S-X, Rule 8-03.

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

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

year presentation.

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

Results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the full year ending December 31, 2021.  These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies, and financial notes thereto included in LCNB's 2020 Annual Report on Form 10-K filed with the SEC.

Accounting Changes

Financial Accounting Standards (“FASB”) Accounting Standards Update (“ASU”) No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting"

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

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

ASU No. 2018-14 was issued in August 2018 and was adopted by LCNB on January 1, 2021. 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 to be applied on a retrospective basis to all periods presented upon adoption. Adoption of ASU No. 2018-14 did not have a material impact on LCNB's results of consolidated operations or financial position.

8

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 1 - Basis of Presentation (continued)

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

ASU No. 2019-12 was issued in December 2019 and adopted by LCNB on January 1, 2021. It simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifies and amends certain other guidance. Adoption of ASU No. 2019-12 did not have a material impact on LCNB's results of consolidated operations or financial position.

Note 2 - Investment Securities

The amortized cost and estimated fair value of equity and debt securities at September 30, 2021 and December 31, 2020 are summarized as follows (in thousands):

	Amortized Cost		Unrealized Gains	Unrealized Losses	Fair Value
September 30, 2021
Debt Securities, Available-for-Sale:
U.S. Treasury notes	$	64,277	194	107	64,364
U.S. Agency notes	100,763		522	1,056	100,229
Corporate bonds	2,600		43	39	2,604
U.S. Agency mortgage-backed securities	96,707		1,895	488	98,114
Municipal securities:
Non-taxable	11,371		150	23	11,498
Taxable	35,981		708	284	36,405
	$	311,699	3,512	1,997	313,214
Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable	$	20,743	60	—	20,803
Taxable	3,677		17	—	3,694
	$	24,420	77	—	24,497
December 31, 2020
Debt Securities, Available-for-Sale:
U.S. Treasury notes	$	2,268	120	—	2,388
U.S. Agency notes	66,983		950	33	67,900
Corporate Bonds	1,200		—	21	1,179
U.S. Agency mortgage-backed securities	88,455		3,180	1	91,634
Municipal securities:
Non-taxable	12,651		282	—	12,933
Taxable	32,409		1,031	3	33,437
	$	203,966	5,563	58	209,471
Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable	$	21,408	181	—	21,589
Taxable	3,402		6	37	3,371
	$	24,810	187	37	24,960

9

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 2 - Investment Securities (continued)

Information concerning debt securities with gross unrealized losses at September 30, 2021 and December 31, 2020, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (dollars in thousands):

	Less than Twelve Months			Twelve Months or Greater
	Fair Value		Unrealized Losses	Fair Value	Unrealized Losses
September 30, 2021
Available-for-Sale:
U.S. Treasury notes	$	39,466	107	—	—
U.S. Agency notes	78,016		1,056	—	—
Corporate bonds	1,861		39	—	—
U.S. Agency mortgage-backed securities	46,042		488	—	—
Municipal securities:
Non-taxable	1,731		23	—	—
Taxable	16,681		284	—	—
	$	183,797	1,997	—	—
December 31, 2020
Available-for-Sale:
U.S. Treasury notes	$	—	—	—	—
U.S. Agency notes	10,674		33	—	—
Corporate Bonds	679		21	—	—
U.S. Agency mortgage-backed securities	290		1	—	—
Municipal securities:
Non-taxable	38		—	—	—
Taxable	3,063		3	—	—
	$	14,744	58	—	—
Held-to-Maturity:
Municipal securities:
Non-taxable	$	1	—	—	0
Taxable	3,113		37	—	—
	$	3,114	37	—	—

Management has determined that the unrealized losses at September 30, 2021 are primarily due to fluctuations in market interest rates and do not reflect credit quality deterioration of the securities.   Because LCNB does not have the intent to sell the investments and it is more likely than not that LCNB will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, LCNB does not consider these investments to be other-than-temporarily impaired.

10

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 2 - Investment Securities (continued)

Contractual maturities of debt securities at September 30, 2021 were as follows (in thousands).  Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations.

	Available-for-Sale			Held-to-Maturity
	Amortized Cost		Fair Value	Amortized Cost	Fair Value
Due within one year	$	8,437	8,491	1,830	1,834
Due from one to five years	88,754		89,421	5,641	5,668
Due from five to ten years	116,771		116,175	2,038	2,057
Due after ten years	1,030		1,013	14,911	14,938
	214,992		215,100	24,420	24,497
U.S. Agency mortgage-backed securities	96,707		98,114	—	—
	$	311,699	313,214	24,420	24,497

Debt securities with a market value of $158,604,000 and $118,599,000 at September 30, 2021 and December 31, 2020, respectively, were pledged to secure public deposits and for other purposes required or as permitted by law.

Certain information concerning the sale of debt securities, available-for-sale, for the three and nine months ended September 30, 2021 and 2020 was as follows (in thousands):

	Three Months Ended September 30,			Nine Months Ended  September 30,
	2021		2020	2021	2020
Proceeds from sales	$	—	—	—	8,786
Gross realized gains	—		—	—	221
Gross realized losses	—		—	—	—

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 September 30, 2021 on its investments in equity securities without a readily determinable fair value.

The cost and estimated fair value of equity securities with a readily determinable fair value at September 30, 2021 and December 31, 2020 are summarized as follows (in thousands):

	September 30, 2021			December 31, 2020
	Cost		Fair Value	Cost	Fair Value
Mutual funds	$	1,407	1,389	1,395	1,402
Equity securities	778		1,089	778	987
Total equity securities with a readily determinable fair value	$	2,185	2,478	2,173	2,389

11

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 2 - Investment Securities (continued)

Certain information concerning changes in fair value of equity securities with a readily determinable fair value for the three and nine months ended September 30, 2021 and 2020 is as follows (in thousands):

	Three Months Ended September 30,			Nine Months Ended  September 30,
	2021		2020	2021	2020
Net gains (losses) recognized	$	(14)	51	76	504
Less net realized gains on equity securities sold	—		99	—	658
Net unrealized gains (losses) recognized and still held at period end	$	(14)	(48)	76	(154)

Note 3 - Loans

Major classifications of loans at September 30, 2021 and December 31, 2020 were as follows (in thousands):

	September 30, 2021		December 31, 2020
Commercial & industrial	$	91,246	100,254
Commercial, secured by real estate	862,202		843,230
Residential real estate	343,318		309,692
Consumer	35,349		36,917
Agricultural	8,852		10,100
Other loans, including deposit overdrafts	247		363
Loans, gross	1,341,214		1,300,556
Deferred origination fees, net	(1,055)		(1,135)
Loans, net of deferred origination fees	1,340,159		1,299,421
Less allowance for loan losses	5,828		5,728
Loans, net	$	1,334,331	1,293,693

Non-accrual, past-due, and accruing restructured loans as of September 30, 2021 and December 31, 2020 were as follows (in thousands):

	September 30, 2021		December 31, 2020
Non-accrual loans:
Commercial, secured by real estate	$	1,963	2,458
Residential real estate	666		1,260
Total non-accrual loans	2,629		3,718
Past-due 90 days or more and still accruing	13		—
Total non-accrual and past-due 90 days or more and still accruing	2,642		3,718
Accruing restructured loans	2,692		5,176
Total	$	5,334	8,894

.

12

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

The allowance for loan losses for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands):

	Commercial & Industrial		Commercial, Secured by Real Estate	Residential Real Estate	Consumer	Agricultural	Other	Total
Three Months Ended September 30, 2021
Balance, beginning of period	$	1,043	3,743	697	122	37	10	5,652
Provision (credit) charged to expenses	(38)		368	(31)	(9)	(1)	17	306
Losses charged off	—		(110)	—	(4)	—	(32)	(146)
Recoveries	—		—	—	—	—	16	16
Balance, end of period	$	1,005	4,001	666	109	36	11	5,828
Nine Months Ended September 30, 2021
Balance, beginning of year	$	816	3,903	837	153	28	(9)	5,728
Provision (credit) charged to expenses	189		210	(183)	(37)	8	52	239
Losses charged off	—		(112)	(16)	(9)	—	(75)	(212)
Recoveries	—		—	28	2	—	43	73
Balance, end of period	$	1,005	4,001	666	109	36	11	5,828
Three Months Ended September 30, 2020
Balance, beginning of period	$	691	3,465	697	133	26	4	5,016
Provision (credit) charged to expenses	114		466	353	32	(1)	12	976
Losses charged off	—		—	(3)	(5)	—	(30)	(38)
Recoveries	—		—	1	3	—	16	20
Balance, end of period	$	805	3,931	1,048	163	25	2	5,974
Nine Months Ended September 30, 2020
Balance, beginning of year	$	456	2,924	528	99	34	4	4,045
Provision (credit) charged to expenses	345		1,277	452	63	(9)	37	2,165
Losses charged off	(14)		(270)	(6)	(20)	—	(93)	(403)
Recoveries	18		—	74	21	—	54	167
Balance, end of period	$	805	3,931	1,048	163	25	2	5,974

13

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

A breakdown of the allowance for loan losses and the loan portfolio by loan segment at September 30, 2021 and December 31, 2020 were as follows (in thousands):

	Commercial & Industrial		Commercial, Secured by Real Estate	Residential Real Estate	Consumer	Agricultural	Other	Total
September 30, 2021
Allowance for loan losses:
Individually evaluated for impairment	$	7	14	10	—	—	—	31
Collectively evaluated for impairment	998		3,987	656	109	36	11	5,797
Acquired credit impaired loans	—		—	—	—	—	0	—
Balance, end of period	$	1,005	4,001	666	109	36	11	5,828
Loans:
Individually evaluated for impairment	$	165	3,756	949	—	—	—	4,870
Collectively evaluated for impairment	90,468		855,480	341,759	35,457	8,853	71	1,332,088
Acquired credit impaired loans	194		1,645	1,186	—	—	176	3,201
Balance, end of period	$	90,827	860,881	343,894	35,457	8,853	247	1,340,159
December 31, 2020
Allowance for loan losses:
Individually evaluated for impairment	$	8	17	27	—	—	—	52
Collectively evaluated for impairment	808		3,886	810	153	28	(9)	5,676
Acquired credit impaired loans	—		—	—	—	—	—	—
Balance, end of period	$	816	3,903	837	153	28	(9)	5,728
Loans:
Individually evaluated for impairment	$	194	6,613	1,641	5	—	—	8,453
Collectively evaluated for impairment	99,040		833,548	306,138	37,047	10,116	179	1,286,068
Acquired credit impaired loans	362		2,048	2,306	—	—	184	4,900
Balance, end of period	$	99,596	842,209	310,085	37,052	10,116	363	1,299,421

14

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

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

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

This category includes PPP loans that were authorized under the CARES Act and updated by the Economic Aid Act. The PPP was implemented by the SBA with support from the Department of the Treasury and provided small businesses that were negatively impacted by the COVID-19 pandemic with government guaranteed and potentially forgivable loans that could be used to pay up to eight or twenty-four weeks, depending on the date of the loan, of payroll costs including benefits. Funds could also be used to pay interest on mortgages, rent, utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures. Eligible borrowers could apply for a First Draw or a Second Draw PPP Loan prior to the program ending on May 31, 2021. PPP loans made by LCNB have a maturity of two years if issued prior to June 5, 2020 and five years if issued on or after June 5, 2020. The loans have an interest rate of 1%. In addition, the SBA paid originating lenders processing fees based on the size of the loan. A borrower who meets certain requirements can request loan forgiveness from the SBA. If loan forgiveness is granted, the SBA will forward the forgiveness amount to the lender. LCNB originated 316 PPP loans with original balances totaling $45.5 million during 2020 and originated an additional 358 loans with original balances totaling $38.3 million during the first half of 2021. The outstanding balance at September 30, 2021 was $13.0 million.

Commercial, Secured by Real Estate Loans.  Commercial real estate loans include loans secured by a variety of commercial, retail, and office buildings, religious facilities, hotels, multifamily (more than four-family) residential properties, construction and land development loans, and other land loans. Mortgage loans secured by owner-occupied agricultural property are included in this category.  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 and liquidity 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 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 fifteen 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.

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%.

15

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

Consumer Loans.  LCNB’s portfolio of consumer loans generally includes secured and unsecured loans to individuals for household, family and other personal expenditures.  Secured loans include loans to fund the purchase of automobiles, recreational vehicles, boats, and similar acquisitions. Consumer loans made by LCNB generally have fixed rates and terms ranging up to 72 months, depending upon the nature of the collateral, size of the loan, and other relevant factors. Consumer loans generally have higher interest rates, but pose additional risks of collectibility and loss when compared to certain other types of loans. Collateral, if present, is generally subject to damage, wear, and depreciation.  The borrower’s ability to repay is of primary importance in the underwriting of consumer loans.

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

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 September 30, 2021 and December 31, 2020 is as follows (in thousands):

	Pass		OAEM	Substandard	Doubtful	Total
September 30, 2021
Commercial & industrial	$	90,667	—	160	—	90,827
Commercial, secured by real estate	810,366		19,996	30,519	—	860,881
Residential real estate	341,129		—	2,765	—	343,894
Consumer	35,457		—	—	—	35,457
Agricultural	8,853		—	—	—	8,853
Other	247		—	—	—	247
Total	$	1,286,719	19,996	33,444	—	1,340,159
December 31, 2020
Commercial & industrial	$	97,391	—	2,205	—	99,596
Commercial, secured by real estate	811,558		9,279	21,372	—	842,209
Residential real estate	306,092		1,005	2,988	—	310,085
Consumer	37,050		—	2	—	37,052
Agricultural	10,116		—	—	—	10,116
Other	363		—	—	—	363
Total	$	1,262,570	10,284	26,567	—	1,299,421

16

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

A loan portfolio aging analysis at September 30, 2021 and December 31, 2020 is as follows (in thousands):

	30-59 Days Past Due		60-89 Days Past Due	Greater Than 90 Days Past Due	Total Past Due	Current	Total Loans Receivable	Total Loans Greater Than 90 Days and Accruing
September 30, 2021
Commercial & industrial	$	—	—	—	—	90,827	90,827	—
Commercial, secured by real estate	1,030		—	784	1,814	859,067	860,881	—
Residential real estate	87		1	591	679	343,215	343,894	13
Consumer	3		—	—	3	35,454	35,457	—
Agricultural	—		—	—	—	8,853	8,853	—
Other	71		—	—	71	176	247	—
Total	$	1,191	1	1,375	2,567	1,337,592	1,340,159	13
December 31, 2020
Commercial & industrial	$	—	—	—	—	99,596	99,596	—
Commercial, secured by real estate	16		—	1,476	1,492	840,717	842,209	—
Residential real estate	497		219	675	1,391	308,694	310,085	—
Consumer	4		1	—	5	37,047	37,052	—
Agricultural	—		—	—	—	10,116	10,116	—
Other	60		—	—	60	303	363	—
Total	$	577	220	2,151	2,948	1,296,473	1,299,421	—

Impaired loans, including acquired credit impaired loans, at September 30, 2021 and December 31, 2020 were as follows (in thousands):

	September 30, 2021				December 31, 2020
	Recorded Investment		Unpaid Principal Balance	Related Allowance	Recorded Investment	Unpaid Principal Balance	Related Allowance
With no related allowance recorded:
Commercial & industrial	$	194	435	—	362	646	—
Commercial, secured by real estate	4,732		5,813	—	6,050	6,735	—
Residential real estate	1,892		2,272	—	3,261	3,695	—
Consumer	—		—	—	4	4	—
Agricultural	—		—	—	—	—	—
Other	176		253	—	184	297	—
Total	$	6,994	8,773	—	9,861	11,377	—
With an allowance recorded:
Commercial & industrial	$	165	170	7	194	199	8
Commercial, secured by real estate	669		669	14	2,611	2,908	17
Residential real estate	243		243	10	686	687	27
Consumer	—		—	—	1	1	—
Agricultural	—		—	—	—	—	—
Other	—		—	—	—	—	—
Total	$	1,077	1,082	31	3,492	3,795	52
Total:
Commercial & industrial	$	359	605	7	556	845	8
Commercial, secured by real estate	5,401		6,482	14	8,661	9,643	17
Residential real estate	2,135		2,515	10	3,947	4,382	27
Consumer	—		—	—	5	5	—
Agricultural	—		—	—	—	—	—
Other	176		253	—	184	297	—
Total	$	8,071	9,855	31	13,353	15,172	52

17

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

The following presents information related to the average recorded investment and interest income recognized on impaired loans, including acquired credit impaired loans, for the three and nine months ended September 30, 2021 and 2020 (in thousands):

	2021			2020
	Average Recorded Investment		Interest Income Recognized	Average Recorded Investment	Interest Income Recognized
Three Months Ended September 30,
With no related allowance recorded:
Commercial & industrial	$	310	21	1,192	25
Commercial, secured by real estate	5,038		97	6,258	61
Residential real estate	2,072		43	2,862	68
Consumer	—		—	7	—
Agricultural	—		—	—	—
Other	169		13	227	6
Total	$	7,589	174	10,546	160
With an allowance recorded:
Commercial & industrial	$	170	2	207	2
Commercial, secured by real estate	671		9	1,174	2
Residential real estate	246		3	827	4
Consumer	—		—	2	—
Agricultural	—		—	—	—
Other	—		—	—	—
Total	$	1,087	14	2,210	8
Total:
Commercial & industrial	$	480	23	1,399	27
Commercial, secured by real estate	5,709		106	7,432	63
Residential real estate	2,318		46	3,689	72
Consumer	—		—	9	—
Agricultural	—		—	—	—
Other	169		13	227	6
Total	$	8,676	188	12,756	168
Nine Months Ended September 30,
With no related allowance recorded:
Commercial & industrial	$	273	64	1,240	314
Commercial, secured by real estate	6,432		299	7,343	609
Residential real estate	2,826		179	3,057	217
Consumer	2		—	11	1
Agricultural	—		—	—	—
Other	180		44	247	21
Total	$	9,713	586	11,898	1,162
With an allowance recorded:
Commercial & industrial	$	179	8	216	10
Commercial, secured by real estate	677		27	1,190	6
Residential real estate	251		11	522	28
Consumer	—		—	4	—
Agricultural	—		—	—	—
Other	—		—	—	—
Total	$	1,107	46	1,932	44
Total:
Commercial & industrial	$	452	72	1,456	324
Commercial, secured by real estate	7,109		326	8,533	615
Residential real estate	3,077		190	3,579	245
Consumer	2		—	15	1
Agricultural	—		—	—	—
Other	180		44	247	21
Total	$	10,820	632	13,830	1,206

18

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

Of the interest income recognized on impaired loans during the nine months ended September 30, 2021 and 2020, approximately $0 and $25,000, respectively, were recognized on a cash basis.

From time to time, the terms of certain loans are modified as troubled debt restructurings ("TDRs") where concessions are granted to borrowers experiencing financial difficulties. Each modification is separately negotiated with the borrower and includes terms and conditions that reflect the borrower's ability to pay the debt as modified. 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 and nine months ended September 30, 2021 and 2020 were as follows (dollars in thousands):

	2021					2020
	Number of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance		Number of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance
Three Months Ended September 30,
Commercial and industrial	—	$	—	—		—	$	—	—
Commercial, secured by real estate	—	—		—		—	—		—
Residential real estate	1	49		49		1	14		14
Consumer	—	—		—		—	—		—
Total	1	$	49	49		1	$	14	14
Nine Months Ended September 30,
Commercial & industrial	—	$	—	$	—	1	$	4	$	5
Commercial, secured by real estate	—	—		—		—	—		—
Residential real estate	3	97		101		1	14		14
Consumer	—	—		—		—	—		—
Total	3	$	97	$	101	2	$	18	$	19

0LCNB is not committed to lend additional funds to borrowers whose loan terms were modified in a troubled debt restructuring.

There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the nine months ended September 30, 2021 and 2020.

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

Information concerning loans that were modified during the nine months ended September 30, 2021 and 2020 and that were determined to be troubled debt restructurings follows (in thousands):

	2021		2020
Impaired loans without a valuation allowance	$	101	5
Impaired loans with a valuation allowance	—		14

19

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

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

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

NaN loans remained on modified terms under the guidance of Section 4013 at September 30, 2021 and the carrying value of such loans was $19,023,000 at December 31, 2020. NaN loans remained on modified terms under the guidance of the revised interagency statement at September 30, 2021 and such loans totaled $1,553,000 at December 31, 2020.

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 September 30, 2021 and December 31, 2020 were approximately $140,147,000 and $137,188,000, respectively.

The total recorded investment in residential consumer mortgage loans secured by residential real estate that were in the process of foreclosure at September 30, 2021 was $418,000.

Note 4 - Acquired Credit Impaired Loans

Loans acquired through mergers are recorded at fair value with no carryover of the acquired entity's previously established allowance for loan losses.  The excess of expected cash flows over the estimated fair value of acquired loans is recognized as interest income over the remaining contractual lives of the loans using the level yield method. Subsequent decreases in expected cash flows will require additions to the allowance for loan losses.  Subsequent improvements in expected cash flows result in the recognition of additional interest income over the then-remaining contractual lives of the loans.

Impaired loans acquired are accounted for under ASC 310-30.  Factors considered in evaluating whether an acquired loan was impaired include delinquency status and history, updated borrower credit status, collateral information, and updated loan-to-value information.  The difference between contractually required payments at the time of acquisition and the cash flows expected to be collected is referred to as the nonaccretable difference. The interest component of the cash flows expected to be collected is referred to as the accretable yield and is recognized as interest income over the remaining contractual life of the loan using the level yield method.   Subsequent decreases in expected cash flows will require additions to the allowance for loan losses.  Subsequent improvements in expected cash flows will result in a reclassification from the nonaccretable difference to the accretable yield.

20

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 4 – Acquired Credit Impaired Loans (continued)

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

	September 30, 2021		December 31, 2020
Acquired from First Capital Bancshares, Inc.
Commercial & industrial	$	1	1
Commercial, secured by real estate	—		—
Residential real estate	405		449
Other loans, including deposit overdrafts	—		—
Loans, gross	406		450
Less allowance for loan losses	—		—
Loans, net	$	406	450
Acquired from Eaton National Bank & Trust Co.
Commercial & industrial	$	98	249
Commercial, secured by real estate	317		601
Residential real estate	473		595
Other loans, including deposit overdrafts	176		184
Loans, gross	1,064		1,629
Less allowance for loan losses	—		—
Loans, net	$	1,064	1,629
Acquired from BNB Bancorp, Inc.
Commercial & industrial	$	—	—
Commercial, secured by real estate	700		780
Residential real estate	51		85
Other loans, including deposit overdrafts	—		—
Loans, gross	751		865
Less allowance for loan losses	—		—
Loans, net	$	751	865
Acquired from Columbus First Bancorp, Inc.
Commercial & industrial	$	95	112
Commercial, secured by real estate	628		667
Residential real estate	257		1,177
Other loans, including deposit overdrafts	—		—
Loans, gross	980		1,956
Less allowance for loan losses	—		—
Loans, net	$	980	1,956
Total
Commercial & industrial	$	194	362
Commercial, secured by real estate	1,645		2,048
Residential real estate	1,186		2,306
Other loans, including deposit overdrafts	176		184
Loans, gross	3,201		4,900
Less allowance for loan losses	—		—
Loans, net	$	3,201	4,900

21

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 4 – Acquired Credit Impaired Loans (continued)

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

	September 30, 2021		December 31, 2020
Outstanding balance	$	4,217	6,128
Carrying amount	3,201		4,900

Activity during the three and nine months ended September 30, 2021 and 2020 for the accretable discount related to acquired credit impaired loans is as follows (in thousands):

	Three Months Ended September 30,			Nine Months Ended September 30,
	2021		2020	2021	2020
Accretable discount at beginning of period	$	84	204	182	480
Reclassification from nonaccretable discount to accretable discount	22		6	65	368
Accretion	(77)		(27)	(218)	(665)
Accretable discount at end of period	$	29	183	29	183

Note 5 - Affordable Housing Tax Credit Limited Partnership

LCNB is a limited partner in limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit 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 September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021		December 31, 2020
Affordable housing tax credit investment	$	14,950	12,000
Less amortization	1,950		1,320
Net affordable housing tax credit investment	$	13,000	10,680
Unfunded commitment	$	9,938	8,237

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 13 years.

22

LCNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

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

The following table presents other information relating to LCNB's affordable housing tax credit investments for the three and nine months ended September 30, 2021 and 2020 (in thousands):

	Three Months Ended September 30,			Nine Months Ended September 30,
	2021		2020	2021	2020
Tax credits and other tax benefits recognized	$	240	264	760	802
Tax credit amortization expense included in provision for income taxes	198		130	630	393

Note 6 – Borrowings

Borrowings at September 30, 2021 and December 31, 2020 were as follows (dollars in thousands):

	September 30, 2021			December 31, 2020
	Amount	Rate		Amount	Rate
FHLB long-term advances	15,000	2.98	%	22,000	2.68	%

All advances from the FHLB of Cincinnati are secured by a blanket pledge of LCNB's 1-4 family first lien mortgage loans in the amount of approximately $311 million and $276 million at September 30, 2021 and December 31, 2020, respectively.  Total remaining borrowing capacity at September 30, 2021 was approximately $228.6 million.

Note 7 - Leases

Lease expenses for offices are included in the consolidated condensed statements of income in net occupancy expense and lease expenses for equipment and ATMs are included in equipment expense. Components of lease expense for the three and nine months ended September 30, 2021 were as follows (in thousands):

	Three Months Ended September 30,			Nine Months Ended  September 30,
	2021		2020	2021	2020
Operating lease expense	$	208	168	635	469
Short-term lease expense	11		12	36	39
Variable lease expense	1		1	3	8
Other	2		1	8	7
Total lease expense	$	222	182	682	523

Other information related to leases at September 30, 2021 were as follows (dollars in thousands):

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	582
Right-of-use assets obtained in exchange for new operating lease liabilities	$	801
Weighted average remaining lease term in years for operating leases	32.3
Weighted average discount rate for operating leases	3.38		%

23

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 8 – Income Taxes

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Statutory tax rate	21.0	%	21.0	%	21.0	%	21.0	%
Increase (decrease) resulting from:
Tax exempt interest	(0.8)	%	(1.0)	%	(0.7)	%	(0.9)	%
Tax exempt income on bank owned life insurance	(1.0)	%	(1.1)	%	(0.9)	%	(1.4)	%
Captive insurance premium income	(1.0)	%	(0.7)	%	(0.8)	%	(0.8)	%
Tax benefit from certain provisions of the CARES Act	—	%	—	%	—	%	(1.1)	%
Other, net	(0.6)	%	(0.3)	%	(0.5)	%	(0.4)	%
Effective tax rate	17.6	%	17.9	%	18.1	%	16.4	%

Note 9 - Commitments and Contingent Liabilities

LCNB is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit.  These financial instruments 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.

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 September 30, 2021 and December 31, 2020 were as follows (in thousands):

	September 30, 2021		December 31, 2020
Commitments to extend credit:
Commercial loans	$	49,295	24,581
Other loans
Fixed rate	7,746		14,668
Adjustable rate	2,571		4,386
Unused lines of credit:
Fixed rate	48,105		24,205
Adjustable rate	144,022		133,073
Unused overdraft protection amounts on demand and NOW accounts	16,708		16,471
Standby letters of credit	5		243
Total commitments	$	268,452	217,627

24

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 9 – Commitments and Contingent Liabilities (continued)

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

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

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

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 September 30, 2021 totaled approximately $2,307,000.

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.

Note 10 – Accumulated Other Comprehensive Income

Changes in accumulated other comprehensive income for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	Unrealized Gains and Losses on Available-for-Sale Debt Securities		Changes in Pension Plan Assets and Benefit Obligations	Total	Unrealized Gains and Losses on Available-for-Sale Debt Securities	Changes in Pension Plan Assets and Benefit Obligations	Total
2021
Balance at beginning of period	$	1,866	(303)	1,563	4,349	(306)	4,043
Before reclassifications	(669)		2	(667)	(3,152)	5	(3,147)
Reclassifications	—		—	—	—	—	—
Balance at end of period	$	1,197	(301)	896	1,197	(301)	896
2020
Balance at beginning of period	$	4,051	(183)	3,868	857	(184)	673
Before reclassifications	286		—	286	3,655	1	3,656
Reclassifications	—		—	—	(175)	—	(175)
Balance at end of period	$	4,337	(183)	4,154	4,337	(183)	4,154

25

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 10 – Accumulated Other Comprehensive Income, continued

Reclassifications out of accumulated other comprehensive income during the three and nine months ended September 30, 2021 and 2020 and the affected line items in the consolidated condensed statements of income were as follows (in thousands):

	Three Months Ended September 30,			Nine Months Ended  September 30,		Affected Line Item in the Consolidated Condensed Statements of Income
	2021		2020	2021	2020
Realized gains from sales of debt securities, available-for-sale	$	—	—	—	221	Net gains from sales of debt securities, available-for-sale
Income tax expense	—		—	—	46	Provision for income taxes
Reclassification adjustment, net of taxes	$	—	—	—	175

Note 11 – Retirement Plans

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

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

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 and nine-month period ended September 30, 2021 and 2020 were as follows (in thousands):

	Three Months Ended September 30,			Nine Months Ended  September 30,
	2021		2020	2021	2020
Qualified noncontributory defined benefit retirement plan	$	261	273	822	814
401(k) plan	162		140	474	452

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

The components of net periodic pension cost of the nonqualified defined benefit retirement plan for the three and nine months ended September 30, 2021 and 2020 are summarized as follows (in thousands):

	Three Months Ended September 30,			Nine Months Ended  September 30,
	2021		2020	2021	2020
Interest cost	$	13	17	39	49
Amortization of unrecognized net loss	2		—	6	—
Net periodic pension cost	$	15	17	45	49

26

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 11 – Retirement Plans (continued)

Amounts recognized in accumulated other comprehensive income, net of tax, at September 30, 2021 and December 31, 2020 for the nonqualified defined benefit retirement plan consists of (in thousands):

	September 30, 2021		December 31, 2020
Net actuarial loss	$	301	306
Past service cost	—		—
Total recognized, net of tax	$	301	306

Note 12 – Stock Based Compensation

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

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

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

LCNB has not granted stock option awards since 2012.

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

	Nine Months Ended September 30,
	2021					2020
	Options	Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands) (1)		Options	Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands) (1)
Outstanding, January 1,	311	$	12.60			9,904	$	11.96
Granted	—	—				—	—
Exercised	(311)	12.60				(9,593)	11.94
Expired	—	—				—	—
Outstanding, September 30,	—	—		$	—	311	12.60		$	—
Exercisable, September 30,	—	—		$	—	311	12.60		$	—
(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.

27

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 12 – Stock Based Compensation (continued)

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

	Nine Months Ended September 30,
	2021		2020
Intrinsic value of options exercised	$	1	46
Cash received from options exercised	4		115
Tax benefit realized from options exercised	—		5

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

	2021			2020
	Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value
Outstanding, January 1,	28,596	$	17.42	17,752	$	18.03
Granted	26,321	16.85		19,211	16.87
Vested	(8,959)	17.54		(3,818)	18.45
Forfeited	(756)	16.86		(3,550)	16.90
Outstanding, September 30,	45,202	$	17.08	29,595	$	17.37

The following table presents expense recorded in salaries and employee benefits for restricted stock awards and the related tax information for the three and nine months ended September 30, 2021 and 2020 (in thousands):

	Three Months Ended September 30,			Nine Months Ended  September 30,
	2021		2020	2021	2020
Restricted stock expense	$	52	34	197	102
Tax effect	11		7	41	21

Unrecognized compensation expense for restricted stock awards was $657,000 at September 30, 2021 and is expected to be recognized over a period of 4.4 years.

Note 13 – Earnings per Common Share

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

28

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 13 – Earnings per Common Share (continued)

Earnings per share for the three and nine months ended September 30, 2021 and 2020 were calculated as follows (dollars in thousands, except share and per share data):

	Three Months Ended September 30,			Nine Months Ended  September 30,
	2021		2020	2021	2020
Net income	$	4,817	4,250	15,347	14,333
Less allocation of earnings and dividends to participating securities	18		10	56	33
Net income allocated to common shareholders	$	4,799	4,240	15,291	14,300
Weighted average common shares outstanding, gross	12,501,234		12,967,460	12,709,326	12,964,582
Less average participating securities	45,958		29,595	45,958	29,595
Weighted average number of shares outstanding used in the calculation of basic earnings per common share	12,455,276		12,937,865	12,663,368	12,934,987
Add dilutive effect of:
Stock options	—		36	10	401
Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share	12,455,276		12,937,901	12,663,378	12,935,388
Earnings per common share:
Basic	$	0.39	0.33	1.21	1.11
Diluted	0.39		0.33	1.21	1.11

There were no anti-dilutive stock options outstanding at September 30, 2021 or 2020.

Note 14 - Fair Value Measurements

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

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

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

•Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets in active markets,  quoted prices for identical assets or liabilities in markets that are not active, inputs other than quoted prices (such as interest rates or yield curves) that are observable for the asset or liability, and inputs that are derived from or corroborated by observable market data.

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

Equity Securities With a Readily Determinable Fair Value

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

29

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 14 - Fair Value Measurements (continued)

Debt Securities, Available-for-Sale

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

•Fair values 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.

30

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 14 - Fair Value Measurements (continued)

The following table summarizes the valuation of LCNB's assets recorded at fair value by input levels as of September 30, 2021 and December 31, 2020 (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)
September 30, 2021
Recurring fair value measurements:
	Equity securities with a readily determinable fair value:
	Equity securities	$	1,089	1,089	—	—
	Mutual funds	52		52	—	—
	Mutual funds measured at net asset value	1,337		1,337	—	—
	Debt securities, available-for-sale:
	U.S. Treasury notes	64,364		64,364	—	—
	U.S. Agency notes	100,229		—	100,229	—
	Corporate bonds	2,604		—	2,604	—
	U.S. Agency mortgage-backed securities	98,114		—	98,114	—
	Municipal securities:
	Non-taxable	11,498		—	11,498	—
	Taxable	36,405		—	36,405	—
	Total recurring fair value measurements	$	315,692	66,842	248,850	—
Nonrecurring fair value measurements:
	Impaired loans	$	1,046	—	—	1,046
	Total nonrecurring fair value measurements	$	1,046	—	—	1,046
December 31, 2020
Recurring fair value measurements:
	Equity securities with a readily determinable fair value:
	Equity securities	$	987	987	—	—
	Mutual funds	50		50	—	—
	Mutual funds measured at net asset value	1,352		1,352	—	—
	Debt securities, available-for-sale:
	U.S. Treasury notes	2,388		2,388	—	—
	U.S. Agency notes	67,900		—	67,900	—
	Corporate bonds	1,179		—	1,179	—
	U.S. Agency mortgage-backed securities	91,634		—	91,634	—
	Municipal securities:
	Non-taxable	12,933		—	12,933	—
	Taxable	33,437		—	33,437	—
	Total recurring fair value measurements	$	211,860	4,777	207,083	—
Nonrecurring fair value measurements:
	Impaired loans	$	3,439	—	—	3,439
	Total nonrecurring fair value measurements	$	3,439	—	—	3,439

31

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 14 - Fair Value Measurements (continued)

The following table presents quantitative information about unobservable inputs used in nonrecurring level 3 fair value measurements at September 30, 2021 and December 31, 2020 (dollars in thousands):

					Range
	Fair Value		Valuation Technique	Unobservable Inputs	High		Low		Weighted Average
September 30, 2021
Impaired loans	$	1,046	Discounted cash flows	Discount rate	8.25	%	4.00	%	6.12	%
December 31, 2020
Impaired loans	$	1,352	Estimated sales price	Adjustments for comparable properties, discounts to reflect current market conditions	Not applicable
	2,087		Discounted cash flows	Discount rate	8.25	%	4.00	%	4.74	%

32

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 14 - Fair Value Measurements (continued)

Carrying amounts and estimated fair values of financial instruments as of September 30, 2021 and December 31, 2020 were 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)
September 30, 2021
FINANCIAL ASSETS:
Cash and cash equivalents	$	23,852	23,852	23,852	—	—
Debt securities, held-to-maturity	24,420		24,497	—	—	24,497
Federal Reserve Bank stock	4,652		4,652	4,652	—	—
Federal Home Loan Bank stock	5,203		5,203	5,203	—	—
Loans, net	1,334,331		1,297,274	—	—	1,297,274
Accrued interest receivable	8,624		8,624	—	8,624	—
FINANCIAL LIABILITIES:
Deposits	1,603,203		1,604,897	1,400,503	204,394	—
Long-term debt	15,000		15,363	—	15,363	—
Accrued interest payable	289		289	—	289	—
December 31, 2020
FINANCIAL ASSETS:
Cash and cash equivalents	$	31,730	31,730	31,730	—	—
Debt securities, held-to-maturity	24,810		24,960	—	—	24,960
Federal Reserve Bank stock	4,652		4,652	4,652	—	—
Federal Home Loan Bank stock	5,203		5,203	5,203	—	—
Loans, net	1,293,693		1,252,642	—	—	1,252,642
Accrued interest receivable	8,337		8,337	—	8,337	—
FINANCIAL LIABILITIES:
Deposits	1,455,423		1,458,413	1,212,903	245,510	—
Long-term debt	22,000		22,595	—	22,595	—
Accrued interest payable	452		452	—	452	—

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 September 30, 2021 and December 31, 2020.

33

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 15 – Recent Accounting Pronouncements

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

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

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

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

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

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

LCNB has created a cross-functional CECL Committee, which reports to the Audit Committee, composed of members from the lending, Wealth Management, and finance departments. During 2017, the CECL Committee selected a vendor to assist in implementation of and ongoing compliance with the new requirements. It has completed analyzing its data collection efforts, selected a calculation model, analyzed its pool segmentation and reporting mechanisms, and has finished back testing in preparation for adoption of the new methodology. While the committee and management expect that implementation of ASU No. 2016-13 will increase the balance of the allowance for loan losses, they continue to analyze modeling after studying the impacts that the most recent economic conditions presented due to the pandemic. As they adjust and finalize appropriate modeling, they are continuing to evaluate the modeling and it’s potential impact on LCNB's results of consolidated operations and financial position. The consolidated financial statement impact of this new standard cannot be reasonably estimated at this time; however, it is anticipated during 2022 that modeling adjustments should be complete after finalizing review of prepayment, curtailment, and forecasting assessments.

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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, 2020, as well as its other filings with the SEC, for a more detailed discussion of risks, uncertainties and factors that could cause actual results to differ from those discussed in the forward-looking statements.

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

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

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

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

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

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

6.LCNB may face competitive loss of customers;

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

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

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

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

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

customers, which could adversely affect LCNB 's operating results and financial condition;

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

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

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

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

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

35

LCNB CORP. AND SUBSIDIARIES

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

Coronavirus Update/Status

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

On May 12, 2021, Ohio Governor Mike DeWine announced that the vast majority of Ohio Department of Health orders related to COVID-19 would be rescinded on June 2, 2021. Measures that have been removed include facial covering protocols, social distancing guidelines, and capacity restrictions for indoor and outdoor events. Businesses can choose to continue facial mask and social distancing protocols in their facilities. Further, on June 17, 2021, Governor DeWine announced that Ohio's State of Emergency caused by the COVID-19 pandemic would be lifted, effective the next day. The National Emergency Declaration remains in force, as does the National Public Health Emergency Declaration.

In response, LCNB management rescinded requirements to wear facial masks and practice social distancing, effective June 2, 2021, except for branches located in areas with local mandates. Employees and customers at branches without local mandates who wish to continue wearing facial masks may continue to do so. Depending on local conditions, some branches transitioned to drive-up only operations or shortened hours for brief periods of time. Plexiglass barriers remain at teller stations and will remain until and if management decides to remove them.

Because of the economic disruption caused by the pandemic, LCNB has provided COVID-19 related payment deferrals, primarily agreements to accept interest only payments for a period of time or agreements to defer principal and interest payments for a period of time, on a number of loans. There were no loans remaining on deferral for COVID-19 reasons at September 30, 2021. Loans still on deferral at December 31, 2020 were as follows (in thousands):

	December 31, 2020
Commercial, secured by real estate	20,231
Residential real estate	324
Consumer	21
	20,576

LCNB participated in the CARES Act PPP that provided government guaranteed and potentially forgivable loans to applicants. The PPP was implemented by the SBA with support from the Department of the Treasury and provided small businesses with funds to pay up to eight or twenty-four weeks, depending on the date of the loan, of payroll costs including benefits. Funds could also be used to pay interest on mortgages, rent, utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures. Outstanding PPP loans at September 30, 2021 and December 31, 2020 totaled $12,971,000 and $21,088,000, respectively, and unrecognized fees at those dates totaled $498,000 and $747,000, respectively.

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

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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 fair values. Thus, an allowance for estimated future losses is not established on the acquisition date. Subsequent to the date of acquisition, expected future cash flows on loans acquired are updated and any losses or reductions in estimated cash flows which arise subsequent to the date of acquisition are reflected as a charge through the provision for loan losses. An increase in the expected cash flows adjusts the level of the accretable yield recognized on a prospective basis over the remaining life of the loan. Due to the number, size, and complexity of loans within the acquired loan portfolio, there is always a possibility of inherent undetected losses.

Accounting for Intangibles.  LCNB’s intangible assets at September 30, 2021 are composed primarily of goodwill and core deposit intangibles related to acquisitions of other financial institutions. It also includes mortgage servicing rights recorded from sales of mortgage loans to the Federal Home Loan Mortgage Corporation and mortgage servicing rights acquired through the acquisition of Eaton National Bank & Trust Co. and Columbus First Bancorp, Inc. Goodwill is not subject to amortization, but is reviewed annually for impairment or sooner if circumstances indicate a possible impairment.  Core deposit intangibles are being amortized on a straight line basis over their respective estimated weighted average lives.  Mortgage servicing rights are capitalized by allocating the total cost of loans between mortgage servicing rights and the loans based on their estimated fair values.  Capitalized mortgage servicing rights are amortized to loan servicing income in proportion to and over the period of estimated servicing income, subject to periodic review for impairment.

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

37

LCNB CORP. AND SUBSIDIARIES

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

Results of Operations

Net income for the three and nine months ended September 30, 2021 was $4,817,000 (total basic and diluted earnings per share of $0.39) and $15,347,000 (total basic and diluted earnings per share of $1.21), respectively. This compares to net income of $4,250,000 (total basic and diluted earnings per share of $0.33) and $14,333,000 (total basic and diluted earnings per share of $1.11) for the same three and nine month periods in 2020.

Net interest income for the three and nine months ended September 30, 2021 was $14,073,000 and $42,814,000, respectively. This compares to net interest income of $13,529,000 and $41,705,000 for the same periods in 2020. Favorably contributing to the variances for both the three- and nine-month periods were fees recognized from PPP loans and market driven decreases in the average rates paid on deposits, aided by a shift from higher cost certificates of deposit to lower cost demand and savings products.

Increases in the provision for loan losses, partially due to adjustments for estimated impacts from the economic downturn caused by the COVID-19 pandemic, negatively affected earnings during the 2020 period. LCNB recorded provisions of $306,000 and $239,000 for the three and nine months ended September 30, 2021, respectively. This compares to respective provisions of $976,000 and $2,165,000 for the same three and nine month periods in 2020.

Non-interest income for the three months and nine months ended September 30, 2021, was $4,106,000 and $11,885,000, respectively. This compares to $4,278,000 and $11,436,000 for the same periods last year. For the three month comparative periods, the increases in fiduciary income and deposit service charges were more than offset by decreases in gains from sales of loans. For the nine-month comparative periods, fiduciary income and deposit service charges increased and were partially offset by decreases in gains from loan sales. Non-interest income for the nine-month period also benefited from a one-time refund on LCNB’s Ohio Financial Institution tax, which was included in other operating income.

Non-interest expense for the three and nine months ended September 30, 2021, was $12,029,000 and $35,729,000, respectively. This compares to $11,653,000 and $33,841,000 for the same three and nine month periods in 2020. The 2021 periods saw increases in salaries and employee benefits, equipment, FDIC insurance premiums, contracted services, and other non-interest expenses. A decrease in marketing expenses partially offset these increases.

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LCNB CORP. AND SUBSIDIARIES

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

Net Interest Income

Three Months Ended September 30, 2021 vs. September 30, 2020

LCNB's primary source of earnings is net interest income, which is the difference between earnings from loans and other investments and interest paid on deposits and other liabilities.  The following table presents, for the three months ended September 30, 2021 and September 30, 2020, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resulting average yields earned or rates paid.

	Three Months Ended September 30,
	2021						2020
	Average Outstanding Balance			Interest Earned/ Paid	Average Yield/ Rate		Average Outstanding Balance			Interest Earned/ Paid	Average Yield/ Rate
					(Dollars in thousands)
Loans (1)	$	1,321,629		13,729	4.12	%	$	1,339,608		14,379	4.27	%
Interest-bearing demand deposits	10,746			11	0.41	%	21,490			17	0.31	%
Federal Reserve Bank stock	4,652			—	—	%	4,652			—	—	%
Federal Home Loan Bank stock	5,203			26	1.98	%	5,203			26	1.99	%
Investment securities:
Equity securities	4,588			17	1.47	%	4,329			18	1.65	%
Debt securities, taxable	309,136			1,027	1.32	%	146,847			633	1.71	%
Debt securities, non-taxable (2)	32,635			271	3.29	%	36,757			315	3.41	%
Total earnings assets	1,688,589			15,081	3.54	%	1,558,886			15,388	3.93	%
Non-earning assets	196,292						188,362
Allowance for loan losses	(5,567)						(5,250)
Total assets	$	1,879,314					$	1,741,998
Savings deposits	$	908,670		291	0.13	%	$	730,858		348	0.19	%
IRA and time certificates	207,010			545	1.04	%	281,586			1,219	1.72	%
Short-term borrowings	1,320			2	0.60	%	—			—	—	%
Long-term debt	15,000			113	2.99	%	33,020			226	2.72	%
Total interest-bearing liabilities	1,132,000			951	0.33	%	1,045,464			1,793	0.68	%
Demand deposits	480,093						433,129
Other liabilities	26,245						24,415
Capital	240,976						238,990
Total liabilities and capital	$	1,879,314					$	1,741,998
Net interest rate spread (3)					3.21	%					3.25	%
Net interest income and net interest margin on a taxable-equivalent basis (4)				14,130	3.32	%				13,595	3.47	%
Ratio of interest-earning assets to interest-bearing liabilities	149.17		%				149.11		%

(1)Includes non-accrual loans.

(2)Income from tax-exempt securities is included in interest income on a taxable-equivalent basis.  Interest income has been divided

    by a factor comprised of the complement of the incremental tax rate of 21%.

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

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

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LCNB CORP. AND SUBSIDIARIES

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

The following table presents the changes in taxable-equivalent basis interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the three months ended September 30, 2021 as compared to the same period in 2020.  Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each.

	Three Months Ended  September 30, 2021 vs. 2020
	Increase (decrease) due to:
	Volume		Rate	Total
	(In thousands)
Interest-earning Assets:
Loans	$	(191)	(459)	(650)
Interest-bearing demand deposits	(10)		4	(6)
Federal Reserve Bank stock	—		—	—
Federal Home Loan Bank stock	—		—	—
Investment securities:
Equity securities	1		(2)	(1)
Debt securities, taxable	567		(173)	394
Debt securities, non-taxable	(34)		(10)	(44)
Total interest income	333		(640)	(307)
Interest-bearing Liabilities:
Savings deposits	73		(130)	(57)
IRA and time certificates	(272)		(402)	(674)
Short-term borrowings	2		—	2
Long-term debt	(134)		21	(113)
Total interest expense	(331)		(511)	(842)
Net interest income	$	664	(129)	535

Net interest income on a fully taxable-equivalent basis for the three months ended September 30, 2021 totaled $14,130,000, an increase of $535,000 from the comparable period in 2020.  Total interest expense decreased $842,000, which was partially offset by a $307,000 decrease in total interest income.

The $307,000 decrease in total interest income was due primarily to a $650,000 decrease in loan interest income, which was partially offset by a $394,000 increase in interest income from taxable debt securities. The decrease in loan interest income was primarily due to a 15 basis point (a basis point equals 0.01%) decrease in the average rate earned on loans and secondarily due to a $18.0 million decrease in the average balance of LCNB's loan portfolio. Loan interest income for the third quarter 2021 included $492,000 of PPP loan fees recognized. The increase in interest income from taxable debt securities was due to a $162.3 million increase in average securities, which was partially offset by a 39 basis point decrease in the average rate earned on these securities. The decrease in average rates for both loans and investment securities was primarily due to market conditions.

The $842,000 decrease in total interest expense was due to a $674,000 decrease in interest expense for IRA and time certificates and a $113,000 decrease in interest expense for long-term debt. Interest expense for IRA and time certificates decreased primarily due to a 68 basis point decrease in the average rate paid for these deposits and secondarily to an $74.6 million decrease in the average balance of these deposits. Management believes the decrease reflects customer preferences for liquidity during uncertain economic periods. Balances in demand deposits and NOW and savings accounts have grown, while balances in IRA and time deposits have decreased. Interest expense for long-term debt decreased due to a $18.0 million decrease in average debt outstanding, slightly offset by a 27 basis point increase in the average rate paid.

40

LCNB CORP. AND SUBSIDIARIES

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

Nine Months Ended September 30, 2021 vs. September 30, 2020

The following table presents, for the nine months ended September 30, 2021 and September 30, 2020, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resulting average yields earned or rates paid.

	Nine Months Ended September 30,
	2021						2020
	Average Outstanding Balance			Interest Earned/ Paid	Average Yield/ Rate		Average Outstanding Balance			Interest Earned/ Paid	Average Yield/ Rate
					(Dollars in thousands)
Loans (1)	$	1,321,426		42,372	4.29	%	$	1,303,770		44,428	4.55	%
Interest-bearing demand deposits	17,031			38	0.30	%	18,164			65	0.48	%
Federal Reserve Bank stock	4,652			140	4.02	%	4,652			140	4.02	%
Federal Home Loan Bank stock	5,203			78	2.00	%	5,203			91	2.34	%
Investment securities:
Equity securities	4,569			54	1.58	%	4,283			73	2.28	%
Debt securities, taxable	262,245			2,650	1.35	%	141,625			2,250	2.12	%
Debt securities, non-taxable (2)	33,335			830	3.33	%	39,270			997	3.39	%
Total earnings assets	1,648,461			46,162	3.74	%	1,516,967			48,044	4.23	%
Non-earning assets	193,079						182,866
Allowance for loan losses	(5,653)						(4,730)
Total assets	$	1,835,887					$	1,695,103
Savings deposits	$	857,289		872	0.14	%	$	704,708		1,141	0.22	%
IRA and time certificates	220,157			1,937	1.18	%	302,431			4,275	1.89	%
Short-term borrowings	796			4	0.67	%	497			7	1.88	%
Long-term debt	16,736			361	2.88	%	35,427			707	2.67	%
Total interest-bearing liabilities	1,094,978			3,174	0.39	%	1,043,063			6,130	0.79	%
Demand deposits	474,281						394,497
Other liabilities	25,249						22,318
Capital	241,379						235,225
Total liabilities and capital	$	1,835,887					$	1,695,103
Net interest rate spread (3)					3.35	%					3.44	%
Net interest income and net interest margin on a taxable-equivalent basis (4)				42,988	3.49	%				41,914	3.69	%
Ratio of interest-earning assets to interest-bearing liabilities	150.55		%				145.43		%

(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 nine months ended September 30, 2021 as compared to the same period in 2020.  Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each.

	Nine Months Ended  September 30, 2021 vs. 2020
	Increase (decrease) due to:
	Volume		Rate	Total
	(In thousands)
Interest-earning Assets:
Loans	$	595	(2,651)	(2,056)
Interest-bearing demand deposits	(4)		(23)	(27)
Federal Reserve Bank stock	—		—	—
Federal Home Loan Bank stock	—		(13)	(13)
Investment securities:
Equity securities	5		(24)	(19)
Debt securities, taxable	1,428		(1,028)	400
Debt securities, non-taxable	(148)		(19)	(167)
Total interest income	1,876		(3,758)	(1,882)
Interest-bearing Liabilities:
Savings deposits	213		(482)	(269)
IRA and time certificates	(979)		(1,359)	(2,338)
Short-term borrowings	3		(6)	(3)
Long-term debt	(399)		53	(346)
Total interest expense	(1,162)		(1,794)	(2,956)
Net interest income	$	3,038	(1,964)	1,074

Net interest income on a fully taxable-equivalent basis for the nine months ended September 30, 2021 totaled $42,988,000, an increase of $1,074,000 from the comparable period in 2020.  Total interest expense decreased $2,956,000, which was partially offset by a $1,882,000 decrease in total interest income.

The $1,882,000 decrease in total interest income was due primarily to a $2,056,000 decrease in loan interest income, which was partially offset by a $400,000 increase in interest income from taxable debt securities. The decrease in loan interest income was primarily due to a 26 basis point decrease in the average rate earned on loans, which was partially offset by a $17.7 million increase in the average balance of LCNB's loan portfolio. Loan interest income for the first three quarters of 2021 included $1,415,000 of PPP loan fees recognized. The increase in interest income from taxable debt securities was due to a $120.6 million increase in average securities, which was largely offset by a 77 basis point decrease in the average rate earned on these securities. The decrease in average rates for both loans and investment securities was primarily due to market conditions.

The $2,956,000 decrease in total interest expense was primarily due to a $2,338,000 decrease in interest expense for IRA and time certificates. Interest expense for IRA and time certificates decreased primarily due to a 71 basis point decrease in the average rate paid for these deposits and secondarily to an $82.3 million decrease in the average balance of these deposits.

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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. For analysis purposes, the loan portfolio is separated into pools of similar loans. These pools include commercial & industrial loans, owner occupied commercial real estate loans, non-owner occupied commercial real estate loans, real estate loans secured by farms, real estate loans secured by multi-family dwellings, residential real estate loans secured by senior liens on 1-4 family dwellings, residential real estate loans secured by junior liens on 1-4 family dwellings, home equity line of credit loans, consumer loans, loans for agricultural purposes not secured by real estate, construction loans secured by 1-4 family dwellings, construction loans secured by other real estate, and several smaller classifications. Within each pool of loans, LCNB examines a variety of factors to determine the adequacy of the allowance for loan losses, including historic charge-off percentages, overall pool quality, a review of specific problem loans, current economic trends and conditions that may affect borrowers' ability to pay, and the nature, volume, and consistency of the loan pool.

The provision for loan losses for the three and nine months ended September 30, 2021 was respectively $306,000 and $239,000, compared to provisions of $976,000 and $2,165,000 for the same periods in 2020. The 2020 periods included qualitative adjustments for estimated impacts from the economic downturn caused by the COVID-19 pandemic. Calculating an appropriate level for the allowance and provision for loan losses involves a high degree of management judgment and is, by its nature, imprecise. Revisions may be necessary as more information becomes available.

Net charge-offs for the three and nine months ended September 30, 2021 were $130,000 and $139,000, respectively, as compared to net charge-offs of $18,000 and $236,000 for the same three and nine-month periods in 2020.

Non-Interest Income

A comparison of non-interest income for the three and nine months ended September 30, 2021 and September 30, 2020 is as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended  September 30,
	2021		2020	Difference	2021	2020	Difference
Fiduciary income	$	1,695	1,275	420	4,959	3,579	1,380
Service charges and fees on deposit accounts	1,621		1,506	115	4,506	4,038	468
Net gains from sales of debt securities, available-for-sale	—		—	—	—	221	(221)
Bank owned life insurance income	269		275	(6)	805	1,163	(358)
Gains from sales of loans	366		999	(633)	560	1,436	(876)
Other operating income	155		223	(68)	1,055	999	56
Total non-interest income	$	4,106	4,278	(172)	11,885	11,436	449

Reasons for changes include:

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

•Service charges and fees on deposit accounts for the three month period increased primarily due to increases in check card income, overdraft fees, and Mastercard incentive income. Service charges and fees on deposit accounts for the nine month period increased primarily due to an increase in check card income, which was partially offset by a decrease in fee income recognized on Insured Cash Sweep ("ICS") deposit products due to lower volumes and a decrease in the amount of fees received due to lower market rates.

•Bank owned life insurance income for the nine months ended September 30, 2020 included a mortality benefit, while no mortality benefits were recognized during the 2021 period.

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

•Other operating income for the three month period decreased primarily due to decreases in realized and unrealized net gains or losses recognized on equity securities. Other operating income increased for the nine month period due to a state tax refund of $508,000 recognized during the second quarter 2021, which was partially offset by decreases in realized and unrealized net gains or losses recognized on equity security investments.

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LCNB CORP. AND SUBSIDIARIES

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

Non-Interest Expense

A comparison of non-interest expense for the three and nine months ended September 30, 2021 and September 30, 2020 is as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended  September 30,
	2021		2020	Difference	2021	2020	Difference
Salaries and employee benefits	$	7,096	6,863	233	20,640	20,279	361
Equipment expenses	421		341	80	1,232	917	315
Occupancy expense, net	713		740	(27)	2,236	2,145	91
State financial institutions tax	437		424	13	1,318	1,280	38
Marketing	253		471	(218)	878	906	(28)
Amortization of intangibles	263		263	—	780	783	(3)
FDIC insurance premiums, net	129		112	17	365	142	223
Contracted services	655		435	220	1,818	1,312	506
Other non-interest expense	2,062		2,004	58	6,462	6,077	385
Total non-interest expense	$	12,029	11,653	376	35,729	33,841	1,888

Reasons for changes include:

•Salaries and employee benefits increased primarily due to increased health care costs, increased bonus expense accruals, and a decrease in salaries and benefits netted against deferred costs on loans, reflecting a lower volume of originations during the 2021 period.

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

•FDIC insurance premiums increased during the nine month period in 2021 because LCNB received small bank assessment credits from the FDIC during the first and second quarters 2020. Premium payments returned to their normal levels after the second quarter 2020.

•Contracted services increased due to employee recruitment services, increased usage of technology services, and to price increases in general.

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

Income Taxes

LCNB's effective tax rate for the three and nine months ended September 30, 2021 was 17.6% and 18.1%, respectively, compared to 17.9% and 16.4% for the three and nine months ended September 30, 2020.  The difference between the statutory rate of 21% and the effective tax rates is primarily due to tax-exempt interest income from municipal securities, tax-exempt earnings from bank owned life insurance, tax-exempt earnings from LCNB Risk Management, Inc., and tax credits and losses related to investments in affordable housing tax credit limited partnerships. A one-time tax benefit recognized as a result of certain provisions in the CARES Act passed by Congress and signed by President Trump during the first quarter 2020 also contributed to the effective tax rate for the nine months ended September 30, 2020.

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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 September 30, 2021 and December 31, 2020 is as follows (dollars in thousands):

	September 30, 2021		December 31, 2020	Difference $	Difference %
ASSETS:
Total cash and cash equivalents	$	23,852	31,730	(7,878)	(24.83)	%
Investment securities:
Equity securities with a readily determinable fair value, at fair value	2,478		2,389	89	3.73	%
Equity securities without a readily determinable fair value, at cost	2,099		2,099	—	—	%
Debt securities, available-for-sale, at fair value	313,214		209,471	103,743	49.53	%
Debt securities, held-to-maturity, at cost	24,420		24,810	(390)	(1.57)	%
Federal Reserve Bank stock, at cost	4,652		4,652	—	—	%
Federal Home Loan Bank stock, at cost	5,203		5,203	—	—	%
Loans, net	1,334,331		1,293,693	40,638	3.14	%
Premises and equipment, net	35,154		35,376	(222)	(0.63)	%
Operating lease right-of-use assets	6,608		6,274	334	5.32	%
Goodwill	59,221		59,221	—	—	%
Core deposit and other intangibles	2,671		3,453	(782)	(22.65)	%
Bank owned life insurance	42,954		42,149	805	1.91	%
Interest receivable	8,624		8,337	287	3.44	%
Other assets	18,771		17,027	1,744	10.24	%
Total assets	$	1,884,252	1,745,884	138,368	7.93	%
LIABILITIES:
Deposits:
Non-interest-bearing	$	483,920	455,073	28,847	6.34	%
Interest-bearing	1,119,283		1,000,350	118,933	11.89	%
Total deposits	1,603,203		1,455,423	147,780	10.15	%
Short-term borrowings	—		—	—	—	%
Long-term debt	15,000		22,000	(7,000)	(31.82)	%
Operating lease liabilities	6,693		6,371	322	5.05	%
Accrued interest and other liabilities	20,937		21,265	(328)	(1.54)	%
Total liabilities	1,645,833		1,505,059	140,774	9.35	%
TOTAL SHAREHOLDERS' EQUITY	238,419		240,825	(2,406)	(1.00)	%
Total liabilities and shareholders' equity	$	1,884,252	1,745,884	138,368	7.93	%

Reasons for changes include:

•Debt securities, available-for-sale, increased due to purchases of additional securities totaling $132.4 million, which was partially offset by maturities and calls of securities totaling $23.5 million.

•Net loans increased due to organic growth in the loan portfolio, partially offset by a net decrease in PPP loans of $8.1 million. Most of the growth occurred in the commercial real estate and residential real estate portfolios, partially offset by a decrease in the commercial and industrial loan portfolio.

•Operating lease right-of-use assets and operating lease liabilities increased due to a new lease for the Union Village branch and the renewal of a postage machine lease.

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

•Other assets increased due to an additional $3.0 investment in Affordable Housing Tax Credit Limited Partnerships and increases in prepaid expenses and federal income tax receivable.

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LCNB CORP. AND SUBSIDIARIES

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

•Non-interest-bearing deposits and interest-bearing deposits have grown substantially since the start of the COVID-19 pandemic and this trend continued during the first nine months of 2021. Management believes the growth reflects customer preferences for liquidity during uncertain economic periods. Balances in demand deposits and NOW and savings accounts have grown, while balances in IRA and time deposits have decreased.

•Long-term debt decreased due to payoffs of matured debt.

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

Regulatory Capital

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

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

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

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

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

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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):

	September 30, 2021			December 31, 2020
Regulatory Capital:
Shareholders' equity	$	233,502		234,092
Goodwill and other intangibles	(60,918)			(61,698)
Accumulated other comprehensive (income) loss	(896)			(4,043)
Tier 1 risk-based capital	171,688			168,351
Eligible allowance for loan losses	5,828			5,728
Total risk-based capital	$	177,516		174,079
Capital ratios:
Common Equity Tier 1 Capital to risk-weighted assets	12.29		%	12.48	%
Tier 1 Capital to risk-weighted assets	12.29		%	12.48	%
Total Capital to risk-weighted assets	12.71		%	12.91	%
Leverage	9.48		%	10.06	%

On September 17, 2019, the FDIC finalized a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations, as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The simplified rule was designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. Its use was permitted beginning with the March 31, 2020 Call Report. Qualifications to use the simplified approach include having a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the Community Bank Leverage Ratio framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. LCNB qualifies to use the simplified measure, but did not opt in for the September 30, 2021 regulatory capital calculations.

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 OCC, the Bank's primary regulator, is necessary for the Bank to pay dividends in excess of this amount. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines.  Management believes the Bank will be able to pay anticipated dividends to LCNB without needing to request approval.  The Bank is not aware of any reasons why it would not receive such approval, if required.

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

Total remaining borrowing capacity with the Federal Home Loan Bank at September 30, 2021 was approximately $167.5 million. In addition, additional borrowings of approximately $55.0 million were available through the line of credit arrangements at September 30, 2021.

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

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LCNB CORP. AND SUBSIDIARIES

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

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

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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 September 30, 2021 IRSA indicates that an increase in interest rates of 200 basis points or more will have a positive effect on NII and a 100 basis point increase or decrease in interest rates will 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	$	61,093	2,305	3.92	%
Up 300	60,081		1,293	2.20	%
Up 200	59,099		311	0.53	%
Up 100	58,252		(536)	(0.91)	%
Base	58,788		—	—	%
Down 100	56,911		(1,877)	(3.19)	%

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 September 30, 2021 EVE analysis indicates that an increase in interest rates will have a negative effect on the EVE and a 100 basis point decrease in interest rates will have a positive effect on the EVE.  The changes in the EVE for all 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	$	168,444	(36,992)	(18.01)	%
Up 300	179,272		(26,164)	(12.74)	%
Up 200	189,682		(15,754)	(7.67)	%
Up 100	200,652		(4,784)	(2.33)	%
Base	205,436		—	—	%
Down 100	237,859		32,423	15.78	%

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

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LCNB CORP. AND SUBSIDIARIES

Item 4. Controls and Procedures

a)  Disclosure controls and procedures.  The Chief Executive Officer and the Chief Financial Officer have carried out an evaluation of the effectiveness of LCNB's disclosure controls and procedures that ensure that information relating to LCNB required to be disclosed by LCNB in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to LCNB's management, including its principal executive officer and principal financial officer, as appropriate, in order to allow timely decisions to be made regarding required disclosures.  Based upon this evaluation, these officers have concluded that, as of September 30, 2021, LCNB's disclosure controls and procedures were effective.

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

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LCNB CORP. AND SUBSIDIARIES

PART II.  OTHER INFORMATION

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

There have been no material changes in the risk factors previously disclosed in the December 31, 2020 Form 10-K.

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

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

On August 24, 2020, LCNB's Board of Directors authorized a share repurchase program (the "Program"). Under the terms of the Program, LCNB is authorized to repurchase up to 645,000 of its outstanding common shares. The Program is authorized to last no longer than five years. The Program replaced and superseded LCNB’s prior share repurchase program, which was adopted in April 2019.

Under the Program, LCNB may purchase common shares through various means such as open market transactions, including block purchases, and privately negotiated transactions. The number of shares repurchased and the timing, manner, price and amount of any repurchases will be determined at LCNB's discretion. Factors include, but are not limited to, share price, trading volume, and general market conditions, along with LCNB’s general business conditions. The Program may be suspended or discontinued at any time and does not obligate LCNB to acquire any specific number of its common shares.

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

The following table sets forth information relating to repurchases made under the Program during the three months ended September 30, 2021:

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 2021	133,517	$	16.49	133,517	119,627
August 2021	29,916	$	17.48	29,916	89,711
September 2021	43,335	$	17.16	43,335	46,376

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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LCNB CORP. AND SUBSIDIARIES

Item 6. Exhibits

Exhibit No.	Exhibit Description
2.1	Agreement and Plan of Merger dated as of December 20, 2017 by and between LCNB Corp. and Columbus First Bancorp, Inc. - incorporated by reference to the Registrant's Current Report on Form 8-K filed on December 21, 2017, Exhibit 2.1.
3.1	Amended and Restated Articles of Incorporation of LCNB Corp., as amended. (This document represents the Amended and Restated Articles of Incorporation of LCNB Corp. in compiled form incorporating all amendments. The compiled document has not been filed with the Ohio Secretary of State.) - incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, Exhibit 3.1.
3.2	Code of Regulations of LCNB Corp. – incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005, Exhibit 3(ii).
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 September 30, 2021 is formatted in Extensible Business Reporting Language:  (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Income, (iii) the Consolidated Condensed Statements of Comprehensive Income, (iv) the Consolidated Condensed Statements of Shareholders' Equity, (v) the Consolidated Condensed Statements of Cash Flows, and (vi) the Notes to Consolidated Condensed Financial Statements.
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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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.
November 3, 2021	/s/ Eric J. Meilstrup
	Eric J. Meilstrup
	Chief Executive Officer and President
November 3, 2021	/s/ Robert C. Haines, II
	Robert C. Haines, II
	Executive Vice President and Chief Financial Officer

53