lcnb-20200930

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, 2020


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

For the transition period from to

Commission File Number 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 6, 2020 was 12,878,670 shares.

Table of Contents

LCNB CORP. AND SUBSIDIARIES

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION			2

Item 1. Financial Statements			2

CONSOLIDATED CONDENSED BALANCE SHEETS			2

CONSOLIDATED CONDENSED STATEMENTS OF INCOME			3

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME			4

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY			5

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS			6

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS			8

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			37

Item 3. Quantitative and Qualitative Disclosures about Market Risks			50

Item 4. Controls and Procedures			51

PART II. OTHER INFORMATION			52

Item 1. Legal Proceedings			52

Item 1A. Risk Factors			52

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			53

Item 3. Defaults Upon Senior Securities			53

Item 4. Mine Safety Disclosures			53

Item 5. Other Information			53

Item 6. Exhibits			54

SIGNATURES			55

Table of Contents

PART I – FINANCIAL INFORMATION


Item 1.			Financial Statements

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in thousands, except per share data)


	September 30, 2020		December 31, 2019
	(Unaudited)
ASSETS:
Cash and due from banks	$	16,151	17,019
Interest-bearing demand deposits	8,334		3,746
Total cash and cash equivalents	24,485		20,765

Investment securities:
Equity securities with a readily determinable fair value, at fair value	2,213		2,312
Equity securities without a readily determinable fair value, at cost	2,099		2,099
Debt securities, available-for-sale, at fair value	157,936		178,000
Debt securities, held-to-maturity, at cost	26,941		27,525
Federal Reserve Bank stock, at cost	4,652		4,652
Federal Home Loan Bank stock, at cost	5,203		5,203
Loans, net	1,334,186		1,239,406
Premises and equipment, net	35,309		34,787

Operating lease right-of-use assets	5,729		5,444
Goodwill	59,221		59,221
Core deposit and other intangibles, net	3,539		4,006
Bank owned life insurance	41,871		41,667
Interest receivable	9,559		3,926
Other assets	12,672		10,295
TOTAL ASSETS	$	1,725,615	1,639,308

LIABILITIES:
Deposits:
Noninterest-bearing	$	426,989	354,391
Interest-bearing	1,003,405		993,889
Total deposits	1,430,394		1,348,280

Long-term debt	31,999		40,994
Operating lease liabilities	5,790		5,446
Accrued interest and other liabilities	18,847		16,540
TOTAL LIABILITIES	1,487,030		1,411,260

COMMITMENTS AND CONTINGENT LIABILITIES	—		—

SHAREHOLDERS' EQUITY:
Preferred shares – no par value, authorized 1,000,000 shares, none outstanding	—		—
Common shares – no par value; authorized 19,000,000 shares; issued 14,157,303 and 14,111,810 shares at September 30, 2020 and December 31, 2019, respectively; outstanding 12,926,686 and 12,936,783 shares at September 30, 2020 and December 31, 2019, respectively	142,310		141,791
Retained earnings	111,760		104,431
Treasury shares at cost, 1,230,617 and 1,175,027 shares at September 30, 2020 and December 31, 2019, respectively	(19,639)		(18,847)
Accumulated other comprehensive income, net of taxes	4,154		673
TOTAL SHAREHOLDERS' EQUITY	238,585		228,048
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,725,615	1,639,308

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

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

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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,
	2020		2019	2020		2019
INTEREST INCOME:
Interest and fees on loans	$	14,379	14,872	$	44,428	44,072
Dividends on equity securities:
With a readily determinable fair value	13		15	40		47
Without a readily determinable fair value	5		16	33		48
Interest on debt securities:
Taxable	633		918	2,250		2,720
Non-taxable	249		379	788		1,340
Interest on interest-bearing time deposits	—		3	—		11
Other investments	43		126	296		532
TOTAL INTEREST INCOME	15,322		16,329	47,835		48,770

INTEREST EXPENSE:
Interest on deposits	1,567		2,475	5,416		7,225
Interest on short-term borrowings	—		3	7		224
Interest on long-term debt	226		273	707		762
TOTAL INTEREST EXPENSE	1,793		2,751	6,130		8,211
NET INTEREST INCOME	13,529		13,578	41,705		40,559
PROVISION FOR LOAN LOSSES	976		264	2,165		213
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	12,553		13,314	39,540		40,346

NON-INTEREST INCOME:
Fiduciary income	1,275		1,123	3,579		3,215
Service charges and fees on deposit accounts	1,506		1,616	4,038		4,421
Net gains (losses) from sales of debt securities, available-for-sale	—		(20)	221		(37)
Bank owned life insurance income	275		289	1,163		654
Gains from sales of loans	999		114	1,436		207
Other operating income	223		234	999		666
TOTAL NON-INTEREST INCOME	4,278		3,356	11,436		9,126

NON-INTEREST EXPENSE:
Salaries and employee benefits	6,863		6,403	20,279		18,808
Equipment expenses	341		322	917		866
Occupancy expense, net	740		751	2,145		2,258
State financial institutions tax	424		433	1,280		1,307
Marketing	471		410	906		1,009
Amortization of intangibles	263		263	783		780
FDIC insurance premiums (credit), net	112		(13)	142		225
Contracted services	435		455	1,312		1,394

Other real estate owned	2		1	(7)		52
Merger-related expenses	—		27	—		114
Other non-interest expense	2,002		1,930	6,084		5,702
TOTAL NON-INTEREST EXPENSE	11,653		10,982	33,841		32,515
INCOME BEFORE INCOME TAXES	5,178		5,688	17,135		16,957
PROVISION FOR INCOME TAXES	928		961	2,802		2,875
NET INCOME	$	4,250	4,727	$	14,333	14,082

Dividends declared per common share	$	0.18	0.17	$	0.54	0.51
Earnings per common share:
Basic	$	0.33	0.36	$	1.11	1.07
Diluted	0.33		0.36	1.11		1.07
Weighted average common shares outstanding:
Basic	12,937,865		12,932,950	12,934,987		13,135,134
Diluted	12,937,901		12,937,145	12,935,388		13,139,100

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

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LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


	Three Months Ended September 30,			Nine Months Ended September 30,
	2020		2019	2020		2019
Net income	$	4,250	4,727	$	14,333	14,082
Other comprehensive income:
Net unrealized gains on available-for-sale debt securities (net of taxes of $76 and $221 for the three months ended September 30, 2020 and 2019, respectively, and $972 and $1,457 for the nine months ended September 30, 2020 and 2019, respectively)	286		829	3,655		5,482
Reclassification adjustment for net realized (gains) losses on sales of available-for-sale debt securities included in net income (net of taxes of $- and $4 for the three months ended September 30, 2020 and 2019, respectively, and $46 and $8 for the nine months ended September 30, 2020 and 2019, respectively)	—		16	(175)		29
Change in nonqualified pension plan unrecognized net loss and unrecognized prior service cost (net of taxes of $- and $- for the three and nine months ended September 30, 2020, respectively)	—		—	1		—
Other comprehensive income, net of tax	286		845	3,481		5,511
TOTAL COMPREHENSIVE INCOME	$	4,536	5,572	$	17,814	19,593

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

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LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY

(Dollars in thousands, except per share data)

(Unaudited)


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

Three Months Ended September 30, 2019
Balance at June 30, 2019	12,978,554	$	141,479	99,400	(17,854)	(53)	222,972
Net income				4,727			4,727
Other comprehensive income, net of taxes						845	845
Dividend Reinvestment and Stock Purchase Plan	6,824	118					118
Repurchase of common stock	(57,915)				(993)		(993)



Compensation expense relating to restricted stock	—	21					21
Common stock dividends, $0.17 per share				(2,198)			(2,198)
Balance at September 30, 2019	12,927,463	$	141,618	101,929	(18,847)	792	225,492

Nine Months Ended September 30, 2019
Balance at December 31, 2018	13,295,276	$	141,170	94,547	(12,013)	(4,719)	218,985
Net income				14,082			14,082
Other comprehensive income, net of taxes						5,511	5,511
Dividend Reinvestment and Stock Purchase Plan	19,683	336					336
Repurchase of common stock	(400,000)				(6,834)		(6,834)



Compensation expense relating to restricted stock	12,504	112					112
Common stock dividends, $0.51 per share				(6,700)			(6,700)
Balance at September 30, 2019	12,927,463	$	141,618	101,929	(18,847)	792	225,492

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

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LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	14,333	14,082
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation, amortization, and accretion	1,960		2,438
Provision for loan losses	2,165		213
Deferred income tax provision (benefit)	(19)		225
Increase in cash surrender value of bank owned life insurance	(846)		(654)
Bank owned life insurance mortality benefits in excess of cash surrender value	(317)		—
Realized gain from equity securities	(504)		(207)
Realized (gain) loss from sales of debt securities, available-for-sale	(221)		37
Realized gain from sales of premises and equipment	(62)		(1)

Realized (gain) loss from sales and impairment of other real estate owned and repossessed assets	(11)		47
Origination of mortgage loans for sale	(42,208)		(10,449)
Realized gains from sales of loans	(1,436)		(207)
Proceeds from sales of mortgage loans	43,175		10,561


Compensation expense related to restricted stock	102		112
Changes in:
Accrued income receivable	(5,783)		(752)
Other assets	(2,421)		(1,839)
Other liabilities	1,401		1,243
TOTAL ADJUSTMENTS	(5,025)		767
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES	9,308		14,849
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of equity securities	967		380
Proceeds from sales of debt securities, available-for-sale	8,786		75,407
Proceeds from maturities and calls of debt securities:
Available-for-sale	48,572		16,012
Held-to-maturity	2,069		2,542
Purchases of equity securities	(364)		(360)
Purchases of debt securities:
Available-for-sale	(33,426)		(38,114)
Held-to-maturity	(1,485)		(6,852)
Proceeds from maturities of interest-bearing time deposits	—		747

Proceeds from redemption of Federal Reserve Bank stock	—		1
Purchase of Federal Home Loan Bank stock	—		(358)

Net increase in loans	(95,858)		(26,753)
Purchase of bank owned life insurance	—		(12,000)
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	(2,169)		(2,701)
Proceeds from sale of premises and equipment	419		5

NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES	(71,323)		7,956
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	82,114		54,464
Net decrease in short-term borrowings	—		(56,230)

Principal payments on long-term debt	(9,000)		(5,055)

Proceeds from issuance of common stock	45		58

Repurchase of common stock	(792)		(6,834)
Proceeds from exercise of stock options	115		—
Cash dividends paid on common stock	(6,747)		(6,422)
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES	65,735		(20,019)
NET CHANGE IN CASH AND CASH EQUIVALENTS	3,720		2,786
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	20,765		20,040
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	24,485	22,826

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	Nine Months Ended September 30,
	2020	2019
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	6,315	7,896
Income taxes paid	2,225	1,901
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Transfer from loans to other real estate owned and repossessed assets	—	17

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

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of Presentation

Basis of Presentation

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

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

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

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

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

Results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year ending December 31, 2020. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies, and financial notes thereto included in LCNB's 2019 Annual Report on Form 10-K filed with the SEC.

Accounting Changes

Financial Accounting Standards Board ("FASB) Accounting Standards Update ("ASU") No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment"

ASU No. 2017-04 was issued in January 2017 and was adopted by LCNB as of January 1, 2020. It applies to public and other entities that have goodwill reported in their financial statements. To simplify the subsequent measurement of goodwill, this ASU eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Adoption of ASU No. 2017-04 did not have a material impact on LCNB's results of consolidated operations or financial position.

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

ASU No. 2018-13 was issued in August 2018 and was adopted by LCNB as of January 1, 2020. It applies to all entities that are required to make disclosures about recurring or nonrecurring fair value measurements. The amendments in this update modify fair value disclosure requirements, including the deletion, modification, and addition of certain targeted disclosures. Adoption of ASU No. 2018-13 did not have a material impact on LCNB's results of consolidated operations or financial position.

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LCNB CORP. AND SUBSIDIARIES

(Continued)

Note 2 - Investment Securities

The amortized cost and estimated fair value of equity and debt securities at September 30, 2020 and December 31, 2019 are summarized as follows (in thousands):


	Amortized Cost		Unrealized Gains	Unrealized Losses	Fair Value
September 30, 2020
Debt Securities, Available-for-Sale:
U.S. Treasury notes	$	2,269	130	—	2,399
U.S. Agency notes	28,328		940	—	29,268
Corporate bonds	700		—	15	685
U.S. Agency mortgage-backed securities	86,497		3,166	3	89,660

Municipal securities:
Non-taxable	12,823		272	12	13,083
Taxable	21,826		1,015	—	22,841
	$	152,443	5,523	30	157,936

Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable	$	23,436	447	—	23,883
Taxable	3,505		1	112	3,394
	$	26,941	448	112	27,277

December 31, 2019
Debt Securities, Available-for-Sale:
U.S. Treasury notes	$	2,273	36	—	2,309
U.S. Agency notes	48,745		273	34	48,984
U.S. Agency mortgage-backed securities	83,977		672	243	84,406

Municipal securities:
Non-taxable	22,174		161	14	22,321
Taxable	19,746		269	35	19,980
	$	176,915	1,411	326	178,000

Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable	$	24,300	343	5	24,638
Taxable	3,225		25	—	3,250
	$	27,525	368	5	27,888

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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, 2020 and December 31, 2019, 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, 2020
Available-for-Sale:


Corporate bonds	$	685	15	—	—
U.S. Agency mortgage-backed securities	1,047		3	—	—
Municipal securities:
Non-taxable	762		12	—	—

	$	2,494	30	—	—

Held-to-Maturity:
Municipal securities:
Non-taxable	$	1,915	—	—	—
Taxable	3,113		112	—	—
	$	5,028	112	—	—

December 31, 2019
Available-for-Sale:

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

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

	$	54	—	2,660	5

Management has determined that the unrealized losses at September 30, 2020 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.

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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, 2020 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	$	10,287	10,327	2,220	2,227
Due from one to five years	33,261		34,293	7,223	7,268
Due from five to ten years	21,669		22,939	2,090	2,109
Due after ten years	729		717	15,408	15,673
	65,946		68,276	26,941	27,277
U.S. Agency mortgage-backed securities	86,497		89,660	—	—
	$	152,443	157,936	26,941	27,277

Debt securities with a market value of $135,819,000 and $123,009,000 at September 30, 2020 and December 31, 2019, 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, 2020 and 2019 was as follows (in thousands):


	Three Months Ended September 30,			Nine Months Ended September 30,
	2020		2019	2020	2019
Proceeds from sales	$	—	25,105	8,786	75,407
Gross realized gains	—		84	221	212
Gross realized losses	—		104	—	249

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, 2020 on its investments in equity securities without a readily determinable fair value.

The amortized cost and estimated fair value of equity securities with a readily determinable fair value at September 30, 2020 and December 31, 2019 are summarized as follows (in thousands):


	September 30, 2020			December 31, 2019
	Amortized Cost		Fair Value	Amortized Cost	Fair Value
Mutual funds	$	1,390	1,393	1,371	1,345
Equity securities	778		820	741	967
Total equity securities with a readily determinable fair value	$	2,168	2,213	2,112	2,312

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(Continued)

Note 2 - Investment Securities (continued)

Certain information concerning changes in fair value of equity securities with a readily determinable fair value for the nine months ended September 30, 2020 and 2019 is as follows (in thousands):


	Three Months Ended September 30,			Nine Months Ended September 30,
	2020		2019	2020	2019
Net gains recognized	$	51	60	504	207
Less net realized gains on equity securities sold	99		23	658	17
Net unrealized gains (losses) recognized and still held at period end	$	(48)	37	(154)	190

Note 3 - Loans

Major classifications of loans at September 30, 2020 and December 31, 2019 were as follows (in thousands):


	September 30, 2020		December 31, 2019
Commercial and industrial	$	124,628	78,306
Commercial, secured by real estate	843,943		804,953
Residential real estate	327,689		322,533
Consumer	36,504		25,232
Agricultural	8,920		11,509
Other loans, including deposit overdrafts	403		1,193
Loans, gross	1,342,087		1,243,726
Deferred origination fees, net	(1,927)		(275)
Loans, net of deferred origination fees	1,340,160		1,243,451
Less allowance for loan losses	5,974		4,045
Loans, net	$	1,334,186	1,239,406

Non-accrual, past-due, and accruing restructured loans as of September 30, 2020 and December 31, 2019 were as follows (in thousands):


	September 30, 2020		December 31, 2019
Non-accrual loans:
Commercial and industrial	$	444	—
Commercial, secured by real estate	2,621		2,467
Residential real estate	1,045		743


Total non-accrual loans	4,110		3,210
Past-due 90 days or more and still accruing	94		—
Total non-accrual and past-due 90 days or more and still accruing	4,204		3,210
Accruing restructured loans	3,700		6,609
Total	$	7,904	9,819

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Note 3 – Loans (continued)

The allowance for loan losses for the three and nine months ended September 30, 2020 and 2019 were as follows (in thousands):


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

Three Months Ended September 30, 2019
Balance, beginning of period	$	497	2,720	773	81	38	3	4,112
Provision (credit) charged to expenses	(50)		372	(101)	10	1	32	264
Losses charged off	(47)		—	(204)	(5)	—	(52)	(308)
Recoveries	—		—	73	4	—	22	99
Balance, end of period	$	400	3,092	541	90	39	5	4,167

Nine Months Ended September 30, 2019
Balance, beginning of year	$	400	2,745	767	87	46	1	4,046
Provision (credit) charged to expenses	47		298	(189)	(12)	(7)	76	213
Losses charged off	(47)		(7)	(272)	(15)	—	(126)	(467)
Recoveries	—		56	235	30	—	54	375
Balance, end of period	$	400	3,092	541	90	39	5	4,167

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(Continued)

Note 3 – Loans (continued)

A breakdown of the allowance for loan losses and the loan portfolio by loan segment at September 30, 2020 and December 31, 2019 were as follows (in thousands):


	Commercial & Industrial		Commercial, Secured by Real Estate	Residential Real Estate	Consumer	Agricultural	Other	Total
September 30, 2020
Allowance for loan losses:
Individually evaluated for impairment	$	9	83	102	—	—	—	194
Collectively evaluated for impairment	796		3,848	946	163	25	2	5,780
Acquired credit impaired loans	—		—	—	—	—	—	—
Balance, end of period	$	805	3,931	1,048	163	25	2	5,974

Loans:
Individually evaluated for impairment	$	647	5,274	1,421	8	—	—	7,350
Collectively evaluated for impairment	121,863		835,528	324,335	36,640	8,938	173	1,327,477
Acquired credit impaired loans	675		2,104	2,324	—	—	230	5,333
Balance, end of period	$	123,185	842,906	328,080	36,648	8,938	403	1,340,160

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

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

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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(Continued)

Note 3 – Loans (continued)

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

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

This category includes Paycheck Protection Program ("PPP") loans that were authorized under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP was implemented by the Small Business Administration ("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, and utilities. PPP loans made by LCNB have a maturity of two years and an interest rate of 1%. In addition, the SBA pays originating lenders processing fees based on the size of the loan, ranging from 1% to 5% of the loan amount. 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.

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

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

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

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

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

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

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Note 3 – Loans (continued)

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, 2020 and December 31, 2019 is as follows (in thousands):


	Pass		OAEM	Substandard	Doubtful	Total
September 30, 2020
Commercial & industrial	$	122,186	—	999	—	123,185
Commercial, secured by real estate	821,099		9,333	12,474	—	842,906
Residential real estate	322,572		2,079	3,429	—	328,080
Consumer	36,646		—	2	—	36,648
Agricultural	8,925		—	13	—	8,938
Other	403		—	—	—	403
Total	$	1,311,831	11,412	16,917	—	1,340,160

December 31, 2019
Commercial & industrial	$	76,236	233	1,902	—	78,371
Commercial, secured by real estate	789,319		3,007	11,828	—	804,154
Residential real estate	319,075		267	3,513	—	322,855
Consumer	25,342		—	13	—	25,355
Agricultural	11,523		—	—	—	11,523
Other	1,193		—	—	—	1,193
Total	$	1,222,688	3,507	17,256	—	1,243,451

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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(Continued)

Note 3 – Loans (continued)

A loan portfolio aging analysis at September 30, 2020 and December 31, 2019 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, 2020
Commercial & industrial	$	—	76	—	76	123,109	123,185	—
Commercial, secured by real estate	—		224	1,584	1,808	841,098	842,906	—
Residential real estate	343		534	1,055	1,932	326,148	328,080	94
Consumer	7		9	—	16	36,632	36,648	—
Agricultural	—		—	—	—	8,938	8,938	—
Other	55		—	—	55	348	403	—
Total	$	405	843	2,639	3,887	1,336,273	1,340,160	94

December 31, 2019
Commercial & industrial	$	283	—	—	283	78,088	78,371	—
Commercial, secured by real estate	339		—	1,171	1,510	802,644	804,154	—
Residential real estate	1,573		260	423	2,256	320,599	322,855	—
Consumer	27		9	—	36	25,319	25,355	—
Agricultural	—		—	—	—	11,523	11,523	—
Other	930		—	—	930	263	1,193	—
Total	$	3,152	269	1,594	5,015	1,238,436	1,243,451	—

Impaired loans, including acquired credit impaired loans, at September 30, 2020 and December 31, 2019 were as follows (in thousands):


	September 30, 2020				December 31, 2019
	Recorded Investment		Unpaid Principal Balance	Related Allowance	Recorded Investment	Unpaid Principal Balance	Related Allowance
With no related allowance recorded:
Commercial & industrial	$	1,119	1,449	—	711	1,253	—
Commercial, secured by real estate	6,209		6,859	—	8,625	9,373	—
Residential real estate	2,740		3,185	—	3,118	3,651	—
Consumer	6		6	—	10	10	—
Agricultural	—		—	—	—	—	—
Other	230		348	—	263	392	—
Total	$	10,304	11,847	—	12,727	14,679	—

With an allowance recorded:
Commercial & industrial	$	203	208	9	230	235	6
Commercial, secured by real estate	1,169		1,384	83	2,338	2,485	272
Residential real estate	1,005		1,006	102	549	549	17
Consumer	2		2	—	17	17	—
Agricultural	—		—	—	—	—	—
Other	—		—	—	—	—	—
Total	$	2,379	2,600	194	3,134	3,286	295

Total:
Commercial & industrial	$	1,322	1,657	9	941	1,488	6
Commercial, secured by real estate	7,378		8,243	83	10,963	11,858	272
Residential real estate	3,745		4,191	102	3,667	4,200	17
Consumer	8		8	—	27	27	—
Agricultural	—		—	—	—	—	—
Other	230		348	—	263	392	—
Total	$	12,683	14,447	194	15,861	17,965	295

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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(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, 2020 and 2019 (in thousands):


	2020			2019
	Average Recorded Investment		Interest Income Recognized	Average Recorded Investment	Interest Income Recognized
Three Months Ended September 30,
With no related allowance recorded:
Commercial & industrial	$	1,192	25	960	11
Commercial, secured by real estate	6,258		61	11,409	290
Residential real estate	2,862		68	3,600	51
Consumer	7		—	12	—
Agricultural	—		—	—	—
Other	227		6	304	8
Total	$	10,546	160	16,285	360

With an allowance recorded:
Commercial & industrial	$	207	2	244	4
Commercial, secured by real estate	1,174		2	2,514	13
Residential real estate	827		4	741	12
Consumer	2		—	19	—
Agricultural	—		—	—	—
Other	—		—	—	—
Total	$	2,210	8	3,518	29

Total:
Commercial & industrial	$	1,399	27	1,204	15
Commercial, secured by real estate	7,432		63	13,923	303
Residential real estate	3,689		72	4,341	63
Consumer	9		—	31	—
Agricultural	—		—	—	—
Other	227		6	304	8
Total	$	12,756	168	19,803	389

Nine Months Ended September 30,
With no related allowance recorded:
Commercial & industrial	$	1,240	314	866	20
Commercial, secured by real estate	7,343		609	13,891	787
Residential real estate	3,057		217	3,724	161
Consumer	11		1	12	1
Agricultural	—		—	—	—
Other	247		21	322	26
Total	$	11,898	1,162	18,815	995

With an allowance recorded:
Commercial & industrial	$	216	10	253	11
Commercial, secured by real estate	1,190		6	2,563	47
Residential real estate	522		28	725	34
Consumer	4		—	21	1
Agricultural	—		—	—	—
Other	—		—	—	—
Total	$	1,932	44	3,562	93

Total:
Commercial & industrial	$	1,456	324	1,119	31
Commercial, secured by real estate	8,533		615	16,454	834
Residential real estate	3,579		245	4,449	195
Consumer	15		1	33	2
Agricultural	—		—	—	—
Other	247		21	322	26
Total	$	13,830	1,206	22,377	1,088

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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(Continued)

Note 3 – Loans (continued)

Of the interest income recognized on impaired loans during the nine months ended September 30, 2020 and 2019, approximately $25,000 and $47,000, 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. 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, 2020 and 2019 were as follows (dollars in thousands):


	2020					2019
	Number of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance		Number of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance
Three Months Ended September 30,
Commercial and industrial	—	$	—	—		—	$	—	—
Commercial, secured by real estate	—	—		—		—	—		—
Residential real estate	1	14		14		1	66		66
Consumer	—	—		—		—	—		—
Total	1	$	14	14		1	$	66	66

Nine Months Ended September 30,
Commercial and industrial	1	$	4	$	5	—	$	—	$	—
Commercial, secured by real estate	—	—		—		2	258		258
Residential real estate	1	14		14		3	120		120
Consumer	—	—		—		—	—		—
Total	2	$	18	$	19	5	$	378	$	378

There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the nine months ended September 30, 2020. One troubled debt restructuring with a balance of $22,000 defaulted within twelve months of the restructuring date during the third quarter 2019.

Information concerning loans that were modified during the nine months ended September 30, 2020 and 2019 and that were determined to be troubled debt restructurings follows (in thousands):


	2020		2019
Impaired loans without a valuation allowance	$	5	282
Impaired loans with a valuation allowance	14		96

The CARES Act includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under FASB Accounting Standards Codification ("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.

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Note 3 – Loans (continued)

In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement on April 7, 2020 that, in consultation with the Financial Accounting Standards Board, 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.

As of September 30, 2020, no loans had been modified under the provisions of Section 4013. From the beginning of the pandemic through September 30, 2020, deferments were granted to loans totaling approximately $407.4 million using the guidance provided in the revised interagency statement. Most of these loans have returned to full payment status. The unpaid principal balance of modified loans with active deferrals totaled $29.4 million at September 30, 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, 2020 and December 31, 2019 were approximately $120,546,000 and $93,596,000, 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, 2020 was $36,000.

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.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 4 – Acquired Credit Impaired Loans (continued)

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


	September 30, 2020		December 31, 2019
Acquired from First Capital Bancshares, Inc.
Commercial & industrial	$	2	5
Commercial, secured by real estate	—		792
Residential real estate	453		551
Other loans, including deposit overdrafts	—		—
Loans, gross	455		1,348
Less allowance for loan losses	—		—
Loans, net	$	455	1,348

Acquired from Eaton National Bank & Trust Co.
Commercial & industrial	$	547	423
Commercial, secured by real estate	622		815
Residential real estate	606		685
Other loans, including deposit overdrafts	230		263
Loans, gross	2,005		2,186
Less allowance for loan losses	—		—
Loans, net	$	2,005	2,186

Acquired from BNB Bancorp, Inc.
Commercial & industrial	$	—	—
Commercial, secured by real estate	802		1,219
Residential real estate	87		100
Other loans, including deposit overdrafts	—		—
Loans, gross	889		1,319
Less allowance for loan losses	—		—
Loans, net	$	889	1,319

Acquired from Columbus First Bancorp, Inc.
Commercial & industrial	$	126	283
Commercial, secured by real estate	680		705
Residential real estate	1,178		1,382
Other loans, including deposit overdrafts	—		—
Loans, gross	1,984		2,370
Less allowance for loan losses	—		—
Loans, net	$	1,984	2,370

Total
Commercial & industrial	$	675	711
Commercial, secured by real estate	2,104		3,531
Residential real estate	2,324		2,718
Other loans, including deposit overdrafts	230		263
Loans, gross	5,333		7,223
Less allowance for loan losses	—		—
Loans, net	$	5,333	7,223

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 4 – Acquired Credit Impaired Loans (continued)

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


	September 30, 2020		December 31, 2019
Outstanding balance	$	6,590	9,139
Carrying amount	5,333		7,223

Activity during the three and nine months ended September 30, 2020 and 2019 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,
	2020		2019	2020	2019
Accretable discount at beginning of period	$	204	626	480	743

Reclassification from nonaccretable discount to accretable discount	6		136	368	195
Disposals	—		—	—	1
Accretion	(27)		(131)	(665)	(308)
Accretable discount at end of period	$	183	631	183	631

Note 5 - Affordable Housing Tax Credit Limited Partnership

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

The following table presents the balances of LCNB's affordable housing tax credit investments and related unfunded commitments at September 30, 2020 and December 31, 2019 (in thousands):


	September 30, 2020		December 31, 2019
Affordable housing tax credit investment	$	10,000	7,000
Less amortization	1,203		810
Net affordable housing tax credit investment	$	8,797	6,190

Unfunded commitment	$	6,864	4,596

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

LCNB expects to fund the unfunded commitment over 10.25 years.

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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, 2020 and 2019 (in thousands):


	Three Months Ended September 30,			Nine Months Ended September 30,
	2020		2019	2020	2019
Tax credits and other tax benefits recognized	$	264	94	802	262
Tax credit amortization expense included in provision for income taxes	130		33	393	124

Note 6 – Borrowings

Borrowings at September 30, 2020 and December 31, 2019 were as follows (dollars in thousands):


	September 30, 2020				December 31, 2019
	Amount		Rate		Amount		Rate


FHLB long-term advances	$	31,999	2.75	%	$	40,994	2.55	%
	$	31,999	2.75	%	$	40,994	2.55	%

All advances from the Federal Home Loan Bank ("FHLB") of Cincinnati, both long-term and short-term, are secured by a blanket pledge of LCNB's 1-4 family first lien mortgage loans in the amount of approximately $290 million and $283 million at September 30, 2020 and December 31, 2019, respectively. Additionally, LCNB is required to hold minimum levels of FHLB stock, based on the outstanding borrowings. Total remaining borrowing capacity at September 30, 2020 was approximately $167.5 million. One of the factors limiting remaining borrowing capacity is ownership of FHLB stock. LCNB could increase its remaining borrowing capacity by purchasing additional FHLB stock.

Note 7 - Leases

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, 2020 were as follows (in thousands):


	Three Months Ended September 30,			Nine Months Ended September 30,
	2020		2019	2020	2019
Operating lease expense	$	168	140	469	420
Short-term lease expense	12		11	39	37
Variable lease expense	1		3	8	8
Other	1		1	7	4
Total lease expense	$	182	155	523	469

Other information related to leases at September 30, 2020 were as follows (dollars in thousands):


Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	420
Right-of-use assets obtained in exchange for new operating lease liabilities	$	653
Weighted average remaining lease term in years for operating leases	36.2
Weighted average discount rate for operating leases	3.57		%

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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,
	2020		2019		2020		2019
Statutory tax rate	21.0	%	21.0	%	21.0	%	21.0	%
Increase (decrease) resulting from:
Tax exempt interest	(1.0)	%	(1.3)	%	(0.9)	%	(1.6)	%
Tax exempt income on bank owned life insurance	(1.1)	%	(1.1)	%	(1.4)	%	(0.8)	%
Captive insurance premium income	(0.7)	%	(0.7)	%	(0.8)	%	(0.8)	%
Tax benefit from certain provisions of the CARES Act	—	%	—	%	(1.1)	%	—	%
Other, net	(0.3)	%	(1.0)	%	(0.4)	%	(0.8)	%
Effective tax rate	17.9	%	16.9	%	16.4	%	17.0	%

Note 9 - Commitments and Contingent Liabilities

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

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

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, 2020 and December 31, 2019 were as follows (in thousands):


	September 30, 2020		December 31, 2019
Commitments to extend credit:
Commercial loans	$	27,406	50,235
Other loans
Fixed rate	16,862		4,431
Adjustable rate	2,060		1,199
Unused lines of credit:
Fixed rate	25,642		28,796
Adjustable rate	147,569		174,577
Unused overdraft protection amounts on demand and NOW accounts	16,466		16,304
Standby letters of credit	243		883
Total commitments	$	236,248	276,425

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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.

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

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

Capital expenditures include the construction or acquisition of new office buildings, improvements to LCNB's offices, purchases of furniture and equipment, and additions or improvements to LCNB's information technology system. Commitments outstanding for capital expenditures as of September 30, 2020 totaled approximately $963,000.

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 (Loss)

Changes in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019 were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	Unrealized Gains on Available-for-Sale Securities		Changes in Pension Plan Assets and Benefit Obligations	Total	Unrealized Gains and Losses on Available-for-Sale Securities	Changes in Pension Plan Assets and Benefit Obligations	Total
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

2019
Balance at beginning of period	$	35	(88)	(53)	(4,631)	(88)	(4,719)
Before reclassifications	829		—	829	5,482	—	5,482
Reclassifications	16		—	16	29	—	29
Balance at end of period	$	880	(88)	792	880	(88)	792

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

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

Reclassifications out of accumulated other comprehensive income (loss) during the three and nine months ended September 30, 2020 and 2019 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
	2020		2019	2020	2019
Realized gains (losses) from sales of debt securities, available-for-sale	$	—	(20)	221	(37)	Net gains (losses) from sales of debt securities, available-for-sale
Income tax expense (benefit)	—		(4)	46	(8)	Provision for income taxes
Reclassification adjustment, net of taxes	$	—	(16)	175	(29)

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, 2020 and 2019 were as follows (in thousands):


	Three Months Ended September 30,			Nine Months Ended September 30,
	2020		2019	2020	2019
Qualified noncontributory defined benefit retirement plan	$	273	215	814	730
401(k) plan	140		131	452	395

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.

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 11 – Retirement Plans (continued)

The components of net periodic pension cost of the nonqualified defined benefit retirement plan for the three and nine months ended September 30, 2020 and 2019 are summarized as follows (in thousands):


	Three Months Ended September 30,			Nine Months Ended September 30,
	2020		2019	2020	2019
Service cost	$	—	—	—	—
Interest cost	17		20	49	57
Amortization of unrecognized net loss	—		—	—	—

Net periodic pension cost	$	17	20	49	57

Amounts recognized in accumulated other comprehensive income, net of tax, at September 30, 2020 and December 31, 2019 for the nonqualified defined benefit retirement plan consists of (in thousands):


	September 30, 2020		December 31, 2019
Net actuarial loss	$	184	184
Past service cost	—		—
Total recognized, net of tax	$	184	184

Note 12 – Stock Based Compensation

LCNB established an Ownership Incentive Plan (the "2002 Plan") during 2002 that allowed for stock-based awards to eligible employees, as determined by the Board of Directors. The awards were made in the form of stock options, share awards, and/or appreciation rights. The 2002 Plan provided for the issuance of up to 200,000 shares of common stock. The 2002 Plan expired on April 16, 2012. Any outstanding unexercised options, however, continue to be exercisable in accordance with their terms.

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

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

LCNB has not granted stock option awards since 2012. Options granted to date under the 2002 Plan vest ratably over a five-year period and expire ten years after the date of grant. Stock options outstanding at September 30, 2020 were as follows:


	Outstanding Stock Options				Exercisable Stock Options
Exercise Price Range	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)

$11.00 - $12.99	311	$	12.60	1.4	311	$	12.60	1.4

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 12 – Stock Based Compensation (continued)

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


	Nine Months Ended September 30,
	2020				2019
	Options	Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands) (1)	Options	Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands) (1)
Outstanding, January 1,	9,904	$	11.96		13,278	$	11.98
Granted	—	—			—	—
Exercised	(9,593)	11.94			—	—
Expired	—	—			—	—
Outstanding, September 30,	311	12.60		—	13,278	11.98		76
Exercisable, September 30,	311	12.60		—	13,278	11.98		76
(1) Aggregate Intrinsic Value is defined as the amount by which the current market value of the underlying stock exceeds the exercise price of the option.

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


	Nine Months Ended September 30,
	2020		2019
Intrinsic value of options exercised	$	46	—
Cash received from options exercised	115		—
Tax benefit realized from options exercised	5		—

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

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


	2020			2019
	Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value
Outstanding, January 1,	17,752	$	18.03	16,958	$	18.94
Granted	19,211	16.87		12,504	16.95
Vested	(3,818)	18.45		(10,711)	18.44
Forfeited	(3,550)	16.90		—	—
Outstanding, September 30,	29,595	$	17.37	18,751	$	17.90

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, 2020 and 2019 (in thousands):


	Three Months Ended September 30,			Nine Months Ended September 30,
	2020		2019	2020	2019
Restricted stock expense	$	34	21	102	112
Tax effect	7		5	21	24

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 12 – Stock Based Compensation (continued)

Unrecognized compensation expense for restricted stock awards was $445,000 at September 30, 2020 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.

Earnings per share for the three and nine months ended September 30, 2020 and 2019 were calculated as follows (dollars in thousands, except share and per share data):


	Three Months Ended September 30,			Nine Months Ended September 30,
	2020		2019	2020	2019
Net income	$	4,250	4,727	14,333	14,082
Less allocation of earnings and dividends to participating securities	10		7	33	24
Net income allocated to common shareholders	$	4,240	4,720	14,300	14,058

Weighted average common shares outstanding, gross	12,967,460		12,951,701	12,964,582	13,157,538
Less average participating securities	29,595		18,751	29,595	22,404
Weighted average number of shares outstanding used in the calculation of basic earnings per common share	12,937,865		12,932,950	12,934,987	13,135,134
Add dilutive effect of:
Stock options	36		4,195	401	3,966

Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share	12,937,901		12,937,145	12,935,388	13,139,100

Earnings per common share:
Basic	$	0.33	0.36	1.11	1.07
Diluted	0.33		0.36	1.11	1.07

There were no anti-dilutive stock options outstanding at September 30, 2020 or 2019.

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.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 14 - Fair Value Measurements (continued)

•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.

Debt Securities, Available-for-Sale

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

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

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

Assets Recorded at Fair Value on a Nonrecurring Basis

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

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

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

Table of Contents

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, 2020 and December 31, 2019 (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, 2020
Recurring fair value measurements:
	Equity securities with a readily determinable fair value:

	Equity securities	$	820	820	—	—
	Mutual funds	42		42	—	—
	Mutual funds measured at net asset value	1,351		1,351	—	—

	Debt securities, available-for-sale:
	U.S. Treasury notes	2,399		2,399	—	—
	U.S. Agency notes	29,268		—	29,268	—
	Corporate bonds	685		—	685	—
	U.S. Agency mortgage-backed securities	89,660		—	89,660	—

	Municipal securities:
	Non-taxable	13,083		—	13,083	—
	Taxable	22,841		—	22,841	—
	Total recurring fair value measurements	$	160,149	4,612	155,537	—

Nonrecurring fair value measurements:
	Impaired loans	$	2,186	—	—	2,186

	Total nonrecurring fair value measurements	$	2,186	—	—	2,186

December 31, 2019
Recurring fair value measurements:
	Equity securities with a readily determinable fair value:

	Equity securities	$	967	967	—	—
	Mutual funds	45		45	—	—
	Mutual funds measured at net asset value	1,300		1,300	—	—

	Debt securities, available-for-sale:
	U.S. Treasury notes	2,309		2,309	—	—
	U.S. Agency notes	48,984		—	48,984	—
	U.S. Agency mortgage-backed securities	84,406		—	84,406	—

	Municipal securities:
	Non-taxable	22,321		—	22,321	—
	Taxable	19,980		—	19,980	—
	Total recurring fair value measurements	$	180,312	4,621	175,691	—

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

Table of Contents

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, 2020 and December 31, 2019 (dollars in thousands):


					Range
	Fair Value		Valuation Technique	Unobservable Inputs	High		Low		Weighted Average
September 30, 2020
Impaired loans	$	1,591	Estimated sales price	Adjustments for comparable properties, discounts to reflect current market conditions	Not applicable
	595		Discounted cash flows	Discount rate	8.25	%	4.50	%	6.61	%


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

Table of Contents

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 14 - Fair Value Measurements (continued)

Carrying amounts and estimated fair values of financial instruments as of September 30, 2020 and December 31, 2019 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, 2020
FINANCIAL ASSETS:
Cash and cash equivalents	$	24,485	24,485	24,485	—	—

Debt securities, held-to-maturity	26,941		27,277	—	—	27,277
Federal Reserve Bank stock	4,652		4,652	4,652	—	—
Federal Home Loan Bank stock	5,203		5,203	5,203	—	—
Loans, net	1,334,186		1,286,554	—	—	1,286,554
Accrued interest receivable	9,559		9,559	—	9,559	—

FINANCIAL LIABILITIES:
Deposits	1,430,394		1,433,857	1,162,096	271,761	—

Long-term debt	31,999		32,727	—	32,727	—
Accrued interest payable	514		514	—	514	—

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

Debt securities, held-to-maturity	27,525		27,888	—	—	27,888
Federal Reserve Bank stock	4,652		4,652	4,652	—	—
Federal Home Loan Bank stock	5,203		5,203	5,203	—	—
Loans, net	1,239,406		1,252,156	—	—	1,252,156
Accrued interest receivable	3,911		3,911	—	3,911	—

FINANCIAL LIABILITIES:
Deposits	1,348,280		1,352,061	1,004,057	348,004	—

Long-term debt	40,994		41,487	—	41,487	—
Accrued interest payable	705		705	—	705	—

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, 2020 and December 31, 2019.

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

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 14 - Fair Value Measurements (continued)

Cash and cash equivalents

The carrying amounts presented are deemed to approximate fair value.

Equity securities without a readily determinable fair value

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

Debt securities, held-to-maturity

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

Federal Home Loan Bank stock and Federal Reserve Bank stock

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

Loans

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

Deposits

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

Borrowings

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

Accrued interest receivable and accrued interest payable

Carrying amount approximates fair value.

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 15 – Recent Accounting Pronouncements

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

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

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

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

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

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

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

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 15 – Recent Accounting Pronouncements (continued)

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

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

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

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

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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, 2019, 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.LCNB’s ability to integrate recent and any future acquisitions may be unsuccessful or may be more difficult, time-consuming, or costly than expected;

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

5.LCNB may face competitive loss of customers;

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

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

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

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

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

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

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

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

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

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

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

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LCNB CORP. AND SUBSIDIARIES

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

Coronavirus Update/Status

The coronavirus (COVID-19) pandemic has created unprecedented challenges throughout the communities LCNB serves, the state of Ohio, the United States and the entire world. LCNB has implemented a number of procedures in response to the pandemic to support the safety and well-being of our employees, customers, and shareholders that continue through the date of this report, including the following:

•We addressed the safety of our 33 branches, following the guidelines of the Center for Disease Control, by temporarily closing our lobbies from March through May 2020 in an effort to encourage use of mobile banking applications and our drive-thru facilities, while allowing access to the lobbies by appointment only and only when necessary;

•We re-opened most lobbies during June and July 2020 and introduced various safety measures including the installation of clear barriers at the teller windows, placing markers on the floor to properly space customers as they wait, enhancing our cleaning procedures, and requiring the wearing of masks;

•We hold frequent executive management meetings to address issues that change rapidly;

•We have encouraged non customer service employees to work remotely from home as much as possible and have adopted technological improvements to make this possible;

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

•We provided COVID-19 related payment deferrals to 596 loan customers with aggregate loan balances at the various times of deferral totaling approximately $407.4 million; and

•We chose to participate in the CARES Act Paycheck Protection Program ("PPP") that provided government guaranteed and potentially forgivable loans to applicants. The PPP was implemented by the Small Business Administration 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, and utilities. Through September 30, 2020, we were able to assist 316 small businesses and had funded $45.5 million of such loans. We believe these loans and our participation in the program is good for our customers, the employees who work for these companies, and the communities we serve.

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

Critical Accounting Policies

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

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.

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LCNB CORP. AND SUBSIDIARIES

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

Acquired Credit Impaired Loans. LCNB accounts for acquisitions using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be measured at their fair values at the acquisition date. Acquired loans are reviewed to determine if there is evidence of deterioration in credit quality since inception and if it is probable that LCNB will be unable to collect all amounts due under the contractual loan agreements. The analysis includes expected prepayments and estimated cash flows including principal and interest payments at the date of acquisition. The amount in excess of the estimated future cash flows is not accreted into earnings. The amount in excess of the estimated future cash flows over the book value of the loan is accreted into interest income over the remaining life of the loan (accretable yield). LCNB records these loans on the acquisition date at their 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, 2020 are composed primarily of goodwill and core deposit intangibles related to acquisitions of other financial institutions. It also includes mortgage servicing rights recorded from sales of mortgage loans to the Federal Home Loan Mortgage Corporation and mortgage servicing rights acquired through the acquisition of Eaton National Bank & Trust Co. and Columbus First Bancorp, Inc. Goodwill is not subject to amortization, but is reviewed annually for impairment or sooner if circumstances indicate a possible impairment. Core deposit intangibles are being amortized on a straight line basis over their respective estimated weighted average lives. Mortgage servicing rights are capitalized by allocating the total cost of loans between mortgage servicing rights and the loans based on their estimated fair values. Capitalized mortgage servicing rights are amortized to loan servicing income in proportion to and over the period of estimated servicing income, subject to periodic review for impairment.

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

Results of Operations

Net income for the three and nine months ended September 30, 2020 was $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), respectively. This compares to net income of $4,727,000 (total basic and diluted earnings per share of $0.36) and $14,082,000 (total basic and diluted earnings per share of $1.07) for the same three and nine month periods in 2019.

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 periods. The provision for the three and nine months ended September 30, 2020 was $976,000 and $2,165,000, respectively, compared to $264,000 and $213,000 for the same three and nine month periods in 2019.

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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, 2020 vs. September 30, 2019

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, 2020 and September 30, 2019, 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,
	2020						2019
	Average Outstanding Balance			Interest Earned/ Paid	Average Yield/ Rate		Average Outstanding Balance			Interest Earned/ Paid	Average Yield/ Rate
					(Dollars in thousands)
Loans (1)	$	1,339,608		14,379	4.27	%	$	1,227,806		14,872	4.81	%
Interest-bearing demand deposits	21,490			17	0.31	%	8,737			68	3.09	%
Interest-bearing time deposits	—			—	—	%	268			3	4.44	%
Federal Reserve Bank stock	4,652			—	—	%	4,652			—	—	%
Federal Home Loan Bank stock	5,203			26	1.99	%	5,203			58	4.42	%
Investment securities:
Equity securities	4,329			18	1.65	%	4,343			31	2.83	%
Debt securities, taxable	146,847			633	1.71	%	163,385			918	2.23	%
Debt securities, non-taxable (2)	36,757			315	3.41	%	65,702			480	2.90	%
Total earnings assets	1,558,886			15,388	3.93	%	1,480,096			16,430	4.40	%
Non-earning assets	188,362						177,924
Allowance for loan losses	(5,250)						(3,986)
Total assets	$	1,741,998					$	1,654,034

Savings deposits	$	730,858		348	0.19	%	$	695,449		651	0.37	%
IRA and time certificates	281,586			1,219	1.72	%	336,678			1,824	2.15	%
Short-term borrowings	—			—	—	%	468			3	2.54	%
Long-term debt	33,020			226	2.72	%	41,988			273	2.58	%
Total interest-bearing liabilities	1,045,464			1,793	0.68	%	1,074,583			2,751	1.02	%
Demand deposits	433,129						333,575
Other liabilities	24,415						20,660
Capital	238,990						225,216
Total liabilities and capital	$	1,741,998					$	1,654,034
Net interest rate spread (3)					3.25	%					3.38	%
Net interest income and net interest margin on a taxable-equivalent basis (4)				13,595	3.47	%				13,679	3.67	%
Ratio of interest-earning assets to interest-bearing liabilities	149.11		%				137.74		%

(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, 2020 as compared to the same period in 2019. 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, 2020 vs. 2019 Increase (decrease) due to:
	Volume		Rate	Total
	(In thousands)
Interest-earning Assets:
Loans	$	1,286	(1,779)	(493)

Interest-bearing demand deposits	44		(95)	(51)
Interest-bearing time deposits	(3)		—	(3)
Federal Reserve Bank stock	—		—	—
Federal Home Loan Bank stock	—		(32)	(32)
Investment securities:
Equity securities	—		(13)	(13)
Debt securities, taxable	(86)		(199)	(285)
Debt securities, non-taxable	(238)		73	(165)
Total interest income	1,003		(2,045)	(1,042)

Interest-bearing Liabilities:
Savings deposits	32		(335)	(303)
IRA and time certificates	(272)		(333)	(605)
Short-term borrowings	(3)		—	(3)
Long-term debt	(61)		14	(47)
Total interest expense	(304)		(654)	(958)
Net interest income	$	1,307	(1,391)	(84)

Net interest income on a fully taxable-equivalent basis for the three months ended September 30, 2020 totaled $13,595,000, a decrease of $84,000 from the comparable period in 2019. Total interest income decreased $1,042,000, substantially offset by a $958,000 decrease in total interest expense.

The $1,042,000 decrease in total interest income was due primarily to a $493,000 decrease in loan interest income and a $450,000 total decrease in interest income from taxable and non-taxable debt securities. The decrease in loan interest income was primarily due to a 54 basis point (a basis point equals 0.01%) decrease in the average rate earned on loans, partially offset by a $111.8 million increase in the average balance of LCNB's loan portfolio. The decrease in interest income from taxable and non-taxable debt securities was due to a $45.5 million combined decrease in average debt securities and to a 52 basis point decrease in the average rate earned on taxable debt securities. Decreases in debt securities were invested in the loan portfolio and were also used to enhance liquidity.

The $958,000 decrease in total interest expense was due to a $303,000 decrease in interest expense for savings deposits and a $605,000 decrease in interest expense for IRA and time certificates. Interest expense for savings deposits decreased primarily due to an 18 basis point market-driven decrease in the average rate paid for these deposits, slightly offset by a $35.4 million increase in the average balance of these deposits. Interest expense for IRA and time certificates decreased primarily due to a 43 basis point decrease in the average rate paid for these deposits and secondarily to a $55.1 million decrease in the average balance of these deposits. Interest expense for long-term debt decreased due to a $9.0 million decrease in average debt outstanding, slightly offset by a 14 basis point increase in the average rate paid.

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LCNB CORP. AND SUBSIDIARIES

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

Nine Months Ended September 30, 2020 vs. September 30, 2019

The following table presents, for the nine months ended September 30, 2020 and September 30, 2019, 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,
	2020						2019
	Average Outstanding Balance			Interest Earned/ Paid	Average Yield/ Rate		Average Outstanding Balance			Interest Earned/ Paid	Average Yield/ Rate
					(Dollars in thousands)
Loans (1)	$	1,303,770		44,428	4.55	%	$	1,218,183		44,072	4.84	%
Interest-bearing demand deposits	18,164			65	0.48	%	8,687			195	3.00	%
Interest-bearing time deposits	—			—	—	%	608			11	2.42	%
Federal Reserve Bank stock	4,652			140	4.02	%	4,652			140	4.02	%
Federal Home Loan Bank stock	5,203			91	2.34	%	5,076			197	5.19	%
Investment securities:
Equity securities	4,283			73	2.28	%	4,285			95	2.96	%
Debt securities, taxable	141,625			2,250	2.12	%	158,816			2,720	2.29	%
Debt securities, non-taxable (2)	39,270			997	3.39	%	79,676			1,696	2.85	%
Total earnings assets	1,516,967			48,044	4.23	%	1,479,983			49,126	4.44	%
Non-earning assets	182,866						166,252
Allowance for loan losses	(4,730)						(4,049)
Total assets	$	1,695,103					$	1,642,186

Savings deposits	$	704,708		1,141	0.22	%	$	693,776		1,913	0.37	%
IRA and time certificates	302,431			4,275	1.89	%	326,282			5,312	2.18	%
Short-term borrowings	497			7	1.88	%	7,898			224	3.79	%
Long-term debt	35,427			707	2.67	%	43,067			762	2.37	%
Total interest-bearing liabilities	1,043,063			6,130	0.79	%	1,071,023			8,211	1.03	%
Demand deposits	394,497						330,620
Other liabilities	22,318						16,899
Capital	235,225						223,644
Total liabilities and capital	$	1,695,103					$	1,642,186
Net interest rate spread (3)					3.44	%					3.41	%
Net interest income and net interest margin on a taxable-equivalent basis (4)				41,914	3.69	%				40,915	3.70	%
Ratio of interest-earning assets to interest-bearing liabilities	145.43		%				138.18		%

(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 nine months ended September 30, 2020 as compared to the same period in 2019. 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, 2020 vs. 2019 Increase (decrease) due to:
	Volume		Rate	Total
	(In thousands)
Interest-earning Assets:
Loans	$	2,998	(2,642)	356
Federal funds sold	—		—	—
Interest-bearing demand deposits	112		(242)	(130)
Interest-bearing time deposits	(11)		—	(11)
Federal Reserve Bank stock	—		—	—
Federal Home Loan Bank stock	5		(111)	(106)
Investment securities:
Equity securities	—		(22)	(22)
Debt securities, taxable	(282)		(188)	(470)
Debt securities, non-taxable	(980)		281	(699)
Total interest income	1,842		(2,924)	(1,082)

Interest-bearing Liabilities:
Savings deposits	30		(802)	(772)
IRA and time certificates	(370)		(667)	(1,037)
Short-term borrowings	(141)		(76)	(217)
Long-term debt	(145)		90	(55)
interest income from non-taxable debt securities	(626)		(1,455)	(2,081)
Net interest income	$	2,468	(1,469)	999

Net interest income on a fully taxable-equivalent basis for the nine months ended September 30, 2020 totaled $41,914,000, an increase of $999,000 from the comparable period in 2019. Total interest income decreased $1,082,000 and total interest expense decreased $2,081,000.

The $1,082,000 decrease in total interest income was due primarily to a $1,169,000 total decrease in interest income from taxable and non-taxable debt securities and several smaller decreases in other line items, partially offset by a $356,000 increase in loan interest income. The decrease in interest income from taxable and non-taxable debt securities was due to a $57.6 million combined decrease in average debt securities, partially offset by a 54 basis point increase in the average rate earned on non-taxable debt securities. Decreases in debt securities were invested in the loan portfolio and used to pay down short-term borrowings and long-term debt. The increase in loan interest income was caused by a $85.6 million increase in the average balance of LCNB's loan portfolio, partially offset by a 29 basis point decrease in the average rate earned on loans.

The $2,081,000 decrease in total interest expense was due to a $772,000 decrease in interest expense for savings deposits, a $1,037,000 decrease in interest expense for IRA and time certificates, and a $217,000 decrease in interest expense for short-term borrowings. Interest expense for savings deposits and IRA and time certificates decreased primarily due to, respectively, a 15 basis point and a 29 basis point market-driven decrease in the average rates paid for these deposits and secondarily to a $23.9 million total decrease in the average balance of IRA and time certificates. Interest expense for short-term borrowings decreased due to a $7.4 million decrease in average debt outstanding and to a 191 basis point decrease in the average rate paid.

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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 and industrial loans, owner occupied commercial real estate loans, non-owner occupied commercial real estate loans, real estate loans secured by farms, real estate loans secured by multi-family dwellings, residential real estate loans secured by senior liens on 1-4 family dwellings, residential real estate loans secured by junior liens on 1-4 family dwellings, home equity line of credit 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, 2020 was, respectively, $712,000 and $1,952,000 greater than the comparable periods in 2019. 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, 2020 were, respectively, $18,000 and $236,000, as compared to respective net charge-offs of $209,000 and $92,000 for the same three and nine month periods in 2019.

Non-Interest Income

A comparison of non-interest income for the three and nine months ended September 30, 2020 and September 30, 2019 is as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019	Difference	2020	2019	Difference
Fiduciary income	$	1,275	1,123	152	3,579	3,215	364
Service charges and fees on deposit accounts	1,506		1,616	(110)	4,038	4,421	(383)
Net gains (losses) from sales of debt securities, available-for-sale	—		(20)	20	221	(37)	258
Bank owned life insurance income	275		289	(14)	1,163	654	509
Gains from sales of loans	999		114	885	1,436	207	1,229
Other operating income	223		234	(11)	999	666	333
Total non-interest income	$	4,278	3,356	922	11,436	9,126	2,310

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

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

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

•Gains from sales of loans increased primarily due to a greater volume of residential real estate loan sales; approximately $42.2 million of loans were sold during the nine months ended September 30, 2020 compared to $10.4 million of loan sales during the same period in 2019.

•Other operating income increased during the nine month period primarily due to net gains realized from the sale of equity security investments, partially offset by unrealized net losses from equity securities held in the portfolio.

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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, 2020 and September 30, 2019 is as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019	Difference	2020	2019	Difference
Salaries and employee benefits	$	6,863	6,403	460	20,279	18,808	1,471
Equipment expenses	341		322	19	917	866	51
Occupancy expense, net	740		751	(11)	2,145	2,258	(113)
State financial institutions tax	424		433	(9)	1,280	1,307	(27)
Marketing	471		410	61	906	1,009	(103)
Amortization of intangibles	263		263	—	783	780	3
FDIC insurance premiums	112		(13)	125	142	225	(83)
Contracted services	435		455	(20)	1,312	1,394	(82)

Other real estate owned	2		1	1	(7)	52	(59)
Merger-related expenses	—		27	(27)	—	114	(114)
Other non-interest expense	2,002		1,930	72	6,084	5,702	382
Total non-interest expense	$	11,653	10,982	671	33,841	32,515	1,326

Reasons for changes include:

•Salaries and employee benefits increased 7.2% and 7.8% for the respective three and nine month periods primarily due to salary and wage increases and newly hired employees, including additional business development positions. An increase in health insurance costs also contributed to the increase in salaries and employee benefits.

•Occupancy expense decreased during the nine month period primarily due to decreases in facility repair and maintenance costs.

•Marketing decreased during the nine month period primarily due to a realignment of LCNB's marketing strategy.

•FDIC insurance premiums for the nine month period of 2020 reflects Small Bank Assessment Credits received from the FDIC during the first and second quarters 2020 because the Deposit Insurance Fund was above the mandated 1.35% level. LCNB has received the full amount of the credit during the first two quarters of 2020 and the third quarter premium payment was at its normal level.

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

Income Taxes

LCNB's effective tax rate for the three and nine months ended September 30, 2020 was 17.9% and 16.4%, respectively, compared to 16.9% and 17.0% for the respective three and nine months ended September 30, 2019. The difference between the statutory rate of 21% and the effective tax rates is primarily due to tax-exempt interest income from municipal securities, tax-exempt earnings from bank owned life insurance, tax-exempt earnings from LCNB Risk Management, Inc., and tax credits and losses related to investments in affordable housing tax credit limited partnerships. A one-time tax benefit recognized as a result of certain provisions in the Coronavirus Aid, Relief, & Economic Security ("CARES") Act passed by Congress and signed by President Trump during the first quarter 2020 also contributed to the difference during the 2020 nine month period.

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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, 2020 and December 31, 2019 is as follows (dollars in thousands):


	September 30, 2020		December 31, 2019	Difference $	Difference %
ASSETS:
Total cash and cash equivalents	$	24,485	20,765	3,720	17.91	%

Investment securities:
Equity securities with a readily determinable fair value, at fair value	2,213		2,312	(99)	(4.28)	%
Equity securities without a readily determinable fair value, at cost	2,099		2,099	—	—	%
Debt securities, available-for-sale, at fair value	157,936		178,000	(20,064)	(11.27)	%
Debt securities, held-to-maturity, at cost	26,941		27,525	(584)	(2.12)	%
Federal Reserve Bank stock, at cost	4,652		4,652	—	—	%
Federal Home Loan Bank stock, at cost	5,203		5,203	—	—	%
Loans, net	1,334,186		1,239,406	94,780	7.65	%
Premises and equipment, net	35,309		34,787	522	1.50	%
Operating lease right-of-use assets	5,729		5,444	285	5.24	%
Goodwill	59,221		59,221	—	—	%
Core deposit and other intangibles	3,539		4,006	(467)	(11.66)	%
Bank owned life insurance	41,871		41,667	204	0.49	%
Interest receivable	9,559		3,926	5,633	143.48	%
Other assets	12,672		10,295	2,377	23.09	%
Total assets	$	1,725,615	1,639,308	86,307	5.26	%

LIABILITIES:
Deposits:
Non-interest-bearing	$	426,989	354,391	72,598	20.49	%
Interest-bearing	1,003,405		993,889	9,516	0.96	%
Total deposits	1,430,394		1,348,280	82,114	6.09	%

Long-term debt	31,999		40,994	(8,995)	(21.94)	%
Operating lease liabilities	5,790		5,446	344	6.32	%
Accrued interest and other liabilities	18,847		16,540	2,307	13.95	%
Total liabilities	1,487,030		1,411,260	75,770	5.37	%

TOTAL SHAREHOLDERS' EQUITY	238,585		228,048	10,537	4.62	%
Total liabilities and shareholders' equity	$	1,725,615	1,639,308	86,307	5.26	%

Reasons for changes include:

•Debt securities, available-for-sale, decreased due to sales of securities with a total book value of $8.6 million and maturities and calls of securities totaling $48.6 million. These decreases were partially offset by purchases totaling $33.4 million and by a net increase in fair values totaling $4.4 million. The net funds received were invested in the loan portfolio, used to help pay down long-term debt, and used to increase liquidity.

•Net loans increased due to organic growth in the loan portfolio, including PPP loans with carrying value of $45.3 million at September 30, 2020. Most of the growth occurred in the commercial and industrial and commercial real estate portfolios.

•Premises and equipment, net increased due primarily to Main Office remodeling costs, partially offset by depreciation expense.

•Operating lease right-of-use assets and operating lease liabilities increased due to the replacement of previously owned ATMs with outsourced ATMs.

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

•Interest receivable increased primarily due to interest accrued on COVID-19 related loan payment deferrals.

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

•Other assets increased primarily due to a $3.0 million affordable housing tax credit investment made during the second quarter 2020.

•Non-interest-bearing deposits and interest-bearing deposits have grown substantially since the start of the COVID-19 pandemic. 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. There were no new borrowings during 2020.

•Accrued interest and other liabilities increased primarily due to payables connected with the $3.0 million affordable housing tax credit investment mentioned above.

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

Goodwill

LCNB performs an impairment test of the carrying value of goodwill annually in the fourth quarter or sooner if circumstances indicate a possible impairment. Impairment indicators that may be considered include the condition of the economy and banking industry; estimated future cash flows; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of LCNB’s stock and other relevant events. These and other factors could lead to a conclusion that goodwill is impaired, which would require LCNB to write off the difference between the estimated fair value of the company and the carrying value. Given the current economic environment resulting from the COVID-19 pandemic, the probability of such impairments has increased. Specifically, the market price of LCNB's common stock decreased, similar to decreases experienced by other financial institutions. Accordingly, an interim impairment test was conducted as of June 30, 2020. At the conclusion of the assessment, management determined that fair value exceeded carrying value and that an impairment charge was not necessary at that time. After reviewing developments during the third quarter 2020, management determined that an impairment test was not necessary at September 30, 2020. Management will continue to monitor developments regarding the COVID-19 pandemic and measures implemented in response to the pandemic, market capitalization, overall economic conditions and any other triggering events or circumstances that may indicate an impairment of goodwill in the future.

Regulatory Capital

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

In addition to the minimum 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	%

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

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.

On September 17, 2019, the FDIC finalized a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations, as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The simplified rule was designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. It may be used beginning with the March 31, 2020 Call Report. Qualifications to use the simplified approach include having a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR 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, 2020 regulatory capital calculations.

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


	September 30, 2020			December 31, 2019
Regulatory Capital:
Shareholders' equity	$	235,371		222,065
Goodwill and other intangibles	(61,961)			(62,744)
Accumulated other comprehensive (income) loss	(4,155)			(673)
Tier 1 risk-based capital	169,255			158,648
Eligible allowance for loan losses	5,974			4,045
Total risk-based capital	$	175,229		162,693
Capital ratios:
Common Equity Tier 1 Capital to risk-weighted assets	12.28		%	12.21	%
Tier 1 Capital to risk-weighted assets	12.28		%	12.21	%
Total Capital to risk-weighted assets	12.72		%	12.52	%
Leverage	10.12		%	10.06	%

Liquidity

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

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

Total remaining borrowing capacity with the Federal Home Loan Bank at September 30, 2020 was approximately $167.5 million. One of the factors limiting remaining borrowing capacity is ownership of FHLB stock. LCNB could increase its borrowing capacity by purchasing additional FHLB stock. In addition, additional borrowings of approximately $55.0 million were available through the line of credit arrangements at September 30, 2020.

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

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

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

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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, 2020 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 decrease 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	$	61,192	3,195	5.51	%
Up 300	60,092		2,095	3.61	%
Up 200	59,002		1,005	1.73	%
Up 100	57,877		(120)	(0.21)	%
Base	57,997		—	—	%
Down 100	56,277		(1,720)	(2.97)	%

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, 2020 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	$	197,998	(31,180)	(13.61)	%
Up 300	206,277		(22,901)	(9.99)	%
Up 200	213,969		(15,209)	(6.64)	%
Up 100	220,726		(8,452)	(3.69)	%
Base	229,178		—	—	%
Down 100	271,658		42,480	18.54	%

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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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, 2020, 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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PART II. OTHER INFORMATION

LCNB CORP. AND SUBSIDIARIES


Item 1.			Legal Proceedings

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


Item 1A.			Risk Factors

The disclosures below supplement the risk factors previously disclosed under Item 1A. of LCNB’s 2019 Annual Report on Form 10-K.

The ultimate long-term impact on LCNB's business and financial results from the COVID-19 pandemic will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic is creating extensive disruptions to the global economy and to the lives of individuals throughout the world. Governments, businesses, and the public 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. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our Form 10-K could be exacerbated and such effects could have a material adverse impact on us in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk, human capital and self-insurance.

Ohio Governor Mike DeWine issued a Stay-at-Home Order, effective 11:59 p.m. on March 23, 2020, in the interest of protecting the state's citizens and ordered non-essential businesses to close. After several extensions, the Stay-at-Home Order lapsed on May 29, 2020 and was replaced with an Urgent Health Advisory. Banks were a designated essential business and LCNB continued operations. As a result of the Stay-at-Home Order and the Urgent Health Advisory, many of LCNB's commercial borrowers were required to cease or curtail operations or may be facing operational issues, such as supply chain disruptions and decreased sales. Some businesses may not be able to survive. Many home mortgage and consumer borrowers were suddenly unemployed or working reduced hours. LCNB has made and expects that it will need to continue to make short-term modifications to a number of loans to help borrowers through this period, but the eventual number of modifications that will be required or their impact on LCNB's financial results cannot be estimated at this time. Likewise, the pandemic’s effect on LCNB’s allowance for loan losses and provision for loan losses cannot be estimated at this time.

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

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

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


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

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

On 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, 2020:


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
August 2020	7,980	$	14.83	7,980	637,020
September 2020	47,610	$	14.13	47,610	589,410


Item 3.			Defaults Upon Senior Securities

None.


Item 4.			Mine Safety Disclosures

Not applicable.


Item 5.			Other Information

None.

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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, 2020 is formatted in Extensible Business Reporting Language: (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Income, (iii) the Consolidated Condensed Statements of Comprehensive Income, (iv) the Consolidated Condensed Statements of Shareholders' Equity, (v) the Consolidated Condensed Statements of Cash Flows, and (vi) the Notes to Consolidated Condensed Financial Statements.

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

Table of Contents

LCNB CORP. AND SUBSIDIARIES

SIGNATURES

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


			LCNB Corp.

November 9, 2020			/s/ Eric J. Meilstrup
			Eric J. Meilstrup
			Chief Executive Officer and President

November 9, 2020			/s/ Robert C. Haines, II
			Robert C. Haines, II
			Executive Vice President and Chief Financial Officer