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    LCNB   US50181P1003

LCNB CORP.

(LCNB)
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LCNB : Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements (form 10-Q)

08/04/2021 | 04:21pm EDT
Certain statements made in this document regarding LCNB's financial condition,
results of operations, plans, objectives, future performance and business, are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are identified by the fact they are not historical
facts and include words such as "anticipate", "could", "may", "feel", "expect",
"believe", "plan", and similar expressions. Please refer to LCNB's Annual Report
on Form 10-K for the year ended December 31, 2020, as well as its other filings
with the SEC, for a more detailed discussion of risks, uncertainties and factors
that could cause actual results to differ from those discussed in the
forward-looking statements.

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

1.the success, impact, and timing of the implementation of LCNB's business
strategies;
2.the significant risks and uncertainties for LCNB's business, results of
operations and financial condition, as well as its regulatory capital and
liquidity ratios and other regulatory requirements, caused by the COVID-19
pandemic, which will depend on several factors, including the scope and duration
of the pandemic, its influence on financial markets, the effectiveness of LCNB's
work from home arrangements and staffing levels in operational facilities, the
impact of market participants on which LCNB relies and actions taken by
governmental authorities and other third parties in response to the pandemic;
3.the disruption of global, national, state, and local economies associated with
the COVID-19 pandemic, which could affect LCNB's liquidity and capital
positions, impair the ability of our borrowers to repay outstanding loans,
impair collateral values, and further increase the allowance for credit losses;
4.LCNB's ability to integrate future acquisitions may be unsuccessful or may be
more difficult, time-consuming, or costly than expected;
5.LCNB may incur increased loan charge-offs in the future;
6.LCNB may face competitive loss of customers;
7.changes in the interest rate environment may have results on LCNB's operations
materially different from those anticipated by LCNB's market risk management
functions;
8.changes in general economic conditions and increased competition could
adversely affect LCNB's operating results;
9.changes in regulations and government policies affecting bank holding
companies and their subsidiaries, including changes in monetary policies, could
negatively impact LCNB's operating results;
10.LCNB may experience difficulties growing loan and deposit balances;
11.United States trade relations with foreign countries could negatively impact
the financial condition of LCNB's
customers, which could adversely affect LCNB 's operating results and financial
condition;
12.deterioration in the financial condition of the U.S. banking system may
impact the valuations of investments LCNB has made in the securities of other
financial institutions resulting in either actual losses or other-than-temporary
impairments on such investments;
13.difficulties with technology or data security breaches, including
cyberattacks, that could negatively affect LCNB's ability to conduct business
and its relationships with customers, vendors, and others;
14.adverse weather events and natural disasters and global and/or national
epidemics; and
15.government intervention in the U.S. financial system, including the effects
of legislative, tax, accounting, and regulatory actions and reforms, including
the CARES Act, the Dodd-Frank Act, the Jumpstart Our Business Startups Act, the
Consumer Financial Protection Bureau, the capital ratios of Basel III as adopted
by the federal banking authorities, and the Tax Cuts and Jobs Act.

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

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

On May 12, 2021, Governor Mike DeWine announced that the vast majority of Ohio
Department of Health orders related to COVID-19 would be rescinded on June 2,
2021. Measures that have been removed include facial covering protocols, social
distancing guidelines, and capacity restrictions for indoor and outdoor events.
Businesses can choose to continue facial mask and social distancing protocols in
their facilities. In response, LCNB management rescinded requirements to wear
facial masks and practice social distancing, effective June 2, 2021. Employees
and customers who wish to continue wearing facial masks may continue to do so.
Plexiglass barriers at teller stations will remain until and if management
decides to remove them. Further, on June 17, 2021, Governor DeWine announced
that Ohio's State of Emergency caused by the COVID-19 pandemic would be lifted,
effective the next day. The National Emergency Declaration remains in force, as
does the National Public Health Emergency Declaration.
Because of the economic disruption caused by the pandemic, LCNB has provided
COVID-19 related payment deferrals, primarily agreements to accept interest only
payments for a period of time or agreements to defer principal and interest
payments for a period of time, on a number of loans. Loans still on deferral at
June 30, 2021 and December 31, 2020 are as follows (in thousands):
                                         June 30, 2021       December 31, 

2020


Commercial, secured by real estate      $       10,404            20,231
Residential real estate                              -               324
Consumer                                             -                21
                                        $       10,404            20,576



LCNB participated in the CARES Act PPP that provided government guaranteed and
potentially forgivable loans to applicants. The PPP was implemented by the SBA
with support from the Department of the Treasury and provided small businesses
with funds to pay up to eight or twenty-four weeks, depending on the date of the
loan, of payroll costs including benefits. Funds could also be used to pay
interest on mortgages, rent, utilities, covered operations expenditures, covered
property damage costs, covered supplier costs, and covered worker protection
expenditures. Outstanding PPP loans at June 30, 2021 and December 31, 2020
totaled $23,824,000 and $21,088,000, respectively, and unrecognized fees at
those dates totaled $926,000 and $747,000, respectively.

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

Critical Accounting Policies


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

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                          LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The allowance consists of specific and general components. The specific
component typically relates to loans that are classified as doubtful,
substandard, or special mention. For such loans an allowance is established when
the discounted cash flows or collateral value is lower than the carrying value
of that loan. The general component covers non-classified loans and is based on
historical loss experience adjusted for qualitative factors, which include
trends in underperforming loans, trends in the volume and terms of loans,
economic trends and conditions, concentrations of credit, trends in the quality
of loans, and borrower financial statement exceptions.

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


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

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

Results of Operations


Net income for the three and six months ended June 30, 2021 was $5,290,000
(total basic and diluted earnings per share of $0.41) and $10,530,000 (total
basic and diluted earnings per share of $0.82), respectively. This compares to
net income of $5,057,000 (total basic and diluted earnings per share of $0.39)
and $10,083,000 (total basic and diluted earnings per share of $0.78) for the
same three and six month periods in 2020.

Net interest income for the three months ended June 30, 2021, was $14,369,000,
compared to $13,998,000 for the comparable period in 2020. Net interest income
for the six-month period ended June 30, 2021, increased $565,000 to $28,741,000,
as compared to $28,176,000 in the same period last year. Favorably contributing
to the variances for both the three- and six-month periods were fees recognized
from PPP loans and market driven decreases in the average rates paid on
deposits, aided by a shift from higher cost certificates of deposit to lower
cost demand and savings products.


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                          LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Increases in the provision for loan losses, partially due to adjustments for
estimated impacts from the economic downturn caused by the COVID-19 pandemic,
negatively affected earnings during the 2020 period. LCNB recorded loan loss
credits of $15,000 and $67,000 for the three and six month months ended June 30,
2021, respectively. This compares to respective provisions of $16,000 and
$1,189,000 for the same three and six month periods in 2020.

Non-interest income for the three months ended June 30, 2021, increased $995,000
or by 30.0% to $4,314,000, compared to $3,319,000 for the same period last year.
For the six months ended June 30, 2021, non-interest income increased $621,000
or by 8.7% to $7,779,000, compared to $7,158,000 for the same period last year.
The primary drivers of the second quarter and first half year-over-year
increases in non-interest income were increased fiduciary income, deposit
service charges, and a one-
time refund for the Company's Ohio Financial Institution taxes, which was
included in other operating income.

Non-interest expense for the three months ended June 30, 2021, was $1,092,000
greater than the comparable period in 2020 primarily due to increases in
salaries and employee benefits, equipment, marketing, FDIC insurance, contracted
services, and other non-interest expenses. For the first half ended June 30,
2021, non-interest expense increased $1,512,000 from the comparable period in
2020.

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Table of Contents

                          LCNB CORP. AND SUBSIDIARIES

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

Three Months Ended June 30, 2021 vs. June 30, 2020
LCNB's primary source of earnings is net interest income, which is the
difference between earnings from loans and other investments and interest paid
on deposits and other liabilities.  The following table presents, for the three
months ended June 30, 2021 and June 30, 2020, average balances for
interest-earning assets and interest-bearing liabilities, the income or expense
related to each item, and the resulting average yields earned or rates paid.
                                                                                                 Three Months Ended June 30,
                                                                            2021                                                              2020
                                                    Average              Interest               Average               Average              Interest               Average
                                                  Outstanding             Earned/                Yield/             Outstanding             Earned/               Yield/
                                                    Balance                Paid                   Rate                Balance                Paid                  Rate
                                                                                                   (Dollars in thousands)
Loans (1)                                       $  1,328,760              14,108                     4.31  %       $ 1,318,753              14,822                    4.52  %
Interest-bearing demand deposits                      24,770                  14                     0.23  %            27,486                  17                    0.25  %

Federal Reserve Bank stock                             4,652                 140                    12.21  %             4,652                 140                   12.10  %
Federal Home Loan Bank stock                           5,203                  26                     2.03  %             5,203                  32                    2.47  %
Investment securities:
Equity securities                                      4,619                  18                     1.58  %             4,206                  25                    2.39  %
Debt securities, taxable                             264,908                 905                     1.39  %           131,018                 667                    2.05  %
Debt securities, non-taxable (2)                      33,214                 276                     3.37  %            37,292                 322                    3.47  %
Total earnings assets                              1,666,126              15,487                     3.77  %         1,528,610              16,025                    4.22  %
Non-earning assets                                   191,587                                                           180,691
Allowance for loan losses                             (5,678)                                                           (4,998)
Total assets                                    $  1,852,035                                                       $ 1,704,303

Savings deposits                                $    866,922                 301                     0.14  %       $   703,889                 307                    0.14  %
IRA and time certificates                            219,625                 644                     1.19  %           305,284               1,425                    1.88  %
Short-term borrowings                                    716                   1                     0.57  %                82                   -                       -  %
Long-term debt                                        15,571                 114                     2.97  %            34,964                 227                    2.61  %
Total interest-bearing liabilities                 1,102,834               1,060                     0.39  %         1,044,219               1,959                    0.75  %
Demand deposits                                      483,523                                                           402,909
Other liabilities                                     24,027                                                            21,588
Capital                                              241,651                                                           235,587
Total liabilities and capital                   $  1,852,035                                                       $ 1,704,303
Net interest rate spread (3)                                                                         3.38  %                                                          3.47  %
Net interest income and net interest
margin on a taxable-equivalent basis (4)                                  14,427                     3.51  %                                14,066                    3.70  %
Ratio of interest-earning assets to
interest-bearing liabilities                          151.08  %                                                         146.39  %


(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.





                                       39

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Table of Contents

                          LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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 June 30, 2021 as compared to the same
period in 2020.  Changes not solely attributable to rate or volume have been
allocated to volume and rate changes in proportion to the relationship of
absolute dollar amounts of the changes in each.
                                                                              Three Months Ended June 30, 2021 vs. 2020
                                                                                     Increase (decrease) due to:
                                                                         Volume                   Rate                  Total
                                                                                           (In thousands)
Interest-earning Assets:
Loans                                                              $           112                   (826)                (714)

Interest-bearing demand deposits                                                (2)                    (1)                  (3)

Federal Reserve Bank stock                                                       -                      -                    -
Federal Home Loan Bank stock                                                     -                     (6)                  (6)
Investment securities:
Equity securities                                                                2                     (9)                  (7)
Debt securities, taxable                                                       512                   (274)                 238
Debt securities, non-taxable                                                   (34)                   (12)                 (46)
Total interest income                                                          590                 (1,128)                (538)

Interest-bearing Liabilities:
Savings deposits                                                                63                    (69)                  (6)
IRA and time certificates                                                     (336)                  (445)                (781)
Short-term borrowings                                                            -                      1                    1
Long-term debt                                                                (139)                    26                 (113)
Total interest expense                                                     
  (412)                  (487)                (899)
Net interest income                                                $         1,002                   (641)                 361



Net interest income on a fully taxable-equivalent basis for the three months
ended June 30, 2021 totaled $14,427,000, an increase of $361,000 from the
comparable period in 2020.  Total interest expense decreased $899,000, which was
partially offset by a $538,000 decrease in total interest income.

The $538,000 decrease in total interest income was due primarily to a $714,000
decrease in loan interest income, which was partially offset by a $238,000
increase in interest income from taxable debt securities. The decrease in loan
interest income was primarily due to a 21 basis point (a basis point equals
0.01%) decrease in the average rate earned on loans, which was partially offset
by a $10.0 million increase in the average balance of LCNB's loan portfolio.
Loan interest income for the second quarter 2021 included $401,000 of PPP loan
fees recognized. The increase in interest income from taxable debt securities
was due to a $133.9 million increase in average securities, which was partially
offset by a 66 basis point decrease in the average rate earned on these
securities. The decrease in average rates was primarily due to market
conditions.

The $899,000 decrease in total interest expense was due to a $781,000 decrease
in interest expense for IRA and time certificates and a $113,000 decrease in
interest expense for long-term debt. Interest expense for IRA and time
certificates decreased primarily due to a 69 basis point decrease in the average
rate paid for these deposits and secondarily to an $85.7 million decrease in the
average balance of these deposits. Interest expense for long-term debt decreased
due to a $19.4 million decrease in average debt outstanding, slightly offset by
a 36 basis point increase in the average rate paid.


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Table of Contents

                          LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Six Months Ended June 30, 2021 vs. June 30, 2020
The following table presents, for the six months ended June 30, 2021 and
June 30, 2020, average balances for interest-earning assets and interest-bearing
liabilities, the income or expense related to each item, and the resulting
average yields earned or rates paid.
                                                                                                 Six Months Ended June 30,
                                                                           2021                                                              2020
                                                   Average              Interest               Average               Average              Interest               Average
                                                 Outstanding             Earned/                Yield/             Outstanding             Earned/               Yield/
                                                   Balance                Paid                   Rate                Balance                Paid                  Rate
                                                                                                  (Dollars in thousands)
Loans (1)                                       $ 1,321,323              28,643                     4.37  %       $ 1,285,654              30,049                    4.70  %
Interest-bearing demand deposits                     20,226                  27                     0.27  %            16,483                  48                    0.59  %

Federal Reserve Bank stock                            4,652                 140                     6.07  %             4,652                 140                    6.05  %
Federal Home Loan Bank stock                          5,203                  52                     2.02  %             5,203                  65                    2.51  %
Investment securities:
Equity securities                                     4,560                  37                     1.64  %             4,260                  55                    2.60  %
Debt securities, taxable                            238,411               1,623                     1.37  %           138,986               1,617                    2.34  %
Debt securities, non-taxable (2)                     33,691                 559                     3.35  %            40,541                 682                    3.38  %
Total earnings assets                             1,628,066              31,081                     3.85  %         1,495,779              32,656                    4.39  %
Non-earning assets                                  191,517                                                           180,083
Allowance for loan losses                            (5,696)                                                           (4,468)
Total assets                                    $ 1,813,887                                                       $ 1,671,394

Savings deposits                                $   831,172                 581                     0.14  %       $   691,490                 793                    0.23  %
IRA and time certificates                           226,840               1,392                     1.24  %           312,968               3,056                    1.96  %
Short-term borrowings                                   530                   2                     0.76  %               749                   7                    1.88  %
Long-term debt                                       17,619                 248                     2.84  %            36,644                 481                    2.64  %
Total interest-bearing liabilities                1,076,161               2,223                     0.42  %         1,041,851               4,337                    0.84  %
Demand deposits                                     471,327                                                           374,968
Other liabilities                                    24,814                                                            21,253
Capital                                             241,585                                                           233,322
Total liabilities and capital                   $ 1,813,887                                                       $ 1,671,394
Net interest rate spread (3)                                                                        3.43  %                                                          3.55  %
Net interest income and net interest
margin on a taxable-equivalent basis (4)                                 28,858                     3.57  %                                28,319                    3.81  %
Ratio of interest-earning assets to
interest-bearing liabilities                         151.28  %                                                         143.57  %


(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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Table of Contents

                          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 six months ended June 30, 2021 as compared to the same
period in 2020.  Changes not solely attributable to rate or volume have been
allocated to volume and rate changes in proportion to the relationship of
absolute dollar amounts of the changes in each.
                                                                               Six Months Ended June 30, 2021 vs. 2020
                                                                                     Increase (decrease) due to:
                                                                         Volume                  Rate                  Total
                                                                                           (In thousands)
Interest-earning Assets:
Loans                                                              $           817                (2,223)               (1,406)

Interest-bearing demand deposits                                                 9                   (30)                  (21)

Federal Reserve Bank stock                                                       -                     -                     -
Federal Home Loan Bank stock                                                     -                   (13)                  (13)
Investment securities:
Equity securities                                                                4                   (22)                  (18)
Debt securities, taxable                                                       853                  (847)                    6
Debt securities, non-taxable                                                  (114)                   (9)                 (123)
Total interest income                                                        1,569                (3,144)               (1,575)

Interest-bearing Liabilities:
Savings deposits                                                               139                  (351)                 (212)
IRA and time certificates                                                     (708)                 (956)               (1,664)
Short-term borrowings                                                           (2)                   (3)                   (5)
Long-term debt                                                                (266)                   33                  (233)
Total interest expense                                                     
  (837)               (1,277)               (2,114)
Net interest income                                                $         2,406                (1,867)                  539



Net interest income on a fully taxable-equivalent basis for the six months ended
June 30, 2021 totaled $28,858,000, an increase of $539,000 from the comparable
period in 2020.  Total interest expense decreased $2,114,000, which was
partially offset by a $1,575,000 decrease in total interest income.

The $1,575,000 decrease in total interest income was due primarily to a
$1,406,000 decrease in loan interest income. The decrease in loan interest
income was primarily due to a 33 basis point decrease in the average rate earned
on loans, which was partially offset by a $35.7 million increase in the average
balance of LCNB's loan portfolio. The decrease in average rates was due
primarily to market conditions. Loan interest income for the first half of 2021
included $916,000 of PPP loan fees recognized.

The $2,114,000 decrease in total interest expense was primarily due to a
$1,664,000 decrease in interest expense for IRA and time certificates. Interest
expense for IRA and time certificates decreased primarily due to a 72 basis
point decrease in the average rate paid for these deposits and secondarily to an
$86.1 million decrease in the average balance of these deposits.








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                          LCNB CORP. AND SUBSIDIARIES

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

Provision and Allowance For Loan Losses


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

The credit for loan losses for the three and six months ended June 30, 2021 was
respectively $15,000 and $67,000, compared to provisions of $16,000 and
$1,189,000 for the same periods in 2020. The 2020 first quarter period 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 six months ended June 30, 2021 were $12,000
and $9,000, respectively, as compared to net charge-offs of $8,000 and $218,000
for the same three and six-month periods in 2020.

Non-Interest Income

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

                                                                 Three Months Ended                                            Six Months Ended
                                                                      June 30,                                                     June 30,
                                                    2021              2020             Difference              2021                   2020             Difference
Fiduciary income                                $   1,735             1,201                534                 3,264                 2,304                 960
Service charges and fees on deposit accounts        1,519             1,237                282                 2,885                 2,532              

353

Net gains from sales of debt securities,
available-for-sale                                      -                 -                  -                     -                   221              

(221)

Bank owned life insurance income                      269               287                (18)                  536                   888                (352)
Gains from sales of loans                             151               317               (166)                  194                   437                (243)
Other operating income                                640               277                363                   900                   776                 124
Total non-interest income                       $   4,314             3,319                995                 7,779                 7,158                 621



Reasons for changes include:
•Fiduciary income increased primarily due to growth in the market value of
assets serviced.
•Service charges and fees on deposit accounts for the three month period
increased primarily due to increases in check card income and overdraft fees.
Service charges and fees on deposit accounts for the six month period increased
primarily due to increases in check card income, which was partially offset by
decreases in overdraft fees and fee income recognized on Insured Cash Sweep
("ICS") deposit products.
•Net gains from sales of debt securities, available-for-sale, decreased due to
the absence of security sales during the 2021 period.
•Bank owned life insurance income for the six months ended June 30, 2020
included a mortality benefit, while no mortality benefits were recognized during
the 2021 period.
•Gains from sales of loans decreased primarily due to a lower volume of
residential real estate loan sales.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
•Other operating income increased due to a state tax refund of $508,000
recognized during the second quarter 2021, which was partially offset by
decreases in realized and unrealized net gains or losses recognized on equity
security investments.

Non-Interest Expense

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

                                                          Three Months Ended                                                Six Months Ended
                                                               June 30,                                                         June 30,
                                           2021                2020               Difference               2021                     2020              Difference
Salaries and employee benefits         $    7,111               6,648                 463                  13,544                  13,416                 128
Equipment expenses                            443                 289                 154                     811                     576                 235
Occupancy expense, net                        729                 723                   6                   1,523                   1,405                 118
State financial institutions tax              437                 420                  17                     881                     856                  25
Marketing                                     357                 258                  99                     625                     435                 190
Amortization of intangibles                   260                 260                   -                     517                     520                  (3)
FDIC insurance premiums, net                  123                  31                  92                     236                      30                 206
Contracted services                           623                 475                 148                   1,163                     877                 286

Other non-interest expense                  2,125               2,012                 113                   4,400                   4,073                 327
Total non-interest expense             $   12,208              11,116               1,092                  23,700                  22,188               1,512



Reasons for changes include:
•Salaries and employee benefits increased primarily due to increased health care
costs, increased bonus expense accruals, and to a decrease in salaries and
benefits netted against deferred costs on loans, reflecting a lower volume of
originations during the 2021 period.
•Equipment expenses increased primarily due to increased equipment rental costs
and increased depreciation charges for furniture and equipment. During 2020,
LCNB gradually replaced ATMs that it had previously owned with new ATMs obtained
through an outsourcing arrangement.
•Occupancy expense increased primarily due to increased janitorial and cleaning
costs and to increases in facility repair and maintenance costs.
•Marketing increased primarily due to expanded use of television, radio, and
digital media.
•FDIC insurance premiums increased in 2021 because LCNB received small bank
assessment credits from the FDIC during the first and second quarters 2020.
Premium payments returned to their normal levels after the second quarter 2020.
•Contracted services increased due to employee recruitment services paid during
the second quarter 2021, increased usage of technology services, and to price
increases in general.
•Other non-interest expense increased partially due to a strategic decision to
outsource LCNB's ATM operations to a third-party vendor during 2020, relieving
LCNB branch personnel from various ATM maintenance responsibilities.

Income Taxes


LCNB's effective tax rate for the three and six months ended June 30, 2021 was
18.5% and 18.2%, respectively, compared to 18.3% and 15.7% for the three and six
months ended June 30, 2020.  The difference between the statutory rate of 21%
and the effective tax rates is primarily due to tax-exempt interest income from
municipal securities, tax-exempt earnings from bank owned life insurance,
tax-exempt earnings from LCNB Risk Management, Inc., and tax credits and losses
related to investments in affordable housing tax credit limited partnerships. A
one-time tax benefit recognized as a result of certain provisions in the CARES
Act passed by Congress and signed by President Trump during the first quarter
2020 also contributed to the effective tax rate for the six months ended June
30, 2020.





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                          LCNB CORP. AND SUBSIDIARIES

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

A comparison of balance sheet line items at June 30, 2021 and December 31, 2020 is as follows (dollars in thousands):

                                                              June 30, 2021           December 31, 2020            Difference $             Difference %

ASSETS:

Total cash and cash equivalents                             $       22,909                  31,730                   (8,821)                       

(27.80) %

Investment securities: Equity securities with a readily determinable fair value, at fair value

                                                        2,488                   2,389                       99                          

4.14 % Equity securities without a readily determinable fair value, at cost

                                                       2,099                   2,099                        -                             -  %
Debt securities, available-for-sale, at fair value                 310,515                 209,471                  101,044                         48.24  %
Debt securities, held-to-maturity, at cost                          24,242                  24,810                     (568)                        (2.29) %
Federal Reserve Bank stock, at cost                                  4,652                   4,652                        -                             -  %
Federal Home Loan Bank stock, at cost                                5,203                   5,203                        -                             -  %
Loans, net                                                       1,312,113               1,293,693                   18,420                          1.42  %
Premises and equipment, net                                         35,356                  35,376                      (20)                        (0.06) %
Operating lease right-of-use assets                                  6,730                   6,274                      456                          7.27  %
Goodwill                                                            59,221                  59,221                        -                             -  %
Core deposit and other intangibles                                   2,853                   3,453                     (600)                       (17.38) %
Bank owned life insurance                                           42,685                  42,149                      536                          1.27  %
Interest receivable                                                  8,395                   8,337                       58                          0.70  %
Other assets                                                        17,209                  17,027                      182                          1.07  %
Total assets                                                $    1,856,670               1,745,884                  110,786                          6.35  %

LIABILITIES:
Deposits:
Non-interest-bearing                                        $      472,830                 455,073                   17,757                          3.90  %
Interest-bearing                                                 1,104,515               1,000,350                  104,165                         10.41  %
Total deposits                                                   1,577,345               1,455,423                  121,922                          8.38  %
Short-term borrowings                                                    -                       -                        -                             -  %
Long-term debt                                                      15,000                  22,000                   (7,000)                       (31.82) %
Operating lease liabilities                                          6,846                   6,371                      475                          7.46  %
Accrued interest and other liabilities                              17,527                  21,265                   (3,738)                       (17.58) %
Total liabilities                                                1,616,718               1,505,059                  111,659                          7.42  %

TOTAL SHAREHOLDERS' EQUITY                                         239,952                 240,825                     (873)                        (0.36) %
Total liabilities and shareholders' equity                  $    1,856,670               1,745,884                  110,786                          6.35  %



Reasons for changes include:
•Debt securities, available-for-sale, increased due to purchases of additional
securities totaling $121.6 million, which was partially offset by maturities and
calls of securities totaling $16.6 million.
•Net loans increased due to organic growth in the loan portfolio, including a
net increase in PPP loans of $2.7 million. Most of the growth occurred in the
commercial real estate and residential real estate portfolios.
•Operating lease right-of-use assets and operating lease liabilities increased
due to a new lease for the Union Village office and the renewal of a postage
machine lease.
•Core deposit and other intangibles decreased due to amortization of core
deposit intangibles and mortgage servicing rights.
•Non-interest-bearing deposits and interest-bearing deposits have grown
substantially since the start of the COVID-19 pandemic and this trend continued
during the first half of 2021. Management believes the growth reflects customer
preferences for liquidity during uncertain economic periods. Balances in demand
deposits and NOW and savings accounts have grown, while balances in IRA and time
deposits have decreased.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
•Long-term debt decreased due to payoffs of matured debt.
•Accrued interest and other liabilities decreased due to reductions in several
liability categories. Accrued bonuses decreased because annual bonus payments
are made in January. The liability for affordable housing tax credit limited
partnership investments decreased as funding payments were made to the
partnerships (see note 5 for more information on these investments). A decrease
in deferred federal income taxes payable due to movements in the fair value of
debt security investments also contributed to the overall decrease.
•Total shareholders' equity decreased primarily due to a decrease in accumulated
other comprehensive income, net of taxes caused by market-driven decreases in
the fair value of LCNB's debt security investments, dividends paid to
shareholders, and treasury shares purchased. These decreases were partially
offset by earnings retained during the first six months of 2021.

Regulatory Capital


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

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

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

                                                                                               Minimum Requirement
                                                                                                   with Capital               To Be Considered
                                                                     Minimum Requirement       Conservation Buffer            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                    8.0  %                    10.5  %                        10.0  %
risk-weighted assets
Leverage Ratio (Tier 1 Capital to adjusted quarterly average                      4.0  %                        N/A                         5.0  %
total assets)


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. Its use was permitted beginning with the March 31, 2020 Call Report.
Qualifications to use the simplified approach include having a tier 1 leverage
ratio of greater than 9%, less than $10 billion in total consolidated assets,
and limited amounts of off-balance-sheet exposures and trading assets and
liabilities. A qualifying community banking organization that opts into the
Community Bank Leverage Ratio framework and meets all requirements under the
framework will be considered to have met the well-capitalized ratio requirements
under the Prompt Corrective Action regulations and will not be required to
report or calculate risk-based capital. LCNB qualifies to use the simplified
measure, but did not opt in for the June 30, 2021 regulatory capital
calculations.






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                          LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
A summary of the Bank's regulatory capital and capital ratios follows (dollars
in thousands):
                                                                       June 30, 2021          December 31, 2020
Regulatory Capital:
Shareholders' equity                                                  $     235,778                   234,092
Goodwill and other intangibles                                              (61,181)                  (61,698)
Accumulated other comprehensive (income) loss                                (1,563)                   (4,043)
Tier 1 risk-based capital                                                   173,034                   168,351
Eligible allowance for loan losses                                            5,652                     5,728
Total risk-based capital                                              $     178,686                   174,079
Capital ratios:
Common Equity Tier 1 Capital to risk-weighted assets                          12.68  %                  12.48  %
Tier 1 Capital to risk-weighted assets                                        12.68  %                  12.48  %
Total Capital to risk-weighted assets                                         13.10  %                  12.91  %
Leverage                                                                       9.69  %                  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 OCC, the Bank's primary regulator,
is necessary for the Bank to pay dividends in excess of this amount. In
addition, dividend payments may not reduce capital levels below minimum
regulatory guidelines.  Management believes the Bank will be able to pay
anticipated dividends to LCNB without needing to request approval.  The Bank is
not aware of any reasons why it would not receive such approval, if required.

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

Total remaining borrowing capacity with the Federal Home Loan Bank at June 30,
2021 was approximately $212.1 million. In addition, additional borrowings of
approximately $55.0 million were available through the line of credit
arrangements at June 30, 2021.

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

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

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