UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.   20549

FORM 10-Q

(Mark One)

( X )

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

For the quarterly period ended March 31, 2010

 (     )

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  000-26121

LCNB Corp.

(Exact name of registrant as specified in its charter)

Ohio

 31-1626393

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

2 North Broadway, Lebanon, Ohio   45036

(Address of principal executive offices, including Zip Code)

(513) 932-1414

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

                                                  [X] 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  

     Large accelerated filer [  ]

Accelerated filer [X]

     Non-accelerated filer [  ] (Do not check if a smaller reporting company)

Smaller reporting company [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

                                                  [  ] Yes         [X] No

The number of shares outstanding of the issuer's common stock, without par value, as of May 3, 2010 was 6,687,232 shares.

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LCNB Corp.

INDEX

PART I – FINANCIAL INFORMATION

3

Item 1.  Financial Statements

3

CONSOLIDATED BALANCE SHEETS

3

CONSOLIDATED STATEMENTS OF INCOME

4

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

5

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

6

CONSOLIDATED STATEMENTS OF CASH FLOWS

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8

REPORT OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRM

26

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

27

Item 3.  Quantitative and Qualitative Disclosures about Market Risks

33

Item 4.  Controls and Procedures

34

Item 4T.  Controls and Procedures

34

PART II -- OTHER INFORMATION

35

Item 1. Legal Proceedings

35

Item 1A.  Risk Factors

35

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

35

Item 3. Defaults Upon Senior Securities

35

Item 4. (Removed and Reserved).

35

Item 5. Other Information

35

Item 6. Exhibits

36

SIGNATURES

38

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PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
					March 31,						December 31,
					2010						2009
					(Unaudited)
ASSETS:
Cash and due from banks					$	23,622						12,626
Federal funds sold and interest-bearing demand deposits						3,710						-
Total cash and cash equivalents						27,332						12,626
Investment securities:
Available-for-sale, at fair value						184,946						201,578
Held-to-maturity, at cost						13,887						13,030
Federal Reserve Bank and Federal Home Loan Bank stock, at cost						3,031						3,031
Loans, net						456,769						457,418
Premises and equipment, net						15,558						15,722
Goodwill						5,915						5,915
Bank owned life insurance						14,275						14,122
Other assets						11,366						10,967
TOTAL ASSETS					$	733,079						734,409
LIABILITIES:
Deposits:
Noninterest-bearing					$	89,038						93,894
Interest-bearing						542,141						530,285
Total deposits						631,179						624,179
Short-term borrowings						5,108						14,265
Long-term debt						24,153						24,960
Accrued interest and other liabilities						5,573						5,390
TOTAL LIABILITIES						666,013						668,794
SHAREHOLDERS' EQUITY:
Preferred shares - no par value, authorized 1,000,000 shares,      none outstanding						-						-
Common shares - no par value, authorized 8,000,000 shares,      issued 7,445,514 shares at March 31, 2010 and December 31, 2009						11,068						11,068
Surplus						15,416						15,407
Retained earnings						50,104						48,962
Treasury shares at cost,      758,282 shares at  March 31, 2010 and December 31, 2009						(11,737)						(11,737)
Accumulated other comprehensive income, net of taxes						2,215						1,915
TOTAL SHAREHOLDERS' EQUITY						67,066						65,615
TOTAL LIABILITES AND SHAREHOLDERS' EQUITY					$	733,079						734,409
The accompanying notes to consolidated financial statements are an integral part of these statements.

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LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
			Three Months Ended
			March 31,
			2010				2009
INTEREST INCOME:
Interest and fees on loans		$	6,822				6,876
Dividends on Federal Reserve Bank and Federal Home Loan Bank stock			24				24
Interest on investment securities-
Taxable			931				1,071
Non-taxable			808				624
Other short-term investments			8				12
TOTAL INTEREST INCOME			8,593				8,607
INTEREST EXPENSE:
Interest on deposits			1,976				2,621
Interest on short-term borrowings			9				-
Interest on long-term debt			177				107
TOTAL INTEREST EXPENSE			2,162				2,728
NET INTEREST INCOME			6,431				5,879
PROVISION FOR LOAN LOSSES			208				98
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			6,223				5,781
NON-INTEREST INCOME:
Trust income			469				481
Service charges and fees			946				935
Net gain on sales of securities			77				-
Insurance agency income			419				366
Bank owned life insurance income			153				158
Gains from sales of mortgage loans			30				137
Other operating income			89				53
TOTAL NON-INTEREST INCOME			2,183				2,130
NON-INTEREST EXPENSE:
Salaries and wages			2,401				2,352
Pension and other employee benefits			631				662
Equipment expenses			209				244
Occupancy expense, net			524				482
State franchise tax			186				162
Marketing			79				113
Intangible amortization			27				28
FDIC insurance premiums			218				25
Write-off of pension asset			-				722
Other non-interest expense			1,245				1,127
TOTAL NON-INTEREST EXPENSE			5,520				5,917
INCOME BEFORE INCOME TAXES			2,886				1,994
PROVISION FOR INCOME TAXES			674				431
NET INCOME			2,212				1,563
PREFERRED STOCK DIVIDENDS AND DISCOUNT ACCRETION			-				102
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS		$	2,212				1,461
Dividends declared per common share		$	0.16				0.16
Earnings per common share:
Basic		$	0.33				0.22
Diluted			0.33				0.22
Weighted average common shares outstanding:
Basic			6,687,232				6,687,232
Diluted			6,729,790				6,687,232
The accompanying notes to consolidated financial statements are an integral part of these statements.

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LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
			Three Months Ended
			March 31,
			2010				2009
Net Income		$	2,212				1,563
Other comprehensive income:
Net unrealized gain (loss) on available-for-sale     securities (net of taxes of $181 and $53 for the three     months ended March 31, 2010 and 2009, respectively)			351				(102)
Reclassification adjustment for net realized gain on         sale of available-for-sale securities included in net     income (net of taxes of $26)			(51)				-
Reversal of pension plan unrecognized net loss     (net of taxes of $1,564)			-				3,037
Total comprehensive income		$	2,512				4,498
The accompanying notes to consolidated financial statements are an integral part of these statements.

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		LCNB CORP. AND SUBSIDIARIES
		CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
		(Dollars in thousands, except per share amounts)
		(Unaudited)
																											Accumulated
			Common																								Other									Total
			Shares				Preferred							Common							Retained			Treasury			Comprehensive								Shareholders'
			Outstanding				Stock							Stock			Surplus				Earnings			Shares			Income (Loss)									Equity
Balance January 1, 2010			6,687,232			$	-							11,068			15,407				48,962			(11,737)					1,915							65,615
Net income																					2,212															2,212
Net unrealized gain on available-for-   sale securities, net of tax																													300							300
Compensation expense relating to   stock options																	9																			9
Common stock dividends, $0.16 per share																					(1,070)															(1,070)
Balance March 31, 2010			6,687,232				-							11,068			15,416				50,104			(11,737)					2,215							67,066
Balance January 1, 2009			6,687,232			$	-							11,068			14,792				46,584			(11,737)					(2,591)							58,116
Net income																					1,563															1,563
Issuance of preferred stock and   related warrant							12,817										583																			13,400
Net unrealized loss on available-for-   sale securities, net of tax																													(102)							(102)
Reversal of pension plan unrecognized   net loss, net of tax																													3,037							3,037
Compensation expense relating to   stock options																	6																			6
Preferred stock dividends and   discount accretion							35														(102)															(67)
Common stock dividends, $0.16 per share																					(1,069)															(1,069)
Balance March 31, 2009			6,687,232			$	12,852							11,068			15,381				46,976			(11,737)					344							74,884
		The accompanying notes to consolidated financial statements are an integral part of these statements.

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LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
		Three Months Ended
		March 31,
		2010		2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,212		1,563
Adjustments to reconcile net income to net cash flows from operating activities-
Depreciation, amortization and accretion		631		482
Provision for loan losses		208		98
Increase in cash surrender value of bank owned life insurance		(153)		(158)
Realized (gain) loss on sales of securities available-for-sale		(77)		-
Realized (gain) loss on sales of premises and equipment		(4)		(18)
Origination of mortgage loans for sale		(1,600)		(10,034)
Realized gains from sales of mortgage loans		(30)		(137)
Proceeds from sales of mortgage loans		1,613		10,070
Compensation expense related to stock options		9		6
Increase (decrease) due to changes in assets and liabilities:
Income receivable		(149)		(373)
Other assets		(221)		(1,106)
Other liabilities		28		1,360
NET CASH FLOWS FROM OPERATING ACTIVITIES		2,467		1,753
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities available-for-sale		5,342		-
Proceeds from maturities of investment securities:
Available-for-sale		16,875		30,764
Held-to-maturity		516		80
Purchases of investment securities:
Available-for-sale		(5,324)		(68,560)
Held-to-maturity		(1,373)		(2,849)
Net decrease in loans		259		7,423
Proceeds from sale of repossessed assets		61		59
Purchases of premises and equipment		(87)		(292)
Proceeds from sales of premises and equipment		4		18
NET CASH FLOWS FROM INVESTING ACTIVITIES		16,273		(33,357)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		7,000		12,647
Net decrease in short-term borrowings		(9,157)		(1,443)
Proceeds from long-term debt		-		15,000
Principal payments on long-term debt		(807)		-
Proceeds from issuance of preferred stock		-		13,400
Cash dividends paid on common stock		(1,070)		(1,069)
Cash dividends paid on preferred stock		-		(67)
NET CASH FLOWS FROM FINANCING ACTIVITIES		(4,034)		38,468
NET CHANGE IN CASH AND CASH EQUIVALENTS		14,706		6,864
CASH AND CASH EQUIVALENTS AT BEGINNING OF  PERIOD		12,626		18,020
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	27,332		24,884
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest	$	2,186		2,787
Income taxes		315		-
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Investment securities transferred from available-for-sale to held-to-maturity		-		1,944
Transfer from loans to other real estate owned and repossessed assets		125		7
The accompanying notes to consolidated financial statements are an integral part of these statements.

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of Presentation

Substantially all of the assets, liabilities and operations of LCNB Corp. ("LCNB") are attributable to its wholly-owned subsidiaries, LCNB National Bank (the "Bank") and Dakin Insurance Agency, Inc. ("Dakin").  The accompanying unaudited consolidated financial statements include the accounts of LCNB, the Bank, and Dakin.

The unaudited interim consolidated financial statements, which have been reviewed by J.D. Cloud & Co. L.L.P., LCNB’s independent registered public accounting firm, in accordance with standards established by the Public Company Accounting Oversight Board, as indicated by their report included herein and which does not express an opinion on those 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”).  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of financial position, results of operations, and cash flows for the interim periods, as required by Regulation S-X, Rule 10-01.

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

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

Results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results to be expected for the full year ending December 31, 2010.  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 2009 Annual Report on Form 10-K filed with the SEC.

-8-

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 2 -  Investment Securities

The amortized cost and fair value of available-for-sale investment securities at March 31, 2010 and December 31, 2009 are summarized as follows (in thousands):

 

	March 31, 2010
		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
U.S. Treasury notes	$	13,248		10		20		13,238
U.S. Agency notes		35,828		238		-		36,066
U.S. Agency mortgage-backed securities		45,590		1,245		30		46,805
Corporate securities		5,931		60		-		5,991
Municipal securities:
Non-taxable		70,632		1,931		38		72,525
Taxable		9,127		227		-		9,354
Other debt securities		547		-		-		547
Trust preferred securities		298		52		-		350
Equity securities		63		7		-		70
	$	181,264		3,770		88		184,946

	December 31, 2009
		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
U.S. Treasury notes	$	13,288		49		29		13,308
U.S. Agency notes		45,931		207		250		45,888
U.S. Agency mortgage-backed securities		48,650		1,093		119		49,624
Corporate securities		8,450		64		26		8,488
Municipal securities:
Non-taxable		72,002		2,056		36		74,022
Taxable		9,127		176		2		9,301
Other debt securities		542		-		4		538
Trust preferred securities		298		46		-		344
Equity securities		62		3		-		65
	$	198,350		3,694		466		201,578

The fair value of held-to-maturity investment securities, consisting of non-taxable municipal securities, approximates amortized cost at March 31, 2010 and December 31, 2009.

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 2 -  Investment Securities (continued)

Information concerning securities with gross unrealized losses at March 31, 2010, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (in thousands):

		March 31, 2010
		Less than Twelve Months				Twelve Months or Greater
		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury notes	$	10,564		20		-		-
U.S. Agency mortgage-    backed securities		7,243		30		42		-
Municipal securities		2,941		33		435		5
	$	20,748		83		477		5

The unrealized losses at March 31, 2010 are primarily due to increases in market interest rates.  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 maturity, LCNB does not consider these investments to be other-than-temporarily impaired.

Note 3 - Loans

Major classifications of loans at March 31, 2010 and December 31, 2009 are as follows (in thousands):

		March 31,				December 31,
			2010				2009
Commercial and industrial		$	44,092				42,807
Commercial, secured by real estate			187,593				185,024
Residential real estate			191,771				193,293
Consumer			23,792				26,185
Agricultural			2,648				3,125
Other loans, including deposit overdrafts			9,441				9,422
			459,337				459,856
Deferred net origination costs			492				560
			459,829				460,416
Less allowance for loan losses			3,060				2,998
Loans, net		$	456,769				457,418

-10-

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

Changes in the allowance for loan losses for the three months ended March 31, 2010 and 2009 were as follows (in thousands):

			Three Months Ended
			March 31,
			2010				2009
Balance, beginning of year		$	2,998				2,468
Provision for loan losses			208				98
Charge-offs			(205)				(197)
Recoveries			59				99
Net charge-offs			(146)				(98)
Balance, end of period		$	3,060				2,468

Charge-offs for the three months ended March 31, 2010 and 2009 primarily consisted of consumer loans and checking and NOW account overdrafts.  

Non-accrual, past-due, and restructured loans as of March 31, 2010 and December 31, 2009 were as follows (in thousands):

		March 31,				December 31,
			2010				2009
Non-accrual loans		$	3,370				2,939
Past-due 90 days or more and still accruing			547				924
Restructured loans			7,120				7,173
Total		$	11,037				11,036
Percent to total loans			2.40%				2.40%

Non-accrual loans at March 31, 2010 were $431,000 greater than at December 31, 2009 and loans past-due 90 days or more and still accruing decreased $377,000 primarily due to the reclassification of three loans to the same borrower from past-due 90 days or more and still accruing at December 31, 2009 to non-accrual at March 31, 2010.  

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 – Loans (continued)

The following is a summary of information pertaining to loans considered to be impaired at March 31, 2010 and December 31, 2009 (in thousands):

		March 31,				December 31,
			2010				2009
Impaired loans without a valuation allowance	$		7,728				6,927
Impaired loans with a valuation allowance			3,225				3,249
Total impaired loans			10,953				10,176
Valuation allowance related to impaired loans	$		944				858

Other real estate owned (which includes property acquired through foreclosure or deed-in-lieu of foreclosure and also includes property deemed to be in-substance foreclosed) and other repossessed assets, which are included in “other assets” in the consolidated balance sheets, totaled approximately $2,554,000 at March 31, 2010, compared to $2,470,000 at December 31, 2009.  Other real estate owned increased primarily due to the transfer of a residential real estate property into this category during the first quarter 2010.

Loans sold to and serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of those loans at March 31, 2010 and December 31, 2009 were $57,196,000 and $57,369,000, respectively.  Loans sold to the Federal Home Loan Mortgage Corporation during the three months ended March 31, 2010 and 2009 totaled $1,600,000 and $10,034,000, respectively.  The decrease in the amount of mortgage loans sold is primarily due to an above average number of refinanced loans during the first quarter 2009 resulting from a general decline in market interest rates during that period.

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 4 – Borrowings

Funds borrowed from the Federal Home Loan Bank of Cincinnati at March 31, 2010 and December 31, 2009 are as follows (in thousands):

	Current
	Interest	March 31,				December 31,
	Rate		2010				2009
Fixed Rate Advances, due at maturity:
Advance due February 2011	2.10%	$	5,000				5,000
Advance due August 2012	1.99%		6,000				6,000
Advance due March 2017	5.25%		5,000				5,000
Fixed Rate Advances, with monthly   principal and interest payments:
Advance due March 2014	2.45%		4,048				4,288
Advance due March 2019	2.82%		4,105				4,672
		$	24,153				24,960

All advances from the Federal Home Loan Bank of Cincinnati are secured by a blanket pledge of LCNB’s 1-4 family first lien mortgage loans in the amount of approximately $148 million and $149 million at March 31, 2010 and December 31, 2009, respectively.  Additionally, LCNB was required to hold minimum levels of FHLB stock, based on the outstanding borrowings.  

Short-term borrowings at December 31 are as follows (dollars in thousands):

		March 31, 2010				December 31, 2009
		Amount		Rate		Amount		Rate
U.S. Treasury demand note	$	601		-%		457		-%
Federal funds purchased		-		-%		7,000		0.50%
Line of credit		-		-%		3,173		1.00%
Repurchase agreements		4,507		0.40%		3,635		0.40%
	$	5,108		0.35%		14,265		0.57%

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 5 - 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.

LCNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.  Financial instruments whose contract amounts represent off-balance-sheet credit risk at March 31, 2010 and December 31, 2009 were as follows (in thousands):

		March 31,				December 31,
			2010				2009
Commitments to extend credit:
Commercial loans		$	3,830				10,020
Other loans:
Fixed rate			1,246				359
Adjustable rate			1,265				537
Unused lines of credit:
Fixed rate			4,144				4,168
Adjustable rate			70,787				69,974
Unused overdraft protection amounts on   demand and NOW accounts			10,174				10,205
Standby letters of credit			7,096				7,273
		$	98,542				102,536

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 in line of credit loans.  Commitments to extend credit and unused lines of credit generally have fixed expiration dates or other termination clauses.  

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.  At March 31, 2010 and December 31, 2009, outstanding guarantees of approximately $1,566,000 and $1,744,000, respectively, were issued to developers and contractors.  These guarantees generally are fully secured and have varying maturities.  In addition, LCNB has a participation in a letter of credit securing payment of principal and interest on a bond issue.  The participation amount at March 31, 2010 and December 31, 2009 was approximately $5.5 million.  The agreement has a final maturity date of January 2012.

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; property, plant and equipment; residential realty; and income-producing commercial properties.

-14-

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 5 - Commitments and Contingent Liabilities (continued)

Commitments for capital expenditures outstanding as of March 31, 2010 totaled approximately $120,000.

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 6 – Regulatory Capital

On January 9, 2009, LCNB received $13.4 million of new equity capital from the U.S. Department of the Treasury’s Capital Purchase Program (the “CPP”) established under the Emergency Economic Stabilization Act of 2008.  The investment by the Treasury Department was comprised of $13.4 million in preferred shares, with a warrant to purchase 217,063 common shares of LCNB at an exercise price of $9.26, with a term of ten years.  The preferred shares were scheduled to pay a dividend of 5% per year for the first five years and 9% thereafter.  Participation in the CPP was voluntary and participating institutions were required to comply with a number of restrictions and provisions, including, but not limited to, restrictions on compensation of certain executive officers and limitations on stock repurchase activities and dividend payments.  

On October 21, 2009, LCNB entered into a repurchase agreement with the Treasury Department pursuant to which it redeemed all 13,400 shares of its preferred shares.  In connection with this redemption, LCNB paid approximately $13.5 million to the Treasury Department, which included the original investment amount of $13.4 million plus accrued and unpaid dividends of approximately $123,000.  

LCNB did not repurchase the warrant issued to the Treasury Department as part of the CPP.  Pursuant to the terms of the repurchase agreement, the warrant has been cancelled and LCNB has issued a substitute warrant to the Treasury Department with the same terms as the original warrant, except that Section 13(H) of the original warrant, which related to the reduction of shares subject to the warrant in the event that LCNB raised $13.4 million in a qualified stock offering prior to December 31, 2009, has been removed.  The substitute warrant remains outstanding at March 31, 2010.

On April 20, 2010, LCNB obtained shareholder approval to increase the number of authorized common shares to 12,000,000.

-15-

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 6 – Regulatory Capital (continued)

The Bank and LCNB are required by regulators to meet certain minimum levels of capital adequacy. These are expressed in the form of certain ratios. Capital is separated into Tier 1 capital (essentially shareholders' equity less goodwill and other intangibles) and Tier 2 capital (essentially the allowance for loan losses limited to 1.25% of risk-weighted assets). The first two ratios, which are based on the degree of credit risk in LCNB's assets, provide for weighting assets based on assigned risk factors and include off-balance sheet items such as loan commitments and stand-by letters of credit. The ratio of Tier 1 capital to risk-weighted assets must be at least 4.0% and the ratio of Total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8.0%.  The capital leverage ratio supplements the risk-based capital guidelines. Banks are required to maintain a minimum ratio of Tier 1 capital to adjusted quarterly average total assets of 3.0%.

For various regulatory purposes, financial institutions are classified into categories based upon capital adequacy.  The highest "well-capitalized" category requires capital ratios of at least 10% for total risk-based, 6% for Tier 1 risk-based, and 5% for leverage.  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.  A summary of the regulatory capital and capital ratios of LCNB follows (dollars in thousands):

		At				At
		March 31,				December 31,
			2010				2009
Regulatory Capital:
Shareholders' equity		$	67,066				65,615
Goodwill and other intangibles			(6,479)				(6,507)
Accumulated other comprehensive income			(2,215)				(1,915)
Tier 1 risk-based capital			58,372				57,193
Eligible allowance for loan losses			3,060				2,998
Total risk-based capital		$	61,432				60,191
Capital ratios:
Total risk-based (8% required)			13.01%				12.68%
Tier 1 risk-based (4% required)			12.36%				12.04%
Leverage (3% required)			7.95%				7.77%

-16-

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 7 – Employee Benefits

LCNB has a noncontributory defined benefit retirement plan that covers substantially all regular full-time employees hired before January 1, 2009.  Effective January 1, 2009, LCNB redesigned its noncontributory defined benefit retirement plan and merged its single-employer plan into a multiple-employer plan, which is accounted for as a multi-employer plan because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer.  Accordingly, the assets and obligations of the single-employer plan were transferred to the multiple-employer plan in January 2009.  At that time, the pension plan related balance sheet accounts were adjusted resulting in an approximate $3.0 million increase in other comprehensive income and a $722,000 charge to non-interest expense in the consolidated statements of income.  Employees hired on or after January 1, 2009 are not eligible to participate in this plan.  

Effective February 1, 2009, LCNB amended the plan to reduce benefits for those whose age plus vesting service equaled less than 65 at that date.  Also effective February 1, 2009, an enhanced Internal Revenue Code 401(k) plan (the “401(k) plan”) was made available to those hired on or after January 1, 2009 and to those who received benefit reductions from the amendments to the noncontributory defined benefit retirement plan.  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.  Employees who received a benefit reduction under the retirement plan amendments receive an automatic contribution of 5% or 7% of annual compensation, depending on the sum of an employee’s age and vesting service, into the 401(k) plan, regardless of the contributions made by the employees.  This contribution is made annually and these employees do not receive any employer matches to their 401(k) contributions.

Funding and administrative costs of the qualified noncontributory defined benefit retirement plan charged to pension and other employee benefits in the consolidated statements of income for the three months ended March 31, 2010 and 2009 were $60,000 and $64,000, respectively.  Employer expense incurred in connection with the 401(k) plan during the three months ended March 31, 2010 and 2009 were $74,000 and $60,000 respectively.

Effective February 1, 2009, LCNB established a nonqualified defined benefit retirement plan for certain highly compensated employees.  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.  

The components of net periodic pension cost of the nonqualified defined benefit retirement plan for the three months ended March 31, 2010 are summarized as follows (000’s):

Service cost	$	43
Interest cost		8
Amortization of unrecognized prior service cost		12
Net periodic pension cost	$	63

-17-

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 8 - Stock Based Compensation

Under the Ownership Incentive Plan (the "Plan"), LCNB may grant stock-based awards to eligible employees.  The awards may be in the form of stock options, share awards, and/or appreciation rights. The Plan provides for the issuance of up to 200,000 common shares.

Options granted to date vest ratably over a five year period and expire ten years after the date of grant. Stock options outstanding at March 31, 2010 were as follows:

	Outstanding					Exercisable
Expiration Date	Number	Weighted Average Exercise Price				Number	Weighted Average Exercise Price			Number Exercised
Feb 2013	11,056	$	13.09			11,056	$	13.09		-
Jan 2014	8,108		17.66			8,108		17.66		-
Jan 2016	7,934		18.95			6,347		18.95		-
Feb 2017	8,116		17.88			4,870		17.88		-
Feb 2018	13,918		12.55			5,567		12.55		-
Jan 2019	29,110		9.00			5,822		9.00		-
Feb 2020	20,798		11.50			-		11.50
	99,040		12.71			41,770		14.78		-

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

		Three Months ended March 31,
		2010				2009
		Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Outstanding, January 1,		78,242		$13.04		49,132		$15.43
Granted		20,798		11.50		29,110		9.00
Exercised		-		-		-		-
Outstanding, March 31,		99,040		12.71		78,242		13.04
Exercisable,  March 31,		41,770		14.78		29,954		15.73

The aggregate intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) for options outstanding at March 31, 2010 that were “in the money” (market price greater than exercise price) was $98,000.  The aggregate intrinsic value at that date for only the options that were exercisable was $17,000.  The intrinsic value changes based on changes in the market value of LCNB’s stock.

-18-

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 8 - Stock Based Compensation (continued)

The estimated weighted-average fair value of the options granted in the first quarter of 2010 and 2009 were $2.27 and $1.89 per option, respectively.  The fair value was estimated at the dates of grant using the Black-Scholes option-pricing model and the following assumptions:

	2010	2009
Risk-free interest rate	3.34%	3.49%
Average dividend yield	4.31%	4.04%
Volatility factor of the expected market
price of LCNB’s common stock	28.32%	27.54%
Average life in years	7.0	9.0

Total expense related to options included in salaries and wages in the consolidated statements of income for the three months ended March 31, 2010 and 2009 was $9,000 and $6,000, respectively.

A total of 2,511 restricted shares were granted in February 2010.  These shares will vest in November 2010.  Until they vest, they are restricted from sale, transfer, or assignment in accordance with the terms of the agreement under which they were issued.  Compensation cost for restricted stock grants are calculated using the fair value of LCNB’s common stock and the number of shares issued.  No restricted shares were granted prior to February 2010.

-19-

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 9 - Earnings Per Common Share

Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period.  Diluted earnings per common share is adjusted for the dilutive effects of stock options, warrant, and restricted stock.  The diluted average number of common shares outstanding has been increased for the assumed exercise of stock options, warrant, and restricted stock with proceeds used to purchase treasury shares at the average market price for the period.  The computations were as follows for the three months ended March 31, 2010 and 2009 (dollars in thousands, except share and per share data):

		For the Three Months
		Ended March 31,
		2010		2009
Net income available to common shareholders	$	2,212		1,461
Weighted average number of shares outstanding used in the calculation of basic earnings per common share		6,687,232		6,687,232
Add dilutive effect of:
Stock options		2,207		-
Restricted stock		1,060		-
Stock warrant		39,291		-
		42,558		-
Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share		6,729,790		6,687,232
Basic earnings per common share	$	0.33		0.22
Diluted earnings per common share	$	0.33		0.22

-20-

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 10- Fair Value of Financial Instruments

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

·

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

·

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

·

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

The majority of LCNB’s debt securities are classified as available-for-sale. The securities are reported at fair value with unrealized holding gains and losses reported net of income taxes in accumulated other comprehensive income.  

LCNB utilizes a pricing service for determining the fair values of most of its investment securities.  Fair value for U.S. Treasury notes and corporate securities are determined based on market quotations (level 1).  Fair value for most of the other investment securities is 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.  In addition, approximately $547,000 is invested in a mutual fund.  LCNB uses the fair value estimate provided by the mutual fund company, which uses market quotations when such quotes are available and good faith judgment when market quotations are not available.  Because LCNB does not know the portion of the mutual fund valued using market quotations and the portion valued using good faith judgment, the entire investment in the mutual fund has been measured using level 3 inputs.  Additionally, Dakin owns stock in an insurance company and LCNB Corp. owns trust preferred securities in various financial institutions. Market quotations (level 1) are used to determine fair value for these investments.  Dakin also owns stock in another insurance agency.  A market does not exist for the other insurance agency’s stock.  This stock is considered to have level 3 inputs.

-21-

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 10- Fair Value of Financial Instruments (continued)

The following table summarizes the valuation of LCNB’s available-for-sale securities by input levels as of March 31, 2010 and December 31, 2009 (in thousands):

					Fair Value Measurements at Reporting Date Using
	Fair Value Measurements				Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
March 31, 2010
Available-for-sale securities:
U.S. Treasury notes	$	13,238			13,238			-			-
U.S. Agency notes		36,066			-			36,066			-
U.S. Agency mortgage-        backed securities		46,805			-			46,805			-
Corporate securities		5,991			5,991			-			-
Municipal securities:
Non-taxable		72,525			-			72,525			-
Taxable		9,354			-			9,354			-
Other debt securities		547			-			-			547
Trust preferred securities		350			350			-			-
Equity securities		70			47			-			23
Totals	$	184,946			19,626			164,750			570
December 31, 2009
Available-for-sale securities:
U.S. Treasury notes	$	13,308			13,308			-			-
U.S. Agency notes		45,888			-			45,888			-
U.S. Agency mortgage-       backed securities		49,624			-			49,624			-
Corporate securities		8,488			8,488			-			-
Municipal securities:
Non-taxable		74,022			-			74,022			-
Taxable		9,301			-			9,301			-
Other debt securities		538			-			-			538
Trust preferred securities		344			344			-			-
Equity securities		65			42			-			23
Totals	$	201,578			22,182			178,835			561

-22-

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 10- Fair Value of Financial Instruments (continued)

The following table is a reconciliation of the beginning and ending balances of recurring fair value measurements that use significant unobservable inputs (level 3) for the three months ended March 31, 2010 (in thousands):

		Total		Other Debt Securities		Equity Securities
Beginning balance	$	561		538		23
Purchases		-		-		-
Dividends reinvested		5		5		-
Net change in unrealized gains (losses)   included in other comprehensive income		4		4		-
Ending balance	$	570		547		23

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.  When the fair value of the collateral is based on an observable market price or current appraised value, the inputs are considered to be level 2.  When an appraised value is not available and there is not an observable market price, the inputs are considered to be level 3.  

Other real estate owned is adjusted to fair value 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.  The inputs for a valuation based on current appraised value are considered to be level 2.  

-23-

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 10- Fair Value of Financial Instruments (continued)

The table below presents LCNB’s impaired loans, other real estate owned, and repossessed assets measured at fair value on a nonrecurring basis as of March 31, 2010 and December 31, 2009 by the level in the fair value hierarchy within which those measurements fall (in thousands):

						Fair Value Measurements at Reporting Date Using
		Fair Value Measurements				Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
March 31, 2010
Impaired loans		$	2,281			-			83			2,198
Other real estate owned			2,513			-			2,513			-
Repossessed assets			41			-			-			41
Totals		$	4,835			-			2,596			2,239
December 31, 2009
Impaired loans		$	2,391			-			-			2,391
Other real estate owned			2,424			-			2,424			-
Repossessed assets			46			-			-			46
Totals		$	4,861			-			2,424			2,437

Carrying amounts and estimated fair values of financial instruments as of March 31, 2010 and December 31, 2009 were as follows (in thousands):

		March 31, 2010						December 31, 2009
	Carrying			Fair			Carrying				Fair
		Amount			Value		Amount				Value
FINANCIAL ASSETS:
Cash and cash equivalents	$	27,332			27,332			12,626			12,626
Securities available-for-sale		184,946			184,946			201,578			201,578
Securities held-to-maturity		13,887			13,887			13,030			13,030
Federal Reserve Bank and     Federal Home Loan Bank stock		3,031			3,031			3,031			3,031
Loans, net		456,769			466,693			457,418			467,226
FINANCIAL LIABILITIES:
Deposits		631,179			633,762			624,179			627,536
Short-term borrowings		5,108			5,108			14,265			14,265
Long-term debt		24,153			25,392			24,960			26,266

-24-

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 10- Fair Value of Financial Instruments (continued)

The fair value of off-balance-sheet financial instruments at March 31, 2010 and December 31, 2009 was not material.

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:

Cash and cash equivalents

The carrying amounts presented are deemed to approximate fair value.

Investment securities

Fair values for securities, excluding Federal Home Loan Bank and Federal Reserve Bank stock, are based on quoted market prices, if available.  If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and/or discounted cash flow analyses or other methods.  The carrying value of Federal Home Loan Bank and Federal Reserve Bank stock approximates fair value based on the respective redemptive provisions.

Loans

Fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, incorporating assumptions of current and projected prepayment speeds.

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.

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.

-25-

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

LCNB Corp. and subsidiaries

Lebanon, Ohio

We have reviewed the accompanying consolidated balance sheet of LCNB Corp. and subsidiaries as of March 31, 2010, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the three-month periods ended March 31, 2010 and 2009.  These interim financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of LCNB Corp. and subsidiaries as of December 31, 2009, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for the year then ended (not presented herein), and in our report dated February 22, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2009, is fairly stated in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ J.D. Cloud & Co. L.L.P.

 

Cincinnati, Ohio

May 3, 2010

-26-

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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 matters disclosed herein may be deemed to be forward-looking statements that involve risks and uncertainties.  Forward looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words and their derivatives such as “expects,” “anticipates,” “believes,” “estimates,” “plans,” “projects,” or other statements concerning opinions or judgments of LCNB and its management about future events.   Factors that could influence the accuracy of such forward looking statements include, but are not limited to, regulatory policy changes, interest rate fluctuations, loan demand, loan delinquencies and losses, general economic conditions and other risks.  Such forward-looking statements represent management's judgment as of the current date. Actual strategies and results in future time periods may differ materially from those currently expected. LCNB disclaims, however, any intent or obligation to update such forward-looking statements.  LCNB intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Results of Operations

LCNB’s net income available to common shareholders for the three months ended March 31, 2010 was $2,212,000 or $0.33 basic and diluted earnings per common share, compared to $1,461,000 or $0.22 basic and diluted earnings per common share for the three months ended March 31, 2009.  Affecting net income to common shareholders and earnings per common share was an increase in net interest income and a decrease in non-interest expense, offset by an increase in the provision for loan losses.  Negatively affecting net income available to common shareholders during 2009 were preferred stock dividends paid and related discount accretion recorded in connection with the preferred shares and warrant issued under the U.S. Department of the Treasury’s Capital Purchase Program (the “CPP”) on January 9, 2009. LCNB did not have these costs during 2010 because the preferred stock was redeemed from the U.S. Department of the Treasury in October 2009.

Net interest income increased during the three month period in 2010 compared to 2009 primarily because of growth in interest earning assets and a general decline in market interest rates.  Non-interest expense during the three month period in 2010 was less than the comparable period in 2009  because of the absence of a pension-related charge recognized by LCNB during the first quarter 2009.  This decrease was partially offset by increases in FDIC insurance expense and other smaller miscellaneous increases.

  

Current economic conditions have contributed to an increase in loan delinquencies, but LCNB’s loan portfolio continues to benefit from responsible underwriting and lending practices.  Net charge-offs for the first quarter of 2010 and 2009 totaled $146,000 and $98,000, respectively.  Non-accrual loans and loans past due 90 days or more and still accruing interest totaled $3,917,000 or 0.85% of total loans at March 31, 2010, compared to $3,863,000 or 0.84% of total loans at December 31, 2009.  Other real estate owned (which includes property acquired through foreclosure or deed-in-lieu of foreclosure and also includes property deemed to be in-substance foreclosed) and other repossessed assets totaled approximately $2,554,000 at March 31, 2010, compared to $2,470,000 at December 31, 2009.

Net Interest Income

LCNB's primary source of earnings is net interest income, which is the difference between earnings from loans and other investments and interest paid on deposits and other liabilities.  The following table presents, for the three months ended March 31, 2010 and 2009, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resultant average yields earned or rates paid.

-27-

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LCNB CORP. AND SUBSIDIARIES

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

Operations (continued)

	Three Months Ended March 31,
	2010											2009
	Average				Interest				Average			Average				Interest				Average
	Outstanding				Earned/				Yield/			Outstanding				Earned/				Yield/
	Balance				Paid				Rate			Balance				Paid				Rate
	(Dollars in thousands)
Loans (1)	$	458,503				6,822			6.03%			$	450,065			$	6,876			6.20%
Federal funds sold and interest-bearing   demand deposits		10,105				8			0.32%				19,184				12			0.25%
Federal Reserve Bank stock		940				-			-%				937				-			-%
Federal Home Loan Bank stock		2,091				24			4.65%				2,091				24			4.65%
Investment securities:
Taxable		118,537				931			3.19%				101,365				1,071			4.29%
Non-taxable (2)		86,068				1,224			5.77%				65,649				945			5.84%
Total interest-earning assets		676,244				9,009			5.40%				639,291				8,928			5.66%
Non-earning assets		70,885											54,929
Allowance for loan losses		(3,003)											(2,477)
Total assets	$	744,126										$	691,743
Interest-bearing deposits	$	547,394				1,976			1.46%				515,996				2,621			2.06%
Short-term borrowings		8,000				9			0.46%				746				-			-%
Long-term debt		24,574				177			2.92%				12,167				107			3.57%
Total interest-bearing liabilities		579,968				2,162			1.51%				528,909				2,728			2.09%
Demand deposits		91,687											84,144
Other liabilities		5,356											3,893
Capital		67,115											74,797
Total liabilities and capital	$	744,126										$	691,743
Net interest rate spread (3)									3.89%											3.57%
Net interest income and net interest margin on a tax-equivalent basis (4)						6,847			4.11%							$	6,200			3.93%
Ratio of interest-earning assets to interest-bearing liabilities		116.60%											120.87%

(1)

Includes nonaccrual loans if any.

(2)

Income from tax-exempt securities is included in interest income on a tax-equivalent basis.  Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 34%.

(3)

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

(4)

The net interest margin is the tax-equivalent net interest income divided by average interest-earning assets.