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 June 30, 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 August 9, 2010 was 6,687,232 shares.

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LCNB CORP. AND SUBSIDIARIES

INDEX

PART I – FINANCIAL INFORMATION

2

Item 1.  Financial Statements

2

CONSOLIDATED BALANCE SHEETS

2

CONSOLIDATED STATEMENTS OF INCOME

3

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

4

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

5

CONSOLIDATED STATEMENTS OF CASH FLOWS

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7

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

36

Item 4.  Controls and Procedures

37

Item 4T. Controls and Procedures

37

PART II.  OTHER INFORMATION

38

Item 1.     Legal Proceedings

38

Item 1A.  Risk Factors

38

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

39

Item 3.     Defaults Upon Senior Securities

39

Item 4.     (Removed and Reserved)

39

Item 5.     Other Information

39

Item 6.     Exhibits

40

SIGNATURES

42

1

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PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

	LCNB CORP. AND SUBSIDIARIES
	CONSOLIDATED BALANCE SHEETS
	(Dollars in thousands)
							June 30,				December 31,
							2010				2009
							(Unaudited)
ASSETS:
	Cash and due from banks					$		36,673			12,626
	Interest-bearing demand deposits							16,177			-
		Total cash and cash equivalents						52,850			12,626
	Investment securities:
		Available-for-sale, at fair value						202,329			201,578
		Held-to-maturity, at cost						13,705			13,030
	Federal Reserve Bank and Federal Home Loan Bank stock, at cost							3,030			3,031
	Loans, net							456,572			457,418
	Premises and equipment, net							15,651			15,722
	Goodwill							5,915			5,915
	Bank owned life insurance							13,950			14,122
	Other assets							10,977			10,967
				TOTAL ASSETS		$		774,979			734,409
LIABILITIES:
	Deposits –
		Noninterest-bearing				$		93,973			93,894
		Interest-bearing						578,009			530,285
			Total deposits					671,982			624,179
	Short-term borrowings							3,469			14,265
	Long-term debt							23,811			24,960
	Accrued interest and other liabilities							5,722			5,390
				TOTAL LIABILITIES				704,984			668,794
SHAREHOLDERS’ EQUITY:
	Preferred shares – no par value, authorized 1,000,000 shares,
		none outstanding						-			-
	Common shares – no par value, authorized 12,000,000 shares,
		issued 7,445,514 shares at June 30, 2010 and December 31, 2009						11,068			11,068
	Surplus							15,426			15,407
	Retained earnings							51,786			48,962
	Treasury shares at cost,
		758,282 shares at June 30, 2010 and December 31, 2009						(11,737)			(11,737)
	Accumulated other comprehensive income (loss), net of taxes							3,452			1,915
				TOTAL SHAREHOLDERS’ EQUITY				69,995			65,615
				TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$		774,979			734,409
The accompanying notes to consolidated financial statements are an integral part of these statements.

2

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LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
					Three Months Ended				Six Months Ended
					June 30,				June 30,
					2010		2009		2010		2009
INTEREST INCOME:
	Interest and fees on loans			$	6,787		6,820		13,609		13,696
	Dividends on Federal Reserve Bank
		and Federal Home Loan Bank stock			51		51		75		75
	Interest on investment securities –
		Taxable			883		1,062		1,814		2,133
		Non-taxable			783		710		1,591		1,334
	Other short-term investments				17		16		25		28
			TOTAL INTEREST INCOME		8,521		8,659		17,114		17,266
INTEREST EXPENSE:
	Interest on deposits				1,928		2,370		3,904		4,991
	Interest on short-term borrowings				4		-		13		-
	Interest on long-term debt				173		156		350		263
			TOTAL INTEREST EXPENSE		2,105		2,526		4,267		5,254
			NET INTEREST INCOME		6,416		6,133		12,847		12,012
	PROVISION FOR LOAN LOSSES				511		208		719		306
			NET INTEREST INCOME AFTER
			PROVISION FOR LOAN LOSSES		5,905		5,925		12,128		11,706
NON-INTEREST INCOME:
	Trust income				441		433		910		914
	Service charges and fees				1,030		1,003		1,976		1,938
	Net gain on sales of securities				51		-		128		-
	Insurance agency income				423		392		842		758
	Bank owned life insurance income				944		158		1,097		316
	Gains from sales of mortgage loans				18		194		48		331
	Other operating income				42		31		131		84
			TOTAL NON-INTEREST INCOME		2,949		2,211		5,132		4,341
NON-INTEREST EXPENSE:
	Salaries and wages				2,447		2,372		4,848		4,724
	Pension and other employee benefits				601		614		1,232		1,276
	Equipment expenses				225		243		434		487
	Occupancy expense, net				441		380		965		862
	State franchise tax				175		156		361		318
	Marketing				132		128		211		241
	Intangible amortization				27		27		54		55
	FDIC insurance premiums				229		584		447		609
	Write-off of pension asset				-		-		-		722
	Other non-interest expense				1,263		1,263		2,508		2,390
			TOTAL NON-INTEREST EXPENSE		5,540		5,767		11,060		11,684
			INCOME BEFORE INCOME TAXES		3,314		2,369		6,200		4,363
PROVISION FOR INCOME TAXES					562		529		1,236		960
			NET INCOME		2,752		1,840		4,964		3,403
PREFERRED STOCK DIVIDENDS AND   DISCOUNT ACCRETION					-		206		-		308
			NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	2,752		1,634		4,964		3,095
Dividends declared per common share				$	0.16		0.16		0.32		0.32
Earnings per common share:
	Basic			$	0.41		0.24		0.74		0.46
	Diluted				0.41		0.24		0.74		0.46
Weighted average common shares outstanding:
	Basic				6,687,232		6,687,232		6,687,232		6,687,232
	Diluted				6,742,663		6,693,084		6,736,435		6,687,232
The accompanying notes to consolidated financial statements are an integral part of these statements.

3

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LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
							Three Months Ended				Six Months Ended
							June 30,				June 30,
							2010		2009		2010		2009
Net Income						$	2,752		1,840		4,964		3,403
Other comprehensive income:
	Net unrealized gain on available-for-sale securities (net of taxes of $654 and $299 for the three months ended June 30, 2010 and 2009, respectively, and $835 and $246 for the six months ended June 30, 2010 and 2009, respectively)						1,270		587		1,621		485
	Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of taxes of $18 and $44 for the three and six months ended June 30, 2010, respectively)						(33)		-		(84)		-
	Reversal of pension plan unrecognized net loss (net of taxes of $1,564)						-		-		-		3,037
		TOTAL COMPREHENSIVE INCOME				$	3,989		2,427		6,501		6,925
The accompanying notes to consolidated financial statements are an integral part of these statements.

4

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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												4,964						4,964
Net unrealized gain on available-for-sale   securities, net of tax and reclassification   adjustment																1,537		1,537
Compensation expense relating to stock options										19								19
Common stock dividends, $0.32 per share												(2,140)						(2,140)
Balance June 30, 2010				6,687,232		-		11,068		15,426		51,786		(11,737)		3,452		69,995
Balance January 1, 2009				6,687,232	$			11,068		14,792		46,584		(11,737)		(2,591)		58,116
Net income												3,403						3,403
Issuance of preferred stock and related warrants						12,817				583								13,400
Net unrealized gain on available-for-sale   securities, net of tax																485		485
Reversal of pension plan unrecognized net   loss, net of tax																3,037		3,037
Compensation expense relating to stock options										15								15
Preferred stock dividends and discount   accretion						73						(308)						(235)
Common stock dividends, $0.32 per share												(2,139)						(2,139)
Balance June 30, 2009				6,687,232	$	12,890		11,068		15,390		47,540		(11,737)		931		76,082
			The accompanying notes to consolidated financial statements are an integral part of these statements.

5

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LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
									Six Months Ended
									June 30,
									2010		2009
CASH FLOWS FROM OPERATING ACTIVITIES:
		Net income						$	4,964		3,403
		Adjustments to reconcile net income to net cash flows from operating activities-
				Depreciation, amortization, and accretion					1,262		1,050
				Provision for loan losses					719		306
				Increase in cash surrender value of bank owned life insurance					(305)		(316)
				Bank owned life insurance death benefits in excess of cash surrender value					(792)		-
				Realized (gain) loss on sales of securities available-for-sale					(128)		-
				Realized (gain) loss on sales of premises and equipment					13		(18)
				Origination of mortgage loans for sale					(2,554)		(23,552)
				Realized gains from sales of mortgage loans					(48)		(331)
				Proceeds from sales of mortgage loans					2,575		23,650
				Compensation expense related to stock options					19		15
				Partial charge-off of other real estate owned					84		-
				Increase (decrease) due to changes in assets and liabilities:
				Income receivable					242		(342)
				Other assets					(367)		(1,307)
				Other liabilities					(458)		2,044
						NET CASH FLOWS FROM OPERATING ACTIVITIES			5,226		4,602
CASH FLOWS FROM INVESTING ACTIVITIES:
		Proceeds from sales of investment securities available-for-sale							11,657		-
		Proceeds from maturities and calls of investment securities:
		Available-for-sale							29,831		41,304
		Held-to-maturity							1,840		191
		Purchases of investment securities:
		Available-for-sale							(40,328)		(91,848)
		Held-to-maturity							(2,515)		(4,317)
		Purchase of Federal Reserve Bank stock							-		(3)
		Proceeds from redemption of Federal Reserve Bank stock							1		-
		Net (increase) decrease in loans							(139)		(1,076)
		Proceeds from bank owned life insurance death benefits							1,269		-
		Proceeds from sale of repossessed assets							117		72
		Purchases of premises and equipment							(469)		(941)
		Proceeds from sales of premises and equipment							16		18
						NET CASH FLOWS FROM INVESTING ACTIVITIES			1,280		(56,600)
CASH FLOWS FROM FINANCING ACTIVITIES:
		Net increase (decrease) in deposits							47,803		37,366
		Net increase (decrease) in short-term borrowings							(10,796)		(1,119)
		Proceeds from long-term debt							-		15,000
		Principal payments on long-term debt							(1,149)		(344)
		Proceeds from issuance of preferred stock							-		13,400
		Cash dividends paid on common stock							(2,140)		(2,139)
		Cash dividends paid on preferred stock							-		(235)
						NET CASH FLOWS FROM FINANCING ACTIVITIES			33,718		61,929
						NET CHANGE IN CASH AND CASH EQUIVALENTS			40,224		9,931
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD									12,626		18,020
CASH AND CASH EQUIVALENTS AT END OF PERIOD								$	52,850		27,951
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
		Interest						$	4,313		5,366
		Income taxes							1,761		900
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							161		-
The accompanying notes to consolidated financial statements are an integral part of these statements.

6

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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.

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 and six months ended June 30, 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 Form 10-K filed with the SEC.

7

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 2 - Investment Securities

The amortized cost and estimated fair value of available-for-sale investment securities at June 30, 2010 and December 31, 2009 are summarized as follows (in thousands):

 

	June 30, 2010
		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
U.S. Treasury notes	$	20,410		213		-		20,623
U.S. Agency notes		41,360		281		5		41,636
U.S. Agency mortgage-backed securities		42,747		1,844		-		44,591
Corporate securities		8,562		89		-		8,651
Municipal securities:
Non-taxable		69,631		2,709		11		72,329
Taxable		13,149		382		4		13,527
Other debt securities		551		10		-		561
Trust preferred securities		298		47		-		345
Equity securities		64		2		-		66
	$	196,772		5,577		20		202,329

	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 taxable and non-taxable municipal securities, approximates amortized cost at June 30, 2010 and December 31, 2009.

 

Substantially all investment securities with gross unrealized losses at June 30, 2010 were in continuous loss positions of less than twelve months.

8

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 2 - Investment Securities (continued)

The unrealized losses at June 30, 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 at maturity, LCNB does not consider these investments to be other-than-temporarily impaired.

Note 3 - Loans

Major classifications of loans at June 30, 2010 and December 31, 2009 are as follows (in thousands):

			June 30,		December 31,
			2010			2009
Commercial and industrial		$	37,767			42,807
Commercial, secured by real estate			193,311			185,024
Residential real estate			193,089			193,293
Consumer			22,442			26,185
Agricultural			3,206			3,125
Other loans, including deposit overdrafts			9,446			9,422
			459,261			459,856
Deferred net origination costs			461			560
			459,722			460,416
Less allowance for loan losses			3,150			2,998
	Loans, net	$	456,572			457,418

Changes in the allowance for loan losses for the six months ended June 30, 2010 and 2009 were as follows (in thousands):

			Six Months Ended June 30,
			2010			2009
Balance, beginning of period		$	2,998			2,468
Provision for loan losses			719			306
Charge-offs			(682)			(393)
Recoveries			115			219
Net charge-offs			(567)			(174)
Balance, end of period		$	3,150			2,600

9

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 - Loans (continued)

Charge-offs for the six months ended June 30, 2010 include charge-offs totaling $281,000 on two commercial and industrial loans to the same borrower, which ceased operations during the second quarter 2010.  The remaining charge-offs for the six months ended June 30, 2010 included $79,000 in residential real estate loan charge-offs and $314,000 of charge-offs related to consumer loans and checking and NOW account overdrafts.  Charge-offs for the six months ended June 30, 2009 consisted primarily of consumer loans and checking and NOW account overdrafts.  

Non-accrual, past-due, and restructured loans as of June 30, 2010 and December 31, 2009 were as follows (in thousands):

			June 30,		December 31,
			2010		2009
Non-accrual loans		$	4,228		2,939
Past-due 90 days or more and still accruing			72		924
Restructured loans			8,350		7,173
	Total	$	12,650		11,036
Percent to total loans			2.75%		2.40%

Non-accrual loans at June 30, 2010 were $1.3 million greater than at December 31, 2009 primarily due to the reclassification of loans that were previously included in the past-due 90 days or more and still accruing and restructured loan classifications at December 31, 2009.

The following is a summary of information pertaining to loans considered to be impaired at June 30, 2010 and December 31, 2009 (in thousands):

		June 30,		December 31,
		2010		2009
Impaired loans without a valuation allowance	$	7,735		6,927
Impaired loans with a valuation allowance		4,548		3,249
Total impaired loans		12,283		10,176
Valuation allowance related to impaired loans	$	968		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 $2,470,000 at June 30, 2010 and December 31, 2009.  

10

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 - Loans (continued)

Loans sold to and serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of those loans at June 30, 2010 and December 31, 2009 were $56,639,000 and $57,369,000, respectively.  Loans sold to the Federal Home Loan Mortgage Corporation during the three and six months ended June 30, 2010 totaled $954,000 and $2,554,000, respectively, and $13,518,000 and $23,552,000 during the three and six months ended June 30, 2009, respectively.  The decrease in the amount of mortgage loans sold is primarily due to an above average number of refinanced loans during the first half of 2009 resulting from a general decline in market interest rates during that period.

Note 4 – Borrowings

Funds borrowed from the Federal Home Loan Bank of Cincinnati at June 30, 2010 and December 31, 2009 are as follows (in thousands):

	Current
	Interest	June 30,			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%		3,807			4,288
Advance due March 2019	2.82%		4,004			4,672
		$	23,811			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 $150 million and $149 million at June 30, 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 June 30, 2010 and December 31, 2009 are as follows (dollars in thousands):

		June 30, 2010				December 31, 2009
		Amount		Rate		Amount		Rate
U.S. Treasury demand note	$	357		-%		457		-%
Federal funds purchased		-		-%		7,000		0.50%
Line of credit		-		-%		3,173		1.00%
Repurchase agreements		3,112		0.40%		3,635		0.40%
	$	3,469		0.36%		14,265		0.57%

11

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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 included commitments to extend credit.  They involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.  Exposure to credit loss in the event of nonperformance by the other parties to financial instruments for commitments to extend credit is represented by the contract amount of those instruments.

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

LCNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.  Financial instruments whose contract amounts represent off-balance-sheet credit risk at June 30, 2010 and December 31, 2009 were as follows (in thousands):

			June 30,			December 31,
			2010				2009
	Commitments to extend credit:
	Commercial loans	$	2,592				10,020
	Other loans
	Fixed rate		1,150				359
	Adjustable rate		501				537
	Unused lines of credit:
	Fixed rate		3,386				4,168
	Adjustable rate		75,581				69,974
	Unused Bounce Protection amounts on
	demand and NOW accounts		10,105				10,205
	Standby letters of credit		7,114				7,273
		$	100,429				102,536

12

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 5 – Commitments and Contingent Liabilities (continued)

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Unused lines of credit include amounts not drawn 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 June 30, 2010 and December 31, 2009, outstanding guarantees of approximately $1,584,000 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 June 30, 2010 and December 31, 2009 was approximately $5.5 million.  The agreement has a final maturity date of July 15, 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.

Commitments for capital expenditures outstanding as of June 30, 2010 totaled approximately $720,000.

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.  

13

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 6 – Regulatory Capital (continued)

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 June 30, 2010.

On April 20, 2010, LCNB obtained shareholder approval to increase the number of authorized common shares from 8,000,000 to 12,000,000.

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):

14

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 6 – Regulatory Capital (continued)

				At			At
				June 30,		December 31,
				2010			2009
Regulatory Capital:
	Shareholders' equity		$	69,995			65,615
	Goodwill and other intangibles			(6,420)			(6,507)
	Accumulated other comprehensive (income) loss			(3,483)			(1,915)
		Tier 1 risk-based capital		60,092			57,193
Eligible allowance for loan losses				3,150			2,998
		Total risk-based capital	$	63,242			60,191
Capital ratios:
	Total risk-based (required 8.00%)			13.31%			12.68%
	Tier 1 risk-based (required 4.00%)			12.65%			12.04%
	Leverage (required 3.00%)			8.03%			7.77%

15

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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 and 401(k) plan charged to pension and other employee benefits in the consolidated statements of income for the three and six-month periods ended June 30, 2010 and 2009 were as follows (in thousands):

						For the Three Months								For the Six Months
							Ended June 30,							Ended June 30,
					2010				2009					2010		2009
Qualified noncontributory defined benefit retirement plan		$			61				53					121		117
401(k) plan					79				52					153		112

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.  

16

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 7 – Employee Benefits (continued)

The components of net periodic pension cost of the nonqualified defined benefit retirement plan for the three and six months ended June 30, 2010 are summarized as follows (000’s):

		Three Months Ended June 30, 2010		Six Months Ended June 30, 2010
Service cost	$	44		87
Interest cost		8		16
Amortization of unrecognized prior service cost		12		24
Net periodic pension cost	$	64		127

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 June 30, 2010 were as follows:

	Outstanding Stock Options							Exercisable Stock Options
Exercise Price Range	Number	Weighted Average Exercise Price			Weighted Average Remaining Contractual Life (Years)			Number	Weighted Average Exercise Price
$9.00 - $10.99	29,110		9.00		8.6			5,822		9.00
$11.00 - $12.99	34,716		11.92		8.8			5,567		12.55
$13.00 - $14.99	11,056		13.09		2.6			11,056		13.00
$17.00 - $18.99	24,158		18.16		5.3			19,325		18.14
	99,040		12.71		7.2			41,770		14.78

17

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 8 - Stock Based Compensation (continued)

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

		Six Months ended June 30,
		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, June 30,		99,040		12.71		78,242		13.04
Exercisable, June 30,		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 June 30, 2010 that were “in the money” (market price greater than exercise price) was $85,000.  The aggregate intrinsic value at that date for only the options that were exercisable was $16,000.  The intrinsic value changes based on changes in the market value of LCNB’s stock.

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 and six months ended June 30, 2010 were $10,000 and $19,000, respectively, and $9,000 and $15,000 for the three and six months ended June 30, 2009, 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.

18

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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 and six months ended June 30, 2010 and 2009 (dollars in thousands, except share and per share data):

						For the Three Months								For the Six Months
							Ended June 30,							Ended June 30,
					2010				2009					2010		2009
Net income available to common shareholders		$			2,752				1,634					4,964		3,095
Weighted average number of shares outstanding used in the calculation of basic earnings per common share					6,687,232				6,687,232					6,687,232		6,687,232
Add dilutive effect of:
Stock options					3,403				-					2,817		-
Restricted stock					2,511				-					1,790		-
Stock warrant					49,517				5,852					44,596		-
Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share					6,742,663				6,693,084					6,736,435		6,687,232
Basic earnings per common share		$			0.41				0.24					0.74		0.46
Diluted earnings per common share		$			0.41				0.24					0.74		0.46

19

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

LCNB utilizes a pricing service for determining the fair values of 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 $561,000 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.

20

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 10 - Fair Value Measurements (continued)

The following table summarizes the valuation of LCNB’s available-for-sale securities by input levels as of June 30, 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)
June 30, 2010
Available-for-sale securities:
U.S. Treasury notes	$	20,623			20,623			-			-
U.S. Agency notes		41,636			-			41,636			-
U.S. Agency mortgage-        backed securities		44,591			-			44,591			-
Corporate securities		8,651			8,651			-			-
Municipal securities:
Non-taxable		72,329			-			72,329			-
Taxable		13,527			-			13,527			-
Other debt securities		561			-			-			561
Trust preferred securities		345			345			-			-
Equity securities		66			43			-			23
Totals	$	202,329			29,662			172,083			584
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

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 is a reconciliation of the beginning and ending balances of recurring fair value measurements that use significant unobservable inputs (level 3) for the six months ended June 30, 2010 (in thousands):

		Total		Other Debt Securities		Equity Securities
Beginning balance	$	561		538		23
Purchases		-		-		-
Dividends reinvested		9		9		-
Net change in unrealized gains (losses)   included in other comprehensive income		14		14		-
Ending balance	$	584		561		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 and 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.  

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 table below presents LCNB’s impaired loans, other real estate owned, and repossessed assets measured at fair value on a nonrecurring basis as of June 30, 2010 and December 31, 2009 by the level in the fair value hierarchy within which the inputs for these 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)
June 30, 2010
Impaired loans		$	3,580			24			833			2,723
Other real estate owned			2,444			-			2,444			-
Repossessed assets			26			-			-			26
Totals		$	6,050			24			3,277			2,749
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

The fair value measurement for impaired loans using level 1 inputs was determined from a sales contract for the loan’s collateral real estate property.

Carrying amounts and estimated fair values of financial instruments as of June 30, 2010 and December 31, 2009 were as follows (in thousands):

		June 30, 2010						December 31, 2009
	Carrying			Fair			Carrying				Fair
		Amount			Value		Amount				Value
FINANCIAL ASSETS:
Cash and cash equivalents	$	52,850			52,850			12,626			12,626
Securities available-for-sale		202,329			202,329			201,578			201,578
Securities held-to-maturity		13,705			13,705			13,030			13,030
Federal Reserve Bank and     Federal Home Loan Bank stock		3,030			3,030			3,031			3,031
Loans, net		456,572			468,671			457,418			467,226
FINANCIAL LIABILITIES:
Deposits		671,982			674,788			624,179			627,536
Short-term borrowings		3,469			3,469			14,265			14,265
Long-term debt		23,811			25,002			24,960			26,266

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 fair value of off-balance-sheet financial instruments at June 30, 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.

24

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 11 – Recent Accounting Pronouncements

Accounting Standards Update No. 2010-18, “Effect of a Loan Modification When the Loan is Part of a Pool That Is Accounted for as a Single Asset,” was issued by the Financial Accounting Standards Board (the “FASB”) in April 2010.  This update applies to the modification of a loan or loans that are part of a pool that is accounted for in the aggregate under the terms of Accounting Standards Codification ("ASC") 310-30-15-6.  As a result of the amendments in the update, modifications of loans that are accounted for within a pool do not result in the removal of the modified loans from the pool, even if the modification is considered a troubled debt restructuring.  The amendments in the update are effective for modifications occurring in the first interim or annual period ending on or after July 15, 2010.   LCNB does not currently account for any loans on a pooled basis and does not anticipate that adoption of this update will have a material effect on its consolidated financial statements.

Accounting Standards Update No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” was issued by the FASB in July 2010.  The update significantly expands required disclosures for an entity’s allowance for loan losses and the credit quality of its loan portfolio.  For public entities, enhanced disclosures as of the end of the reporting period will be effective for interim and annual reporting periods ending on or after December 15, 2010.  Enhanced disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.

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 June 30, 2010, and the related consolidated statements of income and comprehensive income for each of the three-month and six-month periods ended June 30, 2010 and 2009, and the related consolidated statements of shareholders’ equity and cash flows for each of the six-month periods ended June 30, 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

August 9, 2010

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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 was $2,752,000 or $0.41 basic and diluted earnings per common share and $4,964,000 or $0.74 basic and diluted earnings per common share for the three and six-month periods ended June 30, 2010, respectively.  Net income available to common shareholders was $1,634,000 or $0.24 basic and diluted earnings per common share and $3,095,000 or $0.46 basic and diluted earnings per common share for the comparable periods in 2009.  The increase in net income available to common shareholders and earnings per common share were primarily due to increases in net interest income and non-interest income and a decrease in non-interest expense.  In addition, preferred stock dividends paid and related discount accretion reduced net income available to common shareholders for the three and six months ended June 30, 2009 by $206,000 and $308,000, respectively.  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.  These positive factors were partially offset by an increase in the provision for loan losses.

LCNB’s loan portfolio continues to benefit from responsible underwriting and lending practices.  Current economic conditions, however, have contributed to an increase in loan delinquencies.  Net charge-offs for the first half of 2010 and 2009 totaled $567,000 and $174,000, respectively.  Non-accrual loans and loans past due 90 days or more and still accruing interest totaled $4,300,000 or 0.94% of total loans at June 30, 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 $2,470,000 at June 30, 2010 and December 31, 2009.

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LCNB CORP. AND SUBSIDIARIES

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

Operations (continued)

Net Interest Income

Three Months Ended June 30, 2010 vs. 2009.

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, 2010 and 2009, 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,
		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)		$	459,586		6,787		5.92%	$	448,623		$	6,820		6.10%
Interest-bearing demand deposits			8,273		17		0.82%		24,113			16		0.27%
Federal Reserve Bank stock			940		28		11.95%		940			28		11.95%
Federal Home Loan Bank stock			2,091		23		4.41%		2,091			23		4.41%
Investment securities:
	Taxable		132,810		883		2.67%		104,339			1,062		4.08%
	Non-taxable (2)		70,221		1,186		6.77%		76,111			1,076		5.67%
	Total earnings assets		673,921		8,924		5.31%		656,217			9,025		5.52%
Non-earning assets			87,305						61,882
Allowance for loan losses			(3,017)						(2,507)
	Total assets	$	758,209					$	715,592
Interest-bearing deposits		$	560,295		1,928		1.38%	$	529,517			2,370		1.80%
Short-term borrowings			5,256		4		0.31%		810			-		-%
Long-term debt			23,928		173		2.90%		19,771			156		3.16%
	Total interest-bearing liabilities		589,479		2,105		1.43%		550,098			2,526		1.84%
Demand deposits			95,092						84,948
Other liabilities			5,137						3,967
Capital			68,501						76,579
	Total liabilities and capital	$	758,209					$	715,592
Net interest rate spread (3)							3.88%							3.68%
Net interest income and net   interest margin on a taxable-   equivalent basis (4)					6,819		4.06%				$	6,499		3.97%
Ratio of interest-earning assets to   interest-bearing liabilities			114.32%						119.29%

(1)

Includes nonaccrual loans, if any.

(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 34%.

(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.