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LCNB CORP - Quarter Report: 2011 September (Form 10-Q)

form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549

FORM 10-Q

(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2011
 
o
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 incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
2 North Broadway, Lebanon, Ohio   45036
(Address of principal executive offices, including Zip Code)

(513) 932-1414
(Registrant's telephone number, including area code)

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         o 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).
x Yes         o 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 o Accelerated filer x
  Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
o Yes         x No
 
The number of shares outstanding of the issuer's common stock, without par value, as of November 8, 2011 was 6,697,982 shares.
 


 
 

 
 
LCNB CORP. AND SUBSIDIARIES

INDEX
 
2
   
2
   
2
   
3
   
4
   
5
   
6
   
7
   
35
   
36
   
46
   
47
   
PART II.  OTHER INFORMATION
48
   
Item 1.     Legal Proceedings
48
   
Item 1A.  Risk Factors
48
   
48
   
48
   
Item 4.     (Removed and Reserved)
48
   
Item 5.     Other Information
48
   
Item 6.     Exhibits
49
   
50
 
 
1

 
PART I – FINANCIAL INFORMATION
 
Item 1.  Financial Statements
LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
ASSETS:
           
Cash and due from banks
  $ 17,577       10,817  
Interest-bearing demand deposits
    15,080       182  
Total cash and cash equivalents
    32,657       10,999  
Investment securities:
               
Available-for-sale, at fair value
    268,017       235,882  
Held-to-maturity, at cost
    11,133       12,141  
Federal Reserve Bank stock, at cost
    941       939  
Federal Home Loan Bank stock, at cost
    2,091       2,091  
Loans, net
    446,295       452,350  
Premises and equipment, net
    17,496       16,017  
Goodwill
    5,915       5,915  
Bank owned life insurance
    14,689       14,242  
Other assets
    9,325       9,558  
TOTAL ASSETS
  $ 808,559       760,134  
                 
LIABILITIES:
               
Deposits:
               
Noninterest-bearing
  $ 102,348       98,994  
Interest-bearing
    587,349       539,545  
Total deposits
    689,697       638,539  
Short-term borrowings
    12,386       21,691  
Long-term debt
    21,718       23,120  
Accrued interest and other liabilities
    7,298       6,077  
TOTAL LIABILITIES
    731,099       689,427  
                 
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 7,453,173 shares at September 30, 2011 and 7,445,514 shares at December 31, 2010
    11,081       11,068  
Surplus
    15,566       15,447  
Retained earnings
    56,995       54,045  
Treasury shares at cost, 755,771 shares at September 30, 2011 and December 31, 2010
    (11,698 )     (11,698 )
Accumulated other comprehensive income, net of taxes
    5,516       1,845  
TOTAL SHAREHOLDERS’ EQUITY
    77,460       70,707  
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 808,559       760,134  
 
The accompanying notes to consolidated financial statements are an integral part of these statements.
 
 
2


LCNB CORP. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
INTEREST INCOME:
                       
Interest and fees on loans
  $ 6,294       6,748       19,289       20,379  
Interest on investment securities –
                               
Taxable
    1,036       913       2,826       2,725  
Non-taxable
    619       773       1,966       2,364  
Other investments
    27       38       124       138  
TOTAL INTEREST INCOME
    7,976       8,472       24,205       25,606  
                                 
INTEREST EXPENSE:
                               
Interest on deposits
    1,371       1,902       4,454       5,806  
Interest on short-term borrowings
    6       6       23       19  
Interest on long-term debt
    160       173       499       523  
TOTAL INTEREST EXPENSE
    1,537       2,081       4,976       6,348  
NET INTEREST INCOME
    6,439       6,391       19,229       19,258  
PROVISION FOR LOAN LOSSES
    588       268       1,476       987  
                                 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    5,851       6,123       17,753       18,271  
                                 
NON-INTEREST INCOME:
                               
Trust income
    553       479       1,572       1,389  
Service charges and fees on deposit accounts
    957       1,009       2,810       2,940  
Net gain on sales of securities
    273       48       692       176  
Bank owned life insurance income
    153       148       447       1,245  
Gains from sales of mortgage loans
    35       195       92       243  
Other operating income
    79       49       224       202  
TOTAL NON-INTEREST INCOME
    2,050       1,928       5,837       6,195  
                                 
NON-INTEREST EXPENSE:
                               
Salaries and employee benefits
    2,983       2,861       8,990       8,400  
Equipment expenses
    288       222       745       646  
Occupancy expense, net
    443       456       1,305       1,421  
State franchise tax
    190       173       582       528  
Marketing
    145       118       370       320  
Intangible amortization
    15       15       43       43  
FDIC insurance premiums
    95       269       563       716  
Other non-interest expense
    1,294       1,426       3,984       3,891  
TOTAL NON-INTEREST EXPENSE
    5,453       5,540       16,582       15,965  
INCOME BEFORE INCOME TAXES
    2,448       2,511       7,008       8,501  
PROVISION FOR INCOME TAXES
    581       561       1,640       1,725  
INCOME FROM CONTINUING OPERATIONS
    1,867       1,950       5,368       6,776  
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX
    -       39       793       177  
NET INCOME
  $ 1,867       1,989       6,161       6,953  
                                 
Dividends declared per common share
  $ 0.16       0.16       0.48       0.48  
                                 
Basic earnings per common share:
                               
Continuing operations
  $ 0.28       0.30       0.80       1.02  
Discontinued operations
    -       -       0.12       0.02  
                                 
Diluted earnings per common share:
                               
Continuing operations
  $ 0.28       0.30       0.80       1.02  
Discontinued operations
    -       -       0.12       0.02  
                                 
Weighted average common shares outstanding:
                               
Basic
    6,690,963       6,687,232       6,690,157       6,687,232  
Diluted
    6,750,807       6,740,884       6,746,568       6,737,965  
 
The accompanying notes to consolidated financial statements are an integral part of these statements.
 
 
3

 
LCNB CORP. AND SUBSIDIARIES
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net Income
  $ 1,867       1,989       6,161       6,953  
                                 
Other comprehensive income:
                               
                                 
Net unrealized gain on available-for-sale securities (net of taxes of $1,348 and $719 for the three months ended September 30, 2011 and 2010, respectively, and $2,054 and $1,554 for the nine months ended September 30, 2011 and 2010, respectively)
    2,618             1,396             3,969             3,017  
                                 
Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of taxes of $92 and $17 for the three months ended September 30, 2011 and 2010, respectively, and $235 and $61 for the nine months ended September 30, 2011 and 2010, respectively)
    (181 )     (31 )     (457 )     (115 )
                                 
Change in nonqualified pension plan unrecognized net loss (net of taxes of $3 and $9 for the three and nine months ended September 30, 2011, respectively)
    5       -       17       -  
                                 
Reclassification adjustment for recognition of nonqualified pension plan net loss (net of taxes of $3 and $7 for the three and nine months ended September 30, 2011, respectively)
    (5 )     -       (13 )     -  
                                 
Nonqualified pension plan curtailment (net of taxes of $80)
    -       -       155       -  
                                 
TOTAL COMPREHENSIVE INCOME
  $ 4,304       3,354       9,832       9,855  
 
The accompanying notes to consolidated financial statements are an integral part of these statements.
 
 
4

 
LCNB CORP. AND SUBSIDIARIES
(Dollars in thousands, except per share amounts)
(Unaudited)

   
Common
Shares
Outstanding
   
 
Common
Stock
   
 
 
Surplus
   
 
Retained
Earnings
   
 
Treasury
Shares
   
Accumulated
Other
Comprehensive
Income
   
Total
Shareholders’
Equity
 
                                           
Balance January 1, 2010
    6,687,232     $ 11,068       15,407       48,962       (11,737 )     1,915       65,615  
Net income
                            6,953                       6,953  
Net unrealized gain on available-for-sale securities, net of taxes
                                            3,017       3,017  
Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income, net of taxes
                                            (115 )     (115 )
Compensation expense relating to stock options
                    30                               30  
Common stock dividends, $0.48 per share
                            (3,210 )                     (3,210 )
Balance September 30, 2010
    6,687,232       11,068       15,437       52,705       (11,737 )     4,817       72,290  
                                                         
Balance January 1, 2011
    6,689,743     $ 11,068       15,447       54,045       (11,698 )     1,845       70,707  
Net income
                            6,161                       6,161  
Net unrealized gain on available-for-sale securities, net of taxes
                                            3,969       3,969  
Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income, net of taxes
                                            (457 )     (457 )
Change in nonqualified pension plan unrecognized net gain (loss), net of taxes
                                            17       17  
Reclassification adjustment for recognition of nonqualified pension plan net gain, net of taxes
                                            (13 )     (13 )
Nonqualified pension plan curtailment entry, net of taxes
                                            155       155  
Dividend Reinvestment and Stock Purchase Plan
    7,659       13       84                               97  
Compensation expense relating to stock options
                    35                               35  
Common stock dividends, $0.48 per share
                            (3,211 )                     (3,211 )
Balance September 30, 2011
    6,697,402       11,081       15,566       56,995       (11,698 )     5,516       77,460  
 
The accompanying notes to consolidated financial statements are an integral part of these statements.
 
 
5

 
LCNB CORP. AND SUBSIDIARIES
(In thousands)
(unaudited)
 
   
Nine Months Ended
 
   
September 30,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 6,161       6,953  
Adjustments to reconcile net income to net cash flows from operating activities:
               
Depreciation, amortization, and accretion
    2,137       2,007  
Provision for loan losses
    1,476       987  
Curtailment charge for nonqualified defined benefit retirement plan
    191       -  
Increase in cash surrender value of bank owned life insurance
    (447 )     (453 )
Bank owned life insurance death benefits in excess of cash surrender value
    -       (792 )
Realized (gain) loss on sales of securities available-for-sale
    (692 )     (176 )
Realized (gain) loss on sales of premises and equipment
    (6 )     16  
Realized gain from sale of insurance agency
    (1,503 )     -  
Realized gain from sale of repossessed assets
    (48 )     (18 )
Origination of mortgage loans for sale
    (4,871 )     (12,512 )
Realized gains from sales of mortgage loans
    (92 )     (243 )
Proceeds from sales of mortgage loans
    4,911       12,624  
Compensation expense related to stock options
    35       30  
Partial charge-off of other real estate owned
    -       389  
Changes in:
               
Accrued income receivable
    (458 )     (366 )
Other assets
    31       (63 )
Other liabilities
    (119 )     111  
NET CASH FLOWS FROM OPERATING ACTIVITIES
    6,706       8,494  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from sales of investment securities available-for-sale
    28,470       12,591  
Proceeds from maturities and calls of investment securities:
               
Available-for-sale
    43,123       46,839  
Held-to-maturity
    3,658       3,989  
Purchases of investment securities:
               
Available-for-sale
    (98,750 )     (77,025 )
Held-to-maturity
    (2,650 )     (3,435 )
Purchase of Federal Reserve Bank stock
    (2 )     -  
Proceeds from redemption of Federal Reserve Bank stock
    -       1  
Net (increase) decrease in loans
    4,255       1  
Proceeds from bank owned life insurance death benefits
    -       1,269  
Proceeds from sale of repossessed assets
    295       137  
Purchases of premises and equipment
    (2,323 )     (919 )
Proceeds from sales of premises and equipment
    16       16  
Proceeds from sale of insurance agency, net of cash disposed
    1,523       -  
NET CASH FLOWS FROM INVESTING ACTIVITIES
    (22,385 )     (16,536 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net increase (decrease) in deposits
    51,158       48,216  
Net increase (decrease) in short-term borrowings
    (9,305 )     (7,468 )
Proceeds from long-term debt
    5,000       -  
Principal payments on long-term debt
    (6,402 )     (1,493 )
Issuance of common stock
    97       -  
Cash dividends paid on common stock
    (3,211 )     (3,210 )
NET CASH FLOWS FROM FINANCING ACTIVITIES
    37,337       36,045  
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
    21,658       28,003  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    10,999       12,626  
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 32,657       40,629  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
CASH PAID DURING THE YEAR FOR:
               
Interest
  $ 5,096       6,385  
Income taxes
    2,844       2,331  
                 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
               
Transfer from loans to other real estate owned and repossessed assets
    229       170  
 
The accompanying notes to consolidated financial statements are an integral part of these statements.
 
 
6

 
LCNB CORP. AND SUBSIDIARIES
(Unaudited)
 
Note 1 - Basis of Presentation
Substantially all of the assets, liabilities and operations of LCNB Corp. ("LCNB") are attributable to its wholly-owned subsidiary, LCNB National Bank (the "Bank").  The accompanying unaudited consolidated financial statements include the accounts of LCNB and the Bank.  LCNB completed the sale of its subsidiary, Dakin Insurance Agency, Inc. (“Dakin”) on March 23, 2011.  The financial results of Dakin are included as income from discontinued operations, net of tax, in the accompanying unaudited consolidated financial statements through the date of sale.

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 and nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011.  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 2010 Annual Report on Form 10-K filed with the SEC.
 
 
7

 
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 September 30, 2011 and December 31, 2010 are summarized as follows (in thousands):

   
September 30, 2011
 
   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
U.S. Treasury notes
  $ 17,437       115       33       17,519  
U.S. Agency notes
    102,302       1,807       9       104,100  
U.S. Agency mortgage-backed securities
    46,139       1,615       82       47,672  
Corporate securities
    6,361       23       25       6,359  
Municipal securities:
                               
Non-taxable
    63,305       4,005       11       67,299  
Taxable
    21,581       851       32       22,400  
Mutual funds
    1,588       28       -       1,616  
Trust preferred securities
    549       45       19       575  
Equity securities
    476       17       16       477  
    $ 259,738       8,506       227       268,017  

   
December 31, 2010
 
   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
                         
U.S. Treasury notes
  $ 19,724       16       155       19,585  
U.S. Agency notes
    83,600       107       845       82,862  
U.S. Agency mortgage-backed securities
    31,786       1,364       56       33,094  
Corporate securities
    2,012       13       -       2,025  
Municipal securities:
                               
Non-taxable
    71,902       2,642       116       74,428  
Taxable
    22,049       302       383       21,968  
Mutual fund
    1,063       -       10       1,053  
Trust preferred securities
    549       57       2       604  
Equity securities
    249       18       4       263  
    $ 232,934       4,519       1,571       235,882  

The fair value of held-to-maturity investment securities, consisting of taxable and non-taxable municipal securities, approximates amortized cost at September 30, 2011 and December 31, 2010.
 
 
8

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 2 - Investment Securities (continued)
Substantially all securities in unrealized loss positions at September 30, 2011 have been in a loss position less than twelve months.  Management has determined that the unrealized losses at September 30, 2011 are primarily due to fluctuations in market interest rates and do not reflect credit quality deterioration of the securities.   Because LCNB does not have the intent to sell the investments and it is more likely than not that LCNB will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, LCNB does not consider these investments to be other-than-temporarily impaired.
 
Note 3 - Loans
Major classifications of loans at September 30, 2011 and December 31, 2010 are as follows (in thousands):

   
September 30,
   
December 31,
 
   
2011
    2010  
             
Commercial and industrial
  $ 32,156       36,122  
Commercial, secured by real estate
    204,174       196,136  
Residential real estate
    183,878       190,277  
Consumer
    16,047       19,691  
Agricultural
    3,245       2,966  
Other loans, including deposit overdrafts
    9,759       9,413  
      449,259       454,605  
Deferred net origination costs
    277       386  
      449,536       454,991  
Less allowance for loan losses
    3,241       2,641  
Loans, net
  $ 446,295       452,350  

 
9

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 3 - Loans (continued)
 Non-accrual, past-due, and restructured loans as of September 30, 2011 and December 31, 2010 were as follows (dollars in thousands):

   
September 30,
   
December 31,
 
   
2011
   
2010
 
Non-accrual loans
  $ 3,120       3,761  
Past-due 90 days or more and still accruing
    667       300  
Restructured loans
    9,605       9,088  
Total
  $ 13,392       13,149  
Percent to total loans
    2.98 %     2.89 %

Non-accrual loans at September 30, 2011 decreased from the balance at December 31, 2010 primarily due to the receipt of a $594,000 guarantee payment on a Small Business Administration loan during the first quarter 2011.  Restructured loans at September 30, 2011 increased from the balance at December 31, 2010 primarily due to the modification of two commercial real estate loans to the same borrower totaling $626,000 during the first quarter 2011.

Loans sold to and serviced for others are not included in the accompanying consolidated balance sheets.  The unpaid principal balances of those loans at September 30, 2011 and December 31, 2010 were $67,956,000 and $70,705,000, respectively.  Loans sold to the Federal Home Loan Mortgage Corporation during the three and nine months ended September 30, 2011 totaled $2,173,000 and $4,871,000, respectively, and $9,958,000 and $12,512,000 during the three and nine months ended September 30, 2010, respectively.
 
 
10


LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 3 – Loans (continued)
The allowance for loan losses and recorded investment in loans for the nine months ended September 30 were as follows (in thousands):

   
Commercial
& Industrial
   
Commercial,
Secured by
Real Estate
   
Residential
Real Estate
   
Consumer
   
Agricultural
   
Other
   
Unallocated
   
Total
 
September 30, 2011
                                               
Allowance for loan losses:
                                               
Balance, beginning of year
  $ 305       1,625       459       246       -       6       -       2,641  
Provision charged to expenses
    499       409       501       36       -       31       -       1,476  
Losses charged off
    (251 )     (203 )     (371 )     (183 )     -       (100 )     -       (1,108 )
Recoveries
    -       30       28       105       -       69       -       232  
Balance, end of period
  $ 553       1,861       617       204       -       6       -       3,241  
                                                                 
Ending balance:  individually evaluated for impairment
  $ 337       303       93       -       -       -       -       733  
Ending balance:  collectively evaluated for impairment
    216       1,558       524       204       -       6       -       2,508  
                                                                 
Loans:
                                                               
Ending balance
  $ 32,156       204,174       183,878       16,047       3,245       9,759       -       449,259  
Ending balance:  individually evaluated for impairment
    904       11,621       596       10       -       -       -       13,131  
Ending balance:  collectively evaluated for impairment
    31,252       192,553       183,282       16,037       3,245       9,759       -       436,128  
 
 
11

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 3 – Loans (continued)

   
Commercial
& Industrial
   
Commercial,
Secured by
Real Estate
   
Residential
Real Estate
   
Consumer
   
Agricultural
   
Other
   
Unallocated
   
Total
 
September 30, 2010
                                               
Allowance for loan losses:
                                               
Balance, beginning of year
  $ 546       1,628       491       313       -       9       11       2,998  
Provision charged to expenses
    (30 )     720       96       179       -       33       (11 )     987  
Losses charged off
    (289 )     (1,011 )     (111 )     (343 )     -       (109 )     -       (1,863 )
Recoveries
    6       -       1       88       -       73       -       168  
Balance, end of period
  $ 233       1,337       477       237       -       6       -       2,290  
                                                                 
Ending balance:  individually evaluated for impairment
  $ -       210       -       -       -       -       -       210  
Ending balance:  collectively evaluated for impairment
    233       1,127       477       237       -       6       -       2,080  
                                                                 
Loans:
                                                               
Ending balance
  $ 35,853       193,422       194,703       21,384       3,191       9,415       -       457,968  
Ending balance:  individually evaluated for impairment
    947       10,712       533       -       -       -       -       12,192  
Ending balance:  collectively evaluated for impairment
    34,906       182,710       194,170       21,384       3,191       9,415       -       445,776  
 
 
12

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 3 – Loans (continued)
LCNB uses a risk-rating system to quantify loan quality.  A loan is assigned to a risk category based on relevant information about the ability of the borrower to service the debt including, but not limited to, current financial information, historical payment experience, credit documentation, public information, and current economic trends.  The categories used are:

 
·
Pass – loans categorized in this category are higher quality loans that do not fit any of the other categories described below.
 
 
·
Other Assets Especially Mentioned (OAEM) - loans in this category are currently protected but are potentially weak.  These loans constitute a risk but not to the point of justifying a classification of substandard.  The credit risk may be relatively minor yet constitute an undue risk in light of the circumstances surrounding a specific asset.
 
 
·
Substandard – loans in this category are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the possibility that LCNB will sustain some loss if the deficiencies are not corrected.
 
 
·
Doubtful – loans classified in this category have all the weaknesses inherent in loans classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
 
 
13

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 3 – Loans (continued)
An analysis of LCNB’s loan portfolio by credit quality indicators at September 30, 2011 and December 31, 2010 is as follows (in thousands):

   
No Grade
   
Pass
   
OAEM
   
Substandard
   
Doubtful
   
Total
 
September 30, 2011
                                   
Commercial & industrial
  $ 1,094       26,975       1,101       2,408       578       32,156  
Commercial, secured by real estate
    2,831       189,346       1,292       8,592       2,113       204,174  
Residential real estate
    18,404       161,527       1,569       2,296       82       183,878  
Consumer
    405       15,504       -       117       21       16,047  
Agricultural
    373       1,472       -       1,400       -       3,245  
Other
    192       9,567       -       -       -       9,759  
Total
  $ 23,299       404,391       3,962       14,813       2,794       449,259  
                                                 
December 31, 2010
                                               
Commercial & industrial
  $ 1,299       32,421       1,177       1,225       -       36,122  
Commercial, secured by real estate
    2,053       179,710       4,897       8,574       902       196,136  
Residential real estate
    17,346       170,900       264       1,702       65       190,277  
Consumer
    394       19,144       -       72       81       19,691  
Agricultural
    247       2,719       -       -       -       2,966  
Other
    116       9,297       -       -       -       9,413  
Total
  $ 21,455       414,191       6,338       11,573       1,048       454,605  

 
14


LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 3 – Loans (continued)
A loan portfolio aging analysis at September 30, 2011 and December 31, 2010 is as follows (in thousands):

   
30-59 Days
Past Due
   
60-89 Days
Past Due
   
Greater Than
90 Days
   
Total
Past Due
   
Current
   
Total Loans
Receivable
   
Total Loans
Greater Than
90 Days and
Accruing
 
                                           
September 30, 2011
                                         
Commercial & industrial
  $ -       -       578       578       31,578       32,156       578  
Commercial, secured by real estate
    -       110       2,113       2,223       201,951       204,174       -  
Residential real estate
    440       108       887       1,435       182,443       183,878       80  
Consumer
    118       102       9       229       15,818       16,047       9  
Agricultural
    -       -       -       -       3,245       3,245       -  
Other
    192       -       -       192       9,567       9,759       -  
Total
  $ 750       320       3,587       4,657       444,602       449,259       667  
                                                         
December 31, 2010
                                                       
Commercial & industrial
  $ 138       -       595       733       35,389       36,122       1  
Commercial, secured by real estate
    753       -       1,766       2,519       193,617       196,136       114  
Residential real estate
    482       36       698       1,216       189,061       190,277       110  
Consumer
    231       54       76       361       19,330       19,691       75  
Agricultural
    -       -       -       -       2,966       2,966       -  
Other
    5       -       -       5       9,408       9,413       -  
Total
  $ 1,609       90       3,135       4,834       449,771       454,605       300  
 
 
15

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 3 – Loans (continued)
Impaired loans at September 30, 2011 and December 31, 2010 were as follows (in thousands):

   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
September 30, 2011
                             
With no related allowance recorded:
                             
Commercial & industrial
  $ -       -       -       -       -  
Commercial, secured by real estate
    6,897       6,897       -       7,009       216  
Residential real estate
    332       332       -       332       -  
Consumer
    1       1       -       1       -  
Total
    7,230       7,230       -       7,342       216  
                                         
With an allowance recorded:
                                       
Commercial & industrial
    567       904       337       1,181       44  
Commercial, secured by real estate
    4,421       4,724       303       4,943       117  
Residential real estate
    172       264       92       255       -  
Consumer
    8       9       1       5       -  
Total
    5,168       5,901       733       6,384       161  
                                         
Total:
                                       
Commercial & industrial
    567       904       337       1,181       44  
Commercial, secured by real estate
    11,318       11,621       303       11,952       333  
Residential real estate
    504       596       92       587       -  
Consumer
    9       10       1       6       -  
Total
  $ 12,398       13,131       733       13,726       377  

 
16

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 3 – Loans (continued)

   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
December 31, 2010
                             
With no related allowance recorded:
                             
Commercial & industrial
  $ 594       594       -       751       9  
Commercial, secured by real estate
    8,350       8,350       -       9,058       372  
Residential real estate
    533       533       -       534       -  
Total
    9,477       9,477       -       10,343       381  
                                         
With an allowance recorded:
                                       
Commercial & industrial
    356       476       120       693       29  
Commercial, secured by real estate
    2,974       3,150       176       3,403       142  
Residential real estate
    -       -       -       -       -  
Total
  $ 3,330       3,626       296       4,096       171  
                                         
Total:
                                       
Commercial & industrial
  $ 950       1,070       120       1,444       38  
Commercial, secured by real estate
    11,324       11,500       176       12,461       514  
Residential real estate
    533       533       -       534       -  
Total
  $ 12,807       13,103       296       14,439       552  

Non-accrual loans at September 30, 2011 and December 31, 2010 were as follows (in thousands):

   
September 30,
2011
   
December 31,
2010
 
             
Commercial and industrial
  $ -       595  
Commercial, secured by real estate
    2,113       2,377  
Residential real estate
    1,007       789  
      3,120       3,761  
 
 
17

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 3 – Loans (continued)
Loan modifications that were classified as troubled debt restructurings during the three and nine months ended September 30, 2011 and 2010 were as follows (dollars in thousands):

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
Number
of Loans
   
Balance at
Modification
   
Number
of Loans
   
Balance at
Modification
   
Number
of Loans
   
Balance at
Modification
   
Number
of Loans
   
Balance at
Modification
 
                                                 
Commercial and industrial
    -     $ -       -     $ -       1     $ 204       -     $ -  
Commercial, secured by real estate
    2       626       1       1,170       2       626       2       3,505  
Residential real estate
    -       -       -       -       5       64       -       -  
Consumer
    -       -       -       -       3       11       -       -  
      2     $ 626       1     $ 1,170       11     $ 905       2     $ 3,505  

Each restructured loan is separately negotiated with the borrower and includes terms and conditions that reflect the borrower’s ability to pay the debt as modified.  Modifications may include interest only payments for a period of time, temporary or permanent reduction of the loan’s interest rate, or extensions of the maturity date.

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

Troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date were as follows (dollars in thousands):

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
Number
of Loans
   
Recorded
Balance
   
Number of
Loans
   
Recorded
Balance
   
Number of
Loans
   
Recorded
Balance
   
Number of
Loans
   
Recorded
Balance
 
                                                 
Commercial and industrial
    -     $ -       -     $ -       -     $ -       1     $ 595  
Commercial, secured by real estate
    -       -       -       -       -       -       1       750  
      -     $ -       -     $ -       -     $ -       2     $ 1,345  
 
 
18

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 3 – Loans (continued)
As a result of adopting the amendments in Accounting Standards Update No. 2011-02, “Receivables (Topic 310):  A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” LCNB reassessed all restructurings that occurred on or after the beginning of the current fiscal year (January 1, 2011) for identification as troubled debt restructurings. LCNB identified as troubled debt restructurings certain receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology. Upon identifying those receivables as troubled debt restructurings, LCNB identified them as impaired under the guidance in Section 310-10-35. The amendments in Accounting Standards Update No. 2011-02 require prospective application of the impairment measurement guidance in Section 310-10-35 for those receivables newly identified as impaired. At the end of the first interim period of adoption (September 30, 2011), the recorded investment in receivables for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are now impaired under Section 310-10-35 was $192,000 and the allowance for credit losses associated with those receivables, on the basis of a current evaluation of loss, was $1,000.
 
Note 4 – Other Real Estate Owned
Other real estate owned includes property acquired through foreclosure or deed-in-lieu of foreclosure and also includes property deemed to be in-substance foreclosed and are included in “other assets” in the consolidated balance sheets.  Changes in other real estate owned were as follows (in thousands):

   
Nine Months Ended
September 30,
 
   
2011
   
2010
 
Balance, beginning of year
  $ 2,088       2,424  
Additions
    -       104  
Reductions due to valuation write downs
    -       (389 )
Balance, end of period
  $ 2,088       2,139  

Other real estate owned at September 30, 2011 consisted of two commercial properties and one single-family residential home.  Other real estate owned at September 30, 2010 consisted of two commercial properties and two single-family residential homes.  Additions for the 2010 period consisted of one single family residential home.
 
 
19

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 5 – Borrowings
Funds borrowed from the Federal Home Loan Bank of Cincinnati at September 30, 2011 and December 31, 2010 were as follows (dollars in thousands):

   
Current
Interest
Rate
   
September 30,
2011
   
December 31,
2010
 
                   
Fixed Rate Advances, due at maturity:
                 
Advance due February 2011
    2.10 %   $ -       5,000  
Advance due August 2012
    1.99 %     6,000       6,000  
Advance due January 2015
    2.00 %     5,000       -  
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 %     2,576       3,319  
Advance due March 2019
    2.82 %     3,142       3,801  
            $ 21,718       23,120  

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 $143 million and $148 million at September 30, 2011 and December 31, 2010, respectively.  Additionally, LCNB was required to hold minimum levels of FHLB stock, based on the outstanding borrowings.

Short-term borrowings at September 30, 2011 and December 31, 2010 are as follows (dollars in thousands):

   
September 30, 2011
   
December 31, 2010
 
   
Amount
   
Rate
   
Amount
   
Rate
 
U.S. Treasury demand note
  $ 1,038       - %   $ 1,295       - %
Federal funds purchased
    -       - %     7,000       0.50 %
Line of credit
    -       - %     3,026       1.00 %
Repurchase agreements
    11,348       0.15 %     10,370       0.30 %
    $ 12,386       0.14 %   $ 21,691       0.44 %
 
Note 6 - 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.
 
 
20

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 6 – Commitments and Contingent Liabilities (continued)
LCNB offers the Bounce Protection product, a customer deposit overdraft program, which is offered as a service and does not constitute a contract between the customer and LCNB.

LCNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.  Financial instruments whose contract amounts represent off-balance-sheet credit risk at September 30, 2011 and December 31, 2010 were as follows (in thousands):

   
September 30,
   
December 31,
 
   
2011
   
2010
 
Commitments to extend credit:
           
Commercial loans
  $ 8,206       1,856  
Other loans
               
Fixed rate
    2,683       1,200  
Adjustable rate
    1,334       480  
Unused lines of credit:
               
Fixed rate
    2,846       1,773  
Adjustable rate
    51,217       67,038  
Unused Bounce Protection amounts on demand and NOW accounts
    9,920       10,031  
Standby letters of credit
    5,653       6,528  
    $ 81,859       88,906  

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 September 30, 2011 and December 31, 2010, outstanding guarantees of approximately $624,000 and $998,000, respectively, were issued to developers and contractors.  These guarantees generally are fully secured and have varying maturities.  In addition, LCNB has a participation in four letters of credit securing payment of principal and interest on a bond issue.  The participation amounts at September 30, 2011 and December 31, 2010 totaled approximately $5.0 million and $5.5 million, respectively.  The letters of credit have a final maturity date of July 15, 2014, as extended.

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.
 
 
21


LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 6 – Commitments and Contingent Liabilities (continued)
Capital expenditures include the construction or acquisition of new office buildings, improvements to LCNB’s 26 offices, purchases of furniture and equipment, and additions or improvements to LCNB’s information technology system.  Material commitments for capital expenditures outstanding as of September 30, 2011 totaled approximately $202,000.

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 7 – Regulatory Capital
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.
 
 
22

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 7 – Regulatory Capital (continued)
A summary of the regulatory capital and capital ratios of LCNB follows (dollars in thousands):

   
At
   
At
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
             
Regulatory Capital:
           
Shareholders' equity
  $ 77,460       70,707  
Goodwill and other intangibles
    (6,086 )     (6,413 )
Accumulated other comprehensive (income) loss
    (5,515 )     (1,845 )
Tier 1 risk-based capital
    65,859       62,449  
                 
Eligible allowance for loan losses
    3,241       2,641  
Total risk-based capital
  $ 69,100       65,090  
                 
Capital ratios:
               
Total risk-based (required 8.00%)
    14.57 %     13.82 %
Tier 1 risk-based (required 4.00%)
    13.89 %     13.26 %
Leverage (required 3.00%)
    8.31 %     8.12 %
 
Note 8 – Employee Benefits
LCNB participates in a noncontributory defined benefit retirement multi-employer plan that covers substantially all regular full-time employees hired before January 1, 2009.

Employees of LCNB also participate in a defined contribution 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 hired before January 1, 2009 who received a benefit reduction under certain amendments to the defined benefit retirement plan 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.
 
 
23

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 8 – Employee Benefits (continued)
Funding and administrative costs of the qualified noncontributory defined benefit retirement plan and 401(k) plan charged to salaries and employee benefits in the consolidated statements of income for the three and nine-month periods ended September 30, 2011 and 2010 were as follows (in thousands):

   
For the Three Months
   
For the Nine Months
 
   
Ended September 30,
   
Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Qualified noncontributory defined benefit retirement plan
  $ 198       71       456       192  
                                 
401(k) plan
    75       76       232       229  

Certain highly compensated employees participate in a nonqualified defined benefit retirement plan.  The nonqualified plan ensures that participants receive the full amount of benefits to which they would have been entitled under the noncontributory defined benefit retirement plan in the absence of limits on benefit levels imposed by certain sections of the Internal Revenue Code.

The components of net periodic pension cost of the nonqualified defined benefit retirement plan for the three and nine months ended September 30, 2011 and 2010 are summarized as follows (in thousands):

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Service cost
  $ 23       44       89       131  
Interest cost
    9       8       26       24  
Amortization of unrecognized prior service cost
    7       12       25       36  
Amortization of unrecognized net gain
    (8 )     (1 )     (20 )     (1 )
Net periodic pension cost
  $ 31       63       120       190  

Amounts recognized in accumulated other comprehensive income, net of deferred federal income taxes, at September 30, 2011 and December 31, 2010 for the nonqualified defined benefit retirement plan consists of (in thousands):

   
September 30,
   
December 31,
 
   
2011
   
2010
 
Net actuarial gain
  $ (103 )     (117 )
Past service cost
    63       225  
Total net accumulated other comprehensive (income) loss
  $ (50 )     108  

 
24

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 9 - Stock Based Compensation
LCNB established an Ownership Incentive Plan (the "Plan") during 2002 that allows for stock-based awards to eligible employees, as determined by the Board of Directors.  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 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 September 30, 2011 were as follows:

     
Outstanding Stock Options
   
Exercisable Stock Options
 
 
 
Exercise
Price Range
   
 
 
 
Number
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life (Years)
   
 
 
 
Number
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life (Years)
 
                                       
$ 9.00 - $10.99       29,110     $ 9.00       6.5       13,891     $ 9.00       5.6  
$ 11.00 - $12.99       59,799       11.89       7.3       18,918       12.08       4.4  
$ 13.00 - $14.99       11,056       13.09       1.3       11,056       13.09       1.3  
$ 17.00 - $18.99       24,158       18.16       3.4       22,844       18.17       3.3  
          124,123       12.54       5.8       66,709       13.69       3.8  

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

   
2011
   
2010
 
   
 
 
Options
   
Weighted
Average
Exercise
Price
   
 
 
Options
   
Weighted
Average
Exercise
Price
 
Outstanding, January 1
    99,040     $ 12.71       78,242     $ 13.04  
Granted
    25,083       11.85       20,798       11.50  
Exercised
    -       -       -       -  
Outstanding, September 30
    124,123       12.54       99,040       12.71  
Exercisable, September 30
    66,709       13.69       41,770       14.78  

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 September 30, 2011 that were “in the money” (market price greater than exercise price) was $217,000.  The aggregate intrinsic value at that date for only the options that were exercisable was $87,000.  The intrinsic value changes based on changes in the market value of LCNB’s stock.
 
 
25

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 9 - Stock Based Compensation (continued)
The fair value of options granted is estimated at the date of grant using the Black-Scholes option-pricing model.  The following table shows the estimated weighted-average fair value and the assumptions used in calculating that value for options granted during the nine month periods ended September 30:

   
2011
   
2010
 
Estimated weighted-average fair value of options granted
  $ 2.09        2.27  
Risk-free interest rate
    2.84 %     3.34 %
Average dividend yield
    4.43 %     4.31 %
Volatility factor of the expected market price of LCNB's common stock
    27.37 %     28.32 %
Average life in years
    6.5       7.0  

Total expense related to options included in salaries and employee benefits in the consolidated statements of income for the three and nine months ended September 30, 2011 were $13,000 and $35,000, respectively, and $11,000 and $30,000 for the three and nine months ended September 30, 2010, respectively.

A total of 2,511 restricted shares were granted to an executive officer in February 2010 and vested in November 2010.  Until they vested, they were restricted from sale, transfer, or assignment in accordance with the terms of the agreement under which they were issued.  At the date of vesting, the shares were issued from treasury stock and, therefore, did not affect the number of securities remaining available for future issuance in the table above.  No restricted shares were granted prior to February 2010 or during the first nine months of 2011.
 
 
26

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 10 - 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 nine months ended September 30, 2011 and 2010 (dollars in thousands, except share and per share data):

   
For the Three Months
   
For the Nine Months
 
   
Ended September 30,
   
Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Income from continuing operations
  $ 1,867       1,950       5,368       6,776  
Income from discontinued operations,
net of tax
    -       39       793       177  
Net income
  $ 1,867       1,989       6,161       6,953  
                                 
Weighted average number of shares outstanding used in the calculation of basic earnings per common share
      6,690,963         6,687,232         6,690,157         6,687,232  
                                 
Add dilutive effect of:
                               
Stock options
    5,003       3,435       4,426       3,029  
Restricted stock
    -       2,511       -       2,033  
Stock warrant
    54,841       47,706       51,985       45,671  
      59,844       53,652       56,411       50,733  
                                 
Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share
      6,750,807         6,740,884         6,746,568         6,737,965  
                                 
Basic earnings per common share:
                               
Continuing operations
  $ 0.28       0.30       0.80       1.02  
Discontinued operations
    -       -       0.12       0.02  
                                 
Diluted earnings per common share:
                               
Continuing operations
  $ 0.28       0.30       0.80       1.02  
Discontinued operations
    -       -       0.12       0.02  
 
 
27

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 11 - 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.  The investments in mutual funds are considered to have level 3 inputs because LCNB does not have precise information about the methods used by the mutual fund companies to assign fair values or full information on the investments made by the funds.  Additionally, LCNB Corp. owns trust preferred securities in various financial institutions and equity securities in non-financial companies.   Market quotations (level 1) are used to determine fair values for these investments.
 
 
28

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 11 - Fair Value Measurements (continued)
The following table summarizes the valuation of LCNB’s available-for-sale securities by input levels as of September 30, 2011 and December 31, 2010 (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)
 
September 30, 2011
                       
Available-for-sale securities:
                       
U.S. Treasury notes
  $ 17,519       17,519       -       -  
U.S. Agency notes
    104,100       -       104,100       -  
U.S. Agency mortgage-
backed securities
    47,672       -       47,672       -  
Corporate securities
    6,359       6,359       -       -  
Municipal securities:
                               
Non-taxable
    67,299       -       67,299       -  
Taxable
    22,400       -       22,400       -  
Mutual funds
    1,616       -       -       1,616  
Trust preferred securities
    575       575       -       -  
Equity securities
    477       477       -       -  
Totals
  $ 268,017       24,930       241,471       1,616  
                                 
December 31, 2010
                               
Available-for-sale securities:
                               
U.S. Treasury notes
  $ 19,585       19,585       -       -  
U.S. Agency notes
    82,862       -       82,862       -  
U.S. Agency mortgage-
backed securities
    33,094       -       33,094       -  
Corporate securities
    2,025       2,025       -       -  
Municipal securities:
                               
Non-taxable
    74,428       -       74,428       -  
Taxable
    21,968       -       21,968       -  
Mutual fund
    1,053       -       -       1,053  
Trust preferred securities
    604       604       -       -  
Equity securities
    263       263       -       -  
Totals
  $ 235,882       22,477       212,352       1,053  
 
 
29

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 11- 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 nine months ended September 30, 2011 and 2010 (in thousands):

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
   
Mutual
Funds
   
Total
   
Mutual
Funds
   
Equity
Securities
 
Beginning balance
  $ 1,053       561       538       23  
Purchases
    500       -       -       -  
Dividends reinvested
    25       14       14       -  
Net change in unrealized gains (losses) included in other comprehensive income
    38       18       18       -  
Ending balance
  $ 1,616       593       570       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.
 
 
30


LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 11- 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 September 30, 2011 and December 31, 2010 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)
 
September 30, 2011
                       
Impaired loans
  $ 5,168       -       1,167       4,001  
Other real estate owned
    2,088       -       2,088       -  
Repossessed assets
    8       -       -       8  
Totals
  $ 7,264       -       3,255       4,009  
                                 
December 31, 2010
                               
Impaired loans
  $ 4,080       -       1,430       2,650  
Other real estate owned
    2,088       -       2,088       -  
Repossessed assets
    26       -       -       26  
Totals
  $ 6,194       -       3,518       2,676  

Carrying amounts and estimated fair values of financial instruments as of September 30, 2011 and December 31, 2010 were as follows (in thousands):

   
September 30, 2011
   
December 31, 2010
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Amount
   
Value
   
Amount
   
Value
 
                         
FINANCIAL ASSETS:
                       
Cash and cash equivalents
  $ 32,657       32,657       10,999       10,999  
Investment securities:
                               
Available-for-sale
    268,017       268,017       235,882       235,882  
Held-to-maturity
    11,133       11,133       12,141       12,141  
Federal Reserve Bank stock
    941       941       939       939  
Federal Home Loan Bank stock
    2,091       2,091       2,091       2,091  
Loans, net
    446,295       459,453       452,350       465,053  
                                 
FINANCIAL LIABILITIES:
                               
Deposits
    689,697       695,965       638,539       642,734  
Short-term borrowings
    12,386       12,386       21,691       21,691  
Long-term debt
    21,718       22,986       23,120       24,217  
 
 
31

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 11- Fair Value of Financial Instruments (continued)
The fair value of off-balance-sheet financial instruments at September 30, 2011 and December 31, 2010 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.
 
 
32

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 12 – Discontinued Operations
LCNB sold its insurance agency subsidiary on March 23, 2011 and therefore its financial results are reported in the income statements as income from discontinued operations, net of taxes.  Income from discontinued operations for the nine months ended September 30, 2011 include the gain recognized from the sale less certain related closing costs, taxes, and a curtailment expense recognized in LCNB’s nonqualified defined benefit retirement plan due to the sale.  The following table summarizes income from discontinued operations for the periods indicated (in thousands):

   
For the Three Months
   
For the Nine Months
 
   
Ended September 30,
   
Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Dakin Insurance Agency financial results:
                       
Revenue
  $ -       380       381       1,225  
Non-interest expenses
    -       322       301       957  
Income from operations before income taxes
    -       58       80       268  
Gain from sale of insurance agency
    -       -       1,503       -  
Closing costs related to sale
    -       -       (60 )     -  
Curtailment expense on nonqualified defined benefit retirement plan
    -       -       (191 )     -  
Provision for income taxes
    -       (19 )     (539 )     (91 )
Total income (loss) from discontinued operations, net of tax
  $ -       39       793       177  
 
Note 13 – Recent Accounting Pronouncements
Accounting Standards Update No. 2011-04, “Fair Value Measurement (ASC Topic 820):  Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” was issued by the Financial Accounting Standards Board (the “FASB”) in May 2011.  The update does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within IFRS or U.S. GAAP.  It supersedes most of the guidance in ASC Topic 820, although many of the changes are clarifications of existing guidance or wording changes to align with IFRS 13.  Changes to current guidance include:
 
·
Clarification on using premiums and discounts in calculating fair value when level 2 or 3 inputs are used,
 
·
An expansion of disclosures about fair value measurements, and
 
·
The categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position, but for which the fair value is required to be disclosed.

The amendments in the update must be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after Dec. 15, 2011. Early application by public entities is not permitted.  The required disclosures will be included in LCNB’s financial statements beginning January 1, 2012.
 
 
33

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 13 – Recent Accounting Pronouncements (continued)
Accounting Standards Update No. 2011-05, “Comprehensive Income (ASC Topic 220):  Presentation of Comprehensive Income,” was issued by the FASB in June 2011.  The update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity.  Instead, a company is required to report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements.  The amendments in the update are effective for public companies during the interim and annual periods beginning after Dec. 15, 2011 with early adoption permitted.  LCNB’s presentation of the Consolidated Statements of Comprehensive Income already complies with the requirements of the update.

Accounting Standards Update No. 2011-08, “Intangibles – Goodwill and Other (ASC Topic 350):  Testing Goodwill for Impairment,” was issued by the FASB in September 2011.  The update simplifies the goodwill impairment test by allowing companies an option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.  Under that option, a company no longer will be required to calculate the fair value of a reporting unit unless the company determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount.  A company has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test.  The company may resume performing the qualitative assessment in any subsequent period.  The guidance includes examples of the types of events and circumstances to consider in conducting the qualitative assessment.  The update also eliminates the provision allowing a company to carry forward its detailed calculation of a reporting unit’s fair value from a prior year.  The amendments in the update will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted.  LCNB management does not anticipate that adoption of this update will have a material effect on its consolidated financial statements.

Accounting Standards Update No. 2011-09, “Compensation-Retirement Benefits-Multiemployer Plans (ASC Subtopic 715-80):  Disclosures about an Employer’s Participation in a Multiemployer Plan,” was issued by the FASB in September 2011.  The update requires companies to provide enhanced disclosures relating to participation in multiemployer pension plans, including:
 
·
The amount of contributions made to each significant plan and to all plans in the aggregate,
 
·
An indication of whether the company’s contributions represent more than 5% of total contributions to the plan,
 
·
An indication of which plans are subject to a funding improvement plan,
 
·
Information about the funded status of the plan, and
 
·
A description of the nature and effect of any changes affecting comparability between for each period in which an income statement is presented.

For public companies, the amendments in the update are effective for annual periods ending after December 15, 2011.  The required disclosures will be included in LCNB’s financial statements for the year ended December 31, 2011.
 
 
34

 
 
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 September 30, 2011, and the related consolidated statements of income and comprehensive income for each of the three-month and nine-month periods ended September 30, 2011 and 2010, and the related consolidated statements of shareholders’ equity and cash flows for each of the nine-month periods ended September 30, 2011 and 2010.  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, 2010, 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 March 1, 2011, 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, 2010, 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      
November 8, 2011
     
 
 
35

 
LCNB CORP. AND SUBSIDIARIES


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
Net income for the three and nine months ended September 30, 2011 was $1,867,000 (total basic and diluted earnings per common share of $0.28) and $6,161,000 (total basic and diluted earnings per common share of $0.92), respectively.  This compares to $1,989,000 (total basic and diluted earnings per common share of $0.30) and $6,953,000 (total basic and diluted earnings per common share of $1.04) for the same three and nine-month periods in 2010.

Net income from continuing operations for the three and nine months ended September 30, 2011 was $1,867,000 and $5,368,000, respectively.  This compares to $1,950,000 and $6,776,000 for the comparable periods in 2010.  Net income from discontinued operations, net of taxes, for the nine months ended September 30, 2011 was $793,000, which is a $616,000 increase from the same period in 2010.  This increase was caused by the sale of LCNB’s insurance agency subsidiary, Dakin Insurance Agency, Inc., during the first quarter 2011 and reflects the gain recognized on the sale less certain related closing costs, taxes, and a curtailment expense recognized in LCNB’s nonqualified defined benefit retirement plan due to the sale.
 
Net loan charge-offs for the first nine months of 2011 and 2010 totaled $876,000 and $1,695,000, respectively.  Non-accrual loans and loans past due 90 days or more and still accruing interest totaled $3,787,000 or 0.84% of total loans at September 30, 2011, compared to $4,061,000 or 0.89% of total loans at December 31, 2010.  The decrease was primarily due to the receipt of a guarantee payment on a Small Business Administration loan that had been classified as non-accrual at December 31, 2010.  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 $2,095,000 at September 30, 2011 and $2,114,000 at December 31, 2010.  The decrease is due to the sale of other repossessed assets during 2011.
 
 
36

 
LCNB CORP. AND SUBSIDIARIES

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

Net interest income for the three months ended September 30, 2011 increased $48,000 over the comparative period in 2010 primarily due to an increase in average interest earning assets, partially offset by a decrease in the net interest margin.  Net interest income for the nine months ended September 30, 2011 decreased $29,000 from the comparative period in 2010 primarily due to a decrease in the net interest margin, partially offset by an increase in interest earning assets.

Non-interest income for the three months ended September 30, 2011 was $122,000 greater than the comparable period in 2010 primarily due to an increase in net gains from the sale of investment securities, partially offset by a decrease in net gains from the sale of mortgage loans.  Non-interest income for the nine-month period in 2011 was $358,000 less than the comparative period in 2010 primarily due to the absence in 2011 of death benefits received from bank owned life insurance during the second quarter 2010 and a decrease in net gains from the sale of mortgage loans.  These decreases were partially offset by an increase in net gains from the sale of investment securities.

Non-interest expense for the three months ended September 30, 2011 decreased $87,000 compared to the same period in 2010 primarily due to decreases in FDIC insurance premiums and foreclosed real estate write downs and holding costs, partially offset by an increase in employee salaries and benefits.  Non-interest expense for the first nine months of 2011 was $617,000 greater than the comparable period in 2010 primarily due to increases in employee salaries and benefits, partially offset by decreases in FDIC insurance premiums and on foreclosed real estate write downs and holding costs.
 
 
37

 
LCNB CORP. AND SUBSIDIARIES

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

Net Interest Income

Three Months Ended September 30, 2011 vs. 2010.
LCNB's primary source of earnings is net interest income, which is the difference between earnings from loans and other investments and interest paid on deposits and other liabilities.  The following table presents, for the three months ended September 30, 2011 and 2010, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resulting average yields earned or rates paid.

   
Three Months Ended September 30,
 
    2011     2010  
   
Average
   
Interest
   
Average
   
Average
   
Interest
   
Average
 
   
Outstanding
   
Earned/
   
Yield/
   
Outstanding
   
Earned/
   
Yield/
 
   
Balance
   
Paid
   
Rate
   
Balance
   
Paid
   
Rate
 
      (Dollars in thousands)  
Loans (1)
  $ 454,192       6,294       5.50 %     458,952       6,748       5.83 %
Interest-bearing demand deposits
    10,641       6       0.22 %     25,698       15       0.23 %
Federal Reserve Bank stock
    941       -       - %     939       -       - %
Federal Home Loan Bank stock
    2,091       21       3.98 %     2,091       23       4.36 %
Investment securities:
                                               
Taxable
    198,189       1,036       2.07 %     138,480       913       2.62 %
Non-taxable (2)
    76,550       938       4.86 %     85,871       1,171       5.41 %
Total earnings assets
    742,604       8,295       4.43 %     712,031       8,870       4.94 %
Non-earning assets
    65,271                       68,050                  
Allowance for loan losses
    (3,030 )                     (3,017 )                
Total assets
  $ 804,845                       777,064                  
                                                 
Interest-bearing deposits
  $ 586,380       1,371       0.93 %     574,853       1,902       1.31 %
Short-term borrowings
    12,050       6       0.20 %     6,379       6       0.37 %
Long-term debt
    21,834       160       2.91 %     23,584       173       2.91 %
Total interest-bearing liabilities
    620,264       1,537       0.98 %     604,816       2,081       1.37 %
Demand deposits
    101,513                       94,094                  
Other liabilities
    6,725                       6,527                  
Capital
    76,343                       71,627                  
Total liabilities and capital
  $ 804,845                       777,064                  
                                                 
Net interest rate spread (3)
                    3.45 %                     3.57 %
                                                 
Net interest income and net interest margin on a taxable- equivalent basis (4)
              6,758       3.61 %               6,789       3.78 %
                                                 
Ratio of interest-earning assets to interest-bearing liabilities
    119.72 %                     117.73 %                
 
(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.
 
 
38

 
LCNB CORP. AND SUBSIDIARIES

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

The following table presents the changes in taxable-equivalent basis interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the three months ended September 30, 2011 as compared to the same period in 2010.  Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each.

   
Three Months Ended
 
   
September 30, 2011 vs. 2010
 
   
Increase (decrease) due to:
 
   
Volume
   
Rate
   
Total
 
   
(In thousands)
 
Interest-earning Assets:
                 
Loans
  $ (69 )     (385 )     (454 )
Interest-bearing demand deposits
    (9 )     -       (9 )
Federal Reserve Bank stock
    -       -       -  
Federal Home Loan Bank stock
    -       (2 )     (2 )
Investment securities:
                       
Taxable
    339       (216 )     123  
Nontaxable
    (120 )     (113 )     (233 )
Total interest income
    141       (716 )     (575 )
                         
Interest-bearing Liabilities:
                       
Deposits
    37       (568 )     (531 )
Short-term borrowings
    4       (4 )     -  
Long-term debt
    (13 )     -       (13 )
Total interest expense
    28       (572 )     (544 )
Net interest income
  $ 113       (144 )     (31 )

Net interest income on a fully tax-equivalent basis for the three months ended September 30, 2011 totaled $6,758,000, a decrease of $31,000 from the comparable period in 2010.  The decrease resulted from a decrease in total interest income of $575,000, largely offset by a decrease in total interest expense of $544,000.

The decrease in total interest income was due to a 51 basis point (one basis point equals 0.01%) decrease in the average rate earned on earning assets, partially offset by the effect of a $30.6 million increase in average earning assets.  The increase in interest earning assets was due to a $59.7 million increase in average taxable investment securities.  The decrease in the average rate earned on earning assets was primarily due to general decreases in market interest rates.
 
 
39

 
LCNB CORP. AND SUBSIDIARIES

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

The decrease in total interest expense was primarily due to a 39 basis point decrease in the average rate paid, slightly offset by the effect of a $15.4 million increase in average interest-bearing liabilities.  The decrease in the average rate paid on interest-bearing liabilities was primarily due to general decreases in market interest rates.  The increase in average interest-bearing liabilities was due to a $11.5 million increase in average interest-bearing deposits primarily resulting from an increase in public funds and continuing consumer trends and a $5.7 million increase in average short-term borrowings.

Nine Months Ended September 30, 2011 vs. 2010.
The following table presents, for the nine months ended September 30, 2011 and 2010, 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.

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
   
Average
   
Interest
   
Average
   
Average
   
Interest
   
Average
 
 
Outstanding
   
Earned/
   
Yield/
   
Outstanding
   
Earned/
   
Yield/
 
   
Balance
   
Paid
   
Rate
   
Balance
   
Paid
   
Rate
 
         
(Dollars in thousands)
             
                                     
Loans (1)
  $ 457,663       19,289       5.64 %     459,015       20,379       5.94 %
Interest-bearing demand deposits
    15,878       28       0.24 %     22,649       40       0.24 %
Federal Reserve Bank stock
    940       28       3.98 %     939       28       3.99 %
Federal Home Loan Bank stock
    2,091       68       4.35 %     2,091       70       4.48 %
Investment securities:
                                               
Taxable
    171,186       2,826       2.21 %     125,551       2,725       2.90 %
Non-taxable (2)
    78,773       2,979       5.06 %     85,184       3,582       5.62 %
Total earnings assets
    726,531       25,218       4.64 %     695,429       26,824       5.16 %
Non-earning assets
    65,978                       67,471                  
Allowance for loan losses
    (2,861 )                     (3,013 )                
Total assets
  $ 789,648                       759,887                  
                                                 
Interest-bearing deposits
  $ 575,168       4,454       1.04 %     560,948       5,806       1.38 %
Short-term borrowings
    12,263       23       0.25 %     6,558       19       0.39 %
Long-term debt
    23,152       499       2.88 %     24,025       523       2.91 %
Total interest-bearing liabilities
    610,583       4,976       1.09 %     591,531       6,348       1.43 %
Demand deposits
    100,077                       93,633                  
Other liabilities
    5,602                       5,625                  
Capital
    73,386                       69,098                  
Total liabilities and capital
  $ 789,648                       759,887                  
                                                 
Net interest rate spread (3)
                    3.55 %                     3.73 %
                                                 
Net interest income and net interest margin on a taxable- equivalent basis (4)
              20,242       3.73 %               20,476       3.94 %
                                                 
Ratio of interest-earning assets to interest-bearing liabilities
    118.99 %                     117.56 %                

(1)
Includes nonaccrual loans, if any.  Income from tax-exempt loans is included in interest income on a tax-equivalent basis, using an incremental rate of 34%.
(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.

 
40

 
LCNB CORP. AND SUBSIDIARIES

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

The following table presents the changes in taxable-equivalent basis interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the nine months ended September 30, 2011 as compared to the same period in 2010.

   
Nine Months Ended
 
   
September 30, 2011 vs. 2010
 
   
Increase (decrease) due to:
 
   
Volume
 
Rate
   
Total
 
   
(In thousands)
 
Interest-earning Assets:
                 
Loans
  $ (60 )     (1,030 )     (1,090 )
Interest-bearing demand deposits
    (12 )     -       (12 )
Federal Reserve Bank stock
    -       -       -  
Federal Home Loan Bank stock
    -       (2 )     (2 )
Investment securities:
                       
Taxable
    848       (747 )     101  
Nontaxable
    (258 )     (345 )     (603 )
Total interest income
    518       (2,124 )     (1,606 )
                         
Interest-bearing Liabilities:
                       
Deposits
    144       (1,496 )     (1,352 )
Short-term borrowings
    12       (8 )     4  
Long-term debt
    (19 )     (5 )     (24 )
Total interest expense
    137       (1,509 )     (1,372 )
Net interest income
  $ 381       (615 )     (234 )

Net interest income on a fully tax-equivalent basis for the first nine months of 2011 totaled $20,242,000, a $234,000 decrease from the first nine months of 2010.  The decrease resulted from a decrease in total interest income of $1,606,000, largely offset by a $1,372,000 decrease in total interest expense.

The decrease in total interest income was due to a 52 basis point decrease in the average rate earned on earning assets, partially offset by the effect of a $31.1 million increase in average total earning assets.  The increase in average earning assets was due to a $45.6 million increase in average taxable investment securities.  The decrease in the average rate earned on earning assets was primarily due to general decreases in market interest rates.
 
 
41

 
LCNB CORP. AND SUBSIDIARIES

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

The decrease in total interest expense was due primarily to a 34 basis point decrease in the average rate paid on interest-bearing liabilities, partially offset by the effect of a $19.1 million increase in average interest-bearing liabilities.  The increase in average interest-bearing liabilities was due to a $14.2 million increase in average interest-bearing deposits primarily resulting from an increase in public funds and continuing consumer trends and a $5.7 million increase in average short-term borrowings.  The decrease in the average rate paid also reflects a general decrease in market rates.
 
Provision and Allowance For Loan Losses
The total provision for loan losses is determined based upon management's evaluation as to the amount needed to maintain the allowance for loan losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio.  In addition to historic charge-off percentages, factors taken into consideration to determine the adequacy of the allowance for loan losses include the nature, volume, and consistency of the loan portfolio, overall portfolio quality, a review of specific problem loans, and current economic conditions that may affect borrowers’ ability to pay.  The provision for loan losses for the three months ended September 30, 2011 and 2010 was $588,000 and $268,000, respectively, and $1,476,000 and $987,000 for the nine months ended September 30, 2011 and 2010, respectively.  The increase in the provision for the three and nine-month periods in 2011 reflects an increase in impaired loans, the net charge-off trend, and current economic conditions.
 
Non-Interest Income

Three Months Ended September 30, 2011 vs. 2010.
Non-interest income for the third quarter of 2011 was $122,000 greater than for the comparable period in 2010.  Trust income increased $74,000 primarily due to executor fees received during the third quarter 2011 and net gains on sale of securities increased $225,000 primarily due to the volume of securities sold.   These increases were partially offset by a $160,000 decrease in gains from sales of mortgage loans during the third quarter 2011 resulting from a decrease in the volume of loans sold.
 
Nine Months Ended September 30, 2011 vs. 2010.
Non-interest income for the first nine months of 2011 was $358,000 less than for the comparable period in 2010.  The decrease was due to a $798,000 decrease in bank owned life insurance income primarily due to the absence in 2011 of death benefits received during the second quarter 2010.  In addition, gains from sales of mortgage loans decreased $151,000 due to a decrease in the volume of loans sold.  Partially offsetting these decreases were a $516,000 increase in net gains on sales of securities and a $183,000 increase in trust income.  Gains from sales of securities increased due to a greater volume of sales.  Trust income increased primarily due to executor fees received and a change in the mix of trust assets.
 
 
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LCNB CORP. AND SUBSIDIARIES

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

Non-Interest Expense

Three Months Ended September 30, 2011 vs. 2010.
Total non-interest expense decreased $87,000 during the third quarter 2011 as compared to the third quarter 2010 primarily due to a $174,000 decrease in FDIC insurance premiums expense and a $132,000 decrease in other non-interest expense.  The decrease in FDIC insurance premiums is primarily due to the implementation of a new assessment base that uses total assets and tier one capital as opposed to deposits.  The decrease in other non-interest expense is primarily due to decreased write downs and holding costs for foreclosed property.  These decreases were partially offset by a $122,000 or 4.3% increase in salaries and employee benefits.  In addition to routine salary and wage increases, this increase also reflects increases in pension expense and health insurance costs.  In addition, equipment expenses increased $66,000 primarily due to increased depreciation expense relating to ATM and computer equipment replacements.

Nine Months Ended September 30, 2011 vs. 2010.
Total non-interest expense increased $617,000 during the first nine months of 2011 as compared to the same period in 2010 primarily due to a $590,000 increase in salaries and employee benefits, a $99,000 increase in equipment expenses, and a $93,000 increase in other non-interest expense.  Salaries and employee benefits and equipment expenses increased due to the same reasons described above.  Other non-interest expense for the first nine months of 2011 includes a $56,000 loss, net of recoveries received during the second quarter 2011, recognized on a standby letter of credit, $52,000 in environmental remediation costs for the lot on which LCNB’s new Lebanon Drive-Up facility is located, $50,000 in NASDAQ® application fees, and other smaller miscellaneous increases.  These increases were partially offset by decreased write downs and holding costs for foreclosed property.
 
Income Taxes
LCNB’s effective tax rates for continuing operations for the nine months ended September 30, 2011 and 2010 were 23.4% and 20.3%, respectively.  The difference between the statutory rate of 34.0% and the effective tax rate is primarily due to tax-exempt interest income from municipal securities and tax-exempt earnings from bank owned life insurance.
 
Financial Condition
Total assets at September 30, 2011 were $48.4 million greater than at December 31, 2010.  The increase in total assets is primarily due to a $21.7 million increase in cash and cash equivalents and a $32.1 million increase in available-for-sale investment securities.  Most of the growth in available-for-sale investment securities was in U.S. Agency notes, which increased $21.2 million, and U.S. Agency mortgage-backed securities, which increased $14.6 million.
 
 
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LCNB CORP. AND SUBSIDIARIES

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

Net loans at September 30, 2011 were $6.1 million less than at December 31, 2010.  This decrease was composed of a $5.5 million decrease in gross loans and a $600,000 increase in the allowance for loan losses.  Consumer loans decreased $3.6 million due to weak demand for new loans, commercial and industrial loans decreased $4.0 million, and residential real estate loans decreased $6.4 million largely because the majority of loans originated during the first nine months of 2011 were sold to the Federal Home Loan Mortgage Corporation.  Residential mortgage loans sold during the nine-month period totaled $4.9 million.  These decreases were partially offset by an $8.0 increase in commercial real estate loans.

Total deposits were $51.2 million greater at September 30, 2011 than at December 31, 2010, primarily due to a $51.4 million increase in public fund deposits by local government entities.  Public fund deposits can be relatively volatile due to seasonal tax collections and the financial needs of the local entities.  LCNB believes that much of the increase at September 30, 2011 was due to seasonal property and other tax receipts.  The deposit growth was used to reduce short-term borrowings, which decreased $9.3 million, fund growth in the investment portfolio, and enhance LCNB’s liquidity position for anticipated future needs.
 
Liquidity
LCNB depends on dividends from its subsidiaries for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders.  National banking law limits the amount of dividends the Bank may pay to the sum of retained net income, as defined, for the current year plus retained net income for the previous two years.  Prior approval from the Office of the Comptroller of the Currency, the Bank’s primary regulator, is necessary for the Bank to pay dividends in excess of this amount.  In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines.  Management believes the Bank will be able to pay anticipated dividends to LCNB without needing to request approval.

Liquidity is the ability to have funds available at all times to meet the commitments of LCNB.  Asset liquidity is provided by cash and assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash and cash equivalents and securities available for sale.  At September 30, 2011, LCNB’s liquid assets amounted to $300.7 million or 37.2% of total assets, an increase from $246.9 million or 32.5% of total assets at December 31, 2010.

Liquidity is also provided by access to core funding sources, primarily core depositors in LCNB’s market area.  Approximately 75.4% of total deposits at September 30, 2011 were “core” deposits, compared to 81.8% of deposits at December 31, 2010.  Core deposits, for this purpose, are defined as total deposits less public funds and certificates of deposit greater than $100,000.  The percentage of core deposits to total deposits decreased because of the growth in public fund deposits discussed above in relation to total growth in deposits.

Secondary sources of liquidity include LCNB’s ability to sell loan participations, borrow funds from the Federal Home Loan Bank, purchase federal funds, issue repurchase agreements, or use a line of credit established with another bank.
 
 
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LCNB CORP. AND SUBSIDIARIES

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

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


Market risk for LCNB is primarily interest rate risk.  LCNB attempts to mitigate this risk through asset/liability management strategies designed to decrease the vulnerability of its earnings to material and prolonged changes in interest rates.  LCNB does not use derivatives such as interest rate swaps, caps, or floors to hedge this risk.  LCNB has not entered into any market risk instruments for trading purposes.

LCNB's Asset and Liability Management Committee ("ALCO") primarily uses a combination of Interest Rate Sensitivity Analysis (“IRSA”) and Economic Value of Equity (“EVE”) analysis for measuring and managing interest rate risk.  IRSA is used to estimate the effect on net interest income during a one-year period of instantaneous and sustained movements in interest rates, also called interest rate shocks, of 100, 200, and 300 basis points.  Management considers the results of the down 200 and down 300 basis point scenarios to not be meaningful in the current interest rate environment.  The base projection uses a current interest rate scenario.  As shown below, the September 30, 2011 IRSA indicates that an increase in interest rates would have a positive effect on net interest income (“NII”) and a decrease in interest rates would have a negative effect on NII. The changes in NII for all rate assumptions are within LCNB’s acceptable ranges.

Rate Shock Scenario in Basis Points
 
Amount
   
$ Change in
NII
   
% Change in
NII
 
   
(Dollars in thousands)
 
Up 300
  $ 26,723       1,208       4.73 %
Up 200
    26,295       780       3.06 %
Up 100
    25,861       346       1.36 %
Base
    25,515       -       - %
Down 100
    25,257       (258 )     -1.01 %

IRSA shows the effect on NII during a one-year period only.  A more long-range model is the EVE analysis, which shows the estimated present value of future cash inflows from interest-earning assets less the present value of future cash outflows for interest-bearing liabilities for the same rate shocks.  As shown below, the September 30, 2011 EVE analysis indicates that an increase in interest rates would have a negative effect on the EVE and a decrease in rates would have a positive effect on the EVE.  The changes in EVE for the up 300 basis points scenario is slightly outside LCNB’s policy range of a 25% change, but management has determined the changes are acceptable in the current economic environment.

Rate Shock Scenario in Basis Points
 
Amount
   
$ Change in
EVE
   
% Change in
EVE
 
   
(Dollars in thousands)
 
Up 300
  $ 63,494       (23,318 )     -26.86 %
Up 200
    70,703       (16,109 )     -18.56 %
Up 100
    78,608       (8,204 )     -9.45 %
Base
    86,812       -       - %
Down 100
    94,820       8,008       9.22 %
                         
 
 
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LCNB CORP. AND SUBSIDIARIES
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risks (continued)

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

a)  Disclosure controls and procedures.  The Chief Executive Officer and the Chief Financial Officer have carried out an evaluation of the effectiveness of LCNB's disclosure controls and procedures that ensure that information relating to LCNB required to be disclosed by LCNB in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to LCNB’s management, including its principal executive officer and principal financial officer, as appropriate, in order to allow timely decisions to be made regarding required disclosures.  Based upon this evaluation, these officers have concluded, that as of September 30, 2011, LCNB's disclosure controls and procedures were effective.

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

Not applicable


The Dodd-Frank Act directs the Federal Reserve to set interchange rates in electronic debit card transactions involving issuers with more than $10 billion in assets.  On June 29, 2011, the Federal Reserve issued a final rule, which goes into effect on October 1, 2011, setting the maximum interchange fee an issuer may receive at the sum of 21 cents per transaction plus five basis points multiplied by the value of the transaction.  The Federal Reserve also issued an interim final rule that allows for an upward adjustment of at most one cent to an issuer’s debit card interchange fee if the issuer develops and implements policies and procedures to achieve the fraud prevention standards detailed in the interim final rule.  Although institutions with $10 billion or less in total assets will be exempt from the new rules, many within the financial institutions industry believe that smaller institutions will need to match the pricing of those institutions with assets greater than $10 billion or lose business to the larger institutions.  The effect of the new rules on LCNB’s income statement cannot be predicted at this time.


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

During the period covered by this report, LCNB did not purchase any shares of its equity securities.


Not applicable



Not applicable
 
 
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LCNB CORP. AND SUBSIDIARIES
 

Exhibit No.
Exhibit Description
3.1
Amended and Restated Articles of Incorporation of LCNB Corp., as amended – incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010, Exhibit 3.1.
   
3.2
Code of Regulations of LCNB Corp. – incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005, Exhibit 3(ii).
   
Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
   
Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
   
Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
   
101
The following financial information from LCNB Corp.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 is formatted in Extensible Business Reporting Language:  (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text.
 
 
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
LCNB Corp.
 
       
November 8, 2011 
By:
/s/ Stephen P. Wilson   
   
Stephen P. Wilson, Chief Executive Officer and
 
   
Chairman of the Board of Directors
 

       
November 8, 2011
By:
/s/Robert C. Haines, II  
   
Robert C. Haines, II, Executive Vice President
 
   
and Chief Financial Officer
 
 
 
50