UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.   20549  FORM 10-Q  (Mark One)  (  X  ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended September 30, 2009  (      ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition period from ______________  to  ______________  Commission File Number  000-26121  LCNB Corp. (Exact name of registrant as specified in its charter)  Ohio 31-1626393 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)  2 North Broadway, Lebanon, Ohio   45036 (Address of principal executive offices, including Zip Code)  (513) 932-1414 (Registrant's telephone number, including area code)  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes         [  ] No  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [  ] Yes         [  ] No  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one): [ ] Large accelerated filer  [X] Accelerated filer  [ ] Non-accelerated filer  [ ] Smaller reporting company  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [  ] Yes         [X] No  The number of shares outstanding of the issuer's common stock, without par value, as of November 5, 2009 was 6,687,232 shares.


LCNB CORP. AND SUBSIDIARIES  INDEX  PART I  FINANCIAL INFORMATION 2  Item 1.  Financial Statements 2  CONSOLIDATED BALANCE SHEETS 2  CONSOLIDATED STATEMENTS OF INCOME 3  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 4  CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY 5  CONSOLIDATED STATEMENTS OF CASH FLOWS 6  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 27  Item 2. Management's Discussion and Analysis of Financial Condition and Results of  Operations  28  Item 3.  Quantitative and Qualitative Disclosures about Market Risks 39  Item 4.  Controls and Procedures 40  PART II.  OTHER INFORMATION 41  Item 1.     Legal Proceedings 41  Item 1A.  Risk Factors 41  Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds 41  Item 3.     Defaults Upon Senior Securities 41  Item 4.     Submission of Matters to a Vote of Security Holders 41  Item 5.     Other Information 41  Item 6.     Exhibits 42  SIGNATURES 44     1      PART I  FINANCIAL INFORMATION  Item 1.  Financial Statements  LCNB CORP. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Dollars in thousands)September 30,December 31,20092008(Unaudited)ASSETS:Cash and due from banks$22,16111,278Federal funds sold and interest-bearing demand deposits8,8116,742Total cash and cash equivalents30,97218,020Investment securities:Available-for-sale, at fair value201,614136,244Held-to-maturity, at cost12,156-Federal Reserve Bank and Federal Home Loan Bank stock, at cost3,0313,028Loans, net457,199451,343Premises and equipment, net15,97615,582Goodwill5,9155,915Other intangible assets, net919807Bank owned life insurance13,96413,485Other assets8,0605,307TOTAL ASSETS$749,806649,731LIABILITIES:Deposits Noninterest-bearing$81,81582,645Interest-bearing557,266494,977Total deposits639,081577,622Short-term borrowings3172,206Long-term debt25,3095,000Accrued interest and other liabilities5,9346,787TOTAL LIABILITIES670,641591,615SHAREHOLDERS EQUITY:Preferred shares  no par value, authorized 1,000,000 shares,13,400 shares issued at September 30, 200912,929-Common shares  no par value, authorized 8,000,000 shares, issued7,445,514 shares at September 30, 2009 and December 31, 200811,06811,068Surplus15,39814,792Retained earnings48,30646,584Treasury shares at cost, 758,282 shares at September 30, 2009 andDecember 31, 2008(11,737)(11,737)Accumulated other comprehensive income (loss), net of taxes3,201(2,591)TOTAL SHAREHOLDERS EQUITY79,16558,116TOTAL LIABILITIES AND SHAREHOLDERS EQUITY$749,806649,731The accompanying notes to consolidated financial statements are an integral part of these statements.   2


LCNB CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(Dollars in thousands, except per share data)(Unaudited)Three Months EndedNine Months EndedSeptember 30,September 30,2009200820092008INTEREST INCOME:Interest and fees on loans$6,8847,11520,58021,850Dividends on Federal Reserve Bankand Federal Home Loan Bank stock2628101106Interest on investment securities Taxable1,0507843,1831,806Non-taxable7955302,1291,459Other short-term investments1315141466TOTAL INTEREST INCOME8,7688,60826,03425,687INTEREST EXPENSE:Interest on deposits2,2783,2207,2699,996Interest on short-term borrowings-4-12Interest on long-term debt17766440197TOTAL INTEREST EXPENSE2,4553,2907,70910,205NET INTEREST INCOME6,3135,31818,32515,482PROVISION FOR LOAN LOSSES664188970322NET INTEREST INCOME AFTERPROVISION FOR LOAN LOSSES5,6495,13017,35515,160NON-INTEREST INCOME:Trust income4514431,3651,421Service charges and fees1,0181,1692,9563,193Net gain on sales of securities60-60-Insurance agency income4024211,1601,281Bank owned life insurance income162135478397Gains from sales of mortgage loans4623779Other operating income3733121129TOTAL NON-INTEREST INCOME2,1762,2036,5176,430NON-INTEREST EXPENSE:Salaries and wages2,3782,2597,1026,704Pension and other employee benefits5036011,7791,803Equipment expenses262243749718Occupancy expense, net4184161,2801,235State franchise tax152158470489Marketing112119353330Intangible amortization284483287FDIC premiums3172192652Write-off of pension asset--722-Other non-interest expense1,0241,0673,4143,357TOTAL NON-INTEREST EXPENSE5,1944,92816,87814,975INCOME BEFORE INCOME TAXES2,6312,4056,9946,615PROVISION FOR INCOME TAXES5886111,5481,679NET INCOME2,0431,7945,4464,936PREFERRED STOCK DIVIDENDS AND
DISCOUNT ACCRETION206-514-NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS$1,8371,7944,9324,936Dividends declared per common share$0.160.160.480.48Earnings per common share:Basic$0.270.270.740.74Diluted0.270.270.740.74Average common shares outstanding:Basic6,687,2326,687,2326,687,2326,687,232Diluted6,707,7466,687,2326,693,0326,687,232The accompanying notes to consolidated financial statements are an integral part of these statements.


3


LCNB CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In thousands)(Unaudited)Three Months EndedNine Months EndedSeptember 30,September 30,2009200820092008Net Income$2,0431,7945,4464,936Other comprehensive income (loss):Net unrealized gain on available-for-sale securities (net of taxes of $1,194 and $340 for the three months ended September 30, 2009 and 2008, respectively, and $1,440 and $127 for the nine months ended September 30, 2009 and 2008, respectively)2,3106612,795246Reclassification adjustment for  net realized gain on sale of available-for-sale securities included in net income (net of taxes of $20)(40)(40)Reversal of pension plan unrecognized net loss
(net of taxes of $1,564)--3,037-Recognition of pension plan net actuarial loss (net of taxes of $10 and $31 for the three and nine months ended September 30, 2008, respectively)-20-60TOTAL COMPREHENSIVE INCOME$4,3132,47511,2385,242The accompanying notes to consolidated financial statements are an integral part of these statements.


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LCNB CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY(Dollars in thousands, except per share amounts)(Unaudited)AccumulatedCommonOtherTotalSharesPreferredCommonRetainedTreasuryComprehensiveShareholdersOutstandingStockStockSurplusEarningsSharesIncome (Loss)EquityBalance January 1, 20096,687,232$11,06814,79246,584(11,737)(2,591)58,116Net income5,4465,446Issuance of preferred stock and related warrants12,81758313,400Net unrealized gain on available-for-sale
securities, net of tax2,7552,755Reversal of pension plan unrecognized net
loss, net of tax3,0373,037Compensation expense relating to stock options2323Preferred stock dividends and discount
accretion112(514)(402)Common stock dividends, $0.48 per share(3,210)(3,210)Balance September 30, 20096,687,232$12,92911,06815,39848,306(11,737)3,20179,165Balance January 1, 20086,687,232$-11,06814,76144,261(11,737)(1,825)56,528Net income4,9364,936Net unrealized gain (loss) on available-for-sale
securities, net of tax246246Change in pension plan unrecognized net loss,
net of tax6060Compensation expense relating to stock options2323Common stock dividends, $0.48 per share(3,210)(3,210)Balance September 30, 20086,687,232$-11,06814,78445,987(11,737)(1,519)58,583The accompanying notes to consolidated financial statements are an integral part of these statements.


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LCNB CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)(unaudited)Nine Months EndedSeptember 30,20092008CASH FLOWS FROM OPERATING ACTIVITIES:Net income$5,4464,936Adjustments to reconcile net income to net cash flows from operating activities-Depreciation, amortization, and accretion1,7341,593Provision for loan losses970322Federal Home Loan Bank stock dividends-(82)Increase in cash surrender value of bank owned life insurance(478)(397)Realized loss (gain) on sales of securities available for sale(60)-Realized loss (gain) on sale of premises and equipment(17)(3)Origination of mortgage loans for sale(26,033)(814)Realized gains from sales of mortgage loans(377)(9)Proceeds from sales of mortgage loans26,151814Compensation expense related to stock options2323Increase (decrease) due to changes in assets and liabilities:Income receivable(945)(730)Other assets(1,139)(178)Other liabilities2,414148NET CASH FLOWS FROM OPERATING ACTIVITIES7,6895,623CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sales of securities available for sale210-Proceeds from maturities and calls of investment securities46,65624,780Purchases of investment securities(120,659)(73,742)Purchase of Federal Reserve Bank stock(3)(215)Net (increase) decrease in loans(9,435)(3,886)Proceeds from sale of other real estate owned-877Additions to other real estate owned-(37)Proceeds from sale of repossessed assets72-Purchases of premises and equipment(1,263)(1,228)Proceeds from sales of premises and equipment183NET CASH FLOWS FROM INVESTING ACTIVITIES(84,404)(53,448)CASH FLOWS FROM FINANCING ACTIVITIES:Net increase (decrease) in deposits61,45960,258Net increase (decrease) in short-term borrowings(1,889)186Proceeds from long-term debt21,000-Principal payments on long-term debt(691)-Proceeds from issuance of preferred stock13,400-Cash dividends paid on common stock(3,210)(3,210)Cash dividends paid on preferred stock(402)-NET CASH FLOWS FROM FINANCING ACTIVITIES89,66757,234NET CHANGE IN CASH AND CASH EQUIVALENTS12,9529,409CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD18,02031,190CASH AND CASH EQUIVALENTS AT END OF PERIOD$30,97240,599SUPPLEMENTAL CASH FLOW INFORMATION:CASH PAID DURING THE YEAR FOR:Interest$7,81310,315Income taxes1,5601,750SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:Transfer from loans to other real estate owned and repossessed assets2,392-The accompanying notes to consolidated financial statements are an integral part of these statements.


6      LCNB CORP. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   Note 1 - Basis of Presentation Substantially all of the assets, liabilities and operations of LCNB Corp. ("LCNB") are attributable to its wholly-owned subsidiaries, LCNB National Bank (the "Bank") and Dakin Insurance Agency, Inc. ("Dakin").  The accompanying unaudited consolidated financial statements include the accounts of LCNB, the Bank, and Dakin.  The unaudited interim consolidated financial statements, which have been reviewed by J.D. Cloud & Co. L.L.P., LCNBs independent registered public accounting firm, in accordance with standards established by the Public Company Accounting Oversight Board, as indicated by their report included herein and which does not express an opinion on those statements, have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and regulations of the Securities and Exchange Commission (the SEC).  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of financial position, results of operations, and cash flows for the interim periods, as required by Regulation S-X, Rule 10-01.  Certain prior period data presented in the financial statements have been reclassified to conform with the current year presentation.  The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Management has reviewed and evaluated transactions and events for subsequent event accounting and disclosure purposes through November 5, 2009, the date the financial statements were issued.  Results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year ending December 31, 2009.  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 2008 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, 2009 and December 31, 2008 are summarized as follows (in thousands):  September 30, 2009Amortized
CostUnrealized
GainsUnrealized
LossesFair
ValueU.S. Treasury notes$5,31363-5,376U.S. Agency notes45,4793626545,776U.S. Agency mortgage-backed securities51,9361,3087353,171Corporate securities7,413198-7,611Municipal securities:Non-taxable75,9452,730278,673Taxable9,755276-10,031Trust preferred securities34848-396Other debt securities5363-539Marketable equity securities392-41$196,7644,990140201,614  December 31, 2008Amortized
CostUnrealized
GainsUnrealized
LossesFair
ValueU.S. Agency notes$44,264372-44,636U.S. Agency mortgage-backed securities32,3104913332,768Corporate securities1,010411,013Municipal securities:Non-taxable53,82143062753,624Taxable3,6054643,647Other debt securities521-9512Marketable equity securities377-44$135,5681,350674136,244  The fair value of held-to-maturity investment securities, consisting of non-taxable and taxable municipal securities, approximates amortized cost at September 30, 2009.  8      LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 2 - Investment Securities (continued) Information concerning securities with gross unrealized losses at September 30, 2009, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (in thousands):  Less than Twelve MonthsTwelve Months or GreaterFair
ValueUnrealized
LossesFair
ValueUnrealized
LossesU.S. Agency notes$10,99265--U.S. Agency mortgage-
backed securities9,98572421Corporate securities250---Municipal securities:Non-taxable--4382Taxable200---Marketable equity securities41---$21,4681374803  The unrealized losses at September 30, 2009 are primarily due to increases in market interest rates. Because LCNB does not have the intent to sell the investments and it is more likely than not that LCNB will not be required to sell the investments before recovery of their amortized cost bases, which may be maturity, LCNB does not consider these investments to be other-than-temporarily impaired at September 30, 2009.  Accumulated other comprehensive income at September 30, 2009 consisted solely of the net unrealized gain on available-for-sale investment securities.  9      LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 3 - Loans Major classifications of loans at September 30, 2009 and December 31, 2008 are as follows (in thousands):  September 30,December 31,20092008Commercial and industrial$43,70738,724Commercial, secured by real estate181,286174,493Residential real estate193,695194,039Consumer27,86333,369Agricultural3,3483,216Other loans, including deposit overdrafts9,4779,203459,376453,044Deferred net origination costs622767459,998453,811Less allowance for loan losses2,7992,468Loans, net$457,199451,343  Changes in the allowance for loan losses for the nine months ended September 30, 2009 and 2008 were as follows (in thousands):  Nine Months EndedSeptember 30,20092008Balance, beginning of period$2,4682,468Provision for loan losses970322Charge-offs(910)(646)Recoveries271324Balance, end of period$2,7992,468  Charge-offs for the nine months ended September 30, 2009 included charge-offs on three commercial real estate loans totaling $352,000.  The balance of charge-offs during this period consisted primarily of residential second mortgage loans, consumer loans, and checking and NOW account overdrafts.  Charge-offs for the nine months ended September 30, 2008 consisted primarily of consumer loans and checking and NOW account overdrafts.  10      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, 2009 and December 31, 2008 were as follows (in thousands):  September 30,December 31,20092008Non-accrual loans$1,4452,281Past-due 90 days or more and still accruing336806Restructured loans2,468332Total$4,2493,419Percent to total loans0.92%0.75%  Non-accrual loans at September 30, 2009 consisted of three commercial real estate loans totaling $789,000 and four residential real estate loans totaling $656,000.  Included in the commercial real estate non-accrual loans at September 30, 2009 were two loans totaling $647,000 that had been classified as past-due 90 days or more and still accruing interest at December 31, 2008, when their total balance outstanding was $670,000.  Non-accrual loans at December 31, 2008 included a commercial real estate loan with a balance of $2,149,000.  The borrower was unsuccessful in its efforts to sell the property and LCNB accepted a deed in lieu of foreclosure during the third quarter 2009.  The remaining balance of non-accrual loans at December 31, 2008 consisted primarily of residential real estate mortgage loans.  Loans past-due 90 days or more and still accruing interest at September 30, 2009 were primarily composed of consumer and residential mortgage loans.  Loans past-due 90 days or more and still accruing interest at December 31, 2008 were primarily composed of the two commercial real estate loans mentioned previously and consumer and residential mortgage loans.  The increase in restructured loans is due to a commercial real estate loan which was restructured during the first quarter 2009.  Its balance at September 30, 2009 was $2,162,000.  Restructured loans at September 30, 2009 and December 31, 2008 also include a commercial real estate loan in the amount of $306,000 and $310,000, respectively.    11      LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 3 - Loans (continued) The following is a summary of information pertaining to loans considered to be impaired at September 30, 2009 and December 31, 2008 (in thousands):  September 30,December 31,20092008Impaired loans without a valuation allowance$1,2972,451Impaired loans with a valuation allowance5,3303,121Total impaired loans6,6275,572Valuation allowance related to impaired loans$1,092630  Other real estate owned (which includes property acquired through foreclosure or deed-in-lieu of foreclosure and also includes property deemed to be in-substance foreclosed) and other repossessed assets, which are included in other assets in the consolidated balance sheets, totaled approximately $2,424,000 at September 30, 2009, compared to $89,000 at December 31, 2008.  Other real estate owned increased due to the transfer of three commercial real estate properties into this category during the third quarter 2009.  Loans sold to and serviced for others are not included in the accompanying balance sheets.  The unpaid principal balances of those loans at September 30, 2009 and December 31, 2008 were $57,111,000 and $37,783,000, respectively.  Loans sold to the Federal Home Loan Mortgage Corporation during the three and nine months ended September 30, 2009 totaled $2,481,000 and $26,033,000, respectively, and $81,000 and $814,000 during the three and nine months ended September 30, 2008, respectively.  The increase in the amount of mortgage loans sold is primarily due to an increase in the number of refinanced loans because of the general decline in market interest rates for residential mortgage loans during the first nine months of 2009.   12      LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 4  Borrowings Funds borrowed from the Federal Home Loan Bank of Cincinnati at September 30, 2009 and December 31, 2008 are as follows (thousands):  CurrentInterestSeptember 30,December 31,Rate20092008Fixed Rate Advances, due at maturity:Advance due February 20112.10%$5,000-Advance due July 20121.99%6,000-Advance due March 20175.25%5,0005,000Fixed Rate Advances, with monthly
principal and interest payments:Advance due March 20142.45%4,527-Advance due March 20192.82%4,782-$25,3095,000  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.  Short-term borrowings at September 30, 2009 and December 31, 2008 consisted of U.S. Treasury demand note borrowings of approximately $317,000 and $2,206,000, respectively.  The U.S. Treasury was not charging interest at September 30, 2009 or December 31, 2008.   Note 5 - Commitments and Contingent Liabilities LCNB is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments included commitments to extend credit.  They involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.  Exposure to credit loss in the event of nonperformance by the other parties to financial instruments for commitments to extend credit is represented by the contract amount of those instruments.   13      LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 5 - Commitments and Contingent Liabilities (continued) 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, 2009 and December 31, 2008 were as follows (in thousands):  September 30,December 31,20092008Commitments to extend credit:Commercial loans$4,4614,376Other loansFixed rate5191,033Adjustable rate604302Unused lines of credit:Fixed rate5,2672,807Adjustable rate66,76470,647Unused overdraft protection amounts ondemand and NOW accounts10,25310,408Standby letters of credit7,2578,138$95,12597,711  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, 2009 and December 31, 2008, outstanding guarantees of $1.7 million and $1.8 million, respectively, were issued to developers and contractors.  These guarantees generally are fully secured and have varying maturities.  In addition, LCNB has a participation in a letter of credit securing payment of principal and interest on a bond issue.  The participation amount at September 30, 2009 and December 31, 2008 was approximately $5.5 million and $6.3 million, respectively.  The agreement has a final maturity date of January, 2012.  LCNB evaluates each customer's credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the borrower.  Collateral held varies, but may include accounts receivable; inventory; property, plant and equipment; residential realty; and income-producing commercial properties.   14      LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 5  Commitments and Contingent Liabilities (continued) Management believes that LCNB has sufficient liquidity to fund its lending and capital expenditure commitments.  LCNB and its subsidiaries are parties to various claims and proceedings arising in the normal course of business.  Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings and claims will not be material to the consolidated financial position or results of operations.   Note 6  Regulatory Capital On January 9, 2009, LCNB received $13.4 million of new equity capital from the U.S. Treasury Departments Capital Purchase Program (CPP) established under the Emergency Economic Stabilization Act of 2008.  The investment by the U.S. Treasury Department is comprised of $13.4 million in preferred shares, with a warrant to purchase 217,063 common shares of LCNB at an exercise price of $9.26, with a term of ten years.  LCNB allocated $583,000 of the proceeds from the preferred stock issuance to the warrants.  The resulting discount in the preferred stock is being amortized over five years and is being reported as an adjustment to preferred stock dividends.  The preferred shares pay a dividend of 5% per year for the first five years and will pay 9% thereafter. LCNB may repay the U.S. Treasury Department amounts previously received at any time without penalty, subject to consultation with the Office of the Comptroller of the Currency, LCNBs primary regulator.  The minimum redemption amount is 25% of the issue price, or $3,350,000 for LCNB.  LCNB may repurchase the warrant at fair market value, as defined in the Securities Purchase Agreement, if it redeems the preferred stock in full.  If the warrant is not repurchased at the time the preferred stock is redeemed, the U.S. Treasury Department will attempt to sell the warrant in the secondary market.  Participation in the CPP is voluntary and requires participating institutions to comply with a number of restrictions and provisions, including, but not limited to, restrictions on compensation of certain executive officers and limitations on stock repurchase activities and dividend payments.  Generally, LCNB will be unable to increase dividends to common shareholders or repurchase common shares without U.S. Treasury Department permission for a period of three years from the date of participation unless the preferred securities are no longer held by the U.S. Treasury Department.  Additionally, no dividends may be paid on common stock unless and until all accrued and unpaid dividends for all past dividend periods owed to the U.S. Treasury Department on the preferred shares are fully paid.  For more information regarding the terms of agreement between LCNB and the U.S. Treasury Department under the CPP and the securities issued by LCNB to the Treasury thereunder, please see the Current Report on Form 8-K filed by LCNB with the SEC on January 9, 2009, which is hereby, along with exhibits thereto, incorporated by reference.  On October 21, 2009, LCNB redeemed all 13,400 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A.  See Notes to Consolidated Financial Statements, Note 11 - Subsequent Event of this report for additional information pertaining to the redemption of the preferred shares.  15      LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 6  Regulatory Capital (continued) The Bank and LCNB are required by regulators to meet certain minimum levels of capital adequacy. These are expressed in the form of certain ratios. Capital is separated into Tier 1 capital (essentially shareholders' equity less goodwill and other intangibles) and Tier 2 capital (essentially the allowance for loan losses limited to 1.25% of risk-weighted assets). The first two ratios, which are based on the degree of credit risk in LCNB's assets, provide for weighing assets based on assigned risk factors and include off-balance sheet items such as stand-by letters of credit. The ratio of Tier 1 capital to risk-weighted assets must be at least 4.0% and the ratio of Total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8.0%.  The capital leverage ratio supplements the risk-based capital guidelines. Banks are required to maintain a minimum ratio of Tier 1 capital to adjusted quarterly average total assets of 3.0%.  For various regulatory purposes, financial institutions are classified into categories based upon capital adequacy.  The highest "well-capitalized" category requires capital ratios of at least 10% for total risk-based, 6% for Tier 1 risk-based, and 5% for leverage.  As of the most recent notification from their regulators, the Bank and LCNB were categorized as "well-capitalized" under the regulatory framework for prompt corrective action.  Management believes that no conditions or events have occurred since the last notification that would change the Bank's or LCNB's category.  A summary of the regulatory capital and capital ratios of LCNB follows (dollars in thousands):  AtAtSeptember 30,December 31,20092008Regulatory Capital:Shareholders' equity$79,16558,116Goodwill and other intangibles(6,534)(6,600)Accumulated other comprehensive (income) loss(3,201)2,591Tier 1 risk-based capital69,43054,107Eligible allowance for loan losses2,7992,468Total risk-based capital$72,22956,575Capital ratios:Total risk-based (required 8.00%)15.08%12.61%Tier 1 risk-based (required 4.00%)14.50%12.06%Leverage (required 3.00%)9.48%8.19%  16      LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 7  Employee Benefits Effective January 1, 2009, LCNB redesigned its qualified noncontributory defined benefit retirement plan and merged its single-employer plan into a multiple-employer plan, which is accounted for as a multi-employer plan because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer.  Accordingly, the assets and obligations of the single-employer plan were transferred to the multiple-employer plan in January 2009.  At that time, the pension plan related balance sheet accounts were adjusted resulting in an approximate $3.0 million increase in other comprehensive income, which is included in shareholders equity, and a $722,000 charge to non-interest expense in the consolidated statements of income.  Employees hired on or after January 1, 2009 are not eligible to participate in this plan.  Effective February 1, 2009, LCNB amended the plan to reduce benefits for those whose age plus vesting service equaled less than 65 at that date.  Also effective February 1, 2009, an enhanced 401-K plan was made available to those hired on or after January 1, 2009 and to those who received benefit reductions from the amendments to the noncontributory defined benefit retirement plan.  Employees hired on or after January 1, 2009 will receive a 50% employer match on their contributions into the 401-K plan, up to a maximum LCNB contribution of 3% of each individual employees annual compensation.  Employees who received a benefit reduction under the retirement plan amendments will 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 will be made annually and these employees will not receive any employer matches to their 401-K contributions.  Funding and administrative costs of the qualified noncontributory defined benefit retirement plan charged to pension and other employee benefits in the consolidated statements of income for the three and nine months ended September 30, 2009 were $10,000 and $82,000, respectively.  Employer expense incurred in connection with the 401-K plan during the three and nine months ended September 30, 2009 was $58,000 and $170,000 respectively.  The components of net periodic pension cost of the qualified noncontributory defined benefit retirement plan for the three and nine months ended September 30, 2008 are summarized as follows (in thousands):  For the Three MonthsFor the Nine MonthsEnded September 30,
2008Ended September 30,
2008Service cost$186559Interest cost140420Expected return on plan assets(132)(396)Amortization of net loss3091Net periodic pension cost224674   17      LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 7  Employee Benefits (continued) Effective February 1, 2009, LCNB established a nonqualified defined benefit retirement plan for certain highly compensated employees.  The nonqualified plan ensures that participants receive the full amount of benefits to which they would have been entitled under the noncontributory defined benefit retirement plan in the absence of limits on benefit levels imposed by certain sections of the Internal Revenue Code.  The components of net periodic pension cost of the nonqualified defined benefit retirement plan for the three and nine months ended September 30, 2009 are summarized as follows (in thousands):  For the Three MonthsFor the Nine MonthsEnded September 30,
2009Ended September 30,
2009Service cost$41108Interest cost719Prior service cost1232Net periodic pension cost60159   Note 8 - Stock Options Under the Ownership Incentive Plan (the "Plan"), LCNB may grant stock-based awards to eligible employees.  The awards may be in the form of stock options, share awards, and/or appreciation rights. The Plan provides for the issuance of up to 200,000 common shares.  As of September 30, 2009, only stock options have been granted under the Plan.  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, 2009 were as follows:  OutstandingExercisableExpiration
DateNumberWeighted Average Exercise PriceNumberWeighted Average Exercise PriceNumber ExercisedFeb 201311,056$13.0911,056$13.09-Jan 20148,10817.668,10817.66-Jan 20167,93418.954,76018.95-Feb 20178,11617.883,24617.88-Feb 201813,91812.552,78412.55-Jan 201929,1109.00---78,242$13.0429,954$15.73-    18      LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 8 - Stock Options (continued) The following table summarizes stock option activity for the periods indicated:  Nine Months ended September 30,20092008OptionsWeighted Average Exercise PriceOptionsWeighted Average Exercise PriceOutstanding, January 1,49,132$ 15.4335,214$ 16.57Granted29,1109.0013,91812.55Exercised----Outstanding, September 30,78,242$ 13.0449,132$ 15.43Exercisable,  September 30,29,954$ 15.7322,339$ 15.60  At September 30, 2009, 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 that date and that were in the money (market price greater than exercise price) was approximately $58,000.  There was no aggregate intrinsic value at that date for only the options that were exercisable.  The intrinsic value changes based on changes in the market price of the Companys stock.  The estimated weighted-average fair value of the options granted in the first quarter of 2009 and 2008 was $1.89 and $2.27 per option, respectively.  The fair value was estimated at the dates of grant using the Black-Scholes option-pricing model and the following assumptions:  20092008Risk-free interest rate3.49%3.56%Average dividend yield4.04%3.77%Volatility factor of the expected marketprice of LCNBs common stock27.54%22.72%Average life in years9.08.2   Total expense related to options included in salaries and wages in the consolidated statements of income for the three and nine months ended September 30, 2009 were $9,000 and $24,000, respectively and $8,000 and $23,000 for the three and nine months ended September 30, 2008, respectively.    19      LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 9 - Earnings per Common Share Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period.  Diluted earnings per common share is adjusted for the dilutive effects of stock options and warrants.  The diluted average number of common shares outstanding has been increased for the assumed exercise of stock options and warrants with proceeds used to purchase treasury shares at the average market price for the period.  The computations were as follows (dollars in thousands, except share and per share data):  For the Three MonthsFor the Nine MonthsEnded September 30,Ended September 30,2009200820092008Net income available to common shareholders$1,8371,7944,9324,936Weighted average number of shares outstanding used in the calculation of basic earnings per common share6,687,2326,687,2326,687,2326,687,232Add dilutive effect of warrants20,514-5,800-Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share6,707,7466,687,2326,693,0326,687,232Basic earnings per common share$0.270.270.740.74Diluted earnings per common share$0.270.270.740.74   Note 10 - Fair Value of Financial Instruments The inputs to valuation techniques used to measure fair value are assigned to one of three broad input 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; and  · Level 3 - inputs that are unobservable for the asset or liability.  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.  20      LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 10 - Fair Value Measurements (continued) The majority of LCNBs debt securities are classified as available-for-sale.  The securities are reported at fair value with unrealized holding gains and losses reported net of income taxes in accumulated other comprehensive income.  LCNB utilizes a pricing service for determining the fair values of most of its investment securities.  Fair value for U.S. Treasury Notes and corporate securities are determined based on market quotations (level 1).  Fair value for most of the other investment securities is calculated using the discounted cash flow method for each security.  The discount rates for these cash flows are estimated by the pricing service using rates observed in the market (level 2).  Cash flow streams are dependent on estimated prepayment speeds and the overall structure of the securities given existing market conditions.  In addition, approximately $539,000 is invested in a mutual fund.  LCNB uses the fair value estimate provided by the mutual fund company, which uses market quotations when such quotes are available and good faith judgment when market quotations are not available.  Because LCNB does not know the portion of the mutual fund valued using market quotations and the portion valued using good faith judgment, the entire investment in the mutual fund has been classified as a level 3 input.  Additionally, Dakin owns stock in an insurance company and LCNB Corp. owns trust preferred securities in various financial institutions. Market quotations (level 1) are used to determine fair value for these investments.  The following table summarizes the valuation of LCNBs financial assets and liabilities measured on a recurring basis by the input levels defined by the fair value hierarchy as of September 30, 2009 and December 31, 2008 (000s):  Fair Value Measurements at
Reporting Date UsingFair Value MeasurementsQuoted Prices in Active Markets for Identical Assets
(Level 1)Significant Other Observable Inputs
(Level 2)Significant Unobservable Inputs
(Level 3)September 30, 2009Available-for-sale
securities$201,61413,424187,651539December 31, 2008Available-for-sale
securities$136,2441,057132,7312,456     21      LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 10 - Fair Value Measurements (continued) The following table is a reconciliation of the beginning and ending balances of recurring fair value measurements that use significant unobservable inputs (level 3) for the three and nine months ended September 30, 2009 and 2008 (000s):  For the Three MonthsFor the Nine MonthsEnded September 30,Ended September 30,2009200820092008Beginning balance$5262,0872,4561,592Purchases---500Tax-exempt municipal securities reclassified
as held-to-maturity--(1,944)-Dividends reinvested551516Net change in unrealized gains (losses)
included in other comprehensive income8112(15)Ending balance$5392,0935392,093  Assets that may be recorded at fair value on a nonrecurring basis include impaired loans, other real estate owned, and other repossessed assets.  A loan is considered impaired when management believes it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement.  Impaired loans are carried at the present value of estimated future cash flows using the loans existing rate or the fair value of collateral if the loan is collateral dependent, if this value is less than the loan balance.  When the fair value of the collateral is based on an observable market price or current appraised value, the inputs are considered to be level 2.  When an appraised value is not available and there is not an observable market price, the inputs are considered to be level 3.  Other real estate owned is adjusted to fair value upon transfer of the loan to foreclosed assets, usually based on an appraisal of the property.  Subsequently, foreclosed assets are carried at the lower of carrying value or fair value.  The inputs for a valuation based on current appraised value are considered to be level 2.   22      LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 10 - Fair Value Measurements (continued) The following table summarizes the valuation of LCNBs assets measured on a nonrecurring basis by the input levels defined by the fair value hierarchy as of September 30, 2009 and December 31, 2008 (000s):  Fair Value Measurements at
Reporting Date UsingFair Value MeasurementsQuoted Prices in Active Markets for Identical Assets
(Level 1)Significant Other Observable Inputs
(Level 2)Significant Unobservable Inputs
(Level 3)September 30, 2009Impaired loans$5,535--5,535Other real estate owned2,424-2,424-Totals$7,9592,4245,535December 31, 2008Impaired loans$2,491--2,491Other real estate owned39-39-Repossessed assets50-50-Totals$2,580-892,491  Carrying amounts and estimated fair values of financial instruments as of September 30, 2009 and December 31, 2008 were as follows (000s):  September 30, 2009December 31, 2008CarryingFairCarryingFairAmountValueAmountValueFINANCIAL ASSETS:Cash and cash equivalents$30,97230,97218,02018,020Securities available for sale201,614201,614136,244136,244Securities held to maturity12,15612,156--Federal Reserve Bank and
Federal Home Loan Bank stock3,0313,0313,0283,028Loans, net457,199470,428451,343465,201FINANCIAL LIABILITIES:Deposits639,081642,789577,622581,536Short-term borrowings3173172,2062,206Long-term debt25,30926,6655,0005,493   23      LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 10 - Fair Value Measurements (continued) The fair value of off-balance-sheet financial instruments at September 30, 2009 and December 31, 2008 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 the Company.  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.  The carrying value of Federal Home Loan Bank and Federal Reserve Bank stock approximates fair value based on the respective redemptive provisions.  The amortized cost of held-to-maturity securities approximates fair value.  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 and U.S. Treasury demand note borrowings are deemed to approximate fair value of short-term borrowings.  For long-term debt, fair values are estimated based on the discounted value of expected net cash flows using current interest rates.   24      LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 11  Subsequent Event On October 21, 2009, LCNB entered into a repurchase agreement with the U.S. Department of the Treasury (the Treasury Department) pursuant to which LCNB redeemed all 13,400 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, sold to the Treasury Department on January 9, 2009 in connection with the Treasury Departments Capital Purchase Program (CPP).  Under the CPP, the Treasury Department also received a warrant to purchase 217,063 shares of the Companys common stock with an exercise price of $9.26 per share.  In connection with this redemption, LCNB paid approximately $13.5 million to the Treasury Department, which includes the original investment amount of $13.4 million plus accrued and unpaid dividends of approximately $123,000.  As a result of the redemption, LCNB Corp. recorded a reduction in retained earnings of approximately $463,000 in the fourth quarter of 2009 associated with accelerated discount accretion related to the difference between the amount at which the Preferred Stock sale was initially recorded and its redemption price. The Preferred Stock dividend and the acceleration of the accretion will reduce the fourth quarters net income available to common shareholders and earnings per common share.  The funds for the redemption were obtained, in part, through the sale of approximately $10.9 million of available-for-sale investment securities at a total net loss of $74,000.  All securities sold had an unrealized gain at September 30, 2009.  LCNB Corp. exceeded all regulatory requirements to be classified as well capitalized before accepting the CPP investment and will exceed the regulatory requirements after the redemption.  LCNB Corp. does not intend to negotiate the repurchase of the warrant issued to the Treasury Department as part of the CPP.  Instead, pursuant to the terms of the repurchase agreement, the warrant has been cancelled and LCNB has issued a substitute warrant to the Treasury Department with the same terms as the original warrant, except that Section 13(H) of the original warrant, which dealt with the reduction of shares subject to the warrant in the event that LCNB raised $13.4 million in a qualified stock offering prior to December 31, 2009, has been removed.  A copy of the repurchase agreement was filed by LCNB as Exhibit 10.1 to its Current Report on Form 8-K dated October 21, 2009, and a copy of the substitute warrant is included as an exhibit to this report.  Both documents are incorporated by reference into this Note 11, and the foregoing summary of certain provisions of these documents is qualified in its entirety by reference thereto.   25      LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 12  Recent Accounting Pronouncements Statement of Financial Accounting Standards (SFAS) No. 166, Accounting for Transfers of Financial Assets  an amendment of FASB Statement No. 140 and SFAS No. 167, Amendments to FASB Interpretation No. 46(R) were issued by the Financial Accounting Standards Board (the FASB) on June 12, 2009.  Both standards will be effective for LCNB on January 1, 2010.  SFAS No. 166 requires more information about transfers of financial assets, including securitization transactions and the continued risk exposures related to such transfers.  It eliminates the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosures.  SFAS No. 167 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting or similar rights should be consolidated.  The determination of whether a company is required to consolidate an entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the entitys economic performance.  Additional disclosures are also required.  LCNB management does not anticipate that adoption of SFAS No. 166 and No. 167 will have a material effect on LCNBs consolidated financial statements.  Accounting Standards Update No. 2009-05, Measuring Liabilities at Fair Value was issued by the FASB in August 2009.  For those entities that elect to value liabilities at fair value, this release provides guidance for measuring the fair value of liabilities and classifying the inputs as level 1, level 2, or level 3. It is effective for the first reporting period, including interim periods, after issuance.  LCNB does not currently value any of its liabilities at fair value and does not anticipate that adoption of this update will have a material effect on its consolidated financial statements.    26      REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    To the Board of Directors and Shareholders LCNB Corp. and subsidiaries Lebanon, Ohio   We have reviewed the accompanying consolidated balance sheet of LCNB Corp. and subsidiaries as of September 30, 2009, and the related consolidated statements of income and comprehensive income for each of the three-month and nine-month periods ended September 30, 2009 and 2008, and the related consolidated statements of shareholders equity and cash flows for each of the nine-month periods ended September 30, 2009 and 2008.  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 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, 2008, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for the year then ended (not presented herein), and in our report dated February 27, 2009, 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, 2008, 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 5, 2009  27      LCNB CORP. AND SUBSIDIARIES   Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements Certain matters disclosed herein may be deemed to be forward-looking statements that involve risks and uncertainties.  Forward looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words and their derivatives such as expects, anticipates, believes, estimates, plans, projects, or other statements concerning opinions or judgments of LCNB and its management about future events.  Factors that could influence the accuracy of such forward looking statements include, but are not limited to, regulatory policy changes, interest rate fluctuations, loan demand, loan delinquencies and losses, general economic conditions and other risks.  Such forward-looking statements represent management's judgment as of the current date. Actual strategies and results in future time periods may differ materially from those currently expected. LCNB disclaims, however, any intent or obligation to update such forward-looking statements. LCNB intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.   Results of Operations LCNBs net income available to common shareholders was $1,837,000 or $0.27 basic and diluted earnings per common share and $4,932,000 or $0.74 basic and diluted earnings per common share for the three and nine-month periods ended September 30, 2009, respectively.  Net income available to common shareholders was $1,794,000 or $0.27 basic and diluted earnings per common share and $4,936,000 or $0.74 basic and diluted earnings per common share for the comparable periods in 2008.  Affecting net income to common shareholders and earnings per common share for the three and nine month periods was an increase in net interest income, offset by increases in the provision for loan losses and non-interest expense.  Negatively affecting net income available to common shareholders during 2009 were preferred stock dividends paid and related discount accretion recorded in connection with the preferred shares and warrant issued under the Capital Purchase Program (the CPP) on January 9, 2009.  Net interest income grew during the three and nine month periods of 2009 compared to 2008 primarily because of growth in interest earning assets and a general market decline in deposit interest rates.  Non-interest expense during the three and nine periods of 2009 was influenced by industry-wide increases in FDIC deposit insurance premiums, an industry-wide special assessment levied by the FDIC, and a pension-related charge recognized by LCNB during the first quarter 2009.  Current economic conditions have contributed to an increase in loan delinquencies, but LCNBs loan portfolio continues to benefit from responsible underwriting and lending practices.  Net charge-offs for the first nine months of 2009 and 2008 totaled $639,000 and $322,000, respectively.  Non-accrual loans and loans past due 90 days or more and still accruing interest totaled $1,781,000 or 0.39% of total loans at September 30, 2009, compared to $3,087,000 or 0.68% of total loans at December 31, 2008.  Other real estate owned and other repossessed assets totaled approximately $2,424,000 at September 30, 2009, compared to $89,000 at December 31, 2008.  Non-accrual loans and loans past due 90 days or more decreased and other real estate owned increased largely due to the transfer of commercial real estate property into the other real estate owned category.      28


LCNB CORP. AND SUBSIDIARIES  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)  LCNBs net income was $2,043,000 for the three months ended September 30, 2009, compared to $1,794,000 for the three months ended September 30, 2008.  The return on average assets (ROAA) for the third quarter 2009 was 1.09% and the return on average total equity (ROAE) was 10.46%, compared with an ROAA of 1.09% and an ROAE of 12.27% for the third quarter of 2008.  LCNBs net income was $5,446,000 during the first nine months of 2009 compared to $4,936,000 for the first nine months of 2008.  The ROAA and ROAE for the first nine months of 2009 were 1.02% and 9.54%, respectively.  The comparable ratios for the first nine months of 2008 were 1.05% and 11.38%, respectively.  The decrease in ROAE during the 2009 periods is primarily due to the addition of preferred stock to equity on January 9, 2009.    [Remainder of this page intentionally left blank]


29


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, 2009 vs. 2008. 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, 2009 and 2008, 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 30,20092008AverageInterestAverageAverageInterestAverageOutstandingEarned/Yield/OutstandingEarned/Yield/BalancePaidRateBalancePaidRate(Dollars in thousands)Loans (1)$457,372$6,8845.97%$443,602$7,1156.36%Federal funds sold and interest-
bearing demand deposits20,014130.26%24,2011262.07%Interest-bearing deposits in banks---%3,913252.53%Federal Reserve Bank stock940--%938--%Federal Home Loan Bank stock2,091264.93%2,063285.38%Investment securities:Taxable112,3751,0503.71%74,4107844.18%Non-taxable (2)86,6621,2055.52%53,1308036.00%Total earnings assets679,4549,1785.36%602,2578,8815.85%Non-earning assets64,01954,005Allowance for loan losses(2,678)(2,473)Total assets$740,795$653,789Interest-bearing deposits$548,5122,2781.65%$501,3413,2202.55%Short-term borrowings599--%72542.19%Long-term debt23,9291772.93%5,000665.24%Total interest-bearing liabilities573,0402,4551.70%507,0663,2902.57%Demand deposits84,92783,443Other liabilities5,3425,312Capital77,48657,968Total liabilities and capital$740,795$653,789Net interest rate spread (3)3.66%3.28%Net interest income and net interest margin
on a taxable-equivalent basis (4)$6,7233.93%$5,5913.68%Ratio of interest-earning assets to
interest-bearing liabilities118.57%118.77% (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.


30      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, 2009 as compared to the same period in 2008.  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 EndedSeptember 30, 2009 vs. 2008Increase (decrease) due to:VolumeRateTotal(In thousands)Interest-earning Assets:Loans$216(447)(231)Federal funds sold and interest-bearing
demand deposits(19)(94)(113)Interest-bearing deposits in banks(25)-(25)Federal Reserve Bank stock---Federal Home Loan Bank stock-(2)(2)Investment securities:Taxable363(97)266Nontaxable471(69)402Total interest income1,006(709)297Interest-bearing Liabilities:Deposits280(1,222)(942)Short-term borrowings(1)(3)(4)Long-term debt151(40)111Total interest expense430(1,265)(835)Net interest income$5765561,132  Net interest income on a fully tax-equivalent basis for the three months ended September 30, 2009 totaled $6,723,000, an increase of $1,132,000 from the comparable period in 2008.  Total interest income increased $297,000 and total interest expense decreased $835,000.  The increase in total interest income was due to a $77.2 million increase in average earning assets, partially offset by a 49 basis point (one basis point equals 0.01%) decrease in the average rate earned on earning assets.  The increase in interest earning assets was primarily due to a $71.5 million increase in average investment securities and a $13.8 million increase in the loan portfolio.  The decrease in the average rate earned on earning assets was primarily due to general decreases in market interest rates.  31      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 an 87 basis point decrease in the average rate paid, partially offset by a $66.0 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 average interest-bearing deposits, which increased $47.2 million, and average long-term borrowings, which increased $18.9 million due to additional borrowings from the Federal Home Loan Bank of Cincinnati during the first and third quarters of 2009.  Nine Months Ended September 30, 2009 vs. 2008. The following table presents, for the nine months ended September 30, 2009 and 2008, 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 30,20092008AverageInterestAverageAverageInterestAverageOutstandingEarned/Yield/OutstandingEarned/Yield/BalancePaidRateBalancePaidRate(Dollars in thousands)Loans (1)$452,047$20,5806.09%$445,882$21,8506.55%Federal funds sold and interest-
bearing demand deposits21,107410.26%24,2484282.36%Interest-bearing deposits in banks---%2,044382.48%Federal Reserve Bank stock939283.99%850243.77%Federal Home Loan Bank stock2,091734.67%2,036825.38%Investment securities:Taxable106,0673,1834.01%55,1561,8064.37%Non-taxable (2)76,2173,2265.66%48,9572,2116.03%Total earnings assets658,46827,1315.51%579,17326,4396.10%Non-earning assets60,31352,829Allowance for loan losses(2,555)(2,472)Total assets$716,226$629,530Interest-bearing deposits$531,4617,2691.83%$478,5119,9962.79%Short-term borrowings718--%726122.21%Long-term debt18,6654403.15%5,0001975.26%Total interest-bearing liabilities550,8447,7091.87%484,23710,2052.82%Demand deposits84,67282,472Other liabilities4,4134,882Capital76,29757,939Total liabilities and capital$716,226$629,530Net interest rate spread (3)3.64%3.28%Net interest income and net interest margin
on a taxable-equivalent basis (4)$19,4223.94%$16,2343.74%Ratio of interest-earning assets to
interest-bearing liabilities119.54%119.61%  (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.  32      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, 2009 as compared to the same period in 2008.  Nine Months EndedSeptember 30, 2009 vs. 2008Increase (decrease) due to:VolumeRateTotal(In thousands)Interest-earning Assets:Loans$299(1,569)(1,270)Federal funds sold and interest-bearing
demand deposits(49)(338)(387)Interest-bearing deposits in banks(38)-(38)Federal Reserve Bank stock314Federal Home Loan Bank stock2(11)(9)Investment securities:Taxable1,539(162)1,377Nontaxable1,162(147)1,015Total interest income2,918(2,226)692Interest-bearing Liabilities:Deposits1,013(3,740)(2,727)Short-term borrowings-(12)(12)Long-term debt350(107)243Total interest expense1,363(3,859)(2,496)Net interest income$1,5551,6333,188  Net interest income on a fully tax-equivalent basis for the first nine months of 2009 totaled $19,422,000, a $3,188,000 increase from the first nine months of 2008.  Total interest income increased $692,000 and total interest expense decreased $2,496,000.  The increase in total interest income was primarily due to a $79.3 million increase in average total earning assets, partially offset by a 59 basis point decrease in the average rate earned on earning assets.  The increase in average earning assets was primarily due to a $78.2 million increase in average investment securities.  The decrease in the average rate earned on earning assets was primarily due to general decreases in market interest rates.  33      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 95 basis point decrease in the average rate paid on interest-bearing liabilities, partially offset by a $66.6 million increase in average interest-bearing liabilities.  The increase in average interest-bearing liabilities was primarily due to a $53.0 million increase in average interest-bearing deposits and a $13.7 million increase in average long term debt due to additional borrowings from the Federal Home Loan Bank of Cincinnati during the first and third quarters of 2009.   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, 2009 and 2008 was $664,000 and $188,000, respectively, and $970,000 and $322,000 for the nine months ended September 30, 2009 and 2008, respectively.  The increase in the provision for loan losses reflects an increase in non-accrual and delinquent loans, the net charge-off trend, and the current economic conditions.   Non -Interest Income  Three Months Ended September 30, 2009 vs. 2008. Non-interest income for the third quarter of 2009 was $27,000 less than for the same period in 2008. Service charges and fees decreased $151,000 primarily due to fewer overdraft fees on checking and NOW accounts.  This decrease was partially offset by a $60,000 increase in gains on sales of securities and a $44,000 increase in gains from sales of mortgage loans.  Gains from sales of mortgage loans increased due to a higher volume of sales to the Federal Home Loan Mortgage Corporation during the 2009 period.  Loan sales during the third quarter 2009 totaled $2,481,000 compared to $81,000 in sales during the third quarter 2008.  The increase in the amount of mortgage loans sold is primarily due to an increase in the number of loans being refinanced, reflecting a general decline in market interest rates for residential mortgage loans during the first nine months of 2009.  Nine Months Ended September 30, 2009 vs. 2008. Non-interest income for the first nine months of 2009 was $87,000 greater than for the same period in 2008.  Gains from sales of mortgage loans increased $368,000, partially offset by a $237,000 decrease in service charges and fees and a $121,000 decrease in insurance agency income.  Loan sales for the first nine months of 2009 totaled $26,033,000, compared to $814,000 of loans sold for the first nine months of 2008.  Service charges and fees decreased primarily due to fewer overdraft fees on checking and NOW accounts and insurance agency income decreased due to a $64,000 decrease in contingency commissions and a general decline in commission income due to market factors.  Contingency commissions are profit-sharing arrangements on property and casualty policies between the originating agency and the carrier and are generally based on underwriting results and written premiums.  As such, the amount received each year can vary significantly depending on loss experience.  34       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, 2009 vs. 2008. Total non-interest expense increased $266,000 during the third quarter 2009 as compared to the third quarter 2008 primarily due to a $296,000 increase in FDIC premiums reflecting an industry-wide increase in quarterly premiums.  Salaries and wages increased $119,000 primarily due to additional employees, partially due to the opening of the Centerville office in September 2008, and annual salary and wage increases.  These expense increases were partially offset by a $98,000 decrease in pension and other employee benefits primarily due to lower pension expense.  Nine Months Ended September 30, 2009 vs. 2008. Total non-interest expense increased $1,903,000 during the first nine months of 2009 as compared to the first nine months of 2008 primarily due to an $874,000 increase in FDIC premiums and a $722,000 write-off of a pension asset during the first quarter 2009.  The increase in FDIC premiums includes an approximate $325,000 expense recognized for an industry-wide special assessment levied by the FDIC as of June 30, 2009.  The balance of the increase reflects industry-wide increases in quarterly premiums. The write-off of the pension asset is related to the redesign during the first quarter 2009 of LCNBs retirement program.  The plans were redesigned to provide competitive benefits to employees and provide more predictable and lower retirement plan costs over the long term.  Because of the redesign, pension plan related balance sheet accounts were adjusted resulting in an approximate $3.0 million after tax increase in other comprehensive income, which is a component of shareholders equity, and the $722,000 charge to non-interest expense.  The remainder of the increase in total non-interest expense is due to a $398,000 increase in salaries and wages primarily for the same reasons discussed above, partially offset by a $204,000 decrease in intangible amortization.  The decrease in the intangible amortization is primarily due to the amortization in full during 2008 of an intangible asset related to the purchase of three offices from another bank in 1997.   Income Taxes LCNBs effective tax rates for the nine months ended September 30, 2009 and 2008 were 22.1% and 25.4%, 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, 2009 were $100.1 million greater than at December 31, 2008.  The growth in total assets were primarily funded by a $61.5 million increase in total deposits, a $20.3 million increase in long-term debt, and $13.4 million received from the sale of preferred stock to the U.S. Treasury Department under the CPP.  35      LCNB CORP. AND SUBSIDIARIES  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)  Net loans at September 30, 2009 were $5,856,000 greater than at December 31, 2008.  Commercial and industrial loans were $4,983,000 greater at September 30, 2009 and commercial real estate loans were $6,793,000 greater.  During the same period, residential real estate loans decreased $344,000 and consumer loans decreased $5,506,000.  Residential real estate loans decreased primarily because new loans originated were sold to FHLMC.  New residential real estate loans sold during the nine months ended September 30, 2009 totaled $26,033,000.  Consumer loans decreased primarily due to weak demand.  The investment securities portfolio at September 30, 2009 was $77.5 million greater than at December 31, 2008.  Most of the growth was in U. S. Agency mortgage-backed securities, which increased $20.4 million and municipal securities, which increased $43.6 million.  The $20.3 million increase in long-term debt is due to new borrowings from the Federal Home Loan Bank of Cincinnati during the first and third quarters of 2009.  Of the $61.5 million increase in total deposits, approximately $29.8 million was due to increases in public fund deposits by local governmental entities. LCNB has also been receiving a higher than normal increase in deposits due, in part, to the volatility of current economic conditions.  Most of the deposit growth has been in liquid NOW account, money fund deposit account, and regular savings account products.  On January 9, 2009, LCNB received $13.4 million of new capital from the U.S. Treasury Department under the CPP and issued 13,400 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A and a warrant to the U.S. Treasury Department for the purchase of 217,063 common shares of LCNB stock at an exercise price of $9.26.  LCNB allocated $583,000 of the proceeds from the preferred stock issuance to the warrants.  The resulting discount in the preferred stock is being amortized over five years and is being reported as an adjustment to preferred stock dividends.  The issuance of preferred stock significantly increased LCNBs capital and liquidity levels. The preferred stock pays a cumulative dividend of 5% per annum for the first five years and 9% per annum thereafter if not redeemed first.  For more information regarding the terms of agreement between LCNB and the U.S. Treasury Department under the CPP and the securities issued by LCNB to the U.S. Treasury Department thereunder, please see the Current Report on Form 8-K filed by LCNB with the SEC on January 9, 2009 which is hereby, along with exhibits thereto, incorporated by reference.  On October 21, 2009, LCNB redeemed all 13,400 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A.  See Notes to Consolidated Financial Statements, Note 11  Subsequent Event for additional information pertaining to the redemption of the preferred shares.  Other assets at September 30, 2009 were $2.8 million greater than at December 31, 2008 primarily due to the transfer of three commercial real estate properties totaling $2.4 million from the loan portfolio into other real estate owned during the third quarter 2009.    36      LCNB CORP. AND SUBSIDIARIES  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)  Liquidity On October 21, 2009, LCNB redeemed all 13,400 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A.  See Notes to Consolidated Financial Statements, Note 11  Subsequent Event for additional information pertaining to the redemption of the preferred shares.  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, would be 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, interest-bearing deposits in other banks, and securities available for sale.  At September 30, 2009, LCNBs liquid assets amounted to $232.6 million or 31.0% of total assets, an increase from $154.3 million or 23.7% of total assets at December 31, 2008. Most of this growth was due to growth in investment securities available for sale.  Liquidity is also provided by access to core funding sources, primarily core depositors in the banks market area.  Approximately 76.5% of total deposits at September 30, 2009 were core deposits, compared to 79.6% of deposits at December 31, 2008.  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, or use a line of credit established with another bank.  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.   37      LCNB CORP. AND SUBSIDIARIES  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)  Recent Accounting Pronouncements Statement of Financial Accounting Standards (SFAS) No. 166, Accounting for Transfers of Financial Assets  an amendment of FASB Statement No. 140 and SFAS No. 167, Amendments to FASB Interpretation No. 46(R) were issued by the Financial Accounting Standards Board (the FASB) on June 12, 2009.  Both standards will be effective for LCNB on January 1, 2010.  SFAS No. 166 requires more information about transfers of financial assets, including securitization transactions and the continued risk exposures related to such transfers.  It eliminates the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosures.  SFAS No. 167 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting or similar rights should be consolidated.  The determination of whether a company is required to consolidate an entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the entitys economic performance.  Additional disclosures are also required. LCNB management does not anticipate that adoption of SFAS No. 166 and No. 167 will have a material effect on LCNBs consolidated financial statements. Accounting Standards Update No. 2009-05, Measuring Liabilities at Fair Value was issued by the FASB in August 2009.  For those entities that elect to value liabilities at fair value, this release provides guidance for measuring the fair value of liabilities and classifying the inputs as level 1, level 2, or level 3.  It is effective for the first reporting period, including interim periods, after issuance.  LCNB does not currently value any of its liabilities at fair value and does not anticipate that adoption of this update will have a material effect on its consolidated financial statements.   38      LCNB CORP. AND SUBSIDIARIES   Item 3.  Quantitative and Qualitative Disclosures about Market Risks Market risk for LCNB is primarily interest rate risk.  LCNB attempts to mitigate this risk through asset/liability management strategies designed to decrease the vulnerability of its earnings to material and prolonged changes in interest rates.  LCNB does not use derivatives such as interest rate swaps, caps, or floors to hedge this risk.  LCNB has not entered into any market risk instruments for trading purposes.  The Bank's Asset and Liability Management Committee ("ALCO") primarily uses a combination of Interest Rate Sensitivity Analysis (IRSA) and Economic Value of Equity (EVE) analysis for measuring and managing interest rate risk.  IRSA is used to estimate the effect on net interest income 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 300 basis points scenario 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, 2009 IRSA indicates that an increase in interest rates would have a positive effect on net interest income (NII), and a decrease in 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 PointsAmount$ Change in
Net Interest
Income% Change in
Net Interest
Income(Dollars in thousands)Up 300$28,0678893.27%Up 20027,7896112.25%Up 10027,4112330.86%Base27,178--%Down 10026,970(208)-0.77%Down 20026,832(346)-1.27%  IRSA shows the effect on NII during a one-year period only.  A more long-range model is the EVE analysis, which shows the estimated present value of future cash inflows from interest-earning assets less the present value of future cash outflows for interest-bearing liabilities for the same rate shocks.  As shown below, the September 30, 2009 EVE analysis indicates that an increase in interest rates would have a negative effect on the EVE and a decrease in rates would have a positive effect on the EVE.  The changes in EVE for all rate assumptions are within LCNBs acceptable ranges.  Rate Shock Scenario in Basis PointsAmount$ Change in
EVE% Change in
EVE(Dollars in thousands)Up 300$75,554(21,368)-22.05%Up 20083,069(13,853)-14.29%Up 10089,816(7,106)-7.33%Base96,922--%Down 100102,3495,4275.60%Down 200108,51811,59611.96%  39      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.    Item 4.  Controls and Procedures a)Disclosure controls and procedures.  The Chief Executive Officer and the Chief Financial Officer have carried out an evaluation of the effectiveness of LCNB's disclosure controls and procedures that ensure that information relating to LCNB required to be disclosed by LCNB in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to LCNBs management, including its principal executive officer and principal financial officer, as appropriate, in order to allow timely decisions to be made regarding required disclosures.  Based upon this evaluation, these officers have concluded, that as of September 30, 2009, 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.   40      PART II.  OTHER INFORMATION LCNB CORP. AND SUBSIDIARIES    Item 1.     Legal Proceedings Not applicable   Item 1A.  Risk Factors No material changes   Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds During the period of this report, LCNB did not sell any of its securities that were not registered under the Securities Act, except as previously disclosed in the Current Report on Form 8-K filed on January 9, 2009.  During the period covered by this report, LCNB did not purchase any shares of its equity securities.  During the period of this report, LCNB was unable to increase dividends to common shareholders without U.S. Treasury Department permission for a period of three years from the date of participation in the CPP unless the preferred securities are no longer held by the U.S. Treasury Department.  Additionally, no dividends were permitted to be paid on common stock unless and until all accrued and unpaid dividends for all past dividend periods owed to the U.S. Treasury Department on the preferred shares are fully paid. On October 21, 2009, LCNB redeemed all 13,400 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A.  See Notes to Consolidated Financial Statements, Note 11 - Subsequent Event of this report for additional information pertaining to the redemption of the preferred shares.  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, would be 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.   Item 3.     Defaults Upon Senior Securities Not applicable   Item 4.     Submission of Matters to a Vote of Security Holders None   Item 5.     Other Information Not applicable  41      LCNB CORP. AND SUBSIDIARIES    Item 6.     Exhibits Exhibit No.Exhibit Description3.1Amended and Restated Articles of Incorporation of LCNB Corp.  incorporated by reference to Form 10-K for the fiscal year ended December 30, 2008, Exhibit 3.1.3.2Code of Regulations of LCNB Corp.  incorporated by reference to Form 10-Q for the quarterly period ended March 31, 2005, Exhibit 3(ii).4.1Warrant to Purchase Shares of Common Stock of the Registrant, dated January 9, 2009  incorporated by reference to the Registrants Current Report on Form 8-K filed on January 9, 2009, Exhibit 4.1.4.2Letter Agreement, dated as of January 9, 2009 between the Registrant and the U.S. Department of the Treasury, which includes the Securities Purchase Agreement  Standard Terms  incorporated by reference to the Registrants Current Report on Form 8-K filed on January 9, 2009, Exhibit 10.1.4.3Substitute Warrant to Purchase Shares of Common Stock of the Registrant, dated January 9, 2009.4.4Repurchase Letter Agreement, dated as of October 21, 2009 between the Registrant and the U.S. Department of the Treasury  incorporated by reference to the Registrants Current Report on Form 8-K filed on October 21, 2009, Exhibit 10.1.10.1LCNB Corp. Ownership Incentive Plan  incorporated by reference to Registrants Form DEF 14A Proxy Statement pursuant to Section 14(a), dated March 15, 2002, Exhibit A (000-26121).10.2Form of Option Grant Agreement under the LCNB Corp. Ownership Incentive Plan  incorporated by reference to Form 10-K for the fiscal year ended December 31, 2005, Exhibit 10.2.10.3Letter Agreement, dated as of January 9, 2009 between the Registrant and the U.S. Department of the Treasury, which includes the Securities Purchase Agreement  Standard Terms  incorporated by reference to the Registrants Current Report on Form 8-K filed on January 9, 2009, Exhibit 10.1.10.4Nonqualified Executive Retirement Plan  incorporated by reference to the Registrants quarterly report on Form 10-Q for the period ended June 30, 2009, Exhibit 10.4.10.5Repurchase Letter Agreement, dated as of October 21, 2009 between the Registrant and the U.S. Department of the Treasury  incorporated by reference to the Registrants Current Report on Form 8-K filed on October 21, 2009, Exhibit 10.1.  42      LCNB CORP. AND SUBSIDIARIES   Item 6.     Exhibits (continued) Exhibit No.Exhibit Description31.1Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.31.2Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.32Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.   43      SIGNATURES   Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.    LCNB Corp.  November 5, 2009 /s/ Stephen P. Wilson Stephen P. Wilson, Chief Executive Officer and Chairman of the Board of Directors   November 5, 2009 /s/Robert C. Haines, II Robert C. Haines, II, Executive Vice President and Chief Financial Officer    44