UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.   20549  FORM 10-Q  (Mark One)  ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended March 31, 2010  (     ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition period from   to  Commission File Number  000-26121  LCNB Corp. (Exact name of registrant as specified in its charter)  Ohio 31-1626393 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)  2 North Broadway, Lebanon, Ohio   45036 (Address of principal executive offices, including Zip Code)  (513) 932-1414 (Registrant's telephone number, including area code)  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes         [  ] No  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [  ] Yes         [  ] No  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. Large accelerated filer [  ] Accelerated filer [X] Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [  ]  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [  ] Yes         [X] No  The number of shares outstanding of the issuer's common stock, without par value, as of May 3, 2010 was 6,687,232 shares.   LCNB Corp.  INDEX   PART I  FINANCIAL INFORMATION 3  Item 1.  Financial Statements 3  CONSOLIDATED BALANCE SHEETS 3  CONSOLIDATED STATEMENTS OF INCOME 4  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5  CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 6  CONSOLIDATED STATEMENTS OF CASH FLOWS 7  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8  REPORT OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRM 26  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 27  Item 3.  Quantitative and Qualitative Disclosures about Market Risks 33  Item 4.  Controls and Procedures 34  Item 4T.  Controls and Procedures 34  PART II -- OTHER INFORMATION 35  Item 1. Legal Proceedings 35  Item 1A.  Risk Factors 35  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35  Item 3. Defaults Upon Senior Securities 35  Item 4. (Removed and Reserved). 35  Item 5. Other Information 35  Item 6. Exhibits 36  SIGNATURES 38     -2-    PART I  FINANCIAL INFORMATION   Item 1.  Financial Statements LCNB CORP. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Dollars in thousands)March 31,December 31,20102009(Unaudited)ASSETS:Cash and due from banks$23,62212,626Federal funds sold and interest-bearing demand deposits3,710-Total cash and cash equivalents27,33212,626Investment securities:Available-for-sale, at fair value184,946201,578Held-to-maturity, at cost13,88713,030Federal Reserve Bank and Federal Home Loan Bank stock, at cost3,0313,031Loans, net456,769457,418Premises and equipment, net15,55815,722Goodwill5,9155,915Bank owned life insurance14,27514,122Other assets11,36610,967TOTAL ASSETS$733,079734,409LIABILITIES:Deposits:Noninterest-bearing$89,03893,894Interest-bearing542,141530,285Total deposits631,179624,179Short-term borrowings5,10814,265Long-term debt24,15324,960Accrued interest and other liabilities5,5735,390TOTAL LIABILITIES666,013668,794SHAREHOLDERS' EQUITY:Preferred shares - no par value, authorized 1,000,000 shares,
none outstanding--Common shares - no par value, authorized 8,000,000 shares,
issued 7,445,514 shares at March 31, 2010 and December 31, 200911,06811,068Surplus15,41615,407Retained earnings50,10448,962Treasury shares at cost,
758,282 shares at  March 31, 2010 and December 31, 2009(11,737)(11,737)Accumulated other comprehensive income, net of taxes2,2151,915TOTAL SHAREHOLDERS' EQUITY67,06665,615TOTAL LIABILITES AND SHAREHOLDERS' EQUITY$733,079734,409The accompanying notes to consolidated financial statements are an integral part of these statements.  -3-     LCNB CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(Dollars in thousands, except per share data)(Unaudited)Three Months EndedMarch 31,20102009INTEREST INCOME:Interest and fees on loans$6,8226,876Dividends on Federal Reserve Bank and Federal Home Loan Bank stock2424Interest on investment securities-Taxable9311,071Non-taxable808624Other short-term investments812TOTAL INTEREST INCOME8,5938,607INTEREST EXPENSE:Interest on deposits1,9762,621Interest on short-term borrowings9-Interest on long-term debt177107TOTAL INTEREST EXPENSE2,1622,728NET INTEREST INCOME6,4315,879PROVISION FOR LOAN LOSSES20898NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES6,2235,781NON-INTEREST INCOME:Trust income469481Service charges and fees946935Net gain on sales of securities77-Insurance agency income419366Bank owned life insurance income153158Gains from sales of mortgage loans30137Other operating income8953TOTAL NON-INTEREST INCOME2,1832,130NON-INTEREST EXPENSE:Salaries and wages2,4012,352Pension and other employee benefits631662Equipment expenses209244Occupancy expense, net524482State franchise tax186162Marketing79113Intangible amortization2728FDIC insurance premiums21825Write-off of pension asset-722Other non-interest expense1,2451,127TOTAL NON-INTEREST EXPENSE5,5205,917INCOME BEFORE INCOME TAXES2,8861,994PROVISION FOR INCOME TAXES674431NET INCOME2,2121,563PREFERRED STOCK DIVIDENDS AND DISCOUNT ACCRETION-102NET INCOME AVAILABLE TO COMMON SHAREHOLDERS$2,2121,461Dividends declared per common share$0.160.16Earnings per common share:Basic$0.330.22Diluted0.330.22Weighted average common shares outstanding:Basic6,687,2326,687,232Diluted6,729,7906,687,232The accompanying notes to consolidated financial statements are an integral part of these statements.  -4-     LCNB CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In thousands)(Unaudited)Three Months EndedMarch 31,20102009Net Income$2,2121,563Other comprehensive income:Net unrealized gain (loss) on available-for-sale
securities (net of taxes of $181 and $53 for the three
months ended March 31, 2010 and 2009, respectively)351(102)Reclassification adjustment for net realized gain on
sale of available-for-sale securities included in net
income (net of taxes of $26)(51)-Reversal of pension plan unrecognized net loss
(net of taxes of $1,564)-3,037Total comprehensive income$2,5124,498The accompanying notes to consolidated financial statements are an integral part of these statements.    -5-


LCNB CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY(Dollars in thousands, except per share amounts)(Unaudited)AccumulatedCommonOtherTotalSharesPreferredCommonRetainedTreasuryComprehensiveShareholders'OutstandingStockStockSurplusEarningsSharesIncome (Loss)EquityBalance January 1, 20106,687,232$-11,06815,40748,962(11,737)1,91565,615Net income2,2122,212Net unrealized gain on available-for-
sale securities, net of tax300300Compensation expense relating to
stock options99Common stock dividends, $0.16 per share(1,070)(1,070)Balance March 31, 20106,687,232-11,06815,41650,104(11,737)2,21567,066Balance January 1, 20096,687,232$-11,06814,79246,584(11,737)(2,591)58,116Net income1,5631,563Issuance of preferred stock and
related warrant12,81758313,400Net unrealized loss on available-for-
sale securities, net of tax(102)(102)Reversal of pension plan unrecognized
net loss, net of tax3,0373,037Compensation expense relating to
stock options66Preferred stock dividends and
discount accretion35(102)(67)Common stock dividends, $0.16 per share(1,069)(1,069)Balance March 31, 20096,687,232$12,85211,06815,38146,976(11,737)34474,884The accompanying notes to consolidated financial statements are an integral part of these statements.


-6-


LCNB CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)(Unaudited)Three Months EndedMarch 31,20102009CASH FLOWS FROM OPERATING ACTIVITIES:Net income$2,2121,563Adjustments to reconcile net income to net cash flows from operating activities-Depreciation, amortization and accretion631482Provision for loan losses20898Increase in cash surrender value of bank owned life insurance(153)(158)Realized (gain) loss on sales of securities available-for-sale(77)-Realized (gain) loss on sales of premises and equipment(4)(18)Origination of mortgage loans for sale(1,600)(10,034)Realized gains from sales of mortgage loans(30)(137)Proceeds from sales of mortgage loans1,61310,070Compensation expense related to stock options96Increase (decrease) due to changes in assets and liabilities:Income receivable(149)(373)Other assets(221)(1,106)Other liabilities281,360NET CASH FLOWS FROM OPERATING ACTIVITIES2,4671,753CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sales of investment securities available-for-sale5,342-Proceeds from maturities of investment securities:Available-for-sale16,87530,764Held-to-maturity51680Purchases of investment securities:Available-for-sale(5,324)(68,560)Held-to-maturity(1,373)(2,849)Net decrease in loans2597,423Proceeds from sale of repossessed assets6159Purchases of premises and equipment(87)(292)Proceeds from sales of premises and equipment418NET CASH FLOWS FROM INVESTING ACTIVITIES16,273(33,357)CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits7,00012,647Net decrease in short-term borrowings(9,157)(1,443)Proceeds from long-term debt-15,000Principal payments on long-term debt(807)-Proceeds from issuance of preferred stock-13,400Cash dividends paid on common stock(1,070)(1,069)Cash dividends paid on preferred stock-(67)NET CASH FLOWS FROM FINANCING ACTIVITIES(4,034)38,468NET CHANGE IN CASH AND CASH EQUIVALENTS14,7066,864CASH AND CASH EQUIVALENTS AT BEGINNING OF  PERIOD12,62618,020CASH AND CASH EQUIVALENTS AT END OF PERIOD$27,33224,884SUPPLEMENTAL CASH FLOW INFORMATION:CASH PAID DURING THE YEAR FOR:Interest$2,1862,787Income taxes315-SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:Investment securities transferred from available-for-sale to held-to-maturity-1,944Transfer from loans to other real estate owned and repossessed assets1257The accompanying notes to consolidated financial statements are an integral part of these statements.  -7-    LCNB CORP. AND SUBSIDIARIES   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   Note 1 - Basis of Presentation Substantially all of the assets, liabilities and operations of LCNB Corp. ("LCNB") are attributable to its wholly-owned subsidiaries, LCNB National Bank (the "Bank") and Dakin Insurance Agency, Inc. ("Dakin").  The accompanying unaudited consolidated financial statements include the accounts of LCNB, the Bank, and Dakin.  The unaudited interim consolidated financial statements, which have been reviewed by J.D. Cloud & Co. L.L.P., LCNBs independent registered public accounting firm, in accordance with standards established by the Public Company Accounting Oversight Board, as indicated by their report included herein and which does not express an opinion on those statements, have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and regulations of the Securities and Exchange Commission (the SEC).  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of financial position, results of operations, and cash flows for the interim periods, as required by Regulation S-X, Rule 10-01.  Certain prior period data presented in the financial statements have been reclassified to conform with the current year presentation.  The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results to be expected for the full year ending December 31, 2010.  These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in LCNB's 2009 Annual Report on Form 10-K filed with the SEC.    -8-    LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 2 -  Investment Securities The amortized cost and fair value of available-for-sale investment securities at March 31, 2010 and December 31, 2009 are summarized as follows (in thousands):  March 31, 2010Amortized
CostUnrealized
GainsUnrealized
LossesFair
ValueU.S. Treasury notes$13,248102013,238U.S. Agency notes35,828238-36,066U.S. Agency mortgage-backed securities45,5901,2453046,805Corporate securities5,93160-5,991Municipal securities:Non-taxable70,6321,9313872,525Taxable9,127227-9,354Other debt securities547--547Trust preferred securities29852-350Equity securities637-70$181,2643,77088184,946  December 31, 2009Amortized
CostUnrealized
GainsUnrealized
LossesFair
ValueU.S. Treasury notes$13,288492913,308U.S. Agency notes45,93120725045,888U.S. Agency mortgage-backed securities48,6501,09311949,624Corporate securities8,45064268,488Municipal securities:Non-taxable72,0022,0563674,022Taxable9,12717629,301Other debt securities542-4538Trust preferred securities29846-344Equity securities623-65$198,3503,694466201,578  The fair value of held-to-maturity investment securities, consisting of non-taxable municipal securities, approximates amortized cost at March 31, 2010 and December 31, 2009.   -9-    LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 2 -  Investment Securities (continued) Information concerning securities with gross unrealized losses at March 31, 2010, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (in thousands):  March 31, 2010Less than Twelve MonthsTwelve Months or GreaterFair
ValueUnrealized
LossesFair
ValueUnrealized
LossesU.S. Treasury notes$10,56420--U.S. Agency mortgage-
backed securities7,2433042-Municipal securities2,941334355$20,748834775  The unrealized losses at March 31, 2010 are primarily due to increases in market interest rates.  Because LCNB does not have the intent to sell the investments and it is more likely than not that LCNB will not be required to sell the investments before recovery of their amortized cost bases, which may be maturity, LCNB does not consider these investments to be other-than-temporarily impaired.   Note 3 - Loans Major classifications of loans at March 31, 2010 and December 31, 2009 are as follows (in thousands):  March 31,December 31,20102009Commercial and industrial$44,09242,807Commercial, secured by real estate187,593185,024Residential real estate191,771193,293Consumer23,79226,185Agricultural2,6483,125Other loans, including deposit overdrafts9,4419,422459,337459,856Deferred net origination costs492560459,829460,416Less allowance for loan losses3,0602,998Loans, net$456,769457,418   -10-    LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 3  Loans (continued) Changes in the allowance for loan losses for the three months ended March 31, 2010 and 2009 were as follows (in thousands):  Three Months EndedMarch 31,20102009Balance, beginning of year$2,9982,468Provision for loan losses20898Charge-offs(205)(197)Recoveries5999Net charge-offs(146)(98)Balance, end of period$3,0602,468  Charge-offs for the three months ended March 31, 2010 and 2009 primarily consisted of consumer loans and checking and NOW account overdrafts.  Non-accrual, past-due, and restructured loans as of March 31, 2010 and December 31, 2009 were as follows (in thousands):  March 31,December 31,20102009Non-accrual loans$3,3702,939Past-due 90 days or more and still accruing547924Restructured loans7,1207,173Total$11,03711,036Percent to total loans2.40%2.40%  Non-accrual loans at March 31, 2010 were $431,000 greater than at December 31, 2009 and loans past-due 90 days or more and still accruing decreased $377,000 primarily due to the reclassification of three loans to the same borrower from past-due 90 days or more and still accruing at December 31, 2009 to non-accrual at March 31, 2010.  -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 March 31, 2010 and December 31, 2009 (in thousands):  March 31,December 31,20102009Impaired loans without a valuation allowance$7,7286,927Impaired loans with a valuation allowance3,2253,249Total impaired loans10,95310,176Valuation allowance related to impaired loans$944858  Other real estate owned (which includes property acquired through foreclosure or deed-in-lieu of foreclosure and also includes property deemed to be in-substance foreclosed) and other repossessed assets, which are included in other assets in the consolidated balance sheets, totaled approximately $2,554,000 at March 31, 2010, compared to $2,470,000 at December 31, 2009.  Other real estate owned increased primarily due to the transfer of a residential real estate property into this category during the first quarter 2010.  Loans sold to and serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of those loans at March 31, 2010 and December 31, 2009 were $57,196,000 and $57,369,000, respectively.  Loans sold to the Federal Home Loan Mortgage Corporation during the three months ended March 31, 2010 and 2009 totaled $1,600,000 and $10,034,000, respectively.  The decrease in the amount of mortgage loans sold is primarily due to an above average number of refinanced loans during the first quarter 2009 resulting from a general decline in market interest rates during that period.  -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 March 31, 2010 and December 31, 2009 are as follows (in thousands):  CurrentInterestMarch 31,December 31,Rate20102009Fixed Rate Advances, due at maturity:Advance due February 20112.10%$5,0005,000Advance due August 20121.99%6,0006,000Advance due March 20175.25%5,0005,000Fixed Rate Advances, with monthly
principal and interest payments:Advance due March 20142.45%4,0484,288Advance due March 20192.82%4,1054,672$24,15324,960  All advances from the Federal Home Loan Bank of Cincinnati are secured by a blanket pledge of LCNBs 1-4 family first lien mortgage loans in the amount of approximately $148 million and $149 million at March 31, 2010 and December 31, 2009, respectively.  Additionally, LCNB was required to hold minimum levels of FHLB stock, based on the outstanding borrowings.  Short-term borrowings at December 31 are as follows (dollars in thousands):  March 31, 2010December 31, 2009AmountRateAmountRateU.S. Treasury demand note$601-%457-%Federal funds purchased--%7,0000.50%Line of credit--%3,1731.00%Repurchase agreements4,5070.40%3,6350.40%$5,1080.35%14,2650.57%  -13-    LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 5 - Commitments and Contingent Liabilities LCNB is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit.  They involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.  Exposure to credit loss in the event of nonperformance by the other parties to financial instruments for commitments to extend credit is represented by the contract amount of those instruments.  LCNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.  Financial instruments whose contract amounts represent off-balance-sheet credit risk at March 31, 2010 and December 31, 2009 were as follows (in thousands):  March 31,December 31,20102009Commitments to extend credit:Commercial loans$3,83010,020Other loans:Fixed rate1,246359Adjustable rate1,265537Unused lines of credit:Fixed rate4,1444,168Adjustable rate70,78769,974Unused overdraft protection amounts on
demand and NOW accounts10,17410,205Standby letters of credit7,0967,273$98,542102,536  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Unused lines of credit include amounts not drawn in line of credit loans.  Commitments to extend credit and unused lines of credit generally have fixed expiration dates or other termination clauses.  Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.  At March 31, 2010 and December 31, 2009, outstanding guarantees of approximately $1,566,000 and $1,744,000, respectively, were issued to developers and contractors.  These guarantees generally are fully secured and have varying maturities.  In addition, LCNB has a participation in a letter of credit securing payment of principal and interest on a bond issue.  The participation amount at March 31, 2010 and December 31, 2009 was approximately $5.5 million.  The agreement has a final maturity date of January 2012.  LCNB evaluates each customer's credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the borrower.  Collateral held varies, but may include accounts receivable; inventory; property, plant and equipment; residential realty; and income-producing commercial properties.  -14-    LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 5 - Commitments and Contingent Liabilities (continued) Commitments for capital expenditures outstanding as of March 31, 2010 totaled approximately $120,000.  Management believes that LCNB has sufficient liquidity to fund its lending and capital expenditure commitments.  LCNB and its subsidiaries are parties to various claims and proceedings arising in the normal course of business.  Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings and claims will not be material to the consolidated financial position or results of operations.   Note 6  Regulatory Capital On January 9, 2009, LCNB received $13.4 million of new equity capital from the U.S. Department of the Treasurys Capital Purchase Program (the CPP) established under the Emergency Economic Stabilization Act of 2008.  The investment by the Treasury Department was comprised of $13.4 million in preferred shares, with a warrant to purchase 217,063 common shares of LCNB at an exercise price of $9.26, with a term of ten years.  The preferred shares were scheduled to pay a dividend of 5% per year for the first five years and 9% thereafter.  Participation in the CPP was voluntary and participating institutions were required to comply with a number of restrictions and provisions, including, but not limited to, restrictions on compensation of certain executive officers and limitations on stock repurchase activities and dividend payments.  On October 21, 2009, LCNB entered into a repurchase agreement with the Treasury Department pursuant to which it redeemed all 13,400 shares of its preferred shares.  In connection with this redemption, LCNB paid approximately $13.5 million to the Treasury Department, which included the original investment amount of $13.4 million plus accrued and unpaid dividends of approximately $123,000.  LCNB did not repurchase the warrant issued to the Treasury Department as part of the CPP.  Pursuant to the terms of the repurchase agreement, the warrant has been cancelled and LCNB has issued a substitute warrant to the Treasury Department with the same terms as the original warrant, except that Section 13(H) of the original warrant, which related to the reduction of shares subject to the warrant in the event that LCNB raised $13.4 million in a qualified stock offering prior to December 31, 2009, has been removed.  The substitute warrant remains outstanding at March 31, 2010.  On April 20, 2010, LCNB obtained shareholder approval to increase the number of authorized common shares to 12,000,000.   -15-    LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 6  Regulatory Capital (continued) The Bank and LCNB are required by regulators to meet certain minimum levels of capital adequacy. These are expressed in the form of certain ratios. Capital is separated into Tier 1 capital (essentially shareholders' equity less goodwill and other intangibles) and Tier 2 capital (essentially the allowance for loan losses limited to 1.25% of risk-weighted assets). The first two ratios, which are based on the degree of credit risk in LCNB's assets, provide for weighting assets based on assigned risk factors and include off-balance sheet items such as loan commitments and stand-by letters of credit. The ratio of Tier 1 capital to risk-weighted assets must be at least 4.0% and the ratio of Total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8.0%.  The capital leverage ratio supplements the risk-based capital guidelines. Banks are required to maintain a minimum ratio of Tier 1 capital to adjusted quarterly average total assets of 3.0%.  For various regulatory purposes, financial institutions are classified into categories based upon capital adequacy.  The highest "well-capitalized" category requires capital ratios of at least 10% for total risk-based, 6% for Tier 1 risk-based, and 5% for leverage.  As of the most recent notification from their regulators, the Bank and LCNB were categorized as "well-capitalized" under the regulatory framework for prompt corrective action.  Management believes that no conditions or events have occurred since the last notification that would change the Bank's or LCNB's category.  A summary of the regulatory capital and capital ratios of LCNB follows (dollars in thousands):  AtAtMarch 31,December 31,20102009Regulatory Capital:Shareholders' equity$67,06665,615Goodwill and other intangibles(6,479)(6,507)Accumulated other comprehensive income(2,215)(1,915)Tier 1 risk-based capital58,37257,193Eligible allowance for loan losses3,0602,998Total risk-based capital$61,43260,191Capital ratios:Total risk-based (8% required)13.01%12.68%Tier 1 risk-based (4% required)12.36%12.04%Leverage (3% required)7.95%7.77%   -16-    LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 7  Employee Benefits LCNB has a noncontributory defined benefit retirement plan that covers substantially all regular full-time employees hired before January 1, 2009.  Effective January 1, 2009, LCNB redesigned its noncontributory defined benefit retirement plan and merged its single-employer plan into a multiple-employer plan, which is accounted for as a multi-employer plan because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer.  Accordingly, the assets and obligations of the single-employer plan were transferred to the multiple-employer plan in January 2009.  At that time, the pension plan related balance sheet accounts were adjusted resulting in an approximate $3.0 million increase in other comprehensive income and a $722,000 charge to non-interest expense in the consolidated statements of income.  Employees hired on or after January 1, 2009 are not eligible to participate in this plan.  Effective February 1, 2009, LCNB amended the plan to reduce benefits for those whose age plus vesting service equaled less than 65 at that date.  Also effective February 1, 2009, an enhanced Internal Revenue Code 401(k) plan (the 401(k) plan) was made available to those hired on or after January 1, 2009 and to those who received benefit reductions from the amendments to the noncontributory defined benefit retirement plan.  Employees hired on or after January 1, 2009 receive a 50% employer match on their contributions into the 401(k) plan, up to a maximum LCNB contribution of 3% of each individual employees annual compensation.  Employees who received a benefit reduction under the retirement plan amendments receive an automatic contribution of 5% or 7% of annual compensation, depending on the sum of an employees age and vesting service, into the 401(k) plan, regardless of the contributions made by the employees.  This contribution is made annually and these employees do not receive any employer matches to their 401(k) contributions.  Funding and administrative costs of the qualified noncontributory defined benefit retirement plan charged to pension and other employee benefits in the consolidated statements of income for the three months ended March 31, 2010 and 2009 were $60,000 and $64,000, respectively.  Employer expense incurred in connection with the 401(k) plan during the three months ended March 31, 2010 and 2009 were $74,000 and $60,000 respectively.  Effective February 1, 2009, LCNB established a nonqualified defined benefit retirement plan for certain highly compensated employees.  The nonqualified plan ensures that participants receive the full amount of benefits to which they would have been entitled under the noncontributory defined benefit retirement plan in the absence of limits on benefit levels imposed by certain sections of the Internal Revenue Code.  The components of net periodic pension cost of the nonqualified defined benefit retirement plan for the three months ended March 31, 2010 are summarized as follows (000s):  Service cost$43Interest cost8Amortization of unrecognized prior service cost12Net periodic pension cost$63   -17-    LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 8 - Stock Based Compensation Under the Ownership Incentive Plan (the "Plan"), LCNB may grant stock-based awards to eligible employees.  The awards may be in the form of stock options, share awards, and/or appreciation rights. The Plan provides for the issuance of up to 200,000 common shares.  Options granted to date vest ratably over a five year period and expire ten years after the date of grant. Stock options outstanding at March 31, 2010 were as follows:  OutstandingExercisableExpiration
DateNumberWeighted Average Exercise PriceNumberWeighted Average Exercise PriceNumber ExercisedFeb 201311,056$13.0911,056$13.09-Jan 20148,10817.668,10817.66-Jan 20167,93418.956,34718.95-Feb 20178,11617.884,87017.88-Feb 201813,91812.555,56712.55-Jan 201929,1109.005,8229.00-Feb 202020,79811.50-11.5099,04012.7141,77014.78-  The following table summarizes stock option activity for the periods indicated:  Three Months ended March 31,20102009OptionsWeighted Average Exercise PriceOptionsWeighted Average Exercise PriceOutstanding, January 1,78,242$13.0449,132$15.43Granted20,79811.5029,1109.00Exercised----Outstanding, March 31,99,04012.7178,24213.04Exercisable,  March 31,41,77014.7829,95415.73  The aggregate intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) for options outstanding at March 31, 2010 that were in the money (market price greater than exercise price) was $98,000.  The aggregate intrinsic value at that date for only the options that were exercisable was $17,000.  The intrinsic value changes based on changes in the market value of LCNBs stock.  -18-    LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 8 - Stock Based Compensation (continued) The estimated weighted-average fair value of the options granted in the first quarter of 2010 and 2009 were $2.27 and $1.89 per option, respectively.  The fair value was estimated at the dates of grant using the Black-Scholes option-pricing model and the following assumptions:  20102009Risk-free interest rate3.34%3.49%Average dividend yield4.31%4.04%Volatility factor of the expected marketprice of LCNBs common stock28.32%27.54%Average life in years7.09.0  Total expense related to options included in salaries and wages in the consolidated statements of income for the three months ended March 31, 2010 and 2009 was $9,000 and $6,000, respectively.  A total of 2,511 restricted shares were granted in February 2010.  These shares will vest in November 2010.  Until they vest, they are restricted from sale, transfer, or assignment in accordance with the terms of the agreement under which they were issued.  Compensation cost for restricted stock grants are calculated using the fair value of LCNBs common stock and the number of shares issued.  No restricted shares were granted prior to February 2010.   -19-    LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 9 - Earnings Per Common Share Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period.  Diluted earnings per common share is adjusted for the dilutive effects of stock options, warrant, and restricted stock.  The diluted average number of common shares outstanding has been increased for the assumed exercise of stock options, warrant, and restricted stock with proceeds used to purchase treasury shares at the average market price for the period.  The computations were as follows for the three months ended March 31, 2010 and 2009 (dollars in thousands, except share and per share data):  For the Three MonthsEnded March 31,20102009Net income available to common shareholders$2,2121,461Weighted average number of shares outstanding used in the calculation of basic earnings per common share6,687,2326,687,232Add dilutive effect of:Stock options2,207-Restricted stock1,060-Stock warrant39,291-42,558-Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share6,729,7906,687,232Basic earnings per common share$0.330.22Diluted earnings per common share$0.330.22   -20-    LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 10- Fair Value of Financial Instruments The inputs to valuation techniques used to measure fair value are assigned to one of three broad levels:  · Level 1  quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the reporting date.  · Level 2  inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets in active markets,  quoted prices for identical assets or liabilities in markets that are not active, inputs other than quoted prices (such as interest rates or yield curves) that are observable for the asset or liability, and inputs that are derived from or corroborated by observable market data.  · Level 3 - inputs that are unobservable for the asset or liability.  The majority of LCNBs debt securities are classified as available-for-sale. The securities are reported at fair value with unrealized holding gains and losses reported net of income taxes in accumulated other comprehensive income.  LCNB utilizes a pricing service for determining the fair values of most of its investment securities.  Fair value for U.S. Treasury notes and corporate securities are determined based on market quotations (level 1).  Fair value for most of the other investment securities is calculated using the discounted cash flow method for each security.  The discount rates for these cash flows are estimated by the pricing service using rates observed in the market (level 2).  Cash flow streams are dependent on estimated prepayment speeds and the overall structure of the securities given existing market conditions.  In addition, approximately $547,000 is invested in a mutual fund.  LCNB uses the fair value estimate provided by the mutual fund company, which uses market quotations when such quotes are available and good faith judgment when market quotations are not available.  Because LCNB does not know the portion of the mutual fund valued using market quotations and the portion valued using good faith judgment, the entire investment in the mutual fund has been measured using level 3 inputs.  Additionally, Dakin owns stock in an insurance company and LCNB Corp. owns trust preferred securities in various financial institutions. Market quotations (level 1) are used to determine fair value for these investments.  Dakin also owns stock in another insurance agency.  A market does not exist for the other insurance agencys stock.  This stock is considered to have level 3 inputs.   -21-    LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 10- Fair Value of Financial Instruments (continued) The following table summarizes the valuation of LCNBs available-for-sale securities by input levels as of March 31, 2010 and December 31, 2009 (in thousands):  Fair Value Measurements at Reporting Date UsingFair Value MeasurementsQuoted Prices in Active Markets for Identical Assets
(Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs
(Level 3)March 31, 2010Available-for-sale securities:U.S. Treasury notes$13,23813,238--U.S. Agency notes36,066-36,066-U.S. Agency mortgage-
backed securities46,805-46,805-Corporate securities5,9915,991--Municipal securities:Non-taxable72,525-72,525-Taxable9,354-9,354-Other debt securities547--547Trust preferred securities350350--Equity securities7047-23Totals$184,94619,626164,750570December 31, 2009Available-for-sale securities:U.S. Treasury notes$13,30813,308--U.S. Agency notes45,888-45,888-U.S. Agency mortgage-
backed securities49,624-49,624-Corporate securities8,4888,488--Municipal securities:Non-taxable74,022-74,022-Taxable9,301-9,301-Other debt securities538--538Trust preferred securities344344--Equity securities6542-23Totals$201,57822,182178,835561   -22-    LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 10- Fair Value of Financial Instruments (continued) The following table is a reconciliation of the beginning and ending balances of recurring fair value measurements that use significant unobservable inputs (level 3) for the three months ended March 31, 2010 (in thousands):  TotalOther
Debt
SecuritiesEquity SecuritiesBeginning balance$56153823Purchases---Dividends reinvested55-Net change in unrealized gains (losses)
included in other comprehensive income44-Ending balance$57054723  Assets that may be recorded at fair value on a nonrecurring basis include impaired loans, other real estate owned, and other repossessed assets.  A loan is considered impaired when management believes it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement.  Impaired loans are carried at the present value of estimated future cash flows using the loans existing rate or the fair value of collateral if the loan is collateral dependent, if this value is less than the loan balance.  When the fair value of the collateral is based on an observable market price or current appraised value, the inputs are considered to be level 2.  When an appraised value is not available and there is not an observable market price, the inputs are considered to be level 3.  Other real estate owned is adjusted to fair value upon transfer of the loan to foreclosed assets, usually based on an appraisal of the property.  Subsequently, foreclosed assets are carried at the lower of carrying value or fair value.  The inputs for a valuation based on current appraised value are considered to be level 2.   -23-    LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 10- Fair Value of Financial Instruments (continued) The table below presents LCNBs impaired loans, other real estate owned, and repossessed assets measured at fair value on a nonrecurring basis as of March 31, 2010 and December 31, 2009 by the level in the fair value hierarchy within which those measurements fall (in thousands):  Fair Value Measurements at Reporting Date UsingFair Value MeasurementsQuoted Prices in Active Markets for Identical Assets
(Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs
(Level 3)March 31, 2010Impaired loans$2,281-832,198Other real estate owned2,513-2,513-Repossessed assets41--41Totals$4,835-2,5962,239December 31, 2009Impaired loans$2,391--2,391Other real estate owned2,424-2,424-Repossessed assets46--46Totals$4,861-2,4242,437  Carrying amounts and estimated fair values of financial instruments as of March 31, 2010 and December 31, 2009 were as follows (in thousands):  March 31, 2010December 31, 2009CarryingFairCarryingFairAmountValueAmountValueFINANCIAL ASSETS:Cash and cash equivalents$27,33227,33212,62612,626Securities available-for-sale184,946184,946201,578201,578Securities held-to-maturity13,88713,88713,03013,030Federal Reserve Bank and
Federal Home Loan Bank stock3,0313,0313,0313,031Loans, net456,769466,693457,418467,226FINANCIAL LIABILITIES:Deposits631,179633,762624,179627,536Short-term borrowings5,1085,10814,26514,265Long-term debt24,15325,39224,96026,266   -24-    LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)   Note 10- Fair Value of Financial Instruments (continued) The fair value of off-balance-sheet financial instruments at March 31, 2010 and December 31, 2009 was not material.  Fair values of financial instruments are based on various assumptions, including the discount rate and estimates of future cash flows.  Therefore, the fair values presented may not represent amounts that could be realized in actual transactions.  In addition, because the required disclosures exclude certain financial instruments and all nonfinancial instruments, any aggregation of the fair value amounts presented would not represent the underlying value of LCNB.  The following methods and assumptions were used to estimate the fair value of certain financial instruments:  Cash and cash equivalents The carrying amounts presented are deemed to approximate fair value.  Investment securities Fair values for securities, excluding Federal Home Loan Bank and Federal Reserve Bank stock, are based on quoted market prices, if available.  If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and/or discounted cash flow analyses or other methods.  The carrying value of Federal Home Loan Bank and Federal Reserve Bank stock approximates fair value based on the respective redemptive provisions.  Loans Fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, incorporating assumptions of current and projected prepayment speeds.  Deposits The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date.  The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.  Borrowings The carrying amounts of federal funds purchased, repurchase agreements, and U.S. Treasury demand note borrowings are deemed to approximate fair value of short-term borrowings.  For long-term debt, fair values are estimated based on the discounted value of expected net cash flows using current interest rates.     -25-    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    To the Board of Directors and Shareholders LCNB Corp. and subsidiaries Lebanon, Ohio   We have reviewed the accompanying consolidated balance sheet of LCNB Corp. and subsidiaries as of March 31, 2010, and the related consolidated statements of income, comprehensive income, shareholders equity, and cash flows for the three-month periods ended March 31, 2010 and 2009.  These interim financial statements are the responsibility of the Company's management.  We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.  Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.  We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of LCNB Corp. and subsidiaries as of December 31, 2009, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for the year then ended (not presented herein), and in our report dated February 22, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2009, is fairly stated in all material respects, in relation to the consolidated balance sheet from which it has been derived.     /s/ J.D. Cloud & Co. L.L.P.      Cincinnati, Ohio May 3, 2010   -26-    LCNB CORP. AND SUBSIDIARIES    Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations  Forward Looking Statements Certain matters disclosed herein may be deemed to be forward-looking statements that involve risks and uncertainties.  Forward looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words and their derivatives such as expects, anticipates, believes, estimates, plans, projects, or other statements concerning opinions or judgments of LCNB and its management about future events.   Factors that could influence the accuracy of such forward looking statements include, but are not limited to, regulatory policy changes, interest rate fluctuations, loan demand, loan delinquencies and losses, general economic conditions and other risks.  Such forward-looking statements represent management's judgment as of the current date. Actual strategies and results in future time periods may differ materially from those currently expected. LCNB disclaims, however, any intent or obligation to update such forward-looking statements.  LCNB intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.  Results of Operations LCNBs net income available to common shareholders for the three months ended March 31, 2010 was $2,212,000 or $0.33 basic and diluted earnings per common share, compared to $1,461,000 or $0.22 basic and diluted earnings per common share for the three months ended March 31, 2009.  Affecting net income to common shareholders and earnings per common share was an increase in net interest income and a decrease in non-interest expense, offset by an increase in the provision for loan losses.  Negatively affecting net income available to common shareholders during 2009 were preferred stock dividends paid and related discount accretion recorded in connection with the preferred shares and warrant issued under the U.S. Department of the Treasurys Capital Purchase Program (the CPP) on January 9, 2009. LCNB did not have these costs during 2010 because the preferred stock was redeemed from the U.S. Department of the Treasury in October 2009.  Net interest income increased during the three month period in 2010 compared to 2009 primarily because of growth in interest earning assets and a general decline in market interest rates.  Non-interest expense during the three month period in 2010 was less than the comparable period in 2009  because of the absence of a pension-related charge recognized by LCNB during the first quarter 2009.  This decrease was partially offset by increases in FDIC insurance expense and other smaller miscellaneous increases.  Current economic conditions have contributed to an increase in loan delinquencies, but LCNBs loan portfolio continues to benefit from responsible underwriting and lending practices.  Net charge-offs for the first quarter of 2010 and 2009 totaled $146,000 and $98,000, respectively.  Non-accrual loans and loans past due 90 days or more and still accruing interest totaled $3,917,000 or 0.85% of total loans at March 31, 2010, compared to $3,863,000 or 0.84% of total loans at December 31, 2009.  Other real estate owned (which includes property acquired through foreclosure or deed-in-lieu of foreclosure and also includes property deemed to be in-substance foreclosed) and other repossessed assets totaled approximately $2,554,000 at March 31, 2010, compared to $2,470,000 at December 31, 2009.  Net Interest Income LCNB's primary source of earnings is net interest income, which is the difference between earnings from loans and other investments and interest paid on deposits and other liabilities.  The following table presents, for the three months ended March 31, 2010 and 2009, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resultant average yields earned or rates paid.  -27-


LCNB CORP. AND SUBSIDIARIES  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)  Three Months Ended March 31,20102009AverageInterestAverageAverageInterestAverageOutstandingEarned/Yield/OutstandingEarned/Yield/BalancePaidRateBalancePaidRate(Dollars in thousands)Loans (1)$458,5036,8226.03%$450,065$6,8766.20%Federal funds sold and interest-bearing
demand deposits10,10580.32%19,184120.25%Federal Reserve Bank stock940--%937--%Federal Home Loan Bank stock2,091244.65%2,091244.65%Investment securities:Taxable118,5379313.19%101,3651,0714.29%Non-taxable (2)86,0681,2245.77%65,6499455.84%Total interest-earning assets676,2449,0095.40%639,2918,9285.66%Non-earning assets70,88554,929Allowance for loan losses(3,003)(2,477)Total assets$744,126$691,743Interest-bearing deposits$547,3941,9761.46%515,9962,6212.06%Short-term borrowings8,00090.46%746--%Long-term debt24,5741772.92%12,1671073.57%Total interest-bearing liabilities579,9682,1621.51%528,9092,7282.09%Demand deposits91,68784,144Other liabilities5,3563,893Capital67,11574,797Total liabilities and capital$744,126$691,743Net interest rate spread (3)3.89%3.57%Net interest income and net interest margin on a tax-equivalent basis (4)6,8474.11%$6,2003.93%Ratio of interest-earning assets to interest-bearing liabilities116.60%120.87%  (1) Includes nonaccrual loans if any. (2) Income from tax-exempt securities is included in interest income on a tax-equivalent basis.  Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 34%. (3) The net interest rate spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities. (4) The net interest margin is the tax-equivalent net interest income divided by average interest-earning assets.


-28-    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 tax-equivalent 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 March 31, 2010 as compared to the same period in 2009.  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 EndedMarch 31,2010 vs. 2009Increase (decrease) due to:VolumeRateTotal(In thousands)Interest-earning Assets:Loans$128(182)(54)Federal funds sold and interest-
bearing demand deposits(7)3(4)Investment securities:Taxable163(303)(140)Nontaxable291(12)279Total interest income575(494)81Interest-bearing Liabilities:Deposits151(796)(645)Short-term borrowings-99Long-term debt92(22)70Total interest expense243(809)(566)Net interest income$332315647  Net interest income on a tax-equivalent basis for the three months ended March 31, 2010 totaled $6,847,000, an increase of $647,000 from the comparable period in 2009.  Total tax-equivalent interest income increased $81,000 and total interest expense decreased $566,000.  The increase in total interest income was primarily due to a $37.0 million increase in average total earning assets, partially offset by a 26 basis point (a basis point equals 0.01%) decrease in the average rate earned on earning assets.  The increase in average interest earning assets was primarily due to a $37.6 million increase in average investment securities.  The decrease in the average rate earned reflects a general decrease in market rates.  The decrease in total interest expense was primarily due to a 58 basis point decrease in the average rate paid on interest-bearing liabilities, partially offset by a $51.1 million increase in average interest-bearing liabilities.  The increase in average interest-bearing liabilities was primarily due to a $31.4 million increase in average interest-bearing deposits and a $12.4 million increase in average long-term borrowings.  The decrease in the average rate paid also reflects a general decrease in market rates.   -29-    LCNB CORP. AND SUBSIDIARIES  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)  Provision and Allowance for Loan Losses The total provision for loan losses is determined based upon management's evaluation as to the amount needed to maintain the allowance for loan losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio.  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 March 31, 2010 and 2009 was $208,000 and $98,000, respectively.  The increase in the provision reflects an increase in non-accrual and delinquent loans, the net charge-off trend, and current economic conditions.  Non-Interest Income Total non-interest income for the first quarter 2010 was $53,000 greater than for the first quarter 2009. This increase is primarily due to a $53,000 increase in insurance agency income, a $77,000 increase in gains from sales of securities, and a $65,000 increase in check card income (included with service charges and fees).  These increases were partially offset by $107,000 decrease in gains from sales of mortgage loans and a $67,000 decrease in overdraft fees (included with service charges and fees).  Insurance agency income increased due to a $23,000 increase in contingency commissions and an increase in commission income reflecting the sales of new policies.  Contingency commissions are profit-sharing arrangements on property and casualty policies between the originating agency and the underwriter and are generally based on underwriting results and written premium.  As such, the amount received each year can vary significantly depending on loss experience.  Gains from the sale of mortgage loans decreased due to a lesser volume of loans sold during the first quarter 2010 as compared to the first quarter 2009.  A general decline in market interest rates created an increased demand for refinanced loans during 2009. Loans sold during the first quarter 2010 totaled $1,600,000 compared to $10.0 million of loan sales during the 2009 period.  The increase in check card income and the decrease in overdraft fees both reflect continuing historical trends.  Non-Interest Expense Non-interest expense for the first quarter 2010 was $397,000 less than for the first quarter 2009 due to a $722,000 one-time pension plan related charge recognized during the first quarter 2009.  The remaining $325,000 increase was largely due to a $193,000 increase in FDIC insurance premium expense and other smaller miscellaneous increases.  During the first quarter 2009, LCNB redesigned its retirement program to provide competitive benefits to employees and provide more predictable and lower retirement plan costs over the long term.  Retirement plan changes include an enhanced 401(k) plan, reduced pension plan benefits for employees whose age and vesting service do not meet certain thresholds, and merging LCNBs single-employer pension plan into a multiple-employer plan.  At the time the single-employer pension plan was merged into the multiple-employer plan, pension plan related balance sheet accounts were adjusted, resulting in an approximate $3.0 million after-tax increase in other comprehensive income and a $722,000 charge to non-interest expense ($477,000 on an after-tax basis).   -30-    LCNB CORP. AND SUBSIDIARIES  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)   Income Taxes LCNBs effective tax rates for the three months ended March 31, 2010 and 2009 were 23.4% and 21.6%, 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 income from bank owned life insurance.   Financial Condition Total assets at March 31, 2010 were $1.3 million less than at December 31, 2009.  The decrease in total assets is primarily due to the decrease of investment securities of $15.8 million, which was partially offset by an increase in cash and cash equivalents of $14.7 million.  Proceeds received from maturities and calls of investment securities were not replaced with new securities in order to build liquidity for anticipated future needs.  Net loans decreased $739,000 primarily due to a $2.4 million decrease in consumer loans and a $1.5 million decrease in residential real estate loans.  These decreases were largely offset by a total increase of $3.9 million in commercial real estate and commercial and industrial loans.  Consumer loans decreased due to weak demand for new loans and residential real estate loans decreased because the majority of loans originated during the first quarter were sold to the Federal Home Loan Mortgage Corporation.  Residential mortgage loan sales for the first quarter 2010 totaled $1.6 million.  In an effort to increase the volume of residential mortgage loans originated, management initiated a no closing costs special promotion in April 2010.  Total deposits were $7.0 million greater at March 31, 2010 than at December 31, 2009, primarily due to a $5.7 million increase in public fund deposits by local government entities.  Public fund deposits can be relatively volatile due to seasonal tax collections and the financial needs of the local entities.  LCNB believes that much of the increase during the first quarter was due to seasonal property and other tax receipts.  The remaining deposit growth resulted from increases in NOW, money fund deposit, and savings account product balances, while time deposits decreased by $2.3 million during this time period.  The deposit growth was used to reduce short-term borrowings, which decreased $9.2 million between March 31, 2010 and December 31, 2009.   Liquidity LCNB depends on dividends from its subsidiaries for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders.  National banking law limits the amount of dividends the Bank may pay to the sum of retained net income, as defined, for the current year plus retained net income for the previous two years.  Prior approval from the Office of the Comptroller of the Currency, the Banks primary regulator, is necessary for the Bank to pay dividends in excess of this amount.  In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines.  Management believes the Bank will be able to pay anticipated dividends to LCNB without needing to request approval.   -31-    LCNB CORP. AND SUBSIDIARIES  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)   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 March 31, 2010, LCNBs liquid assets amounted to $212.3 million or 29.0% of total assets, a slight decrease from $214.2 million or 29.2% of total assets at December 31, 2009.  Liquidity is also provided by access to core funding sources, primarily core deposits in the banks market area.  Approximately 79.2% of total deposits at March 31, 2010 were core deposits, compared to 79.8% of deposits at December 31, 2009.  Core deposits, for this purpose, are defined as total deposits less public funds and certificates of deposit equal to or greater than $100,000.  Secondary sources of liquidity include LCNBs ability to sell loan participations, borrow funds from the Federal Home Loan Bank, purchase federal funds, issue repurchase agreements, or use a line of credit established with another bank.  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.   -32-    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 March 31, 2010 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
NII% Change in
NII(Dollars in thousands)Up 300$26,9535892.23%Up 20026,6793151.19%Up 10026,448840.32%Base26,364--%Down 10026,276(88)-0.33%Down 20026,321(43)-0.16%  IRSA shows the effect on NII during a one-year period only.  A long-range model is the EVE analysis, which shows the estimated present value of future cash inflows from interest-earning assets less the present value of future cash outflows for interest-bearing liabilities for the same rate shocks.  The EVE analysis at March 31, 2010 is shown below.  It shows a negative effect on the EVE for increases in interest rates and a positive effect for decreases in interest rates.  The changes in EVE are within LCNBs acceptable ranges.  Rate Shock Scenario in Basis PointsAmount$ Change in
EVE% Change in
EVE(Dollars in thousands)Up 300$64,527(14,474)-18.32%Up 20069,417(9,584)-12.13%Up 10074,039(4,962)-6.28%Base79,001--%Down 10083,5054,5045.70%Down 20088,2569,25511.72%   -33-    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.  Based upon this evaluation, these officers have concluded, that as of March 31, 2010, 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.     Item 4T.  Controls and Procedures  Not applicable; the registrant is an accelerated filer.   -34-    LCNB CORP. AND SUBSIDIARIES    PART II -- OTHER INFORMATION   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.  During the period covered by this report, LCNB did not purchase any shares of its equity securities.    Item 3. Defaults Upon Senior Securities  Not Applicable    Item 4. (Removed and Reserved).    Item 5. Other Information  Not Applicable      -35-    LCNB CORP. AND SUBSIDIARIES     Item 6.     Exhibits Exhibit No.Exhibit Description3.1Amended and Restated Articles of Incorporation of LCNB Corp., as amended.3.2Code of Regulations of LCNB Corp.  incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005, Exhibit 3(ii).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 - incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009, Exhibit 4.3.4.4Repurchase 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 the Registrants Annual Report on 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 10.1.10.6Restricted Stock Grant Agreement, dated as of February 22, 2010, between the Registrant and Stephen P. Wilson.  -36-    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.     -37-    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.  May 3, 2010 /s/ Stephen P. Wilson Stephen P. Wilson, CEO & Chairman of the Board of Directors   May 3, 2010 /s/ Robert C. Haines, II Robert C. Haines, II, Executive Vice President and Chief Financial Officer    -38-