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

Earnings for the first quarter of 2009 were $1,563,000 or $0.22 basic and diluted earnings per share, compared to $1,444,000 or $0.22 basic and diluted earnings per share for the first quarter of 2008. Return on average assets for the quarters ended March 31, 2009 and 2008 were 0.92% and 0.96%, respectively. Return on average equity for the first quarter 2009 was 8.47%, compared to 10.04% for the first quarter 2008.

The increase in net income during the first quarter 2009 was primarily due to a $895,000 increase in net interest income, a $67,000 increase in non-interest income, and a $44,000 decrease in the provision for income taxes. These favorable items were partially offset by an $872,000 increase in non-interest expense.

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, 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.

                          LCNB CORP. AND SUBSIDIARIES


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

Operations (continued)


                                                                     Three Months Ended March 31,
                                                         2009                                            2008
                                         Average         Interest       Average          Average          Interest       Average
                                       Outstanding        Earned/        Yield/        Outstanding         Earned/        Yield/
                                         Balance           Paid           Rate           Balance            Paid           Rate
                                                                        (Dollars in thousands)

Loans (1)                            $    450,065        $ 6,876         6.20%        $    445,978        $ 7,524         6.79%
Federal funds sold and                     19,184             12         0.25%              19,520            151         3.11%
interest-bearing
 demand deposits
Federal Reserve Bank stock                    937              -            -%                 722              -            -%
Federal Home Loan Bank stock                2,091             24         4.65%               2,010             26         5.20%
Investment securities:
  Taxable                                 101,365          1,071         4.29%              41,304            468         4.56%
  Non-taxable (2)                          65,649            945         5.84%              44,944            676         6.05%
   Total interest-earning assets          639,291          8,928         5.66%             554,478          8,845         6.42%
Non-earning assets                         54,929                                           53,146
Allowance for loan losses                 (2,477)                                          (2,467)
   Total assets                      $    691,743                                     $    605,157

Interest-bearing deposits            $    515,996          2,621         2.06%             456,673          3,562         3.14%
Short-term borrowings                         746              -            -%                 526              4         3.06%
Long-term debt                             12,167            107         3.57%               5,000             65         5.23%
   Total interest-bearing                 528,909          2,728         2.09%             462,199          3,631         3.16%
liabilities
Demand deposits                            84,144                                           80,831
Other liabilities                           3,893                                            4,484
Capital                                    74,797                                           57,643
   Total liabilities and capital     $    691,743                                     $    605,157

Net interest rate spread (3)                                             3.57%                                            3.26%

Net interest income and net interest                     $ 6,200         3.93%                            $ 5,214         3.78%
margin on a tax-equivalent basis (4)

Ratio of interest-earning assets to       120.87%                                          119.97%
interest-bearing liabilities

Includes nonaccrual loans if any.

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%.

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

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

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, 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 Ended
                                                      March 31,
                                                    2009 vs. 2008
                                             Increase (decrease) due to:
                                        Volume                  Rate      Total
                                                    (In thousands)
Interest-earning Assets:
  Loans                              $       68                 (716)     (648)
  Federal funds sold and interest-          (3)                 (136)     (139)
   bearing demand deposits
  Federal Home Loan Bank stock                1                   (3)       (2)
  Investment securities:
   Taxable                                  637                  (34)       603
   Nontaxable                               299                  (30)       269
    Total interest income                 1,002                 (919)        83

Interest-bearing Liabilities:
  Deposits                                  419               (1,360)     (941)
  Short-term borrowings                       1                   (5)       (4)
  Long-term debt                             69                  (27)        42
    Total interest expense                  489               (1,392)     (903)
      Net interest income            $      513                   473       986

Net interest income on a tax-equivalent basis for the three months ended March 31, 2009 totaled $6,200,000, an increase of $986,000 from the comparable period in 2008. Total tax-equivalent interest income increased $83,000 and total interest expense decreased $903,000.

The increase in total interest income was primarily due to an $84.8 million increase in average total earning assets, partially offset by a 76 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 an $80.8 million increase in average investment securities. The increase was funded through a combination of increases in deposits, borrowings from the Federal Home Loan Bank of Cincinnati, and $13.4 million received from the sale of preferred stock to the U.S. Treasury Department through its Capital Purchase Program. 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 107 basis point decrease in the average rate paid on interest-bearing liabilities, partially offset by a $66.7 million increase in average interest-bearing liabilities. The increase in average interest-bearing liabilities was primarily due to a $59.3 million increase in average interest-bearing deposits and a $7.2 million increase in average long-term borrowings. The decrease in the average rate paid also reflects a general decrease in market rates.

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, 2009 was $98,000 compared to $83,000 for the three months ended March 31, 2008.

Non-Interest Income

Total non-interest income for the first quarter 2009 was $67,000 greater than for the first quarter 2008. This increase is primarily due to a $130,000 increase in gains from the sale of mortgage loans, partially offset by a $50,000 decrease in insurance agency income and a $25,000 decrease in service charges and fees. Gains from the sale of mortgage loans increased due to a greater volume of loans sold during the first quarter 2009 as compared to the first quarter 2008. The general decline in market interest rates has created an increased demand for refinanced loans during 2009. Loans sold during the first quarter 2009 totaled $10.0 million compared to $643,000 of loan sales during the 2008 period. Insurance agency income decreased due to a $66,000 decrease in contingency commissions, offset by 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. The decrease in service charges and fees reflects a continuing downward trend in the amount of overdraft fees received.

Non-Interest Expense

Non-interest expense for the first quarter 2009 was $872,000 greater than for the first quarter 2008 primarily due to a $722,000 pension plan related charge.
The remaining $150,000 increase was largely due to a $137,000 increases in salaries and benefits resulting from routine salary and wage increases and an increase in the number of employees. Secondary causes of the increase included a $44,000 increase in employee benefits resulting from increased retirement plan expenses and an $80,000 increase in occupancy expenses primarily due to increased costs for maintenance and repair and janitorial services.

These expense increases were partially offset by a $94,000 decrease in intangible amortization, 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.

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).

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, 2009 and 2008 were 21.6% and 24.8%, 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, 2009 were $39.7 million greater than at December 31, 2008 primarily due to a $40.3 million increase in investment securities. This increase was funded through a $12.6 million increase in total deposits, a $15.0 million increase in borrowings from the Federal Home Loan Bank of Cincinnati, and $13.4 million received from the sale of preferred stock to the U.S. Treasury Department through its Capital Purchase Program.

Net loans at March 31, 2009 were $7.6 million less than at December 31, 2008 primarily due to decreases totaling $8.8 million in residential real estate and consumer loans, partially offset by a $3.6 million increase in commercial real estate loans. Residential real estate loans decreased because approximately $10.0 million of new loans originated during the first quarter 2009 were sold to the Federal Home Loan Mortgage Corporation. This compares to $643,000 of such loans sold during the first quarter 2008. The increase in the amount of loans sold reflects an increased demand for refinanced loans because of the general decline in market interest rates.

Total deposits increased in all categories except demand deposit accounts, which decreased $1.3 million, and certificate of deposit accounts with balances less than $100,000, which decreased $5.3 million. LCNB has been receiving a higher than normal increase in deposits due, in part, to the volatility of current economic conditions.

On January 9, 2009, LCNB received $13.4 million of new capital from the U.S. Treasury Department under the Capital Purchase Program (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.

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

Operations (continued)

Liquidity

LCNB depends on dividends from its subsidiaries for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders.
National banking law limits the amount of dividends the Bank may pay to the sum of retained net income, as defined, for the current year plus retained net income for the previous two years. Prior approval from the Office of the Comptroller of the Currency, the Bank's primary regulator, is necessary for the Bank to pay dividends in excess of this amount. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines. Management believes the Bank will be able to pay anticipated dividends to LCNB without needing to request approval.

Liquidity is the ability to have funds available at all times to meet the commitments of LCNB. Asset liquidity is provided by cash and assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash, federal funds sold, interest-bearing demand deposits, and securities available for sale. At March 31, 2009, LCNB's liquid assets amounted to $196.7 million or 28.5% of total assets, an increase from $154.3 million or 23.7% of total assets at December 31, 2008. Much of this increase was due to growth in investment securities.

Liquidity is also provided by access to core funding sources, primarily core deposits in the bank's market area. Approximately 79.5% of total deposits at March 31, 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 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, 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.

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

Operations (continued)

Recent Accounting Pronouncements

The Financial Accounting Standards Board issued three final Staff Positions (FSPs) on April 9, 2009 that provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly," provides guidelines for determining fair value measurements when an active market does not exist or where the price inputs represent distressed sales. FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," provides that the frequency of fair value disclosures required by Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," will be increased from annually to quarterly. FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments," provides additional guidance on determining and accounting for other-than-temporary impairments in investment securities. If an investment security is determined to be other-than-temporarily impaired and if the company does not intend to sell the security and it is not more likely than not that the security will be sold before the anticipated recovery of the impairment, the company will now be required to separate the impairment into the amount related to a credit loss and the amount related to other factors. The amount related to a credit loss will be recognized in earnings and the amount related to other factors will be recognized in other comprehensive income. This FSP also changes disclosure requirements in the notes to the financial statements.

The FSPs are effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for interim and annual periods ending after March 15, 2009. With the exception of certain municipal securities purchased direct from local governmental entities, substantially all of LCNB's investment securities are traded in active markets. LCNB management does not anticipate that adoption of these FSPs will have a material effect on LCNB's consolidated financial statements.