LCNB CORP (LCNB) FY 2022 MD&A

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction

This discussion and analysis of the consolidated financial condition and consolidated results of operations of LCNB is intended to amplify certain financial information regarding LCNB and should be read in conjunction with the consolidated financial statements and related notes thereto contained in this Annual Report to Shareholders on Form 10-K.

Overview

Net income for 2022 was $22,128,000 (basic and diluted earnings per share of $1.93), compared to $20,974,000 (basic and diluted earnings per share of $1.66) in 2021 and $20,075,000 (basic and diluted earnings per share of $1.55) in 2020 .

The following items affected financial position and results of operations for the years indicated:

•Net loans increased 2.3% to $1.40 billion at December 31, 2022 compared to $1.36 billion at December 31, 2021.

•Total assets increased 0.8% to $1.92 billion at December 31, 2022 compared to $1.90 billion at December 31, 2021.

•Net interest income in 2022 was $61,042,000, compared to $57,124,000 in 2021 and $56,218,000 in 2020.

•Net gains from sales of loans totaled $196,000 in 2022, $852,000 in 2021, and $2,297,000 in 2020. Gains were higher in 2021 and 2020 primarily due to the volume of loans sold.

•Other non-interest expense for 2022 included $471,000 in losses from the sales of two office buildings as a result of LCNB's branch consolidation strategy.

•Gains from sales of other real estate owned was $889,000 in 2022.

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 years indicated, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resulting average yields earned or rates paid.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

(1)Includes non-accrual loans if any.

(2)Income from tax-exempt securities is included in interest income on a taxable-equivalent basis.  Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 21%.

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

(4)The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

The following table presents the changes in 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 years indicated.  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.

(1)Non-accrual loans, if any, are included in average loan balances.

(2)Change in interest income from non-taxable investment securities is computed based on interest income determined on a taxable-equivalent yield basis.  Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 21%.

2022 vs. 2021.  Net interest income on a fully tax-equivalent basis for 2022 totaled $61,242,000, an increase of $3,888,000 from 2021.  The increase resulted from an increase in total taxable-equivalent interest income of $4,546,000, partially offset by an increase in total interest expense of $658,000.

The increase in total interest income was due primarily to a $3,105,000 increase in interest income from loans and a $1,359,000 increase in interest income from taxable debt securities. Loan interest increased due to a $51.2 million increase in average loans and to a 7 basis point increase in the average rate earned. The average rate earned includes loan prepayment fees, which increased from $601,000 for 2021 to $1,025,000 for 2022. Interest income from taxable debt securities increased due to a $21.4 million increase in average securities and to a 36 basis point increase in the average rate earned on these securities.

The increase in total interest expense was primarily due to an $816,000 increase in interest paid on NOW and money fund deposits, a $410,000 increase in interest paid on short-term borrowings, and a $144,000 increase in interest paid on long-term debt, partially offset by a $731,000 decrease in interest paid on IRA and time certificates. Interest paid on NOW and money fund deposits increased due to a $53.3 million increase in average balances and to a 15 basis point increase in the average rate paid. Interest paid on IRA and time certificates decreased due to a $42.2 million decrease in average deposit balances and to a 15 basis point decrease in the average rate paid. Interest paid on short-term borrowings increased due to a $13.7 million increase in average balances and to a 214 basis point increase in the average rate paid. Interest paid on long-term debt increased due to a $1.8 million increase in average balances and to a 52 basis point increase in the average rate paid.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

The increased rates paid on interest-bearing liabilities and the increased yield earned on interest-earning assets is largely the result of higher market interest rates that were caused by FOMC increases in the federal funds target rate totaling 425 basis points during 2022.

2021 vs. 2020.  Net interest income on a fully tax-equivalent basis for 2021 totaled $57,354,000, an increase of $863,000 from 2020.  The increase resulted from a decrease in total interest expense of $3,509,000, partially offset by a decrease in total taxable-equivalent interest income of $2,646,000.

The decrease in total interest income was due primarily to a $3,125,000 decrease in interest income from loans and a $206,000 decrease in interest income from non-taxable debt securities, partially offset by a $752,000 increase in interest income from taxable debt securities. Loan interest decreased due to a 32 basis point decrease in the average rate earned, partially offset by a $22.8 million increase in average loans and by fees recognized from PPP loans of $1,655,000. Interest income from non-taxable debt securities decreased due to a $5.5 million decrease in average securities and to a 6 basis point decrease in the average rate earned on these securities. Interest income from taxable debt securities increased due to an $123.8 million increase in average securities, partially offset by a 61 basis point decrease in the average rate earned on these securities.

The decrease in total interest expense was primarily due to a $2,778,000 decrease in interest paid on IRA and time certificates, a $452,000 decrease in interest paid on long-term debt, and a $282,000 decrease in interest paid on NOW and money fund deposits. Interest paid on IRA and time certificates decreased due to a 66 basis point decrease in the average rate paid and to a $75.4 million decrease in average deposit balances. Interest paid on long-term debt decreased due to an $18.1 million decrease in average balances, partially offset by 21 basis point increase in the average rate paid. Interest paid on NOW and money fund deposits decreased due to a 9 basis point decrease in the average rate paid, partially offset by a $72.1 million increase in average balances. Decreases in average rates paid for IRA and time certificates and NOW and money fund deposits were primarily due to decreases in market rates. The increase in the average paid on long-term debt reflects the maturity of comparatively lower rate debt during the year. No new debt was obtained during 2021.

Provisions and Allowance for Loan Losses

LCNB continuously reviews the loan portfolio for credit risk through the use of its lending and loan review functions.  Independent loan reviews analyze specific loans, providing validation that credit risks are appropriately identified, graded, and reported to the Loan Committee, Board of Directors, and the Audit Committee of the Board of Directors. New credits meeting specific criteria are analyzed prior to origination and are reviewed by the Loan Committee, the Loan Committee of the Board of Directors, and the Board of Directors.

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. For analysis purposes, the loan portfolio is separated into pools of similar loans. These pools include commercial and industrial loans, owner occupied commercial real estate loans, non-owner occupied commercial real estate loans, real estate loans secured by farms, real estate loans secured by multi-family dwellings, residential real estate loans secured by senior liens on 1-4 family dwellings, residential real estate loans secured by junior liens on 1-4 family dwellings, home equity line of credit loans, consumer loans, loans for agricultural purposes not secured by real estate, construction loans secured by 1-4 family dwellings, construction loans secured by other real estate, and several smaller classifications. Within each pool of loans, LCNB examines a variety of factors to determine the adequacy of the allowance for loan losses, including historic charge-off percentages, overall pool quality, a review of specific problem loans, current economic trends and conditions that may affect borrowers' ability to pay, and the nature, volume, and consistency of the loan pool.

LCNB recorded net provision for loans losses for 2022 of $250,000, compared to a $269,000 net recovery for 2021 and a $2,014,000 provision for 2020. The 2020 period included qualitative adjustments for estimated impacts from the economic downturn caused by the COVID-19 pandemic. Calculating an appropriate level for the allowance and provision for loan losses involves a high degree of management judgment and is, by its nature, imprecise. Revisions may be necessary as more information becomes available.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Non-Interest Income

A comparison of non-interest income for 2022, 2021, and 2020 is as follows:

Reasons for changes include:

•Fiduciary income decreased during 2022 primarily due to decreases in the fair values of trust and brokerage assets managed, on which fees are based. The decreases in fair value are primarily due to an overall decrease in the market values of equity and debt securities caused by general economic conditions. The decreases in fair value were partially offset by an increase in the number of wealth management accounts. Fiduciary income increased during 2021 due to a combination of new accounts and increases in the fair value of assets managed.

•Service charges and fees on deposit accounts increased during 2022 primarily due to an increase in the volume of overdraft fees collected and fees recognized in relation to the ICS deposit program, partially offset by an overall decrease in service charges collected on deposit accounts. Service charges and fees on deposit accounts increased during 2021 primarily due to increases in fees received from debit card usage, partially offset by a decrease in fee income recognized on the ICS deposit program.

•Net gains on sales of debt securities were less during 2022 as compared to 2021 and 2020 because no securities were sold during 2022.

•Bank owned life insurance income was greater in 2020 primarily due to a mortality benefit received. No mortality benefits were received during 2022 or 2021.

•Net gains from sales of loans were greater during 2020 as compared to 2022 and 2021 primarily due to the lower volume of loans sold.

•Other operating income decreased in 2022, as compared to 2021 and 2020, primarily because LCNB recognized $292,000 in losses on equity securities during 2022 as compared to $142,000 and $675,000 in gains during 2021 and 2020, respectively. In addition, other operating income for 2021 included a one-time Ohio Financial Institutions Tax refund of $508,000.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Non-Interest Expense

A comparison of non-interest expense for 2022, 2021, and 2020 is as follows:

Reasons for changes include:

•Salaries and employee benefits were 3.1% greater in 2022 than in 2021 and 1.6% greater in 2021 than in 2020. The increase in 2022 was primarily due to overall wage and benefit increases, increased compensation expense recognized on restricted stock grants, increased pension expense, and to a higher amount of personnel expenses deferred in 2021 attributable to the high volume of PPP loans originated in that period. The increase in 2021 was primarily due to increased employer taxes on employee payroll, increased compensation expense recognized on restricted stock grants, and increased health insurance costs.

•Equipment expenses decreased during 2022 as compared to 2021 primarily due to decreased depreciation charges for furniture and equipment and decreased maintenance and repair costs, partially offset by increased equipment rental costs. Equipment expenses increased during 2021 as compared to 2020 primarily due to increased depreciation charges for furniture and equipment and increased equipment rental costs. During 2020, LCNB replaced ATMs that it had previously owned with new ATMs obtained through an outsourcing arrangement.

•Amortization of intangibles decreased during 2022 because the core deposit intangibles from the First Capital Bancshares, Inc. and Eaton National Bank & Trust Co. acquisitions amortized in full during the first quarter 2022.

•FDIC premiums were higher in 2022 and 2021 as compared to 2020 because LCNB received small bank assessment credits from the FDIC during the first and second quarters of 2020 and the third and fourth quarters of 2019. Premium payments returned to their normal levels after the second quarter 2020.

•ATM expense was higher in 2022 and 2021 than in 2020 partially due to a strategic decision to outsource LCNB's ATM operations to a third-party vendor, relieving LCNB branch personnel from various ATM maintenance responsibilities. The transition took place gradually during 2020 and all ATMs were outsourced during 2021.

•Telephone expense was lower in 2022 and 2021, as compared to 2020, due to connection modifications.

•Contracted services were greater in 2022 and 2021, as compared to 2020, due to additional fees paid for data services and general price increases on other contracted services. Fees for recruitment services were also part of the increase during 2021.

•Other real estate owned, net for 2022 is primarily due to a gain recognized on the sale of foreclosed property, slightly offset by other expenses recognized on such property.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

•Other non-interest expense for 2022 included $471,000, in losses from the sales of two office buildings as a result of LCNB's office consolidation strategy. Legal and accounting fees also increased during 2022, partially offset by lower printing and supply costs. Other non-interest expense increased in 2021, as compared to 2020, primarily due to increased ATM maintenance costs due to the outsourcing agreement, increased costs to support LCNB's electronic banking products, increased printing and supply costs, and increased legal fees.

On October 18, 2022, the FDIC issued a final rule that will increase the initial base deposit insurance assessment rate paid by insured depository institutions by two basis points, beginning with the first quarterly assessment period of 2023. According to the FDIC, the proposal increases the likelihood that its designated reserve ratio will reach the required minimum level of 1.35% by the statutory deadline of September 30, 2028 and will support progress toward achieving the long-term goal of a 2% ratio. LCNB's current initial base deposit insurance rate is three basis points and it will increase to five basis points when the final rule takes effect. If the increased rate had been in effect for the assessments paid in 2022, LCNB estimates that it would have paid approximately $349,000 in additional premiums. The increase will remain in effect until the long-term goal of a 2% FDIC designated reserve ratio is achieved. Progressively lower assessment rates will take effect when the reserve ratio

reaches 2% and again when the reserve ratio reaches 2.5%.

On March 12, 2023, the FDIC made a joint statement with the Department of the Treasury and the Board of Governors of the Federal Reserve that any losses to the DIF in connection with support for uninsured depositors in connection with the Signature Bank and Silicon Valley Bank closures will be recovered by a special assessment paid by insured depository institutions. The timing and amount of the special assessment cannot be determined at this time.

On September 2, 2022, the OCC announced reduced assessment rates for OCC-chartered community banks, such as LCNB.

Effective with the March 2023 assessment, the OCC will make a 40% reduction in assessments based on the first $200 million

in bank assets and a 20% reduction for assets between $200 million and $20 billion. If the new rates had been in effect for the

2022 assessments, LCNB estimates that it would have paid approximately $72,000 less than the amounts actually paid.

Income Taxes

LCNB's effective tax rates for the years ended December 31, 2022, 2021, and 2020 were 17.9%, 18.0%, and 16.9%, respectively.  The difference between the statutory rate of 21% and the effective tax rate is primarily due to tax-exempt interest income from municipal securities, tax-exempt earnings from bank owned life insurance, tax-exempt earnings from LCNB Risk Management, Inc., and tax credits and losses related to investments in affordable housing tax credit limited partnerships. A one-time tax benefit recognized as a result of certain provisions in the CARES Act also contributed to the difference during 2020.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Financial Condition

A comparison of balance sheet line items at December 31, 2022 and 2021 is as follows (in thousands):

Reasons for changes include:

•Debt securities, available-for-sale, decreased primarily due to decreases in fair values totaling $35.9 million and maturities and calls totaling $20.7 million, partially offset by new purchases totaling $39.3 million.

•Federal Home Loan Bank stock decreased because excess shares over the minimum required investment were redeemed by the Federal Home Loan Bank of Cincinnati, partially offset by new purchases.

•Net loans increased due to organic growth in the loan portfolio. Most of the growth occurred in the commercial and industrial and commercial real estate loan portfolios, partially offset by a decrease in the residential real estate loan portfolio.

•Core deposit and other intangibles decreased due to amortization of core deposit intangibles.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

•Bank owned life insurance increased due to increases in the cash values of the policies. No new policies were purchased during 2022.

•Other assets increased primarily due to an increase in net deferred tax assets caused by an increase in the net unrealized loss incurred by LCNB's available-for-sale debt securities portfolio. In addition, LCNB made an additional $2.0 milllion commitment in Affordable Housing Tax Credit Limited Partnerships. These increases were partially offset by a decrease in a clearing account.

•LCNB experienced disintermediation in all interest-bearing deposit categories during 2022 as a result of general increases in market interest rates caused by the FOMC's efforts to reduce inflation through periodic increases in the Federal Funds rate. Deposit decreases were partially offset by a $32.1 million increase in ICS reciprocal account deposits.

•Short-term borrowings increased primarily as a result of deposit disintermediation and were used to fund loan growth and treasury share purchases.

•Long-term debt increased due to a new $15 million term loan borrowed from a correspondent financial institution and was used to fund treasury share purchases. This new debt was partially offset by the payment in full of a matured $5 million Federal Home Loan Bank advance.

•Accrued interest and other liabilities decreased due to a combination of a decrease in LIHTC liabilities due to funding payments made during 2022 and a reclassification of net deferred federal income taxes from a net liability at December 31, 2021 to a net asset at December 31, 2022.

•Treasury shares increased because of the repurchase of 1,212,634 shares of common stock during 2022, which represents 9.8% of shares outstanding at December 31, 2021.

•Accumulated other comprehensive loss, net of taxes increased because of market-driven decreases in the fair value of LCNB's available-for-sale debt securities investments.

Liquidity

LCNB Corp. depends on dividends from the Bank for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders. Federal banking law limits the amount of dividends the Bank may pay to the sum of retained net income for the current year plus retained net income for the previous two years. Prior approval from the OCC, 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 Corp. without needing to request approval. The Bank is not aware of any reasons why it would not receive such approval, if required.

Effective liquidity management ensures that cash is available to meet the cash flow needs of borrowers and depositors, pay dividends to shareholders, and meet LCNB's operating cash needs. Primary funding sources include customer deposits with the Bank, short-term and long-term borrowings from the Federal Home Loan Bank, short-term line of credit arrangements totaling $60.0 million with three correspondent banks, and interest and repayments received from LCNB's loan and investment portfolios.

Total remaining borrowing capacity with the Federal Home Loan Bank at December 31, 2022 was approximately $160.6 million. Additional borrowings of approximately $38.5 million were available through the line of credit arrangements at year-end.

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 current liquidity levels. Management believes LCNB has the ability to generate and obtain adequate amounts of liquidity to meet its requirements in the short and long-term.

Commitments to extend credit at December 31, 2022 totaled $321.4 million and are more fully described in Note 13 - Commitments and Contingent Liabilities to LCNB's consolidated financial statements.  Since many commitments to extend credit may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

The following table provides information concerning LCNB's commitments at December 31, 2022:

Capital Resources

The Bank is required by banking regulators to meet certain minimum levels of capital adequacy. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on LCNB's and the Bank's financial statements.  These minimum levels 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). Common Equity Tier 1 Capital is the sum of common stock, related surplus, and retained earnings, net of treasury stock, accumulated other comprehensive income, and other adjustments. The first three ratios, which are based on the degree of credit risk in the Bank'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. Information summarizing the regulatory capital of the Bank at December 31, 2022 and 2021 and corresponding regulatory minimum requirements is included in Note 14 - Regulatory Matters of the consolidated financial statements.

The FDIC, the insurer of deposits in financial institutions, has adopted a risk-based insurance premium system based in part on an institution's capital adequacy. Under this system, a depository institution is required to pay successively higher premiums depending on its capital levels and its supervisory rating by its primary regulator. It is management's intention to maintain sufficient capital to permit the Bank to maintain a "well capitalized" designation, which is the FDIC's highest rating.

On May 27, 2022, LCNB's Board of Directors authorized a share repurchase program (the “Program”). Under the terms of

the Program, LCNB is authorized to repurchase up to 500,000 of its outstanding common shares. The Program replaced and superseded LCNB’s prior share repurchase program, which was adopted on August 24, 2020.

Under the Program, LCNB may purchase common shares through various means such as open market transactions, including

block purchases, and privately negotiated transactions. The number of shares repurchased and the timing, manner, price and

amount of any repurchases will be determined at LCNB's discretion. Factors include, but are not limited to, share price, trading

volume, and general market conditions, along with LCNB’s general business conditions. The Program may be suspended or

discontinued at any time and does not obligate LCNB to acquire any specific number of its common shares.

As part of the Program, LCNB entered into a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The 10b5-1 trading plan permits common shares to be repurchased at times that LCNB might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. The 10b5-1 trading plan is administered by an independent broker and is subject to price, market volume and timing restrictions.

The Program expired on or around December 31, 2022 and was replaced with a new share repurchase program that was authorized by the Board of Directors on February 27, 2023. The new share repurchase program authorizes the repurchase of up to 500,000 shares of common stock.

The 2015 Ownership Incentive Plan (the "2015 Plan") was approved by LCNB's shareholders at the annual meeting on April 28, 2015 and allows for stock-based awards to eligible employees, as determined by the Compensation Committee of the Board of Directors. Awards may be made in the form of stock options, appreciation rights, restricted shares, and/or restricted share units. The 2015 Plan provides for the issuance of up to 450,000 shares. The 2015 Plan will terminate on April 28, 2025 and is subject to earlier termination by the Compensation Committee.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Critical Accounting Estimates

The accounting policies of LCNB conform to U.S. generally accepted accounting principles and require management to make estimates and develop assumptions that affect the amounts reported in the financial statements and related footnotes. These estimates and assumptions are based on information available to management as of the date of the financial statements. Actual results could differ significantly from management’s estimates. As this information changes, management’s estimates and assumptions used to prepare LCNB’s financial statements and related disclosures may also change. The most significant accounting policies followed by LCNB are presented in Note 1 of the Notes to Consolidated Financial Statements included herein. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the items described below to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new information becomes available.

Allowance for Loan Losses.  The allowance for loan losses is established through a provision for loan losses charged to expense.  Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely.  Subsequent recoveries, if any, are credited to the allowance.  The allowance is an amount that management believes will be adequate to absorb inherent losses in the loan portfolio, based on evaluations of the collectability of loans and prior loan loss experience.  The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components.  The specific component relates to loans that are classified as doubtful, substandard, or special mention.  For such loans an allowance is established when the discounted cash flows or collateral value is lower than the carrying value of that loan.  The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors, which include trends in underperforming loans, trends in the volume and terms of loans, economic trends and conditions, concentrations of credit, trends in the quality of loans, and borrower financial statement exceptions.

Based on its evaluations, management believes that the allowance for loan losses will be adequate to absorb estimated losses inherent in the current loan portfolio.

Accounting for Intangibles.  LCNB’s intangible assets at December 31, 2022 are composed primarily of goodwill and core deposit intangibles related to acquisitions of other financial institutions. It also includes mortgage servicing rights recorded from sales of mortgage loans to the Federal Home Loan Mortgage Corporation and mortgage servicing rights acquired through the acquisition of Eaton National and CFB.

Goodwill is not subject to amortization, but is reviewed annually for impairment.   A review for impairment may be conducted more frequently than annually if circumstances indicate a possible impairment. Impairment indicators that may be considered include the condition of the economy and banking industry; estimated future cash flows; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of LCNB’s stock; and other relevant events. These and other factors could lead to a conclusion that goodwill is impaired, which would require LCNB to write off the difference between the estimated fair value of the Company and the carrying value.

Core deposit intangibles are being amortized on a straight line basis over their respective estimated weighted average lives.

Core deposit intangibles acquired from business combinations are initially measured at their estimated fair values and are then amortized on a straight-line basis over their estimated useful lives.  Management evaluates whether events or circumstances have occurred that indicate the remaining useful life or carrying value of the amortizing intangible should be revised.

Mortgage servicing rights are capitalized by allocating the total cost of loans between mortgage servicing rights and the loans based on their estimated fair values.  Capitalized mortgage servicing rights are amortized to loan servicing income in proportion to and over the period of estimated servicing income, subject to periodic review for impairment.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Fair Value Accounting for Debt Securities.  Debt securities classified as available-for-sale are carried at estimated fair value.  Unrealized gains and losses, net of taxes, are reported as accumulated other comprehensive income or loss in shareholders’ equity.  Fair value is estimated using market quotations for U.S. Treasury investments.  Fair value for the majority of the remaining available-for-sale securities is estimated using the discounted cash flow method for each security with discount rates based on rates observed in the market.

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