ACQUISITIONS

On October 9, 2012, LCNB and First Capital Bancshares, Inc. ("First Capital") entered into an Agreement and Plan of Merger ("Merger Agreement") pursuant to which First Capital was merged into LCNB on January 11, 2013 in a stock and cash transaction valued at approximately $20.2 million. Immediately following the merger of First Capital into LCNB, Citizens National Bank of Chillicothe ("Citizens"), a wholly-owned subsidiary of First Capital, was merged into LCNB National Bank. Citizens operated six full–service branches with a main office and two other facilities in Chillicothe, Ohio and one branch in each of Frankfort, Ohio, Clarksburg, Ohio, and Washington Court House, Ohio. These offices became branches of the Bank after the merger.

Under the terms of the Merger Agreement, each shareholder of First Capital common stock was entitled to elect to receive, for each share of First Capital Common Stock, (i) $30.76 in cash, (ii) 2.329 common shares of LCNB (subject to an adjustment based upon the average closing price of LCNB common shares for the 25 trading days prior to the effective date of the merger), or (iii) a combination of cash and LCNB common stock. A First Capital shareholder's election to receive cash or stock was subject to allocation procedures that ensured that no more than 50% and no less than 40% of the outstanding First Capital shares were exchanged for cash and that no more than 60% and no less than 50% of the outstanding First Capital shares were exchanged for LCNB common shares.

The merger with First Capital was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at their estimated fair values as of the merger date, as summarized in the following table (in thousands):



Consideration Paid:
Common shares issued (888,811)	$	12,354
Cash paid to shareholders	7,828
Total value of consideration paid	20,182

Identifiable Assets Acquired:
Cash and cash equivalents	17,632
Investment securities:
Available-for-sale	21,606
Held-to-maturity	384
Federal Reserve Bank stock	157
Federal Home Loan Bank stock	763
Loans	98,904
Premises and equipment	3,949
Bank owned life insurance	3,687
Core deposit intangible	2,574
Other real estate owned	127
Deferred income taxes	185
Other assets	1,380
Total identifiable assets acquired	151,348

Liabilities Assumed:
Deposits	136,823
Long-term debt	1,792
Other liabilities	822
Total liabilities assumed	139,437

Total Identifiable Net Assets Acquired	11,911

Goodwill resulting from merger	$	8,271

The amount of goodwill recorded reflects LCNB's entrance into a new market and related synergies that are expected to result from the acquisition and represents the excess purchase price over the estimated fair value of the net assets acquired. The goodwill will not be amortizable and is not deductible for tax purposes. The core deposit intangible will be amortized over nine years using the straight-line method.

Direct costs related to the acquisition were expensed as incurred and are recorded in non-interest expense in the consolidated statements of income. During 2013, LCNB incurred $1,326,000 in merger and acquisition integration expenses related to the transaction, including $603,000 in merger related costs (consisting primarily of professional fees and employee severance costs) and $723,000 for converting Citizens data processing system to LCNB's system.

The results of operations are included in the consolidated statement of income from the date of the merger. The estimated amount of Citizens revenue (net interest income plus non-interest income) and net income, excluding merger and data conversion costs, included in LCNB's consolidated statement of income for 2013 were as follows (in thousands):



Total revenue	$	6,445
Net income	2,780

The following table presents unaudited pro forma information as if the merger with First Capital had occurred on January 1, 2011 (in thousands). This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of the core deposit intangible, and related income tax effects. It does not include merger and data conversion costs. The pro forma information does not necessarily reflect the results of operations that would have occurred had the merger with First Capital occurred in 2011. In particular, expected operational cost savings are not reflected in the pro forma amounts.



	For Years Ended December 31,
	2013		2012	2011
Total revenue	$	38,495	40,799	40,565
Net income	9,260		9,344	8,682
Basic earnings per common share	1.18		1.23	1.15
Diluted earnings per common share	1.16		1.21	1.14

On October 28, 2013, LCNB and Colonial Banc Corp. (“Colonial”) entered into a Stock Purchase Agreement (“Purchase Agreement”) pursuant to which LCNB purchased from Colonial on January 24, 2014 all of the issued and outstanding shares of Eaton National Bank in a cash transaction valued at $24.75 million. Immediately following the acquisition, Eaton National Bank was merged into LCNB. Eaton operated five full–service branches with a main office and one other facility in Eaton, Ohio and one branch in each of West Alexandria, Ohio, New Paris, Ohio, and Lewisburg, Ohio. These offices became branches of LCNB after the merger.

The acquisition will be accounted for in accordance with applicable accounting guidance. Accordingly, the assets and liabilities of Eaton National Bank will be recorded at estimated fair values at the acquisition date. The excess of the cash paid over the net fair values of the assets acquired, including identifiable intangible assets, and liabilities assumed will be recorded as goodwill. The results of operations will be included in the consolidated income statement from the date of the acquisition. Goodwill will be subject to an annual test for impairment and the amount impaired, if any, will be charged to expense at the time of impairment.

The estimated fair values of the assets and liabilities have not yet been determined. The recorded amounts reflected on the historic financial records of Eaton National Bank as of the acquisition date include total assets of approximately $183 million, consisting primarily of net loans of $124 million and investments of $35 million. Recorded liabilities totaling approximately $165 million consisted primarily of deposits totaling $164 million.