Note 2 – Acquisition

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 ("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, net		98,899
Premises and equipment, net		3,729
Bank owned life insurance		3,687
Core deposit intangible		2,574
Other real estate owned		127
Deferred income taxes		504
Other assets		1,150
Total identifiable assets acquired		151,212

Liabilities Assumed:
Deposits		136,823
Long-term debt		1,792
Other liabilities		819
Total liabilities assumed		139,434

Total Identifiable Net Assets Acquired		11,778

Goodwill resulting from merger	$	8,404

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.

The following table details the acquired loans that are accounted for in accordance with FASB ASC 310-30 (in thousands):

Contractually required principal at acquisition	$	103,456
Contractual cash flows not expected to be collected (nonaccretable difference)		(3,409	)
Expected cash flows at acquisition		100,047
Interest component of expected cash flows (accretable discount)		(1,148	)
Fair value of acquired loans	$	98,899

In accordance with U.S. GAAP, there was no carryover of the allowance for loan losses that had been previously recorded by Citizens.

Direct costs related to the acquisition were expensed as incurred and are recorded in other non-interest expense in the consolidated statements of income. During the first quarter 2013 LCNB incurred $1,055,000 in merger and acquisition integration expenses related to the transaction, including $496,000 in merger related costs and $559,000 for converting Citizens data processing system to LCNB's system.

The results of operations are included in the consolidated income statement from the date of the merger. The estimated amount of Citizens revenue and net income, excluding merger and data conversion costs, included in LCNB's consolidated income statement for the first quarter 2013 was $1,260,000 and $393,000 respectively.

The following table presents unaudited pro forma information as if the merger with First Capital had occurred on January 1, 2012 (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 2012. In particular, expected operational cost savings are not reflected in the pro forma amounts.

	Three Months Ended
	March 31,
	2013		2012

Total revenue	$	9,688		10,466
Net income		2,115		2,555

Basic earnings per common share		0.28		0.34
Diluted earnings per common share		0.27		0.33