LCNB (LCNB) 10-K 2010 FY Annual report

EXHIBIT 13

LCNB Corp. 2010 Annual Report

CEO’s and President's Letter to Shareholders (page 1 and 2 of Annual Report):

Dear Shareholders:

A struggling economy, increased banking regulation, and higher FDIC premiums have made it difficult for some U.S. banks to deliver good results in 2010. LCNB is happy to report that, in spite of those   challenges, 2010 was another very successful year and we are proud to present these results in this year’s annual report.

The theme of this year’s annual report is, “If LCNB is in your Community... This is a Good Sign.” This refers directly to the importance of a bank to the economic health of any community. A traditional regulated bank, whose success is tied to the success of its customers and its community is so very important for several reasons. A community bank is the economic engine that enables its customers to create jobs and to create wealth and opportunity. It renders advice on how fast to grow and how far to go to ensure that customers are successful in the long-run. The bank’s value to the community itself goes beyond economic value and provides the power of involvement and support. Support is given by inves ting time and money in many organizations and events which contribute to the quality of life in a community. It also supports those things, both necessary and nice, that differentiates a community and makes it a great place to live.

A successful year is measured in numerous ways. We measure it financially and with the completion of successful projects within the organization.

Financially, LCNB earned a return on average assets of 1.22% and a return on average equity of 13.36% in 2010. Net income available to common shareholders in 2010 exceeded 2009 results by 41% resulting in net income available to common shareholders of $9.4 million. That net income produced total earnings per share of $1.40 which is 40% higher than the $1.00 earnings per share from 2009 results. Although LCNB Corp. total assets grew from $734 million to $760 million in 2010, loan growth was still sluggish in 2010. Net loans declined 1.11% from 2009 to $452 million. But within that total, commercial loans grew by almost 2% and we have originated or refinanced $19 million in 1-4 family mortgages for consumers taking advantage of the low interest rate environment in 2010. Another $24 million of 1-4 family mortgages were originated and sold in the secondary market during 2010. The Trust and Brokerage Departments both had 14% growth in assets they manage for our customers and deposits continued to grow in 2010 to $639 million. Total shareholder’s equity on December 31, 2010 was $70.7 million. Our capital remains in the “well capitalized” designation.

LCNB Management and the Board of Directors believe continuing to pay a dividend to our shareholders is important. During 2010 our shareholders received a dividend of $.64 per share. LCNB returned earnings to its shareholders of 46% in 2010.

In addition to the successful year financially, our employees also were busy improving delivery channels for our customers. We started upgrading our ATM machines to newer models in 2010 and this project will continue in 2011. Because of the constant threat of dishonest people trying to exploit our electronic delivery channels, we have added additional firewalls and other more secure ways that our customers can access their bank information and transact business electronically. We will always strive to maintain the latest security measures to protect our customers’ information. Although we did not build or acquire any new facilities in 2010, we began construction of a new branch in the City of Monroe and the new Auto B ank in Lebanon. Both projects should be complete by late Spring of 2011.

In November, Dave Beckett, a director of LCNB since 1999 and President of Dakin Insurance Agency, a subsidiary of LCNB Corp., announced that he and his family planned to relocate to another state. We are sorry to lose Dave as a director and as president of Dakin Insurance. He has very competently fulfilled both roles. The LCNB Board of Directors decided not to fill the vacant director’s seat at this time. In addition, the LCNB Board of Directors decided to divest of Dakin Insurance by selling the agency.

Additional statistical data and information on our financial performance for 2010 is available in the LCNB Corp. Annual Report on Form 10-K. This report is filed annually with the Securities and Exchange Commission. We have enclosed the Form 10-K with the initial mailing of this report to shareholders and it is available upon request or from the shareholders information section on our website, www.LCNB.com.

The Annual Meeting for LCNB Corp. will be Tuesday, April 26th, 2011 at 10:00 a.m. at our Main Office located at 2 North Broadway in Lebanon, Ohio. Proxy material is included with this initial mailing. Please review, sign and return the proxy in the envelope provided. We would be pleased to have you attend our annual meeting in person.  Thank you for your continued support.

Stephen P. Wilson

Chairman and CEO

Steve P. Foster

President

Please Note:  “In the spirit of service to our communities and profession, Steve Wilson continues to demonstrate his dedication to the banking industry. He served as chairman of the Ohio Bankers League (OBL) in 1997 and,­ beginning in October 2010, Steve is serving as Chairman of the American Bankers Association (ABA).

It is a prestigious honor that Steve has been given to represent our banking industry and his leadership and experience is important to banking at this crucial time.” - Steve P. Foster

FINANCIAL HIGHLIGHTS

(Dollars in thousands, except per share data)

	For the Years Ended December 31,
	2010			2009			2008			2007			2006
Income Statement
Net interest income	$	25,655			24,793			20,928			18,152			18,315
Net income from continuing operations		9,133			7,687			6,427			5,737			6,182
Income from discontinued operations, net of tax		240			79			176			217			332
Net income		9,373			7,766			6,603			5,954			6,514
Net income available to common shareholders		9,373			6,658			6,603			5,954			6,514
Dividends declared per common share (1)		0.64			0.64			0.64			0.62			0.60
Basic earnings per common share (1):
Continuing operations		1.37			0.99			0.96			0.90			0.95
Discontinued operations		0.03			0.01			0.03			0.04			0.05
Diluted earnings per common share (1):
Continuing operations		1.36			0.98			0.96			0.90			0.95
Discontinued operations		0.03			0.01			0.03			0.04			0.05
Balance Sheet
Loans – net	$	452,350			457,418			451,343			444,419			388,320
Earning assets		706,226			678,055			599,825			550,733			505,485
Total assets		760,134			734,409			649,731			604,058			548,215
Total deposits		638,539			624,179			577,622			535,929			478,615
Short-term borrowings		21,691			14,265			2,206			1,459			15,370
Long-term debt		23,120			24,960			5,000			5,000			-
Total shareholders' equity		70,707			65,615			58,116			56,528			50,999
Per common share: Book value at year end (1)		10.57			9.81			8.69			8.45			7.99
Performance Ratios
Return on average assets		1.22	%		1.07	%		1.03	%		1.08	%		1.19	%
Return on average shareholders’ equity		13.36	%		10.43	%		11.35	%		11.41	%		12.48	%

(1)  All per share data have been adjusted to reflect a 100% stock dividend accounted for as a stock split in 2007.

LCNB CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
At December 31,
(Dollars in thousands)
		2010	2009
ASSETS:
Cash and due from banks	$	10,817	12,626
Interest-bearing demand deposits		182	-
Total cash and cash equivalents		10,999	12,626
Investment securities:
Available-for-sale, at fair value		235,882	201,578
Held-to-maturity, at cost		12,141	13,030
Federal Reserve Bank stock, at cost		939	940
Federal Home Loan Bank stock, at cost		2,091	2,091
Loans, net		452,350	457,418
Premises and equipment, net		16,017	15,722
Goodwill		5,915	5,915
Bank owned life insurance		14,242	14,122
Other assets		9,558	10,967
TOTAL ASSETS	$	760,134	734,409
LIABILITIES:
Deposits:
Noninterest-bearing	$	98,994	93,894
Interest-bearing		539,545	530,285
Total deposits		638,539	624,179
Short-term borrowings		21,691	14,265
Long-term debt		23,120	24,960
Accrued interest and other liabilities		6,077	5,390
TOTAL LIABILITIES		689,427	668,794
SHAREHOLDERS' EQUITY:
Preferred shares - no par value, authorized 1,000,000 shares, none outstanding		-	-
Common shares - no par value, authorized 12,000,000 shares, issued 7,445,514 at December 31, 2010 and 2009		11,068	11,068
Surplus		15,447	15,407
Retained earnings		54,045	48,962
Treasury shares at cost, 755,771 shares and 758,282 shares at December 31, 2010 and 2009, respectively		(11,698)	(11,737)
Accumulated other comprehensive income, net of taxes		1,845	1,915
TOTAL SHAREHOLDERS' EQUITY		70,707	65,615
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	760,134	734,409

LCNB CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
(Dollars in thousands, except per share data)
	2010		2009		2008
INTEREST INCOME:
Interest and fees on loans	$	26,977		27,493		29,024
Interest on investment securities:
Taxable		3,686		4,237		2,641
Non-taxable		3,126		2,921		1,995
Other investments		200		202		689
TOTAL INTEREST INCOME		33,989		34,853		34,349
INTEREST EXPENSE:
Interest on deposits		7,613		9,434		13,145
Interest on short-term borrowings		27		3		13
Interest on long-term debt		694		623		263
TOTAL INTEREST EXPENSE		8,334		10,060		13,421
NET INTEREST INCOME		25,655		24,793		20,928
PROVISION FOR LOAN LOSSES		1,680		1,400		620
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		23,975		23,393		20,308
NON-INTEREST INCOME:
Trust income		1,897		1,916		1,861
Service charges and fees on deposit accounts		3,953		3,985		4,211
Net gain on sales of securities		948		110		-
Bank owned life insurance income		1,389		637		534
Gains from sales of mortgage loans		496		396		11
Other operating income		248		204		184
TOTAL NON-INTEREST INCOME		8,931		7,248		6,801
NON-INTEREST EXPENSE:
Salaries and employee benefits		11,271		10,534		10,183
Equipment expenses		889		995		973
Occupancy expense, net		1,875		1,721		1,652
State franchise tax		703		610		614
Marketing		448		408		433
Intangible amortization		57		57		257
FDIC premiums		958		1,271		75
ATM expense		513		513		456
Computer maintenance and supplies		456		449		454
Telephone expense		414		407		439
Other real estate owned		506		17		9
Write-off of pension asset		-		722		-
Other non-interest expense		3,189		3,005		3,003
TOTAL NON-INTEREST EXPENSE		21,279		20,709		18,548
INCOME BEFORE INCOME TAXES		11,627		9,932		8,561
PROVISION FOR INCOME TAXES		2,494		2,245		2,134
NET INCOME FROM CONTINUING OPERATIONS		9,133		7,687		6,427
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX		240		79		176
NET INCOME		9,373		7,766		6,603
PREFERRED STOCK DIVIDENDS AND DISCOUNT ACCRETION		-		1,108		-
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	9,373		6,658		6,603
Basic earnings per common share:
Continuing operations	$	1.37		0.99		0.96
Discontinued operations		0.03		0.01		0.03
Diluted earnings per common share:
Continuing operations		1.36		0.98		0.96
Discontinued operations		0.03		0.01		0.03
Weighted average shares outstanding:
Basic		6,687,500		6,687,232		6,687,232
Diluted		6,736,622		6,701,309		6,687,232

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

LCNB Corp. and subsidiaries

We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of LCNB Corp. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of income, and consolidated statements of comprehensive income, shareholders’ equity and cash flows (not included herein), for each of the three years in the period ended December 31, 2010; and in our report dated March 1, 2011 we expressed an unqualified opinion on those consolidated financial statements.

In our opinion, the information set forth in the accompanying condensed consolidated financial statements is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived.

 /s/ J.D. Cloud & Co. L.L.P.

Cincinnati, Ohio

March 1, 2011