LCNB (LCNB) 10-K 2012 FY Annual report

EXHIBIT 13

LCNB Corp. 2012 Annual Report

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

Dear Shareholders:

We are proud to present to you the 2012 Annual Report for LCNB Corp. and our subsidiary LCNB National Bank. Your Bank concluded another successful year in its 135-year history. This year's report is titled, "Community Banks - The Economic Engine of local Communities". We believe that a strong a community bank is vital to the health of its community. Within this report you will find a summary of historical financial information, as well as, more detailed financials for those who like a more in-depth presentation.

Our bank was founded in 1877 to be the economic engine for Lebanon and surrounding Warren County. Like today, our founders and their community faced great uncertainty and needed a strong, stable financial institution to provide security and stimulus to the local economy. Throughout our history we cautiously and purposefully expanded into other communities to provide that same security and economic stimulus. Presently, we serve that role in eight counties with 31 offices. We strongly support the success of the communities we serve and strive to meet, not only economic needs, but quality of life needs, as well.

Since 2012 was a presidential election year there was a lot of uncertainty about what direction the country and our economy might take in 2013. Although the election is over there is still a lot of uncertainty about how the tax changes and the rising fiscal debt will affect the U.S. economy. The Federal Reserve's policy of maintaining low interest rates to stimulate economic growth has put pressure on banks' interest margins. Community banks still rely on that margin to generate a large percentage of total income. LCNB management has recognized the importance of generating non-interest income to supplement interest margin income. One area generating non-interest income, is the trust department and investment services, which contributed over $2.3 million during 2012, a 10% increase over 2011. The continued success of these departments is an important part of the future growth of LCNB.

The financial results for 2012 include a return on average assets of 1.02% and a return on average equity of 10.22%. Net income was $8.3 million, resulting in total basic earnings per share of $1.23. Total shareholders' equity increased $4 million from December 31, 2011 to December 31, 2012, an increase of 5.2%. Our capital remains in the "well capitalized" designation.

Although total net loans decreased by $8 million, commercial real estate loans increased by just over $11 million. Low interest rates in 2012 were reflected in robust mortgage activity. LCNB originated or refinanced $24 million of 1-4 family mortgages for consumers in 2012. Another $28 million of 1-4 family mortgages were originated and sold in the secondary market in 2012. Credit quality continued to improve in 2012. Net loan charge-offs were lower, totaling $.8 million compared to $1.8 million in 2011. Non-accrual loans and loans past due 90-days or more and still accruing interest totaled $2.4 million or 0.53% of total loans at December 31, 2012 compared to $3.7 million or 0.80% of total loans at December, 2011.

Despite low interest rates, deposits increased $8 million during 2012 to $671.5 million.

The winning formula for our bank continues to be maintaining a strong capital base; paying a regular dividend; strong underwriting of loans; and, pursuing robust earnings.

One major event in 2012 was the negotiation of the purchase of Citizens National Bank of Chillicothe. The negotiations resulted in a successful merger agreement signed on October 9, 2012 and closed on January 11, 2013. LCNB National Bank now has approximately $950 million in total assets and serves customers in eight counties with 31 offices. The LCNB Board and Management felt that the culture of both banks were very similar and the two banks would be stronger as one. As part of the merger agreement, John Kochensparger, Chairman of the Citizens National Bank Board, was offered a board seat with LCNB. John joined the LCNB Board on January 14, 2013. The remaining Citizens National Bank board members agreed to serve on an Advisory Board for 2013. The LCNB Board of Directors and management feel that measured growth is just one part of a strategy for the future success of LCNB.

In 2012 several projects were completed. The bank's phone system was upgraded with new equipment and enhanced connections between offices. As we expand, the importance of communication between our offices and with our customers become more critical in providing the best customer service. We continue to believe that answering each call to the bank with a highly trained employee, not a machine, is one key to excellent customer service. The ability for customers to apply for consumer loans online was added to our website as a complement to our online mortgage application. We have also redesigned our website for 2013. All of our offices participated in the St. Jude Home Giveaway in the first half of 2012 by selling tickets and staffing a telethon for a chance to win a brand new home in the Maineville area. This charitable event raised almost $650,000 to support the St. Jude Research Hospital's continued research for medical treatment and the care of severely ill children. The caring and generosity for others by our employees is a strength of LCNB.

Additional statistical data and information on our financial performance for 2012 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 shareholder information section on our website, www.LCNB.com or www.LCNBCorp.com.

The Annual Meeting for LCNB Corp. will be Tuesday, April 23, 2013 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.

/s/ Stephen P. Wilson	/s/ Steve P. Foster
Stephen P. Wilson	Steve P. Foster
Chairman and CEO	President

FINANCIAL HIGHLIGHTS

(Dollars in thousands, except per share data)

	For the Years Ended December 31,
	2012			2011			2010			2009			2008
Income Statement
Net interest income	$	25,049			25,706			25,697			24,838			20,977
Net income from continuing operations		8,270			7,322			9,133			7,687			6,427
Income from discontinued operations, net of tax		-			793			240			79			176
Net income		8,270			8,115			9,373			7,766			6,603
Net income available to common shareholders		8,270			8,115			9,373			6,658			6,603
Dividends declared per common share		0.64			0.64			0.64			0.64			0.64
Basic earnings per common share:
Continuing operations		1.23			1.09			1.37			0.99			0.96
Discontinued operations		-			0.12			0.03			0.01			0.03
Diluted earnings per common share:
Continuing operations		1.22			1.08			1.36			0.98			0.96
Discontinued operations		-			0.12			0.03			0.01			0.03
Balance Sheet
Loans, net	$	450,346			458,331			452,350			457,418			451,343
Earning assets		732,968			736,119			706,226			678,055			599,825
Total assets		788,637			791,570			760,134			734,409			649,731
Total deposits		671,471			663,562			638,539			624,179			577,622
Short-term borrowings		13,756			21,596			21,691			14,265			2,206
Long-term debt		13,705			21,373			23,120			24,960			5,000
Total shareholders' equity		82,006			77,960			70,707			65,615			58,116
Per common share: Book value at year end		12.18			11.63			10.57			9.81			8.69
Performance Ratios
Return on average assets		1.02	%		1.02	%		1.22	%		1.07	%		1.03	%
Return on average shareholders’ equity		10.22	%		10.89	%		13.36	%		10.43	%		11.35	%

LCNB CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

At December 31,

(Dollars in thousands)

		2012	2011
ASSETS:
Cash and due from banks	$	11,260	12,449
Interest-bearing demand deposits		2,215	7,086
Total cash and cash equivalents		13,475	19,535
Investment securities:
Available-for-sale, at fair value		258,506	254,006
Held-to-maturity, at cost		15,424	10,734
Federal Reserve Bank stock, at cost		949	940
Federal Home Loan Bank stock, at cost		2,091	2,091
Loans, net		450,346	458,331
Premises and equipment, net		16,564	17,346
Goodwill		5,915	5,915
Bank owned life insurance		16,915	14,837
Other assets		8,452	7,835
TOTAL ASSETS	$	788,637	791,570
LIABILITIES:
Deposits:
Noninterest-bearing	$	133,848	106,793
Interest-bearing		537,623	556,769
Total deposits		671,471	663,562
Short-term borrowings		13,756	21,596
Long-term debt		13,705	21,373
Accrued interest and other liabilities		7,699	7,079
TOTAL LIABILITIES		706,631	713,610
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 7,485,527 and 7,460,494 shares at December 31, 2012 and 2011, respectively		27,107	26,753
Retained earnings		61,843	57,877
Treasury shares at cost, 753,627 and 755,771 shares at December 31, 2012 and 2011, respectively		(11,665)	(11,698)
Accumulated other comprehensive income, net of taxes		4,721	5,028
TOTAL SHAREHOLDERS' EQUITY		82,006	77,960
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	788,637	791,570

LCNB CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the years ended December 31,

(Dollars in thousands, except per share data)

	2012		2011		2010
INTEREST INCOME:
Interest and fees on loans	$	23,585		25,502		27,020
Interest on investment securities:
Taxable		3,737		3,843		3,686
Non-taxable		2,441		2,571		3,126
Other investments		175		177		199
TOTAL INTEREST INCOME		29,938		32,093		34,031
INTEREST EXPENSE:
Interest on deposits		4,317		5,702		7,613
Interest on short-term borrowings		16		28		27
Interest on long-term debt		556		657		694
TOTAL INTEREST EXPENSE		4,889		6,387		8,334
NET INTEREST INCOME		25,049		25,706		25,697
PROVISION FOR LOAN LOSSES		1,351		2,089		1,680
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		23,698		23,617		24,017
NON-INTEREST INCOME:
Trust income		2,317		2,099		1,897
Service charges and fees on deposit accounts		3,605		3,739		3,904
Net gain on sales of securities		1,853		948		948
Bank owned life insurance income		578		596		1,389
Gains from sales of mortgage loans		506		177		496
Other operating income		190		205		253
TOTAL NON-INTEREST INCOME		9,049		7,764		8,887
NON-INTEREST EXPENSE:
Salaries and employee benefits		11,614		11,743		11,271
Equipment expenses		1,100		1,038		889
Occupancy expense, net		1,671		1,761		1,875
State franchise tax		790		764		703
Marketing		526		480		448
FDIC premiums		405		545		958
ATM expense		620		553		513
Computer maintenance and supplies		524		565		456
Telephone expense		465		407		414
Contracted services		441		420		370
Other real estate owned		490		350		506
Other non-interest expense		3,036		3,223		2,874
TOTAL NON-INTEREST EXPENSE		21,682		21,849		21,277
INCOME BEFORE INCOME TAXES		11,065		9,532		11,627
PROVISION FOR INCOME TAXES		2,795		2,210		2,494
NET INCOME FROM CONTINUING OPERATIONS		8,270		7,322		9,133
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX		-		793		240
NET INCOME	$	8,270		8,115		9,373
Basic earnings per common share:
Continuing operations	$	1.23		1.09		1.37
Discontinued operations		-		0.12		0.03
Diluted earnings per common share:
Continuing operations		1.22		1.08		1.36
Discontinued operations		-		0.12		0.03
Weighted average shares outstanding:
Basic		6,717,357		6,692,385		6,687,500
Diluted		6,802,475		6,751,599		6,736,622

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

LCNB Corp.

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, 2012 and 2011, 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, 2012; and in our report dated February 25, 2013, 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

February 25, 2013