LCNB Corp. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited consolidated results include LCNB Corp., LCNB National Bank, and its captive insurance subsidiary. The May 2018 Columbus First Bancorp (CFB) acquisition materially affects comparison with Q1 2018, which did not include CFB.
Financial results and position
| Metric | Q1 2019 / March 31, 2019 | Comparable / prior period |
|---|---|---|
| Net interest income | $13.391 million | $10.188 million in Q1 2018 |
| Net interest margin, taxable-equivalent | 3.71% | 3.59% in Q1 2018 |
| Provision (credit) for loan losses | $(105,000) | $79,000 provision in Q1 2018 |
| Non-interest income / expense | $2.790 million / $10.718 million | $2.636 million / $9.549 million in Q1 2018 |
| Net income; diluted EPS | $4.627 million; $0.35 | $2.713 million; $0.27 in Q1 2018 |
| Total assets | $1.632 billion | $1.637 billion at December 31, 2018 |
| Net loans; total deposits | $1.203 billion; $1.348 billion | $1.195 billion; $1.301 billion at December 31, 2018 |
| Cash and cash equivalents | $19.527 million | $20.040 million at December 31, 2018 |
| Borrowings | No short-term borrowings; $42.982 million long-term debt | $56.230 million short-term and $47.032 million long-term at December 31, 2018 |
| Shareholders’ equity | $224.018 million | $218.985 million at December 31, 2018 |
Q1 cash flows were $2.323 million provided by operating activities, $12.664 million provided by investing activities, and $15.500 million used in financing activities. Cash and cash equivalents declined by $513,000 during the quarter.
The Bank was classified as well-capitalized. At March 31, its common equity Tier 1 and Tier 1 risk-based capital ratios were each 12.77%, total risk-based capital was 13.10%, and the leverage ratio was 10.09%. Management reported approximately $101.8 million of remaining FHLB borrowing capacity and $40 million available under correspondent-bank credit lines.
Changes and management commentary
- Net income increased about 71% year over year; management said the CFB acquisition significantly affected Q1 2019 results. Taxable-equivalent net interest income rose $3.161 million, driven mainly by higher average loan balances and loan yields. The filing attributes a significant portion of loan growth to CFB.
- Interest expense rose $1.768 million, reflecting higher average interest-bearing liabilities and rates paid. Non-interest expense increased $1.169 million; salaries, state financial institutions tax, marketing, and contracted services rose, while merger-related expense fell from $758,000 to $67,000.
- Net loans increased $8.4 million from year-end, which management attributed to organic growth. Deposits rose $46.9 million, including a $35.1 million increase in public-fund deposits that may be seasonally volatile. LCNB used deposit growth and securities-sale proceeds to reduce short-term borrowings.
- LCNB sold $21.8 million of available-for-sale debt securities and recorded an $18,000 net loss. Unrealized losses on debt securities remained, which management attributed primarily to market interest-rate movements rather than credit deterioration; it said it did not expect to be required to sell the securities before recovery of amortized cost.
- Adoption of lease accounting in January 2019 added $5.348 million of operating lease right-of-use assets and $5.289 million of lease liabilities. The filing provides no full-year earnings or revenue guidance and notes that quarterly results are not necessarily indicative of full-year results.
Risks, contingencies, and unusual items
- Management expects adoption of the expected-credit-loss standard (ASU 2016-13, effective for LCNB in 2020) to increase the loan-loss allowance, but the financial impact could not yet be reasonably estimated.
- Reported credit measures included a $4.126 million allowance for loan losses, $2.845 million of nonaccrual loans, and $177,000 of loans at least 90 days past due and still accruing. Management considered the allowance adequate; estimates remain inherently subjective.
- Interest-rate sensitivity modeling indicated a 100-basis-point rate increase would raise modeled one-year net interest income by 1.05%, while a 100-basis-point decrease would reduce it by 0.41%. Management cautioned that modeling assumptions are uncertain and the analysis is not a forecast.
- Risks cited include acquisition integration, loan losses, competition, economic and interest-rate changes, deposit and loan growth, cybersecurity, and regulatory changes. Management said routine legal claims were not expected to have a material effect; no material changes to risk factors were reported.
- LCNB had $234.4 million of credit commitments and approximately $4.6 million of capital-expenditure commitments. Management believed liquidity was sufficient to meet these commitments. It reported no material pending legal proceedings and no material control changes; disclosure controls were considered effective.
Important facts for investors to verify
- Separate CFB’s acquisition-related contribution from organic growth when assessing year-over-year earnings, loans, deposits, and expenses.
- Monitor the cost and stability of deposits, especially public-fund balances, and the sustainability of the improved net interest margin.
- Track asset quality, classified and restructured loans, recoveries, and the expected allowance impact from CECL adoption.
- Review securities portfolio valuation and realized or unrealized losses, along with interest-rate sensitivity as market conditions change.
- Confirm that capital, borrowing capacity, and liquidity remain adequate while funding commitments and shareholder dividends.