LCNB Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; interim financial statements are unaudited. LCNB is an Ohio bank holding company whose principal subsidiary is LCNB National Bank.
Financial performance and position
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $10.188 million | $9.987 million, Q1 2017 |
| Net interest margin, taxable-equivalent | 3.59% | 3.55%, Q1 2017 |
| Non-interest income | $2.636 million | $2.430 million, Q1 2017 |
| Non-interest expense | $9.549 million | $7.968 million, Q1 2017 |
| Net income / diluted EPS | $2.713 million / $0.27 | $3.246 million / $0.32, Q1 2017 |
| Operating cash flow | $1.416 million | $1.869 million, Q1 2017 |
| Total assets | $1.289 billion | $1.296 billion, Dec. 31, 2017 |
| Net loans | $853.1 million | $845.7 million, Dec. 31, 2017 |
| Total deposits | $1.123 billion | $1.086 billion, Dec. 31, 2017 |
| Cash and cash equivalents | $17.5 million | $25.4 million, Dec. 31, 2017 |
| Long-term debt / short-term borrowings | $6.2 million / none | $0.3 million / $47.0 million, Dec. 31, 2017 |
Net income fell 16% year over year. The $758,000 of merger-related costs were a significant expense; lower income taxes partly offset the impact. The effective tax rate was 15.1%, versus 26.8% in Q1 2017, following the federal corporate tax-rate reduction and reflecting tax-exempt income and tax credits.
Loan growth was led by commercial real estate lending. The allowance for loan losses was $3.529 million, and the quarter’s provision was $79,000 versus $15,000 a year earlier. Non-accrual loans plus loans 90 days past due and still accruing totaled $2.890 million (0.34% of loans), down from $2.965 million at year-end. Net recoveries were $47,000, compared with net charge-offs of $262,000 in Q1 2017.
Shareholders’ equity was $148.6 million, down $1.7 million from year-end, mainly reflecting a $3.0 million after-tax decline in other comprehensive income associated with unrealized losses on available-for-sale securities. Regulatory capital ratios remained above stated well-capitalized thresholds: common equity Tier 1 and Tier 1 ratios were each 13.18%, total capital was 13.57%, and leverage was 9.57%.
Material changes and management commentary
- Reported net interest income increased $201,000 year over year, supported by loan growth; management also cited higher deposit and borrowing costs and lower average investment securities. Taxable-equivalent net interest income was $10.375 million, down $35,000 from Q1 2017.
- Non-interest income rose $206,000, primarily from fiduciary income and deposit-account fees. Non-interest expense increased $1.581 million, driven by merger costs, higher salaries and benefits, and expenses associated with the new operations center. Full-time equivalent employees rose to 297 from 271.
- Deposits increased $37.6 million from year-end, including a $13.7 million increase in public-fund deposits, which management notes can be seasonal and volatile. Core deposits were 84.3% of total deposits, down from 85.1%.
- Available-for-sale debt securities declined $7.3 million from year-end, reflecting maturities and calls and lower fair values. Management attributed unrealized losses primarily to interest-rate changes, not credit deterioration, and stated it did not expect to be required to sell the securities before recovery.
- Cash decreased $7.9 million during the quarter. Funding cash flows included a $47.0 million reduction in short-term borrowings, $37.6 million of deposit growth, and $6.0 million of new long-term borrowings. Management reported no liquidity or operational problems; liquid assets were $288.6 million, or 22.4% of assets.
Outlook, risks and contingencies
- Pending acquisition: LCNB agreed to acquire Columbus First Bancorp in an all-stock transaction, with CFB shareholders entitled to two LCNB shares per CFB share. Based on LCNB’s March 31 closing price, the transaction was valued at approximately $60.4 million. Closing was anticipated in Q2 2018, subject to regulatory and shareholder approvals and other conditions. Integration, approval, timing, and cost are identified risks; purchase-accounting fair values had not yet been determined.
- Interest-rate risk: LCNB reported that its models indicated higher rates would benefit net interest income and economic value of equity, but cautioned that results depend on uncertain assumptions and are not forecasts. The company does not use derivatives to hedge this risk.
- Credit and funding exposure: Off-balance-sheet commitments totaled $191.6 million, versus $150.7 million at year-end. These include lending commitments and unused lines; actual funding and credit losses depend on customer activity and performance. Management believed liquidity was sufficient to meet commitments.
- Other contingencies: Capital-expenditure commitments were approximately $255,000. Management said routine legal claims were not expected to have a material effect. No material changes to risk factors were reported.
- Accounting changes: LCNB expected adoption of the new lease standard to result in approximately $5 million of right-of-use assets and lease liabilities. It expected the new expected-credit-loss standard to increase the allowance, but said the impact could not yet be reasonably estimated.
- The filing provides no specific earnings or revenue guidance. Management cautions that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the Columbus First Bancorp merger received approvals, closed on schedule, and produced costs or integration outcomes consistent with expectations.
- Whether loan growth, delinquencies, non-accruals, and the allowance for loan losses remain consistent with management’s credit-quality assessment.
- Whether deposit growth—particularly public-fund deposits—persists, and how funding costs affect net interest margin and earnings.
- How interest-rate movements affect available-for-sale securities, accumulated other comprehensive loss, liquidity, and capital.
- The eventual balance-sheet and earnings effects of lease and expected-credit-loss accounting adoption.