LCNB Corp. — Q2 2017 Form 10-Q
Business context and reporting period. LCNB is an Ohio bank holding company. This unaudited filing covers the quarter and six months ended June 30, 2017; balance-sheet comparisons are against December 31, 2016.
Financial performance and position
- Q2 earnings: Net income was $3.0 million, up 1.2% from $3.0 million a year earlier; diluted EPS was $0.30 versus $0.29. Six-month net income was $6.25 million, up 5.3%, and diluted EPS was $0.62 versus $0.59.
- Revenue and margins: Q2 net interest income was $10.07 million, down $52,000 year over year; taxable-equivalent net interest margin declined to 3.50% from 3.55%. For six months, net interest income rose $163,000 to $20.06 million and taxable-equivalent margin was 3.53% versus 3.52%. Noninterest income was $2.79 million for Q2, up $40,000, and $5.22 million for six months, down $172,000, mainly reflecting fewer securities-sale gains.
- Expenses and credit costs: Q2 noninterest expense increased $143,000 to $8.61 million; six-month expense decreased $181,000 to $16.58 million. Provision for loan losses was $222,000 for Q2 and $237,000 for six months, down from $396,000 and $486,000, respectively, in 2016. Six-month net charge-offs, however, increased to $430,000 from $242,000.
- Balance sheet: Total assets were $1.336 billion, up $28.8 million since year-end. Net loans were $823.6 million, up $7.3 million; total deposits were $1.144 billion, up $33.0 million. Shareholders’ equity was $147.9 million, up $5.0 million.
- Cash flow and liquidity: For the first six months, operating cash flow was $7.8 million; investing activities used $16.3 million and financing activities provided $19.5 million. Cash and cash equivalents rose $11.1 million to $30.0 million. Management reported liquid assets of $358.8 million, or 26.9% of assets, and said liquidity was adequate.
- Debt and capital: Short-term borrowings were $31.7 million, down from $42.0 million at year-end; long-term debt was $402,000. LCNB reported a 13.03% Common Equity Tier 1 ratio, 13.41% total risk-based capital ratio, and 8.97% leverage ratio. The Bank and holding company were categorized as well-capitalized.
Material changes and management commentary
- Commercial real estate lending increased $18.0 million from year-end, while residential real estate loans decreased $7.1 million. Total loans grew modestly.
- Non-accrual loans plus loans at least 90 days past due and accruing fell to $3.9 million (0.47% of loans) from $5.7 million (0.70%). Management attributed much of the improvement to two related commercial real estate loans transferred to OREO and sold in Q1. Accruing troubled debt restructurings remained $11.3 million.
- Q2 expenses included $138,000 of organizational costs for LCNB Risk Management, a captive insurance subsidiary incorporated during the quarter. The new Lebanon Operations Center contributed to a $5.6 million first-half premises-and-equipment outlay.
- Q2 BOLI income included mortality benefits. Six-month expense benefited from lower OREO costs and the absence of a $251,000 prior-year penalty for early repayment of FHLB debt.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management states interim results are not necessarily indicative of full-year results.
- Disclosed risks include credit losses, competition, economic conditions, deposit and loan growth, regulatory changes, and interest-rate movements. Interest-rate modeling showed a 5.57% increase in projected one-year net interest income under a 300-basis-point rate increase, but a 7.28% decline in modeled economic value of equity; management cautions that these scenarios are not forecasts.
- Off-balance-sheet commitments totaled $127.6 million, including credit commitments, unused lines, overdraft protection and standby letters of credit. Capital expenditure commitments were approximately $416,000. Management stated it had sufficient liquidity to fund commitments; routine legal claims were not expected to be material.
- Management expects the future CECL credit-loss standard to increase the allowance but could not reasonably estimate the impact. It estimated about $5 million of right-of-use assets and lease liabilities under the new lease standard. The filing reports no material change in risk factors and no material pending legal proceeding.
Important facts for investors to verify
- Whether loan growth—particularly commercial real estate growth—and credit quality remain sustainable; monitor charge-offs, criticized loans, non-accruals and restructured loans.
- Whether deposit growth persists: public-fund deposits drove much of the increase, and core deposits declined to 82.8% of deposits from 85.0% at year-end.
- How interest-rate changes affect both net interest margin and the economic value of equity, and whether the modeled assumptions remain appropriate.
- The eventual CECL adoption effect on the allowance and the balance-sheet impact of lease accounting.
- Whether expenses tied to the captive insurer and Operations Center continue, and how investment-security gains affect reported earnings.