LCNB Corp. — Q1 2016 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the three months ended March 31, 2016, compared with Q1 2015; balance-sheet comparisons are against December 31, 2015. LCNB is a bank holding company whose operations are primarily conducted through LCNB National Bank. Results reflect the April 2015 acquisition of BNB Bancorp.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Net income | $2.964 million | $2.834 million in Q1 2015 |
| Basic and diluted EPS | $0.30 | $0.30 in Q1 2015 |
| Net interest income | $9.772 million; taxable-equivalent NIM 3.49% | $9.328 million; taxable-equivalent NIM 3.83% in Q1 2015 |
| Noninterest income | $2.642 million | $2.306 million in Q1 2015 |
| Noninterest expense | $8.292 million | $7.649 million in Q1 2015 |
| Provision for loan losses | $90,000 | $69,000 in Q1 2015 |
| Total assets | $1.286 billion | $1.281 billion at December 31, 2015 |
| Loans, net | $775.6 million | $767.8 million at December 31, 2015 |
| Total deposits | $1.120 billion | $1.087 billion at December 31, 2015 |
| Short-term borrowings / long-term debt | $11.7 million / $0.8 million | $37.4 million / $5.9 million at December 31, 2015 |
| Shareholders’ equity | $142.9 million | $140.1 million at December 31, 2015 |
Cash flow: Operating activities provided $1.6 million; investing activities provided $5.4 million; financing activities used $0.9 million. Cash and cash equivalents increased $6.1 million to $21.1 million. Cash dividends declared were $0.16 per common share, unchanged year over year.
Capital and liquidity: Management reported the Bank and LCNB were well-capitalized. At March 31, the Common Equity Tier 1 and Tier 1 risk-based ratios were 13.13%, total risk-based capital was 13.52%, and leverage was 8.60%. Liquid assets were $372.2 million, or 28.9% of assets, versus $393.0 million, or 30.7%, at year-end. Core deposits represented 81.8% of deposits, down from 84.3%.
Material changes versus comparable periods
- Net income rose $130,000 year over year, while EPS remained $0.30; weighted-average basic shares increased to 9.92 million from 9.31 million, largely reflecting the BNB acquisition.
- Net interest income increased $444,000 on a GAAP basis. Higher average loans and investments supported interest income, but the taxable-equivalent net interest margin declined 34 basis points year over year to 3.49%.
- Noninterest income increased $336,000, principally because net securities gains rose to $371,000 from $111,000. Approximately $20.1 million of securities were sold in Q1 2016 versus $5.9 million in Q1 2015.
- Noninterest expense increased $643,000. Salaries and benefits rose $273,000, reflecting wage increases and staffing, including employees retained from BNB. Other expense included a $251,000 penalty for early repayment of a $5 million FHLB advance bearing 5.25% interest.
- Compared with year-end, deposits increased $33.0 million, including a $30.5 million increase in public-fund deposits; net loans increased $7.8 million, led by commercial real estate growth. Available-for-sale securities declined, and bank-owned life insurance increased $4.2 million after a $4.0 million policy purchase.
- Accumulated other comprehensive income increased to $3.1 million from $0.2 million, mainly due to unrealized gains on available-for-sale securities. Equity also reflects a $1.545 million warrant repurchase and cancellation.
Outlook, risks, and unusual items
- No quantified earnings or balance-sheet guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results.
- Management identified risks including credit losses, competition, loan and deposit growth, economic conditions, interest-rate changes, regulation, and potential valuation losses on securities. Management considers the allowance adequate, but notes its estimation is subjective.
- Credit quality weakened on certain measures: nonaccrual loans plus loans 90 days past due and still accruing rose to $3.427 million, or 0.44% of loans, from $2.282 million, or 0.30%, at year-end. The increase primarily reflected two loans to one borrower totaling $1.307 million newly placed on nonaccrual. Q1 net charge-offs were $69,000 versus $353,000 a year earlier. The allowance was $3.150 million.
- Three troubled debt restructurings totaling $407,000 post-modification were reported in Q1 2016; none of the reported restructurings subsequently defaulted within 12 months and remained in default at period-end. Other real estate owned was $846,000, consisting of one commercial property.
- Public-fund deposits may be volatile. Capital expenditure commitments were approximately $10.9 million, including a new operations center; management said liquidity was sufficient to fund lending and capital commitments. Off-balance-sheet credit commitments totaled $119.6 million.
- Interest-rate sensitivity modeling indicated a 7.84% increase in projected one-year net interest income under a 300-basis-point rate rise, but a 1.00% decline in economic value of equity. Management says results are model-dependent and not forecasts. LCNB reported no derivatives used to hedge interest-rate risk.
- Management reported effective disclosure controls, no material changes in internal control, no material changes to risk factors, and no material legal proceedings. The early FHLB payoff penalty and securities gains were notable Q1 items.
Key facts investors should verify
- Whether the rise in nonaccrual loans and the concentration in the two related-borrower credits lead to further credit deterioration or provisioning.
- Whether loan and deposit growth is sustainable, particularly given the seasonality and potential volatility of public-fund deposits.
- Whether net interest margin stabilizes or continues to compress as asset yields, deposit costs, and interest rates change.
- How much of reported earnings growth depends on securities gains and other nonrecurring items, and how operating expenses evolve after the BNB acquisition.
- Progress, final cost, and funding needs for the approximately $10.9 million of capital commitments, including the new operations center.
- Future capital, liquidity, and dividend capacity, including the effect of regulatory capital-buffer requirements.