LCNB Corp. — 2015 Form 10-K
Business context and reporting period. Annual report for the fiscal year ended December 31, 2015; the filing also reports quarterly results. LCNB is an Ohio-based financial holding company whose principal business is community banking through LCNB National Bank, serving southwestern and south-central Ohio. On April 30, 2015, LCNB acquired BNB Bancorp for approximately $13.5 million in cash and stock; its two Brookville offices joined the Bank.
Financial performance and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Interest income | $42.7 million | $39.5 million |
| Net interest income | $39.3 million | $35.9 million |
| Provision for loan losses | $1.4 million | $0.9 million |
| Non-interest income | $10.1 million | $9.1 million |
| Non-interest expense | $32.4 million | $30.8 million |
| Net income | $11.5 million | $9.9 million |
| Diluted EPS | $1.17 | $1.05 |
| Total assets | $1,280.5 million | $1,108.1 million |
| Loans, net | $767.8 million | $695.8 million |
| Deposits | $1,087.2 million | $946.2 million |
| Shareholders’ equity | $140.1 million | $125.7 million |
- Net income increased 16.3%; diluted EPS rose from $1.05 to $1.17. Return on average assets was 0.94% (0.88% in 2014), return on average equity was 8.43% (8.04%), and fully taxable-equivalent net interest margin eased to 3.64% from 3.66%.
- Year-end short-term borrowings were $37.4 million and long-term debt was $5.9 million, versus $16.6 million and $11.4 million, respectively, in 2014.
- Operating cash flow was $13.2 million, compared with $15.9 million in 2014. Investing cash flow was negative $65.6 million, principally reflecting securities purchases and loan growth; financing cash flow was positive $51.5 million. Cash and cash equivalents ended the year at $15.0 million.
- Management reported liquid assets of $393.0 million, or 30.7% of assets, up from $301.2 million, or 27.2%, in 2014. Core deposits were 84.3% of deposits. Remaining FHLB borrowing capacity was approximately $99.6 million.
Fourth-quarter results
For the quarter ended December 31, 2015, net income was $2.9 million and diluted EPS was $0.29, compared with $3.2 million and $0.34 in the fourth quarter of 2014. Net interest income was $9.9 million versus $9.5 million; provision for loan losses was $0.4 million versus $0.2 million.
Material changes and credit quality
- BNB contributed $99.1 million of acquired deposits and $34.7 million of loans at acquisition. Excluding the merger, management attributed remaining loan growth to new originations. Securities available-for-sale increased $92.6 million during 2015.
- Net interest income increased $3.5 million, primarily from higher average earning assets; lower average borrowing costs also contributed. Non-interest income rose $1.0 million, including higher trust income and gains on securities and mortgage loan sales.
- Non-interest expense rose $1.5 million, primarily because salaries and benefits increased $1.8 million, partly offset by lower merger-related costs. Other real estate expense included impairment charges on a commercial property.
- Non-accrual loans declined to $1.7 million from $5.6 million. Total non-accrual, 90-days-past-due accruing, and restructured loans fell to $16.0 million, or 2.08% of loans, from $20.1 million, or 2.87%. The improvement partly reflected the Q2 sale of impaired loans with a carrying value of approximately $4.5 million.
- Net charge-offs were $1.4 million, or 0.18% of average loans, versus $1.4 million, or 0.21%, in 2014. The allowance was $3.1 million, equal to 0.41% of loans, down from 0.45%; the provision increased to $1.4 million. Management considered the allowance adequate, but emphasized the estimate’s inherent subjectivity.
Outlook, risks and notable items
- LCNB provided no specific earnings or growth guidance. Management stated that low rates and the yield curve were expected to continue pressuring net interest margin. Its rate model showed higher one-year net interest income under +100 to +300 basis-point shocks, but lower economic value of equity; management cautioned that model results are not forecasts and depend on uncertain assumptions.
- Key risks include interest-rate and credit risk, especially the sizeable commercial real estate and commercial loan portfolios; economic conditions in LCNB’s concentrated Ohio markets; competition for deposits and loans; acquisition integration; regulatory and capital requirements; and deposit or funding volatility. Available-for-sale securities’ fair values may also decline as rates change.
- At year-end, the Company and Bank were classified as well-capitalized. The Bank’s total risk-based capital ratio was 13.65% and leverage ratio was 8.49%. Approximately $8.3 million of Bank retained earnings was available for dividends in 2016 under the stated regulatory limit.
- Annual dividends remained $0.64 per share; management expected a similar schedule, subject to regulatory restrictions and business conditions. In January 2016, LCNB prepaid a $5.0 million FHLB advance. In February 2016, it agreed to repurchase outstanding warrants for $1.545 million.
- Capital expenditure commitments totaled approximately $11.0 million, including a new operations center. Credit commitments and standby letters of credit totaled $118.9 million, though many may not be drawn. Management said routine legal claims were not expected to have a material effect; no material pending legal proceeding was identified. The independent auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of 2015 earnings and balance-sheet growth came from BNB versus organic growth, and whether acquired operations deliver expected benefits.
- Whether credit quality remains sound after the impaired-loan sale; monitor commercial real estate exposures, charge-offs, restructured loans, and allowance coverage.
- How net interest margin and deposit costs respond to changing rates, competition, and the funding mix, including increased short-term borrowings and public deposits.
- Whether the $11.0 million capital program, dividend policy, and other commitments remain compatible with liquidity, capital requirements, and acquisition plans.