LCNB Corp. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. LCNB is a bank holding company whose operations are conducted primarily through LCNB National Bank. Results and balance-sheet growth were significantly affected by the January 2014 acquisition of Eaton National Bank & Trust Co. (ENB), purchased for $24.75 million.
Financial performance and position
Amounts are in millions except per-share data. Income-statement comparisons are with the corresponding 2013 period; balance-sheet comparisons are with December 31, 2013.
| Metric | Q3 2014 | Nine months 2014 |
|---|---|---|
| Net interest income | $9.00, up 20.7% | $26.36, up 21.0% |
| Net interest margin, taxable-equivalent | 3.57%, unchanged | 3.60%, up from 3.55% |
| Provision for loan losses | $0.40 | $0.74 |
| Noninterest income | $2.32, up 13.1% | $6.69, down 0.6% |
| Noninterest expense | $7.24, up 17.4% | $23.51, up 20.1% |
| Net income | $2.72, up 15.3% | $6.65, up 3.4% |
| Diluted EPS | $0.29, versus $0.30 | $0.71, versus $0.83 |
Q3 average earning assets grew with ENB, while the average yield declined; lower funding costs partly offset that yield pressure. Nine-month taxable-equivalent net interest income rose $4.62 million. EPS declined despite higher net income, reflecting a larger share count after the 2013 stock issuance.
- Balance sheet: Assets were $1.123 billion, up $191.0 million; net loans were $682.6 million, up $111.9 million; deposits were $956.6 million, up $170.9 million. The ENB acquisition contributed $115.9 million of loans and $165.3 million of deposits.
- Funding and debt: Short-term borrowings were $25.0 million, versus $8.7 million at year-end; long-term debt was $11.4 million, versus $12.1 million. Noninterest-bearing deposits totaled $190.9 million.
- Cash flow: Nine-month operating cash flow was $9.0 million; investing cash outflow was $7.1 million and financing cash inflow was $16.4 million. Cash and cash equivalents ended at $33.1 million.
- Liquidity and capital: Management reported $325.9 million of liquid assets, 29.0% of total assets, and said liquidity was adequate. Core deposits were 81.5% of deposits, down from 83.9%. LCNB reported capital ratios of 13.77% Tier 1 risk-based, 14.27% total risk-based, and 8.22% leverage; the Bank and holding company were described as well-capitalized.
Material changes and credit quality
ENB drove substantial balance-sheet and operating-cost growth. Nine-month salaries and benefits increased $2.11 million and other noninterest expense increased $1.24 million, reflecting added staff and offices, contracted and technology services, foreclosed-property costs, and amortization of ENB’s core deposit intangible. Merger-related expense was $1.37 million for the nine months, compared with $1.33 million a year earlier; Q3 2014 expense was $4,000.
Credit metrics weakened from year-end: nonaccrual loans plus loans at least 90 days past due and still accruing rose to $6.38 million, or 0.93% of loans, from $3.21 million, or 0.56%. Management attributed much of the increase to acquired impaired loans classified as nonaccrual. Nine-month net charge-offs were $1.03 million versus $0.38 million, including $0.60 million on three commercial real estate loans. The allowance was $3.30 million, approximately 0.48% of gross loans. Management believed it was adequate, but the estimate is inherently judgmental.
Nine-month noninterest income was nearly flat: higher trust and deposit-fee income was offset by lower securities and mortgage-loan sale gains. Total deposits also included a $24.0 million increase in public funds, which management noted may be seasonally volatile.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management’s forward-looking statements identify interest-rate fluctuations, regulatory changes, loan demand, credit losses, and economic conditions as risks.
- Interest-rate simulations estimated that a 100–300 basis-point increase would raise one-year net interest income by 2.90%–8.87%, but reduce economic value of equity by 1.93%–2.94%. Management cautioned that these models rely on uncertain assumptions and are not earnings or equity forecasts. LCNB reported no use of derivatives to hedge interest-rate risk.
- Off-balance-sheet credit commitments and standby letters of credit totaled $103.1 million. Management said it had sufficient liquidity to meet lending and capital-expenditure commitments; capital expenditures committed at quarter-end were approximately $120,000.
- Management said claims and proceedings arising in the ordinary course were not expected to be material. No legal proceedings or material changes to reported risk factors were disclosed.
Important facts for investors to verify
- Whether credit deterioration, charge-offs, and acquired impaired loans continue to increase, and how allowance adequacy changes with portfolio growth.
- How ENB contributes to earnings after integration costs, and whether ongoing expense growth is matched by revenue and efficiency improvements.
- The sustainability and composition of deposit growth, particularly public-fund balances, and the increased use of short-term borrowings.
- How interest-rate changes affect both net interest income and economic value of equity, given the differing simulation results.
- Whether liquidity and regulatory capital remain adequate as the combined balance sheet grows; reported capital ratios were lower than at year-end 2013.