LCNB Corp. — Second Quarter 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated results; amounts below are in millions of dollars unless noted. LCNB is a bank holding company whose operations are principally conducted through LCNB National Bank.
Business context and financial performance
Results reflect the January 24, 2014 acquisition of Eaton National Bank & Trust Co. (ENB), which added five branches and materially expanded assets, loans, deposits and expenses. The acquisition was a $24.75 million cash transaction; $13.45 million of goodwill was recorded.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $9.006 | $7.360 | $17.369 | $14.338 |
| Provision for loan losses | $0.255 | $0.042 | $0.336 | $0.191 |
| Noninterest income | $2.301 | $2.178 | $4.378 | $4.685 |
| Noninterest expense | $7.600 | $6.324 | $16.272 | $13.415 |
| Net income | $2.611 | $2.348 | $3.934 | $4.076 |
| Diluted EPS | $0.28 | $0.30 | $0.42 | $0.53 |
Q2 net income increased about 11% year over year, while first-half net income decreased about 3%. First-half net interest income rose about 21%, primarily on higher average earning assets from ENB and improved margin. Taxable-equivalent net interest margin was 3.59% for Q2 and 3.62% for the first half, versus 3.54% in each comparable 2013 period. First-half noninterest income declined, principally because securities and mortgage-loan sale gains were lower. Expense growth reflected ENB staffing and offices, contracted and technology costs, other real estate owned costs, and acquired-intangible amortization. The effective tax rate was 23.4% for the first half, compared with 24.8%.
Financial position, liquidity and credit
- At June 30, total assets were $1,151.1 million, up from $932.3 million at year-end 2013. Net loans were $688.3 million, up $117.6 million; deposits were $986.8 million, up $201.1 million. Much of the growth came from ENB.
- Cash and cash equivalents totaled $18.9 million. Six-month operating cash flow was $4.4 million; investing cash outflow was $46.9 million, including the acquisition and securities purchases; financing cash inflow was $46.6 million. Cash increased $4.2 million.
- Short-term borrowings were $23.5 million and long-term debt was $11.5 million. Liquid assets were $346.6 million, or 30.1% of assets, versus $272.9 million, or 29.3%, at year-end. Core deposits were 82.2% of deposits, down from 83.9%, partly due to increased public-fund deposits, which management noted can be volatile.
- Regulatory capital ratios declined following ENB’s acquisition: tier 1 risk-based capital was 13.27%, total risk-based capital 13.77%, and leverage 8.05%, versus 18.03%, 18.65%, and 11.10%, respectively, at December 31, 2013. The company and Bank remained classified as well-capitalized.
- Asset-quality indicators weakened: nonaccrual and 90-days-past-due accruing loans totaled $6.4 million, or 0.92% of loans, versus $3.2 million, or 0.56%, at year-end. Nonaccrual loans alone increased to $6.2 million from $3.0 million. Management attributed much of the rise to acquired impaired loans placed on nonaccrual in Q2. First-half net charge-offs increased to $0.530 million from $0.202 million; the allowance was $3.394 million, down from $3.588 million.
Outlook, risks and contingencies
The filing provides no numerical earnings or revenue guidance. Management said liquidity was adequate and that the allowance was considered sufficient for estimated inherent loan losses, while noting that allowance estimates are subjective and may change. Interest-rate simulations indicated that a 100–300 basis-point rate increase could raise one-year net interest income by 2.74%–8.30%, while reducing economic value of equity by 2.78%–5.10%; management cautioned that these models are assumption-dependent and not forecasts.
Principal identified risks include interest-rate changes, loan demand and credit losses, economic conditions, regulatory changes, and uncertainty in acquired-loan cash-flow estimates. Commitments and other off-balance-sheet credit exposures totaled $96.3 million. Management considered pending legal claims immaterial; capital-expenditure commitments were not material. No material changes to reported risk factors were disclosed. Disclosure controls were considered effective, with no reported material change in internal control over financial reporting.
Important facts for investors to verify
- Whether higher nonaccrual loans, charge-offs and acquired-credit-impaired exposures persist, and whether the allowance remains adequate.
- ENB integration costs, expense trends, and the extent to which anticipated operating synergies are realized; pro forma figures exclude merger and data-conversion costs and expected cost savings.
- Capital and liquidity trends, including the impact of public-fund deposit volatility and continued acquisition-related balance-sheet growth.
- Interest-rate sensitivity assumptions and actual effects on net interest margin and economic value of equity.
- Whether reported growth in earnings assets and deposits translates into sustainable per-share earnings, given the larger share count and lower year-over-year first-half EPS.