LCNB Corp. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited consolidated results. LCNB is a bank holding company whose operations are primarily conducted through LCNB National Bank. Amounts below are in millions of dollars unless stated otherwise.
Business context and financial performance
LCNB completed its $24.75 million cash acquisition of Eaton National Bank & Trust Co. (ENB) on January 24, 2014. ENB added five full-service branches and materially increased LCNB’s assets, loans, deposits, and staffing. Comparisons with Q1 2013 are also affected by the prior-year First Capital acquisition.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net interest income | $8.363 | $6.978 |
| Provision for loan losses | $0.081 | $0.149 |
| Noninterest income | $2.077 | $2.507 |
| Net income | $1.323 | $1.728 |
| Basic and diluted EPS | $0.14 | $0.23 |
| Declared dividend per share | $0.16 | $0.16 |
Net interest income plus noninterest income, a simple operating-revenue measure, was $10.440 million, up from $9.485 million. Net income fell about 23%, while average shares outstanding rose substantially, reflecting share issuance associated with earlier growth and acquisitions. Tax-equivalent net interest margin improved to 3.66% from 3.53%; the average yield on earning assets declined slightly, while the average rate paid on interest-bearing liabilities decreased to 0.49% from 0.66%.
Management attributed the higher net interest income mainly to ENB-related growth in average earning assets and improved margin. Lower securities and mortgage-loan sale gains reduced noninterest income by $0.430 million. Noninterest expense increased $1.581 million to $8.672 million, including $1.292 million of merger-related expense, as well as higher staffing, occupancy, and other costs. Merger-related expenses were higher than in Q1 2013.
Financial condition, cash flow, and credit
- Total assets were $1.134 billion at March 31, 2014, versus $932.3 million at December 31, 2013. Net loans were $681.8 million, up from $570.8 million; deposits were $984.5 million, up from $785.8 million. The increases principally reflect the ENB acquisition.
- Cash and cash equivalents were $33.4 million, compared with $14.7 million at year-end. The company reported liquid assets of $343.5 million, or 30.3% of total assets, versus $272.9 million, or 29.3%, at year-end. Core deposits were 82.7% of deposits, down from 83.9%.
- Short-term borrowings were $11.2 million and long-term debt was $11.6 million. Shareholders’ equity was $119.8 million. LCNB reported total risk-based capital of 13.08%, Tier 1 risk-based capital of 12.60%, and a leverage ratio of 8.49%; the company and Bank were classified as well-capitalized. Ratios declined from year-end levels, which management attributed to assets added through ENB.
- Operating cash flow was $1.0 million, versus a $0.1 million outflow in Q1 2013. Investing activities used $15.7 million, including $9.1 million net cash paid in the acquisition; financing activities provided $33.5 million, including deposit growth. Cash increased $18.7 million during the quarter.
- The allowance for loan losses was $3.370 million, approximately 0.49% of period-end gross loans. Q1 net charge-offs were $299,000, compared with $182,000 a year earlier. Nonaccrual loans plus loans 90 days past due and still accruing were 0.90% of loans, versus 0.56% at year-end. Accruing restructured loans were $14.2 million.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management said it believed the loan-loss allowance was adequate, liquidity was sufficient to meet lending and capital-expenditure commitments, and it had experienced no liquidity or operational problems. These are management assessments, not guarantees; interim results are not necessarily indicative of full-year results.
Interest-rate risk is the principal identified market risk. The company does not use derivatives to hedge it. Its model estimated that a 300-basis-point rate increase would raise one-year net interest income by 7.99%, while reducing economic value of equity by 5.28%; management cautioned that model assumptions are uncertain and results are not forecasts. Off-balance-sheet credit commitments totaled $101.1 million. Capital expenditure commitments were approximately $90,000. Management said ordinary-course legal claims were not expected to have a material effect. No material changes to reported risk factors were disclosed.
Important facts for investors to verify
- How much of the increase in loans, deposits, and earnings reflects ENB versus organic growth, and how integration costs and expected synergies develop.
- Whether the increase in charge-offs and the 0.90% nonaccrual/past-due ratio persists; review acquired-loan estimates, criticized credits, and allowance adequacy.
- Whether net interest margin, funding costs, and deposit mix remain favorable, particularly under changing interest rates.
- How recurring expenses compare with merger-related costs, and whether lower securities and mortgage-loan sale gains continue.
- Capital and liquidity after acquisition growth, including the sensitivity of capital ratios and the availability of funding for commitments.