LCNB Corp. — Second-Quarter 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless otherwise noted. The interim financial statements were reviewed, not audited.
Business context and reporting period
LCNB is a bank holding company whose operations are principally conducted through LCNB National Bank. Results were materially affected by the January 11, 2013 acquisition of First Capital Bancshares and its subsidiary, Citizens National Bank of Chillicothe. The transaction added six branches in Ohio and was funded with approximately $7.8 million cash and 888,811 LCNB shares valued at approximately $12.4 million.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $7.360m | $6.299m | $14.338m | $12.708m |
| Non-interest income | $2.178m | $1.755m | $4.685m | $4.091m |
| Total revenue (net interest income plus non-interest income) | $9.538m | $8.054m | $19.023m | $16.799m |
| Provision for loan losses | $0.042m | $0.091m | $0.191m | $0.306m |
| Non-interest expense | $6.324m | $5.330m | $13.415m | $10.778m |
| Net income | $2.348m | $1.987m | $4.076m | $4.264m |
| Diluted earnings per share | $0.30 | $0.29 | $0.53 | $0.63 |
- Q2 net income rose approximately 18% year over year, while first-half net income declined approximately 4%. First-half diluted EPS fell 16%, with the higher share count following the acquisition contributing to per-share comparisons.
- Tax-equivalent net interest margin was 3.54% in Q2 versus 3.52% a year earlier; for the first half it was 3.54% versus 3.61%. Growth in average earning assets lifted net interest income, while lower market rates reduced average asset yields.
- At June 30, total assets were $945.5m, up from $788.6m at December 31, 2012; net loans were $552.9m versus $450.3m; and deposits were $800.8m versus $671.5m. Management attributed the principal increases to the acquisition.
- Cash and cash equivalents were $19.9m, compared with $13.5m at year-end. First-half operating cash flow was $3.6m, investing cash flow was negative $7.4m, and financing cash flow was positive $10.2m. Cash increased $6.4m during the period.
- Short-term borrowings rose to $36.3m from $13.8m, including a $25.0m FHLB short-term advance. Long-term debt declined to $12.8m from $13.7m. Total borrowings were approximately $49.1m at quarter-end.
- Shareholders’ equity was $90.2m versus $82.0m at year-end. Accumulated other comprehensive income moved from positive $4.7m to negative $1.2m, principally reflecting unrealized losses on available-for-sale securities. The declared dividend remained $0.16 per share per quarter.
Material changes versus prior periods
- Net interest income increased $1.061m in Q2 and $1.630m in the first half, primarily due to larger average earning assets following the Citizens acquisition. Lower funding costs also helped, partly offset by declining yields.
- Non-interest expense increased $0.994m in Q2 and $2.637m in the first half. First-half results included $1.326m of merger and system-conversion costs; the filing does not provide a quantified estimate of future cost savings.
- First-half non-interest income increased $0.594m, supported by higher deposit fees and securities-sale gains; trust income was lower than the prior-year period because certain one-time fees did not recur.
- First-half net charge-offs were $0.202m versus $0.285m a year earlier. Nonaccrual and loans at least 90 days past due but still accruing totaled $3.139m, or 0.56% of loans, versus $2.411m, or 0.53%, at December 31, 2012. Accruing restructured loans were $13.582m.
- Available-for-sale securities had $5.814m of gross unrealized losses at June 30, compared with $0.309m at year-end. Management attributed the losses primarily to interest-rate movements, not credit deterioration, and stated it did not intend or expect to be required to sell the securities before recovery.
Outlook, risks, contingencies, and unusual items
- The filing gives no specific earnings or revenue guidance. Management said results for the first half are not necessarily indicative of full-year results.
- Management reported sufficient liquidity for lending and capital commitments. Liquid assets were $298.8m, or 31.6% of assets, versus $272.0m, or 34.5%, at year-end. Core deposits represented 83.4% of deposits, slightly below 83.6%; local-government public-fund deposits increased $20.4m and may be seasonally volatile.
- LCNB and the Bank were classified as well-capitalized at their most recent regulatory notification. At June 30, reported LCNB ratios were 12.86% Tier 1 risk-based capital, 13.45% total risk-based capital, and 8.03% leverage.
- Interest-rate modeling estimated that a 300-basis-point increase would raise one-year net interest income by 7.81%, but reduce economic value of equity by 8.55%. Management cautioned that these models rely on uncertain assumptions and are not forecasts. LCNB reported no use of derivatives to hedge interest-rate risk.
- Off-balance-sheet commitments and standby letters of credit totaled $95.9m. Management considered liquidity adequate; it stated that ordinary-course legal claims were not expected to have a material effect. A participation in letters of credit securing a bond issue, totaling approximately $5.0m, terminated July 11, 2013.
- Other unusual items included $8.258m of acquisition goodwill and $2.574m of core deposit intangible, with the latter amortized over nine years. The acquisition’s first-half contribution, excluding merger and conversion costs, was estimated at $2.885m revenue and $1.148m net income. Unaudited pro forma results were lower year over year, but excluded integration costs and expected cost savings.
Most important facts for investors to verify
- Whether post-acquisition integration produces savings sufficient to offset recurring branch, staffing, and intangible-amortization costs.
- Whether criticized, past-due, nonaccrual, and restructured loan levels—and the allowance for loan losses—remain appropriate as the enlarged loan portfolio seasons.
- How sustainable the funding mix is, particularly public-fund deposits and increased short-term borrowings, and whether liquidity remains adequate.
- Whether unrealized securities losses recover or affect capital if liquidity needs require sales; monitor interest-rate exposure given the differing NII and economic-value sensitivity results.
- How acquired-loan accounting, acquisition-related pro forma comparisons, and the higher share count affect reported earnings per share and future comparability.