LCNB Corp. — 2017 Form 10-K Summary
Business context and reporting period. LCNB is an Ohio-based financial holding company whose principal subsidiary, LCNB National Bank, provides community banking, lending, trust and brokerage services, primarily in southwestern and south-central Ohio. This filing covers the fiscal year ended December 31, 2017; comparisons are principally with 2016.
Financial results and condition
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Net income | $12.972 million | $12.482 million | Up 3.9% |
| Basic / diluted EPS | $1.30 / $1.29 | $1.26 / $1.25 | Both increased $0.04 |
| Net interest income | $40.864 million | $40.246 million | Up $0.618 million; fully taxable-equivalent NIM rose to 3.58% from 3.51% |
| Provision for loan losses | $0.215 million | $0.913 million | Lower provision supported earnings |
| Net interest income after provision | $40.649 million | $39.333 million | Up $1.316 million |
| Non-interest income / expense | $10.458 million / $33.863 million | $10.853 million / $33.261 million | Income declined; expenses increased |
| Total assets | $1.296 billion | $1.307 billion | Down $11.2 million |
| Net loans / deposits | $845.7 million / $1.086 billion | $816.2 million / $1.111 billion | Loans up $29.4 million; deposits down $25.1 million |
| Shareholders’ equity | $150.3 million | $142.9 million | Up $7.3 million |
Profitability and credit quality. Return on average assets was 0.99% versus 0.96%; return on average equity was 8.74% versus 8.60%. Net charge-offs were $0.387 million, or 0.05% of average loans, compared with $0.467 million, or 0.06%. The allowance for loan losses was $3.403 million, 0.40% of total loans, versus $3.575 million, or 0.44%. Non-accrual loans were $2.965 million; non-accrual, past-due and restructured loans together were 1.58% of loans, down from 2.13%.
Cash flow, liquidity and debt. Operating activities provided $18.135 million in cash; investing activities provided $14.801 million; financing activities used $26.415 million. Cash and cash equivalents ended at $25.386 million, up $6.521 million. Liquid assets were $303.9 million, or 23.5% of assets, versus $339.5 million, or 26.0%. Core deposits represented 85.1% of deposits. Short-term borrowings were $47.0 million, mainly FHLB advances, and long-term debt was $0.303 million. Reported remaining FHLB borrowing capacity was approximately $56.3 million; additional stated lines included up to $30 million and a $10 million federal funds arrangement.
Capital. LCNB and the Bank were categorized as well-capitalized. At year-end, the consolidated common equity Tier 1 ratio was 13.29%, total risk-based capital ratio 13.66%, and leverage ratio 9.51%.
Material changes versus 2016
- Loan growth, especially commercial real estate lending, lifted loan interest income; net loans rose about 3.6%. Commercial loans secured by real estate increased $50.7 million, while residential real estate loans declined $14.2 million.
- Net interest income increased, while the fully taxable-equivalent margin improved to 3.58%. Higher short-term borrowing costs partly offset asset-income growth.
- Non-interest income decreased $0.395 million, principally because securities-sale gains fell to $0.233 million from $1.082 million. Fiduciary income and deposit fees increased.
- Non-interest expense increased $0.602 million. Lower other-real-estate-owned costs and FDIC premiums partly offset higher compensation, occupancy, marketing and contracted-service costs.
- Deposits declined $25.1 million. Management attributed part of the decline to growth in brokerage assets and a deposit-sweep product. Short-term borrowings increased $5.0 million.
- Investment securities declined by approximately $50.6 million in total, as LCNB used funds to support lending, deposit outflows and liquidity.
Outlook, commentary, risks and unusual items
- Pending acquisition: LCNB agreed in December 2017 to acquire Columbus First Bancorp in an all-stock transaction, subject to shareholder, regulatory and other approvals, with closing expected in the second quarter of 2018. The filing describes an announced transaction value of $66.9 million, while a later estimate based on LCNB’s February 28, 2018 share price values it at approximately $58.8 million. The transaction would add one Worthington, Ohio branch; integration and approval risks are disclosed.
- Tax reform: The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21% effective January 1, 2018. Deferred-tax remeasurement produced a one-time 2017 tax benefit of approximately $224,000, or $0.02 per share. LCNB also disclosed a $486,000 tax effect in accumulated other comprehensive income and intended to reclassify it to retained earnings in 2018.
- Operating outlook and risks: The filing provides no quantified earnings or revenue guidance. Management warned that the prevailing rate environment and yield curve could pressure net interest margin. Key risks include interest-rate shifts, concentrated regional exposure, commercial real estate and business lending, competition, credit-loss estimation, deposit competition, cybersecurity and technology, regulation, and acquisition execution.
- Rate sensitivity: The company’s model estimated that a 100-basis-point rate increase would raise one-year net interest income by 1.59%, while estimated economic value of equity would decline 1.35%. Management cautioned that these simulations depend on uncertain assumptions and are not forecasts.
- Other items: 2017 expenses included $154,000 of organizational costs for a newly formed captive insurance subsidiary and $113,000 of fixed-asset sale losses. The company reported no material pending litigation beyond routine matters. Management and the auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- Confirm the final Columbus First merger consideration, approvals, closing date, fair-value allocation, integration costs and expected contribution.
- Assess whether commercial real estate concentration and loan growth remain consistent with credit standards; commercial real estate loans were 62.2% of loans, including $85.9 million in multifamily lending.
- Track deposit trends, the mix and cost of funding, reliance on FHLB advances, and liquidity after securities portfolio reductions.
- Evaluate sustainability of earnings growth given lower securities gains, higher operating expenses, margin sensitivity and the one-time tax benefit.
- Monitor the expected impact and implementation of the current expected credit loss accounting standard; management anticipated an increase in the allowance but had not estimated the amount.
- Verify the stated merger-value difference and the available borrowing capacity and facility terms in subsequent filings.