LCNB Corp. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. LCNB is a bank holding company whose operations are principally conducted through LCNB National Bank. Financial statements are unaudited. BNB Bancorp was acquired April 30, 2015; reported results therefore include BNB only from that date.
Key financial results
Amounts are in millions of dollars except per-share data and ratios.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $9.50 | $9.00 | $29.43 | $26.36 |
| Provision for loan losses | $0.24 | $0.40 | $0.99 | $0.74 |
| Non-interest income | $2.39 | $2.32 | $7.52 | $6.69 |
| Non-interest expense | $8.09 | $7.24 | $24.16 | $23.51 |
| Net income | $2.63 | $2.72 | $8.59 | $6.65 |
| Diluted EPS | $0.26 | $0.29 | $0.88 | $0.71 |
| Tax-equivalent net interest margin | 3.37% | 3.57% | 3.71% | 3.60% |
- Quarterly net income declined about 3%, while nine-month net income increased about 29%. The nine-month diluted EPS increase also reflects higher earnings, alongside increased weighted-average shares.
- Q3 net interest income rose $0.50 million, principally from higher average earning-asset volume; margin fell 20 basis points year over year. For the first nine months, net interest income rose $3.06 million and margin increased 11 basis points.
- At September 30, total assets were $1.275 billion, loans net of allowance were $759.9 million, and deposits were $1.104 billion. Since December 31, 2014, assets grew $167.1 million, loans $64.0 million, and deposits $157.3 million; acquisition effects were significant.
- Cash and cash equivalents were $33.2 million. Nine-month operating cash flow was $8.7 million (versus $9.0 million in 2014); investing cash flow was negative $38.2 million and financing cash flow positive $46.9 million. Net cash increased $17.4 million.
- Short-term borrowings were $14.9 million and long-term debt $6.0 million, down from $16.6 million and $11.4 million, respectively, at year-end. Liquid assets were $394.0 million, or 30.9% of assets, compared with $301.2 million, or 27.2%, at year-end.
- Shareholders’ equity was $140.9 million. The company and Bank were reported as “well-capitalized”; LCNB’s Tier 1 risk-based capital ratio was 13.54%, total risk-based capital 13.92%, and leverage ratio 8.60%.
Material changes and notable items
- BNB contributed $448,000 of revenue and $131,000 of net income in Q3, and $773,000 of revenue and $196,000 of net income for the period since acquisition. The acquisition added $34.7 million of loans, $99.1 million of deposits, and $2.55 million of goodwill.
- Quarterly non-interest expense increased $0.85 million, including higher salaries and benefits and other expenses; the latter included increased real-estate-owned costs and impairment charges. Nine-month expense rose $0.65 million, as higher compensation costs were partly offset by $0.73 million lower merger-related costs.
- Provision for loan losses was $0.25 million higher year over year for the first nine months. Net charge-offs were $1.15 million, compared with $1.03 million. Non-accrual and 90-days-past-due accruing loans fell to $2.38 million from $5.80 million at year-end, primarily after the second-quarter sale of impaired loans with about $4.5 million carrying value.
- Non-interest income increased $0.83 million for nine months, including higher trust income, securities gains, and loan-sale gains. No securities were sold in Q3 2015, versus $97,000 of gains in Q3 2014.
- Dividends declared remained $0.16 per share for Q3 and $0.48 per share for the nine-month period.
Outlook, risks, and contingencies
- The filing provides no specific earnings or growth guidance. Management said results for the interim periods are not necessarily indicative of full-year results and expressed the view that the allowance for loan losses was adequate and liquidity sufficient for lending and capital expenditure commitments.
- Management identified risks including acquisition integration, possible higher charge-offs, competition and customer loss, interest-rate changes, economic conditions, loan and deposit growth challenges, regulatory changes, and securities valuation or impairment risks.
- Interest-rate sensitivity modeling indicated a 2.70% increase in one-year net interest income under a 100-basis-point rate increase and an 8.45% increase under a 300-basis-point increase. Economic value of equity declined 0.88% under a 100-basis-point increase. Management cautioned that these simulations depend on uncertain assumptions and are not forecasts.
- Off-balance-sheet commitments and standby letters of credit totaled $111.0 million. Capital expenditure commitments were approximately $10.9 million, including a planned Lebanon, Ohio operations center; cost estimates could change because bidding was incomplete.
- Management said ordinary-course legal claims were not expected to have a material effect. The filing reported no material change in risk factors and no material control changes; disclosure controls were considered effective.
Important facts for investors to verify
- How much of reported balance-sheet and earnings growth reflects BNB versus organic growth, and how integration and expected synergies are progressing.
- Whether loan quality and reserve adequacy remain sound, given charge-offs, provision changes, acquired loans, and the impact of the impaired-loan sale on reported delinquencies.
- Whether margin pressure, funding mix, and public-fund deposit volatility affect future net interest income and liquidity.
- The final cost and timing of the planned operations center and other capital commitments.
- Capital and dividend capacity as the capital conservation buffer begins to phase in, including the Bank’s ability to upstream dividends to the parent.