LCNB Corp. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results include LCNB Corp. and its bank subsidiary. Comparisons are with the corresponding 2014 periods unless otherwise noted. The April 30, 2015 acquisition of BNB Bancorp materially affects comparability.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $10.600 million | $9.006 million | $19.928 million | $17.369 million |
| Provision for loan losses | $677,000 | $255,000 | $746,000 | $336,000 |
| Non-interest income | $2.831 million | $2.301 million | $5.137 million | $4.378 million |
| Non-interest expense | $8.426 million | $7.600 million | $16.075 million | $16.272 million |
| Net income | $3.123 million | $2.611 million | $5.957 million | $3.934 million |
| Diluted EPS | $0.32 | $0.28 | $0.62 | $0.42 |
| Dividends declared per share | $0.16 | $0.16 | $0.32 | $0.32 |
Margins: Taxable-equivalent net interest margin was 3.95% in Q2 2015 versus 3.59% in Q2 2014; for the first half it was 3.89% versus 3.62%.
June 30 balance sheet: Total assets were $1.249 billion, loans net of allowance were $751.9 million, and deposits were $1.084 billion. Cash and cash equivalents totaled $27.9 million. Short-term borrowings were $12.7 million and long-term debt was $6.1 million. Shareholders’ equity was $137.7 million. These balances compare with December 31, 2014: assets $1.108 billion, net loans $695.8 million, deposits $946.2 million, and equity $125.7 million.
Cash flow, six months: Operating activities provided $5.0 million; investing activities used $19.7 million; financing activities provided $26.8 million. Cash and cash equivalents increased $12.1 million to $27.9 million.
Capital and liquidity: LCNB reported regulatory ratios of 13.90% for Tier 1 risk-based capital, 14.28% for total risk-based capital, and 8.85% for leverage at June 30; management said the company and Bank remained well-capitalized. Liquid assets were $375.8 million, or 30.1% of total assets, compared with $301.2 million, or 27.2%, at year-end. Core deposits were 82.0% of deposits, down from 84.3%.
Material changes and drivers
- Net income rose year over year in both the quarter and first half. Management attributed higher net interest income to increased average earning assets, primarily loans, improved net interest margin, lower interest expense, and interest recognized on impaired loans sold in Q2.
- BNB added $34.7 million of loans, $58.2 million of investment securities, and $99.1 million of deposits at acquisition. LCNB issued 560,132 common shares and paid cash as consideration; $2.55 million of goodwill was recorded. The acquired BNB operations contributed $325,000 of revenue and $65,000 of net income, excluding merger expenses, from acquisition through June 30.
- Q2 non-interest expense increased $826,000, chiefly from higher salaries and benefits and $452,000 more merger-related expense. First-half non-interest expense decreased $197,000, largely because merger costs were $770,000 lower than in 2014, partly offset by increased compensation expense.
- Loan balances grew $56.0 million from year-end, reflecting BNB and organic growth. Deposits rose $137.8 million, including $43.7 million of growth in local-government public funds, which management notes can be volatile.
- The company sold impaired loans with a carrying value of approximately $4.5 million in Q2. Non-accrual loans and loans at least 90 days past due and still accruing fell to $2.1 million (0.28% of loans) from $5.8 million (0.83%) at year-end. Management said the sale reduced watched credits and improved credit-quality metrics; the sale also contributed to higher charge-offs and provision.
Outlook, risks and other notable matters
- The filing provides no specific earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management identifies risks including acquisition integration and execution, potential higher charge-offs, competition and customer losses, interest-rate changes, economic conditions, loan and deposit growth, regulation, and possible impairment or losses on securities of financial institutions.
- Interest-rate modeling indicated a positive one-year net interest income effect from rate increases: +2.83% under a 100-basis-point shock and +8.66% under a 300-basis-point shock. Economic value of equity was estimated to decline 1.70% and 2.38%, respectively. Management cautions that these model outputs depend on uncertain assumptions and are not forecasts.
- Off-balance-sheet commitments and standby letters of credit totaled $113.3 million. Planned capital expenditures were approximately $106,000, excluding the uncosted planned Lebanon operations center. Management said it believed liquidity was sufficient to fund commitments.
- Management considered the allowance for loan losses adequate; the allowance was $2.879 million at quarter-end. The effective tax rate for the first half was 27.7%, versus 23.4% a year earlier, primarily reflecting tax-exempt income and other tax items.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reports no legal proceedings and no material changes to risk factors.
Important facts for investors to verify
- Progress and costs of integrating BNB, final purchase-price allocations, and whether expected acquisition synergies are realized.
- Whether improved delinquency and non-accrual measures persist after the impaired-loan sale, and the adequacy of the allowance amid higher charge-offs.
- Stability of public-fund deposits, core funding, and liquidity as local-government balances fluctuate.
- Exposure of earnings and equity to changing interest rates and investment-security valuations; scenario results are model-based, not forecasts.
- Capital levels, dividend capacity, and the cost and timing of the proposed operations center.