LCNB Corp. — Q2 2011 Form 10-Q
Business context and reporting period. LCNB is a bank holding company whose operations are primarily conducted through LCNB National Bank. This unaudited quarterly report covers the three and six months ended June 30, 2011; comparisons are to the corresponding 2010 periods unless noted. Its interim financial statements were reviewed by its independent accountant, not audited.
Financial performance and position
| Metric | Q2 2011 | Six months 2011 | Comparable 2010 |
|---|---|---|---|
| Net interest income | $6.432 million | $12.790 million | $6.427 million; $12.867 million |
| Provision for loan losses | $224,000 | $888,000 | $511,000; $719,000 |
| Non-interest income | $1.856 million | $3.787 million | $2.514 million; $4.267 million |
| Non-interest expense | $5.328 million | $11.129 million | $5.218 million; $10.425 million |
| Income from continuing operations | $2.023 million | $3.501 million | $2.685 million; $4.826 million |
| Net income | $1.992 million | $4.294 million | $2.752 million; $4.964 million |
| Basic and diluted EPS | $0.30 | $0.64 total | $0.41; $0.74 total |
Margins and cash flow. Tax-equivalent net interest margin was 3.70% in Q2 (3.95% in 2010) and 3.79% for the first half (4.02% in 2010). For the six months, operating cash flow was $4.208 million, investing cash flow was negative $15.885 million, and financing cash flow was positive $27.519 million. Cash and cash equivalents ended at $26.841 million, up $15.842 million from year-end.
Balance sheet and liquidity. At June 30, total assets were $792.950 million, up $32.816 million from December 31, 2010; net loans were $454.447 million, deposits $678.751 million, and shareholders’ equity $74.116 million. Deposits rose $40.212 million, including a $32.9 million increase in public funds that management said may be seasonal and volatile. Short-term borrowings declined $9.493 million to $12.198 million; long-term debt was $22.061 million. Liquid assets were $277.6 million, or 35.0% of assets, versus $246.9 million, or 32.5%, at year-end. Management reported no liquidity or operational problems and believed liquidity was sufficient for lending and capital commitments.
Capital and credit. LCNB and the Bank were classified as well-capitalized. June 30 ratios were 14.42% total risk-based capital, 13.76% Tier 1 risk-based capital, and 8.24% leverage. The allowance for loan losses was $3.109 million, up from $2.641 million at year-end. Six-month net charge-offs were $420,000. Non-accrual loans plus loans at least 90 days past due and accruing totaled $3.756 million, or 0.82% of loans; total non-accrual, past-due and restructured loans were $13.259 million, or 2.90% of loans.
Material changes and unusual items
- Net income fell 28% in Q2 and 13% for the first half. Continuing-operations income declined in both periods; first-half net income included $793,000 of after-tax discontinued-operations income, versus $138,000 in 2010.
- LCNB sold Dakin Insurance Agency on March 23, 2011. First-half discontinued results included a $1.503 million pretax sale gain, closing costs, taxes, and a $191,000 pension-plan curtailment expense. Q2 discontinued operations recorded a $31,000 loss after tax.
- Net interest income was nearly flat in Q2 and lower for the first half. Management attributed pressure mainly to lower market rates: falling asset yields reduced interest income, partly offset by lower funding costs. Tax-equivalent margin contracted year over year.
- Non-interest income declined primarily because 2010 included bank-owned life insurance death benefits; first-half 2011 also benefited from higher securities-sale gains and trust income. Salaries and benefits and other expenses drove the increase in non-interest expense; the latter included a $56,000 standby-letter-of-credit loss and $52,000 of environmental remediation costs.
- Commercial real estate loans grew $10.8 million from year-end, while other loan categories generally declined. Management said the first-half provision increase reflected delinquent and non-accrual loan trends, net charge-offs, and economic conditions; the Q2 provision decreased as newly identified impaired loans fell.
- Interest-rate sensitivity analysis estimated a 0.54% increase in one-year net interest income under a 300-basis-point rate increase, but a 26.13% decline in economic value of equity under that scenario—slightly outside company policy. Management considered the modeled change acceptable, while noting the analyses depend on uncertain assumptions.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results. Key risks include interest-rate movements, loan demand and credit losses, economic conditions, and regulatory changes. LCNB does not use derivatives to hedge interest-rate risk. A new debit-card interchange rule effective October 1, 2011 could affect industry pricing; management said the effect on LCNB could not be predicted. Off-balance-sheet credit commitments totaled $81.363 million, and capital expenditure commitments were approximately $800,000. Management believed claims and proceedings would not materially affect financial position or results.
Subsequent to quarter-end, LCNB registered 400,000 shares for its dividend reinvestment and stock purchase plan and applied to move its stock listing from OTCBB to the NASDAQ Capital Market. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether seasonal public-fund deposits persist, and the resulting effect on core deposit mix and funding costs.
- Credit quality trends, especially commercial real estate exposures, restructured loans, impaired loans, and allowance adequacy.
- Underlying earnings excluding the Dakin sale gain and other discontinued-operation items, and the sustainability of recurring non-interest income.
- Net interest margin and earnings sensitivity if interest rates change; review the assumptions behind the rate-shock and economic-value models.
- Potential business and revenue effects of debit-card interchange regulation and the company’s listing and share-issuance plans.