LCNB Corp. — Q3 2019 Form 10-Q
Business context and period. LCNB is an Ohio-based bank holding company. This unaudited filing covers the quarter and nine months ended September 30, 2019; balance-sheet comparisons are against December 31, 2018. Results include Columbus First Bancorp from its May 31, 2018 acquisition date, so year-over-year comparisons reflect different periods of acquired-business contribution.
Financial performance and condition
- Profit: Q3 net income was $4.727 million, up 12.5% year over year; diluted EPS was $0.36 versus $0.32. Nine-month net income was $14.082 million, up 45.9%; diluted EPS was $1.07 versus $0.84. Dividends declared were $0.17 per share in Q3 and $0.51 for nine months.
- Interest income and margins: Q3 net interest income was $13.578 million, up 3.6%; nine-month net interest income was $40.559 million, up 17.0%. On a taxable-equivalent basis, net interest margin was 3.67% versus 3.59% in Q3 and 3.70% versus 3.61% for nine months. Nine-month average loan yield increased to 4.84% from 4.52%.
- Noninterest items: Noninterest income rose to $3.376 million in Q3 from $2.928 million and to $9.163 million for nine months from $8.356 million. Noninterest expense rose to $11.002 million in Q3 from $10.324 million and to $32.552 million for nine months from $30.585 million. Nine-month salary and benefits expense increased $3.017 million; merger expenses fell to $0.114 million from $1.959 million.
- Credit costs and asset quality: Loan-loss provision was $0.264 million in Q3 and $0.213 million for nine months, compared with $0.659 million and $0.962 million, respectively, in 2018. Nine-month net charge-offs were $0.092 million versus $0.349 million. Nonaccrual loans increased to $3.523 million from $2.951 million at year-end; accruing restructured loans declined to $6.784 million from $10.516 million. The allowance was $4.167 million against $1.226 billion of gross loans.
- Cash flow: For the nine months, operating cash flow was $14.849 million versus $11.382 million; investing cash flow provided $7.956 million versus $4.968 million; financing activities used $20.019 million versus $21.924 million. Cash and cash equivalents ended at $22.826 million, up from $20.040 million at year-end.
- Balance sheet and funding: Total assets were $1.644 billion, up 0.5% from year-end. Net loans increased 2.3% to $1.222 billion and deposits rose 4.2% to $1.355 billion. Available-for-sale debt securities declined 19.8% to $191.230 million. Short-term borrowings fell from $56.230 million to zero; long-term debt declined to $41.990 million from $47.032 million. Shareholders’ equity was $225.492 million.
- Liquidity and capital: Management reported approximately $87.4 million of remaining FHLB borrowing capacity and $55 million available under correspondent-bank lines. The Bank was classified as well-capitalized; at September 30, its CET1 and Tier 1 risk-based ratios were 12.36%, total risk-based capital was 12.68%, and leverage was 9.96%. Risk-weighted ratios declined from year-end as funds shifted from securities to loans.
Material changes, outlook, risks and unusual items
- Management attributed earnings growth principally to higher loan balances and yields, including the contribution of the Columbus First acquisition. Deposit and debt funding costs also rose: the average rate paid on interest-bearing liabilities increased 45 basis points for the nine-month comparison, partly offsetting asset-income growth.
- LCNB sold $75.4 million of available-for-sale securities during the first nine months and used proceeds toward loan growth and debt repayment. It purchased $12 million of bank-owned life insurance policies at the start of Q3; the policies contributed to higher BOLI income.
- The company repurchased 400,000 shares for $6.834 million during the nine months under a 500,000-share authorization; 100,000 shares remained authorized at September 30. Q3 repurchases totaled 57,915 shares.
- LCNB adopted lease accounting on January 1, 2019, recording $5.565 million of operating lease right-of-use assets and $5.531 million of lease liabilities. Management stated the transition did not restate prior periods.
- LCNB expects adoption of CECL to increase the loan-loss allowance, but said the financial impact could not yet be reasonably estimated. It planned to delay adoption until the applicable effective date for eligible smaller reporting companies. The filing provides no earnings or revenue guidance; management said liquidity was sufficient for lending and capital-expenditure commitments and reported no current liquidity or operational problems.
- Risks identified include interest-rate and economic changes, credit losses, competition, deposit and loan growth, acquisition integration, regulation, and technology or cybersecurity events. Management said risk factors had no material changes, and believed unrealized securities losses primarily reflected interest-rate movements rather than credit deterioration. Routine legal matters were not expected to have a material effect.
Investor verification priorities
- Assess whether deposit-cost increases and repricing pressure could erode net interest margin, particularly after the period’s rate changes.
- Review commercial real-estate concentration, rising nonaccrual loans, the allowance’s adequacy, and the eventual CECL impact.
- Check the durability of deposit growth, including the $85.6 million increase in public-fund deposits, which management described as potentially volatile.
- Reconcile earnings growth with acquisition-related comparisons, higher operating costs, securities activity, and the new BOLI investment.
- Monitor capital ratios, remaining borrowing capacity, and capital returns following the share repurchases and declared dividends.