LCNB Corp. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. LCNB is an Ohio bank holding company. Unless stated otherwise, dollar amounts below are in millions.
Financial results and condition
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $11.368 | $10.073 | $21.556 | $20.060 |
| Provision for loan losses | $0.224 | $0.222 | $0.303 | $0.237 |
| Noninterest income | $2.791 | $2.790 | $5.427 | $5.220 |
| Noninterest expense | $10.711 | $8.611 | $20.260 | $16.579 |
| Net income | $2.738 | $3.003 | $5.451 | $6.249 |
| Diluted EPS | $0.25 | $0.30 | $0.52 | $0.62 |
- Tax-equivalent net interest margin was 3.63% in Q2 versus 3.50% a year earlier; for the first half it was 3.61% versus 3.53%.
- Operating cash flow was $6.353 for the first half, compared with $7.839 in 2017. Investing activities used $0.218; financing activities used $6.620. Cash and cash equivalents ended at $24.901, down $0.485 from year-end.
- At June 30, assets were $1,631.4, net loans $1,155.5, deposits $1,380.9, and shareholders’ equity $212.4. Loans grew $309.8 and deposits $295.1 from year-end, primarily reflecting the acquisition described below.
- Short-term borrowings were zero, compared with $47.0 at year-end; long-term debt was $27.1, up from $0.3. The company reported $117.6 of remaining FHLB borrowing capacity and approximately $40.0 available through correspondent-bank lines.
- Consolidated regulatory capital ratios were 12.70% CET1, 12.70% Tier 1, 13.00% total risk-based capital, and 11.42% leverage. LCNB and the Bank were categorized as well-capitalized.
- The allowance for loan losses was $3.603, approximately 0.31% of loans. First-half net charge-offs were $0.103, versus $0.430 a year earlier.
Material changes and notable items
- LCNB acquired Columbus First Bancorp (CFB) on May 31, 2018, issuing 3.253 million shares valued at $63.598 and paying $0.783 to cancel awards. The acquisition added approximately $282.7 of loans and $245.0 of deposits. Provisional goodwill of $28.977 was recorded; purchase accounting remains incomplete. CFB’s reported contribution from the acquisition date was $0.906 in revenue and $0.469 in net income, excluding merger expenses.
- Merger expenses were $0.855 in Q2 and $1.613 in the first half. A $0.645 impairment charge was recorded on a branch building contracted for sale; the sale was anticipated in Q3.
- Despite higher net interest income, net income and EPS declined year over year. Higher staff costs, merger expenses, and the building impairment drove expense growth. The lower federal corporate tax rate contributed to lower income-tax expense: the effective rate was 15.1% versus 25.5% in Q2 and 26.2% for the first half of 2017.
- Net interest income increased mainly from loan growth and a modestly higher loan yield, partly offset by lower investment-securities income and higher deposit costs. The filing attributes the decrease in tax-exempt securities’ effective yield partly to the federal tax-rate reduction.
- Available-for-sale securities declined $17.5 from year-end, including a $4.5 decrease in fair value. Accumulated other comprehensive loss increased to $6.383. Management attributed securities losses primarily to interest-rate movements, not credit deterioration, and stated it did not expect to need to sell the securities before recovery.
Outlook, risks, and contingencies
- No numerical earnings or revenue guidance is provided. LCNB said the CFB transaction was expected to be accretive and to expand its presence in the Columbus-area market; actual post-acquisition results include limited operating history, and integration may be more costly, difficult, or time-consuming than expected.
- Management considered liquidity sufficient for lending and capital-expenditure commitments and reported no liquidity or operational problems. Outstanding commitments totaled $257.8, including unused credit lines; management believed available liquidity was adequate to fund them. Capital-expenditure commitments were approximately $0.260.
- Nonaccrual loans were $4.065 and loans at least 90 days past due and still accruing were $0.005 in the loan note; accruing restructured loans were $10.228. Management said problem-loan growth was largely attributable to one borrower. The filing also reports a different nonaccrual/past-due total in MD&A; see verification items below.
- Key stated risks include acquisition integration, loan charge-offs and credit quality, interest-rate changes, deposit and loan growth, competition, economic conditions, regulatory changes, and technology or cybersecurity incidents. Management’s rate-sensitivity models indicated higher rates would increase modeled one-year net interest income, but cautioned that assumptions are uncertain and results are not forecasts.
- Management said routine legal claims were not expected to have a material effect. No material changes to risk factors were reported. Disclosure controls were assessed as effective, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the credit-quality disclosure: the loan note shows $4.065 of nonaccrual loans plus $0.005 past due 90 days or more and accruing, while MD&A cites $4.138 for the combined amount.
- Track completion of CFB purchase accounting, including acquired-loan fair values, credit-impaired classifications, related taxes, and final goodwill; reported amounts are provisional.
- Assess whether merger and conversion expenses, staffing growth, and the branch impairment are nonrecurring, and whether the acquisition delivers the expected accretion and synergies.
- Monitor loan quality, concentrations and the allowance as the portfolio expands; assess the effect of rate changes on deposit costs, securities values, and net interest margin.
- Confirm liquidity and capital remain adequate as commitments are funded and public-fund deposits fluctuate; compare capital ratios with applicable requirements, including the capital conservation buffer.