LCNB Corp. — Q3 2017 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, 2017; comparisons are with the same 2016 periods unless stated otherwise. Balance-sheet comparisons are with December 31, 2016. Amounts are in millions except per-share data.
Financial results and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $10.147 | $10.010 | $30.207 | $29.907 |
| Noninterest income | $2.659 | $2.846 | $7.879 | $8.238 |
| Net income | $3.106 | $2.896 | $9.355 | $8.828 |
| Diluted EPS | $0.31 | $0.29 | $0.93 | $0.88 |
| Taxable-equivalent net interest margin | 3.52% | 3.42% | 3.53% | 3.49% |
- Quarterly net interest income rose $137,000; nine-month net interest income rose $300,000. Loan growth was the main driver, partly offset by lower average loan yields. The filing reports taxable-equivalent net interest income of $10.569 million for Q3 and $31.487 million year to date.
- At September 30, total assets were $1,314.3 million, loans net of allowance were $830.8 million, deposits were $1,121.5 million, and shareholders’ equity was $149.7 million. Since year-end 2016, assets increased $7.5 million, net loans increased $14.6 million, deposits increased $10.6 million, and equity increased $6.8 million.
- Cash and cash equivalents were $21.2 million. Short-term borrowings were $30.0 million and long-term debt was $0.363 million. The company reported liquid assets of $331.6 million, or 25.2% of total assets, versus $339.5 million, or 26.0%, at year-end.
- For the first nine months, operating cash flow was $12.6 million, investing cash flow was negative $4.1 million, and financing cash flow was negative $6.1 million; cash increased $2.3 million.
- The allowance for loan losses was $3.407 million, down from $3.575 million at year-end. Nonaccrual and loans 90 days past due and accruing totaled $4.482 million, down from $5.748 million; criticized substandard loans were $24.834 million, versus $33.654 million at year-end.
Material changes and management commentary
- Net income increased $210,000 in Q3 and $527,000 year to date. Noninterest income fell $187,000 in Q3 and $359,000 year to date, primarily reflecting lower securities-sale gains as sales volume declined.
- Loan-loss provision was a $12,000 credit in Q3, compared with a $372,000 expense in Q3 2016; year-to-date provision was $225,000 versus $858,000. Nine-month net charge-offs were $393,000, compared with $189,000 in 2016.
- Q3 noninterest expense increased $79,000; nine-month expense decreased $102,000. Higher occupancy, equipment, marketing, salaries, and contracted services were partly offset by lower other-real-estate-owned expense and FDIC premiums. The 2017 nine-month comparison also benefited from the absence of a $251,000 early debt repayment penalty recorded in 2016.
- Commercial real-estate loans grew $32.9 million since year-end, while residential real-estate loans declined $12.3 million. Public-fund deposits increased $39.1 million and contributed to deposit growth; management notes these balances can be seasonal and volatile. Core deposits were 82.2% of deposits, down from 85.0%.
- LCNB discontinued customer repurchase agreements during Q3 and had $30.0 million of short-term FHLB advances at quarter-end. The new Operations Center contributed to higher premises and equipment and related depreciation and occupancy costs.
Outlook, risks, and contingencies
- The filing provides no numerical earnings or growth guidance. Management said liquidity was adequate to fund lending and capital-expenditure commitments and reported no liquidity or operational problems.
- Management identifies interest-rate movements, credit losses, competition, economic conditions, regulatory changes, and difficulty growing loans or deposits among forward-looking risks. Interest-rate modeling indicated that a 300-basis-point increase could raise one-year net interest income by 5.34% while reducing economic value of equity by 5.69%; the filing cautions these simulations depend on uncertain assumptions and are not forecasts.
- Management expects the forthcoming credit-loss standard (ASU 2016-13) to increase the allowance, but said the impact could not yet be reasonably estimated. It estimated about $5 million in discounted right-of-use assets and lease liabilities under the new lease standard, based on assumptions that may change.
- Unusual items included a $144,000 premises impairment charge and $154,000 of year-to-date organizational costs for a captive insurance subsidiary formed in Q2 2017. No material pending legal proceeding or material change in risk factors was reported. Off-balance-sheet commitments totaled $141.9 million; management believed liquidity was sufficient to meet commitments.
Important facts for investors to verify
- Whether loan growth, especially in commercial real estate, is sustainable and how concentrations and credit quality evolve.
- Whether lower securities-sale gains and higher funding costs affect future earnings and net interest margin.
- The seasonality and concentration of public-fund deposits, and the effect of future deposit pricing or borrowing needs on liquidity.
- The eventual allowance and earnings impact of CECL, and the assumptions underlying the estimated lease liabilities.
- Whether operational costs tied to the Operations Center and captive insurance subsidiary persist, and how the company manages interest-rate exposure.