LCNB Corp. — Q1 2017 Form 10-Q
Business context and reporting period. LCNB Corp. is an Ohio bank holding company whose operations are principally conducted through LCNB National Bank. This unaudited quarterly report covers the three months ended March 31, 2017; year-over-year comparisons are to Q1 2016, and balance-sheet comparisons are to December 31, 2016. Amounts below are in millions of dollars unless noted.
Financial performance and condition
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior year-end |
|---|---|---|
| Net income | $3.246; $0.32 basic and diluted EPS | $2.964; $0.30 EPS in Q1 2016 |
| Interest income / interest expense | $10.864 / $0.877 | $10.621 / $0.849 in Q1 2016 |
| Net interest income | $9.987; taxable-equivalent net interest margin 3.55% | $9.772; taxable-equivalent margin 3.49% in Q1 2016 |
| Noninterest income / expense | $2.430 / $7.968 | $2.642 / $8.292 in Q1 2016 |
| Provision for loan losses | $0.015 | $0.090 in Q1 2016 |
| Return on average assets / equity | 1.01% / 9.10% | 0.93% / 8.37% in Q1 2016 |
| Total assets | $1,319.074 | $1,306.799 at December 31, 2016 |
| Loans, net / deposits | $807.153 / $1,148.198 | $816.228 / $1,110.905 at December 31, 2016 |
| Cash and cash equivalents | $33.274 | $18.865 at December 31, 2016 |
| Short-term borrowings / long-term debt | $15.957 / $0.480 | $42.040 / $0.598 at December 31, 2016 |
| Shareholders’ equity | $145.318 | $142.944 at December 31, 2016 |
Cash flow. Operating activities provided $1.869 million and investing activities provided $2.905 million in Q1 2017. Financing activities provided $9.635 million, including a $37.293 million net increase in deposits, partly offset by a $26.083 million decrease in short-term borrowings and $1.520 million in dividends paid. Cash and cash equivalents increased $14.409 million during the quarter.
Liquidity and capital. Liquid assets were $360.0 million, or 27.3% of total assets, versus $339.5 million, or 26.0%, at year-end. Core deposits were 82.9% of deposits, down from 85.0%, mainly reflecting growth in public funds. LCNB and the Bank were classified as well-capitalized. LCNB’s March 31 ratios were 13.27% Common Equity Tier 1, 13.27% Tier 1 risk-based, 13.66% total risk-based capital, and 8.92% leverage.
Material changes versus comparable periods
- Net income increased $0.282 million, or about 9.5%, year over year. Net interest income increased $0.215 million as loan growth more than offset lower loan yields and higher interest costs.
- Noninterest income fell $0.212 million, principally because Q1 2016 included $0.371 million of securities-sale gains; there were no securities-sale gains in Q1 2017.
- Noninterest expense declined $0.324 million. Q1 2016 included a $0.251 million prepayment penalty on an FHLB borrowing; lower FDIC premiums also contributed.
- Net loan charge-offs rose to $0.262 million from $0.069 million, despite the lower loan-loss provision. Nonaccrual loans and loans at least 90 days past due and still accruing declined to $3.881 million, or 0.48% of loans, from $5.748 million, or 0.70%, at year-end. The decrease included transfer and subsequent sale of two commercial real-estate loans to one borrower.
- Net loans declined $9.075 million from year-end despite $44.7 million of originations, as paydowns, payoffs, and a transfer to other real estate owned more than offset originations. Deposits rose $37.293 million, including a $29.1 million increase in public-fund deposits; short-term borrowings fell $26.083 million.
Outlook, risks, contingencies, and unusual items
- No specific earnings or growth guidance is provided. Management states that Q1 results are not necessarily indicative of full-year results and says it intends to maintain adequate liquidity; it reported no liquidity or operational problems.
- Management identifies risks including loan charge-offs, competition, difficulty growing loans or deposits, economic and regulatory changes, interest-rate movements, and valuation or impairment risk in securities. Interest-rate models indicate a 6.25% increase in one-year net interest income under a 300-basis-point rate increase, but a 5.20% decline in economic value of equity; management cautions that these models are assumption-dependent and are not forecasts.
- Public-fund deposits can be volatile and seasonal. At quarter-end, approximately 82.9% of deposits were classified as core funding.
- Two commercial real-estate loans to the same borrower, totaling $1.236 million and modified in Q4 2016, subsequently defaulted in February 2017. Newly restructured troubled debt in Q1 2017 totaled $23,000 after modification. Total accruing restructured loans were $11.606 million at March 31.
- Undrawn credit commitments and standby letters of credit totaled $119.346 million. Outstanding capital-expenditure commitments were approximately $2.140 million, including remaining costs for a new Lebanon Operations Center. Management believes liquidity is sufficient to fund lending and capital commitments.
- Management said ordinary-course legal claims are not expected to have a material effect. No material risk-factor changes were reported. The allowance for loan losses was $3.328 million; management considered it adequate, but estimates are inherently subjective.
- Management expects adoption of the new credit-loss standard (ASU 2016-13) to increase the loan-loss allowance; the impact remains under evaluation. The filing estimates about $5 million of right-of-use assets and lease liabilities under the new lease standard for current leases.
Important facts for investors to verify
- Whether public-fund deposit growth is sustained or reverses seasonally, and the resulting effect on liquidity and funding costs.
- Developments in the defaulted commercial real-estate loans and the broader commercial-property exposure; commercial real-estate-secured loans were $475.6 million.
- Whether elevated net charge-offs persist and whether the $3.328 million allowance remains adequate as loan quality and economic conditions evolve.
- Progress, remaining cost, and execution risks for the new Operations Center, alongside the disclosed $2.140 million capital commitment.
- How interest-rate changes affect net interest income, deposit pricing, securities values, and economic value of equity; reported sensitivity analyses are scenario estimates, not forecasts.