LCNB Corp. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. LCNB is an Ohio bank holding company whose banking subsidiary accounts for substantially all operations. Comparisons are with the corresponding 2015 periods unless stated otherwise. Dollar amounts below are in millions except per-share data.
Financial results and condition
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $10.125 | $10.600 | $19.897 | $19.928 |
| Provision for loan losses | $0.396 | $0.677 | $0.486 | $0.746 |
| Non-interest income | $2.750 | $2.831 | $5.392 | $5.137 |
| Non-interest expense | $8.468 | $8.426 | $16.760 | $16.075 |
| Net income | $2.968 | $3.123 | $5.932 | $5.957 |
| Diluted EPS | $0.29 | $0.32 | $0.59 | $0.62 |
| Tax-equivalent net interest margin | 3.55% | 3.95% | 3.52% | 3.89% |
- Q2 net income declined about 5%; first-half net income was nearly flat, down $0.025 million. The reported dividend was $0.16 per share in Q2 and $0.32 for the six months.
- At June 30, total assets were $1,312.6 million; net loans $797.1 million; deposits $1,124.7 million; and shareholders’ equity $145.7 million. From year-end 2015, loans grew $29.3 million and deposits grew $37.5 million.
- Cash and cash equivalents were $19.0 million. First-half operating cash flow was $6.7 million, investing cash flow was negative $23.6 million, and financing cash flow was positive $20.9 million.
- Short-term borrowings were $30.5 million and long-term debt $0.7 million, down from $5.9 million at year-end. Liquid assets were $372.5 million, or 28.4% of total assets, versus $393.0 million, or 30.7%, at year-end. Core deposits were 81.8% of deposits, down from 84.3%.
- Regulatory capital ratios at June 30: Common Equity Tier 1 and Tier 1 risk-based capital 12.89%; total risk-based capital 13.29%; leverage 8.56%. The Bank and company were reported as well-capitalized.
Changes, management commentary, and risks
- Net interest margin compressed year over year as asset yields declined; growth in average earning assets partly offset the impact. Management attributed prior-year comparisons in part to non-accrual interest associated with impaired loans sold in Q2 2015 and to the 2015 BNB acquisition.
- First-half non-interest income increased $0.255 million, mainly from higher securities-sale gains and deposit fees. Non-interest expense increased $0.685 million.
- Unusual first-half costs included a $0.251 million penalty for early repayment of a $5.0 million FHLB advance bearing 5.25%, and a $0.346 million write-down of commercial foreclosed property. Management said the debt repayment is expected to reduce future interest expense.
- Credit indicators weakened in certain areas: non-accrual loans plus loans 90 days past due and accruing rose to $3.066 million, or 0.38% of loans, from $2.282 million, or 0.30%, at year-end. Management cited two loans to one borrower totaling $1.307 million newly placed on non-accrual. Net charge-offs were $0.242 million for the half-year, versus $0.988 million in 2015; the prior period included charge-offs related to the impaired-loan sale. The allowance was $3.373 million.
- Deposits increased partly because public-fund deposits rose $31.7 million; management cautioned these balances can be seasonal and volatile. Capital expenditures outstanding were approximately $7.9 million, including construction of a new operations center. Management stated it believes liquidity is sufficient to meet lending and capital commitments and the allowance is adequate.
- Interest-rate sensitivity modeling indicated a 300-basis-point increase could raise projected one-year net interest income 2.74%, while reducing estimated economic value of equity 3.25%. Management cautioned that these models rely on uncertain assumptions and are not earnings or equity forecasts.
- Risks identified include credit losses, interest-rate changes, competition, economic conditions, difficulty growing loans or deposits, regulatory changes, and investment valuation risks. No material risk-factor changes, legal proceedings, or internal-control changes were reported; disclosure controls were deemed effective.
- No specific financial guidance was provided. Management said results for the interim periods are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the rise in non-accrual and past-due loans—and the related borrower exposure—leads to further provisions or charge-offs.
- Whether lower net interest margin persists and how deposit pricing and public-fund deposit volatility affect funding costs and liquidity.
- Whether the foreclosed-property write-down and FHLB prepayment penalty are isolated, and the realized savings from the debt repayment.
- Progress, final cost, and funding for the new operations center, alongside the company’s capital and dividend capacity.