LCNB Corp. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Interim statements are unaudited and were reviewed, not audited, by the independent accountant.
Business context and material changes
LCNB is a bank holding company whose operations are principally conducted through LCNB National Bank. On January 11, 2013, LCNB acquired First Capital Bancshares and merged its Citizens National Bank subsidiary into LCNB National Bank. The acquisition added six full-service branches in Ohio. The transaction was valued at approximately $20.2 million, funded with about $12.4 million of LCNB shares and $7.8 million in cash; it added $8.4 million of goodwill. Results include Citizens from the acquisition date.
Financial performance
- Income and revenue: Net income was $1.728 million, down 24% from $2.277 million in Q1 2012. Basic and diluted EPS were $0.23, versus $0.34. Net interest income increased 9% to $6.978 million; noninterest income rose 7% to $2.507 million. Net interest income plus noninterest income was $9.485 million, versus $8.745 million.
- Interest margins: Tax-equivalent net interest margin was 3.53%, down from 3.69%; net interest rate spread was 3.40%, versus 3.53%. Growth in average earning assets, mainly from the acquisition, supported interest income, while lower average yields partly offset that benefit.
- Expenses and taxes: Noninterest expense increased 30% to $7.091 million, including $1.055 million of merger and data-conversion costs. Income before taxes fell to $2.245 million from $3.082 million. The effective tax rate was 23.0%, versus 26.1%.
- Loans and credit: Loans, net, were $546.3 million at March 31, up from $450.3 million at year-end, largely reflecting acquired loans. The allowance for loan losses was $3.404 million; quarterly provision was $149,000, compared with $215,000 a year earlier. Net charge-offs were $182,000, versus $256,000. Nonaccrual and 90-days-past-due loans totaled $3.353 million, or 0.61% of loans, up from $2.411 million, or 0.53%, at year-end. Including accruing restructured loans, the reported ratio was 3.10%, compared with 3.47%.
- Cash flow and liquidity: Operating cash flow was negative $78,000, versus positive $2.158 million in Q1 2012. Investing activities provided $7.945 million and financing activities provided $6.971 million; cash and cash equivalents rose to $28.313 million from $13.475 million at year-end. Management reported liquid assets of $305.9 million, 32.3% of total assets, and said it experienced no liquidity or operational problems.
- Balance sheet and funding: Total assets were $946.4 million, up from $788.6 million at year-end; deposits were $820.9 million, versus $671.5 million. Management also cited a $27.9 million increase in local-government public-fund deposits, which may be volatile. Short-term borrowings were $11.6 million and long-term debt was $13.1 million. Shareholders’ equity was $94.2 million.
- Capital and shareholder returns: LCNB reported regulatory capital ratios of 13.40% total risk-based, 12.80% Tier 1 risk-based, and 8.13% leverage at March 31. The Bank and LCNB were reported as well-capitalized under regulatory standards. The quarterly dividend declared was $0.16 per share, unchanged from Q1 2012.
Management commentary, outlook and risks
Management attributed lower earnings primarily to acquisition-related expenses and higher ongoing costs from added staff and offices. Higher net interest income and noninterest income partly offset the expense increase. Citizens contributed an estimated $1.260 million of revenue and $393,000 of net income before merger and data-conversion costs during the quarter. Pro forma figures, which exclude those costs and do not reflect expected cost savings, showed Q1 2013 net income of $2.115 million and diluted EPS of $0.27.
The filing provides no specific earnings or financial guidance. Management’s forward-looking statements identify regulatory changes, interest-rate fluctuations, loan demand, delinquencies and losses, and general economic conditions as risks. Interest-rate models indicated that a 100–300 basis-point rise could increase projected one-year net interest income by 2.23%–6.96%, while reducing estimated economic value of equity by 3.22%–8.36%; management cautioned that these simulations are not forecasts and depend on uncertain assumptions. LCNB said it does not use derivatives to hedge interest-rate risk.
Off-balance-sheet commitments to extend credit and standby letters of credit totaled $102.7 million at March 31, up from $82.8 million at year-end. Management stated it believes liquidity is sufficient to meet lending and capital-expenditure commitments. It also believed ordinary-course claims and proceedings would not have a material effect. The filing reported no material change in risk factors and no applicable legal proceedings.
Most important facts for investors to verify
- Whether the acquisition’s integration costs and added operating expenses decline as expected, and whether anticipated cost savings are realized.
- Whether loan quality trends worsen: nonaccrual and seriously past-due loans increased from year-end, and the allowance and provision should be assessed against acquired-loan risks and future charge-offs.
- How sustainable deposit growth is, particularly public-fund deposits, and how the funding mix affects liquidity and net interest margin.
- Whether the decline in reported capital ratios after the acquisition leaves adequate capital under applicable requirements; review current regulatory filings for updated ratios.
- Whether operating cash flow and earnings improve after this quarter’s acquisition-related and working-capital effects.