LCNB Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. LCNB is a bank holding company whose assets, liabilities, and operations are substantially attributable to LCNB National Bank. The interim financial statements are unaudited and were reviewed by the independent accountant, which did not express an audit opinion.
Financial performance
Amounts below are in thousands of dollars except per-share data and percentages.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $6,214 | $6,439 | $18,922 | $19,229 |
| Provision for loan losses | $436 | $588 | $742 | $1,476 |
| Non-interest income | $2,205 | $2,033 | $6,296 | $5,783 |
| Non-interest expense | $5,564 | $5,436 | $16,342 | $16,528 |
| Net income | $1,847 | $1,867 | $6,111 | $6,161 |
| Continuing-operations EPS, diluted | $0.27 | $0.28 | $0.90 | $0.80 |
| Tax-equivalent net interest margin | 3.44% | 3.61% | 3.55% | 3.73% |
For the first nine months, operating cash flow was $7.8 million, investing cash flow was negative $12.0 million, and financing cash flow was $17.7 million. Cash and cash equivalents increased $13.5 million to $33.1 million.
Financial position and liquidity
- At September 30, 2012, total assets were $817.2 million, up $25.6 million from December 31, 2011. Total deposits were $701.1 million, up $37.5 million; net loans were $454.5 million, down $3.8 million.
- Shareholders’ equity was $82.1 million. Short-term borrowings were $12.1 million and long-term debt was $14.0 million, compared with $21.6 million and $21.4 million, respectively, at year-end 2011.
- Liquid assets were $298.8 million, or 36.6% of assets, versus $273.5 million, or 34.6%, at year-end. Management reported no liquidity or operational problems.
- Public-fund deposits from local governments increased $33.7 million and may be seasonally volatile. Core deposits were 76.9% of deposits, down from 79.9% at year-end.
- LCNB and the Bank were categorized as well-capitalized. LCNB reported Tier 1 risk-based capital of 14.71%, total risk-based capital of 15.32%, and a leverage ratio of 8.76%.
Changes versus comparable periods
- Q3 net income declined $20,000 year over year. Nine-month net income declined $50,000, although continuing-operations income increased from $5.4 million to $6.1 million. The 2011 nine-month comparison included $793,000 of after-tax discontinued-operation income, principally from the sale of Dakin Insurance Agency.
- Net interest income and margin declined as lower yields on earning assets outweighed reduced funding costs. The nine-month tax-equivalent margin fell to 3.55% from 3.73%.
- Non-interest income increased $513,000 over nine months, principally from higher gains on securities and mortgage-loan sales and trust income that included first-quarter estate fees. Deposit service charges declined.
- The nine-month loan-loss provision fell by $734,000, reflecting management’s view that credit quality had stabilized. Non-accrual and 90-day-past-due loans were $2.8 million, or 0.61% of loans, versus $3.7 million, or 0.80%, at year-end. Other real estate owned rose to $2.3 million from $1.6 million.
- Nine-month non-interest expense declined $186,000, mainly due to lower FDIC premiums and the absence of certain 2011 costs. Q3 expense increased $128,000, including higher compensation and other operating costs.
Outlook, risks, and unusual items
- No numerical earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- On October 9, 2012, after quarter-end, LCNB agreed to acquire First Capital Bancshares in a stock-and-cash transaction valued at approximately $19.6 million. First Capital had year-end 2011 assets of $148.2 million and deposits of $132.0 million. Closing was anticipated in Q4 2012 or Q1 2013, subject to shareholder and regulatory approvals and other conditions. LCNB said it might need regulatory approval for a special Bank dividend to fund the cash portion.
- Management stated LCNB already met the proposed fully phased-in regulatory capital requirements. The filing notes that capital rules were proposed, not yet fully implemented.
- Interest-rate risk is the primary market risk; LCNB did not use derivatives for hedging. Its simulation estimated a 6.02% increase in one-year net interest income under a 300-basis-point rate increase, but a 3.74% decrease in economic value of equity. Management cautioned that model assumptions are uncertain and the simulations are not forecasts.
- Off-balance-sheet commitments totaled $82.4 million, including credit commitments, unused lines, Bounce Protection amounts, and standby letters of credit. Management believed liquidity was sufficient to fund commitments. Normal-course legal claims were not expected by management to have a material effect.
- Other notable items included a $76,000 write-down of foreclosed real estate in the first quarter and increased mortgage-loan originations and sales. Management attributed unrealized securities losses primarily to interest-rate movements and did not consider the securities other-than-temporarily impaired.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no material change in risk factors.
Important facts for investors to verify
- Acquisition approvals, final consideration and financing needs, expected closing timing, and any impact on capital or dividends.
- Whether the unusually strong public-fund deposit growth persists and how its volatility affects liquidity and funding costs.
- Loan performance, including commercial real-estate exposures, restructured loans, charge-offs, and the increase in foreclosed property.
- Net interest margin trends and the sensitivity of earnings and economic value to changing interest rates.
- The sustainability of gains from securities and mortgage-loan sales and first-quarter trust fees, alongside ongoing operating-cost trends.