LCNB Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. LCNB is a bank holding company whose operations are primarily conducted through LCNB National Bank. The interim financial statements are unaudited and were reviewed by the independent accounting firm.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $7.455 million | $6.214 million | $21.793 million | $18.922 million |
| Provision for loan losses | $178,000 | $436,000 | $369,000 | $742,000 |
| Non-interest income | $2.047 million | $2.205 million | $6.732 million | $6.296 million |
| Non-interest expense | $6.163 million | $5.564 million | $19.578 million | $16.342 million |
| Net income | $2.357 million | $1.847 million | $6.433 million | $6.111 million |
| Diluted EPS | $0.30 | $0.27 | $0.83 | $0.90 |
Q3 net income rose about 28%; nine-month net income rose about 5%, while nine-month diluted EPS declined about 8%, reflecting the larger share count. Dividends declared were $0.16 per share for Q3 and $0.48 per share for nine months, unchanged from the comparable periods.
Tax-equivalent net interest margin was 3.57% in Q3 versus 3.44% a year earlier, and 3.55% for the first nine months, essentially unchanged year over year. Management attributed higher net interest income mainly to greater average earning assets from the First Capital acquisition; lower market yields partly offset volume growth. The effective tax rate was 25.0% for nine months versus 24.9%.
Financial position, cash flow and liquidity
- At September 30, 2013, total assets were $942.3 million, loans net of allowance were $562.7 million, deposits were $808.3 million, and shareholders’ equity was $92.2 million. At December 31, 2012, these were $788.6 million, $450.3 million, $671.5 million, and $82.0 million, respectively. Growth reflects the January acquisition as well as other balance-sheet activity.
- Cash and cash equivalents were $14.7 million. Nine-month operating cash flow was $6.8 million, investing cash outflow was $8.5 million, and financing cash inflow was $2.9 million; cash increased $1.2 million from year-end.
- Short-term borrowings were $22.8 million and long-term debt was $12.4 million, compared with $13.8 million and $13.7 million at year-end. Management reported liquid assets of $286.0 million, or 30.3% of assets, versus $272.0 million, or 34.5%, at year-end. Core deposits were 81.1% of deposits, down from 83.6%, primarily due to growth in public-fund deposits, which management described as potentially seasonal and volatile.
- Regulatory capital ratios at September 30 were 13.26% Tier 1 risk-based, 13.86% total risk-based, and 8.19% leverage. The company and Bank were reported as “well-capitalized.”
Material changes and notable items
- LCNB completed its $20.2 million stock-and-cash acquisition of First Capital Bancshares and Citizens National Bank on January 11, 2013, adding six branches. The acquisition added approximately $98.9 million of loans and $136.8 million of deposits; $8.1 million of goodwill was recorded.
- Nine-month 2013 results include $1.326 million of acquisition integration and data-conversion costs. Citizens’ contribution to reported results, excluding these costs, was estimated at $4.561 million in revenue and $1.898 million in net income for the nine months. Management said acquisition accounting adjustments were substantially complete.
- Non-interest expense increased $3.236 million year over year for nine months, including acquisition-related costs and higher staffing and branch expenses. Non-interest income increased $436,000, mainly from deposit-account service charges; Q3 non-interest income declined $158,000, partly because securities and mortgage-loan gains were lower.
- Available-for-sale securities had a net unrealized loss reflected in accumulated other comprehensive income; accumulated other comprehensive income moved from $4.7 million at year-end to a $508,000 loss at September 30. Management attributed securities losses primarily to interest-rate movements, not credit deterioration, and did not consider them other-than-temporarily impaired.
- Credit indicators included $2.857 million of nonaccrual and 90-days-past-due accruing loans, 0.50% of total loans, versus $2.411 million and 0.53% at year-end. Including accruing restructured loans, the total was $17.032 million, or 3.01% of loans, versus $15.754 million, or 3.47%. The allowance for loan losses was $3.423 million; nine-month net charge-offs were $383,000 versus $807,000 in 2012.
- On October 28, LCNB agreed to buy Eaton National Bank for $24.75 million cash, subject to shareholder and regulatory approvals, with closing expected in Q1 2014. The transaction was expected to be funded by a $25 million common-stock offering. LCNB completed an offering on November 5 of 1,642,857 shares at $17.50 per share, receiving approximately $27.1 million net proceeds, intended primarily to fund the acquisition.
Outlook, risks and contingencies
The filing gives no quantified earnings or revenue guidance. Management said it believed liquidity was sufficient for lending and capital commitments and anticipated the Bank could pay expected dividends to the holding company without seeking regulatory approval. Management’s rate-sensitivity analysis estimated that a 100–300 basis-point rate increase would raise modeled one-year net interest income by 2.18%–6.83%, while reducing modeled economic value of equity by 4.12%–8.52%. The filing cautions that these simulations are assumption-dependent and are not forecasts.
Principal stated risks include interest-rate fluctuations, loan demand and credit losses, general economic conditions, and regulatory changes. LCNB did not use derivatives to hedge interest-rate risk. Off-balance-sheet commitments to extend credit and related items totaled $91.5 million. Management considered ordinary-course legal claims immaterial; the filing reported no material change in risk factors and no legal proceedings. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether First Capital integration delivers expected operating efficiencies and how recurring expenses compare with one-time merger and conversion costs.
- The effect of the Eaton National acquisition, its approvals and funding, and the dilution and use of proceeds from the November stock offering.
- Credit quality trends, especially commercial real-estate exposures, restructured loans, acquired impaired loans, and allowance adequacy as the loan portfolio grows.
- Public-fund deposit volatility, funding needs, and the effect of changing interest rates on both earnings and economic value.
- The sustainability of earnings per share and dividends given acquisition-related share issuance and the divergence between net-income and EPS growth.