LCNB Corp. — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2019; comparisons are with the three and six months ended June 30, 2018. Unless stated otherwise, dollar amounts below are in millions.
Business context and financial performance
LCNB is a bank holding company. Its primary earnings source is net interest income. The 2019 results include a full quarter of Columbus First Bancorp (CFB), acquired May 31, 2018; the 2018 second-quarter comparison includes CFB only from the acquisition date.
- Q2: Net interest income was $13.59, up from $11.37; net income was $4.73 versus $2.74; diluted EPS was $0.36 versus $0.25. Total interest income was $16.33 and noninterest income was $3.00.
- First half: Net interest income was $26.98 versus $21.56; net income was $9.36 versus $5.45; diluted EPS was $0.71 versus $0.52. Total interest income was $32.44 and noninterest income was $5.77.
- Net interest margin: On a taxable-equivalent basis, Q2 margin was 3.72% versus 3.63%; first-half margin was 3.71% versus 3.61%. Q2 net interest income on that basis increased $2.15, with higher interest income partly offset by higher interest expense.
- Costs and credit provision: Q2 noninterest expense was $10.83 versus $10.71; first-half expense was $21.53 versus $20.26. Loan-loss provision was $0.05 in Q2 and a $0.05 credit for the first half, compared with provisions of $0.22 and $0.30 in the respective 2018 periods.
- Balance sheet at June 30: Assets were $1,642.01; net loans $1,226.15; deposits $1,357.96; shareholders’ equity $222.97. Loans grew $31.57 and deposits grew $57.04 from year-end 2018.
- Debt and liquidity: Short-term borrowings were zero, down from $56.23 at year-end; long-term debt was $41.99, down from $47.03. Cash and cash equivalents were $23.19. Remaining FHLB borrowing capacity was about $87.4, with another $40.0 available under correspondent-bank lines.
- Cash flow, first half: Operating activities provided $8.25; investing activities provided $9.27; financing activities used $14.37. Cash and cash equivalents increased $3.15 to $23.19.
Material changes and management commentary
- Management attributed higher loan interest income primarily to loan growth and higher yields; CFB loans contributed significantly to the year-over-year average loan increase. Higher deposit costs and greater average interest-bearing liabilities partly offset this benefit.
- Net loans increased amid organic growth. LCNB sold $50.3 of available-for-sale debt securities during the first half and used funds for loan growth and to reduce borrowings. Available-for-sale securities declined $39.76 from year-end.
- Deposits increased partly because of a $47.0 increase in local-government public deposits, which management notes can be volatile and seasonal. Total deposits also grew as interest-bearing deposits rose.
- Bank capital ratios remained above the stated well-capitalized thresholds. At June 30, the Bank’s CET1 and Tier 1 risk-based ratios were each 12.44%, total risk-based capital was 12.77%, and leverage was 9.95%.
- LCNB adopted lease accounting on January 1, 2019, recognizing $5.69 in operating lease right-of-use assets and $5.62 in lease liabilities. This is a balance-sheet presentation change, with no prior-period restatement.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- LCNB was preparing to adopt the expected-credit-loss standard (CECL), effective for it beginning in 2020. Management expected the standard to increase the allowance for loan losses, but said the financial impact could not yet be reasonably estimated.
- Key disclosed risks include interest-rate changes, economic conditions, loan credit losses, competition, deposit and loan growth, acquisition integration, cybersecurity and regulatory changes. Interest-rate simulations indicated that a 100-basis-point increase would raise modeled one-year net interest income 1.19%, while a 100-basis-point decrease would reduce it 1.09%; management cautions these models are not forecasts.
- Off-balance-sheet commitments totaled $242.22, including credit commitments and standby letters of credit. Capital expenditure commitments were approximately $3.75. Management said liquidity was sufficient to meet lending and capital commitments. Routine claims and proceedings were not expected to have a material effect.
- Q2 2019 merger-related expense was $0.02 versus $0.86 in Q2 2018; first-half amounts were $0.09 and $1.61. The company also recorded an impairment charge on other real estate owned in Q2 2019; the filing does not provide a clear amount for that charge. Lower other expense partly reflected the absence of a $0.65 office-building impairment recorded in Q2 2018.
- The board authorized a repurchase program of up to 500,000 shares. During Q2, LCNB repurchased 342,085 shares for approximately $5.84.
Important facts for investors to verify
- Assess earnings comparability given that CFB contributed for a full quarter in 2019 but only from May 31 in the 2018 comparison period.
- Track deposit pricing and the stability of public-fund deposits, along with loan growth and net interest margin.
- Review commercial real-estate concentration, criticized loans, nonperforming assets and the adequacy of the allowance; the filing reports an allowance of $4.11 and nonaccrual loans of $2.96 at June 30.
- Monitor CECL implementation and its eventual effect on reserves, earnings and capital.
- Verify the use and remaining authorization of the share repurchase program and the company’s capacity to maintain dividends and liquidity.