LCNB Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial statement amounts are in thousands unless noted. Results include Columbus First Bancorp (CFB) only from its May 31, 2018 acquisition, so reported year-over-year comparisons are affected by the merger.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Interest income | $15,070 | $11,055 | $38,750 | $32,853 |
| Net interest income | $13,103 | $10,147 | $34,659 | $30,207 |
| Provision for loan losses | $659 | $(12) | $962 | $225 |
| Non-interest income | $2,921 | $2,659 | $8,348 | $7,879 |
| Non-interest expense | $10,317 | $8,672 | $30,577 | $25,251 |
| Net income | $4,201 | $3,106 | $9,652 | $9,355 |
| Diluted EPS | $0.32 | $0.31 | $0.84 | $0.93 |
| Tax-equivalent net interest margin | 3.59% | 3.52% | 3.61% | 3.53% |
Q3 net income rose about 35%, while nine-month net income increased about 3%. Nine-month EPS declined despite higher net income, with weighted-average diluted shares rising to 11.49 million from 10.01 million, substantially reflecting shares issued for the CFB acquisition. The effective tax rate was 16.8% for Q3 and 15.8% for the nine months, compared with 25.1% and 25.8% in 2017; the lower federal statutory rate and tax-exempt income contributed.
Net interest income growth reflected higher average loan balances and loan yields, partly offset by higher deposit and borrowing costs and lower income from debt securities. Q3 average loans were $1.156 billion versus $824 million; average interest-bearing liability cost increased to 0.74% from 0.41%. Nine-month tax-equivalent net interest income was $35.2 million, up $3.7 million.
Financial position, cash flow and liquidity
- At September 30, total assets were $1.620 billion, loans net of allowance were $1.158 billion, deposits were $1.371 billion, and shareholders’ equity was $213.5 million. Asset growth from year-end 2017 was primarily acquisition-related.
- Cash and cash equivalents were $19.8 million, down from $25.4 million at year-end 2017. For the nine months, operating cash flow was $11.4 million, investing cash flow was $5.0 million provided, and financing cash flow was $21.9 million used.
- Short-term borrowings fell to zero from $47.0 million at year-end; long-term debt rose to $23.1 million, including debt assumed from CFB. Management reported approximately $121.7 million of remaining FHLB borrowing capacity and $40 million available under correspondent-bank lines, and stated liquidity was adequate.
- Regulatory capital ratios at September 30 included 12.97% CET1, 13.30% total risk-based capital and 10.01% leverage. LCNB and the Bank were reported as well-capitalized.
- The allowance for loan losses was $4.0 million, up from $3.4 million at year-end. Nonaccrual loans were $2.6 million; accruing restructured loans were $10.3 million. Management considered the allowance adequate.
Material changes and unusual items
- LCNB acquired CFB on May 31, 2018, issuing 3.25 million shares valued at $63.6 million and paying $783,000 to cancel share-based awards. The acquisition added approximately $282.1 million in loans and $244.4 million in deposits; acquisition goodwill was $29.1 million. Integration risk and final purchase accounting remain relevant.
- Merger-related expenses were $346,000 in Q3 and $2.0 million for the nine months. CFB contributed $2.99 million of revenue and $1.61 million of net income in Q3, excluding merger expenses.
- A $645,000 premises impairment charge was recorded during Q2 in connection with a branch building held for sale. Available-for-sale securities had a $4.6 million net-of-tax unrealized loss in other comprehensive income for the nine months, which management attributed primarily to interest-rate movements rather than credit deterioration.
- Net charge-offs were $246,000 in Q3 and $349,000 for the nine months. The nine-month provision increased to $962,000 from $225,000 a year earlier.
- Public-fund deposits contributed to deposit growth and may be seasonal or volatile. Commitments to extend credit and related off-balance-sheet commitments totaled $259.9 million at quarter-end.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management described interest-rate risk as the principal market risk and reported models indicating higher rates would increase one-year net interest income and economic value of equity; it cautioned that these simulations depend on uncertain assumptions and are not forecasts. Key disclosed risks include acquisition integration, credit losses, interest-rate changes, competition, economic conditions, loan and deposit growth, regulatory and tax changes, and technology or cybersecurity incidents. Management said ordinary-course legal matters were not expected to be material. It expects the forthcoming expected-credit-loss standard to increase the allowance, but the impact could not yet be reasonably estimated.
Investor verification priorities
- Assess organic loan and deposit growth separately from CFB’s acquired balances, and track whether acquisition integration costs and anticipated synergies develop as expected.
- Review loan quality, criticized and nonaccrual exposures, charge-offs, and allowance adequacy as the acquired portfolio seasons.
- Monitor deposit pricing, public-fund deposit volatility, funding costs, and the effect of rising rates on net interest margin.
- Verify the timing and final accounting for the branch sale and impairment, and follow the fair-value impact of securities losses on equity.
- Track dilution from acquisition shares and the estimated balance-sheet effect of adopting the expected-credit-loss standard.