LCNB Corp. — Q1 2023 Form 10-Q
Business context and reporting period: LCNB Corp. is an Ohio-based bank holding company. This unaudited quarterly report covers the three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. Unless noted otherwise, figures below are in U.S. dollars.
Financial results and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior date |
|---|---|---|
| Net interest income | $13.9 million | $14.2 million in Q1 2022 |
| Tax-equivalent net interest margin | 3.28% | 3.35% in Q1 2022 |
| Net income; diluted EPS | $4.2 million; $0.37 | $4.5 million; $0.38 in Q1 2022 |
| Provision / (recovery) for credit losses | $(57,000) recovery | $49,000 provision in Q1 2022 |
| Non-interest income | $3.6 million | $3.6 million in Q1 2022 |
| Non-interest expense | $12.5 million | $12.3 million in Q1 2022 |
| Operating cash flow | $2.5 million provided | $4.6 million provided in Q1 2022 |
| Total assets | $1.925 billion | $1.919 billion at December 31, 2022 |
| Total deposits | $1.604 billion | $1.605 billion at December 31, 2022 |
| Loans, net | $1.387 billion | $1.396 billion at December 31, 2022 |
| Shareholders’ equity | $204.1 million | $200.7 million at December 31, 2022 |
- Earnings and margins: Net income declined about 8% year over year. Tax-equivalent net interest income fell $284,000: interest income rose $2.8 million, but interest expense increased $3.1 million. Management attributed the pressure mainly to higher deposit and borrowing costs following rapid Federal Reserve rate increases.
- Revenue and expenses: Fiduciary income and deposit fees increased, offsetting lower gains from loan sales. Expenses rose $275,000, with higher salaries and benefits, occupancy costs, and FDIC premiums partly offset by lower equipment, state tax, and marketing expenses.
- Credit: The allowance for credit losses on loans was $7.9 million, or 0.56% of loans, versus $5.6 million, or 0.40%, at year-end. Non-accrual loans were $701,000 (0.05% of loans), compared with $391,000 (0.03%) at year-end. Q1 net charge-offs were $16,000.
- Funding and liquidity: Deposits were nearly unchanged overall, but noninterest-bearing deposits declined $32.5 million while interest-bearing deposits increased $31.4 million. Short-term borrowings rose to $76.5 million from $71.5 million; the quarter-end weighted rate was 5.05%. Cash and cash equivalents were $31.9 million. Management reported approximately $127.9 million of remaining FHLB capacity and $33.5 million available under correspondent-bank lines, and said liquidity was sufficient for lending and capital commitments.
- Debt and capital: Long-term debt was $18.6 million. The Bank was categorized as well-capitalized; its reported CET1 and Tier 1 risk-based capital ratios were each 11.97%, total risk-based capital was 12.52%, and leverage was 9.58%.
- Other material balance-sheet movement: AFS securities’ fair value increased to $293.4 million from $289.9 million, while accumulated other comprehensive loss improved by $5.0 million to $25.0 million, reflecting partial market-value recovery. AFS debt securities had $31.6 million of gross unrealized losses at quarter-end; management attributed fair-value declines to market and other factors and reported no credit-loss provision for the portfolio.
Changes, outlook, risks and unusual items
- LCNB adopted CECL on January 1, 2023 using the modified retrospective method. The filing’s adoption disclosures appear inconsistent: the equity roll-forward and adoption table show a $1.922 million reduction to opening retained earnings, while MD&A describes a $0.3 million increase to retained earnings and a $0.4 million decrease in the allowance. The adoption impact should be verified against the complete filing.
- The Board authorized a new repurchase plan for up to 500,000 shares. LCNB repurchased 107,028 shares during the quarter for $1.8 million; 407,932 remained authorized at March 31.
- Interest-rate sensitivity analysis estimated a 1.13% decline in one-year net interest income under a 100-basis-point rate increase and a 2.36% decline under a 300-basis-point increase. The economic value of equity model showed a 21.52% increase under a 200-basis-point rate decrease, slightly above the stated 20% limit for that scenario. Management cautioned that the models depend on uncertain assumptions and are not earnings forecasts.
- LCNB cited banking-industry stress, deposit competition, unrealized securities losses, possible recession, regulatory changes, and potential higher FDIC assessments as risks. The amount and timing of a potential special FDIC assessment were not determinable at filing.
- No earnings guidance or quantified forward outlook was provided. Management said the quarter’s results are not necessarily indicative of full-year results. It reported effective disclosure controls and no material change in internal control over financial reporting.
- Off-balance-sheet commitments totaled $302.9 million, down from $321.4 million at year-end; capital expenditure commitments were approximately $2.6 million. Management believed liquidity was sufficient to meet these commitments. It stated routine legal claims were not expected to be material.
Investor verification priorities
- Reconcile the conflicting CECL adoption effects on the allowance, deferred taxes, and retained earnings.
- Assess deposit mix and pricing, reliance on short-term borrowings, and available borrowing capacity as funding costs change.
- Monitor unrealized securities losses, interest-rate exposure, and the EVE down-200-basis-point result above the stated limit.
- Track loan delinquencies, non-accrual balances, commercial real estate concentration, and allowance assumptions under CECL.
- Confirm the eventual amount and timing of any special FDIC assessment and its effect on expenses.