LCNB Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. LCNB is an Ohio bank holding company whose subsidiaries provide banking and related financial services. Figures are unaudited; dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $15.44 | $14.07 | $44.83 | $42.81 |
| Net income | $5.58 | $4.82 | $15.72 | $15.35 |
| Diluted EPS | $0.49 | $0.39 | $1.36 | $1.21 |
| Provision for (recovery of) loan losses | ($0.16) | $0.31 | $0.27 | $0.24 |
| Non-interest income | $3.58 | $4.11 | $10.66 | $11.89 |
| Non-interest expense | $12.35 | $12.03 | $36.07 | $35.73 |
- Q3 net income rose about 16% year over year; nine-month net income rose about 2%. Q3 net interest income increased about 10%, and nine-month net interest income increased about 5%.
- Taxable-equivalent net interest margin was 3.54% in Q3 versus 3.32% a year earlier; nine-month margin was 3.48% versus 3.49%. Management cited loan growth, higher yields on taxable securities and loan prepayment fees. Q3 prepayment penalty income was $265,000; nine-month total was $998,000.
- Non-interest income declined year over year, reflecting lower fiduciary income, fewer loan-sale gains, and unrealized losses on equity investments. The 2021 nine-month comparison included a one-time $508,000 Ohio financial institutions tax refund.
- Q3 expenses included $332,000 in office-building sale losses. Nine-month other real estate owned expense reflected an $889,000 gain on a property sale; office-building sale losses for the nine-month period were $471,000.
- Cash provided by operations for the first nine months was $18.34 million, versus $14.79 million in 2021. Investing activities used $24.61 million and financing activities provided $17.59 million. Ending cash and cash equivalents were $29.46 million, up from $18.14 million at year-end 2021.
Financial position, credit and liquidity
- Total assets were $1.905 billion at September 30, essentially unchanged from year-end 2021. Net loans were $1.371 billion, up $7.1 million; deposits were $1.657 billion, up $28.6 million.
- Loan growth was concentrated in commercial real estate and commercial and industrial loans, partly offset by declines in residential real estate, consumer and agricultural loans. Gross loans were $1.377 billion; the allowance was $5.64 million, approximately 0.41% of gross loans.
- Non-accrual loans were $465,000, down from $1.48 million at year-end 2021. There were no loans 90 days past due and still accruing. Accruing troubled debt restructurings were $1.28 million, versus $2.62 million at year-end.
- Shareholders’ equity fell to $195.44 million from $238.60 million. The main pressures were $29.80 million of nine-month other comprehensive loss, principally unrealized losses on available-for-sale securities, and $22.98 million of share repurchases. Net income partly offset these items.
- Available-for-sale debt securities had a $290.42 million fair value against $330.09 million amortized cost. Management attributed unrealized losses primarily to interest-rate changes, and stated it did not intend, and was not more likely than not required, to sell before recovery of amortized cost.
- Long-term debt was $24.54 million, including a $14.54 million term loan at 4.25% due June 2025 and $10 million of FHLB advances. Short-term borrowings were $4 million. Management reported approximately $206.5 million of remaining FHLB borrowing capacity and $56 million available under correspondent-bank lines.
- The Bank was categorized as well-capitalized. At September 30, its CET1 and Tier 1 risk-based capital ratios were 12.02%, total risk-based capital was 12.39%, and leverage ratio was 9.57%. Management reported no liquidity or operational problems.
Outlook, risks and notable items
- The filing gives no specific earnings or revenue guidance. Management reported that the Federal Funds target rate had risen 300 basis points in the first nine months of 2022 and that further increases were forecast at the time. Its interest-rate sensitivity model estimated one-year net interest income would rise 4.99% under an immediate 400-basis-point increase; estimated economic value of equity would fall 12.51% under that scenario. Management cautioned that the models are assumption-dependent and are not forecasts.
- Key risks discussed include further rate increases and borrower repayment stress, economic disruption related to COVID-19 and the Russia/Ukraine conflict, credit losses, reduced borrowing demand, competition, and cybersecurity or technology incidents.
- LCNB expected to adopt the CECL credit-loss standard for fiscal 2023. Management estimated adoption could increase the allowance for loan losses by 24% to 53%, while noting that modeling and potential effects were still under review.
- During the first nine months, LCNB repurchased 1,172,456 shares for $22.98 million, equal to 9.4% of shares outstanding at year-end 2021. A May 2022 plan authorized repurchases of up to 500,000 shares and was scheduled to expire around December 31, 2022.
- Management said the FDIC assessment-rate increase scheduled to begin in 2023 would have added approximately $88,000 to its assessment if applied to the September 2022 payment. It also cited an OCC assessment reduction expected to take effect with the March 2023 assessment.
- Management believed the allowance was adequate and that liquidity was sufficient to fund lending and capital expenditure commitments. It reported effective disclosure controls and no material pending legal proceedings.
Important facts for investors to verify
- Whether deposit pricing and funding costs keep pace with further rate moves, and how that affects net interest margin and earnings.
- Whether loan growth, borrower performance and the allowance remain sound, particularly in commercial real estate and commercial lending.
- The eventual CECL adoption impact compared with the disclosed estimated 24%–53% allowance increase.
- How much of the securities-related accumulated other comprehensive loss may persist or affect capital if securities are sold.
- The effect of repurchases and added borrowing on capital, liquidity, per-share results and future dividends.