LCNB Corp. 2024 Q3 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2024, for LCNB Corp. (LCNB), a community banking holding company headquartered in Lebanon, Ohio. The reporting period reflects the ongoing integration of two significant acquisitions: Cincinnati Bancorp, Inc. (closed November 2023) and Eagle Financial Bancorp, Inc. (closed April 2024). LCNB operates primarily in Southwest and South-Central Ohio and Northern Kentucky.
Key Financial Metrics
| Metric | Q3 2024 (3 Months) | Q3 2023 (3 Months) | YTD 2024 (9 Months) | YTD 2023 (9 Months) |
|---|---|---|---|---|
| Net Income | $4.53 million | $4.07 million | $7.37 million | $12.92 million |
| Diluted EPS | $0.31 | $0.37 | $0.53 | $1.16 |
| Net Interest Income | $14.97 million | $13.57 million | $44.08 million | $41.69 million |
| Non-Interest Income | $6.41 million | $3.58 million | $14.42 million | $10.81 million |
| Non-Interest Expense | $15.39 million | $12.24 million | $48.68 million | $36.85 million |
| Provision for Credit Losses | $0.66 million | ($0.11 million) recovery | $1.31 million | ($0.14 million) recovery |
| Total Assets | $2.35 billion | $1.97 billion (approx. avg) | Balance Sheet: $2.35 billion (Sep 30, 2024) vs $2.29 billion (Dec 31, 2023) | |
| Total Deposits | $1.92 billion | $1.82 billion (Dec 31, 2023) | Balance Sheet: $1.92 billion (Sep 30, 2024) vs $1.82 billion (Dec 31, 2023) | |
| Net Interest Margin (TE) | 2.84% | 3.04% | 2.81% | 3.20% |
| Return on Average Assets | 0.77% | 0.83% | 0.50% | 0.87% |
Material Changes vs. Prior Period
- Revenue Growth: Net interest income increased $1.40 million (Q3) and $2.39 million (YTD) compared to 2023, driven by higher average loan balances from acquisitions and increased loan yields. Non-interest income surged $2.83 million (Q3) and $3.61 million (YTD), primarily due to higher fiduciary income, service charges, and gains on loan sales.
- Expense Increases: Non-interest expenses rose $3.14 million (Q3) and $11.84 million (YTD). Increases were attributed to higher salaries and benefits due to expanded headcount from mergers, increased FDIC premiums, and amortization of intangibles. Merger-related expenses totaled $3.38 million for the nine months ended September 30, 2024.
- Profitability Decline (YTD): While Q3 net income grew year-over-year, YTD net income decreased significantly ($5.55 million decline) compared to 2023. This was largely due to the timing of merger expenses and a $0.84 million pretax loss on the sale of below-market rate loans acquired from Cincinnati Bancorp in Q2 2024.
- Balance Sheet: Total assets increased $55.3 million from year-end 2023. Loans held for sale increased to $35.7 million, while net loans decreased slightly due to transfers to held-for-sale. Long-term debt increased $42.5 million to fund liquidity and loan growth, while short-term borrowings were fully paid down.
Guidance, Outlook, and Risks
- Management Commentary: Management attributes the increase in net interest income to the successful integration of EFBI and CNNB, which expanded the loan portfolio. The decline in net interest margin (2.81% YTD vs 3.20% prior year) reflects the higher cost of funds in a rising rate environment, partially offset by higher loan yields.
- Acquisition Integration: The company continues to finalize purchase accounting adjustments for the EFBI and CNNB acquisitions. Goodwill increased by $10.7 million year-over-year due to these transactions.
- Interest Rate Risk: LCNB utilizes Interest Rate Sensitivity Analysis (IRSA) and Economic Value of Equity (EVE) models. As of September 30, 2024, a 100 basis point increase in rates is projected to decrease Net Interest Income (NII) by 0.85%, while a 100 basis point decrease is projected to decrease NII by 0.26%.
- Risks: Key risks include the successful integration of recent acquisitions, potential increases in loan charge-offs, competitive pressure on deposit costs, and the impact of changing interest rates on the net interest margin. The company also notes risks related to cybersecurity and economic conditions affecting its concentrated geographic market.
- Subsequent Event: On September 20, 2024, LCNB received a non-binding letter of intent to sell a loan pool with an unpaid principal balance of $39.5 million, expected to close in November 2024.
Investor Verification Checklist
- Merger Expense Run-Rate: Verify the trajectory of merger-related expenses to determine when they will normalize, as they significantly impacted YTD earnings.
- Deposit Cost Trends: Monitor the cost of interest-bearing deposits, which rose significantly (average rate on IRA/time certificates increased 165 bps YTD), to assess pressure on future net interest margins.
- Commercial Real Estate (CRE) Exposure: Review the $999 million CRE portfolio (64% of total loans), specifically the concentration in multi-family (26%) and office (12%) sectors, for potential credit deterioration.
- Loan Sale Strategy: Confirm the volume and profitability of future loan sales, as the company actively manages its portfolio by transferring loans to held-for-sale (e.g., $104.3 million sold YTD).
- Regulatory Capital: Verify that the "well-capitalized" status is maintained despite the integration of acquired assets and the associated goodwill amortization.