LCNB Corp. — Q2 2023 Form 10-Q
Business context and reporting period. LCNB Corp. is an Ohio bank holding company whose principal subsidiary is LCNB National Bank. This unaudited filing covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are to December 31, 2022. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $14.18 | $15.17 | $28.12 | $29.39 |
| Provision for (recovery of) credit losses | $0.03 | $0.38 | ($0.03) | $0.43 |
| Non-interest income | $3.65 | $3.53 | $7.23 | $7.08 |
| Non-interest expense | $12.08 | $11.47 | $24.60 | $23.72 |
| Net income | $4.69 | $5.62 | $8.85 | $10.14 |
| Basic and diluted EPS | $0.42 | $0.49 | $0.79 | $0.87 |
- Net interest margin on a taxable-equivalent basis was 3.28% in Q2 2023 versus 3.54% in Q2 2022. The six-month table reports 3.28% versus 3.45%.
- Operating cash flow was $7.01 for the first half, versus $11.33 in 2022. Investing cash outflow was $27.45, while financing cash inflow was $23.75. Cash and cash equivalents increased $3.32 to $26.02.
Financial position, liquidity and capital
- Total assets were $1.951 billion, up $31.4 million from year-end. Net loans were $1.431 billion, up $35.7 million; gross loans were $1.439 billion.
- Deposits totaled $1.597 billion, down $8.3 million. Noninterest-bearing deposits fell $25.5 million while interest-bearing deposits rose $17.3 million, reflecting migration to interest-bearing products.
- Short-term borrowings increased to $112.3 million from $71.5 million; long-term debt was $18.1 million. Short-term borrowings carried a 5.12% weighted rate at quarter-end. Reported remaining capacity was approximately $100.5 million at FHLB and $47.7 million through correspondent-bank lines.
- Shareholders’ equity was $202.3 million. The Bank’s CET1 and total risk-based capital ratios were 11.66% and 12.21%, respectively; its leverage ratio was 9.48%. LCNB and the Bank were classified as well-capitalized.
- The allowance for credit losses was $8.0 million, or 0.55% of loans, compared with $5.6 million and 0.40% at year-end. Nonaccrual loans were $451,000, or 0.03% of loans. Net charge-offs were $49,000 for the first half.
- Available-for-sale debt securities had $35.1 million of gross unrealized losses at June 30; accumulated other comprehensive loss was $27.8 million, net of tax. Management said it did not intend, and did not expect to be required, to sell securities in unrealized-loss positions.
Changes, outlook and risks
- Interest income rose, including from higher loan yields, but interest expense increased more as deposit rates and short-term borrowing costs rose. Management attributed lower net interest income principally to higher-cost funding amid rapid Federal Funds Rate increases.
- Non-interest expense increased, including $440,000 of first-half merger expenses and higher FDIC premiums and employee costs. Comparisons also reflect an $889,000 gain on other real estate sold in 2022 and a $425,000 gain on a decommissioned office property sold in 2023.
- LCNB adopted CECL on January 1, 2023. Adoption increased the allowance by approximately $2.4 million and reduced retained earnings by $1.9 million, net of a $0.5 million tax impact. Management’s expected-loss estimates depend on economic forecasts and other assumptions.
- LCNB agreed to acquire Cincinnati Bancorp in a stock-and-cash transaction. The deal was subject to regulatory and CNNB shareholder approval and other conditions, with closing anticipated in Q4 2023; consideration may be reduced if specified adjusted equity falls below $36.8 million.
- No formal earnings or financial guidance is provided in the supplied filing text. Management reported no current liquidity or operational problems and believed liquidity was sufficient for lending and capital commitments.
- Management cited risks including higher rates and deposit competition, potential recession and securities losses, credit losses, acquisition integration, competition, cyber and technology risks, and regulatory changes. Interest-rate models showed a 1.05% reduction in one-year net interest income under a 100-basis-point rate increase; EVE sensitivity for downward rate shocks exceeded stated limits, which management considered acceptable because the modeled effect was positive.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. Routine legal claims were not expected to have a material effect.
Important facts for investors to verify
- Reconcile the filing’s six-month margin discussion: the table reports 3.28% for 2023 versus 3.45% for 2022, while the narrative refers to 3.54% as the prior-year first-half margin; 3.54% is also the Q2 2022 figure.
- Track deposit mix and funding costs, short-term borrowing dependence, and remaining borrowing capacity.
- Review the Cincinnati Bancorp merger approvals, closing timing, integration costs, and any adjustment to consideration.
- Monitor credit quality and CECL assumptions, especially commercial real estate exposures and changing economic forecasts.
- Assess unrealized securities losses and interest-rate sensitivity, including the disclosed EVE results under falling-rate scenarios.
- Confirm the effect of share repurchases and dividends on capital and per-share results.