LCNB Corp. — Q2 2022 Form 10-Q
Business context and reporting period. LCNB is an Ohio bank holding company. This unaudited report covers the quarter and six months ended June 30, 2022; balance-sheet comparisons are against December 31, 2021. Dollar amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $15.17 | $14.37 | $29.39 | $28.74 |
| Net income | $5.62 | $5.29 | $10.14 | $10.53 |
| Diluted EPS | $0.49 | $0.41 | $0.87 | $0.82 |
| Provision for loan losses | $0.38 | $(0.02) credit | $0.43 | $(0.07) credit |
| Non-interest income | $3.53 | $4.31 | $7.08 | $7.78 |
| Non-interest expense | $11.47 | $12.21 | $23.72 | $23.70 |
- Margins: Taxable-equivalent net interest margin was 3.54% in Q2 versus 3.47% a year earlier; for the first half it was 3.45% versus 3.57%. First-half net interest income rose 2.3%, but margin narrowed.
- Balance sheet at June 30: Assets were $1.913 billion; deposits $1.659 billion; net loans $1.368 billion; cash and cash equivalents $31.8 million. Total assets rose 0.5% from year-end and deposits rose 1.8%.
- Credit: Gross loans were $1.373 billion, up $4.0 million from year-end. The allowance was $5.8 million, or about 0.42% of gross loans. Non-accrual loans were $0.6 million, down from $1.5 million at year-end; reported past-due loans over 90 days and still accruing were zero. First-half net charge-offs were $99,000.
- Cash flow, first half: Operating activities provided $11.3 million; investing activities used $21.7 million; financing activities provided $24.0 million. Cash increased $13.7 million to $31.8 million.
- Debt and liquidity: Short-term borrowings were $5 million and long-term debt $25 million, compared with $0 and $10 million at year-end. The $15 million term loan carries a fixed 4.25% rate and matures in June 2025. Management reported approximately $220.4 million of remaining FHLB capacity and $55 million available on correspondent-bank lines, and stated it had experienced no liquidity or operational problems.
- Capital and equity: The Bank’s Tier 1 risk-based capital ratio was 12.01%, total risk-based capital 12.40%, and leverage ratio 9.58%; the Bank and parent were categorized as well-capitalized. Shareholders’ equity fell 14.9% to $203.0 million, largely reflecting a $20.1 million after-tax securities-related comprehensive loss and $21.6 million of share repurchases.
Material changes and notable items
- Q2 net income increased 6.2% year over year; first-half net income declined 3.7%. EPS increased in both periods, while weighted-average shares fell substantially, reflecting repurchases.
- Q2 net interest income improved as loan and taxable-securities balances grew and deposit costs fell. For the first half, lower loan yields partly offset higher taxable-securities income and reduced deposit expense.
- Non-interest income declined, in part because 2021 included a $508,000 Ohio financial-institutions-tax refund; 2022 also reflected lower fiduciary income in Q2 and unrealized losses on equity securities.
- Non-interest expense was broadly flat for the first half. Results included an $889,000 gain on sale of foreclosed property, partly offset by a $140,000 impairment charge related to the Colerain office building, which was sold in July 2022.
- Available-for-sale debt securities had $27.5 million of gross unrealized losses at June 30, compared with $4.1 million at year-end. Management attributed the losses primarily to interest-rate movements, not credit deterioration, and said it did not intend, and was not more likely than not required, to sell before recovery.
- LCNB repurchased 1,084,723 shares during the first half for $21.6 million. A new plan authorized up to 500,000 additional shares and was set to expire around December 31, 2022.
Outlook, risks, and contingencies
- The filing provides no formal earnings or revenue guidance. Management noted further Federal Reserve rate increases were expected during the remainder of 2022 and into 2023. Its June 30 sensitivity analysis estimated that a 100-basis-point rate increase would raise one-year net interest income by 0.84%, while a 400-basis-point increase would raise it by 4.27%; a 400-basis-point increase was estimated to reduce economic value of equity by 8.38%. Management cautioned that these models are assumption-dependent and are not forecasts.
- Risks highlighted include rising rates and borrower repayment stress, economic disruption from COVID-19 and the Russia/Ukraine conflict, possible credit deterioration and collateral-value declines, competition, deposit and loan growth challenges, and cybersecurity threats. The company said the effects remain uncertain.
- Off-balance-sheet commitments totaled $351.8 million, including unused lines of credit and commitments to extend credit. Management believed liquidity was adequate. Capital expenditure commitments were approximately $1.0 million.
- LCNB expects CECL adoption for fiscal 2023 and anticipates an increase in the allowance for credit losses; the impact was not yet reasonably estimable. Management said implementation modeling was still being finalized.
- Management reported no material pending legal proceedings beyond routine business matters and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether deposit pricing and funding costs rise quickly enough to pressure net interest margin as market rates change.
- Whether credit quality, commercial real-estate exposure, and the allowance remain adequate as economic conditions evolve.
- The drivers and potential duration of securities-related unrealized losses, and any impact on capital or liquidity if securities must be sold.
- The sustainability of reported earnings after the foreclosed-property gain and the effect of share repurchases on per-share results and capital.
- The eventual CECL transition adjustment and any related effects on the allowance, earnings, and regulatory capital.