LCNB Corp. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023. LCNB is an Ohio bank holding company. Q1 results include Cincinnati Bancorp (acquired November 1, 2023), so year-over-year comparisons reflect a larger business as well as changed operating conditions.
Financial performance
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Interest income | $24.8 million | $17.9 million |
| Net interest income | $13.9 million | $13.9 million; down $0.05 million |
| Tax-equivalent net interest margin | 2.72% in the table; MD&A states 2.73% | 3.28% |
| Provision for credit losses | $0.13 million expense | $0.06 million recovery |
| Non-interest income | $3.9 million | $3.6 million |
| Non-interest expense | $15.5 million | $12.5 million |
| Net income / diluted EPS | $1.9 million / $0.15 | $4.2 million / $0.37 |
| Operating cash flow | $(12.5) million | $2.5 million |
Net income fell about 54%. Higher loan interest income and non-interest income were outweighed by sharply higher funding costs and expenses. Interest expense rose to $10.9 million from $4.0 million, while non-interest expense increased by $2.9 million, including $0.8 million of merger costs. The effective tax rate was 14.0%, versus 17.8%.
Financial position, funding and credit
- At March 31, total assets were $2.28 billion, deposits $1.86 billion, and shareholders’ equity $233.7 million.
- Net loans were $1.65 billion, down $67.1 million from year-end, largely because $64.9 million of loans were transferred to held-for-sale. Held-for-sale loans totaled $75.6 million and were scheduled for sale with servicing rights in Q2.
- Deposits increased $34.1 million from year-end, but noninterest-bearing deposits declined $26.7 million as customers shifted toward interest-bearing accounts. Interest-bearing deposits cost more year over year; the average rate on demand and money-market deposits was 2.45%, versus 1.00%, and on IRA/time certificates was 4.42%, versus 2.35%.
- Short-term borrowings fell to $10.0 million from $97.4 million, while long-term debt rose to $162.6 million from $113.1 million, largely reflecting additional FHLB advances. Remaining FHLB borrowing capacity was approximately $118.8 million; correspondent-bank lines provided another $85 million.
- Cash and cash equivalents were $33.0 million, down $6.8 million from year-end. Operating cash use primarily reflected mortgage-loan originations for sale. Management reported no liquidity or operational problems and believes liquidity is adequate.
- The loan allowance was $10.6 million, or 0.64% of total loans, compared with 0.61% at year-end. Nonaccrual loans were $2.7 million (0.16% of loans), including a $2.6 million commercial real-estate loan that subsequently defaulted. Net charge-offs were $45,000.
- The bank was classified as well-capitalized. At March 31, its CET1 and Tier 1 risk-based capital ratios were 10.34%, total risk-based capital was 10.94%, and leverage was 8.08%.
Material changes, outlook and risks
- Interest income increased, notably on loans, but funding-cost increases more than absorbed the gain; the narrower net interest margin is a key trend. Management attributed higher funding costs to market-rate increases, deposit repricing and increased borrowing.
- Non-interest income benefited from fiduciary fees and residential mortgage-loan sale gains; it also included a $214,000 securities-sale loss. The securities portfolio had $29.6 million of unrealized losses on available-for-sale debt securities; management attributed these to interest rates, not credit deterioration, and said it did not expect to have to sell securities before cost recovery.
- LCNB acquired Eagle Financial Bancorp on April 12, 2024, after quarter-end. Purchase accounting for the acquired net assets remained in process. The acquisition added three Cincinnati offices; LCNB planned to consolidate a nearby office in July and did not expect a material financial impact.
- No numerical earnings or margin guidance is provided. Management describes liquidity as adequate, but identifies acquisition integration, credit losses and allowance adequacy, competition, deposit and loan growth, interest-rate changes, economic conditions, and technology/cybersecurity among risks.
- Interest-rate sensitivity analysis estimated that a 300-basis-point increase would reduce one-year net interest income by 7.57%; a 300-basis-point decrease would increase it by 5.82%. These simulations depend on assumptions and are not forecasts of actual results.
- Off-balance-sheet commitments totaled $302.1 million, including credit commitments and unused lines; amounts drawn may be lower. Management said routine legal claims are not expected to have a material effect.
Important facts for investors to verify
- Resolve the filing’s reported Q1 tax-equivalent margin discrepancy: 2.72% in the table versus 2.73% in MD&A.
- Track deposit mix, deposit pricing, borrowing levels and net interest margin as funding costs adjust.
- Review performance and integration costs for the Cincinnati Bancorp and Eagle Financial acquisitions, including final Eagle purchase accounting.
- Monitor the $75.6 million held-for-sale loan portfolio and whether the planned second-quarter sale occurs on expected terms.
- Assess commercial real-estate credit quality, the subsequently defaulted $2.6 million loan, and whether the allowance remains adequate as economic forecasts change.
- Consider liquidity and capital alongside the $302.1 million in commitments and the bank’s regulatory dividend constraints.