LCNB Corp. 2023 Form 10-K Summary
Business context and period: LCNB Corp. is an Ohio-based financial holding company operating primarily through LCNB National Bank, serving Southwestern and South Central Ohio and Northern Kentucky. This filing covers the fiscal year ended December 31, 2023; financial comparisons are primarily with 2022. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | 2023 | 2022 | Change / context |
|---|---|---|---|
| Net income | $12.6 million | $22.1 million | Down 42.9% |
| Diluted EPS | $1.10 | $1.93 | Down 43.0% |
| Net interest income | $56.3 million | $61.0 million | Down $4.7 million |
| Net interest margin, tax-equivalent | 3.14% | 3.55% | Down 41 basis points |
| Provision for credit losses | $2.1 million | $0.3 million | Includes $1.7 million for acquired non-PCD loans |
| Non-interest income | $15.4 million | $14.3 million | Up $1.1 million |
| Non-interest expense | $54.4 million | $48.1 million | Includes $4.7 million merger costs |
| Total assets | $2.29 billion | $1.92 billion | Up 19.4% |
| Net loans | $1.71 billion | $1.40 billion | Up 22.7% |
| Total deposits | $1.82 billion | $1.60 billion | Up 13.7% |
| Shareholders’ equity | $235.3 million | $200.7 million | Up 17.3% |
- Revenue and margins: Interest income rose to $79.6 million from $65.8 million, but interest expense increased much faster, to $23.3 million from $4.7 million. Higher deposit and borrowing costs more than offset loan growth and higher asset yields. Net interest margin is stated on a tax-equivalent basis.
- Profit drivers: Earnings were pressured by lower net interest income, higher credit-loss provision, and acquisition-related expenses. Fiduciary income increased to $7.1 million; loan-sale gains rose to $0.7 million. The effective tax rate was 17.2%, versus 17.9%.
- Cash flow: Operating activities provided $20.7 million, investing activities used $57.8 million, and financing activities provided $54.1 million. Cash and cash equivalents increased $17.0 million to $39.7 million.
- Credit quality: The allowance for credit losses on loans was $10.5 million, or 0.61% of loans, compared with $5.6 million, or 0.40%, at year-end 2022. Non-accrual loans were $80,000, versus $391,000. The 2023 allowance and provision are affected by adoption of CECL and the Cincinnati acquisition.
- Debt and liquidity: Short-term borrowings were $97.4 million and long-term debt $113.1 million, compared with $71.5 million and $19.1 million, respectively, in 2022. Management reported approximately $89.2 million of remaining FHLB capacity and $63.6 million available under correspondent lines at year-end. Uninsured deposits were estimated at $203.9 million, down from $212.7 million.
- Capital: The Bank was categorized as well capitalized. At year-end, its CET1 and Tier 1 risk-based ratios were each 10.17%, total risk-based capital was 10.75%, and leverage was 8.05%. Ratios declined from 2022.
Material changes and unusual items
- LCNB completed its acquisition of Cincinnati Bancorp, Inc. (CNNB) on November 1, 2023. It issued 2.04 million shares and paid $9.5 million cash; recorded goodwill was $20.3 million. The acquired company contributed approximately $1.5 million of net interest income and a $231,000 net loss after acquisition through year-end.
- LCNB reported $4.656 million in merger-related expense, including costs associated with CNNB and the pending Eagle Financial Bancorp transaction. Eagle’s merger was expected to close in the second quarter of 2024; completion and results remain uncertain.
- LCNB adopted CECL on January 1, 2023. Adoption increased the allowance for loan losses by $2.2 million and reduced retained earnings by $1.9 million, net of tax effects. Prior-year figures were not restated.
- Unrealized losses on available-for-sale securities remained substantial: $28.2 million gross at year-end 2023, although that was lower than $37.9 million in 2022. Management attributed the losses to interest rates, not credit impairment, and stated it did not expect to be required to sell before recovery.
- Common dividends were $0.85 per share for 2023, versus $0.81 in 2022. LCNB repurchased 199,913 shares during 2023; no repurchases occurred in the final quarter.
Outlook, risks, and contingencies
- The filing provides no specific earnings, margin, loan-growth, or deposit-growth guidance. Management said it believed liquidity was adequate for short- and long-term needs and reported no liquidity or operational problems.
- Interest-rate sensitivity modeling estimated that a sustained 100-basis-point increase would reduce one-year net interest income by 2.81%; a 300-basis-point increase would reduce it by 7.41%. Management cautioned that these models are assumption-dependent and are not earnings forecasts.
- Commercial real estate is a significant exposure: commercial real estate loans were approximately 64.2% of total loans at year-end. Risks include weaker property values, reduced borrower cash flows, and local economic deterioration.
- Other stated risks include deposit competition and deposit outflows, higher funding costs, interest-rate changes, acquisition integration, credit-loss estimation, cyber incidents, technology disruption, and regulatory changes. LCNB also noted industry-wide confidence and market volatility following bank failures in 2023.
- The Bank made certain dividends to the holding company in excess of the prior two years’ Bank net income limits in connection with the CNNB acquisition and a February 2024 payment. After-the-fact OCC approval was requested and remained outstanding in the filing.
- LCNB disclosed $267.4 million of credit commitments and $2.9 million of capital expenditure commitments. It stated routine claims and proceedings were not expected to materially affect its financial position or results. The auditor issued an unqualified opinion on the financial statements; the auditor did not express an opinion on internal control effectiveness.
Important facts for investors to verify
- Whether deposit pricing and borrowing costs stabilize enough to improve net interest margin, and whether deposit balances remain resilient.
- How the CNNB integration performs, whether acquisition fair values and goodwill are revised, and whether the Eagle merger closes on expected terms and timing.
- Whether the allowance for credit losses remains adequate as CECL forecasts evolve, particularly for commercial real estate and acquired loans.
- The status of OCC approval for the excess Bank dividend payments, and the effect of regulatory limits on future parent-company dividends.
- Whether unrealized securities losses recover without forced sales, and how capital ratios and liquidity capacity change with funding and market conditions.