Business context and reporting period
LCNB Corp. is an Ohio bank holding company operating primarily in southwestern and south-central Ohio through LCNB National Bank. Its community banking business includes commercial, real estate, residential, consumer and agricultural lending, deposits, wealth management and investment services. This Form 10-K reports the fiscal year ended December 31, 2022; it does not provide standalone fourth-quarter results.
Financial performance and condition
| Metric | 2022 | 2021 |
|---|---|---|
| Net income | $22.1 million | $21.0 million |
| Basic and diluted EPS | $1.93 | $1.66 |
| Net interest income | $61.0 million | $57.1 million |
| Net interest margin, tax-equivalent | 3.55% | 3.45% |
| Total non-interest income | $14.3 million | $16.2 million |
| Total non-interest expense | $48.1 million | $48.0 million |
| Provision for (recovery of) loan losses | $0.25 million | $(0.27) million |
| Operating cash flow | $25.2 million | $17.8 million |
- Total assets were $1.919 billion, up 0.8%; net loans were $1.396 billion, up 2.3%.
- Total deposits were $1.605 billion, down 1.5%. Cash and cash equivalents ended the year at $22.7 million.
- Cash flows were $25.2 million provided by operations, $44.9 million used in investing and $24.2 million provided by financing; cash increased $4.6 million.
- Year-end borrowings included $71.5 million short-term and $19.1 million long-term debt. The company reported approximately $160.6 million in remaining FHLB borrowing capacity and $38.5 million available under correspondent lines.
- The Bank’s regulatory capital ratios were 11.94% CET1, 11.94% Tier 1 risk-based, 12.31% total risk-based and 9.72% leverage; it was classified as well capitalized.
Material changes versus the prior comparable period
- Net income increased 5.5%, while EPS rose from $1.66 to $1.93. LCNB repurchased 1.213 million shares in 2022, approximately 9.8% of shares outstanding at year-end 2021, contributing to the reduction in weighted-average shares.
- Tax-equivalent net interest income increased $3.9 million as loan and taxable-securities income rose with higher rates and average balances. Interest expense increased $0.7 million; the reported net interest margin improved 10 basis points.
- Non-interest income fell $1.9 million, mainly from lower fiduciary income, mortgage-loan sale gains and other operating income. Fiduciary fees were affected by lower market values of managed assets.
- Available-for-sale debt securities had $37.9 million of gross unrealized losses at year-end, largely attributed by management to interest-rate and market changes. After-tax accumulated other comprehensive loss increased to $30.0 million from $1.8 million, reducing shareholders’ equity to $200.7 million from $238.6 million.
- Deposits declined $23.8 million amid rate-driven disintermediation, partly offset by $32.1 million of growth in ICS reciprocal deposits. Short-term borrowings rose from zero to $71.5 million. LCNB also obtained a $15 million term loan, partly offset by repayment of a matured $5 million FHLB advance.
- Credit quality indicators improved: non-accrual loans were $0.4 million versus $1.5 million, and the allowance was $5.6 million, or 0.40% of loans, versus $5.5 million, also 0.40%.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings, revenue or margin guidance. Management said liquidity was adequate and reported no liquidity or operational problems, while noting that forecasts and market-risk models depend on uncertain assumptions.
- Interest-rate exposure is a key risk. The FOMC raised its target range by 425 basis points during 2022. The company’s one-year simulation estimated net interest income declines of 0.70% to 1.09% under rate increases of 100 to 300 basis points; management cautioned that model results are not forecasts.
- Commercial real estate lending is substantial: $936.3 million of the $1.401 billion loan portfolio at year-end. The filing highlights potential borrower, collateral-value and local economic risks, alongside concentration, liquidity, deposit competition, cybersecurity and operational risks.
- Uninsured deposits were estimated at $212.7 million. Commitments to extend credit, unused lines and standby letters totaled $321.4 million; amounts drawn may differ from commitments.
- CECL was adopted January 1, 2023. LCNB estimated increases of approximately $2.1 million in the loan allowance and $0.5 million for unfunded commitments, with an estimated $1.6 million reduction to retained earnings after tax. The filing said the separate adoption of ASU 2022-02 had no material impact.
- The FDIC’s assessment-rate increase began in 2023; LCNB estimated it would have added approximately $349,000 to 2022 premiums if then in effect. A separate industry assessment related to support for uninsured depositors at Signature Bank and Silicon Valley Bank was announced in March 2023; its timing and amount were undetermined.
- Unusual 2022 items included $471,000 of losses on sales of two office buildings, an $889,000 gain from sales of foreclosed property, and $292,000 of losses on equity securities. The Hunter branch closed in January 2023.
- The 2022 financial statements received an unqualified audit opinion. The auditor identified the allowance for loan losses, particularly qualitative adjustments on collectively evaluated loans, as a critical audit matter. The company was not required to obtain, and the auditor did not express an opinion on, internal-control effectiveness.
Important facts for investors to verify
- Whether deposit trends, uninsured-deposit levels and borrowing needs changed materially after year-end, and how available funding capacity compares with actual liquidity needs.
- How the interest-rate environment affected deposit costs, loan yields and net interest margin after 2022; compare actual results with the filing’s sensitivity assumptions.
- Whether the CECL reserve increase and related retained-earnings adjustment matched the estimates, and whether credit quality or commercial real estate exposures have since deteriorated.
- The realized or continuing effect of securities valuation losses on capital, liquidity and the ability to hold investments until recovery.
- The cost of higher FDIC assessments and any special assessment, alongside the effects of the 2022 share repurchases, new 2023 repurchase authorization and dividend requirements.