LCNB Corp. — Q1 2022 Form 10-Q
Business context and reporting period: LCNB Corp. is an Ohio bank holding company whose subsidiaries include LCNB National Bank. This unaudited filing covers the three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Unless noted otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q1 2022 | Prior comparable period / date |
|---|---|---|
| Net interest income | $14.223 | $14.372 in Q1 2021 |
| Tax-equivalent net interest margin | 3.35% | 3.68% in Q1 2021 |
| Net income | $4.523 | $5.240 in Q1 2021 |
| Basic and diluted EPS | $0.38 | $0.41 in Q1 2021 |
| Non-interest income / expense | $3.550 / $12.250 | $3.465 / $11.492 in Q1 2021 |
| Total assets | $1,899.630 | $1,903.629 at Dec. 31, 2021 |
| Net loans | $1,373.991 | $1,363.939 at Dec. 31, 2021 |
| Total deposits | $1,636.606 | $1,628.819 at Dec. 31, 2021 |
| Short-term borrowings / long-term debt | $24.746 / $10.000 | $0 / $10.000 at Dec. 31, 2021 |
| Shareholders’ equity | $206.875 | $238.604 at Dec. 31, 2021 |
Net interest income plus non-interest income was $17.773, compared with $17.837 in Q1 2021. Operating cash flow was $4.603, versus $4.039; investing activities used $12.070, versus $67.846; financing activities provided $9.272, versus $73.221. Cash and cash equivalents ended the quarter at $19.941.
The allowance for loan losses was $5.530, or about 0.40% of gross loans. Q1 provision was $0.049, compared with a $0.052 credit a year earlier; net charge-offs were $0.025, versus net recoveries of $0.003. Non-accrual loans were $1.455, and accruing troubled debt restructurings were $2.280.
Material changes and management commentary
- Net income fell about 14% year over year. Management cited lower loan yields and fewer recognized PPP fees, a modestly higher loan-loss provision, and increased non-interest expense. Salary and employee benefit expense rose $0.782, partly offset by lower intangible amortization.
- Tax-equivalent net interest income declined $0.159. Loan interest income fell $0.749, including lower PPP fee recognition ($0.248 in Q1 2022 versus $0.523 in Q1 2021); taxable debt-security income rose $0.377. Net interest margin declined 33 basis points.
- Loans grew $10.052 from year-end, primarily in commercial real estate and commercial and industrial lending. Deposits rose $7.787; noninterest-bearing deposits increased while interest-bearing deposits declined slightly.
- Available-for-sale securities declined $14.713 in carrying value from year-end. Unrealized losses on these securities, net of tax, reduced quarterly comprehensive income by $13.189 and increased accumulated other comprehensive loss to $14.997. Management attributed the security losses primarily to market interest-rate changes, not credit deterioration, and said it did not intend or expect to be required to sell the securities before recovery.
- Shareholders’ equity fell $31.729, reflecting the securities-related OCI loss and a $21.086 increase in treasury shares. LCNB repurchased 1,051,688 shares at $20 per share ($21.034 million) outside its existing publicly announced repurchase program. The company also reported $24.746 of short-term borrowings, including a fully drawn $20 million revolving line obtained during the quarter; management said the borrowing financed the repurchase.
- The Bank’s reported capital ratios remained above regulatory well-capitalized thresholds: CET1 12.05%, Tier 1 risk-based 12.05%, total risk-based 12.42%, and leverage 9.54%. The Bank had approximately $225.5 million of remaining FHLB borrowing capacity and $50.3 million available through correspondent-bank credit lines.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management said results for the quarter are not necessarily indicative of full-year results, and it continued to monitor COVID-19 effects. The company identified interest-rate changes, borrower repayment capacity, economic disruption from COVID-19 and the Russia/Ukraine conflict, competition, technology and cybersecurity, and regulatory changes among risks. The filing specifically noted that further rate increases could raise borrower costs and credit risk or weaken loan demand.
Interest-rate models indicated that a 200-basis-point increase would raise modeled one-year net interest income by 1.55%, while a 100-basis-point increase would reduce it by 0.47%. A 100-basis-point decline produced a modeled 22.34% increase in economic value of equity, slightly outside LCNB’s stated acceptable range. Management cautioned that model assumptions are uncertain and the simulations are not forecasts.
Off-balance-sheet commitments totaled $320.620, primarily credit commitments and unused lines. Management believed liquidity was sufficient to meet lending and capital expenditure commitments. Routine claims and proceedings were not expected to have a material effect. LCNB planned to adopt CECL for fiscal 2023 and expected the standard to increase the allowance, but said the impact could not yet be reasonably estimated. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- How rising rates affect deposit costs, loan yields, net interest margin, and borrower credit quality, particularly given the quarter’s lower loan yield and rate sensitivity results.
- The size and timing of the CECL allowance increase expected upon adoption in 2023, and how economic forecasts affect the estimate.
- The rationale, funding, and capital and liquidity implications of the $21.034 million share repurchase made outside the standing repurchase program.
- Whether unrealized securities losses remain attributable to rates rather than credit deterioration, and whether any liquidity needs could require securities sales.
- Trends in commercial real estate concentration, criticized loans, non-accruals, and the $320.620 million of off-balance-sheet commitments.