LCNB Corp. — Q1 2020 Form 10-Q
Business context and period: LCNB is an Ohio-based bank holding company. This unaudited report covers the three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. Unless noted otherwise, dollar amounts below are in millions.
Financial results and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior date |
|---|---|---|
| Net income; diluted EPS | $5.026; $0.39 | Q1 2019: $4.627; $0.35 |
| Net interest income | $14.178 reported; $14.254 taxable-equivalent | Q1 2019: $13.391 reported; $13.536 taxable-equivalent |
| Net interest margin, taxable-equivalent | 3.92% | Q1 2019: 3.71% |
| Provision for loan losses | $1.173 | Q1 2019: $0.105 credit |
| Non-interest income / expense | $3.839 / $11.072 | Q1 2019: $2.772 / $10.700 |
| Total assets | $1,636.280 | December 31, 2019: $1,639.308 |
| Net loans / total deposits | $1,267.379 / $1,345.872 | December 31, 2019: $1,239.406 / $1,348.280 |
| Cash and cash equivalents | $24.795 | December 31, 2019: $20.765 |
| Long-term debt / shareholders’ equity | $35.996 / $233.478 | December 31, 2019: $40.994 / $228.048 |
| Operating cash flow | $1.305 | Q1 2019: $2.323 |
Q1 2020 investing cash flow was $12.245 and financing cash flow was $(9.520), producing a $4.030 increase in cash. The Bank’s reported capital ratios were 12.44% common equity Tier 1, 12.44% Tier 1, 12.82% total capital and 10.43% leverage; management said LCNB and the Bank were well-capitalized.
Material changes and notable items
- Net income rose about 8.6% year over year. Taxable-equivalent net interest income increased $0.718, reflecting loan growth and lower deposit and short-term borrowing costs; the margin improved to 3.92% from 3.71%.
- Loans, net, increased $27.973 from year-end, mainly in commercial and commercial real estate lending. Available-for-sale debt securities decreased $36.561, primarily from sales, maturities and calls; proceeds helped fund lending and debt paydown.
- The $1.173 loan-loss provision, versus a prior-year credit, reflected deterioration in the economic outlook related to COVID-19; management attributed about 67% of the increase to that downturn. Net charge-offs were $0.210, compared with net recoveries of $0.185 in Q1 2019. The allowance rose to $5.008 from $4.045.
- Non-interest income increased $1.067, including higher securities gains, bank-owned life insurance income and gains on equity investment sales. Bank-owned life insurance income included a mortality benefit. Salaries and benefits increased $0.606; total non-interest expense increased $0.372.
- The effective tax rate declined to 12.9% from 16.9%, including a tax benefit from CARES Act provisions. The company declared dividends of $0.18 per common share, versus $0.17 a year earlier.
- Nonaccrual loans declined to $2.829 from $3.210 at year-end. Loans more than 90 days past due and still accruing were $0.039; accruing restructured loans were $4.126, down from $6.609.
Outlook, risks and contingencies
- No numerical earnings or financial guidance was provided. Management emphasized that COVID-19’s duration and effects on borrowers, credit losses, loan income, markets, operations, liquidity and capital were uncertain and could not be estimated reliably.
- By the report date, LCNB had provided payment deferrals to more than 500 customers on loans totaling approximately $369 million, subject to stated eligibility criteria. Through April 30, after quarter-end, it reported assisting more than 300 small businesses and funding over $46 million of PPP loans.
- Management said liquidity was adequate and reported remaining FHLB borrowing capacity of approximately $93.4 million and about $55.0 million available under correspondent-bank lines. It had elected not to use the PPP Liquidity Facility at that time.
- Interest-rate sensitivity analysis estimated one-year net interest income increases of 0.85% under a 100-basis-point rate increase and 0.21% under a 100-basis-point decrease. Economic value of equity was estimated to decline 18.09% under a 400-basis-point increase and rise 13.30% under a 100-basis-point decrease. Management cautioned that these models rely on uncertain assumptions and are not forecasts.
- Management assessed goodwill at March 31 and concluded it was more likely than not that reporting-unit fair value exceeded carrying value, while noting continued monitoring. It expected CECL adoption, planned for fiscal 2023, to increase the allowance; the impact was not yet reasonably estimable.
- Off-balance-sheet commitments totaled $341.112, up from $276.425 at year-end. Management believed liquidity was sufficient for lending and capital commitments. Routine legal claims were not expected to have a material effect; no material pending legal proceedings were reported.
Important facts for investors to verify
- How borrower payment deferrals, PPP lending and subsequent economic conditions affect credit quality, provisioning and charge-offs.
- Whether loan growth, deposit mix and lower market rates sustain net interest income and margin.
- The source and durability of non-interest income increases, particularly securities and equity gains and the insurance mortality benefit.
- Liquidity and capital capacity if commitments are drawn or credit conditions worsen; monitor regulatory ratios and FHLB borrowing availability.
- Future CECL allowance effects and any goodwill impairment indicators as COVID-19 developments evolve.