LCNB Corp. 2021 Second-Quarter 10-Q Summary
Business context and reporting period
LCNB Corp. is an Ohio bank holding company whose principal subsidiary is LCNB National Bank. This unaudited filing covers the quarter and six months ended June 30, 2021; balance-sheet comparisons are with December 31, 2020. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial results and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $14.37 | $14.00 | $28.74 | $28.18 |
| Net income | $5.29 | $5.06 | $10.53 | $10.08 |
| Diluted EPS | $0.41 | $0.39 | $0.82 | $0.78 |
| Non-interest income | $4.31 | $3.32 | $7.78 | $7.16 |
| Non-interest expense | $12.21 | $11.12 | $23.70 | $22.19 |
- Taxable-equivalent net interest margin was 3.51% in Q2 versus 3.70% a year earlier, and 3.57% for the first half versus 3.81%.
- At June 30, total assets were $1,856.7 million, up 6.4% from year-end. Net loans were $1,312.1 million, up 1.4%; deposits were $1,577.3 million, up 8.4%. Available-for-sale debt securities increased 48.2% to $310.5 million.
- Cash and cash equivalents were $22.9 million. Long-term debt was $15.0 million, down $7.0 million from year-end; there were no short-term borrowings. Shareholders’ equity was $240.0 million.
- For the first half, operating cash flow was $7.6 million, investing cash flow was negative $122.2 million, and financing cash flow was positive $105.9 million. Cash declined $8.8 million.
- The Bank’s regulatory capital ratios at June 30 included 12.68% common equity Tier 1, 13.10% total risk-based capital, and a 9.69% leverage ratio. The filing states the Bank and Company were classified as well-capitalized.
Material changes versus prior comparable periods
- First-half net income rose 4.4% year over year. Lower deposit and borrowing costs and PPP loan fees supported net interest income, partly offset by lower asset yields. First-half PPP fees recognized in loan interest income were $0.916 million.
- Non-interest income increased $0.621 million in the first half. Higher fiduciary income and deposit fees contributed; the second quarter also included a one-time $0.508 million Ohio financial-institution tax refund.
- Non-interest expense rose $1.512 million in the first half, including higher employee, equipment, marketing, FDIC insurance, contracted-service, and other costs.
- Loan-loss provision was a credit of $0.067 million for the first half, compared with a $1.189 million provision in 2020. Net charge-offs were $0.009 million versus $0.218 million.
- Deposits grew, with balances in demand, NOW, and savings accounts increasing while IRA and time deposits decreased. The company attributed deposit growth partly to customer preference for liquidity.
- Accumulated other comprehensive income fell to $1.6 million from $4.0 million at year-end, principally reflecting market-driven declines in available-for-sale securities’ fair value. LCNB repurchased 261,304 shares in the first half.
Outlook, commentary, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management said it continued to monitor COVID-19 and anticipated further responses as conditions evolved. Management considered the allowance adequate, while noting its estimates are subjective and may change as information develops.
- COVID-related loans still on payment deferral totaled $10.4 million at June 30, down from $20.6 million at year-end. Loans remaining on modified terms under CARES Act Section 4013 also totaled $10.4 million. PPP loans outstanding were $23.8 million.
- Management cited COVID-19 and economic disruption, borrower repayment and collateral risks, interest-rate changes, competition, technology and cybersecurity, regulatory changes, and execution of business strategies among factors that could affect results.
- Interest-rate simulations indicated a 100-basis-point increase would reduce modeled one-year net interest income by 0.97%, while increases of 200 basis points or more were modeled to increase it. A 100-basis-point increase was modeled to reduce economic value of equity by 3.09%. Management cautioned these simulations are assumption-dependent, not forecasts, and LCNB does not use derivatives to hedge this risk.
- Remaining FHLB borrowing capacity was approximately $212.1 million, with another $55.0 million available through correspondent-bank lines. Management said liquidity was adequate. Commitments to extend credit totaled $266.7 million; capital expenditure commitments were $1.7 million. Management expected no material liability from routine legal matters.
- The company expects CECL adoption after December 15, 2022 and anticipates an increase in the allowance, but said the financial impact could not yet be reasonably estimated.
Important facts for investors to verify
- How much of reported earnings and future interest income depends on PPP fees, and how quickly those fees run off.
- Whether margin pressure persists as asset yields and deposit costs change, including under alternative interest-rate scenarios.
- Credit trends, including the adequacy of the allowance, deferred and restructured loans, and commercial real-estate exposure.
- Whether deposit growth remains stable and how the securities portfolio’s market-value movements affect equity and liquidity.
- Whether the increase in non-interest expenses is recurring, and the ongoing effects of the share-repurchase program on capital and per-share results.