LCNB Corp. — Q3 2020 Form 10-Q Summary
Business context and period. LCNB Corp. is an Ohio bank holding company. This unaudited report covers the three and nine months ended September 30, 2020; balance-sheet comparisons are with December 31, 2019. Management cautions that interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $13.529 million | $13.578 million | $41.705 million | $40.559 million |
| Provision for loan losses | $0.976 million | $0.264 million | $2.165 million | $0.213 million |
| Non-interest income | $4.278 million | $3.356 million | $11.436 million | $9.126 million |
| Non-interest expense | $11.653 million | $10.982 million | $33.841 million | $32.515 million |
| Net income | $4.250 million | $4.727 million | $14.333 million | $14.082 million |
| Diluted earnings per share | $0.33 | $0.36 | $1.11 | $1.07 |
| Taxable-equivalent net interest margin | 3.47% | 3.67% | 3.69% | 3.70% |
- Q3 net income fell about 10% year over year; nine-month net income rose about 2%. Higher credit-loss provisions weighed on earnings, partly offset by lower funding costs and higher non-interest income.
- Q3 taxable-equivalent net interest income declined $0.084 million year over year. For nine months, it increased $0.999 million. Lower rates reduced asset yields, while lower deposit and borrowing costs reduced interest expense.
- At September 30, assets were $1.726 billion, up 5.3% from year-end 2019. Net loans were $1.334 billion, up 7.7%; deposits were $1.430 billion, up 6.1%. Noninterest-bearing deposits grew 20.5%.
- Cash and cash equivalents were $24.5 million. Long-term debt was $32.0 million, down $9.0 million from year-end; no new borrowings were made during 2020. FHLB borrowing capacity was approximately $167.5 million, with another $55.0 million available under correspondent-bank lines.
- Operating cash flow for the nine months was $9.3 million versus $14.8 million in 2019. Investing used $71.3 million, largely reflecting $95.9 million of net loan growth; financing provided $65.7 million, principally from deposit growth. Cash increased $3.7 million to $24.5 million.
- Bank regulatory capital ratios at September 30 included 12.28% common equity Tier 1, 12.72% total risk-based capital, and 10.12% leverage. The Bank and holding company were categorized as well-capitalized.
Material changes and credit quality
- The allowance for loan losses increased to $5.974 million from $4.045 million at year-end. Management attributed the higher 2020 provision partly to qualitative adjustments for the COVID-19-driven economic downturn. Management considered the allowance adequate but emphasized the estimates are judgmental and may change.
- Net loans included $45.3 million of PPP loans at September 30. LCNB had funded $45.5 million for 316 small businesses through the program.
- From the start of the pandemic through September 30, payment deferrals had been granted on loans totaling approximately $407.4 million at the relevant dates. Most returned to full payment; loans with active deferrals had $29.4 million unpaid principal. No loans had been modified under CARES Act Section 4013. Nonaccrual loans were $4.1 million, compared with $3.2 million at year-end.
- Non-interest income rose, driven in part by loan-sale gains ($1.436 million for nine months versus $0.207 million) as residential mortgage loan sales increased. Fiduciary income also grew. Deposit service charges declined.
- Non-interest expense rose 4.1% for nine months, principally from salaries and benefits. Other expenses included costs associated with outsourcing ATM operations. The nine-month effective tax rate was 16.4%, including a CARES Act-related tax benefit.
- Available-for-sale debt securities were $157.9 million, down from $178.0 million at year-end, while accumulated other comprehensive income increased to $4.154 million, reflecting market-value gains on securities.
Outlook, risks, and contingencies
- The filing provides no quantified earnings or financial guidance. Management said the pandemic’s ultimate effects remain uncertain and will depend on its duration, economic conditions, borrower performance, market developments, and government responses.
- Key risks include COVID-19-related credit deterioration, future charge-offs and allowance needs, customer and deposit trends, interest-rate changes, competition, cybersecurity and technology disruptions, and execution or integration risks.
- Interest-rate models estimate that a 200-basis-point rate increase would raise one-year net interest income by 1.73%, while a 100-basis-point decrease would lower it by 2.97%. The economic value of equity model indicates declines under rising-rate scenarios. Management cautions that these simulations depend on uncertain assumptions and are not forecasts.
- Management performed a goodwill impairment test at June 30 amid pandemic-related concerns and found fair value exceeded carrying value; it concluded no September 30 interim test was required. Goodwill was $59.2 million, and further impairment remains a risk if conditions worsen.
- Management reported adequate liquidity and no pandemic-related liquidity or operational problems. It had not elected to use the Federal Reserve’s PPP Liquidity Facility. Off-balance-sheet commitments totaled $236.2 million; capital-expenditure commitments were approximately $0.963 million. Management did not expect pending routine legal matters to have a material effect.
- LCNB authorized a new repurchase program in August for up to 645,000 shares, lasting no longer than five years. It repurchased 55,590 shares during Q3 for $0.792 million. The company expects CECL adoption after December 15, 2022 and anticipates a higher allowance, but its financial impact was not yet estimable.
Important facts for investors to verify
- Whether active COVID-19 deferrals and PPP borrower outcomes lead to higher delinquencies, charge-offs, or further allowance increases.
- Whether loan growth, deposit mix, and lower interest rates sustain net interest income and margins.
- How recurring mortgage-sale gains, higher operating costs, and tax benefits affect earnings comparability.
- Whether liquidity, capital ratios, and the dividend remain resilient under adverse credit or economic conditions.
- Future goodwill impairment indicators and the eventual allowance impact of CECL implementation.