LCNB Corp. — Q2 2020 Form 10-Q
Business context and period: LCNB Corp. is an Ohio-based bank holding company. This unaudited report covers the three and six months ended June 30, 2020; balance-sheet comparisons are with December 31, 2019. Dollar amounts below are in millions unless stated otherwise.
Financial results and condition
| Metric | Q2 / June 30, 2020 | Comparable period / prior date |
|---|---|---|
| Net income | $5.06; diluted EPS $0.39 | Q2 2019: $4.73; $0.36 |
| Six-month net income | $10.08; diluted EPS $0.78 | First half 2019: $9.36; $0.71 |
| Net interest income | Q2 $14.00; first half $28.18 | Q2 2019 $13.59; first half 2019 $26.98 |
| Net interest margin, taxable-equivalent | Q2 3.70%; first half 3.81% | Q2 2019 3.72%; first half 2019 3.71% |
| Provision for loan losses | Q2 $0.02; first half $1.19 | Q2 2019 $0.05; first half 2019 credit of $0.05 |
| Loans, net | $1,330 | $1,239 at Dec. 31, 2019 |
| Deposits | $1,439 | $1,348 at Dec. 31, 2019 |
| Cash and cash equivalents | $42.7 | $20.8 at Dec. 31, 2019 |
| Long-term debt | $34.0 | $41.0 at Dec. 31, 2019 |
| Total assets / shareholders’ equity | $1,735 / $237 | $1,639 / $228 at Dec. 31, 2019 |
For the first half, operating cash flow was $4.9 million, investing cash flow was negative $62.3 million, and financing cash flow was positive $79.3 million. Cash increased $22.0 million. The company declared dividends of $0.18 per share for Q2 and $0.36 for the first half.
Bank regulatory capital ratios at June 30 were 12.13% for common equity Tier 1, 12.13% for Tier 1 risk-based capital, 12.49% for total risk-based capital, and 10.23% for leverage. The Bank and company were most recently classified as well-capitalized. Available borrowing capacity included approximately $70.6 million from the FHLB and $55.0 million under correspondent-bank lines.
Material changes and drivers
- Q2 net income rose about 7% year over year; first-half net income rose about 8%. Lower funding costs supported net interest income, while Q2 taxable-equivalent margin eased 2 basis points year over year.
- First-half loans grew 7.3%. Growth was concentrated in commercial and industrial and commercial real estate lending; PPP loans had a reported carrying value of $45.3 million at quarter-end.
- Deposits increased 6.7%, led by noninterest-bearing deposits, while long-term debt declined 17.1% after maturities were repaid.
- First-half noninterest income increased $1.39 million, including higher bank-owned life insurance income, loan-sale gains, and securities gains. Service charges on deposit accounts declined. Noninterest expense increased $0.66 million, principally from salaries and benefits.
- The allowance for loan losses increased to $5.02 million from $4.05 million at year-end. Management attributed approximately 69% of the first-half increase in provision to adjustments for potential COVID-19 recession effects.
Outlook, risks, and unusual items
- The filing provides no quantified earnings or balance-sheet guidance. Management said results for the interim period are not necessarily indicative of full-year results.
- COVID-19 is a central uncertainty. LCNB reported payment deferrals for 582 customers covering approximately $384 million of loans. It had funded $45.5 million of PPP loans to 316 small businesses. Management said the eventual effects on credit losses, loan modifications, income, liquidity, and capital could not be estimated.
- LCNB had not elected the CARES Act provision suspending certain troubled-debt-restructuring accounting. It reported $384.3 million of COVID-related modified loans under interagency guidance.
- Management conducted an interim goodwill impairment test due to the pandemic-related economic environment and recorded no impairment. It said impairment risk had increased and would continue to be monitored.
- Management reported adequate liquidity and no liquidity or operational problems. It did not use the Federal Reserve’s PPP Liquidity Facility.
- Interest-rate risk models indicated a 6.62% increase in one-year net interest income under a 400-basis-point rate increase, but a 13.72% decline in modeled economic value of equity under that scenario. Management cautioned that these simulations are not forecasts and depend on uncertain assumptions.
- Management considered unrealized losses on investment securities to reflect interest-rate movements, not credit deterioration, and said it did not expect to be required to sell affected securities before recovery.
Important facts for investors to verify
- Whether COVID-related deferrals and the $384.3 million modified-loan balance lead to higher delinquencies, charge-offs, or additional allowance needs.
- PPP loan balances, forgiveness and fee recognition, and the effect of PPP lending on reported loan growth and yields.
- Deposit growth, funding costs, loan yields, and net interest margin as the low-rate environment continues.
- Allowance adequacy relative to portfolio growth and risk-rating changes; nonaccrual loans were $3.88 million, versus $3.21 million at year-end.
- Continued capital, liquidity, and goodwill impairment monitoring, as well as the effect of market movements on securities values and trust-related fees.
- LCNB said it had 100,000 shares remaining under its repurchase authorization and made no repurchases in the first half of 2020.