LCNB Corp. — Q1 2021 Form 10-Q
Business and period: LCNB Corp. is an Ohio bank holding company whose principal subsidiary is LCNB National Bank. This unaudited report covers the three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020, and income and cash-flow comparisons are with Q1 2020.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior date |
|---|---|---|
| Net income | $5.24 million | $5.03 million in Q1 2020 |
| Basic and diluted EPS | $0.41 | $0.39 in Q1 2020 |
| Net interest income | $14.37 million | $14.18 million in Q1 2020 |
| Net interest margin, taxable-equivalent | 3.68% | 3.92% in Q1 2020 |
| Net interest spread | 3.53% | 3.65% in Q1 2020 |
| Provision for loan losses | $52,000 credit | $1.17 million provision in Q1 2020 |
| Total assets | $1.82 billion | $1.75 billion at December 31, 2020 |
| Net loans | $1.33 billion | $1.29 billion at December 31, 2020 |
| Total deposits | $1.54 billion | $1.46 billion at December 31, 2020 |
| Long-term debt | $17.0 million | $22.0 million at December 31, 2020 |
| Shareholders’ equity | $239.2 million | $240.8 million at December 31, 2020 |
Net interest income rose modestly as lower funding costs more than offset lower interest income. Average earning-asset yield fell to 3.98% from 4.57%, while the average cost of interest-bearing liabilities declined to 0.45% from 0.92%. The reported net interest margin narrowed to 3.68% from 3.92% on a taxable-equivalent basis.
Operating cash flow was $4.0 million, compared with $1.3 million in Q1 2020. Investing activities used $67.8 million, primarily reflecting $40.8 million of available-for-sale securities purchases and $34.7 million of net loan growth. Financing activities provided $73.2 million, mainly from an $81.7 million increase in deposits, partially offset by $5.0 million of debt repayments and $2.3 million of dividends paid. Cash and cash equivalents ended the quarter at $41.1 million, up from $31.7 million at year-end.
The Bank reported regulatory capital ratios of 12.48% for CET1 and Tier 1 risk-based capital, 12.89% for total risk-based capital, and 10.11% for leverage; it was classified as well-capitalized. Available borrowing capacity was approximately $172.6 million at the FHLB and $55.0 million under correspondent-bank lines.
Material changes and notable items
- Net income increased 4.3% year over year. The $1.23 million year-over-year reduction in the loan-loss provision supported earnings; Q1 2020 included pandemic-related qualitative reserve adjustments.
- Noninterest income declined to $3.47 million from $3.84 million, including no securities-sale gains in 2021 and no 2020-like bank-owned life insurance mortality benefit. Fiduciary income increased by $426,000.
- Noninterest expense rose to $11.49 million from $11.07 million, with increases in equipment, occupancy, marketing, contracted services, and other expenses.
- Loans grew $35.7 million during the quarter, including a $12.2 million net increase in PPP loans. PPP balances were $33.3 million at quarter-end; unrecognized PPP fees were $1.04 million.
- Available-for-sale debt securities rose $28.1 million from year-end. Their market-driven unrealized losses reduced other comprehensive income by $3.44 million and contributed to lower equity.
- The company repurchased 70,321 shares for approximately $1.14 million during the quarter. The declared quarterly dividend was $0.19 per share, versus $0.18 a year earlier.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said it continued to monitor COVID-19 and anticipated adapting as conditions evolved. It considered the allowance for loan losses adequate, but emphasized that estimates are judgmental and may change as information develops. LCNB expects adoption of CECL after December 15, 2022 and anticipates an increase in the allowance, but said the financial impact could not yet be reasonably estimated.
At March 31, loans still on COVID-related payment deferrals totaled $19.7 million. Separately, loans modified under CARES Act Section 4013 totaled $18.9 million, and loans under related interagency guidance totaled $781,000. Nonaccrual loans were $3.4 million; accruing restructured loans were $5.0 million. Management attributed unrealized securities losses primarily to interest-rate movements, not credit deterioration, and said it did not expect to be required to sell the securities before recovery.
Off-balance-sheet commitments totaled $299.7 million, up from $217.6 million at year-end; management stated it believed liquidity was sufficient to fund lending and capital expenditure commitments. Capital expenditure commitments were approximately $1.84 million. Routine legal claims were not expected by management to have a material effect. The filing identifies COVID-19 and economic conditions, borrower repayment and collateral risk, interest-rate changes, competition, cybersecurity, regulation, and acquisition integration among factors that could affect results. Interest-rate modeling showed a 2.43% decline in projected one-year net interest income under a 100-basis-point rate decrease; the modeled economic value of equity fell 21.13% under a 400-basis-point increase and rose 21.38% under a 100-basis-point decrease. These are model scenarios, not forecasts.
Important facts for investors to verify
- Whether loan quality, payment deferrals, PPP forgiveness and repayment, and the allowance remain consistent with management’s assessment as pandemic support changes.
- Whether deposit growth and loan growth continue, and how their mix and pricing affect net interest margin and liquidity.
- The sensitivity of earnings and economic value to interest rates, including the assumptions underlying the disclosed interest-rate models.
- The eventual CECL adoption impact and any changes in securities valuations, accumulated other comprehensive income, and regulatory capital.
- Whether the increased off-balance-sheet commitments create material funding needs or credit exposure; confirm the status of repurchases and dividends.