LCNB has returned cash to shareholders
LCNB’s (NASDAQ:LCNB) Management has returned cash to shareholders in the form of a regular dividend payout and a share buyback program. LCNB offers investors a current dividend yield of 4.2% per year while holding their shares. We find that very attractive. In addition, LCNB has increased its dividend per share for each of the last 5 years. Over the 2017-2020 period, dividends have grown at a CAGR of 3.3%. With a low payout ratio of 47% in 2020, we believe LCNB’s dividends are sustainable. In addition, we see the prospect that the dividend per share will continue to grow in the medium term. The average payout ratio over the last 5 years was 49.5%. LCNB’s most recent share buyback initiative was approved in August 2020, replacing a previous similar initiative. Under the current buyback program, LCNB can repurchase up to 645,000 shares [equivalent to 5% of shares outstanding] in the next five years. By March 2021, LCNB repurchased ~1.5% of outstanding shares. The buyback, along with the dividend, demonstrates LCNB management’s commitment to returning cash to shareholders and is positive for long-term investors in our view.
LCNB is trading on both P/B and P/E at cheap valuations. Looking at historical 2020 financials, LCNB’s P/E ratio is 11.2x. Also, the P/B for 2020 is 0.93x. This suggests to us the potential for a re-rating as the company weathers the impact of COVID-19, continues to improve profitability and maintain the quality of its healthcare assets. We believe these valuations, combined with the 4.2% dividend yield, offer investors an attractive entry point from a risk/reward perspective.
Ohio focused bank
LCNB Corp is a financial holding company with LCNB National Bank as its principal wholly owned subsidiary. LCNB National Bank is a regional bank with operations in southwest and south-central Ohio. The bank has 33 offices, an operations center and 36 ATMs. The bank offers customers industrial, real estate, agricultural, construction and consumer loans, among others. In addition, LCNB Bank offers mortgage, auto and personal loans. 64.9% of the Bank’s loan portfolio is commercial property secured by real estate and 23.8% is residential property. In addition to providing credit, LCNB also offers wealth management services, which include trusteeship and securities brokerage offerings.
Growth in NII and Net Income
interest income [NII] for LCNB has shown steady growth in recent years. Over a 5-year period, the NII CAGR for the company was 7.4%. In 2020, the NII increased by 3.3% year-on-year. Net income, on the other hand, has grown well for LCNB, posting a CAGR of 11.8% for 2016-2020. For 2020, net income improved by 6.2% yoy on higher NII and noninterest income. The continued focus on growing noninterest income will, in our view, improve profitability in the coming year. In the last 3 years alone, noninterest income has grown at a CAGR of 8%.
Trust business has increased
LCNB provides trust and investment management services to its clients, which include trust administration, estate administration, trustee services, investment management of trusts, agency accounts, and endowments/endowments. Growth in this business has been and continues to be an important driver of noninterest income improvements. We believe the trust and investment management business is relatively stable and provides an alternative source of income for LCNB. In 2020, fiduciary income for LCNB increased by 15.0% and accounts for ~32% of noninterest income. In Q1 21, a strong increase in trust and fixed assets resulted in a 38.6% increase in the company’s trust income. LCNB has also reached $3.0 billion in assets under management, of which trust and fixed assets account for 22%.
Lower loan losses in 2021
With the COVID-19 pandemic over the past year, LCNB Bank has dramatically increased loan loss provisions in 2020. This number increased practically 10 times year-on-year due to the expected disruption in economic activity. However, asset quality has remained relatively high into 2021. Given this and the high amount of provisions made in 2020 itself, LCNB has reported a small credit loss credit for the March 2021 quarter. This has helped increase net income. With no significant deterioration in asset quality expected in the near term and economic activity rebounding, we expect the provision for credit losses to remain minimal in 2021.
The asset quality remains healthy
Even with the economic disruption caused by the COVID-19 pandemic, asset quality has held up for LCNB. The ratio of non-performing assets to total assets was 0.19% in 1Q21, up just 1bp yoy. In addition, interest-free loans and loans that were 90 days or more past due and still accruing interest accounted for 0.25% of total loans in 1Q21 compared to 0.23% in 1Q20. These metrics are our view very encouraging given the environment last year.
12.5% CET1 to risk-weighted assets
Source: Bloomberg Terminal [Financial History]
LCNB is a well capitalized bank considering the minimum regulatory capital requirements it must meet. Its CET1 to risk-weighted assets is 12.5% as of March 2021, well above the required threshold. The company’s total Tier 1 capital to risk-weighted assets is also 12.5%, while total capital to risk-weighted assets is 12.9%. These two key figures are also well above the minimum requirements.
0.9x P/B, 4% dividend yield, 11x P/E
Source: Bloomberg Terminal [Dividend History]
LCNB is a financial holding company for Ohio-focused LCNB Bank. Even as a small bank, over the past 5 years, the company has recorded a consistent NII and CAGR of net income of 7.4% and 11.8%, respectively. Management also has an impressive track record of returning cash to shareholders through dividends, which have grown at a CAGR of 2.7% over the past 5 years, and share buybacks. The current dividend yield is 4.2%. In addition, the company is well capitalized and has robust asset quality. Despite last year’s COVID-19 related economic shutdowns, LCNB has maintained its asset quality and we expect lower provisions to support profitability and growth in 2021. Additionally, as the economy returns to “normal” and moves beyond the disruptions caused by COVID-19, LCNB will benefit from increased economic activity. These factors, coupled with favorable valuations of 11.2x P/E and 0.93x P/B on trailing 2020 financials, make LCNB an attractive choice from a short to medium term perspective, in our view.
30% upside potential
We value LCNB at 13x our future EPS estimate of $1.70. This brings us to a target price of $22.00, which is a 28% increase from the current share price. At our target price, the implied book value for LCNB is 1.2x 2020 BV.
Lower loan loss provisions to increase net income
As a precautionary measure in the COVID-19 pandemic, the LCNB management had planned an increased risk provision for loan defaults. As asset quality remains stable, loan loss provisions for 2021 could trend down as in 1Q21 and improve profitability.
4.2% dividend yield
LCNB has increased its dividend per share to shareholders for the last 3 years. A current dividend yield of 4.2% and room for further increases with higher dividend payments are a catalyst for the stock price.
In 2020, LCNB had announced a share buyback program for 645,000 shares [5% of current shares outstanding]. This replaced a previous buyback program. Returning cash to shareholders in the form of buybacks is another catalyst for the stock.
Asset Quality Deterioration
Any deterioration in asset quality and non-performing loans will adversely affect LCNB’s finances and capital adequacy.
Slowdown in NII
Economic slowdowns can lead to a reduction in the company’s NII and consequently negatively impact profitability.
Given LCNB’s concentration in southwest and south-central Ohio, regulatory changes could have a significant impact on LCNB’s business.