LCNB Corp (LCNB), headquartered in Lebanon, Ohio, is the one-bank holding company for LCNB National Bank. LCNB’s roots trace all the way back to 1877 (founded as The Lebanon Citizens National Bank) and it currently operates a 33 branches in markets in or adjacent to Cincinnati, Dayton, and Columbus.
While recent market weakness has not spared many bank socks, LCNB’s share performance has been in a sustained downtrend since shares peaked after the 2016 election. While its hard to attribute the downtrend to a singular cause (the bank’s operating results support an argument that its not an earnings-related issue), there are a couple of items that could be at play. First, LCNB announced a fairly-large acquisition at the end of 2017 (Columbus First Bancorp) with a TBV earnback estimate of 4.3 years. Columbus is a new market for LCNB and that brings heightened execution risk and, typically, a bump in expense items beyond typical one-time deal charges. The one-time items have hit profitability YTD, but this is a proven management team and they should be able to normalize operational costs and begin to see deal benefits in the intermediate-term. Second, the rally in shares in late 2016 and early 2017 got ahead of itself: LCNB shares traded above 200% TBV for nearly the first half of 2017. Its hard for a bank to grow into and justify such a lofty valuation, which is another reason I think shares trended down mid-2017 to early-2018.
Beyond the share price and market valuation, there is a lot to like in LCNB’s underlying business and performance. LCNB managed through the previous financial crisis without printing a full year net loss. In fact, the crisis and credit overhang hit bank profitability the hardest in FY 2011, and LCNB still reported $1.20 EPS, 1.0% ROA, 10.9% ROE, and 2.53% NPAs (its highest level of nonperforming assets). At the risk of sounding like a dolt, I believe current market valuation of LCNB provides a good entry point for a long-term investment even as it is printing a lower EPS, ROA, and ROE than it did in 2011.
There is certainly some operational overhang to work through on the Columbus merger, but I think the aggressive selloff is not warranted and provides a nice entry level to invest alongside a bank set up for strong performance over a full cycle and upside potential for a takeout. Primary drivers setting up LCNB shareholders for continued investment performance over the near- and longer-term:
- Compounding Earnings: Under the current regulatory environment, ROE should normalize post-merger and return to a 10%+ rate and provide attractive growth and investment returns to shareholders. LCNB has printed a ROAA in 38 of its last 41 years of operation – I’ll take that.
- Dividend Income: LCNB pays a healthy 4.4% dividend yield. The 57% payout ratio is high, but current EPS is currently depressed by one-time merger expenses so that figure should decline as EPS normalizes. Even with the large payout ratio, the bank has already has a healthy equity/capital base and doesn’t see the need to retain earnings.
- Potential M&A Upside: from an acquirer’s perspective, LCNB has some nice attributes. I’m a sucker for valuable deposit funding and LCNB delivers on that front.
- Market Geography: nestled in three larger markets in Ohio, plenty of buyers to consider as a fit.
- Deposit Funding: impressive, all around
- 24% of LCNB’s deposits are noninterest-bearing
- The cost of the interest-bearing deposits is 0.51%
- The total cost of funds on LCNB’s $1.1 Billion deposit book is 0.41%
- LCNB has a ~85% loan/deposit ratio; acquiring banks are looking at $200 Million of “excess” (and cheap) funding.
- Asset Quality: credit book looks to be in decent shape, CRE loan mix is a little high but its manageable. Biggest issue is the softer loan loss reserve balance relative to NPA/NPLs; ratios such as LLR/NPA are likely understated as they don’t include credit marks/discounts applied to acquired loans, but there is a risk an acquirer would have to consider an above-average credit market to normalize.
Some concerns that could pressure earnings/profitability/growth to keep an eye on:
- CRE Mix – the arbitrarily-set industry threshold for CRE allocation is 300% of Capital, which LCNB (barely) currently exceeds. I won’t waste the ink here given the amount of coverage CRE lending has received in the business press, but that concentration is worth monitoring.
- Economic Cycle
- Hard to forecast where we are here, but all banks and shareholders, no matter the quality of management, bear the risk of a downturn in the local and national economy.
Bank Description & Geography
LCNB Bank was established in 1877 and currently has a 33 branch network in Ohio.
- Directors / Named Executives, as group – 3.1%
- LCNB National Bank – 4.7%
- BlackRock – 3.6%
- Vanguard – 2.9%
- Castine Capital – 2.5%
- Kennedy Capital – 1.7%
- First Financial ($13.8B Assets / FFBC)
- WesBanco ($12.6B / WSBC)
- First Merchants ($11.1B / FRME)
- First Commonwealth ($7.7B / FCF)
- Peoples Bancorp ($4.0B / PEBO)