LCNB Corp. Q4: Regional Bank With A Growing Dividend (NASDAQ:LCNB)

LCNB Corp (NASDAQ:LCNB) is a bank holding company whose primary asset is LCNB National Bank in southern and central Ohio. For the last few years, the share price has seen a lot of up and down swings, as the market seems unsure of how to value it.

Currently, LCNB’s dividend yields over 5%, some of the highest it’s been. The low valuation appears to reflect greater fears surrounding regional banks since the failure of SVB last spring, as well as anticipation of a commercial real estate bubble bursting, to which many such banks would be exposed. I’m going to review the financial history and status of LCNB and attempt to provide insights into the security (and potential growth) of the dividend.

Earnings and Dividends

Over the past decade, LCNB grew as it acquired other local banks. This grew its revenues and brought them up to over 30 branches. Even during COVID, the trend here was of growth until 2023.

LCNB has been consistently profitable, but 2023 saw a fairly sharp dip in net income. Obviously, that’s important to anyone concerned about the dividend, so let’s break that down.

Above, if we compare 2023’s results to 2022’s, we see that a lot of this reduction in earnings actually comes from interest expense. Namely, interest income only rose about $13.8M, while interest expense was up about $18.5M. Non-interest income was up only $1.2M, while non-interest expense was up $6.3M.

With the screenshot that I condensed above, we can see the primary source of increased interest expense has been the higher yields they pay to customers for their deposits. This was to be expected, given the recent rate hikes by the Fed.

While the current dividend rate is $0.88 per share, it’s still helpful to see how much total cash the company allocates to dividends.

We see here that, while the amount fluctuates depending on how many shares are issued or repurchased, it’s been less than $10M, sufficiently covered by 2023’s total net income. For most years, this shows the dividend payout ratio is usually about half or less of earnings. 2023’s results make it 78%, giving it still something of a buffer.

Balance Sheet and Loan Portfolio

Let’s take a look at the updated figures LCNB gave on its balance sheet.

Its largest asset is, by far, its loan portfolio. Meanwhile, the largest liability is its customer deposits.

The loans here are quite varied. Of the $1.7B in Q4, the largest chunk was $501M in non-owner occupied, secured, commercial loans. Overall, non-industrial, commercial loans accounted for about 64% of the portfolio.

The 2023 Form 10K (pg. 72) states:

Commercial real estate loans include loans secured by a variety of commercial, retail and office buildings, religious facilities, hotels, multifamily (more than four-family) residential properties, construction and land development loans, and other land loans. Mortgage loans secured by owner-occupied agricultural property are included in this category.

Therefore, there’s more to this section than underused office space in a post-COVID economy. Moreover, if any of their commercial real estate has been facing trouble, the monthly nature of the principal and interest payments should bear this out.

Despite the distress in the macro-environment, losses and non-performing loans for the entire loan portfolio have been near-zero.

None of them are in multifamily either, but office real estate (included in non-owner occupied) does show some recent DQs.

A Look to the Future

Ohio Real Estate

When considering the future of this ~5% dividend and its growth, the miniscule delinquencies in commercial real estate doesn’t mean that some may not materialize. Yet, this report shows that the situation on LCNB’s turf may not be like what is feared across the country:

Generally speaking, office market trends in Columbus have remained unchanged during the past five years.

With Columbus and Cincinnati having favorable economic trends, I think this speaks well for mortgages in those areas. Additionally, the quote I listed above mentions how their mortgages typically span five years or more. With monthly principal payments as well, there isn’t a balloon of principal that many borrowers will be struggling as well toward the end of the loan.

Even so, folks should pay attention as quarterly results continue to come up. If delinquencies on the commercial loans begin to appear among the delinquencies, that could be a warning sign of more to come.

Buybacks

The company has also used some of its excess earnings to pursue buybacks. LCNB’s share price often trades close to its book value, but the company appears to proceed with these buybacks, whatever the price at the time.

Buybacks when the price is above book value per share will cause this value to decline. It will also increase if it’s below book value. This can create certain types of cyclicality to the stock if earnings increase and create enough cash flow to enable more buybacks again. For folks reinvesting dividends, I believe they may be able to use this pattern to reinvest at a better rate, if they want to manage it that much.

Over time, however, buybacks will make the continued growth of the dividend easier by eliminating shares.

Net Interest Income

With interest expense being one of the main factors that reduced earnings, an increase here would post more problems. Thankfully, the Fed has paused, and so the current outlook is favorable, but investors should be vigilant if that changes. Thankfully, LCNB has provided an estimate of the impact if interest rates change:

A decrease is projected to reduce their interest expense, which would make the dividend easier to grow and buybacks easier to pick up. I think this will be the main catalyst to dividend growth, and rate cuts will be very much worth watching for this stock.

Upcoming Merger

In November, LCNB announced plans to acquire Eagle Financial Corp (OTC:EFBI). The deal is expected to close this year, but I will note this detail:

Subject to the terms of the merger agreement, which has been approved by the Board of Directors of each company, EFBI shareholders will have the opportunity to elect to receive either 1.1401 shares of LCNB stock or $19.10 per share in cash for each share of EFBI common stock owned, subject to at least 60%, but not more than 70% of the shares of EFBI being exchanged for LCNB common stock.

LCNB will probably deserve some reassessment by the third quarter of this year, based on the potential for share dilution that exists with this deal, compared to its improvement to LCNB’s bottom line. It will not be known until the merger happens.

(Alternatively, you could see if it’s possible to get EFBI for less than $19.10, haha.)

Conclusion

A regional bank with a ~5% dividend yield might be tempting and scary for investors. Yet, LCNB has not faced serious liquidity issues, and the delinquencies on its loans have remained extremely low in world where plenty of lenders can’t say that. This appears to be related to the local trends in central and southern Ohio. With a history of profitability, LCNB itself doesn’t seem particularly risky either.

A good regional bank could be subject to a bank run, but I think LCNB doesn’t have anywhere near the (unique) problems that SVB had last year in the spring. It’s steadily compounding, and folks are getting a high, growing yield thanks to the recent pessimism. After last week’s price leap, I consider my money market position a safer investment for a similar yield, and so while there’s a lot to LCNB, it isn’t quite a buy, in my view, but it could easily become one.