2023-06-20 05:38:14 ET
Summary
- Earnings will increase next year thanks to a jump in loan balances following the upcoming acquisition of CNNB.
- The margin will likely remain under pressure this year due to unfavorable shifts in the funding mix.
- The December 2023 target price suggests a small downside from the current market price.
- LCNB is offering a high dividend yield. Further, the estimated payout ratio appears sustainable; therefore, the dividend seems secure.
The acquisition of Cincinnati Bancorp ( OTCQX:CNNB ) later this year will boost the earnings of LCNB Corp. ( LCNB ) next year. I’m expecting LCNB Corp. to report adjusted earnings of $1.47 per share for 2023 and $1.60 per share for 2024. The year-end target price is quite close to the current market price. Further, LCNB is offering an attractive dividend yield. Based on the total expected return, I’m adopting a hold rating on LCNB stock.
Upcoming Acquisition to Boost the Loan Balance
LCNB Corporation is planning to acquire Cincinnati Bancorp in the last quarter of 2023, according to a press release . As Cincinnati Bancorp had $262.9 million in loans at the end of March 2023, the transaction is expected to boost LCNB’s loan book size by around 19%.
Apart from the acquisition, loan growth will likely remain muted as the outlook on organic growth is lackluster. The portfolio’s growth was quite low last year and negative during the first quarter of 2023. Going forward, I’m expecting growth to improve from the first quarter’s level because the regional economy is healthy and conducive to loan growth. LCNB serves communities in Southwest and South-Central Ohio. As shown below, the state's unemployment rate has declined sharply in recent months.
However, organic loan growth will likely remain below the historical average because of high-interest rates. Considering my outlook on organic and acquired growth, I’m expecting the loan book size to surge by 21% in 2023 and 3% in 2024. The following table shows my balance sheet estimates.
Financial Position | FY19 | FY20 | FY21 | FY22 | FY23E | FY24E |
Net Loans | 1,239 | 1,294 | 1,364 | 1,396 | 1,689 | 1,741 |
Growth of Net Loans | 3.8% | 4.4% | 5.4% | 2.3% | 21.1% | 3.0% |
Other Earning Assets | 214 | 253 | 337 | 317 | 386 | 397 |
Deposits | 1,348 | 1,455 | 1,629 | 1,605 | 1,872 | 1,929 |
Borrowings and Sub-Debt | 46 | 28 | 16 | 97 | 118 | 122 |
Common equity | 228 | 241 | 239 | 201 | 247 | 257 |
Book Value Per Share ($) | 17.4 | 18.6 | 19.3 | 17.6 | 21.1 | 19.3 |
Tangible BVPS ($) | 12.6 | 13.8 | 14.3 | 12.2 | 15.9 | 14.7 |
Source: SEC Filings, Author's Estimates(In USD million unless otherwise specified) |
Margin to Trend Downwards this Year Before Stabilizing
LCNB Corporation’s net interest margin shrank by a massive 49 basis points during the first quarter of 2023 partly because of a surge in average borrowings that carried high rates. Further, the deposit mix worsened during the quarter as depositors chose to redirect their deposits from non-interest-bearing deposits into high-rate accounts.
Going forward, the funding mix can shift even further towards higher-rate accounts because rate hikes increase the incentive to chase rates. I’m expecting the Fed funds rate to grow by 50 basis points in the second half of 2023 before stabilizing. The results of the management’s rate sensitivity analysis given in the 10-Q filing show that a 200-basis points hike in rates can decrease the net interest income by 1.61% over twelve months.
1Q 2023 10-Q Filing
Meanwhile, the acquisition will barely affect the margin as Cincinnati Bancorp’s net interest margin is quite close to LCNB Corporation’s margin. CNNB reported a margin of 3.18% while LCNB reported a margin of 3.28% for the first quarter of 2023.
Considering these factors, I’m expecting the net interest margin to dip by 15 basis points in the last nine months of 2023 and then remain unchanged in 2024.
Acquisition Benefits to Boost Earnings Next Year
The acquisition of Cincinnati Bancorp will boost the loan portfolio, and consequently the earnings of LCNB corporation. On the other hand, one-time merger-related expenses will constrain earnings growth this year. As mentioned in the press release, the management is estimating merger-related expenses of $7.3 million. The per-share, after-tax impact of these expenses will be around $0.55.
The acquisition of Cincinnati Bancorp will also have a dilution effect on earnings per share. As per the terms of the merger agreement, the target’s shareholders will have the opportunity to elect to receive either 0.9274 shares of LCNB stock or $17.21 per share in cash for each share of Cincinnati Bancorp common stock owned, subject to 80% of all CNNB shares being exchanged for LCNB common stock. I’m estimating the transaction to increase LCNB’s shares outstanding by 2.14 million shares, or 19%.
Overall, I’m expecting LCNB Corp. to report earnings of $0.92 per share for 2023 (including one-time merger-related expenses) and $1.60 per share for 2024. Excluding the one-time expenses, I’m expecting LCNB Corp to report adjusted earnings of $1.47 per share for 2023. The following table shows my income statement estimates.
Income Statement | FY19 | FY20 | FY21 | FY22 | FY23E | FY24E |
Net interest income | 54 | 56 | 57 | 61 | 56 | 66 |
Provision for loan losses | 0 | 2 | (0) | 0 | 0 | 1 |
Non-interest income | 12 | 16 | 16 | 14 | 15 | 18 |
Non-interest expense | 44 | 46 | 48 | 48 | 58 | 56 |
Net income - Common Sh. | 19 | 20 | 21 | 22 | 11 | 21 |
EPS - Diluted ($) | 1.44 | 1.55 | 1.66 | 1.93 | 0.92 | 1.60 |
Source: SEC Filings, Earnings Releases, Author's Estimates(In USD million unless otherwise specified) |
The Risk Level Appears Satisfactory
The only remarkable source of risk for LCNB Corporation is the unrealized loss racked up on the Available-for-Sale (“AFS”) securities portfolio. Unrealized mark-to-market losses on AFS securities amounted to $31.6 million at the end of March 2023, which is 15.5% of total equity. I’m expecting these losses to increase this year and then reverse next year when interest rates start declining. Due to my interest rate outlook and the moderate amount of unrealized losses, I’m not too worried about this risk source.
Market Price is Currently Higher than Year-End Target Price
LCNB Corp is offering a high dividend yield of 5.6% at the current quarterly dividend rate of $0.21 per share. The adjusted earnings and dividend estimates suggest a payout ratio of 57% for 2023, which is higher than the five-year average of 47%. Nevertheless, the implied payout ratio for 2023 is easily sustainable; therefore, I’m not expecting any change in the dividend level.
I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value LCNB Corp. The stock has traded at an average P/TB ratio of 1.28 in the past, as shown below.
FY19 | FY20 | FY21 | FY22 | Average | |
T. Book Value per Share ($) | 12.6 | 13.8 | 14.3 | 12.2 | |
Average Market Price ($) | 17.4 | 14.8 | 17.5 | 17.5 | |
Historical P/TB | 1.38x | 1.07x | 1.22x | 1.43x | 1.28x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/TB multiple with the forecast tangible book value per share of $15.9 gives a target price of $20.2 for the end of 2023. This price target implies a 34.8% upside from the June 16 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 1.08x | 1.18x | 1.28x | 1.38x | 1.48x |
TBVPS - Dec 2023 ($) | 15.9 | 15.9 | 15.9 | 15.9 | 15.9 |
Target Price ($) | 17.1 | 18.7 | 20.2 | 21.8 | 23.4 |
Market Price ($) | 15.0 | 15.0 | 15.0 | 15.0 | 15.0 |
Upside/(Downside) | 13.7% | 24.3% | 34.8% | 45.4% | 56.0% |
Source: Author's Estimates |
The stock has traded at an average P/E ratio of around 10.3x in the past, as shown below.
FY19 | FY20 | FY21 | FY22 | Average | |
Earnings per Share ($) | 1.44 | 1.55 | 1.66 | 1.93 | |
Average Market Price ($) | 17.4 | 14.8 | 17.5 | 17.5 | |
Historical P/E | 12.0x | 9.5x | 10.5x | 9.1x | 10.3x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $0.92 gives a target price of $9.5 for the end of 2023. This price target implies a 36.9% downside from the June 16 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 8.3x | 9.3x | 10.3x | 11.3x | 12.3x |
EPS 2023 ($) | 0.92 | 0.92 | 0.92 | 0.92 | 0.92 |
Target Price ($) | 7.6 | 8.5 | 9.5 | 10.4 | 11.3 |
Market Price ($) | 15.0 | 15.0 | 15.0 | 15.0 | 15.0 |
Upside/(Downside) | (49.2)% | (43.1)% | (36.9)% | (30.8)% | (24.7)% |
Source: Author's Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $14.9 , which implies a 1.1% downside from the current market price. Adding the forward dividend yield gives a total expected return of 4.5%. Hence, I’m adopting a hold rating on LCNB Corp.
For further details see:
LCNB Corp.: The Upcoming Acquisition Likely To Bear Fruit Next Year