LCNB CORP (LCNB) stock intrinsic value fair value estimate & owner earnings analysis

LCNB Corp. is the holding company for LCNB National Bank, a community bank founded in 1877 and headquartered in Lebanon, Ohio. It operates 35 offices in Warren, Butler, Clinton, Clermont, Fayette, Franklin, Hamilton, Montgomery, Preble and Ross Counties in Ohio. It earns money the ordinary way: it takes deposits, lends them out, and collects fees from trust, wealth management and mortgage banking. About 64% of its loans are secured by commercial real estate and about 28% by homes. Two mergers, Cincinnati Bancorp in November 2023 and Eagle Financial Bancorp (EAGLE.bank) in April 2024, made it materially larger, so years before 2025 describe a smaller bank. How we measured earning power. For a bank, deposits and borrowings are the raw material of the business, so we value its cash earnings after paying depositors and lenders and do not subtract its borrowings again. We start from the cash the bank generated in 2025, its first full year with both mergers complete and no merger costs. After removing the cash swings from mortgages made for resale and other short-term balance-sheet movements, and after charging stock compensation and branch spending, that came to about $26.7 million, or $1.89 per share. 2024 ($0.93) and 2023 ($1.16) were held down by merger costs and partial-year ownership of the acquired banks, so we did not use them as the base. We made three corrections to the 2025 figure. First, cash flow adds back the provision for loan losses, and actual 2025 charge-offs were only $0.4 million, so the $1.89 carries almost no cost for bad loans. We charge a normal 0.15% a year on the roughly $1.70 billion loan book, about $2.1 million after tax. Second, branch and equipment spending in 2025 was unusually light ($0.96 million against $2.2 million of depreciation), so we charge spending at the depreciation rate. Third, the bank buys its tax savings in part by funding affordable-housing tax credit partnerships ($1.6 million in 2025, $2.1 million in 2024, $2.7 million in 2023). The tax savings show up in its cash earnings but the purchase cost does not, so we deduct it. That gives a normal 2025 level of about $1.50 per share. Amortization of the deposit relationships bought in the mergers is a sunk merger cost and is added back. We account for its economic meaning, acquired deposits running off, by crediting no deposit growth in any case. What 2026 shows. Net interest income in the first half of 2026 was $38.6 million, 14% more than in the first half of 2025, and net income was $11.9 million against $10.5 million. Over the same period, about $2.8 million of loans were charged off, almost all in the first quarter. Deposits slipped to $1.82 billion at June 30, 2026, from $1.84 billion at year-end, and loans were roughly flat at $1.70 billion. Owner cash earnings rose about 103% in 2025, but almost all of that was merger costs ending and a full year of Eagle, which will not repeat. Our base case starts at $1.75 per share. That is below the $1.89 actually earned in 2025, and it is above our $1.50 normal level only by the gain in interest income already reported in two consecutive quarters of 2026. Why no growth. A bank can grow only by keeping capital to support a larger balance sheet, so valuing all of its cash earnings and also crediting growth would count the same dollars twice. Growth by acquisition was paid for partly with new shares and is not a repeatable, self-funded process we can credit. Deposits are currently shrinking. We hold earnings flat, but we keep them going beyond ten years, because the deposit franchise and the branch network have earned through every cycle since 1877. Debt. Long-term borrowings were $103.8 million at June 30, 2026, down from $155.2 million at the end of 2024. At year-end 2025 they consisted of $95.0 million of Federal Home Loan Bank advances at 4.83% and a $9.4 million holding-company term loan at a fixed 6.5%, with a balloon payment due June 15, 2028. Their interest is already deducted in every figure above, so in each case nothing further is owed ahead of the common shares. Shareholders' equity was $280.6 million at June 30, 2026, and tangible book value (equity less goodwill and other intangibles) was about $12.81 per share. The 2028 balloon is small relative to the bank's earnings and does not threaten any case. Bear case, about $21.58 per share. Commercial real estate (64% of loans) meets a credit downturn on the scale of 2008-2010, and the 2026 losses on logistics loans are an early sign of how quickly a single sector can turn. Loan losses run at 1.0% of loans a year for three years, which is our estimate of a severe cycle for a book like this and about three times the rate charged off in early 2026. That cuts owner earnings to about $0.69 per share in each of those years, roughly $9.7 million a year, which is below the current dividend of about $12.5 million, so the dividend would likely be cut. Cumulative pre-tax losses of about $51 million would be absorbed by $280.6 million of equity without issuing shares. After the cycle, deposits keep leaving, the 2026 margin gain unwinds, and earnings settle about 6% below our normal level, at $1.41 per share. On that basis the bank still earns about 11% a year on its tangible capital. This is why its earnings are worth more than its roughly $12.81 per share of tangible book even in this case: the low-cost deposit base keeps earning a spread after the losses are absorbed. The bank's earnings are worth about $21.58 per share, with nothing further owed ahead of the common. Base case, about $29.17 per share. Earnings hold at our 2025 normal level plus the interest-income gain already reported in 2026, about $1.75 per share a year, with normal losses of 0.15% of loans and no growth, continuing indefinitely. Worth about $29.17 per share, with nothing further owed ahead of the common. Bull case, about $33.67 per share. The second-quarter 2026 run rate proves durable (net income of $7.5 million in the quarter), and losses stay at about 0.07% of loans, in line with the bank's own record over the past decade, when loan write-offs were about 0.1% of loans or less each year from 2016 through 2025. That gives about $2.02 per share a year, flat. We credit no fee growth or loan growth because neither is secured. Worth about $33.67 per share, with nothing further owed ahead of the common. What changed since our last estimate. The business itself moved little: interest income kept rising, and losses in the second quarter of 2026 were small after the first-quarter charge-offs. The previous figures were made on a different basis and are not directly comparable. Margin-of-safety price. We are fairly confident in the earnings level. 2025 was a clean year, the first half of 2026 confirms it, and we have charged normal losses and spending that the 2025 cash figures left out. The worst plausible event is a commercial real estate bust in southwestern Ohio larger than our bear case. With 64% of loans in commercial real estate, that concentration is the main risk. The bank's structure is sound: equity of $280.6 million, falling borrowings, and no maturity before the small 2028 balloon, so it should survive a severe cycle without issuing shares. Three things we are most likely to be wrong about are the 2026 interest-income gain, the normal loss rate, and deposit runoff. If the 2026 gain fades and losses settle permanently at 0.5% of loans, earnings would be about $1.17 per share and the shares worth about $19.44. The price assumes a holding period of about three years, during which the bank pays about $0.88 a share in dividends a year, as long as the dividend is not cut. From $17.00, a return to the base value within three years with dividends implies about 23% a year. If instead the full bear cycle arrives and the dividend is suspended, a recovery to the bear value of $21.58 implies about 8% a year over three years; $17.00 is below that bear value. The base case clears the target, and the margin-of-safety price sits below the bear value. The margin-of-safety price is $17.00. What would make this wrong: commercial real estate or logistics losses far above 1% a year for longer than three years, a renewed jump in deposit costs of the kind seen in 2023, or another acquisition paid for in shares at a poor price.