LCNB CORP Fair Value Disclosure

 

NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS

 

LCNB measures certain assets at fair value using various valuation techniques and assumptions, depending on the nature of the asset.  Fair value is defined as the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date.

 

The inputs to the valuation techniques used to measure fair value are assigned to one of three broad levels:

 

•

Level 1 – quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the reporting date.

 

•

Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly. Level 2 inputs may include quoted prices for similar assets in active markets, quoted prices for identical assets or liabilities in markets that are not active, inputs other than quoted prices (such as interest rates or yield curves) that are observable for the asset or liability, and inputs that are derived from or corroborated by observable market data.

 

•

Level 3 – inputs that are unobservable for the asset or liability.

 

Equity Securities with a Readily Determinable Fair Value

Equity securities with a readily determinable fair value are reported at fair value with changes in fair value reported in other operating income in the Consolidated Statements of Income. Fair values for equity securities are determined based on market quotations (level 1). At December 31, 2022, LCNB had investments in two mutual funds that were traded in active markets and their fair values were based on market quotations (level 1). These two mutual funds were sold during the first quarter of 2023. An investment in another mutual fund is measured at fair value using the fund's net asset value ("NAV") and is considered level 1 because the NAV is determined and published and is the basis for current transactions.

 

Debt Securities, Available-for-Sale

The majority of LCNB's financial debt securities are classified as available-for-sale.  The securities are reported at fair value with unrealized holding gains and losses reported net of income taxes in accumulated other comprehensive loss. LCNB utilizes a pricing service for determining the fair values of its debt securities.  Methods and significant assumptions used to estimate fair value are as follows:

 

•

Fair value for U.S. Treasury notes are determined based on market quotations (level 1).

 

•

Fair values for the other debt securities are calculated using the discounted cash flow method for each security. The discount rates for these cash flows are estimated by the pricing service using rates observed in the market (level 2). Cash flow streams are dependent on estimated prepayment speeds and the overall structure of the securities given existing market conditions.

 

Assets Recorded at Fair Value on a Nonrecurring Basis

Assets that may be recorded at fair value on a nonrecurring basis include individually evaluated collateral dependent loans (or impaired loans prior to the adoption of ASC 326), other real estate owned, and other repossessed assets.

 

LCNB does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral dependent loans are recorded to reflect partial write-downs or specific reserves that are based on the observable market price or current estimated value of the collateral. These loans are reported in the nonrecurring table below at initial recognition of significant borrower distress and on an ongoing basis until recovery or charge-off. The fair values of distressed loans are determined using either the sales comparison approach or income approach. Respective unobservable inputs for the approaches consist of adjustments for differences between comparable sales and the utilization of appropriate capitalization rates.

 

Other real estate owned is adjusted to fair value, less costs to sell, upon transfer of the loan to foreclosed assets, usually based on an appraisal of the property.  Subsequently, foreclosed assets are carried at the lower of carrying value or fair value.  Other repossessed assets are valued at estimated sales prices, less costs to sell. The inputs for other real estate owned and other repossessed assets are considered to be level 3.

 

 

The following table summarizes the valuation of LCNB’s assets recorded at fair value by input levels as of December 31 (in thousands):

 

						Fair Value Measurements at the End of
						the Reporting Period Using
						Quoted Prices				Significant
						in Active				Other				Significant
						Markets for				Observable				Unobservable
		Fair Value				Identical Assets				Inputs				Inputs
		Measurements				(Level 1)				(Level 2)				(Level 3)
2024
Recurring fair value measurements:
Equity securities with a readily determinable fair value:
Equity securities		$	98				98				—				—
Mutual funds measured at net asset value			1,265				1,265				—				—
Debt securities available-for-sale:
U.S. Treasury notes			66,180				66,180				—				—
U.S. Agency notes			77,517				—				77,517				—
Corporate bonds			7,756				—				7,756				—
U.S. Agency mortgage-backed securities			69,546				—				69,546				—
Municipal securities:
Non-taxable			3,982				—				3,982				—
Taxable			33,346				—				33,346				—
Total recurring fair value measurements		$	259,690				67,543				192,147				—
Nonrecurring fair value measurements:
Individually evaluated collateral dependent loans			1,816				—				—				1,816
Total nonrecurring fair value measurements		$	1,816				—				—				1,816
2023
Recurring fair value measurement:
Equity securities with a readily determinable fair value:
Equity securities		$	96				96				—				—
Mutual funds measured at net asset value			1,240				1,240				—				—
Debt securities available-for-sale:
U.S. Treasury notes			68,202				68,202				—				—
U.S. Agency notes			80,901				—				80,901				—
Corporate bonds			6,534				—				6,534				—
U.S. Agency mortgage-backed securities			72,790				—				72,790				—
Municipal securities:
Non-taxable			7,171				—				7,171				—
Taxable			41,003				—				41,003				—
Total recurring fair value measurements		$	277,937				69,538				208,399				—
Nonrecurring fair value measurements:
Individually evaluated collateral dependent loans			—				—				—				—
Total nonrecurring fair value measurements		$	—				—				—				—

 

 

The following table presents quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements at December 31, 2024 and 2023 (dollars in thousands):

 

Range

Fair Value

Valuation Technique

Unobservable Inputs

High

Low

Weighted Average

2024

Individually evaluated collateral dependent loans

$

1,816

Estimated sales price

Adjustments for comparable properties, discounts to reflect current market conditions

Not applicable

2023

Individually evaluated collateral dependent loans

$

—

Estimated sales price

Adjustments for comparable properties, discounts to reflect current market conditions

Not applicable

 

 

Carrying amounts and estimated fair values of financial instruments as of December 31, excluding financial instruments recorded at fair value, were as follows (in thousands):

 

										Fair Value Measurements at the End of
										the Reporting Period Using
										Quoted Prices				Significant
										in Active				Other				Significant
										Markets for				Observable				Unobservable
		Carrying				Fair				Identical Assets				Inputs				Inputs
		Amount				Value				(Level 1)				(Level 2)				(Level 3)
2024
FINANCIAL ASSETS:
Cash and cash equivalents		$	35,744				35,744				35,744				—				—
Debt securities, held-to-maturity			16,324				14,929				—				14,929				—
Loans, net			1,709,811				1,659,244				—				—				1,659,244
Loans held-for-sale			5,556				5,556				—				5,556				—
Accrued interest receivable			8,701				8,701				—				8,701				—
Lender risk account			6,033				6,033				—				—				6,033
FINANCIAL LIABILITIES:
Deposits			1,878,292				1,887,331				1,367,709				519,622				—
Short-term borrowings			—				—				—				—				—
Long-term debt			155,153				156,523				—				156,523				—
Accrued interest payable			2,482				2,482				—				2,482				—
2023
FINANCIAL ASSETS:
Cash and cash equivalents		$	39,723				39,723				39,723				—				—
Debt securities, held-to-maturity			16,858				15,679				—				—				15,679
Loans, net			1,712,946				1,534,406				—				—				1,534,406
Accrued interest receivable			8,405				8,405				—				8,405				—
Lender risk account			2,262				2,262				—				—				2,262
FINANCIAL LIABILITIES:
Deposits			1,824,389				1,824,105				1,485,418				338,687				—
Short-term borrowings			97,395				97,395				—				97,395				—
Long-term debt			113,123				112,986				—				112,986				—
Accrued interest payable			1,697				1,697				—				1,697				—

 

The fair values of off-balance-sheet financial instruments such as loan commitments and letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of such instruments were not material at December 31, 2024 and 2023.

 

Fair values of financial instruments are based on various assumptions, including the discount rate and estimates of future cash flows.  Therefore, the fair values presented may not represent amounts that could be realized in actual transactions.  In addition, because the required disclosures exclude certain financial instruments and all nonfinancial instruments, any aggregation of the fair value amounts presented would not represent the underlying value of the Company.