FAIR VALUE OF FINANCIAL INSTRUMENTS |
FAIR VALUE OF FINANCIAL INSTRUMENTS
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 income.
LCNB utilizes a pricing service for determining the fair values of most of its investment 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. |
| | • | Fair value for trust preferred and equity securities are determined based on market quotations (level 1). These securities are not priced by the pricing service. |
| | • | LCNB has investments in five mutual funds. These investments are not priced by the pricing service. Investments in two of the mutual funds are measured at fair value using net asset values ("NAV") per share as a practical expedient and are not required to be classified in the fair value hierarchy. These funds can be redeemed at any time at their current NAVs. Two other mutual funds are traded in active markets and their fair values are based on market quotations (level 1). The investment in the remaining mutual fund, which is not traded in an active market, is considered to have level 2 inputs because an investor can have its interest in the fund redeemed for the balance of its capital account at any quarter-end assuming the fund is given a 60 day notice. The investment in this fund is carried at fair value, which approximates cost. |
Assets that may be recorded at fair value on a nonrecurring basis include impaired loans, other real estate owned, and other repossessed assets. A loan is considered impaired when management believes it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impaired loans are carried at the present value of estimated future cash flows using the loan's existing rate or the fair value of collateral if the loan is collateral dependent, if this value is less than the loan balance. The inputs are considered to be level 3.
Other real estate owned is adjusted to fair value 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. These inputs are also 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 | | | Fair Value Measurements | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | December 31, 2017 | | | | | | | | Recurring fair value measurements: | | | | | | | | Investment securities available-for-sale: | | | | | | | | U.S. Treasury notes | $ | 2,259 |
| | 2,259 |
| | — |
| | — |
| U.S. Agency notes | 83,261 |
| | — |
| | 83,261 |
| | — |
| U.S. Agency mortgage-backed securities | 67,153 |
| | — |
| | 67,153 |
| | — |
| Municipal securities: | |
| | |
| | |
| | |
| Non-taxable | 102,174 |
| | — |
| | 102,174 |
| | — |
| Taxable | 20,366 |
| | — |
| | 20,366 |
| | — |
| Mutual funds | 1,023 |
| | 23 |
| | 1,000 |
| | — |
| Mutual funds measured at net asset value (a) | 1,519 |
| | | | | | | Trust preferred securities | 50 |
| | 50 |
| | — |
| | — |
| Equity securities | 667 |
| | 667 |
| | — |
| | — |
| Total recurring fair value measurements | $ | 278,472 |
| | 2,999 |
| | 273,954 |
| | — |
| | | | | | | | | | Nonrecurring fair value measurements: | |
| | |
| | |
| | |
| Impaired loans | $ | 3,359 |
| | — |
| | — |
| | 3,359 |
| | | | | | | | | | December 31, 2016 | |
| | |
| | |
| | |
| Recurring fair value measurement: | |
| | |
| | |
| | |
| Investment securities available-for-sale: | |
| | |
| | |
| | |
| U.S. Treasury notes | $ | 28,145 |
| | 28,145 |
| | — |
| | — |
| U.S. Agency notes | 85,400 |
| | — |
| | 85,400 |
| | — |
| U.S. Agency mortgage-backed securities | 71,047 |
| | — |
| | 71,047 |
| | — |
| Municipal securities: | |
| | |
| | |
| | |
| Non-taxable | 113,015 |
| | — |
| | 113,015 |
| | — |
| Taxable | 19,845 |
| | — |
| | 19,845 |
| | — |
| Mutual funds | 1,000 |
| | — |
| | 1,000 |
| | — |
| Mutual funds measured at net asset value (a) | 1,482 |
| | | | | | | Trust preferred securities | 48 |
| | 48 |
| | — |
| | — |
| Equity securities | 677 |
| | 677 |
| | — |
| | — |
| Total recurring fair value measurements | $ | 320,659 |
| | 28,870 |
| | 290,307 |
| | — |
| | | | | | | | | | Nonrecurring fair value measurements: | |
| | |
| | |
| | |
| Impaired loans | $ | 5,340 |
| | — |
| | — |
| | 5,340 |
| | | | | | | | | | (a) | In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Balance Sheets. |
The following table presents quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements at December 31, 2017 and 2016 (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | Range | | | Fair Value | | Valuation Technique | | Unobservable Inputs | | High | | Low | | Weighted Average | 2017 | | | | | | | | | | | | | Impaired loans | | $ | 3,359 |
| | Estimated sales price | | Adjustments for comparable properties, discounts to reflect current market conditions | | Not applicable | | | | | Discounted cash flows | | Discount rate | | 8.25 | % | | 3.25 | % | | 6.27 | % | | | | | | | | | | | | | | 2016 | | | | | | | | | | | | | Impaired loans | | $ | 5,340 |
| | Estimated sales price | | Adjustments for comparable properties, discounts to reflect current market conditions | | Not applicable | | | | | Discounted cash flows | | Discount rate | | 8.25 | % | | 4.50 | % |
| 5.56 | % |
Carrying amounts and estimated fair values of financial instruments as of December 31 were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | Fair Value Measurements at the End of the Reporting Period Using | | Carrying Amount | | Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | 2017 | | | | | | | | | | FINANCIAL ASSETS: | | | | | | | | | | Cash and cash equivalents | $ | 25,386 |
| | 25,386 |
| | 25,386 |
| | — |
| | — |
| Investment securities, held-to-maturity | 32,571 |
| | 32,350 |
| | — |
| | — |
| | 32,350 |
| Federal Reserve Bank stock | 2,732 |
| | 2,732 |
| | 2,732 |
| | — |
| | — |
| Federal Home Loan Bank stock | 3,638 |
| | 3,638 |
| | 3,638 |
| | — |
| | — |
| Loans, net | 845,657 |
| | 813,368 |
| | — |
| | — |
| | 813,368 |
| Accrued interest receivable | 3,511 |
| | 3,511 |
| | — |
| | 3,511 |
| | — |
| | | | | | | | | | | FINANCIAL LIABILITIES: | |
| | |
| | | | | | | Deposits | 1,085,821 |
| | 1,087,086 |
| | 894,046 |
| | 193,040 |
| | — |
| Short-term borrowings | 47,000 |
| | 47,000 |
| | 47,000 |
| | — |
| | — |
| Long-term debt | 303 |
| | 307 |
| | — |
| | 307 |
| | — |
| Accrued interest payable | 329 |
| | 329 |
| | — |
| | 329 |
| | — |
| | | | | | | | | | | 2016 | | | | | | | | | | FINANCIAL ASSETS: | | | | | | | | | | Cash and cash equivalents | $ | 18,865 |
| | 18,865 |
| | 18,865 |
| | — |
| | — |
| Investment securities, held-to-maturity | 41,003 |
| | 40,490 |
| | — |
| | — |
| | 40,490 |
| Federal Reserve Bank stock | 2,732 |
| | 2,732 |
| | 2,732 |
| | — |
| | — |
| Federal Home Loan Bank stock | 3,638 |
| | 3,638 |
| | 3,638 |
| | — |
| | — |
| Loans, net | 816,228 |
| | 799,791 |
| | — |
| | — |
| | 799,791 |
| Accrued interest receivable | 3,559 |
| | 3,559 |
| | — |
| | 3,559 |
| | — |
| | | | | | | | | | | FINANCIAL LIABILITIES: | |
| | |
| | | | | | | Deposits | 1,110,905 |
| | 1,113,187 |
| | 896,147 |
| | 217,040 |
| | — |
| Short-term borrowings | 42,040 |
| | 42,040 |
| | 42,040 |
| | — |
| | — |
| Long-term debt | 598 |
| | 614 |
| | — |
| | 614 |
| | — |
| Accrued interest payable | 307 |
| | 307 |
| | — |
| | 307 |
| | — |
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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, 2017 and 2016.
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. The following methods and assumptions were used to estimate the fair value of certain financial instruments:
Cash and cash equivalents The carrying amounts presented are deemed to approximate fair value.
Investment securities, held-to-maturity Fair values for investment securities, held-to-maturity are based on quoted market prices for similar securities and/or discounted cash flow analysis or other methods.
Federal Home Loan Bank and Federal Reserve Bank stock The carrying value of Federal Home Loan Bank and Federal Reserve Bank stock approximates fair value based on the respective redemptive provisions.
Loans Fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, incorporating assumptions of current and projected prepayment speeds. These current rates approximate market rates.
Deposits The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities, which approximates market rates.
Borrowings The carrying amounts of federal funds purchased, repurchase agreements, and U.S. Treasury demand note borrowings are deemed to approximate fair value of short-term borrowings. For long-term debt, fair values are estimated based on the discounted value of expected net cash flows using current interest rates.
Accrued interest receivable and Accrued interest payable Carrying amount approximates fair value.
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