Fair Value Measurements

6 Months Ended

Jun. 30, 2021

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 condensed statements of income. Fair values for equity securities are determined based on market quotations (level 1). LCNB has invested in two mutual funds that are traded in active markets and their fair values are based on market quotations (level 1). Investments in another two mutual funds are measured at fair value using net asset values ("NAV") and are considered level 1 because the NAVs are determined and published and are 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 income (loss). LCNB utilizes a pricing service for determining the fair values of its debt securities. Methods and significant assumptions used to estimate fair value were 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 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. These inputs 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 June 30, 2021 and December 31, 2020 (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)
June 30, 2021
Recurring fair value measurements:
	Equity securities with a readily determinable fair value:
	Equity securities	$	1,094	1,094	—	—
	Mutual funds	54		54	—	—
	Mutual funds measured at net asset value	1,340		1,340	—	—

	Debt securities, available-for-sale:
	U.S. Treasury notes	64,494		64,494	—	—
	U.S. Agency notes	95,489		—	95,489	—
	Corporate bonds	1,893		—	1,893	—
	U.S. Agency mortgage-backed securities	100,093		—	100,093	—
	Municipal securities:
	Non-taxable	11,899		—	11,899	—
	Taxable	36,647		—	36,647	—
	Total recurring fair value measurements	$	313,003	66,982	246,021	—

Nonrecurring fair value measurements:
	Impaired loans	$	1,065	—	—	1,065

	Total nonrecurring fair value measurements	$	1,065	—	—	1,065

December 31, 2020
Recurring fair value measurements:
	Equity securities with a readily determinable fair value:
	Equity securities	$	987	987	—	—
	Mutual funds	50		50	—	—
	Mutual funds measured at net asset value	1,352		1,352	—	—

	Debt securities, available-for-sale:
	U.S. Treasury notes	2,388		2,388	—	—
	U.S. Agency notes	67,900		—	67,900	—
	Corporate bonds	1,179		—	1,179	—
	U.S. Agency mortgage-backed securities	91,634		—	91,634	—
	Municipal securities:
	Non-taxable	12,933		—	12,933	—
	Taxable	33,437		—	33,437	—
	Total recurring fair value measurements	$	211,860	4,777	207,083	—

Nonrecurring fair value measurements:
	Impaired loans	$	3,439	—	—	3,439

	Total nonrecurring fair value measurements	$	3,439	—	—	3,439

The following table presents quantitative information about unobservable inputs used in nonrecurring level 3 fair value measurements at June 30, 2021 and December 31, 2020 (dollars in thousands):


					Range
	Fair Value		Valuation Technique	Unobservable Inputs	High		Low		Weighted Average
June 30, 2021

Impaired loans	1,065		Discounted cash flows	Discount rate	8.25	%	4.00	%	6.12	%


December 31, 2020
Impaired loans	$	1,352	Estimated sales price	Adjustments for comparable properties, discounts to reflect current market conditions	Not applicable
	2,087		Discounted cash flows	Discount rate	8.25	%	4.00	%	4.74	%

Carrying amounts and estimated fair values of financial instruments as of June 30, 2021 and December 31, 2020 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)
June 30, 2021
FINANCIAL ASSETS:
Cash and cash equivalents	$	22,909	22,909	22,909	—	—

Debt securities, held-to-maturity	24,242		24,389	—	—	24,389
Federal Reserve Bank stock	4,652		4,652	4,652	—	—
Federal Home Loan Bank stock	5,203		5,203	5,203	—	—
Loans, net	1,312,113		1,272,961	—	—	1,272,961
Accrued interest receivable	8,395		8,395	—	8,395	—

FINANCIAL LIABILITIES:
Deposits	1,577,345		1,579,285	1,362,599	216,686	—

Long-term debt	15,000		15,437	—	15,437	—
Accrued interest payable	311		311	—	311	—

December 31, 2020
FINANCIAL ASSETS:
Cash and cash equivalents	$	31,730	31,730	31,730	—	—

Debt securities, held-to-maturity	24,810		24,960	—	—	24,960
Federal Reserve Bank stock	4,652		4,652	4,652	—	—
Federal Home Loan Bank stock	5,203		5,203	5,203	—	—
Loans, net	1,293,693		1,252,642	—	—	1,252,642
Accrued interest receivable	8,337		8,337	—	8,337	—

FINANCIAL LIABILITIES:
Deposits	1,455,423		1,458,413	1,212,903	245,510	—

Long-term debt	22,000		22,595	—	22,595	—
Accrued interest payable	452		452	—	452	—

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 June 30, 2021 and December 31, 2020.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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