Fair Value Measurements

3 Months Ended

Mar. 31, 2024

FAIR VALUE MEASUREMENTS

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 an investment in a mutual fund that is measured at fair value using net asset values, which are considered level 1 because the net asset values 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. 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 values 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.

The following table summarizes the valuation of LCNB's assets recorded at fair value by input levels as of March 31, 2024 and December 31, 2023 (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)
March 31, 2024
Recurring fair value measurements:
	Equity securities with a readily determinable fair value:
	Equity securities	$	98	98	—	—

	Mutual funds measured at net asset value	1,236		1,236	—	—

	Debt securities, available-for-sale:
	U.S. Treasury notes	67,806		67,806	—	—
	U.S. Agency notes	80,590		—	80,590	—
	Corporate bonds	6,626		—	6,626	—
	U.S. Agency mortgage-backed securities	69,793		—	69,793	—
	Municipal securities:
	Non-taxable	4,403		—	4,403	—
	Taxable	33,568		—	33,568	—
	Total recurring fair value measurements	$	264,120	69,140	194,980	—

Nonrecurring fair value measurements:
	Individually evaluated loans	$	1,483	—	—	1,483

	Total nonrecurring fair value measurements	$	1,483	—	—	1,483

December 31, 2023
Recurring fair value measurements:
	Equity securities with a readily determinable fair value:
	Equity securities	$	96	96	—	—
	Mutual funds	—		—	—	—
	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 loans	$	—	—	—	—

	Total nonrecurring fair value measurements	$	—	—	—	—

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

Range

Fair Value

Valuation Technique

Unobservable Inputs

High

Low

Weighted Average

March 31, 2024

Individually evaluated collateral dependent loans

1,483

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 March 31, 2024 and December 31, 2023 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)
March 31, 2024
FINANCIAL ASSETS:
Cash and cash equivalents	$	32,951	32,951	32,951	—	—

Debt securities, held-to-maturity, net	16,746		16,923	—	—	16,923


Loans, net	1,645,797		1,460,905	—	—	1,460,905
Accrued interest receivable	9,115		9,115	—	9,115	—

FINANCIAL LIABILITIES:
Deposits	1,858,493		1,858,750	1,447,549	411,201	—
Short-term borrowings	10,000		10,000	—	10,000	—
Long-term debt	162,638		161,588	—	161,588	—
Accrued interest payable	1,972		1,972	—	1,972	—

December 31, 2023
FINANCIAL ASSETS:
Cash and cash equivalents	$	39,723	39,723	39,723	—	—

Debt securities, held-to-maturity, net	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	—

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 March 31, 2024 and December 31, 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 LCNB.

- 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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