Fair Value Measurements

6 Months Ended

Jun. 30, 2023

FAIR VALUE MEASUREMENTSLCNB 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). 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. Investments in another two mutual funds are measured at fair value using net asset values and 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 June 30, 2023 and December 31, 2022 (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, 2023
Recurring fair value measurements:
	Equity securities with a readily determinable fair value:
	Equity securities	$	72	72	—	—

	Mutual funds measured at net asset value	1,207		1,207	—	—

	Debt securities, available-for-sale:
	U.S. Treasury notes	70,963		70,963	—	—
	U.S. Agency notes	78,720		—	78,720	—
	Corporate bonds	6,503		—	6,503	—
	U.S. Agency mortgage-backed securities	75,322		—	75,322	—
	Municipal securities:
	Non-taxable	8,502		—	8,502	—
	Taxable	41,146		—	41,146	—
	Total recurring fair value measurements	$	282,435	72,242	210,193	—

Nonrecurring fair value measurements:
	Individually evaluated loans	$	22	—	—	22

	Total nonrecurring fair value measurements	$	22	—	—	22

December 31, 2022
Recurring fair value measurements:
	Equity securities with a readily determinable fair value:
	Equity securities	$	1,039	1,039	—	—
	Mutual funds	41		41	—	—
	Mutual funds measured at net asset value	1,193		1,193	—	—

	Debt securities, available-for-sale:
	U.S. Treasury notes	76,447		76,447	—	—
	U.S. Agency notes	77,976		—	77,976	—
	Corporate bonds	6,685		—	6,685	—
	U.S. Agency mortgage-backed securities	79,440		—	79,440	—
	Municipal securities:
	Non-taxable	8,524		—	8,524	—
	Taxable	40,778		—	40,778	—
	Total recurring fair value measurements	$	292,123	78,720	213,403	—

Nonrecurring fair value measurements:
	Individually evaluated loans	$	923	—	—	923

	Total nonrecurring fair value measurements	$	923	—	—	923

The following table presents quantitative information about unobservable inputs used in nonrecurring level 3 fair value measurements at June 30, 2023 and December 31, 2022 (dollars in thousands):

Range

Fair Value

Valuation Technique

Unobservable Inputs

High

Low

Weighted Average

June 30, 2023

Individually evaluated collateral dependent loans

Estimated sales price

Adjustments for comparable properties, discounts to reflect current market conditions

Not applicable

December 31, 2022

Individually evaluated loans

923

Discounted cash flows

Discount rate

8.13

4.63

6.04

Carrying amounts and estimated fair values of financial instruments as of June 30, 2023 and December 31, 2022 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, 2023
FINANCIAL ASSETS:
Cash and cash equivalents	$	26,020	26,020	26,020	—	—

Debt securities, held-to-maturity, net	19,123		17,590	—	—	17,590


Loans, net	1,431,295		1,249,702	—	—	1,249,702
Accrued interest receivable	7,811		7,811	—	7,811	—

FINANCIAL LIABILITIES:
Deposits	1,596,709		1,595,620	1,375,690	219,930	—
Short-term borrowings	112,289		112,289	112,289	—	—
Long-term debt	18,122		17,668	—	17,668	—
Accrued interest payable	915		915	—	915	—

December 31, 2022
FINANCIAL ASSETS:
Cash and cash equivalents	$	22,701	22,701	22,701	—	—

Debt securities, held-to-maturity, net	19,878		18,885	—	—	18,885


Loans, net	1,395,632		1,219,112	—	—	1,219,112
Accrued interest receivable	7,482		7,482	—	7,482	—

FINANCIAL LIABILITIES:
Deposits	1,604,970		1,604,380	1,448,470	155,910	—
Short-term borrowings	71,455		71,455	71,455	—	—
Long-term debt	19,072		18,573	—	18,573	—
Accrued interest payable	311		311	—	311	—

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, 2023 and December 31, 2022.

- 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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