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Note 16 - Fair Value Measurements
 9 Months Ended
Sep. 30, 2024
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

NOTE 16 - 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, except for loans held-for-sale. 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 September 30, 2024 and December 31, 2023 (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)

 

September 30, 2024

                

Recurring fair value measurements:

                

Equity securities with a readily determinable fair value:

                

Equity securities

 $94   94   —   — 

Mutual funds measured at net asset value

  1,294   1,294   —   — 
                 

Debt securities, available-for-sale:

                

U.S. Treasury notes

  65,572   65,572   —   — 

U.S. Agency notes

  83,308   —   83,308   — 

Corporate bonds

  6,862   —   6,862   — 

U.S. Agency mortgage-backed securities

  68,339   —   68,339   — 

Municipal securities:

                

Non-taxable

  4,374   —   4,374   — 

Taxable

  34,167   —   34,167   — 

Total recurring fair value measurements

 $264,010   66,960   197,050   — 
                 

Nonrecurring fair value measurements:

                

Individually evaluated collateral dependent loans

 $1,678   —   —   1,678 

Total nonrecurring fair value measurements

 $1,678   —   —   1,678 
                 

December 31, 2023

                

Recurring fair value measurements:

                

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 September 30, 2024 and December 31, 2023 (dollars in thousands):

 

         

Range

     

Valuation

 

Unobservable

     

Weighted

  

Fair Value

 

Technique

 

Inputs

 

High

 

Low

 

Average

September 30, 2024

             

Individually evaluated collateral dependent loans

 $1,678 

Estimated sales price

 

Adjustments for comparable properties, discounts to reflect current market conditions

 

Not applicable

    
              

December 31, 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 September 30, 2024 and December 31, 2023 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)

 

September 30, 2024

                    

FINANCIAL ASSETS:

                    

Cash and cash equivalents

 $39,374   39,374   39,374   —   — 

Debt securities, held-to-maturity, net

  18,730   17,675   —   17,675   — 

Loans, net

  1,707,193   1,700,822   —   —   1,700,822 

Loans held-for-sale

  35,687   35,687   —   35,687   — 

Accrued interest receivable

  9,450   9,450   —   9,450   — 
                     

FINANCIAL LIABILITIES:

                    

Deposits

  1,917,005   1,930,109   1,383,859   546,250   — 

Short-term borrowings

  —   —   —   —   — 

Long-term debt

  155,662   155,964   —   155,964   — 

Accrued interest payable

  2,127   2,127   —   2,127   — 
                     

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 methodology to derive the fair value of loans at September 30, 2024 is consistent with the methodology utilized to determine the fair value of loans acquired in the Company’s recent acquisitions of CNNB and EFBI

 

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  September 30, 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.