CB Financial Services, Inc.CBFV
CB Financial Services, Inc. Fair Value Disclosure
FAIR VALUE DISCLOSURE
ASC Topic 820 “Fair Value Measurement” defines fair value and provides the framework for measuring fair value and required disclosures about fair value measurements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the transaction date. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used in valuation methods to determine fair value.
The three levels of fair value hierarchy are as follows:
Level 1 - Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.
Level 2 - Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets, and other observable inputs.
Level 3 - Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows, and other similar techniques.
This hierarchy requires the use of observable market data when available. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.
The majority of the Company’s securities are included in Level 2 of the fair value hierarchy. Fair values for Level 2 securities were primarily determined by a third-party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. The standard inputs that are normally used include benchmark yields of like securities, reportable trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications.
The Company uses derivative instruments, including interest rate swaps and risk participation agreements, and the fair value of such instruments are calculated using accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative, considering the contractual terms of each derivative, and uses observable market-based inputs, such as interest rate curves and implied volatilities. Credit valuation adjustments are incorporated to appropriately reflect nonperformance risk and the respective counterparties' nonperformance risk in calculating fair value measurements. These instruments are classified as Level 2.
There were no transfers from Level 1 to Level 2 and no transfers into or out of Level 3 during the years ended December 31, 2024 and 2023, respectively.
The following table presents the financial assets measured at fair value on a recurring basis and reported on the Consolidated Statements of Financial Condition as of the dates indicated, by level within the fair value hierarchy.
| December 31, | Fair Value Hierarchy | 2024 | 2023 | ||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||
ASSETS | |||||||||||||||||
| Available-for-Sale Debt Securities | |||||||||||||||||
| U.S. Government Agencies | Level 2 | $ | 3,945 | $ | 3,949 | ||||||||||||
| Obligations of States and Political Subdivisions | Level 2 | 3,347 | 3,373 | ||||||||||||||
| Mortgage-Backed Securities - Government-Sponsored Enterprises | Level 2 | 50,363 | 54,532 | ||||||||||||||
| Collateralized Mortgage Obligations - Government-Sponsored Enterprises | Level 2 | 94,957 | 105,130 | ||||||||||||||
| Collateralized Loan Obligations | Level 2 | 98,779 | 29,804 | ||||||||||||||
| Corporate Debt | Level 2 | 8,123 | 7,719 | ||||||||||||||
| Total Available-for-Sale Debt Securities | 259,514 | 204,507 | |||||||||||||||
| Equity Securities | |||||||||||||||||
| Mutual Funds | Level 1 | 879 | 888 | ||||||||||||||
| Other | Level 1 | 1,760 | 1,700 | ||||||||||||||
| Total Equity Securities | 2,639 | 2,588 | |||||||||||||||
| Total Securities | $ | 262,153 | $ | 207,095 | |||||||||||||
| Total Assets | $ | 262,153 | $ | 207,095 | |||||||||||||
| LIABILITIES | |||||||||||||||||
Derivative Financial Liabilities | |||||||||||||||||
| Interest Rate Swaps | Level 2 | $ | 801 | $ | 1,777 | ||||||||||||
| Risk Participation Agreements | Level 2 | 66 | 94 | ||||||||||||||
| Total Liabilities | $ | 867 | $ | 1,871 | |||||||||||||
The following table presents the financial assets measured at fair value on a nonrecurring basis on the Consolidated Statements of Financial Condition as of the dates indicated by level within the fair value hierarchy. The table also presents the significant unobservable inputs used in the fair value measurements. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loans include quoted market prices for identical assets classified as Level 1 inputs or observable inputs, employed by certified appraisers, for similar assets classified as Level 2 inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level 3 inputs.
| Financial Asset | Fair Value Hierarchy | December 31, 2024 | Valuation Technique | Significant Unobservable Inputs | Range | Weighted Average | ||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||
| Impaired Loans Individually Assessed | Level 3 | $ | 5,244 | Appraisal of Collateral (1) | Appraisal Adjustments (2) | 25% | to | 52% | 26.2% | |||||||||||||||||
| Financial Asset | Fair Value Hierarchy | December 31, 2023 | Valuation Technique | Significant Unobservable Inputs | Range | Weighted Average | ||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||
| OREO | Level 3 | — | Appraisal of Collateral (1) | Appraisal Adjustments (2) | 100% | to | 100% | 100.0% | ||||||||||||||||||
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which may include various Level 3 inputs, which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of appraisal adjustments and liquidation expense are presented as a percent of the appraisal.
Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing the loans and is classified as Level 3 in the fair value hierarchy. At December 31, 2024, the fair value of impaired loans consists of loan balances of $5.6 million less specific valuation allowances of $398,000. At December 31, 2023, the Company did not have any impaired loans that would be required to be remeasured.
The fair value of MSRs is determined by calculating the present value of estimated future net servicing cash flows, considering expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. The expected rate of mortgage loan prepayments is the most significant factor driving the value of MSRs. MSRs are considered impaired if the carrying value exceeds fair value. Since the valuation model includes significant unobservable inputs as listed above, MSRs are classified as Level 3. At December 31, 2024 and 2023, the Company did not have any MSRs that would be required to be remeasured.
OREO properties are evaluated at the time of acquisition and recorded at fair value, less estimated selling costs. After acquisition, OREO is recorded at the lower of cost or fair value, less estimated selling costs. The fair value of an OREO property is determined from a qualified independent appraisal and is classified as Level 3 in the fair value hierarchy. At December 31, 2024, the Company did not have any OREO that would be required to be remeasured. At December 31, 2023, OREO measured at fair value less costs to sell had no carrying value, which consisted of the outstanding balance of $37,000 less write-downs of $37,000.
Financial instruments are defined as cash, evidence of an ownership in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses and other factors, as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates that are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in the assumptions on which the estimated fair values are based may have significant impact on the resulting estimated fair values.
The estimated fair values of the Company’s financial instruments at the dates indicated are as follows:
| 2024 | 2023 | ||||||||||||||||||||||||||||
| December 31, | Fair Value Hierarchy | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||||||
| Financial Assets: | |||||||||||||||||||||||||||||
| Cash and Due From Banks: | |||||||||||||||||||||||||||||
| Interest-Earning | Level 1 | $ | 39,332 | $ | 39,332 | $ | 62,442 | $ | 62,442 | ||||||||||||||||||||
| Noninterest-Earning | Level 1 | 10,240 | 10,240 | 5,781 | 5,781 | ||||||||||||||||||||||||
| Securities | See Above | 262,153 | 262,153 | 207,095 | 207,095 | ||||||||||||||||||||||||
| Loans, Net | Level 3 | 1,082,821 | 1,045,104 | 1,100,689 | 1,051,722 | ||||||||||||||||||||||||
| Restricted Stock | Level 2 | 3,055 | 3,055 | 3,345 | 3,345 | ||||||||||||||||||||||||
| Mortgage Servicing Rights | Level 3 | 466 | 849 | 540 | 974 | ||||||||||||||||||||||||
| Accrued Interest Receivable | Level 2 | 5,586 | 5,586 | 5,086 | 5,086 | ||||||||||||||||||||||||
| Financial Liabilities: | |||||||||||||||||||||||||||||
| Deposits | Level 2 | 1,283,517 | 1,284,494 | 1,267,159 | 1,263,574 | ||||||||||||||||||||||||
| Other Borrowed Funds | |||||||||||||||||||||||||||||
| FHLB Borrowings | Level 2 | 20,000 | 20,004 | 20,000 | 19,962 | ||||||||||||||||||||||||
| Subordinated Debt | Level 2 | 14,718 | 14,206 | 14,678 | 13,378 | ||||||||||||||||||||||||
| Derivative Liabilities | Level 2 | 867 | 867 | 1,871 | 1,871 | ||||||||||||||||||||||||
| Accrued Interest Payable | Level 2 | 2,496 | 2,496 | 1,814 | 1,814 | ||||||||||||||||||||||||
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.