SB FINANCIAL GROUP, INC. Fair Value Disclosure

Note 19: Disclosures About Fair Value of Assets and Liabilities

 

Pursuant to ASC 820, fair value is defined as 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. A three level hierarchy exists in ASC 820 for fair value measurements based upon the inputs to the valuation of an asset or liability:

 

Level 1: Quoted prices in active markets for identical assets or liabilities

 

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

 

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis, recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

 

Available-for-sale securities

 

The fair value of available-for-sale securities are determined by various valuation methodologies. Level 2 securities include obligations of U.S. government agencies, mortgage-backed securities, obligations of political and state subdivisions, and corporate securities. Level 2 inputs do not include quoted prices for individual securities in active markets; however, they do include inputs that are either directly or indirectly observable for the individual security being valued. Such observable inputs include interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates. Also included are inputs derived principally from or corroborated by observable market data by correlation or other means.

 

Interest rate contracts

 

The fair values of interest rate contracts are based upon the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account underlying interest rates, creditworthiness of underlying customers for credit derivatives and, when appropriate, the creditworthiness of the counterparties.

 

Forward contracts

 

The fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets or benchmarked thereto (Level 1).

 

Interest Rate Lock Commitments (IRLCs)

 

The fair value of IRLCs are determined using the projected sale price of individual loans based on changes in the market interest rates, projected pull-through rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3).

The following table presents the fair value measurements of securities measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fell at December 31, 2025 and 2024:

 

($ in thousands)		Fair value at December 31, 2025				(Level 1)				(Level 2)				(Level 3)
U.S. Treasury and Government Agencies		$	5,203			$	-			$	5,203			$	-
Mortgage-backed securities			159,952				-				159,952				-
State and political subdivisions			9,849				-				9,849				-
Other corporate securities			13,622				-				13,622				-
Interest rate contracts - assets			1,465				-				1,465				-
Interest rate contracts - liabilities			(1,465	)			-				(1,465	)			-
Forward contracts			(30	)			(30	)			-				-
IRLCs			15				-				-				15

 

($ in thousands)		Fair value at December 31, 2024				(Level 1)				(Level 2)				(Level 3)
U.S. Treasury and Government Agencies		$	7,389			$	-			$	7,389			$	-
Mortgage-backed securities			169,620				-				169,620				-
State and political subdivisions			9,407				-				9,407				-
Other corporate securities			15,171				-				15,171				-
Interest rate contracts - assets			4,029				-				4,029				-
Interest rate contracts - liabilities			(4,029	)			-				(4,029	)			-
Forward contracts			69				69				-				-
IRLCs			(21	)			-				-				(21	)

 

Level 1 - quoted prices in active markets for identical assets

Level 2 - significant other observable inputs

Level 3 - significant unobservable inputs

 

The following table reconciles the beginning and ending balances of recurring fair value measurements recognized in the accompanying consolidated balance sheets using significant unobservable (Level 3) inputs for the years ended December 31, 2025, and 2024.

 

		for the Twelve Months Ended December 31,
($ in thousands)		2025				2024
Interest rate lock commitments
Balance at beginning of period		$	(21	)		$	45
Change in fair value			36				(66	)
Balance at end of period		$	15			$	(21	)

  

The following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

 

Collateral-Dependent Individually Evaluated Loans, Net of ACL

 

Loans for which it is probable the Company will not collect all principal and interest due according to contractual terms are measured for collateral dependency. The estimated fair value of collateral-dependent loans is based on the appraised value of the collateral, less estimated cost to sell. Collateral-dependent loans are classified within Level 3 of the fair value hierarchy. This method requires obtaining independent appraisals of the collateral from a list of preapproved appraisers, which are reviewed for accuracy and consistency by the Company. The appraised values are reduced by applying a discount factor to the value based on the Company’s loan review policy. All individually evaluated loans held by the Company were collateral dependent at December 31, 2025 and 2024.

Mortgage Servicing Rights

 

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models associated with the servicing rights and discounting the cash flows using discount market rates, prepayment speeds and default rates. The servicing portfolio has been valued using all relevant positive and negative cash flows including servicing fees, miscellaneous income and float; marginal costs of servicing; the cost of carry of advances; and foreclosure losses; and applying certain prevailing assumptions used in the marketplace. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy. These mortgage servicing rights are tested for impairment on a quarterly basis.

 

The following tables presents the fair value measurements of assets measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements fell at December 31, 2025 and 2024:

 

($ in thousands)		Fair value at December 31, 2025				(Level 1)				(Level 2)				(Level 3)
Collateral-dependent Individually evaluated loans		$	955			$	-			$	-			$	955
Mortgage servicing rights			5,813				-				-				5,813

 

($ in thousands)		Fair value at December 31, 2024				(Level 1)				(Level 2)				(Level 3)
Collateral-dependent Individually evaluated loans		$	1,167			$	-			$	-			$	1,167
Mortgage servicing rights			1,814				-				-				1,814

 

Level 1 - quoted prices in active markets for identical assets

Level 2 - significant other observable inputs  

Level 3 - significant unobservable inputs

 

Unobservable (Level 3) Inputs

 

The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at December 31, 2025 and 2024:

 

($ in thousands)

Fair value at December 31, 2025

Valuation technique

Unobservable inputs

Range (weighted- average)

Collateral-dependent individually evaluated loans

$

955

Market comparable properties

Comparability adjustments (%)

1 - 19% (12%)

Mortgage servicing rights

5,813

Discounted cash flow

Discount rate

10.38%

Constant prepayment rate

7.34%

P&I earnings credit

3.73%

T&I earnings credit

3.93%

Inflation for cost of servicing

3.50%

IRLCs

15

Discounted cash flow

Loan closing rates

43% - 99%

($ in thousands)		Fair value at December 31, 2024				Valuation technique		Unobservable inputs		Range (weighted- average)
Collateral-dependent individually evaluated loans		$	1,167			Market comparable properties		Comparability adjustments (%)			24 - 404% (84%)
Mortgage servicing rights			1,814			Discounted cash flow		Discount rate			11.13%
								Constant prepayment rate			7.30%
								P&I earnings credit			4.44%
								T&I earnings credit			4.49%
								Inflation for cost of servicing			3.50%
IRLCs			(21	)		Discounted cash flow		Loan closing rates			64% - 99%

 

The mortgage servicing rights portfolio is measured for fair value by an independent third party. The valuation of the portfolio hinges on a number of quantitative factors. These factors include, but are not limited to, a discount rate applied to the cash flows, and an assumption of future principal prepayments. The prepayment assumptions are based upon the historical performance of the Company’s portfolio as well as market metrics.

 

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.

 

Cash and Due From Banks, Interest Bearing Time Deposits, FRB and FHLB Stock and Interest Receivable and Payable

 

Fair value is determined to be the carrying amount for these items (which include cash on hand, due from banks, and federal funds sold) because they represent cash or mature in 90 days or less, and do not represent unanticipated credit concerns.

 

Loans Held for Sale

 

The fair value of loans held for sale is based upon quoted market prices, where available, or is determined by discounting estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans and adjusted to reflect the inherent credit risk.

 

Loans

 

The estimated fair value of loans follows the guidance in ASU 2016-01, which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments. The fair value calculation at that date discounted estimated future cash flows using rates that incorporated discounts for credit, liquidity, and marketability factors.

 

Deposits, Repurchase Agreements and FHLB Advances

 

Deposits include demand deposits, savings accounts and certain money market deposits. The carrying amount approximates the fair value. The estimated fair value for fixed-maturity time deposits, as well as borrowings, is based on estimates of the rate the Company could pay on similar instruments with similar terms and maturities at December 31, 2025 and 2024.

Loan Commitments

 

The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The estimated fair values for other financial instruments and off-balance-sheet loan commitments approximate cost at December 31, 2025 and 2024 and are not considered significant to this presentation.

 

Trust Preferred Securities

 

The fair value for Trust Preferred Securities is estimated by discounting the cash flows using an appropriate discount rate.

 

Subordinated Debt

 

The fair value for Subordinated Debt is estimated by discounting the cash flows using an appropriate discount rate.

 

The following tables present estimated fair values of the Company’s financial instruments. The fair values of certain instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for these financial instruments, and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

 

($ in thousands)		Carrying				Fair				Fair value measurements using
December 31, 2025		Amount				value				(Level 1)				(Level 2)				(Level 3)
Financial assets
Cash and due from banks		$	71,543			$	71,543			$	71,543			$	-			$	-
Interest bearing time deposits			1,140				1,140				-				1,140				-
Loans held for sale			1,761				1,779				-				1,779				-
Loans, net of allowance for credit losses			1,164,477				1,127,003				-				-				1,127,003
Federal Reserve and FHLB Bank stock, at cost			5,610				5,610				-				5,610				-
Interest receivable			5,490				5,490				-				5,490				-
Financial liabilities
Deposits		$	1,307,244			$	1,307,177			$	1,033,944			$	273,233			$	-
Repurchase agreements			9,230				9,230				-				9,230				-
FHLB advances			35,000				35,121				-				35,121				-
Trust preferred securities			10,310				8,644				-				8,644				-
Subordinated debt, net of issuance costs			19,739				19,051				-				19,051				-
Interest payable			2,460				2,460				-				2,460				-

 

($ in thousands)		Carrying				Fair				Fair value measurements using
December 31, 2024		amount				value				(Level 1)				(Level 2)				(Level 3)
Financial assets
Cash and due from banks		$	25,928			$	25,928			$	25,928			$	-			$	-
Interest bearing time deposits			1,565				1,565				-				1,565				-
Loans held for sale			6,770				6,861				-				6,861				-
Loans, net of allowance for credit losses			1,031,639				1,033,064				-				-				1,033,064
Federal Reserve and FHLB Bank stock, at cost			5,223				5,223				-				5,223				-
Interest receivable			4,908				4,908				-				4,908				-
Financial liabilities
Deposits		$	1,152,605			$	1,155,747			$	893,388			$	262,359			$	-
Repurchase agreements			10,585				10,585				-				10,585				-
FHLB advances			35,000				34,782				-				34,782				-
Trust preferred securities			10,310				9,495				-				9,495				-
Subordinated debt, net of issuance costs			19,690				19,155				-				19,155				-
Interest payable			2,351				2,351				-				2,351				-