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FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2023

NOTE 9—FAIR VALUE MEASUREMENTS:

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, management used various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.

The fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and gives the lowest priority to unobservable inputs (Level 3). The levels of the fair value hierarchy are as follows:

Level 1Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2Observable 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 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency mortgage-backed debt securities, corporate debt securities, derivative contracts and residential mortgage loans held-for-sale.

Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly structured or long-term derivative contracts.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset or a liability’s categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. The Company assesses the levels of assets and liabilities at each measurement date. There were no transfers to or from Level 3 of the fair value hierarchy for assets and liabilities during the six months ended June 30, 2023 or 2022.

Level 1 investments were valued using quoted market prices. Level 2 investments were valued using market consensus prices that are corroborated by observable market data and quoted market prices for similar assets and liabilities.

The Company has two joint venture investments. For TSO JV, the Company calculates the fair value of the investment based on the net asset NAV of the entity. The fair value of the investment is equivalent to 50% of the total NAV of the JV, which represents the Company’s share of the entity and is based upon the practical expedient method permitted under ASC 820. For NCL JV, the Company uses a discounted cash flow methodology and adjusts the NAV of the entity by a fair value adjustment for the fixed rate debt liability.

Due to the inherent uncertainty of determining the fair value of Level 3 investments that do not have a readily available market value, the fair value of the investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that may ultimately be received or settled. Further, such investments are generally subject to legal and other restrictions or otherwise are less liquid than publicly traded instruments. If the Company were required to liquidate a portfolio investment in a forced or liquidation sale, the Company may realize significantly less than the value at which such investment had previously been recorded.

The Company’s investments are subject to market risk. Market risk is the potential for changes in the value due to market changes. Market risk is directly impacted by the volatility and liquidity in the markets in which the investments are traded. In addition recent changes in inflation and base interest rates, supply chain disruptions, significant market volatility, risk of recession, recent economic and market events, unrelated bank failures and declines in depositor confidence in depository institutions, the ongoing war between Russia and Ukraine and general uncertainty surrounding the financial and political stability of the United States, United Kingdom, the European Union and China could further negatively impact the fair value of the Company’s investments after June 30, 2023, in addition to other circumstances and events that are not yet known.

The table below provides a roll forward of the Level 3 equity warrant asset fair values.


Equity Warrant Assets:	Three Months Ended June 30, 2023		Six Months Ended June 30, 2023
Balance at beginning of period	$	148	$	—
New equity warrant assets	—		311
Changes in fair value, net	84		(79)
Balance at end of period	$	232	$	232

The following tables present fair value measurements of certain of the Company’s assets and liabilities measured at fair value and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair values as of June 30, 2023 and December 31, 2022:


	Fair Value Measurements at June 30, 2023
	Total		Level 1		Level 2		Level 3
Assets:

Debt securities available-for-sale
U.S. Treasury notes	$	29,108	$	29,108	$	—	$	—
Government agency debentures	3,799		—		3,799		—
Loans held for sale, at fair value	106,231		—		4,342		101,889
Loans held for investment, at fair value	512,418		—		—		512,418
Other real estate owned 1	3,612		—		—		3,612
Non-controlled/affiliate investments	1,360		—		—		1,360
Servicing assets	35,754		—		—		35,754
Derivative instruments2	562		—		562		—
Joint ventures	27,722		—		—		27,722
Total assets	$	720,566	$	29,108	$	8,703	$	682,755

(1) Included in Other Assets on the Consolidated Statements of Assets and Liabilities.

(2) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings.


	Fair Value Measurements at December 31, 2022
	Total		Level 1		Level 2		Level 3
Assets:

Loans held for sale, at fair value	$	19,171	—		$	19,171	$	—
Loans held for investment, at fair value	505,268		—		—		505,268
Controlled investments	259,217		—		—		259,217
Other real estate owned1	3,529		—		—		3,529
Non-control investments	1,360		—		—		1,360
Servicing assets	30,268		—		—		30,268
Controlled investments measured at NAV2	23,022		—		—		—
Total assets	$	841,835	$	—	$	19,171	$	799,642

(1) Included in Other Assets on the Consolidated Statements of Assets and Liabilities.

(2) The Company’s investment in TSO JV and NCL JV are measured at fair value using NAV and have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Statements of Assets and Liabilities.

The following tables represents the changes in the investments, servicing assets and liabilities measured at fair value using Level 3 inputs for the six months ended June 30, 2023 and 2022:


	Six Months Ended June 30, 2023
	Held for Investment, at fair value		Held for Sale, at fair value		Controlled Investments		Joint Ventures		Servicing Assets		Non-Control Investments		Other Real Estate Owned1
Fair value, December 31, 2022	$	505,268	$	—	$	259,217	$	23,022	$	30,268	$	1,360	$	3,529
Removal of new entities consolidating in current period	—		—		(259,217)		—		—		—		—
Reclass of Loans Held for Sale to Held for Investment	5,334		—		—		—		—		—		—
Beginning Value of Additional Entities Reported after Conversion to BHC	—		69,747		—				—		—		—
Gain on investments	8,965		1,137		—		2,700		—		—		(51)
Change in net unrealized depreciation on servicing assets due to changes in valuation inputs or assumptions	—		—		—		—		4,007		—		—
Change in net unrealized depreciation on servicing assets due to factors other than changes in valuation inputs or assumptions	—		—		—		—		(3,622)		—		—
Realized gain (loss)	(12,609)		—		—		—		—		—		(336)
SBA loans, funded	37,967		31,955		—		—		—		—		—

Conventional loans, funded	—		41,660
Foreclosed real estate acquired	(2,218)		—		—		—		—		—		2,218
Purchase of investments	—		41,023		—		2,000		—		—		—
Purchase of loans from SBA	9,462		(82,488)		—		—		—		—		—
Sale of investment	—		—		—		—		—		—		(1,748)






Principal payments received on loans	(39,751)		(1,145)		—		—		—		—		—
Additions to servicing assets	—		—		—		—		5,101		—		—
Fair value, June 30, 2023	$	512,418	$	101,889	$	—	$	27,722	$	35,754	$	1,360	$	3,612

(1) Included in Other Assets on the Consolidated Statements of Assets and Liabilities.



	Six Months Ended June 30, 2022
	SBA Unguaranteed Investments		Controlled Investments		Servicing Assets		Non-Control Investments		Other Real Estate Owned1
Fair value, December 31, 2021	$	424,417	$	230,935	$	28,008	$	1,000	$	2,354
Net change in unrealized appreciation (depreciation) on investments	(2,862)		1,875		—		—		(74)
Change in net unrealized appreciation on servicing assets due to changes in valuation inputs or assumptions	—		—		(2,340)		—		—

Realized loss	(3,270)		—		—		—		(205)
SBA unguaranteed non-affiliate investments, funded	88,053		—		—		—		—
Foreclosed real estate acquired	(676)		—		—		—		676
Purchase of investments	—		19,750		—		—		—

Sale of investment	—		—		—		—		(1,033)






Principal payments received on debt investments	(45,680)		(2,025)		—		—		—
Additions to servicing assets	—		—		6,152		—		—
Fair value, June 30, 2022	$	459,982	$	250,535	$	31,820	$	1,000	$	1,718

(1) Included in Other Assets on the Consolidated Statements of Assets and Liabilities.

The following tables provide a summary of quantitative information about the Company’s Level 3 fair value measurements as of June 30, 2023 and December 31, 2022. In addition to the inputs noted in the table below, according to our valuation policy we may also use other valuation techniques and methodologies when determining our fair value measurements. The tables below are not intended to be all-inclusive, but rather provide information on the significant Level 3 inputs as they relate to the Company’s fair value measurements at June 30, 2023 and December 31, 2022.


	Fair Value as of			Weighted		Range
	June 30, 2023		Unobservable Input	Average1		Minimum		Maximum
Assets:
Held for investment, at fair value - accrual loans	$	469,280	Market yields	8.40	%	8.40	%	8.40	%
			Cumulative prepayment rate	22.50	%	22.50	%	22.50	%
			Average cumulative default rate	20.00	%	20.00	%	20.00	%
Held for investment, at fair value - non-accrual loans	$	43,138	Market yields	8.50	%	8.50	%	8.50	%
			Cumulative prepayment rate	—	%	—	%	—	%
			Average cumulative default rate	30.00	%	30.00	%	30.00	%
Held for sale, at fair value	$	101,889	Market yields	9.76	%	7.13	%	12.25	%
			Cumulative prepayment rate	92.67	%	90.00	%	95.50	%
			Average cumulative default rate	20.00	%	20.00	%	20.00	%
Joint Ventures	$	27,722	Market yields	8.40	%	8.40	%	8.40	%
			Cost of equity	11.00	%	10.00	%	12.00	%
			Weighted average cost of capital	9.00	%	8.00	%	10.00	%
Non-control equity investments	$	1,000	Market yields	10.00	%	8.00	%	12.00	%
	$	360	Cost basis	N/A		N/A		N/A



Servicing assets	$	35,754	Market yields	13.75	%	13.75	%	13.75	%
			Cumulative prepayment rate	22.50	%	22.50	%	22.50	%
			Average cumulative default rate	20.00	%	20.00	%	20.00	%
Other real estate owned	$	3,612	Appraised value	N/A		N/A		N/A


	Fair Value as of			Weighted		Range
	December 31, 2022		Unobservable Input	Average1		Minimum		Maximum
Assets:
SBA unguaranteed non-affiliate investments - accrual loans	$	470,835	Market yields	7.90	%	7.90	%	7.90	%
			Cumulative prepayment rate	25.00	%	25.00	%	25.00	%
			Average cumulative default rate	25.00	%	25.00	%	25.00	%
SBA unguaranteed non-affiliate investments - non-accrual loans	$	34,433	Market yields	8.87	%	8.87	%	8.87	%
			Average cumulative default rate	30.00	%	30.00	%	30.00	%
Controlled equity investments1	$	241,113	EBITDA multiples-TTM2	8.00x		7.50x		8.50x
			EBITDA multiples-NTM2	6.90x		6.00x		7.50x
			Revenue multiples2	2.46x		0.80x		3.20x
			Book value multiples2	1.00x		0.80x		1.20x
			Weighted average cost of capital2	13.20	%	11.50	%	23.60	%
Controlled debt investments	$	18,104	Market yields	10.00	%	10.00	%	10.00	%
Non-control equity investments	$	1,000	Market yields	10.00	%	8.00	%	12.00	%
	$	360	Recent transaction	N/A		N/A		N/A
Servicing assets	$	30,268	Market yields	16.50	%	16.50	%	16.50	%
			Cumulative prepayment rate	25.00	%	25.00	%	25.00	%
			Average cumulative default rate	25.00	%	25.00	%	25.00	%
Other real estate owned	$	3,529	Appraised value	N/A		N/A		N/A

(1) Weighted by relative fair value.

(2) The Company valued $145.6 million of investments using a combination of EBITDA, both trailing twelve months (“TTM”) and next twelve months (“NTM”), and revenue multiples in the overall valuation approach, which included the use of market comparable companies. The Company valued $95.3 million of investments using only discounted cash flows.

Estimated Fair Value of Other Financial Instruments

GAAP also requires disclosure of the fair value of financial instruments carried at book value on the Unaudited Consolidated Statements of Financial Condition. The carrying amounts and estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis are as follows:


	June 30, 2023
	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Financial Assets:
Cash and due from banks	$	48,673	$	48,673	$	—	$	—	$	48,673
Restricted cash	66,741		66,741		—		—		66,741
Interest bearing deposits in banks	140,920		140,920		—		—		140,920
Loans held for sale, at amortized cost	41,641		—		—		41,641		41,843
Total loans held for investment, at amortized cost, net	213,501		—		—		213,501		218,265
Financial Liabilities:
Deposits	447,357		—		447,357		—		447,357
Borrowings	697,387		—		—		697,387		697,387

	December 31, 2022
	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Financial Assets:
Cash and due from banks	$	53,692	$	53,692	$	—	$	—	$	53,692
Restricted cash	71,914		71,914		—		—		71,914
Financial Liabilities:
Borrowings	539,326		—		—		539,326		539,326

- 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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