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Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2023

Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability on the measurement date and is determined using an exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Assets and liabilities recorded at fair value on a recurring basis, such as AFS securities and equity investments. Additionally, from time to time, the Company records fair value adjustments on a nonrecurring basis. These nonrecurring adjustments typically involve application of lower of cost or fair value accounting and write-downs of individual assets.

The Company classifies its assets and liabilities recorded at fair value as one of the following three categories and a financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement:

Level 1—Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2—Significant other 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.

Level 3—Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Securities AFS: The fair values of investment securities are determined by matrix pricing, which is a mathematical technique used to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Management obtains the fair values of investment securities on a monthly basis from a third-party pricing service.

Other Investment: The Company has an equity investment with readily determinable fair value. The fair value for the equity investment with readily determinable fair value is obtained from unadjusted quoted prices in active markets on the date of measurement and classified as Level 1.

Assets and liabilities measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022 are summarized below:



	Fair Value Measure on a Recurring Basis
($ in thousands)	Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2023
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	46,332	$	—	$	46,332	$	—
Residential collateralized mortgage obligations	150,131		—		150,131		—
Municipal securities-tax exempt	5,787		—		5,787		—
Other investments:
Mutual fund - CRA qualified	3,370		3,370		—		—
December 31, 2022
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	49,764	$	—	$	49,764	$	—
Residential collateralized mortgage obligations	160,045		—		160,045		—
Other investments:
Mutual fund - CRA qualified	3,330		3,330		—		—

There were no transfers of assets or liabilities between the Level 1 and Level 2 classifications for the three and six months ended June 30, 2023 or 2022.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or fair value and write-downs of individual assets.

Collateral-dependent loans: Collateral-dependent loans are loans where repayment is expected to be provided solely by the sale of the underlying collateral and there are no other available and reliable sources of repayment. Prior to the adoption of ASU 2016-13, impaired loans were evaluated and valued at the time the loan was identified as impaired, at the lower of cost or fair value. Fair value for both collateral-dependent and impaired loans are measured based on the value of the collateral securing these loans and are classified at a Level 3 in the fair value hierarchy. Collateral may include real estate, or business assets including equipment, inventory and accounts receivable. The value of real estate collateral is determined based on an appraisal by qualified licensed appraisers hired by the Company. The value of business equipment

is based on an appraisal by qualified licensed appraisers hired by the Company if significant, or the equipment’s net book value on the business’ financial statements. Inventory and accounts receivable collateral are valued based on independent field examiner review or aging reports. Appraisals may utilize a single valuation approach or a combination or approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Appraised values are reviewed by management using historical knowledge, market considerations, and knowledge of the client and client’s business.

The following table presents the fair value hierarchy and fair value of assets that were still held and had fair value adjustments measured on a nonrecurring basis as of June 30, 2023 and December 31, 2022:



	Fair Value Measure on a Nonrecurring Basis
($ in thousands)	Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2023
Collateral-dependent loans:
SBA—real estate	$	768	$	—	$	—	$	768

Home mortgage	2,305		—		—		2,305
Total	$	3,073	$	—	$	—	$	3,073
December 31, 2022
Impaired loans:
SBA—real estate	$	423	$	—	$	—	$	423
Total	$	423	$	—	$	—	$	423
Total

The following table presents the increase (decrease) in value of certain assets held at the end of the respective reporting periods presented for which a nonrecurring fair value adjustment was recognized during the period presented:



	Three Months Ended June 30,				Six Months Ended June 30,
($ in thousands)	2023		2022		2023		2022
Collateral-dependent loans:
SBA—real estate	$	(1)	$	8	$	1	$	15

Total	$	(1)	$	8	$	1	$	15

The following table presents information about significant unobservable inputs utilized in the Company’s nonrecurring Level 3 fair value measurements as of June 30, 2023 and December 31, 2022:

($ in thousands)

Fair Value
Measurements
(Level 3)

Valuation
Techniques

Unobservable
Inputs

Range of
Inputs

Weighted-

Average of

Inputs(1)

June 30, 2023

Collateral-dependent loans:

SBA—real estate

768

Income approach - income capitalization

Capitalization rate

8.0% to 11.5%

9.9%

Home mortgage

2,305

Sales comparison approach

Market data comparison

0.5% to 15.1%

6.5%

December 31, 2022

Impaired loans:

SBA—real estate

423

Income approach - income capitalization

Capitalization rate

11.5%

(1)Weighted-average of inputs is based on the relative fair value of the respective assets as of June 30, 2023 and December 31, 2022.

Financial Instruments: The carrying amounts and estimated fair values of financial instruments that are not carried at fair value on a recurring basis as of June 30, 2023 and December 31, 2022 are as follows. These financial assets and liabilities are measured at amortized cost basis on the Company’s Consolidated Balance Sheets:



	June 30, 2023
($ in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Fair Value
Financial assets:
Cash and cash equivalents	$	143,761	$	143,761	$	—	$	—	$	143,761
Loans held for sale	—		—		—		—		—
Loans receivable, net	1,695,395		—		—		1,681,164		1,681,164
Accrued interest receivable, net	7,703		60		828		6,815		7,703
Other investments:
FHLB and PCBB stock	12,717		N/A		N/A		N/A		N/A
Time deposits placed	96		—		96		—		96
Servicing assets	12,654		—		—		18,177		18,177
Financial liabilities:
Deposits	1,859,639		—		1,856,997		—		1,856,997

Accrued interest payable	9,354		—		9,354		—		9,354



	December 31, 2022
($ in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Fair Value
Financial assets:
Cash and cash equivalents	$	82,972	$	82,972	$	—	$	—	$	82,972
Loans held for sale	44,335		—		47,217		—		47,217
Loans receivable, net	1,659,051		—		—		1,626,036		1,626,036
Accrued interest receivable, net	7,180		51		716		6,413		7,180
Other investments:
FHLB and PCBB stock	8,673		N/A		N/A		N/A		N/A
Time deposits placed	95		—		95		—		95
Servicing assets	12,759		—		—		16,845		16,845
Financial liabilities:
Deposits	1,885,771		—		1,880,508		—		1,880,508

Accrued interest payable	2,771		—		2,771		—		2,771

- 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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