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Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2023
Fair Value Disclosures [Abstract] |
Fair Value of Financial Instruments | Fair Value of Financial Instruments The Company measures and discloses certain assets and liabilities at fair value. 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 (that is, not a forced liquidation or distressed sale). GAAP establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements. Among other things, the standard requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s estimates for market assumptions. These two types of inputs create the following fair value hierarchy. Level 1 – Quoted prices in active markets for identical instruments. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. Level 2 – Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less active markets for identical or similar instruments, or other observable inputs that can be corroborated by observable market data. Level 3 – Unobservable inputs supported by little or no market activity for 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 also includes observable inputs from nonbinding single dealer quotes not corroborated by observable market data. In developing Level 3 measurements, management incorporates whatever market data might be available and uses discounted cash flow models where appropriate. These calculations include projections of future cash flows, including appropriate default and loss assumptions, and market-based discount rates. The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future date. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. Transfers between levels of the fair value hierarchy are deemed to occur at the end of the reporting period. The following methods were used to estimate the fair value of each class of financial instruments: Cash and cash equivalents: The carrying amount of these items is a reasonable estimate of their fair value. Investment securities held-to-maturity: The estimated fair values of investment securities are priced using current active market quotes, if available, which are considered Level 1 measurements. For most of the portfolio, matrix pricing based on the securities’ relationship to other benchmark quoted prices is used to establish the fair value. These measurements are considered Level 2. Investment in Federal Home Loan Bank stock: The fair value is based upon the redemption value of the stock, which equates to the carrying value. Strategic Program loans held-for-sale: The carrying amount of these items is a reasonable estimate of their fair value. Loans held for investment: The fair value is estimated by discounting the future cash flows and estimated prepayments using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. Some loan types’ fair value approximated carrying value because of their floating rate or expected maturity characteristics. SBA servicing asset: The fair value of servicing assets is based on, in part, third-party valuations that project estimated future cash inflows that include servicing fees and outflows that include market rates for costs of servicing. The present value of the future cash flows are calculated utilizing market-based discount rates. The market-based discount rates represent risk spreads based on secondary market transactions utilizing calculated prepayment curves. Because observable loan transactions are used to determine the risk spreads, the Company considers the measurement to be Level 2. Investment in BFG: The Company’s valuation technique utilized the average of the discounted cash flow method and the Guideline Public Company method. The valuation was also adjusted using a Guideline Transaction method based on the potential transaction announced on July 25, 2023 and the share price on September 30, 2023. A 20% lack of marketability discount was applied to the valuation as well as a 4.50% discount to non-voting shares to arrive at fair value as of September 30, 2023 and December 31, 2022. The calculation of fair value utilized significant unobservable inputs, including projected cash flows, growth rates, and discount rates. The fair value of the investment in BFG was $4.0 million and $4.8 million as of September 30, 2023 and December 31, 2022, respectively. The following table summarizes investment in BFG activity for the periods indicated:
| For the Nine Months Ended September 30,
($ in thousands) | 2023 |  | 2022
Beginning balance | $ | 4,800 |  |  | $ | 5,900 |
Change in fair value of BFG | (800) |  |  | (1,400) |
Ending balance | $ | 4,000 |  |  | $ | 4,500 |
Deposits: The carrying amount of deposits with no stated maturity, such as savings and checking accounts, is a reasonable estimate of their fair value. The market value of certificates of deposit is based upon the discounted value of contractual cash flows. The discount rate is determined using the rates currently offered on comparable instruments. Accrued interest receivable and payable: The fair value of accrued interest receivable and payable approximates their carrying amount. PPP Liquidity Facility: The fair value of PPPLF is estimated using a discounted cash flow based on the remaining contractual term and current borrowing rates for similar terms. The table below presents the carrying amount and fair value of the Company's financial instruments:
|  |  | September 30, 2023 |  | December 31, 2022
($ in thousands) | Level |  | Carrying Amount |  | Estimated Fair Value |  | Carrying Amount |  | Estimated Fair Value
Financial assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents | 1 |  | $ | 126,771 |  |  | $ | 126,771 |  |  | $ | 100,567 |  |  | $ | 100,567 |
Investment securities held-to-maturity | 2 |  | 15,840 |  |  | 13,867 |  |  | 14,292 |  |  | 12,728 |
Investment in FHLB stock | 2 |  | 476 |  |  | 476 |  |  | 449 |  |  | 449 |
Loans held for investment | 3 |  | 324,197 |  |  | 343,070 |  |  | 224,217 |  |  | 237,225 |
Loans held-for-sale | 2 |  | 45,710 |  |  | 45,710 |  |  | 23,589 |  |  | 23,589 |
Accrued interest receivable | 2 |  | 2,711 |  |  | 2,711 |  |  | 1,818 |  |  | 1,818 |
SBA servicing asset | 2 |  | 4,398 |  |  | 4,398 |  |  | 5,210 |  |  | 5,210 |
Investment in BFG | 3 |  | 4,000 |  |  | 4,000 |  |  | 4,800 |  |  | 4,800 |
Financial liabilities: |  |  |  |  |  |  |  |  |
Total deposits | 2 |  | 386,753 |  |  | 361,998 |  |  | 242,998 |  |  | 221,287 |
Accrued interest payable | 2 |  | 581 |  |  | 581 |  |  | 54 |  |  | 54 |
PPP Liquidity Facility | 2 |  | 221 |  |  | 221 |  |  | 314 |  |  | 314 |
Assets measured at fair value on a nonrecurring basis are summarized as follows:
($ in thousands) |  |  |  | Fair Value Measurements Using
Description of Financial Instrument |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
September 30, 2023 |  |  |  |  |  |  |  |
Nonrecurring assets |  |  |  |  |  |  |  |
Individually evaluated loans |  | $ | 10,703 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,703 |
December 31, 2022 |  |  |  |  |  |  |  |
Nonrecurring assets |  |  |  |  |  |  |  |
Individually evaluated loans |  | $ | 450 |  |  | $ | — |  |  | $ | — |  |  | $ | 450 |
Individually evaluated loans – The loan amount above represents loans individually evaluated that have been adjusted to fair value. When collateral dependent loans are individually evaluated, they are measured using the current fair value of the collateral securing these loans, less selling costs. The fair value of real estate collateral is determined using collateral valuations or a discounted cash flow analysis using inputs such as discount rates, sale prices of similar assets, and term of expected disposition. Some appraised values are adjusted based on management’s review and analysis, which may include historical knowledge, changes in market conditions, estimated selling and other anticipated costs, and/or expertise and knowledge. The loss represents charge-offs on loans for adjustments made based on the fair value of the collateral. Quantitative information for Level 3 fair value measurements – The range and weighted average of the significant unobservable inputs used to fair value Level 3 nonrecurring assets as of September 30, 2023 and as of December 31, 2022, along with the valuation techniques used, are shown in the following table:
($ in thousands) | Fair Value |  | Valuation Technique | Unobservable Input |  | Range (Weighted Average)
September 30, 2023 |  |  |  |  |  |
Individually evaluated loans | $ | 10,703 |  |  | Market comparable | Adjustment to appraisal value |  | 3.30 | %
December 31, 2022 |  |  |  |  |  |
Individually evaluated loans | $ | 450 |  |  | Market comparable | Adjustment to appraisal value |  | 0.20 | %
The range and weighted average of the significant unobservable inputs used to fair value the investment in BFG Level 3 recurring asset as of September 30, 2023 and as of December 31, 2022 are shown in the following table:
($ in thousands) | September 30, 2023 Range (Weighted Average) |  | December 31, 2022 Range (Weighted Average)
Discounted Cash Flows |  |  |
Revenue growth rate | 10.5 | % |  | 10.8 | %
Expense growth rate | 13.9 | % |  | 11.5 | %
Discount rate | 27.5 | % |  | 30.0 | %
Guideline Public Company |  |  |
Multiples of enterprise value | 2.8x to 5.0x |  | 3.0x to 5.0x
As mentioned above, the valuation as of September 30, 2023 was also adjusted using a Guideline Transaction method based on the potential transaction announced on July 25, 2023 and the share price on September 30, 2023.

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482106/820-10-50-2 + Details
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