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Fair Value of Financial Instruments
 9 Months Ended
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)20232022
Beginning balance$4,800 $5,900 
Change in fair value of BFG(800)(1,400)
Ending balance$4,000 $4,500 
Deposits: The carrying amount of deposits with no stated maturity, such as savings and checking accounts, is a reasonable estimate of their fair value. The market value of certificates of deposit is based upon the discounted value of contractual cash flows. The discount rate is determined using the rates currently offered on comparable instruments.
Accrued interest receivable and payable: The fair value of accrued interest receivable and payable approximates their carrying amount.
PPP Liquidity Facility: The fair value of PPPLF is estimated using a discounted cash flow based on the remaining contractual term and current borrowing rates for similar terms.
The table below presents the carrying amount and fair value of the Company's financial instruments:
September 30, 2023December 31, 2022
($ in thousands)LevelCarrying
Amount		Estimated
Fair Value		Carrying
Amount		Estimated
Fair Value
Financial assets:
Cash and cash equivalents1$126,771 $126,771 $100,567 $100,567 
Investment securities held-to-maturity215,840 13,867 14,292 12,728 
Investment in FHLB stock2476 476 449 449 
Loans held for investment3324,197 343,070 224,217 237,225 
Loans held-for-sale245,710 45,710 23,589 23,589 
Accrued interest receivable22,711 2,711 1,818 1,818 
SBA servicing asset24,398 4,398 5,210 5,210 
Investment in BFG34,000 4,000 4,800 4,800 
Financial liabilities:
Total deposits2386,753 361,998 242,998 221,287 
Accrued interest payable2581 581 54 54 
PPP Liquidity Facility2221 221 314 314 
Assets measured at fair value on a nonrecurring basis are summarized as follows:
($ in thousands)Fair Value Measurements Using
Description of Financial InstrumentFair ValueLevel 1Level 2Level 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 ValueValuation
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 rate10.5 %10.8 %
Expense growth rate13.9 %11.5 %
Discount rate27.5 %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.