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FAIR VALUE | 9 Months Ended
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Sep. 30, 2024
Fair Value Disclosures [Abstract] |
FAIR VALUE | FAIR VALUE Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values: Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access at 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, and 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. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy. Investment Securities Available for Sale: The fair values of investment securities available for sale are determined by matrix pricing, which is a mathematical technique used to value debt securities without relying exclusively on quoted prices for the specific investment securities, but rather by relying on the investment securities’ relationship to other benchmark quoted investment securities (Level 2). Management obtains the fair values of investment securities available for sale on a monthly basis from a third party pricing service. Government Guaranteed Loans HFI, at Fair Value: The Company has elected to account for certain government guaranteed loans HFI at fair value. Fair value is calculated based on the present value of estimated future payments (Level 3). The valuation model uses interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future payments. Whenever available, the present value is validated against available market data. Individually Evaluated Loans: Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments can also include certain impairment amounts for collateral-dependent loans calculated when establishing the ACL. Loans are considered collateral dependent when the Company has determined that foreclosure of the collateral is probable or when a borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of collateral. A collateral dependent loan’s ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. Fair value of the loan’s collateral is determined by appraisals, independent valuation, or management’s estimation of fair value which is then adjusted for the cost related to liquidation of the collateral. Collateral dependent loans are generally classified as Level 3 based on management’s judgment and estimation. Other Real Estate Owned: Other real estate owned assets are recorded at the lower of cost or fair value upon the transfer of a loan to other real estate owned and, subsequently, continue to be measured and carried at the lower of cost or fair value. The fair value of other real estate owned is based on recent real estate appraisals which are generally updated annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales, cost, 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. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Other real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly. Appraisals for both collateral dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by either the Company or the Company's appraisal services vendor. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Management compares the best-efforts price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraised value to arrive at fair value. Repossessed Assets: Repossessed assets are recorded at the lower of cost or fair value upon the transfer of a loan to repossessed assets. The fair value of a repossessed asset, upon initial recognition, is estimated using a market approach or based on observable market data, such as a current appraisal, recent sale price of similar assets, or assumptions specific to the individual property or equipment, such as management applied discounts used to further reduce values to a net realizable value when observable inputs become stale. Government Guaranteed Loan Servicing Rights: The fair value of government guaranteed loan servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. There were no government guaranteed loan servicing rights carried at fair value at September 30, 2024 and December 31, 2023. On a quarterly basis, government guaranteed loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the cost. If the carrying amount exceeds fair value, impairment is recorded. Assets measured at fair value on a recurring basis at September 30, 2024 are summarized below. There were no liabilities carried at fair value on a recurring basis at September 30, 2024.
| Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total
Financial assets |  |  |  |  |  |  |
Investment securities available for sale | $ | — |  |  | $ | 37,984 |  |  | $ | — |  |  | $ | 37,984 |
Government guaranteed loans HFI, at fair value | — |  |  | — |  |  | 86,441 |  |  | 86,441 |
Assets measured at fair value on a recurring basis at December 31, 2023 are summarized below. There were no liabilities carried at fair value on a recurring basis at December 31, 2023.
| Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total
Financial assets |  |  |  |  |  |  |
Investment securities available for sale | $ | — |  |  | $ | 39,575 |  |  | $ | — |  |  | $ | 39,575 |
Government guaranteed loans HFI, at fair value | — |  |  | — |  |  | 91,508 |  |  | 91,508 |
There were no transfers between levels for assets and liabilities recorded at fair value on a recurring basis during the reported periods. Financial Instruments Recorded Using Fair Value Option The Company also elected the fair value option for certain of its government guaranteed loans HFI as the Company believed that fair value was the best indicator of the resolution of those loans at that time. Depending on market conditions and liquidity needs of the Company, management determines whether it is advantageous to hold or sell government guaranteed loans on a loan-by-loan basis. The portion of these loans guaranteed by the government are generally readily marketable in the secondary market and the portion of the loans that are not guaranteed may be sold periodically to other third party financial institutions. Interest income on these loans is recorded based on the contractual term of the loan and in accordance with the Company’s policy on other loans HFI. The following tables provide more information about the fair value carrying amount and the unpaid principal outstanding of HFI government guaranteed loans measured at fair value at September 30, 2024 and December 31, 2023.
| September 30, 2024
| Total Loans |  | Nonaccrual(1) |  | 90 Days or More Past Due(1)
| Fair Value Carrying Amount |  | Unpaid Principal Balance |  | Fair Value Gain (Loss) |  | Fair Value Carrying Amount |  | Unpaid Principal Balance |  | Fair Value Gain (Loss) |  | Fair Value Carrying Amount |  | Unpaid Principal Balance |  | Fair Value Gain (Loss)
Real estate - commercial | $ | 16,424 |  |  | $ | 16,476 |  |  | $ | (52) |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Commercial and industrial | 70,017 |  |  | 68,494 |  |  | 1,523 |  |  | 1,559 |  |  | 1,992 |  |  | (433) |  |  | — |  |  | — |  |  | — |
Total loans HFI, at fair value | $ | 86,441 |  |  | $ | 84,970 |  |  | $ | 1,471 |  |  | $ | 1,559 |  |  | $ | 1,992 |  |  | $ | (433) |  |  | $ | — |  |  | $ | — |  |  | $ | — |
| December 31, 2023
| Total Loans |  | Nonaccrual(1) |  | 90 Days or More Past Due(1)
| Fair Value Carrying Amount |  | Unpaid Principal Balance |  | Fair Value Gain (Loss) |  | Fair Value Carrying Amount |  | Unpaid Principal Balance |  | Fair Value Gain (Loss) |  | Fair Value Carrying Amount |  | Unpaid Principal Balance |  | Fair Value Gain (Loss)
Real estate - commercial | $ | 19,219 |  |  | $ | 19,156 |  |  | $ | 63 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Commercial and industrial | 72,289 |  |  | 68,777 |  |  | 3,512 |  |  | 485 |  |  | 585 |  |  | (100) |  |  | 162 |  |  | 182 |  |  | (20) |
Total loans HFI, at fair value | $ | 91,508 |  |  | $ | 87,933 |  |  | $ | 3,575 |  |  | $ | 485 |  |  | $ | 585 |  |  | $ | (100) |  |  | $ | 162 |  |  | $ | 182 |  |  | $ | (20) |
(1) The nonaccrual and 90 days or more past due loan balances do not include the portion of government guaranteed loan balances. The total amount of net gains and losses from changes in fair value and interest income included in earnings for the nine months ended September 30, 2024 and September 30, 2023 for government guaranteed loans HFI, at fair value, were as follows:
| Nine Months Ended September 30,
| 2024 |  | 2023
Interest income | $ | 5,978 |  |  | $ | 3,151 |
Change in fair value | 9,923 |  |  | 11,021 |
Total gain, net | $ | 15,901 |  |  | $ | 14,172 |
Changes in fair value for government guaranteed loans HFI, at fair value, were included in Government guaranteed loans fair value gain on the Consolidated Statements of Income. The table below presents a reconciliation of government guaranteed loans HFI, at fair value, which were valued on a recurring basis and used significant unobservable inputs (Level 3) for the nine months ended September 30, 2024 and September 30, 2023:
| Nine Months Ended September 30,
| 2024 |  | 2023
Balance of government guaranteed loans HFI at fair value, beginning of period | $ | 91,508 |  |  | $ | 27,078 |
New government guaranteed originations at fair value | 105,754 |  |  | 143,535 |
Loans sold | (116,977) |  |  | (90,120) |
Principal payments | (3,767) |  |  | (7,336) |
Charge-offs | — |  |  | — |
Total fair value gains during the period | 9,923 |  |  | 11,021 |
Balance of government guaranteed loans HFI at fair value, end of period | $ | 86,441 |  |  | $ | 84,178 |
The Company’s valuation of government guaranteed loans HFI, at fair value, was supported by an analysis prepared by an independent third party and approved by management. The approach to determine fair value involved several steps: 1) identifying each loan’s unique characteristics, including balance, payment type, term, coupon, age, and principal and interest payment; 2) projecting these loan level characteristics for the life of each loan; and 3) performing discounted cash flow modeling. The following table provides information about the valuation techniques and unobservable inputs used in the valuation of government guaranteed loans HFI that fall within Level 3 of the fair value hierarchy at September 30, 2024 and December 31, 2023:
| Fair Value |  | Valuation Technique |  | Unobservable Inputs |  | Range (Weighted Average)
September 30, 2024 |  |  |  |  |  |  |
Government guaranteed loans HFI, at fair value | $ | 86,441 |  |  | Discounted |  | Discount rate |  | 6.56%-9.94% (8.51%)
|  |  | cash flow |  | Conditional prepayment rate |  | 10.87%-12.63% (12.09%)
December 31, 2023 |  |  |  |  |  |  |
Government guaranteed loans HFI, at fair value | $ | 91,508 |  |  | Discounted |  | Discount rate |  | 7.36%-10.86% (8.74%)
|  |  | cash flow |  | Conditional prepayment rate |  | 10.38%-15.69% (13.91%)
The significant unobservable inputs impacting the fair value measurement of government guaranteed loans HFI, at fair value, include discount rates and conditional prepayment rates. Increases in discount rates or prepayment rates would result in a lower fair value measurement. Although the prepayment rate and discount rate are not directly interrelated, they generally move in opposite directions. The discount rates and conditional prepayment rates were weighted by the relative principal balance outstanding of these loans. Assets measured at fair value on a nonrecurring basis (Level 3) at September 30, 2024 are summarized below:
| Fair Value |  | Valuation Technique(s) |  | Significant Unobservable Input(s) |  | Discount % Amount
Repossessed assets | $ | 94 |  |  | Discounted appraisals, estimated net realizable value of collateral |  | Collateral discounts |  | 10%
Assets measured at fair value on a nonrecurring basis (Level 3) at December 31, 2023 are summarized below:
| Fair Value |  | Valuation Technique(s) |  | Significant Unobservable Input(s) |  | Discount % Amount
Individually evaluated loans | $ | 135 |  |  | Discounted appraisals, estimated net realizable value of collateral |  | Collateral discounts |  | 10%
Fair Value of Financial Instruments The carrying values and estimated fair values of financial instruments not carried at fair value, at September 30, 2024 and December 31, 2023 are as follows:
|  |  | September 30, 2024 |  | December 31, 2023
| Level |  | Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value
Assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents | 1 |  | $ | 64,383 |  |  | $ | 64,383 |  |  | $ | 58,385 |  |  | $ | 58,385 |
Time deposits in banks | 2 |  | 2,264 |  |  | 2,228 |  |  | 4,646 |  |  | 4,561 |
Investment securities held to maturity | 2 |  | 2,487 |  |  | 2,321 |  |  | 2,484 |  |  | 2,263 |
Nonmarketable equity securities, at cost | 2 |  | 4,997 |  |  | 4,997 |  |  | 4,770 |  |  | 4,770 |
Government guaranteed loans held for sale | 2 |  | 595 |  |  | 667 |  |  | — |  |  | — |
Loans HFI, at amortized cost | 3 |  | 941,818 |  |  | 937,576 |  |  | 810,721 |  |  | 786,350 |
Accrued interest receivable | 2 |  | 8,537 |  |  | 8,537 |  |  | 7,130 |  |  | 7,130 |
Government guaranteed loan servicing rights | 3 |  | 15,966 |  |  | 18,596 |  |  | 14,959 |  |  | 16,318 |
Liabilities: |  |  |  |  |  |  |  |  |
Noninterest-bearing deposits | 2 |  | $ | 95,995 |  |  | $ | 95,995 |  |  | $ | 93,708 |  |  | $ | 93,708 |
Interest-bearing transaction accounts | 2 |  | 247,923 |  |  | 247,923 |  |  | 259,422 |  |  | 259,422 |
Savings and money market deposits | 2 |  | 455,297 |  |  | 455,297 |  |  | 373,000 |  |  | 373,000 |
Time deposits | 2 |  | 312,981 |  |  | 313,339 |  |  | 259,008 |  |  | 255,372 |
FHLB borrowings | 2 |  | 10,000 |  |  | 10,000 |  |  | 10,000 |  |  | 10,000 |
Subordinated debentures | 2 |  | 5,954 |  |  | 5,485 |  |  | 5,949 |  |  | 5,215 |
Notes payable | 2 |  | 2,048 |  |  | 2,031 |  |  | 2,389 |  |  | 2,369 |
Accrued interest payable | 2 |  | 1,114 |  |  | 1,114 |  |  | 882 |  |  | 882 |

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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/exampleRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 55 -Paragraph 107 -Publisher FASB -URI https://asc.fasb.org/1943274/2147482078/820-10-55-107 Reference 2: http://www.xbrl.org/2003/role/exampleRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 55 -Paragraph 100 -Publisher FASB -URI https://asc.fasb.org/1943274/2147482078/820-10-55-100 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Subparagraph (c)(3) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-2 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (a) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2E -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-2E Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (h) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (e) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (d) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 10: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Subparagraph (h) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-2 Reference 11: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Subparagraph (g) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-2 Reference 12: http://www.xbrl.org/2003/role/disclosureRef -Topic 940 -SubTopic 820 -Name Accounting Standards Codification -Section 50 -Paragraph 1 -Subparagraph (a) -Publisher FASB -URI https://asc.fasb.org/1943274/2147478119/940-820-50-1 + Details
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