Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (i.e. an 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. The three-level fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:

Fair value is measured on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate certain assets or liabilities for impairment or for disclosure purposes. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company records securities available-for-sale at fair value on a recurring basis. Certain other assets, such as loans held-for-sale, impaired loans, servicing assets and other real estate owned (“OREO”) are recorded at fair value on a non-recurring basis. Non-recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the re-measurement is performed. The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Investment securities: The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Management reviews the valuation techniques and assumptions used by the provider and determines that the provider uses widely accepted valuation techniques based on observable market inputs appropriate for the type of security being measured. Securities held-to-maturity are not measured at fair value on a recurring basis.

Loans held-for-sale: The Company records SBA loans held-for-sale, residential property loans held-for-sale and certain non-residential real estate loans held-for-sale at the lower of cost or fair value, on an aggregate basis. The Company obtains fair values from a third party independent valuation service provider. Loans held-for-sale accounted for at the lower of cost or fair value are considered to be recognized at fair value when they are recorded at below cost, on an aggregate basis, and are classified as Level 2.

Impaired loans: The Company records fair value adjustments on certain loans that reflect (i) partial write-downs, through charge-offs or specific reserve allowances, that are based on the current appraised or market-quoted value of the underlying collateral or (ii) the full charge-off of the loan carrying value. In some cases, the properties for which market quotes or appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for collateral-dependent impaired loans are obtained from real estate brokers or other third-party consultants, and are classified as Level 3.

Other real estate owned: The Company initially records OREO at fair value at the time of foreclosure. Thereafter, OREO is recorded at the lower of cost or fair value based on their subsequent changes in fair value. The fair value of OREO is generally based on recent real estate appraisals adjusted for estimated selling costs. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and result in a Level 3 classification due to the unobservable inputs used for determining fair value. Only OREO with a valuation allowance are considered to be carried at fair value.

Servicing Assets: Servicing assets represent the value associated with servicing loans that have been sold. The fair value for servicing assets is determined through discounted cash flow analysis and utilizes discount rates and prepayment speed assumptions as inputs. All of these assumptions require a significant degree of management estimation and judgment. The fair market valuation is performed on a quarterly basis for servicing assets. Servicing assets are accounted for at the lower of cost or market value and considered to be recognized at fair value when they are recorded at below cost and are classified as Level 3.


	Fair Value Measurement Level
($ in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
September 30, 2020
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	—	$	79,771	$	—	$	79,771
Residential collateralized mortgage obligations	—		30,673		—		30,673
SBA loan pool securities	—		12,707		—		12,707
Municipal bonds	—		5,831		—		5,831
Total securities available-for-sale	—		128,982		—		128,982
Total assets measured at fair value on a recurring basis	$	—	$	128,982	$	—	$	128,982
Total liabilities measured at fair value on a recurring basis	$	—	$	—	$	—	$	—
December 31, 2019
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	—	$	38,738	$	—	$	38,738
Residential collateralized mortgage obligations	—		43,894		—		43,894
SBA loan pool securities	—		14,152		—		14,152
Municipal bonds	—		782		—		782
Total securities available-for-sale	—		97,566		—		97,566
Total assets measured at fair value on a recurring basis	$	—	$	97,566	$	—	$	97,566
Total liabilities measured at fair value on a recurring basis	$	—	$	—	$	—	$	—


	Fair Value Measurement Level
($ in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
September 30, 2020
Impaired loans:
SBA property	$	—	$	—	$	251	$	251
Commercial lines of credit	—		—		1,120		1,120
SBA commercial term	—		—		12		12
Total impaired loans	—		—		1,383		1,383


Total assets measured at fair value on a non-recurring basis	$	—	$	—	$	1,383	$	1,383
Total liabilities measured at fair value on a non-recurring basis	$	—	$	—	$	—	$	—
December 31, 2019
Impaired loans:
SBA property	$	—	$	—	$	116	$	116
Commercial lines of credit	—		—		1,562		1,562
Total impaired loans	—		—		1,678		1,678
Total assets measured at fair value on a non-recurring basis	$	—	$	—	$	1,678	$	1,678
Total liabilities measured at fair value on a non-recurring basis	$	—	$	—	$	—	$	—

($ in thousands)

Fair Value

Valuation Technique(s)

Unobservable Input(s)

Range (Weighted-Average)

September 30, 2020

Impaired loans:

SBA property

251

Fair value of collateral

Commercial lines of credit

1,120

Sales comparison approach

Adjustment for differences between the comparable estate sales

-10% to 13% (2.1%)

SBA commercial term

Fair value of collateral

December 31, 2019

Impaired loans:

SBA property

116

Fair value of collateral

Commercial lines of credit

1,562

Sales comparison approach

Adjustment for differences between the comparable estate sales

-4% to 26% (0.86%)

Income approach

Adjustment for differences in net operating income expectations

-4% to -11% (-6.20%)

Capitalization rate

5.0%


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2020		2019		2020		2019
Collateral dependent impaired loans:

SBA property	$	(9)	$	—	$	(147)	$	(20)
Commercial lines of credit	(79)		—		(799)		—
SBA commercial term	—		—		(164)		—


Other real estate owned	—		(18)		—		(18)
Net losses recognized	$	(88)	$	(18)	$	(1,110)	$	(38)

The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on financial instruments both on and off the consolidated balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates. The following methods and assumptions were used to estimate the fair value of significant financial instruments.

Financial assets: The carrying amounts of interest-bearing deposits with other financial institutions and accrued interest receivable are considered to approximate fair value. The fair values of investment securities are generally based on matrix pricing (Level 2). The fair value of loans is estimated based on a discounted cash flow approach under an exit price notion. The fair value reflects the estimated yield that would be negotiated with a willing market participant. Because sale transactions of such loans are not readily observable, as many of the loans have unique risk characteristics, the valuation is based on significant unobservable inputs (Level 3). It is not practical to determine the fair value of Federal Home Loan Bank (“FHLB”) and other restricted stock due to restrictions placed on its transferability.

Financial liabilities: The carrying amounts of accrued interest payable are considered to approximate fair value. The fair value of deposits is estimated based on discounted cash flows. The discount rate is derived from the interest rates currently being offered for similar remaining maturities. Non-maturity deposits are estimated based on their historical decaying experiences (Level 3). The fair value of FHLB advances is estimated based on discounted cash flows. The discount rate is derived from the current market rates for borrowings with similar remaining maturities (Level 2).

Off-balance-sheet financial instruments: The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair value of these financial instruments is not material and is excluded from the table below.


	Carrying Value		Fair Value		Fair Value Measurements
($ in thousands)					Level 1		Level 2		Level 3
September 30, 2020
Financial assets:
Interest-bearing deposits in other financial institutions	$	243,810	$	243,810	$	243,810	$	—	$	—
Securities available-for-sale	128,982		128,982		—		128,982		—

Loans held-for-sale	30,878		33,770		—		33,770		—
Net loans held-for-investment	1,554,258		1,568,235		—		—		1,568,235
FHLB and other restricted stock	8,447		N/A		N/A		N/A		N/A
Accrued interest receivable	11,246		11,246		4		314		10,928
Financial liabilities:
Deposits	$	1,647,107	$	1,653,614	$	—	$	—	$	1,653,614
FHLB advances	130,000		130,406		—		130,406		—
Accrued interest payable	2,626		2,626		—		2		2,624
December 31, 2019
Financial assets:
Interest-bearing deposits in other financial institutions	$	128,420	$	128,420	$	128,420	$	—	$	—
Securities available-for-sale	97,566		97,566		—		97,566		—
Securities held-to-maturity	20,154		20,480		—		20,480		—
Loans held-for-sale	1,975		2,102		—		2,102		—
Net loans held-for-investment	1,436,451		1,449,383		—		—		1,449,383
FHLB and other restricted stock	8,345		N/A		N/A		N/A		N/A
Accrued interest receivable	5,136		5,136		78		375		4,683
Financial liabilities:
Deposits	$	1,479,307	$	1,468,540	$	—	$	—	$	1,468,540
FHLB advances	20,000		20,092		—		20,092		—
Accrued interest payable	6,004		6,004		—		1		6,003