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Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2021

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 classify 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 AFS 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 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 September 30, 2021 and December 31, 2020 are summarized below:



	Fair Value Measure on a Recurring Basis
($ in thousands)	September 30, 2021
	Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	27,214	$	—	$	27,214	$	—
Residential collateralized mortgage obligations	$	75,321	$	—	$	75,321	$	—
Other investment securities:
Mutual fund - CRA qualified	$	3,734	$	3,734	$	—	$	—

	December 31, 2020
U.S. Government sponsored agency securities	$	1,005	$	—	$	1,005	$	—
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	19,704	$	—	$	19,704	$	—
Residential collateralized mortgage obligations	$	71,082	$	—	$	71,082	$	—
Other investment securities:
Mutual fund - CRA qualified	$	3,773	$	3,773	$	—	$	—

There were no transfers between Level 1 and Level 2 for the three and nine months ended September 30, 2021 or 2020.

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.

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. 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 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. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s judgment, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals for collateral-dependent impaired loans 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 the Company. Once received, a member of the credit department 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.

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 September 30, 2021 and December 31, 2020:



($ in thousands)	Fair Value Measure on a Nonrecurring Basis
	September 30, 2021
	Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	443	$	—	$	—	$	443

	December 31, 2020
Impaired loans	$	87	$	—	$	—	$	87

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:



($ in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Impaired loans	$	(106)	$	—	$	(99)	$	(56)

The following table presents information about significant unobservable inputs utilized in the Company’s nonrecurring Level 3 fair value measurements as of September 30, 2021 and December 31, 2020:



	September 30, 2021
($ in thousands)	Fair Value Measurements (Level 3)		Valuation Techniques	Unobservable Inputs	Range of Inputs	Weighted- Average of Inputs (1)
Impaired loans:
Commercial and industrial (2)	$	—	Income approach - discounted cash flows	Discount rate	3.8%	3.8%
SBA loans—real estate	$	47	Market approach	Market data comparison	(13.0)% to 18.0%	(0.1)%
SBA loans—real estate	$	396	Income approach - income capitalization	Capitalization rate	12.0%	12.0%

	December 31, 2020
Impaired loans:
Commercial and industrial (2)	$	—	Income approach - discounted cash flows	Discount rate	3.8%	3.8%
SBA loans—non-real estate	$	62	Income approach - discounted cash flows	Discount rate	5.3%	5.3%
SBA loans—non-real estate	$	25	Market approach	Market data comparison	(3.5)% to 7.1%	2.9%

(1)Weighted-average of inputs is based on the relative fair value of the respective assets as of September 30, 2021 and December 31, 2020.

(2)Applying fair value adjustments on the impaired loan through the full specific reserve allowance of the loan carrying value resulted in a zero fair value balance as of September 30, 2021 and December 31, 2020.

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 September 30, 2021 and December 31, 2020 are as follows. These financial assets and liabilities are measured at amortized cost basis on the Company’s Consolidated Balance Sheet:



($ in thousands)	September 30, 2021
	Carrying Amount		Level 1		Level 2		Level 3		Estimated Fair Value
Financial Assets:
Cash and cash equivalents	$	188,145	$	188,145	$	—	$	—	$	188,145
Loans held for sale	$	94,466	$	—	$	104,218	$	—	$	104,218
Loans receivable, net	$	1,217,687	$	—	$	—	$	1,217,597	$	1,217,597
Accrued interest receivable, net	$	3,931	$	5	$	267	$	3,659	$	3,931
Other investments:
FHLB and PCBB stock	$	7,195	N/A		N/A		N/A		N/A
Time deposits placed	$	96	$	—	$	96	$	—	$	96
Servicing assets	$	12,389	$	—	$	—	$	15,138	$	15,138
Financial Liabilities:
Deposit	$	1,496,406	$	—	$	1,497,270	$	—	$	1,497,270
Accrued interest payable	$	575	$	—	$	575	$	—	$	575



($ in thousands)	December 31, 2020
	Carrying Amount		Level 1		Level 2		Level 3		Estimated Fair Value
Financial Assets:
Cash and cash equivalents	$	106,310	$	106,310	$	—	$	—	$	106,310
Loans held for sale	$	26,659	$	—	$	26,659	$	—	$	26,659
Loans receivable, net	$	1,084,384	$	—	$	—	$	1,109,217	$	1,109,217
Accrued interest receivable, net	$	3,985	$	7	$	249	$	3,729	$	3,985
Other investments:
FHLB and PCBB stock	$	6,233	N/A		N/A		N/A		N/A
Time deposits placed	$	95	$	—	$	95	$	—	$	95
Servicing assets	$	7,360	$	—	$	—	$	9,106	$	9,106
Financial Liabilities:
Deposit	$	1,200,090	$	—	$	1,200,789	$	—	$	1,200,789
FHLB Advances	$	5,000	$	—	$	5,000	$	—	$	5,000
Accrued interest payable	$	1,021	$	—	$	1,021	$	—	$	1,021

- 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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