Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2024

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

Fair Value of Financial Instruments

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 classifies 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 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 an 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.

Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).

Assets and liabilities measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023 are summarized below:

	Fair Value Measure on a Recurring Basis
($ in thousands)	Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2024
Assets:
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	40,161	$	—	$	40,161	$	—
Residential collateralized mortgage obligations	153,114		—		153,114		—
Municipal securities - tax exempt	6,098		—		6,098		—
Other investments:
Mutual fund - CRA qualified	3,615		3,615		—		—
Liabilities:
Derivative financial instruments	$	1,486	$	—	$	1,486	$	—
December 31, 2023
Assets:
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	43,877	$	—	$	43,877	$	—
Residential collateralized mortgage obligations	144,459		—		144,459		—
Municipal securities - tax exempt	5,914		—		5,914		—
Other investments:
Mutual fund - CRA qualified	3,463		3,463		—		—

There were no transfers of assets or liabilities between the Level 1 and Level 2 classifications for the three and nine months ended September 30, 2024 or 2023.

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.

Collateral-dependent loans: Collateral-dependent loans are loans where repayment is expected to be provided solely by the sale of the underlying collateral and there are no other available and reliable sources of repayment. Fair value for collateral-dependent loans are measured based on the value of the collateral securing these loans and are classified at a Level 3 in the fair value hierarchy. Collateral may include real estate, or business assets including equipment, inventory and accounts receivable. The value of real estate collateral is determined based on an appraisal by qualified licensed appraisers hired by the Company. The value of business equipment is based on an appraisal by qualified licensed appraisers hired by the Company if significant, or the equipment’s net book value on the business’ financial statements. Inventory and accounts receivable collateral are valued based on independent field examiner review or aging reports. Appraisals may utilize a single valuation approach or a combination or 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 for similar loans and collateral underlying such loans. Appraised values are

reviewed by management using historical knowledge, market considerations, and knowledge of the client and client’s business.

Other real estate owned: Fair value of other real estate owned ("OREO") is based primarily on third party appraisals, less costs to sell and result in a Level 3 classification of the inputs for determining fair value. Appraisals are required annually and may be updated more frequently as circumstances require and the fair value adjustments are made to OREO based on the updated appraised value of the property.

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, 2024 and December 31, 2023:

	Fair Value Measure on a Nonrecurring Basis
($ in thousands)	Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2024
Collateral-dependent loans:
SBA—real estate	$	1,437	$	—	$	—	$	1,437
OREO	1,237		—		—		1,237
Total	$	2,674	$	—	$	—	$	2,674
December 31, 2023
Collateral-dependent loans:
SBA—real estate	$	1,432	$	—	$	—	$	1,432
Total	$	1,432	$	—	$	—	$	1,432
Total

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:

	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2024		2023		2024		2023
Collateral-dependent loans:
SBA—real estate	$	2	$	—	$	5	$	—
Total	$	2	$	—	$	5	$	—

The following table presents information about significant unobservable inputs utilized in the Company’s nonrecurring Level 3 fair value measurements as of September 30, 2024 and December 31, 2023:

($ in thousands)	Fair Value Measurements (Level 3)		Valuation Techniques	Unobservable Inputs	Range of Inputs	Weighted- Average of Inputs(1)
September 30, 2024
Collateral-dependent loans:
SBA—real estate	$	1,437	Income approach - income capitalization	Capitalization rate	8.0% to 11.8%	10.4%
OREO	$	1,237	Sales comparison approach	Market data comparison	(3.7)% to 2.2%	(0.5)%
December 31, 2023
Collateral-dependent loans:
SBA—real estate	$	1,432	Income approach - income capitalization	Capitalization rate	9.3% to 11.0%	9.9%

(1)Weighted-average of inputs is based on the relative fair value of the respective assets as of September 30, 2024 and December 31, 2023.

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, 2024 and December 31, 2023 are as follows. These financial assets and liabilities are measured at amortized cost basis on the Company’s Consolidated Balance Sheets:

	September 30, 2024
($ in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Fair Value
Financial assets:
Cash and cash equivalents	$	166,756	$	166,756	$	—	$	—	$	166,756
Loans held for sale	8,160		—		8,814		—		8,814
Loans receivable, net	1,908,047		—		—		2,021,543		2,021,543
Accrued interest receivable, net	9,479		204		868		8,407		9,479
Other investments:
FHLB and PCBB stock	12,805		N/A		N/A		N/A		N/A
Time deposits placed	100		—		100		—		100
Servicing assets	10,877		—		—		16,500		16,500
Financial liabilities:
Deposits	2,064,603		—		2,064,603		—		2,064,603
FHLB advances	75,000		—		74,992		—		74,992
Accrued interest payable	19,483		—		19,483		—		19,483

	December 31, 2023
($ in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Fair Value
Financial assets:
Cash and cash equivalents	$	91,216	$	91,216	$	—	$	—	$	91,216
Loans receivable, net	1,743,852		—		—		1,793,258		1,793,258
Accrued interest receivable, net	8,259		69		859		7,331		8,259
Other investments:
FHLB and PCBB stock	12,718		N/A		N/A		N/A		N/A
Time deposits placed	95		—		95		—		95
Servicing assets	11,741		—		—		17,218		17,218
Financial liabilities:
Deposits	1,807,558		—		1,808,444		—		1,808,444
FHLB advances	105,000		—		104,231		—		104,231
Accrued interest payable	12,628		—		12,628		—		12,628