Note 15: Fair Value Measurements

Fair Value Measurements Using Fair Value Hierarchy

The Company classifies measurements of fair value within a hierarchy based upon inputs that give the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 inputs include:

quoted prices for similar assets and liabilities in active markets,

quoted prices for identical assets and liabilities in inactive markets,

inputs that are observable for the asset or liability (such as interest rates, prepayment speeds, credit risks, etc.);

or inputs that are derived principally from or corroborated by observable market data by correlation or by other means.

Level 3 inputs are unobservable and reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Fair Value of Financial Instruments

The following tables show the carrying amounts and estimated fair values of the Company’s financial instruments (dollars in thousands):`



			Fair Value Measurements at September 30, 2020 using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
FINANCIAL ASSETS:
Cash and restricted cash	$	17,976	$	17,976	$	—	$	—	$	17,976
Certificates of deposit		1,757				1,757				1,757
Loans, net		119,833		—		—		118,966		118,966
Investment in joint venture		889		—		—		889		889
Accrued interest receivable		835		—		—		835		835
FINANCIAL LIABILITIES:
Term-debt	$	52,544	$	—	$	—	$	44,481	$	44,481
Investor notes payable		75,292		—		—		77,293		77,293
Other financial liabilities		514		—		—		514		514



			Fair Value Measurements at December 31, 2019 using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
FINANCIAL ASSETS:
Cash and restricted cash	$	25,993	$	25,993	$	—	$	—	$	25,993
Loans, net		128,843		—		—		126,438		126,438
Investment in joint venture		891		—		—		891		891
Accrued interest receivable		635		—		—		635		635
FINANCIAL LIABILITIES:
Term-debt	$	71,427	$	—	$	—	$	55,072	$	55,072
Investor notes payable		73,046		—		—		74,592		74,592
Other financial liabilities		503		—		—		503		503

Management uses judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at September 30, 2020 and December 31, 2019.

The Company used the following methods and assumptions to estimate the fair value of financial instruments:

Cash and restricted cash – The carrying amounts reported in the balance sheets approximate fair value for cash.

Certificates of deposit – Management estimates fair value by using a present value discounted cash flow with a discount rate approximating the current market rate for similar assets. Management classifies certificates of deposits as Level 2 of the fair value hierarchy.

Loans – Management estimates fair value by discounting the future cash flows of the loans. The discount rate the Company uses is the current average rates at which it would make loans to borrowers with similar credit ratings and for the same remaining maturities.

Investments – Management estimates fair value by analyzing the operations and marketability of the underlying investment to determine if the investment is other-than-temporarily impaired.

Investor Notes Payable – Management estimates the fair value of fixed maturity notes by discounting the future cash flows of the notes. The discount rate the Company uses is the rates currently offered for investor notes payable of similar remaining maturities. Company management estimates the discount rate by using market rates that reflect the interest rate risk inherent in the notes.

Term-debt – Management estimates the fair value of borrowings from financial institutions discounting the future cash flows of the borrowings. The discount rate the Company uses is the current incremental borrowing rates for similar types of borrowing arrangements. Company management estimates the discount rate by using market rates that reflect the interest rate risk inherent in the notes.

Off-Balance Sheet Instruments – Management determines the fair value of loan commitments on fees currently charged to enter into similar agreements, taking into account the remaining term of the agreements and the counterparties' credit standing. The fair value of loan commitments is insignificant at September 30, 2020 and December 31, 2019.

Fair Value Measured on a Nonrecurring Basis

The Company measures certain assets at fair value on a nonrecurring basis. On these assets, the Company only makes fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the fair value of assets measured on a nonrecurring basis (dollars in thousands):



	Fair Value Measurements Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets at September 30, 2020:
Collateral-dependent loans (net of allowance and discount)	$	—	$	—	$	5,815	$	5,815
Investment in joint venture		—		—		889		889
Foreclosed assets (net of allowance)		—		—		301		301
Total	$	—	$	—	$	7,005	$	7,005

Assets at December 31, 2019:
Collateral-dependent loans (net of allowance and discount)	$	—	$	—	$	8,640	$	8,640
Investments in joint venture		—		—		891		891
Foreclosed assets (net of allowance)		—		—		301		301
Total	$	—	$	—	$	9,832	$	9,832

Impaired Loans

The Company records loans that management considers impaired at fair value on a nonrecurring basis. Once a loan is considered impaired, the fair value is measured using one of several methods, including collateral liquidation value, market value of similar debt and discounted cash flows. Those impaired loans not requiring a specific charge against the allowance represent loans for which the fair value of the expected repayments or collateral meet or exceed the recorded investment in the loan. Loans which management deems to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs.

Foreclosed Assets

The Company initially records real estate acquired through foreclosure or other proceedings (foreclosed assets) at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost. After foreclosure, management periodically performs valuations on foreclosed assets. The company carries foreclosed assets held for sale at the lower of cost or fair value, less estimated costs of disposal. The fair values of real properties initially are determined based on appraisals. In some cases, management adjusts the appraised values for various factors including age of the appraisal, age of comparable properties included in the appraisal, and known changes in the market or in the collateral. The Company makes subsequent valuations of the real properties based either on management estimates or on updated appraisals. If management makes significant adjustments to appraised values based on unobservable inputs, the Company categorizes foreclosed assets under Level 3. Otherwise, if management bases the foreclosed assets’ value on recent appraisals and the only adjustments made are for known contractual selling costs, the Company will categorize the foreclosed assets under Level 2.

The fair value of impaired loans at September 30, 2020 has decreased from December 31, 2019 as two loans previously classified as impaired were classified as non-impaired, performing loans. In addition, one impaired loan that was outstanding at December 31, 2019 was sold during the first nine months of 2020.

The table below summarizes the valuation methodologies used to measure the fair value adjustments for Level 3 assets recorded at fair value on a nonrecurring basis (dollars in thousands):



September 30, 2020
Assets	Fair Value (in thousands)		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired Loans	$	5,815	Discounted appraised value	Selling cost / Estimated market decrease	21% - 81% (23%)
Investment in joint venture		889	Internal evaluations	Estimated future market value	0% (0%)
Foreclosed Assets		301	Internal evaluations	Selling cost	6% (6%)



December 31, 2019
Assets	Fair Value (in thousands)		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired loans	$	8,640	Discounted appraised value	Selling cost / Estimated market decrease	21% - 81% (23%)
Investments in joint venture		891	Internal evaluations	Estimated future market value	0% (0%)
Foreclosed assets		301	Internal evaluations	Selling cost	6% (6%)