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Fair Value Disclosures | 12 Months Ended
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Dec. 31, 2022
Fair Value Disclosures [Abstract] |
Fair Value Disclosures | FAIR VALUE DISCLOSURES 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 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 are summarized in the table below.
(Dollars in thousands) |  | Fair Value Measurements Using |  | Total Fair Value
December 31, 2022 |  | Level 1 |  | Level 2 |  | Level 3 |
Assets measured at fair value on a recurring basis |  |  |  |  |  |  |  |
Securities available for sale |  |  |  |  |  |  |  |
Mortgage-backed securities, residential |  | $ | — |  |  | $ | 50,633 |  |  | $ | — |  |  | $ | 50,633 |
Asset-backed securities |  | — |  |  | 6,331 |  |  | — |  |  | 6,331 |
State and municipal |  | — |  |  | 13,438 |  |  | — |  |  | 13,438 |
CLO securities |  | — |  |  | 181,011 |  |  | — |  |  | 181,011 |
Corporate bonds |  | — |  |  | 1,263 |  |  | — |  |  | 1,263 |
SBA pooled securities |  | — |  |  | 1,828 |  |  | — |  |  | 1,828 |
|  | $ | — |  |  | $ | 254,504 |  |  | $ | — |  |  | $ | 254,504 |
Equity securities with readily determinable fair values |  |  |  |  |  |  |  |
Mutual fund |  | $ | 5,191 |  |  | $ | — |  |  | $ | — |  |  | $ | 5,191 |
Loans held for sale |  | $ | — |  |  | $ | 5,641 |  |  | $ | — |  |  | $ | 5,641 |
Indemnification asset |  | $ | — |  |  | $ | — |  |  | $ | 3,896 |  |  | $ | 3,896 |
Revenue share asset |  | $ | — |  |  | $ | — |  |  | $ | 5,515 |  |  | $ | 5,515 |
Liabilities measured at fair value on a recurring basis |  |  |  |  |  |  |  |
Return of premium liability |  | $ | — |  |  | $ | — |  |  | $ | 575 |  |  | $ | 575 |
(Dollars in thousands) |  | Fair Value Measurements Using |  | Total Fair Value
December 31, 2021 |  | Level 1 |  | Level 2 |  | Level 3 |
Assets measured at fair value on a recurring basis |  |  |  |  |  |  |  |
Securities available for sale |  |  |  |  |  |  |  |
Mortgage-backed securities, residential |  | $ | — |  |  | $ | 37,449 |  |  | $ | — |  |  | $ | 37,449 |
Asset-backed securities |  | — |  |  | 6,764 |  |  | — |  |  | 6,764 |
State and municipal |  | — |  |  | 26,825 |  |  | — |  |  | 26,825 |
CLO Securities |  | — |  |  | 106,634 |  |  | — |  |  | 106,634 |
Corporate bonds |  | — |  |  | 2,056 |  |  | — |  |  | 2,056 |
SBA pooled securities |  | — |  |  | 2,698 |  |  | — |  |  | 2,698 |
|  | $ | — |  |  | $ | 182,426 |  |  | $ | — |  |  | $ | 182,426 |
Equity securities with readily determinable fair values |  |  |  |  |  |  |  |
Mutual fund |  | $ | 5,504 |  |  | $ | — |  |  | $ | — |  |  | $ | 5,504 |
Loans held for sale |  | $ | — |  |  | $ | 7,330 |  |  | $ | — |  |  | $ | 7,330 |
Indemnification asset |  | $ | — |  |  | $ | — |  |  | $ | 4,786 |  |  | $ | 4,786 |
Derivative financial instruments (cash flow hedges) |  |  |  |  |  |  |  |
Interest rate swap |  | $ | — |  |  | $ | 6,164 |  |  | $ | — |  |  | $ | 6,164 |
There were no transfers between levels for the years ended December 31, 2022 and 2021. The Company used the following methods and assumptions to estimate fair value of financial instruments that are measured at fair value on a recurring basis: Securities available for sale – The fair values of debt securities available for sale are determined by third-party matrix pricing, which is a mathematical technique widely used in the industry 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 inputs). Equity securities with readily determinable fair values – The fair values of equity securities are determined based on quoted market prices in active markets and are classified in Level 1 of the valuation hierarchy. Loans held for sale – The fair value of loans held for sale is determined using commitments on hand from investors or prevailing market prices and are classified in Level 2 of the valuation hierarchy. Derivative Financial Instruments – The Company used interest rate swaps as part of its cash flow strategy to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The derivative financial instrument fair value is considered a Level 2 classification. Indemnification Asset The fair value of the indemnification asset is calculated as the present value of the estimated cash payments expected to be received from Covenant for probable losses on the covered Over-Formula Advance Portfolio. The cash flows are discounted at a rate to reflect the uncertainty of the timing and receipt of the payments from Covenant. The indemnification asset is reviewed quarterly and changes to the asset are recorded as adjustments to other noninterest income within the Consolidated Statements of Income. The indemnification asset fair value is considered a Level 3 classification. At December 31, 2022 and 2021, the estimated cash payments expected to be received from Covenant for probable losses on the covered Over-Formula Advance Portfolio were $4,101,000 and $5,038,000, respectively, and a discount rate of 5.0% and 5.0%, respectively, was applied to calculate the present value of the indemnification asset. A reconciliation of the opening balance to the closing balance of the fair value of the indemnification asset is as follows:
(Dollars in thousands) | 2022 |  | 2021 |  | 2020
Beginning balance | $ | 4,786 |  |  | $ | 36,225 |  |  | $ | — |
Indemnification asset recognized in business combination | — |  |  | — |  |  | 30,959 |
Change in fair value of indemnification asset recognized in earnings | (890) |  |  | 4,194 |  |  | 5,266 |
Indemnification recognized | — |  |  | (35,633) |  |  | — |
Ending balance | $ | 3,896 |  |  | $ | 4,786 |  |  | $ | 36,225 |
Revenue Share Asset On June 30, 2022 and September 6, 2022, the Company entered into and closed two separate agreements to sell two separate portfolios of factored receivables. The June 30, 2022 agreement contains revenue share provisions that entitles the Company to an amount equal to fifteen percent of the future gross monthly revenue of the clients associated with the sold factored receivable portfolio. The September 6, 2022 agreement contains revenue share provisions that entitles the Company to an amount ranging from fifteen to twenty percent, depending on the client, of the future gross monthly revenue of the clients associated with the sold factored receivable portfolio. The fair value of the revenue share assets is calculated each reporting period, and changes in the fair value of the revenue share assets are recorded in noninterest income in the consolidated statements of income. The revenue share asset fair value is considered a Level 3 classification. At December 31, 2022, the estimated cash payments expected to be received from the purchaser for the Company's share of future gross monthly revenue was $7,613,000 and a discount rate of 10.0% was applied to calculate the present value of the revenue share asset. A reconciliation of the opening balance to the closing balance of the fair value of the revenue share asset is as follows:
(Dollars in thousands) |  |  |  | 2022 |  |
Beginning balance |  |  |  | $ | — |  |  |
Revenue share asset recognized |  |  |  | 6,237 |  |  |
Change in fair value of revenue share asset recognized in earnings |  |  |  | (62) |  |  |
Revenue share payments received |  |  |  | (660) |  |  |
Ending balance |  |  |  | $ | 5,515 |  |  |
Return of Premium Liability On June 23, 2022, the Company made the decision to sell and closed on the sale of a portfolio of equipment loans for cash consideration. The associated agreement contains a provision that in the event that a sold loan is prepaid in full prior to the due date of the final scheduled contractual payment, the Company will return a pro-rata portion of the premium calculated as of the date of such prepayment in full. The fair value of the return of premium liability is calculated each reporting period, and changes in the fair value of the return of premium liability are recorded in noninterest income in the consolidated statements of income. The return of premium liability is considered a Level 3 classification. At December 31, 2022, the fair value of the estimated premium expected to be returned to the purchaser for sold loans prepaid in full was calculated as the difference between the discounted cash flows of each sold loan assuming no prepayments and the discounted cash flows of each sold loan assuming an 11.0% prepayment speed; consistent with management's expected prepayment speed. A reconciliation of the opening balance to the closing balance of the fair value of the return of premium liability is as follows:
(Dollars in thousands) |  | 2022
Beginning balance |  | $ | — |
Return of premium liability recognized in business combination |  | 708 |
Change in fair value of return of premium liability recognized in earnings |  | (35) |
Return of premium payments made |  | (98) |
Ending balance |  | $ | 575 |
Assets measured at fair value on a non-recurring basis are summarized in the table below. There were no liabilities measured at fair value on a non-recurring basis at December 31, 2022 and 2021.
(Dollars in thousands) |  | Fair Value Measurements Using |  | Total Fair Value
December 31, 2022 |  | Level 1 |  | Level 2 |  | Level 3 |
Collateral dependent loans |  |  |  |  |  |  |  |
Commercial real estate |  | $ | — |  |  | $ | — |  |  | $ | 269 |  |  | $ | 269 |
1-4 family residential |  | — |  |  | — |  |  | 46 |  |  | 46 |
Commercial |  | — |  |  | — |  |  | 6,994 |  |  | 6,994 |
Factored receivables |  | — |  |  | — |  |  | 29,367 |  |  | 29,367 |
Consumer |  | — |  |  | — |  |  | — |  |  | — |
Equity investment without readily determinable fair value |  | 38,088 |  |  | — |  |  | — |  |  | 38,088 |
|  | $ | 38,088 |  |  | $ | — |  |  | $ | 36,676 |  |  | $ | 74,764 |
(Dollars in thousands) |  | Fair Value Measurements Using |  | Total Fair Value
December 31, 2021 |  | Level 1 |  | Level 2 |  | Level 3 |
Collateral dependent loans |  |  |  |  |  |  |  |
Commercial real estate |  | $ | — |  |  | $ | — |  |  | $ | 366 |  |  | $ | 366 |
1-4 family residential |  | — |  |  | — |  |  | 61 |  |  | 61 |
Commercial |  | — |  |  | — |  |  | 2,435 |  |  | 2,435 |
Factored receivables |  | — |  |  | — |  |  | 30,224 |  |  | 30,224 |
Consumer |  | — |  |  | — |  |  | 60 |  |  | 60 |
Other real estate owned (1): |  |  |  |  |  |  |  |
Commercial real estate |  | — |  |  | — |  |  | 7 |  |  | 7 |
Construction, land development, land |  | — |  |  | — |  |  | 63 |  |  | 63 |
|  | $ | — |  |  | $ | — |  |  | $ | 33,216 |  |  | $ | 33,216 |
(1) Represents the fair value of OREO that was adjusted subsequent to its initial classification as OREO. As of December 31, 2022 and 2021, the only Level 3 assets with material unobservable inputs are associated with impaired loans and OREO. Collateral Dependent Loans Specific Allocation of ACL A loan is considered to be a collateral dependent loan when, based on current information and events, the Company expects repayment of the financial assets to be provided substantially through the operation or sale of the collateral and the Company has determined that the borrower is experiencing financial difficulty as of the measurement date. The ACL is measured by estimating the fair value of the loan based on the present value of expected cash flows, the market price of the loan, or the underlying fair value of the loan’s collateral. For real estate loans, fair value of the loan’s collateral is determined by third-party appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third-party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 5% to 8% of the appraised value. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business. OREO OREO is primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the ACL. Subsequent changes in fair value are reported as adjustments to the carrying amount and are recorded against earnings. The Company outsources the valuation of OREO with material balances to third-party appraisers. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third-party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 5% to 8% of the appraised value. The estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis were as follows:
| December 31, 2022
| Carrying Amount |  | Fair Value Measurements Using |  | Total Fair Value
(Dollars in thousands) |  | Level 1 |  | Level 2 |  | Level 3 |
Financial assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 408,182 |  |  | $ | 408,182 |  |  | $ | — |  |  | $ | — |  |  | $ | 408,182 |
Securities - held to maturity | 4,077 |  |  | — |  |  | — |  |  | 5,476 |  |  | 5,476 |
Loans not previously presented, gross | 4,088,411 |  |  | 187,729 |  |  | — |  |  | 3,805,701 |  |  | 3,993,430 |
FHLB and other restricted stock | 6,252 |  |  | N/A |  | N/A |  | N/A |  | N/A
Accrued interest receivable | 21,977 |  |  | 21,977 |  |  | — |  |  | — |  |  | 21,977 |
Financial liabilities: |  |  |  |  |  |  |  |  |
Deposits | 4,171,336 |  |  | — |  |  | 4,159,695 |  |  | — |  |  | 4,159,695 |
Customer repurchase agreements | 340 |  |  | — |  |  | 340 |  |  | — |  |  | 340 |
Federal Home Loan Bank advances | 30,000 |  |  | — |  |  | 30,000 |  |  | — |  |  | 30,000 |
Subordinated notes | 107,800 |  |  | — |  |  | 104,400 |  |  | — |  |  | 104,400 |
Junior subordinated debentures | 41,158 |  |  | — |  |  | 42,721 |  |  | — |  |  | 42,721 |
Accrued interest payable | 2,830 |  |  | 2,830 |  |  | — |  |  | — |  |  | 2,830 |
| December 31, 2021
| Carrying Amount |  | Fair Value Measurements Using |  | Total Fair Value
(Dollars in thousands) |  | Level 1 |  | Level 2 |  | Level 3 |
Financial assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 383,178 |  |  | $ | 383,178 |  |  | $ | — |  |  | $ | — |  |  | $ | 383,178 |
Securities - held to maturity | 4,947 |  |  | — |  |  | — |  |  | 5,447 |  |  | 5,447 |
Loans not previously presented, gross | 4,834,426 |  |  | 142,962 |  |  | — |  |  | 4,685,058 |  |  | 4,828,020 |
FHLB and other restricted stock | 10,146 |  |  | N/A |  | N/A |  | N/A |  | N/A
Accrued interest receivable | 15,319 |  |  | 15,319 |  |  | — |  |  | — |  |  | 15,319 |
Financial liabilities: |  |  |  |  |  |  |  |  |
Deposits | 4,646,679 |  |  | — |  |  | 4,646,552 |  |  | — |  |  | 4,646,552 |
Customer repurchase agreements | 2,103 |  |  | — |  |  | 2,103 |  |  | — |  |  | 2,103 |
Federal Home Loan Bank advances | 180,000 |  |  | — |  |  | 180,000 |  |  | — |  |  | 180,000 |
Paycheck Protection Program Liquidity Facility | 27,144 |  |  | — |  |  | 27,144 |  |  | — |  |  | 27,144 |
Subordinated notes | 106,957 |  |  | — |  |  | 110,045 |  |  | — |  |  | 110,045 |
Junior subordinated debentures | 40,602 |  |  | — |  |  | 41,286 |  |  | — |  |  | 41,286 |
Accrued interest payable | 1,951 |  |  | 1,951 |  |  | — |  |  | — |  |  | 1,951 |
For those financial instruments not previously described, the following methods and assumptions were used by the Company in estimating the fair values of financial instruments as disclosed herein: Cash and Cash Equivalents For financial instruments with a shorter term or with no stated maturity, prevailing market rates, and limited credit risk, the carrying amounts approximate fair value and are considered a Level 1 classification. Securities held to maturity The fair values of the Company’s investments in the subordinated notes of Trinitas IV, Trinitas V, and Trinitas VI classified as securities held to maturity are determined based on the securities’ discounted projected future cash flows (net present value), resulting in a Level 3 classification. Loans Loans include loans held for investment, excluding collateral dependent loans previously described above. For variable rate loans that reprice frequently and have no significant changes in credit risk, excluding previously presented collateral dependent loans measured at fair value on a non-recurring basis, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses. The discount rates used to determine the fair value of loans use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans. These loans are considered a Level 3 classification. The fair values of commercial loans in the Company’s liquid credit portfolio are determined based on quoted market prices in active markets and are considered a Level 1 classification. FHLB and other restricted stock FHLB and other restricted stock is restricted to member banks and there are restrictions placed on its transferability. As a result, the fair value of FHLB and other restricted stock was not practicable to determine. Deposits The fair values disclosed for demand deposits and non-maturity transaction accounts are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts) and are considered a Level 2 classification. Fair values for fixed rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification. Customer repurchase agreements The carrying amount of customer repurchase agreements approximates fair value due to their short-term nature. The customer repurchase agreement fair value is considered a Level 2 classification. Federal Home Loan Bank advances The Company’s FHLB advances have variable rates or a maturity of less than three months and therefore fair value materially approximates carrying value and is considered a Level 2 classification. Paycheck Protection Program Liquidity Fund The Company’s PPPLF borrowings correspond to PPP loans and are expected to be short-term in duration, therefore fair value materially approximates carrying value and is considered a Level 2 classification. Subordinated notes The subordinated notes were valued based on quoted market prices, but due to limited trading activity for the subordinated notes in these markets, the subordinated notes are considered a Level 2 classification. Junior subordinated debentures The junior subordinated debentures were valued by discounting future cash flows using current interest rates for similar financial instruments, resulting in a Level 2 classification. Accrued Interest Receivable and Accrued Interest Payable The carrying amounts of accrued interest receivable and accrued interest payable approximate their fair values given the short-term nature of the receivables and are considered a Level 1 classification.

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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/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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