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Fair Value Disclosures
 12 Months Ended
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 UsingTotal
Fair Value
December 31, 2022Level 1Level 2Level 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 $575 
(Dollars in thousands)Fair Value Measurements UsingTotal
Fair Value
December 31, 2021Level 1Level 2Level 3
Assets measured at fair value on a recurring basis
Securities available for sale
Mortgage-backed securities, residential$— $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)202220212020
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 combination708 
Change in fair value of return of premium liability recognized in earnings(35)
Return of premium payments made(98)
Ending balance$575 
Assets measured at fair value on a non-recurring basis are summarized in the table below. There were no liabilities measured at fair value on a non-recurring basis at December 31, 2022 and 2021.
(Dollars in thousands)Fair Value Measurements UsingTotal
Fair Value
December 31, 2022Level 1Level 2Level 3
Collateral dependent loans
Commercial real estate$— $— $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 value38,088 — — 38,088 
$38,088 $— $36,676 $74,764 
(Dollars in thousands)Fair Value Measurements UsingTotal
Fair Value
December 31, 2021Level 1Level 2Level 3
Collateral dependent loans
Commercial real estate$— $— $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 UsingTotal
Fair Value
(Dollars in thousands)Level 1Level 2Level 3
Financial assets:
Cash and cash equivalents$408,182 $408,182 $— $— $408,182 
Securities - held to maturity4,077 — — 5,476 5,476 
Loans not previously presented, gross4,088,411 187,729 — 3,805,701 3,993,430 
FHLB and other restricted stock6,252  N/A  N/A  N/A N/A
Accrued interest receivable21,977 21,977 — — 21,977 
Financial liabilities:
Deposits4,171,336 — 4,159,695 — 4,159,695 
Customer repurchase agreements340 — 340 — 340 
Federal Home Loan Bank advances30,000 — 30,000 — 30,000 
Subordinated notes107,800 — 104,400 — 104,400 
Junior subordinated debentures41,158 — 42,721 — 42,721 
Accrued interest payable2,830 2,830 — — 2,830 
December 31, 2021
Carrying
Amount		Fair Value Measurements UsingTotal
Fair Value
(Dollars in thousands)Level 1Level 2Level 3
Financial assets:
Cash and cash equivalents$383,178 $383,178 $— $— $383,178 
Securities - held to maturity4,947 — — 5,447 5,447 
Loans not previously presented, gross4,834,426 142,962 — 4,685,058 4,828,020 
FHLB and other restricted stock10,146 N/AN/AN/AN/A
Accrued interest receivable15,319 15,319 — — 15,319 
Financial liabilities:
Deposits4,646,679 — 4,646,552 — 4,646,552 
Customer repurchase agreements2,103 — 2,103 — 2,103 
Federal Home Loan Bank advances180,000 — 180,000 — 180,000 
Paycheck Protection Program Liquidity Facility27,144 — 27,144 — 27,144 
Subordinated notes106,957 — 110,045 — 110,045 
Junior subordinated debentures40,602 — 41,286 — 41,286 
Accrued interest payable1,951 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.