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Fair Value Disclosures | 9 Months Ended
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Sep. 30, 2023
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. The methods of determining the fair value of assets and liabilities presented in this note are consistent with the methodologies disclosed in Note 17 of the Company’s 2022 Form 10-K. 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
September 30, 2023 |  | Level 1 |  | Level 2 |  | Level 3 |
Assets measured at fair value on a recurring basis |  |  |  |  |  |  |  |
Securities available for sale |  |  |  |  |  |  |  |
Mortgage-backed securities, residential |  | $ | — |  |  | $ | 43,182 |  |  | $ | — |  |  | $ | 43,182 |
Asset-backed securities |  | — |  |  | 1,253 |  |  | — |  |  | 1,253 |
State and municipal |  | — |  |  | 5,028 |  |  | — |  |  | 5,028 |
CLO securities |  | — |  |  | 240,475 |  |  | — |  |  | 240,475 |
Corporate bonds |  | — |  |  | 749 |  |  | — |  |  | 749 |
SBA pooled securities |  | — |  |  | 1,637 |  |  | — |  |  | 1,637 |
|  | $ | — |  |  | $ | 292,324 |  |  | $ | — |  |  | $ | 292,324 |
Equity securities with readily determinable fair values |  |  |  |  |  |  |  |
Mutual fund |  | $ | 4,289 |  |  | $ | — |  |  | $ | — |  |  | $ | 4,289 |
Loans held for sale |  | $ | — |  |  | $ | 6,416 |  |  | $ | — |  |  | $ | 6,416 |
Indemnification asset |  | $ | — |  |  | $ | — |  |  | $ | 1,701 |  |  | $ | 1,701 |
Revenue share asset |  | $ | — |  |  | $ | — |  |  | $ | 2,696 |  |  | $ | 2,696 |
Liabilities measured at fair value on a recurring basis |  |  |  |  |  |  |  |
Return of premium liability |  | $ | — |  |  | $ | — |  |  | $ | 272 |  |  | $ | 272 |
(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 |
There were no transfers between levels during 2023 or 2022. 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 acquired during 2020. 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 or expense, as appropriate, within the Consolidated Statements of Income. The indemnification asset fair value is considered a Level 3 classification. At September 30, 2023 and December 31, 2022, the estimated cash payments expected to be received from Covenant for probable losses on the covered Over-Formula Advance Portfolio were approximately $1,791,000 and $4,101,000, 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:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(Dollars in thousands) |  | 2023 |  | 2022 |  | 2023 |  | 2022
Beginning balance |  | $ | 1,905 |  |  | $ | 4,377 |  |  | $ | 3,896 |  |  | $ | 4,786 |
Indemnification asset recognized in business combination |  | — |  |  | — |  |  | — |  |  | — |
Change in fair value of indemnification asset recognized in earnings |  | (204) |  |  | (204) |  |  | (530) |  |  | (613) |
Indemnification reduction |  | — |  |  | — |  |  | (1,665) |  |  | — |
Ending balance |  | $ | 1,701 |  |  | $ | 4,173 |  |  | $ | 1,701 |  |  | $ | 4,173 |
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 September 30, 2023 and December 31, 2022, the estimated cash payments expected to be received from the purchaser for the Company's share of future gross monthly revenue as $3,546,000 and $7,613,000, respectively, 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:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(Dollars in thousands) |  | 2023 |  | 2022 |  | 2023 |  | 2022
Beginning balance |  | $ | 3,053 |  |  | $ | 5,210 |  |  | $ | 5,515 |  |  | $ | — |
Revenue share asset recognized |  | — |  |  | 1,027 |  |  | — |  |  | 6,237 |
Change in fair value of revenue share asset recognized in earnings |  | (78) |  |  | 171 |  |  | (1,867) |  |  | 171 |
Revenue share payments received |  | (279) |  |  | (230) |  |  | (952) |  |  | (230) |
Ending balance |  | $ | 2,696 |  |  | $ | 6,178 |  |  | $ | 2,696 |  |  | $ | 6,178 |
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 September 30, 2023 and 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% and 11.0% prepayment speed, respectively; 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:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(Dollars in thousands) |  | 2023 |  | 2022 |  | 2023 |  | 2022
Beginning balance |  | $ | 376 |  |  | $ | 708 |  |  | $ | 575 |  |  | $ | — |
Return of premium liability recognized |  | — |  |  | — |  |  | — |  |  | 708 |
Change in fair value of return of premium liability recognized in earnings |  | (104) |  |  | (104) |  |  | (303) |  |  | (104) |
Return of premium payments made |  | — |  |  | (34) |  |  | — |  |  | (34) |
Ending balance |  | $ | 272 |  |  | $ | 570 |  |  | $ | 272 |  |  | $ | 570 |
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 September 30, 2023 and December 31, 2022.
(Dollars in thousands) |  | Fair Value Measurements Using |  | Total Fair Value
September 30, 2023 |  | Level 1 |  | Level 2 |  | Level 3 |
Collateral dependent loans |  |  |  |  |  |  |  |
Commercial real estate |  | $ | — |  |  | $ | — |  |  | $ | 1,374 |  |  | $ | 1,374 |
1-4 family residential |  | — |  |  | — |  |  | 63 |  |  | 63 |
Commercial |  | — |  |  | — |  |  | 1,431 |  |  | 1,431 |
Factored receivables |  | — |  |  | — |  |  | 32,500 |  |  | 32,500 |
|  | $ | — |  |  | $ | — |  |  | $ | 35,368 |  |  | $ | 35,368 |
(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 |
Equity investment without readily determinable fair value |  | 38,088 |  |  | — |  |  | — |  |  | 38,088 |
|  | $ | 38,088 |  |  | $ | — |  |  | $ | 36,676 |  |  | $ | 74,764 |
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. The estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis at September 30, 2023 and December 31, 2022 were as follows:
(Dollars in thousands) |  | Carrying Amount |  | Fair Value Measurements Using |  | Total Fair Value
September 30, 2023 |  |  | Level 1 |  | Level 2 |  | Level 3 |
Financial assets: |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 337,583 |  |  | $ | 337,583 |  |  | $ | — |  |  | $ | — |  |  | $ | 337,583 |
Securities - held to maturity |  | 3,311 |  |  | — |  |  | — |  |  | 4,756 |  |  | 4,756 |
Loans not previously presented, gross |  | 4,336,160 |  |  | 129,815 |  |  | — |  |  | 4,111,712 |  |  | 4,241,527 |
FHLB and other restricted stock |  | 10,101 |  |  | N/A |  | N/A |  | N/A |  | N/A
Accrued interest receivable |  | 33,930 |  |  | 33,930 |  |  | — |  |  | — |  |  | 33,930 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |
Deposits |  | 4,487,051 |  |  | — |  |  | 4,478,382 |  |  | — |  |  | 4,478,382 |
Federal Home Loan Bank advances |  | 30,000 |  |  | — |  |  | 30,000 |  |  | — |  |  | 30,000 |
Subordinated notes |  | 108,454 |  |  | — |  |  | 88,057 |  |  | — |  |  | 88,057 |
Junior subordinated debentures |  | 41,592 |  |  | — |  |  | 43,392 |  |  | — |  |  | 43,392 |
Accrued interest payable |  | 8,382 |  |  | 8,382 |  |  | — |  |  | — |  |  | 8,382 |
(Dollars in thousands) |  | Carrying Amount |  | Fair Value Measurements Using |  | Total Fair Value
December 31, 2022 |  |  | 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 |

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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 -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482106/820-10-50-2 + Details
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