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Fair Value Measurements | 6 Months Ended
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Jun. 30, 2021
Fair Value Disclosures [Abstract] |
Fair Value Measurements |
8. | Fair Value Measurements
U.S. GAAP defines the fair value of a financial instrument as the amount that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date. The Company is responsible for the determination of fair value and the supporting methodologies and assumptions. The Company uses various pricing sources and third parties to provide and validate the values utilized. The degree of judgment used in measuring the fair value of financial instruments is generally inversely correlated with the level of observable valuation inputs. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Financial instruments for which no quoted prices are available have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. Assets recorded at fair value are measured and classified in accordance with a fair value hierarchy consisting of the three “levels” based on the observability of inputs available in the marketplace used to measure the fair values as discussed below:
| • |  | Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
| • |  | Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or
| • |  | Level 3: Unobservable inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Management estimates include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Recurring Fair Value Measurements The Company values its investments including commercial paper and floating NAV money market funds recorded in cash and cash equivalents, investments in marketable debt securities, available-for-sale, assets held in the rabbi trust, deferred compensation liability and contingent and deferred consideration at fair value on a recurring basis. Fair values for investments included in cash and cash equivalents and marketable debt securities, available-for-sale were determined for each individual security in the investment portfolio and all these securities are Level 1 or 2 measurements as appropriate. Fair values for assets held in the rabbi trust and related deferred compensation liability were determined based on the cash surrender value of the company owned variable life insurance policies and underlying investments in the trust, and are Level 2 and Level 1 measurements, respectively. Contingent consideration in connection with acquisitions, is carried at fair value and determined on a contract-by-contract basis, calculated using unobservable inputs based on a probability of achieving EBITDA and other performance requirements, and is a Level 3 measurement. Deferred consideration in connection with acquisitions is carried at fair value and calculated using a discounted cash flow estimate with the only remaining condition on such payments being the passage of time, and is a Level 2 measurement. Assets and liabilities carried at fair value on a recurring basis consisted of the following (in thousands):
|  | June 30, 2021 |  |  | December 31, 2020 |
|  | Fair Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Fair Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Assets held in rabbi trust |  | $ | 11,178 |  |  | $ | — |  |  | $ | 11,178 |  |  | $ | — |  |  | $ | 10,295 |  |  | $ | — |  |  | $ | 10,295 |  |  | $ | — |
Cash equivalents (1) : |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial paper and other |  | $ | 1,800 |  |  | $ | — |  |  | $ | 1,800 |  |  | $ | — |  |  | $ | 9,399 |  |  | $ | — |  |  | $ | 9,399 |  |  | $ | — |
Money market funds |  |  | 167,441 |  |  |  | 167,441 |  |  |  | — |  |  |  | — |  |  |  | 158,271 |  |  |  | 158,271 |  |  |  | — |  |  |  | — |
|  | $ | 169,241 |  |  | $ | 167,441 |  |  | $ | 1,800 |  |  | $ | — |  |  | $ | 167,670 |  |  | $ | 158,271 |  |  | $ | 9,399 |  |  | $ | — |
Marketable debt securities, available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Short-term investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. treasuries |  | $ | 74,436 |  |  | $ | 74,436 |  |  | $ | — |  |  | $ | — |  |  | $ | 75,970 |  |  | $ | 75,970 |  |  | $ | — |  |  | $ | — |
U.S. government sponsored entities |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 32,447 |  |  |  | — |  |  |  | 32,447 |  |  |  | — |
Corporate debt |  |  | 72,736 |  |  |  | — |  |  |  | 72,736 |  |  |  | — |  |  |  | 49,841 |  |  |  | — |  |  |  | 49,841 |  |  |  | — |
|  | $ | 147,172 |  |  | $ | 74,436 |  |  | $ | 72,736 |  |  | $ | — |  |  | $ | 158,258 |  |  | $ | 75,970 |  |  | $ | 82,288 |  |  | $ | — |
Long-term investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. treasuries |  | $ | 52,196 |  |  | $ | 52,196 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,641 |  |  | $ | 3,641 |  |  | $ | — |  |  | $ | — |
U.S. government sponsored entities |  |  | 913 |  |  |  | — |  |  |  | 913 |  |  |  | — |  |  |  | 1,152 |  |  |  | — |  |  |  | 1,152 |  |  |  | — |
Corporate debt |  |  | 37,649 |  |  |  | — |  |  |  | 37,649 |  |  |  | — |  |  |  | 36,287 |  |  |  | — |  |  |  | 36,287 |  |  |  | — |
ABS and other |  |  | 6,756 |  |  |  | — |  |  |  | 6,756 |  |  |  | — |  |  |  | 6,693 |  |  |  | — |  |  |  | 6,693 |  |  |  | — |
|  | $ | 97,514 |  |  | $ | 52,196 |  |  | $ | 45,318 |  |  | $ | — |  |  | $ | 47,773 |  |  | $ | 3,641 |  |  | $ | 44,132 |  |  | $ | — |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent consideration |  | $ | 6,817 |  |  | $ | — |  |  | $ | — |  |  | $ | 6,817 |  |  | $ | 5,572 |  |  | $ | — |  |  | $ | — |  |  | $ | 5,572 |
Deferred consideration |  | $ | 11,998 |  |  | $ | — |  |  | $ | 11,998 |  |  | $ | — |  |  | $ | 15,248 |  |  | $ | — |  |  | $ | 15,248 |  |  | $ | — |
Deferred compensation liability |  | $ | 8,346 |  |  | $ | 8,346 |  |  | $ | — |  |  | $ | — |  |  | $ | 8,287 |  |  | $ | 8,287 |  |  | $ | — |  |  | $ | — |
(1) | Included in cash and cash equivalents on the accompanying condensed consolidated balance sheets.
There were no transfers in or out of Level 3 during the six months ended June 30, 2021 and 2020. During the six months ended June 30, 2021, the Company considered current and future interest rates and the economic impact from the COVID-19 pandemic, including new variants and vaccination rates, on the probability of achieving EBITDA and other performance targets in its determination of fair value for the contingent consideration. The Company is uncertain as to the extent of the volatility in the unobservable inputs in the foreseeable future. Deferred consideration in connection with acquisitions is carried at fair value and calculated using a discounted cash flow estimate with the only remaining condition on such payments being the passage of time. As of June 30, 2021 and December 31, 2020, contingent and deferred consideration ha d a maximum undiscounted payment to be settled in cash or stock of $31.0 million and $33.2 million, respectively. Assuming the achievement of the applicable performance criteria and/or service and time requirements, the Company anticipates these payments will be made over the next one to seven-year period. Changes in fair value are included in selling, general and administrative expense in the condensed consolidated statements of net and comprehensive income. A reconciliation of contingent consideration measured at fair value on a recurring basis consisted of the following (in thousands):
|  | Six Months Ended June 30, |
|  | 2021 |  |  | 2020 |
Beginning balance |  | $ | 5,572 |  |  | $ | 3,387 |
Contingent consideration in connection with acquisitions (1) |  |  | (100 | ) |  |  | 1,800 |
Change in fair value of contingent consideration |  |  | 1,345 |  |  |  | 21 |
Payments of contingent consideration |  |  | — |  |  |  | — |
Ending balance |  | $ | 6,817 |  |  | $ | 5,208 |
(1) | Contingent consideration in connection with acquisitions represents a noncash investing activity. Six months ended June 30, 2021 relates to a measurement period adjustment. See Note 5 – “Acquisitions, Goodwill and Other Intangible Assets” for additional information.
Quantitative information about the valuation technique and significant unobservable inputs used in the valuation of the Company’s Level 3 financial liabilities measured at fair value on a recurring basis consisted of the following (dollars in thousands):
|  | Fair Value at June 30, 2021 |  |  | Valuation Technique |  | Unobservable inputs |  | Range (Weighted Average) (1) |
Contingent consideration |  | $ | 6,817 |  |  | Discounted cash flow |  | Expected life of cash flows |  |  | 1.9-6.3 years (3.8 years) |
|  |  |  |  |  |  |  | Discount rate |  |  | 1.9%-3.7% (2.8%) |
|  |  |  |  |  |  |  | Probability of achievement |  |  | 33.8%-100.0% (90.1%) |
|  | Fair Value at December 31, 2020 |  |  | Valuation Technique |  | Unobservable inputs |  | Range (Weighted Average) (1) |
Contingent consideration |  | $ | 5,572 |  |  | Discounted cash flow |  | Expected life of cash flows |  |  | 2.4-6.8 years (4.4 years) |
|  |  |  |  |  |  |  | Discount rate |  |  | 2.6%-4.3% (3.4%) |
|  |  |  |  |  |  |  | Probability of achievement |  |  | 50.0%-100.0% (86.1%) |
(1) | Unobservable inputs were weighted by the relative fair value of the instruments.
Nonrecurring Fair Value Measurements In accordance with U.S. GAAP, from time to time, the Company measures certain assets at fair value on a nonrecurring basis. The Company reviews the carrying value of MSRs, intangibles, goodwill and other assets for indications of impairment at least annually. When indications of potential impairment are identified, the Company may be required to determine the fair value of those assets and record an adjustment for the carrying amount in excess of the fair value determined. Any fair value determination would be based on valuation approaches, which are appropriate under the circumstances and utilize Level 2 and Level 3 measurements as required. MSRs are recorded at fair value upon acquisition of a servicing contract. The Company has elected the amortization method for the subsequent measurement of MSRs. MSRs are carried at the lower of amortized cost or fair value. MSRs are a Level 3 measurement. The Company’s MSRs do not trade in an active, open market with readily observable prices. The estimated fair value of the Company’s MSRs were developed using a discounted cash flow model that calculates the present value of estimated future net servicing income. The model considers contractual provisions and assumptions of market participants including specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. The Company periodically reassesses and adjusts, when necessary, the underlying inputs and assumptions used to reflect observable market conditions and assumptions that a market participant would consider in valuing an MSR asset. Management uses assumptions in the determination of fair value for MSRs after considering default, severity, prepayment and discount rates related to the specific types and underlying collateral of the various serviced loans, interest rates, refinance rates, and current government and private sector responses on the economic impact of the COVID-19 pandemic. MSRs are carried at the lower of amortized cost or fair value. The fair value of the MSRs approximated the carrying value at June 30, 2021 and December 31, 2020 after consideration of the revisions to the various assumptions. See Note 6 – “Selected Balance Sheet Data – Other Assets – MSRs” for additional information. Quantitative information about the valuation technique and significant unobservable inputs used in the valuation of the Company’s Level 3 financial assets measured at fair value on a nonrecurring basis consisted of the following (dollars in thousands):
|  | Fair Value at June 30, 2021 |  |  | Valuation Technique |  | Unobservable inputs |  | Range (Weighted Average) (1) |
MSRs |  | $ | 2,367 |  |  | Discounted cash flow |  | Constant prepayment rates |  |  | 0.0%-20.0% (10.0%) |
|  |  |  |  |  |  |  | Constant default rate |  |  | 0.3%-4.5% (1.2%) |
|  |  |  |  |  |  |  | Loss severity |  |  | 26.2%-31.4% (28.0%) |
|  |  |  |  |  |  |  | Discount rate |  |  | 10.0%-10.0% (10.0%) |
|  | Fair Value at December 31, 2020 |  |  | Valuation Technique |  | Unobservable inputs |  | Range (Weighted Average) (1) |
MSRs |  | $ | 2,135 |  |  | Discounted cash flow |  | Constant prepayment rates |  |  | 0.0%-20.0% (10.0%) |
|  |  |  |  |  |  |  | Constant default rate |  |  | 0.3%-4.1% (1.1%) |
|  |  |  |  |  |  |  | Loss severity |  |  | 26.2%-31.4% (28.0%) |
|  |  |  |  |  |  |  | Discount rate |  |  | 10.0%-10.0% (10.0%) |
(1) | Weighted average is based on the 10% constant prepayment rate scenario which the Company uses as the reported fair value.

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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 http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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