Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.20.2
Fair Value Measurements
 9 Months Ended
Sep. 30, 2020
Fair Value Disclosures [Abstract]  
Fair Value Measurements
10.
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 net asset value 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 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 the probability of achieving EBITDA and other performance requirements, and is a Level 3 measurement. During the nine months ended September 30, 2020, the Company considered the economic impact of
COVID-19
on the probability of achieving EBITDA and other performance targets, and current and future interest rates in its determination of fair value for the contingent consideration. The Company is uncertain 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, and is a Level 2 measurement.
 
Assets and liabilities carried at fair value on a recurring basis consisted of the following (in thousands):
 
     September 30, 2020      December 31, 2019  
     Fair Value      Level 1      Level 2      Level 3      Fair Value      Level 1      Level 2      Level 3  
Assets:
                        
Assets held in rabbi trust
    $ 9,467      $ —        $ 9,467      $ —        $ 9,452      $ —        $ 9,452      $ —    
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Cash equivalents
(1)
:
                        
Commercial paper and other
    $ 2,950      $ —        $ 2,950      $ —        $ 5,087      $ —        $ 5,087      $ —    
Money market funds
      130,045        130,045        —          —          185,513        185,513        —          —    
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
   $ 132,995      $ 130,045      $ 2,950      $ —        $ 190,600      $ 185,513      $ 5,087      $ —    
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Marketable debt securities,
available-for-sale:
                        
Short-term investments:
                        
U.S. treasuries
    $ 93,641      $ 93,641      $ —        $ —        $ 124,580      $ 124,580      $ —        $ —    
U.S. government sponsored entities
      37,740        —          37,740        —          —          —          —          —    
Corporate debt
      38,132        —          38,132        —          26,172        —          26,172        —    
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
   $ 169,513      $ 93,641      $ 75,872      $ —        $
 
 150,752      $ 124,580      $ 26,172      $ —    
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Long-term investments:
                        
U.S. treasuries
    $ 3,689      $ 3,689      $ —        $ —        $ 24,423      $ 24,423      $ —        $ —    
U.S. government sponsored entities
      1,269        —          1,269        —          1,355        —          1,355        —    
Corporate debt
      34,357        —          34,357        —          26,471        —          26,471        —    
ABS and other
      7,190        —          7,190        —          8,560        —          8,560        —    
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
   $ 46,505      $ 3,689      $ 42,816      $ —        $ 60,809      $ 24,423      $
 
 36,386      $ —    
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Liabilities:
                        
Contingent consideration
    $ 4,683      $ —        $ —        $ 4,683      $ 3,387      $ —        $ —        $ 3,387  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Deferred consideration
    $ 5,352      $ —        $ 5,352      $ —        $ 1,390      $ —        $ 1,390      $ —    
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Deferred compensation liability
    $ 7,914      $ 7,914      $ —        $ —        $ 8,241      $ 8,241      $ —        $ —    
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
(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 nine months ended September 30, 2020 and 2019.
As of September 30, 2020 and December 31, 2019, contingent and deferred consideration has a maximum undiscounted payment of $16.1 million and $7.3 million, respectively. Assuming the achievement of the applicable performance criteria and/or service and time requirements, the Company anticipates these
earn-out
and deferred payments will be made over the next one to five-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):
 
    
Nine Months Ended
September 30,
  
     2020      2019  
Beginning balance
(1)
    $ 3,387      $ 2,875  
Contingent consideration in connection with acquisitions
(2)
      1,800        —    
Change in fair value of contingent consideration
      134        (11 ) 
Payments of contingent consideration
      (638 )       —    
  
 
 
     
 
 
  
Ending balance
    $ 4,683      $ 2,864  
  
 
 
     
 
 
  
 
(1)
 
Beginning balance for 2020 reflects the reclassification of $1,401 from contingent consideration related to deferred consideration. See Note 7 – “Selected Balance Sheet Data – Other Liabilities” for additional information.
(2)
 
Contingent consideration in connections with acquisitions represents a noncash investing activity.
 
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
September 30, 2020		  
 
 Valuation Technique
 
 
 Unobservable inputs   
 
 Range
 
(Weighted Average)
(1)
  
Contingent consideration
    $ 4,683  
 
    Discounted cash flow
 
 
   Expected life of cash flows   
 
  
0.5-5.0 years
 
 
 
(2.0 years)
 
      Discount rate   
 
  
4.1%-4.4%
 
 
 
(4.2%)
 
      Probability of achievement   
 
  
62%-100.0%
 
 
 
(85.5%)
 
     Fair Value at
December 31, 2019		  
 
 Valuation Technique
 
 
 Unobservable inputs   
 
 Range
 
(Weighted Average)
(1)
  
Contingent consideration
    $ 3,387  
 
    Discounted cash flow
 
 
   Expected life of cash flows   
 
  
0.4-5.8
years
 
 
 
(2.4 years)
 
      Discount rate   
 
  
3.6%-4.9%
 
 
 
(4.1%)
 
      Probability of achievement   
 
  
33.0%-100.0%
 
 
 
(74.3%)
 
 
(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 made revisions to the assumptions used in the determination of fair value for MSRs after considering the economic impact of the
COVID-19
pandemic on 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 to the pandemic. The fair value of the MSRs approximated the carrying value at September 30, 2020 and December 31, 2019 after consideration of the revisions to the various assumptions. See Note 7 – “Selected Balance Sheet Data – Other Assets – MSRs” for additional information.
As market conditions change, the Company will
re-evaluate
assumptions used in the determination of fair value for MSRs and is uncertain to the extent of the volatility in the unobservable inputs in the foreseeable future.
 
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
September 30, 2020		  
 
Valuation Technique
 
 
 
Unobservable inputs
 
 
 Range
 
(Weighted Average)
(1)
  
MSRs
    $ 2,296  
 
 
 Discounted cash flow
 
 
 
 Constant prepayment
 
rates
 
 
  
0.0%-20.0% (
10.0
%)
  
  
 
 
 
 Constant default rate
 
 
  
0.4%-5.1%
(1.5%)		  
  
 
 
 
 Loss severity
 
 
  
24.2%-50.0% (30.1%)
  
  
 
 
 
 Discount rate
 
 
  
10.0%-10.0%
(10.0%)		  
     Fair Value at
December 31, 2019		     
Valuation Technique
   
 
Unobservable inputs
 
    Range
 
(Weighted Average)
(1)
  
MSRs
    $ 2,204     
 
 Discounted cash flow   
 
 
 Constant prepayment rates
 
     
0.0%-20.0%
(10.0%)		  
        
 
 
 Constant default rate
 
     
2.0%-2.0%
(2.0%)		  
        
 
 
 Loss severity
 
     
40.0%-40.0%
(40.0%)		  
        
 
 
 Discount rate
 
     
9.5%-9.7%
(9.7%)		  
 
(1)
Weighted average is based on the 10% constant prepayment rate scenario which the Company uses as the reported fair value.