Fair Value of Assets and Liabilities

3 Months Ended

Mar. 31, 2024

(13) FAIR VALUE OF ASSETS AND LIABILITIES

The Company follows the provisions of FASB ASC 820, which defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements.

In accordance with FASB ASC 820, the Company has categorized its assets and liabilities measured at fair value, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The Company's assessment and classification of an investment within a level can change over time based upon maturity or liquidity of the investment and would be reflected at the beginning of the quarter in which the change occurred.

As required by FASB ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a level 3 fair value measurement may include inputs that are observable (levels 1 and 2) and unobservable (level 3). Therefore, gains and losses for such assets and liabilities categorized within the level 3 table below may include changes in fair value that are attributable to both observable inputs (levels 1 and 2) and unobservable inputs (level 3).

Assets and liabilities measured at fair value, recorded on the consolidated balance sheets, are categorized based on the inputs to the valuation techniques as follows:

Level 1. Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access (examples include active exchange-traded equity securities, exchange-traded derivatives, most U.S. Government and agency securities, and certain other sovereign government obligations).

Level 2. Assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:

Quoted prices for similar assets or liabilities in active markets (for example, restricted stock);

Quoted price for identical or similar assets or liabilities in non-active markets (for example, corporate and municipal bonds, which trade infrequently);

Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and

Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (examples include certain residential and commercial mortgage-related assets, including loans, securities, and derivatives).

Level 3. Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the assets or liability (examples include certain private equity investments, and certain residential and commercial mortgage-related assets, including loans, securities, and derivatives).

A review of fair value hierarchy classification is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain assets or liabilities. Reclassifications impacting level 3 of the fair value hierarchy are reported as transfers in/out of the level 3 category as of the beginning of the quarter in which the reclassifications occur.

Equity investments were recorded at cost less impairment plus or minus observable price changes. Commencing in 2020, the Company elected to measure equity investments at fair value on a non-recurring basis.

The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023.


March 31, 2024 (Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Interest-bearing deposits	$	—	$	1,250	$	—	$	1,250
Investment securities		—		53,038		—		53,038
Equity securities		1,730		—		—		1,730
Total (1)	$	1,730	$	54,288	$	—	$	56,018

(1)

Total unrealized losses of $0.2 million, net of tax, was included in other comprehensive income for the three months ended March 31, 2024 related to these assets.


December 31, 2023 (Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Interest-bearing deposits	$	—	$	1,250	$	—	$	1,250
Investment securities		—		54,282		—		54,282
Equity securities		1,748		—		—		1,748
Total (1)	$	1,748	$	55,532	$	—	$	57,280

(1)

Total unrealized losses of $0.3 million, net of tax, was included in other comprehensive loss for the year ended December 31, 2023 related to these assets.

The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2024 and December 31, 2023.


March 31, 2024 (Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Equity investments	$	—	$	—	$	16,374	$	16,374
Impaired loans		—		—		21,881		21,881
Loan collateral in process of foreclosure		—		—		10,198		10,198
Total	$	—	$	—	$	48,453	$	48,453


December 31, 2023 (Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Equity investments	$	—	$	—	$	11,430	$	11,430
Impaired loans		—		—		25,974		25,974
Loan collateral in process of foreclosure		—		—		11,772		11,772
Total	$	—	$	—	$	49,176	$	49,176

Significant Unobservable Inputs

ASC Topic 820 requires disclosure of quantitative information about the significant unobservable inputs used in the valuation of assets and liabilities classified as level 3 within the fair value hierarchy. The tables below are not intended to be all-inclusive, but rather to provide information on significant unobservable inputs and valuation techniques used by the Company.

The valuation techniques and significant unobservable inputs used in non-recurring level 3 fair value measurements of assets and liabilities as of March 31, 2024 and December 31, 2023.


(Dollars in thousands except per share amounts)	Fair Value at March 31, 2024		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
Equity investments	$	11,290	Investee financial analysis	Financial condition and operating performance of the borrower (1)	N/A
				Collateral support	N/A
		5,084	Precedent market transaction	Sale price	$5,084
		273	Precedent market transaction	Offering price	$8.73 / share
Impaired loans		21,881	Market approach	Historical and actual loss experience	0.00% - 43.51%
				Transfer prices (2)	$0.0 - 79.5
				Collateral value	N/A
Loan collateral in process of foreclosure		10,198	Market approach	Transfer prices (2)	$0.0 - 79.5
				Collateral value (3)	$1.8 - $43.2

(1)

Includes projections based on revenue, EBITDA, leverage, and liquidation amounts. These assumptions are based on a variety of factors, including economic conditions, industry, and market developments, market valuations of comparable companies, and company-specific developments, including exit strategies and realization opportunities.

(2)

Represents amount net of liquidation costs.

(3)

Relates to the recreation loan portfolio.


(Dollars in thousands except per share amounts)	Fair Value at December 31, 2023		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
Equity investments	$	11,157	Investee financial analysis	Financial condition and operating performance of the borrower (1)	N/A
				Collateral support	N/A
		273	Precedent market transaction	Offering price	$8.73 / share
Impaired loans		25,974	Market approach	Historical and actual loss experience	0.00% - 28.48%
				Transfer prices (2)	$0.0 - $79.5
				Collateral value	N/A
Loan collateral in process of foreclosure		11,772	Market approach	Transfer prices (2)	$0.0 - $79.5
				Collateral value (3)	$2.3 - $45.0

(1)

(2)

Represents amount net of liquidation costs.

(3)

Relates to the recreation loan portfolio.

- 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 + Details