Merchants Bancorp Fair Value Disclosure
Note 16: Disclosures About Fair Value of Assets and Liabilities
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1 | | Quoted prices in active markets for identical assets or liabilities |
Level 2 | 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 for substantially the full term of the assets or liabilities | |
Level 3 | Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities |
Recurring Measurements
The following tables present the fair value measurements of assets and liabilities recognized on the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2025 and 2024:
Fair Value Measurements Using | ||||||||||||
Quoted Prices in | Significant |
| ||||||||||
Active Markets | Other | Significant | ||||||||||
for Identical | Observable | Unobservable | ||||||||||
Fair | Assets | Inputs | Inputs | |||||||||
| Value | | (Level 1) | | (Level 2) | | (Level 3) | |||||
(In thousands) | ||||||||||||
December 31, 2025 | ||||||||||||
Mortgage loans in process of securitization | $ | 620,094 | $ | — | $ | 620,094 | $ | — | ||||
Securities available for sale: |
| |
| |
| |
| | ||||
Treasury notes |
| 30,680 |
| 30,680 |
| — |
| — | ||||
Federal agencies |
| 259,508 |
| — |
| 259,508 |
| — | ||||
Mortgage-backed - Agency |
| 3,556 |
| — |
| 3,556 |
| — | ||||
Mortgage-backed - Non-Agency residential - fair value option | 385,460 | — | 385,460 | — | ||||||||
Mortgage-backed - Agency - fair value option | 185,854 | — | 185,854 | — | ||||||||
Loans held for sale |
| 76,980 |
| — |
| 76,980 |
| — | ||||
Loans receivable | 47,318 | — | 47,318 | — | ||||||||
Servicing rights |
| 217,296 |
| — |
| — |
| 217,296 | ||||
Derivative assets: | ||||||||||||
Interest rate lock commitments |
| 227 |
| — |
| — |
| 227 | ||||
Forward contracts |
| 2 |
| — |
| 2 |
| — | ||||
Interest rate swaps | 2,354 | — | 2,354 | — | ||||||||
Interest rate swaps, caps and floors (back-to-back) | 7,289 | — | 7,289 | — | ||||||||
Put options | 37,570 | — | 5,640 | 31,930 | ||||||||
Interest rate floors | 9,540 | — | — | 9,540 | ||||||||
Derivative liabilities: | ||||||||||||
Interest rate lock commitments |
| 107 | — | — | 107 | |||||||
Forward contracts | 467 | — | 467 | — | ||||||||
Interest rate swaps, caps and floors (back-to-back) |
| 7,289 | — | 7,289 | — | |||||||
December 31, 2024 |
| | ||||||||||
Mortgage loans in process of securitization | $ | 428,206 | $ | — | $ | 428,206 | $ | — | ||||
Securities available for sale: |
| |
| |
| |
| | ||||
Treasury notes |
| 90,006 |
| 90,006 |
| — |
| — | ||||
Federal agencies |
| 252,936 |
| — |
| 252,936 |
| — | ||||
Mortgage-backed - Agency |
| 1,162 | — |
| 1,162 |
| — | |||||
Mortgage-backed - Non-Agency residential - fair value option | 430,779 | — |
| 430,779 |
| — | ||||||
Mortgage-backed - Agency - fair value option | 205,167 |
| — |
| 205,167 |
| — | |||||
Loans held for sale | 78,170 |
| — |
| 78,170 |
| — | |||||
Servicing rights | 189,935 |
| — |
| — |
| 189,935 | |||||
Derivative assets: |
| |||||||||||
Interest rate lock commitments |
| 30 |
| — |
| — |
| 30 | ||||
Forward contracts | 229 |
| — |
| 229 |
| — | |||||
Interest rate swaps |
| 4,199 | — | 4,199 | — | |||||||
Interest rate swaps, caps and floors (back-to-back) | 309 | — | 309 | — | ||||||||
Put options | 43,777 | — | 12,481 | 31,296 | ||||||||
Interest rate floors | 4,043 | — | — | 4,043 | ||||||||
Derivative liabilities: | ||||||||||||
Interest rate lock commitments |
| 176 | — | — | 176 | |||||||
Forward contracts | 1 | — | 1 | — | ||||||||
Interest rate swaps, caps and floors (back-to-back) |
| 309 | — | 309 | — | |||||||
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized on the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques
during the years ended December 31, 2025 and 2024. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
The Company values its assets and liabilities in the principal market where it sells the particular asset or transfers the liability with the greatest volume and level of activity. In the absence of an active market, the value is based on the most advantageous market for the asset or liability.
Mortgage Loans in Process of Securitization, Securities Available for Sale, and Securities with a Fair Value Option Election
Where quoted market prices are available in an active market, securities such as U.S. Treasuries are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy including Federal agencies, mortgage-backed securities, municipal securities and Federal Housing Administration participation certificates. In certain cases, if Level 1 or Level 2 inputs are not available, securities would be classified within Level 3 of the hierarchy.
Loans Held for Sale
Certain loans held for sale at fair value are saleable into the secondary mortgage markets and their fair values are estimated using observable quoted market or contracted prices, or market price equivalents, which would be used by other market participants. These saleable loans are considered Level 2.
Servicing Rights
Servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed, cost of servicing, interest rates, and default rate. Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the hierarchy.
The Chief Financial Officer’s (CFO) office contracts with an independent pricing specialist to generate fair value estimates on a quarterly basis. The CFO’s office challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with GAAP.
Derivative Financial Instruments
Interest rate lock commitments - The Company estimates the fair value of interest rate lock commitments based on the value of the underlying mortgage loan, quoted mortgage-backed security prices, estimates of the fair value of the servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the interest rate lock commitment, net of expenses. With respect to its interest rate lock commitments, management determined that a Level 3 classification was most appropriate based on the various significant unobservable inputs utilized in estimating the fair value of its interest rate lock commitments.
Forward contracts - The Company estimates the fair value of forward sales commitments based on market quotes of mortgage-backed security prices for securities similar to the ones used, which are considered Level 2.
Interest rate swaps – The Company estimates the fair value of interest rate swaps based on prices that are obtained from a third party that uses observable market inputs, thereby supporting a Level 2 classification.
Interest rate swaps, caps, and floors (back-to-back) – The Company estimates the fair value of these derivatives made in relation to specific contracts with customers based on prices that are obtained from a third party that uses observable market inputs, thereby supporting a Level 2 classification.
Put options - The fair value of put options is linked to securities available for sale that are accounted for using the fair value option and are classified as either Level 2 or Level 3 on the hierarchy. The put options are classified as Level 2 or Level 3 in the hierarchy, depending upon the magnitude of observable inputs in the valuation of the securities. These valuations are estimated by a third party.
Interest rate floors - The fair value of certain interest rate floors is linked to securities available for sale that are accounted for using the fair value option. Other interest rate floors are linked to loans with warehouse customers. The value of the interest rate floors is based on estimated discounted cash flows that are based on inputs that are not readily observable and, thus, are classified as Level 3 on the hierarchy. These valuations are estimated by a third party.
Credit default swap – The fair value of CDSs is linked to the value of its underlying mortgage loans. The Company estimates the fair value based on estimated discounted cash flows that are derived from inputs, including credit spreads that are not readily observable and, thus, are classified as Level 3 on the hierarchy. These valuations are estimated by a third party.
Level 3 Reconciliation
The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized on the accompanying consolidated balance sheets using significant unobservable (Level 3) inputs:
Year Ended December 31, | |||||||||
| 2025 | | 2024 | | 2023 | ||||
(In thousands) | |||||||||
Servicing rights | |||||||||
Balance, beginning of period | $ | 189,935 | $ | 158,457 | $ | 146,248 | |||
Purchased servicing |
| 14,482 |
| — |
| 513 | |||
Originated servicing |
| 23,654 |
| 18,670 |
| 14,755 | |||
Paydowns |
| (12,223) |
| (9,901) |
| (7,621) | |||
Changes in fair value |
| 1,448 |
| 22,709 |
| 4,562 | |||
Balance, end of period | $ | 217,296 | $ | 189,935 | $ | 158,457 | |||
Securities available for sale - Mortgage-backed - Non-Agency residential - fair value option | |||||||||
Balance, beginning of period | $ | — | $ | 485,500 | $ | — | |||
Purchases | — | — | 483,906 | ||||||
Paydowns |
| — |
| (42,079) |
| — | |||
Changes in fair value |
| — |
| (12,642) |
| 1,594 | |||
Transfers out of Level 3 | — | (430,779) | — | ||||||
Balance, end of period | $ | — | $ | — | $ | 485,500 | |||
Derivative assets - put options | |||||||||
Balance, beginning of period | $ | 31,296 | $ | 18,654 | $ | — | |||
Purchases |
| — |
| — |
| 20,248 | |||
Changes in fair value |
| 634 |
| 12,642 |
| (1,594) | |||
Balance, end of period | $ | 31,930 | $ | 31,296 | $ | 18,654 | |||
Derivative assets - interest rate floors | |||||||||
Balance, beginning of period | $ | 4,043 | $ | 6,576 | $ | — | |||
Purchases |
| — |
| — |
| 6,576 | |||
Changes in fair value |
| 5,497 |
| (2,533) |
| — | |||
Balance, end of period | $ | 9,540 | $ | 4,043 | $ | 6,576 | |||
Derivative assets - interest rate lock commitments | |||||||||
Balance, beginning of period | $ | 30 | $ | 140 | $ | 28 | |||
Gain (loss) recognized |
| 197 |
| (110) |
| 112 | |||
Balance, end of period | $ | 227 | $ | 30 | $ | 140 | |||
Derivative liabilities - interest rate lock commitments | |||||||||
Balance, beginning of period | $ | 176 | $ | 4 | $ | 23 | |||
Gain (loss) recognized |
| (69) |
| 172 |
| (19) | |||
Balance, end of period | $ | 107 | 176 | $ | 4 | ||||
Two residential mortgage-backed, non-Agency securities with a fair value of $430.8 million as of December 31, 2024 were transferred from Level 3 to Level 2 because the valuation technique utilized contained more observable market data for the security.
Nonrecurring Measurements
The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2025 and 2024:
Fair Value Measurements Using | ||||||||||||
Quoted Prices in | Significant |
| ||||||||||
Active Markets | Other | Significant | ||||||||||
for Identical | Observable | Unobservable | ||||||||||
Fair | Assets | Inputs | Inputs | |||||||||
Assets | | Value | | (Level 1) | | (Level 2) | | (Level 3) | ||||
(In thousands) | ||||||||||||
December 31, 2025 |
| |
| |
| |
| | ||||
Collateral dependent loans | $ | 143,771 | $ | — | $ | — | $ | 143,771 | ||||
Other real estate owned | 60,145 | — | — | 60,145 | ||||||||
December 31, 2024 |
| |
| |
| |
| | ||||
Collateral dependent loans | $ | 59,915 | $ | — | $ | — | $ | 59,915 | ||||
Other real estate owned | 7,313 | — | — | 7,313 | ||||||||
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized on the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
Collateral Dependent Loans, Net of ACL-Loans
The estimated fair value of collateral dependent loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral dependent loans are classified within Level 3 of the fair value hierarchy.
The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be classified as substandard, collateral-dependent and subsequently as deemed necessary by the CCO’s office. Appraisals and evaluations are reviewed for accuracy and consistency by the CCO’s office. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the CCO’s office by comparison to historical results.
Other Real Estate Owned
The estimated fair value of other real estate owned is usually based on the appraised fair value of the collateral or in certain circumstances on sales agreements, and in all cases net of estimated cost to sell. Other real estate owned is classified within Level 3 of the fair value hierarchy.
The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying other real estate owned are obtained when the loan is in the process of foreclosure and subsequently as deemed necessary by the CCO’s office. Appraisals and evaluations are reviewed for accuracy and consistency by the CCO’s office. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the CCO’s office by comparison to historical results.
Unobservable (Level 3) Inputs:
The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill.
Valuation | Weighted | ||||||||||
| Fair Value | | Technique | | Unobservable Inputs | Range | | Average | |||
(In thousands) | |||||||||||
December 31, 2025: |
| |
| |
| ||||||
Collateral dependent loans | $ | 143,771 |
| Market comparable properties |
| Marketability discount and costs to sell | 12% - 70% |
| 31% | ||
Other real estate owned | 60,145 | Market comparable properties | Marketability discount and costs to sell | 6% - 9% | 9% | ||||||
Servicing rights - Multi-family | 164,224 |
| Discounted cash flow |
| Discount rate | 8% - 15% |
| 9% | |||
|
| |
| Constant prepayment rate | 0% - 100% |
| 8% | ||||
Earnings rate on escrows | 3% | 3% | |||||||||
Servicing rights - Single-family | 33,151 | Discounted cash flow | Discount rate | 9% - 12% | 9% | ||||||
Constant prepayment rate | 3% - 53% | 9% | |||||||||
Servicing rights - Healthcare | 15,105 |
| Discounted cash flow |
| Discount rate | 8% - 13% |
| 11% | |||
Constant prepayment rate | 1% - 100% |
| 7% | ||||||||
Earnings rate on escrows | 3% | 3% | |||||||||
Servicing rights - SBA | 4,816 | Discounted cash flow | Discount rate | 16% | 16% | ||||||
Constant prepayment rate | 10% - 31% | 16% | |||||||||
Derivative assets: | |||||||||||
Interest rate lock commitments | 227 |
| Discounted cash flow |
| Loan closing rates | 45% - 99% |
| 99% | |||
Put options | 31,930 | Intrinsic value | Market credit spread | 4% | 4% | ||||||
Interest rate floors | 9,540 | Discounted cash flow | Discount rate | 5% - 7% | 6% | ||||||
Derivative liabilities - interest rate lock commitments | 107 |
| Discounted cash flow |
| Loan closing rates | 45% - 99% |
| 99% | |||
December 31, 2024: |
| |
| |
| ||||||
Collateral dependent loans | $ | 59,915 |
| Market comparable properties |
| Marketability discount and costs to sell | 0% - 90% |
| 29% | ||
Other real estate owned | 7,313 | Market comparable properties | Marketability discount and costs to sell | 2% - 8% | 5% | ||||||
Servicing rights - Multi-family | 146,483 |
| Discounted cash flow |
| Discount rate | 8% - 15% |
| 9% | |||
| |
| Constant prepayment rate | 0% - 100% |
| 7% | |||||
Earnings rate on escrows | 3% | 3% | |||||||||
Servicing rights - Single-family | 34,986 |
| Discounted cash flow | Discount rate | 10% - 11% | 10% | |||||
Constant prepayment rate | 6% - 14% | 7% | |||||||||
Servicing rights - Healthcare | 4,207 |
| Discounted cash flow |
| Discount rate | 13% |
| 13% | |||
Constant prepayment rate | 1% - 2% |
| 1% | ||||||||
Earnings rate on escrows | 3% | 3% | |||||||||
Servicing rights - SBA | 4,259 |
| Discounted cash flow | Discount rate | 16% | 16% | |||||
Constant prepayment rate | 4% - 24% | 14% | |||||||||
Derivative assets: |
|
|
| ||||||||
Interest rate lock commitments | 30 |
| Discounted cash flow | Loan closing rates | 71% - 99% |
| 87% | ||||
Put options | 31,296 | Intrinsic value |
| Market credit spread | 4% | 4% | |||||
Interest rate floors | 4,043 | Discounted cash flow | Discount rate | 6% - 8% | 7% | ||||||
Derivative liabilities - interest rate lock commitments | 176 | Discounted cash flow | Loan closing rates | 71% - 99% |
| 87% | |||||
Sensitivity of Significant Unobservable Inputs
The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement, and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.
Collateral Dependent Loans and Other Real Estate Owned
The significant unobservable inputs used in the fair value measurement of the Company’s collateral dependent loans and other real estate owned is based on liquidation amounts of the underlying collateral using the most recently available appraisals with adjustments made for a marketability discount and costs to sell.
Servicing Rights
The significant unobservable inputs used in the fair value measurement of the Company’s servicing rights are discount rates and constant prepayment rates. These two inputs can drive a significant amount of a market participant’s valuation of servicing rights. Significant increases (decreases) in the discount rate or assumed constant prepayment rates used to value servicing rights would decrease (increase) the value derived. Additionally, the earnings rate on escrow balances can influence the fair value of servicing rights because higher (lower) expected interest income earned on custodial escrow deposits increases (decreases) the net economic benefit a market participant would attribute to the servicing asset.
Derivative Financial Instruments
The significant unobservable input used in the fair value measurement of certain put options include market credit spreads that can be impacted by market conditions and drive a significant amount of a market participant’s valuation of the put option and its related security. The impact of changes to the unobservable inputs for the put option is mitigated by changes to the observable inputs for the related security, which are valued in opposite directions, so as to minimize the financial impact to the Company.
The significant unobservable input used in the fair value measurement of interest rate floor derivatives associated with certain securities available for sale and loans include the discount rate that can have a significant impact on the value of the derivative. Another variable that affects the floor value is the forward interest curve, which is observable, but changes with market conditions as interest rates and future interest rate expectations change.
For interest rate lock commitments, the loan closing rate represents a significant unobservable input, as higher (lower) expected pull-through or closing probabilities increase (decrease) the likelihood that the commitment will convert into a funded loan, thereby impacting the fair value attributed to the derivative.
Fair Value of Financial Instruments
The following table presents the carrying amount and estimated fair values of the Company’s financial instruments not carried at fair value and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2025 and 2024.
Fair Value Measurements Using | |||||||||||||||
Quoted Prices in | Significant |
| |||||||||||||
Active Markets | Other | Significant | |||||||||||||
for Identical | Observable | Unobservable | |||||||||||||
Carrying | Fair | Assets | Inputs | Inputs | |||||||||||
| Value | | Value | | (Level 1) | | (Level 2) | | (Level 3) | ||||||
(In thousands) | |||||||||||||||
December 31, 2025 | |||||||||||||||
Financial assets: |
| |
| |
| |
| |
| | |||||
Cash and cash equivalents | $ | 212,202 | $ | 212,202 | $ | 212,202 | $ | — | $ | — | |||||
Securities purchased under agreements to resell |
| 1,520 |
| 1,520 |
| — |
| 1,520 |
| — | |||||
Securities held to maturity | 1,543,659 | 1,543,554 |
| — |
| 712,490 |
| 831,064 | |||||||
FHLB stock and other equity securities |
| 227,589 |
| 227,589 |
| — |
| 196,391 |
| 31,198 | |||||
Loans held for sale |
| 3,796,032 |
| 3,796,032 |
| — |
| 3,796,032 |
| — | |||||
Loans receivable, net |
| 10,904,063 |
| 10,950,634 |
| — |
| — |
| 10,950,634 | |||||
Interest receivable |
| 81,807 |
| 81,807 |
| — |
| 81,807 |
| — | |||||
Financial liabilities: |
| |
|
| |
| |
| | ||||||
Deposits |
| 13,041,192 |
| 13,041,901 |
| 11,179,428 |
| 1,862,473 |
| — | |||||
Subordinated debt |
| 71,800 |
| 71,800 |
| — |
| 71,800 |
| — | |||||
FHLB advances |
| 3,762,858 |
| 3,762,110 |
| — |
| 3,762,110 |
| — | |||||
Other borrowing | 7,934 | 7,934 | — | 7,934 | — | ||||||||||
Interest payable |
| 25,345 |
| 25,345 |
| — |
| 25,345 |
| — | |||||
December 31, 2024 |
| |
| |
| |
| |
| | |||||
Financial assets: |
| |
| |
| |
| |
| | |||||
Cash and cash equivalents | $ | 476,610 | $ | 476,610 | $ | 476,610 | $ | — | $ | — | |||||
Securities purchased under agreements to resell |
| 1,559 |
| 1,559 |
| — |
| 1,559 |
| — | |||||
Securities held to maturity | 1,664,686 | 1,664,674 |
| — |
| 538,871 |
| 1,125,803 | |||||||
FHLB stock and other equity securities |
| 217,804 |
| 217,804 |
| — |
| 187,804 |
| 30,000 | |||||
Loans held for sale |
| 3,693,340 |
| 3,693,340 |
| — |
| 3,693,340 |
| — | |||||
Loans receivable, net |
| 10,354,002 |
| 10,297,439 |
| — |
| — |
| 10,297,439 | |||||
Interest receivable |
| 83,409 |
| 83,409 |
| — |
| 83,409 |
| — | |||||
Financial liabilities: |
| |
|
| |
| |
| | ||||||
Deposits |
| 11,919,976 |
| 11,923,961 |
| 8,001,487 |
| 3,922,474 |
| — | |||||
Subordinated debt |
| 71,800 |
| 71,800 |
| — |
| 71,800 |
| — | |||||
FHLB advances |
| 4,172,030 |
| 4,171,843 |
| — |
| 4,171,843 |
| — | |||||
Other borrowing | 57,934 | 57,934 | — | 57,934 | — | ||||||||||
Credit-linked notes | 84,358 | 84,357 | 84,357 | ||||||||||||
Interest payable |
| 34,475 | 34,475 | — | 34,475 | — | |||||||||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 27, 2026 | Showing above |
| 2024 | Feb 28, 2025 | |
| 2023 | Mar 12, 2024 | |
| 2022 | Mar 16, 2023 | |
| 2021 | Mar 4, 2022 | |
| 2020 | Mar 5, 2021 | |
| 2019 | Mar 16, 2020 | |
| 2018 | Mar 15, 2019 | |
| 2017 | Mar 28, 2018 | |
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.