Fair Value

3 Months Ended

Mar. 31, 2020

NOTE 11 — FAIR VALUE

Fair Value Hierarchy

The Company measures certain financial assets and liabilities at fair value. Fair value is defined as 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. U.S. GAAP also establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels. See Note 1 — Business and Summary of Significant Accounting Policies in the Company's 2019 Form 10-K for a description of its valuation process for assets and liabilities measured at fair value and the fair value hierarchy.

The Company considered the impact of the COVID-19 pandemic on the markets related to the Company’s assets and liabilities for the purpose of fair value measurement. The Company observed increased volatility in those markets with significant effects on market prices and interest rates, in addition to significant decreases in the level of activity in the markets for its assets and liabilities. However, the Company did not identify persuasive evidence to conclude that the markets were not orderly. As a result, the fair value of the Company’s assets and liabilities were measured based on market conditions that existed as of March 31, 2020.

Disclosures that follow in this note exclude assets and liabilities classified as discontinued operations.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes the Company’s assets and liabilities measured at estimated fair value on a recurring basis.

Assets and Liabilities Measured at Fair Value on a Recurring Basis (dollars in millions)

	Total			Level 1		Level 2			Level 3
March 31, 2020
Assets
Residential MBS – U.S. government/sponsored agency	$	4,392.0		$	—	$	4,392.0		$	—
U.S. treasury securities		9.3			—		9.3			—
Other securities		1,453.4			—		1,387.7			65.7
Total debt securities AFS		5,854.7			—		5,789.0			65.7

Interest rate contracts — non-qualifying hedges		524.8			—		524.1			0.7
Other derivative — non-qualifying hedges		21.0			—		20.2			0.8
Total derivative assets at fair value — non-qualifying hedges⁽¹⁾		545.8			—		544.3			1.5
Foreign currency forward contracts — net investment qualifying hedges		0.7			—		0.7			—
Total Derivative assets at fair value — qualifying hedges⁽¹⁾		0.7			—		0.7			—
Total	$	6,401.2		$	—	$	6,334.0		$	67.2
Liabilities
Interest rate contracts — non-qualifying hedges	$	(80.1	)	$	—	$	(80.1	)	$	—
Other derivative— non-qualifying hedges		(15.0	)		—		(12.4	)		(2.6	)
Total derivative liabilities at fair value — non-qualifying hedges⁽¹⁾		(95.1	)		—		(92.5	)		(2.6	)
FDIC True-up liability		(69.3	)		—		—			(69.3	)
Total	$	(164.4	)	$	—	$	(92.5	)	$	(71.9	)
December 31, 2019
Assets
Residential MBS – U.S. government/sponsored agency	$	4,773.8		$	—	$	4,773.8		$	—
U.S. treasury securities		11.3			4.7		6.6			—
Other securities		1,226.7			—		1,159.6			67.1
Total debt securities AFS		6,011.8			4.7		5,940.0			67.1
Securities carried at fair value with changes recorded in net income		47.2			0.1		47.1			—

Interest rate contracts — non-qualifying hedges		176.9			—		176.7			0.2
Other derivative — non-qualifying hedges		13.8			—		13.7			0.1
Total derivative assets at fair value — non-qualifying hedges⁽¹⁾		190.7			—		190.4			0.3
Total	$	6,249.7		$	4.8	$	6,177.5		$	67.4
Liabilities
Interest rate contracts — non-qualifying hedges	$	(14.5	)	$	—	$	(14.5	)	$	—
Other derivative— non-qualifying hedges		(6.9	)		—		(6.1	)		(0.8	)
Total derivative liabilities at fair value — non-qualifying hedges⁽¹⁾		(21.4	)		—		(20.6	)		(0.8	)
Foreign currency forward contracts — net investment qualifying hedges		(10.6	)		—		(10.6	)		—
Total derivative liabilities at fair value — qualifying hedges		(10.6	)		—		(10.6	)		—
FDIC True-up liability		(68.8	)		—		—			(68.8	)
Total	$	(100.8	)	$	—	$	(31.2	)	$	(69.6	)

⁽¹⁾	^{Derivative fair values include accrued interest.}

The methods and assumptions used to estimate the fair value of each class of financial instruments measured at fair value on a recurring basis are as follows:

Debt securities AFS — Investments in U.S. government agency and sponsored agency guaranteed mortgage-backed securities, U.S. government agency and sponsored agency obligations, U.S. Treasury securities and supranational securities were valued using Level 2 inputs. The market for certain corporate bonds is not active, therefore the estimated fair value was determined using a discounted cash flow technique. Given the lack of observable market data, the estimated fair value of the corporate bonds was classified as Level 3. See Note 1 – Business and Summary of Significant Accounting Policies in the Company's 2019 Form 10-K for details on significant inputs and valuation techniques.

Securities carried at fair value with changes recorded in net income — Most equity securities were valued using Level 2 inputs based on published net asset value, with the remaining securities being valued using Level 1 inputs.

Derivative Assets and Liabilities — Derivatives were valued using models that incorporate inputs depending on the type of derivative. Besides the fair value of credit derivatives, which were estimated using Level 3 inputs, most derivative instruments were valued using Level 2 inputs based on quoted prices for similar assets and liabilities and model-based valuation techniques for which all significant assumptions are observable in the market. See Note 1 – Business and Summary of Significant Accounting Policies in the Company's 2019 Form 10-K for details on significant inputs and valuation techniques. See Note 10 — Derivative Financial Instruments for notional principal amounts and fair values.

FDIC True-up Liability — The FDIC True-up liability was recorded at estimated fair value as of the date of the OneWest transaction related to the FDIC-assisted transaction of La Jolla and was measured at fair value at each reporting date until the contingency is resolved. Due to the significant unobservable inputs used, these measurements were classified as Level 3. As of March 31, 2020, the fair value of the liability was measured based on the accrued amount of FDIC True-up payment, which was settled in April 2020.

The following tables summarize information about significant unobservable inputs related to the Company’s categories of Level 3 financial assets and liabilities measured on a recurring basis.

Quantitative Information about Level 3 Fair Value Measurements — Recurring (dollars in millions)

Financial Instrument	Estimated Fair Value			Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs	Weighted Average
March 31, 2020
Assets
Debt Securities — AFS	$	65.7		Discounted cash flow	Discount Rate	6.0% - 6.2%	6.1%
Derivative assets — non-qualifying		1.5		Internal valuation model	Borrower Rate	2.6% - 4.8%	3.2%
Total Assets	$	67.2
Liabilities
FDIC True-up liability	$	(69.3	)	FDIC True-up payment
Derivative liabilities — non-qualifying		(2.6	)	Internal valuation model
Total Liabilities	$	(71.9	)
December 31, 2019
Assets
Debt Securities — AFS	$	67.1		Discounted cash flow	Discount Rate	6.0% - 6.2%	6.0%
Derivative assets — non-qualifying		0.3		Internal valuation model	Borrower Rate	2.8% - 5.0%	3.6%
Total Assets	$	67.4
Liabilities
FDIC True-up liability	$	(68.8	)	Discounted cash flow	Discount Rate	2.2%	2.2%
Derivative liabilities — non-qualifying		(0.8	)	Market comparable
Total Liabilities	$	(69.6	)

The following table summarizes the changes in estimated fair value for all assets and liabilities measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3).

Changes in Estimated Fair Value of Level 3 Financial Assets and Liabilities Measured on a Recurring Basis (dollars in millions)

	Securities- AFS			Derivative Assets- Non- Qualifying			Derivative Liabilities- Non- Qualifying			FDIC True-up Liability
Balance as of December 31, 2019	$	67.1		$	0.3		$	(0.8	)	$	(68.8	)
Included in earnings		—			1.2			(1.8	)		(0.5	)
Included in comprehensive income		(1.4	)		—			—			—
Balance as of March 31, 2020	$	65.7		$	1.5		$	(2.6	)	$	(69.3	)
Balance as of December 31, 2018	$	65.9		$	0.4		$	—		$	(66.9	)
Included in earnings		—			(0.1	)		(0.1	)		(0.5	)
Included in comprehensive income		1.3			—			—			—
Balance as of March 31, 2019	$	67.2		$	0.3		$	(0.1	)	$	(67.4	)

Assets Measured at Estimated Fair Value on a Non-recurring Basis

Certain assets or liabilities are required to be measured at estimated fair value on a non-recurring basis subsequent to initial recognition. Generally, these adjustments are the result of LOCOM or other impairment accounting. In determining the estimated fair values, the Company determined that substantially all the changes in estimated fair value were due to declines in market conditions versus instrument specific credit risk. This was determined by examining the changes in market factors relative to instrument specific factors.

Assets and liabilities acquired in the MOB Transaction were recorded at fair value on the acquisition date pursuant to ASC 805. See Note 2-Acquisition and Discontinued Operations for balances and assumptions used in the valuation.

The following table presents assets measured at estimated fair value on a non-recurring basis for which a non-recurring change in fair value has been recorded in the current year.

Carrying Value of Assets Measured at Fair Value on a Non-recurring Basis (dollars in millions)

	Carrying Value		Fair Value Measurements at Reporting Date Using:
	Total		Level 1		Level 2		Level 3		Total Gains (Losses)
March 31, 2020
Assets held for sale	$	27.1	$	—	$	2.7	$	24.4	$	(4.0	)
Collateral-dependent loans		12.8		—		—		12.8		(26.6	)
Mortgage Servicing Rights		7.8		—		—		7.8		(2.0	)
Total	$	47.7	$	—	$	2.7	$	45.0	$	(32.6	)
December 31, 2019
Assets held for sale	$	22.6	$	—	$	1.9	$	20.7	$	2.2
Impaired loans		244.8		—		—		244.8		(73.5	)
Tax credit investments		82.0		—		—		82.0		(5.1	)
Total	$	349.4	$	—	$	1.9	$	347.5	$	(76.4	)

The methods and assumptions used to estimate the fair value of each class of financial instruments measured at fair value on a non-recurring basis are as follows:

Assets Held for Sale — The fair value of Level 2 assets was primarily estimated based on the prices of recent trades of similar assets. The carrying value of level 3 assets approximates fair value.

Collateral-dependent loans – ACL is established for an excess of amortized cost of collateral-dependent loans over the fair value of the underlying collateral less costs to sell. The fair value of collateral-dependent loans is classified as Level 3 as the fair value of underlying collateral is estimated primarily based on third party appraisals discounted based on the Company’s experience with liquidation value or other valuation techniques such as income, market and cost approaches.

Mortgage Servicing Rights – Under the amortization method, the amortized cost basis of the MSRs was reduced to its fair value for the impairment loss recognized. The fair value of the MSRs was valued under the income approach using the discounted cash flow model based on level 3 inputs including prepayment speed, discount rates and cost to service.

Impaired Loans — The value of impaired loans was assessed through the evaluation of their aggregate carrying values relative to contractual amounts owed (unpaid principal balance) from customers. See Note 3 – Loans in the Company's 2019 Form 10-K for methods and assumptions used.

Tax Credit Investments – The fair value was estimated based on remaining future tax benefits and Level 3 inputs including market yields of comparable investments. During the fourth quarter of 2019, the Company recognized an impairment loss of $5.1 million on certain tax credit investments.

Financial Instruments not Measured at Fair Value

The carrying values and estimated fair values of financial instruments not measured at fair value presented below exclude leases and certain other assets and liabilities, which were not required for disclosure.

Carrying Value and Fair Value of Financial Instruments (dollars in millions)

				Estimated Fair Value
	Carrying Value			Level 1		Level 2			Level 3			Total
March 31, 2020
Financial Assets
Cash and interest-bearing deposits	$	3,698.5		$	3,698.5	$	—		$	—		$	3,698.5
Assets held for sale (excluding leases)		49.2			—		21.3			28.1			49.4
Loans (excluding leases)⁽¹⁾		36,278.9			—		855.9			32,406.9			33,262.8
Investment securities⁽²⁾		273.9			—		—			273.9			273.9
Other assets subject to fair value disclosure ⁽³⁾		566.2			—		—			566.2			566.2
Financial Liabilities
Deposits⁽⁴⁾		(42,182.0	)		—		—			(42,334.2	)		(42,334.2	)
Borrowings⁽⁴⁾		(8,121.4	)		—		(7,430.6	)		(551.9	)		(7,982.5	)
Credit balances of factoring clients		(1,023.7	)		—		—			(1,023.7	)		(1,023.7	)
Other liabilities subject to fair value disclosure⁽⁵⁾		(637.2	)		—		—			(637.2	)		(637.2	)
December 31, 2019
Financial Assets
Cash and interest-bearing deposits	$	2,685.6		$	2,685.6	$	—		$	—		$	2,685.6
Assets held for sale (excluding leases)		29.6			—		7.5			22.2			29.7
Loans (excluding leases)⁽¹⁾		28,744.5			—		1,114.5			27,684.3			28,798.8
Securities purchased under agreement to resell		950.0			—		950.0			—			950.0
Investment securities⁽²⁾		217.8			—		—			217.8			217.8
Other assets subject to fair value disclosure ⁽³⁾		418.2			—		—			418.2			418.2
Financial Liabilities
Deposits⁽⁴⁾		(35,156.2	)		—		—			(35,263.8	)		(35,263.8	)
Borrowings⁽⁴⁾		(6,549.6	)		—		(6,532.0	)		(365.2	)		(6,897.2	)
Credit balances of factoring clients		(1,176.2	)		—		—			(1,176.2	)		(1,176.2	)
Other liabilities subject to fair value disclosure⁽⁵⁾		(831.6	)		—		—			(831.6	)		(831.6	)

⁽¹⁾	^{Carrying value of loans (excluding leases) excludes the ACL.}

⁽²⁾	^{Non-marketable investments carried at cost. See Assets and Liabilities Measured at Fair Value on a Recurring Basis in this note above for debt securities AFS and securities carried at fair value with changes recorded in net income.}

⁽³⁾	^{Other assets subject to fair value disclosure primarily include accrued interest receivable and miscellaneous receivables. The remaining assets have carrying values that approximated fair value, generally due to their short-term nature.}

⁽⁴⁾	^{Deposits and borrowings include accrued interest, which is included in “Other liabilities”.}

⁽⁵⁾	^{Other liabilities subject to fair value disclosure include accounts payable, accrued liabilities, customer security and maintenance deposits and miscellaneous liabilities. The carrying value of these approximated fair value.}

The methods and assumptions used to estimate the fair value of each class of financial instruments not measured at fair value are as follows:

Loans

▪

Commercial and Consumer Loans — Commercial and consumer loans are generally valued individually. As there is no liquid secondary market for most loans, the fair value was primarily estimated based on analysis that used significant Level 3 inputs. See Note 1 – Business and Summary of Significant Accounting Policies in the Company's 2019 Form 10-K for details on significant inputs and valuation techniques.

▪

PCD loans — These loans were valued by separating the loans into performing and non-performing groups and stratifying them based on common risk characteristics such as product type, FICO score and other economic attributes. Due to the significance of the unobservable inputs, these loans are classified as Level 3.

Securities Purchased Under Agreement to Resell – The fair value of securities purchased under agreement to resell (reverse repo) was determined using a discount cash flow technique. Interest rates appropriate to the maturity and underlying collateral are used for discounting the estimated cash flows. As observable market interest rates are used, the fair value of securities purchased under agreement to resell was classified as Level 2. As of March 31, 2020, there were no outstanding reverse repo transactions.

Investment Securities

▪

Non-marketable securities - Utilize Level 3 inputs to estimate fair value and were generally recorded under the cost method of accounting. FHLB and FRB stock carrying values approximate fair value. Of the remaining non-marketable securities, the fair value is determined based on techniques that use significant assumptions that are not observable in the market.

Deposits — The estimated fair value of deposits with no stated maturity, such as demand deposit accounts, money market accounts, and savings accounts was the amount payable on demand at the reporting date. The fair value of time deposits is estimated using Level 3 inputs.

Borrowings

The Level 2 fair value of borrowings were valued using market inputs and discounted value of the contractual cash flows using current estimated market discount rates for borrowings with similar terms, remaining maturities and put dates and did not require significant judgment. These borrowings included:

▪	Unsecured debt — Unsecured debt consisted of both senior debt and subordinated debt with a par value of $4.5 billion at March 31, 2020 and December 31, 2019.

▪

Secured borrowings — Secured borrowings consisted of FHLB advances with a par value of $3.1 billion and $1.7 billion at March 31, 2020 and December 31, 2019, respectively. The estimated fair value of FHLB advances was based on a discounted cash flow model. The cash flows were calculated using the contractual features of the advance and then discounted using observable rates.

▪

Securities sold under agreements to repurchase - The fair value of securities sold under agreements to repurchase (repo) was determined using a discount cash flow technique. Interest rates appropriate to the maturity and underlying collateral are used for discounting the estimated cash flows. As observable market interest rates are used, the fair value of repo transactions was classified as Level 2.

The Level 3 fair value of borrowings included:

▪

Secured borrowings — Secured borrowings consisted of structured financings with a par value of $0.6 billion and $0.4 billion at March 31, 2020 and December 31, 2019, respectively. The fair values of structured financings were estimated based on Level 3 inputs since market estimates were not available.

Credit balances of factoring clients — The impact of the time value of money from the unobservable discount rate for credit balances of factoring clients is inconsequential due to the short term nature of these balances, therefore, the carrying value approximated fair value, and the credit balances were classified as Level 3.

- 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.

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