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Fair Value
9 Months Ended
Sep. 30, 2022
Fair Value.  
Fair Value

Note 12 — Fair Value

Fair value estimates are dependent upon subjective assumptions and involve significant uncertainties resulting in variability in estimates with changes in assumptions. The following table summarizes the principal amounts, carrying values and the estimated fair values of our financial instruments (in thousands):

September 30, 2022

December 31, 2021

Principal /

Carrying

Estimated

Principal /

Carrying

Estimated

    

Notional Amount

    

Value

    

Fair Value

    

Notional Amount

    

Value

    

Fair Value

Financial assets:

Loans and investments, net

$

14,989,643

$

14,791,426

$

14,993,875

$

12,158,995

$

11,981,048

$

12,181,194

Loans held-for-sale, net

552,306

543,876

554,044

1,077,239

1,093,609

1,117,085

Capitalized mortgage servicing rights, net

n/a

403,886

530,859

n/a

422,734

477,323

Securities held-to-maturity, net

236,712

157,818

150,027

210,728

140,484

149,911

Derivative financial instruments

187,082

 

4,206

 

4,206

280,654

 

1,665

 

1,665

Financial liabilities:

Credit and repurchase facilities

$

4,642,911

$

4,633,132

$

4,622,672

$

4,493,699

$

4,481,579

$

4,484,107

Collateralized loan obligations

8,009,329

 

7,971,996

 

7,800,210

5,924,705

 

5,892,810

 

5,914,453

Senior unsecured notes

1,295,750

 

1,283,527

 

1,165,125

1,295,750

 

1,280,545

 

1,301,708

Convertible senior unsecured notes, net

353,608

346,040

327,244

264,000

259,385

294,690

Junior subordinated notes

154,336

 

142,933

 

103,402

154,336

 

142,382

 

101,698

Derivative financial instruments

464,506

 

23,239

 

23,239

301,816

 

1,482

 

1,482

Assets and liabilities disclosed at fair value are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Determining which category an asset or liability falls within the hierarchy requires judgment and we evaluate our hierarchy disclosures each quarter. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities are as follows:

Level 1—Inputs are unadjusted and quoted prices exist in active markets for identical assets or liabilities, such as government, agency and equity securities.

Level 2—Inputs (other than quoted prices included in Level 1) are observable for the asset or liability through correlation with market data. Level 2 inputs may include quoted market prices for a similar asset or liability, interest rates and credit risk. Examples include non-government securities, certain mortgage and asset-backed securities, certain corporate debt and certain derivative instruments.

Level 3—Inputs reflect our best estimate of what market participants would use in pricing the asset or liability and are based on significant unobservable inputs that require a considerable amount of judgment and assumptions. Examples include certain mortgage and asset-backed securities, certain corporate debt and certain derivative instruments.

The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy.

Loans and investments, net. Fair values of loans and investments that are not impaired are estimated using inputs based on direct capitalization rate and discounted cash flow methodologies using discount rates, which, in our opinion, best reflect current market interest rates that would be offered for loans with similar characteristics and credit quality (Level 3). Fair values of impaired loans and investments are estimated using inputs that require significant judgments, which include assumptions regarding discount rates, capitalization rates, creditworthiness of major tenants, occupancy rates, availability of financing, exit plans and other factors (Level 3).

Loans held-for-sale, net. Consists of originated loans that are generally expected to be transferred or sold within 60 days to 180 days of loan funding, and are valued using pricing models that incorporate observable inputs from current market assumptions or a hypothetical securitization model utilizing observable market data from recent securitization spreads and observable pricing of loans with similar characteristics (Level 2). Fair value includes the fair value allocated to the associated future MSRs and is calculated pursuant to the valuation techniques described below for capitalized mortgage servicing rights, net (Level 3).

Capitalized mortgage servicing rights, net. Fair values are estimated using inputs based on discounted future net cash flow methodology (Level 3). The fair value of MSRs carried at amortized cost are estimated using a process that involves the use of independent third-party valuation experts, supported by commercially available discounted cash flow models and analysis of current market data. The key inputs used in estimating fair value include the contractually specified servicing fees, prepayment speed of the underlying loans, discount rate, annual per loan cost to service loans, delinquency rates, late charges and other economic factors.

Securities held-to-maturity, net. Fair values are approximated using inputs based on current market quotes received from financial sources that trade such securities and are based on prevailing market data and, in some cases, are derived from third-party proprietary models based on well recognized financial principles and reasonable estimates about relevant future market conditions (Level 3).

Derivative financial instruments. Fair values of rate lock and forward sale commitments are estimated using valuation techniques, which include internally-developed models developed based on changes in the U.S. Treasury rate and other observable market data (Level 2). The fair value of rate lock commitments includes the fair value of the expected net cash flows associated with the servicing of the loans, see capitalized mortgage servicing rights, net above for details on the applicable valuation technique (Level 3). We also consider the impact of counterparty non-performance risk when measuring the fair value of these derivatives. Given the credit quality of our counterparties, the short duration of interest rate lock commitments and forward sale contracts, and our historical experience, the risk of nonperformance by our counterparties is not significant.

Credit and repurchase facilities. Fair values for credit and repurchase facilities of the Structured Business are estimated using discounted cash flow methodology, using discount rates, which, in our opinion, best reflect current market interest rates for financing with similar characteristics and credit quality (Level 3). The majority of our credit and repurchase facilities for the Agency Business bear interest at rates that are similar to those available in the market currently and fair values are estimated using Level 2 inputs. For these facilities, the fair values approximate their carrying values.

Collateralized loan obligations and junior subordinated notes. Fair values are estimated based on broker quotations, representing the discounted expected future cash flows at a yield that reflects current market interest rates and credit spreads (Level 3).

Senior unsecured notes. Fair values are estimated at current market quotes received from active markets when available (Level 1). If quotes from active markets are unavailable, then the fair values are estimated utilizing current market quotes received from inactive markets (Level 2).

Convertible senior unsecured notes, net. Fair values are estimated using current market quotes received from inactive markets (Level 2).

We measure certain financial assets and financial liabilities at fair value on a recurring basis. The fair values of these financial assets and liabilities are determined using the following input levels at September 30, 2022 (in thousands):

Fair Value Measurements Using Fair

Carrying

Value Hierarchy

    

Value

    

Fair Value

    

Level 1

    

Level 2

    

Level 3

Financial assets:

Derivative financial instruments

$

4,206

$

4,206

$

$

2,652

$

1,554

Financial liabilities:

Derivative financial instruments

$

23,239

$

23,239

$

$

23,239

$

We measure certain financial and non-financial assets at fair value on a nonrecurring basis. The fair values of these financial and non-financial assets, if applicable, are determined using the following input levels at September 30, 2022 (in thousands):

Fair Value Measurements Using Fair

Net Carrying

Value Hierarchy

    

Value

    

Fair Value

    

Level 1

    

Level 2

    

Level 3

Financial assets:

Impaired loans, net

Loans held-for-investment (1)

$

61,745

$

61,745

$

$

$

61,745

Loans held-for-sale (2)

123,705

123,705

123,705

$

185,450

$

185,450

$

$

123,705

$

61,745

(1)We had an allowance for credit losses of $85.4 million relating to seven impaired loans with an aggregate carrying value, before loan loss reserves, of $147.1 million at September 30, 2022.
(2)We recorded an impairment loss of $12.2 million related to 12 loans held-for-sale with an aggregate carrying value, before unrealized impairment losses, of $135.9 million.

Loan impairment assessments. Loans held-for-investment are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan origination costs and fees, loan purchase discounts, and net of the allowance for credit losses, when such loan or investment is deemed to be impaired. We consider a loan impaired when, based upon current information, it is probable that all amounts due for both principal and interest will not be collected according to the contractual terms of the loan agreement. We evaluate our loans to determine if the value of the underlying collateral securing the impaired loan is less than the net carrying value of the loan, which may result in an allowance, and corresponding charge to the provision for credit losses, or an impairment loss. These valuations require significant judgments, which include assumptions regarding capitalization and discount rates, revenue growth rates, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan and other factors.

Loans held-for-sale are generally transferred and sold within 60-180 days of loan origination and are reported at lower of cost or market. We consider a loan classified as held-for-sale impaired if, based on current information, it is probable that we will sell the loan below par, or not be able to collect all principal and interest in accordance with the contractual terms of the loan agreement. These loans are valued using pricing models that incorporate observable inputs from current market assumptions or a hypothetical securitization model utilizing observable market data from recent securitization spreads and observable pricing of loans with similar characteristics.

The table above and below includes all impaired loans, regardless of the period in which the impairment was recognized.

Quantitative information about Level 3 fair value measurements at September 30, 2022 is as follows ($ in thousands):

    

Fair Value

    

Valuation Techniques

    

Significant Unobservable Inputs

 

Financial assets:

Impaired loans:

Land

$

50,000

 

Discounted cash flows

 

Discount rate

21.50

%

 

Revenue growth rate

3.00

%

Discount rate

11.25

%

Retail

11,745

Discounted cash flows

Capitalization rate

9.25

%

Revenue growth rate

3.00

%

Derivative financial instruments:

Rate lock commitments

1,554

Discounted cash flows

W/A discount rate

13.24

%

The derivative financial instruments using Level 3 inputs are outstanding for short periods of time (generally less than 60 days). A roll-forward of Level 3 derivative instruments is as follows (in thousands):

Fair Value Measurements Using 

Fair Value Measurements Using 

Significant Unobservable Inputs

Significant Unobservable Inputs

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2022

    

2021

    

2022

    

2021

Derivative assets and liabilities, net

Beginning balance

$

1,035

$

124

$

295

$

1,967

Settlements

(16,554)

(23,412)

(47,491)

(81,486)

Realized gains recorded in earnings

15,519

23,288

47,196

79,519

Unrealized gains recorded in earnings

1,554

707

1,554

707

Ending balance

$

1,554

$

707

$

1,554

$

707

The components of fair value and other relevant information associated with our rate lock commitments, forward sales commitments and the estimated fair value of cash flows from servicing on loans held-for-sale are as follows (in thousands):

Unrealized

Notional/

Fair Value of

Interest Rate

Impairemnt

Total Fair Value

September 30, 2022

    

Principal Amount

    

Servicing Rights

    

Movement Effect

    

Loss

    

Adjustment

Rate lock commitments

$

117,575

$

1,554

$

(2,434)

$

$

(880)

Forward sale commitments

534,013

2,434

2,434

Loans held-for-sale, net (1)

552,306

7,411

(12,163)

(4,752)

Total

$

8,965

$

$

(12,163)

$

(3,198)

(1)Loans held-for-sale, net are recorded at the lower of cost or market on an aggregate basis and includes fair value adjustments related to estimated cash flows from MSRs.

We measure certain assets and liabilities for which fair value is only disclosed. The fair value of these assets and liabilities are determined using the following input levels at September 30, 2022 (in thousands):

Fair Value Measurements Using Fair Value Hierarchy

    

Carrying Value

    

Fair Value

    

Level 1

    

Level 2

    

Level 3

Financial assets:

Loans and investments, net

$

14,791,426

$

14,993,875

$

$

$

14,993,875

Loans held-for-sale, net

543,876

554,044

546,633

7,411

Capitalized mortgage servicing rights, net

403,886

530,859

530,859

Securities held-to-maturity, net

157,818

150,027

150,027

Financial liabilities:

Credit and repurchase facilities

$

4,633,132

$

4,622,672

$

$

511,513

$

4,111,159

Collateralized loan obligations

 

7,971,996

 

7,800,210

 

 

 

7,800,210

Senior unsecured notes

 

1,283,527

 

1,165,125

 

1,165,125

 

 

Convertible senior unsecured notes, net

346,040

327,244

327,244

Junior subordinated notes

 

142,933

 

103,402

 

 

 

103,402