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Fair Value | 9 Months Ended
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Sep. 30, 2017
Fair Value |
Fair Value | Note 14 — 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:
|  | September 30, 2017 |  | December 31, 2016 |
|  | Principal / Notional Amount |  | Carrying Value |  | Estimated Fair Value |  | Principal / Notional Amount |  | Carrying Value |  | Estimated Fair Value |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Loans and investments, net |  | $ | 2,094,376,123 |  | $ | 1,997,555,985 |  | $ | 2,056,020,469 |  | $ | 1,790,159,966 |  | $ | 1,695,732,351 |  | $ | 1,749,130,232 |
Loans held-for-sale, net |  | 333,983,865 |  | 333,267,976 |  | 338,766,761 |  | 675,493,536 |  | 673,367,304 |  | 683,833,449 |
Capitalized mortgage servicing rights, net |  | n/a |  | 247,875,659 |  | 293,807,076 |  | n/a |  | 227,742,986 |  | 245,455,881 |
Available-for-sale securities |  | 58,789 |  | 4,707,085 |  | 4,707,085 |  | 58,789 |  | 5,403,463 |  | 5,403,463 |
Securities held-to-maturity, net |  | 28,035,293 |  | 18,851,089 |  | 18,882,997 |  | — |  | — |  | — |
Derivative financial instuments |  | 100,898,203 |  | 488,747 |  | 488,747 |  | 550,117,700 |  | 5,614,990 |  | 5,614,990 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Credit and repurchase facilities |  | $ | 564,231,866 |  | $ | 562,326,537 |  | $ | 563,366,477 |  | $ | 908,680,198 |  | $ | 906,636,790 |  | $ | 907,882,886 |
Collateralized loan obligations |  | 1,079,874,000 |  | 1,066,230,488 |  | 1,080,228,695 |  | 737,000,000 |  | 728,441,109 |  | 728,642,500 |
Senior unsecured notes |  | 97,860,025 |  | 95,088,379 |  | 99,817,226 |  | 97,860,025 |  | 94,521,566 |  | 99,034,345 |
Convertible senior unsecured notes, net |  | 100,000,000 |  | 95,381,121 |  | 105,438,000 |  | 86,250,000 |  | 80,660,038 |  | 86,586,375 |
Junior subordinated notes |  | 154,336,000 |  | 139,418,416 |  | 93,833,687 |  | 175,858,000 |  | 157,858,555 |  | 105,649,537 |
Related party financing |  | 50,000,000 |  | 50,000,000 |  | 53,270,857 |  | 50,000,000 |  | 50,000,000 |  | 55,119,744 |
Derivative financial instruments |  | 287,993,000 |  | 1,881,450 |  | 1,881,450 |  | 522,650,829 |  | 2,451,422 |  | 2,451,422 |
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. 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. Determining which category an asset or liability falls within the hierarchy requires significant judgment and we evaluate our hierarchy disclosures each quarter. 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 Level 3 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. Fair values of impaired loans and investments are estimated using Level 3 inputs that require significant judgments, which include assumptions regarding discount rates, capitalization rates, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan and other factors. Loans held-for-sale, net. Consists of originated loans that are generally transferred or sold within 60 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 Level 3 inputs based on discounted future net cash flow methodology. 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. Available-for-sale securities. Fair values are estimated based on current market quotes received from active markets or financial sources that trade such securities. The fair values of available-for-sale equity securities traded in active markets are estimated using Level 1 inputs. The fair values of available-for-sale debt securities are estimated using the recent purchase price and subsequent sales price of the securities, which are deemed Level 2 inputs. The fair value of our Agency IOs were estimated using Level 3 inputs and are derived from third party proprietary models using discounted cash flows based on the underlying contractual cash flows and require significant judgements, including assumptions on discount rates and constant prepayment rates. Securities held-to-maturity, net. Fair values are approximated using Level 3 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. Derivative financial instruments. The 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 facilities and repurchase agreements. Fair values for the Structured Business are estimated at Level 3 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. The majority of our credit facilities for the Agency Business bear interest at rates that are similar to those available in the market currently and the fair values are estimated using Level 2 inputs. For these facilities, the fair values approximate their carrying values. Collateralized loan obligations, junior subordinated notes and related party financing. Fair values are estimated at Level 3 based on broker quotations, representing the discounted expected future cash flows at a yield that reflects current market interest rates and credit spreads. Senior unsecured notes. Fair values are estimated at Level 1 based on current market quotes received from active markets. Convertible senior unsecured notes, net. Fair values are estimated at Level 2 based on current market quotes received from inactive markets. We measure certain financial assets and financial liabilities at fair value on a recurring basis. The fair value of these financial assets and liabilities was determined using the following input levels as of September 30, 2017:
|  | Carrying |  |  |  | Fair Value Measurements Using Fair Value Hierarchy |
|  | Value |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3 |
Financial assets: |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities |  | $ | 4,707,085 |  | $ | 4,707,085 |  | $ | 264,553 |  | $ | — |  | $ | 4,442,532 |
Derivative financial instruments |  | 488,747 |  | 488,747 |  | — |  | 68,989 |  | 419,758 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |
Derivative financial instruments |  | $ | 1,881,450 |  | $ | 1,881,450 |  | $ | — |  | $ | 1,881,450 |  | $ | — |
See Note 8 — Securities for a roll-forward of our available-for-sale securities fair valued using Level 3 inputs. 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 were determined using the following input levels as of September 30, 2017:
|  | Net Carrying |  |  |  | Fair Value Measurements Using Fair Value Hierarchy |
|  | Value |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3 |
Financial assets: |  |  |  |  |  |  |  |  |  |  |
Impaired loans, net (1) |  | $ | 101,284,128 |  | $ | 101,284,128 |  | $ | — |  | $ | — |  | $ | 101,284,128 |
Non-financial assets: |  |  |  |  |  |  |  |  |  |  |
Long-lived assets (2) |  | $ | 11,540,664 |  | $ | 11,540,664 |  | $ | — |  | $ | — |  | $ | 11,540,664 |
| (1) |  | We had an allowance for loan losses of $83.3 million relating to six loans with an aggregate carrying value, before loan loss reserves, of $184.5 million at September 30, 2017.
| (2) |  | During the second quarter of 2016, we determined that a real estate owned hotel property exhibited indicators of impairment and an impairment analysis was performed, which resulted in an impairment loss of $11.2 million. During the first half of 2017, we received additional market analyses which resulted in a further impairment loss of $2.7 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 loan 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 we will be unable to collect all amounts due for both principal and interest 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 loan losses. 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. The table above and below includes all impaired loans, regardless of the period in which the impairment was recognized. Long-lived assets: We review our real estate owned assets when events or circumstances change, indicating that the carrying amount of an asset may not be recoverable. In the evaluation of a real estate owned asset for impairment, many factors are considered, including estimated current and expected operating cash flows from the asset during the projected holding period, costs necessary to extend the life or improve the asset, expected capitalization rates, projected stabilized net operating income, selling costs, and the ability to hold and dispose of the asset in the ordinary course of business. We first compare the undiscounted cash flows to be generated by the asset to the carrying value of such asset. If the undiscounted cash flows are less than the carrying value, we recognize impairment based on discounted cash flows. Quantitative information about Level 3 fair value measurements at September 30, 2017 were as follows:
|  |  |  | Valuation |  |  |  |  |
|  | Fair Value |  | Techniques |  | Significant Unobservable Inputs |
Financial assets: |  |  |  |  |  |  |  |  |
Impaired loans (1): |  |  |  |  |  |  |  |  |
|  |  |  |  |  | Discount rate |  | 11.00% |
Office |  | $ | 792,500 |  | Discounted cash flows |  | Capitalization rate |  | 8.10% |
|  |  |  |  |  | Revenue growth rate |  | 2.50% |
|  |  |  |  |  | Discount rate |  | 15.00% |
Land |  | 71,441,628 |  | Discounted cash flows |  | Capitalization rate |  | 7.25% |
|  |  |  |  |  | Revenue growth rate |  | 3.00% |
|  |  |  |  |  | Discount rate |  | 9.00% |
Hotel |  | 29,050,000 |  | Discounted cash flows |  | Capitalization rate |  | 7.00% |
|  |  |  |  |  | Revenue growth rate |  | 3.30% |
Derivative financial instruments: |  |  |  |  |  |  |  |  |
Rate lock commitments |  | 419,758 |  | Discounted cash flows |  | W/A discount rate |  | 10.22% |
Non-financial assets: |  |  |  |  |  |  |  |  |
Long-lived assets: |  |  |  |  |  |  |  |  |
|  |  |  |  |  | Discount rate |  | 11.75% |
Hotel |  | 11,540,664 |  | Discounted cash flows |  | Capitalization rate |  | 9.75% |
|  |  |  |  |  | Revenue growth rate |  | 3.50% |
|  |  |  |  |  | Hold period |  | 3 years |
| (1) |  | Includes all impaired loans regardless of the period in which a loan loss provision was recorded.
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 were as follows:
|  | Fair Value Measurements Using Significant Unobservable Inputs |
|  | Three Months Ended September 30, |  | Nine Months Ended September 30, |
|  | 2017 |  | 2016 |  | 2017 |  | 2016 |
Derivative assets and liabilities, net |  |  |  |  |  |  |  |  |
Balance at beginning of period |  | $ | 1,419,530 |  | $ | — |  | $ | 2,816,132 |  | $ | — |
Additions from the Acquisition |  | — |  | 4,528,640 |  | — |  | 4,528,640 |
Settlements |  | (18,897,011 | ) | (15,286,185 | ) | (57,578,012 | ) | (15,286,185 | )
Realized gains recorded in earnings |  | 17,477,481 |  | 10,757,545 |  | 54,761,880 |  | 10,757,545 |
Unrealized gains recorded in earnings |  | 419,758 |  | 681,882 |  | 419,758 |  | 681,882 |
Balance at end of period |  | $ | 419,758 |  | $ | 681,882 |  | $ | 419,758 |  | $ | 681,882 |
The following table presents 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.
|  | Notional/ Principal Amount |  | Fair Value of Servicing Rights |  | Interest Rate Movement Effect |  | Total Fair Value Adjustment |
September 30, 2017 |  |  |  |  |  |  |  |  |
Rate lock commitments |  | $ | 30,179,000 |  | $ | 419,758 |  | $ | (64,378 | ) | $ | 355,380 |
Forward sale commitments |  | 358,712,203 |  | — |  | 64,378 |  | 64,378 |
Loans held-for-sale, net (1) |  | 328,533,203 |  | 5,450,662 |  | — |  | 5,450,662 |
Total |  |  |  | $ | 5,870,420 |  | $ | — |  | $ | 5,870,420 |
| (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 mortgage servicing rights.
We measure certain assets and liabilities for which fair value is only disclosed. The fair value of these assets and liabilities was determined using the following input levels as of September 30, 2017:
|  |  |  |  |  | Fair Value Measurements Using Fair Value Hierarchy |
|  | Carrying Value |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3 |
Financial assets: |  |  |  |  |  |  |  |  |  |  |
Loans and investments, net |  | $ | 1,997,555,985 |  | $ | 2,056,020,469 |  | $ | — |  | $ | — |  | $ | 2,056,020,469 |
Loans held-for-sale, net |  | 333,267,976 |  | 338,766,761 |  | — |  | 333,316,099 |  | 5,450,662 |
Capitalized mortgage servicing rights, net |  | 247,875,659 |  | 293,807,076 |  | — |  | — |  | 293,807,076 |
Securities held-to-maturity, net |  | 18,851,089 |  | 18,882,997 |  | — |  | — |  | 18,882,997 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |
Credit and repurchase facilities |  | $ | 562,326,537 |  | $ | 563,366,477 |  | $ | — |  | $ | 327,987,187 |  | $ | 235,379,290 |
Collateralized loan obligations |  | 1,066,230,488 |  | 1,080,228,695 |  | — |  | — |  | 1,080,228,695 |
Senior unsecured notes |  | 95,088,379 |  | 99,817,226 |  | 99,817,226 |  | — |  | — |
Convertible senior unsecured notes, net |  | 95,381,121 |  | 105,438,000 |  | — |  | 105,438,000 |  | — |
Junior subordinated notes |  | 139,418,416 |  | 93,833,687 |  | — |  | — |  | 93,833,687 |
Related party financing |  | 50,000,000 |  | 53,270,857 |  | — |  | — |  | 53,270,857 |

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- 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 Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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