Fair Value Accounting

12 Months Ended

Dec. 31, 2021

Fair Value Disclosures [Abstract]

Fair Value Accounting

19. FAIR VALUE ACCOUNTING

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC 825 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 825 are described in "Note 1. Summary of Significant Accounting Policies" of these Notes to Consolidated Financial Statements.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally-developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth below.

Under ASC 825, the Company elected the FVO treatment for junior subordinated debt issued by WAL. This election is irrevocable and results in the recognition of unrealized gains and losses on these items at each reporting date. These unrealized gains and losses are recognized as part of OCI rather than earnings. The Company did not elect FVO treatment for the junior subordinated debt assumed in the Bridge Capital Holdings acquisition.

For the years ended December 31, 2021, 2020, and 2019, unrealized losses from fair value changes on junior subordinated debt were as follows:

	Year Ended December 31,
	2021		2020		2019
	(in millions)
Unrealized losses	$	(1.5)	$	(4.2)	$	(13.0)
Changes included in OCI, net of tax	(1.2)		(3.1)		(9.8)

Fair value on a recurring basis

Financial assets and financial liabilities measured at fair value on a recurring basis include the following:

AFS debt securities: Securities classified as AFS are reported at fair value utilizing Level 1 and Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include quoted prices in active markets, dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things.

Equity securities: Preferred stock and CRA investments are reported at fair value primarily utilizing Level 1 inputs.

Independent pricing service: The Company's independent pricing service provides pricing information on the majority of the Company's Level 1 and Level 2 AFS debt securities. For a small subset of securities, other pricing sources are used, including observed prices on publicly-traded securities and dealer quotes. Management independently evaluates the fair value measurements received from the Company's third-party pricing service through multiple review steps. First, management reviews what has transpired in the marketplace with respect to interest rates, credit spreads, volatility, and mortgage rates, among other things, and develops an expectation of changes to the securities' valuations from the previous quarter. Then, management selects a sample of investment securities and compares the values provided by its primary third-party pricing service to the market values obtained from secondary sources, including other pricing services and safekeeping statements, and evaluates those with notable variances. In instances where there are discrepancies in pricing from various sources and management expectations, management may manually price securities using currently observed market data to determine whether they can develop similar prices or may utilize bid information from broker dealers. Any remaining discrepancies between management's review and the prices provided by the vendor are discussed with the vendor and/or the Company's other valuation advisors.

Loans HFS: Government-insured or guaranteed and agency-conforming loans HFS are salable into active markets. Accordingly, the fair value of these loans is based on quoted market or contracted selling prices or a market price equivalent, which are categorized as Level 2 in the fair value hierarchy.

The fair value of EBO loans, private label loans, and loans that are delinquent or have an underwriting defect are valued using Level 3 inputs since they lack active markets.

Mortgage servicing rights: MSRs are measured based on valuation techniques using Level 3 inputs. The Company uses a discounted cash flow model that incorporates assumptions that market participants would use in estimating the fair value of servicing rights, including, but not limited to, option adjusted spread, conditional prepayment rate, servicing fee rate, recapture rate, and cost to service.

Derivative financial instruments: Treasury futures and options, Eurodollar futures, and swap futures are measured based on valuation techniques using Level 1 inputs from exchange-provided daily settlement quotes. Forward purchase and sales contracts are measured based on valuation techniques using Level 2 inputs, such as quoted market price, contracted selling price, or market price equivalent. Interest rate swaps are reported at fair value utilizing Level 2 inputs. The Company obtains dealer quotations to value its interest rate swaps. IRLCs are measured based on valuation techniques that consider loan type, underlying loan amount, maturity date, note rate, loan program, and expected settlement date, with Level 3 inputs for the servicing release premium and pull-through rate. These measurements are adjusted at the loan level to consider the servicing release premium and loan pricing adjustment specific to each loan. The base value is then adjusted for the pull-through rate. The pull-through rate and servicing fee multiple are unobservable inputs based on historical experience.

Junior subordinated debt: The Company estimates the fair value of its junior subordinated debt using a discounted cash flow model which incorporates the effect of the Company’s own credit risk in the fair value of the liabilities (Level 3). The Company’s cash flow assumptions are based on contractual cash flows as the Company anticipates that it will pay the debt according to its contractual terms.

The fair value of assets and liabilities measured at fair value on a recurring basis was determined using the following inputs as of the periods presented: 

	Fair Value Measurements at the End of the Reporting Period Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
	(in millions)
December 31, 2021
Available-for-sale debt securities
CLO	$	—	$	926.2	$	—	$	926.2
Commercial MBS issued by GSEs	—		68.5		—		68.5
Corporate debt securities	—		382.9		—		382.9
Private label residential MBS	—		1,508.0		—		1,508.0
Residential MBS issued by GSEs	—		1,993.4		—		1,993.4
Tax-exempt	—		1,215.1		—		1,215.1
U.S. treasury securities	13.0		—		—		13.0
Other	27.4		54.3		—		81.7
Total AFS debt securities	$	40.4	$	6,148.4	$	—	$	6,188.8
Equity securities
CRA investments	$	27.4	$	17.2	$	—	$	44.6
Preferred stock	113.9		—		—		113.9
Total equity securities	$	141.3	$	17.2	$	—	$	158.5
Loans HFS	$	—	$	3,894.2	$	45.5	$	3,939.7
Mortgage servicing rights	—		—		698.0		698.0
Derivative assets (1)	—		39.2		11.0		50.2
Liabilities:
Junior subordinated debt (2)	$	—	$	—	$	67.4	$	67.4
Derivative liabilities (1)	—		98.2		1.6		99.8

(1)See "Note 15. Derivatives and Hedging Activities." In addition, the carrying value of loans is increased by $38.5 million as of December 31, 2021 for the effective portion of the hedge, which relates to the fair value of the hedges put in place to mitigate against fluctuations in interest rates.

(2)Includes only the portion of junior subordinated debt that is recorded at fair value at each reporting period pursuant to the election of FVO treatment.

	Fair Value Measurements at the End of the Reporting Period Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
	(in millions)
December 31, 2020
Assets:
Available-for-sale debt securities
CLO	$	—	$	146.9	$	—	$	146.9
Commercial MBS issued by GSEs	—		84.6		—		84.6
Corporate debt securities	—		270.2		—		270.2
Private label residential MBS	—		1,476.9		—		1,476.9
Residential MBS issued by GSEs	—		1,486.6		—		1,486.6
Tax-exempt	—		1,187.4		—		1,187.4
Other	26.5		29.4		—		55.9
Total AFS debt securities	$	26.5	$	4,682.0	$	—	$	4,708.5
Equity securities
CRA investments	$	27.8	$	25.6	$	—	$	53.4
Preferred stock	113.9		—		—		113.9
Total equity securities	$	141.7	$	25.6	$	—	$	167.3
Derivative assets (1)	$	—	$	4.2	$	—	$	4.2
Liabilities:
Junior subordinated debt (2)	$	—	$	—	$	65.9	$	65.9
Derivative liabilities (1)	—		87.5		—		87.5

(1)See "Note 15. Derivatives and Hedging Activities." In addition, the carrying value of loans is increased by $85.5 million and the net carrying value of subordinated debt is decreased by $2.7 million as of December 31, 2020, which relates to the effective portion of the hedges put in place to mitigate against fluctuations in interest rates.

(2)Includes only the portion of junior subordinated debt that is recorded at fair value at each reporting period pursuant to the election of FVO treatment.

For the years ended December 31, 2021, 2020, and 2019, the change in Level 3 liabilities measured at fair value on a recurring basis included in OCI was as follows: 

	Junior Subordinated Debt
	Year Ended December 31,
	2021		2020		2019
	(in millions)
Beginning balance	$	(65.9)	$	(61.7)	$	(48.7)
Change in fair value (1)	(1.5)		(4.2)		(13.0)
Ending balance	$	(67.4)	$	(65.9)	$	(61.7)

(1)Unrealized gains/(losses) attributable to changes in the fair value of junior subordinated debt are recorded as part of OCI, net of tax, and totaled $(1.2) million, $(3.1) million, and $(9.8) million for the years ended December 31, 2021, 2020, and 2019, respectively.

The significant unobservable inputs used in the fair value measurements of these Level 3 liabilities were as follows: 

	December 31, 2021		Valuation Technique	Significant Unobservable Inputs	Input Value
	(in millions)
Junior subordinated debt	$	67.4	Discounted cash flow	Implied credit rating of the Company	2.61	%

	December 31, 2020		Valuation Technique	Significant Unobservable Inputs	Input Value
	(in millions)
Junior subordinated debt	$	65.9	Discounted cash flow	Implied credit rating of the Company	2.87	%

The significant unobservable inputs used in the fair value measurement of the Company’s junior subordinated debt as of December 31, 2021 and 2020 was the implied credit risk for the Company. As of December 31, 2021 and 2020, the implied credit risk spread was calculated as the difference between the average of the 15-year 'BB' and 'BBB' rated financial indexes over the corresponding swap index.

As of December 31, 2021, the Company estimates the discount rate at 2.61%, which represents an implied credit spread of 2.40% plus three-month LIBOR (0.21%). As of December 31, 2020, the Company estimated the discount rate at 2.87%, which was a 2.64% credit spread plus three-month LIBOR (0.24%).

The change in Level 3 assets and liabilities measured at fair value on a recurring basis included in income was as follows:

	Year Ended December 31, 2021
	Loans held for sale		Mortgage servicing rights		Net interest rate lock commitments (1)
	(in millions)
Balance, December 31, 2020	$	—	$	—	$	—
Acquired in AmeriHome acquisition	0.7		1,347.0		23.7
Purchases and additions	131.7		763.8		23,045.4
Settlement of interest rate lock commitments upon acquisition or origination of loans HFS	—		—		(23,054.3)
Sales and payments	(93.4)		(1,270.7)		—
Transfers from Level 2 to Level 3	7.3		—		—
Transfers from Level 3 to Level 2	(0.8)		—		—
Change in fair value	—		(2.5)		(5.4)
Realization of cash flows	—		(139.6)		—
Balance, December 31, 2021	$	45.5	$	698.0	$	9.4
Unrealized (losses) gains included in income related to assets held at period end	$	0.1	$	(19.5)	$	9.4

(1)    Interest rate lock commitment asset and liability positions are presented net.

The significant unobservable inputs used in the fair value measurements of these Level 3 assets and liabilities were as follows:

		December 31, 2021
Asset/liability	Key inputs	Range	Weighted average
Mortgage servicing rights:	Option adjusted spread (in basis points)	553 - 735	600
	Conditional prepayment rate (1)	9.9% - 20.7%	15.2
	Recapture rate	20.0% - 20.0%	20
	Servicing fee rate (in basis points)	25.0 - 50.0	29.5
	Cost to service	$84 - $91	86
Loans held for sale:	Whole loan spread to TBA price (in basis points)	(3.65) - (2.86)	(3.3)
Interest rate lock commitments:	Servicing fee multiple	3.6 - 5.4	4.6
	Pull-through rate	75% - 100%	90

(1)    Lifetime total prepayment speed annualized.

The following is a summary of the difference between the aggregate fair value and the aggregate UPB of loans HFS for which the fair value option has been elected:

	December 31, 2021
	Fair value		Unpaid principal balance		Difference
	(in millions)
Loans held for sale:
Current through 89 days delinquent	$	3,937.5	$	3,807.3	$	130.2
90 days or more delinquent	2.2		2.2		—
Total	$	3,939.7	$	3,809.5	$	130.2

Fair value on a nonrecurring basis

Certain assets are measured at fair value on a nonrecurring basis. That is, the assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of credit deterioration). The following table presents such assets carried on the Consolidated Balance Sheet by caption and by level within the ASC 825 hierarchy:

	Fair Value Measurements at the End of the Reporting Period Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Active Markets for Similar Assets (Level 2)		Unobservable Inputs (Level 3)
	(in millions)
As of December 31, 2021
Loans HFI	$	216.0	$	—	$	—	$	216.0
Other assets acquired through foreclosure	11.7		—		—		11.7
As of December 31, 2020
Loans HFI	$	187.3	$	—	$	—	$	187.3
Other assets acquired through foreclosure	1.4		—		—		1.4

For Level 3 assets measured at fair value on a nonrecurring basis as of December 31, 2021 and 2020, the significant unobservable inputs used in the fair value measurements were as follows:

	December 31, 2021		Valuation Technique(s)		Significant Unobservable Inputs	Range
	(in millions)
Loans HFI	$	216.0	Collateral method	Third party appraisal	Costs to sell	6.0% to 10.0%
			Discounted cash flow method	Discount rate	Contractual loan rate	3.0% to 6.0%
				Scheduled cash collections	Probability of default	0% to 20.0%
				Proceeds from non-real estate collateral	Loss given default	0% to 70.0%
Other assets acquired through foreclosure	11.7		Collateral method	Third party appraisal	Costs to sell	4.0% to 10.0%

	December 31, 2020		Valuation Technique(s)		Significant Unobservable Inputs	Range
	(in millions)
Loans HFI	$	187.3	Collateral method	Third party appraisal	Costs to sell	4.0% to 10.0%
			Discounted cash flow method	Discount rate	Contractual loan rate	2.0% to 7.0%
				Scheduled cash collections	Probability of default	0% to 20.0%
				Proceeds from non-real estate collateral	Loss given default	0% to 70.0%
Other assets acquired through foreclosure	1.4		Collateral method	Third party appraisal	Costs to sell	4.0% to 10.0%

Loans HFI: Loans measured at fair value on a nonrecurring basis include collateral dependent loans. The specific reserves for these loans are based on collateral value, net of estimated disposition costs and other identified quantitative inputs. Collateral value is determined based on independent third-party appraisals or internally-developed discounted cash flow analyses. Appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore qualifying the assets as Level 3 in the fair value hierarchy. In addition, when adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable and the fair value measurement is categorized as a Level 3 measurement. Internal discounted cash flow analyses are also utilized to estimate the fair value of these loans, which considers internally-developed, unobservable inputs such as discount rates, default rates, and loss severity.

Total Level 3 collateral dependent loans had an estimated fair value of $216.0 million and $187.3 million at December 31, 2021 and 2020, respectively, net of a specific valuation allowance of $10.8 million and $8.9 million at December 31, 2021 and 2020, respectively.

Other assets acquired through foreclosure: Other assets acquired through foreclosure consist of properties acquired as a result of, or in-lieu-of, foreclosure. These assets are initially reported at the fair value determined by independent appraisals using appraised value less estimated cost to sell. Such properties are generally re-appraised every twelve months and there is risk for subsequent volatility. Costs relating to the development or improvement of the assets are capitalized and costs relating to holding the assets are charged to expense.

Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore qualifying the assets as Level 3 in the fair value hierarchy. When significant adjustments are based on unobservable inputs, such as when a current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the resulting fair value measurement has been categorized as a Level 3 measurement. The Company had $11.7 million and $1.4 million of such assets at December 31, 2021 and 2020, respectively.

Fair Value of Financial Instruments

The estimated fair value of the Company’s financial instruments is as follows: 

	December 31, 2021
	Carrying Amount		Fair Value
			Level 1		Level 2		Level 3		Total
	(in millions)
Financial assets:
Investment securities:
HTM	$	1,107.1	$	—	$	1,146.4	$	—	$	1,146.4
AFS	6,188.8		40.4		6,148.4		—		6,188.8
Equity securities	158.5		141.3		17.2		—		158.5
Derivative assets	50.2		—		39.2		11.0		50.2
Loans HFS	5,635.1		—		3,894.2		1,760.2		5,654.4
Loans HFI, net	38,822.9		—		—		39,218.2		39,218.2
Mortgage servicing rights	698.0		—		—		698.0		698.0
Accrued interest receivable	227.9		—		227.9		—		227.9
Financial liabilities:
Deposits	$	47,612.0	$	—	$	47,615.5	$	—	$	47,615.5
Other borrowings	1,501.9		—		1,518.4		—		1,518.4
Qualifying debt	895.8		—		857.3		81.3		938.6
Derivative liabilities	99.8		—		98.2		1.6		99.8
Accrued interest payable	9.2		—		9.2		—		9.2

	December 31, 2020
	Carrying Amount		Fair Value
			Level 1		Level 2		Level 3		Total
	(in millions)
Financial assets:
Investment securities:
HTM	$	568.8	$	—	$	611.8	$	—	$	611.8
AFS	4,708.5		26.5		4,682.0		—		4,708.5
Equity securities	167.3		141.7		25.6		—		167.3
Derivative assets	4.2		—		4.2		—		4.2
Loans HFI, net	26,774.1		—		—		27,231.0		27,231.0
Accrued interest receivable	166.1		—		166.1		—		166.1
Financial liabilities:
Deposits	$	31,930.5	$	—	$	31,935.9	$	—	$	31,935.9
Other borrowings	21.0		—		21.0		—		21.0
Qualifying debt	548.7		—		488.1		79.3		567.4
Derivative liabilities	87.5		—		87.5		—		87.5
Accrued interest payable	11.0		—		11.0		—		11.0

Interest rate risk

The Company assumes interest rate risk (the risk to the Company’s earnings and capital from changes in interest rate levels) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments, as well as its future net interest income, will change when interest rate levels change and that change may be either favorable or unfavorable to the Company.

Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the Company's change in EVE and net interest income resulting from hypothetical changes in interest rates. If potential changes to EVE and net interest income resulting from hypothetical interest rate changes are not within the limits established by the BOD, the BOD may direct management to adjust the asset and liability mix to bring interest rate risk within BOD-approved limits.

WAB has an ALCO charged with managing interest rate risk within the BOD-approved limits. Limits are structured to preclude an interest rate risk profile that does not conform to both management and BOD risk tolerances without ALCO approval. There is also ALCO reporting at the Parent level for reviewing interest rate risk for the Company, which gets reported to the BOD and its Finance and Investment Committee.

Fair value of commitments

The estimated fair value of standby letters of credit outstanding at December 31, 2021 and 2020 approximates zero as there have been no significant changes in borrower creditworthiness. Loan commitments on which the committed interest rates are less than the current market rate are insignificant at December 31, 2021 and 2020.