| FAIR VALUE OF FINANCIAL INSTRUMENTS |
9. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value is based upon market quotations, broker quotations, counterparty quotations or pricing services quotations, which provide valuation estimates based upon reasonable market order indications and are subject to significant variability based on market conditions, such as interest rates, credit spreads and market liquidity. The fair value of the mortgage loan receivables held for sale is based upon a securitization model utilizing market data from recent securitization spreads and pricing. Fair Value Summary Table The carrying values and estimated fair values of the Company’s financial instruments, which are both reported at fair value on a recurring basis (as indicated) or amortized cost/par, at June 30, 2015 and December 31, 2014 are as follows ($ in thousands): June 30, 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted Average | | Outstanding Face Amount | | Amortized Cost Basis | | Fair Value | | Fair Value Method | | Yield % | | Remaining Maturity/Duration (years) | Assets: | |
| | |
| | |
| | | | |
| | | CMBS(1) | $ | 1,834,181 |
| | $ | 1,858,247 |
| | $ | 1,867,019 |
| | Internal model, third-party inputs | | 2.72 | % | | 3.48 | CMBS interest-only(1) | 6,742,719 |
| (9) | 344,990 |
| | 345,739 |
| | Internal model, third-party inputs | | 3.53 | % | | 3.49 | GNMA interest-only(2) | 959,516 |
| (9) | 44,059 |
| | 41,822 |
| | Internal model, third-party inputs | | 4.40 | % | | 5.38 | GN construction securities(1) | 33,206 |
| | 33,964 |
| | 34,218 |
| | Internal model, third-party inputs | | 3.59 | % | | 9.10 | GN permanent securities(1) | 10,004 |
| | 10,272 |
| | 10,537 |
| | Internal model, third-party inputs | | 4.95 | % | | 4.22 | Mortgage loan receivable held for investment, at amortized cost | 1,758,362 |
| | 1,740,808 |
| | 1,760,986 |
| | Discounted Cash Flow(5) | | 7.74 | % | | 1.71 | Mortgage loan receivable held for sale | 507,425 |
| | 507,710 |
| | 517,337 |
| | Discounted Cash Flow(6) | | 4.30 | % | | 8.39 | FHLB stock(7) | 69,931 |
| | 69,931 |
| | 69,931 |
| | (7) | | 3.50 | % | | N/A | Nonhedge derivatives(1)(8) | 351,700 |
| | N/A |
| | 1,600 |
| | Counterparty quotations | | N/A |
| | 0.91 | | | | | | | | | | | | | Liabilities: | |
| | |
| | |
| | | | |
| | | Repurchase agreements - short-term | 751,296 |
| | 751,296 |
| | 751,296 |
| | Discounted Cash Flow(3) | | 1.59 | % | | 0.40 | Repurchase agreements - long-term | 305,084 |
| | 305,084 |
| | 305,084 |
| | Discounted Cash Flow(4) | | 1.26 | % | | 1.37 | Borrowings under credit agreement | 12,000 |
| | 12,000 |
| | 12,000 |
| | Discounted Cash Flow(10) | | 2.94 | % | | 0.08 | Borrowings under credit and security agreement | 46,750 |
| | 46,750 |
| | 46,750 |
| | Discounted Cash Flow(10) | | 2.04 | % | | 1.27 | Revolving credit facility | 75,000 |
| | 75,000 |
| | 75,000 |
| | Discounted Cash Flow(10) | | 3.69 | % | | 0.08 | Mortgage loan financing | 523,055 |
| | 529,097 |
| | 533,688 |
| | Discounted Cash Flow(4) | | 4.85 | % | | 8.22 | Borrowings from the FHLB | 1,758,000 |
| | 1,758,000 |
| | 1,764,072 |
| | Discounted Cash Flow | | 0.76 | % | | 1.57 | Senior unsecured notes | 619,555 |
| | 619,555 |
| | 624,087 |
| | Broker quotations, pricing services | | 6.65 | % | | 4.11 | Nonhedge derivatives(1)(8) | 1,017,900 |
| | N/A |
| | 9,165 |
| | Counterparty quotations | | N/A |
| | 1.80 |
December 31, 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted Average | | Outstanding Face Amount | | Amortized Cost Basis | | Fair Value | | Fair Value Method | | Yield % | | Remaining Maturity/Duration (years) | Assets: | |
| | |
| | |
| | | | |
| | | CMBS(1) | $ | 2,247,565 |
| | $ | 2,277,995 |
| | $ | 2,305,409 |
| | Broker quotations, pricing services | | 2.60 | % | | 4.23 | CMBS interest-only(1) | 7,239,503 |
| (9) | 376,085 |
| | 378,335 |
| | Broker quotations, pricing services | | 4.88 | % | | 3.45 | GNMA interest-only(2) | 1,400,141 |
| (9) | 67,543 |
| | 66,642 |
| | Broker quotations, pricing services | | 5.90 | % | | 4.50 | GN construction securities(1) | 27,538 |
| | 28,178 |
| | 28,406 |
| | Broker quotations, pricing services | | 3.56 | % | | 9.42 | GN permanent securities(1) | 36,232 |
| | 36,515 |
| | 36,773 |
| | Broker quotations, pricing services | | 4.94 | % | | 1.32 | Mortgage loan receivable held for investment, at amortized cost | 1,536,923 |
| | 1,521,053 |
| | 1,540,388 |
| | Discounted Cash Flow(5) | | 7.33 | % | | 1.96 | Mortgage loan receivable held for sale | 417,955 |
| | 417,955 |
| | 421,991 |
| | Discounted Cash Flow(6) | | 4.31 | % | | 9.72 | FHLB stock(7) | 72,340 |
| | 72,340 |
| | 72,340 |
| | (7) | | 3.50 | % | | N/A | Nonhedge derivatives(1)(8) | 125,050 |
| | N/A |
| | 424 |
| | Counterparty quotations | | N/A |
| | 3.45 | | | | | | | | | | | | | Liabilities: | |
| | |
| | |
| | | | |
| | | Repurchase agreements - short-term | 1,331,603 |
| | 1,331,603 |
| | 1,331,603 |
| | Discounted Cash Flow(3) | | 1.32 | % | | 0.23 | Repurchase agreements - long-term | 100,062 |
| | 100,062 |
| | 100,062 |
| | Discounted Cash Flow(3) | | 1.89 | % | | 1.59 | Borrowings under credit agreement | 11,000 |
| | 11,000 |
| | 11,000 |
| | Discounted Cash Flow(10) | | 2.91 | % | | 1.07 | Borrowings under credit and security agreement | 46,750 |
| | 46,750 |
| | 46,750 |
| | Discounted Cash Flow(10) | | 2.01 | % | | 1.77 | Revolving credit facility | 25,000 |
| | 25,000 |
| | 25,000 |
| | Discounted Cash Flow(10) | | 3.66 | % | | 2.12 | Mortgage loan financing | 442,753 |
| | 447,410 |
| | 455,846 |
| | Discounted Cash Flow(4) | | 4.85 | % | | 8.47 | Borrowings from the FHLB | 1,611,000 |
| | 1,611,000 |
| | 1,616,373 |
| | Discounted Cash Flow | | 0.79 | % | | 2.05 | Senior unsecured notes | 619,555 |
| | 619,555 |
| | 611,745 |
| | Broker quotations, pricing services | | 6.65 | % | | 4.61 | Nonhedge derivatives(1)(8) | 1,428,700 |
| | N/A |
| | 13,446 |
| | Counterparty quotations | | N/A |
| | 1.41 |
| | (1) | Measured at fair value on a recurring basis with the net unrealized gains or losses recorded as a component of other comprehensive income (loss) in equity |
| | (2) | Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings |
| | (3) | Fair value for repurchase agreement liabilities is estimated to approximate carrying amount primarily due to the short interest rate reset risk (30 days) of the financings and the high credit quality of the assets collateralizing these positions. If the collateral is determined to be impaired, the related financing would be revalued accordingly. There are no impairments on any positions. |
| | (4) | For the mortgage loan financing, the carrying value approximates the fair value discounting the expected cash flows at current market rates. If the collateral is determined to be impaired, the related financing would be revalued accordingly. There are no impairments on any positions. |
| | (5) | Fair value for floating rate mortgage loan receivables, held for investment is estimated to approximate the outstanding face amount given the short interest rate reset risk (30 days) and no significant change in credit risk. Fair value for fixed rate mortgage loan receivables, held for investment is measured using a hypothetical securitization model utilizing market data from recent securitization spreads and pricing. |
| | (6) | Fair value for mortgage loan receivables, held for sale is measured using a hypothetical securitization model utilizing market data from recent securitization spreads and pricing. |
| | (7) | Fair value of the FHLB stock approximates outstanding face amount as the Company’s wholly-owned subsidiary is restricted from trading the stock and can only put the stock back to the FHLB, at the FHLB’s discretion, at par. |
| | (8) | The outstanding face amount of the nonhedge derivatives represents the notional amount of the underlying contracts. |
| | (9) | Represents notional outstanding balance of underlying collateral |
| | (10) | Fair value for borrowings under credit agreement, credit and security agreement and revolving credit facility is estimated to approximate carrying amount primarily due to the short interest rate reset risk (30 days) of the financings and the high credit quality of the assets collateralizing these positions. |
The following table summarizes the Company’s financial assets and liabilities, which are both reported at fair value on a recurring basis (as indicated) or amortized cost/par, at June 30, 2015 and December 31, 2014 ($ in thousands): June 30, 2015 | | | | | | | | | | | | | | | | | | | | | | Financial Instruments Reported at Fair Value on Combined Consolidated Statements of Financial Condition | | Outstanding Face Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Total | | | | | | | | | | | | Assets: | | |
| | |
| | |
| | |
| | |
| CMBS(1) | | $ | 1,834,181 |
| | $ | — |
| | $ | — |
| | $ | 1,867,019 |
| | $ | 1,867,019 |
| CMBS interest-only(1) | | 6,742,719 |
| (3) | — |
| | — |
| | 345,739 |
| | 345,739 |
| GNMA interest-only(2) | | 959,516 |
| (3) | — |
| | 41,822 |
| | — |
| | 41,822 |
| GN construction securities(1) | | 33,206 |
| | — |
| | 34,218 |
| | — |
| | 34,218 |
| GN permanent securities(1) | | 10,004 |
| | — |
| | 10,537 |
| | — |
| | 10,537 |
| Nonhedge derivatives(4) | | 351,700 |
| | — |
| | 1,600 |
| | — |
| | 1,600 |
| | | | | $ | — |
| | $ | 88,177 |
| | $ | 2,212,758 |
| | $ | 2,300,935 |
| Liabilities: | | | | | | | | | | | Nonhedge derivatives(4) | | 1,017,900 |
| | $ | — |
| | $ | 9,165 |
| | $ | — |
| | $ | 9,165 |
| | | | | | | | | | | | Financial Instruments Not Reported at Fair Value on Combined Consolidated Statements of Financial Condition | | Outstanding Face Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Total | | | | | | | | | | | | Assets: | | | | | | | | | | | Mortgage loan receivable held for investment | | $ | 1,758,362 |
| | $ | — |
| | $ | — |
| | $ | 1,760,986 |
| | $ | 1,760,986 |
| Mortgage loan receivable held for sale | | 507,425 |
| | — |
| | — |
| | 517,337 |
| | 517,337 |
| FHLB stock | | 69,931 |
| | — |
| | — |
| | 69,931 |
| | 69,931 |
| | | | | $ | — |
| | $ | — |
| | $ | 2,348,254 |
| | $ | 2,348,254 |
| Liabilities: | | |
| | |
| | |
| | |
| | 0 |
| Repurchase agreements (short-term) | | 751,296 |
| | $ | — |
| | $ | 39,465 |
| | $ | 711,831 |
| | $ | 751,296 |
| Repurchase agreements (long-term) | | 305,084 |
| | — |
| | — |
| | 305,084 |
| | 305,084 |
| Borrowings under credit agreement | | 12,000 |
| | — |
| | — |
| | 12,000 |
| | 12,000 |
| Borrowings under credit and security agreement | | 46,750 |
| | — |
| | — |
| | 46,750 |
| | 46,750 |
| Revolving credit facility | | 75,000 |
| | — |
| | — |
| | 75,000 |
| | 75,000 |
| Mortgage loan financing | | 523,055 |
| | — |
| | — |
| | 533,688 |
| | 533,688 |
| Borrowings from the FHLB | | 1,758,000 |
| | — |
| | — |
| | 1,764,072 |
| | 1,764,072 |
| Senior unsecured notes | | 619,555 |
| | — |
| | — |
| | 624,087 |
| | 624,087 |
| | | | | $ | — |
| | $ | 39,465 |
| | $ | 4,072,512 |
| | $ | 4,111,977 |
|
| | (1) | Measured at fair value on a recurring basis with the net unrealized gains or losses recorded as a component of other comprehensive income (loss) in equity. |
| | (2) | Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings. |
| | (3) | Represents notional outstanding balance of underlying collateral. |
| | (4) | Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings. The outstanding face amount of the nonhedge derivatives represents the notional amount of the underlying contracts. |
December 31, 2014 | | | | | | | | | | | | | | | | | | | | | | Financial Instruments Reported at Fair Value on Combined Consolidated Statements of Financial Condition | | Outstanding Face Amount | | Fair Value | | | Level 1 | | Level 2 | | Level 3 | | Total | | | | | | | | | | | | Assets: | | |
| | |
| | |
| | |
| | |
| CMBS(1) | | $ | 2,247,565 |
| | $ | — |
| | $ | — |
| | $ | 2,305,409 |
| | $ | 2,305,409 |
| CMBS interest-only(1) | | 7,239,503 |
| (3) | — |
| | — |
| | 378,335 |
| | 378,335 |
| GNMA interest-only(2) | | 1,400,141 |
| (3) | — |
| | 66,642 |
| | — |
| | 66,642 |
| GN construction securities(1) | | 27,538 |
| | — |
| | 28,406 |
| | — |
| | 28,406 |
| GN permanent securities(1) | | 36,232 |
| | — |
| | 36,773 |
| | — |
| | 36,773 |
| Nonhedge derivatives(4) | | 125,050 |
| | — |
| | 424 |
| | — |
| | 424 |
| | | | | $ | — |
| | $ | 132,245 |
| | $ | 2,683,744 |
| | $ | 2,815,989 |
| Liabilities: | | | | | | | | | | | Nonhedge derivatives(4) | | 1,428,700 |
| | — |
| | 13,446 |
| | — |
| | 13,446 |
| | | | | | | | | | | | | | | | | | | | | | | Financial Instruments Not Reported at Fair Value on Combined Consolidated Statements of Financial Condition | | Outstanding Face Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Total | | | | | | | | | | | | Assets: | | | | | | | | | | | Mortgage loan receivable held for investment | | 1,536,923 |
| | — |
| | — |
| | 1,540,388 |
| | 1,540,388 |
| Mortgage loan receivable held for sale | | 417,955 |
| | — |
| | — |
| | 421,991 |
| | 421,991 |
| FHLB stock | | 72,340 |
| | — |
| | — |
| | 72,340 |
| | 72,340 |
| | | | | $ | — |
| | $ | — |
| | $ | 2,034,719 |
| | $ | 2,034,719 |
| Liabilities: | | |
| | |
| | |
| | |
| | 0 |
| Repurchase agreements (short-term) | | 1,331,603 |
| | — |
| | 68,357 |
| | 1,263,246 |
| | 1,331,603 |
| Repurchase agreements (long-term) | | 100,062 |
| | — |
| | — |
| | 100,062 |
| | 100,062 |
| Borrowings under credit agreement | | 11,000 |
| | — |
| | — |
| | 11,000 |
| | 11,000 |
| Borrowings under credit and security agreement | | 46,750 |
| | — |
| | — |
| | 46,750 |
| | 46,750 |
| Revolving credit facility | | 25,000 |
| | — |
| | — |
| | 25,000 |
| | 25,000 |
| Mortgage loan financing | | 442,753 |
| | — |
| | — |
| | 455,846 |
| | 455,846 |
| Borrowings from the FHLB | | 1,611,000 |
| | — |
| | — |
| | 1,616,373 |
| | 1,616,373 |
| Senior unsecured notes | | 619,555 |
| | — |
| | — |
| | 611,745 |
| | 611,745 |
| | | | | $ | — |
| | $ | 68,357 |
| | $ | 4,130,022 |
| | $ | 4,198,379 |
|
| | (1) | Measured at fair value on a recurring basis with the net unrealized gains or losses recorded as a component of other comprehensive income (loss) in equity. |
| | (2) | Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings. |
| | (3) | Represents notional outstanding balance of underlying collateral. |
| | (4) | Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings. The outstanding face amount of the nonhedge derivatives represents the notional amount of the underlying contracts. |
The following table summarizes changes in level 3 of financial instruments reported at fair value on the combined consolidated statements of financial condition for the six months ended June 30, 2015. There were no changes for the six months ended June 30, 2014 ($ in thousands):
| | | | | | Level 3 | | | Balance at December 31, 2014 | $ | 2,683,744 |
| Transfer from level 2 | — |
| Purchases | 365,848 |
| Sales | (721,210 | ) | Paydowns/maturities | (88,559 | ) | Amortization of premium/discount | (30,666 | ) | Unrealized gain/(loss) | (20,144 | ) | Realized gain/(loss) on sale | 23,745 |
| Balance at June 30, 2015 | $ | 2,212,758 |
|
|