NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
WAL is a bank holding company headquartered in Phoenix, Arizona, incorporated under the laws of the state of Delaware. WAL provides a full spectrum of customized loan, deposit, and treasury management capabilities, including 24/7 funds transfer and other digital payment offerings through its wholly-owned banking subsidiary, WAB.
WAB operates the following full-service banking divisions: ABA, BON, FIB, Bridge, and TPB. The Company also serves business customers through a national platform of specialized financial services, including mortgage banking services through AmeriHome, and digital payment services for the class action legal industry through DST. In addition, the Company has the following non-bank subsidiaries: CSI, a captive insurance company formed and licensed under the laws of the State of Arizona and established as part of the Company's overall enterprise risk management strategy, and WATC, which provides corporate trust services and levered loan administration solutions.
Basis of presentation
The accompanying Unaudited Consolidated Financial Statements as of June 30, 2023 and for the three and six months ended June 30, 2023 and 2022 have been prepared in accordance with GAAP for interim financial information and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by GAAP for complete financial statements. Accordingly, these statements should be read in conjunction with the Company's audited Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. The accounts of the Company and its consolidated subsidiaries are included in the Consolidated Financial Statements.
The information furnished in these interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for each respective period presented. Such adjustments are of a normal, recurring nature. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter or for the full year.
Recent accounting pronouncements
Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method
In March 2023, the FASB issued guidance within ASU 2023-02, Investments — Equity Method and Joint Ventures (Topic 323). The amendments in this update permit entities to elect to account for tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. Previously this option was only permitted for LIHTC investments. Additionally, the amendments in this update require that all tax equity investments accounted for using the proportional amortization method apply the delayed equity contribution guidance in Subtopic 323-740 and disclosure of the nature of an entity's tax equity investments and their effect on an entity's financial position and results of operations.
The amendments in this update are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years and are applied on a modified retrospective or a retrospective basis. The adoption of this guidance is not expected to have a material impact on the Company's Consolidated Financial Statements.
Recently adopted accounting guidance
Troubled Debt Restructurings and Vintage Disclosures
In March 2022, the FASB issued guidance within ASU 2022-02, Financial Instruments—Credit Losses (Topic 326). The amendments in this update eliminate the accounting guidance and related disclosures for TDRs by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty and requiring an entity to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost.
The Company adopted this accounting guidance prospectively on January 1, 2023. The adoption of this guidance did not have a material impact on the Company's Consolidated Financial Statements.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management's estimates and judgments are ongoing and are based on experience, current and expected future conditions, third-party evaluations and various other assumptions that management believes are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities, as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from those estimates and assumptions used in the Consolidated Financial Statements and related notes. Material estimates that are susceptible to significant changes in the near term relate to: 1) the determination of the ACL; 2) certain assets and liabilities carried at fair value; and 3) accounting for income taxes.
Principles of consolidation
As of June 30, 2023, WAL has the following significant wholly-owned subsidiaries: WAB and eight unconsolidated subsidiaries used as business trusts in connection with the issuance of trust-preferred securities.
WAB has the following significant wholly-owned subsidiaries: 1) WABT, which holds certain investment securities, municipal and nonprofit loans, and leases; 2) WA PWI, which holds interests in certain limited partnerships invested primarily in low income housing tax credits and small business investment corporations; 3) Helios Prime, which holds interests in certain limited partnerships invested in renewable energy projects; 4) BW Real Estate, Inc., which operates as a real estate investment trust and holds certain of WAB's real estate loans and related securities; and 5) Western Finance Company, which purchases and originates equipment finance leases and provides mortgage banking services through its wholly-owned subsidiary, AmeriHome.
The Company does not have any other significant entities that should be consolidated. All significant intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in the Consolidated Income Statements for the prior periods have been reclassified to conform to the current presentation. The reclassifications had no effect on net income or stockholders’ equity as previously reported.
Goodwill and other intangible assets
The Company evaluated whether the continued effects from the March 2023 bank failures may give rise to a triggering event and elected to perform a Step 0 goodwill impairment assessment, which included analyzing qualitative factors applicable to the Company, the financial performance of the Company, and valuation metrics of publicly traded companies comparable to the Company and its reporting units. As of June 30, 2023, the Company does not believe that these events or circumstances have significantly altered the long-term financial performance of the Company. Accordingly, it was determined that it is more likely than not that the fair value of the Company and its reporting units exceeds their respective carrying values as of June 30, 2023. The Company's goodwill totaled $527 million at June 30, 2023 and December 31, 2022, with $290 million and $237 million allocated to the Commercial and Consumer Related segments, respectively.
2. INVESTMENT SECURITIES
The carrying amounts and fair values of investment securities are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Fair Value |
| | (in millions) |
| Held-to-maturity | | | | | | | | |
| Private label residential MBS | | $ | 192 | | | $ | — | | | $ | (40) | | | $ | 152 | |
| Tax-exempt | | 1,175 | | | 1 | | | (142) | | | 1,034 | |
| Total HTM securities | | $ | 1,367 | | | $ | 1 | | | $ | (182) | | | $ | 1,186 | |
| | | | | | | | |
| Available-for-sale debt securities | | | | | | | | |
| CLO | | $ | 2,183 | | | $ | — | | | $ | (39) | | | $ | 2,144 | |
| Commercial MBS issued by GSEs | | 69 | | | — | | | (9) | | | 60 | |
| Corporate debt securities | | 411 | | | — | | | (73) | | | 338 | |
| | | | | | | | |
| Private label residential MBS | | 1,371 | | | — | | | (230) | | | 1,141 | |
| Residential MBS issued by GSEs | | 2,141 | | | — | | | (376) | | | 1,765 | |
| Tax-exempt | | 919 | | | — | | | (89) | | | 830 | |
| | | | | | | | |
| U.S. Treasury securities | | 2,286 | | | — | | | — | | | 2,286 | |
| Other | | 74 | | | 3 | | | (10) | | | 67 | |
| Total AFS debt securities | | $ | 9,454 | | | $ | 3 | | | $ | (826) | | | $ | 8,631 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Fair Value |
| | (in millions) |
| Held-to-maturity | | | | | | | | |
| Private label residential MBS | | $ | 198 | | | $ | — | | | $ | (39) | | | $ | 159 | |
| Tax-exempt | | 1,091 | | | — | | | (138) | | | 953 | |
| Total HTM securities | | $ | 1,289 | | | $ | — | | | $ | (177) | | | $ | 1,112 | |
| | | | | | | | |
| Available-for-sale debt securities | | | | | | | | |
| CLO | | $ | 2,796 | | | $ | — | | | $ | (90) | | | $ | 2,706 | |
| Commercial MBS issued by GSEs | | 104 | | | 1 | | | (8) | | | 97 | |
| Corporate debt securities | | 429 | | | — | | | (39) | | | 390 | |
| | | | | | | | |
| Private label residential MBS | | 1,442 | | | — | | | (243) | | | 1,199 | |
| Residential MBS issued by GSEs | | 2,123 | | | — | | | (383) | | | 1,740 | |
| Tax-exempt | | 1,004 | | | 2 | | | (115) | | | 891 | |
| | | | | | | | |
| | | | | | | | |
| Other | | 75 | | | 6 | | | (12) | | | 69 | |
| Total AFS debt securities | | $ | 7,973 | | | $ | 9 | | | $ | (890) | | | $ | 7,092 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
In addition, the Company held equity securities, which primarily consisted of preferred stock and CRA investments, with a fair value of $139 million and $160 million at June 30, 2023 and December 31, 2022, respectively. Unrealized gains on equity securities of $0.1 million and losses of $10.0 million for the three months ended June 30, 2023 and 2022, respectively, and losses of $8.4 million and $16.7 million for the six months ended June 30, 2023 and 2022, respectively, were recognized in earnings as a component of fair value loss adjustments.
Securities with carrying amounts of approximately $7.3 billion and $1.7 billion at June 30, 2023 and December 31, 2022, respectively, were pledged for various purposes as required or permitted by law.
The following tables summarize the Company's AFS debt securities in an unrealized loss position, aggregated by major security type and length of time in a continuous unrealized loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2023 |
| Less Than Twelve Months | | More Than Twelve Months | | Total |
| Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value |
| (in millions) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Available-for-sale debt securities | | | | | | | | | | | |
| CLO | $ | 2 | | | $ | 261 | | | $ | 37 | | | $ | 1,875 | | | $ | 39 | | | $ | 2,136 | |
| Commercial MBS issued by GSEs | 1 | | | 12 | | | 8 | | | 45 | | | 9 | | | 57 | |
| Corporate debt securities (1) | 2 | | | 15 | | | 71 | | | 320 | | | 73 | | | 335 | |
| Private label residential MBS | 1 | | | 28 | | | 229 | | | 1,084 | | | 230 | | | 1,112 | |
| Residential MBS issued by GSEs | 8 | | | 239 | | | 368 | | | 1,508 | | | 376 | | | 1,747 | |
| Tax-exempt | 6 | | | 130 | | | 83 | | | 695 | | | 89 | | | 825 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Other | 2 | | | 18 | | | 8 | | | 36 | | | 10 | | | 54 | |
| Total AFS securities | $ | 22 | | | $ | 703 | | | $ | 804 | | | $ | 5,563 | | | $ | 826 | | | $ | 6,266 | |
(1)Includes securities with an ACL that have a fair value of $109 million and unrealized losses of $40 million.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Less Than Twelve Months | | More Than Twelve Months | | Total |
| Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value |
| (in millions) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Available-for-sale debt securities | | | | | | | | | | | |
| CLO | $ | 81 | | | $ | 2,467 | | | $ | 9 | | | $ | 216 | | | $ | 90 | | | $ | 2,683 | |
| Commercial MBS issued by GSEs | 4 | | | 46 | | | 4 | | | 14 | | | 8 | | | 60 | |
| Corporate debt securities | 28 | | | 263 | | | 11 | | | 120 | | | 39 | | | 383 | |
| Private label residential MBS | 27 | | | 279 | | | 216 | | | 912 | | | 243 | | | 1,191 | |
| Residential MBS issued by GSEs | 82 | | | 600 | | | 301 | | | 1,101 | | | 383 | | | 1,701 | |
| Tax-exempt | 93 | | | 752 | | | 22 | | | 78 | | | 115 | | | 830 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Other | 4 | | | 26 | | | 8 | | | 26 | | | 12 | | | 52 | |
| Total AFS securities | $ | 319 | | | $ | 4,433 | | | $ | 571 | | | $ | 2,467 | | | $ | 890 | | | $ | 6,900 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The total number of AFS debt securities in an unrealized loss position at June 30, 2023 was 797, compared to 832 at December 31, 2022.
On a quarterly basis, the Company performs an impairment analysis on its AFS debt securities that are in an unrealized loss position at the end of the period to determine whether credit losses should be recognized on these securities.
Qualitative considerations made by the Company in its impairment analysis are further discussed below.
Government Issued Securities
Commercial and residential MBS are issued by either government agencies or GSEs. These securities are either explicitly or implicitly guaranteed by the U.S. government and are highly rated by major rating agencies. Further, principal and interest payments on these securities continue to be made on a timely basis.
Non-Government Issued Securities
Qualitative factors used in the Company's credit loss assessment of its securities that are not issued and guaranteed by the U.S. government include consideration of any adverse conditions related to a specific security, industry, or geographic region of its securities, any credit ratings below investment grade, the payment structure of the security and the likelihood of the issuer to be able to make payments that increase in the future, and failure of the issuer to make any scheduled principal or interest payments.
For the Company's corporate debt and tax-exempt securities, the Company also considers various metrics of the issuer including days of cash on hand, the ratio of long-term debt to total assets, the net change in cash between reporting periods, and consideration of any breach in covenant requirements. The Company's corporate debt securities are primarily investment grade, issuers continue to make timely principal and interest payments, and the unrealized losses on these security portfolios primarily relate to changes in interest rates and other market conditions that are not considered to be credit-related issues. The Company continues to receive timely principal and interest payments on its tax-exempt securities and the majority of these issuers have revenues pledged for payment of debt service prior to payment of other types of expenses.
In consideration of the continued effects from the March 2023 bank failures, the Company performed a targeted impairment analysis on its AFS debt securities issued by regional banks held in its corporate debt securities portfolio. The Company considered the issuers' credit ratings, probability of default, and other factors. As a result of the analysis, a $2.2 million and $21.5 million provision for credit losses was recognized during the three and six months ended June 30, 2023, respectively. The provision for credit losses for the six months ended June 30, 2023 included recognition of a $17.1 million charge-off for one debt security issued by a regional bank that was sold. The Company does not intend to sell and it is more likely than not that the Company will not be required to sell the remainder of these regional bank debt securities prior to their anticipated recovery, therefore, no credit losses on the Company's remaining AFS securities portfolio have been recognized during the three and six months ended June 30, 2023.
For the Company's private label residential MBS, which consist of non-agency collateralized mortgage obligations that are secured by pools of residential mortgage loans, the Company also considers metrics such as securitization risk weight factor, current credit support, whether there were any mortgage principal losses resulting from defaults in payments on the underlying mortgage collateral, and the credit default rate over the last twelve months. These securities primarily carry investment grade credit ratings, principal and interest payments on these securities continue to be made on a timely basis, and credit support for these securities is considered adequate.
The Company's CLO portfolio consists of highly rated securitization tranches, containing pools of medium to large-sized corporate, high yield loans. These are variable rate securities that have an investment grade rating of Single-A or better. Unrealized losses on these securities are primarily a function of the differential from the offer price and the valuation mid-market price as well as changes in interest rates.
Unrealized losses on the Company's other securities portfolio relate to taxable municipal and trust preferred securities. The Company is continuing to receive timely principal and interest payments on its taxable municipal securities, these securities continue to be highly rated and the number of days of cash on hand is strong. The Company's trust preferred securities are investment grade and the issuers continue to make timely principal and interest payments.
The following table presents a rollforward by major security type of the ACL on the Company's AFS debt securities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2023 |
| | Balance,
March 31, 2023 | | | | Provision for Credit Losses | | Charge-offs | | Recoveries | | Balance,
June 30, 2023 |
| | (in millions) |
| Available for sale securities | | | | | | | | | | | | |
| Corporate debt securities | | $ | 2.2 | | | | | $ | 2.2 | | | $ | — | | | $ | — | | | $ | 4.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2023 |
| | Balance,
December 31, 2022 | | | | Provision for Credit Losses | | Charge-offs | | Recoveries | | Balance,
June 30, 2023 |
| | (in millions) |
| Available for sale securities | | | | | | | | | | | | |
| Corporate debt securities | | $ | — | | | | | $ | 21.5 | | | $ | (17.1) | | | $ | — | | | $ | 4.4 | |
There were no credit losses recognized on AFS securities during the three and six months ended June 30, 2022.
The credit loss model under ASC 326-20, applicable to HTM debt securities, requires recognition of lifetime expected credit losses through an allowance account at the time the security is purchased.
The following table presents a rollforward by major security type of the ACL on the Company's HTM debt securities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2023 |
| | Balance,
March 31, 2023 | | | | Provision for Credit Losses | | Charge-offs | | Recoveries | | Balance,
June 30, 2023 |
| | (in millions) |
| Held-to-maturity debt securities | | | | | | | | | | | | |
| Tax-exempt | | $ | 6.5 | | | | | $ | (0.5) | | | $ | — | | | $ | — | | | $ | 6.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2023 |
| | Balance,
December 31, 2022 | | | | Provision for Credit Losses | | Charge-offs | | Recoveries | | Balance,
June 30, 2023 |
| | (in millions) |
| Held-to-maturity debt securities | | | | | | | | | | | | |
| Tax-exempt | | $ | 5.2 | | | | | $ | 0.8 | | | $ | — | | | $ | — | | | $ | 6.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2022: |
| | Balance,
March 31, 2022 | | | | Provision for Credit Losses | | Charge-offs | | Recoveries | | Balance
June 30, 2022 |
| | (in millions) |
| Held-to-maturity debt securities | | | | | | | | | | | | |
| Tax-exempt | | $ | 3.2 | | | | | $ | — | | | $ | — | | | $ | — | | | $ | 3.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2022: |
| | Balance,
December 31, 2021 | | | | Provision for Credit Losses | | Charge-offs | | Recoveries | | Balance
June 30, 2022 |
| | (in millions) |
| Held-to-maturity debt securities | | | | | | | | | | | | |
| Tax-exempt | | $ | 5.2 | | | | | $ | (2.0) | | | $ | — | | | $ | — | | | $ | 3.2 | |
No allowance has been recognized on the Company's HTM private label residential MBS as losses are not expected due to the Company holding a senior position in these securities.
Accrued interest receivable on HTM securities totaled $4 million at June 30, 2023 and December 31, 2022, and is excluded from the estimate of expected credit losses.
The following tables summarize the carrying amount of the Company’s investment ratings position, which are updated quarterly and used to monitor the credit quality of the Company's securities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 |
| | AAA | | Split-rated AAA/AA+ | | AA+ to AA- | | A+ to A- | | BBB+ to BBB- | | BB+ and below | | Unrated | | Totals |
| | (in millions) |
| Held-to-maturity | | | | | | | | | | | | | | | | |
| Private label residential MBS | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 192 | | | $ | 192 | |
| Tax-exempt | | — | | | — | | | — | | | — | | | — | | | — | | | 1,175 | | | 1,175 | |
| Total HTM securities (1) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,367 | | | $ | 1,367 | |
| | | | | | | | | | | | | | | | |
| Available-for-sale debt securities | | | | | | | | | | | | | | | | |
| CLO | | $ | 120 | | | $ | — | | | $ | 1,960 | | | $ | 64 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,144 | |
| Commercial MBS issued by GSEs | | — | | | 60 | | | — | | | — | | | — | | | — | | | — | | | 60 | |
| Corporate debt securities | | — | | | — | | | — | | | 70 | | | 219 | | | 49 | | | — | | | 338 | |
| Private label residential MBS | | 1,115 | | | — | | | 25 | | | — | | | — | | | 1 | | | — | | | 1,141 | |
| Residential MBS issued by GSEs | | — | | | 1,765 | | | — | | | — | | | — | | | — | | | — | | | 1,765 | |
| Tax-exempt | | 9 | | | 16 | | | 354 | | | 376 | | | — | | | — | | | 75 | | | 830 | |
| | | | | | | | | | | | | | | | |
| U.S. Treasury securities | | — | | | 2,286 | | | — | | | — | | | — | | | — | | | — | | | 2,286 | |
| Other | | — | | | — | | | 9 | | | 9 | | | 29 | | | 3 | | | 17 | | | 67 | |
| Total AFS securities (1) | | $ | 1,244 | | | $ | 4,127 | | | $ | 2,348 | | | $ | 519 | | | $ | 248 | | | $ | 53 | | | $ | 92 | | | $ | 8,631 | |
| | | | | | | | | | | | | | | | |
| Equity securities | | | | | | | | | | | | | | | | |
| Common stock | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 2 | | | $ | 2 | |
| CRA investments | | — | | | 25 | | | — | | | — | | | — | | | — | | | 12 | | | 37 | |
| Preferred stock | | — | | | — | | | — | | | — | | | 53 | | | 37 | | | 10 | | | 100 | |
| Total equity securities (1) | | $ | — | | | $ | 25 | | | $ | — | | | $ | — | | | $ | 53 | | | $ | 37 | | | $ | 24 | | | $ | 139 | |
(1)For rated securities, if ratings differ, the Company uses an average of the available ratings by major credit agencies.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | AAA | | Split-rated AAA/AA+ | | AA+ to AA- | | A+ to A- | | BBB+ to BBB- | | BB+ and below | | Unrated | | Totals |
| | (in millions) |
| Held-to-maturity | | | | | | | | | | | | | | | | |
| Private label residential MBS | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 198 | | | $ | 198 | |
| Tax-exempt | | — | | | — | | | — | | | — | | | — | | | — | | | 1,091 | | | 1,091 | |
| Total HTM securities (1) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,289 | | | $ | 1,289 | |
| | | | | | | | | | | | | | | | |
| Available-for-sale debt securities | | | | | | | | | | | | | | | | |
| CLO | | $ | 310 | | | $ | — | | | $ | 2,121 | | | $ | 275 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,706 | |
| Commercial MBS issued by GSEs | | — | | | 97 | | | — | | | — | | | — | | | — | | | — | | | 97 | |
| Corporate debt securities | | — | | | — | | | — | | | 74 | | | 316 | | | — | | | — | | | 390 | |
| Private label residential MBS | | 1,158 | | | — | | | 41 | | | — | | | — | | | — | | | — | | | 1,199 | |
| Residential MBS issued by GSEs | | — | | | 1,740 | | | — | | | — | | | — | | | — | | | — | | | 1,740 | |
| Tax-exempt | | 11 | | | 15 | | | 392 | | | 425 | | | — | | | — | | | 48 | | | 891 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Other | | — | | | — | | | 9 | | | 9 | | | 27 | | | 6 | | | 18 | | | 69 | |
| Total AFS securities (1) | | $ | 1,479 | | | $ | 1,852 | | | $ | 2,563 | | | $ | 783 | | | $ | 343 | | | $ | 6 | | | $ | 66 | | | $ | 7,092 | |
| | | | | | | | | | | | | | | | |
| Equity securities | | | | | | | | | | | | | | | | |
| Common stock | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 3 | | | $ | 3 | |
| CRA investments | | — | | | 24 | | | — | | | — | | | — | | | — | | | 25 | | | 49 | |
| Preferred stock | | — | | | — | | | — | | | — | | | 82 | | | 17 | | | 9 | | | 108 | |
| Total equity securities (1) | | $ | — | | | $ | 24 | | | $ | — | | | $ | — | | | $ | 82 | | | $ | 17 | | | $ | 37 | | | $ | 160 | |
(1)For rated securities, if ratings differ, the Company uses an average of the available ratings by major credit agencies.
A security is considered to be past due once it is 30 days contractually past due under the terms of the agreement. As of June 30, 2023, the Company did not have a significant amount of investment securities that were past due or on nonaccrual status.
The amortized cost and fair value of the Company's debt securities by contractual maturities are shown below. MBS are shown separately as individual MBS are comprised of pools of loans with varying maturities. Therefore, these securities are listed separately in the maturity summary.
| | | | | | | | | | | | | | |
| | June 30, 2023 |
| | Amortized Cost | | Estimated Fair Value |
| | (in millions) |
| Held-to-maturity | | | | |
| Due in one year or less | | $ | 22 | | | $ | 22 | |
| After one year through five years | | 6 | | | 6 | |
| After five years through ten years | | 33 | | | 31 | |
| After ten years | | 1,114 | | | 975 | |
| Mortgage-backed securities | | 192 | | | 152 | |
| Total HTM securities | | $ | 1,367 | | | $ | 1,186 | |
| | | | |
| Available-for-sale | | | | |
| Due in one year or less | | $ | 2,286 | | | $ | 2,285 | |
| After one year through five years | | 166 | | | 149 | |
| After five years through ten years | | 898 | | | 832 | |
| After ten years | | 2,523 | | | 2,399 | |
| Mortgage-backed securities | | 3,581 | | | 2,966 | |
| Total AFS securities | | $ | 9,454 | | | $ | 8,631 | |
The following table presents gross gains and losses on sales of investment securities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | |
| | 2023 | | 2022 | | 2023 | | 2022 | | |
| | (in millions) | | |
| Available-for-sale securities | | | | | | | | | | |
| Gross gains | | $ | 0.1 | | | $ | 0.4 | | | $ | 3.5 | | | $ | 7.3 | | | |
| Gross losses | | (13.7) | | | — | | | (29.6) | | | — | | | |
| Net (losses) gains on AFS securities | | $ | (13.6) | | | $ | 0.4 | | | $ | (26.1) | | | $ | 7.3 | | | |
| | | | | | | | | | |
| Equity securities | | | | | | | | | | |
| Gross gains | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | |
| Gross losses | | — | | | (0.6) | | | — | | | (0.6) | | | |
| Net losses on equity securities | | $ | — | | | $ | (0.6) | | | $ | — | | | $ | (0.6) | | | |
During the three months ended June 30, 2023, the Company sold securities with a carrying value of $355 million and recognized a net loss of $13.6 million. During the six months ended June 30, 2023, the Company sold securities with a carrying value of $814 million and recognized a net loss of $26.1 million. Sales of CLOs were executed as part of the Company's balance sheet repositioning strategy and resulted in the gross losses above. Sales of MBS and tax-exempt municipal securities were completed to secure gains. During the three and six months ended June 30, 2022, the Company sold securities with a carrying value of $22 million and $107 million, respectively, and incurred a net loss of $0.2 million and a net gain of $6.7 million.
3. LOANS HELD FOR SALE
The Company purchases and originates residential mortgage loans to be sold or securitized through its AmeriHome mortgage banking business channel. In addition, as of March 31, 2023, the Company transferred $5.9 billion of loans (primarily commercial and industrial loans) to HFS. During the three months ended June 30, 2023, the Company successfully completed loan dispositions from this transferred loan pool totaling $3.5 billion and transferred a net $0.7 billion of HFS loans back to HFI at the end of the period as a result of a change in management's intentions. As of June 30, 2023, $1.8 billion of these loans remain classified as HFS.
The following is a summary of loans HFS by type:
| | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
| | (in millions) |
| Government-insured or guaranteed: | | | | |
| EBO (1) | | $ | 3 | | | $ | — | |
| Non-EBO | | 816 | | | 591 | |
| Total government-insured or guaranteed | | $ | 819 | | | $ | 591 | |
| Agency-conforming | | 538 | | | 593 | |
| Total government-insured and agency-conforming | | $ | 1,357 | | | $ | 1,184 | |
| Transferred to HFS: | | | | |
| | | | |
| | | | |
| | | | |
| Commercial and industrial | | $ | 1,619 | | | $ | — | |
| Construction | | 134 | | | — | |
| Residential | | 46 | | | — | |
| Total transferred to HFS | | $ | 1,799 | | | $ | — | |
| Total loans HFS | | $ | 3,156 | | | $ | 1,184 | |
(1) EBO loans are delinquent FHA, VA, or USDA loans repurchased under the terms of the GNMA MBS program that can be repooled or resold when loans are brought current either through the borrower's reperformance or through completion of a loan modification.
If management’s intent or ability to hold loans for investment has changed, such loans will be transferred to HFS. Loans transferred from HFI to HFS are transferred at the lower of its amortized cost basis (adjusted for any charge-offs) or fair value. If the amortized cost basis of the transferred loan exceeds its fair value, a valuation allowance equal to the difference in these amounts will be established on the transfer date and any subsequent changes in the valuation allowance will be recognized in earnings. Any ACL previously recorded on transferred loans is reversed and recognized in earnings at the time of the transfer.
The following is a summary of the net gain on loan purchase, origination, and sale activities on residential mortgage loans to be sold or securitized:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| Mortgage servicing rights capitalized upon sale of loans | | $ | 244.8 | | | $ | 193.4 | | | $ | 387.2 | | | $ | 397.5 | |
| Net proceeds from sale of loans (1) | | (230.6) | | | (361.7) | | | (338.0) | | | (698.6) | |
| Provision for and change in estimate of liability for losses under representations and warranties, net | | 0.3 | | | 0.8 | | | 2.7 | | | 1.6 | |
| Change in fair value | | (9.7) | | | 59.3 | | | (3.1) | | | (6.9) | |
| | | | | | | | |
| Change in fair value of derivatives: | | | | | | | | |
| Unrealized gain (loss) on derivatives | | 37.2 | | | (49.8) | | | 15.0 | | | 31.4 | |
| Realized gain on derivatives | | 4.9 | | | 167.9 | | | 2.5 | | | 303.5 | |
| Total change in fair value of derivatives | | 42.1 | | | 118.1 | | | 17.5 | | | 334.9 | |
| Net gain on residential mortgage loans HFS | | $ | 46.9 | | | $ | 9.9 | | | $ | 66.3 | | | $ | 28.5 | |
| Loan acquisition and origination fees | | 15.4 | | | 17.3 | | | 27.4 | | | 35.6 | |
| Net gain on loan origination and sale activities | | $ | 62.3 | | | $ | 27.2 | | | $ | 93.7 | | | $ | 64.1 | |
(1) Represents the difference between cash proceeds received upon settlement and loan basis.
4. LOANS, LEASES AND ALLOWANCE FOR CREDIT LOSSES
The composition of the Company's HFI loan portfolio is as follows:
| | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
| | (in millions) |
| Warehouse lending | | $ | 5,549 | | | $ | 5,561 | |
| Municipal & nonprofit | | 1,558 | | | 1,524 | |
| Tech & innovation | | 2,401 | | | 2,293 | |
| Equity fund resources | | 931 | | | 3,717 | |
| Other commercial and industrial | | 6,396 | | | 7,793 | |
| CRE - owner occupied | | 1,648 | | | 1,656 | |
| Hotel franchise finance | | 4,101 | | | 3,807 | |
| Other CRE - non-owner occupied | | 5,792 | | | 5,457 | |
| Residential | | 13,502 | | | 13,996 | |
| Residential - EBO | | 1,432 | | | 1,884 | |
| Construction and land development | | 4,403 | | | 3,995 | |
| Other | | 162 | | | 179 | |
| Total loans HFI | | 47,875 | | | 51,862 | |
| Allowance for credit losses | | (321) | | | (310) | |
| Total loans HFI, net of allowance | | $ | 47,554 | | | $ | 51,552 | |
Loans classified as HFI are stated at the amount of unpaid principal, adjusted for net deferred fees and costs, premiums and discounts on acquired and purchased loans, and an ACL. Net deferred loan fees of $115 million and $141 million reduced the carrying value of loans as of June 30, 2023 and December 31, 2022, respectively. Net unamortized purchase premiums on acquired and purchased loans of $187 million and $195 million increased the carrying value of loans as of June 30, 2023 and December 31, 2022, respectively.
Nonaccrual and Past Due Loans
Loans are placed on nonaccrual status when management determines that the full repayment of principal and collection of interest according to contractual terms is no longer likely, generally when the loan becomes 90 days or more past due.
The following tables present nonperforming loan balances by loan portfolio segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 |
| | Nonaccrual with No Allowance for Credit Loss | | Nonaccrual with an Allowance for Credit Loss | | Total Nonaccrual | | Loans Past Due 90 Days or More and Still Accruing |
| | (in millions) |
| | | | | | | | |
| Municipal & nonprofit | | $ | 6 | | | $ | 7 | | | $ | 13 | | | $ | — | |
| Tech & innovation | | — | | | 7 | | | 7 | | | — | |
| | | | | | | | |
| Other commercial and industrial | | 59 | | | 23 | | | 82 | | | — | |
| CRE - owner occupied | | 16 | | | 2 | | | 18 | | | — | |
| | | | | | | | |
| Other CRE - non-owner occupied | | 3 | | | 75 | | | 78 | | | — | |
| Residential | | — | | | 58 | | | 58 | | | — | |
| Residential - EBO | | — | | | — | | | — | | | 481 | |
| | | | | | | | |
| | | | | | | | |
| Total | | $ | 84 | | | $ | 172 | | | $ | 256 | | | $ | 481 | |
Loans contractually delinquent by 90 days or more and still accruing totaled $481 million at June 30, 2023 and consisted of government guaranteed EBO residential loans.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Nonaccrual with No Allowance for Credit Loss | | Nonaccrual with an Allowance for Credit Loss | | Total Nonaccrual | | Loans Past Due 90 Days or More and Still Accruing |
| | (in millions) |
| | | | | | | | |
| Municipal & nonprofit | | $ | — | | | $ | 7 | | | $ | 7 | | | $ | — | |
| Tech & innovation | | — | | | 1 | | | 1 | | | — | |
| | | | | | | | |
| Other commercial and industrial | | 1 | | | 23 | | | 24 | | | — | |
| CRE - owner occupied | | 10 | | | 2 | | | 12 | | | — | |
| Hotel franchise finance | | — | | | 10 | | | 10 | | | — | |
| Other CRE - non-owner occupied | | 5 | | | 3 | | | 8 | | | — | |
| Residential | | — | | | 19 | | | 19 | | | — | |
| Residential - EBO | | — | | | — | | | — | | | 582 | |
| Construction and land development | | 4 | | | — | | | 4 | | | — | |
| | | | | | | | |
| Total | | $ | 20 | | | $ | 65 | | | $ | 85 | | | $ | 582 | |
Loans contractually delinquent by 90 days or more and still accruing totaled $582 million at December 31, 2022 and consisted of government guaranteed EBO residential loans.
The reduction in interest income associated with loans on nonaccrual status was approximately $2.8 million and $1.2 million for the three months ended June 30, 2023 and 2022, respectively, and $3.6 million and $2.3 million for the six months ended June 30, 2023 and 2022, respectively.
The following table presents an aging analysis of past due loans by loan portfolio segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 |
| | Current | | 30-59 Days
Past Due | | 60-89 Days
Past Due | | Over 90 days
Past Due | | Total
Past Due | | Total |
| | (in millions) |
| Warehouse lending | | $ | 5,549 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 5,549 | |
| Municipal & nonprofit | | 1,558 | | | — | | | — | | | — | | | — | | | 1,558 | |
| Tech & innovation | | 2,401 | | | — | | | — | | | — | | | — | | | 2,401 | |
| Equity fund resources | | 931 | | | — | | | — | | | — | | | — | | | 931 | |
| Other commercial and industrial | | 6,396 | | | — | | | — | | | — | | | — | | | 6,396 | |
| CRE - owner occupied | | 1,648 | | | — | | | — | | | — | | | — | | | 1,648 | |
| Hotel franchise finance | | 4,101 | | | — | | | — | | | — | | | — | | | 4,101 | |
| Other CRE - non-owner occupied | | 5,792 | | | — | | | — | | | — | | | — | | | 5,792 | |
| Residential | | 13,388 | | | 94 | | | 20 | | | — | | | 114 | | | 13,502 | |
| Residential - EBO | | 662 | | | 173 | | | 116 | | | 481 | | | 770 | | | 1,432 | |
| Construction and land development | | 4,396 | | | 7 | | | — | | | — | | | 7 | | | 4,403 | |
| Other | | 162 | | | — | | | — | | | — | | | — | | | 162 | |
| Total loans | | $ | 46,984 | | | $ | 274 | | | $ | 136 | | | $ | 481 | | | $ | 891 | | | $ | 47,875 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Current | | 30-59 Days
Past Due | | 60-89 Days
Past Due | | Over 90 days
Past Due | | Total
Past Due | | Total |
| | (in millions) |
| Warehouse lending | | $ | 5,561 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 5,561 | |
| Municipal & nonprofit | | 1,524 | | | — | | | — | | | — | | | — | | | 1,524 | |
| Tech & innovation | | 2,270 | | | 23 | | | — | | | — | | | 23 | | | 2,293 | |
| Equity fund resources | | 3,717 | | | — | | | — | | | — | | | — | | | 3,717 | |
| Other commercial and industrial | | 7,791 | | | 2 | | | — | | | — | | | 2 | | | 7,793 | |
| CRE - owner occupied | | 1,656 | | | — | | | — | | | — | | | — | | | 1,656 | |
| Hotel franchise finance | | 3,807 | | | — | | | — | | | — | | | — | | | 3,807 | |
| Other CRE - non-owner occupied | | 5,454 | | | 3 | | | — | | | — | | | 3 | | | 5,457 | |
| Residential | | 13,955 | | | 37 | | | 4 | | | — | | | 41 | | | 13,996 | |
| Residential - EBO | | 969 | | | 217 | | | 116 | | | 582 | | | 915 | | | 1,884 | |
| Construction and land development | | 3,995 | | | — | | | — | | | — | | | — | | | 3,995 | |
| Other | | 178 | | | 1 | | | — | | | — | | | 1 | | | 179 | |
| Total loans | | $ | 50,877 | | | $ | 283 | | | $ | 120 | | | $ | 582 | | | $ | 985 | | | $ | 51,862 | |
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually to classify the loans as to credit risk. This analysis is performed on a quarterly basis. The following tables present risk ratings by loan portfolio segment and origination year. The origination year is the year of origination or renewal.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loan Amortized Cost Basis by Origination Year | | Revolving Loans Amortized Cost Basis | | Total |
| As of and for the six months ended June 30, 2023 | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | |
| (in millions) |
| Warehouse lending | | | | | | | | | | | | | | | |
| Pass | $ | 387 | | | $ | 248 | | | $ | 320 | | | $ | 293 | | | $ | — | | | $ | — | | | $ | 4,301 | | | $ | 5,549 | |
| Special mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Classified | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | $ | 387 | | | $ | 248 | | | $ | 320 | | | $ | 293 | | | $ | — | | | $ | — | | | $ | 4,301 | | | $ | 5,549 | |
| Current period gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | |
| Municipal & nonprofit | | | | | | | | | | | | | | |
| Pass | $ | 25 | | | $ | 131 | | | $ | 187 | | | $ | 186 | | | $ | 71 | | | $ | 927 | | | $ | — | | | $ | 1,527 | |
| Special mention | — | | | 7 | | | — | | | — | | | — | | | 11 | | | — | | | 18 | |
| Classified | — | | | — | | | — | | | — | | | 6 | | | 7 | | | — | | | 13 | |
| Total | $ | 25 | | | $ | 138 | | | $ | 187 | | | $ | 186 | | | $ | 77 | | | $ | 945 | | | $ | — | | | $ | 1,558 | |
| Current period gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | |
| Tech & innovation | | | | | | | | | | | | | | | |
| Pass | $ | 226 | | | $ | 774 | | | $ | 275 | | | $ | 77 | | | $ | 53 | | | $ | 1 | | | $ | 908 | | | $ | 2,314 | |
| Special mention | 12 | | | 32 | | | — | | | 6 | | | — | | | — | | | 17 | | | 67 | |
| Classified | 6 | | | 5 | | | 6 | | | 3 | | | — | | | — | | | — | | | 20 | |
| Total | $ | 244 | | | $ | 811 | | | $ | 281 | | | $ | 86 | | | $ | 53 | | | $ | 1 | | | $ | 925 | | | $ | 2,401 | |
| Current period gross charge-offs | $ | 2 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 2 | |
| | | | | | | | | | | | | | | |
| Equity fund resources | | | | | | | | | | | | | | | |
| Pass | $ | 116 | | | $ | 89 | | | $ | 48 | | | $ | 3 | | | $ | 12 | | | $ | 4 | | | $ | 659 | | | $ | 931 | |
| Special mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Classified | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | $ | 116 | | | $ | 89 | | | $ | 48 | | | $ | 3 | | | $ | 12 | | | $ | 4 | | | $ | 659 | | | $ | 931 | |
| Current period gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | |
| Other commercial and industrial | | | | | | | | | | | | | | |
| Pass | $ | 961 | | | $ | 1,804 | | | $ | 513 | | | $ | 194 | | | $ | 112 | | | $ | 284 | | | $ | 2,361 | | | $ | 6,229 | |
| Special mention | 19 | | | 47 | | | 15 | | | — | | | — | | | — | | | — | | | 81 | |
| Classified | — | | | 27 | | | 47 | | | 3 | | | 1 | | | 1 | | | 7 | | | 86 | |
| Total | $ | 980 | | | $ | 1,878 | | | $ | 575 | | | $ | 197 | | | $ | 113 | | | $ | 285 | | | $ | 2,368 | | | $ | 6,396 | |
| Current period gross charge-offs | $ | — | | | $ | 3 | | | $ | 6 | | | $ | 4 | | | $ | — | | | $ | — | | | $ | — | | | $ | 13 | |
| | | | | | | | | | | | | | | |
| CRE - owner occupied | | | | | | | | | | | | | | | |
| Pass | $ | 57 | | | $ | 349 | | | $ | 359 | | | $ | 169 | | | $ | 142 | | | $ | 510 | | | $ | 35 | | | $ | 1,621 | |
| Special mention | 2 | | | — | | | — | | | — | | | 1 | | | 1 | | | — | | | 4 | |
| Classified | 3 | | | — | | | 6 | | | 3 | | | 4 | | | 7 | | | — | | | 23 | |
| Total | $ | 62 | | | $ | 349 | | | $ | 365 | | | $ | 172 | | | $ | 147 | | | $ | 518 | | | $ | 35 | | | $ | 1,648 | |
| Current period gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | |
| Hotel franchise finance | | | | | | | | | | | | | | |
| Pass | $ | 439 | | | $ | 1,751 | | | $ | 663 | | | $ | 95 | | | $ | 465 | | | $ | 251 | | | $ | 118 | | | $ | 3,782 | |
| Special mention | — | | | — | | | 40 | | | — | | | 40 | | | 21 | | | — | | | 101 | |
| Classified | 27 | | | 9 | | | 20 | | | 26 | | | 112 | | | 24 | | | — | | | 218 | |
| Total | $ | 466 | | | $ | 1,760 | | | $ | 723 | | | $ | 121 | | | $ | 617 | | | $ | 296 | | | $ | 118 | | | $ | 4,101 | |
| Current period gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loan Amortized Cost Basis by Origination Year | | Revolving Loans Amortized Cost Basis | | Total |
| As of and for the six months ended June 30, 2023 | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | |
| (in millions) |
| | | | | | | | | | | | | | | |
| Other CRE - non-owner occupied | | | | | | | | | | | | | | |
| Pass | $ | 1,028 | | | $ | 2,121 | | | $ | 772 | | | $ | 670 | | | $ | 219 | | | $ | 277 | | | $ | 265 | | | $ | 5,352 | |
| Special mention | 16 | | | 150 | | | 72 | | | 38 | | | 29 | | | — | | | 1 | | | 306 | |
| Classified | — | | | — | | | 96 | | | — | | | 14 | | | 4 | | | 20 | | | 134 | |
| Total | $ | 1,044 | | | $ | 2,271 | | | $ | 940 | | | $ | 708 | | | $ | 262 | | | $ | 281 | | | $ | 286 | | | $ | 5,792 | |
| Current period gross charge-offs | $ | — | | | $ | — | | | $ | 2 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 2 | |
| | | | | | | | | | | | | | | |
| Residential | | | | | | | | | | | | | | | |
| Pass | $ | 177 | | | $ | 3,687 | | | $ | 8,207 | | | $ | 847 | | | $ | 284 | | | $ | 215 | | | $ | 27 | | | $ | 13,444 | |
| Special mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Classified | — | | | 18 | | | 32 | | | 3 | | | 3 | | | 2 | | | — | | | 58 | |
| Total | $ | 177 | | | $ | 3,705 | | | $ | 8,239 | | | $ | 850 | | | $ | 287 | | | $ | 217 | | | $ | 27 | | | $ | 13,502 | |
| Current period gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | |
| Residential - EBO | | | | | | | | | | | | | | | |
| Pass | $ | — | | | $ | 9 | | | $ | 248 | | | $ | 591 | | | $ | 291 | | | $ | 293 | | | $ | — | | | $ | 1,432 | |
| Special mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Classified | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | $ | — | | | $ | 9 | | | $ | 248 | | | $ | 591 | | | $ | 291 | | | $ | 293 | | | $ | — | | | $ | 1,432 | |
| Current period gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | |
| Construction and land development | | | | | | | | | | | | | | |
| Pass | $ | 736 | | | $ | 1,859 | | | $ | 497 | | | $ | 138 | | | $ | — | | | $ | 2 | | | $ | 1,026 | | | $ | 4,258 | |
| Special mention | — | | | — | | | 5 | | | 112 | | | — | | | — | | | — | | | 117 | |
| Classified | — | | | — | | | 28 | | | — | | | — | | | — | | | — | | | 28 | |
| Total | $ | 736 | | | $ | 1,859 | | | $ | 530 | | | $ | 250 | | | $ | — | | | $ | 2 | | | $ | 1,026 | | | $ | 4,403 | |
| Current period gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | |
| Other | | | | | | | | | | | | | | | |
| Pass | $ | 2 | | | $ | 14 | | | $ | 5 | | | $ | — | | | $ | 4 | | | $ | 66 | | | $ | 71 | | | $ | 162 | |
| Special mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Classified | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | $ | 2 | | | $ | 14 | | | $ | 5 | | | $ | — | | | $ | 4 | | | $ | 66 | | | $ | 71 | | | $ | 162 | |
| Current period gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | |
| Total by Risk Category | | | | | | | | | | | | | | |
| Pass | $ | 4,154 | | | $ | 12,836 | | | $ | 12,094 | | | $ | 3,263 | | | $ | 1,653 | | | $ | 2,830 | | | $ | 9,771 | | | $ | 46,601 | |
| Special mention | 49 | | | 236 | | | 132 | | | 156 | | | 70 | | | 33 | | | 18 | | | 694 | |
| Classified | 36 | | | 59 | | | 235 | | | 38 | | | 140 | | | 45 | | | 27 | | | 580 | |
| Total | $ | 4,239 | | | $ | 13,131 | | | $ | 12,461 | | | $ | 3,457 | | | $ | 1,863 | | | $ | 2,908 | | | $ | 9,816 | | | $ | 47,875 | |
| Current period gross charge-offs | $ | 2 | | | $ | 3 | | | $ | 8 | | | $ | 4 | | | $ | — | | | $ | — | | | $ | — | | | $ | 17 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loan Amortized Cost Basis by Origination Year | | Revolving Loans Amortized Cost Basis | | Total |
| December 31, 2022 | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | |
| (in millions) |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Warehouse lending | | | | | | | | | | | | | | | |
| Pass | $ | 397 | | | $ | 41 | | | $ | 152 | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,928 | | | $ | 5,518 | |
| Special mention | 43 | | | — | | | — | | | — | | | — | | | — | | | — | | | 43 | |
| Classified | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | $ | 440 | | | $ | 41 | | | $ | 152 | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,928 | | | $ | 5,561 | |
| | | | | | | | | | | | | | | |
| Municipal & nonprofit | | | | | | | | | | | | | | | |
| Pass | $ | 107 | | | $ | 185 | | | $ | 187 | | | $ | 78 | | | $ | 43 | | | $ | 917 | | | $ | — | | | $ | 1,517 | |
| Special mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Classified | — | | | — | | | — | | | — | | | — | | | 7 | | | — | | | 7 | |
| Total | $ | 107 | | | $ | 185 | | | $ | 187 | | | $ | 78 | | | $ | 43 | | | $ | 924 | | | $ | — | | | $ | 1,524 | |
| | | | | | | | | | | | | | | |
| Tech & innovation | | | | | | | | | | | | | | | |
| Pass | $ | 813 | | | $ | 374 | | | $ | 87 | | | $ | 66 | | | $ | 4 | | | $ | 1 | | | $ | 853 | | | $ | 2,198 | |
| Special mention | 36 | | | 22 | | | 3 | | | — | | | — | | | — | | | 20 | | | 81 | |
| Classified | 2 | | | 12 | | | — | | | — | | | — | | | — | | | — | | | 14 | |
| Total | $ | 851 | | | $ | 408 | | | $ | 90 | | | $ | 66 | | | $ | 4 | | | $ | 1 | | | $ | 873 | | | $ | 2,293 | |
| | | | | | | | | | | | | | | |
| Equity fund resources | | | | | | | | | | | | | | | |
| Pass | $ | 1,020 | | | $ | 1,189 | | | $ | 191 | | | $ | 16 | | | $ | — | | | $ | — | | | $ | 1,301 | | | $ | 3,717 | |
| Special mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Classified | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | $ | 1,020 | | | $ | 1,189 | | | $ | 191 | | | $ | 16 | | | $ | — | | | $ | — | | | $ | 1,301 | | | $ | 3,717 | |
| | | | | | | | | | | | | | | |
| Other commercial and industrial | | | | | | | | | | | | | | | |
| Pass | $ | 2,968 | | | $ | 1,272 | | | $ | 262 | | | $ | 277 | | | $ | 312 | | | $ | 206 | | | $ | 2,406 | | | $ | 7,703 | |
| Special mention | — | | | 44 | | | — | | | — | | | — | | | — | | | 3 | | | 47 | |
| Classified | 3 | | | 21 | | | 10 | | | 3 | | | 3 | | | 1 | | | 2 | | | 43 | |
| Total | $ | 2,971 | | | $ | 1,337 | | | $ | 272 | | | $ | 280 | | | $ | 315 | | | $ | 207 | | | $ | 2,411 | | | $ | 7,793 | |
| | | | | | | | | | | | | | | |
| CRE - owner occupied | | | | | | | | | | | | | | | |
| Pass | $ | 338 | | | $ | 359 | | | $ | 174 | | | $ | 157 | | | $ | 211 | | | $ | 339 | | | $ | 29 | | | $ | 1,607 | |
| Special mention | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
| Classified | — | | | 14 | | | 7 | | | 1 | | | 5 | | | 10 | | | 11 | | | 48 | |
| Total | $ | 338 | | | $ | 373 | | | $ | 181 | | | $ | 158 | | | $ | 216 | | | $ | 350 | | | $ | 40 | | | $ | 1,656 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Hotel franchise finance | | | | | | | | | | | | | | | |
| Pass | $ | 1,762 | | | $ | 726 | | | $ | 54 | | | $ | 528 | | | $ | 290 | | | $ | 103 | | | $ | 118 | | | $ | 3,581 | |
| Special mention | — | | | — | | | 26 | | | — | | | — | | | — | | | — | | | 26 | |
| Classified | 18 | | | 20 | | | — | | | 117 | | | 45 | | | — | | | — | | | 200 | |
| Total | $ | 1,780 | | | $ | 746 | | | $ | 80 | | | $ | 645 | | | $ | 335 | | | $ | 103 | | | $ | 118 | | | $ | 3,807 | |
| | | | | | | | | | | | | | | |
| Other CRE - non-owner occupied | | | | | | | | | | | | | | | |
| Pass | $ | 2,344 | | | $ | 1,201 | | | $ | 870 | | | $ | 264 | | | $ | 160 | | | $ | 218 | | | $ | 315 | | | $ | 5,372 | |
| Special mention | 3 | | | 38 | | | — | | | 12 | | | — | | | — | | | 1 | | | 54 | |
| Classified | — | | | 4 | | | — | | | 12 | | | 10 | | | 5 | | | — | | | 31 | |
| Total | $ | 2,347 | | | $ | 1,243 | | | $ | 870 | | | $ | 288 | | | $ | 170 | | | $ | 223 | | | $ | 316 | | | $ | 5,457 | |
| | | | | | | | | | | | | | | |
| Residential | | | | | | | | | | | | | | | |
| Pass | $ | 4,041 | | | $ | 8,474 | | | $ | 878 | | | $ | 308 | | | $ | 150 | | | $ | 90 | | | $ | 36 | | | $ | 13,977 | |
| Special mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Classified | 6 | | | 9 | | | — | | | 3 | | | 1 | | | — | | | — | | | 19 | |
| Total | $ | 4,047 | | | $ | 8,483 | | | $ | 878 | | | $ | 311 | | | $ | 151 | | | $ | 90 | | | $ | 36 | | | $ | 13,996 | |
| | | | | | | | | | | | | | | |
| Residential - EBO | | | | | | | | | | | | | | | |
| Pass | $ | 3 | | | $ | 268 | | | $ | 712 | | | $ | 454 | | | $ | 191 | | | $ | 256 | | | $ | — | | | $ | 1,884 | |
| Special mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Classified | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | $ | 3 | | | $ | 268 | | | $ | 712 | | | $ | 454 | | | $ | 191 | | | $ | 256 | | | $ | — | | | $ | 1,884 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loan Amortized Cost Basis by Origination Year | | Revolving Loans Amortized Cost Basis | | Total |
| December 31, 2022 | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | |
| (in millions) |
| Construction and land development | | | | | | | | | | | | | | |
| Pass | $ | 1,533 | | | $ | 815 | | | $ | 273 | | | $ | 14 | | | $ | — | | | $ | — | | | $ | 1,258 | | | $ | 3,893 | |
| Special mention | — | | | — | | | 98 | | | — | | | — | | | — | | | — | | | 98 | |
| Classified | — | | | — | | | — | | | 4 | | | — | | | — | | | — | | | 4 | |
| Total | $ | 1,533 | | | $ | 815 | | | $ | 371 | | | $ | 18 | | | $ | — | | | $ | — | | | $ | 1,258 | | | $ | 3,995 | |
| | | | | | | | | | | | | | | |
| Other | | | | | | | | | | | | | | | |
| Pass | $ | 23 | | | $ | 10 | | | $ | 13 | | | $ | 5 | | | $ | 2 | | | $ | 61 | | | $ | 64 | | | $ | 178 | |
| Special mention | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
| Classified | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | $ | 23 | | | $ | 10 | | | $ | 13 | | | $ | 5 | | | $ | 2 | | | $ | 62 | | | $ | 64 | | | $ | 179 | |
| | | | | | | | | | | | | | | |
| Total by Risk Category | | | | | | | | | | | | | | | |
| Pass | $ | 15,349 | | | $ | 14,914 | | | $ | 3,853 | | | $ | 2,167 | | | $ | 1,363 | | | $ | 2,191 | | | $ | 11,308 | | | $ | 51,145 | |
| Special mention | 82 | | | 104 | | | 127 | | | 12 | | | — | | | 2 | | | 24 | | | 351 | |
| Classified | 29 | | | 80 | | | 17 | | | 140 | | | 64 | | | 23 | | | 13 | | | 366 | |
| Total | $ | 15,460 | | | $ | 15,098 | | | $ | 3,997 | | | $ | 2,319 | | | $ | 1,427 | | | $ | 2,216 | | | $ | 11,345 | | | $ | 51,862 | |
Restructurings for Borrowers Experiencing Financial Difficulty
The Company adopted the amendments in ASU 2022-02, which eliminated accounting guidance on TDR loans for creditors and requires enhanced disclosures for loan modifications to borrowers experiencing financial difficulty that were made on or after January 1, 2023. See “Note 1. Summary of Significant Accounting Policies” of these Notes to Unaudited Financial Statements for further discussion of the amendments in this update.
The following table presents the amortized cost basis of loans HFI that were modified during the period by loan portfolio segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost Basis at June 30, 2023 |
| | Payment Delay and Term Extension | | Term Extension | | Payment Delay | | Total | | % of Total Class of Financing Receivable |
| Three Months Ended | | (dollars in millions) |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Other commercial and industrial | | $ | — | | | $ | 27 | | | $ | — | | | $ | 27 | | | 0.4 | % |
| | | | | | | | | | |
| Hotel franchise finance | | — | | | 9 | | | — | | | 9 | | | 0.2 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Construction and land development | | — | | | 28 | | | — | | | 28 | | | 0.6 | |
| | | | | | | | | | |
| Total | | $ | — | | | $ | 64 | | | $ | — | | | $ | 64 | | | 0.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost Basis at June 30, 2023 |
| | Payment Delay and Term Extension | | Term Extension | | Payment Delay | | Total | | % of Total Class of Financing Receivable |
| Six Months Ended | | (dollars in millions) |
| | | | | | | | | | |
| | | | | | | | | | |
| Tech & innovation | | $ | 2 | | | $ | — | | | $ | 5 | | | $ | 7 | | | 0.3 | % |
| | | | | | | | | | |
| Other commercial and industrial | | — | | | 27 | | | — | | | 27 | | | 0.4 | |
| | | | | | | | | | |
| Hotel franchise finance | | — | | | 27 | | | — | | | 27 | | | 0.7 | |
| | | | | | | | | | |
| Residential | | — | | | — | | | 1 | | | 1 | | | 0.0 | |
| | | | | | | | | | |
| Construction and land development | | — | | | 28 | | | — | | | 28 | | | 0.6 | |
| | | | | | | | | | |
| Total | | $ | 2 | | | $ | 82 | | | $ | 6 | | | $ | 90 | | | 0.2 | % |
The performance of these modified loans is monitored for 12 months following the modification. As of June 30, 2023, modified loans on nonaccrual status totaled $35 million and the remaining $55 million were current with contractual payments.
In the normal course of business, the Company also modifies EBO loans, which are delinquent FHA, VA, or USDA insured or guaranteed loans repurchased under the terms of the GNMA MBS program and can be repooled or resold when loans are brought current. During the three and six months ended June 30, 2023, the Company completed modifications of EBO loans with an amortized cost of $35 million and $92 million, respectively. These modifications were largely payment delays and term extensions, or both.
Troubled Debt Restructurings
Prior to the adoption of ASU 2022-02, the Company accounted for a modification to the contractual terms of a loan that resulted in granting a concession to a borrower experiencing financial difficulties as a TDR. The loan terms that were modified or restructured due to a borrower’s financial situation included, but were not limited to, a reduction in the stated interest rate, an extension of the maturity or renewal of the loan at an interest rate below current market, a reduction in the face amount of the debt, a reduction in the accrued interest, or deferral of interest payments. The majority of the Company's modifications were extensions in terms or deferral of payments which resulted in no lost principal or interest. Consistent with regulatory guidance, a TDR loan that was subsequently modified in another restructuring agreement but had shown sustained performance and classification as a TDR, was removed from TDR status provided that the modified terms were market-based at the time of modification.
The following table presents TDR loans by loan portfolio segment:
| | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Number of Loans | | Recorded Investment |
| |
| | | | |
| | | | |
| | | | |
| | | | |
| Other commercial and industrial | | 4 | | | $ | 2 | |
| CRE - owner occupied | | 1 | | | 1 | |
| Hotel franchise finance | | 1 | | | 10 | |
| Other CRE - non-owner occupied | | 1 | | | 1 | |
| | | | |
| | | | |
| | | | |
| | | | |
| Total | | 7 | | | $ | 14 | |
As of December 31, 2022, the ACL on TDR loans totaled $4 million and there were no outstanding commitments on TDR loans.
During the three months ended June 30, 2022, the Company had no new TDR loans. During the six months ended June 30, 2022, the Company had one new TDR loan with a recorded investment of $4 million. No principal amounts were forgiven and there were no waived fees or other expenses resulting from this TDR.
During the three and six months ended June 30, 2022, there were no loans for which there was a payment default within 12 months following the modification.
Collateral-Dependent Loans
The following table presents the amortized cost basis of collateral-dependent loans by loan portfolio segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
| | Real Estate Collateral | | Other Collateral | | Total | | Real Estate Collateral | | Other Collateral | | Total |
| | (in millions) |
| | | | | | | | | | | | |
| Municipal & nonprofit | | $ | — | | | $ | 13 | | | $ | 13 | | | $ | — | | | $ | 7 | | | $ | 7 | |
| Tech & innovation | | — | | | — | | | — | | | — | | | 6 | | | 6 | |
| | | | | | | | | | | | |
| Other commercial and industrial | | — | | | 11 | | | 11 | | | — | | | 30 | | | 30 | |
| CRE - owner occupied | | 18 | | | — | | | 18 | | | 42 | | | — | | | 42 | |
| Hotel franchise finance | | 174 | | | — | | | 174 | | | 186 | | | — | | | 186 | |
| Other CRE - non-owner occupied | | 133 | | | — | | | 133 | | | 27 | | | — | | | 27 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Construction and land development | | 28 | | | — | | | 28 | | | 4 | | | — | | | 4 | |
| | | | | | | | | | | | |
| Total | | $ | 353 | | | $ | 24 | | | $ | 377 | | | $ | 259 | | | $ | 43 | | | $ | 302 | |
The Company did not identify any significant changes in the extent to which collateral secures its collateral dependent loans, whether in the form of general deterioration or from other factors during the period ended June 30, 2023.
Allowance for Credit Losses
The ACL consists of the ACL on funded loans HFI and an ACL on unfunded loan commitments. The ACL on HTM securities is estimated separately from loans, see "Note 2. Investment Securities" of these Notes to Unaudited Consolidated Financial Statements for further discussion. Management considers the level of ACL to be a reasonable and supportable estimate of expected credit losses inherent within the Company's HFI loan portfolio as of June 30, 2023.
The below tables reflect the activity in the ACL on loans HFI by loan portfolio segment, which includes an estimate of future recoveries:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2023 |
| | Balance,
March 31, 2023 | | Provision for (Recovery of) Credit Losses | | | | Charge-offs | | Recoveries | | Balance,
June 30, 2023 |
| | (in millions) |
| Warehouse lending | | $ | 6.6 | | | $ | (1.4) | | | | | $ | — | | | $ | — | | | $ | 5.2 | |
| Municipal & nonprofit | | 18.4 | | | (1.9) | | | | | — | | | — | | | 16.5 | |
| Tech & innovation | | 36.4 | | | (2.8) | | | | | — | | | — | | | 33.6 | |
| Equity fund resources | | 3.3 | | | (1.6) | | | | | — | | | — | | | 1.7 | |
| Other commercial and industrial | | 51.1 | | | 5.9 | | | | | 6.0 | | | (0.8) | | | 51.8 | |
| CRE - owner occupied | | 8.6 | | | (0.6) | | | | | — | | | — | | | 8.0 | |
| Hotel franchise finance | | 47.7 | | | (2.0) | | | | | — | | | — | | | 45.7 | |
| Other CRE - non-owner occupied | | 66.4 | | | 25.9 | | | | | 2.2 | | | — | | | 90.1 | |
| Residential | | 31.7 | | | 2.2 | | | | | — | | | — | | | 33.9 | |
| Residential - EBO | | — | | | — | | | | | — | | | — | | | — | |
| Construction and land development | | 31.5 | | | 0.2 | | | | | — | | | — | | | 31.7 | |
| Other | | 3.0 | | | (0.1) | | | | | — | | | — | | | 2.9 | |
| Total | | $ | 304.7 | | | $ | 23.8 | | | | | $ | 8.2 | | | $ | (0.8) | | | $ | 321.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2023 |
| | Balance,
December 31, 2022 | | Provision for (Recovery of) Credit Losses | | | | Charge-offs | | Recoveries | | Balance,
June 30, 2023 |
| | (in millions) |
| Warehouse lending | | $ | 8.4 | | | $ | (3.2) | | | | | $ | — | | | $ | — | | | $ | 5.2 | |
| Municipal & nonprofit | | 15.9 | | | 0.6 | | | | | — | | | — | | | 16.5 | |
| Tech & innovation | | 30.8 | | | 4.6 | | | | | 1.8 | | | — | | | 33.6 | |
| Equity fund resources | | 6.4 | | | (4.7) | | | | | — | | | — | | | 1.7 | |
| Other commercial and industrial | | 85.9 | | | (24.8) | | | | | 13.3 | | | (4.0) | | | 51.8 | |
| CRE - owner occupied | | 7.1 | | | 0.9 | | | | | — | | | — | | | 8.0 | |
| Hotel franchise finance | | 46.9 | | | (1.2) | | | | | — | | | — | | | 45.7 | |
| Other CRE - non-owner occupied | | 47.4 | | | 44.9 | | | | | 2.2 | | | — | | | 90.1 | |
| Residential | | 30.4 | | | 3.5 | | | | | — | | | — | | | 33.9 | |
| Residential - EBO | | — | | | — | | | | | — | | | — | | | — | |
| Construction and land development | | 27.4 | | | 4.3 | | | | | — | | | — | | | 31.7 | |
| Other | | 3.1 | | | (0.1) | | | | | 0.1 | | | — | | | 2.9 | |
| Total | | $ | 309.7 | | | $ | 24.8 | | | | | $ | 17.4 | | | $ | (4.0) | | | $ | 321.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2022 |
| | Balance,
March 31, 2022 | | Provision for (Recovery of) Credit Losses | | | | Charge-offs | | Recoveries | | Balance,
June 30, 2022 |
| | (in millions) |
| Warehouse lending | | $ | 2.9 | | | $ | 0.8 | | | | | $ | — | | | $ | — | | | $ | 3.7 | |
| Municipal & nonprofit | | 13.4 | | | 0.2 | | | | | — | | | — | | | 13.6 | |
| Tech & innovation | | 28.0 | | | (2.6) | | | | | — | | | — | | | 25.4 | |
| Equity fund resources | | 6.6 | | | 7.4 | | | | | — | | | — | | | 14.0 | |
| Other commercial and industrial | | 115.7 | | | 5.1 | | | | | 2.3 | | | (0.7) | | | 119.2 | |
| CRE - owner occupied | | 8.1 | | | (0.7) | | | | | — | | | (0.1) | | | 7.5 | |
| Hotel franchise finance | | 30.6 | | | 3.2 | | | | | — | | | — | | | 33.8 | |
| Other CRE - non-owner occupied | | 15.3 | | | 6.8 | | | | | — | | | — | | | 22.1 | |
| Residential | | 23.8 | | | (5.0) | | | | | — | | | — | | | 18.8 | |
| Construction and land development | | 10.7 | | | 1.5 | | | | | — | | | — | | | 12.2 | |
| Other | | 2.5 | | | 0.3 | | | | | 0.1 | | | (0.2) | | | 2.9 | |
| Total | | $ | 257.6 | | | $ | 17.0 | | | | | $ | 2.4 | | | $ | (1.0) | | | $ | 273.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2022 |
| | Balance,
December 31, 2021 | | Provision for (Recovery of) Credit Losses | | | | Charge-offs | | Recoveries | | Balance,
June 30, 2022 |
| | (in millions) |
| Warehouse lending | | $ | 3.0 | | | $ | 0.7 | | | | | $ | — | | | $ | — | | | $ | 3.7 | |
| Municipal & nonprofit | | 13.7 | | | (0.1) | | | | | — | | | — | | | 13.6 | |
| Tech & innovation | | 25.7 | | | (2.3) | | | | | — | | | (2.0) | | | 25.4 | |
| Equity fund resources | | 9.6 | | | 4.4 | | | | | — | | | — | | | 14.0 | |
| Other commercial and industrial | | 103.6 | | | 19.4 | | | | | 4.9 | | | (1.1) | | | 119.2 | |
| CRE - owner occupied | | 10.6 | | | (3.2) | | | | | — | | | (0.1) | | | 7.5 | |
| Hotel franchise finance | | 41.5 | | | (7.7) | | | | | — | | | — | | | 33.8 | |
| Other CRE - non-owner occupied | | 16.9 | | | 5.2 | | | | | — | | | — | | | 22.1 | |
| Residential | | 12.5 | | | 6.3 | | | | | — | | | — | | | 18.8 | |
| Construction and land development | | 12.5 | | | (0.3) | | | | | — | | | — | | | 12.2 | |
| Other | | 2.9 | | | (0.1) | | | | | 0.1 | | | (0.2) | | | 2.9 | |
| Total | | $ | 252.5 | | | $ | 22.3 | | | | | $ | 5.0 | | | $ | (3.4) | | | $ | 273.2 | |
Accrued interest receivable of $296 million and $304 million at June 30, 2023 and December 31, 2022, respectively, was excluded from the estimate of credit losses. Whereas, accrued interest receivable related to the Company's Residential-EBO loan portfolio segment was included in the estimate of credit losses and had an allowance of $6 million and $9 million, as of June 30, 2023 and December 31, 2022, respectively.
In addition to the ACL on funded loans HFI, the Company maintains a separate ACL related to off-balance sheet credit exposures, including unfunded loan commitments. This allowance is included in Other liabilities on the Consolidated Balance Sheets.
The below table reflects the activity in the ACL on unfunded loan commitments:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| Balance, beginning of period | | $ | 44.8 | | | $ | 43.3 | | | $ | 47.0 | | | $ | 37.6 | |
| Provision for credit losses | | (3.7) | | | 10.5 | | | (5.9) | | | 16.2 | |
| Balance, end of period | | $ | 41.1 | | | $ | 53.8 | | | $ | 41.1 | | | $ | 53.8 | |
The following tables disaggregate the Company's ACL on funded loans HFI and loan balances by measurement methodology:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 |
| | Loans | | Allowance |
| | Collectively Evaluated for Credit Loss | | Individually Evaluated for Credit Loss | | Total | | Collectively Evaluated for Credit Loss | | Individually Evaluated for Credit Loss | | Total |
| | (in millions) |
| Warehouse lending | | $ | 5,549 | | | $ | — | | | $ | 5,549 | | | $ | 5.2 | | | $ | — | | | $ | 5.2 | |
| Municipal & nonprofit | | 1,545 | | | 13 | | | 1,558 | | | 14.0 | | | 2.5 | | | 16.5 | |
| Tech & innovation | | 2,383 | | | 18 | | | 2,401 | | | 30.1 | | | 3.5 | | | 33.6 | |
| Equity fund resources | | 931 | | | — | | | 931 | | | 1.7 | | | — | | | 1.7 | |
| Other commercial and industrial | | 6,312 | | | 84 | | | 6,396 | | | 46.3 | | | 5.5 | | | 51.8 | |
| CRE - owner occupied | | 1,628 | | | 20 | | | 1,648 | | | 8.0 | | | — | | | 8.0 | |
| Hotel franchise finance | | 3,884 | | | 217 | | | 4,101 | | | 45.7 | | | — | | | 45.7 | |
| Other CRE - non-owner occupied | | 5,659 | | | 133 | | | 5,792 | | | 87.2 | | | 2.9 | | | 90.1 | |
| Residential | | 13,502 | | | — | | | 13,502 | | | 33.9 | | | — | | | 33.9 | |
| Residential EBO | | 1,432 | | | — | | | 1,432 | | | — | | | — | | | — | |
| Construction and land development | | 4,375 | | | 28 | | | 4,403 | | | 31.7 | | | — | | | 31.7 | |
| Other | | 162 | | | — | | | 162 | | | 2.9 | | | — | | | 2.9 | |
| Total | | $ | 47,362 | | | $ | 513 | | | $ | 47,875 | | | $ | 306.7 | | | $ | 14.4 | | | $ | 321.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Loans | | Allowance |
| | Collectively Evaluated for Credit Loss | | Individually Evaluated for Credit Loss | | Total | | Collectively Evaluated for Credit Loss | | Individually Evaluated for Credit Loss | | Total |
| | (in millions) |
| Warehouse lending | | $ | 5,561 | | | $ | — | | | $ | 5,561 | | | $ | 8.4 | | | $ | — | | | $ | 8.4 | |
| Municipal & nonprofit | | 1,517 | | | 7 | | | 1,524 | | | 13.4 | | | 2.5 | | | 15.9 | |
| Tech & innovation | | 2,280 | | | 13 | | | 2,293 | | | 30.3 | | | 0.5 | | | 30.8 | |
| Equity fund resources | | 3,717 | | | — | | | 3,717 | | | 6.4 | | | — | | | 6.4 | |
| Other commercial and industrial | | 7,754 | | | 39 | | | 7,793 | | | 80.4 | | | 5.5 | | | 85.9 | |
| CRE - owner occupied | | 1,612 | | | 44 | | | 1,656 | | | 7.1 | | | — | | | 7.1 | |
| Hotel franchise finance | | 3,607 | | | 200 | | | 3,807 | | | 44.7 | | | 2.2 | | | 46.9 | |
| Other CRE - non-owner occupied | | 5,428 | | | 29 | | | 5,457 | | | 47.4 | | | — | | | 47.4 | |
| Residential | | 13,996 | | | — | | | 13,996 | | | 30.4 | | | — | | | 30.4 | |
| Residential EBO | | 1,884 | | | — | | | 1,884 | | | — | | | — | | | — | |
| Construction and land development | | 3,991 | | | 4 | | | 3,995 | | | 27.4 | | | — | | | 27.4 | |
| Other | | 179 | | | — | | | 179 | | | 3.1 | | | — | | | 3.1 | |
| Total | | $ | 51,526 | | | $ | 336 | | | $ | 51,862 | | | $ | 299.0 | | | $ | 10.7 | | | $ | 309.7 | |
Loan Purchases and Sales
During the three and six months ended June 30, 2023, loan purchases totaled $511 million and $1.0 billion, respectively, which consisted primarily of commercial and industrial and residential loans. Loan purchases during the three and six months ended June 30, 2022 totaled $3.1 billion and $5.5 billion, respectively, which consisted primarily of residential loans. There were no loans purchased with more-than-insignificant deterioration in credit quality during the three and six months ended June 30, 2023 and 2022.
The Company transferred $6.0 billion of loans HFI (primarily commercial and industrial loans) to HFS as of March 31, 2023. During the three months ended June 30, 2023, the Company successfully completed loan sales from this transferred loan pool totaling $2.6 billion and transferred a net $0.7 billion of HFS loans back to HFI at the end of the period as a result of a change in management's intentions.
The Company also transferred loans from HFI to HFS, where the loan sales settled during the period that the transfer was made. During the three and six months ended June 30, 2023, loans with a carrying value of approximately $212 million and $1.1 billion, respectively, were transferred. A net loss of $8.6 million and $25.9 million for the three and six months ended June 30, 2023, respectively, was recognized on these loan sales. During the three and six months ended June 30, 2022, the Company did not have significant sales of loans HFI.
5. MORTGAGE SERVICING RIGHTS
The following table presents the changes in fair value of the Company's MSR portfolio related to its mortgage banking business and other information related to its servicing portfolio:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in millions) |
| Balance, beginning of period | $ | 910 | | | $ | 950 | | | $ | 1,148 | | | $ | 698 | |
| | | | | | | |
| Additions from loans sold with servicing rights retained | 245 | | | 194 | | | 387 | | | 398 | |
| Carrying value of MSRs sold | (149) | | | (350) | | | (499) | | | (350) | |
| Change in fair value | 24 | | | 62 | | | 16 | | | 143 | |
| Mark to market adjustments | 1 | | | — | | | 4 | | | — | |
| Realization of cash flows | (24) | | | (30) | | | (49) | | | (63) | |
| Balance, end of period | $ | 1,007 | | | $ | 826 | | | $ | 1,007 | | | $ | 826 | |
| | | | | | | |
| Unpaid principal balance of mortgage loans serviced for others | $ | 59,705 | | | $ | 52,184 | | | | | |
Changes in the fair value of MSRs are recorded as Net loan servicing revenue in the Consolidated Income Statement. Due to the regulatory capital impact of MSRs on capital ratios, the Company sells certain MSRs and related servicing advances in the normal course of business. During the three months ended June 30, 2023, MSR sales had an aggregate net sales price of $150 million and the UPB of loans underlying these sales totaled $8.8 billion. During the six months ended June 30, 2023, MSR sales had an aggregate net sales price of $501 million and the UPB of loans underlying these sales totaled $28.3 billion. During the three and six months ended June 30, 2022, the Company sold MSRs for an aggregate net sales price of $350 million and the UPB of the loans underlying these sales totaled $24.1 billion. As of June 30, 2023 and December 31, 2022, the Company had a remaining receivable balance of $74 million and $39 million, respectively, related to holdbacks on MSR sales for servicing transfers, which were recorded in Other assets on the Consolidated Balance Sheet.
The Company receives loan servicing fees, net of subservicing costs, based on the UPB of the underlying loans. Loan servicing fees are collected from payments made by borrowers. The Company may receive other remuneration from rights to various borrower contracted fees, such as late charges, collateral reconveyance charges, and non-sufficient funds fees. Contractually specified servicing fees, late fees, and ancillary income associated with the Company's MSR portfolio totaled $54.0 million and $116.9 million for the three and six months ended June 30, 2023, respectively, and $48.9 million and $91.8 million for the three and six months ended June 30, 2022, respectively, which are recorded as Net loan servicing revenue in the Consolidated Income Statement.
In accordance with its contractual loan servicing obligations, the Company is required to advance funds to or on behalf of investors when borrowers do not make payments. The Company advances property taxes and insurance premiums for borrowers who have insufficient funds in escrow accounts, plus any other costs to preserve real estate properties. The Company may also advance funds to maintain, repair, and market foreclosed real estate properties. The Company is entitled to recover all or a portion of the advances from borrowers of reinstated and performing loans, from the proceeds of liquidated properties or from the government agency or GSE guarantor of charged-off loans. Servicing advances are charged-off when they are deemed to be uncollectible. As of June 30, 2023 and December 31, 2022, net servicing advances totaled $77 million and $102 million, respectively, which are recorded as Other assets on the Consolidated Balance Sheet.
The following table presents the effect of hypothetical changes in the fair value of MSRs caused by assumed immediate changes in interest rates, discount rates, and prepayment speeds that are used to determine fair value:
| | | | | | | | | | |
| | June 30, 2023 | | |
| | (in millions) |
| Fair value of mortgage servicing rights | | $ | 1,007 | | | |
| Increase (decrease) in fair value resulting from: | | | | |
| Interest rate change of 50 basis points | | | | |
| Adverse change | | (57) | | | |
| Favorable change | | 53 | | | |
| Discount rate change of 50 basis points | | | | |
| Increase | | (19) | | | |
| Decrease | | 20 | | | |
| Conditional prepayment rate change of 1% | | | | |
| Increase | | (26) | | | |
| Decrease | | 28 | | | |
| Cost to service change of 10% | | | | |
| Increase | | (12) | | | |
| Decrease | | 12 | | | |
Sensitivities are hypothetical changes in fair value and cannot be extrapolated because the relationship of changes in assumptions to changes in fair value may not be linear. In addition, the offsetting effect of hedging activities are not contemplated in these results and further, the effect of a variation in a particular assumption is calculated without changing any other assumptions, whereas a change in one factor may result in changes to another. Accordingly, no assurance can be given that actual results would be consistent with the results of these estimates. As a result, actual future changes in MSR values may differ significantly from those reported.
6. DEPOSITS
The table below summarizes deposits by type:
| | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
| | (in millions) |
| Non-interest-bearing demand deposits | | $ | 16,733 | | | $ | 19,691 | |
| Interest-bearing transaction accounts | | 12,646 | | | 9,507 | |
| Savings and money market accounts | | 13,085 | | | 19,397 | |
| Time certificates of deposit ($250,000 or more) | | 6,677 | | | 3,815 | |
| Other time deposits | | 1,900 | | | 1,234 | |
| Total deposits | | $ | 51,041 | | | $ | 53,644 | |
A summary of the contractual maturities for all time deposits as of June 30, 2023 is as follows:
| | | | | | | | |
| | |
| | (in millions) |
| 2023 | | $ | 4,972 | |
| 2024 | | 3,202 | |
| 2025 | | 400 | |
| 2026 | | 2 | |
| 2027 | | 1 | |
| | |
| | |
| Total | | $ | 8,577 | |
WAB is a participant in the IntraFi Network, a network that offers deposit placement services such as CDARS and ICS, and other reciprocal deposit networks which offer products that qualify large deposits for FDIC insurance. At June 30, 2023, the Company had $11.4 billion of reciprocal deposits, compared to $2.8 billion at December 31, 2022.
Brokered deposits provide an additional source of deposits and are placed with the Bank through third-party brokers. At June 30, 2023 and December 31, 2022, the Company reported wholesale brokered deposits of $18.3 billion and $4.8 billion, respectively. As of June 30, 2023, $11.4 billion of reciprocal deposits were included as brokered deposits. Although classified as brokered deposits, due to the reciprocal nature of these deposits, the Company believes that these deposits carry a lower risk of withdrawal and deposit volatility. To improve depositor stability, the Company undertook an initiative to encourage its depositors to move their accounts into reciprocal deposit structures. This significantly increased the Company's insured deposit ratio from 45% at December 31, 2022 to 77% at June 30, 2023.
In addition, deposits for which the Company provides account holders with earnings credits or referral fees totaled $14.9 billion and $12.9 billion at June 30, 2023 and December 31, 2022, respectively. The Company incurred $87.8 million and $17.3 million in deposit related costs on these deposits during the three months ended June 30, 2023 and 2022, respectively. The Company incurred $173.4 million and $26.0 million in deposit related costs on these deposits during the six months ended June 30, 2023 and 2022, respectively. These costs are reported as Deposit costs in non-interest expense. The increase in these costs from the prior year is due to an increase in average earnings credit rates as well as an increase in average deposit balances eligible for earnings credits or referral fees.
7. OTHER BORROWINGS
The following table summarizes the Company’s borrowings by type:
| | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
| | (in millions) |
| Short-Term: | | | | |
| Federal funds purchased | | $ | — | | | $ | 640 | |
| BTFP advances | | 1,300 | | | — | |
| FHLB advances | | 4,900 | | | 4,300 | |
| Warehouse borrowings | | 55 | | | — | |
| Repurchase agreements | | 2,482 | | | 27 | |
| Secured borrowings | | 62 | | | 25 | |
| Total short-term borrowings | | $ | 8,799 | | | $ | 4,992 | |
| Long-Term: | | | | |
| | | | |
| AmeriHome senior notes, net of fair value adjustment | | $ | 314 | | | $ | 315 | |
| Credit linked notes, net of debt issuance costs | | 454 | | | 992 | |
| Total long-term borrowings | | $ | 768 | | | $ | 1,307 | |
| | | | |
| Total other borrowings | | $ | 9,567 | | | $ | 6,299 | |
Short-Term Borrowings
Federal Funds Lines of Credit
The Company maintains overnight federal fund lines of credit totaling $175 million as of June 30, 2023, which have rates comparable to the federal funds effective rate plus 0.10% to 0.20%.
FHLB and FRB Advances
The Company also maintains secured overnight lines of credit with the FHLB and the FRB. The Company’s borrowing capacity is determined based on collateral pledged, generally consisting of investment securities and loans, at the time of the borrowing. As of June 30, 2023 and December 31, 2022, the Company had additional available credit with the FHLB of approximately $6.2 billion and $6.8 billion respectively. The weighted average rate on FHLB advances was 5.32% and 4.70% as of June 30, 2023 and December 31, 2022, respectively.
The FRB established the BTFP in March 2023, which offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral valued at par. The rate for BTFP advances is the one-year overnight index swap rate plus 10 basis points and is fixed for the term of the advance. The weighted average rate on BTFP advances was 4.76% as of June 30, 2023. The Company had additional available credit of $34 million under the BTFP as of June 30, 2023. Other available credit with the FRB totaled $16.0 billion and $5.2 billion as of June 30, 2023 and December 31, 2022, respectively.
Warehouse Borrowings
Warehouse borrowing lines of credit are used to finance the acquisition of loans through the use of repurchase agreements. Repurchase agreements operate as financings under which the Company transfers loans to secure these borrowings. The borrowing amounts are based on the attributes of the collateralized loans and are defined in the repurchase agreement of each warehouse lender. The Company retains beneficial ownership of the transferred loans and will receive the loans from the lender upon full repayment of the borrowing. The repurchase agreements may require the Company to transfer additional assets to the lender in the event the estimated fair value of the existing transferred loans declines.
As of June 30, 2023, the Company had access to approximately $2.8 billion in uncommitted warehouse funding, of which $55 million was drawn at a weighted average borrowing rate of 6.92%. There were no warehouse borrowings outstanding at December 31, 2022.
Repurchase Agreements
Other repurchase facilities include CLO securities, EBO loan, and customer repurchase agreements. The Company's securities repurchase agreements are collateralized by $1.9 billion of CLO investments. The balance and weighted average rate on these agreements was $1.4 billion and 6.46%, respectively, as of June 30, 2023. There were no securities repurchase agreements outstanding at December 31, 2022.
The balance and weighted average rate of EBO loan repurchase agreements was $1.1 billion and 7.06%, respectively, as of June 30, 2023. These repurchase agreements are collateralized with $1.4 billion of EBO loans. There were no EBO loan backed repurchase agreements at December 31, 2022.
The balance of customer repurchase agreements was $5 million and $27 million as of June 30, 2023 and December 31, 2022, respectively, and the weighted average rate was 0.22% and 0.15% as of June 30, 2023 and December 31, 2022, respectively.
Secured Borrowings
Secured borrowings consist of transfers of loans HFS not qualifying for sales accounting treatment. The weighted average interest rate on secured borrowings was 6.54% and 6.39% as of June 30, 2023 and December 31, 2022, respectively.
Long-Term Borrowings
AmeriHome Senior Notes
Prior to the Company's acquisition of AmeriHome, in October 2020, AmeriHome issued senior notes with an aggregate principal amount of $300 million, maturing on October 26, 2028. The senior notes accrue interest at a rate of 6.50% per annum, paid semiannually. The senior notes contain provisions that allow for redemption of up to 40% of the original aggregate principal amount of the notes during the first three years after issuance at a price equal to 106.50%, plus accrued and unpaid interest. After this three-year period, AmeriHome may redeem some or all of the senior notes at a price equal to 103.25% of the outstanding principal amount, plus accrued and unpaid interest. In 2025, the redemption price of these senior notes declines to 100% of the outstanding principal balance. The carrying amount of the senior notes includes a fair value adjustment (premium) of $19 million recognized as of the acquisition date that is being amortized over the term of the notes.
Credit Linked Notes
The Company entered into credit linked note transactions that effectively transferred the risk of first losses on certain pools of the Company’s warehouse and equity fund resource loans to the purchasers of these notes. In the event of a failure to pay by the relevant obligor, insolvency of the relevant obligor, or restructuring of such loans that results in a loss on a loan that is included in any of the reference pools, the principal balance of the notes will be reduced to the extent of such loss and a gain on recovery of credit guarantees will be recognized within non-interest income in the Consolidated Income Statement. The purchasers of the notes have the option to acquire the underlying reference loan in the event of obligor default. There have been no historical losses on the warehouse lines of credit and equity fund resource loans.
The Company also entered into credit linked note transactions that effectively transfer the risk of first losses on reference pools of the Company's loans purchased under its residential mortgage purchase program to the purchasers of the notes. The principal and interest payable on these notes may be reduced by a portion of the Company's loss on such loans if one of the following occurs with respect to a covered loan: (i) realized losses incurred by the Company on a loan following a liquidation of the loan or certain other events, or (ii) a modification of the loan resulting in a reduction in payments. The aggregate losses, if any, for each payment date will be allocated to reduce the class principal amount and (for modifications) the current interest of the notes in reverse order of class priority. Losses on residential mortgages have not generally been significant.
The Company's outstanding credit linked note issuances are detailed in the tables below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2023 |
| Description | | Issuance Date | | Maturity Date | | Interest Rate | | Principal | | Debt Issuance Costs |
| | | | | | | | (in millions) |
| Residential mortgage loans (1) | | December 12, 2022 | | October 25, 2052 | | SOFR + 7.80% | | $ | 92 | | | $ | 2 | |
| Residential mortgage loans (2) | | June 30, 2022 | | April 25, 2052 | | SOFR + 6.00% | | 184 | | | 3 | |
| | | | | | | | | | |
| Residential mortgage loans (4) | | December 29, 2021 | | July 25, 2059 | | SOFR + 4.67% | | 197 | | | 3 | |
| | | | | | | | | | |
| Total | | | | | | | | $ | 473 | | | $ | 8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Description | | Issuance Date | | Maturity Date | | Interest Rate | | Principal | | Debt Issuance Costs |
| | | | | | | | (in millions) |
| Residential mortgage loans (1) | | December 12, 2022 | | October 25, 2052 | | SOFR + 7.80% | | $ | 95 | | | $ | 2 | |
| Residential mortgage loans (2) | | June 30, 2022 | | April 25, 2052 | | SOFR + 6.00% | | 189 | | | 3 | |
| Equity fund resource loans (3) | | June 23, 2022 | | June 30, 2028 | | SOFR + 6.75% | | 300 | | | 4 | |
| Residential mortgage loans (4) | | December 29, 2021 | | July 25, 2059 | | SOFR + 4.67% | | 202 | | | 3 | |
| Warehouse loans (5) | | June 28, 2021 | | December 30, 2024 | | LIBOR + 5.50% | | 242 | | | 2 | |
| Total | | | | | | | | $ | 1,028 | | | $ | 14 | |
(1) There are multiple classes of these notes, each with an interest rate of SOFR plus a spread that ranges from 2.25% to 11.00% (or, a weighted average spread of 7.80%) on a reference pool balance of $1.8 billion as of June 30, 2023 and December 31, 2022.
(2) There are multiple classes of these notes, each with an interest rate of SOFR plus a spread that ranges from 2.25% to 15.00% (or, a weighted average spread of 6.00%) on a reference pool balance of $3.7 billion and $3.8 billion as of June 30, 2023 and December 31, 2022, respectively.
(3) These notes had a reference pool balance of $1.6 billion as of December 31, 2022.
(4) There are six classes of these notes, each with an interest rate of SOFR plus a spread that ranges from 3.15% to 8.50% (or, a weighted average spread of 4.67%) on a reference pool balance of $3.9 billion and $4.0 billion as of June 30, 2023 and December 31, 2022, respectively.
(5) These notes had a reference pool balance of $689 million as of December 31, 2022.
During the three and six months ended June 30, 2023, the Company recognized a gain on extinguishment of debt of $0.7 million and $13.4 million, respectively, related to the pay off of the credit linked notes on its warehouse and equity fund resource loans.
8. QUALIFYING DEBT
Subordinated Debt
The Company's subordinated debt issuances are detailed in the tables below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2023 |
| Description | | Issuance Date | | Maturity Date | | Interest Rate | | Principal | | Debt Issuance Costs |
| | | | | | | | (in millions) |
| WAL fixed-to-variable-rate (1) | | June 2021 | | June 15, 2031 | | 3.00 | % | | $ | 600 | | | $ | 7 | |
| WAB fixed-to-variable-rate (2) | | May 2020 | | June 1, 2030 | | 5.25 | % | | 225 | | | 1 | |
| Total | | | | | | | | $ | 825 | | | $ | 8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Description | | Issuance Date | | Maturity Date | | Interest Rate | | Principal | | Debt Issuance Costs |
| | | | | | | | (in millions) |
| WAL fixed-to-variable-rate (1) | | June 2021 | | June 15, 2031 | | 3.00 | % | | $ | 600 | | | $ | 7 | |
| WAB fixed-to-variable-rate (2) | | May 2020 | | June 1, 2030 | | 5.25 | % | | 225 | | | 1 | |
| Total | | | | | | | | $ | 825 | | | $ | 8 | |
(1) Notes are redeemable, in whole or in part, beginning on June 15, 2026 at their principal amount plus accrued and unpaid interest and has a fixed interest rate of 3.00%. The notes also convert to a variable rate of three-month SOFR plus 225 basis points on this date.
(2) Debt is redeemable, in whole or in part, on or after June 1, 2025 at its principal amount plus accrued and unpaid interest and has a fixed interest rate of 5.25% through June 1, 2025 and then converts to a variable rate per annum equal to three-month SOFR plus 512 basis points.
The carrying value of all subordinated debt issuances totaled $817 million at June 30, 2023 and December 31, 2022.
Junior Subordinated Debt
The Company has formed or acquired through acquisition eight statutory business trusts, which exist for the exclusive purpose of issuing Cumulative Trust Preferred Securities.
With the exception of debt issued by Bridge Capital Trust I and Bridge Capital Trust II, junior subordinated debt is recorded at fair value at each reporting date due to the FVO election made by the Company under ASC 825. The Company did not make the FVO election for the junior subordinated debt acquired in the Bridge acquisition. Accordingly, the carrying value of these trusts does not reflect the current fair value of the debt and includes a fair market value adjustment established at acquisition that is being accreted over the remaining life of the trusts.
The carrying value of junior subordinated debt was $71 million and $76 million as of June 30, 2023 and December 31, 2022, respectively, with maturity dates ranging from 2033 through 2037. The weighted average interest rate of all junior subordinated debt as of June 30, 2023 was 7.88%, which is equal to three-month LIBOR plus the contractual spread of 2.34%, compared to a weighted average interest rate of 7.11% at December 31, 2022. Subsequent to June 30, 2023, interest rates on the Company's junior subordinated debt will be based on SOFR plus a spread adjustment.
In the event of certain changes or amendments to regulatory requirements or federal tax rules, the debt is redeemable in whole. The obligations under these instruments are fully and unconditionally guaranteed by the Company and rank subordinate and junior in right of payment to all other liabilities of the Company. Based on guidance issued by the FRB, the Company's securities continue to qualify as Tier 1 Capital.
9. STOCKHOLDERS' EQUITY
Stock-Based Compensation
Restricted Stock Awards
Restricted stock awards granted to employees generally vest over a 3-year period and stock grants made to non-employee WAL directors generally vest over six months. The Company estimates the compensation cost for stock grants based upon the grant date fair value. Stock compensation expense is recognized on a straight-line basis over the requisite service period for the entire award. The aggregate grant date fair value for the restricted stock awards granted during the three and six months ended June 30, 2023 was $0.7 million and $45.2 million, respectively. Stock compensation expense related to restricted stock awards granted to employees is included in Salaries and employee benefits in the Consolidated Income Statement. For restricted stock awards granted to WAL directors, the related stock compensation expense is included in Legal, professional, and directors' fees. For the three and six months ended June 30, 2023, the Company recognized $9.1 million and $17.6 million, respectively, in stock-based compensation expense related to employee and WAL director stock grants, compared to $7.6 million and $14.7 million for the three and six months ended June 30, 2022, respectively.
Performance Stock Units
The Company grants performance stock units to members of its executive management that do not vest unless the Company achieves a specified cumulative EPS target and a TSR performance measure over a three-year performance period. The number of shares issued will vary based on the cumulative EPS target and relative TSR performance factor that is achieved. The Company estimates the cost of performance stock units based upon the grant date fair value and expected vesting percentage over the three-year performance period. During the three and six months ended June 30, 2023, the Company recognized stock-based compensation expense of $1.4 million and a net reversal of stock-based compensation expense of $1.1 million on unvested performance stock units due to revised performance expectations, compared to $3.4 million and $6.2 million in stock-based compensation expense for such units during the three and six months ended June 30, 2022, respectively.
The three-year performance period for the 2020 grant ended on December 31, 2022, and based on the Company's cumulative EPS and TSR performance measure for the performance period, these shares vested at 180% of the target award under the terms of the grant. As a result, 157,784 shares became fully vested and distributed to executive management in the first quarter of 2023.
The three-year performance period for the 2019 grant ended on December 31, 2021, and the Company's cumulative EPS and TSR performance measure for the performance period exceeded the level required for a maximum award under the terms of the grant. As a result, 203,646 shares became fully vested and were distributed to executive management in the first quarter of 2022.
Preferred Stock
The Company has 12,000,000 depositary shares outstanding, each representing a 1/400th ownership interest in a share of the Company’s 4.250% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Shares, Series A, par value $0.0001 per share, with a liquidation preference of $25 per depositary share (equivalent to $10,000 per share of Series A preferred stock). During the three and six months ended June 30, 2023 and 2022, the Company declared and paid a quarterly cash dividend of $0.27 per depositary share, for a total dividend payment to preferred shareholders of $3.2 million and $6.4 million, respectively.
Common Stock Issuances
Pursuant to ATM Distribution Agreement
During the three months ended June 30, 2022, the Company did not sell any shares under the ATM program. During the six months ended June 30, 2022, the Company sold 1.3 million shares under the ATM program at a weighted-average selling price of $86.78 per share for gross proceeds of $108.4 million. Sales under the ATM program were being made pursuant to a prospectus dated May 14, 2021 and prospectus supplements filed with the SEC in an offering of shares from the Company's shelf registration statement on Form S-3 (No. 333-256120). Total related offering costs were $0.7 million for the six months ended June 30, 2022, substantially all of which related to compensation costs paid to the distribution agents. There were no sales under the ATM program during the three and six months ended June 30, 2023 and as of June 30, 2023, the remaining number of shares that can be sold under this agreement totaled 1,107,769.
Cash Dividend on Common Shares
During the three and six months ended June 30, 2023, the Company declared and paid a quarterly cash dividend of $0.36 per share, for a total dividend payment to shareholders of $39.4 million and $78.8 million, respectively. During the three and six months ended June 30, 2022, the Company declared and paid a quarterly cash dividend of $0.35 per share, for a total dividend payment to shareholders of $37.9 million and $75.2 million, respectively.
Treasury Shares
Treasury share purchases represent shares surrendered to the Company equal in value to the statutory payroll tax withholding obligations arising from the vesting of employee restricted stock awards. During the three and six months ended June 30, 2023, the Company purchased treasury shares of 7,815 and 151,219, respectively, at a weighted average price of $31.96 and $72.49 per share, respectively. During the three and six months ended June 30, 2022, the Company purchased treasury shares of 2,635 and 188,169, respectively, at a weighted average price of $77.50 and $93.29 per share, respectively.
10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component, net of tax, for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| | Unrealized holding gains (losses) on AFS securities | | Unrealized holding losses on SERP | | Unrealized holding gains (losses) on junior subordinated debt | | Impairment loss on securities | | Total |
| | (in millions) |
| Balance, March 31, 2023 | | $ | (594.3) | | | $ | (0.3) | | | $ | 1.9 | | | $ | 1.2 | | | $ | (591.5) | |
| Other comprehensive (loss) income before reclassifications | | (34.2) | | | — | | | 5.0 | | | — | | | (29.2) | |
| Amounts reclassified from AOCI | | 10.2 | | | — | | | — | | | — | | | 10.2 | |
| Net current-period other comprehensive (loss) income | | (24.0) | | | — | | | 5.0 | | | — | | | (19.0) | |
| Balance, June 30, 2023 | | $ | (618.3) | | | $ | (0.3) | | | $ | 6.9 | | | $ | 1.2 | | | $ | (610.5) | |
| | | | | | | | | | |
| Balance, March 31, 2022 | | $ | (236.3) | | | $ | (0.3) | | | $ | 1.5 | | | $ | — | | | $ | (235.1) | |
| Other comprehensive (loss) income before reclassifications | | (284.5) | | | — | | | 2.0 | | | — | | | (282.5) | |
| Amounts reclassified from AOCI | | (0.3) | | | — | | | — | | | — | | | (0.3) | |
| Net current-period other comprehensive (loss) income | | (284.8) | | | — | | | 2.0 | | | — | | | (282.8) | |
| Balance, June 30, 2022 | | $ | (521.1) | | | $ | (0.3) | | | $ | 3.5 | | | $ | — | | | $ | (517.9) | |
| | | | | | | | | | |
| | Six Months Ended June 30, |
| | Unrealized holding gains (losses) on AFS securities | | Unrealized holding losses on SERP | | Unrealized holding gains (losses) on junior subordinated debt | | Impairment loss on securities | | Total |
| | (in millions) |
| Balance, December 31, 2022 | | $ | (663.7) | | | $ | (0.3) | | | $ | 3.0 | | | $ | — | | | $ | (661.0) | |
| Other comprehensive income before reclassifications | | 25.9 | | | — | | | 3.9 | | | 1.2 | | | 31.0 | |
| Amounts reclassified from AOCI | | 19.5 | | | — | | | — | | | — | | | 19.5 | |
| Net current-period other comprehensive income | | 45.4 | | | — | | | 3.9 | | | 1.2 | | | 50.5 | |
| Balance, June 30, 2023 | | $ | (618.3) | | | $ | (0.3) | | | $ | 6.9 | | | $ | 1.2 | | | $ | (610.5) | |
| | | | | | | | | | |
| Balance, December 31, 2021 | | $ | 16.7 | | | $ | (0.3) | | | $ | (0.7) | | | $ | — | | | $ | 15.7 | |
| Other comprehensive (loss) income before reclassifications | | (532.4) | | | — | | | 4.2 | | | — | | | (528.2) | |
| Amounts reclassified from AOCI | | (5.4) | | | — | | | — | | | — | | | (5.4) | |
| Net current-period other comprehensive (loss) income | | (537.8) | | | — | | | 4.2 | | | — | | | (533.6) | |
| Balance, June 30, 2022 | | $ | (521.1) | | | $ | (0.3) | | | $ | 3.5 | | | $ | — | | | $ | (517.9) | |
11. DERIVATIVES AND HEDGING ACTIVITIES
The Company is a party to various derivative instruments. The primary types of derivatives that the Company uses are interest rate contracts, forward purchase and sale commitments, and interest rate futures. Generally, these instruments are used to help manage the Company's exposure to interest rate risk related to IRLCs and its inventory of loans HFS and MSRs and also to meet client financing and hedging needs.
Derivatives are recorded at fair value on the Consolidated Balance Sheets, after taking into account the effects of bilateral collateral and master netting agreements. These agreements allow the Company to settle all derivative contracts held with the same counterparty on a net basis, and to offset net derivative positions with related cash collateral, where applicable.
Derivatives Designated in Hedge Relationships
The Company utilizes derivatives that have been designated as part of a hedge relationship in accordance with the applicable accounting guidance to minimize the exposure to changes in benchmark interest rates and volatility of net interest income and EVE to interest rate fluctuations. The primary derivative instruments used to manage interest rate risk are interest rate swaps, which convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) from either a fixed rate to a variable rate, or from a variable rate to a fixed rate.
The Company has pay fixed/receive variable interest rate swaps designated as fair value hedges of certain fixed rate loans. As a result, the Company receives variable-rate interest payments in exchange for making fixed-rate payments over the lives of the contracts without exchanging the notional amounts. The variable-rate interest payments are based on LIBOR and converted to SOFR plus a spread adjustment upon the discontinuation of LIBOR in June 2023.
The Company also has pay fixed/receive variable interest rate swaps, designated as fair value hedges using the portfolio layer method to manage the exposure to changes in fair value associated with fixed rate loans, resulting from changes in the designated benchmark interest rate (federal funds rate). These portfolio layer hedges provide the Company the ability to execute a fair value hedge of the interest rate risk associated with a portfolio of similar prepayable assets. Under these interest rate swap contracts, the Company receives a variable rate based on SOFR and pays a fixed rate on the outstanding notional amount.
The Company also had pay fixed/receive variable interest rate swaps, designated as fair value hedges using the last-of-layer method. Upon termination of these last-of-layer hedges in 2022, the cumulative basis adjustment on these hedges was allocated across the remaining loan pool and is being amortized over the remaining term. At June 30, 2023, the remaining cumulative basis adjustment on the terminated last-of-layer hedges totaled $15 million.
Derivatives Not Designated in Hedge Relationships
Management enters into certain foreign exchange derivative contracts, back-to-back interest rate contracts, and risk participation agreements which are not designated as accounting hedges. Foreign exchange derivative contracts include spot, forward, forward window, and swap contracts. The purpose of these derivative contracts is to mitigate foreign currency risk on transactions entered into, or on behalf of customers. Contracts with customers, along with the related derivative trades that the Company places, are both remeasured at fair value, and are referred to as economic hedges since they economically offset the Company's exposure. The Company's back-to-back interest rate contracts are used to allow customers to manage long-term interest rate risk. Risk participation agreements are entered into with lead banks in certain loan syndications to share in the risk of default on interest rate swaps on the participated loan.
The Company also uses derivative financial instruments to manage exposure to interest rate risk within its mortgage banking business related to IRLCs and its inventory of loans HFS and MSRs. The Company economically hedges the changes in fair value associated with changes in interest rates generally by utilizing forward sale commitments, interest rate futures and interest rate swaps.
Fair Value Hedges
As of June 30, 2023 and December 31, 2022, the following amounts are reflected on the Consolidated Balance Sheets related to cumulative basis adjustments for outstanding fair value hedges:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
| | Carrying Value of Hedged Assets/(Liabilities) | | Cumulative Fair Value Hedging Adjustment (1) | | Carrying Value of Hedged Assets/(Liabilities) | | Cumulative Fair Value Hedging Adjustment (1) |
| | (in millions) |
| Loans HFI, net of deferred loan fees and costs (2) | | $ | 3,934 | | | $ | 52 | | | $ | 447 | | | $ | 17 | |
| | | | | | | | |
(1)Included in the carrying value of the hedged assets/(liabilities).
(2)As of June 30, 2023, included portfolio layer method derivative instruments with $3.5 billion designated as the hedged amount (from a closed portfolio of prepayable fixed rate loans with a carrying value of $6.8 billion). The cumulative basis adjustment included in the carrying value of these hedged items totaled $29 million.
For the Company's derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current period earnings. The loss or gain on the hedged item is recognized in the same line item as the offsetting loss or gain on the related interest rate swaps. For loans, the gain or loss on the hedged item is included in interest income, as shown in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| | 2023 | | 2022 |
| Income Statement Classification | | Gain/(Loss) on Swaps | | Gain/(Loss) on Hedged Item | | Gain/(Loss) on Swaps | | Gain/(Loss) on Hedged Item |
| | (in millions) |
| Interest income | | $ | 39.0 | | | $ | (39.0) | | | $ | 15.2 | | | $ | (15.2) | |
| | | | | | | | |
| | | | | | | | |
| | Six Months Ended June 30, |
| | 2023 | | 2022 |
| Income Statement Classification | | Gain/(Loss) on Swaps | | Gain/(Loss) on Hedged Item | | Gain/(Loss) on Swaps | | Gain/(Loss) on Hedged Item |
| | (in millions) |
| Interest income | | $ | 34.7 | | | $ | (34.7) | | | $ | 48.7 | | | $ | (48.7) | |
| | | | | | | | |
In addition to the gains and losses on the Company's outstanding fair value hedges presented in the above table, the Company recognized $2.9 million and $5.9 million in interest income related to the amortization of the cumulative basis adjustment on its discontinued last-of-layer hedges during the three and six months ended June 30, 2023, respectively.
Fair Values, Volume of Activity, and Gain/Loss Information Related to Derivative Instruments
The following table summarizes the fair value of the Company's derivative instruments on a gross basis as of June 30, 2023, December 31, 2022, and June 30, 2022. The change in the notional amounts of these derivatives from June 30, 2022 to June 30, 2023 indicates the volume of the Company's derivative transaction activity during these periods. The derivative asset and liability balances are presented on a gross basis, prior to the application of bilateral collateral and master netting agreements. Total derivative assets and liabilities are adjusted to take into account the impact of legally enforceable master netting agreements that allow the Company to settle all derivative contracts with the same counterparty on a net basis and to offset the net derivative position with the related cash collateral. Where master netting agreements are not in effect or are not enforceable under bankruptcy laws, the Company does not adjust those derivative amounts with counterparties.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 | | June 30, 2022 |
| | | Fair Value | | | | Fair Value | | | | Fair Value |
| Notional
Amount | | Derivative Assets | | Derivative Liabilities | | Notional
Amount | | Derivative Assets | | Derivative Liabilities | | Notional
Amount | | Derivative Assets | | Derivative Liabilities |
| (in millions) |
| Derivatives designated as hedging instruments: | | | | | | | | | | | | | | |
| Fair value hedges | | | | | | | | | | | | | | | | | |
| Interest rate contracts | $ | 4,033 | | | $ | 56 | | | $ | 4 | | | $ | 476 | | | $ | 18 | | | $ | — | | | $ | 500 | | | $ | 5 | | | $ | 11 | |
| Total | $ | 4,033 | | | $ | 56 | | | $ | 4 | | | $ | 476 | | | $ | 18 | | | $ | — | | | $ | 500 | | | $ | 5 | | | $ | 11 | |
| | | | | | | | | | | | | | | | | |
| Derivatives not designated as hedging instruments (1): | | | | | | | | | | | | | | |
| Foreign currency contracts | $ | 71 | | | $ | 1 | | | $ | 1 | | | $ | 250 | | | $ | 1 | | | $ | 9 | | | $ | 138 | | | $ | 1 | | | $ | — | |
| Forward purchase contracts | 4,484 | | | 1 | | | 16 | | | 2,709 | | | 1 | | | 13 | | | 4,764 | | | 32 | | | 10 | |
| Forward sales contracts | 7,279 | | | 26 | | | 2 | | | 4,985 | | | 16 | | | 8 | | | 9,621 | | | 35 | | | 35 | |
| Futures purchase contracts (2), (3) | 200 | | | — | | | — | | | — | | | — | | | — | | | 700 | | | — | | | — | |
| Futures sales contracts (2), (3) | 12,210 | | | — | | | — | | | 8,706 | | | — | | | — | | | 6,072 | | | — | | | — | |
| Interest rate lock commitments | 2,331 | | | 6 | | | 4 | | | 1,459 | | | 5 | | | 3 | | | 2,819 | | | 15 | | | 3 | |
| Interest rate contracts | 2,424 | | | 14 | | | 14 | | | 1,538 | | | 6 | | | 6 | | | 64 | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| Risk participation agreements | 44 | | | — | | | — | | | 48 | | | — | | | — | | | — | | | — | | | — | |
| Total | $ | 29,043 | | | $ | 48 | | | $ | 37 | | | $ | 19,695 | | | $ | 29 | | | $ | 39 | | | $ | 24,178 | | | $ | 83 | | | $ | 48 | |
| Margin | | | 85 | | | 12 | | | | | 4 | | | 1 | | | | | (9) | | | 24 | |
| Total, including margin | $ | 29,043 | | | $ | 133 | | | $ | 49 | | | $ | 19,695 | | | $ | 33 | | | $ | 40 | | | $ | 24,178 | | | $ | 74 | | | $ | 72 | |
(1)Relate to economic hedging arrangements.
(2)The Company enters into forward purchase and sales contracts that are subject to daily remargining and almost all of which are based on three-month SOFR to hedge against its MSR valuation exposure. The notional amount on these contracts is substantial as these contracts have a duration of only 0.25 years and are intended to cover the longer duration of MSR hedges.
(3)The notional amounts previously reported for December 31, 2022 and June 30, 2022 have been adjusted in the current period to account for the impact of offsetting contracts. To close a futures contract prior to settlement, the Company purchases an offsetting future with the same terms as the original contract and these contracts no longer require settlement.
The fair value of derivative contracts, after taking into account the effects of master netting agreements, is included in other assets or other liabilities on the Consolidated Balance Sheets, as summarized in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 | | June 30, 2022 |
| Gross amount of recognized assets (liabilities) | | Gross offset | | Net assets (liabilities) | | Gross amount of recognized assets (liabilities) | | Gross offset | | Net assets (liabilities) | | Gross amount of recognized assets (liabilities) | | Gross offset | | Net assets (liabilities) |
| (in millions) |
| Derivatives subject to master netting arrangements: | | | | | | | | | | |
| Assets | | | | | | | | | | | | | | | | | |
| Forward purchase contracts | $ | 1 | | | $ | — | | | $ | 1 | | | $ | 1 | | | $ | — | | | $ | 1 | | | $ | 31 | | | $ | — | | | $ | 31 | |
| Forward sales contracts | 26 | | | — | | | 26 | | | 13 | | | — | | | 13 | | | 33 | | | — | | | 33 | |
| Interest rate contracts | 70 | | | — | | | 70 | | | 18 | | | — | | | 18 | | | 5 | | | — | | | 5 | |
| Margin | 85 | | | — | | | 85 | | | 4 | | | — | | | 4 | | | (9) | | | — | | | (9) | |
| Netting | — | | | (28) | | | (28) | | | — | | | (17) | | | (17) | | | — | | | (55) | | | (55) | |
| $ | 182 | | | $ | (28) | | | $ | 154 | | | $ | 36 | | | $ | (17) | | | $ | 19 | | | $ | 60 | | | $ | (55) | | | $ | 5 | |
| Liabilities | | | | | | | | | | | | | | | | | |
| Forward purchase contracts | $ | (16) | | | $ | — | | | $ | (16) | | | $ | (12) | | | $ | — | | | $ | (12) | | | $ | (10) | | | $ | — | | | $ | (10) | |
| Forward sales contracts | (2) | | | — | | | (2) | | | (8) | | | — | | | (8) | | | (34) | | | — | | | (34) | |
| Interest rate contracts | (4) | | | — | | | (4) | | | — | | | — | | | — | | | (11) | | | — | | | (11) | |
| Margin | (12) | | | — | | | (12) | | | (1) | | | — | | | (1) | | | (24) | | | — | | | (24) | |
| Netting | — | | | 28 | | | 28 | | | — | | | 17 | | | 17 | | | — | | | 55 | | | 55 | |
| $ | (34) | | | $ | 28 | | | $ | (6) | | | $ | (21) | | | $ | 17 | | | $ | (4) | | | $ | (79) | | | $ | 55 | | | $ | (24) | |
| Derivatives not subject to master netting arrangements: | | | | | | | | | | |
| Assets | | | | | | | | | | | | | | | | | |
| Foreign currency contracts | $ | 1 | | | $ | — | | | $ | 1 | | | $ | 1 | | | $ | — | | | $ | 1 | | | $ | 1 | | | $ | — | | | $ | 1 | |
| Forward purchase contracts | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
| Forward sales contracts | — | | | — | | | — | | | 3 | | | — | | | 3 | | | 2 | | | — | | | 2 | |
| Interest rate lock commitments | 6 | | | — | | | 6 | | | 5 | | | — | | | 5 | | | 15 | | | — | | | 15 | |
| Interest rate contracts | — | | | — | | | — | | | 6 | | | — | | | 6 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| $ | 7 | | | $ | — | | | $ | 7 | | | $ | 15 | | | $ | — | | | $ | 15 | | | $ | 19 | | | $ | — | | | $ | 19 | |
| Liabilities | | | | | | | | | | | | | | | | | |
| Foreign currency contracts | $ | (1) | | | $ | — | | | $ | (1) | | | $ | (9) | | | $ | — | | | $ | (9) | | | $ | — | | | $ | — | | | $ | — | |
| Forward purchase contracts | — | | | — | | | — | | | (1) | | | — | | | (1) | | | — | | | — | | | — | |
| Forward sales contracts | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
| Interest rate lock commitments | (4) | | | — | | | (4) | | | (3) | | | — | | | (3) | | | (3) | | | — | | | (3) | |
| Interest rate contracts | (14) | | | — | | | (14) | | | (6) | | | — | | | (6) | | | — | | | — | | | — | |
| $ | (19) | | | $ | — | | | $ | (19) | | | $ | (19) | | | $ | — | | | $ | (19) | | | $ | (4) | | | $ | — | | | $ | (4) | |
| Total derivatives and margin | | | | | | | | | | | | | | | | | |
| Assets | $ | 189 | | | $ | (28) | | | $ | 161 | | | $ | 51 | | | $ | (17) | | | $ | 34 | | | $ | 79 | | | $ | (55) | | | $ | 24 | |
| Liabilities | $ | (53) | | | $ | 28 | | | $ | (25) | | | $ | (40) | | | $ | 17 | | | $ | (23) | | | $ | (83) | | | $ | 55 | | | $ | (28) | |
The following table summarizes the net gain (loss) on derivatives included in income:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| Net gain (loss) on loan origination and sale activities: | | | | | | |
| Interest rate lock commitments | | $ | (11.1) | | | $ | 23.2 | | | $ | 0.3 | | | $ | 2.4 | |
| Forward contracts | | 55.6 | | | 101.0 | | | 18.8 | | | 342.3 | |
| | | | | | | | |
| Interest rate swaps | | (4.6) | | | — | | | (3.3) | | | — | |
| Other contracts | | 2.2 | | | (6.1) | | | 1.8 | | | (9.8) | |
| Total gain | | $ | 42.1 | | | $ | 118.1 | | | $ | 17.6 | | | $ | 334.9 | |
| Net loan servicing revenue: | | | | | | | | |
| Forward contracts | | $ | (13.2) | | | $ | (8.0) | | | $ | (14.7) | | | $ | (42.9) | |
| | | | | | | | |
| Futures contracts | | 18.7 | | | (21.9) | | | 14.7 | | | (43.9) | |
| Interest rate swaps | | (36.5) | | | — | | | (17.6) | | | — | |
| Total loss | | $ | (31.0) | | | $ | (29.9) | | | $ | (17.6) | | | $ | (86.8) | |
Counterparty Credit Risk
Like other financial instruments, derivatives contain an element of credit risk. This risk is measured as the expected replacement value of the contracts. Management enters into bilateral collateral and master netting agreements that provide for the net settlement of all contracts with the same counterparty. Additionally, management monitors counterparty credit risk exposure on each contract to determine appropriate limits on the Company's total credit exposure across all product types, which may require the Company to post collateral to counterparties when these contracts are in a net liability position and conversely, for counterparties to post collateral to the Company when these contracts are in a net asset position. Management reviews the Company's collateral positions on a daily basis and exchanges collateral with counterparties in accordance with standard ISDA documentation and other related agreements. The Company generally posts or holds collateral in the form of cash deposits or highly rated securities issued by the U.S. Treasury or government-sponsored enterprises (FNMA, and FHLMC), or guaranteed by GNMA. At June 30, 2023, December 31, 2022, and June 30, 2022 collateral pledged by the Company to counterparties for its derivatives totaled $90 million, $11 million, and $30 million, respectively.
12. EARNINGS PER SHARE
Diluted EPS is calculated using the weighted average outstanding common shares during the period, including common stock equivalents. Basic EPS is calculated using the weighted average outstanding common shares during the period.
The following table presents the calculation of basic and diluted EPS and summarizes the weighted average common shares excluded from the diluted EPS calculation due to their antidilutive effect:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2023 | | 2022 | | 2023 | | 2022 |
| | | (in millions, except per share amounts) |
| Weighted average shares - basic | | 108.3 | | | 107.3 | | | 108.2 | | | 106.7 | |
| Dilutive effect of stock awards | | — | | | 0.4 | | | 0.1 | | | 0.4 | |
| Weighted average shares - diluted | | 108.3 | | | 107.7 | | | 108.3 | | | 107.1 | |
| Net income available to common stockholders | | $ | 212.5 | | | $ | 257.0 | | | $ | 351.5 | | | $ | 493.9 | |
| | | | | | | | |
| Earnings per Common Share: | | | | | | | | |
| Basic | | $ | 1.96 | | | $ | 2.40 | | | $ | 3.25 | | | $ | 4.63 | |
| Diluted | | 1.96 | | | 2.39 | | | 3.24 | | | 4.61 | |
| | | | | | | | |
| Antidilutive restricted stock outstanding | | 0.4 | | | — | | | 0.2 | | | — | |
13. INCOME TAXES
The Company's effective tax rate was 17.1% and 19.6% for the three months ended June 30, 2023 and 2022, respectively. For each of the six months ended June 30, 2023 and 2022, the Company's effective tax rate was 19.5%. The decrease in the three-month effective tax rate was primarily due to increases in expected LIHTC benefits during 2023.
As of June 30, 2023, the net DTA balance totaled $315 million. There was not a significant change in the net deferred tax asset of $311 million at December 31, 2022 as decreases to MSR DTLs were offset by increases in the fair market value of AFS securities and decreases to the accrued bonus DTA.
Although realization is not assured, the Company believes that the realization of the recognized deferred tax asset of $315 million at June 30, 2023 is more-likely-than-not based on expectations as to future taxable income and based on available tax planning strategies that could be implemented if necessary to prevent a carryover from expiring.
At June 30, 2023 and December 31, 2022, the Company had no deferred tax valuation allowance.
LIHTC and renewable energy projects
The Company holds ownership interests in limited partnerships and limited liability companies that invest in affordable housing and renewable energy projects. These investments are designed to generate a return primarily through the realization of federal tax credits and deductions. The limited liability entities are considered to be VIEs; however, as a limited partner, the Company is not the primary beneficiary and is not required to consolidate these entities.
Investments in LIHTC and renewable energy totaled $596 million and $624 million as of June 30, 2023 and December 31, 2022, respectively. Unfunded LIHTC and renewable energy obligations are included in Other liabilities on the Consolidated Balance Sheet and totaled $338 million and $398 million as of June 30, 2023 and December 31, 2022, respectively. For the three months ended June 30, 2023 and 2022, $27.7 million and $15.4 million, respectively, of amortization related to LIHTC investments was recognized as a component of income tax expense. For the six months ended June 30, 2023 and 2022, $39.0 million and $28.8 million, respectively, of amortization related to LIHTC investments was recognized as a component of income tax expense.
14. COMMITMENTS AND CONTINGENCIES
Unfunded Commitments and Letters of Credit
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. They involve, to varying degrees, elements of credit risk in excess of amounts recognized on the Consolidated Balance Sheets.
Lines of credit are obligations to lend money to a borrower. Credit risk arises when the borrower's current financial condition may indicate less ability to pay than when the commitment was originally made. In the case of letters of credit, the risk arises from the potential failure of the customer to perform according to the terms of a contract. In such a situation, the third party might draw on the letter of credit to pay for completion of the contract and the Company would look to its customer to repay these funds with interest. To minimize the risk, the Company uses the same credit policies in making commitments and conditional obligations as it would for a loan to that customer.
Letters of credit and financial guarantees are commitments issued by the Company to guarantee the performance of a customer to a third party in borrowing arrangements. The Company generally has recourse to recover from the customer any amounts paid under the guarantees. Typically, letters of credit issued have expiration dates within one year.
A summary of the contractual amounts for unfunded commitments and letters of credit are as follows:
| | | | | | | | | | | | | | |
| | | June 30, 2023 | | December 31, 2022 |
| | | (in millions) |
Commitments to extend credit, including unsecured loan commitments of $1,168 at June 30, 2023 and $1,209 at December 31, 2022 | | $ | 15,319 | | | $ | 18,674 | |
| Credit card commitments and financial guarantees | | 405 | | | 379 | |
Letters of credit, including unsecured letters of credit of $6 at June 30, 2023 and $7 at December 31, 2022 | | 240 | | | 265 | |
| Total | | $ | 15,964 | | | $ | 19,318 | |
Commitments to extend credit are agreements to lend to a customer provided that there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company enters into credit arrangements that generally provide for the termination of advances in the event of a covenant violation or other event of default. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. The commitments are collateralized by the same types of assets used as loan collateral.
The Company has exposure to credit losses from unfunded commitments and letters of credit. As funds have not been disbursed on these commitments, they are not reported as loans outstanding. Credit losses related to these commitments are included in Other liabilities as a separate loss contingency and are not included in the ACL reported in "Note 4. Loans, Leases and Allowance for Credit Losses" of these Notes to Unaudited Consolidated Financial Statements. This loss contingency for unfunded loan commitments and letters of credit was $41 million and $47 million as of June 30, 2023 and December 31, 2022, respectively. Changes to this liability are adjusted through the provision for credit losses in the Consolidated Income Statement.
Commitments to Invest in Renewable Energy Projects
The Company has off-balance sheet commitments to invest in renewable energy projects, as described in "Note 13. Income Taxes" of these Notes to Unaudited Consolidated Financial Statements, subject to the underlying project meeting certain milestones. These conditional commitments totaled $104 million and $117 million as of June 30, 2023 and December 31, 2022, respectively.
Concentrations of Lending Activities
The Company monitors concentrations of lending activities at the product and borrower relationship level. No borrower relationships at both the commitment and funded loan level exceeded 5% of total loans HFI as of June 30, 2023 and December 31, 2022. The Company does not have a single external customer from which it derives 10% or more of its revenues. Commercial and industrial loans made up 35% and 40% of total HFI loans as of June 30, 2023 and December 31, 2022, respectively. The Company's loan portfolio also includes credit exposure to the CRE market. As of June 30, 2023 and December 31, 2022, CRE-non-owner occupied loans accounted for approximately 21% and 18% of total loans HFI, respectively. In addition, approximately $2.3 billion, or 4.8%, of total loans HFI consisted of CRE-non-owner occupied office loans as of June 30, 2023, compared to $2.4 billion, or 4.6%, as of December 31, 2022. These office loans primarily consist of shorter-term bridge loans that enable borrowers to reposition or redevelop projects, with the vast majority located in suburban locations. Construction and land loans were 9% and 8% of total loans HFI as of June 30, 2023 and December 31, 2022, respectively.
Contingencies
The Company is involved in various lawsuits of a routine nature that are being handled and defended in the ordinary course of the Company’s business. Expenses are being incurred in connection with these lawsuits, but in the opinion of management, based in part on consultation with outside legal counsel, the resolution of these lawsuits and associated defense costs will not have a material impact on the Company’s financial position, results of operations, or cash flows.
Lease Commitments
The Company has operating leases under which it leases its branch offices, corporate headquarters, other offices, and data facility centers. Operating lease costs totaled $7.1 million and $14.5 million during the three and six months ended June 30, 2023, compared to $6.2 million and $12.1 million for the three and six months ended June 30, 2022. Other lease costs, which include common area maintenance, parking, and taxes, and were included as occupancy expense, totaled $1.2 million and $2.5 million during the three and six months ended June 30, 2023, compared to $1.0 million and $2.1 million for the three and six months ended June 30, 2022.
15. 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).
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 the debt at each reporting date. These unrealized gains and losses are recognized in OCI rather than earnings. The Company did not elect FVO treatment for the junior subordinated debt assumed in the Bridge Capital Holdings acquisition.
The following table presents unrealized gains and losses from fair value changes on junior subordinated debt:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| Unrealized gains | | $ | 6.7 | | | $ | 2.7 | | | $ | 5.2 | | | $ | 5.6 | |
| Changes included in OCI, net of tax | | 5.0 | | | 2.0 | | | 3.9 | | | 4.2 | |
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 and common 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.
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: Forward purchase and sales contracts are measured based on valuation techniques using Level 2 inputs, such as quoted market prices, contracted selling prices, or a market price equivalent. Interest rate and foreign currency contracts are reported at fair value utilizing Level 2 inputs. The Company obtains dealer quotations to value its interest rate contracts. 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
| June 30, 2023 | | (in millions) |
| | | | | | | | |
| Assets: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Available-for-sale debt securities | | | | | | | | |
| CLO | | $ | — | | | $ | 2,144 | | | $ | — | | | $ | 2,144 | |
| Commercial MBS issued by GSEs | | — | | | 60 | | | — | | | 60 | |
| Corporate debt securities | | — | | | 338 | | | — | | | 338 | |
| Private label residential MBS | | — | | | 1,141 | | | — | | | 1,141 | |
| Residential MBS issued by GSEs | | — | | | 1,765 | | | — | | | 1,765 | |
| Tax-exempt | | — | | | 830 | | | — | | | 830 | |
| | | | | | | | |
| U.S. Treasury securities | | 2,286 | | | — | | | — | | | 2,286 | |
| Other | | 27 | | | 40 | | | — | | | 67 | |
| Total AFS debt securities | | $ | 2,313 | | | $ | 6,318 | | | $ | — | | | $ | 8,631 | |
| Equity securities | | | | | | | | |
| Common stock | | $ | 2 | | | $ | — | | | $ | — | | | $ | 2 | |
| CRA investments | | 25 | | | 12 | | | — | | | 37 | |
| Preferred stock | | 95 | | | 5 | | | — | | | 100 | |
| Total equity securities | | $ | 122 | | | $ | 17 | | | $ | — | | | $ | 139 | |
| Loans HFS (2) | | $ | — | | | $ | 1,337 | | | $ | 3 | | | $ | 1,340 | |
| MSRs | | — | | | — | | | 1,007 | | | 1,007 | |
| Derivative assets (1) | | — | | | 98 | | | 6 | | | 104 | |
| Liabilities: | | | | | | | | |
| Junior subordinated debt (3) | | $ | — | | | $ | — | | | $ | 57 | | | $ | 57 | |
| Derivative liabilities (1) | | — | | | 37 | | | 4 | | | 41 | |
(1)See "Note 11. Derivatives and Hedging Activities." In addition, the carrying value of loans is decreased by $52 million as of June 30, 2023 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. Derivative assets and liabilities exclude margin of $85 million and $12 million, respectively.
(2)Includes only the portion of loans HFS that is recorded at fair value at each reporting period pursuant to the election of FVO treatment.
(3)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 |
| December 31, 2022 | | (in millions) |
| | | | | | | | |
| Assets: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Available-for-sale debt securities | | | | | | | | |
| CLO | | $ | — | | | $ | 2,706 | | | $ | — | | | $ | 2,706 | |
| Commercial MBS issued by GSEs | | — | | | 97 | | | — | | | 97 | |
| Corporate debt securities | | — | | | 390 | | | — | | | 390 | |
| Private label residential MBS | | — | | | 1,199 | | | — | | | 1,199 | |
| Residential MBS issued by GSEs | | — | | | 1,740 | | | — | | | 1,740 | |
| Tax-exempt | | — | | | 891 | | | — | | | 891 | |
| | | | | | | | |
| | | | | | | | |
| Other | | 24 | | | 45 | | | — | | | 69 | |
| Total AFS debt securities | | $ | 24 | | | $ | 7,068 | | | $ | — | | | $ | 7,092 | |
| Equity securities | | | | | | | | |
| Common stock | | $ | 3 | | | $ | — | | | $ | — | | | $ | 3 | |
| CRA investments | | 24 | | | 25 | | | — | | | 49 | |
| Preferred stock | | 108 | | | — | | | — | | | 108 | |
| Total equity securities | | $ | 135 | | | $ | 25 | | | $ | — | | | $ | 160 | |
| Loans - HFS (2) | | $ | — | | | $ | 1,172 | | | $ | 1 | | | $ | 1,173 | |
| Mortgage servicing rights | | — | | | — | | | 1,148 | | | 1,148 | |
| Derivative assets (1) | | — | | | 42 | | | 5 | | | 47 | |
| Liabilities: | | | | | | | | |
| Junior subordinated debt (3) | | $ | — | | | $ | — | | | $ | 63 | | | $ | 63 | |
| Derivative liabilities (1) | | — | | | 36 | | | 3 | | | 39 | |
(1)See "Note 11. Derivatives and Hedging Activities." In addition, the carrying value of loans is decreased by $17 million as of December 31, 2022 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. Derivative assets and liabilities exclude margin of $4 million and $1 million, respectively.
(2)Includes only the portion of loans HFS that is recorded at fair value at each reporting period pursuant to the election of FVO treatment.
(3)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.
The change in Level 3 liabilities measured at fair value on a recurring basis included in OCI was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Junior Subordinated Debt |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in millions) |
| Beginning balance | | $ | (64.0) | | | $ | (64.5) | | | $ | (62.5) | | | $ | (67.4) | |
| Change in fair value (1) | | 6.7 | | | 2.7 | | | 5.2 | | | 5.6 | |
| Ending balance | | $ | (57.3) | | | $ | (61.8) | | | $ | (57.3) | | | $ | (61.8) | |
(1)Unrealized gains attributable to changes in the fair value of junior subordinated debt are recorded in OCI, net of tax, and totaled $5.0 million and $2.0 million for three months ended June 30, 2023 and 2022, respectively, and $3.9 million and $4.2 million for the six months ended June 30, 2023 and 2022, respectively.
The significant unobservable inputs used in the fair value measurements of these Level 3 liabilities were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | Valuation Technique | | Significant Unobservable Inputs | | Input Value |
| | (in millions) | | | | | | |
| Junior subordinated debt | | $ | 57 | | | Discounted cash flow | | Implied credit rating of the Company | | 10.13 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | Valuation Technique | | Significant Unobservable Inputs | | Input Value |
| | (in millions) | | | | | | |
| Junior subordinated debt | | $ | 63 | | | Discounted cash flow | | Implied credit rating of the Company | | 8.13 | % |
The significant unobservable inputs used in the fair value measurement of the Company’s junior subordinated debt as of June 30, 2023 and December 31, 2022 was the implied credit risk for the Company. The implied credit risk spread as of June 30,
2023 was calculated as the difference between the average of the 10 and 15-year 'BB' rated financial indexes over the corresponding swap indexes. As of December 31, 2022, 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 June 30, 2023, the Company estimates the discount rate at 10.13%, which represents an implied credit spread of 4.58% plus three-month LIBOR (5.55%). As of December 31, 2022, the Company estimated the discount rate at 8.13%, which was a 3.36% credit spread plus three-month LIBOR (4.77%).
The change in Level 3 assets and liabilities measured at fair value on a recurring basis included in income was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended June 30, 2023 | | | Six Months Ended June 30, 2023 |
| | | | MSRs | | Net IRLCs (1) | | | | MSRs | | Net IRLCs (1) |
| | | | (in millions) |
| Balance, beginning of period | | | | $ | 910 | | | $ | 14 | | | | | $ | 1,148 | | | $ | 2 | |
| Purchases and additions | | | | 245 | | | 4,210 | | | | | 387 | | | 7,156 | |
| Sales and payments | | | | (149) | | | — | | | | | (499) | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Settlement of IRLCs upon acquisition or origination of loans HFS | | | | — | | | (4,219) | | | | | — | | | (7,154) | |
| Change in fair value | | | | 24 | | | (3) | | | | | 16 | | | (2) | |
| Mark to market adjustments | | | | 1 | | | — | | | | | 4 | | | — | |
| Realization of cash flows | | | | (24) | | | — | | | | | (49) | | | — | |
| Balance, end of period | | | | $ | 1,007 | | | $ | 2 | | | | | $ | 1,007 | | | $ | 2 | |
| Changes in unrealized gains for the period (2) | | | | $ | 31 | | | $ | 2 | | | | | $ | 31 | | | $ | 2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended June 30, 2022 | | | Six Months Ended June 30, 2022 |
| | | | MSRs | | Net IRLCs (1) | | | | MSRs | | Net IRLCs (1) |
| | | | (in millions) |
| Balance, beginning of period | | | | $ | 950 | | | $ | (11) | | | | | $ | 698 | | | $ | 9 | |
| | | | | | | | | | | | |
| Purchases and additions | | | | 194 | | | 5,575 | | | | | 398 | | | 10,898 | |
| Sales and payments | | | | (350) | | | — | | | | | (350) | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Settlement of IRLCs upon acquisition or origination of loans HFS | | | | — | | | (5,543) | | | | | — | | | (10,864) | |
| Change in fair value | | | | 62 | | | (9) | | | | | 143 | | | (31) | |
| Realization of cash flows | | | | (30) | | | — | | | | | (63) | | | — | |
| Balance, end of period | | | | $ | 826 | | | $ | 12 | | | | | $ | 826 | | | $ | 12 | |
| Changes in unrealized gains for the period (2) | | | | $ | 40 | | | $ | 12 | | | | | $ | 89 | | | $ | 12 | |
(1) IRLC asset and liability positions are presented net.
(2) Amounts recognized as part of non-interest income.
The significant unobservable inputs used in the fair value measurements of these Level 3 assets and liabilities were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, 2023 | | | | |
| Asset/liability | | Key inputs | | Range | | Weighted average | | | | |
| MSRs: | | Option adjusted spread (in basis points) | | 48 - 307 | | 237 | | | | |
| Conditional prepayment rate (1) | | 9.1% - 20.9% | | 15.3% | | | | |
| Recapture rate | | 20.0% - 20.0% | | 20.0% | | | | |
| Servicing fee rate (in basis points) | | 25.0 - 56.5 | | 34.6 | | | | |
| Cost to service | | $93 - $100 | | $ | 94 | | | | | |
| | | | | | | | | | |
| IRLCs: | | Servicing fee multiple | | 3.3 - 5.3 | | 4.3 | | | | |
| Pull-through rate | | 71% - 100% | | 89% | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2022 |
| Asset/liability | | Key inputs | | Range | | Weighted average |
| MSRs: | | Option adjusted spread (in basis points) | | 190 - 621 | | 378 |
| Conditional prepayment rate (1) | | 8.5% - 18.5% | | 13.4% |
| Recapture rate | | 20.0% - 20.0% | | 20.0% |
| Servicing fee rate (in basis points) | | 25.0 - 56.5 | | 33.2 |
| Cost to service | | $87 - $94 | | $90 |
| | | | | | |
| IRLCs: | | Servicing fee multiple | | 2.9 - 5.5 | | 4.3 |
| Pull-through rate | | 69% - 100% | | 89% |
(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 FVO has been elected:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
| | Fair value | | UPB | | Difference | | Fair value | | UPB | | Difference |
| | (in millions) |
| Loans HFS: | | | | | | | | | | | | |
| Current through 89 days delinquent | | $ | 1,339 | | | $ | 1,311 | | | $ | 28 | | | $ | 1,172 | | | $ | 1,138 | | | $ | 34 | |
| 90 days or more delinquent | | 1 | | | 2 | | | (1) | | | 1 | | | 1 | | | — | |
| Total | | $ | 1,340 | | | $ | 1,313 | | | $ | 27 | | | $ | 1,173 | | | $ | 1,139 | | | $ | 34 | |
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 June 30, 2023: | | | | | | | | |
| Loans HFI | | $ | 368 | | | $ | — | | | $ | — | | | $ | 368 | |
| Other assets acquired through foreclosure | | 11 | | | — | | | — | | | 11 | |
| As of December 31, 2022: | | | | | | | | |
| Loans HFI | | $ | 295 | | | $ | — | | | $ | — | | | $ | 295 | |
| Other assets acquired through foreclosure | | 11 | | | — | | | — | | | 11 | |
For Level 3 assets measured at fair value on a nonrecurring basis as of period end, the significant unobservable inputs used in the fair value measurements were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2023 | | Valuation Technique(s) | | Significant Unobservable Inputs | | Range |
| (in millions) | | | | | | | | |
| Loans HFI | $ | 368 | | | 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 8.0% |
| | 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 | | | Collateral method | | Third party appraisal | | Costs to sell | | 4.0% to 10.0% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | Valuation Technique(s) | | Significant Unobservable Inputs | | Range |
| (in millions) | | | | | | | | |
| Loans HFI | $ | 295 | | | 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 8.0% |
| | 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 | | | 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 $368 million and $295 million at June 30, 2023 and December 31, 2022, respectively, net of a specific ACL of $9 million and $7 million at June 30, 2023 and December 31, 2022, 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 12 months. 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 million of such assets at June 30, 2023 and December 31, 2022.
Fair Value of Financial Instruments
The estimated fair value of the Company’s financial instruments is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 |
| | Carrying Amount | | Fair Value |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| | (in millions) |
| Financial assets: | | | | | | | | | | |
| | | | | | | | | | |
| Investment securities: | | | | | | | | | | |
| HTM | | $ | 1,367 | | | $ | — | | | $ | 1,186 | | | $ | — | | | $ | 1,186 | |
| AFS | | 8,631 | | | 2,313 | | | 6,318 | | | — | | | 8,631 | |
| Equity | | 139 | | | 122 | | | 17 | | | — | | | 139 | |
| Derivative assets (2) | | 104 | | | — | | | 98 | | | 6 | | | 104 | |
| Loans HFS (1) | | 3,156 | | | — | | | 3,136 | | | 20 | | | 3,156 | |
| Loans HFI, net | | 47,554 | | | — | | | — | | | 44,772 | | | 44,772 | |
| Mortgage servicing rights | | 1,007 | | | — | | | — | | | 1,007 | | | 1,007 | |
| Accrued interest receivable | | 348 | | | — | | | 348 | | | — | | | 348 | |
| Financial liabilities: | | | | | | | | | | |
| Deposits | | $ | 51,041 | | | $ | — | | | $ | 51,040 | | | $ | — | | | $ | 51,040 | |
| Other borrowings | | 9,567 | | | — | | | 9,490 | | | — | | | 9,490 | |
| Qualifying debt | | 888 | | | — | | | 620 | | | 69 | | | 689 | |
| Derivative liabilities (2) | | 41 | | | — | | | 37 | | | 4 | | | 41 | |
| Accrued interest payable | | 104 | | | — | | | 104 | | | — | | | 104 | |
(1) Includes loans transferred from HFI to HFS. As these transferred loans are salable into active markets, the fair value 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.
(2) Derivative assets and liabilities exclude margin of $85 million and $12 million, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Carrying Amount | | Fair Value |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| | (in millions) |
| Financial assets: | | | | | | | | | | |
| Investment securities: | | | | | | | | | | |
| HTM | | $ | 1,289 | | | $ | — | | | $ | 1,112 | | | $ | — | | | $ | 1,112 | |
| AFS | | 7,092 | | | 24 | | | 7,068 | | | — | | | 7,092 | |
| Equity securities | | 160 | | | 135 | | | 25 | | | — | | | 160 | |
| Derivative assets (1) | | 51 | | | — | | | 42 | | | 5 | | | 47 | |
| Loans HFS | | 1,184 | | | — | | | 1,172 | | | 1 | | | 1,173 | |
| Loans HFI, net | | 51,552 | | | — | | | — | | | 47,679 | | | 47,679 | |
| Mortgage servicing rights | | 1,148 | | | — | | | — | | | 1,148 | | | 1,148 | |
| Accrued interest receivable | | 357 | | | — | | | 357 | | | — | | | 357 | |
| Financial liabilities: | | | | | | | | | | |
| Deposits | | $ | 53,644 | | | $ | — | | | $ | 53,698 | | | $ | — | | | $ | 53,698 | |
| Other borrowings | | 6,299 | | | — | | | 6,261 | | | — | | | 6,261 | |
| Qualifying debt | | 893 | | | — | | | 735 | | | 75 | | | 810 | |
| Derivative liabilities (1) | | 40 | | | — | | | 36 | | | 3 | | | 39 | |
| Accrued interest payable | | 35 | | | — | | | 35 | | | — | | | 35 | |
(1) Derivative assets and liabilities exclude margin of $4 million and $1 million, respectively.
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. Interest rate risk is also evaluated at the Parent level, which is reported to the BOD and its Finance and Investment Committee.
Fair value of commitments
The estimated fair value of letters of credit outstanding at June 30, 2023 and December 31, 2022 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 June 30, 2023 and December 31, 2022.
16. SEGMENTS
The Company's reportable segments are aggregated with a focus on products and services offered and consist of three reportable segments:
•Commercial: provides commercial banking and treasury management products and services to small and middle-market businesses, specialized banking services to sophisticated commercial institutions and investors within niche industries, as well as financial services to the real estate industry.
•Consumer Related: offers both commercial banking services to enterprises in consumer-related sectors and consumer banking services, such as residential mortgage banking.
•Corporate & Other: consists of the Company's investment portfolio, Corporate borrowings and other related items, income and expense items not allocated to other reportable segments, and inter-segment eliminations.
The Company's segment reporting process begins with the assignment of all loan and deposit accounts directly to the segments where these products are originated and/or serviced. Equity capital is assigned to each segment based on the risk profile of their assets and liabilities. With the exception of goodwill, which is assigned a 100% weighting, equity capital allocations ranged from 0% to 20% during the year. Any excess or deficient equity not allocated to segments based on risk is assigned to the Corporate & Other segment.
Net interest income, provision for credit losses, and non-interest expense amounts are recorded in their respective segments to the extent that the amounts are directly attributable to those segments. Net interest income is recorded in each segment on a TEB with a corresponding increase in income tax expense, which is eliminated in the Corporate & Other segment.
Further, net interest income of a reportable segment includes a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics. Using this funds transfer pricing methodology, liquidity is transferred between users and providers. A net user of funds has lending/investing in excess of deposits/borrowings and a net provider of funds has deposits/borrowings in excess of lending/investing. A segment that is a user of funds is charged for the use of funds, while a provider of funds is credited through funds transfer pricing, which is determined based on the average estimated life of the assets or liabilities in the portfolio. Residual funds transfer pricing mismatches are allocable to the Corporate & Other segment and presented in net interest income.
The net income amount for each reportable segment is further derived by the use of expense allocations. Certain expenses not directly attributable to a specific segment are allocated across all segments based on key metrics, such as number of employees, number of transactions processed for loans and deposits, and average loan and deposit balances. These types of expenses include information technology, operations, human resources, finance, risk management, credit administration, legal, and marketing.
Income taxes are applied to each segment based on estimated effective tax rates. Any difference in the corporate tax rate and the aggregate effective tax rates in the segments are adjusted in the Corporate & Other segment.
The following is a summary of operating segment information for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet: | | Consolidated Company | | Commercial | | Consumer Related | | Corporate & Other |
| At June 30, 2023: | | (in millions) |
| Assets: | | | | | | | | |
| Cash, cash equivalents, and investment securities | | $ | 12,527 | | | $ | 13 | | | $ | 150 | | | $ | 12,364 | |
| Loans HFS | | 3,156 | | | 1,049 | | | 2,107 | | | — | |
| Loans HFI, net of deferred fees and costs | | 47,875 | | | 28,139 | | | 19,736 | | | — | |
| Less: allowance for credit losses | | (321) | | | (269) | | | (52) | | | — | |
| Net loans HFI | | 47,554 | | | 27,870 | | | 19,684 | | | — | |
| Other assets acquired through foreclosure, net | | 11 | | | 11 | | | — | | | — | |
| Goodwill and other intangible assets, net | | 674 | | | 293 | | | 381 | | | — | |
| Other assets | | 4,238 | | | 567 | | | 1,693 | | | 1,978 | |
| Total assets | | $ | 68,160 | | | $ | 29,803 | | | $ | 24,015 | | | $ | 14,342 | |
| Liabilities: | | | | | | | | |
| Deposits | | $ | 51,041 | | | $ | 21,460 | | | $ | 22,380 | | | $ | 7,201 | |
| Borrowings and qualifying debt | | 10,455 | | | 6 | | | 1,489 | | | 8,960 | |
| Other liabilities | | 979 | | | 70 | | | 173 | | | 736 | |
| Total liabilities | | 62,475 | | | 21,536 | | | 24,042 | | | 16,897 | |
| Allocated equity: | | 5,685 | | | 2,494 | | | 1,715 | | | 1,476 | |
| Total liabilities and stockholders' equity | | $ | 68,160 | | | $ | 24,030 | | | $ | 25,757 | | | $ | 18,373 | |
| Excess funds provided (used) | | — | | | (5,773) | | | 1,742 | | | 4,031 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Income Statement: | | | | | | | | |
| Three Months Ended June 30, 2023: | | (in millions) |
| Net interest income | | $ | 550.3 | | | $ | 356.5 | | | $ | 204.8 | | | $ | (11.0) | |
| Provision for credit losses | | 21.8 | | | 18.2 | | | 1.9 | | | 1.7 | |
| Net interest income (expense) after provision for credit losses | | 528.5 | | | 338.3 | | | 202.9 | | | (12.7) | |
| Non-interest income | | 119.0 | | | 30.8 | | | 86.1 | | | 2.1 | |
| Non-interest expense | | 387.4 | | | 147.7 | | | 232.3 | | | 7.4 | |
| Income (loss) before income taxes | | 260.1 | | | 221.4 | | | 56.7 | | | (18.0) | |
| Income tax expense (benefit) | | 44.4 | | | 43.4 | | | 11.2 | | | (10.2) | |
| Net income (loss) | | $ | 215.7 | | | $ | 178.0 | | | $ | 45.5 | | | $ | (7.8) | |
| | | | | | | | |
| Six Months Ended June 30, 2023: | | (in millions) |
| Net interest income | | $ | 1,160.2 | | | $ | 746.0 | | | $ | 404.0 | | | $ | 10.2 | |
| Provision for credit losses | | 41.2 | | | 15.6 | | | 3.4 | | | 22.2 | |
| Net interest income (expense) after provision for credit losses | | 1,119.0 | | | 730.4 | | | 400.6 | | | (12.0) | |
| Non-interest income | | 61.0 | | | (65.9) | | | 137.1 | | | (10.2) | |
| Non-interest expense | | 735.3 | | | 283.6 | | | 424.4 | | | 27.3 | |
| Income (loss) before provision for income taxes | | 444.7 | | | 380.9 | | | 113.3 | | | (49.5) | |
| Income tax expense | | 86.8 | | | 81.9 | | | 24.0 | | | (19.1) | |
| Net income (loss) | | $ | 357.9 | | | $ | 299.0 | | | $ | 89.3 | | | $ | (30.4) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet: | | Consolidated Company | | Commercial | | Consumer Related | | Corporate |
| At December 31, 2022: | | (in millions) |
| Assets: | | | | | | | | |
| Cash, cash equivalents, and investment securities | | $ | 9,803 | | | $ | 12 | | | $ | — | | | $ | 9,791 | |
| Loans held for sale | | 1,184 | | | — | | | 1,184 | | | — | |
| Loans, net of deferred fees and costs | | 51,862 | | | 31,414 | | | 20,448 | | | — | |
| Less: allowance for credit losses | | (310) | | | (262) | | | (48) | | | — | |
| Total loans | | 51,552 | | | 31,152 | | | 20,400 | | | — | |
| Other assets acquired through foreclosure, net | | 11 | | | 11 | | | — | | | — | |
| Goodwill and other intangible assets, net | | 680 | | | 293 | | | 387 | | | — | |
| Other assets | | 4,504 | | | 435 | | | 2,180 | | | 1,889 | |
| Total assets | | $ | 67,734 | | | $ | 31,903 | | | $ | 24,151 | | | $ | 11,680 | |
| Liabilities: | | | | | | | | |
| Deposits | | $ | 53,644 | | | $ | 29,494 | | | $ | 18,492 | | | $ | 5,658 | |
| Borrowings and qualifying debt | | 7,192 | | | 27 | | | 340 | | | 6,825 | |
| Other liabilities | | 1,542 | | | 83 | | | 656 | | | 803 | |
| Total liabilities | | 62,378 | | | 29,604 | | | 19,488 | | | 13,286 | |
| Allocated equity: | | 5,356 | | | 2,684 | | | 1,691 | | | 981 | |
| Total liabilities and stockholders' equity | | $ | 67,734 | | | $ | 32,288 | | | $ | 21,179 | | | $ | 14,267 | |
| Excess funds provided (used) | | — | | | 385 | | | (2,972) | | | 2,587 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Income Statements: | | | | | | | | |
| Three Months Ended June 30, 2022: | | (in millions) |
| Net interest income | | $ | 525.0 | | | $ | 370.5 | | | $ | 219.4 | | | $ | (64.9) | |
| Provision for (recovery of) credit losses | | 27.5 | | | 32.7 | | | (5.2) | | | — | |
| Net interest income (expense) after provision for credit losses | | 497.5 | | | 337.8 | | | 224.6 | | | (64.9) | |
| Non-interest income | | 95.0 | | | 18.0 | | | 74.6 | | | 2.4 | |
| Non-interest expense | | 268.9 | | | 115.9 | | | 139.1 | | | 13.9 | |
| Income (loss) before income taxes | | 323.6 | | | 239.9 | | | 160.1 | | | (76.4) | |
| Income tax expense (benefit) | | 63.4 | | | 57.3 | | | 38.1 | | | (32.0) | |
| Net income (loss) | | $ | 260.2 | | | $ | 182.6 | | | $ | 122.0 | | | $ | (44.4) | |
| | | | | | | | |
| Six Months Ended June 30, 2022: | | (in millions) |
| Net interest income | | $ | 974.5 | | | $ | 705.3 | | | $ | 402.7 | | | $ | (133.5) | |
| Provision for (recovery of) credit losses | | 36.5 | | | 33.2 | | | 5.3 | | | (2.0) | |
| Net interest income (expense) after provision for credit losses | | 938.0 | | | 672.1 | | | 397.4 | | | (131.5) | |
| Non-interest income | | 201.3 | | | 34.9 | | | 153.8 | | | 12.6 | |
| Non-interest expense | | 517.5 | | | 230.4 | | | 264.1 | | | 23.0 | |
| Income (loss) before income taxes | | 621.8 | | | 476.6 | | | 287.1 | | | (141.9) | |
| Income tax expense (benefit) | | 121.5 | | | 113.4 | | | 68.5 | | | (60.4) | |
| Net income (loss) | | $ | 500.3 | | | $ | 363.2 | | | $ | 218.6 | | | $ | (81.5) | |
17. REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue streams within the scope of ASC 606 include service charges and fees, interchange fees on credit and debit cards, success fees, and legal settlement service fees. These revenues totaled $24.3 million and $11.3 million for the three months ended June 30, 2023 and 2022, respectively, and $38.3 million and $25.6 million for the six months ended June 30, 2023 and 2022, respectively. The Company had no material unsatisfied performance obligations as of June 30, 2023 or December 31, 2022.
18. MERGERS, ACQUISITIONS AND DISPOSITIONS
Acquisition of Digital Disbursements
On January 25, 2022, the Company completed its acquisition of DST, doing business as Digital Disbursements, a digital payments platform for the class action legal industry. The acquisition of DST extended the Company's digital payment efforts by providing a digital payments platform for the class action market and broader legal industry.
This transaction was accounted for as a business combination under the acquisition method of accounting. Assets purchased and liabilities assumed were recorded at their respective acquisition date estimated fair values, which were final as of December 31, 2022.
Total consideration of $57.0 million, comprised of cash paid at closing of $50.6 million and contingent consideration with an estimated fair value of $6.4 million, was exchanged for all of the issued and outstanding membership interests of DST. The terms of the acquisition include a contingent consideration arrangement that is based on performance for the three year period subsequent to the acquisition. There is no required minimum or maximum payment amount specified under the terms of the contingent consideration agreement. The fair value of the contingent consideration recognized on the acquisition date was estimated using a discounted cash flow approach.
DST’s results of operations have been included in the Company's results beginning January 25, 2022 and are reported as part of the Consumer Related segment. Acquisition and restructure expenses of $0.4 million for the six months ended June 30, 2022 were included as a component of non-interest expense in the Consolidated Income Statement, all of which were acquisition related costs as defined by ASC 805.
The fair value amounts of identifiable assets acquired and liabilities assumed in the DST acquisition are as follows:
| | | | | | | | |
| | January 25, 2022 |
| | (in millions) |
| Assets acquired: | | |
| Cash and cash equivalents | | $ | 0.6 | |
| Identified intangible assets | | 20.1 | |
| Other assets | | 0.1 | |
| Total assets | | $ | 20.8 | |
| Liabilities assumed: | | |
| Other liabilities | | $ | 0.4 | |
| Total liabilities | | 0.4 | |
| Net assets acquired | | $ | 20.4 | |
| Consideration paid | | |
| Cash | | $ | 50.6 | |
| Contingent consideration | | 6.4 | |
| Total consideration | | $ | 57.0 | |
| Goodwill | | $ | 36.6 | |
In connection with the acquisition, the Company acquired identifiable intangible assets totaling $20.1 million, as detailed in the table below:
| | | | | | | | | | | | | | |
| | Acquisition Date Fair Value | | Estimated Useful Life |
| | (in millions) | | (in years) |
| Customer relationships | | $ | 15.7 | | | 7 |
| Developed technology | | 4.1 | | | 5 |
| Trade name | | 0.3 | | | 10 |
| Total | | $ | 20.1 | | | |
Goodwill in the amount of $36.6 million was recognized, of which $31.8 million is expected to be deductible for tax purposes. Goodwill was allocated entirely to the Consumer Related segment and represents the strategic, operational, and financial benefits expected from the acquisition, including expansion of the Company's settlement services offerings, diversification of its revenue sources, and post-acquisition synergies from integrating Digital Disbursements, as well as the value of the acquired workforce.