FAIR VALUE

Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accounting Standards Codification Topic 820, Fair Value Measurement, also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1:

Quoted prices in active markets for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 1 assets and liabilities include debt and equity securities that are actively traded in an exchange or over-the-counter market and are highly liquid, such as, among other assets and securities, certain U.S. treasury and other U.S. government debt.

Level 2:

Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets include securities with quoted prices that are traded less frequently than exchange-traded instruments and whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

Level 3:

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models such as discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

When available, the Company generally uses quoted market prices to determine fair value, in which case the items are classified in Level 1. In some cases where a market price is available, the Company will make use of acceptable practical expedients (such as matrix pricing) to calculate fair value, in which case the items are classified in Level 2.

The Company considers relevant and observable market prices in its valuations where possible. The frequency of transactions, the size of the bid-ask spread and the nature of the participants are some of the factors the Company uses to help determine whether a market is active and orderly or inactive and not orderly. Price quotes based upon transactions that are not orderly are not considered to be determinative of fair value and should be given little, if any, weight in measuring fair value.

If quoted market prices are not available, fair value is based upon internally developed valuation techniques that use, where possible, current market-based or independently sourced market parameters, such as interest rates, credit spreads, housing value forecasts, etc. Items valued using such internally generated valuation techniques are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be some significant inputs that are readily observable.

The following section describes the valuation methodologies used by the Company to measure various financial instruments at fair value, including an indication of the level in the fair value hierarchy in which each instrument is generally classified:

Securities—trading. Trading securities are recorded at fair value. The trading portfolio consists of two different issues of floating-rate debt securities collateralized by pools of bank trust preferred securities. Recent liquidity and economic uncertainty have made the market for collateralized debt obligations less active or inactive. As quoted market prices are not available, the Level 3 fair values for these securities are determined by the Company utilizing industry-standard tools to calculate the net present value of the expected cash flows available to the securities from the underlying assets. The Company’s expected cash flows are calculated for each security and include the impact of actual and forecasted bank defaults within each collateral pool as well as structural features of the security’s tranche such as lock outs, subordination and overcollateralization. The forecast of underlying bank defaults in each pool is based upon a quarterly financial update including the trend in non-performing assets, the allowance for loan and lease losses and the underlying bank’s capital ratios. Also a factor is the Company’s loan and lease loss experience in the local economy in which the bank operates. At December 31, 2016, the Company’s forecast of cash flows for both securities includes actual and forecasted defaults totaling 17.9% of all banks in the collateral pools, compared to 16.1% of the banks actually in default. The expected cash flows reflect the Company’s best estimate of all pool losses which are then applied to the overcollateralization reserve and the subordinated tranches to determine the cash flows. The Company selects a discount rate margin based upon the spread between U.S. Treasury rates and the market rates for active credit grades for financial companies. The discount margin when added to the U.S. Treasury rate determines the discount rate, reflecting primarily market liquidity and interest rate risk since expected credit loss is included in the cash flows. At December 31, 2016, the Company used a weighted average discount margin of 475 basis points above U.S. Treasury rates to calculate the net present value of the expected cash flows and the fair value of its trading securities.

The Level 3 fair values determined by the Company for its trading securities rely heavily on management’s assumptions as to the future credit performance of the collateral banks, the impact of the global and regional economic activity, the timing of forecasted defaults and the discount rate applied to cash flows. The fair value of the trading securities at December 31, 2016 is sensitive to an increase or decrease in the discount rate. An increase in the discount margin of 100 basis points would have reduced the total fair value of the trading securities and decreased net income before income tax by $803. A decrease in the discount margin of 100 basis points would have increased the total fair value of the trading securities and increased net income before income tax by $921.

Securities—available-for-sale and held-to-maturity. Available-for-sale (“AFS”) securities are recorded at fair value and consist of residential mortgage-backed securities (“RMBS”) issued by U.S. agencies, non-agencies, collateralized loan obligations, and municipals. Held-to-maturity (“HTM”) securities are recorded at amortized cost and consist of RMBS issued by U.S. agencies, RMBS issued by non-agencies, and municipals. Fair value for U.S. agency securities is generally based on quoted market prices of similar securities used to form a dealer quote or a pricing matrix. There continues to be significant illiquidity in the market for RMBS issued by non-agencies, impacting the availability and reliability of transparent pricing. As orderly quoted market prices are not available, the Level 3 fair values for these securities are determined by the Company utilizing industry-standard tools to calculate the net present value of the expected cash flows available to the securities from the underlying mortgage assets. The Company computes Level 3 fair values for each non-agency RMBS in the same manner (as described below) whether available-for-sale or held-to-maturity.

To determine the performance of the underlying mortgage loan pools, the Company estimates prepayments, defaults, and loss severities based on a number of macroeconomic factors, including housing price changes, unemployment rates, interest rates and borrower attributes such as credit score and loan documentation at the time of origination. For each security, the Company inputs a projection of monthly default rates, loss severity rates and voluntary prepayment rates for the underlying mortgages for the remaining life of each security to determine the expected cash flows. The projections of default rates are derived by the Company from the historic default rate observed in the pool of loans collateralizing the security, increased by and decreased by the forecasted increase or decrease in the national unemployment rate. The projections of loss severity rates are derived by the Company from the historic loss severity rate observed in the pool of loans, increased by (and decreased by) the forecasted decrease or increase in the national home price appreciation (“HPA”) index. The largest factors influencing the Company’s modeling of the monthly default rate are unemployment and HPA, as a strong correlation exists. The national unemployment rate announced prior to the end of the period covered by this report (reported for November 2016) was 4.6%, down from the high of 10.0% in October 2009. Consensus estimates for unemployment are that the rate will continue to decline. Going forward, the Company is projecting lower monthly default rates. The range of loss severity rates applied to each default used in the Company’s projections at December 31, 2016 are from 40.0% up to 68.8% based upon individual bond historical performance. The default rates and the severities are projected for every non-agency RMBS security held by the Company and will vary monthly based upon the actual performance of the security and the macroeconomic factors discussed above.

To determine the discount rates used to compute the present value of the expected cash flows for these non-agency RMBS securities, the Company separates the securities by the borrower characteristics in the underlying pool. Specifically, “prime” securities generally have borrowers with higher FICO scores and better documentation of income. “Alt-A” securities generally have borrowers with a lower FICO and less documentation of income. “Pay-option ARMs” are Alt-A securities with borrowers that tend to pay the least amount of principal (or increase their loan balance through negative amortization). The Company calculates separate discount rates for prime, Alt-A and Pay-option ARM non-agency RMBS securities using market-participant assumptions for risk, capital and return on equity. The range of annual default rates used in the Company’s projections at December 31, 2016 are from 1.5% up to 13.7% with prime securities tending toward the lower end of the range and Alt-A and Pay-option ARMs tending toward the higher end of the range. The Company applies its discount rates to the projected monthly cash flows which already reflect the full impact of all forecasted losses using the assumptions described above. When calculating present value of the expected cash flows at December 31, 2016, the Company computed its discount rates as a spread between 239 and 668 basis points over the interpolated swap curve with prime securities tending toward the lower end of the range and Alt-A and Pay-option ARMs tending toward the higher end of the range.

The Bank’s estimate of fair value for non-agency securities using Level 3 pricing is highly subjective and is based on the Bank’s estimate of voluntary prepayments, default rates, severities and discount margins, which are forecasted monthly over the remaining life of the security. Changes in one or more of these assumptions can cause a significant change in the estimated fair value. For further details see the table later in this note that summarizes quantitative information about Level 3 fair value measurements.

Loans Held for Sale. Loans held for sale at fair value are primarily single-family and multifamily residential loans. The fair value of residential loans held for sale is determined by pricing for comparable assets or by existing forward sales commitment prices with investors.

Impaired Loans. Impaired loans are loans which are inadequately protected by the current net worth and paying capacity of the borrowers or the collateral pledged. The accrual of interest income has been discontinued for impaired loans. The impaired loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. The Company assesses loans individually and identifies impairment when the loan is classified as impaired, has been restructured, or management has serious doubts about the future collectibility of principal and interest, even though the loans may currently be performing. The fair value of an impaired loan is determined based on an observable market price or current appraised value of the underlying collateral. The fair value of impaired loans with specific write-offs or allocations of the allowance for loan losses are generally based on recent real estate appraisals or internal valuation analyses consistent with the methodology used in real estate appraisals and include other third-party valuations and analysis of cash flows. These appraisals and analyses are updated at least on an annual basis. The Company primarily obtains real estate appraisals and in the rare cases where an appraisal cannot be obtained, the Company performs an internal valuation analysis. These appraisals and analyses may utilize a single valuation approach or a combination of approaches including comparable sales and income approaches. The sales comparison approach uses at least three recent similar property sales to help determine the fair value of the property being appraised. The income approach is calculated by taking the net operating income generated by the collateral property of the rent collected and dividing it by an assumed capitalization rate. Adjustments are routinely made in the process by the appraisers to account for differences between the comparable sales and income data available. When measuring the fair value of the impaired loan based upon the projected sale of the underlying collateral, the Company subtracts the costs expected to be incurred for the transfer of the underlying collateral, which includes items such as sales commissions, delinquent taxes and insurance premiums. These adjustments to the estimated fair value of non-performing loans may result in increases or decreases to the provision for loan losses recorded in current earnings. Such adjustments are typically significant and result in a Level 3 classification for the inputs for determining fair value.

Other Real Estate Owned and Repossessed Vehicles. Non-recurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (“OREO”) are measured at the lower of carrying amount or fair value, less estimated costs to sell. Fair values are generally based on third-party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Mortgage Servicing Rights. The Company initially records all mortgage servicing rights (“MSRs”) at fair value and accounts for MSRs at fair value during the life of the MSR, with changes in fair value recorded through current period earnings. Fair value adjustments encompass market-driven valuation changes as well as modeled amortization involving the run-off of value that occurs due to the passage of time as individual loans are paid by borrowers. Market expectations about loan duration, and correspondingly the expected term of future servicing cash flows, may vary from time to time due to changes in expected prepayment activity, especially when interest rates rise or fall. Market expectations of increased loan prepayment speeds may negatively impact the fair value of the single family MSRs. Fair value is also dependent on the discount rate used in calculating present value, which is imputed from observable market activity and market participants and results in Level 3 classification. Management reviews and adjusts the discount rate on an ongoing basis. An increase in the discount rate would reduce the estimated fair value of the MSRs asset.

Mortgage Banking Derivatives. Fair value for mortgage banking derivatives are either based upon prices in active secondary markets for identical securities or based on quoted market prices of similar assets used to form a dealer quote or a pricing matrix. If no such quoted price exists, the fair value of a commitment is determined by quoted prices for a similar commitment or commitments, adjusted for the specific attributes of each commitment. These fair values are then adjusted for items such as fallout and estimated costs to originate the loan.

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 or, in some cases, more conservative than 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 relevant reporting date.

The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis at December 31, 2016 and June 30, 2016. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:



	December 31, 2016
(Dollars in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
ASSETS:
Securities—Trading: Collateralized Debt Obligations	$	—	$	—	$	8,151	$	8,151
Securities—Available-for-Sale:
Agency RMBS	$	—	$	33,264	$	—	$	33,264
Non-Agency RMBS	—		—		82,226		82,226
Municipal	—		29,373		—		29,373
Other Debt Securities	—		234,871		—		234,871
Total—Securities—Available-for-Sale	$	—	$	297,508	$	82,226	$	379,734
Loans Held for Sale	$	—	$	33,990	$	—	$	33,990
Mortgage Servicing Rights	$	—	$	—	$	6,150	$	6,150
Other assets – Derivative Instruments	$	—	$	—	$	2,340	$	2,340
LIABILITIES:
Other liabilities – Derivative Instruments	$	—	$	—	$	89	$	89

	June 30, 2016
(Dollars in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total

ASSETS:
Securities—Trading: Collateralized Debt Obligations	$	—	$	—	$	7,584	$	7,584
Securities—Available-for-Sale:
Agency RMBS	$	—	$	33,722	$	—	$	33,722
Non-Agency RMBS	—		—		9,364		9,364
Municipal	—		34,719		—		34,719
Other Debt Securities	—		187,642		—		187,642
Total—Securities—Available-for-Sale	$	—	$	256,083	$	9,364	$	265,447
Loans Held for Sale	$	—	$	20,871	$	—	$	20,871
Mortgage Servicing Rights	$	—	$	—	$	3,943	$	3,943
Other assets – Derivative Instruments	$	—	$	—	$	2,202	$	2,202
LIABILITIES:
Other liabilities – Derivative Instruments	$	—	$	—	$	884	$	884

The following tables present additional information about assets measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:



	For the Three Months Ended
	December 31, 2016
(Dollars in thousands)	Securities – Trading: Collateralized Debt Obligations		Securities – Available-for-Sale: Non-Agency RMBS			Mortgage Servicing Rights		Derivative Instruments, net		Total

Opening balance	$	7,695	$	133,169		$	4,855	$	2,186	$	147,905
Transfers into Level 3	—		—			—		—		—
Transfers out of Level 3	—		—			—		—		—
Total gains or losses for the period:
Included in earnings—Sale of mortgage-backed securities	—		(2,569		)	—		—		(2,569		)
Included in earnings—Fair value gain (loss) on trading securities	456		—			—		—		456
Included in earnings—Mortgage banking income	—		—			585		65		650
Included in other comprehensive income	—		1,780			—		—		1,780
Purchases, originations, issues, sales and settlements:
Purchases/originations	—		—			710		—		710
Issues	—		—			—		—		—
Sales	—		(44,210		)	—		—		(44,210		)
Settlements	—		(4,594		)	—		—		(4,594		)
Other-than-temporary impairment	—		(1,350		)	—		—		(1,350		)
Closing balance	$	8,151	$	82,226		$	6,150	$	2,251	$	98,778

Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	$	456	$	(2,569	)	$	585	$	65	$	(1,463	)

	For the Six Months Ended
	December 31, 2016
(Dollars in thousands)	Securities – Trading: Collateralized Debt Obligations		Securities – Available-for-Sale: Non-Agency RMBS			Mortgage Servicing Rights		Derivative Instruments, net		Total

Opening Balance	$	7,584	$	9,364		$	3,943	$	1,318	$	22,209
Transfers into Level 3	—		124,547			—		—		124,547
Transfers out of Level 3	—		—			—		—		—
Total gains or losses for the period:
Included in earnings—Sale of mortgage-backed securities	—		(1,868		)	—		—		(1,868		)
Included in earnings—Fair value gain (loss) on trading securities	567		—			—		—		567
Included in earnings—Mortgage banking income	—		—			364		933		1,297
Included in other comprehensive income	—		9,314			—		—		9,314
Purchases, originations, issues, sales and settlements:
Purchases/originations	—		—			1,843		—		1,843
Issues	—		—			—		—		—
Sales	—		(50,609		)	—		—		(50,609		)
Settlements	—		(7,052		)	—		—		(7,052		)
Other-than-temporary impairment	—		(1,470		)	—		—		(1,470		)
Closing balance	$	8,151	$	82,226		$	6,150	$	2,251	$	98,778

Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	$	567	$	(1,868	)	$	364	$	933	$	(4	)



	For the Three Months Ended
	December 31, 2015
(Dollars in thousands)	Securities – Trading: Collateralized Debt Obligations			Securities – Available-for-Sale: Non-Agency RMBS			Mortgage Servicing Rights			Derivative Instruments, net			Total

Opening balance	$	7,902		$	24,993		$	2,687		$	1,018		$	36,600
Transfers into Level 3	—			—			—			—			—
Transfers out of Level 3	—			—			—			—			—
Total gains or losses for the period:
Included in earnings—Sale of mortgage-backed securities	—			(680		)	—			—			(680		)
Included in earnings—Fair value gain on trading securities	(196		)	—			—			—			(196		)
Included in earnings—Mortgage banking income	—			—			95			13			108
Included in other comprehensive income	—			(715		)	—			—			(715		)
Purchases, originations, issues, sales and settlements:
Purchases/originations	—			—			693			—			693
Issues	—			—			—			—			—
Sales	—			(2,089		)	—			—			(2,089		)
Settlements	—			(369		)	—			—			(369		)
Other-than-temporary impairment	—			(4		)	—			—			(4		)
Closing balance	$	7,706		$	21,136		$	3,475		$	1,031		$	33,348

Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	$	(196	)	$	(680	)	$	95		$	13		$	(768	)

	For the Six Months Ended
	December 31, 2015
(Dollars in thousands)	Securities – Trading: Collateralized Debt Obligations			Securities – Available-for-Sale: Non-Agency RMBS			Mortgage Servicing Rights			Derivative Instruments, net			Total

Opening Balance	$	7,832		$	26,633		$	2,098		$	2,261		$	38,824
Transfers into Level 3	—			—			—			—			—
Transfers out of Level 3	—			—			—			—			—
Total gains or losses for the period:
Included in earnings—Sale of mortgage-backed securities	—			(680		)	—			—			(680		)
Included in earnings—Fair value gain (loss) on trading securities	(126		)	—			—			—			(126		)
Included in earnings—Mortgage banking income	—			—			(51		)	(1,230		)	(1,281		)
Included in other comprehensive income	—			(961		)	—			—			(961		)
Purchases, originations, issues, sales and settlements:
Purchases/originations	—			—			1,428			—			1,428
Issues	—			—			—			—			—
Sales	—			(2,089		)	—			—			(2,089		)
Settlements	—			(1,728		)	—			—			(1,728		)
Other-than-temporary impairment	—			(39		)	—			—			(39		)
Closing balance	$	7,706		$	21,136		$	3,475		$	1,031		$	33,348

Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	$	(126	)	$	(680	)	$	(51	)	$	(1,230	)	$	(2,087	)

The table below summarizes the quantitative information about level 3 fair value measurements at the periods indicated:



	December 31, 2016
(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
Securities – Trading: Collateralized Debt Obligations	$	8,151	Discounted Cash Flow	Total Projected Defaults, Discount Rate over Treasury	13.7 to 22.0% (17.8%) 4.75 to 4.75% (4.75%)
Securities – Available-for-Sale: Non-agency RMBS	$	82,226	Discounted Cash Flow	Projected Constant Prepayment Rate, Projected Constant Default Rate, Projected Loss Severity, Discount Rate over LIBOR	2.5 to 25.3% (10.0%) 1.5 to 13.7% (4.3%) 40.0 to 68.8% (57.4%) 2.39 to 6.68% (3.61%)
Mortgage Servicing Rights	$	6,150	Discounted Cash Flow	Projected Constant Prepayment Rate, Life (in years), Discount Rate	6.6 to 21.7% (9.0%) 2.9 to 8.5 (6.9) 9.5 to 13.0% (9.7%)
Derivative Instruments, net	$	2,251	Sales Comparison Approach	Projected Sales Profit of Underlying Loans	0.2 to 0.7% (0.5%)



	June 30, 2016
(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
Securities – Trading: Collateralized Debt Obligations	$	7,584	Discounted Cash Flow	Total Projected Defaults, Discount Rate over Treasury	11.7 to 21.0% (16.5%) 5.0 to 5.0% (5.0%)
Securities – Available-for-Sale: Non-agency RMBS	$	9,364	Discounted Cash Flow	Projected Constant Prepayment Rate, Projected Constant Default Rate, Projected Loss Severity, Discount Rate over LIBOR	9.1 to 20.6% (14.2%) 1.5 to 13.6% (6.1%) 40.0 to 68.8% (51.5%) 2.5 to 2.9% (2.8%)
Mortgage Servicing Rights	$	3,943	Discounted Cash Flow	Projected Constant Prepayment Rate, Life (in years), Discount Rate	7.8 to 21.8% (10.6%) 3.5 to 7.1 (6.2) 9.5 to 10.5% (9.5%)
Derivative Instruments, net	$	1,318	Sales Comparison Approach	Projected Sales Profit of Underlying Loans	0.3 to 0.6% (0.4%)

The significant unobservable inputs used in the fair value measurement of the Company’s residential mortgage-backed securities are prepayment rates, probability of default, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.

The table below summarizes changes in unrealized gains and losses and interest income recorded in earnings for level 3 trading assets and liabilities that are still held at the periods indicated:



	For the Three Months Ended					For the Six Months Ended
	December 31,					December 31,
(Dollars in thousands)	2016		2015			2016		2015
Interest income on investments	$	70	$	60		$	143	$	117
Fair value adjustment	456		(195		)	567		(126		)
Total	$	526	$	(135	)	$	710	$	(9	)

The table below summarizes assets measured for impairment on a non-recurring basis:



	December 31, 2016
(Dollars in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance
Impaired Loans:
Single family real estate secured:
Mortgage	$	—	$	—	$	28,351	$	28,351
Home equity	—		—		47		47
Multifamily real estate secured	—		—		5,478		5,478
Commercial real estate secured	—		—		232		232
Auto and RV secured	—		—		216		216
Other	—		—		445		445
Total	$	—	$	—	$	34,769	$	34,769
Other real estate owned and foreclosed assets:
Single family real estate	$	—	$	—	$	908	$	908
Autos and RVs	—		—		53		53
Total	$	—	$	—	$	961	$	961

	June 30, 2016
(Dollars in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance
Impaired Loans:
Single family real estate secured:
Mortgage	$	—	$	—	$	28,610	$	28,610
Home equity	—		—		33		33
Multifamily real estate secured	—		—		2,218		2,218
Commercial real estate secured	—		—		254		254
Auto and RV secured	—		—		278		278
Other	—		—		676		676
Total	$	—	$	—	$	32,069	$	32,069
Other real estate owned and foreclosed assets:
Multifamily real estate	—		—		207		207
Autos and RVs	—		—		45		45
Total	$	—	$	—	$	252	$	252
HTM Securities – Non-Agency RMBS	$	—	$	—	$	79,164	$	79,164

Impaired loans measured for impairment on a non-recurring basis using the fair value of the collateral for collateral-dependent loans have a carrying amount of $34,769, after charge-offs of $903 for the six months ended December 31, 2016, and life to date charge-offs of $5,665. Impaired loans had a related allowance of $705 at December 31, 2016.

Other real estate owned and foreclosed assets, which are measured at the lower of carrying value or fair value less costs to sell, had a net carrying amount of $961 after charge-offs of $323 for the three months ended December 31, 2016.

Held-to-maturity securities measured for impairment on a non-recurring basis had no fair value and no carrying amount at December 31, 2016, with no net impairment charges to income and no changes to other comprehensive income during the six months ended December 31, 2016. The Company recognized net impairment charges to income of $102 and an increase in other comprehensive income of $3,496 for the six months ended December 31, 2015. These held-to-maturity securities are valued using Level 3 inputs.

The Company has elected the fair value option for Agency loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan. None of these loans are 90 days or more past due nor on nonaccrual as of December 31, 2016 and June 30, 2016.

As of December 31, 2016 and June 30, 2016, the aggregate fair value, contractual balance (including accrued interest), and unrealized gain was as follows:



(Dollars in thousands)	December 31, 2016		June 30, 2016
Aggregate fair value	$	33,990	$	20,871
Contractual balance	33,232		20,226
Unrealized gain	$	758	$	645

The total amount of unrealized gains and losses from changes in fair value included in earnings for the period indicated below for loans held for sale were:



	For the Three Months Ended					For the Six Months Ended
	December 31,					December 31,
(Dollars in thousands)	2016		2015			2016		2015
Interest income	$	192	$	161		$	329	$	433
Change in fair value	99		(286		)	1,046		(1,292		)
Total	$	291	$	(125	)	$	1,375	$	(859	)

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the periods indicated:



	December 31, 2016
(Dollars in thousands)	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)¹
Impaired loans:
Single family real estate secured:
Mortgage	$	28,351	Sales comparison approach	Adjustment for differences between the comparable sales	-33.3 to 56.4% (-3.0%)
Home equity	$	47	Sales comparison approach	Adjustment for differences between the comparable sales	-7.8 to 22.0% (1.5%)
Multifamily real estate secured	$	5,478	Sales comparison approach, income approach, Discounted cash flows	Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations	-26.7 to 25.0% (-9.5%)
Commercial real estate secured	$	232	Sales comparison approach and income approach	Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations	0.0 to 23.6% (11.8%)
Auto and RV secured	$	216	Sales comparison approach	Adjustment for differences between the comparable sales	-31.0 to 25.9% (-6.7%)
Other	$	445	Discounted cash flow	Projected Constant Prepayment Rate, Projected Constant Default Rate, Projected Loss Severity, Discount Rate	0.0 to 0.0% (0.0%) 0.0 to 10.0% (5.0%) 100.0 to 100.0% (100.0%) 4.9 to 6.0% (5.4%)
Other real estate owned and foreclosed assets:
Single family real estate	$	908	Sales comparison approach	Adjustment for differences between the comparable sales	-23.0 to 12.5% (-5.3%)
Autos and RVs	$	53	Sales comparison approach	Adjustment for differences between the comparable sales	-5.9 to 16.1% (4.3%)

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¹For impaired loans, other real estate owned and foreclosed assets the ranges shown may vary positively or negatively based on the comparable sales reported in the current appraisal. In certain instances, the range can be significant due to small sample sizes and in some cases the property being valued having limited comparable sales with similar characteristics at the time the current appraisal is conducted.



	June 30, 2016
(Dollars in thousands)	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average) ¹
Impaired loans:
Single family real estate secured:
Mortgage	$	28,610	Sales comparison approach	Adjustment for differences between the comparable sales	-40.6 to 69.5% (6.2%)
Home equity	$	33	Sales comparison approach	Adjustment for differences between the comparable sales	-27.2 to 0.0% (-11.1%)
Multifamily real estate secured	$	2,218	Sales comparison approach and income approach	Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, capitalization rate	-29.7 to 58.0% (3.0%)
Commercial real estate secured	$	254	Sales comparison approach and income approach	Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, capitalization rate	0.0 to 66.7% (33.3%)
Auto and RV secured	$	278	Sales comparison approach	Adjustment for differences between the comparable sales	0.0 to 22.8% (10.6%)
Other	$	676	Discounted cash flow	Projected Constant Prepayment Rate, Projected Constant Default Rate, Projected Loss Severity, Discount Rate	0.0 to 0.0% (0.0%) 0.0 to 10.0% (5.0%) 100.0 to 100.0% (100.0%) 6.6 to 8.0% (7.3%)
Other real estate owned and foreclosed assets:
Multifamily real estate	$	207	Sales comparison approach and income approach	Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, capitalization rate	0.0 to 25.0% (12.5%)
Autos and RVs	$	45	Sales comparison approach	Adjustment for differences between the comparable sales	0.0 to 20.6% (10.2%)
HTM Securities – Non-Agency RMBS	$	79,164	Discounted cash flow	Projected Constant Prepayment Rate, Projected Constant Default Rate, Projected Loss Severity, Discount Rate over LIBOR	2.6 to 48.8% (12.0%) 1.5 to 17.8% (5.7%) 40.0 to 65.9% (56.5%) 2.9 to 8.2% (5.7%)

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Fair value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments at December 31, 2016 and June 30, 2016 were as follows:



	December 31, 2016
			Fair Value
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Financial assets:
Cash and cash equivalents	$	707,593	$	707,593	$	—	$	—	$	707,593
Securities trading	8,151		—		—		8,151		8,151
Securities available-for-sale	379,734		—		297,508		82,226		379,734
Loans held for sale, at fair value	33,990		—		33,990		—		33,990
Loans held for sale, at lower of cost or fair value	15,905		—		—		16,610		16,610
Loans and leases held for investment—net	6,811,470		—		—		6,982,624		6,982,624
Accrued interest receivable	21,538		—		—		21,538		21,538
Mortgage servicing rights	6,150		—		—		6,150		6,150
Financial liabilities:
Time deposits and savings	6,610,674		—		6,238,765		—		6,238,765
Securities sold under agreements to repurchase	35,000		—		35,640		—		35,640
Advances from the Federal Home Loan Bank	665,000		—		671,061		—		671,061
Subordinated notes and debentures and other	56,408		—		52,401		—		52,401
Accrued interest payable	1,700		—		1,700		—		1,700



	June 30, 2016
	Fair Value
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Financial assets:
Cash and cash equivalents	$	486,727	$	486,727	$	—	$	—	$	486,727
Securities trading	7,584		—		—		7,584		7,584
Securities available-for-sale	265,447		—		256,083		9,364		265,447
Securities held-to-maturity	199,174		—		77,415		125,262		202,677
Loans held for sale, at fair value	20,871		—		20,871		—		20,871
Loans held for sale, at lower of cost or fair value	33,530		—		—		33,530		33,530
Loans and leases held for investment—net	6,354,679		—		—		6,640,918		6,640,918
Accrued interest receivable	26,201		—		—		26,201		26,201
Mortgage servicing rights	3,943		—		—		3,943		3,943
Financial liabilities:
Time deposits and savings	6,044,051		—		5,946,991		—		5,946,991
Securities sold under agreements to repurchase	35,000		—		36,391		—		36,391
Advances from the Federal Home Loan Bank	727,000		—		747,940		—		747,940
Subordinated notes and debentures and other	56,016		—		58,299		—		58,299
Accrued interest payable	1,667		—		1,667		—		1,667

The methods and assumptions, not previously presented, used to estimate fair value are described as follows: Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans, deposits, borrowings or subordinated debt and for variable rate loans, deposits, borrowings or subordinated debt with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. A discussion of the methods of valuing trading securities, available for sale securities and loans held for sale can be found earlier in this footnote. The carrying amount of stock of the Federal Home Loan Bank (“FHLB”) approximates the estimated fair value of this investment. The fair value of off-balance sheet items is not considered material.