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. ASC Topic 820 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 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.

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 are 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.

Securities—trading and available-for-sale. Trading securities are recorded at fair value. Available-for-sale securities are recorded at fair value and consist of residential mortgage-backed securities (“RMBS”) issued by U.S. government-backed or government-sponsored enterprises including Fannie Mae, Freddie Mac and Ginnie Mae (“agency”), RMBS issued by non-agencies, municipal securities as well as other Non-RMBS securities. Fair value for agency securities and municipal securities are 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. The Company inputs for each security a projection of monthly default rates, loss severity rates and voluntary prepayment rates for the underlying mortgages for the remaining life of the 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 or decreased by the forecasted increase or decrease 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 most updated unemployment rate reported in June 2020 was 11.1%. Consensus estimates for unemployment are that the rate will begin to decrease. The Company agrees with consensus estimates and thus is projecting lower monthly default rates. The Company projects that severities will continue to improve as HPA improves.

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 June 30, 2020 are from 0.5% up to 4.5%. The range of loss severity rates applied to each default used in the Company’s projections at June 30, 2020 are from 35.0% up to 68.4% 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. Based upon the actual performance of the underlying collateral, the securities’ credit enhancement will be impacted. The range of existing credit enhancement is from 0.1% to 89.7%, with a weighted average credit enhancement 24.1%. 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 June 30, 2020, the Company computed its discount rates as a spread between 288 and 943 basis points over the LIBOR Index using the LIBOR forward curve.

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 each 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.

Impaired Loans and Leases. The fair value of an impaired loan or lease is determined based on an observable market price or current appraised value of the underlying collateral. The fair value of impaired loans and leases with specific write-offs or allocations of the allowance for loan and lease 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 or lease 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 nonaccrual loans and leases may result in increases or decreases to the provision for loan and lease losses recorded in current earnings. Such adjustments are typically significant and result in a Level 3 classification for the inputs for determining fair value.

Mortgage Servicing Rights. Fair value is derived from 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 input from observable market activity, 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.

The fair value of forward sale commitments is 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.



	June 30, 2020
(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: Municipal	$	—	$	105	$	—	$	105
Securities—Available-for-Sale:
Agency Debt¹	$	—	$	1,799	$	—	$	1,799
Agency RMBS¹	—		16,826		—		16,826
Non-Agency RMBS²	—		—		18,332		18,332
Municipal	—		10,400		—		10,400
Asset-backed securities and structured notes	—		140,270		—		140,270
Total—Securities—Available-for-Sale	$	—	$	169,295	$	18,332	$	187,627
Loans Held for Sale	$	—	$	51,995	$	—	$	51,995
Mortgage servicing rights	$	—	$	—	$	10,675	$	10,675
Other assets—Derivative instruments	$	—	$	—	$	9,131	$	9,131
LIABILITIES:
Other liabilities—Derivative instruments	$	—	$	—	$	1,715	$	1,715


	June 30, 2019
(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—Available-for-Sale:
Agency Debt¹	—		1,685		—		1,685
Agency RMBS¹	$	—	$	9,586	$	—	$	9,586
Non-Agency RMBS²	—		—		13,025		13,025
Municipal	—		21,162		—		21,162
Asset-backed securities and structured notes	—		182,055		—		182,055
Total—Securities—Available-for-Sale	$	—	$	214,488	$	13,025	$	227,513
Loans Held for Sale	$	—	$	33,260	$	—	$	33,260
Mortgage servicing rights	$	—	$	—	$	9,784	$	9,784
Other assets—Derivative Instruments	$	—	$	—	$	1,978	$	1,978
LIABILITIES:
Other liabilities—Derivative instruments	$	—	$	—	$	732	$	732



	Year Ended June 30, 2020
(Dollars in thousands)	Securities- Available-for- Sale: Non- Agency RMBS			Mortgage Servicing Rights¹			Derivative Instruments, net		Total
Assets:
Opening Balance	$	13,025		$	9,784		$	1,246	$	24,055
Transfers into Level 3	—			—			—		—
Transfers out of Level 3	—			—			—		—
Total gains or losses for the period:
Included in earnings—Mortgage banking income	—			(5,806		)	6,170		364
Included in other comprehensive income	617			—			—		617
Purchases, issues, sales and settlements:
Purchases	7,000			6,697			—		13,697
Issues	—			—			—		—
Sales	—			—			—		—
Settlements	(2,310		)	—			—		(2,310		)
Other-than-temporary impairment	—			—			—		—
Closing balance	$	18,332		$	10,675		$	7,416	$	36,423
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	$	—		$	(5,806	)	$	6,170	$	364



	Year Ended June 30, 2019
(Dollars in thousands)	Securities- Available-for- Sale: Non- Agency RMBS			Mortgage Servicing Rights¹			Derivative Instruments, net		Total
Assets:
Opening Balance	$	17,443		$	10,752		$	953	$	29,148
Transfers into Level 3	—			—			—		—
Transfers out of Level 3	—			—			—		—
Total gains or losses for the period:
Included in earnings—Sale of securities	(133		)	—			—		(133		)
Included in earnings—Fair value gain(loss) on trading securities	—			—			—		—
Included in earnings—Mortgage banking income	—			(3,362		)	293		(3,069		)
Included in other comprehensive income	766			—			—		766
Purchases, issues, sales and settlements:
Purchases	—			2,394			—		2,394
Issues	—			—			—		—
Sales	(2,058		)	—			—		(2,058		)
Settlements	(2,172		)	—			—		(2,172		)
Other-than-temporary impairment	(821		)	—			—		(821		)
Closing balance	$	13,025		$	9,784		$	1,246	$	24,055
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	$	(133	)	$	(3,362	)	$	293	$	(3,202	)



	June 30, 2020
(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Securities – Non-agency RMBS	$	18,332	Discounted Cash Flow	Projected Constant Prepayment Rate, Projected Constant Default Rate, Projected Loss Severity, Discount Rate over LIBOR	2.5 to 47.9% (26.1%) 0.5 to 4.5% (2.0%) 35.0 to 68.4% (50.1%) 2.9 to 9.4% (5.0%)
Mortgage Servicing Rights	$	10,675	Discounted Cash Flow	Projected Constant Prepayment Rate, Life (in years), Discount Rate	4.7 to 39.6% (11.4%) 1.6 to 7.7 (6.2) 9.5 to 14.0% (9.8%)
Derivative Instruments	$	7,416	Sales Comparison Approach	Projected Sales Profit of Underlying Loans	-0.3 to 0.8% (0.2%)



	June 30, 2019
(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Securities – Non-agency RMBS	$	13,025	Discounted Cash Flow	Projected Constant Prepayment Rate, Projected Constant Default Rate, Projected Loss Severity, Discount Rate over LIBOR	2.9 to 32.5% (10.0%) 1.5 to 10.2% (4.4%) 40.0 to 68.3% (59.4%) 2.7 to 6.9% (4.1%)
Mortgage Servicing Rights	$	9,784	Discounted Cash Flow	Projected Constant Prepayment Rate, Life (in years), Discount Rate	4.7 to 33.7% (10.1%) 1.9 to 8.8 (6.4) 9.5 to 13.0% (9.8%)
Derivative Instruments	$	1,246	Sales Comparison Approach	Projected Sales Profit of Underlying Loans	0.4 to 0.8% (0.6%)

The significant unobservable inputs used in the fair value measurement of the Company’s residential mortgage-backed securities are projected prepayment rates, probability of default, and projected 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 projected loss severity and a directionally opposite change in the assumption used for projected prepayment rates.



	June 30, 2020
(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 and leases:
Single family real estate secured:
Mortgage	$	—	$	—	$	84,030	$	84,030
Multifamily real estate secured	—		—		530		530
Commercial real estate secured	—		—		2,895		2,895
Auto and RV secured	—		—		202		202
Commercial & Industrial	—		—		213		213
Other	—		—		71		71
Total	$	—	$	—	$	87,941	$	87,941
Other real estate owned and foreclosed assets:
Single family real estate	$	—	$	—	$	6,114	$	6,114
Autos and RVs	—		—		294		294
Total	$	—	$	—	$	6,408	$	6,408


	June 30, 2019
(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 and leases:
Single family real estate secured:
Mortgage	$	—	$	—	$	46,005	$	46,005
Multifamily real estate secured	—		—		2,108		2,108
Auto and RV secured	—		—		115		115
Other	—		—		216		216
Total	$	—	$	—	$	48,444	$	48,444
Other real estate owned and foreclosed assets:
Single family real estate	$	—	$	—	$	7,449	$	7,449
Autos and RVs	—		—		36		36
Total	$	—	$	—	$	7,485	$	7,485

Impaired loans and leases measured for impairment on a non-recurring basis using the fair value of the collateral for collateral-dependent loans have a carrying amount of $87.9 million at June 30, 2020 and life to date charge-offs of $7.2 million. Impaired loans had a related allowance of $0.6 million at June 30, 2020. At June 30, 2019, such impaired loans had a carrying amount of $48.4 million and life to date charge-offs of $3.5 million, and a related allowance of $0.4 million.



	June 30, 2020
(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)¹
Impaired loans and leases:
Single family real estate secured:
Single family real estate secured: Mortgage	$	84,030	Sales comparison approach	Adjustment for differences between the comparable sales	-15.3 to 10.9% (-0.9%)
Multifamily real estate secured	$	530	Sales comparison approach and income approach	Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, capitalization rate	15.0 to 15.0% (15.0%)
Commercial real estate secured	$	2,895	Sales comparison approach and income approach	Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, capitalization rate	1.5 to 1.8% (1.6%)
Auto and RV secured	$	202	Sales comparison approach	Adjustment for differences between the comparable sales	-63.2 to 22.0% (-20.9%)
Commercial & Industrial	$	213	Discounted cash flow	Discount Rate	-100 to 0.0% (-50.0%)
Other	$	71	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%) -1.2 to 1.2% (0.0%)
Other real estate owned and foreclosed assets:
Other real estate owned and foreclosed assets:
Single family real estate	$	6,114	Sales comparison approach	Adjustment for differences between the comparable sales	18.7 to 18.7% (18.7%)
Autos and RVs	$	294	Sales comparison approach	Adjustment for differences between the comparable sales	-24.6 TO 44.2% (2.8%)



	June 30, 2019
(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)¹
Impaired loans and leases:
Single family real estate secured:
Mortgage	$	46,005	Sales comparison approach	Adjustment for differences between the comparable sales	-83.2 to 80.0% (-2.0%)
Multifamily real estate secured	$	2,108	Sales comparison approach and income approach	Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, capitalization rate	-87.9 to 102.7% (-0.1%)
Auto and RV secured	$	115	Sales comparison approach	Adjustment for differences between the comparable sales	-49.0 to 24.0% (2.6%)
Other	$	216	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%) -2.2 to 1.1% (-0.6%)
Other real estate owned and foreclosed assets:
Single family real estate	$	7,449	Sales comparison approach	Adjustment for differences between the comparable sales	-46.3 to 53.0% (5.3%)
Autos and RVs	$	36	Sales comparison approach	Adjustment for differences between the comparable sales	-13.6 to 56.3% (8.0%)



	June 30, 2020
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Financial assets:
Cash, cash equivalents, cash segregated, and federal funds sold	$	1,950,519	$	1,950,519	$	—	$	—	$	1,950,519
Securities trading	105		—		105		—		105
Securities available-for-sale	187,627		—		169,295		18,332		187,627
Loans held for sale, at fair value	51,995		—		51,995		—		51,995
Loans held for sale, at lower of cost or fair value	44,565		—		—		44,625		44,625
Loans and leases held for investment—net	10,631,349		—		—		11,138,255		11,138,255
Securities borrowed	222,368		—		—		222,613		222,613
Customer, broker-dealer and clearing receivables	220,266		—		—		220,464		220,464
Mortgage servicing rights	10,675		—		—		10,675		10,675
Financial liabilities:
Total deposits	11,336,694		—		11,088,447		—		11,088,447
Advances from the Federal Home Loan Bank	242,500		—		254,114		—		254,114
Borrowings, subordinated notes and debentures	235,789		—		234,445		—		234,445
Securities loaned	255,945		—		—		256,790		256,790
Customer, broker-dealer and clearing payables	347,614		—		—		347,614		347,614



	June 30, 2019
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Financial assets:
Cash, cash equivalents, cash segregated, and federal funds sold	$	857,368	$	857,368	$	—	$	—	$	857,368
Securities available-for-sale	227,513		—		214,488		13,025		227,513
Loans held for sale, at fair value	33,260		—		33,260		—		33,260
Loans held for sale, at lower of cost or fair value	4,800		—		—		4,990		4,990
Loans and leases held for investment—net	9,382,124		—		—		9,630,061		9,630,061
Securities borrowed	144,706		—		—		144,720		144,720
Customer, broker-dealer and clearing receivables	203,192		—		—		203,355		203,355
Mortgage servicing rights	9,784		—		—		9,784		9,784
Financial liabilities:
Total deposits	8,983,173		—		8,758,861		—		8,758,861
Advances from the Federal Home Loan Bank	458,500		—		461,156		—		461,156
Borrowings, subordinated notes and debentures	168,929		—		169,212		—		169,212
Securities loaned	198,356		—		—		198,197		198,197
Customer, broker-dealer and clearing payables	238,604		—		—		229,987		229,987

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 and leases or deposits that reprice frequently and fully. For fixed rate loans and leases, deposits, borrowings or subordinated debt and for variable rate loans and leases, 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 regulatory agencies approximates the estimated fair value of this investment. The fair value of off-balance sheet items is not considered material.