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Disclosures About Fair Value of Financial Instruments
9 Months Ended
Sep. 30, 2019
Fair Value Disclosures [Abstract]  
Disclosures About Fair Value of Financial Instruments
Disclosures About Fair Value of Financial Instruments
 
We are required to disclose fair value information about financial instruments whether or not recognized in the consolidated statement of financial condition. Fair value information of certain financial instruments and all nonfinancial instruments is not required to be disclosed. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Financial assets and liabilities recognized or disclosed at fair value on a recurring basis and certain financial assets and liabilities on a non-recurring basis are accounted for using a three-level hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. This hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest level input that has a significant impact on fair value measurement is used.

Financial assets and liabilities are categorized based upon the following characteristics or inputs to the valuation techniques:

Level 1 - Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices for identical assets or liabilities in actively traded markets. This is the most reliable fair value measurement and includes, for example, active exchange-traded equity securities.

Level 2 - Financial assets and liabilities for which values are based on quoted prices in markets that are not active or for which values are based on similar assets or liabilities that are actively traded. Level 2 also includes pricing models in which the inputs are corroborated by market data, for example, matrix pricing.

Level 3 - Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Level 3 inputs include the following:

Quotes from brokers or other external sources that are not considered binding;
Quotes from brokers or other external sources where it cannot be determined that market participants would in fact transact for the asset or liability at the quoted price;
Quotes and other information from brokers or other external sources where the inputs are not deemed observable.

We are responsible for the valuation process and as part of this process may use data from outside sources in establishing fair value. We perform due diligence to understand the inputs used or how the data was calculated or derived. We also corroborate the reasonableness of external inputs in the valuation process.

The carrying amounts reported in the consolidated statement of financial condition approximate fair value for the following financial instruments: cash and cash equivalents, marketable securities available-for-sale, accrued interest receivable, interest rate lock commitments, forward commitments, interest rate swaps, savings and checking deposits and accrued interest payable.

Marketable securities
 
Where available, market values are based on quoted market prices, dealer quotes, and prices obtained from independent pricing services.
 
Debt securities — available-for-sale - Generally, debt securities are valued using pricing for similar securities, recently executed transactions and other pricing models utilizing observable inputs. The valuation for most debt securities is classified as Level 2. Securities within Level 2 include corporate bonds, municipal bonds, mortgage-backed securities and US government obligations.
 
Debt securities — held-to-maturity - The fair value of debt securities held-to-maturity is determined in the same manner as debt securities available-for-sale.
 
Loans held-for-sale
    
The estimated fair value of loans held-for-sale is based on market bids obtained from potential buyers.

Loans held for investment

The fair value of the loans held of investment is estimated using a discounted cash flow analysis that utilizes interest rates currently being offered for similar loans adjusted for liquidity and credit risk.
    
FHLB stock
 
Due to the restrictions placed on transferability of FHLB stock, it is not practical to determine the fair value.

 Borrowed funds
 
Fixed rate advances are valued by comparing their contractual cost to the prevailing market cost.  The carrying amount of collateralized borrowings approximates the fair value.
 
Junior subordinated debentures
 
The fair value of junior subordinated debentures is calculated using the discounted cash flows at the prevailing rate of interest.
 
Interest rate lock commitments and forward commitments

The fair value of interest rate lock commitments is based on the value of underlying loans held-for-sale which is based on quoted prices for similar loans in the secondary market.  This value is then adjusted based on the probability of the loan closing (i.e. the “pull-through” amount, a significant unobservable input).  The fair value of forward sale commitments is based on quoted prices from the secondary market based on the settlement date of the contracts.  

Cash flow hedges, interest rate and foreign exchange swap agreements
 
The fair value of the interest rate swaps is based upon the present value of the expected future cash flows using the LIBOR swap curve, the basis for the underlying interest rate. To price interest rate swaps, cash flows are first projected for each payment date using the fixed rate for the fixed side of the swap and the forward rates for the floating side of the swap. These swap cash flows are then discounted to time zero using LIBOR zero-coupon interest rates. The sum of the present value of both legs is the fair market value of the interest rate swap. These valuations have been derived from our third party vendor’s proprietary models rather than actual market quotations. The proprietary models are based upon financial principles and assumptions that we believe to be reasonable. The fair value of the foreign exchange swap is derived from proprietary models rather than actual market quotations. The proprietary models are based upon financial principles and assumptions we believe to be reasonable.

Off-balance sheet financial instruments
 
These financial instruments generally are not sold or traded and estimated fair values are not readily available. However, the fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. Commitments to extend credit are generally short-term in nature and, if drawn upon, are issued under current market terms. At September 30, 2019 and December 31, 2018, there was no significant unrealized appreciation or depreciation on these financial instruments.

The following table sets forth the carrying amount and estimated fair value of our financial instruments included in the consolidated statement of financial condition at September 30, 2019 (in thousands): 
 
Carrying
amount
 
Estimated
fair value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
107,602

 
107,602

 
107,602

 

 

Securities available-for-sale
807,823

 
807,823

 

 
807,823

 

Securities held-to-maturity
18,958

 
19,237

 

 
19,237

 

Loans receivable, net
8,790,299

 
8,693,690

 

 

 
8,693,690

Residential mortgage loans held-for-sale
8,859

 
8,859

 

 

 
8,859

Accrued interest receivable
27,069

 
27,069

 
27,069

 

 

Interest rate lock commitments
505

 
505

 

 

 
505

Forward commitments
215

 
215

 

 
215

 

Interest rate swaps
26,181

 
26,181

 

 
26,181

 

FHLB stock
21,401

 
21,401

 

 

 

Total financial assets
$
9,808,912

 
9,712,582

 
134,671

 
853,456

 
8,703,054

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

 
 

Savings and checking deposits
$
7,048,049

 
7,048,049

 
7,048,049

 

 

Time deposits
1,633,451

 
1,644,309

 

 

 
1,644,309

Borrowed funds
255,257

 
255,260

 
255,260

 

 

Junior subordinated debentures
121,787

 
116,872

 

 

 
116,872

Interest rate swaps
26,257

 
26,257

 

 
26,257

 

Accrued interest payable
1,314

 
1,314

 
1,314

 

 

Total financial liabilities
$
9,086,115

 
9,092,061

 
7,304,623

 
26,257

 
1,761,181

 
The following table sets forth the carrying amount and estimated fair value of our financial instruments included in the consolidated statement of financial condition at December 31, 2018 (in thousands): 
 
Carrying
amount
 
Estimated
fair value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
68,789

 
68,789

 
68,789

 

 

Securities available-for-sale
801,450

 
801,450

 

 
801,450

 

Securities held-to-maturity
22,765

 
22,446

 

 
22,446

 

Loans receivable, net
7,996,225

 
7,845,313

 

 

 
7,845,313

Residential mortgage loans held-for-sale

 

 

 

 

Accrued interest receivable
24,490

 
24,490

 
24,490

 

 

Interest rate swaps
6,445

 
6,445

 

 
6,445

 

FHLB stock
15,635

 
15,635

 

 

 

Total financial assets
$
8,935,799

 
8,784,568

 
93,279

 
830,341

 
7,845,313

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

 
 

Savings and checking accounts
$
6,489,338

 
6,489,338

 
6,489,338

 

 

Time deposits
1,404,841

 
1,434,410

 

 

 
1,434,410

Borrowed funds
234,389

 
234,389

 
234,389

 

 

Junior subordinated debentures
111,213

 
102,572

 

 

 
102,572

Interest rate swaps
6,445

 
6,445

 

 
6,445

 

Accrued interest payable
744

 
744

 
744

 

 

Total financial liabilities
$
8,246,970

 
8,267,898

 
6,724,471

 
6,445

 
1,536,982



Fair value estimates are made at a point-in-time, based on relevant market data and information about the instrument. The methods and assumptions detailed above were used in estimating the fair value of financial instruments at both September 30, 2019 and December 31, 2018.  There were no transfers of financial instruments between Level 1 and Level 2 during the quarter ended September 30, 2019.
     The following table represents assets and liabilities measured at fair value on a recurring basis at September 30, 2019 (in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total
assets at
fair value
Debt securities:
 

 
 

 
 

 
 

U.S. government and agencies
$

 
14,965

 

 
14,965

Government sponsored enterprises

 
119,833

 

 
119,833

States and political subdivisions

 
29,390

 

 
29,390

Corporate

 
918

 

 
918

Total debt securities

 
165,106

 

 
165,106

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

GNMA

 
24,715

 

 
24,715

FNMA

 
86,858

 

 
86,858

FHLMC

 
53,209

 

 
53,209

Non-agency

 
506

 

 
506

Collateralized mortgage obligations:
 

 
 

 
 

 
 

GNMA

 
144,829

 

 
144,829

FNMA

 
200,873

 

 
200,873

FHLMC

 
131,727

 

 
131,727

Total mortgage-backed securities

 
642,717

 

 
642,717

 
 
 
 
 
 
 
 
Interest rate lock commitments

 

 
505

 
505

Forward commitments

 
215

 

 
215

Interest rate swaps

 
26,181

 

 
26,181

Total assets
$

 
834,219

 
505

 
834,724

 
 
 
 
 
 
 
 
Interest rate swaps
$

 
26,257

 

 
26,257

Total liabilities
$

 
26,257

 

 
26,257

The following table represents assets and liabilities measured at fair value on a recurring basis at December 31, 2018 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
assets at
fair value
Debt securities:
 

 
 

 
 

 
 

U.S. government and agencies
$

 
14,780

 

 
14,780

Government sponsored enterprises

 
187,335

 

 
187,335

States and political subdivisions

 
21,163

 

 
21,163

Corporate

 
914

 

 
914

Total debt securities

 
224,192

 

 
224,192

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

GNMA

 
27,041

 

 
27,041

FNMA

 
73,196

 

 
73,196

FHLMC

 
51,621

 

 
51,621

Non-agency

 
528

 

 
528

Collateralized mortgage obligations:
 

 
 

 
 

 
 

GNMA

 
52,331

 

 
52,331

FNMA

 
207,033

 

 
207,033

FHLMC

 
165,508

 

 
165,508

Total mortgage-backed securities

 
577,258

 

 
577,258

 
 
 
 
 
 
 
 
Interest rate swaps

 
6,445

 

 
6,445

Total assets
$

 
807,895

 

 
807,895

 
 
 
 
 
 
 
 
Interest rate swaps
$

 
6,445

 

 
6,445

Total liabilities
$

 
6,445

 

 
6,445



The following table presents the changes in Level 3 assets and liabilities measured at fair value on a recurring basis (in thousands):
 
For the quarter ended September 30,
 
For the nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Beginning balance
$

 

 

 

Total gains or losses
 
 
 
 
 
 
 
Included in earnings

 

 

 

Purchases
505

 

 
505

 

Sales

 

 

 

Transfers from Level 3

 

 

 

Transfers into Level 3

 

 

 

Ending balance
$
505

 

 
505

 



Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment, real estate owned, and mortgage servicing rights. 

    
The following table represents the fair market measurement for only those nonrecurring assets that had a fair market value below the carrying amount as of September 30, 2019 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
assets at
fair value
Loans measured for impairment
$

 

 
40,603

 
40,603

Real estate owned

 

 
1,237

 
1,237

Total assets
$

 

 
41,840

 
41,840



The following table represents the fair market measurement for only those nonrecurring assets that had a fair market value below the carrying amount as of December 31, 2018 (in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total
assets at
fair value
Loans measured for impairment
$

 

 
40,333

 
40,333

Real estate owned, net

 

 
2,498

 
2,498

Total assets
$

 

 
42,831

 
42,831



 Impaired loans - A loan is considered to be impaired as described in Note 1 of the Notes to Consolidated Financial Statements in Item 8 of Part II of our 2018 Annual Report on Form 10-K. We classify loans individually evaluated for impairment that require a specific reserve as nonrecurring Level 3.

Real estate owned - Real estate owned is comprised of property acquired through foreclosure or voluntarily conveyed by borrowers. These assets are recorded on the date acquired at the lower of the related loan balance or fair value, less estimated disposition costs, with the fair value being determined by appraisal. Subsequently, foreclosed assets are valued at the lower of the amount recorded at acquisition date or fair value, less estimated disposition costs. We classify real estate owned as nonrecurring Level 3.
 
The following table presents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value at September 30, 2019 (in thousands): 
 
Fair value
 
Valuation
techniques
 
Significant
unobservable inputs
 
Range 
(weighted average)
Loans measured for impairment
$
40,603

 
Appraisal value (1)
 
Estimated cost to sell
 
10.0%
 
 

 
Discounted cash flow
 
Discount rate
 
4.25% to 11.0% (7.50%)
 
 
 
 
 
 
 
 
Real estate owned
$
1,237

 
Appraisal value (1)
 
Estimated cost to sell
 
10.0%
(1)
Fair value is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable, or by using the discounted cash flow method if the loan is not collateral dependent.