FAIR VALUE MEASUREMENT:

For a further discussion of fair value measurements, including information regarding the Company’s valuation methodologies and the fair value hierarchy, see Note 17, Fair Value Measurement within our 2016 Annual Report on Form 10-K.

Valuation Processes

The Company has various processes and controls in place to ensure that fair value measurements are reasonably estimated. The Finance Committee of the Board provides oversight and approves the Company’s Asset/Liability Management Policy ("ALMP"). The Company's ALMP governs, among other things, the application and control of the valuation models used to measure fair value. On a quarterly basis, the Company’s Asset/Liability Management Committee ("ALCO") and the Finance Committee of the Board review significant modeling variables used to measure the fair value of the Company’s financial instruments, including the significant inputs used in the valuation of single family MSRs. Additionally, ALCO periodically obtains an independent review of the MSR valuation process and procedures, including a review of the model architecture and the valuation assumptions. The Company obtains an MSR valuation from an independent valuation firm monthly to assist with the validation of the fair value estimate and the reasonableness of the assumptions used in measuring fair value.

The Company’s real estate valuations are overseen by the Company’s appraisal department. The appraisal department maintains the Company’s appraisal policy and recommends changes to the policy subject to approval by the Company’s Loan Committee and the Credit Committee of the Board. The Company’s appraisals are prepared by independent third-party appraisers and the Company’s internal appraisers. Single family appraisals are generally reviewed by the Company’s single family loan underwriters. Single family appraisals with unusual, higher risk or complex characteristics, as well as commercial real estate appraisals, are reviewed by the Company’s appraisal department.

We obtain pricing from third party service providers for determining the fair value of a substantial portion of our investment securities available for sale. We have processes in place to evaluate such third party pricing services to ensure information obtained and valuation techniques used are appropriate. For fair value measurements obtained from third party services, we monitor and review the results to ensure the values are reasonable and in line with market experience for similar classes of securities. While the inputs used by the pricing vendor in determining fair value are not provided, and therefore unavailable for our review, we do perform certain procedures to validate the values received, including comparisons to other sources of valuation (if available), comparisons to other independent market data and a variance analysis of prices by Company personnel that are not responsible for the performance of the investment securities.

Estimation of Fair Value

Fair value is based on quoted market prices, when available. In cases where a quoted price for an asset or liability is not available, the Company uses valuation models to estimate fair value. These models incorporate inputs such as forward yield curves, loan prepayment assumptions, expected loss assumptions, market volatilities, and pricing spreads utilizing market-based inputs where readily available. The Company believes its valuation methods are appropriate and consistent with those that would be used by other market participants. However, imprecision in estimating unobservable inputs and other factors may result in these fair value measurements not reflecting the amount realized in an actual sale or transfer of the asset or liability in a current market exchange.

The following table summarizes the fair value measurement methodologies, including significant inputs and assumptions, and classification of the Company’s assets and liabilities.



Asset/Liability class	Valuation methodology, inputs and assumptions	Classification
Cash and cash equivalents	Carrying value is a reasonable estimate of fair value based on the short-term nature of the instruments.	Estimated fair value classified as Level 1.
Investment securities
Investment securities available for sale	Observable market prices of identical or similar securities are used where available. If market prices are not readily available, value is based on discounted cash flows using the following significant inputs: • Expected prepayment speeds • Estimated credit losses • Market liquidity adjustments	Level 2 recurring fair value measurement
Investment securities held to maturity	Observable market prices of identical or similar securities are used where available. If market prices are not readily available, value is based on discounted cash flows using the following significant inputs: • Expected prepayment speeds • Estimated credit losses • Market liquidity adjustments	Carried at amortized cost. Estimated fair value classified as Level 2.
Loans held for sale
Single family loans, excluding loans transferred from held for investment	Fair value is based on observable market data, including: • Quoted market prices, where available • Dealer quotes for similar loans • Forward sale commitments	Level 2 recurring fair value measurement
	When not derived from observable market inputs, fair value is based on discounted cash flows, which considers the following inputs: • Current lending rates for new loans • Expected prepayment speeds • Estimated credit losses • Market liquidity adjustments	Estimated fair value classified as Level 3.
Loans originated as held for investment and transferred to held for sale	Fair value is based on discounted cash flows, which considers the following inputs: • Current lending rates for new loans • Expected prepayment speeds • Estimated credit losses • Market liquidity adjustments	Carried at lower of amortized cost or fair value. Estimated fair value classified as Level 3.
Multifamily loans (DUS^®) and other	The sale price is set at the time the loan commitment is made, and as such subsequent changes in market conditions have a very limited effect, if any, on the value of these loans carried on the consolidated statements of financial condition, which are typically sold within 30 days of origination.	Carried at lower of amortized cost or fair value. Estimated fair value classified as Level 2.



Asset/Liability class	Valuation methodology, inputs and assumptions	Classification
Loans held for investment
Loans held for investment, excluding collateral dependent loans and loans transferred from held for sale	Fair value is based on discounted cash flows, which considers the following inputs: • Current lending rates for new loans • Expected prepayment speeds • Estimated credit losses • Market liquidity adjustments	For the carrying value of loans see Note 1–Summary of Significant Accounting Policies of the 2016 Annual Report on Form 10-K. Estimated fair value classified as Level 3.
Loans held for investment, collateral dependent	Fair value is based on appraised value of collateral, which considers sales comparison and income approach methodologies. Adjustments are made for various factors, which may include: • Adjustments for variations in specific property qualities such as location, physical dissimilarities, market conditions at the time of sale, income producing characteristics and other factors • Adjustments to obtain “upon completion” and “upon stabilization” values (e.g., property hold discounts where the highest and best use would require development of a property over time) • Bulk discounts applied for sales costs, holding costs and profit for tract development and certain other properties	Carried at lower of amortized cost or fair value of collateral, less the estimated cost to sell. Classified as a Level 3 nonrecurring fair value measurement in periods where carrying value is adjusted to reflect the fair value of collateral.
Loans held for investment transferred from loans held for sale	Fair value is based on discounted cash flows, which considers the following inputs: • Current lending rates for new loans • Expected prepayment speeds • Estimated credit losses • Market liquidity adjustments	Level 3 recurring fair value measurement
Mortgage servicing rights
Single family MSRs	For information on how the Company measures the fair value of its single family MSRs, including key economic assumptions and the sensitivity of fair value to changes in those assumptions, see Note 7, Mortgage Banking Operations.	Level 3 recurring fair value measurement
Multifamily MSRs and other	Fair value is based on discounted estimated future servicing fees and other revenue, less estimated costs to service the loans.	Carried at lower of amortized cost or fair value Estimated fair value classified as Level 3.
Derivatives
Eurodollar futures	Fair value is based on closing exchange prices.	Level 1 recurring fair value measurement
Interest rate swaps Interest rate swaptions Forward sale commitments	Fair value is based on quoted prices for identical or similar instruments, when available. When quoted prices are not available, fair value is based on internally developed modeling techniques, which require the use of multiple observable market inputs including: • Forward interest rates • Interest rate volatilities	Level 2 recurring fair value measurement



Asset/Liability class	Valuation methodology, inputs and assumptions	Classification
Interest rate lock and purchase loan commitments	The fair value considers several factors including: • Fair value of the underlying loan based on quoted prices in the secondary market, when available. • Value of servicing • Fall-out factor	Level 3 recurring fair value measurement
Other real estate owned (“OREO”)	Fair value is based on appraised value of collateral, less the estimated cost to sell. See discussion of "loans held for investment, collateral dependent" above for further information on appraisals.	Carried at lower of amortized cost or fair value of collateral (Level 3), less the estimated cost to sell.
Federal Home Loan Bank stock	Carrying value approximates fair value as FHLB stock can only be purchased or redeemed at par value.	Carried at par value. Estimated fair value classified as Level 2.
Deposits
Demand deposits	Fair value is estimated as the amount payable on demand at the reporting date.	Carried at historical cost. Estimated fair value classified as Level 2.
Fixed-maturity certificates of deposit	Fair value is estimated using discounted cash flows based on market rates currently offered for deposits of similar remaining time to maturity.	Carried at historical cost. Estimated fair value classified as Level 2.
Federal Home Loan Bank advances	Fair value is estimated using discounted cash flows based on rates currently available for advances with similar terms and remaining time to maturity.	Carried at historical cost. Estimated fair value classified as Level 2.
Long-term debt	Fair value is estimated using discounted cash flows based on current lending rates for similar long-term debt instruments with similar terms and remaining time to maturity.	Carried at historical cost. Estimated fair value classified as Level 2.

The following table presents the levels of the fair value hierarchy for the Company’s assets and liabilities measured at fair value on a recurring basis.



(in thousands)	Fair Value at March 31, 2017		Level 1		Level 2		Level 3

Assets:
Investment securities available for sale
Mortgage backed securities:
Residential	$	174,060	$	—	$	174,060	$	—
Commercial	29,476		—		29,476		—
Municipal bonds	619,934		—		619,934		—
Collateralized mortgage obligations:
Residential	182,037		—		182,037		—
Commercial	69,144		—		69,144		—
Corporate debt securities	51,075		—		51,075		—
U.S. Treasury securities	10,663		—		10,663		—
Single family mortgage servicing rights	235,997		—		—		235,997
Single family loans held for sale	502,288		—		461,958		40,330
Single family loans held for investment	19,042		—		—		19,042
Derivatives
Eurodollar futures	5		5		—		—
Forward sale commitments	4,287		—		4,287		—
Interest rate swaptions	31		—		31		—
Interest rate lock and purchase loan commitments	27,154		—				27,154
Interest rate swaps	11,615		—		11,615		—
Total assets	$	1,936,808	$	5	$	1,614,280	$	322,523
Liabilities:
Derivatives
Eurodollar futures	$	24	$	24	$	—	$	—
Forward sale commitments	7,527		—		7,527		—
Interest rate lock and purchase loan commitments	18		—		—		18
Interest rate swaps	25,904		—		25,904		—
Total liabilities	$	33,473	$	24	$	33,431	$	18



(in thousands)	Fair Value at December 31, 2016		Level 1		Level 2		Level 3

Assets:
Investment securities available for sale
Mortgage backed securities:
Residential	$	177,074	$	—	$	177,074	$	—
Commercial	25,536		—		25,536		—
Municipal bonds	467,673		—		467,673		—
Collateralized mortgage obligations:
Residential	191,201		—		191,201		—
Commercial	70,764		—		70,764		—
Corporate debt securities	51,122		—		51,122		—
U.S. Treasury securities	10,620		—		10,620		—
Single family mortgage servicing rights	226,113		—		—		226,113
Single family loans held for sale	656,334		—		614,524		41,810
Single family loans held for investment	17,988		—		—		17,988
Derivatives
Forward sale commitments	24,623		—		24,623		—
Interest rate swaptions	1		—		1		—
Interest rate lock and purchase loan commitments	19,586		—		—		19,586
Interest rate swaps	15,016		—		15,016		—
Total assets	$	1,953,651	$	—	$	1,648,154	$	305,497
Liabilities:
Derivatives
Forward sale commitments	$	15,203	$	—	$	15,203	$	—
Interest rate lock and purchase loan commitments	367		—		—		367
Interest rate swaps	26,829		—		26,829		—
Total liabilities	$	42,399	$	—	$	42,032	$	367

There were no transfers between levels of the fair value hierarchy during the three months ended March 31, 2017 and 2016.

Level 3 Recurring Fair Value Measurements

The Company's level 3 recurring fair value measurements consist of single family mortgage servicing rights, single family loans held for investment where fair value option was elected, certain single family loans held for sale, and interest rate lock and purchase loan commitments, which are accounted for as derivatives. For information regarding fair value changes and activity for single family MSRs during the three months ended March 31, 2017 and 2016, see Note 7, Mortgage Banking Operations of this Form 10-Q.

The Company transferred certain loans from held for sale to held for investment. These loans were originated as held for sale loans where the Company had elected fair value option. The Company determined these loans to be level 3 recurring assets as the valuation technique included a significant unobservable input. The total amount of held for investment loans where fair value option election was made was $19.0 million at March 31, 2017.

The following information presents significant Level 3 unobservable inputs used to measure fair value of single family loans held for investment where fair value option was elected.

(dollars in thousands)

At March 31, 2017

Fair Value

Valuation

Technique

Significant Unobservable

Input

Low

High

Weighted Average

Loans held for investment, fair value option

19,042

Income approach

Implied spread to benchmark interest rate curve

3.62%

4.87%

4.28%

(dollars in thousands)

At December 31, 2016

Fair Value

Valuation

Technique

Significant Unobservable

Input

Low

High

Weighted Average

Loans held for investment, fair value option

17,988

Income approach

Implied spread to benchmark interest rate curve

3.62%

4.97%

4.49%

The following information presents significant Level 3 unobservable inputs used to measure fair value of certain single family loans held for sale where fair value option was elected.

(dollars in thousands)

At March 31, 2017

Fair Value

Valuation

Technique

Significant Unobservable

Input

Low

High

Weighted Average

Loans held for sale, fair value option

40,330

Income approach

Implied spread to benchmark interest rate curve

3.27%

5.07%

4.05%

Market price movement from comparable bond

(0.37)%

(0.25)%

(0.31)%

(dollars in thousands)

At December 31, 2016

Fair Value

Valuation

Technique

Significant Unobservable

Input

Low

High

Weighted Average

Loans held for sale, fair value option

41,810

Income approach

Implied spread to benchmark interest rate curve

3.46%

6.14%

4.23%

Market price movement from comparable bond

(0.49)%

(0.11)%

(0.27)%

The following table presents fair value changes and activity for Level 3 interest rate lock and purchase loan commitments.



	Three Months Ended March 31,
(in thousands)	2017			2016

Beginning balance, net	$	19,219		$	17,711
Total realized/unrealized gains	35,459			44,528
Settlements	(27,542		)	(33,757		)
Ending balance, net	$	27,136		$	28,482

The following table presents fair value changes and activity for Level 3 loans held for sale and loans held for investment.



Three Months Ended March 31, 2017	Beginning balance		Additions		Transfers			Payoff			Change in mark to market			Ending balance
(in thousands)
Loans held for sale	$	41,810	$	2,799	$	(690	)	$	(3,226	)	$	(363	)	$	40,330
Loans held for investment	17,988		—		1,206			—			(152		)	19,042

Three Months Ended March 31, 2016
Loans held for sale	$	49,322	$	483	$	—		$	(4,829	)	$	582		$	45,558
Loans held for investment	21,544		—		—			(3,080		)	(137		)	18,327

The following information presents significant Level 3 unobservable inputs used to measure fair value of interest rate lock and purchase loan commitments.

(dollars in thousands)

At March 31, 2017

Fair Value

Valuation

Technique

Significant Unobservable

Input

Low

High

Weighted Average

Interest rate lock and purchase loan commitments, net

27,136

Income approach

Fall-out factor

0.42%

62.75%

12.87%

Value of servicing

0.64%

1.94%

1.00%

(dollars in thousands)

At December 31, 2016

Fair Value

Valuation

Technique

Significant Unobservable

Input

Low

High

Weighted Average

Interest rate lock and purchase loan commitments, net

19,219

Income approach

Fall-out factor

0.50%

60.34%

11.95%

Value of servicing

0.65%

2.27%

1.08%

Nonrecurring Fair Value Measurements

Certain assets held by the Company are not included in the tables above, but are measured at fair value on a nonrecurring basis. These assets include certain loans held for investment and other real estate owned that are carried at the lower of cost or fair value of the underlying collateral, less the estimated cost to sell. The estimated fair values of real estate collateral are generally based on internal evaluations and appraisals of such collateral, which use the market approach and income approach methodologies. All impaired loans are subject to an internal evaluation completed quarterly by management as part of the allowance process.

The fair value of commercial properties are generally based on third-party appraisals that consider recent sales of comparable properties, including their income-generating characteristics, adjusted (generally based on unobservable inputs) to reflect the general assumptions that a market participant would make when analyzing the property for purchase. The Company uses a fair value of collateral technique to apply adjustments to the appraisal value of certain commercial loans held for investment that are collateralized by real estate. During the three months ended March 31, 2017 and 2016, the Company recorded no adjustments to the appraisal values of certain commercial loans held for investment that are collateralized by real estate.

The Company uses a fair value of collateral technique to apply adjustments to the stated value of certain commercial loans held for investment that are not collateralized by real estate. During the three months ended March 31, 2017, the Company applied a range of stated value adjustments of 9.4% to 100.0%, with a weighted average of 40.9%. During the three months ended March 31, 2016, the Company did not apply any adjustments to the stated value of such loans. During the three months ended March 31, 2017 and 2016, the Company did not apply any adjustment to the appraisal value of OREO.

Residential properties are generally based on unadjusted third-party appraisals. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property.

These adjustments include management assumptions that are based on the type of collateral dependent loan and may increase or decrease an appraised value. Management adjustments vary significantly depending on the location, physical characteristics and income producing potential of each individual property. The quality and volume of market information available at the time of the appraisal can vary from period-to-period and cause significant changes to the nature and magnitude of the unobservable inputs used. Given these variations, changes in these unobservable inputs are generally not a reliable indicator for how fair value will increase or decrease from period to period.

The following tables present assets that had changes in their recorded fair value during the three months ended March 31, 2017 and 2016 and what we still held at the end of the respective reporting period.



	At or for the Three Months Ended March 31, 2017
(in thousands)	Fair Value of Assets Held at March 31, 2017		Level 1		Level 2		Level 3		Total Gains (Losses)

Loans held for investment⁽¹⁾	$	2,090	$	—	$	—	$	2,090	$	(41	)
Other real estate owned⁽²⁾	5,989		—		—		5,989		—
Total	$	8,079	$	—	$	—	$	8,079	$	(41	)



	At or for the Three Months Ended March 31, 2016
(in thousands)	Fair Value of Assets Held at March 31, 2016		Level 1		Level 2		Level 3		Total Gains (Losses)

Loans held for investment⁽¹⁾	$	2,619	$	—	$	—	$	2,619	$	(34	)
Other real estate owned⁽²⁾	5,485		—		—		5,485		(391		)
Total	$	8,104	$	—	$	—	$	8,104	$	(425	)


(1)	Represents the carrying value of loans for which adjustments are based on the fair value of the collateral.


(2)	Represents other real estate owned where an updated fair value of collateral is used to adjust the carrying amount subsequent to the initial classification as other real estate owned.

Fair Value of Financial Instruments

The following presents the carrying value, estimated fair value and the levels of the fair value hierarchy for the Company’s financial instruments other than assets and liabilities measured at fair value on a recurring basis.



	At March 31, 2017
(in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3

Assets:
Cash and cash equivalents	$	61,492	$	61,492	$	61,492	$	—	$	—
Investment securities held to maturity	49,265		47,965		—		47,965		—
Loans held for investment	3,938,917		3,969,088		—		—		3,969,088
Loans held for sale – transferred from held for investment	16,055		16,055		—		—		16,055
Loans held for sale – multifamily and other	19,616		19,616		—		19,616		—
Mortgage servicing rights – multifamily	21,424		23,387		—		—		23,387
Federal Home Loan Bank stock	41,656		41,656		—		41,656		—
Liabilities:
Deposits	$	4,595,809	$	4,575,208	$	—	$	4,575,208	$	—
Federal Home Loan Bank advances	862,335		864,505		—		864,505		—
Long-term debt	125,189		122,248		—		122,248		—



	At December 31, 2016
(in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3

Assets:
Cash and cash equivalents	$	53,932	$	53,932	$	53,932	$	—	$	—
Investment securities held to maturity	49,861		49,488		—		49,488		—
Loans held for investment	3,801,039		3,840,990		—		—		3,840,990
Loans held for sale – transferred from held for investment	17,512		17,512		—		—		17,512
Loans held for sale – multifamily	40,712		40,712		—		40,712		—
Mortgage servicing rights – multifamily	19,747		21,610		—		—		21,610
Federal Home Loan Bank stock	40,347		40,347		—		40,347		—
Liabilities:
Deposits	$	4,429,701	$	4,410,213	$	—	$	4,410,213	$	—
Federal Home Loan Bank advances	868,379		870,782		—		870,782		—
Long-term debt	125,147		122,357		—		122,357		—