Disclosures about Fair Value of Assets and Liabilities

12 Months Ended

Dec. 31, 2023

Disclosures about Fair Value of Assets and Liabilities

Disclosures about Fair Value of Assets and Liabilities

Note 23: Disclosures About Fair Value of Assets and Liabilities

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of

observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices in active markets for identical assets or liabilities
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 3	Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities

Recurring Measurements

The following tables present the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2023 and 2022:

	Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Assets	Value		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
December 31, 2023
Mortgage loans in process of securitization	$	110,599	$	—	$	110,599	$	—
Securities available for sale:
Treasury notes		128,968		128,968		—		—
Federal agencies		247,755		—		247,755		—
Mortgage-backed - Agency		14,467		—		14,467		—
Mortgage-backed - Non-agency residential - fair value option		485,500		—		—		485,500
Mortgage-backed - Agency - fair value option		236,997		—		236,997
Loans held for sale		86,663		—		86,663		—
Servicing rights		158,457		—		—		158,457
Derivative assets:
Interest rate lock commitments		140		—		—		140
Forward contracts		4		—		4		—
Interest rate swaps		2,610		—		2,610		—
Interest rate swaps (back-to-back)		12,426		—		12,426		—
Put options		25,877		—		7,223		18,654
Interest rate floors		6,576		—		—		6,576
Derivative liabilities:
Interest rate lock commitments		4		—		—		4
Forward contracts		391		—		391		—
Interest rate swaps (back-to-back)		12,426		—		12,426		—
December 31, 2022
Mortgage loans in process of securitization	$	154,194	$	—	$	154,194	$	—
Securities available for sale:
Treasury notes		36,280		36,280		—		—
Federal agencies		271,890		—		271,890		—
Mortgage-backed - Agency		15,167		—		15,167		—
Loans held for sale		82,192		—		82,192		—
Servicing rights		146,248		—		—		146,248
Derivative assets:
Interest rate lock commitments		28		—		—		28
Forward contracts		46		—		46		—
Interest rate swaps		3,030		—		3,030		—
Interest rate swaps (back-to-back)		3,041		—		3,041		—
Derivative liabilities:
Interest rate lock commitments		23		—		—		23
Forward contracts		52		—		52		—
Interest rate swaps (back-to-back)		3,041		—		3,041		—

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets

pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the years ended December 31, 2023 and 2022. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Mortgage Loans in Process of Securitization, Securities Available for Sale, and Securities with a Fair Value Option Election

Where quoted market prices are available in an active market, securities such as U.S. Treasuries are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy including federal agencies, mortgage-backed securities, municipal securities and Federal Housing Administration participation certificates. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

Loans Held for Sale

Certain loans held for sale at fair value are saleable into the secondary mortgage markets and their fair values are estimated using observable quoted market or contracted prices, or market price equivalents, which would be used by other market participants. These saleable loans are considered Level 2.

Servicing Rights

Servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed, cost of servicing, interest rates, and default rate. Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the hierarchy.

The Chief Financial Officer’s (CFO) office contracts with an independent pricing specialist to generate fair value estimates on a quarterly basis. The CFO’s office challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United States.

Derivative Financial Instruments

Interest rate lock commitments - The Company estimates the fair value of interest rate lock commitments based on the value of the underlying mortgage loan, quoted mortgage-backed security prices, estimates of the fair value of the servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the interest rate lock commitment, net of expenses. With respect to its interest rate lock commitments, management determined that a Level 3 classification was most appropriate based on the various significant unobservable inputs utilized in estimating the fair value of its interest rate lock commitments.

Forward sales commitments - The Company estimates the fair value of forward sales commitments based on market quotes of mortgage-backed security prices for securities similar to the ones used, which are considered Level 2.

Interest rate swaps – The Company estimates the fair value of interest rate swaps based on prices that are obtained from a third party that uses observable market inputs, thereby supporting a Level 2 classification.

Put options - The fair value of put options are linked to securities available for sale that are accounted for using the fair value option and are classified as either Level 2 or Level 3 on the hierarchy.  The put options are classified as Level 2 or Level 3 in the hierarchy, depending upon the magnitude of observable inputs in the valuation of the securities. These valuations are estimated by a third party.

Interest rate floors - The fair value of interest rate floors is linked to securities available for sale that are accounted for using the fair value option. The value of the interest rate floors is based on estimated discounted cash

flows that are based on inputs that are not readily observable and, thus, are classified as Level 3 on the hierarchy. These valuations are estimated a third party.

Changes in fair value of the Company’s derivative financial instruments are recognized through noninterest income and/or noninterest expenses on its consolidated statement of income.

Level 3 Reconciliation

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs:

	Year Ended December 31,
	2023		2022		2021
	(In thousands)
Servicing rights
Balance, beginning of period	$	146,248	$	110,348	$	82,604
Additions
Purchased servicing		513		—		2,057
Originated servicing		14,755		27,124		30,421
Subtractions
Paydowns		(7,621)		(10,985)		(16,691)
Sales of servicing		—		—		(438)
Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model		4,562		19,761		12,395
Balance, end of period	$	158,457	$	146,248	$	110,348
Available for sale securities - Mortgage-backed - Non-Agency residential - fair value option
Balance, beginning of period	$	—	$	—	$	—
Purchased securities		483,906		—		—
Changes in fair value		1,594		—		—
Balance, end of period	$	485,500	$	—	$	—
Derivative Assets - put options
Balance, beginning of period	$	—	$	—	$	—
Purchases		20,248		—		—
Changes in fair value		(1,594)		—		—
Balance, end of period	$	18,654	$	—	$	—
Derivative Assets - interest rate floors
Balance, beginning of period	$	—	$	—	$	—
Purchases		6,576		—		—
Balance, end of period	$	6,576	$	—	$	—
Derivative Assets - interest rate lock commitments
Balance, beginning of period	$	28	$	264	$	6,131
Changes in fair value		112		(236)		(5,867)
Balance, end of period	$	140	$	28	$	264
Derivative Liabilities - interest rate lock commitments
Balance, beginning of period	$	23	$	41	$	—
Changes in fair value		(19)		(18)		41
Balance, end of period	$	4		23	$	41

Nonrecurring Measurements

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2023 and 2022:

	Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Assets	Value		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
December 31, 2023
Impaired loans (collateral-dependent)	$	47,026	$	—	$	—	$	47,026
December 31, 2022
Impaired loans (collateral-dependent)	$	4,465	$	—	$	—	$	4,465

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheet, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Collateral Dependent Loans, Net of ACL-Loans

The estimated fair value of collateral dependent loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral dependent loans are classified within Level 3 of the fair value hierarchy.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the Chief Credit Officer’s (“CCO”) office. Appraisals and evaluations are reviewed for accuracy and consistency by the CCO’s office. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the CCO’s office by comparison to historical results.

Unobservable (Level 3) Inputs:

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill.

			Valuation			Weighted
	Fair Value		Technique	Unobservable Inputs	Range	Average
	(In thousands)
At December 31, 2023:
Available for sale securities - Mortgage-backed - Non-Agency residential - fair value option	$	485,500	Discounted cash flow	Market credit spread	2%	2%
Collateral dependent loans	$	47,026	Market comparable properties	Marketability discount	0% - 100%	2%
Servicing rights - Multi-family	$	122,218	Discounted cash flow	Discount rate	8% - 13%	9%
				Constant prepayment rate	0% - 50%	7%
Servicing rights - Single-family	$	30,959	Discounted cash flow	Discount rate	10% - 11%	10%
				Constant prepayment rate	6% - 16%	7%
Servicing rights - SBA	$	5,280	Discounted cash flow	Discount rate	16%	16%
				Constant prepayment rate	3% - 14%	9%
Derivative assets:
Interest rate lock commitments	$	140	Discounted cash flow	Loan closing rates	45% - 99%	78%
Put options	$	18,654	Intrinsic option value	Market credit spread	2%	2%
Interest rate floors	$	6,576	Discounted cash flow	Discount rate	6%-7%	7%
Derivative liabilities - interest rate lock commitments	$	4	Discounted cash flow	Loan closing rates	45% - 99%	78%
At December 31, 2022:
Collateral-dependent impaired loans	$	4,465	Market comparable properties	Marketability discount	4% - 54%	5%
Servicing rights - Multi-family	$	111,690	Discounted cash flow	Discount rate	8% - 13%	9%
				Constant prepayment rate	0% - 39%	8%
Servicing rights - Single-family	$	29,926	Discounted cash flow	Discount rate	9% - 10%	9%
				Constant prepayment rate	7% - 10%	7%
Servicing rights - SBA	$	4,632	Discounted cash flow	Discount rate	16%	16%
				Constant prepayment rate	3% - 12%	8%
Derivative assets - interest rate lock commitments	$	28	Discounted cash flow	Loan closing rates	60% - 87%	77%
Derivative liabilities - interest rate lock commitments	$	23	Discounted cash flow	Loan closing rates	60% - 87%	77%

Sensitivity of Significant Unobservable Inputs

The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement, and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

Securities Available for Sale with a Fair Value Option Election and Related Derivate Financial Instruments

The significant unobservable input used in the fair value measurement of certain securities available for sale and their related put options include market credit spreads that can be impacted by market conditions and drive a significant amount of a market participant’s valuation of the security and its related put option. The impact of changes to the unobservable inputs for the securities is mitigated by changes to the unobservable inputs for the put options, which are valued in opposite directions, so as to minimize the financial impact to the Company.

The significant unobservable input used in the fair value measurement of the interest rate floor derivative associated with certain securities available for sale include the discount rate that can have a significant impact on the value of the derivative. Another variable that affects the floor value is the forward interest curve, which is observable, but changes with market conditions as interest rates and future interest rate expectations change.

Servicing Rights

The significant unobservable inputs used in the fair value measurement of the Company’s servicing rights are discount rates and constant prepayment rates. These two inputs can drive a significant amount of a market participant’s valuation of servicing rights. Significant increases (decreases) in the discount rate or assumed constant prepayment rates used to value servicing rights would decrease (increase) the value derived.

Fair Value of Financial Instruments

The following table presents the carrying amount and estimated fair values of the Company’s financial instruments not carried at fair value and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2023 and 2022.

			Fair Value Measurements Using
					Quoted Prices in		Significant
					Active Markets		Other		Significant
					for Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
Assets	Value		Value		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
December 31, 2023
Financial assets:
Cash and cash equivalents	$	584,422	$	584,422	$	584,422	$	—	$	—
Securities purchased under agreements to resell		3,349		3,349		—		3,349		—
Securities held to maturity		1,204,217		1,203,535		—		484,288		719,247
FHLB stock		48,578		48,578		—		48,578		—
Loans held for sale		3,058,093		3,058,093		—		3,058,093		—
Loans receivable, net		10,127,801		10,088,468		—		—		10,088,468
Interest receivable		91,346		91,346		—		91,346		—
Financial liabilities:
Deposits		14,061,460		14,062,457		8,894,058		5,168,399		—
Short-term subordinated debt		64,922		64,922		—		64,922		—
FHLB advances		771,392		771,029		—		771,029		—
Other borrowing		7,934		7,934		—		7,934		—
Credit linked notes		119,879		119,878		—		119,878		—
Interest payable		43,423		43,423		—		43,423		—
December 31, 2022
Financial assets:
Cash and cash equivalents	$	226,164	$	226,164	$	226,164	$	—	$	—
Securities purchased under agreements to resell		3,464		3,464		—		3,464		—
Securities held to maturity		1,119,078		1,118,966		—		247,182		871,784
FHLB stock		39,130		39,130		—		39,130		—
Loans held for sale		2,828,384		2,828,384		—		2,828,384		—
Loans receivable, net		7,426,858		7,431,731		—		—		7,431,731
Interest receivable		56,262		56,262		—		56,262		—
Financial liabilities:
Deposits		10,071,345		10,064,941		7,082,056		2,982,885		—
Short-term subordinated debt		21,000		21,000		—		21,000		—
FHLB advances		859,392		858,984		—		858,984		—
Other borrowing		50,000		50,000		—		50,000		—
Interest payable		23,384		23,384		—		23,384		—