Fair Value Measurements

FASB ASC 820 defines fair value as the exchange 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 820 also establishes a fair value hierarchy that 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 (unadjusted) for identical assets or liabilities in active exchange markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company has established and documented the process for determining the fair values of its assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, fair value is determined using valuation models or third-party appraisals. The following is a description of the valuation methodologies used to measure and report the fair value of financial assets and liabilities on a recurring or nonrecurring basis.

Measured on a Recurring Basis

Available-for-Sale Securities and Derivative Contracts

Securities available for sale are recorded at fair value on a recurring basis. The fair value of debt securities are priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and under GAAP are considered a Level 2 input method. Securities that are traded on active exchanges, including the Company's equity securities, are measured using the closing price in an active market and are considered a Level 1 input method.

The Company offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the Company enters into the opposite trade with a counter party to offset its interest rate risk. The Company has also entered into commercial loan hedges as well as borrowings hedges using interest rate swaps. The fair value of these interest rate swaps are estimated by a third party pricing service using a discounted cash flow technique. These are considered a Level 2 input method.

The following tables present the balance of assets and liabilities measured at fair value on a recurring basis.



	December 31, 2018
	Level 1		Level 2		Level 3		Total
	(In thousands)
Financial Assets
Available-for-sale securities:
U.S. government and agency securities	$	—	$	200,704	$	—	$	200,704
Municipal bonds	—		23,058		—		23,058
Corporate debt securities	—		222,541		—		222,541
Mortgage-backed securities
Agency pass-through certificates	—		1,005,037		—		1,005,037
Commercial MBS	—		—		—		—
Total available-for-sale securities	—		1,451,340		—		1,451,340
Interest rate contracts	—		3,341		—		3,341
Commercial loan hedges	—		1,506		—		1,506
Borrowings hedges	—		11,751		—		11,751
Total financial assets	$	—	$	1,467,938	$	—	$	1,467,938

Financial Liabilities
Interest rate contracts	$	—	$	3,341	$	—	$	3,341
Total financial liabilities	$	—	$	3,341	$	—	$	3,341

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the three months ended December 31, 2018.



	September 30, 2018
	Level 1		Level 2		Level 3		Total
	(In thousands)
Financial Assets
Available-for-sale securities:
Equity securities	$	488	$	—	$	—	$	488
U.S. government and agency securities	—		207,293		—		207,293
Municipal bonds	—		22,978		—		22,978
Corporate debt securities	—		184,695		—		184,695
Mortgage-backed securities
Agency pass-through certificates	—		896,041		—		896,041
Commercial MBS	—		3,462		—		3,462
Total available-for-sale securities	488		1,314,469		—		1,314,957
Interest rate contracts	—		12,731		—		12,731
Commercial loan hedges	—		3,857		—		3,857
Borrowings hedges	—		22,250		—		22,250
Total financial assets	$	488	$	1,353,307	$	—	$	1,353,795

Financial Liabilities
Interest rate contracts	$	—	$	12,731	$	—	$	12,731
Total financial liabilities	$	—	$	12,731	$	—	$	12,731

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the fiscal year ended September 30, 2018.

Measured on a Nonrecurring Basis

Impaired Loans & Real Estate Owned

Real estate owned ("REO") consists principally of properties acquired through foreclosure. From time to time, and on a nonrecurring basis, adjustments using fair value measurements are recorded to reflect increases or decreases based on the discounted cash flows, the current appraisal or estimated value of the collateral, but only up to the fair value of the real estate owned as of the initial transfer date less selling costs.

When management determines that the fair value of the collateral or the real estate owned requires additional adjustments, either as a result of an updated appraised value or when there is no observable market price, the Company classifies the impaired loan or real estate owned as Level 3. Level 3 assets recorded at fair value on a nonrecurring basis at December 31, 2018 included loans for which a specific reserve allowance was established or a partial charge-off was recorded based on the fair value of collateral, as well as real estate owned where the fair value of the property was less than the cost basis.

The following tables present the aggregated balance of assets that were measured at fair value on a nonrecurring basis at December 31, 2018 and December 31, 2017, and the total gains (losses) resulting from those fair value adjustments for the three months ended December 31, 2018 and December 31, 2017. The estimated fair value measurements are shown gross of estimated selling costs.



	December 31, 2018								Three Months Ended December 31, 2018
	Level 1		Level 2		Level 3		Total		Total Gains (Losses)
	(In thousands)								(In thousands)
Impaired loans (1)	$	—	$	—	$	1,970	$	1,970	$	(726	)
Real estate owned (2)	—		—		520		520		(32		)
Balance at end of period	$	—	$	—	$	2,490	$	2,490	$	(758	)


(1)	The gains (losses) represent remeasurements of collateral-dependent loans.


(2)	The gains (losses) represent aggregate writedowns and charge-offs on REO.



	December 31, 2017								Three Months Ended December 31, 2017
	Level 1		Level 2		Level 3		Total		Total Gains (Losses)
	(In thousands)								(In thousands)
Impaired loans (1)	$	—	$	—	$	688	$	688	$	(507	)
Real estate owned (2)	—		—		2,055		2,055		(180		)
Balance at end of period	$	—	$	—	$	2,743	$	2,743	$	(687	)


(1)	The gains (losses) represent remeasurements of collateral-dependent loans.


(2)	The gains (losses) represent aggregate writedowns and charge-offs on REO.

Impaired loans - The Company adjusts the carrying amount of impaired loans when there is evidence of probable loss and the expected fair value of the loan is less than its contractual amount. The amount of the impairment may be determined based on the estimated present value of future cash flows or the fair value of the underlying collateral. Impaired loans with a specific reserve allowance based on cash flow analysis or the value of the underlying collateral are classified as Level 3 assets.

The evaluations for impairment are prepared by the Company's Problem Loan Review Committee, which is chaired by the Chief Credit Officer and includes the Loan Review manager and Special Credits manager, as well as senior credit officers, division managers and group executives, as applicable. These evaluations are performed in conjunction with the quarterly allowance for loan loss process.

Applicable loans included in the previous quarter's review are reevaluated and if their values are materially different from the prior quarter evaluation, the underlying information (loan balance and collateral value) are compared. Material differences are evaluated for reasonableness and discussions are held between the relationship manager and their division manager to understand the difference and determine if any adjustment is necessary.

The inputs are developed and substantiated on a quarterly basis, based on current borrower developments, market conditions and collateral values. The following methods are used to value impaired loans:

•

The fair value of the collateral, which may take the form of real estate or personal property, is based on internal estimates, field observations, assessments provided by third-party appraisers and other valuation models. The Company performs or reaffirms valuations of collateral-dependent impaired loans at least annually. Adjustments are made if management believes that more recent information is available and relevant with respect to the fair value of the collateral.


•	The present value of the expected future cash flows of the loans is used for measurement of non-collateral-dependent loans to test for impairment.

Real estate owned - When a loan is reclassified from loan status to real estate owned due to the Company taking possession of the collateral, a special credits officer, along with the special credits manager, obtains a valuation, which may include appraisals or third-party price opinions, which is used to establish the fair value of the underlying collateral. The determined fair value, less selling costs, becomes the carrying value of the REO asset.

The fair value of REO assets is re-evaluated quarterly and the REO asset is adjusted to reflect the fair value as necessary. After foreclosure, the valuations are updated periodically and current market conditions may require the assets to be written down further or up to the cost basis established on the date of transfer. The carrying balance of REO assets are also written down once a bona fide offer is contractually accepted, through execution of a purchase and sale agreement, where the accepted price is lower than the cost established on the transfer date.

Fair Values of Financial Instruments

FASB ASC 825 requires disclosure of fair value information about financial instruments, whether or not recognized on the statement of financial condition, for which it is practicable to estimate those values. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value estimates presented do not reflect the underlying fair value of the Company. Although management is not aware of any factors that would materially affect the estimated fair value amounts presented below, such amounts have not been comprehensively revalued for purposes of these financial statements since the dates shown, and therefore, estimates of fair value subsequent to those dates may differ significantly from the amounts presented below.



		December 31, 2018				September 30, 2018
	Level in Fair Value Hierarchy	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
		($ in thousands)
Financial assets
Cash and cash equivalents	1	$	283,375	$	283,375	$	268,650	$	268,650
Available-for-sale securities
Equity securities	1	—		—		488		488
U.S. government and agency securities	2	200,704		200,704		207,293		207,293
Municipal bonds	2	23,058		23,058		22,978		22,978
Corporate debt securities	2	222,541		222,541		184,695		184,695
Mortgage-backed securities
Agency pass-through certificates	2	1,005,037		1,005,037		896,041		896,041
Commercial MBS	2	—		—		3,462		3,462
Total available-for-sale securities		1,451,340		1,451,340		1,314,957		1,314,957
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates	2	1,571,815		1,522,571		1,610,420		1,533,742
Commercial MBS	2	15,000		14,925		15,000		15,028
Total held-to-maturity securities		1,586,815		1,537,496		1,625,420		1,548,770

Loans receivable	3	11,700,239		12,020,772		11,477,081		11,556,326
FHLB and FRB stock	2	135,590		135,590		127,190		127,190
Other assets - interest rate contracts	2	3,341		3,341		12,731		12,731
Other assets - commercial loan hedges	2	1,506		1,506		3,857		3,857
Other assets - borrowings hedges	2	11,751		11,751		22,250		22,250

Financial liabilities
Time deposit accounts	2	4,817,346		4,822,783		4,804,803		4,779,040
FHLB advances	2	2,540,000		2,537,375		2,330,000		2,316,964
Other liabilities - interest rate contracts	2	3,341		3,341		12,731		12,731

The following methods and assumptions were used to estimate the fair value of financial instruments:

Cash and cash equivalents – The carrying amount of these items is a reasonable estimate of their fair value.

Available-for-sale securities and held-to-maturity securities – Securities at fair value are primarily priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and are considered a Level 2 input method. Equity securities that are exchange traded are considered a Level 1 input method.

Loans receivable – Fair values are estimated first by stratifying the portfolios of loans with similar financial characteristics. Loans are segregated by type such as multi-family real estate, residential mortgage, construction, commercial, consumer and land loans. Each loan category is further segmented into fixed- and adjustable-rate interest terms. For residential mortgages and multi-family loans, the bank determined that its best exit price was by securitization. MBS benchmark prices are used as a base price, with further loan level pricing adjustments made based on individual loan characteristics such as Fico score, LTV, Property Type and occupancy. For all other loan categories an estimate of fair value is then calculated based on discounted cash flows using as a discount rate the current rate offered and observed in the market on similar products, plus an adjustment for liquidity to reflect the non-homogeneous nature of the loans, as well as, a annual loss rate based on historical losses to arrive at an estimated exit price fair value. Fair value for impaired loans is also based on recent appraisals or estimated cash flows discounted using rates commensurate with risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.

FHLB and FRB stock – The fair value is based upon the par value of the stock that equates to its carrying value.

Customer accounts – The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the estimated future cash flows using the rates currently offered for deposits with similar remaining maturities.

FHLB advances – The fair value of FHLB advances and other borrowings is estimated by discounting the estimated future cash flows using rates currently available to the Company for debt with similar remaining maturities.

Interest rate contracts – The Company offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the Company enters into the opposite trade with a counterparty to offset its interest rate risk. The fair value of these interest rate swaps is estimated by a third party pricing service using a discounted cash flow technique.

Commercial loan hedges – The fair value of the interest rate swaps is estimated by a third party pricing service using a discounted cash flow technique.

Borrowings hedges – The fair value of the interest rate swaps is estimated by a third party pricing service using a discounted cash flow technique.

The following tables provide a reconciliation of amortized cost to fair value of available-for-sale and held-to-maturity securities.



	December 31, 2018
	Amortized Cost		Gross Unrealized					Fair Value		Yield
	Amortized Cost		Gains		Losses			Fair Value		Yield
	($ in thousands)
Available-for-sale securities
U.S. government and agency securities due
5 to 10 years	$	59,408	$	—	$	(1,386	)	$	58,022	2.72	%
Over 10 years	143,209		19		(546		)	142,682		3.30
Corporate debt securities due
1 to 5 years	113,798		1,068		(1,605		)	113,261		3.93
5 to 10 years	112,587		—		(3,307		)	109,280		3.35
Municipal bonds due
1 to 5 years	1,406		—		(8		)	1,398		2.05
Over 10 years	20,318		1,342		—			21,660		6.45
Mortgage-backed securities
Agency pass-through certificates	1,008,622		4,888		(8,473		)	1,005,037		3.36
	1,459,348		7,317		(15,325		)	1,451,340		3.42
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates	1,571,815		870		(50,114		)	1,522,571		3.16
Commercial MBS	15,000		—		(75		)	14,925		3.33
	1,586,815		870		(50,189		)	1,537,496		3.16
	$	3,046,163	$	8,187	$	(65,514	)	$	2,988,836	3.29	%



	September 30, 2018
	Amortized Cost		Gross Unrealized						Fair Value		Yield
	Amortized Cost		Gains		Losses				Fair Value		Yield
	($ in thousands)
Available-for-sale securities
U.S. government and agency securities due
5 to 10 years	$	60,872	$	—		$	(1,473	)	$	59,399	2.55	%
Over 10 years	148,099		109			(314		)	147,894		3.05
Equity securities
1 to 5 years	500		—			(12		)	488		1.80
Corporate bonds due
1 to 5 years	113,762		1,875			(13		)	115,624		3.59
5 to 10 years	69,965		35			(929		)	69,071		3.23
Municipal bonds due
1 to 5 years	1,398		—			(24		)	1,374		2.05
Over 10 years	20,323		1,281			—			21,604		6.45
Mortgage-backed securities
Agency pass-through certificates	908,092		1,383			(13,434		)	896,041		3.29
Commercial MBS	3,460		2			—			3,462		4.36
	1,326,471		4,685			(16,199		)	1,314,957		3.30
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates	1,610,420		305			(76,983		)	1,533,742		3.16
Other Commercial MBS	15,000		28			—			15,028		3.03
	1,625,420		333			(76,983		)	1,548,770		3.16
	$	2,951,891	$	5,018		$	(93,182	)	$	2,863,727	3.22	%

For available-for-sale investment securities, there were sales totaling $491,000 during the three months ended December 31, 2018 and no sales during the three months ended December 31, 2017. There were purchases of $172,076,000 of available-for-sale investment securities during the three months ended December 31, 2018 and purchases of $40,884 during the three months ended December 31, 2017. For held-to-maturity investment securities, there were no purchases during the three months ended December 31, 2018 and purchases of $170,836,000 during the three months ended December 31, 2017. There were no sales of held-to-maturity investment securities during either period. Substantially all of the agency mortgage-backed securities have contractual due dates that exceed 10 years.

The following tables show the unrealized gross losses and fair value of securities as of December 31, 2018 and September 30, 2018, by length of time that individual securities in each category have been in a continuous loss position. The decline in fair value since purchase is attributable to changes in interest rates. Because the Company does not intend to sell these securities and does not consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other than temporarily impaired.



December 31, 2018	Less than 12 months					12 months or more					Total
	Unrealized Gross Losses			Fair Value		Unrealized Gross Losses			Fair Value		Unrealized Gross Losses			Fair Value
	(In thousands)
Corporate debt securities	$	(1,172	)	$	61,415	$	(3,740	)	$	96,261	$	(4,912	)	157,676
Municipal bonds	(8		)	1,398		—			—		(8		)	1,398
U.S. government and agency securities	(286		)	69,152		(1,646		)	74,212		(1,932		)	143,364
Mortgage-backed securities	(14,860		)	869,583		(43,802		)	1,077,341		(58,662		)	1,946,924
	$	(16,326	)	$	1,001,548	$	(49,188	)	$	1,247,814	$	(65,514	)	$	2,249,362



September 30, 2018	Less than 12 months					12 months or more					Total
	Unrealized Gross Losses			Fair Value		Unrealized Gross Losses			Fair Value		Unrealized Gross Losses			Fair Value
	(In thousands)
Corporate debt securities	$	(929	)	$	49,072	$	(14	)	$	24,988	$	(943	)	$	74,060
Municipal bonds due	(24		)	1,374		—			—		(24		)	1,374
U.S. government and agency securities	(141		)	37,565		(1,645		)	76,499		(1,786		)	114,064
Equity securities	(12		)	488		—			—		(12		)	488
Mortgage-backed securities	(28,748		)	1,035,754		(61,669		)	1,183,017		(90,417		)	2,218,771
	$	(29,854	)	$	1,124,253	$	(63,328	)	$	1,284,504	$	(93,182	)	$	2,408,757