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Fair Value Measurements | 6 Months Ended
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Jun. 30, 2017
Fair Value Measurements | Note 11. Fair Value Measurements GAAP sets forth a definition of fair value, establishes a consistent framework for measuring fair value, and requires disclosure for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. GAAP also clarifies that fair value is an “exit” price, representing the amount that would be received when selling an asset, or paid when transferring a liability, in an orderly transaction between market participants. Fair value is thus a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
| • |  | Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
| • |  | Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
| • |  | Level 3 – Inputs to the valuation methodology are significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants use in pricing an asset or liability.
A financial instrument’s categorization within this valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following tables present assets and liabilities that were measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016, and that were included in the Company’s Consolidated Statements of Condition at those dates:
|  | Fair Value Measurements at June 30, 2017 |
(in thousands) |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Netting Adjustments(1) |  |  | Total Fair Value |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-Related Securities Available for Sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
GSE certificates |  | $ | — |  |  | $ | 2,002,643 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,002,643 |
GSE CMOs |  |  | — |  |  |  | 621,605 |  |  |  | — |  |  |  | — |  |  |  | 621,605 |
Total mortgage-related securities |  | $ | — |  |  | $ | 2,624,248 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,624,248 |
Other Securities Available for Sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S Treasury Obligations |  | $ | 199,992 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 199,992 |
GSE debentures |  |  | — |  |  |  | 91,234 |  |  |  | — |  |  |  | — |  |  |  | 91,234 |
Corporate bonds |  |  | — |  |  |  | 86,120 |  |  |  | — |  |  |  | — |  |  |  | 86,120 |
Municipal bonds |  |  | — |  |  |  | 70,513 |  |  |  | — |  |  |  | — |  |  |  | 70,513 |
Capital trust notes |  |  | — |  |  |  | 66,425 |  |  |  | — |  |  |  | — |  |  |  | 66,425 |
Preferred stock |  |  | 15,435 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 15,435 |
Mutual funds and common stock |  |  | — |  |  |  | 17,150 |  |  |  | — |  |  |  | — |  |  |  | 17,150 |
Total other securities |  | $ | 215,427 |  |  | $ | 331,442 |  |  | $ | — |  |  | $ | — |  |  | $ | 546,869 |
Total securities available for sale |  | $ | 215,427 |  |  | $ | 2,955,690 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,171,117 |
Other Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans held for sale |  | $ | — |  |  | $ | 266,888 |  |  | $ | — |  |  | $ | — |  |  | $ | 266,888 |
Mortgage servicing rights (held for sale at June 30, 2017) |  |  | — |  |  |  | — |  |  |  | 220,586 |  |  |  | — |  |  |  | 220,586 |
Interest rate lock commitments |  |  | — |  |  |  | — |  |  |  | 1,027 |  |  |  | — |  |  |  | 1,027 |
Derivative assets-other (2) |  |  | 1,914 |  |  |  | 1,838 |  |  |  | — |  |  |  | (2,402 | ) |  |  | 1,350 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities |  | $ | (4,641 | ) |  | $ | (1,272 | ) |  | $ | — |  |  | $ | 1,702 |  |  | $ | (4,211 | )
(1) | Includes cash collateral received from, and paid to, counterparties.
(2) | Includes $1.1 million to purchase Treasury options.
|  | Fair Value Measurements at December 31, 2016 |
(in thousands) |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Netting Adjustments(1) |  |  | Total Fair Value |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-Related Securities Available for Sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
GSE certificates |  | $ | — |  |  | $ | 7,326 |  |  | $ | — |  |  | $ | — |  |  | $ | 7,326 |
Total mortgage-related securities |  | $ | — |  |  | $ | 7,326 |  |  | $ | — |  |  | $ | — |  |  | $ | 7,326 |
Other Securities Available for Sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal bonds |  | $ | — |  |  | $ | 631 |  |  | $ | — |  |  | $ | — |  |  | $ | 631 |
Capital trust notes |  |  | — |  |  |  | 7,243 |  |  |  | — |  |  |  | — |  |  |  | 7,243 |
Preferred stock |  |  | 42,724 |  |  |  | 29,260 |  |  |  | — |  |  |  | — |  |  |  | 71,984 |
Mutual funds and common stock |  |  | — |  |  |  | 17,097 |  |  |  | — |  |  |  | — |  |  |  | 17,097 |
Total other securities |  | $ | 42,724 |  |  | $ | 54,231 |  |  | $ | — |  |  | $ | — |  |  | $ | 96,955 |
Total securities available for sale |  | $ | 42,724 |  |  | $ | 61,557 |  |  | $ | — |  |  | $ | — |  |  | $ | 104,281 |
Other Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans held for sale |  | $ | — |  |  | $ | 409,152 |  |  | $ | — |  |  | $ | — |  |  | $ | 409,152 |
Mortgage servicing rights |  |  | — |  |  |  | — |  |  |  | 228,099 |  |  |  | — |  |  |  | 228,099 |
Interest rate lock commitments |  |  | — |  |  |  | — |  |  |  | 982 |  |  |  | — |  |  |  | 982 |
Derivative assets-other (2) |  |  | 2,611 |  |  |  | 16,829 |  |  |  | — |  |  |  | (17,861 | ) |  |  | 1,579 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities |  | $ | (6,009 | ) |  | $ | (17,719 | ) |  | $ | — |  |  | $ | 16,588 |  |  | $ | (7,140 | )
(1) | Includes cash collateral received from, and paid to, counterparties.
(2) | Includes $1.9 million to purchase Treasury options.
The Company reviews and updates the fair value hierarchy classifications for its assets on a quarterly basis. Changes from one quarter to the next that are related to the observability of inputs for a fair value measurement may result in a reclassification from one hierarchy level to another. A description of the methods and significant assumptions utilized in estimating the fair values of available-for-sale securities follows: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities, exchange-traded securities, and derivatives. If quoted market prices are not available for a specific security, then fair values are estimated by using pricing models. These pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices, and credit spreads. In addition to observable market information, models incorporate transaction details such as maturity and cash flow assumptions. Securities valued in this manner would generally be classified within Level 2 of the valuation hierarchy, and primarily include such instruments as mortgage-related and corporate debt securities. Periodically, the Company uses fair values supplied by independent pricing services to corroborate the fair values derived from the pricing models. In addition, the Company reviews the fair values supplied by independent pricing services, as well as their underlying pricing methodologies, for reasonableness. The Company challenges pricing service valuations that appear to be unusual or unexpected. The Company carries loans held for sale originated by its mortgage banking operation at fair value. The fair value of loans held for sale is primarily based on quoted market prices for securities backed by similar types of loans. Changes in the fair value of these assets are largely driven by changes in interest rates subsequent to loan funding, and changes in the fair value of servicing associated with the mortgage loans held for sale. Loans held for sale are classified within Level 2 of the valuation hierarchy. MSRs do not trade in an active open market with readily observable prices. The Company bases the fair value of its MSRs on the present value of estimated future net servicing income cash flows, utilizing a third-party valuation specialist. The specialist estimates future net servicing income cash flows with assumptions that market participants would use to estimate fair value, including estimates of prepayment speeds, discount rates, default rates, refinance rates, servicing costs, escrow account earnings, contractual servicing fee income, and ancillary income. The Company periodically adjusts the underlying inputs and assumptions to reflect market conditions and assumptions that a market participant would consider in valuing the MSR asset. MSR fair value measurements use significant unobservable inputs and, accordingly, are classified within Level 3. Exchange-traded derivatives that are valued using quoted prices are classified within Level 1 of the valuation hierarchy. The majority of the Company’s derivative positions are valued using internally developed models that use readily observable market parameters as their basis. These are parameters that are actively quoted and can be validated by external sources, including industry pricing services. Where the types of derivative products have been in existence for some time, the Company uses models that are widely accepted in the financial services industry. These models reflect the contractual terms of the derivatives, including the period to maturity, and market-based parameters such as interest rates, volatility, and the credit quality of the counterparty. Furthermore, many of these models do not contain a high level of subjectivity, as the methodologies used in the models do not require significant judgment, and inputs to the models are readily observable from actively quoted markets, as is the case for “plain vanilla” interest rate swaps and option contracts. Such instruments are generally classified within Level 2 of the valuation hierarchy. Derivatives that are valued based on models with significant unobservable market parameters, and that are normally traded less actively, have trade activity that is one-way, and/or are traded in less-developed markets, are classified within Level 3 of the valuation hierarchy. The fair values of interest rate lock commitments (“IRLCs”) for residential mortgage loans that the Company intends to sell are based on internally developed models. The key model inputs primarily include the sum of the value of the forward commitment based on the loans’ expected settlement dates and the projected values of the MSRs, loan level price adjustment factors, and historical IRLC closing ratios. The closing ratio is computed by the Company’s mortgage banking operation and is periodically reviewed by management for reasonableness. Such derivatives are classified as Level 3. While the Company believes its valuation methods are appropriate, and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair values of certain financial instruments could result in different estimates of fair values at a reporting date. Fair Value Option Loans Held for Sale The Company has elected the fair value option for its loans held for sale in the mortgage banking division. These loans held for sale consist of one-to-four family mortgage loans, none of which was 90 days or more past due at June 30, 2017. Management believes that the mortgage banking business operates on a short-term cycle. Therefore, in order to reflect the most relevant valuations for the key components of this business, and to reduce timing differences in amounts recognized in earnings, the Company has elected to record loans held for sale at fair value to match the recognition of IRLCs, MSRs, and derivatives, all of which are recorded at fair value in earnings. Fair value is based on independent quoted market prices of mortgage-backed securities comprised of loans with similar features to those of the Company’s loans held for sale, where available, and adjusted as necessary for such items as servicing value, guaranty fee premiums, and credit spread adjustments. The following table reflects the difference between the fair value carrying amount of loans held for sale, for which the Company has elected the fair value option, and the unpaid principal balance:
|  | June 30, 2017 |  |  | December 31, 2016 |
(in thousands) |  | Fair Value Carrying Amount |  |  | Aggregate Unpaid Principal |  |  | Fair Value Carrying Amount Less Aggregate Unpaid Principal |  |  | Fair Value Carrying Amount |  |  | Aggregate Unpaid Principal |  |  | Fair Value Carrying Amount Less Aggregate Unpaid Principal |
Loans held for sale |  | $ | 266,888 |  |  | $ | 260,464 |  |  | $ | 6,424 |  |  | $ | 409,152 |  |  | $ | 408,928 |  |  | $ | 224 |
Gains and Losses Included in Income for Assets Where the Fair Value Option Has Been Elected The assets accounted for under the fair value option are initially measured at fair value. Gains and losses from the initial measurement and subsequent changes in fair value are recognized in earnings. The following table presents the changes in fair value related to initial measurement, and the subsequent changes in fair value included in earnings, for loans held for sale and MSRs for the periods indicated:
|  | Gain (Loss) Included in Mortgage Banking Income from Changes in Fair Value (1) |
|  | For the Three Months Ended June 30, |  |  | For the Six Months Ended June 30, |
(in thousands) |  | 2017 |  |  | 2016 (2) |  |  | 2017 |  |  | 2016 (2) |
Loans held for sale |  | $ | 658 |  |  | $ | 933 |  |  | $ | 595 |  |  | $ | 3,802 |
Mortgage servicing rights (held for sale at June 30, 2017) |  |  | (7,621 | ) |  |  | (30,988 | ) |  |  | (10,348 | ) |  |  | (68,081 | )
Total loss |  | $ | (6,963 | ) |  | $ | (30,055 | ) |  | $ | (9,753 | ) |  | $ | (64,279 | )
(1) | Does not include the effect of economic hedging activities, which is included in “Other non-interest income.”
(2) | The presentation of the amounts for the three and six months ended June 30, 2016 has been modified to conform to the presentation for the three and six months ended June 30, 2017.
The Company has determined that there is no instrument-specific credit risk related to its loans held for sale, due to the short duration of such assets. Changes in Level 3 Fair Value Measurements The following tables present, for the six months ended June 30, 2017 and 2016, a roll-forward of the balance sheet amounts (including changes in fair value) for financial instruments classified in Level 3 of the valuation hierarchy:
(in thousands) |  | Fair Value January 1, 2017 |  |  | Total Realized/Unrealized Gains/(Losses) Recorded in |  |  | Issuances |  |  | Settlements |  |  | Transfers to/(from) Level 3 |  |  | Fair Value at June 30, 2017 |  |  | Change in Unrealized Gains/ (Losses) Related to Instruments Held at June 30, 2017 |
|  | Income/ (Loss) |  |  | Comprehensive (Loss) Income |  |  |  |  |  |
Mortgage servicing rights (held for sale at June 30, 2017) |  | $ | 228,099 |  |  | $ | (19,496 | ) |  | $ | — |  |  | $ | 11,983 |  |  | $ | — |  |  | $ | — |  |  | $ | 220,586 |  |  | $ | (10,348 | )
Interest rate lock commitments |  |  | 982 |  |  |  | 45 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,027 |  |  |  | 1,027 |
(in thousands) |  | Fair Value January 1, 2016 |  |  | Total Realized/Unrealized Gains/(Losses) Recorded in |  |  | Issuances |  |  | Settlements |  |  | Transfers to/(from) Level 3 |  |  | Fair Value at June 30, 2016 |  |  | Change in Unrealized Gains/ (Losses) Related to Instruments Held at June 30, 2016 |
|  | Income/ (Loss) |  |  | Comprehensive (Loss) Income |  |  |  |  |  |
Mortgage servicing rights |  | $ | 243,389 |  |  | $ | (74,238 | ) |  | $ | — |  |  | $ | 19,180 |  |  | $ | — |  |  | $ | — |  |  | $ | 188,331 |  |  | $ | (60,163 | )
Interest rate lock commitments |  |  | 2,526 |  |  |  | 7,607 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 10,133 |  |  |  | 10,133 |
The Company’s policy is to recognize transfers in and out of Levels 1, 2, and 3 as of the end of the reporting period. There were no transfers in or out of Levels 1, 2, or 3 during the three months ended June 30, 2017 or 2016. For Level 3 assets and liabilities measured at fair value on a recurring basis as of June 30, 2017, the significant unobservable inputs used in the fair value measurements were as follows:
(dollars in thousands) |  | Fair Value at June 30, 2017 |  | Valuation Technique |  | Significant Unobservable Inputs |  | Significant Unobservable Input Value |
Mortgage servicing rights (held for sale at June 30, 2017) |  | $220,586 |  | Discounted Cash Flow |  | Weighted Average Constant Prepayment Rate (1) |  |  | 9.16 | %
|  |  |  |  |  | Weighted Average Discount Rate |  |  | 10.05 |
Interest rate lock commitments |  | 1,027 |  | Discounted Cash Flow |  | Weighted Average Closing Ratio |  |  | 75.04 |
(1) | Represents annualized loan repayment rate assumptions.
The significant unobservable inputs used in the fair value measurement of the Company’s MSRs are the weighted average constant prepayment rate and the weighted average discount rate. Significant increases or decreases in either of those inputs in isolation could result in significantly lower or higher fair value measurements. Although the constant prepayment rate and the discount rate are not directly interrelated, they generally move in opposite directions. The significant unobservable input used in the fair value measurement of the Company’s IRLCs is the closing ratio, which represents the percentage of loans currently in an interest rate lock position that management estimates will ultimately close. Generally, the fair value of an IRLC is positive if the prevailing interest rate is lower than the IRLC rate, and the fair value of an IRLC is negative if the prevailing interest rate is higher than the IRLC rate. Therefore, an increase in the closing ratio (i.e., a higher percentage of loans estimated to close) will result in the fair value of the IRLC increasing if in a gain position, or decreasing if in a loss position. The closing ratio is largely dependent on the stage of processing that a loan is currently in, and the change in prevailing interest rates from the time of the interest rate lock. Assets Measured at Fair Value on a Non-Recurring Basis Certain assets are measured at fair value on a non-recurring basis. Such instruments are subject to fair value adjustments under certain circumstances (e.g., when there is evidence of impairment). The following tables present assets and liabilities that were measured at fair value on a non-recurring basis as of June 30, 2017 and December 31, 2016, and that were included in the Company’s consolidated statements of condition at those dates:
|  | Fair Value Measurements at June 30, 2017 Using |
(in thousands) |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Total Fair Value |
Certain impaired loans (1) |  | $ | — |  |  | $ | — |  |  | $ | 45,412 |  |  | $ | 45,412 |
Securities transferred to available-for-sale |  |  | 199,992 |  |  |  | 2,923,081 |  |  |  | — |  |  |  | 3,123,073 |
Loans transferred to held for sale |  |  | — |  |  |  | — |  |  |  | 1,536,836 |  |  |  | 1,536,836 |
Other assets (2) |  |  | — |  |  |  | — |  |  |  | 1,546 |  |  |  | 1,546 |
Total |  | $ | 199,992 |  |  | $ | 2,923,081 |  |  | $ | 1,583,794 |  |  | $ | 4,706,867 |
(1) | Represents the fair value of impaired loans, based on the value of the collateral.
(2) | Represents the fair value of OREO, based on the appraised value of the collateral subsequent to its initial classification as OREO.
|  | Fair Value Measurements at December 31, 2016 Using |
(in thousands) |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Total Fair Value |
Certain impaired loans (1) |  | $ | — |  |  | $ | — |  |  | $ | 15,635 |  |  | $ | 15,635 |
Other assets (2) |  |  | — |  |  |  | — |  |  |  | 5,684 |  |  |  | 5,684 |
Total |  | $ | — |  |  | $ | — |  |  | $ | 21,319 |  |  | $ | 21,319 |
(1) | Represents the fair value of impaired loans, based on the value of the collateral, primarily taxi medallion loans .
(2) | Represents the fair value of OREO, based on the appraised value of the collateral subsequent to its initial classification as OREO.
The fair values of collateral-dependent impaired loans are determined using various valuation techniques, including consideration of appraised values and other pertinent real estate market data. Other Fair Value Disclosures GAAP requires the disclosure of fair value information about the Company’s on- and off-balance sheet financial instruments. When available, quoted market prices are used as the measure of fair value. In cases where quoted market prices are not available, fair values are based on present-value estimates or other valuation techniques. Such fair values are significantly affected by the assumptions used, the timing of future cash flows, and the discount rate. Because assumptions are inherently subjective in nature, estimated fair values cannot be substantiated by comparison to independent market quotes. Furthermore, in many cases, the estimated fair values provided would not necessarily be realized in an immediate sale or settlement of such instruments. The following tables summarize the carrying values, estimated fair values, and fair value measurement levels of financial instruments that were not carried at fair value on the Company’s Consolidated Statements of Condition at the dates indicated:
|  | June 30, 2017 |
|  |  |  |  | Fair Value Measurement Using |
(in thousands) |  | Carrying Value |  |  | Estimated Fair Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 1,129,846 |  |  | $ | 1,129,846 |  |  | $ | 1,129,846 |  |  | $ | — |  |  | $ | — |
FHLB stock (1) |  |  | 589,067 |  |  |  | 589,067 |  |  |  | — |  |  |  | 589,067 |  |  |  | — |
Loans, net |  |  | 38,900,080 |  |  |  | 39,226,420 |  |  |  | — |  |  |  | — |  |  |  | 39,226,420 |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 28,893,565 |  |  | $ | 28,879,234 |  |  | $ | 20,662,712 | (2) |  | $ | 8,216,522 | (3) |  | $ | — |
Borrowed funds |  |  | 12,363,526 |  |  |  | 12,327,278 |  |  |  | — |  |  |  | 12,327,278 |  |  |  | — |
(1) | Carrying value and estimated fair value are at cost.
(2) | NOW and money market accounts, savings accounts, and non-interest-bearing accounts.
(3) | Certificates of deposit.
|  | December 31, 2016 |
|  |  |  |  | Fair Value Measurement Using |
(in thousands) |  | Carrying Value |  |  | Estimated Fair Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 557,850 |  |  | $ | 557,850 |  |  | $ | 557,850 |  |  | $ | — |  |  | $ | — |
Securities held to maturity |  |  | 3,712,776 |  |  |  | 3,813,959 |  |  |  | 200,220 |  |  |  | 3,613,739 |  |  |  | — |
FHLB stock (1) |  |  | 590,934 |  |  |  | 590,934 |  |  |  | — |  |  |  | 590,934 |  |  |  | — |
Loans, net |  |  | 39,308,016 |  |  |  | 39,416,469 |  |  |  | — |  |  |  | — |  |  |  | 39,416,469 |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 28,887,903 |  |  | $ | 28,888,064 |  |  | $ | 21,310,733 | (2) |  | $ | 7,577,331 | (3) |  | $ | — |
Borrowed funds |  |  | 13,673,379 |  |  |  | 13,633,943 |  |  |  | — |  |  |  | 13,633,943 |  |  |  | — |
(1) | Carrying value and estimated fair value are at cost.
(2) | NOW and money market accounts, savings accounts, and non-interest-bearing accounts.
(3) | Certificates of deposit.
The methods and significant assumptions used to estimate fair values for the Company’s financial instruments follow: Cash and Cash Equivalents Cash and cash equivalents include cash and due from banks and federal funds sold. The estimated fair values of cash and cash equivalents are assumed to equal their carrying values, as these financial instruments are either due on demand or have short-term maturities. Securities If quoted market prices are not available for a specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. These pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices, and credit spreads. In addition to observable market information, pricing models also incorporate transaction details such as maturities and cash flow assumptions. Federal Home Loan Bank Stock Ownership in equity securities of the FHLB is restricted and there is no established market for their resale. The carrying amount approximates the fair value. Loans The loan portfolio is segregated into various components for valuation purposes in order to group loans based on their significant financial characteristics, such as loan type (mortgage or other) and payment status (performing or non-performing). The estimated fair values of mortgage and other loans are computed by discounting the anticipated cash flows from the respective portfolios. The discount rates reflect current market rates for loans with similar terms to borrowers of similar credit quality. The estimated fair values of non-performing mortgage and other loans are based on recent collateral appraisals. The methods used to estimate the fair values of loans are extremely sensitive to the assumptions and estimates used. While management has attempted to use assumptions and estimates that best reflect the Company’s loan portfolio and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets. Accordingly, readers are cautioned in using this information for purposes of evaluating the financial condition and/or value of the Company in and of itself, or in comparison with that of any other company. Mortgage Servicing Rights MSRs do not trade in an active market with readily observable prices. Accordingly, the Company bases the fair value of its MSRs on a valuation performed by a third-party valuation specialist. This specialist determines fair value based on the present value of estimated future net servicing income cash flows, and incorporates assumptions that market participants would use to estimate fair value, including estimates of prepayment speeds, discount rates, default rates, refinance rates, servicing costs, escrow account earnings, contractual servicing fee income, and ancillary income. The specialist and the Company evaluate, and periodically adjust, as necessary, these underlying inputs and assumptions to reflect market conditions and changes in the assumptions that a market participant would consider in valuing MSRs. Derivative Financial Instruments For exchange-traded futures and exchange-traded options, fair value is based on observable quoted market prices in an active market. For forward commitments to buy and sell loans and mortgage-backed securities, fair value is based on observable market prices for similar loans and securities in an active market. The fair value of IRLCs for one-to-four family mortgage loans that the Company intends to sell is based on internally developed models. The key model inputs primarily include the sum of the value of the forward commitment based on the loans’ expected settlement dates, the value of MSRs arrived at by an independent MSR broker, government agency price adjustment factors, and historical IRLC fall-out factors. Deposits The fair values of deposit liabilities with no stated maturity (i.e., NOW and money market accounts, savings accounts, and non-interest-bearing accounts) are equal to the carrying amounts payable on demand. The fair values of CDs represent contractual cash flows, discounted using interest rates currently offered on deposits with similar characteristics and remaining maturities. These estimated fair values do not include the intangible value of core deposit relationships, which comprise a significant portion of the Company’s deposit base. Borrowed Funds The estimated fair value of borrowed funds is based either on bid quotations received from securities dealers or the discounted value of contractual cash flows with interest rates currently in effect for borrowed funds with similar maturities and structures. Off-Balance Sheet Financial Instruments The fair values of commitments to extend credit and unadvanced lines of credit are estimated based on an analysis of the interest rates and fees currently charged to enter into similar transactions, considering the remaining terms of the commitments and the creditworthiness of the potential borrowers. The estimated fair values of such off-balance sheet financial instruments were insignificant at June 30, 2017 and December 31, 2016.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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