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Fair Value Measurements
 12 Months Ended
Dec. 31, 2018
Fair Value Measurements
NOTE 14: 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 December 31, 2018 and 2017, and that were included in the Company’s Consolidated Statements of Condition at those dates:
 
 
 
Fair Value Measurements at December 31, 2018
 
(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
 
 
Total
Fair Value
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-Related Debt Securities Available for Sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE certificates
 
$
—
 
 
$
1,707,521
 
 
$
—
 
 
$
—
 
 
$
1,707,521
 
GSE CMOs
 
 
—
 
 
 
1,252,761
 
 
 
—
 
 
 
—
 
 
 
1,252,761
 
Total mortgage-related debt securities
 
$
—
 
 
$
2,960,282
 
 
$
—
 
 
$
—
 
 
$
2,960,282
 
Other Debt Securities Available for Sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
$
—
 
 
$
1,328,927
 
 
$
—
 
 
$
—
 
 
$
1,328,927
 
Asset-backed securities
 
 
—
 
 
 
387,122
 
 
 
—
 
 
 
—
 
 
 
387,122
 
Municipal bonds
 
 
—
 
 
 
66,183
 
 
 
—
 
 
 
—
 
 
 
66,183
 
Corporate bonds
 
 
—
 
 
 
821,715
 
 
 
—
 
 
 
—
 
 
 
821,715
 
Capital trust notes
 
 
—
 
 
 
49,291
 
 
 
—
 
 
 
—
 
 
 
49,291
 
Total other debt securities
 
$
—
 
 
$
2,653,238
 
 
$
—
 
 
$
—
 
 
$
2,653,238
 
Total debt securities available for sale
 
$
—
 
 
$
5,613,520
 
 
$
—
 
 
$
—
 
 
$
5,613,520
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
 
$
13,846
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
13,846
 
Mutual funds and common stock
 
 
—
 
 
 
16,705
 
 
 
—
 
 
 
—
 
 
 
16,705
 
Total equity securities
 
$
13,846
 
 
$
16,705
 
 
$
—
 
 
$
—
 
 
$
30,551
 
Total securities
 
$
13,846
 
 
$
5,630,225
 
 
$
—
 
 
$
—
 
 
$
5,644,071
 
 
 
 
Fair Value Measurements at December 31, 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
 
 
Total
Fair Value
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-Related Securities Available for Sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE certificates
 
$
—
 
 
$
2,068,842
 
 
$
—
 
 
$
—
 
 
$
2,068,842
 
GSE CMOs
 
 
 
 
 
 
549,904
 
 
 
 
 
 
 
 
 
 
 
549,904
 
Total mortgage-related securities
 
$
—
 
 
$
2,618,746
 
 
$
—
 
 
$
—
 
 
$
2,618,746
 
Other Securities Available for Sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury Obligations
 
$
199,898
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
199,898
 
GSE debentures
 
 
—
 
 
 
473,258
 
 
 
—
 
 
 
—
 
 
 
473,258
 
Municipal bonds
 
 
—
 
 
 
70,120
 
 
 
—
 
 
 
—
 
 
 
70,120
 
Corporate bonds
 
 
—
 
 
 
90,775
 
 
 
—
 
 
 
—
 
 
 
90,775
 
Capital trust notes
 
 
—
 
 
 
46,096
 
 
 
—
 
 
 
—
 
 
 
46,096
 
Preferred stock
 
 
15,434
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
15,434
 
Mutual funds and common stock
 
 
—
 
 
 
17,100
 
 
 
—
 
 
 
—
 
 
 
17,100
 
Total other securities
 
$
215,332
 
 
$
697,349
 
 
$
—
 
 
$
—
 
 
$
912,681
 
Total securities available for sale
 
$
215,332
 
 
$
3,316,095
 
 
$
—
 
 
$
—
 
 
$
3,531,427
 
Other Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
 
$
—
 
 
$
35,258
 
 
$
—
 
 
$
—
 
 
$
35,258
 
Mortgage servicing rights
 
 
—
 
 
 
—
 
 
 
2,729
 
 
 
—
 
 
 
2,729
 
 
 
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 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 and exchange-traded securities.
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.
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 had elected the fair value option for its loans held for sale. The loans held for sale at December 31, 2017 consist of one-to-four family none of which were 90 days or more past due at that date.
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:
 
 
 
December 31, 2018
 
 
December 31, 2017
 
(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
 
$
—
 
 
$
—
 
 
$
—
 
 
$
35,258
 
 
$
34,563
 
 
$
695
 
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 MSRs for the periods indicated:
 
 
 
(Loss) Gain Included in
Mortgage Banking Income
from Changes in Fair Value
(1)
 
 
 
For the Twelve Months Ended December 31,
 
(in thousands)
 
2018
 
 
2017
 
 
2016
 
Loans held for sale
 
$
—
 
 
$
899
 
 
$
(5,616
)
Mortgage servicing rights
 
 
(224
)
 
 
(20,076
)
 
 
(27,453
)
Total loss
 
$
(224
)
 
$
(19,177
)
 
$
(33,069
)
 
(1)
Included in “Non-interest income.”
 
Changes in Level 3 Fair Value Measurements
The following tables present, for the twelve months ended December 31, 2018 and 2017, a roll-forward of the balance sheet amounts (including changes in fair value) for financial instruments classified in Level 3 of the valuation hierarchy:
 
 
 
 
 
 
Total Realized/Unrealized
Gains/(Losses) Recorded in
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in
Unrealized
Gains/(Losses)
 
(in thousands)
 
Fair Value
January 1,
2018
 
 
Income/
(Loss)
 
 
Comprehensive
(Loss) Income
 
 
Issuances
 
 
Settlements
 
 
Transfers
to/(from)
Level 3
 
 
Fair Value at
December 31,
2018
 
 
Related to
Instruments Held at
December 31, 2018
 
Mortgage servicing rights
 
$
2,729
 
 
$
(224
)
 
$
—
 
 
$
—
 
 
$
(2,505
)
 
$
—
 
 
$
—
 
 
$
—
 
 
 
 
 
 
 
Total Realized/Unrealized
Gains/(Losses) Recorded in
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in
Unrealized
Gains/(Losses)
 
(in thousands)
 
Fair Value
January 1,
2017
 
 
Income/
(Loss)
 
 
Comprehensive
(Loss) Income
 
 
Issuances
 
 
Settlements
 
 
Transfers
to/(from)
Level 3
 
 
Fair Value at
December 31,
2017
 
 
Related to
Instruments Held at
December 31, 2018
 
Mortgage servicing rights
 
$
228,099
 
 
$
(20,076
)
 
$
—
 
 
$
18,054
 
 
$
(223,348
)
 
$
—
 
 
$
2,729
 
 
$
(222
)
Interest rate lock commitments
 
 
982
 
 
 
(982
)
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
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 twelve months ended December 31, 2018 or 2017.
 
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 December 31, 2018 and 2017, and that were included in the Company’s Consolidated Statements of Condition at those dates:
 
 
 
Fair Value Measurements at December 31, 2018 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)
 
$
—
 
 
$
—
 
 
$
38,213
 
 
$
38,213
 
Other assets
(2)
 
 
—
 
 
 
—
 
 
 
1,265
 
 
 
1,265
 
Total
 
$
—
 
 
$
—
 
 
$
39,478
 
 
$
39,478
 
 
(1)
Represents the fair value of impaired loans, based on the value of the collateral.
(2)
Represents the fair value of repossessed assets, based on the appraised value of the collateral subsequent to its initial classification as repossessed assets.
 
 
 
Fair Value Measurements at December 31, 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)
 
$
—
 
 
$
—
 
 
$
45,837
 
 
$
45,837
 
Other assets
(2)
 
 
—
 
 
 
—
 
 
 
4,357
 
 
 
4,357
 
Total
 
$
—
 
 
$
—
 
 
$
50,194
 
 
$
50,194
 
 
(1)
Represents the fair value of impaired loans, based on the value of the collateral.
(2)
Represents the fair value of repossessed assets, based on the appraised value of the collateral subsequent to its initial classification as repossessed assets.
The fair values of collateral-dependent impaired loans are determined using various valuation techniques, including consideration of appraised values and other pertinent real estate and other market data.
Other Fair Value Disclosures
For 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 December 31, 2018 and 2017:
 
 
 
December 31, 2018
 
 
 
 
 
 
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
 
$
1,474,955
 
 
$
1,474,955
 
 
$
1,474,955
 
 
$
—
 
 
$
—
 
FHLB stock
(1)
 
 
644,590
 
 
 
644,590
 
 
 
—
 
 
 
644,590
 
 
 
—
 
Loans, net
 
 
40,006,088
 
 
 
39,461,985
 
 
 
—
 
 
 
—
 
 
 
39,461,985
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
30,764,430
 
 
 
30,748,729
 
 
$
18,570,108
(2)
 
$
12,178,621
(3)
 
$
—
 
Borrowed funds
 
 
14,207,866
 
 
$
14,136,526
 
 
 
—
 
 
 
14,136,526
 
 
 
—
 
 
(1)
Carrying value and estimated fair value are at cost.
(2)
Interest-bearing checking and money market accounts, savings accounts, and non-interest-bearing accounts.
(3)
Certificates of deposit.
 
 
 
December 31, 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
 
$
2,528,169
 
 
$
2,528,169
 
 
$
2,528,169
 
 
$
—
 
 
$
—
 
FHLB stock
(1)
 
 
603,819
 
 
 
603,819
 
 
 
—
 
 
 
603,819
 
 
 
—
 
Loans, net
 
 
38,265,183
 
 
 
38,254,538
 
 
 
—
 
 
 
—
 
 
 
38,254,538
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
29,102,163
 
 
$
29,044,852
 
 
$
20,458,517
(2)
 
$
8,586,335
(3)
 
$
—
 
Borrowed funds
 
 
12,913,679
 
 
 
12,780,653
 
 
 
—
 
 
 
12,780,653
 
 
 
—
 
 
(1)
Carrying value and estimated fair value are at cost.
(2)
Interest-bearing checking 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 generally restricted and there is no established liquid market for their resale. The carrying amount approximates the fair value.
Loans
The Company discloses the fair value of loans measured at amortized cost using an exit price notion. Prior to adopting ASU No. 2016-01, the Company measured the fair value of loans that are accounted for at amortized cost under an entry price notion. The entry price notion previously applied by the Company used a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument. The exit price notion uses the same approach, but also incorporates other factors, such as enhanced credit risk, illiquidity risk, and market factors. The Company determined the fair value on substantially all of its loans for disclosure purposes, on an individual loan basis. The discount rates reflect current market rates for loans with similar terms to borrowers having similar credit quality on an exit price basis. The estimated fair values of non-performing mortgage and other loans are based on recent collateral appraisals. For those loans where a discounted cash flow technique was not considered reliable, the Company used a quoted market price for each individual loan.
Deposits
The fair values of deposit liabilities with no stated maturity (i.e., interest-bearing checking 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 December 31, 2018 and 2017.