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FAIR VALUE MEASUREMENT | 9 Months Ended
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Sep. 30, 2021
Fair Value Disclosures [Abstract] |
FAIR VALUE MEASUREMENT | FAIR VALUE MEASUREMENT: The term "fair value" is defined as 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. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The Company's approach is to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. Fair Value Hierarchy A three-level valuation hierarchy has been established under ASC 820 for disclosure of fair value measurements. The valuation hierarchy is based on the observability of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels are defined as follows: • Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. • Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. This includes quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability for substantially the full term of the financial instrument. • Level 3 – Unobservable inputs for the asset or liability. These inputs reflect the Company's assumptions of what market participants would use in pricing the asset or liability. The Company's policy regarding transfers between levels of the fair value hierarchy is that all transfers are assumed to occur at the end of the reporting period. 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 valued at fair value on a recurring basis.
Asset/Liability class |  | Valuation methodology, inputs and assumptions |  | Classification
Investment securities |  |  |  |
Investment securities AFS |  | Observable market prices of identical or similar securities are used where available. |  | Level 2 recurring fair value measurement.
|  | 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 3 recurring fair value measurement.
LHFS |  |  |  |
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: • Benchmark yield curve • Estimated discount spread to the benchmark yield curve • Expected prepayment speeds |  | Estimated fair value classified as Level 3.
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 6, Mortgage Banking Operations. |  | Level 3 recurring fair value measurement.
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.
Interest rate lock 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.
The following tables presents the levels of the fair value hierarchy for the Company's assets and liabilities measured at fair value on a recurring basis:
| At September 30, 2021
(in thousands) | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Assets: |  |  |  |  |  |  |
Investment securities AFS |  |  |  |  |  |  |
Mortgage backed securities: |  |  |  |  |  |  |
Residential | $ | 33,467 |  |  | $ | — |  |  | $ | 31,030 |  |  | $ | 2,437 |
Commercial | 42,050 |  |  | — |  |  | 42,050 |  |  | — |
Collateralized mortgage obligations: |  |  |  |  |  |  |
Residential | 184,360 |  |  | — |  |  | 184,360 |  |  | — |
Commercial | 141,324 |  |  | — |  |  | 141,324 |  |  | — |
Municipal bonds | 534,401 |  |  | — |  |  | 534,401 |  |  | — |
Corporate debt securities | 19,849 |  |  | — |  |  | 19,772 |  |  | 77 |
U.S. Treasury securities | 23,392 |  |  | — |  |  | 23,392 |  |  | — |
Single family LHFS | 135,942 |  |  | — |  |  | 135,942 |  |  | — |
Single family LHFI | 4,507 |  |  | — |  |  | — |  |  | 4,507 |
Single family mortgage servicing rights | 61,206 |  |  | — |  |  | — |  |  | 61,206 |
Derivatives |  |  |  |  |  |  |
Forward sale commitments | 1,419 |  |  | — |  |  | 1,419 |  |  | — |
Interest rate lock commitments | 4,612 |  |  | — |  |  | — |  |  | 4,612 |
Interest rate swaps | 8,772 |  |  | — |  |  | 8,772 |  |  | — |
Total assets | $ | 1,195,301 |  |  | $ | — |  |  | $ | 1,122,462 |  |  | $ | 72,839 |
Liabilities: |  |  |  |  |  |  |
Derivatives |  |  |  |  |  |  |
Eurodollar futures | $ | 9 |  |  | $ | 9 |  |  | $ | — |  |  | $ | — |
Forward sale commitments | 1,017 |  |  | — |  |  | 1,017 |  |  | — |
Interest rate lock commitments | 3 |  |  | — |  |  | — |  |  | 3 |
Interest rate swaps | 10,521 |  |  | — |  |  | 10,521 |  |  |
Total liabilities | $ | 11,550 |  |  | $ | 9 |  |  | $ | 11,538 |  |  | $ | 3 |
| At December 31, 2020
(in thousands) | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Assets: |  |  |  |  |  |  |
Investment securities AFS |  |  |  |  |  |  |
Mortgage backed securities: |  |  |  |  |  |  |
Residential | $ | 51,046 |  |  | $ | — |  |  | $ | 48,417 |  |  | $ | 2,629 |
Commercial | 45,184 |  |  | — |  |  | 45,184 |  |  | — |
Collateralized mortgage obligations: |  |  |  |  |  |  |
Residential | 234,909 |  |  | — |  |  | 234,909 |  |  | — |
Commercial | 159,183 |  |  | — |  |  | 159,183 |  |  | — |
Municipal bonds | 564,703 |  |  | — |  |  | 564,703 |  |  | — |
Corporate debt securities | 15,222 |  |  | — |  |  | 15,141 |  |  | 81 |
Agency debentures | 1,846 |  |  | — |  |  | 1,846 |  |  | — |
Single family LHFS | 194,643 |  |  | — |  |  | 194,643 |  |  | — |
Single family LHFI | 7,108 |  |  | — |  |  | — |  |  | 7,108 |
Single family mortgage servicing rights | 49,966 |  |  | — |  |  | — |  |  | 49,966 |
Derivatives |  |  |  |  |  |  |
Forward sale commitments | 1,035 |  |  | — |  |  | 1,035 |  |  | — |
Interest rate lock commitments | 17,395 |  |  | — |  |  | — |  |  | 17,395 |
Interest rate swaps | 17,459 |  |  | — |  |  | 17,459 |  |  | — |
Total assets | $ | 1,359,699 |  |  | $ | — |  |  | $ | 1,282,520 |  |  | $ | 77,179 |
Liabilities: |  |  |  |  |  |  |
Derivatives |  |  |  |  |  |  |
Eurodollar futures | $ | 4 |  |  | $ | 4 |  |  | $ | — |  |  | $ | — |
Forward sale commitments | 3,714 |  |  | — |  |  | 3,714 |  |  | — |
Interest rate lock commitments | 3 |  |  | — |  |  | — |  |  | 3 |
Interest rate swaps | 20,511 |  |  | — |  |  | 20,511 |  |  | — |
Total liabilities | $ | 24,232 |  |  | $ | 4 |  |  | $ | 24,225 |  |  | $ | 3 |
There were no transfers between levels of the fair value hierarchy during the quarters and nine months ended September 30, 2021 and 2020. Level 3 Recurring Fair Value Measurements The Company's level 3 recurring fair value measurements consist of investment securities AFS, single family MSRs, single family LHFI where fair value option was elected, certain single family LHFS and interest rate lock commitments, which are accounted for as derivatives. For information regarding fair value changes and activity for single family MSRs during the quarters and nine months ended September 30, 2021 and 2020, see Note 6, Mortgage Banking Operations of this Quarterly Report on Form 10-Q. The fair value of IRLCs considers several factors, including the fair value in the secondary market of the underlying loan resulting from the exercise of the commitment, the expected net future cash flows related to the associated servicing of the loan (referred to as the value of servicing) and the probability that the commitment will not be converted into a funded loan (referred to as a fall-out factor). The fair value of IRLCs on LHFS, while based on interest rates observable in the market, is highly dependent on the ultimate closing of the loans. The significance of the fall-out factor to the fair value measurement of an individual IRLC is generally highest at the time that the rate lock is initiated and declines as closing procedures are performed and the underlying loan gets closer to funding. The fall-out factor applied is based on historical experience. The value of servicing is impacted by a variety of factors, including prepayment assumptions, discount rates, delinquency rates, contractually specified servicing fees, servicing costs and underlying portfolio characteristics. Because these inputs are not observable in market trades, the fall-out factor and value of servicing are considered to be level 3 inputs. The fair value of IRLCs decreases in value upon an increase in the fall-out factor and increases in value upon an increase in the value of servicing. Changes in the fall-out factor and value of servicing do not increase or decrease based on movements in other significant unobservable inputs. The Company recognizes unrealized gains and losses from the time that an IRLC is initiated until the gain or loss is realized at the time the loan closes, which generally occurs within 30-90 days. For IRLCs that fall out, any unrealized gain or loss is reversed, which generally occurs at the end of the commitment period. The gains and losses recognized on IRLC derivatives generally correlates to volume of single family interest rate lock commitments made during the reporting period (after adjusting for estimated fallout) while the amount of unrealized gains and losses realized at settlement generally correlates to the volume of single family closed loans during the reporting period. The Company uses the discounted cash flow model to estimate the fair value of certain loans that have been transferred from held for sale to held for investment and single family LHFS when the fair value of the loans is not derived using observable market inputs. The key assumption in the valuation model is the implied spread to benchmark interest rate curve. The implied spread is not directly observable in the market and is derived from third party pricing which is based on market information from comparable loan pools. The fair value estimate of single family loans that have been transferred from held for sale to held for investment are sensitive to changes in the benchmark interest rate which might result in a significantly higher or lower fair value measurement. 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 $4.5 million and $7.1 million at September 30, 2021 and December 31, 2020, respectively. The following information presents significant Level 3 unobservable inputs used to measure fair value of certain assets:
(dollars in thousands) | Fair Value |  | Valuation Technique |  | Significant Unobservable Input |  | Low |  | High |  | Weighted Average
September 30, 2021 |  |  |  |  |  |  |  |  |  |  |
Investment securities AFS | $ | 2,514 |  |  | Income approach |  | Implied spread to benchmark interest rate curve |  | 2.00% |  | 2.00% |  | 2.00%
Single family LHFI | 4,507 |  |  | Income approach |  | Implied spread to benchmark interest rate curve |  | 3.14% |  | 8.59% |  | 4.73%
Interest rate lock commitments, net | 4,609 |  |  | Income approach |  | Fall-out factor |  | 0.87% |  | 24.05% |  | 12.18%
|  |  |  |  | Value of servicing |  | 0.39% |  | 1.52% |  | 1.19%
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |
Investment securities AFS | $ | 2,710 |  |  | Income approach |  | Implied spread to benchmark interest rate curve |  | 2.00% |  | 2.00% |  | 2.00%
Single family LHFI | 7,108 |  |  | Income approach |  | Implied spread to benchmark interest rate curve |  | 3.96% |  | 10.64% |  | 6.23%
Interest rate lock commitments, net | 17,392 |  |  | Income approach |  | Fall-out factor |  | 1.97% |  | 38.38% |  | 15.53%
|  |  |  |  | Value of servicing |  | 0.41% |  | 1.44% |  | 0.97%
We had no LHFS where the fair value was not derived with significant observable inputs at September 30, 2021 and December 31, 2020. The following table presents fair value changes and activity for certain Level 3 assets for the periods indicated:
(in thousands) |  | Beginning balance |  | Additions |  | Transfers |  | Payoffs/Sales |  | Change in mark to market (1) |  | Ending balance
Quarter Ended September 30, 2021 |  |  |  |  |  |  |  |  |  |
Investment securities AFS |  | $ | 2,550 |  |  | $ | — |  |  | $ | — |  |  | $ | (48) |  |  | $ | 12 |  |  | $ | 2,514 |
Single family LHFI |  | 5,207 |  |  | 284 |  |  | — |  |  | (1,088) |  |  | 104 |  |  | 4,507 |
Quarter Ended September 30, 2020 |  |  |  |  |  |  |  |  |  |
Investment securities AFS |  | $ | 2,861 |  |  | $ | — |  |  | $ | — |  |  | $ | (48) |  |  | $ | (16) |  |  | $ | 2,797 |
Single family LHFI |  | 5,847 |  |  | 2,169 |  |  | — |  |  | (352) |  |  | (26) |  |  | 7,638 |
Nine Months Ended September 30, 2021 |  |  |  |  |  |  |  |  |  |
Investment securities AFS |  | $ | 2,710 |  |  | $ | — |  |  | $ | — |  |  | $ | (144) |  |  | $ | (52) |  |  | $ | 2,514 |
Single family LHFI |  | 7,108 |  |  | 1,429 |  |  | — |  |  | (4,279) |  |  | 249 |  |  | 4,507 |
Nine Months Ended September 30, 2020 |  |  |  |  |  |  |  |  |  |
Investment securities AFS |  | $ | 1,952 |  |  | $ | 985 |  |  | $ | — |  |  | $ | (387) |  |  | $ | 247 |  |  | $ | 2,797 |
Single family LHFI |  | 3,468 |  |  | 5,515 |  |  | — |  |  | (1,135) |  |  | (210) |  |  | 7,638 |
(1) Changes in fair value for single LHFI are recorded in other noninterest income on the consolidated income statement. The following table presents fair value changes and activity for Level 3 interest rate lock and purchase loan commitments for the periods indicated:
| Quarter Ended September 30, |  | Nine Months Ended September 30,
(in thousands) | 2021 |  | 2020 |  | 2021 |  | 2020
Beginning balance, net | $ | 5,893 |  |  | $ | 17,967 |  |  | $ | 17,392 |  |  | $ | 2,223 |
Total realized/unrealized gains (losses) | 5,299 |  |  | 18,285 |  |  | 9,112 |  |  | 46,313 |
Settlements | (6,583) |  |  | (15,292) |  |  | (21,895) |  |  | (27,576) |
Ending balance, net | $ | 4,609 |  |  | $ | 20,960 |  |  | $ | 4,609 |  |  | $ | 20,960 |
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 periodic basis. These assets include certain LHFI and OREO that are carried at the lower of cost or fair value of the underlying collateral, less the estimated costs 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. We have omitted disclosure related to quantitative inputs given the insignificance of assets measured on a nonrecurring basis. 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 LHFI 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 LHFI that are not collateralized by real estate and 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 table present assets classified as Level 3 assets that had changes in their recorded fair value for the periods indicated and what we still held at the end of the respective reporting period:
(in thousands) | Fair Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total Gains (Losses)
At or for the Quarter Ended September 30, 2021 |  |  |  |  |  |  |  |  |
LHFI (1) | $ | 1,121 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,121 |  |  | $ | (8) |
At or for the Quarter Ended September 30, 2020 |  |  |  |  |  |  |  |  |
LHFI (1) | $ | 3,302 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,302 |  |  | $ | (2,054) |
At or for the Nine Months Ended September 30, 2021 |  |  |  |  |  |  |  |  |
LHFI (1) | $ | 1,121 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,121 |  |  | $ | (70) |
At or for the Nine Months Ended September 30, 2020 |  |  |  |  |  |  |  |  |
LHFI (1) | $ | 3,302 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,302 |  |  | $ | (2,184) |
(1) Represents the carrying value of loans for which adjustments are based on the fair value of the collateral. 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 September 30, 2021
(in thousands) | Carrying Value |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 218,662 |  |  | $ | 218,662 |  |  | $ | 218,662 |  |  | $ | — |  |  | $ | — |
Investment securities HTM | 4,195 |  |  | 4,349 |  |  | — |  |  | 4,349 |  |  | — |
LHFI | 5,295,234 |  |  | 5,337,837 |  |  | — |  |  | — |  |  | 5,337,837 |
LHFS – multifamily and other | 259,170 |  |  | 267,688 |  |  | — |  |  | 267,688 |  |  | — |
Mortgage servicing rights – multifamily | 39,625 |  |  | 43,166 |  |  | — |  |  | — |  |  | 43,166 |
Federal Home Loan Bank stock | 8,723 |  |  | 8,723 |  |  | — |  |  | 8,723 |  |  | — |
Other assets - GNMA EBO loans | 31,553 |  |  | 31,553 |  |  | — |  |  | — |  |  | 31,553 |
Liabilities: |  |  |  |  |  |  |  |  |
Certificates of deposit | $ | 995,475 |  |  | $ | 996,743 |  |  | $ | — |  |  | $ | 996,743 |  |  | $ | — |
Long-term debt | 125,979 |  |  | 117,577 |  |  | — |  |  | 117,577 |  |  | — |
| At December 31, 2020
(in thousands) | Carrying Value |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 58,049 |  |  | $ | 58,049 |  |  | $ | 58,049 |  |  | $ | — |  |  | $ | — |
Investment securities HTM | 4,271 |  |  | 4,507 |  |  | — |  |  | 4,507 |  |  | — |
LHFI | 5,172,778 |  |  | 5,327,711 |  |  | — |  |  | — |  |  | 5,327,711 |
LHFS – multifamily and other | 167,289 |  |  | 167,289 |  |  | — |  |  | 167,289 |  |  | — |
Mortgage servicing rights – multifamily | 35,774 |  |  | 38,423 |  |  | — |  |  | — |  |  | 38,423 |
Federal Home Loan Bank stock | 20,319 |  |  | 20,319 |  |  | — |  |  | 20,319 |  |  | — |
Other assets-GNMA EBO loans | 101,750 |  |  | 101,750 |  |  | — |  |  | — |  |  | 101,750 |
Liabilities: |  |  |  |  |  |  |  |  |
Certificates of deposit | $ | 1,139,807 |  |  | $ | 1,143,747 |  |  | $ | — |  |  | $ | 1,143,747 |  |  | $ | — |
Borrowings | 322,800 |  |  | 322,876 |  |  | — |  |  | 322,876 |  |  | — |
Long-term debt | 125,838 |  |  | 116,893 |  |  | — |  |  | 116,893 |  |  | — |

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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/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=123874694&loc=d3e19207-110258 + Details
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