FAIR VALUES OF FINANCIAL INSTRUMENTS

Fair Value Hierarchy

ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The topic 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 markets that the entity has the ability to access as of the measurement date.


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


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

Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Assets and Liabilities Measured on a Recurring Basis

Securities Available for Sale: The fair values of securities available for sale are generally determined by quoted market prices in active markets, if available (Level 1). If quoted market prices are not available, the Company employs an independent pricing service that utilizes matrix pricing to calculate fair value. Such fair value measurements consider observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and respective terms and conditions for debt instruments. The Company employs procedures to monitor the pricing service's assumptions and establishes processes to challenge the pricing service's valuations that appear unusual or unexpected. Level 2 securities include SBA loan pool securities, U.S. GSE and agency securities, private label residential MBS, and agency residential MBS, non-agency commercial MBS, and non-agency corporate bonds. When a market is illiquid or there is a lack of transparency around the inputs to valuation, the securities are classified as Level 3 and reliance is placed upon internally developed models, and management judgment and evaluation for valuation. The Company had no securities available for sale classified as Level 3 at September 30, 2015 or December 31, 2014.

Loans Held for Sale, Carried at Fair Value: The fair value of loans held for sale is based on commitments outstanding from investors as well as what secondary markets are currently offering for portfolios with similar characteristics. Therefore, loans held for sale subjected to recurring fair value adjustments are classified as Level 2. The fair value includes the servicing value of the loans as well as any accrued interest.

Derivative Assets and Liabilities: The Company’s derivative assets and liabilities are carried at fair value as required by GAAP and are accounted for as freestanding derivatives. The Company has entered into pay-fixed, receive-variable interest rate swap contracts with institutional counterparties to hedge against variability in cash flows attributable to interest rate risk caused by changes in the LIBOR benchmark interest rate on the Company’s ongoing LIBOR-based variable rate deposits and other borrowings. For hedged derivatives, the Company records changes in fair value in Accumulated Other Comprehensive Income (AOCI) in the Consolidated Statements of Financial Condition. For non-hedged derivatives, the Company records changes in fair value in Other Income in the Consolidated Statements of Operations. The Company also enters into interest rate lock commitments (IRLCs) with prospective residential mortgage borrowers. These commitments are carried at fair value based on the fair value of the underlying mortgage loans which are based on observable market data. The Company adjusts the outstanding IRLCs with prospective borrowers based on an expectation that it will be exercised and the loan will be funded. Changes in fair value are recorded in Net Revenue on Mortgage Banking Activities in the Consolidated Statements of Operations. These commitments are classified as Level 2 in the fair value disclosures, as the valuations are based on market observable inputs. Additional derivative assets and liabilities, typically mortgage-backed to-be-announced (TBA) securities, are used to hedge fair value changes, driven by changes in interest rates, in the Company’s mortgage assets. The Company hedges the period from the interest rate lock (assuming a fall-out factor for loans that ultimately do not close) to the date of the loan sale. The estimated fair value is based on current market prices for similar instruments. Given the meaningful level of secondary market activity for derivative contracts, active pricing is available for similar assets and accordingly, the Company classifies its derivative assets and liabilities as Level 2.

Mortgage Servicing Rights: The Company retains servicing on some of its mortgage loans sold and elected the fair value option for valuation of these mortgage servicing rights (MSRs). The value is based on a third party provider that calculates the present value of the expected net servicing income from the portfolio based on key factors that include interest rates, prepayment assumptions, discount rate and estimated cash flows. Because of the significance of unobservable inputs, these servicing rights are classified as Level 3. At December 31, 2014, $5.9 million of the mortgage servicing rights were valued based on a market bid that settled subsequent to that date, which was included as Level 3.

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis as of the dates indicated:



			Fair Value Measurement Level
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
September 30, 2015
Assets
Available for sale securities:
SBA loan pools securities	$	1,516	$	—	$	1,516	$	—
U.S. government-sponsored entities and agency securities	2,001		—		2,001		—
Private label residential mortgage-backed securities	1,917		—		1,917		—
Corporate Bonds	26,247		—		26,247		—
Commercial mortgage-backed securities	115,234		—		115,234		—
Agency mortgage-backed securities	546,304		—		546,304		—
Loans held for sale	351,760		—		351,760		—
Derivative assets ⁽¹⁾	9,748		—		9,748		—
Mortgage servicing rights ⁽²⁾	40,837		—		—		40,837
Liabilities
Derivative liabilities ⁽³⁾	5,873		—		5,873		—
December 31, 2014
Assets
Available for sale securities:
SBA loan pools securities	$	1,715	$	—	$	1,715	$	—
U.S. government-sponsored entities and agency securities	1,982		—		1,982		—
Private label residential mortgage-backed securities	3,168		—		3,168		—
Agency mortgage-backed securities	338,830		—		338,830		—
Loans held for sale	278,749		—		278,749		—
Derivative assets ⁽¹⁾	6,379		—		6,379		—
Mortgage servicing rights ⁽²⁾	19,082		—		—		19,082
Liabilities
Derivative liabilities ⁽³⁾	3,235		—		3,235		—


(1)	Included in Other Assets on the Consolidated Statements of Financial Condition


(2)	Included in Servicing Rights, Net and Servicing Rights Held For Sale on the Consolidated Statements of Financial Condition


(3)	Included in Accrued Expenses and Other Liabilities on the Consolidated Statements of Financial Condition

The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods indicated:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(In thousands)
Mortgage servicing rights
Balance at beginning of period	$	34,198		$	9,816		$	19,082		$	13,535
Transfers out of Level 3 ⁽¹⁾	—			—			—			(9,185		)
Total gains or losses (realized/unrealized):
Included in earnings—realized	—			—			—			—
Included in earnings—fair value adjustment	(3,097		)	110			(2,087		)	(140		)
Included in other comprehensive income	—			—			—			—
Amortization of premium (discount)	—			—			—			—
Additions	12,143			7,735			36,034			18,057
Sales and settlements	(2,407		)	(6,285		)	(12,192		)	(10,891		)
Balance at end of period	$	40,837		$	11,376		$	40,837		$	11,376


(1)	The Company’s policy is to recognize transfers in and transfers out as of the actual date of the event or change in circumstances that causes the transfer.

The following table presents quantitative information about Level 3 fair value measurements on a recurring basis, other than the mortgage servicing rights were valued based on a market bid that settled subsequent to that date, which was included as Level 3 at December 31, 2014, as of the dates indicated:



	Fair Value (In thousands)		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
September 30, 2015
Mortgage servicing rights	$	40,837	Discounted cash flow	Discount rate	9.00% to 18.00% (9.88%)
				Prepayment rate	6.07% to 34.69% (12.09%)
December 31, 2014
Mortgage servicing rights	$	13,135	Discounted cash flow	Discount rate	9.00% to 19.50% (10.09%)
				Prepayment rate	4.59% to 31.02% (13.22%)
September 30, 2014
Mortgage servicing rights	$	11,376	Discounted cash flow	Discount rate	10.00% to 21.22% (10.70%)
				Prepayment rate	4.71% to 34.76% (12.41%)

The significant unobservable inputs used in the fair value measurement of the Company’s servicing rights include the discount rate and prepayment rate. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results.

Assets and Liabilities Measured on a Non-Recurring Basis

Securities Held to Maturity: Investment securities that the Company has the ability and the intent to hold to maturity are classified as held to maturity. Investment securities classified as held to maturity are carried at cost. The fair values of securities held to maturity are generally determined by quoted market prices in active markets, if available (Level 1). If quoted market prices are not available, the Company employs an independent pricing service that utilizes matrix pricing to calculate fair value. Such fair value measurements consider observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and respective terms and conditions for debt instruments (Level 2). The Company employs procedures to monitor the pricing service's assumptions and establishes processes to challenge the pricing service's valuations that appear unusual or unexpected. When a market is illiquid or there is a lack of transparency around the inputs to valuation, the securities are classified as Level 3 and reliance is placed upon internally developed models, and management judgment and evaluation for valuation. Only securities held to maturity with other-than-temporary impairment (OTTI) are considered to be carried at fair value. The Company did not have any OTTI on securities held to maturity at September 30, 2015.

Impaired Loans and Leases: The fair value of impaired loans and leases with specific allocations of the allowance for loan and lease losses based on collateral values is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Loans Held for Sale, Carried at Lower of Cost or Fair Value: The Company records non-conforming jumbo mortgage loans held for sale at the lower of cost or fair value, on an aggregate basis. The Company obtains fair values from a third party independent valuation service provider. Loans held for sale accounted for at the lower of cost or fair value are considered to be recognized at fair value when they are recorded at below cost, on an aggregate basis, and are classified as Level 2.

SBA Servicing Assets: SBA servicing assets represent the value associated with servicing SBA loans that have been sold. The fair value for SBA servicing assets is determined through discounted cash flow analysis and utilizes discount rates and prepayment speed assumptions as inputs. All of these assumptions require a significant degree of management estimation and judgment. The fair market valuation is performed on a quarterly basis for SBA servicing assets. SBA servicing assets are accounted for at the lower of cost or market value and considered to be recognized at fair value when they are recorded at below cost and are classified as Level 3.

Other Real Estate Owned Assets: Other real estate owned assets (OREO) are recorded at the fair value less estimated costs to sell at the time of foreclosure. The fair value of other real estate owned assets is generally based on recent real estate appraisals adjusted for estimated selling costs. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and result in a Level 3 classification of the inputs for determining fair value. Only OREO with a valuation allowance are considered to be carried at fair value. The Company recorded valuation allowance expense for OREO of $16 thousand and $0 for the three months ended September 30, 2015 and 2014, respectively, and $38 thousand and $0 for the nine months ended September 30, 2015 and 2014, respectively.

Alternative Investments (Affordable Housing Fund Investment, SBIC, and Other Investment): The Company generally accounts for its percentage ownership of alternative investment funds at cost, subject to impairment testing. These are non-public investments that cannot be redeemed since the Company’s investment is distributed as the underlying investments are liquidated, which generally takes 10 years. There are currently no plans to sell any of these investments prior to their liquidation. The alternative investments carried at cost are considered to be measured at fair value on a non-recurring basis when there is impairment. The Company had unfunded commitments of $487 thousand, $5.6 million, and $2.0 million for Affordable House Fund Investment, SBIC, and Other Investments at September 30, 2015, respectively.

The following table presents the Company’s financial assets and liabilities measured at fair value on a non-recurring basis as of the dates indicated:



			Fair Value Measurement Level
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
September 30, 2015
Assets
Impaired loans:
Single family residential mortgage	$	3,976	$	—	$	—	$	3,976
Commercial and industrial	1,156		—		—		1,156
Other real estate owned:
Single family residential	34		—		—		34
December 31, 2014
Assets
Impaired loans:
Single family residential mortgage	$	6,206	$	—	$	—	$	6,206
Commercial and industrial	4,313		—		—		4,313
SBA servicing rights	484		—		—		484
Other real estate owned:
Single family residential	423		—		—		423

The following table presents the gains and (losses) recognized on assets measured at fair value on a non-recurring basis for the periods indicated:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(In thousands)
Impaired loans:
Single family residential mortgage	$	—		$	(18	)	$	—		$	(350	)
Real estate mortgage	—			88			—			88
SBA	1			—			1			—
Other consumer	—			—			—			(2		)
Other real estate owned:
Single family residential	(16		)	—			(15		)	—

The following table presents the carrying amounts and estimated fair values of financial assets and liabilities as of the dates indicated:



	Carrying		Fair Value Measurement Level
	Amount		Level 1		Level 2		Level 3		Total
	(In thousands)
September 30, 2015
Financial assets
Cash and cash equivalents	$	378,963	$	378,963	$	—	$	—	$	378,963
Time deposits in financial institutions	1,900		1,900		—		—		1,900
Securities available for sale	693,219		—		693,219		—		693,219
Securities held to maturity	529,532		—		526,958		—		526,958
FHLB and other bank stock	40,643		—		40,643		—		40,643
Loans held for sale	596,565		—		600,774		—		600,774
Loans and leases receivable, net of allowance	4,695,303		—		—		4,817,939		4,817,939
Accrued interest receivable	19,706		19,706		—		—		19,706
Derivative assets	9,748		—		9,748		—		9,748
Financial liabilities
Deposits	5,421,990		—		—		5,180,669		5,180,669
Advances from Federal Home Loan Bank	830,000		—		830,106		—		830,106
Long term debt	262,779		—		261,026		—		261,026
Derivative liabilities	5,873		—		5,873		—		5,873
Accrued interest payable	6,635		6,635		—		—		6,635
December 31, 2014
Financial assets
Cash and cash equivalents	$	231,199	$	231,199	$	—	$	—	$	231,199
Time deposits in financial institutions	1,900		1,900		—		—		1,900
Securities available for sale	345,695		—		345,695		—		345,695
FHLB and other bank stock	42,241		—		42,241		—		42,241
Loans held for sale	1,187,090		—		1,195,834		—		1,195,834
Loans and leases receivable, net of allowance	3,919,642		—		—		4,045,465		4,045,465
Accrued interest receivable	15,113		15,113		—		—		15,113
Derivative assets	6,379		—		6,379		—		6,379
Financial liabilities
Deposits	4,671,831		—		—		4,575,264		4,575,264
Advances from Federal Home Loan Bank	633,000		—		633,083		—		633,083
Long term debt	93,569		—		100,788		—		100,788
Derivative liabilities	3,235		—		3,235		—		3,235
Accrued interest payable	2,044		2,044		—		—		2,044

The methods and assumptions used to estimate fair value are described as follows:

Cash and Cash Equivalents and Time Deposits in Financial Institutions: The carrying amounts of cash and cash equivalents and time deposits in financial institutions approximate fair value due to the short-term nature of these instruments (Level 1).

FHLB and Other Bank Stock: FHLB and other bank stock is recorded at cost. Ownership of FHLB stock is restricted to member banks, and purchases and sales of these securities are at par value with the issuer (Level 2).

Securities Held to Maturity: The fair values of securities held to maturity are based on pricing received from an independent pricing service that utilizes matrix pricing to calculate fair value (Level 2).

Loans and Leases Receivable, Net of Allowance for Loan and Lease Losses: The fair value of loans and leases receivable is estimated based on the discounted cash flow approach. The discount rate was derived from the associated yield curve plus spreads and reflects the rates offered by the Bank for loans with similar financial characteristics. Yield curves are constructed by product and payment types. These rates could be different from what other financial institutions could offer for these loans. No adjustments have been made for changes in credit within the loan portfolio. Additionally, the fair value of our loans may differ significantly from the values that would have been used had a ready market existed for such loans and may differ materially from the values that we may ultimately realize (Level 3).

Accrued Interest Receivable: The carrying amount of accrued interest receivable approximates its fair value (Level 1).

Deposits: The fair value of deposits is estimated based on discounted cash flows. The cash flows for non-maturity deposits, including savings accounts and money market checking, are estimated based on their historical decaying experiences. The discount rate used for fair valuation is based on interest rates currently being offered by the Bank on comparable deposits as to amount and term (Level 3).

Advances from Federal Home Loan Bank: The fair values of advances from FHLB are estimated based on the discounted cash flows approach. The discount rate was derived from the current market rates for borrowings with similar remaining maturities (Level 2).

Long Term Debt: Fair value of long term debt is determined by observable data such as market spreads, cash flows, yield curves, credit information, and respective terms and conditions for debt instruments (Level 2).

Accrued Interest Payable: The carrying amount of accrued interest payable approximates its fair value (Level 1).