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 primarily employs independent pricing services that utilize pricing models 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 Small Business Administration (SBA) loan pool securities, U.S. government sponsored enterprise (GSE) and U.S. government agency residential mortgage-backed securities, Non-agency residential mortgage-backed securities, non-agency commercial mortgage-backed securities, collateralized loan obligations, and corporate debt securities. 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, 2017 or December 31, 2016.

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 market investors are currently offering for portfolios with similar characteristics, except for loans that are repurchased out of Ginnie Mae loan pools that become severely delinquent which are valued based on an internal model that estimates the expected loss the Company will incur on these loans. Therefore, loans held-for-sale subjected to recurring fair value adjustments are classified as Level 2 or, in the case of loans repurchased out of Ginnie Mae loan pools, Level 3. The fair value includes the servicing value of the loans as well as any accrued interest.

Derivative Assets and Liabilities:

Derivative Instruments Related to Mortgage Banking Activities: The Company had no derivative instruments related to mortgage banking activities at September 30, 2017. The Company previously entered into interest rate lock commitments (IRLCs) with prospective residential mortgage borrowers. These commitments were carried at fair value based on the fair value of the underlying mortgage loans which were based on observable market data. The Company adjusted the outstanding IRLCs with prospective borrowers based on an expectation that it would be exercised and the loan would be funded. These commitments were classified as Level 2 in the fair value disclosures, as the valuations are based on market observable inputs. The Company hedged the risk of the overall change in the fair value of loan commitments to borrowers with forward loan sale commitments and trades in to-be-announced (TBA) mortgage-backed securities of GSEs. These forward settling contracts were classified as Level 2, as valuations are based on market observable inputs at December 31, 2016. Fair values of these derivatives were included in assets and liabilities of discontinued operations.

Interest Rate Swaps and Caps: The Company offers interest rate swaps and caps products to certain loan customers to allow them to hedge the risk of rising interest rates on their variable rate loans. The Company originates a variable rate loan and enters into a variable-to-fixed interest rate swap with the customer. The Company also enters into an offsetting swap with a correspondent bank. These back-to-back agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. The fair value of these derivatives is based on a discounted cash flow approach. Due to the observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of interest rate swaps is classified as Level 2.

Foreign Exchange Contracts: The Company offers short-term foreign exchange contracts to its customers to purchase and/or sell foreign currencies at set rates in the future. These products allow customers to hedge the foreign exchange rate risk of their deposits and loans denominated in foreign currencies. In conjunction with these products the Company also enters into offsetting contracts with institutional counterparties to hedge the Company’s foreign exchange rate risk. These back-to-back contracts allow the Company to offer its customers foreign exchange products while minimizing its exposure to foreign exchange rate fluctuations. The fair value of these instruments is determined at each reporting period based on the change in the foreign exchange rate. Given the short-term nature of the contracts, the counterparties’ credit risks are considered nominal and resulted in no adjustments to the valuation of the short-term foreign exchange contracts. Due to the observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of these contracts is classified as Level 2. The Company had no foreign exchange contracts at September 30, 2017.

Mortgage Servicing Rights: The Company retains servicing on some of its mortgage loans sold for which the Company elected to follow the fair value measurement method for subsequent accounting. 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.

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2017:



			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)
Assets
Securities available-for-sale:
SBA loan pools securities	$	1,065	$	—	$	1,065	$	—
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities	489,117		—		489,117		—
Non-agency residential mortgage-backed securities	859		—		859		—
Non-agency commercial mortgage-backed securities	310,917		—		310,917		—
Collateralized loan obligations	1,819,191		—		1,819,191		—
Corporate debt securities	134,515		—		134,515		—
Loans held-for-sale, carried at fair value ⁽¹⁾	102,142		—		17,778		84,364
Mortgage servicing rights ⁽²⁾	38,715		—		—		38,715
Derivative assets:
Interest rate swaps and caps ⁽³⁾	1,112		—		1,112		—
Liabilities
Derivative liabilities:
Interest rate swaps and caps ⁽⁴⁾	1,146		—		1,146		—


(1)	Includes loans held-for-sale carried at fair value of $59.0 million ($17.8 million at Level 2 and $41.2 million at Level 3) of discontinued operations, which are included in Assets of Discontinued Operations in the Consolidated Statements of Financial Condition


(2)	Included in Servicing Rights, Net in the Consolidated Statements of Financial Condition


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


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

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2016:



			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)
Assets
Securities available-for-sale:
SBA loan pools securities	$	1,221	$	—	$	1,221	$	—
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities	807,273		—		807,273		—
Non-agency residential mortgage-backed securities	117,177		—		117,177		—
Collateralized loan obligations	1,406,869		—		1,406,869		—
Corporate debt securities	48,948		—		48,948		—
Loans held-for-sale, carried at fair value⁽¹⁾	416,974		—		358,714		58,260
Mortgage servicing rights ⁽²⁾	76,121		—		—		76,121
Derivative assets
Interest rate lock commitments⁽³⁾	8,317		—		8,317		—
Mandatory forward commitments⁽³⁾	8,897		—		8,897		—
Interest rate swaps and caps⁽⁴⁾	707		—		707		—
Foreign exchange contracts⁽⁴⁾	47		—		47		—
Liabilities
Derivative liabilities
Interest rate lock commitments⁽⁵⁾	231		—		231		—
Mandatory forward commitments⁽⁵⁾	1,212		—		1,212		—
Interest rate swaps and caps⁽⁶⁾	655		—		655		—
Foreign exchange contracts⁽⁶⁾	18		—		18		—


(1)	Includes loans held-for-sale carried at fair value of $406.3 million ($348.1 million at Level 2 and $58.3 million at Level 3) of discontinued operations, which are included in Assets of Discontinued Operations in the Consolidated Statements of Financial Condition.


(2)	Included in Servicing Rights, Net, except for $37.7 million included in Assets of Discontinued Operations, in the Consolidated Statements of Financial Condition


(3)	Included in Assets of Discontinued Operations in the Consolidated Statements of Financial Condition


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


(5)	Included in Liabilities of Discontinued Operations in the Consolidated Statements of Financial Condition


(6)	Included in Accrued Expenses and Other Liabilities in 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), on a consolidated operations basis, for the periods indicated:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(In thousands)
Mortgage servicing rights ⁽¹⁾
Balance at beginning of period	$	42,109		$	52,567		$	76,121		$	49,939
Transfers in and (out) of Level 3 ⁽²⁾	—			—			—			—
Total gains or losses (realized/unrealized):
Included in earnings—fair value adjustment	(1,905		)	(465		)	(4,984		)	(14,497		)
Additions	574			14,300			12,126			35,648
Sales, paydowns, and other ⁽³⁾	(2,063		)	(3,726		)	(44,548		)	(8,414		)
Balance at end of period	$	38,715		$	62,676		$	38,715		$	62,676
Loans Repurchased from Ginnie Mae Loan Pools ⁽⁴⁾
Balance at beginning of period	$	73,545		$	34,251		$	58,260		$	18,291
Transfers in and (out) of Level 3 ⁽²⁾	—			—			—			—
Total gains or losses (realized/unrealized):
Included in earnings—fair value adjustment	(809		)	(21		)	(794		)	121
Additions	24,537			14,445			59,768			35,548
Sales, settlements, and other	(12,909		)	(1,027		)	(32,870		)	(6,312		)
Balance at end of period	$	84,364		$	47,648		$	84,364		$	47,648

(1)

Includes MSRs of discontinued operations, which is included in Assets of Discontinued Operations in the Consolidated Statements of Financial Condition, of $0 and $24.4 million, respectively, for the three months ended September 30, 2017 and 2016 and $37.7 million and $23.0 million, respectively, for the nine months ended September 30, 2017 and 2016 in balance at beginning of period, and $0 and $30.8 million, respectively, for the three and nine months ended September 30, 2017 and 2016 in balance at end of period


(2)	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


(3)	Includes $37.8 million of MSRs sold as a part of discontinued operations for the nine month ended September 30, 2017

(4)

Includes loans repurchased from Ginnie Mae Loan Pools of discontinued operations, which is included in Assets of Discontinued Operations in the Consolidated Statements of Financial Condition, of $52.1 million and $34.3 million, respectively, for the three months ended September 30, 2017 and 2016 and $58.3 million and $18.3 million, respectively, for the nine months ended September 30, 2017 and 2016 in balance at beginning of period, and $41.2 million and $47.6 million, respectively, for the three and nine months ended September 30, 2017 and 2016 in balance at end of period

Loans repurchased from Ginnie Mae Loan pools had aggregate unpaid principal balances of $86.4 million and $58.3 million at September 30, 2017 and December 31, 2016, respectively.

The following table presents, as of the dates indicated, quantitative information about Level 3 fair value measurements on a recurring basis, other than loans that become severely delinquent and are repurchased out of Ginnie Mae loan pools that were valued based on an estimate of the expected loss the Company will incur on these loans, which was included as Level 3 at September 30, 2017 and December 31, 2016:



	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
	($ in thousands)
September 30, 2017
Mortgage servicing rights	$	38,715	Discounted cash flow	Discount rate	9.25% to 15.00% (10.96%)
				Prepayment rate	7.00% to 43.31% (14.49%)
December 31, 2016
Mortgage servicing rights ⁽¹⁾	$	76,121	Discounted cash flow	Discount rate	9.11% to 15.00% (10.18%)
				Prepayment rate	7.00% to 39.90% (11.84%)


(1)	Includes $37.7 million of MSRs of discontinued operations

The significant unobservable inputs used in the fair value measurement of the Company’s servicing rights include the discount rate and prepayment rate. The significant unobservable inputs used in the fair value measurement of the Company's loans repurchased from Ginnie Mae pools at September 30, 2017 included an expected loss rate of 1.55 percent for insured loans and 20.00 percent for uninsured loans. The significant unobservable inputs used in the fair value measurement of the Company's loans repurchased from Ginnie Mae pools at December 31, 2016 included an expected loss rate of 1.55 percent. 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.

Fair Value Option

Loans Held-for-Sale, Carried at Fair Value: The Company elected to measure certain SFR mortgage loans held-for-sale under the fair value option. Electing to measure SFR mortgage loans held-for-sale at fair value reduces certain timing differences and better matches changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. The Company also held repurchased loans as well as sold loans to GNMA subject to a repurchase option at fair value as the Company's intention is to sell these loans and record these loans with transparency. Previously sold loans to GNMA that were delinquent more than 90 days were subject to a repurchase option. These loans were re-recognized by the Company and recorded at fair value, which were offset by a secured borrowing as the loans were still legally owned by GNMA.

The following table presents the fair value and aggregate principal balance of certain assets, on a consolidated operations basis, under the fair value option:



	September 30, 2017							December 31, 2016
	Fair Value		Unpaid Principal Balance		Difference			Fair Value		Unpaid Principal Balance		Difference
	(In thousands)
Loans held-for-sale, carried at fair value in continuing operations:
Total loans	$	43,188	$	44,544	$	(1,356	)	$	10,636	$	10,606	$	30
Nonaccrual loans	34,520		35,051		(531		)	—		—		—
Loans past due 90 days or more and still accruing	—		—		—			—		—		—
Loans held-for-sale, carried at fair value in discontinued operations:
Total loans	$	58,954	$	61,292	$	(2,338	)	$	406,338	$	397,283	$	9,055
Nonaccrual loans	32,905		33,834		(929		)	54,151		54,824		(673		)
Loans past due 90 days or more and still accruing	—		—		—			—		—		—

The assets and liabilities accounted for under the fair value option are initially measured at fair value. Gains and losses from initial measurement and subsequent changes in fair value are recognized in earnings. The following table presents changes in fair value related to initial measurement and subsequent changes in fair value included in earnings for these assets and liabilities measured at fair value for the periods indicated:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017			2016
	(In thousands)
Net gains (losses) from fair value changes
Net gain on sale of loans (continuing operations)	$	(70	)	$	156	$	(62	)	$	156
Net revenue on mortgage banking activities (discontinued operations)	(996		)	15,686		(1,551		)	16,856

Changes in fair value due to instrument-specific credit risk were insignificant for the three and nine months ended September 30, 2017 and 2016. Interest income on loans held-for-sale under the fair value option is measured based on the contractual interest rate and reported in Loans and Leases, including Fees under Interest and Dividend Income and Income from Discontinued Operations in the Consolidated Statements of Operations.

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 amortized 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 independent pricing services that utilize pricing models 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 processes and procedures to monitor and challenge the pricing assumptions and 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. Only securities held-to-maturity with other-than-temporary impairment (OTTI) are considered to be carried at fair value. The Company had no securities classified as held-to-maturity at September 30, 2017, and the Company did not have any OTTI on securities held-to-maturity at December 31, 2016.

Impaired Loans and Leases: The fair value of impaired loans and leases with specific allocations of the ALLL 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 and certain non-residential mortgage loans held-of-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 lower of cost or fair value 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 $134 thousand and $16 thousand for the three months ended September 30, 2017 and 2016, respectively, and $143 thousand and $25 thousand for the nine months ended September 30, 2017 and 2016 in All Other Expense in the Consolidated Statements of Operations.

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, 2017
Assets
Impaired loans:
Single family residential mortgage	$	2,183	$	—	$	—	$	2,183
Commercial and industrial	279		—		—		279
SBA	102		—		—		102
Lease financing	40		—		—		40
SBA servicing rights	1,733		—		—		1,733
Other real estate owned:
Single family residential	949		—		—		949
December 31, 2016
Assets
Impaired loans:
Single family residential mortgage	$	2,956	$	—	$	—	$	2,956
Other real estate owned:
Single family residential	2,502		—		—		2,502

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,
	2017			2016			2017			2016
	(In thousands)
Impaired loans:
Single family residential mortgage	$	(27	)	$	—		$	(27	)	$	(149	)
SBA	(1		)	$	—		(1		)	—
Construction	—			—			(29		)	—
Other real estate owned:
Single family residential	(264		)	(109		)	(236		)	(74		)

Estimated Fair Values of Financial Instruments

The following table presents the carrying amounts and estimated fair values of financial assets and liabilities, on a consolidated operations basis, as of the dates indicated:



	Carrying Amount		Fair Value Measurement Level
			Level 1		Level 2		Level 3		Total
	(In thousands)
September 30, 2017
Financial assets
Cash and cash equivalents	$	611,826	$	611,826	$	—	$	—	$	611,826
Time deposits in financial institutions	1,000		1,000		—		—		1,000
Securities available-for-sale	2,755,664		—		2,755,664		—		2,755,664
Federal Home Loan Bank and other bank stock	67,063		—		67,063		—		67,063
Loans held-for-sale ⁽¹⁾	109,084		—		25,392		84,364		109,756
Loans and leases receivable, net of ALLL	6,181,825		—		—		6,195,299		6,195,299
Accrued interest receivable	34,798		34,798		—		—		34,798
Derivative assets	1,112		—		1,112		—		1,112
Financial liabilities
Deposits	7,403,593		—		—		7,198,216		7,198,216
Advances from Federal Home Loan Bank	1,470,000		—		1,472,820		—		1,472,820
Securities sold under repurchase agreements	36,520		—		36,520		—		36,520
Long term debt	172,865		—		175,873		—		175,873
Derivative liabilities	1,146		—		1,146		—		1,146
Accrued interest payable	8,074		8,074		—		—		8,074
December 31, 2016
Financial assets
Cash and cash equivalents	$	439,510	$	439,510	$	—	$	—	$	439,510
Time deposits in financial institutions	1,000		1,000		—		—		1,000
Securities available-for-sale	2,381,488		—		2,381,488		—		2,381,488
Securities held-to-maturity	884,234		—		899,743		—		899,743
Federal Home Loan Bank and other bank stock	67,842		—		67,842		—		67,842
Loans held-for-sale⁽²⁾	704,651		—		652,928		58,260		711,188
Loans and leases receivable, net of ALLL	5,994,308		—		—		5,999,791		5,999,791
Accrued interest receivable	36,382		36,382		—		—		36,382
Derivative assets	17,968		—		17,968		—		17,968
Financial liabilities
Deposits	9,142,150		—		—		8,908,406		8,908,406
Advances from Federal Home Loan Bank	490,000		—		490,351		—		490,351
Other borrowings	67,922		—		68,000		—		68,000
Long term debt	175,378		—		174,006		—		174,006
Derivative liabilities	2,116		—		2,116		—		2,116
Accrued interest payable	4,114		4,114		—		—		4,114


(1)	Includes loans held-for-sale carried at fair value of $59.0 million ($17.8 million at Level 2 and $41.2 million at Level 3) of discontinued operations


(2)	Includes loans held-for-sale carried at fair value of $406.3 million ($348.1 million at Level 2 and $58.3 million at Level 3) of discontinued operations

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).

Federal Home Loan Bank and Other Bank Stock: Federal Home Loan Bank 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: 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 amortized 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 independent pricing services that utilize pricing models 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. The Company did not have any securities held-to-maturity at September 30, 2017.

Loans and Leases Receivable, Net of ALLL: 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. 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). This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC Topic 820.

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, Securities Sold under Repurchase Agreements, and Other Borrowings: The fair values of advances from FHLB, securities sold under repurchase agreements, and other borrowings 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).