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FAIR VALUES OF FINANCIAL INSTRUMENTS
 12 Months Ended
Dec. 31, 2019
Fair Value Disclosures [Abstract]  
FAIR VALUES OF FINANCIAL INSTRUMENTS 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, we primarily employ 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. We employ procedures to monitor the pricing service's assumptions and establish processes to challenge the pricing service's valuations that appear unusual or unexpected. Multiple quotes or prices may be obtained in this process and we determine which fair value is most appropriate based on market information and analysis. Quotes obtained through this process are generally non-binding. We follow established procedures to ensure that assets and liabilities are properly classified in the fair value hierarchy. Level 2 securities include SBA loan pool securities, U.S. government agency and U.S. government sponsored enterprise 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, including at least one unobservable input, the securities are classified as Level 3 and reliance is placed upon internally developed models, and management judgment and evaluation for valuation. We had no securities available-for-sale classified as Level 3 at December 31, 2019 and 2018.
Loans Held-for-Sale, Carried at Fair Value: The fair value of loans held-for-sale is based on commitments outstanding from investors and current offerings in the secondary market for portfolios with similar characteristics, except for loans that are repurchased out of GNMA loan pools that become severely delinquent which are valued based on an internal model. Loans held-for-sale subject to recurring fair value adjustments are classified as Level 2, or in the case of loans repurchased, Level 3. The fair value includes the servicing value of the loans and any accrued interest.
Derivative Assets and Liabilities:
Interest Rate Swaps and Caps. We offer interest rate swaps and caps products to certain loan clients to allow them to hedge the risk of rising interest rates on their variable rate loans. We originate a variable rate loan and enter into a variable-to-fixed interest rate swap with the client. We also enter into an offsetting swap with a correspondent bank. These back-to-back agreements are intended to offset each other and allow us to originate a variable rate loan, while providing a contract for fixed interest payments for the client. The net cash flow for us is equal to the interest income received from a variable rate loan originated with the client plus a fee. 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.
Mortgage Servicing Rights: We retain servicing on some of our mortgage loans sold and elected the fair value option for these MSRs. Generally, the value is estimated based on a valuation from 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 our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2019:
 
 
 
Fair Value Measurement Level
($ in thousands)
 
Carrying Value
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
December 31, 2019
 
 
 
 
 
Assets
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities
 
$
36,456

$
—

$
36,456

$
—

U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations
 
91,299

—

91,299

—

Municipal securities
 
52,689

—

52,689

—

Non-agency residential mortgage-backed securities
 
196

—

196

—

Collateralized loan obligations
 
718,361

—

718,361

—

Corporate debt securities
 
13,579

—

13,579

—

Loans held-for-sale, carried at fair value
 
22,642

—

3,409

19,233

Mortgage servicing rights (1)
 
1,157

—

—

1,157

Derivative assets:
 
 
 
 
 
Interest rate swaps and caps (1)
 
3,445

—

3,445

—

Foreign exchange contracts (1)
 
138

—

138

—

Liabilities
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
Interest rate swaps and caps (2)
 
3,717

—

3,717

—

Foreign exchange contracts(2)
 
136

—

136

—

(1)
Included in Other Assets on the Consolidated Statements of Financial Condition
(2)
Included in Accrued Expenses and Other Liabilities on the Consolidated Statements of Financial Condition
The following table presents our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2018:
 
 
 
Fair Value Measurement Level
($ in thousands)
 
Carrying Value
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
December 31, 2018
 
 
 
 
 
Assets
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
SBA loan pools securities
 
$
910

$
—

$
910

$
—

U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities
 
437,442

—

437,442

—

Non-agency residential mortgage-backed securities
 
427

—

427

—

Non-agency commercial mortgage-backed securities
 
132,199

—

132,199

—

Collateralized loan obligations
 
1,421,522

—

1,421,522

—

Loans held-for-sale, carried at fair value (1)
 
27,180

—

2,140

25,040

Mortgage servicing rights (2)
 
1,770

—

—

1,770

Derivative assets - Interest rate swaps and caps (2)
 
1,534

—

1,534

—

Liabilities
 
 
 
 
 
Derivative liabilities - Interest rate swaps and caps (3)
 
1,600

—

1,600

—

(1)
Includes loans held-for-sale carried at fair value of $19.5 million ($2.1 million at Level 2 and $17.4 million at Level 3) of discontinued operations, which are included in Assets of Discontinued Operations on the Consolidated Statements of Financial Condition.
(2)
Included in Other Assets in the Consolidated Statements of Financial Condition.
(3)
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:
 
 
Year Ended December 31,
($ in thousands)
 
2019
 
2018
 
2017
Mortgage servicing rights
 
 
 
 
 
 
Balance at beginning of period (1)
 
$
1,770

 
$
31,852

 
$
76,121

Total gains or losses (realized/unrealized):
 
 
 
 
 
 
Included in earnings—fair value adjustment (4)
 
(264
)
 
(1,155
)
 
(10,240
)
Additions
 
—

 
—

 
12,127

Sales, paydowns, and other (2)
 
(349
)
 
(28,927
)
 
(46,156
)
Balance at end of period
 
$
1,157

 
$
1,770

 
$
31,852

Loans repurchased or eligible to be repurchased from Ginnie Mae Loan Pools (3)
 
 
 
 
 
 
Balance at beginning of period
 
$
25,040

 
$
98,940

 
$
58,260

Total gains or losses (realized/unrealized):
 
 
 
 
 
 
Included in earnings—fair value adjustment (5)
 
(16
)
 
(1,378
)
 
(781
)
Additions
 
406

 
23,678

 
117,215

Sales, settlements, and other (6)
 
(6,197
)
 
(96,200
)
 
(75,754
)
Balance at end of period
 
$
19,233

 
$
25,040

 
$
98,940

(1)
Includes MSRs of discontinued operations, which is included in Assets of Discontinued Operations on the Consolidated Statements of Financial Condition, of $0, $0, and $37.7 million for the years ended December 31, 2019, 2018 and 2017 in balance at beginning of period.
(2)
Includes $37.8 million of MSRs sold as a part of discontinued operations for the year ended December 31, 2017.
(3)
Includes loans repurchased from GNMA loan pools of discontinued operations, which is included in Assets of Discontinued Operations on the Consolidated Statements of Financial Condition, of $17.3 million, $32.3 million and $58.3 million in balance at beginning of period, and $0, $17.3 million and $32.3 million in balance at end of period for the years ended December 31, 2019, 2018 and 2017.
(4)
Included in Loan Servicing Income in the Consolidated Statements of Operations.
(5)
Included in Net Gain on Sale of Loans in the Consolidated Statements of Operations.
(6)
Included in sales, settlements and other are $66.0 million of GNMA loans subject to repurchase option that were derecognized when the associated mortgage servicing rights were sold during the year ended December 31, 2018.
Loans repurchased or eligible to be repurchased from GNMA loan pools had aggregate unpaid principal balances of $19.8 million and $25.5 million at December 31, 2019 and 2018. The significant unobservable inputs used in the fair value measurement of our servicing rights include the discount rate and prepayment rate. The significant unobservable inputs used in the fair value measurement of our loans repurchased from GNMA pools at December 31, 2019 and 2018 included an expected loss rate of 1.55 percent for insured loans and 20.00 percent for uninsured loans. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results.
The following table presents, as of the dates indicated, quantitative information about Level 3 fair value measurements on a recurring basis, other than loans that become severely delinquent and are repurchased out of GNMA loan pools that were valued based on an estimate of the expected loss we will incur on these loans at December 31, 2019 and 2018:
($ in thousands)
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range (Weighted-Average)
December 31, 2019
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
$
2,323

 
Discounted cash flow
 
Discount rate
 
8.75% to 13.00% (11.55%)
 
 
 
 
 
 
Prepayment rate
 
8.00% to 66.34% (15.22%)
December 31, 2018
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
$
3,362

 
Discounted cash flow
 
Discount rate
 
9.50% to 13.00% (11.27%)
 
 
 
 
 
 
Prepayment rate
 
8.00% to 66.34% (12.67%)

Fair Value Option
Loans Held-for-Sale, Carried at Fair Value: We elected the fair value option for certain SFR mortgage loans held-for-sale. 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. We also elected to record loans repurchased from GNMA at fair value, as we intend to sell them after curing any defects and, accordingly, they are classified as held-for-sale.
The following table presents the fair value and aggregate principal balance of certain assets, on a consolidated operations basis, under the fair value option as of the dates indicated:
 
 
December 31,
 
 
2019
 
2018
($ in thousands)
 
Fair Value
 
Unpaid Principal Balance
 
Difference
 
Fair Value
 
Unpaid Principal Balance
 
Difference
Loans held-for-sale, carried at fair value in continuing operations:
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
 
$
22,642

 
$
23,455

 
$
(813
)
 
$
7,690

 
$
7,906

 
$
(216
)
Non-accrual loans (1)
 
8,125

 
8,370

 
(245
)
 
2,427

 
2,538

 
(111
)
Loans past due 90 days or more and still accruing
 
—

 
—

 
—

 
—

 
—

 
—

Loans held-for-sale, carried at fair value in discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
 
$
—

 
$
—

 
$
—

 
$
19,490

 
$
20,027

 
$
(537
)
Non-accrual loans (2)
 
—

 
—

 
—

 
8,430

 
8,496

 
(66
)
Loans past due 90 days or more and still accruing
 
—

 
—

 
—

 
—

 
—

 
—

(1)
Includes loans guaranteed by the U.S. government of $6.7 million and $1.6 million at December 31, 2019 and 2018.
(2)
Includes loans guaranteed by the U.S. government of $0 and $7.6 million, at December 31, 2019 and 2018.
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:
 
 
Year Ended December 31,
($ in thousands)
 
2019
 
2018
 
2017
Net gains (losses) from fair value changes
 
 
 
 
 
 
Net gain (loss) on sale of loans (continuing operations)
 
$
106

 
$
204

 
$
(170
)
Net revenue on mortgage banking activities (discontinued operations)
 
—

 
159

 
(288
)

Changes in fair value due to instrument-specific credit risk were insignificant for the years ended December 31, 2019, 2018 and 2017. Interest income on loans held-for-sale under the fair value option is measured based on the contractual interest rate and reported in Loans, including Fees under Interest and Dividend Income and Income from Discontinued Operations on the Consolidated Statements of Operations.
Assets and Liabilities Measured on a Non-Recurring Basis
Impaired Loans: The fair value of impaired loans with specific allocations of the ALL based on collateral values is generally based on recent real estate appraisals and AVMs. 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 deemed significant unobservable inputs used for determining fair value and result in a Level 3 classification.
Other Real Estate Owned Assets: OREO assets initially are recorded at fair value at the time of foreclosure. Thereafter, they are recorded at the lower of cost or fair value. The fair value of OREO 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 the income approach. Such adjustments may be significant and result in a Level 3 classification due to the unobservable inputs used for determining fair value. We recorded valuation allowance expense for OREO assets of $145 thousand, $53 thousand and $236 thousand for the years ended December 31, 2019, 2018 and 2017 in All Other Expense on the Consolidated Statements of Operations.
The following table presents our financial assets and liabilities measured at fair value on a non-recurring basis as of the dates indicated:
 
 
 
 
Fair Value Measurement Level
($ in thousands)
 
Carrying Value
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
December 31, 2019
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Impaired loans:
 
 
 
 
 
 
 
 
Single family residential mortgage
 
$
3,678

 
$
—

 
$
—

 
$
3,678

Commercial and industrial
 
15,409

 
—

 
—

 
15,409

SBA
 
$
1,711

 
—

 
—

 
$
1,711

December 31, 2018
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Impaired loans:
 
 
 
 
 
 
 
 
SBA
 
$
226

 
—

 
—

 
$
226


The following table presents the gains and (losses) recognized on assets measured at fair value on a non-recurring basis for the periods indicated:
 
 
Year Ended December 31,
($ in thousands)
 
2019
 
2018
 
2017
Impaired loans:
 
 
 
 
 
 
Single family residential mortgage
 
$
(490
)
 
$
(115
)
 
$
(164
)
Commercial real estate
 
—

 
(1,752
)
 
—

SBA
 
(46
)
 
(1,048
)
 
(200
)
Other consumer
 
(88
)
 
(141
)
 
(29
)
Other real estate owned:
 
 
 
 
 
 
Single family residential
 
(104
)
 
229

 
(284
)

Estimated Fair Values of Financial Instruments
The following table presents the carrying amounts and estimated fair values of financial assets and liabilities as of the dates indicated:
 
 
Carrying Amount
 
Fair Value Measurement Level
($ in thousands)
 
 
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2019
 
 
 
 
 
 
 
 
 
 
Financial assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
373,472

 
$
373,472

 
$
—

 
$
—

 
$
373,472

Securities available-for-sale
 
912,580

 
—

 
912,580

 
—

 
912,580

Federal Home Loan Bank and other bank stock
 
59,420

 
—

 
59,420

 
—

 
59,420

Loans held-for-sale
 
22,642

 
—

 
3,409

 
19,233

 
22,642

Loans receivable, net of allowance
 
5,894,236

 
—

 
—

 
5,894,732

 
5,894,732

Accrued interest receivable
 
24,523

 
24,523

 
—

 
—

 
24,523

Derivative assets
 
3,583

 
—

 
3,583

 
—

 
3,583

Financial liabilities
 
 
 
 
 
 
 
 
 
 
Deposits
 
5,427,167

 
—

 
—

 
5,430,536

 
5,430,536

Advances from Federal Home Loan Bank
 
1,195,000

 
—

 
1,222,709

 
—

 
1,222,709

Long-term debt
 
173,421

 
—

 
180,213

 
—

 
180,213

Derivative liabilities
 
3,853

 
—

 
3,853

 
—

 
3,853

Accrued interest payable
 
4,687

 
4,687

 
—

 
—

 
4,687

December 31, 2018
 
 
 
 
 
 
 
 
 
 
Financial assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
391,592

 
$
391,592

 
$
—

 
$
—

 
$
391,592

Securities available-for-sale
 
1,992,500

 
—

 
1,992,500

 
—

 
1,992,500

Federal Home Loan Bank and other bank stock
 
68,094

 
—

 
68,094

 
—

 
68,094

Loans held-for-sale (1)
 
27,606

 
—

 
2,566

 
25,040

 
27,606

Loans receivable, net of allowance
 
7,638,681

 
—

 
—

 
7,513,910

 
7,513,910

Accrued interest receivable
 
38,807

 
38,807

 
—

 
—

 
38,807

Derivative assets
 
1,534

 
—

 
1,534

 
—

 
1,534

Financial liabilities
 
 
 
 
 
 
 
 
 
 
Deposits
 
7,916,644

 
—

 
—

 
7,689,324

 
7,689,324

Advances from Federal Home Loan Bank
 
1,520,000

 
—

 
1,517,761

 
—

 
1,517,761

Long-term debt
 
173,174

 
—

 
174,059

 
—

 
174,059

Derivative liabilities
 
1,600

 
—

 
1,600

 
—

 
1,600

Accrued interest payable
 
13,253

 
13,253

 
—

 
—

 
13,253

(1)
Includes loans held-for-sale carried at fair value of $19.5 million ($2.1 million at Level 2 and $17.4 million at Level 3) of discontinued operations.

The methods and assumptions used to estimate fair value for our financial instruments recorded at fair value on a recurring or non-recurring basis 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 are recorded at cost, which approximates fair value. 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).
Loans Receivable, Net of ALL: The fair value of loans receivable, which is based on an exit price notion, is estimated based on the discounted cash flow approach. The discount rate was derived from the associated market yield curve plus appropriate spreads. The resulting fair value reflects market price for loans with similar financial characteristics. Yield curves are constructed by product and payment types. 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 values of deposits with no stated maturity, including noninterest‑bearing deposits, interest-bearing demand deposits, money market and savings accounts are equal to the amount payable on demand as of the balance sheet date (Level 3). The fair value of certificates of deposit is estimated based on discounted cash flows utilizing interest rates currently being offered by the Bank on comparable deposits as to amount and term (Level 3).
Advances from Federal Home Loan Bank and Other Borrowings: The fair values of advances from FHLB and other borrowings are estimated based on a discounted cash flow 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).