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FAIR VALUES OF FINANCIAL INSTRUMENTS | 3 Months Ended
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Mar. 31, 2020
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 March 31, 2020 or December 31, 2019. 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. Foreign Exchange Contracts. We offer 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, we also enter into offsetting contracts with institutional counterparties to hedge the Company’s foreign exchange rate risk. These back-to-back contracts allow us 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 following table presents our financial assets and liabilities measured at fair value on a 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)
March 31, 2020 |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |
Securities available-for-sale: |  |  |  |  |  |  |  |
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities |  | $ | 104,021 |  |  | $ | — |  |  | $ | 104,021 |  |  | $ | — |
U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations |  | 139,419 |  |  | — |  |  | 139,419 |  |  | — |
Municipal securities |  | 54,385 |  |  | — |  |  | 54,385 |  |  | — |
Non-agency residential mortgage-backed securities |  | 160 |  |  | — |  |  | 160 |  |  | — |
Collateralized loan obligations |  | 623,571 |  |  | — |  |  | 623,571 |  |  | — |
Corporate debt securities |  | 47,871 |  |  | — |  |  | 47,871 |  |  | — |
Loans held-for-sale, carried at fair value |  | 20,234 |  |  | — |  |  | 3,107 |  |  | 17,127 |
Derivative assets: |  |  |  |  |  |  |  |
Interest rate swaps and caps (1) |  | 8,242 |  |  | — |  |  | 8,242 |  |  | — |
Foreign exchange contracts (1) |  | 369 |  |  | — |  |  | 369 |  |  | — |
Liabilities |  |  |  |  |  |  |  |
Derivative liabilities: |  |  |  |  |  |  |  |
Interest rate swaps and caps (2) |  | 8,881 |  |  | — |  |  | 8,881 |  |  | — |
Foreign exchange contracts (2) |  | 182 |  |  | — |  |  | 182 |  |  | — |
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 |
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 in the Consolidated Statements of Financial Condition.
(2) | 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 March 31,
($ in thousands) |  | 2020 |  | 2019
Loans repurchased from GNMA Loan Pools |  |  |  |
Balance at beginning of period |  | $ | 19,233 |  |  | $ | 25,040 |
Total (losses) gains (realized/unrealized): |  |  |  |
Included in earnings—fair value adjustment |  | (1,391 | ) |  | 3 |
Additions |  | — |  |  | — |
Sales, settlements, and other |  | (715 | ) |  | (1,974 | )
Balance at end of period |  | $ | 17,127 |  |  | $ | 23,069 |
Loans repurchased from GNMA loan pools had aggregate unpaid principal balances of $19.1 million and $19.8 million as of March 31, 2020 and December 31, 2019. The significant unobservable inputs used in the fair value measurement of our loans repurchased from GNMA loan pools at March 31, 2020 and December 31, 2019 included an expected loss rate of 1.55 percent for insured loans and 20.00 percent for uninsured loans. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. Fair Value Option Loans Held-for-Sale, Carried at Fair Value: We elected the fair value option for certain SFR mortgage loans held-for-sale. Electing to measure SFR mortgage loans held-for-sale at fair value reduces certain timing differences and better matches changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. We also elected to record loans repurchased from GNMA at fair value, as we intend to sell them after curing any defects and, accordingly, they are classified as held-for-sale. Loans previously sold to GNMA that are delinquent more than 90 days are subject to a repurchase option when that condition exists and typically are repurchased by us. To the extent loans are subject to a repurchase option and not repurchased, the loans are re-recognized at fair value and offset by a secured borrowing, as the loans are still legally owned by GNMA. As of March 31, 2020 and December 31, 2019, there are no loans subject to such repurchase option and accordingly no related secured borrowings. The following table presents the fair value and aggregate principal balance of certain assets, on a consolidated operations basis, under the fair value option:
|  | March 31, 2020 |  | December 31, 2019
($ in thousands) |  | Fair Value |  | Unpaid Principal Balance |  | Difference |  | Fair Value |  | Unpaid Principal Balance |  | Difference
Loans held-for-sale, carried at fair value: |  |  |  |  |  |  |  |  |  |  |  |
Total loans |  | $ | 20,234 |  |  | $ | 22,675 |  |  | $ | (2,441 | ) |  | $ | 22,642 |  |  | $ | 23,455 |  |  | $ | (813 | )
Non-accrual loans (1) |  | 5,795 |  |  | 6,901 |  |  | (1,106 | ) |  | 8,125 |  |  | 8,370 |  |  | (245 | )
(1) | Includes loans guaranteed by the U.S. government of $4.5 million and $6.7 million, respectively, at March 31, 2020 and December 31, 2019.
There were no loans held-for-sale that were 90 days or more past due and still accruing interest as of March 31, 2020 and December 31, 2019. The assets accounted for under the fair value option are initially measured at fair value. Gains and losses from initial measurement and subsequent changes in fair value are recognized in earnings. The following table presents changes in fair value related to initial measurement and subsequent changes in fair value included in earnings for these assets measured at fair value for the periods indicated:
|  | Three Months Ended March 31,
($ in thousands) |  | 2020 |  | 2019
Net (losses) gains from fair value changes: |  |  |  |
Fair value adjustment for loans held for sale |  | $ | (1,586 | ) |  | $ | 1 |
Interest income on loans held-for-sale under the fair value option is measured based on the contractual interest rate and reported in interest income on loans, including fees in 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 ACL based on collateral is generally based on recent real estate appraisals and automated valuation models (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. 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)
March 31, 2020 |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |
Impaired loans: |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 18,275 |  |  | $ | — |  |  | $ | — |  |  | $ | 18,275 |
SBA |  | 3,866 |  |  | — |  |  | — |  |  | 3,866 |
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 |
The following table presents the losses recognized on assets measured at fair value on a non-recurring basis for the periods indicated:
|  | Three Months Ended March 31,
($ in thousands) |  | 2020 |  | 2019
Impaired loans: |  |  |  |
Single family residential mortgage |  | $ | (553 | ) |  | $ | (490 | )
Commercial and industrial |  | (965 | ) |  | — |
SBA |  | (112 | ) |  | (54 | )
Other consumer |  | — |  |  | (88 | )
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
March 31, 2020 |  |  |  |  |  |  |  |  |  |
Financial assets |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 435,992 |  |  | $ | 435,992 |  |  | $ | — |  |  | $ | — |  |  | $ | 435,992 |
Securities available-for-sale |  | 969,427 |  |  | — |  |  | 969,427 |  |  | — |  |  | 969,427 |
Federal Home Loan Bank and other bank stock |  | 57,237 |  |  | — |  |  | 57,237 |  |  | — |  |  | 57,237 |
Loans held-for-sale, carried at fair value |  | 20,234 |  |  | — |  |  | 3,107 |  |  | 17,127 |  |  | 20,234 |
Loans receivable, net of allowance for loan losses |  | 5,589,221 |  |  | — |  |  | — |  |  | 5,711,245 |  |  | 5,711,245 |
Accrued interest receivable |  | 24,639 |  |  | 24,639 |  |  | — |  |  | — |  |  | 24,639 |
Derivative assets |  | 8,611 |  |  | — |  |  | 8,611 |  |  | — |  |  | 8,611 |
Financial liabilities |  |  |  |  |  |  |  |  |  |
Deposits |  | 5,562,838 |  |  | — |  |  | — |  |  | 5,570,289 |  |  | 5,570,289 |
Advances from Federal Home Loan Bank |  | 978,000 |  |  | — |  |  | 1,023,811 |  |  | — |  |  | 1,023,811 |
Long term debt |  | 173,479 |  |  | — |  |  | 184,104 |  |  | — |  |  | 184,104 |
Derivative liabilities |  | 9,063 |  |  | — |  |  | 9,063 |  |  | — |  |  | 9,063 |
Accrued interest payable |  | 7,210 |  |  | 7,210 |  |  | — |  |  | — |  |  | 7,210 |
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 for credit losses |  | 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 |

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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=117815213&loc=d3e19207-110258 + Details
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