Fair Value Measurements

U.S. GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP also 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 standard 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 exchange markets that the entity has the ability to access as of the measurement date.

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

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

We have established and documented the Company's process for determining the fair values of our assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, fair value is determined using valuation models or third-party appraisals. The following is a description of the valuation methodologies used to measure and report the fair value of financial assets and liabilities on a recurring or nonrecurring basis:

Measured on a Recurring Basis

Securities

Securities available for sale are recorded at fair value on a recurring basis. Most securities at fair value are priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and under the provisions of the Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification are considered a Level 2 input method. Securities that are traded on active exchanges are considered a Level 1 input method.

The following tables present the balance of assets measured at fair value on a recurring basis at December 31, 2014 and September 30, 2014:



	Fair Value at December 31, 2014
	Level 1		Level 2		Level 3		Total
	(In thousands)
Available-for-sale securities
Equity securities	$	101,636	$	—	$	—	$	101,636
Obligations of U.S. government	—		620,018		—		620,018
Obligations of states and political subdivisions	—		24,068		—		24,068
Corporate debt securities	—		527,938		—		527,938
Mortgage-backed securities
Agency pass-through certificates	—		1,527,810		—		1,527,810
Other commercial MBS	—		93,586		—		93,586
Balance at end of period	$	101,636	$	2,793,420	$	—	$	2,895,056

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the quarter ended December 31, 2014.



	Fair Value at September 30, 2014
	Level 1		Level 2		Level 3		Total
	(In thousands)
Available-for-sale securities
Equity securities	$	101,387	$	—	$	—	$	101,387
Obligations of U.S. government	—		731,943		—		731,943
Obligations of states and political subdivisions	—		23,681		—		23,681
Corporate debt securities	—		509,007		—		509,007
Mortgage-backed securities
Agency pass-through certificates	—		1,584,508		—		1,584,508
Other commercial MBS	—		98,916		—		98,916
Balance at end of period	$	101,387	$	2,948,055	$	—	$	3,049,442

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the quarter ended September 30, 2014.

Measured on a Nonrecurring Basis

Impaired Loans & Real Estate Held for Sale

From time to time, and on a nonrecurring basis, fair value adjustments to collateral-dependent loans are recorded to reflect write-downs of principal balances based on the current appraised or estimated value of the collateral.

Real estate held for sale consists principally of properties acquired through foreclosure. From time to time, and on a nonrecurring basis, fair value adjustments are recorded to reflect write-downs or write-ups, but only up to the fair value of the real estate owned as of the initial transfer date, of principal balances based on the current appraised or estimated value of the collateral.

When management determines that the fair value of the loan collateral or the real estate held for sale requires additional adjustments, either as a result of a non-current appraisal value or when there is no observable market price, the Company classifies the impaired loan or real estate held for sale as Level 3. Level 3 assets recorded at fair value on a nonrecurring basis at December 31, 2014 included loans for which a partial charge-off was recorded based on the fair value of collateral, as well as covered REO and real estate held for sale for which fair value of the properties was less than the cost basis.

The following tables present the aggregated balance of assets measured at estimated fair value on a nonrecurring basis through the three months ended December 31, 2014 and December 31, 2013, and the total losses (gains) resulting from those fair value adjustments for the quarters ended December 31, 2014 and December 31, 2013. These estimated fair values are shown gross of estimated selling costs.



	Through December 31, 2014								Quarter Ended December 31, 2014
	Level 1		Level 2		Level 3		Total		Total Losses (Gains)
	(In thousands)
Impaired loans (1)	$	—	$	—	$	146	$	146	$	64
Covered REO (1)	—		—		1,041		1,041		75
Real estate held for sale (2)	—		—		36,901		36,901		(8,312		)
Balance at end of period	$	—	$	—	$	38,088	$	38,088	$	(8,173	)


(1)	The losses represent remeasurements of collateral-dependent loans.


(2)	The gains in this period include a one-time correction of $8.2 million (see Note A for description).



	Through December 31, 2013								Quarter Ended December 31, 2013
	Level 1		Level 2		Level 3		Total		Total Losses (Gains)
	(In thousands)
Impaired loans (1)	$	—	$	—	$	5,580	$	5,580	$	(805	)
Covered REO (2)	—		—		1,286		1,286		65
Real estate held for sale (2)	—		—		10,342		10,342		3,725
Balance at end of period	$	—	$	—	$	17,208	$	17,208	$	2,985


(1)	The gains represent remeasurements of collateral-dependent loans.


(2)	The losses represent aggregate writedowns and charge-offs on real estate held for sale.

There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at December 31, 2014 or December 31, 2013.

Impaired loans - The Company adjusts the carrying amount of impaired loans when there is evidence of probable loss and the expected fair value of the loan is less than its contractual amount. The amount of the impairment may be determined based on the estimated present value of future cash flows or the fair value of the underlying collateral. Impaired loans with a specific reserve allowance based on cash flow analysis or the value of the underlying collateral are classified as Level 3 assets.

The evaluations for impairment are prepared by the Problem Loan Review Committee, which is chaired by the Chief Credit Officer and includes the Loan Review manager and Special Credits manager, as well as senior credit officers, division managers and group executives, as applicable. These evaluations are performed in conjunction with the quarterly allowance for probable loan & lease losses process. Applicable loans that were included in the previous quarter's review are reevaluated and if their values are materially different from the prior quarter evaluation, the underlying information (loan balance and collateral value) are compared. Material differences are evaluated for reasonableness and discussions are held between the relationship manager and their division manager to understand the difference and determine if any adjustment is necessary.

The inputs are developed and substantiated on a quarterly basis, based on current borrower developments, market conditions and collateral values. The following method is used to value impaired loans:

•

The fair value of the collateral, which may take the form of real estate or personal property, is based on internal estimates, field observations, assessments provided by third-party appraisers and other valuation models. The Company performs or reaffirms valuations of collateral-dependent impaired loans at least annually. Adjustments are made if management believes that more recent information is available and relevant with respect to the fair value of the collateral.

Real estate held for sale ("REO") - When a loan is reclassified from loan status to real estate held for sale due to the Company taking possession of the collateral, a Special Credits officer, along with the Special Credits manager, obtains a valuation, which may include appraisals or third-party price opinions, which is used to establish the fair value of the underlying collateral. The determined fair value, less selling costs, becomes the carrying value of the REO asset. The following method is used to value real estate held for sale:

•

The fair value of REO assets is re-evaluated quarterly and the REO asset is adjusted to reflect the lower of cost or fair value as necessary. After foreclosure, valuations are updated periodically and current market conditions may require the assets to be written down further or up to the cost basis established on the date of transfer. The carrying balance of REO assets are also written down or up once a bona fide offer is contractually accepted, through execution of a Purchase and Sale Agreement, where the accepted price is lower than the cost basis established on the transfer date.

Fair Values of Financial Instruments

U. S. GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the statement of financial condition, for which it is practicable to estimate those values. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value estimates presented do not reflect the underlying fair value of the Company. Although management is not aware of any factors that would materially affect the estimated fair value amounts presented below, such amounts have not been comprehensively revalued for purposes of these financial statements since the dates shown, and therefore, estimates of fair value subsequent to those dates may differ significantly from the amounts presented below.



		December 31, 2014					September 30, 2014
	Level in Fair Value Hierarchy	Carrying Amount		Estimated Fair Value			Carrying Amount		Estimated Fair Value
		(In thousands)
Financial assets
Cash and cash equivalents	1	$	542,769	$	542,769		$	781,843	$	781,843
Available-for-sale securities
Equity securities	1	101,636		101,636			101,387		101,387
Obligations of U.S. government	2	620,018		620,018			731,943		731,943
Obligations of states and political subdivisions	2	24,068		24,068			23,681		23,681
Corporate debt securities	2	527,938		527,938			509,007		509,007
Mortgage-backed securities
Agency pass-through certificates	2	1,527,810		1,527,810			1,584,508		1,584,508
Other commercial MBS	2	93,586		93,586			98,916		98,916
Total available-for-sale securities		2,895,056		2,895,056			3,049,442		3,049,442
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates	2	1,516,219		1,503,781			1,548,265		1,499,218
Total held-to-maturity securities		1,516,219		1,503,781			1,548,265		1,499,218

Loans receivable, net	3	8,253,917		8,816,245			8,148,322		8,667,771
Covered loans, net	3	161,478		167,129			176,476		176,761
FDIC indemnification asset	3	30,356		29,559			36,860		35,976
FHLB and FRB stock	2	154,870		154,870			158,839		158,839

Financial liabilities
Customer accounts	2	10,578,853		9,936,221			10,716,928		9,946,586
FHLB advances	2	1,830,000		1,953,751			1,930,000		2,054,437

Off balance sheet - interest rate swaps	2	—		(4,517		)	—		(170		)

The following methods and assumptions were used to estimate the fair value of financial instruments:

Cash and cash equivalents – The carrying amount of these items is a reasonable estimate of their fair value.

Available-for-sale securities and held-to-maturity securities – Securities at fair value are primarily priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and under the provisions of the Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification are considered a Level 2 input method. Equity securities which are exchange traded are considered a Level 1 input method.

Loans receivable and covered loans – For certain homogeneous categories of loans, such as fixed- and variable-rate residential mortgages, fair value is estimated for securities backed by similar loans, adjusted for differences in loan characteristics, using the same methodology described above for AFS and HTM securities. The fair value of other loan types is estimated by discounting the future cash flows and estimated prepayments using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. Some loan types were valued at carrying value because of their floating rate or expected maturity characteristics. Net deferred loan fees are not included in the fair value calculation but are included in the carrying amount.

FDIC indemnification asset – The fair value of the indemnification asset is estimated by discounting the expected future cash flows using the current rates.

FHLB and FRB stock – The fair value is based upon the par value of the stock which equates to its carrying value.

Customer accounts – The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the estimated future cash flows using the rates currently offered for deposits with similar remaining maturities.

FHLB advances and other borrowings – The fair value of FHLB advances and other borrowings is estimated by discounting the estimated future cash flows using rates currently available to the Company for debt with similar remaining maturities.

The following tables provide a reconciliation of amortized cost to fair value of available-for-sale and held-to-maturity securities as of December 31, 2014 and September 30, 2014:



	December 31, 2014
	Amortized Cost		Gross Unrealized					Fair Value		Yield
	Amortized Cost		Gains		Losses			Fair Value		Yield
	(In thousands)
Available-for-sale securities
U.S. government and agency securities due
1 to 5 years	$	120,467	$	2,396	$	(426	)	$	122,437	1.47
5 to 10 years	153,525		64		(5		)	153,584		1.12
Over 10 years	344,088		336		(427		)	343,997		1.26
Equity Securities
Within 1 year	500		16		—			516		1.80
1 to 5 years	100,000		1,120		—			101,120		1.90
5 to 10 years	—		—		—			—		—
Corporate bonds due
Within 1 year	15,000		67		—			15,067		1.00
1 to 5 years	302,627		1,524		(6		)	304,145		0.71
5 to 10 years	158,236		1,787		(1,297		)	158,726		1.42
Over 10 years	50,000		—		—			50,000		3.00
Municipal bonds due
Over 10 years	20,397		3,671		—			24,068		6.45
Mortgage-backed securities
Agency pass-through certificates	1,495,114		34,386		(1,690		)	1,527,810		2.57
Other commercial MBS	93,533		53		—			93,586		1.51
	2,853,487		45,420		(3,851		)	2,895,056		1.99
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates	1,516,219		9,084		(21,522		)	1,503,781		3.13
	$	4,369,706	$	54,504	$	(25,373	)	$	4,398,837	2.39	%



	September 30, 2014
	Amortized Cost		Gross Unrealized						Fair Value		Yield
	Amortized Cost		Gains		Losses				Fair Value		Yield
	(In thousands)
Available-for-sale securities
U.S. government and agency securities due
1 to 5 years	$	171,154	$	2,585		$	(748	)	$	172,991	1.26
5 to 10 years	203,317		300			(102		)	203,515		1.45
Over 10 years	354,828		1,028			(419		)	355,437		1.25
Equity Securities
1 to 5 years	100,500		887			—			101,387		1.90
5 to 10 years	—		—			—			—		—
Corporate bonds due
Within 1 year	15,000		75			—			15,075		1.00
1 to 5 years	302,540		2,372			—			304,912		0.71
5 to 10 years	138,201		1,789			(970		)	139,020		1.43
Over 10 years	50,000		—			—			50,000		3.00
Municipal bonds due
Over 10 years	20,402		3,279			—			23,681		6.45
Mortgage-backed securities
Agency pass-through certificates	1,561,639		24,893			(2,024		)	1,584,508		2.57
Other commercial MBS	98,851		65			—			98,916		1.49
	3,016,432		37,273			(4,263		)	3,049,442		1.99
Mortgage-backed securities
Agency pass-through certificates	1,548,265		4,855			(53,902		)	1,499,218		3.13
	$	4,564,697	$	42,128		$	(58,165	)	$	4,548,660	2.38	%

During the quarter ended December 31, 2014, there were no available-for-sale securities sold. There were no available-for-sale securities sold during the quarter ended December 31, 2013. Substantially all agency mortgage-backed securities have contractual due dates that exceed 10 years.

The following tables show the unrealized gross losses and fair value of securities at December 31, 2014 and September 30, 2014, by length of time that individual securities in each category have been in a continuous loss position. The decline in fair value is attributable to changes in interest rates. Because the Company does not intend to sell these securities and does not consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other than temporarily impaired.



December 31, 2014	Less than 12 months					12 months or more					Total
	Unrealized Gross Losses			Fair Value		Unrealized Gross Losses			Fair Value		Unrealized Gross Losses			Fair Value
	(In thousands)
Corporate bonds due	$	(406	)	$	72,688	$	(897	)	$	24,104	$	(1,303	)	$	96,792
U.S. government and agency securities due	(422		)	246,045		(436		)	99,564		(858		)	345,609
Agency pass-through certificates	(421		)	62,689		(22,791		)	1,332,778		(23,212		)	1,395,467
	$	(1,249	)	$	381,422	$	(24,124	)	$	1,456,446	$	(25,373	)	$	1,837,868



September 30, 2014	Less than 12 months					12 months or more					Total
	Unrealized Gross Losses			Fair Value		Unrealized Gross Losses			Fair Value		Unrealized Gross Losses			Fair Value
	(In thousands)
Corporate bonds due	$	(125	)	$	24,875	$	(845	)	$	24,155	$	(970	)	$	49,030
U.S. government and agency securities due	(472		)	316,578		(797		)	109,354		(1,269		)	425,932
Agency pass-through certificates	(215		)	19,212		(55,711		)	1,509,209		(55,926		)	1,528,421
	$	(812	)	$	360,665	$	(57,353	)	$	1,642,718	$	(58,165	)	$	2,003,383