FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2020

Fair Value Measurements

Fair Value Hierarchy

The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Valuations within these levels are based upon:

Level 1 - Quoted market prices for identical instruments traded in active exchange markets.

Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.

Level 3 - Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant.

Because broadly traded markets do not exist for most of the Company’s financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. 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. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.

Management monitors the availability of observable market data to assess the appropriate classification of assets and liabilities within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities, or total earnings.

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

For cash, cash equivalents and restricted cash, accrued interest receivable and payable, demand deposits and short-term borrowings, the carrying amount is estimated to be fair value. The fair value of accrued interest receivable/payable balances are determined using inputs and fair value measurements commensurate with the asset or liability from which the accrued interest is generated.

Fair values for available for sale and held to maturity debt securities, which include primarily debt securities issued by U.S. government sponsored agencies, are based on quoted market prices for similar securities.

Fair values for equity securities, which consist of investments in the CRA Qualified Investment Fund, are based on quoted market prices.

Loans are valued using the exit price notion. The fair value is estimated using market quotes for similar assets or the present value of future cash flows, discounted using a market rate for similar products and giving consideration to estimated prepayment risk and credit risk. The fair value of loans is determined utilizing estimates resulting in a Level 3 classification.

Impaired loans are measured for impairment based on the present value of expected future cash flows discounted at the loans' effective interest rate, except that as a practical expedient, the Company may measure impairment based on a loan’s observable market price, or the fair value of the collateral (net of estimated costs to sell) if the loan is collateral dependent. The fair value of impaired loans is determined utilizing estimates resulting in a Level 3 classification.

It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.

The fair value of servicing rights is determined using a valuation model that utilizes interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data.

The fair values of derivatives are based on valuation models using observable market data as of the measurement date.

Fair values for fixed-rate time deposits are estimated using discounted cash flow analyses using interest rates offered at each reporting date by the Company for time deposits with similar remaining maturities. For deposits with no contractual maturity, the fair value is assumed to equal the carrying value.

The fair value of FHLB advances is estimated based on discounting the future cash flows using the market rate currently offered for similar terms.

The fair value of subordinated debentures is based on an indication of value provided by a third-party broker.

For senior debt, the fair value is based on an indication of value provided by a third-party broker.

Fair Value of Financial Instruments

The carrying and estimated fair values of the Company’s financial instruments are as follows:


					Fair Level Measurements Using
(Dollars in thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
As of September 30, 2020:
Financial assets:
Cash, cash equivalents and restricted cash	$	214,066	$	214,066	$	214,066	$	—	$	—
Debt securities:
Available for sale	623,499		623,499		—		623,499		—
Held to maturity	7,990		8,393		—		8,393		—
Equity securities	12,070		12,070		—		12,070		—

Loans receivable, net	6,102,438		6,158,846		—		—		6,158,846
Accrued interest receivable	19,894		19,894		3		1,083		18,808
FHLB stock	29,612		N/A		N/A		N/A		N/A

Financial liabilities:
Deposits	$	5,276,680	$	5,310,264	$	1,938,466	$	3,371,798	$	—
FHLB advances	961,747		1,003,764		—		1,003,764		—
Junior subordinated deferrable interest debentures	61,857		55,751		—		55,751		—
Senior debt	94,509		102,783		—		102,783		—
Accrued interest payable	1,254		1,254		—		1,254		—
Interest rate swaps	10,834		10,834		—		10,834		—
As of December 31, 2019:
Financial assets:
Cash, cash equivalents and restricted cash	$	91,325	$	91,325	$	91,325	$	—	$	—
Debt securities:
Available for sale	625,074		625,074		—		625,074		—
Held to maturity	10,170		10,349		—		10,349		—
Equity securities	11,782		11,782		—		11,782		—
Loans receivable, net	6,194,976		6,346,496		—		—		6,346,496
Accrued interest receivable	20,814		20,814		26		1,685		19,103
FHLB stock	30,342		N/A		N/A		N/A		N/A
Interest rate swap	1,156		1,156		—		1,156		—
Financial liabilities:
Deposits	$	5,234,717	$	5,253,511	$	1,558,029	$	3,695,482	$	—
FHLB advances	978,702		996,860		—		996,860		—
Junior subordinated deferrable interest debentures	61,857		59,272		—		59,272		—
Senior debt	94,416		99,806		—		99,806		—
Accrued interest payable	2,901		2,901		—		2,901		—
Interest rate swap	746		746		—		746		—

These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

Assets and Liabilities Recorded at Fair Value

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of September 30, 2020 and December 31, 2019.

Recurring Basis

The Company is required or permitted to record the following assets and liabilities at fair value on a recurring basis (dollars in thousands):


Description	Fair Value		Level 1		Level 2		Level 3
As of September 30, 2020:
Financial Assets:
Available for sale debt securities:
Government and Government Sponsored Entities:
Residential MBS and CMOs	$	235,840	$	—	$	235,840	$	—
Commercial MBS and CMOs	372,279		—		372,279		—
Agency bonds	15,380		—		15,380		—
Total available for sale debt securities	$	623,499	$	—	$	623,499	$	—
Equity securities	$	12,070	$	—	$	12,070	$	—
Mortgage servicing rights	1,850		—		—		1,850

Financial Liabilities:
Interest rate swaps	10,834		—		10,834		—
As of December 31, 2019:
Financial Assets:
Available for sale debt securities:
Government and Government Sponsored Entities:
Residential MBS and CMOs	$	145,192	$	—	$	145,192	$	—
Commercial MBS and CMOs	356,169		—		356,169		—
Agency bonds	123,713		—		123,713		—

Total available for sale debt securities	$	625,074	$	—	$	625,074	$	—
Equity securities	$	11,782	$	—	$	11,782	$	—
Mortgage servicing rights	2,657		—		—		2,657
Interest rate swap	1,156		—		1,156		—
Financial Liabilities:
Interest rate swap	746		—		746		—

There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2020 or 2019.

Non-recurring Basis

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis. These include assets that are measured at the lower of cost or market value that

were recognized at fair value which was below cost at the reporting date (dollars in thousands):


Description	Fair Value		Level 1		Level 2		Level 3
September 30, 2020
Impaired loans:
Single family residential	$	858	$	—	$	—	$	858
December 31, 2019
Impaired loans:
Single family residential	$	790	$	—	$	—	$	790

As of September 30, 2020, an impaired loan of $1.6 million was adjusted to a fair value of $858 thousand by recording a charge-off of $722 thousand during the first quarter of 2020. At December 31, 2019, this same loan totaled $1.6 million and was adjusted to a fair value of $790 thousand by recording an allowance for loan losses of $790 thousand. The fair value of impaired, collateral dependent loans is estimated at the fair value of the underlying collateral, less estimated selling costs. These loans are categorized as Level 3 due to ongoing real estate market conditions which may require the use of unobservable inputs and assumptions in fair value measurements.

The Company held no real estate owned at September 30, 2020 or December 31, 2019.

- 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.

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