Fair Value Measurements

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The determination of fair values of financial instruments often requires the use of estimates. Where quoted market values in an active market are not readily available, the Company utilizes various valuation techniques to estimate fair value.

Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. However, in many instances, fair value estimates may not be substantiated by comparison to independent markets and may not be realized in an immediate sale of the financial instrument.

GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of fair value hierarchy are as follows:

Level 1: Unadjusted quoted market prices in active markets that are accessible at the measurement date for identical,

unrestricted assets or liabilities;

Level 2: Quoted prices for identical or similar instruments in markets that are active or not active, or inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability; and

(14) Fair Value Measurements (continued)

Level 3: Prices or valuation techniques that require unobservable inputs that are both significant to the fair value measurement and unobservable (i.e., supported by minimal or no market activity). Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The valuation techniques are based upon the unpaid principal balance only and exclude any accrued interest or dividends at the measurement date. Interest income and expense and dividend income are recorded within the Consolidated Statements of Income depending on the nature of the instrument using the effective interest method based on the discount or premium.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The valuation techniques described below were used to measure fair value of financial instruments as reflected in the accompanying tables below on a recurring basis as of December 31, 2018 and 2017.

Securities Available for Sale

For securities available for sale, fair value was estimated using a market approach. The majority of the Company’s securities are fixed income instruments that are not quoted on an exchange, but are traded in active markets. Prices for these instruments are obtained through third-party data service providers or dealer market participants with which the Company has historically transacted both purchases and sales of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing, a Level 2 input, is a mathematical technique used principally to value certain securities to benchmark or to comparable securities. The Company evaluates the quality of Level 2 matrix pricing through comparison to similar assets with greater liquidity and evaluation of projected cash flows. As the Company is responsible for the determination of fair value, it performs quarterly analysis on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to a secondary pricing source. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to assess the reasonableness of the reported prices. The Company’s internal price verification procedures and review of fair value methodology documentation provided by independent pricing services has not historically resulted in an adjustment in the prices obtained from the pricing service. The Company may hold equity securities and debt instruments issued by the U.S. government and U.S. government-sponsored agencies that are traded in active markets with readily accessible quoted market prices that are considered Level 1 inputs.

Derivatives

The Company records all derivatives on the Consolidated Statements of Financial Condition at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. The Company has interest rate derivatives resulting from a service provided to certain qualified borrowers in a loan related transaction and, therefore, are not used to manage interest rate risk in the Company's assets or liabilities. As such, all changes in fair value of the Company's derivatives are recognized directly in earnings.

The fair value of the Company's derivatives are determined using discounted cash flow analysis using observable market-based inputs, which are considered Level 2 inputs.

(14) Fair Value Measurements (continued)

The following tables present the assets and liabilities reported on the Consolidated Statements of Financial Condition at their fair values as of December 31, 2018 and 2017, by level within the fair value hierarchy:



	December 31, 2018
			Fair Value Measurements
	Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(In thousands)
Securities available for sale:
U.S. government and agency obligations	$	54,157	$	54,157	$	—	$	—
Mortgage-backed securities and collateralized mortgage obligations	920,007		—		920,007		—
Municipal obligations	987		—		987		—
Corporate debt securities	53,467		—		53,467		—
Trust preferred securities	4,250		—		4,250		—
Equity securities	1,890		1,890		—		—
Total securities available for sale	1,034,758		56,047		978,711		—
Derivative assets	865		—		865		—
	$	1,035,623	$	56,047	$	979,576	$	—

Derivative liabilities	$	3,467	$	—	$	3,467	$	—



	December 31, 2017
			Fair Value Measurements
	Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(In thousands)
Securities available for sale:
U.S. government and agency obligations	$	39,644	$	39,644	$	—	$	—
Mortgage-backed securities and collateralized mortgage obligations	606,612		—		606,612		—
Municipal obligations	1,957		—		1,957		—
Corporate debt securities	54,514		—		54,514		—
Trust preferred securities	4,656		—		4,656		—
Equity securities	3,187		3,187		—		—
Total securities available for sale	710,570		42,831		667,739		—
Derivative assets	490		—		490		—
	$	711,060	$	42,831	$	668,229	$	—

Derivative liabilities	$	203	$	—	$	203	$	—

There were no transfers between Level 1, Level 2, and Level 3 during the years ended December 31, 2018, September 30, 2016 and the three months ended December 31, 2017. During the year ended September 30, 2017, U.S. Government and agency obligations with a carrying value of $20.4 million were transferred from Level 2 to Level 1.

(14) Fair Value Measurements (continued)

There were no Level 3 assets measured at fair value on a recurring basis at December 31, 2018 and 2017.

Assets Measured at Fair Value on a Non-Recurring Basis

The valuation techniques described below were used to estimate fair value of financial instruments measured on a non-recurring basis as of December 31, 2018 and 2017.

Collateral Dependent Impaired Loans

Loans which meet certain criteria are evaluated individually for impairment. For loans measured for impairment based on the fair value of the underlying collateral, fair value was estimated using a market approach. The Company measures the fair value of collateral underlying impaired loans primarily through obtaining independent appraisals that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments, on an individual case-by-case basis, to comparable assets based on the appraisers’ market knowledge and experience, as well as adjustments for estimated costs to sell between 6% and 8%. The Company classifies these loans as Level 3 within the fair value hierarchy.

Real Estate Owned

Assets acquired through foreclosure or deed in lieu of foreclosure are carried at fair value, less estimated costs to sell between 6% and 8%. Fair value is generally based on independent appraisals that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments, on an individual case basis, to comparable assets based on the appraiser's market knowledge and experience, and are classified as Level 3. When an asset is acquired, the excess of the loan balance over fair value less estimated selling costs is charged to the allowance for loan losses. Operating results from real estate owned, including rental income, operating expenses, and gains and losses realized from the sales of real estate owned, are recorded as incurred.

Mortgage Servicing Rights, Net

Mortgage servicing rights are carried at the lower of cost or estimated fair value. The estimated fair value of MSRs is obtained through an analysis of future cash flows, incorporating assumptions that market participants would use in determining fair value including market discount rates, prepayments speeds, servicing income, servicing costs, default rates and other market driven data, including the market's perception of future interest rate movements. The prepayment speed and the discount rate are considered two of the most significant inputs in the model. A significant degree of judgment is involved in valuing the mortgage servicing rights using Level 3 inputs. The use of different assumptions could have a significant effect on this fair value estimate.



	December 31, 2018
			Fair Value Measurements
	Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(In thousands)

Impaired loans	$	1,525	$	—	$	—	$	1,525
Real estate owned	92		—		—		92
Mortgage servicing rights	442		—		—		442
	$	2,059	$	—	$	—	$	2,059

(14) Fair Value Measurements (continued)



	December 31, 2017
			Fair Value Measurements
	Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)
	(In thousands)

Impaired loans	$	10,251	$	—	$	—		$	10,251
Real estate owned	959		—		—			959
Mortgage servicing rights	316		—		—			316
	$	11,526	$	—	$	—	23	$	11,526

The following table presents qualitative information for Level 3 assets measured at fair value on a non-recurring basis as of December 31, 2018 and 2017:



	December 31, 2018
	Fair value		Valuation methodology	Unobservable inputs	Range	Weighted average
	(In thousands)
Impaired loans	$	1,525	Appraised value ⁽²⁾	Discount for cost to sell ⁽³⁾	6.0% - 8.0%	7.5%
Real estate owned	92		Contract sales price ⁽¹⁾	Discount for cost to sell ⁽³⁾	6.0%	6.0%
Mortgage servicing rights	442		Estimated cash flow	Prepayment speeds	3.3% - 26.8%	12%



	December 31, 2017
	Fair value		Valuation methodology	Unobservable inputs	Range of inputs	Weighted average
	(In thousands)
Impaired loans	$	10,251	Appraised value ⁽²⁾	Discount for cost to sell ⁽³⁾	6.0% - 8.0%	7.2%
Real estate owned	959		Appraised value ⁽²⁾	Discount for cost to sell ⁽³⁾	6.0%	6.0%
Mortgage servicing rights	316		Estimated cash flow	Prepayment speeds	3.6% -11.0%	3.9%

(1) Value is based on signed contract for sale.
(2) Value is based on an independent appraisal of the market or fair value of the loan's underlying collateral.
(3) Includes commissions, fees and other costs.

Other Fair Value Disclosures

The Company is required to disclose estimated fair value of financial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value. A description of the valuation methodologies used for those assets and liabilities not recorded at fair value on a recurring or non-recurring basis are set forth below.

(14) Fair Value Measurements (continued)

Cash and Cash Equivalents

For cash and due from banks, federal funds sold and short-term investments, the carrying amount approximates fair value due to their nature and short-term maturities.

Securities Held to Maturity

For securities held to maturity, fair value was estimated using a market approach. The majority of the Company’s securities are fixed income instruments that are not quoted on an exchange, but are traded in active markets. Prices for these instruments are obtained through third party data service providers or dealer market participants with which the Company has historically transacted both purchases and sales of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing, a Level 2 input, is a mathematical technique used principally to value certain securities to benchmark or to compare securities. The Company evaluates the quality of Level 2 matrix pricing through comparison to similar assets with greater liquidity and evaluation of projected cash flows. As the Company is responsible for the determination of fair value, it performs quarterly analysis on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to a secondary pricing source. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to assess the reasonableness of the reported prices. The Company’s internal price verification procedures and review of fair value methodology documentation provided by independent pricing services has not historically resulted in an adjustment in the prices obtained from the pricing service. The Company also holds debt instruments issued by the U.S. government and U.S. government sponsored agencies that are traded in active markets with readily accessible quoted market prices that are considered Level 1 within the fair value hierarchy.

Federal Home Loan Bank Stock ("FHLB")

The carrying value of FHLB stock is its cost. The fair value of FHLB stock is based on redemption at par value. There is no active market for this stock. The Company classifies the estimated fair value as Level 2 within the fair value hierarchy.

Loans Receivable

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial mortgage, residential mortgage, commercial, construction, and consumer and other. Each loan category is further segmented into fixed and adjustable rate interest terms and into performing and non-performing categories. The fair value of performing loans was estimated using a combination of techniques, including a discounted cash flow model that utilizes a discount rate that reflects the Company’s current pricing for loans with similar characteristics and remaining maturity, adjusted by an amount for estimated credit losses inherent in the portfolio at the balance sheet date. The rates take into account the expected yield curve, as well as an adjustment for prepayment risk, when applicable. The fair value estimated does not incorporate an exit value. The Company classifies the estimated fair value of its loan portfolio as Level 3.

The fair value for significant non-performing loans was based on recent external appraisals of collateral securing such loans, adjusted for the timing of anticipated cash flows. The Company classifies the estimated fair value of its non-performing loan portfolio as Level 3.

Deposits

The fair value of deposits with no stated maturity, such as demand, money market, savings and club deposits, was equal to the amount payable on demand and classified as Level 2. The estimated fair value of certificates of deposit was based on the discounted value of contractual cash flows. The discount rate was estimated using the Company’s current rates offered for deposits with similar remaining maturities. The Company classifies the estimated fair value of its certificates of deposit portfolio as Level 2.

Borrowings

The fair value of borrowings was estimated by discounting future cash flows using rates available for debt with similar terms and maturities and is classified by the Company as Level 2 within the fair value hierarchy.

(14) Fair Value Measurements (continued)

Commitments to Extend Credit and Letters of Credit

The fair value of commitments to extend credit and letters of credit was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

The fair value estimates of commitments to extend credit and letters of credit are deemed immaterial in comparison to their carrying value.

The following tables present the assets and liabilities reported on the Consolidated Statements of Financial Condition at their fair values as of December 31, 2018 and 2017:



	December 31, 2018
			Fair Value Measurements
	Carrying value		Total fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(In thousands)
Financial assets:
Cash and cash equivalents	$	42,201	$	42,201	$	42,201	$	—	$	—
Securities available for sale	1,034,758		1,034,758		56,047		978,711		—
Securities held to maturity	262,143		254,841		23,241		254,841		—
Federal Home Loan Bank stock	58,938		58,938		—		58,938		—
Loans held-for-sale	8,081		8,081				8,081		—
Loans receivable, net	4,979,182		4,841,830		—		—		4,841,830
Derivative assets	865		865		—		865		—

Financial liabilities:			—
Deposits	$	4,413,873	$	4,402,336	$	—	$	4,402,336	$	—
Borrowings	1,189,180		1,185,007		—		1,185,007		—
Derivative liabilities	3,467		3,467		—		3,467		—

(14) Fair Value Measurements (continued)



	December 31, 2017
			Fair Value Measurements
	Carrying value		Total fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)
	(In thousands)
Financial assets:
Cash and cash equivalents	$	65,498	$	65,498	$	65,498	$	—	$	—
Securities available for sale	710,570		710,570		42,831		667,739		—
Securities held to maturity	239,618		236,125		8,344		227,781		—
Federal Home Loan Bank Stock	44,664		44,664		—		44,664		—
Loans receivable, net	4,400,470		4,367,945		—		—		4,367,945
Derivative assets	490		490		—		490		—

Financial liabilities:			—
Deposits	$	4,263,315	$	3,959,460	$	—	$	3,959,460	$	—
Borrowings	929,057		925,032		—		925,032		—
Derivative liabilities	203		203		—		203		—

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because limited markets exist for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include goodwill and other intangibles, deferred tax assets, office properties and equipment, and bank-owned life insurance. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active markets for many of these financial instruments. The lack of uniform methodologies introduces a greater degree of subjectivity to these estimates.