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Fair Value Measurements

6 Months Ended

Mar. 31, 2020

FASB ASC 820, Fair Value Measurement ("ASC 820") 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. ASC 820 also establishes a fair value hierarchy that 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.

The Company has established and documented the process for determining the fair values of its 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

Available-for-Sale Securities and Derivative Contracts

Securities available for sale are recorded at fair value on a recurring basis. The fair value of debt securities are priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and under GAAP are considered a Level 2 input method. Securities that are traded on active exchanges are measured using the closing price in an active market and are considered a Level 1 input method.

The Company offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the Company enters into the opposite trade with a counter party to offset its interest rate risk. The Company has also entered into commercial loan hedges, mortgage pool hedges and borrowings hedges using interest rate swaps. The fair value of these interest rate swaps are estimated by a third party pricing service using a discounted cash flow technique. These are considered a Level 2 input method.

The following tables present the balance of assets and liabilities measured at fair value on a recurring basis.


	March 31, 2020
	Level 1		Level 2		Level 3		Total
	(In thousands)
Financial Assets
Available-for-sale securities:

U.S. government and agency securities	$	—	$	338,361	$	—	$	338,361
Municipal bonds	—		21,997		—		21,997

Corporate debt securities	—		259,524		—		259,524
Mortgage-backed securities
Agency pass-through certificates	—		1,073,165		—		1,073,165

Total available-for-sale securities	—		1,693,047		—		1,693,047
Client swap program hedges	—		43,157		—		43,157



Total financial assets	$	—	$	1,736,204	$	—	$	1,736,204

Financial Liabilities
Client swap program hedges	$	—	$	43,157	$	—	$	43,157
Commercial loan fair value hedges	—		8,703		—		8,703
Mortgage loan fair value hedges	—		13,961		—		13,961
Borrowings cash flow hedges	—		17,189		—		17,189
Total financial liabilities	$	—	$	83,010	$	—	$	83,010


	September 30, 2019
	Level 1		Level 2		Level 3		Total
	(In thousands)
Financial Assets
Available-for-sale securities:

U.S. government and agency securities	$	—	$	270,778	$	—	$	270,778
Municipal bonds	—		22,642		—		22,642

Corporate debt securities	—		209,763		—		209,763
Mortgage-backed securities
Agency pass-through certificates	—		982,559		—		982,559

Total available-for-sale securities	—		1,485,742		—		1,485,742
Client swap program hedges	—		20,381		—		20,381

Mortgage loan fair value hedges	—		1,608		—		1,608

Total financial assets	$	—	$	1,507,731	$	—	$	1,507,731

Financial Liabilities
Client swap program hedges	$	—	$	20,381	$	—	$	20,381
Commercial loan fair value hedges	—		4,288		—		4,288

Borrowings cash flow hedges	—		7,877		—		7,877
Total financial liabilities	$	—	$	32,546	$	—	$	32,546

Measured on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment and real estate owned ("REO"). REO consists principally of properties acquired through foreclosure. From time to time, and on a nonrecurring basis, adjustments using fair value measurements are recorded to reflect increases or decreases based on the discounted cash flows, the current appraisal or estimated value of the collateral or REO property.

When management determines that the fair value of the collateral or the real estate owned requires additional adjustments, either as a result of an updated appraised value or when there is no observable market price, the Company classifies the impaired loan or real estate owned as Level 3. Level 3 assets recorded at fair value on a nonrecurring basis at March 31, 2020 included loans for which a specific reserve allowance was established or a partial charge-off was recorded based on the fair value of collateral, as well as real estate owned where the fair value of the property was less than the cost basis.

The following tables present the aggregated balance of assets that were measured at fair value on a nonrecurring basis at March 31, 2020 and March 31, 2019, and the total gains (losses) resulting from those fair value adjustments during the respective periods. The estimated fair value measurements are shown gross of estimated selling costs.


	March 31, 2020												Three Months Ended March 31, 2020	Six Months Ended March 31, 2020
	Level 1		Level 2		Level 3		Total		Total Gains (Losses)
	(In thousands)												(In thousands)
Impaired loans (1)	$	—	$	—	$	810	$	810	$	(246)	$	(545)
Real estate owned (2)	—		—		1,675		1,675		145		143
Balance at end of period	$	—	$	—	$	2,485	$	2,485	$	(101)	$	(402)

(1)The gains (losses) represent re-measurements of collateral-dependent loans.

(2)The gains (losses) represent re-measurements of REO.


	March 31, 2019												Three Months Ended March 31, 2019	Six Months Ended March 31, 2019
	Level 1		Level 2		Level 3		Total		Total Gains (Losses)
	(In thousands)												(In thousands)
Impaired loans (1)	$	—	$	—	$	3,316	$	3,316	$	(511)	$	(1,237)
Real estate owned (2)	—		—		2,550		2,550		431		399
Balance at end of period	$	—	$	—	$	5,866	$	5,866	$	(80)	$	(838)

(1)The gains (losses) represent re-measurements of collateral-dependent loans.

(2)The gains (losses) represent re-measurements of REO.

Fair Values of Financial Instruments

FASB ASC 825, Financial Instruments ("ASC 825") 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.


		March 31, 2020						September 30, 2019
	Level in Fair Value Hierarchy	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
		($ in thousands)
Financial assets
Cash and cash equivalents	1	$	1,495,574	$	1,495,574	$	419,158	$	419,158
Available-for-sale securities

U.S. government and agency securities	2	338,361		338,361		270,778		270,778
Municipal bonds	2	21,997		21,997		22,642		22,642

Corporate debt securities	2	259,524		259,524		209,763		209,763
Mortgage-backed securities
Agency pass-through certificates	2	1,073,165		1,073,165		982,559		982,559

Total available-for-sale securities		1,693,047		1,693,047		1,485,742		1,485,742
Held-to-maturity securities





Mortgage-backed securities
Agency pass-through certificates	2	913,243		941,181		1,428,480		1,448,088
Commercial MBS	2	7,012		7,012		15,000		15,007
Total held-to-maturity securities		920,255		948,193		1,443,480		1,463,095

Loans receivable	3	11,974,241		12,328,962		11,930,575		12,617,600

FHLB and FRB stock	2	155,990		155,990		123,990		123,990
Other assets - client swap program hedges	2	43,157		43,157		20,381		20,381

Other assets - mortgage loan fair value hedges	2	—		—		1,608		1,608


Financial liabilities
Time deposits	2	4,424,382		4,451,266		4,906,963		4,937,847
FHLB advances	2	3,050,000		3,023,003		2,250,000		2,282,887
Other liabilities - client swap program hedges	2	43,157		43,157		20,381		20,381
Other liabilities - mortgage loan fair value hedges	2	13,961		13,961		—		—
Other liabilities - commercial loan fair value hedges	2	8,703		8,703		4,288		4,288
Other liabilities - borrowings cash flow hedges	2	17,189		17,189		7,877		7,877

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 are considered a Level 2 input method. Equity securities that are exchange traded are considered a Level 1 input method.

Loans receivable – Fair values are estimated first by stratifying the portfolios of loans with similar financial characteristics. Loans are segregated by type such as multi-family real estate, residential mortgage, construction, commercial, consumer and land loans. Each loan category is further segmented into fixed- and adjustable-rate interest terms. For residential mortgages and multi-family loans, the bank determined that its best exit price was by securitization. MBS benchmark prices are used as a base price, with further loan level pricing adjustments made based on individual loan characteristics such as FICO score, LTV, Property Type and occupancy. For all other loan categories an estimate of fair value is then calculated based on discounted cash flows using a discount rate offered and observed in the market on similar products, plus an adjustment for liquidity to reflect the non-homogeneous nature of the loans, as well as, a annual loss rate based on historical losses to arrive at an estimated exit price fair value. Fair value for impaired loans is also based on recent appraisals or estimated cash flows discounted using rates

commensurate with risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.

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

Time deposits – The fair value of time deposits is estimated by discounting the estimated future cash flows using rates offered for deposits with similar remaining maturities.

FHLB advances – 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.

Interest rate swaps – The Company offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the Company enters into the opposite trade with a counterparty to offset its interest rate risk. The Company also uses interest rate swaps for various fair value hedges and cash flow hedges. The fair value of these interest rate swaps is estimated by a third party pricing service using a discounted cash flow technique.

The following tables provide details about the amortized cost and fair value of available-for-sale and held-to-maturity securities.


	March 31, 2020
	Amortized Cost		Gross Unrealized						Fair Value		Yield
					Gains		Losses
	($ in thousands)
Available-for-sale securities
U.S. government and agency securities due


5 to 10 years	$	61,083	$	286	$	(2,069)	$	59,300	1.71	%
Over 10 years	286,932		—		(7,871)		279,061		1.89




Corporate debt securities due
Within 1 year	43,973		7		(4)		43,976		2.34
1 to 5 years	70,000		69		(3,222)		66,847		2.81
5 to 10 years	150,205		1,982		(3,486)		148,701		2.85

Municipal bonds due

1 to 5 years	1,445		20		—		1,465		1.96

Over 10 years	20,293		239		—		20,532		6.45
Mortgage-backed securities
Agency pass-through certificates	1,033,536		41,612		(1,983)		1,073,165		3.10

	1,667,467		44,215		(18,635)		1,693,047		2.83
Held-to-maturity securities







Mortgage-backed securities
Agency pass-through certificates	913,243		27,938		—		941,181		3.17
Commercial MBS	7,012		—		—		7,012		1.67
	920,255		27,938		—		948,193		3.16
	$	2,587,722	$	72,153	$	(18,635)	$	2,641,240	2.95	%


	September 30, 2019
	Amortized Cost		Gross Unrealized							Fair Value		Yield
					Gains		Losses
	($ in thousands)
Available-for-sale securities
U.S. government and agency securities due


5 to 10 years	$	65,287	$	39	$	(629)		$	64,697	2.43	%
Over 10 years	207,067		1		(987)			206,081		3.02




Corporate debt securities due
Within 1 year	43,903		411		—			44,314		3.65
1 to 5 years	70,000		689		(50)			70,639		3.29
5 to 10 years	92,931		1,879		—			94,810		3.27

Municipal bonds due

1 to 5 years	1,430		14		—			1,444		1.94

Over 10 years	20,303		895		—			21,198		6.45
Mortgage-backed securities
Agency pass-through certificates	957,150		26,533		(1,124)			982,559		3.29

	1,458,071		30,461		(2,790)			1,485,742		3.27
Held-to-maturity securities







Mortgage-backed securities
Agency pass-through certificates	1,428,480		19,945		(337)			1,448,088		3.15
Commercial MBS	15,000		7		—			15,007		2.89
	1,443,480		19,952		(337)			1,463,095		3.15
	$	2,901,551	$	50,413	$	(3,127)		$	2,948,837	3.21	%

During the quarter ended March 31, 2020, as permitted in conjunction with the adoption of ASU 2019-04, the Company reclassified $374,680,000 of prepayable debt securities from held-to-maturity to available-for-sale. For available-for-sale investment securities, there were purchases of $159,884,000 during the six months ended March 31, 2020 and purchases of $290,574,000 during the six months ended March 31, 2019. There were sales totaling $204,351,000 of available-for-sale investment securities during the six months ended March 31, 2020 and sales of $491,000 during the six months ended March 31, 2019. For held-to-maturity investment securities, there were no purchases during the six months ended March 31, 2020 and no purchases during the six months ended March 31, 2019. There were no sales of held-to-maturity investment securities during either period. Substantially all of the agency mortgage-backed securities have contractual due dates that exceed 10 years.

The following tables show the gross unrealized losses and fair value of securities as of March 31, 2020 and September 30, 2019, by length of time that individual securities in each category have been in a continuous loss position. The decline in fair value since purchase 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.


March 31, 2020	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 debt securities	$	(1,620)	$	51,306	$	(5,092)	$	75,094	$	(6,712)	126,400

U.S. government and agency securities	$	(5,699)	$	151,823	$	(4,241)	$	165,987	$	(9,940)	$	317,810

Mortgage-backed securities	(82)		18,751		(1,901)		184,405		(1,983)		203,156
	$	(7,401)	$	221,880	$	(11,234)	$	425,486	$	(18,635)	$	647,366


September 30, 2019	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 debt securities	$	—	$	—	$	(50)	$	24,950	$	(50)	$	24,950

U.S. government and agency securities	(656)		152,715		(960)		77,391		(1,616)		230,106

Mortgage-backed securities	(148)		87,895		(1,313)		270,802		(1,461)		358,697
	$	(804)	$	240,610	$	(2,323)	$	373,143	$	(3,127)	$	613,753

- 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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