Fair Value Disclosures | 9 Months Ended |
Sep. 30, 2013 |
Fair Value Disclosures [Abstract] | ' |
Fair Value Disclosures | ' |
NOTE 4—FAIR VALUE DISCLOSURES |
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Fair value is defined as 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. In determining fair value, the Company may use various valuation approaches, including market, income and/or cost approaches. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is a market-based measure considered from the perspective of a market participant. Accordingly, even when market assumptions are not readily available, the Company's own assumptions reflect those that market participants would use in pricing the asset or liability at the measurement date. The fair value measurement accounting guidance describes the following three levels used to classify fair value measurements: |
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• Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by the Company. |
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• Level 2—Quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. |
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• Level 3—Unobservable inputs that are significant to the fair value of the assets or liabilities. |
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The availability of observable inputs can vary and in certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to a fair value measurement requires judgment and consideration of factors specific to the asset or liability. |
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Recurring Fair Value Measurement Techniques |
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U.S. Treasury Securities and Agency Debentures |
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The fair value measurements of U.S. Treasury securities were classified as Level 1 of the fair value hierarchy as they were based on quoted market prices in active markets. The fair value measurements of agency debentures were classified as Level 2 of the fair value hierarchy as they were based on quoted market prices observable in the marketplace. |
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Residential Mortgage-backed Securities |
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The Company's residential mortgage-backed securities portfolio was comprised of agency mortgage-backed securities and CMOs, which represented the majority of the portfolio, and non-agency CMOs. Agency mortgage-backed securities and CMOs are guaranteed by U.S. government sponsored and federal agencies. All of the Company's non-agency CMOs were backed by first lien mortgages and were below investment grade or non-rated as of September 30, 2013. The weighted average coupon rates for the residential mortgage-backed securities as of September 30, 2013 are shown in the following table: |
| | Weighted Average Coupon Rate | | | | | | | | | | | | | | |
Agency mortgage-backed securities | | 3.1 | % | | | | | | | | | | | | | | |
Agency CMOs | | 3.28 | % | | | | | | | | | | | | | | |
Non-agency CMOs | | 3.14 | % | | | | | | | | | | | | | | |
The fair value of agency mortgage-backed securities was determined using a market approach with quoted market prices, recent market transactions and spread data for similar instruments. The fair value of agency CMOs was determined using market and income approaches with the Company's own trading activities for identical or similar instruments. Agency mortgage-backed securities and CMOs were categorized in Level 2 of the fair value hierarchy. |
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Non-agency CMOs were valued using market and income approaches with market observable data, including recent market transactions when available. The valuations of non-agency CMOs reflect the Company's best estimate of what market participants would consider in pricing the financial instruments. The Company considers the price transparency for non-agency CMOs to be a key determinant of the degree of judgment involved in determining the fair value. As of September 30, 2013, the Company's non-agency CMOs were categorized in Level 3 of the fair value hierarchy. The Company's portfolio management group determines the fair value measurements using a discounted cash flow methodology for non-agency CMOs on a monthly basis with market observable data to the extent available. The fair value measurements, valuation techniques and level classification methodology are reviewed and compared to prior periods on a quarterly basis by management from the finance, credit, enterprise risk management and compliance departments. |
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The significant inputs used in the fair value measurement of non-agency CMOs are yield, default rate, loss severity and prepayment rate. Significant changes in any of those inputs in isolation would result in a significant change in the fair value. Generally, an increase in the yield, default rate or loss severity in isolation would result in a decrease in the fair value, and an increase in the prepayment rate would result in an increase in the fair value. In addition, an increase in the assumption used for the prepayment rate generally will result in an increase in yield. |
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The following table presents additional information about the underlying loans and significant inputs used in discounted cash flow methodologies for the valuation of non-agency CMOs that were categorized in Level 3 of the fair value hierarchy as of September 30, 2013: |
| | Weighted Average | | Range | | | | | | | | |
Underlying loans: | | | | | | | | | | | | | | | | |
| Coupon rate | 2.86 | % | | 2.72 | % | - | 6.28 | % | | | | | | | | |
| Maturity (years) | 20 | | | 20 | | - | 25 | | | | | | | | | |
Significant inputs: | | | | | | | | | | | | | | | | |
| Yield | 3 | % | | 3 | % | - | 10 | % | | | | | | | | |
| Default rate(1) | 32 | % | | 3 | % | - | 100 | % | | | | | | | | |
| Loss severity | 28 | % | | 0 | % | - | 65 | % | | | | | | | | |
| Prepayment rate | 13 | % | | 4 | % | - | 39 | % | | | | | | | | |
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(1)The default rate reflects the implied rate necessary to equate market price to the book yield given the market credit assumption. | | | | | | | | | |
Other Debt Securities |
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The fair value measurements of agency debt securities were determined using market and income approaches along with the Company's own trading activities for identical or similar instruments and were categorized in Level 2 of the fair value hierarchy. |
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The Company's municipal bonds are revenue bonds issued by state and other local government agencies. The valuation of corporate bonds is impacted by the credit worthiness of the corporate issuer. All of the Company's municipal bonds and corporate bonds were rated investment grade as of September 30, 2013. These securities were valued using a market approach with pricing service valuations corroborated by recent market transactions for identical or similar bonds. Municipal bonds and corporate bonds were categorized in Level 2 of the fair value hierarchy. |
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Derivative Instruments |
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Interest rate swap and option contracts were valued with an income approach using pricing models that are commonly used by the financial services industry. The market observable inputs used in the pricing models include the swap curve, the volatility surface, and prime or overnight indexed swap basis from a financial data provider. The Company does not consider these models to involve significant judgment on the part of management, and the Company corroborated the fair value measurements with counterparty valuations. The Company's derivative instruments were categorized in Level 2 of the fair value hierarchy. The consideration of credit risk, the Company's or the counterparty's, did not result in an adjustment to the valuation of its derivative instruments in the periods presented. |
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Securities Owned and Securities Sold, Not Yet Purchased |
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Securities transactions entered into by broker-dealer subsidiaries are included in trading securities and securities sold, not yet purchased in the Company's fair value disclosures. For equity securities, the Company's definition of actively traded is based on average daily volume and other market trading statistics. The fair value of securities owned and securities sold, not yet purchased was determined using listed or quoted market prices and the majority were categorized in Level 1 of the fair value hierarchy. |
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Nonrecurring Fair Value Measurement Techniques |
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Loans Receivable and REO |
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The Company records certain other assets at fair value on a nonrecurring basis: 1) one- to four-family and home equity loans in which the amount of the loan balance in excess of the estimated current value of the underlying property less estimated costs to sell has been charged-off; and 2) real estate acquired through physical possession of property or upon foreclosure that is carried at the lower of the property's carrying value or fair value, less estimated selling costs. |
Loans that have been delinquent for 180 days or in bankruptcy are charged-off based on the estimated current value of the underlying property less estimated selling costs and are classified as nonperforming loans. These loans continue to be reported as nonperforming unless they subsequently meet the requirements for being reported as performing loans. TDRs that are charged-off based on the estimated current value of the underlying property less estimated selling costs are classified as nonperforming loans at the time of modification and return to accrual status after six consecutive payments are made in accordance with the modified terms. Property valuations for these one- to four-family and home equity loans are based on the most recent “as is” property valuation data available, which may include appraisals, broker price opinions, prices for similar properties, automated valuation models or home price indices. Subsequent to the recording of an initial fair value measurement, these loans continue to be measured at fair value on a nonrecurring basis, utilizing the estimated value of the underlying property less estimated selling costs. These property valuations are updated on a monthly, quarterly or semi-annual basis depending on the type of valuation initially used. If the value of the underlying property has declined, an additional charge-off is recorded. If the value of the underlying property has increased, previously charged-off amounts are not reversed. If the valuation data obtained is significantly different from the valuation previously received, the Company orders additional property valuation data to corroborate or update the valuation. |
Property valuations for real estate acquired through physical possession of property or upon foreclosure are based on the lowest value of the most recent property valuation data available, which may include appraisals, listing prices or approved offer prices. Nonrecurring fair value measurements on one- to four-family and home equity loans and real estate owned were classified as Level 3 of the fair value hierarchy as the majority of the valuations included Level 3 inputs that were significant to the estimate of fair value. |
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Real estate owned and loans receivable that have been subject to fair value measurement requirements are evaluated and reviewed on a quarterly basis in accordance with policies and procedures that were designed to be in compliance with guidance from the Company's regulators. These policies and procedures govern the frequency of the review, the use of acceptable valuation methods, and the consideration of estimated selling costs. |
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The following table presents additional information about significant unobservable inputs used in the valuation of assets measured at fair value on a nonrecurring basis that were categorized in Level 3 of the fair value hierarchy as of September 30, 2013 (dollars in thousands): |
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| | Unobservable Inputs | | Average | | Range | | | | | |
One- to four-family | | Appraised value | | $ | 387 | | $ | 4 | | - | $ | 2,500 | | | | | |
Home equity | | Appraised value | | $ | 290 | | $ | 9 | | - | $ | 1,600 | | | | | |
Real estate owned | | Appraised value | | $ | 285 | | $ | 1 | | - | $ | 1,163 | | | | | |
Goodwill |
At the end of the second quarter of 2013, the Company decided to exit the market making business, and as a result evaluated the total goodwill allocated to the market making reporting unit for impairment. The Company valued the market making business by using a combination of expected present value of future cash flows of the business, a form of the income approach, and prices of comparable businesses, a form of the market approach, with significant unobservable inputs. The Company refined the estimated fair value of the market making reporting unit using the expected sale structure of the market making business. As a result of the evaluation, it was determined that the entire carrying amount of goodwill allocated to the market making reporting unit was impaired, and the Company recognized $142.4 million impairment of goodwill during the second quarter of 2013. |
Recurring and Nonrecurring Fair Value Measurements |
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Assets and liabilities measured at fair value at September 30, 2013 and December 31, 2012 are summarized in the following tables (dollars in thousands): |
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| | | | | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value | |
September 30, 2013: | | | | | | | | | | | | |
Recurring fair value measurements: | | | | | | | | | | | | |
Assets | | | | | | | | | | | | |
| Available-for-sale securities: | | | | | | | | | | | | |
| | Residential mortgage-backed securities: | | | | | | | | | | | | |
| | | Agency mortgage-backed securities and CMOs | $ | - | | $ | 12,222,556 | | $ | - | | $ | 12,222,556 | |
| | | Non-agency CMOs | | - | | | - | | | 14,012 | | | 14,012 | |
| | | | Total residential mortgage-backed securities | | - | | | 12,222,556 | | | 14,012 | | | 12,236,568 | |
| | Investment securities: | | | | | | | | | | | | |
| | | Agency debentures | | - | | | 318,354 | | | - | | | 318,354 | |
| | | Agency debt securities | | - | | | 675,531 | | | - | | | 675,531 | |
| | | Municipal bonds | | - | | | 46,550 | | | - | | | 46,550 | |
| | | Corporate bonds | | - | | | 4,455 | | | - | | | 4,455 | |
| | | | Total investment securities | | - | | | 1,044,890 | | | - | | | 1,044,890 | |
| | | | | Total available-for-sale securities | | - | | | 13,267,446 | | | 14,012 | | | 13,281,458 | |
| Other assets: | | | | | | | | | | | | |
| | Derivative assets(1) | | - | | | 79,955 | | | - | | | 79,955 | |
| | Deposits with clearing organizations(2) | | 34,000 | | | - | | | - | | | 34,000 | |
| | Held-for-sale assets - trading securities(3) | | 96,393 | | | 1,155 | | | | | | 97,548 | |
| | | Total other assets measured at fair value on a | | | | | | | | | | | | |
| | | | | recurring basis | | 130,393 | | | 81,110 | | | - | | | 211,503 | |
| | | Total assets measured at fair value on a | | | | | | | | | | | | |
| | | | | recurring basis(4) | $ | 130,393 | | $ | 13,348,556 | | $ | 14,012 | | $ | 13,492,961 | |
Liabilities | | | | | | | | | | | | |
| | Derivative liabilities(1) | $ | - | | $ | 206,585 | | $ | - | | $ | 206,585 | |
| | Held-for-sale liabilities - securities sold, not yet purchased(3) | | 93,147 | | | 122 | | | - | | | 93,269 | |
| | | Total liabilities measured at fair value on a | | | | | | | | | | | | |
| | | | | recurring basis(4) | $ | 93,147 | | $ | 206,707 | | $ | - | | $ | 299,854 | |
Nonrecurring fair value measurements: | | | | | | | | | | | | |
| Loans receivable: | | | | | | | | | | | | |
| | One- to four-family | $ | - | | $ | - | | $ | 213,972 | | $ | 213,972 | |
| | Home equity | | - | | | - | | | 46,718 | | | 46,718 | |
| | | Total loans receivable(5) | | - | | | - | | | 260,690 | | | 260,690 | |
| REO(5) | | - | | | - | | | 45,060 | | | 45,060 | |
| | | Total assets measured at fair value on | | | | | | | | | | | | |
| | | a nonrecurring basis(6) | $ | - | | $ | - | | $ | 305,750 | | $ | 305,750 | |
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(1)All derivative assets and liabilities are interest rate contracts. Information related to derivative instruments is detailed in Note 7─Accounting for Derivative Instruments and Hedging Activities. | |
(2)Represents U.S. Treasury securities held by a broker-dealer subsidiary. | |
(3)Assets and liabilities of the market making business were reclassified as held-for-sale, and are presented in the other assets and other liabilities line items, respectively, as of September 30, 2013 on the consolidated balance sheet. Information related to the classification is detailed in Note 2─Business Held-for-Sale. | |
(4)Assets and liabilities measured at fair value on a recurring basis represented 30% and 1% of the Company's total assets and total liabilities, respectively. | |
(5)Represents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated balance sheet as of September 30, 2013, and for which a fair value measurement was recorded during the period. | |
(6)Goodwill allocated to the market making reporting unit with a carrying amount of $142.4 million was written down to zero during the nine months ended September 30, 2013 and categorized in Level 3 of the fair value hierarchy. | |
| | | | | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value | |
December 31, 2012: | | | | | | | | | | | | |
Recurring fair value measurements: | | | | | | | | | | | | |
Assets | | | | | | | | | | | | |
| Trading securities | $ | 100,259 | | $ | 1,011 | | $ | - | | $ | 101,270 | |
| Available-for-sale securities: | | | | | | | | | | | | |
| | Residential mortgage-backed securities: | | | | | | | | | | | | |
| | | Agency mortgage-backed securities and CMOs | | - | | | 12,097,298 | | | - | | | 12,097,298 | |
| | | Non-agency CMOs | | - | | | 185,668 | | | 49,495 | | | 235,163 | |
| | | | Total residential mortgage-backed securities | | - | | | 12,282,966 | | | 49,495 | | | 12,332,461 | |
| | Investment securities: | | | | | | | | | | | | |
| | | Agency debentures | | - | | | 527,996 | | | - | | | 527,996 | |
| | | Agency debt securities | | - | | | 546,762 | | | - | | | 546,762 | |
| | | Municipal bonds | | - | | | 31,346 | | | - | | | 31,346 | |
| | | Corporate bonds | | - | | | 4,455 | | | - | | | 4,455 | |
| | | | Total investment securities | | - | | | 1,110,559 | | | - | | | 1,110,559 | |
| | | | | Total available-for-sale securities | | - | | | 13,393,525 | | | 49,495 | | | 13,443,020 | |
| Other assets: | | | | | | | | | | | | |
| | Derivative assets(1) | | - | | | 14,890 | | | - | | | 14,890 | |
| | Deposits with clearing organizations(2) | | 32,000 | | | - | | | - | | | 32,000 | |
| | | Total other assets measured at fair value on a | | | | | | | | | | | | |
| | | | | recurring basis | | 32,000 | | | 14,890 | | | - | | | 46,890 | |
| | | Total assets measured at fair value on a | | | | | | | | | | | | |
| | | | | recurring basis(3) | $ | 132,259 | | $ | 13,409,426 | | $ | 49,495 | | $ | 13,591,180 | |
Liabilities | | | | | | | | | | | | |
| | Derivative liabilities(1) | $ | - | | $ | 328,504 | | $ | - | | $ | 328,504 | |
| | Securities sold, not yet purchased | | 87,088 | | | 489 | | | - | | | 87,577 | |
| | | Total liabilities measured at fair value on a | | | | | | | | | | | | |
| | | | | recurring basis(3) | $ | 87,088 | | $ | 328,993 | | $ | - | | $ | 416,081 | |
Nonrecurring fair value measurements:(4) | | | | | | | | | | | | |
| Loans receivable: | | | | | | | | | | | | |
| | One- to four-family | $ | - | | $ | - | | $ | 752,008 | | $ | 752,008 | |
| | Home equity | | - | | | - | | | 90,663 | | | 90,663 | |
| | | Total loans receivable | | - | | | - | | | 842,671 | | | 842,671 | |
| REO | | - | | | - | | | 75,885 | | | 75,885 | |
| | | Total assets measured at fair value on | | | | | | | | | | | | |
| | | a nonrecurring basis | $ | - | | $ | - | | $ | 918,556 | | $ | 918,556 | |
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(1)The majority of derivative assets and liabilities are interest rate contracts. Information related to derivative instruments is detailed in Note 7─Accounting for Derivative Instruments and Hedging Activities. | |
(2)Represents U.S. Treasury securities held by a broker-dealer subsidiary. | |
(3)Assets and liabilities measured at fair value on a recurring basis represented 29% and 1% of the Company's total assets and total liabilities, respectively. | |
(4)Represents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated balance sheet as of December 31, 2012, and for which a fair value measurement was recorded during the period. | |
The following table presents the losses associated with the assets measured at fair value on a nonrecurring basis during the three and nine months ended September 30, 2013 and 2012 (dollars in thousands): |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | | |
| | | 2013 | | 2012 | | 2013 | | 2012 | | | | |
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One- to four-family | $ | 10,107 | | $ | 32,465 | | $ | 34,480 | | $ | 167,220 | | | | |
Home equity | | 10,736 | | | 70,999 | | | 46,785 | | | 265,764 | | | | |
| Total losses on loans receivable measured at fair value | $ | 20,843 | | $ | 103,464 | | $ | 81,265 | | $ | 432,984 | | | | |
(Gains) losses on REO measured at fair value | $ | -1,925 | | $ | 3,016 | | $ | -166 | | $ | 11,033 | | | | |
Losses on goodwill measured at fair value | $ | - | | $ | - | | $ | 142,423 | | $ | - | | | | |
Transfers Between Levels 1 and 2 |
For assets and liabilities measured at fair value on a recurring basis, the Company's transfers between levels of the fair value hierarchy are deemed to have occurred at the beginning of the reporting period on a quarterly basis. The Company's transfers of securities owned and securities sold, not yet purchased between Level 1 and 2 are generally driven by trading activities of those securities during the period. The Company had no material transfers between Level 1 and 2 during the three and nine months ended September 30, 2013 and 2012. |
Level 3 Rollforward for Recurring Fair Value Measurements |
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Level 3 assets and liabilities include instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. While the Company's fair value estimates of Level 3 instruments utilized observable inputs where available, the valuation included significant management judgment in determining the relevance and reliability of market information considered. |
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The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the three and nine months ended September 30, 2013 and 2012 (dollars in thousands): |
| | | Available-for-sale Securities | | | | | | | | | | | | | |
| | | Non-agency CMOs | | | | | | | | | | | | | |
Opening balance, July 1, 2013 | | $ | 13,793 | | | | | | | | | | | | | |
Losses recognized in earnings(1) | | | -586 | | | | | | | | | | | | | |
Net gains recognized in other comprehensive income(2) | | | 1,401 | | | | | | | | | | | | | |
Settlements | | | -596 | | | | | | | | | | | | | |
Closing balance, September 30, 2013 | | $ | 14,012 | | | | | | | | | | | | | |
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(1)Losses recognized in earnings were related to instruments held at September 30, 2013 and are reported in the net impairment line item. | | | | | | | | | | | | | |
(2)Net gains recognized in other comprehensive income are reported in the net change from available-for-sale securities line item. | | | | | | | | | | | | | |
| | | Available-for-sale Securities | | | | | | | | | | | | | |
| | | Non-agency CMOs | | | | | | | | | | | | | |
Opening balance, July 1, 2012 | | $ | 90,594 | | | | | | | | | | | | | |
Losses recognized in earnings(1) | | | -2,318 | | | | | | | | | | | | | |
Net gains recognized in other comprehensive income(2) | | | 7,773 | | | | | | | | | | | | | |
Settlements | | | -11,965 | | | | | | | | | | | | | |
Transfer in to Level 3(3)(4) | | | 89,357 | | | | | | | | | | | | | |
Transfer out of Level 3(3)(5) | | | -31,292 | | | | | | | | | | | | | |
Closing balance, September 30, 2012 | | $ | 142,149 | | | | | | | | | | | | | |
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(1)Losses recognized in earnings were related to instruments held at September 30, 2012 and are reported in the net impairment line item. | | | | | | | | | | | | | |
(2)Net gains recognized in other comprehensive income are reported in the net change from available-for-sale securities line item. | | | | | | | | | | | | | |
(3)The Company's transfers in and out of Level 3 are as of the beginning of the reporting period on a quarterly basis. | | | | | | | | | | | | | |
(4)Non-agency CMOs transferred in to Level 3 due to a lack of observable market data, resulting from a decrease in market activity for the securities. | | | | | | | | | | | | | |
(5)Non-agency CMOs transferred out of Level 3 because observable market data became available for those securities. | | | | | | | | | | | | | |
| | | Available-for-sale Securities | | | | | | | | | | | | | |
| | | Non-agency CMOs | | | | | | | | | | | | | |
Opening balance, January 1, 2013 | | $ | 49,495 | | | | | | | | | | | | | |
Losses recognized in earnings(1) | | | -2,331 | | | | | | | | | | | | | |
Net gains recognized in other comprehensive income(2) | | | 4,160 | | | | | | | | | | | | | |
Sales | | | -34,949 | | | | | | | | | | | | | |
Settlements | | | -2,363 | | | | | | | | | | | | | |
Closing balance, September 30, 2013 | | $ | 14,012 | | | | | | | | | | | | | |
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(1)Losses recognized in earnings were related to instruments held at September 30, 2013 and are reported in the net impairment line item. | | | | | | | | | | | | | |
(2)Net gains recognized in other comprehensive income are reported in the net change from available-for-sale securities line item. | | | | | | | | | | | | | |
| | | Available-for-sale Securities | | | | | | | | | | | | | |
| | | Non-agency CMOs | | | | | | | | | | | | | |
Opening balance, January 1, 2012 | | $ | 97,106 | | | | | | | | | | | | | |
Losses recognized in earnings(1) | | | -8,920 | | | | | | | | | | | | | |
Net gains recognized in other comprehensive income(2) | | | 12,217 | | | | | | | | | | | | | |
Settlements | | | -19,246 | | | | | | | | | | | | | |
Transfers in to Level 3(3)(4) | | | 177,244 | | | | | | | | | | | | | |
Transfers out of Level 3(3)(5) | | | -116,252 | | | | | | | | | | | | | |
Closing balance, September 30, 2012 | | $ | 142,149 | | | | | | | | | | | | | |
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(1)Losses recognized in earnings were related to instruments held at September 30, 2012 and are reported in the net impairment line item. | | | | | | | | | | | | | |
(2)Net gains recognized in other comprehensive income are reported in the net change from available-for-sale securities line item. | | | | | | | | | | | | | |
(3)The Company's transfers in and out of Level 3 are as of the beginning of the reporting period on a quarterly basis. | | | | | | | | | | | | | |
(4)Non-agency CMOs transferred in to Level 3 due to a lack of observable market data, resulting from a decrease in market activity for the securities. | | | | | | | | | | | | | |
(5)Non-agency CMOs transferred out of Level 3 because observable market data became available for those securities. | | | | | | | | | | | | | |
The Company's transfers of certain non-agency CMOs in and out of Level 3 are generally driven by changes in price transparency for the securities. Financial instruments for which actively quoted prices or pricing parameters are available will have a higher degree of price transparency than financial instruments that are thinly traded or not quoted. As of September 30, 2013, less than 1% of the Company's total assets and none of its total liabilities represented instruments measured at fair value on a recurring basis categorized as Level 3. |
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Fair Value of Financial Instruments Not Carried at Fair Value |
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The following table summarizes the carrying values, fair values and fair value hierarchy level classification of financial instruments that are not carried at fair value on the consolidated balance sheet at September 30, 2013 and December 31, 2012 (dollars in thousands): |
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| | | | 30-Sep-13 |
| | | | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
Assets | | | | | | | | | | | | | | |
| Cash and equivalents | $ | 1,796,181 | | $ | 1,796,181 | | $ | - | | $ | - | | $ | 1,796,181 |
| Cash required to be segregated under | | | | | | | | | | | | | | |
| | federal or other regulations | $ | 738,221 | | $ | 738,221 | | $ | - | | $ | - | | $ | 738,221 |
| Held-to-maturity securities: | | | | | | | | | | | | | | |
| | Agency mortgage-backed securities and CMOs | $ | 8,255,442 | | $ | - | | $ | 8,285,373 | | $ | - | | $ | 8,285,373 |
| | Agency debentures | | 163,448 | | | - | | | 168,290 | | | - | | | 168,290 |
| | Agency debt securities | | 1,525,263 | | | - | | | 1,523,710 | | | - | | | 1,523,710 |
| | | Total held-to-maturity securities | $ | 9,944,153 | | $ | - | | $ | 9,977,373 | | $ | - | | $ | 9,977,373 |
| Margin receivables | $ | 6,188,708 | | $ | - | | $ | 6,188,708 | | $ | - | | $ | 6,188,708 |
| Loans receivable, net: | | | | | | | | | | | | | | |
| | One- to four-family | $ | 4,619,656 | | $ | - | | $ | - | | $ | 3,903,292 | | $ | 3,903,292 |
| | Home equity | | 3,324,010 | | | - | | | - | | | 3,006,621 | | | 3,006,621 |
| | Consumer and other | | 620,948 | | | - | | | - | | | 635,279 | | | 635,279 |
| | | Total loans receivable, net(1) | $ | 8,564,614 | | $ | - | | $ | - | | $ | 7,545,192 | | $ | 7,545,192 |
| Investment in FHLB stock | $ | 61,400 | | $ | - | | $ | | | $ | 61,400 | | $ | 61,400 |
Liabilities | | | | | | | | | | | | | | |
| Deposits | $ | 25,869,797 | | $ | - | | $ | 25,870,010 | | $ | - | | $ | 25,870,010 |
| Securities sold under agreement to repurchase | $ | 4,449,665 | | $ | - | | $ | 4,480,874 | | $ | - | | $ | 4,480,874 |
| Customer payables | $ | 5,830,257 | | $ | - | | $ | 5,830,257 | | $ | - | | $ | 5,830,257 |
| FHLB advances and other borrowings | $ | 1,285,011 | | $ | - | | $ | 935,296 | | $ | 210,733 | | $ | 1,146,029 |
| Corporate debt | $ | 1,767,749 | | $ | - | | $ | 1,903,587 | | $ | - | | $ | 1,903,587 |
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(1)The carrying value of loans receivable, net includes the allowance for loan losses of $458.9 million and loans that are valued at fair value on a nonrecurring basis as of September 30, 2013. |
| | | | 31-Dec-12 |
| | | | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
Assets | | | | | | | | | | | | | | |
| Cash and equivalents | $ | 2,761,494 | | $ | 2,761,494 | | $ | - | | $ | - | | $ | 2,761,494 |
| Cash required to be segregated under | | | | | | | | | | | | | | |
| | federal or other regulations | $ | 376,898 | | $ | 376,898 | | $ | - | | $ | - | | $ | 376,898 |
| Held-to-maturity securities: | | | | | | | | | | | | | | |
| | Agency mortgage-backed securities and CMOs | $ | 7,887,555 | | $ | - | | $ | 8,182,064 | | $ | - | | $ | 8,182,064 |
| | Agency debentures | | 163,434 | | | - | | | 169,769 | | | - | | | 169,769 |
| | Agency debt securities | | 1,488,959 | | | - | | | 1,558,663 | | | - | | | 1,558,663 |
| | | Total held-to-maturity securities | $ | 9,539,948 | | $ | - | | $ | 9,910,496 | | $ | - | | $ | 9,910,496 |
| Margin receivables | $ | 5,804,041 | | $ | - | | $ | 5,804,041 | | $ | - | | $ | 5,804,041 |
| Loans receivable, net: | | | | | | | | | | | | | | |
| | One- to four-family | $ | 5,281,702 | | $ | - | | $ | - | | $ | 4,561,821 | | $ | 4,561,821 |
| | Home equity | | 4,002,486 | | | - | | | - | | | 3,551,357 | | | 3,551,357 |
| | Consumer and other | | 814,535 | | | - | | | - | | | 838,721 | | | 838,721 |
| | | Total loans receivable, net(1) | $ | 10,098,723 | | $ | - | | $ | - | | $ | 8,951,899 | | $ | 8,951,899 |
| Investment in FHLB stock | $ | 67,400 | | $ | - | | $ | - | | $ | 67,400 | | $ | 67,400 |
Liabilities | | | | | | | | | | | | | | |
| Deposits | $ | 28,392,552 | | $ | - | | $ | 28,394,400 | | $ | - | | $ | 28,394,400 |
| Securities sold under agreement to repurchase | $ | 4,454,661 | | $ | - | | $ | 4,493,463 | | $ | - | | $ | 4,493,463 |
| Customer payables | $ | 4,964,922 | | $ | - | | $ | 4,964,922 | | $ | - | | $ | 4,964,922 |
| FHLB advances and other borrowings | $ | 1,260,916 | | $ | - | | $ | 926,750 | | $ | 196,765 | | $ | 1,123,515 |
| Corporate debt | $ | 1,764,982 | | $ | - | | $ | 1,837,736 | | $ | - | | $ | 1,837,736 |
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(1)The carrying value of loans receivable, net includes the allowance for loan loss of $480.7 million and loans that are valued at fair value on a nonrecurring basis as of December 31, 2012. |
The fair value measurement techniques for financial instruments not carried at fair value on the consolidated balance sheet at September 30, 2013 and December 31, 2012 are summarized as follows: |
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Cash and equivalents, cash required to be segregated under federal or other regulations, margin receivables and customer payables—Fair value is estimated to be carrying value. |
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Held-to-maturity securities—The held-to-maturity securities portfolio included agency mortgage-backed securities and CMOs, agency debentures, and agency debt securities. The fair value of agency mortgage-backed securities is determined using market and income approaches with quoted market prices, recent market transactions and spread data for similar instruments. The fair value of agency CMOs and agency debt securities is determined using market and income approaches with the Company's own trading activities for identical or similar instruments. The fair value of agency debentures is based on quoted market prices that were derived from assumptions observable in the marketplace. |
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Loans receivable, net—Fair value is estimated using a discounted cash flow model. Loans are differentiated based on their individual portfolio characteristics, such as product classification, loan category, pricing features and remaining maturity. Assumptions for expected losses, prepayments and discount rates are adjusted to reflect the individual characteristics of the loans, such as credit risk, coupon, term, and payment characteristics, as well as the secondary market conditions for these types of loans. There was limited or no observable market data for the home equity and one- to four-family loan portfolios, which indicates that the market for these types of loans is considered to be inactive. Given the limited market data, these fair value measurements cannot be determined with precision and changes in the underlying assumptions used, including discount rates, could significantly affect the results of current or future fair value estimates. In addition, the amount that would be realized in a forced liquidation, an actual sale or immediate settlement could be significantly lower than both the carrying value and the estimated fair value of the portfolio. |
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Investment in FHLB stock—FHLB stock is carried at cost, which is considered to be a reasonable estimate of fair value. |
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Deposits—Fair value is the amount payable on demand at the reporting date for sweep deposits, complete savings deposits, other money market and savings deposits and checking deposits. For certificates of deposit and brokered certificates of deposit, fair value is estimated by discounting future cash flows using discount factors derived from current observable rates implied for other similar instruments with similar remaining maturities. |
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Securities sold under agreements to repurchase—Fair value is determined by discounting future cash flows using discount factors derived from current observable rates implied for other similar instruments with similar remaining maturities. |
FHLB advances and other borrowings—Fair value for FHLB advances is estimated by discounting future cash flows using discount factors derived from current observable rates implied for similar instruments with similar remaining maturities. For subordinated debentures, fair value is estimated by discounting future cash flows at the rate implied by dealer pricing quotes. For margin collateral, overnight and other short-term borrowings, fair value approximates carrying value. |
Corporate debt—Fair value is estimated using dealer pricing quotes. The fair value of the non-interest-bearing convertible debentures is directly correlated to the intrinsic value of the Company's underlying stock. As the price of the Company's stock increases relative to the conversion price, the fair value of the convertible debentures increases. |
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