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Fair Value of Financial Instruments | 12 Months Ended
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Jun. 30, 2012
Fair Value of Financial Instruments: |
Fair Value of Financial Instruments |
16. | Fair Value of Financial Instruments:
The Corporation adopted ASC 820, “Fair Value Measurements and Disclosures,” on July 1, 2009 and elected the fair value option (ASC 825, “Financial Instruments”) on May 28, 2009 on loans originated for sale by PBM. ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 825 permits entities to elect to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the Fair Value Option) at specified election dates. At each subsequent reporting date, an entity is required to report unrealized gains and losses on items in earnings for which the fair value option has been elected. The objective of the Fair Value Option is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The following table describes at June 30, 2012 and 2011 the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale at fair value.
(In Thousands) | Aggregate Fair Value |  | Aggregate Unpaid Principal Balance |  | Net Unrealized Gain |
As of June 30, 2012: |  |  |  |  |  |
Loans held for sale, measured at fair value | $ 231,639 |  | $ 220,849 |  | $ 10,790 |
As of June 30, 2011: |  |  |  |  |  |
Loans held for sale, measured at fair value | $ 191,678 |  | $ 185,474 |  | $ 6,204 |
On April 9, 2009, the FASB issued ASC 820-10-65-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This ASC provides additional guidance for estimating fair value in accordance with ASC 820, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased. ASC 820 establishes a three-level valuation hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as follows:
Level 1 | - | Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.
Level 2 | - | Observable inputs other than Level 1 such as: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated to observable market data for substantially the full term of the asset or liability.
Level 3 | - | Unobservable inputs for the asset or liability that use significant assumptions, including assumptions of risks. These unobservable assumptions reflect the Corporation’s estimate of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of pricing models, discounted cash flow models and similar techniques.
ASC 820 requires the Corporation to maximize the use of observable inputs and minimize the use of unobservable inputs. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation. The Corporation’s financial assets and liabilities measured at fair value on a recurring basis consist of investment securities, loans held for sale at fair value, interest-only strips and derivative financial instruments; while non-performing loans, MSA and real estate owned are measured at fair value on a nonrecurring basis. Investment securities are primarily comprised of U.S. government agency MBS, U.S. government sponsored enterprise MBS and private issue CMO. The Corporation utilizes unadjusted quoted prices in active markets for identical securities for its fair value measurement of debt securities, quoted prices in active and less than active markets for similar securities for its fair value measurement of MBS and debt securities (Level 2), and broker price indications for similar securities in non-active markets for its fair value measurement of CMO (Level 3). Derivative financial instruments are comprised of commitments to extend credit on loans to be held for sale, mandatory loan sale commitments, TBA-MBS trades and option contracts. The fair value of TBA-MBS trades is determined using quoted secondary-market prices (Level 2). The fair values of other derivative financial instruments are determined by quoted prices for a similar commitment or commitments, adjusted for the specific attributes of each commitment (Level 3). Loans held for sale at fair value are primarily single-family loans. The fair value is determined, when possible, using quoted secondary-market prices such as mandatory loan sale commitments. If no such quoted price exists, the fair value of a loan is determined by quoted prices for a similar loan or loans, adjusted for the specific attributes of each loan (Level 2). Non-performing loans are loans which are inadequately protected by the current net worth and paying capacity of the borrowers or of the collateral pledged. The non-performing loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. The fair value of a non-performing loan is determined based on an observable market price or current appraised value of the underlying collateral. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the borrower. For non-performing loans which are restructured loans, the fair value is derived from discounted cash flow analysis (Level 3), except those which are in the process of foreclosure or 90 days delinquent for which the fair value is derived from the appraised value of its collateral (Level 2). For other non-performing loans which are not restructured loans, the fair value is derived from historical experience and management estimates by loan type for which collectively evaluated allowances are assigned (Level 3), or the appraised value of its collateral for loans which are in the process of foreclosure or where borrowers file bankruptcy, of which the charge-off will occur when the loan becomes 60 days delinquent (Level 2). Non-performing loans are reviewed and evaluated on at least a quarterly basis for additional allowance and adjusted accordingly, based on the same factors identified above. This loss is not recorded directly as an adjustment to current earnings or other comprehensive income (loss), but rather as a component in determining the overall adequacy of the allowance for loan losses. These adjustments to the estimated fair value of non-performing loans may result in increases or decreases to the provision for loan losses recorded in current earnings. The Corporation uses the amortization method for its MSA, which amortizes the MSA in proportion to and over the period of estimated net servicing income and assesses the MSA for impairment based on fair value at each reporting date. The fair value of MSA is calculated using the present value method; which includes a third party’s prepayment projections of similar instruments, weighted-average coupon rates and the estimated average life (Level 3). The rights to future income from serviced loans that exceed contractually specified servicing fees are recorded as interest-only strips. The fair value of interest-only strips is calculated using the same assumptions that are used to value the related MSA (Level 3). The fair value of real estate owned is derived from the lower of the appraised value at the time of foreclosure or the listing price, gross of disposition costs (Level 2). The Corporation’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Corporation’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The following fair value hierarchy tables present information at June 30, 2012 and 2011 about the Corporation’s assets measured at fair value on a recurring basis:
| Fair Value Measurement at June 30, 2012 Using:
(In Thousands) | Level 1 | Level 2 |  | Level 3 |  | Total |
Assets: |  |  |  |  |  |  |
| Investment securities: |  |  |  |  |  |  |
|  | U.S. government agency MBS | $ - | $ 12,314 |  | $ - |  | $ 12,314 |
|  | U.S. government sponsored enterprise MBS | - | 9,342 |  | - |  | 9,342 |
|  | Private issue CMO | - | - |  | 1,242 |  | 1,242 |
|  |  | Investment securities | - | 21,656 |  | 1,242 |  | 22,898 |
| Loans held for sale, at fair value | - | 231,639 |  | - |  | 231,639 |
| Interest-only strips | - | - |  | 130 |  | 130 |
| Derivative assets: |  |  |  |  |  |  |
|  | Commitments to extend credit on loans to be held for sale | - | - |  | 3,998 |  | 3,998 |
|  | Mandatory loan sale commitments | - | - |  | 38 |  | 38 |
|  | TBA-MBS trades | - | 121 |  | - |  | 121 |
|  | Put option contracts | - | - |  | 36 |  | 36 |
|  |  | Derivative assets | - | 121 |  | 4,072 |  | 4,193 |
Total assets | $ - | $ 253,416 |  | $ 5,444 |  | $ 258,860 |
Liabilities: |  |  |  |  |  |  |
| Derivative liabilities: |  |  |  |  |  |  |
|  | Commitments to extend credit on loans to be held for sale | $ - | $ - |  | $ 17 |  | $ 17 |
|  | Mandatory loan sale commitments | - | - |  | 201 |  | 201 |
|  | TBA-MBS trades | - | 1,274 |  | - |  | 1,274 |
|  |  | Derivative liabilities | - | 1,274 |  | 218 |  | 1,492 |
Total liabilities | $ - | $ 1,274 |  | $ 218 |  | $ 1,492 |
| Fair Value Measurement at June 30, 2011 Using:
(In Thousands) | Level 1 | Level 2 |  | Level 3 |  | Total |
Assets: |  |  |  |  |  |  |
| Investment securities: |  |  |  |  |  |  |
|  | U.S. government agency MBS | $ - | $ 14,409 |  | $ - |  | $ 14,409 |
|  | U.S. government sponsored enterprise MBS | - | 10,417 |  | - |  | 10,417 |
|  | Private issue CMO | - | - |  | 1,367 |  | 1,367 |
|  |  | Investment securities | - | 24,826 |  | 1,367 |  | 26,193 |
| Loans held for sale, at fair value | - | 191,678 |  | - |  | 191,678 |
| Interest-only strips | - | - |  | 200 |  | 200 |
| Derivative assets: |  |  |  |  |  |  |
|  | Commitments to extend credit on loans to be held for sale | - | - |  | 797 |  | 797 |
|  | Mandatory loan sale commitments | - | - |  | 403 |  | 403 |
|  | TBA-MBS trades | - | 252 |  | - |  | 252 |
|  | Put option contracts | - | - |  | 99 |  | 99 |
|  |  | Derivative assets | - | 252 |  | 1,299 |  | 1,551 |
Total assets | $ - | $ 216,756 |  | $ 2,866 |  | $ 219,622 |
Liabilities: |  |  |  |  |  |  |
| Derivative liabilities: |  |  |  |  |  |  |
|  | Commitments to extend credit on loans to be held for sale | $ - | $ - |  | $ 159 |  | $ 159 |
|  | TBA-MBS trades | - | 76 |  | - |  | 76 |
|  |  | Derivative liabilities | - | 76 |  | 159 |  | 235 |
Total liabilities | $ - | $ 76 |  | $ 159 |  | $ 235 |
There were no transfers between level 1 and 2 during the years indicated below. The following tables are reconciliations at the dates indicated of the beginning and ending balances of recurring fair value measurements recognized in the Consolidated Statements of Financial Condition using Level 3 inputs:
| Fair Value Measurement Using Significant Other Unobservable Inputs (Level 3)
(In Thousands) | Private Issue CMO | Interest- Only Strips | Commit- ments to originate (1) | Manda- tory Commit- ments (2) | Option Contracts | Total |
Beginning balance at July 1, 2011 | $ 1,367 |  | $ 200 |  | $ 638 |  | $ 403 |  | $ 99 |  | $ 2,707 |
| Total gains or (losses) (realized/unrealized): |  |  |  |  |  |  |  |  |  |  |  |
| Included in earnings | - |  | - |  | 39,309 |  | (932 | ) | (360 | ) | 38,017 |
| Included in other comprehensive income | 29 |  | (70 | ) | - |  | - |  | - |  | (41 | )
| Purchases | - |  | - |  | - |  | (163 | ) | 305 |  | 142 |
| Issuances | - |  | - |  | (3,257 | ) | - |  | - |  | (3,257 | )
| Settlements | (154 | ) | - |  | (32,709 | ) | 529 |  | (8 | ) | (32,342 | )
| Transfers in and/or out of Level 3 | - |  | - |  | - |  | - |  | - |  | - |
Ending balance at June 30, 2012 | $ 1,242 |  | $ 130 |  | $ 3,981 |  | $ (163 | ) | $ 36 |  | $ 5,226 |
(1) | Consists of commitments to extend credit on loans to be held for sale.
(2) | Consists of mandatory loan sale commitments.
| Fair Value Measurement Using Significant Other Unobservable Inputs (Level 3)
(In Thousands) | Private Issue CMO | Interest- Only Strips | Commit- ments to originate (1) | Manda- tory Commit- ments (2) | Option Contracts | Total |
Beginning balance at July 1, 2010 | $ 1,515 |  | $ 248 |  | $ 638 |  | $ (354 | ) | $ - |  | $ 4,374 |
| Total gains or (losses) (realized/unrealized): |  |  |  |  |  |  |  |  |  |  |  |
| Included in earnings | - |  | (1 | ) | 30,776 |  | 442 |  | (24 | ) | 31,193 |
| Included in other comprehensive income | 55 |  | (47 | ) | - |  | - |  | - |  | 8 |
| Purchases | - |  | - |  | - |  | 403 |  | 123 |  | 526 |
| Issuances | - |  | - |  | (2,184 | ) | - |  | - |  | (2,184 | )
| Settlements | (203 | ) | - |  | (30,919 | ) | (88 | ) | - |  | (31,210 | )
| Transfers in and/or out of Level 3 | - |  | - |  | - |  | - |  | - |  | - |
Ending balance at June 30, 2011 | $ 1,367 |  | $ 200 |  | $ 638 |  | $ 403 |  | $ 99 |  | $ 2,707 |
(1) | Consists of commitments to extend credit on loans to be held for sale.
(2) | Consists of mandatory loan sale commitments.
The following fair value hierarchy tables present information at the dates indicated about the Corporation’s assets measured at fair value on a nonrecurring basis:
| Fair Value Measurement at June 30, 2012 Using:
(In Thousands) | Level 1 |  | Level 2 |  | Level 3 |  | Total |
Non-performing loans (1) | $ - |  | $ 10,335 |  | $ 25,006 |  | $ 35,341 |
MSA | - |  | - |  | 227 |  | 227 |
Real estate owned (1) | - |  | 5,976 |  | - |  | 5,976 |
Total | $ - |  | $ 16,311 |  | $ 25,233 |  | $ 41,544 |
| (1) Amounts are based on collateral value as a practical expedient for fair value, and excludes estimated selling costs where determined.
| Fair Value Measurement at June 30, 2011 Using:
(In Thousands) | Level 1 |  | Level 2 |  | Level 3 |  | Total |
Non-performing loans (1) | $ - |  | $ 24,215 |  | $ 13,187 |  | $ 37,402 |
MSA | - |  | - |  | 322 |  | 322 |
Real estate owned (1) | - |  | 9,033 |  | - |  | 9,033 |
Total | $ - |  | $ 33,248 |  | $ 13,509 |  | $ 46,757 |
| (1) Amounts are based on collateral value as a practical expedient for fair value, and excludes estimated selling costs where determined.
The following table presents additional information about valuation techniques and inputs used for assets and liabilities, including derivative financial instruments, which are measured at fair value and categorized within Level 3 as of June 30, 2012 (dollars in thousands):
| Fair Value As of June 30, 2012 | Valuation Techniques | Unobservable Inputs | Range (1) (Weighted Average) | Impact to Valuation from an Increase in Inputs (2)
Assets: |  |  |  |  |
Securities available-for sale: Private issue CMO | $ 1,242 | Discounted cash flow | Probability of default Loss severity Prepayment speed | 1.8% – 2.8% (2.4%) 36.9% - 37.7% (37.4%) 2.3% – 5.7% (3.5%) | Decrease Decrease Decrease
Non-performing loans | $ 25,006 | Discounted cash flow or broker priced opinion | Default rates Collateral value Los severity | 100% NM (5) 0 – 100% | Decrease Increase Decrease
MSA | $ 227 | Discounted cash flow | Prepayment speed (CPR) Discount rate | 5.6% - 60.0% (26.6%) 9.0% - 10.5% (9.1%) | Decrease Decrease
Interest-only strips | $ 130 | Discounted cash flow | Prepayment speed (CPR) Discount rate | 4.8% - 37.2% (24.2%) 9.0% - 9.0% (9.0%) | Decrease Decrease
Commitments to extend credit on loans to be held for sale | $ 3,998 | Relative value analysis | TBA-MBS broker quotes Fall-out ratio (3) | 99.3% – 104.6% (102.2%) of par 20% - 70% (34%) | Decrease Decrease
Mandatory loan sale commitments | $ 38 | Relative value analysis | Investor quotes TBA-MBS broker quotes Roll-forward costs (4) | 101.5% – 105.6% (104.1%) of par 103.4% – 103.4% (103.4%) of par 0.01% - 0.05% (0.01%) | Decrease Decrease Decrease
Put options | $ 36 | Relative value analysis | Broker quotes | 104.8% – 104.8% (104.8%) of par | Increase
Liabilities: |  |  |  |  |
Commitments to extend credit on loans to be held for sale | $ 17 | Relative value analysis | TBA-MBS broker quotes Fall-out ratio (3) | 100.5% – 103.4% (101.3%) of par 20% - 70% (34%) | Decrease Decrease
Mandatory loan sale commitments | $ 201 | Relative value analysis | Investor quotes TBA-MBS broker quotes Roll-forward costs (4) | 101.5% – 107.2% (104.1%) of par 103.4% – 109.6% (106.4%) of par 0.01% - 0.05% (0.01%) | Decrease Decrease Decrease
(1) | The range is based on the historical estimated fair values and management estimates.
(2) | Unless otherwise noted, this column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect. Significant changes in these inputs in isolation could result in significantly higher or lower fair value measurements.
(3) | The percentage of commitments to extend credit on loans to be held for sale which management has estimated may not fund.
(4) | An estimated cost to roll forward the mandatory loan sale commitments which management has estimated may not be delivered to the corresponding investors in a timely manner.
(5) | Broker priced opinions are conducted every 90 days. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property.
The significant unobservable inputs used in the fair value measurement of the Corporation’s assets and liabilities include the followings: Probability of default, loss severity, constant prepayment speeds, discount rates, TBA-MBS broker quotes, fallout ratios, investor quotes and roll-forward costs, among others. Significant increases or decreases in any of these inputs in isolation could result in significantly lower or higher fair value measurement. The various unobservable inputs used to determine valuations may have similar or diverging impacts on valuation. The carrying amount and fair value of the Corporation’s other financial instruments as of June 30, 2012 and 2011 were as follows (dollars in thousands):
| June 30, 2012
| Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3
Financial assets: |  |  |  |  |
Cash and cash equivalents | $ 145,136 | $ 145,136 | $ 145,136 | - | $ -
Investment securities | $ 22,898 | $ 22,898 | - | $ 21,656 | $ 1,242
Loans held for investment, net | $ 796,836 | $ 801,081 | - | - | $ 801,081
Loans held for sale, at fair value | $ 231,639 | $ 231,639 | - | - | $ 231,639
FHLB – San Francisco stock | $ 22,255 | $ 22,255 | - | $ 22,255 | -
Financial liabilities: |  |  |  |  |
Deposits | $ 961,411 | $ 948,985 | - | - | $ 948,985
Borrowings | $ 126,546 | $ 134,936 | - | - | $ 134,936
| June 30, 2011
| Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3
Financial assets: |  |  |  |  |
Cash and cash equivalents | $ 142,550 | $ 142,550 | $ 142,550 | - | $ -
Investment securities | $ 26,193 | $ 26,193 | - | $ 24,826 | $ 1,367
Loans held for investment, net | $ 881,610 | $ 886,711 | - | - | $ 886,711
Loans held for sale, at fair value | $ 191,678 | $ 191,678 | - | - | $ 191,678
FHLB – San Francisco stock | $ 26,976 | $ 26,976 | - | $ 26,976 | -
Financial liabilities: |  |  |  |  |
Deposits | $ 945,767 | $ 934,494 | - | - | $ 934,494
Borrowings | $ 206,598 | $ 214,992 | - | - | $ 214,992
Cash and cash equivalents: The carrying amount of these financial assets approximates the fair value. Loans held for investment: For loans that reprice frequently at market rates, the carrying amount approximates the fair value. For fixed-rate loans, the fair value is determined by either (i) discounting the estimated future cash flows of such loans over their estimated remaining contractual maturities using a current interest rate at which such loans would be made to borrowers, or (ii) quoted market prices. The allowance for loan losses is subtracted as an estimate of the underlying credit risk. FHLB – San Francisco stock: The carrying amount reported for FHLB – San Francisco stock approximates fair value. When redeemed, the Corporation will receive an amount equal to the par value of the stock. Deposits: The fair value of time deposits is estimated using a discounted cash flow calculation. The discount rate is based upon rates currently offered for deposits of similar remaining maturities. The fair value of transaction accounts (checking, money market and savings accounts) is based on management estimates, consistent with current market conditions. Borrowings: The fair value of borrowings has been estimated using a discounted cash flow calculation. The discount rate on such borrowings is based upon rates currently offered for borrowings of similar remaining maturities. The Corporation has various processes and controls in place to ensure that fair value is reasonably estimated. The Corporation generally determines fair value of their Level 3 assets and liabilities by using internally developed models which primarily utilize discounted cash flow techniques and prices obtained from independent management services or brokers. The Corporation performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process. The fair values of investment securities, commitments to extend credit on loans held for sale, mandatory commitments and option contracts are determined from the independent management services or brokers; while the fair value of MSA and interest only strips are determined using the internally developed models which are based on discounted cash flow analysis. The fair value of non-performing loans is determined by calculating discounted cash flows, collectively evaluated allowances or collateral value, less selling costs. While the Corporation believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. During the year ended June 30, 2012, there were no significant changes to the Corporation’s valuation techniques that had, or are expected to have, a material impact on its consolidated financial position or results of operations.

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- Definition The entire disclosure for financial instruments. This disclosure includes, but is not limited to, fair value measurements of short and long term marketable securities, international currencies forward contracts, and auction rate securities. Financial instruments may include hedging and non-hedging currency exchange instruments, derivatives, securitizations and securities available for sale at fair value. Also included are investment results, realized and unrealized gains and losses as well as impairments and risk management disclosures. + References No definition available. + Details
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