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Fair Value of Financial Instruments | 3 Months Ended
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Dec. 31, 2011
Fair Value of Financial Instruments |
Fair Value of Financial Instruments | Note 9: Fair Value of Financial Instruments The Corporation adopted ASC 820, “Fair Value Measurements and Disclosures,” on July 1, 2008 and elected the fair value option pursuant to 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 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 December 31, 2011: |  |  |  |  |  |
Single-family loans measured at fair value | $ 226,790 |  | $ 217,595 |  | $ 9,195 |
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, mortgage servicing assets and real estate owned are measured at fair value on a nonrecurring basis. Investment securities are primarily comprised of U.S. government agency mortgage-backed securities, U.S. government sponsored enterprise mortgage-backed securities and private issue collateralized mortgage obligations. 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 mortgage-backed securities and debt securities, and broker price indications for similar securities in non-active markets for its fair value measurement of collateralized mortgage obligations. Derivative financial instruments are comprised of commitments to extend credit on loans to be held for sale, loan sale commitments and option contracts. The fair value is determined, when possible, using quoted secondary-market prices. If no such quoted price exists, the fair value of a commitment is determined by quoted prices for a similar commitment or commitments, adjusted for the specific attributes of each commitment. 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. 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 and the accrual of interest income has been discontinued. The non-performing loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. The Corporation assesses loans individually and identifies impairment when the loan is classified as non-performing, been restructured or management has serious doubts about the future collectibility of principal and interest, even though the loans may currently be performing. 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 also restructured loans, the fair value is derived from discounted cash flow analysis, except those which are in the process of foreclosure, for which the fair value is derived from the appraised value of its collateral. Non-performing loans are reviewed and evaluated on at least a quarterly basis for additional impairment 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 mortgage servicing assets, which amortizes servicing assets in proportion to and over the period of estimated net servicing income and assesses servicing assets for impairment based on fair value at each reporting date. The fair value of mortgage servicing assets 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. 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 servicing assets. 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, net of disposition costs. 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 table presents information about the Corporation’s assets measured at fair value on a recurring basis:
| Fair Value Measurement at December 31, 2011 Using:
(In Thousands) | Level 1 | Level 2 |  | Level 3 |  | Total |
Assets: |  |  |  |  |  |  |
| Investment securities: |  |  |  |  |  |  |
|  | U.S. government agency MBS | $ - | $ 13,083 |  | $ - |  | $ 13,083 |
|  | U.S. government sponsored enterprise MBS | - | 9,779 |  | - |  | 9,779 |
|  | Private issue CMO | - | - |  | 1,244 |  | 1,244 |
|  |  | Investment securities | - | 22,862 |  | 1,244 |  | 24,106 |
| Loans held for sale, at fair value | - | 226,790 |  | - |  | 226,790 |
| Interest-only strips | - | - |  | 156 |  | 156 |
| Derivative assets: |  |  |  |  |  |  |
|  | Commitments to extend credit on loans to be held for sale | - | - |  | 2,120 |  | 2,120 |
|  | Mandatory loan sale commitments | - | - |  | 74 |  | 74 |
|  |  | Derivative assets | - | - |  | 2,194 |  | 2,194 |
Total assets | $ - | $ 249,652 |  | $ 3,594 |  | $ 253,246 |
Liabilities: |  |  |  |  |  |  |
| Derivative liabilities: |  |  |  |  |  |  |
|  | Commitments to extend credit on loans to be held for sale | $ - | $ - |  | $ 2 |  | $ 2 |
|  | Mandatory loan sale commitments | - | - |  | 76 |  | 76 |
|  | TBA MBS trades | - | 1,916 |  | - |  | 1,916 |
|  |  | Derivative liabilities | - | 1,916 |  | 78 |  | 1,994 |
Total liabilities | $ - | $ 1,916 |  | $ 78 |  | $ 1,994 |
| 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 |
|  | 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 |
The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the Condensed 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 | Loan Commit- ments to originate (1) | Manda- tory Commit- ments (2) | Option Contracts | Total |
Beginning balance at October 1, 2011 | $ 1,288 |  | $ 167 |  | $ 3,462 |  | $ (130 | ) | $ 142 |  | $4,929 |
| Total gains or losses (realized/unrealized): |  |  |  |  |  |  |  |  |  |  |  |
| Included in earnings | - |  | - |  | (3,462 | ) | 130 |  | (142 | ) | (3,474 | )
| Included in other comprehensive income | 1 |  | (11 | ) | - |  | - |  | - |  | (10 | )
| Purchases | - |  | - |  | - |  | (2 | ) | - |  | (2 | )
| Issuances | - |  | - |  | 2,118 |  | - |  | - |  | 2,118 |
| Settlements | (45 | ) | - |  | - |  | - |  | - |  | (45 | )
| Transfers in and/or out of Level 3 | - |  | - |  | - |  | - |  | - |  | - |
Ending balance at December 31, 2011 | $ 1,244 |  | $ 156 |  | $ 2,118 |  | $ (2 | ) | $ - |  | $ 3,516 |
(1) | Consist of commitments to extend credit on loans to be held for sale.
(2) | Consist of mandatory loan sale commitments.
| Fair Value Measurement Using Significant Other Unobservable Inputs (Level 3)
(In Thousands) | Private Issue CMO | Interest-Only Strips | Derivative Financial Instruments |  | Total |
Beginning balance at October 1, 2010 | $ 1,474 |  | $ 180 |  | $ 2,637 |  | $ 4,291 |
| Total gains or losses (realized/unrealized): |  |  |  |  |  |  |  |
| Included in earnings | - |  | - |  | (2,637 | ) | (2,637 | )
| Included in other comprehensive income | (3 | ) | 4 |  | - |  | 1 |
| Purchases, issuances, and settlements | (71 | ) | - |  | 810 |  | 739 |
| Transfers in and/or out of Level 3 | - |  | - |  | - |  | - |
Ending balance at December 31, 2010 | $ 1,400 |  | $ 184 |  | $ 810 |  | $ 2,394 |
| Fair Value Measurement Using Significant Other Unobservable Inputs (Level 3)
(In Thousands) | Private Issue CMO | Interest- Only Strips | Loan 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 | - |  | - |  | (4,101 | ) | (273 | ) | (241 | ) | (4,615 | )
| Included in other comprehensive income | (41 | ) | (44 | ) | - |  | - |  | - |  | (85 | )
| Purchases | - |  | - |  | - |  | (132 | ) | 142 |  | 10 |
| Issuances | - |  | - |  | 5,581 |  | - |  | - |  | 5,581 |
| Settlements | (82 | ) | - |  | - |  | - |  | - |  | (82 | )
| Transfers in and/or out of Level 3 | - |  | - |  | - |  | - |  | - |  | - |
Ending balance at December 31, 2011 | $ 1,244 |  | $ 156 |  | $ 2,118 |  | $ (2 | ) | $ - |  | $ 3,516 |
(1) | Consist of commitments to extend credit on loans to be held for sale.
(2) | Consist of mandatory loan sale commitments.
| Fair Value Measurement Using Significant Other Unobservable Inputs (Level 3)
(In Thousands) | Private Issue CMO | Interest-Only Strips | Derivative Financial Instruments |  | Total |
Beginning balance at July 1, 2010 | $ 1,515 |  | $ 248 |  | $ 2,611 |  | $ 4,374 |
| Total gains or losses (realized/unrealized): |  |  |  |  |  |  |  |
| Included in earnings | - |  | (1 | ) | (5,249 | ) | (5,250 | )
| Included in other comprehensive income | 15 |  | (63 | ) | - |  | (48 | )
| Purchases, issuances, and settlements | (130 | ) | - |  | 3,448 |  | 3,318 |
| Transfers in and/or out of Level 3 | - |  | - |  | - |  | - |
Ending balance at December 31, 2010 | $ 1,400 |  | $ 184 |  | $ 810 |  | $ 2,394 |
The following fair value hierarchy table presents information about the Corporation’s assets measured at fair value at dates indicated on a nonrecurring basis:
| Fair Value Measurement at December 31, 2011 Using:
(In Thousands) | Level 1 |  | Level 2 |  | Level 3 |  | Total |
Non-performing loans (1) | $ - |  | $ 21,691 |  | $ 10,074 |  | $ 31,765 |
Mortgage servicing assets | - |  | - |  | 252 |  | 252 |
Real estate owned (1) | - |  | 8,521 |  | - |  | 8,521 |
Total | $ - |  | $ 30,212 |  | $ 10,326 |  | $ 40,538 |
(1) | Amounts are based on collateral value as a practical expedient for fair value, and exclude 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 |
Mortgage servicing assets | - |  | - |  | 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 exclude estimated selling costs where determined.
The carrying amount and fair value of the Corporation’s other financial instruments were as follows:
|  | December 31, 2011 |  |  | June 30, 2011 |
|  | Carrying |  |  | Fair |  |  | Carrying |  |  | Fair |
|  | Amount |  |  | Value |  |  | Amount |  |  | Value |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 133,507 |  |  | $ | 133,507 |  |  | $ | 142,550 |  |  | $ | 142,550 |
Investment securities |  | $ | 24,106 |  |  | $ | 24,106 |  |  | $ | 26,193 |  |  | $ | 26,193 |
Loans held for investment, net |  | $ | 845,476 |  |  | $ | 848,534 |  |  | $ | 881,610 |  |  | $ | 886,711 |
Loans held for sale, at fair value |  | $ | 226,790 |  |  | $ | 226,790 |  |  | $ | 191,678 |  |  | $ | 191,678 |
FHLB – San Francisco stock |  | $ | 24,585 |  |  | $ | 24,585 |  |  | $ | 26,976 |  |  | $ | 26,976 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 953,856 |  |  | $ | 942,533 |  |  | $ | 945,767 |  |  | $ | 934,494 |
Borrowings |  | $ | 176,573 |  |  | $ | 186,056 |  |  | $ | 206,598 |  |  | $ | 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 estimated by using the Bank’s interest rate risk model which denotes the fair value of transaction accounts 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.

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