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Fair Value of Financial Instruments | 3 Months Ended
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Sep. 30, 2014
Fair Value Disclosures [Abstract] |
Fair Value of Financial Instruments | Fair Value of Financial Instruments The Corporation adopted ASC 820, “Fair Value Measurements and Disclosures,” and elected the fair value option pursuant to ASC 825, “Financial Instruments” 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 at the dates indicated 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 September 30, 2014: |  |  |
Loans held for sale, measured at fair value | $ | 180,558 |  | $ | 174,564 |  | $ | 5,994 |
As of June 30, 2014: |  |  |
Loans held for sale, measured at fair value | $ | 158,883 |  | $ | 152,192 |  | $ | 6,691 |
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,” 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 ("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, private issue CMO and common stock of a community development financial institution. 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), broker price indications for similar securities in non-active markets for its fair value measurement of CMO (Level 3) and pricing indications from recent transaction in non-active markets for common stock of a community development financial institution (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, including management's estimate of loan commitments which may not fund (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 TBA MBS trades. If no such quoted price exists, the fair value of a loan is determined by quoted prices for a similar loan or loans (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 Corporation 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, net of estimated disposition costs, 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 for those which are in the process of foreclosure or 90 days delinquent for which the fair value is derived from the appraised value of the collateral (Level 2). For other non-performing loans which are not restructured loans, the fair value is derived from relative value analysis: historical experience and management estimates by loan type for which collectively evaluated allowances are assigned (Level 3); or the appraised value of the collateral for loans which are in the process of foreclosure or where borrowers file bankruptcy (Level 2). For non-performing commercial real estate loans, the fair value is derived from the appraised value of the collateral (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, net of estimated 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 the dates indicated about the Corporation’s assets measured at fair value on a recurring basis:
| Fair Value Measurement at September 30, 2014 Using:
(In Thousands) | Level 1 | Level 2 | Level 3 | Total
Assets: |  |  |  |
Investment securities: |  |  |  |
U.S. government agency MBS | $ | — |  | $ | 8,714 |  | $ | — |  | $ | 8,714 |
U.S. government sponsored enterprise MBS | — |  | 6,001 |  | — |  | 6,001 |
Private issue CMO | — |  | — |  | 828 |  | 828 |
Common stock - community development financial institution | — |  | — |  | 250 |  | 250 |
Investment securities | — |  | 14,715 |  | 1,078 |  | 15,793 |
Loans held for sale, at fair value | — |  | 180,558 |  | — |  | 180,558 |
Interest-only strips | — |  | — |  | 70 |  | 70 |
Derivative assets: |  |  |  |
Commitments to extend credit on loans to be held for sale | — |  | — |  | 1,797 |  | 1,797 |
Option contracts | — |  | — |  | 33 |  | 33 |
Derivative assets | — |  | — |  | 1,830 |  | 1,830 |
Total assets | $ | — |  | $ | 195,273 |  | $ | 2,978 |  | $ | 198,251 |
Liabilities: |  |  |  |
Derivative liabilities: |  |  |  |
Commitments to extend credit on loans to be held for sale | $ | — |  | $ | — |  | $ | 12 |  | $ | 12 |
Mandatory loan sale commitments | — |  | — |  | 245 |  | 245 |
TBA MBS trades | — |  | 246 |  | — |  | 246 |
Derivative liabilities | — |  | 246 |  | 257 |  | 503 |
Total liabilities | $ | — |  | $ | 246 |  | $ | 257 |  | $ | 503 |
| Fair Value Measurement at June 30, 2014 Using:
(In Thousands) | Level 1 | Level 2 | Level 3 | Total
Assets: |  |  |  |
Investment securities: |  |  |  |
U.S. government agency MBS | $ | — |  | $ | 9,109 |  | $ | — |  | $ | 9,109 |
U.S. government sponsored enterprise MBS | — |  | 6,385 |  | — |  | 6,385 |
Private issue CMO | — |  | — |  | 853 |  | 853 |
Investment securities | — |  | 15,494 |  | 853 |  | 16,347 |
Loans held for sale, at fair value | — |  | 158,883 |  | — |  | 158,883 |
Interest-only strips | — |  | — |  | 62 |  | 62 |
Derivative assets: |  |  |  |
Commitments to extend credit on loans to be held for sale | — |  | — |  | 2,570 |  | 2,570 |
Derivative assets | — |  | — |  | 2,570 |  | 2,570 |
Total assets | $ | — |  | $ | 174,377 |  | $ | 3,485 |  | $ | 177,862 |
Liabilities: |  |  |  |
Derivative liabilities: |  |  |  |
Commitments to extend credit on loans to be held for sale | $ | — |  | $ | — |  | $ | 4 |  | $ | 4 |
Mandatory loan sale commitments | — |  | — |  | 93 |  | 93 |
TBA MBS trades | — |  | 1,335 |  | — |  | 1,335 |
Derivative liabilities | — |  | 1,335 |  | 97 |  | 1,432 |
Total liabilities | $ | — |  | $ | 1,335 |  | $ | 97 |  | $ | 1,432 |
The following tables summarize reconciliations of the beginning and ending balances during the periods shown of recurring fair value measurements recognized in the Condensed Consolidated Statements of Financial Condition using Level 3 inputs:
| For the Quarter Ended September 30, 2014
| Fair Value Measurement Using Significant Other Unobservable Inputs (Level 3)
(In Thousands) | Private Issue CMO | Common stock (1) | Interest- Only Strips | Loan Commit- ments to Originate (2) | Manda- tory Commit- ments (3) | Option Contracts | Total
Beginning balance at June 30, 2014 | $ | 853 |  | $ | — |  | $ | 62 |  | $ | 2,566 |  | $ | (93 | ) | $ | — |  | $ | 3,388 |
Total gains or losses (realized/ unrealized): |  |  |  |  |  |  |
Included in earnings | — |  | — |  | — |  | (781 | ) | (156 | ) | (105 | ) | (1,042 | )
Included in other comprehensive loss | (1 | ) | — |  | 8 |  | — |  | — |  | — |  | 7 |
Purchases | — |  | 250 |  | — |  | — |  | — |  | 187 |  | 437 |
Issuances | — |  | — |  | — |  | — |  | — |  | — |  | — |
Settlements | (24 | ) | — |  | — |  | — |  | 4 |  | (49 | ) | (69 | )
Transfers in and/or out of Level 3 | — |  | — |  | — |  | — |  | — |  | — |  | — |
Ending balance at September 30, 2014 | $ | 828 |  | $ | 250 |  | $ | 70 |  | $ | 1,785 |  | $ | (245 | ) | $ | 33 |  | $ | 2,721 |
(1) | Common stock of a community development financial institution
(2) | Consists of commitments to extend credit on loans to be held for sale.
(3) | Consists of mandatory loan sale commitments.
| For the Quarter Ended September 30, 2013
| 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 June 30, 2013 | $ | 1,019 |  | $ | 98 |  | $ | (1,032 | ) | $ | 83 |  | $ | 589 |  | $ | 757 |
Total gains or losses (realized/unrealized): |  |  |  |  |  |
Included in earnings | — |  | — |  | 4,397 |  | (230 | ) | 107 |  | 4,274 |
Included in other comprehensive loss | — |  | 5 |  | — |  | — |  | — |  | 5 |
Purchases | — |  | — |  | — |  | — |  | 216 |  | 216 |
Issuances | — |  | — |  | — |  | — |  | — |  | — |
Settlements | (66 | ) | — |  | — |  | 6 |  | (830 | ) | (890 | )
Transfers in and/or out of Level 3 | — |  | — |  | — |  | — |  | — |  | — |
Ending balance at September 30, 2013 | $ | 953 |  | $ | 103 |  | $ | 3,365 |  | $ | (141 | ) | $ | 82 |  | $ | 4,362 |
(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 about the Corporation’s assets measured at fair value at the dates indicated on a nonrecurring basis:
| Fair Value Measurement at September 30, 2014 Using:
(In Thousands) | Level 1 | Level 2 | Level 3 | Total
Non-performing loans | $ | — |  | $ | 11,026 |  | $ | 1,765 |  | $ | 12,791 |
MSA | — |  | — |  | 213 |  | 213 |
Real estate owned, net | — |  | 2,707 |  | — |  | 2,707 |
Total | $ | — |  | $ | 13,733 |  | $ | 1,978 |  | $ | 15,711 |
| Fair Value Measurement at June 30, 2014 Using:
(In Thousands) | Level 1 | Level 2 | Level 3 | Total
Non-performing loans | $ | — |  | $ | 10,910 |  | $ | 5,026 |  | $ | 15,936 |
MSA | — |  | — |  | 241 |  | 241 |
Real estate owned, net | — |  | 2,467 |  | — |  | 2,467 |
Total | $ | — |  | $ | 13,377 |  | $ | 5,267 |  | $ | 18,644 |
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 September 30, 2014:
(Dollars In Thousands) | Fair Value As of September 30, 2014 | 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 | $ | 828 |  | Market comparable pricing | Comparability adjustment | 0.1% – 1.5% (1.3%) | Increase
Common stock of community development financial institution | $ | 250 |  | Market pricing | Pricing indications from recent transactions | $0.00 - $0.14 ($0.05) | Increase
Non-performing loans | $ | 77 |  | Discounted cash flow | Default rates | 0.0% - 30.0% (0.0%) | Decrease
Non-performing loans | $ | 1,688 |  | Relative value analysis | Loss severity | 20.0% - 38.0% (23.2%) | Decrease
MSA | $ | 213 |  | Discounted cash flow | Prepayment speed (CPR) Discount rate | 12.8% - 60.0% (29.7%) 9.0% - 10.5% (9.2%) | Decrease Decrease
Interest-only strips | $ | 70 |  | Discounted cash flow | Prepayment speed (CPR) Discount rate | 19.7% - 38.8% (24.6%) 9.0% | Decrease Decrease
Commitments to extend credit on loans to be held for sale | $ | 1,797 |  | Relative value analysis | TBA-MBS broker quotes Fall-out ratio (3) | 98.6% – 105.1% (99.0%) of par 21.9% - 28.0% (27.5%) | Decrease Decrease
Option contracts | $ | 33 |  | Relative value analysis | Broker quotes | 105.2% - 105.5% (105.2%) of par | Increase
Liabilities: |  |  |  |  |
Commitments to extend credit on loans to be held for sale | $ | 12 |  | Relative value analysis | TBA-MBS broker quotes Fall-out ratio (3) | 100.3% – 103.3% (101.9%) of par 21.9% - 28.0% (27.5%) | Increase Increase
Mandatory loan sale commitments | $ | 245 |  | Relative value analysis | Investor quotes TBA MBS broker quotes Roll-forward costs (4) | 102.8% - 106.4% (104.0%) of par 102.0% - 108.5% (104.2%) of par 0.003% | Increase Increase Increase
(1) | The range is based on the 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.
The significant unobservable inputs used in the fair value measurement of the Corporation’s assets and liabilities include the following: prepayment speeds, discount rates, MBS – TBA 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 September 30, 2014 and June 30, 2014 were as follows:
| September 30, 2014
(In Thousands) | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3
Financial assets: |  |  |  |  |
Loans held for investment, net | $ | 788,958 |  | $ | 795,408 |  | — |  | — |  | $ | 795,408 |
FHLB – San Francisco stock | $ | 7,056 |  | $ | 7,056 |  | — |  | $ | 7,056 |  | — |
Financial liabilities: |  |  |  |  |
Deposits | $ | 902,432 |  | $ | 879,761 |  | — |  | — |  | $ | 879,761 |
Borrowings | $ | 41,416 |  | $ | 44,531 |  | — |  | — |  | $ | 44,531 |
| June 30, 2014
(In Thousands) | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3
Financial assets: |  |  |  |  |
Loans held for investment, net | $ | 772,141 |  | $ | 778,851 |  | — |  | — |  | $ | 778,851 |
FHLB – San Francisco stock | $ | 7,056 |  | $ | 7,056 |  | — |  | $ | 7,056 |  | — |
Financial liabilities: |  |  |  |  |
Deposits | $ | 897,870 |  | $ | 875,440 |  | — |  | — |  | $ | 875,440 |
Borrowings | $ | 41,431 |  | $ | 44,424 |  | — |  | — |  | $ | 44,424 |
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 calculated by using discounted cash flows, relative value analysis 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 quarter ended September 30, 2014, 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 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. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13537-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13433-108611 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13504-108611 + Details
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