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Fair Value of Financial Instruments | 9 Months Ended
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Mar. 31, 2021
Fair Value of Financial Instruments |
Fair Value of Financial Instruments | Note 7: 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.” 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 Corporation also adopted ASU 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies disclosure requirements on fair value measurements to improve their effectiveness.” The guidance permits entities to consider materiality when evaluating fair value measurement disclosures and, among other modifications, requires certain new disclosures related to Level 3 fair value measurements. 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 investment at fair value:
|  |  |  |  | Aggregate |  |  |
|  |  |  |  | Unpaid |  | Net
|  | Aggregate |  | Principal |  | Unrealized
(In Thousands) |  | Fair Value |  | Balance |  | Loss
As of March 31, 2021: |  |  |  |  |  |  |  |  |
Loans held for investment, at fair value |  | $ | 1,879 |  | $ | 1,948 |  | $ | (69)
As of June 30, 2020: |  |  |  |  |  |  |  |  |
Loans held for investment, at fair value |  | $ | 2,258 |  | $ | 2,369 |  | $ | (111)
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 available for sale, loans held for investment at fair value and interest-only strips; while non-performing loans, mortgage servicing assets ("MSA") and real estate owned, if any, are measured at fair value on a nonrecurring basis. Investment securities - available for sale are primarily comprised of U.S. government agency MBS, U.S. government sponsored enterprise MBS and privately issued CMO. The Corporation utilizes quoted prices in active markets for similar securities for its fair value measurement of MBS (Level 2) and broker price indications for similar securities in non-active markets for its fair value measurement of the CMO (Level 3). Loans held for investment at fair value are primarily single-family loans which have been transferred from loans held for sale. The fair value is determined by the management estimates of the specific credit risk attributes of each loan, in addition to the quoted secondary-market prices which account for the interest rate characteristics of each loan (Level 3). Non-performing loans are loans which are inadequately protected by the current sound 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 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, other than non-performing commercial real estate 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 its 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 its 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 the MSA is derived using the present value method; which includes a third party’s prepayment projections of similar instruments, weighted-average coupon rates, estimated servicing costs and discount interest rates (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 derived using the same assumptions that are used to value the related MSA (Level 3). 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 March 31, 2021 Using:
(In Thousands) |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Investment securities - available for sale: |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agency MBS |  | $ | — |  | $ | 2,360 |  | $ | — |  | $ | 2,360
U.S. government sponsored enterprise MBS |  |  | — |  |  | 1,279 |  |  | — |  |  | 1,279
Private issue CMO |  |  | — |  |  | — |  |  | 163 |  |  | 163
Investment securities - available for sale |  |  | — |  |  | 3,639 |  |  | 163 |  |  | 3,802
Loans held for investment, at fair value |  |  | — |  |  | — |  |  | 1,879 |  |  | 1,879
Interest-only strips |  |  | — |  |  | — |  |  | 11 |  |  | 11
Total assets |  | $ | — |  | $ | 3,639 |  | $ | 2,053 |  | $ | 5,692
Liabilities |  | $ | — |  | $ | — |  | $ | — |  | $ | —
Total liabilities |  | $ | — |  | $ | — |  | $ | — |  | $ | —
|  | Fair Value Measurement at June 30, 2020 Using:
(In Thousands) |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Investment securities - available for sale: |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agency MBS |  | $ | — |  | $ | 2,943 |  | $ | — |  | $ | 2,943
U.S. government sponsored enterprise MBS |  |  | — |  |  | 1,577 |  |  | — |  |  | 1,577
Private issue CMO |  |  | — |  |  | — |  |  | 197 |  |  | 197
Investment securities - available for sale |  |  | — |  |  | 4,520 |  |  | 197 |  |  | 4,717
Loans held for investment, at fair value |  |  | — |  |  | — |  |  | 2,258 |  |  | 2,258
Interest-only strips |  |  | — |  |  | — |  |  | 14 |  |  | 14
Total assets |  | $ | — |  | $ | 4,520 |  | $ | 2,469 |  | $ | 6,989
Liabilities: |  | $ | — |  | $ | — |  | $ | — |  | $ | —
Total liabilities |  | $ | — |  | $ | — |  | $ | — |  | $ | —
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 March 31, 2021
|  | Fair Value Measurement
|  | Using Significant Other Unobservable Inputs
|  | (Level 3)
|  | Private Issue |  | Loans Held For Investment, |  | Interest- |  |  |
(In Thousands) |  | CMO |  | at fair value (1) |  | Only Strips |  | Total
Beginning balance at December 31, 2020 |  | $ | 173 |  | $ | 1,972 |  | $ | 12 |  | $ | 2,157
Total gains or losses (realized/unrealized): |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings |  |  | — |  |  | 57 |  |  | — |  |  | 57
Included in other comprehensive loss |  |  | 2 |  |  | — |  |  | (1) |  |  | 1
Purchases |  |  | — |  |  | — |  |  | — |  |  | —
Issuances |  |  | — |  |  | — |  |  | — |  |  | —
Settlements |  |  | (12) |  |  | (150) |  |  | — |  |  | (162)
Transfers in and/or out of Level 3 |  |  | — |  |  | — |  |  | — |  |  | —
Ending balance at March 31, 2021 |  | $ | 163 |  | $ | 1,879 |  | $ | 11 |  | $ | 2,053
| (1) |  | The valuation of loans held for investment at fair value includes management estimates of the specific credit risk attributes of each loan, in addition to the quoted secondary-market prices which account for the interest rate characteristics of each loan.
|  | For the Quarter Ended March 31, 2020
|  | Fair Value Measurement
|  | Using Significant Other Unobservable Inputs
|  | (Level 3)
|  | Private Issue |  | Loans Held For Investment, |  | Interest- |  |  |
(In Thousands) |  | CMO |  | at fair value (1) |  | Only Strips |  | Total
Beginning balance at December 31, 2019 |  | $ | 231 |  | $ | 4,173 |  | $ | 13 |  | $ | 4,417
Total gains or losses (realized/unrealized): |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings |  |  | — |  |  | (25) |  |  | — |  |  | (25)
Included in other comprehensive loss |  |  | (26) |  |  | — |  |  | — |  |  | (26)
Purchases |  |  | — |  |  | — |  |  | — |  |  | —
Issuances |  |  | — |  |  | — |  |  | — |  |  | —
Settlements |  |  | (8) |  |  | (313) |  |  | — |  |  | (321)
Transfers in and/or out of Level 3 |  |  | — |  |  | — |  |  | — |  |  | —
Ending balance at March 31, 2020 |  | $ | 197 |  | $ | 3,835 |  | $ | 13 |  | $ | 4,045
| (1) |  | The valuation of loans held for investment at fair value includes management estimates of the specific credit risk attributes of each loan, in addition to the quoted secondary-market prices which account for the interest rate characteristics of each loan.
|  | For the Nine Months Ended March 31, 2021
|  | Fair Value Measurement
|  | Using Significant Other Unobservable Inputs
|  | (Level 3)
|  | Private Issue |  | Loans Held For Investment, |  | Interest- |  |  |
(In Thousands) |  | CMO |  | at fair value (1) |  | Only Strips |  | Total
Beginning balance at June 30, 2020 |  | $ | 197 |  | $ | 2,258 |  | $ | 14 |  | $ | 2,469
Total gains or losses (realized/unrealized): |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings |  |  | — |  |  | 42 |  |  | — |  |  | 42
Included in other comprehensive loss |  |  | 8 |  |  | — |  |  | (3) |  |  | 5
Purchases |  |  | — |  |  | — |  |  | — |  |  | —
Issuances |  |  | — |  |  | — |  |  | — |  |  | —
Settlements |  |  | (42) |  |  | (421) |  |  | — |  |  | (463)
Transfers in and/or out of Level 3 |  |  | — |  |  | — |  |  | — |  |  | —
Ending balance at March 31, 2021 |  | $ | 163 |  | $ | 1,879 |  | $ | 11 |  | $ | 2,053
| (1) |  | The valuation of loans held for investment at fair value includes management estimates of the specific credit risk attributes of each loan, in addition to the quoted secondary-market prices which account for the interest rate characteristics of each loan.
|  | For the Nine Months Ended March 31, 2020
|  | Fair Value Measurement
|  | Using Significant Other Unobservable Inputs
|  | (Level 3)
|  |  |  |  | Loans Held |  |  |  |  |  |
|  | Private |  | For |  | Interest- |  |  |
|  | Issue |  | Investment, at |  | Only |  |  |
(In Thousands) |  | CMO |  | fair value (1) |  | Strips |  | Total
Beginning balance at June 30, 2019 |  | $ | 269 |  | $ | 5,094 |  | $ | 16 |  | $ | 5,379
Total gains or losses (realized/unrealized): |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings |  |  | — |  |  | (12) |  |  | — |  |  | (12)
Included in other comprehensive loss |  |  | (29) |  |  | — |  |  | (3) |  |  | (32)
Purchases |  |  | — |  |  | — |  |  | — |  |  | —
Issuances |  |  | — |  |  | — |  |  | — |  |  | —
Settlements |  |  | (43) |  |  | (1,247) |  |  | — |  |  | (1,290)
Transfers in and/or out of Level 3 |  |  | — |  |  | — |  |  | — |  |  | —
Ending balance at March 31, 2020 |  | $ | 197 |  | $ | 3,835 |  | $ | 13 |  | $ | 4,045
| (1) |  | The valuation of loans held for investment at fair value includes management estimates of the specific credit risk attributes of each loan, in addition to the quoted secondary-market prices which account for the interest rate characteristics of each loan.
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 March 31, 2021 Using:
(In Thousands) |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Non-performing loans |  | $ | — |  | $ | 1,290 |  | $ | 8,469 |  | $ | 9,759
Mortgage servicing assets |  |  | — |  |  | — |  |  | 253 |  |  | 253
Total |  | $ | — |  | $ | 1,290 |  | $ | 8,722 |  | $ | 10,012
|  | Fair Value Measurement at June 30, 2020 Using:
(In Thousands) |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Non-performing loans |  | $ | — |  | $ | 2,042 |  | $ | 2,882 |  | $ | 4,924
Mortgage servicing assets |  |  | — |  |  | — |  |  | 382 |  |  | 382
Total |  | $ | — |  | $ | 2,042 |  | $ | 3,264 |  | $ | 5,306
The following table presents additional information about valuation techniques and inputs used for assets and liabilities, which are measured at fair value and categorized within Level 3 as of March 31, 2021:
|  |  |  |  |  |  |  |  |  |  | Impact to
|  | Fair Value |  |  |  |  |  |  |  | Valuation
|  | As of |  |  |  |  |  |  |  | from an
|  | March 31, |  | Valuation |  |  |  | Range(1) |  | Increase in
(Dollars In Thousands) |  | 2021 |  | Techniques |  | Unobservable Inputs |  | (Weighted Average) |  | Inputs(2)
Assets: |  |  |  |  |  |  |  |  |  |  |
Securities available-for sale: Private issue CMO |  | $ | 163 |  | Market comparable pricing |  | Comparability adjustment |  | 0.0% - 1.2% (0.9%) |  | Increase
Loans held for investment, at fair value |  | $ | 1,879 |  | Relative value analysis |  | Broker quotes Credit risk factor |  | 98.0% – 103.5% (100.8%) of par 1.4% - 100.0% (4.3%) |  | Increase Decrease
Non-performing loans(3) |  | $ | 7,481 |  | Discounted cash flow |  | Default rates |  | 5.0% |  | Decrease
Non-performing loans(4) |  | $ | 988 |  | Relative value analysis |  | Credit risk factor |  | 20.0% - 30.0% (28.3%) |  | Decrease
Mortgage servicing assets |  | $ | 253 |  | Discounted cash flow |  | Prepayment speed (CPR) Discount rate |  | 15.5% - 60.0% (20.9%) 9.0% - 10.5% (9.1%) |  | Decrease Decrease
Interest-only strips |  | $ | 11 |  | Discounted cash flow |  | Prepayment speed (CPR) Discount rate |  | 19.7% - 23.0% (22.8%) 9.0% |  | Decrease Decrease
Liabilities: |  |  |  |  |  |  |  |  |  |  |
None |  |  |  |  |  |  |  |  |  |  |
| (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) |  | Consists of restructured loans.
| (4) |  | Consists of other non-performing loans, excluding restructured loans.
The significant unobservable inputs used in the fair value measurement of the Corporation’s assets and liabilities include the following: prepayment speeds, discount rates and broker quotes, 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 March 31, 2021 and June 30, 2020 was as follows:
|  | March 31, 2021
|  | Carrying |  | Fair |  |  |  |  |  |  |
(In Thousands) |  | Amount |  | Value |  | Level 1 |  | Level 2 |  | Level 3
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities - held to maturity |  | $ | 239,480 |  | $ | 239,510 |  | $ | — |  | $ | 239,510 |  | $ | —
Loans held for investment, not recorded at fair value |  | $ | 838,395 |  | $ | 837,523 |  | $ | — |  | $ | — |  | $ | 837,523
FHLB – San Francisco stock |  | $ | 7,970 |  | $ | 7,970 |  | $ | — |  | $ | 7,970 |  | $ | —
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 933,756 |  | $ | 901,496 |  | $ | — |  | $ | — |  | $ | 901,496
Borrowings |  | $ | 111,000 |  | $ | 115,187 |  | $ | — |  | $ | — |  | $ | 115,187
|  | June 30, 2020
|  | Carrying |  | Fair |  |  |  |  |  |  |
(In Thousands) |  | Amount |  | Value |  | Level 1 |  | Level 2 |  | Level 3
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities - held to maturity |  | $ | 118,627 |  | $ | 121,201 |  | $ | — |  | $ | 121,201 |  | $ | —
Loans held for investment, not recorded at fair value |  | $ | 900,538 |  | $ | 902,074 |  | $ | — |  | $ | — |  | $ | 902,074
FHLB – San Francisco stock |  | $ | 7,970 |  | $ | 7,970 |  | $ | — |  | $ | 7,970 |  | $ | —
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 892,969 |  | $ | 864,239 |  | $ | — |  | $ | — |  | $ | 864,239
Borrowings |  | $ | 141,047 |  | $ | 149,976 |  | $ | — |  | $ | — |  | $ | 149,976
Investment securities - held to maturity: The investment securities - held to maturity consist of time deposits at CRA qualified minority financial institutions, U.S. SBA securities and U.S. government sponsored enterprise MBS. Due to the short-term nature of the time deposits, the principal balance approximated fair value (Level 2). For the MBS and the U.S. SBA securities, the Corporation utilizes quoted prices in active markets for similar securities for its fair value measurement (Level 2). Loans held for investment, not recorded at fair value: 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. 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 using a discounted cash flow calculation and management estimates of 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. 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 March 31, 2021, there were no significant changes to the Corporation’s valuation techniques that had, or are expected to have, a material impact on its condensed 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/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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