Fair Value of Financial Instruments

3 Months Ended

Jun. 30, 2011

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

Note 11 – Fair Value of Financial Instruments

Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flow or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments for which it is not practicable to estimate fair value, and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Corporation.

The Corporation, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions:

Cash and cash equivalents and accrued interest: The carrying amounts reported in the consolidated balance sheets approximate those assets’ and liabilities’ fair values.

Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. For securities in inactive markets, fair values are based on discounted cash flow or other valuation models.

Loans receivable: The fair values for loans held for sale are based on outstanding sale commitments or quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. For variable-rate loans held for investment that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value of fixed-rate residential mortgage loans held for investment, commercial real estate loans, commercial and industrial loans and consumer and other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. For construction loans, fair values are based on carrying values due to the short-term nature of the loans.

Federal Home Loan Bank stock: The carrying amount of FHLB stock approximates its fair value as it can only be redeemed to the FHLB at its par value.

Deposits: The fair values for negotiable order of withdrawal accounts, passbook accounts and variable rate insured money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair values of fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates being offered on certificates of deposit to a schedule of aggregated expected monthly maturities of the outstanding certificates of deposit.

Other Borrowed Funds: The fair values of the Corporation’s borrowings are estimated using discounted cash flow analysis, based on the Corporation’s current incremental borrowing rates for similar types of borrowing arrangements.

Off-balance-sheet instruments: Fair values of the Corporation’s off-balance-sheet instruments (lending commitments and unused lines of credit) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the counterparties’ credit standing and discounted cash flow analyses. The fair value of these off-balance-sheet items approximates the recorded amounts of the related fees and is not material at June 30, 2011 and March 31, 2011.

The carrying amounts and fair values of the Corporation’s financial instruments consist of the following (in thousands):

	June 30, 2011				March 31, 2011
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	$	128,746	$	128,746	$	107,015	$	107,015
Investment securities available for sale		470,771		470,771		523,289		523,289
Investment securities held to maturity		25		25		27		28
Loans held for sale		16,333		16,544		7,538		7,633
Loans held for investment		2,390,987		2,304,587		2,520,367		2,430,117
Mortgage servicing rights		24,105		25,210		24,961		26,554
Federal Home Loan Bank stock		54,829		54,829		54,829		54,829
Accrued interest receivable		15,623		15,623		16,353		16,353
Financial liabilities:
Deposits		2,646,465		2,600,063		2,703,659		2,653,725
Other borrowed funds		543,679		566,358		654,779		676,914
Accrued interest payable—borrowings		24,200		24,200		20,166		20,166
Accrued interest payable—deposits		3,010		3,010		3,501		3,501

Accounting guidance for fair value establishes a framework for measuring fair value and expands disclosures about fair value measurements. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

In determining the fair value, the Corporation uses various valuation methods including market, income and cost approaches. Based on these approaches, the Corporation utilizes assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable inputs. The Corporation uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on observability of the inputs used in the valuation techniques, the Corporation is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

• Level 1: Valuations for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

• Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or similar assets or liabilities.

• Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. Level 3 valuations incorporate certain unobservable assumptions and projections in determining the fair value assigned to such assets.

Fair Value on a Recurring Basis

The following table presents the financial instruments carried at fair value as of June 30, 2011 and March 31, 2011, by the valuation hierarchy (as described above) (in thousands):

	June 30, 2011		Fair Value Measurements Using
			Quoted Prices
			in Active		Significant Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Available for sale debt securities:
U.S. Government sponsored and federal agency obligations	$	4,195	$	—	$	4,195	$	—
Agency CMOs and REMICs		335		—		335		—
Non-agency CMOs		35,270		—		—		35,270
Residential agency mortgage-backed securities		6,143		—		6,143		—
GNMA securities		423,531		—		423,531		—
Corporate bonds		1,093		593		500		—
Available for sale equity securities:
U.S. Government sponsored agency preferred stock		204		204		—		—
Total assets at fair value	$	470,771	$	797	$	434,704	$	35,270

	March 31, 2011		Fair Value Measurements Using
			Quoted Prices
			in Active		Significant Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Available for sale debt securities:
U.S. Government sponsored and federal agency obligations	$	4,126	$	—	$	4,126	$	—
Agency CMOs and REMICs		358		—		358		—
Non-agency CMOs		46,637		—		—		46,637
Residential agency mortgage-backed securities		6,389		—		6,389		—
GNMA securities		464,560		—		464,560		—
Corporate bonds		1,083		583		500		—
Available for sale equity securities:
U.S. Government sponsored agency preferred stock		136		136		—		—
Total assets at fair value	$	523,289	$	719	$	475,933	$	46,637

An independent pricing service is used to price available-for-sale U.S. Government and federal agency obligations, agency CMOs and Real Estate Mortgage Investments (“REMICs”), residential agency mortgage-backed securities, Ginnie Mae securities and corporate bonds using a market data model under Level 2. The significant inputs used at June 30, 2011 to price Ginnie Mae securities include coupon rates of 1.75% to 5.50%, durations of 0.2 to 8.1 years and PSA prepayment speeds of 167 to 450.

The Corporation had 99.7% of its non-agency CMOs valued by an independent pricing service that used a discounted cash flow model that uses Level 3 inputs in accordance with accounting guidance. The significant inputs used by the model at June 30, 2011 include observable inputs of 30 to 59 day delinquency of 0.8% to 4.9%, 60 to 89 day delinquency of 0.1% to 2.6%, 90 plus day delinquency of 0.8% to 8.4%, loss severity of 28.8% to 65.6%, coupon rates of 4.5% to 7.5%, current credit support of 0% to 17.5%, the month one to month 24 constant default rate of 1.0% to 10.9% and discount rates of 4.0% to 12.0%.

The following is a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):

	Three Months
	Ended			Year Ended
	June 30, 2011			March 31, 2011
										Residential
				Agency CMOs			Non-agency			Agency mortgage-			GNMA
	Non-agency CMOs			and REMICs			CMOs			backed securities			securities
Balance at beginning of period	$	46,637		$	1,413		$	85,367		$	15,440		$	261,754
Total gains (losses) (realized/unrealized)
Included in earnings		21			—			2,754			(5	)		(1,327	)
Included in other comprehensive income		(266	)		6			1,447			491			6,232
Included in earnings as other than temporary impairment		—			—			(440	)		—			—
Purchases		—			—			—			17,058			92,879
Principal repayments		(2,585	)		(663	)		(19,918	)		(1,395	)		(7,168	)
Sales		(8,537	)		—			(22,573	)		—			—
Transfers out of level 3		—			(756	)		—			(31,589	)		(352,370	)
Balance at end of period	$	35,270		$	—		$	46,637		$	—		$	—

There were no transfers in or out of Levels 1, 2 or 3 during the three months ended June 30, 2011. All non-agency CMO’s remained in Level 3 as of June 30, 2011.

Fair Value on a Nonrecurring Basis

Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents such assets carried on the consolidated balance sheet by caption and by level within the fair value hierarchy as of June 30, 2011 and March 31, 2011 (in thousands):

	June 30, 2011		Fair Value Measurements Using
			Quoted Prices
			in Active		Significant Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	116,009	$	—	$	—	$	116,009
Loans held for sale		887		—		—		887
Mortgage servicing rights		7,143		—		—		7,143
Foreclosed properties and repossessed assets		89,491		—		—		89,491
Total assets at fair value	$	213,530	$	—	$	—	$	213,530

	March 31, 2011		Fair Value Measurements Using
			Quoted Prices
			in Active		Significant Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	177,893	$	—	$	—	$	177,893
Loans held for sale		278		—		—		278
Mortgage servicing rights		6,251		—		—		6,251
Foreclosed properties and repossessed assets		90,707		—		—		90,707
Total assets at fair value	$	275,129	$	—	$	—	$	275,129

The Corporation does not record impaired loans at fair value on a recurring basis. However, some loans are considered impaired and an allowance for loan losses is established. The specific reserves for collateral dependent impaired loans are based on the fair value of the collateral less estimated costs to sell. The fair value of collateral is usually determined based on appraisals. In some cases, adjustments were made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. When significant adjustments were based on unobservable inputs, the resulting fair value measurement has been categorized as a Level 3 measurement.

Loans held for sale primarily consist of the current origination of certain fixed-rate mortgage loans and certain adjustable-rate mortgage loans and are carried at lower of cost or fair value, determined on a loan level basis. These loans are valued individually based upon quoted market prices and the amount of any gross loss is recorded as a mark to market charge in loans held for sale. Fees received from the borrower and direct costs to originate the loan are deferred and recorded as an adjustment of the loan carrying value.

Mortgage servicing rights are recorded as an asset when loans are sold to third parties with servicing rights retained. The cost allocated to the mortgage servicing rights retained has been recognized as a separate asset and is initially recorded at fair value and amortized in proportion to, and over the period of, estimated net servicing revenues. The carrying value of these assets is reviewed for impairment on a monthly basis using a lower of carrying value or fair value methodology. The fair value of the servicing rights is determined by estimating the present value of future net cash flows, taking into consideration market loan prepayment speeds, discount rates, servicing costs and other economic factors. For purposes of measuring impairment, the rights are stratified based on predominant risk characteristics of the underlying loans which include product type (i.e., fixed or adjustable) and interest rate bands. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights on a loan-by-loan basis exceed their fair value.

Foreclosed properties and repossessed assets, upon initial recognition, are measured and reported at fair value less estimated costs to sell through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. The fair value of foreclosed properties and repossessed assets, upon initial recognition, is estimated using Level 3 inputs based on fair value less estimated costs to sell. Foreclosed properties and repossessed assets are re-measured at fair value after initial recognition through the use of a valuation allowance on foreclosed assets.