Fair Value of Financial Instruments

9 Months Ended

Mar. 31, 2022

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:


	Level 1:		Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
	Level 2:		Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include 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, inputs other than quoted prices that are observable for the asset or liability or inputs that are derived principally from, or corroborated by, market data by correlation or other means.
	Level 3:		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Assets Measured on a Recurring Basis:

The following methods and significant assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis at March 31, 2022 and June 30, 2021:

Investment Securities Available for Sale

The Company’s available for sale investment securities are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other things. From time to time, the Company validates prices supplied by the independent pricing service by comparison to prices obtained from third-party sources or derived using internal models.

Derivatives

The Company has contracted with a third party vendor to provide periodic valuations for its interest rate derivatives to determine the fair value of its interest rate caps and swaps. The vendor utilizes standard valuation methodologies applicable to interest rate derivatives such as discounted cash flow analysis and extensions of the Black-Scholes model. Such valuations are based upon readily observable market data and are therefore considered Level 2 valuations by the Company.

Those assets measured at fair value on a recurring basis are summarized below:


	March 31, 2022
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In Thousands)
Assets:
Debt securities available for sale:
Obligations of state and political subdivisions	$	-	$	31,078	$	-	$	31,078
Asset-backed securities		-		229,584		-		229,584
Collateralized loan obligations		-		311,620		-		311,620
Corporate bonds		-		153,495		-		153,495
Total debt securities		-		725,777		-		725,777

Mortgage-backed securities available for sale:
Collateralized mortgage obligations		-		7,996		-		7,996
Residential pass-through securities		-		570,150		-		570,150
Commercial pass-through securities		-		222,163		-		222,163
Total mortgage-backed securities		-		800,309		-		800,309
Total securities available for sale	$	-	$	1,526,086	$	-	$	1,526,086

Interest rate contracts	$	-	$	34,007	$	-	$	34,007

Total assets	$	-	$	1,560,093	$	-	$	1,560,093


	June 30, 2021
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In Thousands)
Assets:
Debt securities available for sale:
Obligations of state and political subdivisions	$	-	$	34,603	$	-	$	34,603
Asset-backed securities		-		242,989		-		242,989
Collateralized loan obligations		-		189,880		-		189,880
Corporate bonds		-		158,351		-		158,351
Total debt securities		-		625,823		-		625,823

Mortgage-backed securities available for sale:
Collateralized mortgage obligations		-		13,739		-		13,739
Residential pass-through securities		-		744,491		-		744,491
Commercial pass-through securities		-		292,811		-		292,811
Total mortgage-backed securities		-		1,051,041		-		1,051,041
Total securities available for sale	$	-	$	1,676,864	$	-	$	1,676,864

Interest rate contracts	$	-	$	1,832	$	-	$	1,832

Total assets	$	-	$	1,678,696	$	-	$	1,678,696

Liabilities:
Interest rate contracts	$	-	$	673	$	-	$	673
Total liabilities	$	-	$	673	$	-	$	673

Assets Measured on a Non-Recurring Basis:

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurring basis at March 31, 2022 and June 30, 2021:

Collateral Dependent Individually Analyzed Loans

The fair value of collateral dependent loans that are individually analyzed is determined based upon the appraised fair value of the underlying collateral, less costs to sell. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. Management may also adjust appraised values to reflect estimated changes in market values or apply other adjustments to appraised values resulting from its knowledge of the collateral. Internal valuations may be utilized to determine the fair value of other business assets. For non-collateral-dependent loans, management estimates fair value using discounted cash flows based on inputs that are largely unobservable and instead reflect management’s own estimates of the assumptions as a market participant would in pricing such loans. Collateral dependent individually analyzed loans are considered a Level 3 valuation by the Company.

Other Real Estate Owned

Other real estate owned is recorded at estimated fair value, less estimated selling costs when acquired, thus establishing a new cost basis. Fair value is generally based on independent appraisals. These appraisals include adjustments to comparable assets based on the appraisers’ market knowledge and experience. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the allowance for credit losses. If further declines in the estimated fair value of the asset occur, a write-down is recorded through expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of changes in economic conditions.

Those assets measured at fair value on a non-recurring basis are summarized below:


	March 31, 2022
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In Thousands)
Collateral dependent loans:
Residential mortgage	$	-	$	-	$	2,239	$	2,239
Multi-family mortgage		-		-		4,558		4,558
Nonresidential mortgage		-		-		5,799		5,799
Total	$	-	$	-	$	12,596	$	12,596

Other real estate owned, net:
Residential	$	-	$	-	$	401	$	401
Total	$	-	$	-	$	401	$	401


	June 30, 2021
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In Thousands)
Collateral dependent loans:
Residential mortgage	$	-	$	-	$	3,051	$	3,051
Multi-family mortgage						6,932		6,932
Nonresidential mortgage		-		-		8,679		8,679
Total	$	-	$	-	$	18,662	$	18,662

Other real estate owned, net:
Residential	$	-	$	-	$	178	$	178
Total	$	-	$	-	$	178	$	178

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company has utilized adjusted Level 3 inputs to determine fair value:


	March 31, 2022
	Fair Value		Valuation Techniques		Unobservable Input		Range	Weighted Average
	(Dollars in Thousands)
Collateral dependent loans:
Residential mortgage	$	2,239	Market valuation of underlying collateral	(1)	Adjustments to reflect current conditions/selling costs	(2)	7% - 14%		10.39	%
Multi-family mortgage		4,558	Market valuation of underlying collateral	(1)	Adjustments to reflect current conditions/selling costs	(2)	10% - 11%		10.60	%
Nonresidential mortgage		5,799	Market valuation of underlying collateral	(1)	Adjustments to reflect current conditions/selling costs	(2)	9% - 19%		14.97	%
Total	$	12,596

Other real estate owned, net:
Residential	$	401	Market valuation of underlying collateral	(3)	Adjustments to reflect current conditions/selling costs	(2)	5% - 6%		5.44	%
Total	$	401


	June 30, 2021
	Fair Value		Valuation Techniques		Unobservable Input		Range	Weighted Average
	(Dollars in Thousands)
Collateral dependent loans:
Residential mortgage	$	3,051	Market valuation of underlying collateral	(1)	Adjustments to reflect current conditions/selling costs	(2)	7% - 13%		9.77	%
Multi-family mortgage		6,932	Market valuation of underlying collateral	(1)	Adjustments to reflect current conditions/selling costs	(2)	10% - 11%		10.39	%
Nonresidential mortgage		8,679	Market valuation of underlying collateral	(1)	Adjustments to reflect current conditions/selling costs	(2)	9% - 16%		14.48	%
Total	$	18,662

Other real estate owned, net:
Residential	$	178	Market valuation of underlying collateral	(3)	Adjustments to reflect current conditions/selling costs	(2)	6.00%		6.00	%
Total	$	178

(1)

The fair value of collateral dependent individually analyzed loans is generally determined based on an independent appraisal of the fair value of a loan’s underlying collateral.

(2)

The fair value basis of collateral dependent individually analyzed loans and other real estate owned is adjusted to reflect management’s estimates of selling costs including, but not necessarily limited to, real estate brokerage commissions and title transfer fees.

(3)

The fair value of other real estate owned is generally determined based upon the lower of an independent appraisal of the property’s fair value or the applicable listing price or contracted sales price.

At March 31, 2022, collateral dependent loans valued using Level 3 inputs comprised loans with principal balance totaling $13.6 million and valuation allowances of $976,000 reflecting fair values of $12.6 million. By comparison, at June 30, 2021, collateral dependent loans valued using Level 3 inputs comprised loans with principal balance totaling $25.2 million and valuation allowances of $6.5 million reflecting fair values of $18.7 million.

Once a loan is foreclosed, the fair value of the other real estate owned continues to be evaluated based upon the fair value of the repossessed real estate originally securing the loan. At March 31, 2022 and June 30, 2021, the Company held other real estate owned totaling $401,000 and $178,000, respectively, whose carrying value was written down utilizing Level 3 inputs.

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2022 and June 30, 2021:


	March 31, 2022
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	62,379	$	62,379	$	62,379	$	-	$	-
Investment securities available for sale		1,526,086		1,526,086		-		1,526,086		-
Investment securities held to maturity		121,853		117,017		-		117,017		-
Loans held-for-sale		2,822		2,759		-		2,759		-
Net loans receivable		4,959,341		4,877,212		-		-		4,877,212
FHLB Stock		30,997		-		-		-		-
Interest receivable		19,517		19,517		3		5,311		14,203
Interest rate contracts		34,007		34,007		-		34,007		-

Financial liabilities:
Deposits		5,528,662		5,515,560		3,865,416		-		1,650,144
Borrowings		851,220		853,824		-		-		853,824
Interest payable on deposits		164		164		79		-		85
Interest payable on borrowings		1,365		1,365		-		-		1,365


	June 30, 2021
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	67,855	$	67,855	$	67,855	$	-	$	-
Investment securities available for sale		1,676,864		1,676,864		-		1,676,864		-
Investment securities held to maturity		38,138		39,610		-		39,610		-
Loans held-for-sale		16,492		16,934		-		16,934		-
Net loans receivable		4,793,229		4,830,136		-		-		4,830,136
FHLB Stock		36,615		-		-		-		-
Interest receivable		19,362		19,362		1		4,238		15,123
Interest rate contracts		1,832		1,832		-		1,832		-

Financial liabilities:
Deposits		5,485,306		5,490,923		3,607,560		-		1,883,363
Borrowings		685,876		701,419		-		-		701,419
Interest payable on deposits		145		145		96		-		49
Interest payable on borrowings		1,335		1,335		-		-		1,335
Interest rate contracts		673		673		-		673		-

Commitments. The fair value of commitments to fund credit lines and originate or participate in loans held in portfolio or loans held for sale is estimated using fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, including those relating to loans held for sale that are considered derivative instruments for financial statement reporting purposes, the fair value also considers the difference between current levels of interest and the committed rates. The carrying value, represented by the net deferred fee arising from the unrecognized commitment, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, is not considered material for disclosure.

Limitations. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no fair value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to value anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment, and advances from borrowers for taxes and insurance. In addition, the ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies introduces a greater degree of subjectivity to these estimated fair values.

- 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.

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