Fair Value of Financial Instruments

9 Months Ended

Mar. 31, 2022

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

Note 7. 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: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as general classification of such instruments pursuant to the valuation hierarchy, is set forth below. While management believes the Company’s valuation methodologies are appropriate and consistent with other financial institutions, 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.

Investment Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs), or a broker's opinion of value (Level 3 inputs).

Impaired Loans: The fair value of collateral-dependent impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. Appraisals are generally obtained annually and may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Management performs a review of all appraisals, including any such adjustments. The fair value of uncollateralized or non-collateral-dependent loans are generally based on discounted cash flows which utilize management’s assumption of discount rates and expected future cash flows, resulting in a Level 3 classification.

Foreclosed Real Estate: Assets acquired through or instead of loan foreclosure are initially recorded at fair value, less estimated costs to sell, when acquired, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value, less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Foreclosed properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Credit Department, as well as a third-party specialist, where deemed appropriate, reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Once appraisals are considered appropriate, management discounts the appraised value for estimated selling costs, such as legal, broker, and property maintenance and insurance costs. The most recent analysis performed indicated discount rates ranging between 10% and 20% should be applied to properties with appraisals performed.

Derivatives: The Company’s derivative assets and liabilities consist of transactions undertaken as part of management’s strategy to manage interest rate risk. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy.

Assets and liabilities measured at fair value are summarized below (in thousands):

	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
March 31, 2022
Measured on a recurring basis:
Available for sale debt securities:
U.S. Government and agency obligations	$	-	$	10,229	$	-	$	10,229
Corporate		-		-		4,978		4,978
State and municipal		-		5,533		-		5,533
Mortgage-backed securities – residential		-		14,042		-		14,042
Mortgage-backed securities – commercial		-		2,403		-		2,403
Derivatives – interest rate contracts		-		4,843		-		4,843
Total assets at fair value	$	-	$	37,050	$	4,978	$	42,028
Derivatives – interest rate contracts	$	-	$	4,843	$	-	$	4,843
Total liabilities at fair value	$	-	$	4,843	$	-	$	4,843
Measured on a non-recurring basis:
Impaired loans:
Residential mortgages	$	-	$	-	$	307	$	307
Home equity lines of credit		-		-		28		28
Total assets at fair value	$	-	$	-	$	335	$	335

	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
June 30, 2021
Measured on a recurring basis:
Available for sale debt securities:
U.S. Government and agency obligations	$	-	$	21,816	$	-	$	21,816
Corporate		-		5,058		3,131		8,189
State and municipal		-		7,115		-		7,115
Mortgage-backed securities – residential		-		17,654		-		17,654
Mortgage-backed securities – commercial		-		2,613		-		2,613
Derivatives – interest rate contracts		-		4,232		-		4,232
Total assets at fair value	$	-	$	58,488	$	3,131	$	61,619
Derivatives – interest rate contracts	$	-	$	4,232	$	-	$	4,232
Total liabilities at fair value	$	-	$	4,232	$	-	$	4,232
Measured on a non-recurring basis:
Impaired loans:
Residential mortgages	$	-	$	-	$	312	$	312
Home equity lines of credit		-		-		25		25
Total assets at fair value	$	-	$	-	$	337	$	337

Investment securities with a fair value of $2.0 million were transferred from Level 2 to Level 3 during the three and nine months ended March 31, 2022 because of a lack of observable market data for this investment due to a decrease in the market activity for this security. There were no transfers between levels within the fair value hierarchy during the three and nine months ended March 31, 2021.

Impaired loans in the preceding table had a carrying amount of $454,000 and a remaining valuation allowance of $118,000, at March 31, 2022, as compared to $458,000 and $121,000, respectively, as of June 30, 2021. Impaired loans measured at fair value incurred no net charge-offs and resulted in a benefit for loan losses of $3,000 during the nine months ended March 31, 2022. Impaired loans measured at fair value as of March 31, 2021 incurred no net charge-offs and resulted in a provision for loan losses of $1,000 during the nine months ended March 31, 2021.

The following tables present quantitative information about Level 3 fair value measurements for selected financial instruments measured at fair value on a non-recurring basis at March 31, 2022 and June 30, 2021 (Dollars in thousands):

			Valuation	Unobservable	Range or
	Fair Value		Technique(s)	Input(s)	Rate Used
March 31, 2022
Impaired loans - residential mortgages	$	307	Discounted cash flow	Discount rate	5.4% to 6.3%
Impaired loans - home equity lines of credit		28	Discounted cash flow	Discount rate	5.4% to 6.3%
June 30, 2021
Impaired loans - residential mortgages	$	312	Discounted cash flow	Discount rate	5.4% to 6.3%
Impaired loans - home equity lines of credit		25	Discounted cash flow	Discount rate	5.4% to 6.3%

The following is a summary of the carrying amounts and estimated fair values of the Company’s financial assets and liabilities, none of which are held for trading purposes (in thousands):

	Carrying		Fair Value Measurements
	Amount		Level 1		Level 2			Level 3		Total
March 31, 2022
Financial assets:
Cash and cash equivalents	$	158,892	$	158,892	$	-		$	-	$	158,892
Held to maturity debt securities		410,896		-		324,079	-		55,421		379,500
Available for sale debt securities		37,185		-		32,207			4,978		37,185
Loans receivable, net		1,285,886		-		-			1,254,851		1,254,851
Accrued interest receivable		6,583		-		1,926			4,657		6,583
FHLB stock		3,715	N/A		N/A			N/A		N/A
Derivative assets - interest rate contracts		4,843		-		4,843			-		4,843
Financial liabilities:
Demand, NOW, money market deposits and savings accounts		1,279,627		1,279,627		-			-		1,279,627
Time deposits		345,092		-		348,306			-		348,306
Mortgage escrow funds		8,744		8,744		-			-		8,744
Advances from FHLB		48,357		-		48,950			-		48,950
Accrued interest payable		117		1		116			-		117
Derivative liabilities - interest rate contracts		4,843		-		4,843			-		4,843

	Carrying		Fair Value Measurements
	Amount		Level 1		Level 2		Level 3		Total
June 30, 2021
Financial assets:
Cash and cash equivalents	$	159,305	$	159,305	$	-	$	-	$	159,305
Held to maturity debt securities		337,584		-		305,671		36,466		342,137
Available for sale debt securities		57,387		-		54,256		3,131		57,387
Loans receivable, net		1,229,451		-		-		1,234,116		1,234,116
Accrued interest receivable		6,398		-		1,341		5,057		6,398
FHLB stock		4,507	N/A		N/A		N/A		N/A
Derivative assets - interest rate contracts		4,232		-		4,232		-		4,232
Financial liabilities:
Demand, NOW, money market deposits and savings accounts		1,116,667		1,116,667		-		-		1,116,667
Time deposits		375,015		-		380,948		-		380,948
Mortgage escrow funds		10,536		10,536		-		-		10,536
Advances from FHLB		65,957		-		67,334		-		67,334
Accrued interest payable		146		1		145		-		146
Derivative liabilities - interest rate contracts		4,232		-		4,232		-		4,232

The methods of determining the fair value of assets and liabilities presented in the table above are consistent with our methodologies disclosed in the Company's Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended June 30, 2021.