14. FAIR VALUE

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.

The fair values of securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or 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).

The fair value of interest rate swaps are based on valuation models using observable market data as of the measurement date (Level 2). The fair value of derivatives are classified as a component of other assets and other liabilities on the consolidated statements of condition.

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. 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 appraisers to adjust for differences between the comparable sales and income data available. Such adjustments result in a Level 3 classification of the inputs for determining fair value.

Nonrecurring adjustments to certain commercial and residential real estate properties classified as OREO are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use 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 result in a Level 3 classification of the inputs for determining fair value.

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below (dollars in thousands):


			Fair Value Measurements at
			June 30, 2020 Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets:
Available for sale securities:
U.S. Government and agency obligations	$	61,511	$	61,511	$	—	$	—
Mortgage-backed securities - residential		78		—		78		—
Asset-backed securities		110		—		110		—
Collateralized mortgage obligations – residential		684		—		684		—
Municipal obligations		13,385		—		13,385		—
Total available for sale securities		75,768		61,511		14,257		—
Equity securities		8,533		5,528		3,005		—
Derivative assets		42,922		—		42,922		—
Total	$	127,223	$	67,039	$	60,184	$	—

Liabilities:
Derivative liabilities	$	—	$	—	$	—	$	—
Total	$	—	$	—	$	—	$	—


			Fair Value Measurements at
			June 30, 2019 Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets:
Available for sale securities:
U.S. Government and agency obligations	$	70,867	$	70,867	$	—	$	—
Mortgage-backed securities - residential		112		—		112		—
Asset-backed securities		128		—		128		—
Collateralized mortgage obligations – residential		889		—		889		—
Municipal obligations		14,699		—		14,699		—
Total available for sale securities		86,695		70,867		15,828		—
Equity securities		8,658		5,588		3,070		—
Derivative assets		13,462		—		13,462		—
Total	$	108,815	$	76,455	$	32,360	$	—

Liabilities:
Derivative liabilities	$	144	$	—	$	144	$	—
Total	$	144	$	—	$	144	$	—

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below (dollars in thousands):


			Fair Value Measurements Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
June 30, 2020
Impaired loans:
Commercial loans	$	775	$	—	$	—	$	775
OREO		260		—		—		260

June 30, 2019
Impaired loans:
Commercial loans	$	840	$	—	$	—	$	840
OREO		158		—		—		158

Impaired loans, which are assets measured at fair value on a non-recurring basis, using the fair value of collateral for collateral dependent loans, had a carrying amount of $1.7 million with a valuation allowance of $929,000 resulting in an estimated fair value of $775,000 as of June 30, 2020. Impaired loans, which are assets measured at fair value on a non-recurring basis, using the fair value of collateral for collateral dependent loans, had a carrying amount of $1.3 million with a valuation allowance of $426,000 resulting in an estimated fair value of $840,000 as of June 30, 2019.

OREO measured at fair value less costs to sell, had a carrying amount of $260,000 at June 30, 2020. There were write-downs of $8,000 for the year ended June 30, 2020.

OREO measured at fair value less costs to sell, had a carrying amount of $158,000 at June 30, 2019. There were write-downs of $17,000 for the year ended June 30, 2019.

The carrying and estimated fair values of financial assets and liabilities as of June 30 were as follows (dollars in thousands):


	June 30, 2020
						Fair Value Measurements Using
							Significant
					Active Markets		Other		Significant
					for Identical		Observable		Unobservable
	Carrying		Estimated		Assets		Inputs		Inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and cash equivalents	$	156,903	$	156,903	$	156,903	$	—	$	—
Securities available for sale		75,768		75,768		61,511		14,257		—
Securities held to maturity		6,822		6,917		—		6,917		—
Equity securities		8,533		8,533		5,528		3,005		—
FHLBNY stock		1,010		1,010		—		1,010		—
Net loans receivable		1,148,399		1,180,002		—		—		1,180,002
Accrued interest receivable		3,467		3,467		—		3,467		—
Derivative assets		42,922		42,922		—		42,922		—

Financial liabilities
Deposits
Savings, money market, and demand accounts	$	1,150,591	$	1,150,591	$	—	$	1,150,591	$	—
Time deposits		119,559		120,921		—		120,921		—
Mortgagors’ escrow deposits		6,044		6,044		—		6,044		—
Due to broker		7,758		7,758		7,758		—		—
Accrued interest payable		35		35		—		35		—


	June 30, 2019
						Fair Value Measurements Using
							Significant
					Active Markets		Other		Significant
					for Identical		Observable		Unobservable
	Carrying		Estimated		Assets		Inputs		Inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and cash equivalents	$	230,109	$	230,109	$	230,109	$	—	$	—
Securities available for sale		86,695		86,695		70,867		15,828		—
Securities held to maturity		3,873		3,887		—		3,887		—
Equity securities		8,658		8,658		5,588		3,070		—
FHLBNY stock		924		924		—		924		—
Net loans receivable		1,053,938		1,065,328		—		—		1,065,328
Accrued interest receivable		4,374		4,374		—		4,374		—
Derivative assets		13,462		13,462		—		13,462		—

Financial liabilities
Deposits
Savings, money market, and demand accounts	$	1,200,753	$	1,200,753	$	—	$	1,200,753	$	—
Time deposits		130,565		130,680		—		130,680		—
Mortgagors’ escrow deposits		6,044		6,044		—		6,044		—
Accrued interest payable		17		17		—		17		—
Derivative liabilities		144		144		—		144		—

Short-Term Financial Instruments

The fair value of certain financial instruments are estimated to approximate their carrying amounts because the remaining term to maturity or period to repricing of the financial instrument is less than ninety days. Such financial instruments include cash and cash equivalents, accrued interest receivable and payable, due to brokers and mortgagor’s escrow deposits.

Securities

Fair values of securities available for sale, securities held to maturity and equity securities are determined as outlined earlier in this footnote.

FHLBNY Stock

The fair value of FHLB stock approximates its carrying value due to transferability restrictions.

Loans

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, including residential real estate, commercial real estate, and consumer loans and whether the interest rates are fixed and/or variable.

The estimated fair values of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the respective loan portfolio.

Estimated fair values for nonperforming loans are based on estimated cash flows discounted using a rate commensurate with the credit risk involved. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information.

Derivatives

Fair values of derivative assets and liabilities are determined as outlined earlier in this footnote.

Deposits

The estimated fair value of deposits with no stated maturity, such as savings, money market and demand deposits, is regarded to be the amount payable on demand. The estimated fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using market rates for time deposits with similar maturities. The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposits as compared to the cost of borrowing funds in the market.

Borrowings

The estimated fair value of FHLB advances, if any, is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for borrowings with similar remaining maturities.

The fair values of commitments to extend credit, unused lines of credit, and standby letters of credit are not considered material.