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FAIR VALUE DISCLOSURES
 12 Months Ended
Sep. 30, 2016
Fair Value Disclosures [Abstract]  
FAIR VALUE DISCLOSURES

NOTE R - FAIR VALUE DISCLOSURES

 

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company’s securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets or liabilities on a non-recurring basis, such as held-to-maturity securities, mortgage servicing rights, loans receivable and other real estate owned, or OREO. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

 

In accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), the Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

  Level 1- Valuation is based upon quoted prices for identical instruments traded in active markets.
     
  Level 2- Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
     
  Level 3- Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.

 

The Company bases its fair values on 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. ASC 820 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The following is a description of valuation methodologies used for assets measured at fair value on a recurring basis.

 

Securities available-for-sale

The Company’s available-for-sale portfolio is carried at estimated fair value on a recurring basis, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in stockholders’ equity. The securities available-for-sale portfolio consists of U.S. government and government-sponsored enterprise obligations, municipal bonds, and mortgage-backed securities. The fair values of these securities are obtained from an independent nationally recognized pricing service. An independent pricing service provides prices which are categorized as Level 2, as quoted prices in active markets for identical assets are generally not available for the securities.

 

Derivative financial instruments

The Company uses interest rate floors to manage its interest rate risk. The valuation of these instruments is based on a third party value of interest rate derivative contracts which are based on the fair market value using market prices provided from brokers trading in such instruments, less their carrying value. The carrying value is the price paid for the derivative contracts less prior amortization of the price paid. There are no derivative financial instruments at September 30, 2016 and 2015.

 

The following table provides the level of valuation assumptions used to determine the carrying value of the Company’s assets measured at fair value on a recurring basis at September 30, 2016 and 2015:

 

   Fair Value at September 30, 2016 
   Total   Level 1   Level 2   Level 3 
   (Dollars in thousands) 
Securities available for sale:                    
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential  $5,127   $—   $5,127   $— 
Private label mortgage-backed securities-residential   107    —    107    — 
            Total securities available for sale  $5,234   $—   $5,234   $— 
                     

 

   Fair Value at September 30, 2015 
   Total   Level 1   Level 2   Level 3 
   (Dollars in thousands) 
Securities available for sale:                    
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential  $5,914   $—   $5,914   $— 
Private label mortgage-backed securities-residential   150    —    150    — 
            Total securities available for sale  $6,064   $—   $6,064   $— 

 

The following is a description of valuation methodologies used for assets measured at fair value on a non-recurring basis.

 

Mortgage Servicing Rights

Mortgage Servicing Rights (MSR’s) are carried at the lower of amortized cost or estimated fair value. The estimated fair value of MSRs is determined through a calculation of future cash flows, incorporating estimates of assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market’s perception of future interest rate movements and, as such, are classified as Level 3. No valuation write-downs were made to MSR’s during the years ended September 30, 2016 and 2015.

 

Impaired Loans

Loans which meet certain criteria are evaluated individually for impairment. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Three impairment measurement methods are used, depending upon the collateral securing the asset: 1) the present value of expected future cash flows discounted at the loan’s effective interest rate (the rate of return implicit in the loan); 2) the asset’s observable market price; or 3) the fair value of the collateral if the asset is collateral dependent. The regulatory agencies require this method for loans from which repayment is expected to be provided solely by the underlying collateral. The Company’s impaired loans are generally collateral dependent and, as such, are carried at the estimated fair value of the collateral less estimated selling and disposition costs. Fair value is estimated through current appraisals, and adjusted as necessary, by management, to reflect current market conditions and, as such, are generally classified as Level 3.

 

Appraisals of collateral securing impaired loans are conducted by approved, qualified, and independent third-party appraisers. Such appraisals are ordered via the Bank’s credit administration department, independent from the lender who originated the loan, once the loan is deemed impaired, as described in the previous paragraph. Impaired loans are generally re-evaluated with an updated appraisal within one year of the last appraisal. However, the Company also obtains updated appraisals on performing construction loans that are approaching their maturity date to determine whether or not the fair value of the collateral securing the loan remains sufficient to cover the loan amount prior to considering an extension. The Company discounts the appraised “as is” value of the collateral for estimated selling and disposition costs and compares the resulting fair value of collateral to the outstanding loan amount. If the outstanding loan amount is greater than the discounted fair value, the Company requires a reduction in the outstanding loan balance or additional collateral before considering an extension to the loan. If the borrower is unwilling or unable to reduce the loan balance or increase the collateral securing the loan, it is deemed impaired and the difference between the loan amount and the fair value of collateral, net of estimated selling and disposition costs, is charged off through a reduction of the allowance for loan loss.

 

Other Real Estate Owned

Other real estate owned is carried at lower of cost or estimated fair value less disposal costs. The estimated fair value of the real estate is determined through current appraisals, and adjusted as necessary, by management, to reflect current market conditions. As such, other real estate owned is generally classified as Level 3. Valuation write-downs totaling $301,000 were made to six properties held as other real estate owned during the year ended September 30, 2016. The properties were written down based on an updated appraisal of the real estate.

 

The following tables provide the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a non-recurring basis at September 30, 2016 and 2015:

 

   Fair Value at September 30, 2016 
   Total   Level 1   Level 2   Level 3 
   (In thousands) 
                 
Impaired loans  $958   $—   $—   $958 
Other real estate owned   12,082    —    —    12,082 
   $13,040   $—   $—   $13,040 

 

   Fair Value at September 30, 2015 
   Total   Level 1   Level 2   Level 3 
   (In thousands) 
                 
Impaired loans  $1,489   $—   $—   $1,489 
Other real estate owned   16,192    —    —    16,192 
   $17,681   $—   $—   $17,681 

 

Impaired loans reported for the period ended September 30, 2016 consisted of seven loans with aggregate loan balances of $3.1 million reduced by $848,000 in cumulative charge-offs and $39,000 in specific loss reserves.

 

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

 

Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)
         
  Fair Value Valuation    
September 30, 2016 Estimate Techniques Unobservable Input Range (Weighted Average)
         
Impaired loans $  958 Appraisal of collateral (1) Appraisal adjustments (2) -5.8% to -36.5% (-19.5%)
Other real estate owned $ 12,082 Appraisal of collateral (1) Liquidation expenses (2) -3.9% to -41.6% (-22.4%)

 

Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)
         
  Fair Value Valuation    
September 30, 2015 Estimate Techniques Unobservable Input Range (Weighted Average)
         
Impaired loans $ 1,489 Appraisal of collateral (1) Appraisal adjustments (2) -16.0% to -40.0% (-8.0%)
Other real estate owned  $ 16,192 Appraisal of collateral (1) Liquidation expenses (2) 0.0% to -41.2% (-15.1%)

 

(1)Fair value is generally determined through independent appraisals for the underlying collateral, which generally include various level 3 inputs which are not identifiable.
(2)Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair value:

 

Cash and interest earning deposits with banks: The carrying amounts are a reasonable estimate of fair value.

 

Held to maturity securities: The fair values of Company’s held to maturity securities are obtained from an independent nationally recognized pricing service. The Company’s independent pricing service provides prices which are categorized as Level 2, as quoted prices in active markets for identical assets are generally not available for the securities.

 

Loans receivable: Fair value for the loan portfolio, excluding impaired loans, is estimated based on discounted cash flow analysis using interest rates currently offered for loans with similar terms to borrowers of similar credit quality.

 

Bank owned life insurance: The carrying amounts are based on the cash surrender values of the individual policies, which is a reasonable estimate of fair value.

 

Deposits: The fair value of savings deposits with no stated maturity, such as money market deposit accounts, interest-bearing checking accounts and savings accounts, is equal to the amount payable on demand. The fair value of certificates of deposit including retirement accounts is based on the discounted value of contractual cash flows. The discount rate is equivalent to the rate currently offered by the Bank for deposits of similar size, type and maturity.

 

Accrued interest receivable and payable: For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

 

Federal Home Loan Bank of New York advances: The fair value of borrowings is based on the discounted value of contractual cash flows. The discount rate is equivalent to the rate currently offered by the Federal Home Loan Bank of New York for borrowings of similar maturity and terms.

 

Interest rate derivatives: The third party value of interest rate derivative contracts are based on the fair market value using market prices provided from brokers trading in such instruments, less their carrying value. The carrying value is the price paid for the derivative contracts less prior amortization of the price paid.

 

The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate the letters of credit. Fair values of unrecognized financial instruments including commitments to extend credit and the fair value of letters of credit are considered immaterial.

 

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments carried at cost or amortized cost as of September 30, 2016 and September 30, 2015. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as interest-bearing demand, NOW, and money market savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

 

   Carrying   Fair   Fair Value Measurement Placement 
   Amount   Value   (Level 1)   (Level 2)   (Level 3) 
   (Dollars in thousands) 
September 30, 2016                         
Financial instruments - assets                         
Investment securities held-to-maturity  $52,934   $53,849   $—   $53,849   $— 
Loans   455,031    462,868    —    —    462,868 
Financial instruments - liabilities                         
Certificate of deposit   133,979    135,162    —    135,162    — 
Borrowings   36,040    36,473    —    36,473    — 
                          
September 30, 2015                         
Financial instruments - assets                         
Investment securities held-to-maturity  $52,614   $53,248   $—   $53,248   $— 
Loans   420,596    425,890    —    —    425,890 
Financial instruments - liabilities                         
Certificate of deposit   143,108    144,150    —    144,150    — 
Borrowings   31,594    32,231    —    32,231    —