FAIR VALUE MEASUREMENT

6 Months Ended

Mar. 31, 2022

13. FAIR VALUE MEASUREMENT

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2022 and September 30, 2021, respectively. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

Generally accepted accounting principles used in the United States establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

The three broad levels of hierarchy are as follows:

Level 1 Quoted prices in active markets for identical assets or liabilities.

Level 2 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 for substantially the full term of the assets or liabilities.

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.

Those assets and liabilities as of March 31, 2022 which are measured at fair value on a recurring basis are as follows:


	Category Used for Fair Value Measurement
	Level 1		Level 2		Level 3		Total

	(Dollars in Thousands)

Assets:
Securities available for sale:
U.S. Government and agency obligations	$	—	$	2,613	$	—	$	2,613
State and political subdivisions		—		73,587		—		73,587
Mortgage-backed securities - U.S. Government agencies		—		118,291		—		118,291
Corporate bonds		—		102,658		—		102,658
Equity securities		21		—		—		21
Interest rate swap contracts		—		1,177		—		1,177
Total	$	21	$	298,326	$	—	$	298,347

Liabilities:
Interest rate swap contracts	$	—	$	1,167	$	—	$	1,167
Total	$	—	$	1,167	$	—	$	1,167

Those assets and liabilities as of September 30, 2021 which are measured at fair value on a recurring basis are as follows:


	Category Used for Fair Value Measurement
	Level 1		Level 2		Level 3		Total

	(Dollars in Thousands)

Assets:
Securities available for sale:
U.S. Government and agency obligations	$	—	$	3,194	$	—	$	3,194
State and political subdivisions		—		72,259		—		72,259
Mortgage-backed securities - U.S. Government agencies		—		135,353		—		135,353
Corporate bonds		—		95,141		—		95,141
Equity securities		22		—		—		22
Total	$	22	$	305,947	$	—	$	305,969

Liabilities:
Interest rate swap contracts	$	—	$	12,834	$	—	$	12,834
Total	$	—	$	12,834	$	—	$	12,834

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 Company measures impaired loans and real estate owned at fair value on a non-recurring basis.

Investments Mortgage-Backed and Equity Securities

The fair value of investment and mortgage-backed securities is based on quoted market prices, dealer quotes, and prices obtained from independent pricing services.

Interest Rate Swap Contracts

The fair values of the interest rate swaps used for interest rate risk management and the risk participation agreement
associated with a commercial real estate loan are based on an external derivative valuation model using data inputs from similar transactions as of the valuation date and classified Level 2.

Impaired Loans

Collateral dependent impaired loans are based on the fair value of the collateral which is based on appraisals and would be categorized as Level 2 measurement. In some cases, adjustments are made to the appraised values for various factors including the age of the appraisal, age of the comparable included in the appraisal, and known changes in the market and in the collateral. These adjustments are based upon unobservable inputs, and therefore, the fair value measurement of these assets has been categorized as a Level 3 measurement. These loans are reviewed for impairment and written down to their net realizable value by charges against the allowance for loan losses. There were no loans carried at fair value at March 31, 2022 or September 30, 2021.

Real Estate Owned

Once an asset is determined to be uncollectible, the underlying collateral is generally repossessed and reclassified to foreclosed real estate and repossessed assets. These repossessed assets are carried at the lower of cost or fair value of the collateral, based on independent appraisals, less cost to sell and would be categorized as Level 3 measurement. In

some cases, adjustments are made to the appraised values for various factors including the age of the appraisal, the age of the comparables included in the appraisal, and known changes in the market and in the collateral. Thus the evaluations are based upon unobservable inputs, and therefore, the fair value measurement of these assets has been categorized as a Level 3 measurement.

Summary of Non-Recurring Fair Value Measurements


	At March 31, 2022
	(Dollars in Thousands)
	Level 1		Level 2		Level 3		Total
Other real estate owned	$	—	$	—	$	3,828	$	3,828
Total	$	—	$	—	$	3,828	$	3,828


	At September 30, 2021
	(Dollars in Thousands)
	Level 1		Level 2		Level 3		Total
Other real estate owned	$	—	$	—	$	4,109	$	4,109
Total	$	—	$	—	$	4,109	$	4,109

The following table provides information describing the valuation process used to determine nonrecurring fair value measurements categorized within level 3 of the fair value hierarchy:


	At March 31, 2022
	(Dollars in Thousands)
			Valuation		Range/
	Fair Value		Technique	Unobservable Input	Weighted Ave.
Real estate owned	$	3,828	Property appraisals (1) (3)	Management discount for selling costs, property type and market volatility (2)	2% discount


	At September 30, 2021
	(Dollars in Thousands)
			Valuation		Range/
	Fair Value		Technique	Unobservable Input	Weighted Ave.
Real estate owned	$	4,109	Property appraisals (1) (3)	Management discount for selling costs, property type and market volatility (2)	2% discount

(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally includes 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.

(3)

Includes qualitative adjustments by management and estimated liquidation expenses.

The fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The estimated fair values of the Company’s financial instruments that are not required to be measured or reported at fair value were as follows at March 31, 2022 and September 30, 2021.


					Fair Value Measurements at
	Carrying		Fair		March 31, 2022
	Amount		Value		(Level 1)		(Level 2)		(Level 3)

	(Dollars in Thousands)
Assets:
Investment and mortgage-backed securities held to maturity	$	18,653	$	18,807	$	—	$	18,807	$	—
Loans receivable, net		550,502		538,780		—		—		538,780

Liabilities:
Certificates of deposit		211,635		216,947		216,947		—		—
Advances from FHLB - long-term		206,793		207,755		207,755		—		—


					Fair Value Measurements at
	Carrying		Fair		September 30, 2021
	Amount		Value		(Level 1)		(Level 2)		(Level 3)

	(Dollars in Thousands)
Assets:
Investment and mortgage-backed securities held to maturity	$	20,074	$	21,161	$	—	$	21,161	$	—
Loans receivable, net		618,206		620,017		—		—		620,017

Liabilities:
Certificates of deposit		244,877		252,510		—		—		252,510
Advances from FHLB - long-term		232,025		239,301		—		—		239,301

- 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.

+ References + Details

PRUDENTIAL BANCORP, INC. 10-Q