5. Disclosures About Fair Value of Assets and Liabilities

ASC topic 820 defines fair value as 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 topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

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 active 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.

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics. Level 2 securities include agency mortgage-backed securities and FHLMC stock.

Impaired Loans

At the time a loan is considered impaired, it is evaluated for loss based on the fair value of collateral securing the loan if the loan is collateral dependent. If a loss is identified, a specific allocation will be established as part of the allowance for loan losses such that the loan’s net carrying value is at its estimated fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral-dependent loans, fair value is commonly 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 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. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly 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 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.

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

			Fair Value Measurements Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)

December 31, 2016
Agency mortgage-backed: residential	$	79	$	—	$	79	$	—
FHLMC stock		107		—		107		—
	$	186	$	—	$	186	$	—
June 30, 2016
Agency mortgage-backed: residential	$	81	$	—	$	81	$	—
FHLMC stock		53		—		53		—
	$	134	$	—	$	134	$	—

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

			Fair Value Measurements Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)

December 31, 2016
Other real estate owned, net
One- to four-family	$	23		—		—	$	23
Land		79		—		—		79

June 30, 2016
Other real estate owned, net
One- to four-family	$	274		—		—	$	274
Land		79		—		—		79

There were no impaired loans, which were measured using the fair value of the collateral for collateral-dependent loans, at December 31, 2016, and June 30, 2016. There was no specific provision made for the six month periods ended December 31, 2016 or 2015.

Other real estate owned measured at fair value less costs to sell, had carrying amounts of $102,000 and $353,000 at December 31, 2016 and June 30, 2016, respectively. Other real estate owned was written down $25,000 and $39,000 during the six months ended December 31, 2016 and 2015, respectively.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2016 and June 30, 2016:

					Range
	Fair Value		Valuation	Unobservable	(Weighted
December 31, 2016	(in thousands)		Technique(s)	Input(s)	Average)
Foreclosed and repossessed assets:
1-4 family	$	23	Sales comparison approach	Adjustments for differences between comparable sales	-14.4% to 21.0% (6.9%)
Land	$	79	Sales comparison approach	Adjustments for differences between comparable sales	3.5% to 6.6% (5.4%)

					Range
	Fair Value		Valuation	Unobservable	(Weighted
June 30, 2016	(in thousands)		Technique(s)	Input(s)	Average)
Foreclosed and repossessed assets:
1-4 family	$	274	Sales comparison approach	Adjustments for differences between comparable sales	-24.0% to 15.2% (-5.1%)
Land	$	79	Sales comparison approach	Adjustments for differences between comparable sales	3.5% to 6.6% (5.0%)

The following is a disclosure of the fair value of financial instruments, both assets and liabilities, whether or not recognized in the consolidated balance sheet, for which it is practicable to estimate that value. For financial instruments where quoted market prices are not available, fair values are based on estimates using present value and other valuation methods.

The methods used are greatly affected by the assumptions applied, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in an exchange for certain financial instruments.

The following methods were used to estimate the fair value of all other financial instruments at December 31, 2016 and June 30, 2016:

Cash and cash equivalents and interest-bearing deposits: The carrying amounts presented in the consolidated statements of financial condition for cash and cash equivalents are deemed to approximate fair value.

Held-to-maturity securities: For held-to-maturity securities, fair value is estimated by using pricing models, quoted price of securities with similar characteristics, which is level 2 pricing for the other securities.

Loans held for sale: Loans originated and intended for sale in the secondary market are determined by FHLB pricing schedules.

Loans: The loan portfolio has been segregated into categories with similar characteristics, such as one- to four-family residential, multi-family residential and nonresidential real estate. These loan categories were further delineated into fixed-rate and adjustable-rate loans. The fair values for the resultant loan categories were computed via discounted cash flow analysis, using current interest rates offered for loans with similar terms to borrowers of similar credit quality. For loans on deposit accounts and consumer and other loans, fair values were deemed to equal the historic carrying values. The fair values of the loans does not necessarily represent an exit price.

Loans receivable represents the Company’s most significant financial asset, which is in Level 3 for fair value measurements. A third party provides financial modeling for the Company and results are based on assumptions and factors determined by management.

Federal Home Loan Bank stock: It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Accrued interest receivable: The carrying amount is the estimated fair value.

Deposits: The fair value of NOW accounts, passbook accounts, and money market deposits are deemed to approximate the amount payable on demand. Fair values for fixed-rate certificates of deposit have been estimated using a discounted cash flow calculation using the interest rates currently offered for deposits of similar remaining maturities.

Federal Home Loan Bank advances: The fair value of these advances is estimated using the rates currently offered for similar advances of similar remaining maturities or, when available, quoted market prices.

Advances by borrowers for taxes and insurance and accrued interest payable: The carrying amount presented in the consolidated statement of financial condition is deemed to approximate fair value.

Commitments to extend credit: For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. The fair value of outstanding loan commitments at December 31, 2016 and June 30, 2016, was not material.

Based on the foregoing methods and assumptions, the carrying value and fair value of the Company’s financial instruments at December 31, 2016 and June 30, 2016 are as follows:

			Fair Value Measurements at
(in thousands)	Carrying		December 31, 2016 Using
	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	12,520	$	12,520					$	12,520
Term deposits in other financial institutions		4,699		4,699						4,699
Available-for-sale securities		186			$	186				186
Held-to-maturity securities		9,275				9,320				9,320
Loans held for sale		255				255				255
Loans receivable - net		247,257						250,777		250,777
Federal Home Loan Bank stock		6,482								n/a
Accrued interest receivable		676				13		663		676

Financial liabilities
Deposits	$	183,097	$	80,908	$	102,237				183,145
Federal Home Loan Bank advances		53,110				53,464				53,464
Advances by borrowers for taxes and insurance		242		242						242
Accrued interest payable		29				29				29

			Fair Value Measurements at
(in thousands)	Carrying		June 30, 2016 Using
	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	13,108	$	13,108					$	13,108
Term deposits in other financial institutions		3,711		3,711						3,711
Available-for-sale securities		134			$	134				134
Held-to-maturity securities		4,079				4,151				4,151
Loans receivable – net		238,468					$	242,456		242,456
Federal Home Loan Bank stock		6,482								n/a
Accrued interest receivable		710				21		689		710

Financial liabilities
Deposits	$	188,572	$	81,814	$	106,820			$	188,634
Federal Home Loan Bank advances		33,211				33,517				33,517
Advances by borrowers for taxes and insurance		741		741						741
Accrued interest payable		22				22				22