Fair Value of Assets and Liabilities

GAAP 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. GAAP establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:



Level 1:		Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

Level 2:		Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; and quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology are derived principally from or can be corroborated by observable market data by correlation or other means.

Level 3:		Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Where assets or liabilities are measured at fair value, transfers between levels are recognized at the end of the reporting period, if applicable.

Methods and assumptions for valuing the Company’s financial instruments are set forth below. Estimated fair values are calculated based on the value without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications or estimated transaction costs.

Cash and cash equivalents: The carrying amounts of cash and short-term investments approximate fair values.

Securities: The securities measured at fair value utilizing Level 1 and Level 2 inputs are government-sponsored enterprises, corporate bonds and other obligations, mortgage-backed securities and common stocks. The fair values used by the Company are obtained from an independent pricing service which are not adjusted by management and, represents either quoted market prices for identical securities, quoted market prices for comparable securities or fair values determined by pricing models that consider observable market data, such as interest rate volatilities, credit spreads and prices from market makers and live trading systems and other market indicators, industry and economic events. Municipal securities are valued utilizing Level 3 inputs. Since there is no readily available market pricing and no active market to sell these securities, management believes that the amortized cost of these securities approximates fair value based on their relatively short terms to maturity.

Federal Home Loan Bank of Boston ("FHLB") stock: The carrying amount of FHLB stock approximates fair value based upon the redemption provisions of the FHLB.

Loans held for sale: Fair value of loans held for sale are estimated based on commitments on hand from investors or prevailing market prices.

Loans: Fair values for loans are estimated using discounted cash flow analysis, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. This analysis assumes no prepayment. Fair values for non-performing loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable.

Mortgage servicing rights: Mortgage servicing rights (“MSR”) are the rights of a mortgage servicer to collect mortgage payments and forward them, after deducting a fee, to the mortgage lender. The fair value of servicing rights is estimated using a present value cash flow model. The fair value of MSR is highly sensitive to changes in assumptions. Changes in prepayment speed assumptions generally have the most significant impact on the fair value of our MSR. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of MSR. As interest rates rise, mortgage loan prepayments slow down, which results in an increase in the fair value of MSR. Thus, any measurement of the fair value of our MSR is limited by the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different point in time.

Deposits and mortgage escrow accounts: The fair values for non-certificate accounts and mortgage escrow accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificate accounts are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-term borrowings: The carrying amount of short-term borrowings approximates fair value.

Long-term debt: The fair values of the Company's advances are estimated using discounted cash flow analysis based on current market borrowing rates for similar types of borrowing arrangements.

Accrued interest: The carrying amounts of accrued interest approximate fair value.

Off-balance-sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The estimated fair value of off-balance sheet financial instruments at September 30, 2014 and June 30, 2014 were not material.

The Company does not measure any liabilities at fair value on either a recurring or non-recurring basis.

The following table presents the balances of assets measured at fair value on a recurring basis as of September 30, 2014 and June 30, 2014:



	Level 1		Level 2		Level 3		Total
September 30, 2014	(In Thousands)
Securities available for sale:
Debt securities	$	—	$	131,157	$	—	$	131,157
Marketable equity securities	78		—		—		78
Mortgage servicing rights	—		—		870		870
Total	$	78	$	131,157	$	870	$	132,105

June 30, 2014
Securities available for sale:
Debt securities	$	—	$	133,857	$	—	$	133,857
Marketable equity securities	79		—		—		79
Mortgage servicing rights	—		—		792		792
Total	$	79	$	133,857	$	792	$	134,728

The table below presents, for the three months ended September 30, 2014 and 2013, the changes in Level 3 assets that are measured at fair value on a recurring basis:



	Mortgage Servicing Rights
	Three Months Ended September 30,
	2014		2013
	(In Thousands)
Beginning balance	792		$	654
Changes in fair value	41		137
Capitalized servicing assets	37		39
Transfers in and/or out of Level 3	—		—
Ending balance	$	870	$	830

Also, the Company may be required, from time to time, to measure certain other financial assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from

the application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the carrying value of the related individual assets as of September 30, 2014 and June 30, 2014 all classified in Level 3 fair value hierarchy:



	September 30,		June 30,
	2014		2014
	(In Thousands)
Impaired loans	$	142	$	461
Other real estate owned	159		309
Total	$	301	$	770

During the three months ended September 30, 2014 and 2013 there were no transfers between Levels 1, 2, or 3.

The amount of impaired loans represents the carrying value of loans that include adjustments which are based on the estimated fair value of the underlying collateral. The fair value of collateral used by the Company represents the current tax assessed value, discounted by 20%. This data includes information such as selling price of similar properties, expected future cash flows or earnings of the subject property based on current market expectations, as well as relevant legal, physical and economic factors. If the impaired loan is being actively marketed, the Company uses the realtor’s market analysis or listing price discounted by 10% and less 5% for realtor commission, instead of the tax assessment. The Company had a $49,000 loss on impaired loans for the three months ended September 30, 2014. There was no gain or loss for the three months ended September 30, 2013. Any resulting losses are recognized in earnings through the provision for loan losses. The Company charges off any collateral shortfall on collateral dependent impaired loans.

The Company classifies property acquired through foreclosure or acceptance of a deed in lieu of foreclosure as OREO in its consolidated financial statements. When property is placed into OREO, it is recorded at the fair value less estimated costs to sell at the date of foreclosure or acceptance of deed in lieu of foreclosure. At the time of transfer to OREO, any excess of carrying value over fair value is charged to the allowance for loan losses. Management, or its designee, inspects all OREO property periodically. Holding costs and declines in fair value result in charges to expense after the property is acquired. The Company had $44,000 gain on OREO for the three months ended September 30, 2014. The Company had a $4,000 loss on OREO for the three months ended September 30, 2013.

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all non-financial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

The carrying amounts and related estimated fair values of the Company's financial instruments are as follows. Certain financial instruments and all non-financial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.



	Carrying Amount		Fair Value
September 30, 2014	Carrying Amount		Level 1		Level 2		Level 3		Total
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	18,356	$	18,356	$	—	$	—	$	18,356
Securities available for sale	131,235		78		131,157		—		131,235
Securities held to maturity	10,615		—		—		10,615		10,615
Federal Home Loan Bank stock	6,810		—		—		6,810		6,810
Loans held for sale	1,384		—		1,384		—		1,384
Loans, net	506,145		—		—		510,652		510,652
Accrued interest receivable	1,646		—		—		1,646		1,646
Mortgage servicing rights ⁽¹⁾	870		—		—		870		870

Financial liabilities:
Deposits	489,618		—		—		490,966		490,966
Short-term borrowings	12,000		—		12,000		—		12,000
Long-term debt	111,778		—		114,612		—		114,612
Mortgagors' escrow accounts	1,201		—		—		1,201		1,201

June 30, 2014
Financial assets:
Cash and cash equivalents	$	12,667	$	12,667	$	—	$	—	$	12,667
Securities available for sale	133,936		79		133,857		—		133,936
Securities held to maturity	9,302		—		—		9,302		9,302
Federal Home Loan Bank stock	6,648		—		—		6,648		6,648
Loans held for sale	330		—		330		—		330
Loans, net	507,635		—		—		513,765		513,765
Accrued interest receivable	1,688		—		—		1,688		1,688
Mortgage servicing rights ⁽¹⁾	792		—		—		792		792

Financial liabilities:
Deposits	491,732		—		—		493,500		493,500
Short-term borrowings	4,000		—		4,000		—		4,000
Long-term debt	112,446		—		113,823		—		113,823
Mortgagors' escrow accounts	1,184		—		—		1,184		1,184

⁽¹⁾ Included in other assets