7. DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES - ASC 820, Fair Value Measurements and Disclosures, requires 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 the value. For financial instruments where quoted market prices are not available, fair values are estimated using present value or other valuation methods.

The following methods and assumptions are used in estimating the fair values of financial instruments:

Cash and cash equivalents

The carrying values presented in the consolidated statements of position approximate fair value.

Investments and mortgage-backed securities

For investment securities (debt instruments) and mortgage-backed securities, fair values are based on quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted market prices of comparable instruments.

Loans receivable

The fair value of the loan portfolio is estimated by evaluating homogeneous categories of loans with similar financial characteristics. Loans are segregated by types, such as residential mortgage, commercial real estate, and consumer. Each loan category is further segmented into fixed and adjustable rate interest, terms, and by performing and non-performing categories. The fair value of performing loans, except residential mortgage loans, is calculated by discounting contractual cash flows using estimated market discount rates which reflect the credit and interest rate risk inherent in the loan. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources. The fair value for significant non-performing loans is based on recent internal or external appraisals. Assumptions regarding credit risk, cash flow, and discount rates are judgmentally determined by using available market information.

Federal Home Loan Bank stock

The Bank is a member of the Federal Home Loan Bank system and is required to maintain an investment based upon a pre-determined formula. The carrying values presented in the consolidated statements of position approximate fair value.

Deposits

The fair values of passbook accounts, NOW accounts, and money market savings and demand deposits approximate their carrying values. The fair values of fixed maturity certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently offered for deposits of similar maturities.

Advance from Federal Home Loan Bank

The fair value is calculated using rates available to the Company on advances with similar terms and remaining maturities.

Off-balance sheet items

Carrying value is a reasonable estimate of fair value. These instruments are generally variable rate or short-term in nature, with minimal fees charged.

The estimated fair values of the Company’s financial instruments at September 30, 2013 and June 30, 2013 are as follows:

	September 30, 2013				June 30, 2013
	Carrying Amounts		Fair Value		Carrying Amounts		Fair Value
	(In thousands)
Financial assets:
Cash and due from banks	$	16,639	$	16,639	$	16,787	$	16,787
Investment securities available for sale		33,174		33,174		32,013		32,013
Investment securities held to maturity		393		393		417		417
Mortgage-backed securities		175,261		175,261		170,117		170,117
Loans receivable and loans receivable held for sale		247,285		247,763		254,995		253,472
Accrued interest receivable		1,759		1,759		1,636		1,636
Investment in FHLB stock		6,588		6,588		6,588		6,588

Financial liabilities:
Deposits		424,831		426,396		421,243		422,987
Accrued interest payable		25		25		29		29
FHLB advance		10,000		9,881		15,000		14,850

Off-balance sheet items	$	—	$	—	$	—	$	—

ASC 820-10-50-2 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 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.

Fair value methods and assumptions are set forth below for each type of financial instrument. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 2 securities include U.S. Government and agency mortgage-backed securities, U.S. Government agency bonds, municipal securities, and other real estate owned. If quoted market prices are not available, the Bank utilizes a third party vendor to calculate the fair value of its available for sale securities. The third party vendor uses quoted prices of securities with similar characteristics when available. If such quotes are not available, the third party vendor uses pricing models or discounted cash flow models with observable inputs to determine the fair value of these securities.

Fair value measurements for certain assets and liabilities measured at fair value on a recurring basis:

					Significant		Significant
			Quoted prices in		other		other
			active markets		observable		unobservable
			for identical		inputs		inputs
	Total		assets (Level 1)		(Level 2)		(Level 3)
	(In thousands)
September 30, 2013:
Mortgage-backed securities	$	175,261	$	—	$	175,261	$	—
Municipal bonds		33,010		—		33,010		—
Other equity securities		164		164		—		—
Mortgage servicing rights⁽¹⁾		641		—		641		—

June 30, 2013:
Mortgage-backed securities	$	170,117	$	—	$	170,117	$	—
Municipal bonds		31,851		—		31,851		—
Other equity securities		162		162		—		—

⁽¹⁾

Effective July 1, 2013, the Company changed its accounting method for mortgage servicing rights from the amortization method to the fair value measurement method, as permitted in accordance with FASB ASC 860-50, “Servicing Assets and Liabilities”. In accordance with ASC 860-50, the Company recorded an adjustment at the beginning of the period to retained earnings for the value of such servicing rights at that date.

Fair value measurements for certain assets and liabilities measured at fair value on a nonrecurring basis:

	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant other unobservable inputs (Level 3)
	(In thousands)
September 30, 2013:
Other real estate owned	$	613	$	—	$	613	$	—
Loans held for sale		83		—		83		—
Impaired loans		20,661		—		20,661		—

June 30, 2013:
Other real estate owned	$	618	$	—	$	618	$	—
Loans held for sale		417		—		417		—
Impaired loans		23,920		—		23,920		—

The adjustments to other real estate owned and impaired loans are based primarily on appraisals of the real estate, cash flow analysis or other observable market prices. The Bank’s policy is that fair values for these assets are based on current appraisals or cash flow analysis.

The following table presents fair value measurements for the Company’s financial instruments which are not recognized at fair value in the accompanying statements of financial position on a recurring or nonrecurring basis.

			Quoted prices		Significant		Significant
			in active		other		other
			markets for		observable		unobservable
			identical assets		inputs		inputs
	Total		(Level 1)		(Level 2)		(Level 3)
September 30, 2013:
Financial assets:
Cash and interest bearing deposits	$	16,639	$	16,639	$	—	$	—
Investment securities held to maturity		393		—		393		—
Loans receivable and loans held for sale		247,763		—		247,763		—
Accrued interest receivable		1,759		—		1,759		—
Investment in FHLB stock		6,588		—		6,588		—
Financial liabilities:
Deposits		426,396		—		426,396		—
Accrued interest payable		25		—		25		—
FHLB advances		9,881		—		9,881		—

June 30, 2013:
Financial assets:
Cash and interest bearing deposits	$	16,787	$	16,787	$	—	$	—
Investment securities held to maturity		417		—		417		—
Loans receivable and loans held for sale		253,472		—		253,472		—
Accrued interest receivable		1,636		—		1,636		—
Investment in FHLB stock		6,588		—		6,588		—
Financial liabilities:
Deposits		422,987		—		422,987		—
Accrued interest payable		29		—		29		—
FHLB advances		14,850		—		14,850		—