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18. Fair Value of Financial Instruments

12 Months Ended

Jun. 30, 2013

Notes

18. Fair Value of Financial Instruments

18. Fair Value of Financial Instruments

The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. 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 on a nonrecurring basis, such as impaired loans. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Fair Value Hierarchy

The Company groups assets 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 at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Following is a description of valuation methodologies used for assets recorded at fair value. The Company does not have any liabilities recorded at fair value.

Investment Securities Available for Sale

Securities available for sale are valued on a recurring basis at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted prices of comparable securities. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange or U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities and debentures issued by government sponsored enterprises, municipal bonds, and corporate debt securities.

Loans

The Company does not record loans at fair value on a recurring basis. From time to time, however, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, the fair value is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. The Company reviews all impaired loans each quarter to determine if an allowance is necessary. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

At June 30, 2013 and June 30, 2012, most of the total impaired loans were evaluated based on the fair value of the collateral. For these collateral dependent impaired loans, the Company obtains updated appraisals at least annually. These appraisals are reviewed for appropriateness and then discounted for estimated closing costs to determine if an allowance is necessary. As part of the quarterly review of impaired loans, the Company reviews these appraisals to determine if any additional discounts to the fair value are necessary. If a current appraisal is not obtained, the Company determines whether a discount is needed to the value from the original appraisal based on the decline in value of similar properties with recent appraisals. Impaired loans where a charge-off has occurred or an allowance is established during the period being reported require classification in the fair value hierarchy. The Company records all impaired loans with an allowance as nonrecurring Level 3.

Real Estate Owned

REO is considered held for sale and is adjusted to fair value less estimated selling costs upon transfer of the loan to foreclosed assets. Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. The Company considers all REO carried at fair value as nonrecurring Level 3.

The following table presents financial assets measured at fair value on a recurring basis at the dates indicated:

	June 30, 2013
Description		Total			Level 1			Level 2			Level 3

U.S Government Agencies	$	6,002		$	-		$	6,002		$	-
Residential Mortgage-backed Securities of U.S. Government Agencies and Government sponsored Enterprises		18,748			-			18,748			-
Total	$	24,750		$	-		$	24,750		$	-

	June 30, 2012
Description		Total			Level 1			Level 2			Level 3

U.S Government Agencies	$	6,102		$	-		$	6,102		$	-
Residential Mortgage-backed Securities of U.S. Government Agencies and Government sponsored Enterprises		25,233			-			25,233			-
Total	$	31,335		$	-		$	31,335		$	-

The following table presents financial assets measured at fair value on a non-recurring basis during the periods indicated:

	Year Ended June 30, 2013
Description		Total			Level 1			Level 2			Level 3

Impaired loans	$	12,106		$	-		$	-		$	12,106
Real estate owned		2,403			-			-			2,403
Total	$	14,509		$	-		$	-		$	14,509

	Year Ended June 30, 2012
Description		Total			Level 1			Level 2			Level 3

Impaired loans	$	30,585		$	-		$	-		$	30,585
Real estate owned		12,093			-			-			12,093
Total	$	42,678		$	-		$	-		$	42,678

Quantitative information about Level 3 fair value measurements during the period ended June 30, 2013 is shown in the table below:

	Fair Value
	at June 30,		Valuation		Unobservable				Weighted
	2013		Techniques		Input		Range		Average
Nonrecurring measurements:
Impaired loans, net	$12,106		Discounted Appraisals		Collateral discounts		5% - 40%		12%
Real estate owned	2,403		Discounted Appraisals		Collateral discounts		10% - 15%		12%

The stated carrying value and estimated fair value amounts of financial instruments as of June 30, 2013 and June 30, 2012, are summarized below:

	June 30, 2013
		Carrying			Fair
		Value			Value			Level 1			Level 2			Level 3
Cash and interest-bearing deposits	$	125,713		$	125,713		$	125,713		$	-		$	-
Certificates of deposit in other banks		136,617			136,617			-			136,617			-
Securities available for sale		24,750			24,750			-			24,750			-
Loans, net		1,132,110			1,064,954			-			-			1,064,954
Loans held for sale		10,770			10,942			-			-			10,942
Federal Home Loan Bank stock		1,854			1,854			1,854			-			-
Accrued interest receivable		5,549			5,549			-			157			5,392
Noninterest-bearing and NOW deposits		256,487			256,487			-			256,487			-
Money market accounts		275,718			275,718			-			275,718			-
Savings accounts		82,158			82,158			-			82,158			-
Certificates of deposit		540,387			545,716			-			545,716			-
Accrued interest payable		84			84			-			84			-

	June 30, 2012
		Carrying			Fair
		Value			Value			Level 1			Level 2			Level 3
Cash and interest-bearing deposits	$	224,801		$	224,801		$	224,801		$	-		$	-
Certificates of deposit in other banks		108,010			108,010			-			108,010			-
Securities available for sale		31,335			31,335			-			31,335			-
Loans, net		1,204,732			1,155,429			-			-			1,155,429
Loans held for sale		10,787			10,949			-			-			10,949
Federal Home Loan Bank stock		6,300			6,300			6,300			-			-
Accrued interest receivable		6,008			6,008			-			137			5,871
Noninterest-bearing and NOW deposits		230,683			230,683			-			230,683			-
Money market accounts		257,865			257,865			-			257,865			-
Savings accounts		347,669			347,669			-			347,669			-
Certificates of deposit		629,958			634,379			-			634,379			-
Other borrowings		22,265			24,998			-			24,998			-
Accrued interest payable		242			242			-			242			-

The Company had off-balance sheet financial commitments, which include approximately $205,771 and $213,979 of commitments to originate loans, undisbursed portions of interim construction loans, and unused lines of credit at June 30, 2013 and June 30, 2012 (see Note 5). Since these commitments are based on current rates, the carrying amount approximates the fair value.

Estimated fair values were determined using the following methods and assumptions:

Cash and interest-bearing deposits – The stated amounts approximate fair values as maturities are less than 90 days.

Certificates of deposit in other banks – The stated amounts approximate fair values.

Securities available for sale and investment securities – Fair values are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Loans, net – Fair values for loans are estimated by segregating the portfolio by type of loan and discounting scheduled cash flows using current market interest rates for loans with similar terms and credit quality. A prepayment assumption is used as an estimate of the portion of loans that will be repaid prior to their scheduled maturity. Both the carrying value and estimated fair value amounts are shown net of the allowance for loan losses.

Loans held for sale - The fair value of loans held for sale is determined by outstanding commitments from investors on a “best efforts” basis or current investor yield requirements, calculated on the aggregate loan basis.

Federal Home Loan Bank Stock – No ready market exists for this stock and it has no quoted market value. However, redemption of this stock has historically been at par value. Accordingly, cost is deemed to be a reasonable estimate of fair value.

Deposits – Fair values for demand deposits, money market accounts, and savings accounts are the amounts payable on demand as of June 30, 2013 and June 30, 2012. The fair value of certificates of deposit is estimated by discounting the contractual cash flows using current market interest rates for accounts with similar maturities.

Other borrowings – The fair value of advances from the FHLB is estimated based on current rates for borrowings with similar terms. Fair values for retail repurchase agreements are the amounts payable as of June 30, 2012.

Accrued interest receivable and payable – The stated amounts of accrued interest receivable and payable approximate the fair value.

Limitations – Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, a significant asset not considered a financial asset is premises and equipment. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.