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Disclosures About Fair Value of Assets and Liabilities

9 Months Ended

Mar. 31, 2020

Note 12: Disclosures About Fair Value of Assets and Liabilities

Fair value is 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. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of 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

Recurring Measurements

The following table presents the fair value measurements of assets recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2020 and June 30, 2019:


			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2020:
Available-for-sale securities:
US Government and federal agency	$	8,160	$	—	$	8,160	$	—
Mortgage-backed securities – GSE residential		139,640		—		139,640		—
Small Business Administration		3,607		—		3,607		—
State and political subdivisions		1,541		—		1,541		—
Mortgage servicing rights		821		—		—		821


			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2019:
Available-for-sale securities:
US Government and federal agency	$	12,950	$	—	$	12,950	$	—
Mortgage-backed securities – GSE residential		125,510		—		125,510		—
Small Business Administration		4,935		—		4,935		—
State and political subdivisions		2,896		—		2,896		—
Mortgage servicing rights		853		—		—		853

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended March 31, 2020. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Available-for-Sale

Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. There were no Level 1 securities as of March 31, 2020 or June 30, 2019. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. For these investments, the inputs used by the pricing service to determine fair value may include one, or a combination of, observable inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads,

two-sided

markets, benchmark securities, bid, offers and reference data market research publications and are classified within Level 2 of the valuation hierarchy. Level 2 securities include U.S. Government and federal agency, mortgage-backed securities (GSE—residential) and state and political subdivisions. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. There were no Level 3 securities as of March 31, 2020 or June 30, 2019.

Mortgage Servicing Rights

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.

Level 3 Reconciliation

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs:


	Mortgage Servicing Rights
Balance, July 1, 2019	$	853
Total realized and unrealized gains and losses included in net income		(110	)
Servicing rights that result from asset transfers		173
Payments received and loans refinanced		(95	)

Balance, March 31, 2020	$	821

Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date	$	(110	)

Realized and unrealized gains and losses for items reflected in the table above are included in net income in the consolidated statements of income as noninterest income.

Nonrecurring Measurements

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2020 and June 30, 2019:


			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2020:
Impaired loans (collateral-dependent)	$	—	$	—	$	—	$	—
Foreclosed assets	$	—	$	—	$	—	$	—
June 30, 2019:
Impaired loans (collateral-dependent)	$	33	$	—	$	—	$	33
Foreclosed assets	$	512	$	—	$	—	$	512

The following table presents recoveries (losses) recognized on assets measured on a

non-recurring

basis for the three months and nine months ended March 31, 2020 and 2019:


	Three Months Ended March 31,					Nine Months Ended March 31,
	2020		2019			2020		2019
Impaired loans (collateral-dependent)	$	—	$	—		$	13	$	—
Foreclosed and repossessed assets held for sale	$	—	$	(160	)	$	—	$	(160	)

Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Collateral-dependent Impaired Loans, Net of the Allowance for Loan Losses

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the senior lending officer. Appraisals are reviewed for accuracy and consistency by the senior lending officer. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the senior lending officer by comparison to historical results.

Unobservable (Level 3) Inputs

The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at March 31, 2020 and June 30, 2019.


	Fair Value at March 31, 2020		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Mortgage servicing rights	$	821	Discounted cash flow	Discount rate	9.5% - 11.5% (9.5%)
				Constant prepayment rate	12.0% - 14.5% ( 12.1%)
				Probability of default	0.05% - 0.12% ( 0.11%)


	Fair Value at June 30, 2019		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Mortgage servicing rights	$	853	Discounted cash flow	Discount rate	9.5% - 11.5% (9.5%)
				Constant prepayment rate	8.3% - 11.0% (9.0%)
				Probability of default	0.05% - 0.12% (0.11%)
Impaired loans (collateral dependent)		33	Market comparable properties	Marketability discount	11.1% (11.1%)
Foreclosed assets		512	Market comparable properties	Comparability adjustments (%)	7.8% (7.8%)

Fair Value of Financial Instruments

The following tables present estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2020 and June 30, 2019.


	Carrying Amount		Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2020:
Financial assets
Cash and cash equivalents	$	6,875	$	6,875	$	—	$	—
Interest-bearing time deposits in banks		3,000		3,000		—		—
Loans, net of allowance for loan losses		494,517		—		—		498,172
Federal Home Loan Bank stock		2,408		—		2,408		—
Accrued interest receivable		2,025		—		2,025		—
Financial liabilities
Deposits		533,130		—		241,837		293,137
Repurchase agreements		3,404		—		3,404		—
Federal Home Loan Bank advances		53,500		—		54,533		—
Advances from borrowers for taxes and insurance		1,272		—		1,272		—
Accrued interest payable		935		—		935		—
Unrecognized financial instruments (net of contract amount)		—		—		—		—
Commitments to originate loans		—		—		—		—
Lines of credit		5,000		5,000		—		—


	Carrying Amount		Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2019:
Financial assets
Cash and cash equivalents	$	59,600	$	59,600	$	—	$	—
Interest-bearing time deposits in banks		3,000		3,000		—		—
Loans, net of allowance for loan losses		487,774		—		—		480,479
Federal Home Loan Bank stock		1,174		—		1,174		—
Accrued interest receivable		2,142		—		2,142		—
Financial liabilities
Deposits		607,023		—		276,738		331,865
Repurchase agreements		2,015		—		2,015		—
Federal Home Loan Bank advances		24,000		—		24,419		—
Advances from borrowers for taxes and insurance		747		—		747		—
Accrued interest payable		801		—		801		—
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		—		—		—		—
Lines of credit		—		—		—		—

In accordance with the Company’s adoption of ASU

2016-01

as of July 1, 2018, the methods utilized to measure the fair value of financial instruments at March 31, 2020, represent an approximation of exit price; however, an actual exit price may differ.

- 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.

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