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 that the entity has the ability to access at the measurement date.

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 reflect a reporting entity’s own assumptions and 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 – Recurring Measurement

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.

Impaired Loans – Nonrecurring Measurement

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 charge-off is taken or 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 – Nonrecurring Measurement

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

December 31, 2017
Agency mortgage-backed: residential	$	66	$	--	$	66	$	--

June 30, 2017
Agency mortgage-backed: residential	$	71	$	--	$	71	$	--

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

	Fair Value Measurements Using
(in thousands)	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, 2017
Other real estate owned, net
One- to four-family	$	103		--		--	$	103
Land		79		--		--		79

There were no impaired loans, which were remeasured using the fair value of the collateral for collateral-dependent loans, at December 31, 2017, and June 30, 2017. There was no specific provision made for the six- or three-month periods ended December 31, 2017 or 2016.

Other real estate owned measured at fair value less costs to sell, had carrying amounts of $182,000 at June 30, 2017. Other real estate owned was written down by $0 and $25,000 during the six months ended December 31, 2017 and 2016, 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, 2017 and June 30, 2017:

December 31, 2017	Fair Value (in thousands)		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)

Loans:

One- to four-family	$	70	Sales comparison approach	Adjustments for differences between comparable sales	-23.5% to 13.8% (-1.5%)

June 30, 2017	Fair Value (in thousands)		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)

Foreclosed and repossessed assets:
One- to four-family	$	103	Sales comparison approach	Adjustments for differences between comparable sales	-3.6% to 45.8% (9.5%)
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, 2017 and June 30, 2017:

Cash and cash equivalents, interest-bearing deposits and time deposits in other financial institutions: 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: 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, 2017 and June 30, 2017, 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, 2017 and June 30, 2017 are as follows:

			Fair Value Measurements at
	Carrying		December 31, 2017 Using
(in thousands)	Value		Level 1		Level 2		Level 3		Total

Financial assets
Cash and cash equivalents	$	9,360	$	9,360					$	9,360
Term deposits in other financial institutions		6,681		6,681						6,681
Available-for-sale securities		66			$	66				66
Held-to-maturity securities		1,249				1,271				1,271
Loans receivable - net		260,806						269,381		269,381
Federal Home Loan Bank stock		6,482								n/a
Accrued interest receivable		720				720				720

Financial liabilities
Deposits	$	191,303	$	76,092	$	114,919				191,011
Federal Home Loan Bank advances		48,627				48,699				48,699
Advances by borrowers for taxes and insurance		236		236						236
Accrued interest payable		23				23				23

			Fair Value Measurements at
	Carrying		June 30, 2017 Using
(in thousands)	Value		Level 1		Level 2		Level 3		Total

Financial assets
Cash and cash equivalents	$	12,804	$	12,804					$	12,804
Term deposits in other financial institutions		4,201		4,201						4,201
Available-for-sale securities		71			$	71				71
Held-to-maturity securities		1,487				1,523				1,523
Loans receivable – net		258,244					$	269,606		269,606
Federal Home Loan Bank stock		6,482								n/a
Accrued interest receivable		679				679				679

Financial liabilities
Deposits	$	182,845	$	78,561	$	103,786			$	182,347
Federal Home Loan Bank advances		55,780				55,881				55,881
Advances by borrowers for taxes and insurance		818				818				818
Accrued interest payable		21				21				21