Fair Value Accounting and Measurement

Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants in the Company’s principal market. The Company has established and documented its process for determining the fair values of its assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, management determines the fair value of the Company’s assets and liabilities using valuation models or third-party pricing services, both of which rely on market-based parameters when available, such as interest rate yield curves, option volatilities and credit spreads, or unobservable inputs. Unobservable inputs may be based on management’s judgment, assumptions, and estimates related to credit quality, liquidity, interest rates, and other relevant inputs.

Any changes to valuation methodologies are reviewed by management to ensure they are relevant and justified. Valuation methodologies are refined as more market-based data becomes available.

A three-level valuation hierarchy is used in determining fair value that is based on the transparency of the inputs used in the valuation process. The inputs used in determining fair value in each of the three levels of the hierarchy are as follows:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 - Either: (i) quoted prices for similar assets or liabilities; (ii) observable inputs, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data.

Level 3 - Unobservable inputs.

The hierarchy gives the highest ranking to Level 1 inputs and the lowest ranking to Level 3 inputs. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the overall fair value measurement.

Qualitative disclosures of valuation techniques - Securities available for sale: where quoted prices are available in an active market, securities are classified as Level 1. Level 1 instruments include highly liquid government bonds, securities issued by the U.S. Treasury, and exchange-traded equity securities.

If quoted prices are not available, management determines fair value using pricing models, quoted prices of similar securities, which are considered Level 2, or discounted cash flows. In certain cases, where there is limited activity in the market for a particular instrument, assumptions must be made to determine their fair value. Such instruments are classified as Level 3.

Assets and liabilities measured at fair value on a recurring basis - Assets and liabilities are considered to be fair valued on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly, or quarterly). The following tables show the Company’s assets measured at fair value on a recurring basis at the dates indicated:



	September 30, 2017
	Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
	(In thousands)
Securities available-for-sale
Municipal bonds	$	—	$	16,709	$	—	$	16,709
ABS agency	—		21,819		—		21,819
ABS corporate	—		22,558		—		22,558
Corporate debt	—		19,662		—		19,662
SBA	—		48,101		—		48,101
MBS agency	—		138,082		—		138,082
MBS corporate	—		23,228		—		23,228
	$	—	$	290,159	$	—	$	290,159



	June 30, 2017
	Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
	(In thousands)
Securities available-for-sale
Municipal bonds	$	—	$	22,223	$	—	$	22,223
Agency bonds	—		4,926		—		4,926
ABS agency	—		7,648		—		7,648
ABS corporate	—		9,813		—		9,813
SBA	—		14,178		—		14,178
MBS agency	—		143,436		—		143,436
MBS corporate	—		26,369		—		26,369
	$	—	$	228,593	$	—	$	228,593

Assets and liabilities measured at fair value on a nonrecurring basis - Assets are considered to be fair valued on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the consolidated balance sheets. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements that require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value.

The following tables present the Company’s assets measured at fair value on a nonrecurring basis at the dates indicated:



	September 30, 2017
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans	$	—	$	—	$	7,026	$	7,026
Real estate owned and repossessed assets	—		—		86		86

	$	—	$	—	$	7,112	$	7,112


	June 30, 2017
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans	$	—	$	—	$	7,388	$	7,388
Real estate owned and repossessed assets	—		—		104		104

	$	—	$	—	$	7,492	$	7,492

At September 30, 2017 and June 30, 2017, there were no impaired loans with discounts to appraisal disposition value or other unobservable inputs. The following tables present the techniques used to value assets measured at fair value on a nonrecurring basis at the dates indicated:



	September 30, 2017
	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted-Average)¹
	(In thousands)
Real estate owned and repossessed assets	$	86	Market comparable	Discount to appraisal	0% - 10% (10%)


¹Discount to appraisal disposition value.



	June 30, 2017
	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted-Average)¹
	(In thousands)
Real estate owned and repossessed assets	$	104	Market comparable	Discount to appraisal	0% - 10% (5%)


¹Discount to appraisal disposition value.

The following tables present the carrying value and estimated fair value of financial instruments at the dates indicated:



	September 30, 2017
	Carrying Amount		Estimated Fair Value		Fair Value Measurements Using:
					Level 1		Level 2			Level 3
	(In thousands)
Financial assets
Cash and cash equivalents	$	25,009	$	25,009	$	25,009	$	—		$	—
Investment securities available for sale	290,159		290,159		—		290,159			—
Investment securities held to maturity	51,012		51,683		—		51,683			—
Loans receivable, net	726,891		723,089		—		—			723,089
FHLB stock	5,729		5,729		—		5,729			—
Accrued interest receivable	3,498		3,498		—		3,498			—
Mortgage servicing rights, net	1,112		1,692		—		—			1,692

Financial liabilities
Demand deposits	$	619,740	$	619,740	$	619,740	$	—		$	—
Time deposits	231,193		230,731		—		230,731			—
Borrowings	111,657		114,247		—		114,247			—
Accrued interest payable	217		217		—		217		—	—



	June 30, 2017
	Carrying Amount		Estimated Fair Value		Fair Value Measurements Using:
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets
Cash and cash equivalents	$	24,292	$	24,292	$	24,292	$	—	$	—
Investment securities available for sale	228,593		228,593		—		228,593		—
Investment securities held to maturity	51,872		52,621		—		52,621		—
Loans receivable, net	726,786		723,848		—		—		723,848
FHLB stock	4,368		4,368		—		4,368		—
Accrued interest receivable	3,020		3,020		—		3,020		—
Mortgage servicing rights, net	986		1,600		—		—		1,600

Financial liabilities
Demand deposits	$	612,286	$	612,286	$	612,286	$	—	$	—
Time deposits	211,474		211,072		—		211,072		—
Borrowings	77,427		80,338		—		80,338		—
Accrued interest payable	208		208		—		208		—

Financial assets and liabilities other than investment securities are not traded in active markets. Estimated fair values require subjective judgments and are approximate. The estimates of fair value in the previous table are not necessarily representative of amounts that could be realized in actual market transactions, or of the underlying value of the Company. Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments:

Financial instruments with a carrying amount equal to fair value - The fair value of financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value equal to the carrying amount. These instruments include cash and due from banks, interest bearing deposits with banks, FHLB stock, accrued interest receivable, and accrued interest payable. FHLB stock is not publicly traded, however, it may be redeemed on a dollar-for-dollar basis, for any amount the Bank is not required to hold, subject to the FHLB's discretion. The fair value is therefore equal to the carrying amount.

Securities - Fair values for investment securities are primarily measured using information from a third-party pricing service. The pricing service uses evaluated pricing models based on market data. In the event that limited or less transparent information is provided by the third-party pricing service, fair value is estimated using secondary pricing services or non-binding third-party broker quotes.

Loans held for sale - The fair value of loans held for sale is based on quoted market prices from Federal Home Loan Mortgage Corporation ("Freddie Mac"), which are updated daily and represent prices at which loans are exchanged in high volumes and in a liquid market.

Loans receivable, net - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, including fixed and variable one- to four-family residential real estate, commercial, and consumer loans. There is an accurate and reliable secondary market for one- to four-family residential mortgage production, and available market benchmarks are used to establish discount factors for estimating fair value for these types of loans. Commercial and consumer loans use market benchmarks when available; however, due to the varied term structures and credit issues involved, they mainly rely on cash flow projections and repricing characteristics within the loan portfolio. These amounts are discounted further by embedded probable losses expected to be realized in the portfolio.

Valuations of impaired loans, real estate owned and repossessed assets are periodically performed by management, and the fair values of these loans are carried at the fair value of the underlying collateral less estimated costs to sell. Fair value of the underlying collateral may be determined using an appraisal performed by a qualified independent appraiser.

Mortgage servicing rights, net - The estimated fair value of mortgage servicing rights is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.

Deposits - The fair value of deposits with no stated maturity, such as non-interest bearing deposits, savings and interest checking accounts, and money market accounts, is equal to the amount payable on demand as of September 30, 2017 and June 30, 2017. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Borrowings - The fair value of FHLB advances and other borrowings are calculated using a discounted cash flow method, adjusted for market interest rates and terms to maturity.

Off-balance-sheet financial instruments - Commitments to extend credit represent all off-balance-sheet financial instruments. The fair value of these commitments is not significant.