FAIR VALUE ACCOUNTING

ASC Topic 820-10, “Fair Value Measurements and Disclosures” 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 statement describes three levels of inputs that may be used to measure fair value:

Level 1- Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

Level 2- Significant other 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.

Level 3- Significant unobservable inputs that reflect the Company’s assumptions about the factors that market participants would use in pricing an asset or liability.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the fair value measurement.

The fair value of securities available for sale is determined by obtaining market price quotes from independent third parties wherever such quotes are available (Level 1 inputs); or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Where such quotes are not available, the Company utilizes independent third party valuation analysis to support the Company’s estimates and judgments in determining fair value (Level 3 inputs).

Assets Measured on a Recurring Basis

Level 3 assets measured on a recurring basis are certain investments for which little or no market activity exists or whose value of the underlying collateral is not market observable. Management’s valuation uses both observable as well as unobservable inputs to assist in the Level 3 valuation of mortgage backed securities held by the Bank, employing a methodology that considers future cash flows along with risk-adjusted returns. The inputs in this methodology are as follows: ability and intent to hold to maturity, mortgage underwriting rates, market prices/conditions, loan type, loan-to-value ratio, strength of borrower, loan age, delinquencies, prepayment/cash flows, liquidity, expected future cash flows, rating agency actions, and a discount rate, which is assumed to be approximately equal to the coupon rate for each security. As of March 31, 2015, the Company held no Level 3 securities measured on a recurring basis. The following tables present the financial instruments measured at fair value on a recurring basis as of March 31, 2015 and September 30, 2014:



	Fair Value		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2015
Investment securities:
U.S. government agency obligations	$	15,408	$	—	$	15,408	$	—
Obligations of states and political subdivisions	11,877		—		11,877		—
Mortgage-backed securities	26,665		—		26,665		—
Federal Agricultural Mortgage Corporation	56		—		56		—
Total	$	54,006	$	—	$	54,006	$	—
September 30, 2014
Investment securities:
U.S. government agency obligations	$	22,103	$	—	$	22,103	$	—
Obligations of states and political
subdivisions	11,194		—		11,194		—
Mortgage-backed securities	28,827		—		28,827		—
Federal Agricultural Mortgage Corporation	65				65
Total	$	62,189	$	—	$	62,189	$	—

The following table presents a reconciliation of non-agency mortgage-backed securities held by the Bank measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended March 31, 2015 and 2014:



	Six Months Ended
	March 31, 2015		March 31, 2014
Balance beginning of period	$	—	$	1,226
Total gains or losses (realized/unrealized):
Included in earnings	—		(274		)
Included in other comprehensive loss	—		615
Sales	—		(1,321		)
Payments, accretion and amortization	—		(246		)
Balance end of period	$	—	$	—

Assets Measured on a Nonrecurring Basis

The following tables present the financial instruments measured at fair value on a nonrecurring basis as of March 31, 2015 and September 30, 2014:



	Fair Value		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2015
Foreclosed and repossessed assets, net	$	1,051	$	—	$	—	$	1,051
Loans restructured in a TDR	4,752		—		—		4,752
Total	$	5,803	$	—	$	—	$	5,803
September 30, 2014
Foreclosed and repossessed assets, net	$	1,050	$	—	$	—	$	1,050
Loans restructured in a TDR	5,581		—		—		5,581
Total	$	6,631	$	—	$	—	$	6,631

The fair value of TDRs was determined by obtaining independent third party appraisals and/or internally developed collateral valuations to support the Company’s estimates and judgments in determining the fair value of the underlying collateral supporting TDRs.

The fair value of foreclosed and repossessed assets was determined by obtaining market price valuations from independent third parties wherever such valuations were available. Where such valuations were not available, the Company utilized independent third party appraisals to support the Company’s estimates and judgments in determining fair value for such assets.

Fair Values of Financial Instruments

ASC 825-10 and ASC 270-10, Interim Disclosures about Fair Value Financial Instruments, require disclosures about fair value financial instruments and significant assumptions used to estimate fair value. The estimated fair values of financial instruments not previously disclosed are determined as follows:

Cash and Cash Equivalents

Due to their short-term nature, the carrying amounts of cash and cash equivalents are considered to be a reasonable estimate of fair value.

Other Interest-Bearing Deposits

Fair value of interest bearing deposits is estimated based on their carrying amounts.

Non-marketable Equity Securities, at cost

Non-marketable equity securities are comprised of Federal Home Loan Bank stock and Federal Reserve Bank stock carried at cost, which are their redeemable fair values since the market for each category of this stock is restricted.

Loans Receivable, net

Fair value is estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as real estate, commercial and consumer. The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity date using market discount rates reflecting the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Bank’s repayment schedules for each loan classification.

Accrued Interest Receivable and Payable

Due to their short-term nature, the carrying amounts of accrued interest receivable and payable are considered to be a reasonable estimate of fair value.

Deposits

The fair value of deposits with no stated maturity, such as demand deposits, savings accounts, and money market accounts, is the amount payable on demand at the reporting date. The fair value of fixed rate certificate accounts is calculated by using discounted cash flows applying interest rates currently being offered on similar certificates.

Federal Home Loan Bank Advances

The fair value of long-term borrowed funds is estimated using discounted cash flows based on the Bank’s current incremental borrowing rates for similar borrowing arrangements. The carrying value of short-term borrowed funds approximates its fair value.

Off-Balance-Sheet Instruments

The fair value of off-balance sheet commitments would be estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the customers. Since this amount is immaterial to the Company’s consolidated financial statements, no amount for fair value is presented.

The carrying amount and estimated fair value of the Company's financial instruments as of the dates indicated below were as follows:



	March 31, 2015				September 30, 2014
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	35,879	$	35,879	$	11,434	$	11,434
Interest-bearing deposits	1,495		1,495		245		245
Investment securities	63,044		63,265		70,974		70,997
Non-marketable equity securities, at cost	5,276		5,276		5,515		5,515
Loans receivable, net	446,942		464,428		463,860		479,961
Accrued interest receivable	1,400		1,400		1,478		1,478
Financial liabilities:
Deposits	$	455,487	$	459,947	$	449,767	$	454,170
FHLB advances	50,891		51,335		58,891		59,331
Accrued interest payable	15		15		13		13