FAIR VALUES OF FINANCIAL INSTRUMENTS

ASC 820, Fair Value Measurements defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system and requires disclosures about fair value measurement. It clarifies that 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 in the market in which the reporting entity transacts.

The fair value hierarchy is as follows:

Level 1 Inputs - Valuation is based upon quoted prices for identical instruments traded in active markets that the Company has the ability to access at measurement date.

Level 2 Inputs - 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 significant assumptions are observable in the market.

Level 3 Inputs - Valuation is generated from model-based techniques that use significant assumptions not observable in the market and are used only to the extent that observable inputs are not available. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

There were no transfers between levels of the fair value hierarchy for the years ended September 30, 2018 or 2017.

Securities Available for Sale and Held to Maturity. Securities available for sale are recorded at fair value on a recurring basis and securities held to maturity are carried at amortized cost. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using an independent pricing service. For both Level 1 and Level 2 securities, management uses various methods and techniques to corroborate prices obtained from the pricing service, including but not limited to reference to dealer or other market quotes, and by reviewing valuations of comparable instruments. The Company’s Level 1 securities include equity securities and mutual funds. The Company’s Level 2 securities include U.S. Government agency and instrumentality securities, U.S. Government agency and instrumentality MBS and municipal bonds. The Company had no Level 3 securities at September 30, 2018, or 2017.

The fair values of securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), or valuation 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 significant assumptions are observable in the market (Level 2 inputs). The Company considers these valuations supplied by a third-party provider which utilizes several sources for valuing fixed-income securities. These sources include Interactive Data Corporation, Reuters, Standard and Poor’s, Bloomberg Financial Markets, Street Software Technology and the third‑party provider’s own matrix and desk pricing. The Company, no less than annually, reviews the third party’s methods and source’s methodology for reasonableness and to ensure an understanding of inputs utilized in determining fair value. Sources utilized by the third-party provider include but are not limited to pricing models that vary based on asset class and include available trade, bid, and other market information. This methodology includes but is not limited to broker quotes, proprietary models, descriptive terms and conditions databases, as well as extensive quality control programs. Monthly, the Company receives and compares prices provided by multiple securities dealers and pricing providers to validate the accuracy and reasonableness of prices received from the third-party provider. On a monthly basis, the Investment Committee reviews mark-to-market changes in the securities portfolio for reasonableness.

The following table summarizes the fair values of securities available for sale and held to maturity at September 30, 2018 and 2017. Securities available for sale are measured at fair value on a recurring basis, while securities held to maturity are carried at amortized cost in the Consolidated Statements of Financial Condition.



	Fair Value At September 30, 2018
	Available For Sale								Held to Maturity
(Dollars in Thousands)	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Debt securities
Small business administration securities	44,337		—		44,337		—		—		—		—		—
Obligations of states and political subdivisions	16,910		—		16,910		—		—		—		—		—
Non-bank qualified obligations of states and political subdivisions	1,109,885		—		1,109,885		—		153,546		—		153,546		—
Asset-backed securities	313,028		—		313,028		—		—		—		—		—
Mortgage-backed securities	364,065		—		364,065		—		7,428		—		7,428		—
Total debt securities	1,848,225		—		1,848,225		—		160,974		—		160,974		—
Common equities and mutual funds	3,800		3,800		—		—		—		—		—		—
Total securities	$	1,852,025	$	3,800	$	1,848,225	$	—	$	160,974	$	—	$	160,974	$	—



	Fair Value At September 30, 2017
	Available For Sale								Held to Maturity
(Dollars in Thousands)	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Debt securities
Small business administration securities	57,871		—		57,871		—		—		—		—		—
Obligations of states and political subdivisions	—		—		—		—		19,368		—		19,368		—
Non-bank qualified obligations of states and political subdivisions	950,829		—		950,829		—		432,361		—		432,361		—
Asset-backed securities	96,832		—		96,832		—		—		—		—		—
Mortgage-backed securities	586,454		—		586,454		—		112,456		—		112,456		—
Total debt securities	1,691,986		—		1,691,986		—		564,185		—		564,185		—
Common equities and mutual funds	1,445		1,445		—		—		—		—		—		—
Total securities	$	1,693,431	$	1,445	$	1,691,986	$	—	$	564,185	$	—	$	564,185	$	—

Foreclosed Real Estate and Repossessed Assets. Real estate properties and repossessed assets are initially recorded at the fair value less selling costs at the date of foreclosure, establishing a new cost basis. The carrying amount represents the lower of the new cost basis or the fair value less selling costs of foreclosed assets that were measured at fair value subsequent to their initial classification as foreclosed assets.

Loans and Leases. The Company does not record loans and leases at fair value on a recurring basis. However, if a loan or lease is considered impaired, an allowance for loan and lease losses is established. Once a loan or lease is identified as individually impaired, management measures impairment in accordance with ASC 310, Receivables.

The following table summarizes the assets of the Company that are measured at fair value in the Consolidated Statements of Financial Condition on a non-recurring basis as of September 30, 2018 and 2017.



	Fair Value at September 30, 2018
(Dollars in Thousands)	Total		Level 1		Level 2		Level 3
Impaired Loans and Leases, net
Commercial finance	$	4,825	$	—	$	—	$	4,825
Total National Lending	4,825		—		—		4,825
Total impaired loans and leases	4,825		—		—		4,825
Foreclosed Assets, net	31,638		—		—		31,638
Total	$	36,463	$	—	$	—	$	36,463



	Fair Value At September 30, 2017
(Dollars in Thousands)	Total		Level 1		Level 2		Level 3
Impaired Loans and Leases, net
Foreclosed Assets, net	292		—		—		292
Total	$	292	$	—	$	—	$	292



	Quantitative Information About Level 3 Fair Value Measurements
(Dollars in Thousands)	Fair Value at September 30, 2018		Fair Value at September 30, 2017		Valuation Technique	Unobservable Input
Impaired Loans and Leases, net	$	4,825	$	—	Market approach	Appraised values ⁽¹⁾
Foreclosed Assets, net	31,638		292		Market approach	Appraised values ⁽¹⁾

⁽¹⁾ The Company generally relies on external appraisers to develop this information. Management reduced the appraised value by estimated selling costs in a range of 4% to 10%.

The following tables disclose the Company’s estimated fair value amounts of its financial instruments at the dates provided. It is management’s belief that the fair values presented below are reasonable based on the valuation techniques and data available to the Company as of September 30, 2018 and 2017, as more fully described below. The operations of the Company are managed from a going concern basis and not a liquidation basis. As a result, the ultimate value realized for the financial instruments presented could be substantially different when actually recognized over time through the normal course of operations. Additionally, a substantial portion of the Company’s inherent value is the Bank’s capitalization and franchise value. Neither of these components have been given consideration in the presentation of fair values below.

The following presents the carrying amount and estimated fair value of the financial instruments held by the Company at September 30, 2018 and 2017.



	September 30, 2018
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(Dollars in Thousands)
Financial assets
Cash and cash equivalents	$	99,977	$	99,977	$	99,977	$	—	$	—

Securities available for sale	1,852,025		1,852,025		3,800		1,848,225		—
Securities held to maturity	172,154		160,974		—		160,974		—
Total securities	2,024,179		2,012,999		3,800		2,009,199		—

Loans held for sale	15,606		15,606		—		15,606		—

Loans and leases receivable:
Commercial finance	1,509,849		1,506,969		—		—		1,506,969
Consumer finance	335,361		342,931		—		—		342,931
Tax services	1,073		1,073		—		—		1,073
Total National Lending	1,846,283		1,850,973		—		—		1,850,973
Commercial and multi-family real estate	748,579		731,291		—		—		731,291
One to four family residential mortgage	223,482		220,697		—		—		220,697
Agricultural	60,498		58,849		—		—		58,849
Commercial operating	42,311		41,912		—		—		41,912
Consumer	23,836		24,033		—		—		24,033
Total Community Banking	1,098,706		1,076,782		—		—		1,076,782
Total loans and leases receivable	2,944,989		2,927,755		—		—		2,927,755

Federal Home Loan Bank stock	23,400		23,400		—		23,400		—
Accrued interest receivable	22,016		22,016		22,016		—		—

Financial liabilities
Non-interest bearing demand deposits	2,405,274		2,405,274		2,405,274		—		—
Interest bearing demand deposits, savings, and money markets	218,347		218,347		218,347		—		—
Certificates of deposits	276,180		273,800		—		273,800		—
Wholesale non-maturing deposits	94,384		94,384		94,384		—		—
Wholesale certificates of deposits	1,436,802		1,432,146		—		1,432,146		—
Total deposits	4,430,987		4,423,951		2,718,005		1,705,946		—

Advances from Federal Home Loan Bank	—		—		—		—		—
Federal funds purchased	422,000		422,000		422,000		—		—
Securities sold under agreements to repurchase	3,694		3,694		—		3,694		—
Capital leases	1,876		1,876		—		1,876		—
Trust preferred securities	13,661		13,866		—		13,866		—
Subordinated debentures	73,491		75,563		—		75,563		—
Accrued interest payable	7,794		7,794		7,794		—		—



	September 30, 2017
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(Dollars in Thousands)
Financial assets
Cash and cash equivalents	$	1,267,586	$	1,267,586	$	1,267,586	$	—	$	—

Securities available for sale	1,693,431		1,693,431		1,445		1,691,986		—
Securities held to maturity	563,529		564,185		—		564,185		—
Total securities	2,256,960		2,257,616		1,445		2,256,171		—

Loans and leases receivable:
Commercial finance	255,308		255,813		—		—		255,813
Consumer finance	140,229		141,958		—		—		141,958
Tax services	192		192		—		—		192
Total National Lending	395,729		397,963		—		—		397,963
Commercial and multi-family real estate	585,510		576,330		—		—		576,330
One to four family residential mortgage	196,706		196,970		—		—		196,970
Agricultural	95,394		94,454		—		—		94,454
Commercial operating	30,718		30,682		—		—		30,682
Consumer	22,775		22,003		—		—		22,003
Total Community Banking	931,103		920,439		—		—		920,439
Total loans and leases receivable	1,326,832		1,318,402		—		—		1,318,402

Federal Home Loan Bank stock	61,123		61,123		—		61,123		—
Accrued interest receivable	19,380		19,380		19,380		—		—

Financial liabilities
Non-interest bearing demand deposits	2,454,057		2,454,057		2,454,057		—		—
Interest bearing demand deposits, savings, and money markets	169,557		169,557		169,557		—		—
Certificates of deposit	123,637		123,094		—		123,094		—
Wholesale non-maturing deposits	18,245		18,245		18,245		—		—
Wholesale certificates of deposits	457,928		457,509		—		457,509		—
Total deposits	3,223,424		3,222,462		2,641,859		580,603		—

Advances from Federal Home Loan Bank	415,000		415,003		—		415,003		—
Federal funds purchased	987,000		987,000		987,000		—		—
Securities sold under agreements to repurchase	2,472		2,472		—		2,472		—
Capital leases	1,938		1,938		—		1,938		—
Trust preferred	10,310		10,447		—		10,447		—
Subordinated debentures	73,347		76,500		—		76,500		—
Accrued interest payable	2,280		2,280		2,280		—		—

The following sets forth the methods and assumptions used in determining the fair value estimates for the Company’s financial instruments at September 30, 2018 and 2017.

CASH AND CASH EQUIVALENTS

The carrying amount of cash and short-term investments is assumed to approximate the fair value.

SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY

Securities available for sale are recorded at fair value on a recurring basis and securities held to maturity are carried at amortized cost. Fair values for investment securities are based on obtaining quoted prices on nationally recognized securities exchanges, 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.

LOANS HELD FOR SALE

The carrying amount of loans held for sale is assumed to approximate the fair value.

LOANS AND LEASES RECEIVABLE, NET

The fair value of loans and leases is estimated using a historical or replacement cost basis concept (i.e., an entrance price concept). The fair value of loans and leases was estimated by discounting the future cash flows using the current rates at which similar loans and leases would be made to borrowers and for similar remaining maturities. When using the discounting method to determine fair value, loans and leases were grouped by homogeneous loans and leases with similar terms and conditions and discounted at a target rate at which similar loans and leases would be made to borrowers at September 30, 2018 and 2017. In addition, when computing the estimated fair value for all loans and leases, allowances for loan and lease losses have been subtracted from the calculated fair value as a result of the discounted cash flow which approximates the fair value adjustment for the credit quality component.

FHLB STOCK

The fair value of such stock is assumed to approximate book value since the Company is generally able to redeem this stock at par value.

ACCRUED INTEREST RECEIVABLE

The carrying amount of accrued interest receivable is assumed to approximate the fair value.

DEPOSITS

The carrying values of non-interest-bearing checking deposits, interest-bearing checking deposits, savings, money markets, and wholesale non-maturing deposits are assumed to approximate fair value, since such deposits are immediately withdrawable without penalty. The fair value of time certificates of deposit and wholesale certificates of deposit were estimated by discounting expected future cash flows by the current rates offered on certificates of deposit with similar remaining maturities.

In accordance with ASC 825, Financial Instruments, no value has been assigned to the Company’s long-term relationships with its deposit customers (core value of deposits intangible) since such intangible is not a financial instrument as defined under ASC 825.

ADVANCES FROM FHLB

The fair value of such advances was estimated by discounting the expected future cash flows using current interest rates for advances with similar terms and remaining maturities.

FEDERAL FUNDS PURCHASED

The carrying amount of federal funds purchased is assumed to approximate the fair value.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, CAPITAL LEASES, TRUST PREFERRED SECURITIES AND SUBORDINATED DEBENTURES

The fair value of these instruments was estimated by discounting the expected future cash flows using derived interest rates approximating market over the contractual maturity of such borrowings.

ACCRUED INTEREST PAYABLE

The carrying amount of accrued interest payable is assumed to approximate the fair value.

LIMITATIONS

Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. Additionally, fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business, customer relationships and the value of assets and liabilities that are not considered financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time. Furthermore, since no market exists for certain of the Company’s financial instruments, fair value estimates may be 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 a high level of precision. Changes in assumptions as well as tax considerations could significantly affect the estimates. Accordingly, based on the limitations described above, the aggregate fair value estimates are not intended to represent the underlying value of the Company, on either a going concern or a liquidation basis.