(22)	FAIR VALUE MEASUREMENTS

FASB ASC Topic 820, Fair Value Measurements, provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC Topic 820 are described as follows:

Level 1:

Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted market price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

Level 2:

Inputs to the valuation methodology include quoted market prices for similar assets or liabilities in active markets; quoted market prices for identical or similar assets or liabilities in markets that are not active; or inputs that are derived principally from or can be corroborated by observable market data by correlation or other means.

Level 3:

Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

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, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets carried at fair value or the lower of cost or fair value.

The table below presents the balances of financial assets measured at fair value on a recurring and nonrecurring basis as of September 30, 2016. The Company had no liabilities measured at fair value as of September 30, 2016.

	Carrying Value
	Level 1		Level 2		Level 3		Total
	(In thousands)
September 30, 2016:
Assets Measured – Recurring Basis
Trading account securities	$	-	$	9,255	$	-	$	9,255

Securities available for sale:
Agency bonds and notes	$	-	$	1,032	$	-	$	1,032
Agency mortgage-backed		-		47,405		-		47,405
Agency CMO		-		16,095		-		16,095
Privately-issued CMO		-		2,652		-		2,652
Privately-issued ABS		-		4,532		-		4,532
SBA certificates		-		1,227		-		1,227
Municipal obligations		-		101,550		-		101,550
Total securities available for sale	$	-	$	174,493	$	-	$	174,493

Assets Measured – Nonrecurring Basis
Impaired loans:
Residential real estate	$	-	$	-	$	4,299	$	4,299
Commercial real estate		-		-		6,298		6,298
Land and land development		-		-		241		241
Commercial business		-		-		231		231
Consumer		-		-		244		244
Total impaired loans	$	-	$	-	$	11,313	$	11,313

Loans held for sale:
Residential mortgage loans held for sale	$	-	$	384	$	-	$	384
SBA loans held for sale		-		5,087		-		5,087
Total loans held for sale	$	-	$	5,471	$	-	$	5,471

Loans servicing rights	$	-	$	-	$	310	$	310

Other real estate owned, held for sale:
Residential real estate	$	-	$	-	$	397	$	397
Commercial real estate		-		-		122		122
Total other real estate owned	$	-	$	-	$	519	$	519

The table below presents the balances of financial assets measured at fair value on a recurring and nonrecurring basis as of September 30, 2015. The Company had no liabilities measured at fair value as of September 30, 2015.

	Carrying Value
	Level 1		Level 2		Level 3		Total
	(In thousands)
September 30, 2015:
Assets Measured – Recurring Basis
Trading account securities	$	-	$	9,044	$	-	$	9,044

Securities available for sale:
Agency bonds and notes	$	-	$	5,582	$	-	$	5,582
Agency mortgage-backed		-		48,278		-		48,278
Agency CMO		-		19,014		-		19,014
Privately-issued CMO		-		3,470		-		3,470
Privately-issued ABS		-		6,109		-		6,109
SBA certificates		-		1,480		-		1,480
Municipal obligations		-		94,395		-		94,395
Total securities available for sale	$	-	$	178,328	$	-	$	178,328

SBA loans held for sale	$	-	$	5,835	$	-	$	5,835

Assets Measured – Nonrecurring Basis
Impaired loans:
Residential real estate	$	-	$	-	$	4,681	$	4,681
Commercial real estate		-		-		7,041		7,041
Commercial business		-		-		222		222
Consumer		-		-		285		285
Total impaired loans	$	-	$	-	$	12,229	$	12,229

Residential mortgage loans held for sale	$	-	$	965	$	-	$	965

Other real estate owned, held for sale:
Residential real estate	$	-	$	-	$	434	$	434
Commercial real estate		-		-		181		181
Land and land development		-		-		3		3
Total other real estate owned	$	-	$	-	$	618	$	618

Fair value is based upon quoted market prices, where available. If quoted market prices are not available, fair value is based on internally-developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters or a matrix pricing model that employs the Bond Market Association’s standard calculations for cash flow and price/yield analysis and observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value, or the lower of cost or fair value. These adjustments may include unobservable parameters. Any such valuation adjustments have been applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Trading Account Securities and Securities Available for Sale. Securities classified as trading and available for sale are reported at fair value on a recurring basis. These securities are classified as Level 1 of the valuation hierarchy where quoted market prices from reputable third-party brokers are available in an active market. If quoted market prices are not available, the Company obtains fair value measurements from an independent pricing service. These securities are reported using Level 2 inputs and the fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. For securities where quoted market prices, market prices of similar securities or prices from an independent third party pricing service are not available, fair values are calculated using discounted cash flows or other market indicators and are classified within Level 3 of the fair value hierarchy. Changes in fair value of trading account securities are reported in noninterest income. Changes in fair value of securities available for sale are recorded in other comprehensive income, net of income tax effect.

Impaired Loans. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of impaired loans is classified as Level 3 in the fair value hierarchy.

Impaired loans are measured at the present value of estimated future cash flows using the loan's effective interest rate or the fair value of the collateral if the loan is a collateral-dependent loan. At September 30, 2016 and 2015, all impaired loans were considered to be collateral-dependent for the purpose of determining fair value. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and its fair value is generally determined based on real estate appraisals or other independent evaluations by qualified professionals. The appraisals are then discounted to reflect management’s estimate of the fair value of the collateral given the current market conditions and the condition of the collateral. At September 30, 2016 and 2015, the significant unobservable inputs used in the fair value measurement of impaired loans included a discount from appraised value ranging from 0.0% to 15.0% and estimated costs to sell the collateral ranging from 0.0% to 6.0%. During the years ended September 30, 2016 and 2015, the Company recognized provisions for loan losses of $43,000 and $58,000, respectively, for impaired loans.

Loans Held for Sale. Loans held for sale is comprised of residential mortgage loans and SBA loans held for sale. Residential mortgage loans held for sale are carried at the lower of cost or market value. At September 30, 2016, SBA loans held for sale were carried at the lower of cost or market value. As discussed further below, SBA loans held for sale at September 30, 2015 were reported at fair value in accordance with FASB ASC 825-10. The fair value of loans held for sale is based on specific prices of the underlying contracts for sale to investors, and is classified as Level 2 in the fair value hierarchy.

Loan Servicing Rights. Loan servicing rights represent the value associated with servicing SBA loans that have been sold. The fair value of loan servicing rights is determined on a quarterly basis by an independent third party valuation model using market-based discount rate and prepayment assumptions, and is classified as Level 3 in the fair value hierarchy. At September 30, 2016, the significant unobservable inputs used in the fair value measurement of loan servicing rights included discount rates ranging from 8.54% to 14.46% with a weighted average of 12.27% and prepayment speed assumptions ranging from 4.25% to 8.71% with a weighted average rate of 6.75%. Impairment of the loan servicing rights is recognized on a quarterly basis through a valuation allowance to the extent that fair value is less than the carrying amount. The Company did not recognize any impairment charges on loan servicing rights for the year ended September 30, 2016.

Other Real Estate Owned. Other real estate owned held for sale is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. Fair value of other real estate owned is classified as Level 3 in the fair value hierarchy.

Other real estate owned is reported at fair value less estimated costs to dispose of the property. The fair values are determined by real estate appraisals which are then discounted to reflect management’s estimate of the fair value of the property given current market conditions and the condition of the collateral. At September 30, 2016, the significant unobservable inputs used in the fair value measurement of other real estate owned included a discount from appraised value (including estimated costs to sell the property) ranging from 15.0% to 34.2% with a weighted average of 24.6%. At September 30, 2015, the significant unobservable inputs used in the fair value measurement of other real estate owned included a discount from appraised value (including estimated costs to sell the property) ranging from 15.0% to 56.5% with a weighted average of 23.6%. The Company recognized charges of $100,000 and $73,000 to write down other real estate owned to fair value for the years ended September 30, 2016 and 2015, respectively.

Transfers Between Categories. There have been no changes in the valuation techniques and related inputs used for assets measured at fair value on a recurring and nonrecurring basis during the years ended September 30, 2016 and 2015. There were no transfers into or out of Level 3 financial assets or liabilities for the years ended September 30, 2016 or 2015. In addition, there were no transfers into or out of Levels 1 and 2 of the fair value hierarchy during the years ended September 30, 2016 or 2015.

Financial Instruments Recorded using Fair Value Option. Under FASB ASC 825-10, the Company may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis, with changes in fair value reported in income. The election is made at the acquisition of an eligible financial asset or financial liability, and may not be revoked once made.

The Company elected the fair value option for SBA loans held for sale at September 30, 2015. These loans were intended for sale and the Company believed that the fair value was the best indicator of the resolution of these loans. Interest income was recorded based on the contractual terms of the loans and in accordance with the Company’s policy on loans held for investment. None of these loans were 90 days or more past due, nor were any on nonaccrual status as of September 30, 2015.

At September 30, 2015, the difference between the aggregate fair value ($5.8 million) and the aggregate unpaid principal balance ($5.3 million) of SBA loans held for sale was $558,000. The amount of gains included in earnings for the year ended September 30, 2015 for SBA loans held for sale totaled $558,000, consisting of $24,000 included in interest income on loans and $534,000 in changes in fair value included in net unrealized gain on loans held for sale in the accompanying consolidated statements of income.

All of the SBA loans held for sale at September 30, 2015 were sold during the year ended September 30, 2016. Subsequent to September 30, 2016, the Company did not elect the fair value option on SBA loans held for sale and, as such, all loans held for sale were carried at the lower of cost or market at September 30, 2016.