FAIR VALUE MEASUREMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of three levels. These levels are:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2: Significant observable inputs other than quoted prices included within Level 1, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions market participants would use in pricing an asset or liability based on the best information available in the circumstances.

The Company's assets measured at fair value on a recurring basis consist of investment securities available for sale and investments in equity securities. The estimated fair values of MBS are based upon market prices of similar securities or observable inputs (Level 2). The estimated fair values of mutual funds are based upon quoted market prices (Level 1).

The Company had no liabilities measured at fair value on a recurring basis at December 31, 2018 and September 30, 2018. The Company's assets measured at estimated fair value on a recurring basis at December 31, 2018 and September 30, 2018 were as follows (dollars in thousands):



December 31, 2018	Estimated Fair Value
	Level 1		Level 2		Level 3		Total
Available for sale investment securities
MBS: U.S. government agencies	$	—	$	2,197	$	—	$	2,197
Investments in equity securities
Mutual funds	925		—		—		925
Total	$	925	$	2,197	$	—	$	3,122




September 30, 2018	Estimated Fair Value
	Level 1		Level 2		Level 3		Total
Available for sale investment securities
MBS: U.S. government agencies	$	—	$	237	$	—	$	237
Investments in equity securities
Mutual funds	917		—		—		917
Total	$	917	$	237	$	—	$	1,154

There were no transfers among Level 1, Level 2 and Level 3 during the three months ended December 31, 2018 and the year ended September 30, 2018.

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period.

The Company uses the following methods and significant assumptions to estimate fair value on a non-recurring basis:

Impaired Loans: The estimated fair value of impaired loans is calculated using the collateral value method or on a discounted cash flow basis. The specific reserve for collateral dependent impaired loans is based on the estimated fair value of the collateral less estimated costs to sell, if applicable. In some cases, adjustments are made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal and known changes in the market and in the collateral. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Investment Securities Held to Maturity: The estimated fair value of investment securities held to maturity is based upon the assumptions market participants would use in pricing the investment security. Such assumptions include quoted market prices (Level 1), market prices of similar securities or observable inputs (Level 2) and unobservable inputs such as dealer quotes, discounted cash flows or similar techniques (Level 3).

OREO and Other Repossessed Assets, net: OREO and other repossessed assets are recorded at estimated fair value less estimated costs to sell. Estimated fair value is generally determined by management based on a number of factors, including third-party appraisals of estimated fair value in an orderly sale. Estimated costs to sell are based on standard market factors. The valuation of OREO and other repossessed assets is subject to significant external and internal judgment (Level 3).

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at December 31, 2018 (dollars in thousands):



	Estimated Fair Value
	Level 1		Level 2		Level 3
Impaired loans:
Mortgage loans:
Land	$	—	$	—	$	317
Commercial business loans	—		—		127
Total impaired loans	—		—		444
Investment securities – held to maturity:
MBS - private label residential	—		7		—

OREO and other repossessed assets	—		—		2,026
Total	$	—	$	7	$	2,470

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of December 31, 2018 (dollars in thousands):



	Estimated Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired loans	$	444	Market approach	Appraised value less selling costs	NA

OREO and other repossessed assets	$	2,026	Market approach	Lower of appraised value or listing price less selling costs	NA

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2018 (dollars in thousands):



	Estimated Fair Value
	Level 1		Level 2		Level 3
Impaired loans:
Mortgage loans:
Land	$	—	$	—	$	119
Commercial business loans	—		—		107
Total impaired loans	—		—		226
Investment securities – held to maturity:
MBS - private label residential	—		3		—
OREO and other repossessed assets	—		—		1,913
Total	$	—	$	3	$	2,139

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of September 30, 2018 (dollars in thousands):



	Estimated Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired loans	$	226	Market approach	Appraised value less selling costs	NA

OREO and other repossessed assets	$	1,913	Market approach	Lower of appraised value or listing price less selling costs	NA

GAAP requires disclosure of estimated fair values for certain financial instruments. Such estimates are subjective in nature, and significant judgment is required regarding the risk characteristics of various financial instruments at a discrete point in time. Therefore, such estimates could vary significantly if assumptions regarding uncertain factors were to change. In addition, as the Company normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for certain items which are not defined as financial instruments but for which may have significant value. The Company does not believe that it would be practicable to estimate a represented fair value for these types of items as of December 31, 2018 and September 30, 2018. Because GAAP excludes certain items from fair value disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Company. Additionally, in accordance with ASU No. 2016-01, which the Company adopted on October 1, 2018 on a prospective basis, the Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

The recorded amounts and estimated fair values of financial instruments were as follows as of December 31, 2018 and September 30, 2018 (dollars in thousands):



	December 31, 2018
					Fair Value Measurements Using:
	Recorded Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	161,743	$	161,743	$	161,743	$	—	$	—
CDs held for investment	65,830		65,830		65,830		—		—
Investment securities	35,072		35,594		8,844		26,750		—
FHLB stock	1,395		1,395		1,395		—		—
Other investments	3,000		3,000		3,000		—		—
Loans held for sale	2,988		3,044		3,044		—		—
Loans receivable, net	857,070		843,968		—		—		843,968
Accrued interest receivable	3,497		3,497		3,497		—		—

Financial liabilities
Time deposits	154,773		153,836		—		—		153,836
Accrued interest payable	295		295		295		—		—



	September 30, 2018
					Fair Value Measurements Using:
	Recorded Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	148,864	$	148,864	$	148,864	$	—	$	—
CDs held for investment	63,290		63,290		63,290		—		—
Investment securities	13,964		14,418		8,812		5,606		—
FHLB stock	1,190		1,190		1,190		—		—
Other investments	3,000		3,000		3,000		—		—
Loans held for sale	1,785		1,814		1,814		—		—
Loans receivable, net	725,391		711,071		—		—		711,071
Accrued interest receivable	2,877		2,877		2,877		—		—

Financial liabilities
Time deposits	141,808		140,831		—		—		140,831
Accrued interest payable	225		225		225		—		—