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FAIR VALUE DISCLOSURES
 6 Months Ended
Mar. 31, 2020
Fair Value Disclosures [Abstract]  
FAIR VALUE DISCLOSURES

NOTE G – FAIR VALUE DISCLOSURES

 

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets or liabilities on a non-recurring basis, such as held-to-maturity securities, mortgage servicing rights, loans receivable and other real estate owned, or OREO. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

 

In accordance with ASC 820, the Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

  Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
     
  Level 2 - 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 all significant assumptions are observable in the market.
     
  Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.

 

The Company based its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The following is a description of valuation methodologies used for assets measured at fair value on a recurring basis.

 

Securities available-for-sale

The securities available-for-sale portfolio is carried at estimated fair value on a recurring basis, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in stockholders’ equity. The securities available-for-sale portfolio consists of U.S government-sponsored mortgage-backed securities and private label mortgage-backed securities. The fair values of these securities are obtained from an independent nationally recognized pricing service. An independent pricing service provides the Company with prices which are categorized as Level 2, as quoted prices in active markets for identical assets are generally not available for the securities in the Company’s portfolio. Various modeling techniques are used to determine pricing for Company’s mortgage-backed securities, including option pricing and discounted cash flow models. The inputs to these models include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data.

 

The following tables provide the level of valuation assumptions used to determine the carrying value of the Company’s assets measured at fair value on a recurring basis.

 

   Fair Value at March 31, 2020 
   Total   Level 1   Level 2   Level 3 
   (In thousands)     
Securities available for sale:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $468   $—   $468   $— 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   9,105    —    9,105    — 
            Total securities available for sale  $9,573   $—   $9,573   $— 

 

   Fair Value at September 30, 2019 
   Total   Level 1   Level 2   Level 3 
   (In thousands) 
Securities available for sale:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $495   $—   $495   $— 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   14,708    —    14,708    — 
Debt securities   1,500    —    1,500    — 
            Total securities available for sale  $16,703   $—   $16,703   $— 

 

The following is a description of valuation methodologies used for assets measured at fair value on a non-recurring basis.

 

Mortgage Servicing Rights, net

Mortgage Servicing Rights (MSRs) are carried at the lower of cost or estimated fair value. The estimated fair value of MSR is determined through a calculation of future cash flows, incorporating estimates of assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market’s perception of future interest rate movements and, as such, are classified as Level 3. The Company had MSRs totaling $20,000 and $26,000 at March 31, 2020 and September 30, 2019, respectively.

 

Impaired Loans

Loans which meet certain criteria are evaluated individually for impairment. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Three impairment measurement methods are used, depending upon the collateral securing the asset: 1) the present value of expected future cash flows discounted at the loan’s effective interest rate (the rate of return implicit in the loan); 2) the asset’s observable market price; or 3) the fair value of the collateral, less anticipated selling and disposition costs, if the asset is collateral dependent. The regulatory agencies require the last method for loans from which repayment is expected to be provided solely by the underlying collateral. The Company’s impaired loans are generally collateral dependent and, as such, are carried at the estimated fair value of the collateral less estimated selling costs. Fair value is estimated through current appraisals, and adjusted by management as necessary, to reflect current market conditions and, as such, are generally classified as Level 3.

 

Appraisals of collateral securing impaired loans are conducted by approved, qualified, and independent third-party appraisers. Such appraisals are ordered via the Company’s credit administration department, independent from the lender who originated the loan, once the loan is deemed impaired, as described in the previous paragraph. Impaired loans are generally re-evaluated with an updated appraisal within one year of the last appraisal. The Company discounts the appraised “as is” value of the collateral for estimated selling and disposition costs and compares the resulting fair value of collateral to the outstanding loan amount. If the outstanding loan amount is greater than the discounted fair value, the Company requires a reduction in the outstanding loan balance or additional collateral before considering an extension to the loan. If the borrower is unwilling or unable to reduce the loan balance or increase the collateral securing the loan, it is deemed impaired and the difference between the loan amount and the fair value of collateral, net of estimated selling and disposition costs, is charged off through a reduction of the allowance for loan loss.

 

Other Real Estate Owned

The fair value of other real estate owned is determined through current appraisals, and adjusted as necessary, by management, to reflect current market conditions and anticipated selling and disposition costs. As such, other real estate owned is generally classified as Level 3.

 

The following tables provide the level of valuation assumptions used to determine the carrying value of the Company’s assets measured at fair value on a non-recurring basis at March 31, 2020 and September 30, 2019.

 

   Fair Value at March 31, 2020 
   Total   Level 1   Level 2   Level 3 
   (In thousands) 
                 
Impaired loans  $9,480   $—   $—   $9,480 
Other real estate owned   6,727    —    —    6,727 
Total  $16,207   $—   $—   $16,207 

 

   Fair Value at September 30, 2019 
   Total   Level 1   Level 2   Level 3 
   (In thousands) 
                 
Impaired loans  $6,835   $—   $—   $6,835 
Other real estate owned   7,528    —    —    7,528 
Total  $14,363   $—   $—   $14,363 

 

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Company has utilized Level 3 inputs to determine fair value:

 

Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)
         
  Fair Value Valuation    
March 31, 2020 Estimate Techniques Unobservable Input Range (Weighted Average)
         
Impaired loans  $     9,480 Appraisal of
collateral (1)		 Appraisal adjustments (2) -2.5% to -8.0% (-4.0%)
Other real estate owned  $     6,727 Appraisal of
collateral (1)		 Liquidation expenses (2) -1.3% to -53.8% (-15.6%)

 

 

Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)
         
  Fair Value Valuation    
September 30, 2019 Estimate Techniques Unobservable Input Range (Weighted Average)
         
Impaired loans  $     6,835 Appraisal of
collateral (1)		 Appraisal adjustments (2) -1.9% to -67.2% (-25.0%)
Other real estate owned  $     7,528 Appraisal of
collateral (1)		 Liquidation expenses (2) -9.2% to -48.5% (-19.4%)

 

(1)Fair value is generally determined through independent appraisals for the underlying collateral, which generally include various level 3 inputs which are not identifiable.
(2)Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

 

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments carried at cost or amortized cost as of March 31, 2020 and September 30, 2019.  For short-term financial assets such as cash and cash equivalents and accrued interest receivable, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as interest-bearing demand, NOW, and money market savings deposits, the carrying amount is a reasonable estimate of fair value due to these products being payable on demand and having no stated maturity.

 

   Carrying   Fair   Fair Value Measurement Placement 
   Value   Value   (Level 1)   (Level 2)   (Level 3) 
   (In thousands) 
March 31, 2020                    
Financial instruments - assets                         
Investment securities held to maturity  $30,042   $30,139   $—   $30,139   $— 
Loans   541,921    554,893    —    —    554,893 
                          
Financial instruments - liabilities                         
Certificates of deposit including retirement certificates   128,243    130,492    —    130,492    — 
Borrowings   31,079    31,998    —    31,998    — 
                          
September 30, 2019                         
Financial instruments - assets                         
Investment securities held to maturity  $29,481   $29,344   $—   $29,344   $— 
Loans   518,217    527,088    —    —    527,088 
                          
Financial instruments - liabilities                         
Certificates of deposit including retirement certificates   116,776    117,730    —    117,730    — 
Borrowings   36,189    36,583    —    36,583    — 

 

There were no transfers between fair value measurement placements for the six months ended March 31, 2020.