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

measurements) and the lowest priority to unobservable inputs (Level

measurements). The

three

levels of the fair value hierarchy under FASB ASC Topic

820

are described as follows:

Level

Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets

Level

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

Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level

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 on the following page. These valuation methodologies were applied to all of the Company’s financial and nonfinancial assets carried at fair value or the lower of cost or fair value. The table below presents the balances of assets measured at fair value on a recurring and nonrecurring basis as of

June 30, 2018

and

December 31, 2017.

The Company had

liabilities measured at fair value as of

June 30, 2018

December 31, 2017.

	Carrying Value
(In thousands)	Level 1		Level 2		Level 3		Total

June 30, 2018
Assets Measured on a Recurring Basis
Securities available for sale:
Agency mortgage-backed securities	$	-	$	100,541	$	-	$	100,541
Agency CMO		-		22,662		-		22,662
Agency notes and bonds		-		68,996		-		68,996
Municipal obligations		-		59,239		-		59,239
Total securities available for sale	$	-	$	251,438	$	-	$	251,438

Assets Measured on a Nonrecurring Basis
Impaired loans:
Residential real estate	$	-	$	-	$	2,223	$	2,223
Land		-		-		333		333
Commercial real estate		-		-		259		259
Commercial business		-		-		243		243
Home equity and second mortgage		-		-		76		76
Other consumer		-		-		8		8
Total impaired loans	$	-	$	-	$	3,142	$	3,142

Loans held for sale	$	-	$	2,056	$	-	$	2,056

Foreclosed real estate:
Residential real estate	$	-	$	-	$	282	$	282
Commercial real estate		-		-		3,109		3,109
Total foreclosed real estate	$	-	$	-	$	3,391	$	3,391

December 31, 2017
Assets Measured on a Recurring Basis
Securities available for sale:
Agency mortgage-backed securities	$	-	$	112,649	$	-	$	112,649
Agency CMO		-		15,323		-		15,323
Agency notes and bonds		-		69,028		-		69,028
Municipal obligations		-		74,172		-		74,172
Total securities available for sale	$	-	$	271,172	$	-	$	271,172

Assets Measured on a Nonrecurring Basis
Impaired loans:
Residential real estate	$	-	$	-	$	2,872	$	2,872
Commercial real estate		-		-		401		401
Commercial business		-		-		38		38
Home equity and second mortgage		-		-		60		60
Total impaired loans	$	-	$	-	$	3,371	$	3,371

Loans held for sale	$	-	$	2,630	$	-	$	2,630

Foreclosed real estate:
Residential real estate	$	-	$	-	$	443	$	443
Commercial real estate		-		-		3,528		3,528
Total foreclosed real estate	$	-	$	-	$	3,971	$	3,971

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.

Securities Available for Sale

Securities classified as available for sale are reported at fair value on a recurring basis. These securities are classified as Level

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

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. 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

in the fair value hierarchy.

Impaired loans are carried at the present value of estimated future cash flows using the loan's effective interest rate or the fair value of collateral less estimated costs to sell if the loan is collateral dependent. At

June 30, 2018

and

December 31, 2017,

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. The fair value of the collateral is generally determined based on real estate appraisals or other independent evaluations by qualified professionals, adjusted for estimated costs to sell the property, costs to complete or repair the property and other factors to reflect management’s estimate of the fair value of the collateral given the current market conditions and the condition of the collateral. At

June 30, 2018,

the significant unobservable inputs used in the fair value measurement of impaired loans included a discount from appraised value for estimates of changes in market conditions, the condition of the collateral and estimated costs to sell the collateral ranging from

14%

100%,

with a weighted average discount of

70%.

December 31, 2017,

the discount from appraised value ranged from

14%

62%,

with a weighted average discount of

39%.

The Company recognized provisions for loan losses of

$137,000

and

$5,000

for the

six

months ended

June 30, 2018

and

2017,

respectively, for impaired loans

. The Company recognized provisions for loan losses of

$72,000

and

$3,000

for the

three

months ended

June 30, 2018

and

June 30, 2017,

respectively, for impaired loans.

Loans Held for Sale

. Loans held for sale are carried at the lower of cost or market value. The portfolio is comprised of residential real estate loans and fair value is based on specific prices of underlying contracts for sales to investors. These measurements are classified as Level

Foreclosed Real Estate

Foreclosed real estate is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of foreclosed real estate is classified as Level

in the fair value hierarchy.

Foreclosed real estate 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

June 30, 2018,

the significant unobservable inputs used in the fair value measurement of foreclosed real estate included a discount from appraised value for estimates of changes in market conditions, the condition of the collateral and estimated costs to sell the property ranging from

10%

79%,

with a weighted average of

51%.

December 31, 2017,

the discount from appraised value ranged from

17%

75%,

with a weighted average of

45%.

The Company recognized losses of

$419,000

to write down foreclosed real estate for the

three

and

six

months ended

June 30, 2018.

The Company recognized losses of

$228,000

to write down foreclosed real estate for the

six

months ended

June 30, 2017

and there were

charges to write down foreclosed real estate recognized in income for the

three

months ended

June 30, 2017.

There have been

changes in the valuation techniques and related inputs used for assets measured at fair value on a recurring and nonrecurring basis during the

six

month periods ended

June 30, 2018

and

2017.

There were

transfers into or out of the Company’s Level

financial assets for the

six

month periods ended

June 30, 2018

and

2017.

In addition, there were

transfers into or out of Levels

and

of the fair value hierarchy during the

six

month periods ended

June 30, 2018

and

2017.

GAAP requires disclosure of the fair value of financial assets and financial liabilities, whether or

not

recognized in the balance sheet. In cases where quoted market prices are

not

available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could

not

be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do

not

represent the underlying value of the Company.

The estimated fair values of the Company's financial instruments are as follows:

	Carrying		Fair		Fair Value Measurements Using
(In thousands)	Value		Value		Level 1		Level 2		Level 3

June 30, 2018
Financial assets:
Cash and cash equivalents	$	61,886	$	61,886	$	61,886	$	-	$	-
Interest-bearing time deposits		7,770		7,686		-		7,686		-
Securities available for sale		251,438		251,438		-		251,438		-
Loans held for sale		2,056		2,104		-		2,104		-
Loans, net		419,360		411,787		-		-		411,787
FHLB and other stock		1,988		N/A		N/A		N/A		N/A
Accrued interest receivable		2,676		2,676		-		2,676		-

Financial liabilities:
Deposits		701,836		699,878		-		-		699,878
Accrued interest payable		113		113		-		113		-

December 31, 2017:
Financial assets:
Cash and cash equivalents	$	25,915	$	25,915	$	25,915	$	-	$	-
Interest-bearing time deposits		9,258		9,220		-		9,220		-
Securities available for sale		271,172		271,172		-		271,172		-
Securities held to maturity		1		1		-		1		-
Loans held for sale		2,630		2,678		-		2,678		-
Loans, net		409,618		404,931		-		-		404,931
FHLB and other stock		1,979		N/A		N/A		N/A		N/A
Accrued interest receivable		2,694		2,694		-		2,694		-

Financial liabilities:
Deposits		664,562		663,006		-		-		663,006
FHLB advances		10,000		10,000		-		10,000		-
Accrued interest payable		107		107		-		107		-

The carrying amounts in the preceding table are included in the consolidated balances sheets under the applicable captions. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:

Cash and Cash Equivalents

For cash and short-term investments, including cash and due from banks, interest-bearing deposits with banks with original maturities of

days or less, money market funds, and federal funds sold, the carrying amount is a reasonable estimate of fair value.

Investment Securities and Interest-Bearing Time Deposits

For marketable equity securities, the fair values are based on quoted market prices. For debt securities and interest-bearing time deposits, the Company obtains fair value measurements from an independent pricing service 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 FHLB stock, a restricted equity security, it is

not

practical to determine the fair value due to restrictions place on transferability.

Loans

The fair value of loans, excluding loans held for sale, is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and terms. Impaired loans are valued at the lower of their carrying value or fair value, as previously described. The carrying amount of accrued interest receivable approximates its fair value. The fair value of loans held for sale is based on specific prices of underlying contracts for sale to investors.

Deposits

The fair value of demand deposits, savings accounts, money market deposit accounts and other transaction accounts is the amount payable on demand at the balance sheet date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.

FHLB Advances

The fair value of FHLB advances is estimated by discounting the future cash flows at current interest rates for FHLB advances of similar maturities.