Fair Value of Financial Instruments

The Company has adopted ASU 2016-01, and therefore, is measuring the fair value of loans receivable under the exit price notion. The methodology used to estimate the fair values of other financial instruments did not change from the adoption of ASU 2016-01. Under the exit price notion used at December 31, 2019, and 2018, the fair value estimate of loans receivable was based on similar techniques, with the addition of current origination spreads, liquidity premiums, or credit adjustments. The fair value of nonperforming loans is based on the underlying value of the collateral for periods prior to and after adoption of ASU 2016-01.

The Company determines the fair values of its financial instruments based on the fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair values. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect its estimate for market assumptions.

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability using one of the three valuation techniques. Inputs can be observable or unobservable. Observable inputs are those assumptions that market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from an independent source. Unobservable inputs are assumptions based on the Company’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date.

All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy:


•	Level 1 - Quoted prices for identical instruments in active markets.


•	Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable.


•	Level 3 - Instruments whose significant value drivers are unobservable.

The Company used the following methods to measure fair value on a recurring or nonrecurring basis.


•	Investments available-for-sale: The fair value of all investments, excluding FHLB stock, was based upon quoted market prices for similar investments in active markets, identical or similar investments in markets that are not active, and model-derived valuations whose inputs are observable.


•	OREO: The fair value of OREO properties is measured at the lower of the carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.


•	Derivatives: The fair value of derivatives is based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques for which the determination of fair value may require significant management judgment or estimation.

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis (there were no transfers between Level 1, Level 2 and Level 3 recurring measurements during the periods presented):



	December 31, 2019
	Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Available-for-sale investments:
Mortgage-backed investments:
Fannie Mae	$	15,629	$	—	$	15,629	$	—
Freddie Mac	4,292		—		4,292		—
Ginnie Mae	23,050		—		23,050		—
Other	11,448		—		11,448		—
Municipal bonds	10,911		—		10,911		—
U.S. Government agencies	45,750		—		45,750		—
Corporate bonds	25,521		—		25,521		—
Total available-for-sale investments	136,601		—		136,601		—
Derivative fair value asset	426		—		426		—
	$	137,027	$	—	$	137,027	$	—



	December 31, 2018
	Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Available-for-sale investments:
Mortgage-backed investments:
Fannie Mae	$	23,643	$	—	$	23,643	$	—
Freddie Mac	6,287		—		6,287		—
Ginnie Mae	22,061		—		22,061		—
Other	8,979		—		8,979
Municipal bonds	10,544		—		10,544		—
U.S. Government agencies	47,438		—		47,438		—
Corporate bonds	23,218		—		23,218		—
Total available-for-sale investments	142,170		—		142,170		$	—
Derivative fair value asset	1,662		—		1,662		—
	$	143,832	$	—	$	143,832	—

The estimated fair value of Level 2 investments is based on quoted prices for similar investments in active markets, identical or similar investments in markets that are not active, and model-derived valuations whose inputs are observable.

The tables below present the balances of assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2019, and 2018.



	December 31, 2019
	Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Impaired loans (included in loans receivable, net)⁽¹⁾	$	19,939	$	—	$	—	$	19,939
OREO	454		—		—		454
Total	$	20,393	$	—	$	—	$	20,393

_______________

⁽¹⁾ Total value of impaired loans is net of $31,000 of specific reserves on performing TDRs.



	December 31, 2018
	Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Impaired loans (included in loans receivable, net)⁽¹⁾	$	10,087	$	—	$	—	$	10,087
OREO	483		—		—		483
Total	$	10,570	$	—	$	—	$	10,570

________________

⁽¹⁾ Total value of impaired loans is net of $62,000 of specific reserves on performing TDRs.

The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2019 and 2018.



	December 31, 2019
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average Change in Fair Value)
	(Dollars in thousands)
Impaired Loans	$	19,939	Market approach	Appraised value discounted by market or borrower conditions	0.0% (0.00%)

OREO	$	454	Market approach	Appraised value less selling costs	0.0% (0.00%)



	December 31, 2018
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average Change in Fair Value)
	(Dollars in thousands)
Impaired Loans	$	10,087	Market approach	Appraised value discounted by market or borrower conditions	0.0% (0.00%)

OREO	$	483	Market approach	Appraised value less selling costs	0.0% (0.00%)

The fair value calculation of the Company’s financial instruments are an attempt to incorporate market conditions at a specific point in time. The underlying assumptions are generally subjective and involve uncertainties. Therefore, these fair value estimates are not intended to represent the underlying value of the Company as a whole.

The carrying amounts and estimated fair values of financial instruments at December 31, 2019, and 2018, were as follows:



	December 31, 2019				Fair Value Measurements Using:
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash on hand and in banks	$	10,094	$	10,094	$	10,094	$	—	$	—
Interest-earning deposits	12,896		12,896		12,896		—		—
Investments available-for-sale	136,601		136,601		—		136,601		—
Loans receivable, net	1,108,462		1,096,499		—		—		1,096,499
FHLB stock	7,009		7,009		—		7,009		—
Accrued interest receivable	4,138		4,138		—		4,138		—
Derivative fair value asset	426		426		—		426		—

Financial Liabilities:
Deposits	513,959		513,959		513,959		—		—
Certificates of deposit, retail	425,103		430,418		—		430,418		—
Certificates of deposit, brokered	94,472		94,556		—		94,556		—
Advances from the FHLB	137,700		137,706		—		137,706		—
Accrued interest payable	285		285		—		285		—



	December 31, 2018				Fair Value Measurements Using:
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash on hand and in banks	$	8,122	$	8,122	$	8,122	$	—	$	—
Interest-earning deposits	8,888		8,888		8,888		—		—
Investments available-for-sale	142,170		142,170		—		142,170		—
Loans receivable, net	1,022,904		1,012,114		—		—		1,012,114
FHLB stock	7,310		7,310		—		7,310		—
Accrued interest receivable	4,068		4,068		—		4,068		—
Derivative fair value asset	1,662		1,662		—		1,662		—

Financial Liabilities:
Deposits	450,033		450,033		450,033		—		—
Certificates of deposit, retail	391,174		390,101		—		390,101		—
Certificates of deposit, brokered	97,825		97,466		—		97,466		—
Advances from the FHLB	146,500		146,357		—		146,357		—
Accrued interest payable	478		478		—		478		—

Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business. The fair value has not been estimated for assets and liabilities that are not considered financial instruments.