Fair Value Disclosures

The Corporation determines the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date and is based on exit prices. Fair value includes assumptions about risk, such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. The standard describes three levels of inputs that may be used to measure fair value.

Level 1 — Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.

Level 2 — Level 2 inputs are inputs, other than quoted prices included with Level 1, that are observable for the asset or liability either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Level 3 inputs are supported by little or no market activity and are significant to the fair value of the assets or liabilities.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporation’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below:



	March 31, 2018
	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
	(In Thousands)
Assets:
Securities available-for-sale:
U.S. government agency obligations - government-sponsored enterprises	$	—	$	990	$	—	$	990
Municipal obligations	—		8,181		—		8,181
Collateralized mortgage obligations - government issued	—		22,845		—		22,845
Collateralized mortgage obligations - government-sponsored enterprises	—		93,284		—		93,284
Other securities	—		2,661		—		2,661
Interest rate swaps	—		1,511		—		1,511
Liabilities:
Interest rate swaps	—		961		—		961



	December 31, 2017
	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
	(In Thousands)
Assets:
Securities available-for-sale:
U.S. government agency obligations - government-sponsored enterprises	$	—	$	1,000	$	—	$	1,000
Municipal obligations	—		9,414		—		9,414
Asset backed securities	—		—		—		—
Collateralized mortgage obligations - government issued	—		22,249		—		22,249
Collateralized mortgage obligations - government-sponsored enterprises	—		90,305		—		90,305
Other securities	—		3,037		—		3,037
Interest rate swaps	—		942		—		942
Liabilities:
Interest rate swaps	—		1,064		—		1,064

For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the three months ended March 31, 2018 or the year ended December 31, 2017 related to the above measurements.

Assets and liabilities measured at fair value on a non-recurring basis, segregated by fair value hierarchy are summarized below:



	March 31, 2018
	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
	(In Thousands)
Impaired loans	$	—	$	4,333	$	6,414	$	10,747
Foreclosed properties	—		1,484		—		1,484



	December 31, 2017
	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
	(In Thousands)
Impaired loans	$	—	$	10,063	$	5,084	$	15,147
Foreclosed properties	—		1,069		—		1,069

Impaired loans were written down to the fair value of their underlying collateral less costs to sell of $10.7 million and $15.1 million at March 31, 2018 and December 31, 2017, respectively, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans. Valuation techniques consistent with the market approach, income approach or cost approach were used to measure fair value and primarily included observable inputs for the individual impaired loans being evaluated such as current appraisals, recent sales of similar assets or other observable market data, and are reflected within Level 2 of the hierarchy. In cases where an input is unobservable, specifically when discounts are applied to appraisal values to adjust such values to current market conditions or to reflect net realizable value, the impaired loan balance is reflected within Level 3 of the hierarchy. The quantification of unobservable inputs for Level 3 impaired loan values range from 13% - 75% as of the measurement date of March 31, 2018. The weighted average of those unobservable inputs was 16%. The majority of the impaired loans in the Level 3 category are considered collateral dependent loans or are supported by a SBA guaranty.

Foreclosed properties, upon initial recognition, are remeasured and reported at fair value through a charge-off to the allowance for loan and lease losses, if deemed necessary, based upon the fair value of the foreclosed property. The fair value of a foreclosed property, upon initial recognition, is estimated using a market approach or Level 2 inputs based on observable market data, typically a current appraisal, or Level 3 inputs based upon assumptions specific to the individual property or equipment. Level 3 inputs typically include unobservable inputs such as management applied discounts used to further reduce values to a net realizable value and may be used in situations when observable inputs become stale. Foreclosed property fair value inputs may transition to Level 1 upon receipt of an accepted offer for the sale of the related foreclosed property.

Fair Value of Financial Instruments

The Corporation is required to disclose estimated fair values for its financial instruments. Fair value estimates, methods and assumptions, consistent with exit price concepts for fair value measurements, are set forth below:



	March 31, 2018
	Carrying Amount		Fair Value
			Total		Level 1		Level 2		Level 3
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	61,322	$	61,319	$	41,622	$	19,697	$	—
Securities available-for-sale	127,961		127,961		—		127,961		—
Securities held-to-maturity	41,885		41,409		—		41,409		—
Loans held for sale	3,429		3,772		—		3,772		—
Loans and lease receivables, net	1,544,852		1,541,857		—		4,333		1,537,524
Federal Home Loan Bank stock	8,650		N/A		N/A		N/A		N/A
Accrued interest receivable	5,403		5,403		5,403		—		—
Interest rate swaps	1,511		1,511		—		1,511		—
Financial liabilities:
Deposits	1,371,158		1,367,168		1,001,498		365,670		—
Federal Home Loan Bank advances and other borrowings	308,912		305,156		—		305,156		—
Junior subordinated notes	10,022		8,352		—		—		8,352
Accrued interest payable	2,456		2,456		2,456		—		—
Interest rate swaps	961		961		—		961		—
Off-balance-sheet items:
Standby letters of credit	52		52		—		—		52

N/A = The fair value is not applicable due to restrictions placed on transferability



	December 31, 2017
	Carrying Amount		Fair Value
			Total		Level 1		Level 2		Level 3
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	52,539	$	52,539	$	35,114	$	17,425	$	—
Securities available-for-sale	126,005		126,005		—		126,005		—
Securities held-to-maturity	37,778		37,696		—		37,696		—
Loans held for sale	2,194		2,413		—		2,413		—
Loans and lease receivables, net	1,482,832		1,482,664		—		10,063		1,472,601
Federal Home Loan Bank stock	5,670		N/A		N/A		N/A		N/A
Accrued interest receivable	5,019		5,019		5,019		—		—
Interest rate swaps	942		942		—		942		—
Financial liabilities:
Deposits	1,394,331		1,391,801		1,010,147		381,654		—
Federal Home Loan Bank advances and other borrowings	207,898		206,441		—		206,441		—
Junior subordinated notes	10,019		8,836		—		—		8,836
Accrued interest payable	2,095		2,095		2,095		—		—
Interest rate swaps	1,064		1,064		—		1,064		—
Off-balance-sheet items:
Standby letters of credit	75		75		—		—		75

N/A = The fair value is not applicable due to restrictions placed on transferability

Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the unaudited Consolidated Balance Sheets. 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. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Corporation.

Securities: The fair value measurements of investment securities are determined by a third-party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other things. The fair value measurements are subject to independent verification by another pricing source on a quarterly basis to review for reasonableness. Any significant differences in pricing are reviewed with appropriate members of management who have the relevant technical expertise to assess the results. The Corporation has determined that these valuations are classified in Level 2 of the fair value hierarchy. When the independent pricing service does not provide a fair value measurement for a particular security, the Corporation will estimate the fair value based on specific information about each security. Fair values derived in this manner are classified in Level 3 of the fair value hierarchy.

Loans Held for Sale: Loans held for sale, which consist of the guaranteed portions of SBA loans, are carried at the lower of cost or estimated fair value. The estimated fair value is based on what secondary markets are currently offering for portfolios with similar characteristics.

Interest Rate Swaps: The carrying amount and fair value of existing derivative financial instruments are based upon independent valuation models, which use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative contract. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Limitations: Fair value estimates are made at a discrete point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holding of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and are not considered in the estimates.