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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. A quoted market price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

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.

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 independent

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.

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 below. 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

December 31, 2017.

The Company had

liabilities measured at fair value as of

December 31, 2017.

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

The table below presents the balances of assets measured at fair value on a recurring and nonrecurring basis as of

December 31, 2016.

The Company had

liabilities measured at fair value as of

December 31, 2016.

	Carrying Value
	Level 1		Level 2		Level 3		Total
	(In thousands)
December 31, 2016:

Assets Measured on a Recurring Basis
Securities available for sale:
Agency mortgage-backed securities	$	-	$	108,237	$	-	$	108,237
Agency CMO		-		16,028		-		16,028
Agency notes and bonds		-		68,662		-		68,662
Municipal obligations		-		62,843		-		62,843
Total securities available for sale	$	-	$	255,770	$	-	$	255,770

Assets Measured on a Nonrecurring Basis
Impaired loans:
Residential real estate	$	-	$	-	$	2,060	$	2,060
Commercial real estate		-		-		1,217		1,217
Commercial business		-		-		100		100
Home equity and second mortgage		-		-		231		231
Other consumer		-		-		14		14
Total impaired loans	$	-	$	-	$	3,622	$	3,622

Loans held for sale	$	-	$	4,507	$	-	$	4,507

Foreclosed real estate:
Residential real estate	$	-	$	-	$	226	$	226
Commercial real estate		-		-		4,448		4,448
Total foreclosed real estate	$	-	$	-	$	4,674	$	4,674

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. For securities where quoted market prices, market prices of similar securities or prices from an independent

third

party pricing service are

not

available, fair values are calculated using discounted cash flows or other market indicators and are classified within Level

of the fair value hierarchy. 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 measured 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

December 31, 2017

and

2016,

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, which are then discounted to reflect management’s estimate of the fair value of the collateral given the current market conditions and the condition of the collateral.

December 31, 2017,

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%

62%,

with a weighted average discount of

39%.

December 31, 2016,

33%

65%,

with a weighted average discount of

39%.

The Company recognized provisions for loan losses of

$39,000,

$158,000

and

$154,000

for the years ended

December 31, 2017,

2016

and

2015,

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 estimated based on specific prices of underlying contracts for sales to investors. These measurements are carried at Level

in the fair value hierarchy.

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.

December 31, 2017,

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

17%

75%,

with a weighted average of

45%.

December 31, 2016,

the discount from appraised value ranged from

10%

77%,

with a weighted average of

38%.

The Company recognized charges of

$263,000,

$80,000

and

$100,000

to write down foreclosed real estate to fair value for the years ended

December 31, 2017,

2016

and

2015,

respectively.

Transfers between Categories

. 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 years ended

December 31, 2017

and

2016.

There were

transfers in or out of the Company’s Level

financial assets for the years ended

December 31, 2017

and

2016.

In addition, there were

transfers into or out of Levels

and

of the fair value hierarchy during the years ended

December 31, 2017

and

2016.