7.	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 1:	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 2:	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 3:	Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 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

March

31,

2017

and

December

31,

2016.

The Company had no liabilities measured at fair value as of

March

31,

2017

December

31,

2016.

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

March 31, 2017
Assets Measured on a Recurring Basis
Securities available for sale:
Agency mortgage-backed securities	$	0	$	118,431	$	0	$	118,431
Agency CMO		0		15,206		0		15,206
Agency notes and bonds		0		70,089		0		70,089
Municipal obligations		0		68,386		0		68,386
Mutual funds		73		0		0		73
Total securities available for sale	$	73	$	272,112	$	0	$	272,185

Assets Measured on a Nonrecurring Basis
Impaired loans:
Residential real estate	$	0	$	0	$	2,217	$	2,217
Commercial real estate		0		0		1,082		1,082
Commercial business		0		0		83		83
Home equity and second mortgage		0		0		229		229
Other consumer		0		0		25		25
Total impaired loans	$	0	$	0	$	3,636	$	3,636

Loans held for sale	$	0	$	2,425	$	0	$	2,425

Foreclosed real estate:
Residential real estate	$	0	$	0	$	202	$	202
Commercial real estate		0		0		4,215		4,215
Total foreclosed real estate	$	0	$	0	$	4,417	$	4,417

December 31, 2016
Assets Measured on a Recurring Basis
Securities available for sale:
Agency mortgage-backed securities	$	0	$	108,237	$	0	$	108,237
Agency CMO		0		16,028		0		16,028
Agency notes and bonds		0		68,662		0		68,662
Municipal obligations		0		62,843		0		62,843
Mutual funds		74		0		0		74
Total securities available for sale	$	74	$	255,770	$	0	$	255,844

Assets Measured on a Nonrecurring Basis
Impaired loans:
Residential real estate	$	0	$	0	$	2,060	$	2,060
Land		0		0		1,217		1,217
Commercial real estate		0		0		100		100
Commercial business		0		0		231		231
Home equity and second mortgage		0		0		14		14
Total impaired loans	$	0	$	0	$	3,622	$	3,622

Loans held for sale	$	0	$	4,507	$	0	$	4,507

Foreclosed real estate:
Residential real estate	$	0	$	0	$	226	$	226
Commercial real estate		0		0		4,448		4,448
Total foreclosed real estate	$	0	$	0	$	4,674	$	4,674

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 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

March

31,

2017

and

December

31,

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. At

March

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

12%

64%,

with a weighted average discount of

44%.

December

31,

2016,

the discount from appraised value ranged from

33%

65%,

with a weighted average discount of

39%.

The Company recognized provisions for loan losses for impaired loans for the

three

months ended

March

31,

2017

and

2016

$2,000

and

$106,000,

respectively.

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

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. At

March

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

10%

75%,

with a weighted average of

42%.

December

31,

2016,

the discount from appraised value ranged from

10%

77%,

with a weighted average of

38%.

The Company recognized losses of

$228,000

and

$83,000,

respectively, to write down foreclosed real estate for the

three

month periods ended

March

31,

2017

and

2016,

respectively.

There have been no changes in the valuation techniques and related inputs used for assets measured at fair value on a recurring and nonrecurring basis during the

three

month periods ended

March

31,

2017

and

2016.

There were no transfers into or out of the Company’s Level

financial assets for the

three

month periods ended

March

31,

2017

and

2016.

In addition, there were no transfers into or out of Levels

and

of the fair value hierarchy during the

three

month periods ended

March

31,

2017

and

2016.

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

March 31, 2017
Financial assets:
Cash and cash equivalents	$	47,657	$	47,657	$	47,657	$	0	$	0
Interest-bearing time deposits		13,535		13,556		0		13,556		0
Securities available for sale		272,185		272,185		73		272,112		0
Securities held to maturity		2		2		0		2		0
Loans held for sale		2,425		2,473		0		2,473		0
Loans, net		385,084		384,278		0		0		384,278
FHLB and other stock		1,650		1,650		0		1,650		0
Accrued interest receivable		2,437		2,437		0		2,437		0

Financial liabilities:
Deposits		681,659		680,685		0		0		680,685
Accrued interest payable		122		122		0		122		0

December 31, 2016:
Financial assets:
Cash and cash equivalents	$	45,835	$	45,835	$	45,835	$	0	$	0
Interest-bearing time deposits		14,735		14,786		0		14,786		0
Securities available for sale		255,844		255,844		74		255,770		0
Securities held to maturity		2		2		0		2		0
Loans held for sale		4,507		4,598		0		4,598		0
Loans, net		381,154		381,459		0		0		381,459
FHLB and other stock		1,650		1,650		0		1,650		0
Accrued interest receivable		2,363		2,363		0		2,363		0

Financial liabilities:
Deposits		664,650		663,806		0		0		663,806
Accrued interest payable		133		133		0		133		0

The carrying amounts in the preceding table are included in the consolidated balances sheets under the applicable captions. The fair value of financial instruments with off-balance-sheet risk (primarily loan commitments) is considered immaterial. 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, 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 and other restricted equity securities, the carrying amount is a reasonable estimate of fair value because the stock is not marketable.

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. 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.