(15) Fair Value of Financial Instruments

In accordance with the Fair Value Measurements and Disclosures topic of the FASB ASC, the Company groups its financial assets and liabilities valued at fair value into three levels based on the markets in which the financial assets and liabilities are traded and the reliability of the assumptions used to determine fair value as follows:

· Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities traded in active markets. A quoted 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 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

· Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect management’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques that require the use of significant judgment or estimation.

In accordance with the Fair Value Measurements and Disclosures topic, the Company bases its fair values on the price that it would expect to receive if an asset were sold or the price that it would expect to pay to transfer a liability in an orderly transaction between market participants at the measurement date. Also as required, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements.

The Company uses fair value measurements to determine fair value disclosures. Investment securities held for sale and derivatives are recorded at fair value on a recurring basis. From time to time, the Company may be required to record other financial assets at fair value on a nonrecurring basis, such as loans held for sale, impaired loans and investments, and mortgage servicing assets. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.

Investment Securities Available for Sale. The estimated fair values of U.S. government-sponsored mortgage-backed securities are considered Level 2 inputs because the valuation for investment securities utilized pricing models that varied based on asset class and included trade, bid and other observable market information.

Interest Rate Contracts. The Company may enter into interest rate lock commitments with borrowers on loans intended to be sold. To manage interest rate risk on the lock commitments, the Company may also enter into forward loan sale commitments. The interest rate lock commitments and forward loan sale commitments are treated as derivatives and are recorded at their fair value determined by referring to prices quoted in the secondary market for similar contracts. Interest rate contracts that are classified as assets are included with prepaid expenses and other assets on the consolidated balance sheet while interest rate contracts that are classified as liabilities are included with accounts payable and accrued expenses.

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


	Carrying				Fair Value Measurements Using
(Dollars in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
June 30, 2018
Assets
Cash and cash equivalents	$	27,672	$	27,672	$	27,672	$	—	$	—
Investment securities available for sale		2,658		2,658		—		2,658		—
Investment securities held to maturity		392,189		382,962		—		382,231		731
Loans receivable, net		1,536,392		1,509,423		—		—		1,509,423
FHLB stock		5,925		5,925		—		5,925		—
FRB stock		3,106		3,106		—		3,106		—
Accrued interest receivable		5,195		5,195		8		1,014		4,173
Interest rate contracts		2		2		—		2		—

Liabilities
Deposits		1,647,183		1,643,537		—		1,267,555		375,982
Advances from the Federal Home Loan Bank		88,000		87,327		—		87,327		—
Securities sold under agreements to repurchase		30,000		29,736		—		29,736		—
Accrued interest payable		370		370		—		112		258
Interest rate contracts		2		2		—		2		—

December 31, 2017
Assets
Cash and cash equivalents	$	32,089	$	32,089	$	32,089	$	—	$	—
Investment securities available for sale		2,851		2,851		—		2,851		—
Investment securities held to maturity		404,792		406,663		—		405,818		845
Loans held for sale		403		414		—		414		—
Loans receivable, net		1,488,971		1,505,097		—		—		1,505,097
FHLB stock		6,541		6,541		—		6,541		—
FRB stock		3,103		3,103		—		3,103		—
Accrued interest receivable		5,142		5,142		7		1,045		4,090
Interest rate contracts		8		8		—		8		—

Liabilities
Deposits		1,597,295		1,595,992		—		1,285,070		310,922
Advances from the Federal Home Loan Bank		107,200		107,019		—		107,019		—
Securities sold under agreements to repurchase		30,000		29,846		—		29,846		—
Accrued interest payable		575		575		—		115		460
Interest rate contracts		8		8		—		8		—

At June 30, 2018 and December 31, 2017, neither the commitment fees received on commitments to extend credit nor the fair value thereof was material to the consolidated financial statements of the Company.

The table below presents the balance of assets and liabilities measured at fair value on a recurring basis:


(Dollars in thousands)	Level 1		Level 2		Level 3		Total

June 30, 2018
Interest rate contracts — assets	$	—	$	2	$	—	$	2
Interest rate contracts — liabilities		—		(2)		—		(2)
Available-for-sale investments		—		2,658		—		2,658

December 31, 2017
Interest rate contracts — assets	$	—	$	8	$	—	$	8
Interest rate contracts — liabilities		—		(8)		—		(8)
Available-for-sale investments		—		2,851		—		2,851

The table below presents the balance of assets measured at fair value on a nonrecurring basis as of December 31, 2017 and the related losses for the year ended December 31, 2017. There were no assets measured at fair value as of June 30, 2018.


	Fair Value
(Dollars in thousands)	Adjustment Date	Level 1		Level 2		Level 3		Total			Total Losses

December 31, 2017
Impaired loans	3/31/2017	$	—	$	87	$	—	$	87	$	(11)

The fair value of impaired loans is determined using the value of collateral less estimated selling costs. Gains and losses on impaired loans are included in the provision for loan losses in the consolidated statements of income.