(8)Fair Value Measurements

The Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value as follows:

Level l - Valuation is based on quoted prices in active markets for identical assets or liabilities. Level l assets and liabilities generally include debt and equity securities that are traded in an active exchange market. At March 31, 2017, the Company had no assets or liabilities valued using Level 1 measurements.

Level 2 - Valuation is based on observable inputs other than Level l prices, 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 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

All of the Company’s securities that are measured at fair value are included in Level 2 and are based on pricing models from independent, third party pricing services that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. There are no liabilities measured at fair value. All of the Company’s impaired loans that are measured at fair value are included in Level 3 and are based on the appraised value of the underlying collateral considering discounting factors, if deemed appropriate, and adjusted for selling costs. These appraised values may be discounted based on management’s historical knowledge, expertise or changes in market conditions from time of valuation. The Company did not have any significant transfers of assets or liabilities to or from Levels 1 and 2 of the fair value hierarchy during the three-month period ended March 31, 2017.

Assets and liabilities measured at fair value on a recurring basis at March 31, 2017 and December 31, 2016 are summarized below.


							Total
							Assets
	Level 1		Level 2		Level 3		at Fair Value
	(In thousands)
At March 31, 2017

Assets

Securities available for sale

State and municipal	$	—	$	2,395	$	—	$	2,395

Residential mortgage-backed securities		—		16,452		—		16,452

Total securities available for sale	$	—	$	18,847	$	—	$	18,847

At December 31, 2016

Assets

Securities available for sale

State and municipal	$	—	$	2,385	$	—	$	2,385

Residential mortgage-backed securities		—		17,387		—		17,387

Total securities available for sale	$	—	$	19,772	$	—	$	19,772

The Company may also be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. Assets measured at fair value on a non-recurring basis at March 31, 2017 and December 31, 2016 are summarized below. The fair value adjustments relate to the amount of write-down recorded or related allowance recorded as of March 31, 2017 and December 31, 2016.


							Assets		Adjustments
	Level 1		Level 2		Level 3		at Fair Value		to Fair Value
	(In thousands)
At March 31, 2017

Impaired loans	$	—	$	—	$	78	$	78	$	(7)


							Assets		Adjustments
	Level 1		Level 2		Level 3		At Fair Value		to Fair Value
	(In thousands)
At December 31, 2016

Impaired loans	$	—	$	—	$	78	$	78	$	(7)

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments.

Cash and cash equivalents: The carrying amounts of cash and short-term investments approximate fair values.

Securities: Fair values for the Company’s debt securities are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.

FHLB and Bankers Bank Northeast (BBN) stock: Fair value is based on redemption provisions of the FHLB and BBN. The FHLB and BBN stock have no quoted market value.

Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Capitalized mortgage servicing rights: Fair value is based on a quarterly, independent third-party valuation model that calculates the present value of estimated future net servicing income. The model utilizes a variety of assumptions, the most significant of which are loan prepayment assumptions and the discount rate used to discount future cash flows. Prepayment assumptions, which are impacted by loan rates and terms, are calculated using a moving average of prepayment data published by the Securities Industry and Financial Markets Association and a third party proprietary analysis of prepayment rates embedded in liquid mortgage securities markets and modeled against the serviced loan portfolio by the independent third party valuation specialist. The discount rate is the moving average 10-year, U.S. Treasury rate plus 5.0% adjusted to reflect the current credit spreads and conditions in the market. Other assumptions include delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan cost. All assumptions are adjusted periodically to reflect current circumstances and all are obtained from independent market sources.

Deposits: The fair values for non-certificate accounts are, by definition, equal to the amount payable on demand at the reporting date which is the carrying amount. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-term FHLB advances: The fair value of short-term FHLB advances approximates carrying value, as they generally mature within 90 days.

Long-term FHLB advances: The fair value for long-term FHLB advances is estimated using discounted cash flow analyses based on current market borrowing rates for similar types of borrowing arrangements.

Mortgagors’ escrow accounts: The fair value of mortgagors’ escrow accounts approximates carrying value.

Accrued interest: The carrying amounts of accrued interest approximate fair value.

Off-balance-sheet instruments: The fair value of commitments to originate loans is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments and the unadvanced portion of loans, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date. At March 31, 2017 and December 31, 2016, the fair value of commitments outstanding is not significant since fees charged are not material.

The estimated fair values and related carrying amounts of the Company’s financial instruments at March 31, 2017 and December 31, 2016 are as follows.


	March 31, 2017
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial assets:
Cash and cash equivalents	$	8,153	$	8,153	$	—	$	—	$	8,153
Securities available for sale		18,847		—		18,847		—		18,847
Securities held to maturity		2,462		—		2,453		—		2,453
FHLB stock		2,751		2,751		—		—		2,751
BBN stock		60		60		—		—		60
Loans, net		279,567		—		—		277,713		277,713
Accrued interest receivable		826		826		—		—		826
Capitalized mortgage servicing rights		182		—		580		—		580

Financial liabilities:
Deposits	$	240,530	$	—	$	241,273	$	—	$	241,273
Short-term FHLB advances		21,000		21,000		—		—		21,000
Long-term FHLB advances		23,600		—		23,679		—		23,679
Mortgagors’ escrow accounts		1,973		1,973		—		—		1,973
Accrued interest payable		62		62		—		—		62


	December 31, 2016
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial assets:
Cash and cash equivalents	$	6,129	$	6,129	$	—	$	—	$	6,129
Securities available for sale		19,772		—		19,772		—		19,772
Securities held to maturity		2,503		—		2,490		—		2,490
FHLB stock		2,341		2,341		—		—		2,341
BBN stock		60		60		—		—		60
Loans held for sale		271		275		—		—		275
Loans, net		277,371		—		—		275,824		275,824
Accrued interest receivable		816		816		—		—		816
Capitalized mortgage servicing rights		236		—		601		—		601

Financial liabilities:
Deposits	$	240,508	$	—	$	241,264	$	—	$	241,264
Short-term FHLB advances		17,250		17,250		—		—		17,250
Long-term FHLB advances		24,600		—		24,699		—		24,699
Mortgagors’ escrow accounts		1,633		1,633		—		—		1,633
Accrued interest payable		58		58		—		—		58