16.	FAIR VALUE OF ASSETS AND LIABILITIES

Determination of fair value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various assets and liabilities. 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. Accordingly, the fair value estimates may not be realized in an immediate settlement of the asset or liability.

The following methods and assumptions were used by the Company in estimating fair value disclosures:

Cash and cash equivalents – The carrying amounts of cash and short-term instruments approximate fair values based on the short-term nature of the assets.

Certificates of deposit – Certificates of deposit are carried at cost. These assets are measured at fair value in level 2 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.

Securities – All fair value measurements are obtained from a third-party pricing service and are not adjusted by management. The securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. Securities measured at fair value in Level 2 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.

Federal Home Loan Bank stock – It is not practical to determine the fair value of FHLB stock due to restrictions on its transferability.

Loans held for sale – Fair values are based on commitments in effect from investors or prevailing market prices.

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 non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Mortgage servicing rights – Fair value is based on a valuation model that calculates the present value of estimated future net servicing income, using various assumptions related to fees, discount rates and prepayment speeds.

Deposit liabilities – The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate term certificates 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.

FHLBB advances - The fair values of the Company’s FHLBB advances are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

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

On-balance-sheet derivatives Fair values of forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans and, for derivative loan commitments, fair values also include the value of servicing, deferred origination fees/costs and the probability of such commitments being exercised. Significant management judgment and estimation is required in determining these fair value measurements.

Off-balance sheet credit-related instruments - Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair values of these instruments are not material.

Assets and liabilities measured at fair value on a recurring basis

Assets and liabilities measured at fair value on a recurring basis are summarized below. There were no liabilities measured at fair value on a recurring basis at December 31, 2015.

							Total
	Level 1		Level 2		Level 3		Fair Value
	(In thousands)
December 31, 2016
Assets:
Securities available for sale:
Debt securities	$	—	$	68,099	$	—	$	68,099
Mutual fund		—		538		—		538
Loans held for sale		—		30,452		—		30,452
Derivative loan commitments		—		617		—		617
Forward loan sale commitments		—		65		—		65

Liabilities:
Forward loan sale commitments		—		47		—		47

December 31, 2015
Assets:
Securities available for sale:
Debt securities	$	—	$	61,722	$	—	$	61,722
Mutual fund		—		545		—		545
Derivative loan commitments		—		93		—		93
Forward loan sale commitments		—		14		—		14

There were no transfers between levels for assets and liabilities recorded at fair value on a recurring basis during 2016 or 2015.

Effective July 1, 2016, the Company elected the fair value option pursuant to Accounting Standards Codification (“ASC”) 825, “Financial Instruments” for its residential mortgage loans being held for sale in the secondary market. ASC 825 allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis that may otherwise not be required to be measured at fair value under other accounting standards. The Company elected the fair value option to better match changes in fair values of the loans with changes in the fair value of the forward loan sale commitments which are used to economically hedge them against changes in interest rates between the time an interest rate lock agreement is entered into with the borrower and the time the completed loan is sold. The aggregate fair value of the loans held for sale, the contractual balance of loans held for sale and the gain on loans held for sale totaled $30.5 million, $29.7 million and $768,000, respectively, at December 31, 2016. The gains on loans held for sale is reported as a component of net gains on sale of mortgage loans in the accompanying statement of operations for the year ended December 31, 2016.

Assets measured at fair value on a non-recurring basis

The Company may also be required, from time to time, to measure certain other assets on a non-recurring basis in accordance with U.S. generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related assets as of December 31, 2016 and 2015. The gains and losses represent the amounts recorded during 2016 and 2015 on the assets held at year-end. There are no liabilities measured at fair value on a non-recurring basis.

							Year Ended
	December 31, 2016						December 31, 2016
	Level 1		Level 2		Level 3		Total Gains (Losses)
	(In thousands)
Collateral dependent
impaired loans	$	—	$	—	$	518	$	—
Mortgage servicing rights		—		8,486		—		(390	)

	$	—	$	8,486	$	518	$	(390	)

							Year Ended
	December 31, 2015						December 31, 2015
	Level 1		Level 2		Level 3		Total Gains (Losses)
	(In thousands)
Loans held for sale	$	—	$	2,870	$	—	$	—
Collateral dependent
impaired loans		—		—		552		—
Foreclosed real estate		—		—		500		(100	)
Mortgage servicing rights		—		2,567		—		(34	)

	$	—	$	5,437	$	1,052	$	(134	)

Gains or losses applicable to impaired loans are based on the appraised value of the underlying collateral, discounted as necessary due to management’s estimates of charges in market conditions, less estimated selling costs, and are not recorded directly to current earnings but rather as a component in determining the allowance for loan losses.

The property in foreclosed real estate at December 31, 2015 was adjusted to fair value based on an appraisal that utilized prices in observed transactions involving similar assets or estimated sales price less costs to sell. This appraised value was adjusted by management to recognize the unobservable inputs for specific characteristics of this property.

The Company utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of mortgage servicing rights. The model utilizes loan prepayment assumptions based on current market conditions and applies a discount rate based on indicated rates of return required by market participants. At December 31, 2016 and 2015, there were partial impairments in certain strata and, as a result, increases of $390,000 and $34,000 in the valuation allowance were recorded.

Summary of fair values of financial instruments

The estimated fair values, and related carrying amounts, of the Company’s financial instruments are presented below. Certain financial instruments and all non-financial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein do not represent the underlying fair value of the Company. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which the fair value approximates carrying value include cash and cash equivalents, certificates of deposit and accrued interest receivable. Financial liabilities for which the fair value approximates carrying value include mortgagor’s escrow accounts and accrued interest payable.

	December 31, 2016
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets:
Certificates of deposit	$	3,675	$	3,687	$	—	$	3,687	$	—
Securities available for sale		68,637		68,637		—		68,637		—
Loans held for sale		30,452		30,452		—		30,452		—
Loans, net		332,991		331,132		—		—		331,132
Derivative assets		682		682		—		682		—

Financial liabilities:
Deposits	$	351,179	$	350,979	$	—	$	350,979	$	—
FHLBB advances		38,667		38,531		—		38,531		—
Derivative liabilities		47		47		—		47		—

	December 31, 2015
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets:
Certificates of deposit	$	4,675	$	4,711	$	—	$	4,711	$	—
Securities available for sale		62,267		62,267		—		62,267		—
Loans held for sale		2,870		2,931		—		2,931		—
Loans, net		285,151		283,542		—		—		283,542
Derivative assets		107		107		—		107		—

Financial liabilities:
Deposits	$	309,195	$	309,076	$	—	$	309,076	$	—
FHLBB advances		34,914		34,971		—		34,971		—