Fair Value Measurements

9 Months Ended

Sep. 30, 2020

(9) Fair Value Measurements

The Company reports certain assets at fair value in accordance with GAAP, which defines fair value and establishes a framework for measuring fair value in accordance with generally accepted accounting principles. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:

Basis of Fair Value Measurements

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

An asset’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Fair Values of Assets Measured on a Recurring Basis

The Company’s investments in state and municipal, asset-backed and government mortgage-backed debt securities available-for-sale are generally classified within Level 2 of the fair value hierarchy. For these investments, the Company obtains fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

The following summarizes financial instruments measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019:



	Fair Value Measurements at Reporting Date Using
					Significant		Significant
					Other Observable		Unobservable
					Inputs		Inputs
(In thousands)	Total		Level 1		Level 2		Level 3
September 30, 2020
State and municipal securities	$	10,830	$	—	$	10,830	$	—
Asset-backed securities		5,025		—		5,025		—
Mortgage-backed securities		18,566		—		18,566		—
Totals	$	34,421	$	—	$	34,421	$	—

December 31, 2019
State and municipal securities	$	11,206	$	—	$	11,206	$	—
Asset-backed securities		5,500		—		5,500		—
Mortgage-backed securities		25,084		—		25,084		—
Totals	$	41,790	$	—	$	41,790	$	—

Fair Values of Assets Measured on a Non-Recurring Basis

The Company may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from the application of lower-of-cost-or market accounting or write-downs of individual assets.

Certain impaired loans were adjusted to fair value, less cost to sell, of the underlying collateral securing these loans resulting in losses. The loss is not recorded directly as an adjustment to current earnings, but rather as a component in determining the allowance for loan losses. Fair value was measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties.

The following summarizes assets measured at fair value on a nonrecurring basis at September 30, 2020 and December 31, 2019:



	Fair Value Measurements at Reporting Date Using:
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
(In thousands)	Total		Level 1		Level 2		Level 3
September 30, 2020
Impaired loans
Commercial real estate	$	158	$	—	$	—	$	158
Commercial		3,751		—		—		3,751
Totals	$	3,909	$	—	$	—	$	3,909

December 31, 2019
Impaired loans
Commercial real estate	$	215	$	—	$	—	$	215
Commercial		1,805		—		—		1,805
Totals	$	2,020	$	—	$	—	$	2,020

The following is a summary of the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis at September 30, 2020 and December 31, 2019:



(In thousands)	Fair Value		Valuation Technique	Unobservable Input	Range
September 30, 2020
Impaired loans
Commercial real estate	$	158	Real estate appraisals	Discount for dated appraisals	6 - 10%
Commercial		3,751	Business valuation	Comparable company evaluations	—

December 31, 2019
Impaired loans
Commercial real estate	$	215	Real estate appraisals	Discount for dated appraisals	6 - 10%
Commercial		1,805	Business valuation	Comparable company evaluations	—

Fair Values of Financial Instruments

GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Certain financial instruments and all nonfinancial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The carrying amounts and estimated fair values of the Company's financial instruments, all of which are held or issued for purposes other than trading, are as follows at September 30, 2020 and December 31, 2019:



	Carrying		Fair Value
(In thousands)	Amount		Level 1		Level 2		Level 3		Total
September 30, 2020
Financial assets:
Cash and cash equivalents	$	47,444	$	47,444	$	—	$	—	$	47,444
Available-for-sale debt securities		34,421		—		34,421		—		34,421
Federal Home Loan Bank of Boston stock		895		N/A		N/A		N/A		N/A
Loans, net		1,341,341		—		—		1,352,938		1,352,938
Accrued interest receivable		6,118		—		6,118		—		6,118
Financial liabilities:
Deposits		1,168,234		—		1,168,962		—		1,168,962
Borrowings		73,500		—		74,132		—		74,132

December 31, 2019
Financial assets:
Cash and cash equivalents	$	59,658	$	59,658	$	—	$	—	$	59,658
Available-for-sale debt securities		41,790		—		41,790		—		41,790
Federal Home Loan Bank of Boston stock		1,416		N/A		N/A		N/A		N/A
Loans, net		959,286		—		—		958,270		958,270
Accrued interest receivable		2,854		—		2,854		—		2,854
Financial liabilities:
Deposits		849,905		—		850,774		—		850,774
Borrowings		24,998		—		25,351		—		25,351