Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is,

not

a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs

may

be reduced for many instruments. This condition could cause an instrument to be reclassified from

one

level to another. When market assumptions are

not

readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. If there has been a significant decrease in the volume and level of activity for the asset or liability, regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same.

ASC

820

defines fair value and establishes 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 ASC

820

are described below:

Level

— Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level

— Valuations based on significant observable inputs other than Level

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.

Level

— Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Valuation technique

s - There have been

changes in the valuation techniques used during the current period.

Transfers

- There were

transfers of assets and liabilities measured at fair value on a recurring or nonrecurring basis during the current period

Assets and Liabilities Measured at Fair Value on a Recurring Basis:

Investment

securities

- Where quoted prices are available in an active market, securities are classified within Level

of the valuation hierarchy. Examples of such instruments include publicly-traded common and preferred stocks. If quoted prices are

not

available, then fair values are estimated by using pricing models (

i.e.

, matrix pricing) and market interest rates and credit assumptions or quoted prices of securities with similar characteristics and are classified within Level

of the valuation hierarchy. Examples of such instruments include government agency and government sponsored enterprise mortgage-backed securities, as well as certain preferred and trust preferred stocks. Level

securities are securities for which significant unobservable inputs are utilized.

Certain investments are measured at fair value using the net asset value per share as a practical expedient. These investments include a fund that seeks to invest in securities either issued or guaranteed by the U.S. government or its agencies, as well as a fund that primarily invests in the federally guaranteed portion of SBA

(a) loans. The Company’s investment in securities either issued or guaranteed by the U.S. government or its agencies can be redeemed daily at the closing net asset value per share. The Company’s investment in SBA

(a) loans can be redeemed quarterly with

sixty

days’ notice. In accordance with ASU

2015

07,

these investments have

not

been included in the fair value hierarchy.

Derivative financial instruments

- The valuation of the Company’s interest rate swaps and caps are determined using widely accepted valuation techniques including discounted cash flow analyses on the expected cash flows of derivatives. These analyses reflect the contractual terms of the derivatives, including the period to maturity, and use observable market-based inputs, including forward interest rate curves and implied volatilities. Unobservable inputs, such as credit valuation adjustments are insignificant to the overall valuation of the Company’s derivative financial instruments. Accordingly, the Company has determined that its interest rate derivatives fall within Level

of the fair value hierarchy.

The fair value of derivative loan commitments and forward loan sale agreements are estimated using the anticipated market price based on pricing indications provided from syndicate banks. These commitments and agreements are categorized as Level

The fair value of such instruments was nominal at each date presented.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis:

Collateral dependent impaired l

oans

- Valuations of impaired loans measured at fair value are determined by a review of collateral values. Certain inputs used in appraisals are

not

always observable, and therefore impaired loans are generally categorized as Level

within the fair value hierarchy.

Real estate o

ed and other r

epossessed collateral

- The fair values of real estate owned and other repossessed collateral are estimated based upon appraised values less estimated costs to sell. Certain inputs used in appraisals are

not

always observable, and therefore

may

be categorized as Level

within the fair value hierarchy. When inputs used in appraisals are primarily observable, they are classified as Level

ervicing rights

, net

- The fair value of the servicing rights is based on a valuation model that calculates the present value of estimated future net servicing income. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Certain inputs are

not

observable, and therefore servicing rights, net are generally categorized as Level

within the fair value hierarchy.

Fair Value of other Financial Instruments:

Cash and cash equivalents

- The fair value of cash, due from banks, interest bearing deposits and Federal Home Loan Bank of Boston (“FHLBB”) overnight deposits approximates their relative book values, as these financial instruments have short maturities.

FHL

B stock

- The carrying value of FHLBB stock approximates fair value based on redemption provisions of the FHLBB.

Loans

- Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimates of maturity are based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic conditions, lending conditions and the effects of estimated prepayments.

Loans held for sale

- The fair value of loans held-for-sale is estimated based on bid quotations received from loan dealers.

Interest receivable

- The fair value of this financial instrument approximates the book value as this financial instrument has a short maturity. It is the Company’s policy to stop accruing interest on loans past due by more than

days. Therefore, this financial instrument has been adjusted for estimated credit losses.

Deposits

- The fair value of deposits with

stated maturity, such as noninterest-bearing demand deposits, savings, NOW accounts and money market accounts, is equal to the amount payable on demand. The fair values of time deposits are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do

not

include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. If that value were considered, the fair value of the Company’s net assets could increase.

FHLBB advances, capital lease obligations and subordinated debentures

- The fair value of the Company’s borrowings with the FHLBB is estimated by discounting the cash flows through maturity or the next re-pricing date based on current rates available to the Company for borrowings with similar maturities. The fair value of the Company’s capital lease obligations and subordinated debentures are estimated by discounting the cash flows through maturity based on current rates available to the Company for borrowings with similar maturities.

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 value of such instruments was nominal at each date presented.

Assets and liabilities measured at fair value on a recurring basis are summarized below.

	December 31, 2018
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Assets
Available-for-sale debt securities:
U.S. Government agency securities	$	57,025	$	-	$	57,025	$	-
Agency mortgage-backed securities		21,107		-		21,107		-
Equity investments measured at net asset value (1)		6,711		-		-		-
Other assets – interest rate caps		39		-		39		-
Liabilities
Other liabilities – interest rate swaps	$	1,249	$	-	$	1,249	$	-

	June 30, 2018
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Assets
Available-for-sale debt securities:
U.S. Government agency securities	$	56,887	$	-	$	56,887	$	-
Agency mortgage-backed securities		24,181		-		24,181		-
Equity investments measured at net asset value (1)		6,619		-		-		-
Other assets – interest rate caps		64		-		64		-
Other assets – interest rate swaps		15		-		15		-
Liabilities
Other liabilities – interest rate swap	$	668	$	-	$	668	$	-

(

)

In accordance with ASU

820

10,

certain investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient have

not

been classified in the fair value hierarchy. The fair value amount presented in the table are intended to permit reconciliation of the fair value amount to the consolidated financial statements.

Assets measured at fair value on a nonrecurring basis are summarized below.

	December 31, 2018
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Collateral dependent impaired loans	$	2,408	$	-	$	-	$	2,408
Real estate owned and other repossessed collateral		1,463		-		-		1,463
Servicing rights, net		2,934		-		-		2,934

	June 30, 2018
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Collateral dependent impaired loans	$	1,917	$	-	$	-	$	1,917
Real estate owned and other repossessed collateral		2,233		-		-		2,233
Servicing rights, net		2,970		-		-		2,970

The table below presents quantitative information about significant unobservable inputs (Level

) for assets measured at fair value on a nonrecurring basis at the dates indicated.

	Fair Value
	December 31, 2018		June 30, 2018		Valuation Technique
	(Dollars in thousands)
Collateral dependent impaired loans	$	2,408	$	1,917	Appraisal of collateral (1)
Real estate owned and other repossessed collateral		1,463		2,223	Appraisal of collateral (1)
Servicing rights, net		2,934		2,970	Discounted cash flow (2)

(

) Fair value is generally determined through independent appraisals of the underlying collateral. The Company

may

also use another available source of collateral assessment to determine a reasonable estimate of the fair value of the collateral. Appraisals

may

be adjusted by management for qualitative factors such as economic factors and estimated liquidation expenses. The range of these possible adjustments was

100%.

(

) Fair value is determined using a discounted cash flow model. The unobservable inputs include anticipated rate of loan prepayments and discount rates. The range of prepayment assumptions used was

10.6%

12.4%.

For discount rates, the range was

8.8%

17.7%.

The table below summarizes the total gains (losses) on assets measured at fair value on a non-recurring basis for the

three

and

six

months ended

December 31, 2018

and

2017.

	Three Months Ended December 31,						Six Months Ended December 31,
	2018			2017			2018			2017
	(In thousands)
Collateral dependent impaired loans	$	(22	)	$	(328	)	$	(234	)	$	(351	)

Real estate owned and other repossessed collateral		(25	)		45			(25	)		45
Loan servicing rights		(31	)		110			(138	)		110
Total	$	(78	)	$	(173	)	$	(397	)	$	(196	)

The following table presents the estimated fair value of the Company's financial instruments.

	Carrying		Fair Value Measurements at December 31, 2018
	Amount		Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	137,616	$	137,616	$	137,616	$	-	$	-
Available-for-sale debt securities		78,132		78,132		-		78,132		-
Equity investments measured at net asset value (1)		6,711		6,711		-		-		-
Federal Home Loan Bank stock		1,652		1,652		-		1,652		-
Loans held for sale		1,799		1,799		-		1,799		-
Loans, net		932,978		930,578		-		-		930,578
Accrued interest receivable		2,987		2,987		-		2,987		-
Interest rate caps		39		39		-		39		-

Financial liabilities:
Deposits		985,591		984,047		-		984,047		-
Federal Home Loan Bank advances		15,000		15,000		-		15,000		-
Capital lease obligation		466		473		-		473		-
Subordinated debt		24,128		26,423		-		-		26,423
Interest rate swaps		1,249		1,249		-		1,249		-

	Carrying		Fair Value Measurements at June 30, 2018
	Amount		Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	157,402	$	157,402	$	157,402	$	-	$	-
Available-for-sale debt securities		81,068		81,068		-		81,068		-
Equity investments measured at net asset value (1)		6,619		6,619		-		-		-
Federal Home Loan Bank stock		1,652		1,652		-		1,652		-
Loans held for sale		7,155		7,155		-		7,155		-
Loans, net		866,995		868,730		-		-		868,730
Accrued interest receivable		2,528		2,528		-		2,528		-
Interest rate caps		64		64		-		64		-
Interest rate swaps		15		15				15

Financial liabilities:
Deposits		954,940		953,216		-		953,216		-
Federal Home Loan Bank advances		15,000		15,000		-		15,000		-
Capital lease obligation		605		619		-		619		-
Subordinated debt		23,958		25,961		-		-		25,961
Interest rate swaps		668		668		-		668		-

(

)

In accordance with ASU

820

10,

certain investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient have

not

been classified in the fair value hierarchy. The fair value amount presented in the table are intended to permit reconciliation of the fair value amount to the consolidated financial statements.