FASB ASC 820, “Fair Value Measurement and Disclosures,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an 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. FASB ASC 820 also 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 value:

Level 1 – Quoted market price in active markets

Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include certain debt and equity securities that are traded in an active exchange market.

Level 2 – Significant other observable inputs

Observable inputs other than Level 1 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 2 assets and liabilities include fixed income securities and mortgage-backed securities that are held in the Company’s available-for-sale portfolio and valued by a third-party pricing service, as well as certain impaired loans.

Level 3 – Significant unobservable inputs

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. These methodologies may result in a significant portion of the fair value being derived from unobservable data.

The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 14 of the Company’s 2020 Annual Report on Form 10-K. The Company’s loan portfolio is initially fair valued using a segmented approach, using the eight categories of loans as disclosed in Note 4 – Loans and Allowance for Loan Losses. Loans are considered a Level 3 classification.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020.


	September 30, 2021
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Securities available for sale
US treasuries	$	-	1,000	-	1,000
US government agencies		-	14,277	-	14,277
SBA securities		-	445	-	445
State and political subdivisions		-	22,707	-	22,707
Asset-backed securities		-	10,569	-	10,569
Mortgage-backed securities		-	64,804	-	64,804
Mortgage loans held for sale		-	31,641	-	31,641
Mortgage loan interest rate lock commitments		-	609	-	609
Total assets measured at fair value on a recurring basis	$	-	146,052	-	146,052

Liabilities
MBS forward sales commitments	$	-	(169)	-	(169)
Total liabilities measured at fair value on a recurring basis	$	-	(169)	-	(169)


	December 31, 2020
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Securities available for sale:
US government agencies	$	-	6,493	-	6,493
SBA securities		-	485	-	485
State and political subdivisions		-	19,388	-	19,388
Asset-backed securities		-	11,529	-	11,529
Mortgage-backed securities		-	56,834	-	56,834
Mortgage loans held for sale		-	60,257	-	60,257
Mortgage loan interest rate lock commitments		-	2,385	-	2,385
Total assets measured at fair value on a recurring basis	$	-	157,371	-	157,371

Liabilities
MBS forward sales commitments	$	-	501	-	501
Total liabilities measured at fair value on a recurring basis	$	-	501	-	501

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2021 and December 31, 2020.


	As of September 30, 2021
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Impaired loans	$	-	14,239	2,516	16,755
Other real estate owned		-	-	-	-
Total assets measured at fair value on a nonrecurring basis	$	-	14,239	2,516	16,755


	As of December 31, 2020
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Impaired loans	$	-	8,144	3,109	11,253
Other real estate owned		-	1,169	-	1,169
Total assets measured at fair value on a nonrecurring basis	$	-	9,313	3,109	12,422

The Company had no liabilities carried at fair value or measured at fair value on a nonrecurring basis.

Fair Value of Financial Instruments

Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment and other assets and liabilities.

The estimated fair values of the Company’s financial instruments at September 30, 2021 and December 31, 2020 are as follows:


	September 30, 2021
	Carrying		Fair
(dollars in thousands)	Amount		Value	Level 1	Level 2	Level 3
Financial Assets:
Other investments, at cost	$	2,820	2,820	-	-	2,820
Loans¹		2,335,051	2,304,092	-	-	2,304,092
Financial Liabilities:
Deposits		2,433,018	2,249,961	-	2,249,961	-
Subordinated debentures		36,079	33,773	-	33,773	-


	December 31, 2020
	Carrying		Fair
(dollars in thousands)	Amount		Value	Level 1	Level 2	Level 3
Financial Assets:
Other investments, at cost	$	3,635	3,635	-	-	3,635
Loans¹		2,085,756	2,060,698	-	-	2,060,698
Financial Liabilities:
Deposits		2,142,758	2,008,317	-	2,008,317	-
FHLB and other borrowings		25,000	24,972	-	24,972	-
Subordinated debentures		35,998	30,371	-	30,371	-

¹	Carrying amount is net of the allowance for loan losses and previously presented impaired loans.