The Company uses fair value to record certain assets and liabilities and to determine fair value disclosures. Authoritative accounting guidance (ASC 820, Fair Value Measurements (“ASC 820”)) clarifies that fair value of certain assets and liabilities is an exit price, representing the amount 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 also assumes that the reporting entity would sell the asset or transfer the liability in the principal or most advantageous market.

ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Available-for-sale securities: Available-for-sale securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third-party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). In certain cases, where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. The Company engages a third-party to determine the fair value of its available-for-sale securities.

Rabbi trust assets: The Company established a rabbi trust for the benefit of participants in the Company’s deferred compensation benefit plan. The assets held by the rabbi trust are invested at the direction of the individual participants and are generally invested in marketable investment securities, such as common stocks and mutual funds or short-term investments (e.g., cash) (Level 1). Rabbi trust assets are included in other assets on the consolidated balance sheets.

Mortgage servicing right (“MSR”) assets: The Company currently owns MSR assets from two residential loan portfolios, one serviced for Fannie Mae and one serviced for Freddie Mac. The MSR assets are recorded at fair value on a recurring basis, with changes in fair value recorded in the consolidated statements of operations.

A third-party model is used to determine fair value, which establishes pools of performing loans, calculates cash flows for each pool, and applies a discount rate to each pool. Loans are segregated into 12 pools based on each loan’s term and seasoning (age). All loans have fixed interest rates. Cash flows are then estimated by utilizing assumed service costs and prepayment speeds. Monthly service costs were assumed to be $6.00 and $6.50 per loan as of September 30, 2020 and December 31, 2019, respectively. Prepayment speeds are determined primarily based on the average interest rate of the loans in each pool. The prepayment scale used is the Public Securities Association (“PSA”) model, where “100% PSA” means prepayments are zero in the first month, then increase by 0.2% of the loan balance each month until reaching 6.0% in month 30. Thereafter, the 100% PSA model assumes an annual prepayment of 6.0% of the remaining loan balance. The average PSA speed assumption in the fair value model is 304% and 187% as of September 30, 2020 and December 31, 2019, respectively. A discount rate of 12.0% and 12.5% was then applied to each pool as of September 30, 2020 and December 31, 2019, respectively. The discount rate is intended to represent the estimated market yield for the highest quality grade of comparable servicing. MSR assets are classified as Level 3.

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of the dates stated.

			Fair Value Measurements as of September 30, 2020 Using
	Balance as of September 30, 2020		Level 1		Level 2		Level 3
Available-for-sale securities:
U. S. Government agencies and mortgage backed securities	$	48,870	$	—	$	48,870	$	—
State and municipal obligations		18,846		—		18,846		—
Corporate bonds		20,137		—		14,464		5,673
Total available-for-sale securities	$	87,853	$	—	$	82,180	$	5,673
MSR assets	$	845	$	—	$	—	$	845
Rabbi trust assets	$	959	$	959	$	—	$	—

			Fair Value Measurements as of December 31, 2019 Using
	Balance as of December 31, 2019		Level 1		Level 2		Level 3
Available-for-sale securities:
U. S. Government agencies and mortgage backed securities	$	67,597	$	7,024	$	60,573	$	—
State and municipal obligations		16,576		—		16,576		—
Corporate bonds		15,281		2,000		10,631		2,650
Total available-for-sale securities	$	99,454	$	9,024	$	87,780	$	2,650
MSR assets	$	935	$	—	$	—	$	935
Rabbi trust assets	$	1,082	$	1,082	$	—	$	—

The following table presents the change in financial assets valued using Level 3 inputs for the periods stated.

As of September 30, 2020, seven corporate bonds totaling $5.7 million were reported at their respective purchase prices and as Level 3 assets in the fair value hierarchy as there were no observable market prices for similar investments.

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements.

Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. The measurement of loss associated with impaired loans can be based on either the discounted cash flows of the loan or the fair value of the collateral, if any, less estimated costs to sell, if the loan is collateral-dependent. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Any given loan may have multiple types of collateral; however, the majority of the Company’s loan collateral is real estate. The value of real estate collateral is generally determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties or is discounted by the Company because of lack of marketability, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant or the net book value on the applicable business’s financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of operations.

Other Real Estate Owned, net: OREO is measured at fair value less estimated costs to sell, generally based on an appraisal conducted by an independent, licensed appraiser, or using other methods such as a brokered price opinion of a third-party real estate agent. If the collateral value is significantly adjusted due to differences in the comparable properties or is discounted by the Company because of lack of marketability, then the fair value is considered Level 3. Fair value adjustments, if any, are recorded in the period incurred and included in other noninterest expense on the consolidated statements of operations.

The following tables summarize assets that were measured at fair value on a nonrecurring basis as of the dates stated.

The following tables present quantitative information about Level 3 fair value measurements as of the dates stated.

Of the $9.8 million of impaired loans as of September 30, 2020, $5.7 million were evaluated for impairment using an EV valuation technique, as the Company owns a percentage of nationally syndicated loans to two publicly traded companies and one private conglomerate. EV is estimated using a multiple of earnings before income taxes, depreciation, and amortization (“EBITDA”). EBITDA estimates were developed based on historical and projected performance of these companies while the EV multiple was derived based on publicly available data of these borrower’s respective peer companies and industries.

The carrying values of cash and due from banks, interest-earning deposits, federal funds sold or purchased, noninterest-bearing deposits, savings and interest-bearing deposits, and securities sold under repurchase agreements are payable on demand, or are of such short duration, that carrying value approximates fair value (Level 1).

The carrying values of certificates of deposit, loans held for sale, and accrued interest receivable are payable on demand, or are of such short duration, that carrying value approximates fair value (Level 2).

The carrying value of restricted securities approximates fair value based on the redemption provisions of the issuer.

The fair value of performing loans is estimated by discounting the future cash flows using two sets of data sources. First, recent originations, occurring over the prior twelve months, were evaluated, and second, market data showing originations over the prior three months were evaluated. The selected rate was the greater of the two sources. For all loans other than a selective consumer loan portfolio, credit loss severity rates were calculated using the probability of default and the loss given default percentages derived from market data. For the selective consumer loan portfolio, historical delinquency data were obtained by the servicer of the portfolio. The fair value of impaired loans is measured as described within the Impaired Loans section of this note. The fair value of loans does consider the lack of liquidity and uncertainty in the market that might affect the valuation.

Time deposits are presented at estimated fair value by discounting the future cash flows using recent issuance rates over the prior three months and a market rate analysis of recent offering rates.

The fair value of the Company’s subordinated notes is estimated by utilizing recent issuance rates for subordinated debt offerings of similar issuer size.

The fair value of FHLB advances is estimated by discounting the future cash flows using current interest rates offered for similar advances (Level 2). FRB advances as of September 30, 2020 consist of advances from the PPPLF, which are fixed in rate at 35 basis points annually and have maturity dates that the Company considers to be short-term in nature. As a result, the Company believes that the carrying value of FRB advances approximates fair value (Level 1).

Commitments to extend and standby letters of credit are generally not sold or traded. The estimated fair values of off-balance sheet credit commitments, including standby letters of credit and guarantees written, are not readily available due to the lack of cost-effective and reliable measurement methods for these instruments.

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair value of financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

The following tables summarize financial assets and liabilities at carrying values and estimated fair values on a nonrecurring basis as of the dates stated.

	Carrying Value as of		Fair Value as of		Fair Value Measurements as of September 30, 2020 Using
	September 30, 2020		September 30, 2020		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	9,324	$	9,324	$	9,324	$	—	$	—
Interest-earning deposits		50,069		50,069		50,069		—		—
Federal funds sold		152		152		152		—		—
Certificates of deposit		1,266		1,266		—		1,266		—
Restricted securities		5,022		5,022		—		—		5,022
Loans receivable, net		1,041,711		1,041,429		—		—		1,041,429
Loans held for sale		2,687		2,687		—		2,687		—
Accrued interest receivable		4,664		4,664		—		4,664		—
Financial Liabilities:
Noninterest-bearing demand deposits	$	190,843	$	190,843	$	190,843	$	—	$	—
Savings and interest-bearing demand deposits		424,001		424,001		424,001		—		—
Time deposits		412,837		419,752		—		—		419,752
Securities sold under repurchase agreements		1,117		1,117		1,117		—		—
FHLB advances		25,000		24,849		—		24,849		—
FRB advances		32,637		32,637		32,637		—		—
Subordinated notes, net		31,083		33,087		—		—		33,087

	Carrying Value as of		Fair Value as of		Fair Value Measurements as of December 31, 2019 Using
	December 31, 2019		December 31, 2019		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	6,096	$	6,096	$	6,096	$	—	$	—
Interest-earning deposits		34,358		34,358		34,358		—		—
Federal funds sold		1,359		1,359		1,359		—		—
Certificates of deposit		2,754		2,754		—		2,754		—
Restricted securities		5,706		5,706		—		—		5,706
Loans receivable, net		916,628		910,678		—		—		910,678
Loans held for sale		1,231		1,231		—		1,231		—
Accrued interest receivable		3,035		3,035		—		3,035		—
Financial Liabilities:
Noninterest-bearing demand deposits	$	137,933	$	137,933	$	137,933	$	—	$	—
Savings and interest-bearing demand deposits		382,607		382,607		382,607		—		—
Time deposits		389,900		392,562		—		—		392,562
Securities sold under repurchase agreements		6,525		6,525		6,525		—		—
FHLB advances		45,000		44,936		—		44,936		—
Subordinated notes, net		31,001		32,552		—		—		32,552