Accounting Standards Codification (“ASC”) 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. ASC 820 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation.

Fair value estimates are made at a specific moment in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.

Because no active market readily exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis.

Investment Securities Available-for-Sale (“AFS”)

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. government agencies, mortgage-backed securities issued by government sponsored entities, and municipal bonds. There have been no changes in valuation techniques for the three and six months ended June 30, 2020. Valuation techniques are consistent with techniques used in prior periods.

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 (in thousands):


			Quoted Prices in		Significant
Investment securities			Active Markets		Other		Significant
available for sale			for Identical		Observable		Unobservable
June 30, 2020	Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
U.S. government agencies – GSE’s	$	9,086	$	—	$	9,086	$	—

Mortgage-backed securities – GSE’s		39,533		—		39,533		—

Corporate Bonds		2,206		—		2,206		—

Municipal bonds		12,133		—		12,133		—

Total investment available for sale	$	62,958	$	—	$	62,958	$	—


			Quoted Prices in		Significant
Investment securities			Active Markets		Other		Significant
available for sale			for Identical		Observable		Unobservable
December 31, 2019	Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
U.S. government agencies – GSE’s	$	9,996	$	—	$	9,996	$	—

Mortgage-backed securities – GSE’s		47,743		—		47,743		—

Corporate Bonds		2,299		—		2,299		—

Municipal bonds		12,329		—		12,329		—

Total investment available for sale	$	72,367	$	—	$	72,367	$	—

The following is a description of valuation methodologies used for assets recorded at fair value on a non-recurring basis.

Impaired Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific reserve in the allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, “Receivables”. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, or liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2020 and December 31, 2019, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where a specific reserve is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as non-recurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as non-recurring Level 3. The significant unobservable input used in the fair value measurement of the Company’s impaired loans is the discount applied to appraised values to account for expected liquidation and selling costs. At June 30, 2020, the discounts

used are weighted between 3% and 50%. There were no transfers between levels from the prior reporting periods, and there have been no changes in valuation techniques for the three and six months ended June 30, 2020.

Foreclosed Real Estate

Foreclosed real estate are properties recorded at the balance of the loan or an estimated fair value of the real estate collateral less estimated selling costs, whichever is less. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market. Therefore, foreclosed real estate is classified within Level 3 of the hierarchy. The significant unobservable input used in the fair value measurement of the Company’s foreclosed real estate is the discount applied to appraised values to account for expected liquidation and selling costs. At June 30, 2020, the discounts used ranged between 6% and 10%. There have been no changes in valuation techniques for the three and six months ended June 30, 2020.

Loans held for sale

The Company originates fixed and variable rate residential mortgage loans on a service-release basis in the secondary market. Loans closed but not yet settled with an investor are carried in our loans held for sale portfolio. Virtually all of these loans have commitments to be purchased by investors and the majority of these loans were locked in by price with the investors on the same day or shortly thereafter that the loan was locked in with our customers. Therefore, these loans present very little market risk. The Company usually delivers to, and receives funding from, the investor within 30 to 60 days. Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts” basis. The Company is not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. Because of the short-term nature of these derivative contracts, the fair value of the mortgage loans held for sale in most cases is materially the same as the value of the loan amount at its origination.

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are provided for in a valuation allowance by charges to operations as a component of mortgage banking income. Gains or losses on sales of loans are recognized when control over these assets are surrendered and are included in mortgage banking income in the consolidated statements of income.

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a non-recurring basis as of June 30, 2020 and December 31, 2019 (in thousands):


			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
Asset Category June 30, 2020	Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Impaired loans	$	7,979	$	—	$	—	$	7,979
Foreclosed real estate		3,561		—		—		3,561
Total	$	11,540	$	—	$	—	$	11,540


			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
Asset Category December 31, 2019	Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Impaired loans	$	5,941	$	—	$	—	$	5,941
Foreclosed real estate		3,533		—		—		3,533
Total	$	9,474	$	—	$	—	$	9,474

The following table presents the carrying values and estimated fair values of the Company’s financial instruments at June 30, 2020 and December 31, 2019:


	June 30, 2020
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3

	(dollars in thousands)
Financial assets:
Cash and due from banks	$	24,037	$	24,037	$	24,037	$	—	$	—
Interest-earning deposits in other banks		157,521		157,521		157,521		—		—
Federal funds sold		9,726		9,726		9,726		—		—
Investment securities available for sale		62,958		62,958		—		62,958		—
Loans held for sale		3,455		3,455		—		3,455		—
Loans, net		1,237,945		1,239,667		—		—		1,239,667
Accrued interest receivable		4,400		4,400		—		4,400		—
Stock in the FHLB		3,059		3,059		—		—		3,059
Other non-marketable securities		718		718		—		—		718

Financial liabilities:
Deposits	$	1,338,753	$	1,342,114	$	—	$	1,342,114	$	—
Short-term debt		20,000		20,000		—		20,000		—
Long-term debt		37,372		33,932		—		33,932		—
Accrued interest payable		457		457		—		457		—


	December 31, 2019
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3

	(dollars in thousands)
Financial assets:
Cash and due from banks	$	19,110	$	19,110	$	19,110	$	—	$	—
Interest-earning deposits in other banks		50,920		50,920		50,920		—		—
Federal funds sold		9,047		9,047		9,047		—		—
Investment securities available for sale		72,367		72,367		—		72,367		—
Loans held for sale		928		928		—		928		—
Loans, net		1,021,651		1,016,239		—		—		1,016,239
Accrued interest receivable		4,189		4,189		—		4,189		—
Stock in the FHLB		3,045		3,045		—		—		3,045
Other non-marketable securities		719		719		—		—		719

Financial liabilities:
Deposits	$	992,838	$	995,056	$	—	$	995,056	$	—
Long-term debt		57,372		55,729		—		55,729		—
Accrued interest payable		578		578		—		578		—