GAAP requires the Company to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The 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 the principal or most advantageous market in an orderly transaction between market participants as of the measurement date.

“Fair Value Measurements” defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

The following sections provide a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities Available for Sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. 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 following table presents balances of financial assets and liabilities measured at fair value on a recurring basis at December 31, 2020 and December 31, 2019:

			Fair Value Measurements at
			December 31, 2020
			Using
	Balance as of		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	December 31, 2020		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Assets:
Securities available for sale
Obligations of U.S. government corporations and agencies	$	17,483	$	—	$	17,483	$	—
Mortgage-backed securities		119,009		—		119,009		—
Obligations of states and political subdivisions		27,213		—		27,213		—
Subordinated debt		1,250		—		1,250		—
Total assets at fair value	$	164,955	$	—	$	164,955	$	—

			Fair Value Measurements at
			December 31, 2019
			Using
	Balance as of		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	December 31, 2019		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Assets:
Securities available for sale
Obligations of U.S. government corporations and agencies	$	22,186	$	—	$	22,186	$	—
Mortgage-backed securities		108,161		—		108,161		—
Obligations of states and political subdivisions		34,656		—		34,656		—
Total assets at fair value	$	165,003	$	—	$	165,003	$	—

Certain financial 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 financial and nonfinancial 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 according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on the present value of its expected future cash flows discounted at the loan's coupon rate, or at the loans' observable market price or the fair value of the collateral securing the loans, if they are collateral dependent. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data within the last twelve months (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than one year old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the fair value of the property, less estimated selling costs, establishing a new costs basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Valuations are periodically obtained by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. The fair value measurement of real estate held in other real estate owned is assessed in the same manner as impaired loans described above. We believe that the fair value component in its valuation follows the provisions of GAAP.

The following table displays quantitative information about Level 3 Fair Value Measurements for certain financial assets measured at fair value on a nonrecurring basis for December 31, 2020 and December 31, 2019:

Quantitative information about Level 3 Fair Value Measurements

December 31, 2020

Valuation Technique(s)

Unobservable Input

Range

Weighted Average (1)

Assets:

Impaired loans

Present value of cash flows

Discount rate

4% - 6%

Other real estate owned

Discounted appraised value

Discount for current market conditions and selling costs

December 31, 2019

Valuation Technique(s)

Unobservable Input

Range

Weighted Average

Assets:

Impaired loans

Discounted appraised value

Selling cost

12%

Impaired loans

Present value of cash flows

Discount rate

4% - 6%

Other real estate owned

Discounted appraised value

Discount for current market conditions and selling costs

(1) - Weighted based on the relative fair values of the specific items measured at fair value.

The following table summarizes the Company’s financial and nonfinancial assets that were measured at fair value on a nonrecurring basis at December 31, 2020 and December 31, 2019:

			Carrying value at
			December 31, 2020
	Balance as of		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	December 31, 2020		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Financial Assets:
Impaired loans	$	1,355	$	—	$	—	$	1,355
Nonfinancial Assets:
Other real estate owned		607		—		165		442

			Carrying value at
			December 31, 2019
	Balance as of		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	December 31, 2019		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Financial Assets:
Impaired loans	$	3,075	$	—	$	—	$	3,075
Nonfinancial Assets:
Other real estate owned		183		—		—		183

The carrying amount and fair value of the Company’s financial instruments at December 31, 2020 and 2019 were as follows:

	Fair Value Measurements at
	December 31, 2020
	Using
	Carrying Value as of		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Fair Value as of
	December 31, 2020		(Level 1)		(Level 2)		(Level 3)		December 31, 2020
	(in thousands)
Financial Assets:
Cash and short-term investments	$	79,920	$	79,920	$	—	$	—	$	79,920
Securities		164,955		—		164,955		—		164,955
Restricted Investments		1,267		—		1,267		—		1,267
Loans, net		829,238		—		—		819,691		819,691
Bank owned life insurance		12,709		—		12,709		—		12,709
Accrued interest receivable		3,441		—		3,441		—		3,441
Financial Liabilities:
Deposits	$	1,013,098	$	—	$	1,013,600	$	—	$	1,013,600
Accrued interest payable		72		—		72		—		72

	Fair Value Measurements at
	December 31, 2019
	Using
	Carrying Value as of		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Fair Value as of
	December 31, 2019		(Level 1)		(Level 2)		(Level 3)		December 31, 2019
	(in thousands)
Financial assets:
Cash and short-term investments	$	33,659	$	33,659	$	—	$	—	$	33,659
Securities		165,003		—		165,003		—		165,003
Restricted Investments		1,197		—		1,197		—		1,197
Loans, net		639,787		—		—		633,476		633,476
Bank owned life insurance		398		—		398		—		398
Accrued interest receivable		2,237		—		2,237		—		2,237
Financial liabilities:
Deposits	$	771,544	$	—	$	772,111	$	—	$	772,111
Accrued interest payable		142		—		142		—		142

The Company assumes interest rate risk (the risk that general interest rate levels will change) during its normal operations. As a result, the fair value of the Company’s 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 in order to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay their principal balance in a rising rate environment and more likely to do so in a falling rate environment. Conversely, depositors who are receiving fixed rate interest payments 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 the terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.