Fair Value

9 Months Ended

Sep. 30, 2021

Fair Value

Note 6. Fair Value

Note 6. Fair Value

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The Company records fair value adjustments to certain assets and liabilities and determines fair value disclosures utilizing a definition of fair value of assets and liabilities that states that fair value 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. Additional considerations are involved to determine the fair value of financial assets in markets that are not active.

The Company uses 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:

Level 1 –	Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2 –	Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 –	Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

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:

Securities

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 carrying value of restricted Federal Reserve Bank and Federal Home Loan Bank stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following table.

Loans Held for Sale

The Company uses the fair value accounting for its entire portfolio of originated loans held for sale in accordance with ASC 820 – Fair Value Measurement and Disclosures. Fair value of the Company’s originated loans held for sale through F&M Mortgage is based on observable market prices for similar instruments traded in the secondary mortgage loan markets in which the Company conducts business. The Company’s portfolio of loans held for sale through F&M Mortgage is classified as Level 2. Gains and losses on the sale of loans are recorded within mortgage banking income, net on the Consolidated Statements of Income.      

Derivative assets – IRLCs

The Company recognizes IRLCs at fair value based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best-efforts basis while taking into consideration the probability that the rate lock commitments will close.  All of the Company’s IRLCs are classified as Level 2. 

Derivative Asset/Liability – Forward Sale Commitments

The Company uses the fair value accounting for its forward sales commitments related to IRLCs and LHFS. Best efforts sales commitments are entered into for loans intended for sale in the secondary market at the time the borrower commitment is made. The best efforts commitments are valued using the committed price to the counter-party against the current market price of the interest rate lock commitment or mortgage loan held for sale. All the Company’s forward sale commitments are classified Level 2.

Derivative Asset/Liability – Indexed Certificate of Deposit

The Company’s derivatives, which are associated with the Indexed Certificate of Deposit (ICD) product once offered, are recorded at fair value based on third party vendor supplied information using discounted cash flow analysis from observable-market based inputs, which are considered Level 2 inputs.  This product is no longer offered, however there are a few certificates of deposits that have not matured.

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020 (dollars in thousands):

September 30, 2021	Total		Level 1		Level 2		Level 3
Assets:
Loans held for sale, F&M Mortgage	$	3,610	$	-	$	3,610	$	-
IRLC		333		-		333		-
U. S. Treasury securities		29,494		-		29,494		-
U. S. Government sponsored enterprises		54,974		-		54,974		-
Securities issued by States and political subdivisions in the U. S.		30,294		-		30,294		-
Mortgage-backed obligations of federal agencies		139,082		-		139,082		-
Corporate debt securities		17,601		-		17,601		-
Forward Sales Commitments		145		-		145		-
Assets at Fair Value	$	275,533	$	-	$	275,533	$	-
Liabilities:
Derivatives - ICD	$	3	$	-	$	3	$	-
Liabilities at Fair Value	$	3	$	-	$	3	$	-

December 31, 2020	Total		Level 1		Level 2		Level 3
Assets:
Loans held for sale, F&M Mortgage	$	14,307	$	-	$	14,307	$	-
IRLC		816		-		816		-
U.S. Government sponsored enterprises		6,047		-		6,047		-
Securities issued by States and political subdivisions of the US		17,692		-		17,692		-
Mortgage-backed obligations of federal agencies		73,771		-		73,771		-
Corporate debt securities		9,389		-		9,389		-
Assets at Fair Value	$	122,022	$	-	$	122,022	$	-
Liabilities:
Derivatives – ICD	$	2	$	-	$	2	$	-
Forward Sales Commitments		60		-		60		-
Liabilities at Fair Value	$	62	$	-	$	62	$	-

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 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. Troubled debt restructurings are impaired loans. Impaired loans are measured at fair value on a nonrecurring basis. If an individually-evaluated impaired loan’s balance exceeds fair value, the amount is allocated to the allowance for loan losses. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Impaired Loans, continued

The fair value of an impaired loan and measurement of associated loss is based on one of three methods: the observable market price of the loan, the present value of projected cash flows, or the fair value of the collateral. The observable market price of a loan is categorized as a Level 1 input. The present value of projected cash flows method results in a Level 3 categorization because the calculation relies on the Company’s judgment to determine projected cash flows, which are then discounted at the current rate of the loan, or the rate prior to modification if the loan is a troubled debt restructure.

Loans measured using the fair value of collateral method are categorized in Level 3. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Most collateral is real estate. The Company bases collateral method fair valuation upon the “liquidation” value of independent appraisals or evaluations.

The value of real estate collateral is determined by an independent appraisal utilizing an income or market valuation approach.  Appraisals conducted by an independent, licensed appraiser outside of the Company as observable market data is categorized as Level 3. The value of business equipment is based upon an outside appraisal (Level 3) if deemed significant, or the net book value on the applicable business’ financial statements (Level 3) if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).

As of September 30, 2021 and December 31, 2020, the fair value measurements for impaired loans with specific allocations were primarily based upon the fair value of the collateral.

The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis during the period (dollars in thousands):

September 30, 2021	Total		Level 1		Level 2		Level 3
Real Estate	$	1,011	$	-	$	-	$	1,011
Commercial Real Estate		5,417		-		-		5,417
Dealer Finance		89		-		-		89
Impaired loans	$	6,517	$	-	$	-	$	6,517
December 31, 2020	Total		Level 1		Level 2		Level 3
Farmland	$	1,367	$	-	$	-	$	1,367
Real Estate		6,778		-		-		6,778
Commercial Real Estate		5,631		-		-		5,631
Dealer Finance		132		-		-		132
Impaired loans	$	13,908	$	-	$	-	$	13,908

The following table presents information about Level 3 Fair Value Measurements for September 30, 2021 (dollars in thousands):

	Fair Value at September 30, 2021		Valuation Technique	Significant Unobservable Inputs	Range
Impaired Loans	$	6,517	Discounted appraised value	Discount for selling costs and marketability	6.77%-14.00% (Average 12.16%)

The following table presents information about Level 3 Fair Value Measurements for December 31, 2020 (dollars in thousands):

	Fair Value at December 31, 2020		Valuation Technique	Significant Unobservable Inputs	Range
Impaired Loans	$	13,908	Discounted appraised value	Discount for selling costs and marketability	9.25%-62.00% (Average 24.39%)

Assets Held for Sale

Assets held for sale were transferred from bank premises at the lower of cost less accumulated depreciation or fair value at the date of transfer. The Company periodically evaluates the value of assets held for sale and records an impairment charge for any subsequent declines in fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the assets held for sale as nonrecurring 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 asset held for sale a s nonrecurring Level 3.

September 30, 2021	Total		Level 1		Level 2		Level 3
Bank premises held for sale	$	300	$	-	$	300	$	-

December 31, 2020	Total		Level 1		Level 2		Level 3
Bank premises held for sale	$	520	$	-	$	520	$	-

Other Real Estate Owned

Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. Valuation of other real estate owned is determined using current appraisals from independent parties, a level two input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs.

The Company markets other real estate owned and assets held for sale both independently and with local realtors. Properties marketed by realtors are discounted by selling costs. Properties that the Company markets independently are not discounted by selling costs.

The Company did not have any other real estate owned as of September 30, 2021 and December 31, 2020.