Village Bank & Trust Financial Corp. - 10-K filing on 2017-03-31

Fair Value

12 Months Ended

Dec. 31, 2016

Note 17.

Fair Value

Effective January 1, 2008, the Company adopted the provisions of FASB Codification Topic 820: Fair Value Measurements which defines fair value, establishes a framework for measuring fair value under U.S GAAP, and expands disclosures about fair value measurements.

FASB Codification Topic 820: Fair Value Measurements and Disclosures establishes a hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair values hierarchy is as follows:

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Level 1 Inputs— Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

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Level 2 Inputs — Significant other 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.

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Level 3 Inputs - Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods to determine the fair value of each type of financial instrument:

Securities: Fair values for securities available-for-sale are obtained from an independent pricing service. The prices are not adjusted. The independent pricing service uses industry-standard models to price U.S. Government agency obligations and mortgage backed securities that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace (Levels 1 and 2).

Impaired loans: The fair values of impaired loans are measured for impairment using the fair value of the collateral for collateral-dependent loans on a nonrecurring basis. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or when economic or other circumstances dictate a need to obtain an updated appraisal of the property, then a Level 3 valuation is considered to measure the fair value. 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 using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Operations.

Real estate owned: Real estate owned assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, real estate owned assets are carried at fair value less costs to sell. 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 foreclosed asset 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 foreclosed asset as nonrecurring Level 3.

Assets held for sale: assets held for sale were transferred from premises and equipment at cost less accumulated depreciation 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 as nonrecurring Level 3.

Assets measured at fair value under Topic 820 on a recurring and non-recurring basis are summarized below (in thousands):

	Fair Value Measurement
	at December 31, 2016 Using
			Quoted Prices
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets - Recurring
US Government Agencies	$	32,246		2,103		30,143		-
Mortgage-backed securities		11,648		9,450		2,198		-

Financial Assets - Non-Recurring
Impaired loans		15,441		-		14,467		974
Assets held for sale		841		-		-		841
Real estate owned		2,926		-		2,926		-

	Fair Value Measurement
	at December 31, 2015 Using
			Quoted Prices
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets - Recurring
US Government Agencies	$	33,713		3,307		30,406		-
Mortgage-backed securities		3,001		-		3,001		-
Municipals		1,205		-		1,205		-
						-
Financial Assets - Non-Recurring
Impaired loans		20,509		-		18,862		1,647
Assets held for sale		12,631				-		12,631
Real estate owned		6,249		-		6,190		59

The following table presents qualitative information about Level 3 fair value measurements for financial instruments for the years ended December 31, 2016 and 2015 (dollars in thousands):

	December 31, 2016
					Range
	Fair Value		Valuation	Unobservable	(Weighted
	Estimate		Techniques	Input	Average)
	(In thousands)

Impaired loans - real estate secured	$	517	Appraisal (1) or Internal	Selling costs	6%-10% (7%)
			Valuation (2)	Discount for lack of
				marketability and age
				of appraisal	6%-30% (10%)

Impaired loans - non-real estate secured	$	457	Appraisal (1) or	Selling costs	10%
			Discounted Cash Flow	Discount for lack of
				marketability or practical life	0%-50% (20%)

Real estate owned	$	-	Appraisal (1) or Internal	Selling costs	6%-10% (7%)
			Valuation (2)	Discount for lack of
				marketability and age
				of appraisal	6%-30% (15%)

Assets held for sale	$	841	Appraisal (1) or Internal	Selling costs	6%-10% (7%)
			Valuation (2)	Discount for lack of
				marketability and age
				of appraisal	6%-30% (15%)

	December 31, 2015
					Range
	Fair Value		Valuation	Unobservable	(Weighted
	Estimate		Techniques	Input	Average)
	(In thousands)

Impaired loans - real estate secured	$	1,042	Appraisal (1) or Internal	Selling costs	6%-10% (7%)
			Valuation (2)	Discount for lack of
				marketability and age
				of appraisal	6%-30% (10%)

Impaired loans - non-real estate secured	$	605	Appraisal (1) or	Selling costs	10%
			Discounted Cash Flow	Discount for lack of
				marketability or practical life	0%-50% (20%)

Real estate owned	$	59	Appraisal (1) or Internal	Selling costs	6%-10% (7%)
			Valuation (2)	Discount for lack of
				marketability and age
				of appraisal	6%-30% (15%)

Assets held for sale	$	12,631	Appraisal (1) or Internal	Selling costs	6%-10% (7%)
			Valuation (2)	Discount for lack of
				marketability and age
				of appraisal	6%-30% (15%)

(1)

Fair Value is generally determined through independent appraisals of the underlying collateral, which generally included various level 3 inputs which are not identifiable

(2)

Internal valuations may be conducted to determine Fair Value for assets with nominal carrying balances.

The following table presents the changes in the Level 3 fair value category for the years ended December 31, 2016 and 2015 (in thousands):

	Impaired		Real Estate		Assets Held
	Loans		Owned		for Sale		Total Assets

Balance at December 31, 2014	$	2,263	$	1,337	$	11,743	$	15,343
Total realized and unrealized gains (losses)
Included in earnings		-		142		-		142
Included in other comprehensive income		-		-		-		-
Net transfers in and/or out of Level 3		(616)		(1,420)		888		(1,148)

Balance at December 31, 2015	$	1,647	$	59	$	12,631	$	14,337

Total realized and unrealized gains (losses)
Included in earnings		-		15		-		15
Included in other comprehensive income		-		-		-		-
Net transfers in and/or out of Level 3		(673)		(74)		(11,790)		(12,537)

Balance at December 31, 2016	$	974	$	-	$	841	$	1,815

In general, fair value of securities is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon market prices determined by an outside, independent entity that primarily uses as inputs, observable market-based parameters. Fair value of loans held for sale is based upon internally developed models that primarily use as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and or quarter valuation process.

Cash and cash equivalents – The carrying amount of cash and cash equivalents approximates fair value.

Investment securities – The fair value of investment securities held-to-maturity and available-for-sale is estimated based on quoted prices for similar assets or liabilities determined by bid quotations received from independent pricing services. The carrying amount of other investments approximates fair value.

Loans – For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. For all other loans, fair values are calculated by discounting the contractual cash flows using estimated market discount rates which reflect the credit and interest rate risk inherent in the loans, or by using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Assets held for sale – The carrying value of assets held for sale is based on fair value less selling costs. Fair values for assets held for sale are estimated based on appraised values of the asset or management’s estimation of the value of the assets.

Deposits – The fair value of deposits with no stated maturity, such as demand, interest checking and money market, and savings accounts, is equal to the amount payable on demand at year-end. The fair value of certificates of deposit is based on the discounted value of contractual cash flows using the rates currently offered for deposits of similar remaining maturities.

Borrowings – The fair value of borrowings is based on the discounted value of contractual cash flows using the rates currently offered for borrowings of similar remaining maturities.

Accrued interest – The carrying amounts of accrued interest receivable and payable approximate fair value.

		December 31,				December 31,
		2016				2015
	Level in Fair
	Value	Carrying		Estimated		Carrying		Estimated
	Hierarchy	Value		Fair Value		Value		Fair Value
	(In thousands)
Financial assets
Cash	Level 1	$	10,848	$	10,848	$	17,076	$	17,076
Cash equivalents	Level 2		948		948		186		186
Investment securities available for sale	Level 1		11,553		11,553		3,307		3,307
Investment securities available for sale	Level 2		32,341		32,341		34,612		34,612
Federal Home Loan Bank stock	Level 2		512		512		685		685
Loans held for sale	Level 2		14,784		14,784		14,373		14,373
Loans	Level 2		321,659		310,337		286,262		274,230
Impaired loans	Level 2		14,467		14,467		18,862		18,862
Impaired loans	Level 3		974		974		1,647		1,647
Assets held for sale	Level 3		841		841		12,631		12,631
Other real estate owned	Level 2		2,926		2,926		6,190		6,190
Other real estate owned	Level 3		-		-		59		59
Bank owned life insurance	Level 3		7,093		7,093		7,130		7,130
Accrued interest receivable	Level 2		2,274		2,274		2,060		2,060

Financial liabilities
Deposits	Level 2		383,277		383,985		364,848		365,294
FHLB borrowings	Level 2		2,400		2,402		6,000		6,004
Trust preferred securities	Level 2		8,764		8,565		8,764		8,984
Other borrowings	Level 2		81		81		508		508
Accrued interest payable	Level 2		70		70		1,346		1,346