Fair Value Measurements
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Jun. 30, 2011
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Fair Value Measurements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
FAIR VALUE MEASUREMENTS |
NOTE G — FAIR VALUE MEASUREMENTS
The Fair Value Measurements Topic of ASC 820-10 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. ASC 820-10-20 defines
fair value as the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants. A fair value measurement assumes that the
transaction to sell the asset or transfer the liability occurs in the principal market for the
asset or liability or, in the absence of a principal market, the most advantageous market for the
asset or liability. The price in the principal (or most advantageous) market used to measure the
fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction
is a transaction that assumes exposure to the market for a period prior to the measurement date to
allow for marketing activities that are usual and customary for transactions involving such assets
and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the
principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv)
willing to transact.
ASC 820-10 requires the use of valuation techniques that are consistent with the market approach,
the income approach, or the cost approach. The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable assets and
liabilities. The income approach uses valuation techniques to convert future amounts, such as cash
flows or earnings, to a single present amount on a discounted basis. The cost approach is based on
the amount that currently would be required to replace the service capacity of an asset
(replacement cost). Valuation techniques should be consistently applied. Inputs to valuation
techniques refer to the assumptions that market participants would use in pricing the asset or
liability. Inputs may be observable, meaning those that reflect the assumptions market
participants would use in pricing the asset or liability developed based on market data obtained
from independent sources, or unobservable, meaning those that reflect the reporting entity’s own
assumptions about the assumptions market participants would use in pricing the asset or liability
developed based on the best information available in the circumstances. In that regard, ASC Topic
820-10-55 establishes a fair value 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 value hierarchy is as follows:
Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities
that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. These might include quoted prices for similar
assets or liabilities in active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted prices that are observable for
the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks,
etc.), or inputs that are derived principally from or corroborated by market data by correlation or
other means.
Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that
reflect an entity’s own assumptions about the assumptions that market participants would use in
pricing the assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, as well
as the general classification of such instruments pursuant to the valuation hierarchy, follows.
These valuation methodologies were applied to all of the Company’s financial and nonfinancial
assets and liabilities carried at fair value.
In general, fair value is based upon quoted market prices, where available. If such quoted market
prices are not available, fair value 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’s 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.
Securities Available for Sale. Securities classified as available for sale are reported at fair
value utilizing Level 1,
Level 2 and Level 3 inputs. Unadjusted quoted prices in active markets for identical assets are
utilized to determine fair value at the measurement date for Level 1 securities. For all other
securities, the Company obtains fair value measurements from an independent pricing service. The
fair value measurements consider observable data that may include dealer quotes, market spreads,
the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus
prepayment speeds, credit information, and the bond’s terms and conditions, among other things.
When there are unobservable inputs, such securities are classified as Level 3.
Securities available for sale classified as Level 3 inputs represent non-publicly traded municipal
issues with limited trading activity from entities within the Company’s market area. The fair
value of these investments is determined using Level 3 valuation techniques, as there is no market
available to price these investments. The method used for determining the fair value for these
investments includes a comparison to the fair value of other investment securities valued with
Level 2 inputs with similar characteristics (credit, time to maturity, call structure, etc.) and
the interest yield curve for comparable debt investments.
Impaired Loans. The Company does not record impaired loans at fair value on a recurring basis.
However, periodically, a loan is considered impaired and is reported at the fair value of the
underlying collateral, less estimated costs to sell, if repayment is expected solely from the
collateral. Impaired loans measured at fair value typically consist of loans on nonaccrual status
and loans with a portion of the allowance for loan losses allocated specific to the loan. Some
loans may be included in both categories whereas other loans may only be included in one category.
Collateral values are estimated using level 2 inputs, including recent appraisals, and Level 3
inputs based on customized discounting criteria. Due to the significance of the level 3 inputs,
impaired loans have been classified as level 3.
Other Real Estate Owned (OREO). The Company values OREO at the fair value of the underlying
collateral less expected selling costs. Collateral values are estimated primarily using appraisals
and reflect a market value approach.
The following table summarizes financial and nonfinancial assets (there were no financial or
nonfinancial liabilities) measured at fair value as of June 30, 2011 and December 31, 2010,
segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure
fair value (in thousands):
Impaired loans are reported net of a $1,062,000 allowance for loan losses.
Impaired loans are reported net of a $1,171,000 allowance for loan losses.
The following is a reconciliation of the beginning and ending balances of securities available for
sale which are measured at fair value on a recurring basis using significant unobservable (Level 3)
inputs during the six month period ended June 30, 2011 (in thousands):
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