Fair Value Measurements: Fair Value Assets Measured on Nonrecurring Basis Impaired Loans Policy (Policies)

3 Months Ended

Jun. 30, 2012

Fair Value Assets Measured on Nonrecurring Basis Impaired Loans Policy:

Fair Value Assets Measured on Nonrecurring Basis Impaired Loans Policy

Generally accepted accounting principles apply to loans measured for impairment using practical expedients, including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral. The fair value of a Level 2 collateral dependent loan is generally determined by a recent appraisal in the last twelve months. The fair value of a Level 3 collateral dependent loan is determined by reference to an appraisal older than twelve months in addition to cash flow analysis and/or other market evaluations.

Other real estate owned

Certain assets such as other real estate owned (OREO) are measured at the lesser of cost or fair value less cost to sell. The fair value of Level 2 collateral dependent real estate is generally determined by a recent appraisal in the last twelve months. The fair value of Level 3 collateral dependent real estate is determined by reference to an appraisal older than twelve months in addition to cash flow analysis and/or other market evaluations.

The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis during the period.

	Carrying Value
		Quoted
		Prices in	Significant
		Active	Other	Significant
		Markets for	Observable	Unobservable
		Identical	Inputs	Inputs
		Assets
	Balance	(Level 1)	(Level 2)	(Level 3)
Description
Assets
June 30, 2012
Impaired loans net of
valuation allowance	$6,234,174	$--	$5,196,305	$1,037,869
Real estate owned	$7,543,843	$--	$2,939,851	$4,603,992

March 31, 2012
Impaired loans net of
Valuation allowance	$4,675,569	$--	$1,582,600	$3,092,969
Real estate owned	$9,259,432	$--	$6,697,877	$2,561,555

The changes in Level 3 assets measured at estimated fair value on a nonrecurring basis during the period ended June 30, 2012 were as follows:

	Fair Value Measurements at June 30, 2012
	Impaired	Other Real
	Loans	Owned
Balance April 1, 2012	$3,092,969	$2,561,555
Total gains (losses) realized/unrealized
Included in earnings (write downs)	(134,216)	(70,324)
Newly impaired/New OREO	204,316	--
Sales	(85,200)	(537,820)
Settlements/Foreclosures/Payoffs	(25,000)	--
Transfers into Level 3	--	2,996,581
Transfers out of Level 3	(2,015,000	(346,000)
Balance June 30, 2012	$1,037,869	$4,603,992

The following table displays quantitative information about Level 3 Fair Value Measurements for June 30, 2012.

	Quantitative information about Level 3 Fair Value Measurements for June 30, 2012
				Range
	Fair	Valuation	Unobservable	Weighted
	Value	Technique(s)	Input	Average
Assets

Impaired loans	$167,701	Discounted Appraised Value	Selling cost	5%-10%(6)%
Impaired loans	$884,068	Internal Evaluations	--	--
Other real estate owned	$4,603,992	Discounted	Selling cost	5%-10%(6%)

The Company uses real estate appraisals to value impaired loans and future cash flows or other appropriate methods to determine fair value. Real estate appraisals used to determine fair value for impaired loans secured by real estate as of June 30, 2012 had been obtained on Level 2 loans within the last twelve months and Level 3 loans within the last nineteen months. With the use of these methods, we provide valuation allowances for anticipated losses when management determines that a decline in the value of the collateral or expected cash flows has occurred. The Company does not generally believe obtaining real estate appraisals as frequently as quarterly is of significant value in determining fair value. The delay between ordering and receiving an appraisal and our historical experience that real estate values do not generally fluctuate significantly quarter to quarter are factors influencing this decision. Updated appraisals are obtained periodically and in those instances where management has reason to believe a material change may have occurred in the fair value of the collateral. Evaluation of impairment requires judgment and estimates, and management uses all relevant and timely information available to determine specific reserves on impaired loans, including appraisals and cash flow analysis. Loans are partially or completely charged off in the period when they are deemed uncollectible in accordance with ASC 310-35.

COMMUNITY FINANCIAL CORP /VA/ 10-Q