Fair Value Measurement

3 Months Ended

Sep. 30, 2011

9. Fair Value Measurement

GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

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

Level 2: 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, and other inputs that are observable or can be corroborated by observable market data.

Level 3: 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 balances of assets measured at fair value on a recurring basis are as follows:

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
September 30, 2011
Investment securities available for sale
Corporate bonds and other obligations	$	1,525,222	$	-	$	1,525,222	$	-
FNMA mortgage-backed securities		581,502		-		581,502		-
U.S. Government sponsored enterprise securities		502		-		502		-
Corporate common stock		10,000		-		10,000		-

June 30, 2011
Investment securities available for sale
Corporate bonds and other obligations	$	1,012,322	$	-	$	1,012,322	$	-
FNMA mortgage-backed securities		79,026		-		79,026		-
U.S. Government sponsored enterprise securities		677		-		677		-
Corporate common stock		10,000		-		10,000		-

The balances of assets measured at fair value on a nonrecurring basis are as follows:

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
September 30, 2011
Assets:
Impaired loans	$	519,450	$	-	$	519,450	$	-
Foreclosed real estate		875,492		-		875,492		-

June 30, 2011
Assets:
Impaired loans	$	678,834	$	-	$	678,834	$	-
Foreclosed real estate		1,196,183		-		1,196,183		-

Certain impaired loans were reduced from their recorded investment of $768,532 and $892,914 to their fair value of $519,450 and $678,834 at September 30, 2011 and June 30, 2011, respectively, resulting in an impairment reserve through the allowance for loan losses. Foreclosed real estate was reduced from its recorded investment of $935,294 and $1,219,691 to its fair value of $875,492 and $1,196,183 at September 30, 2011 and June 30, 2011, respectively.

GAAP requires disclosure of estimated fair values of all financial instruments where it is practicable to estimate such values. 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 derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The disclosure requirements exclude certain financial instruments and all nonfinancial instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Cash and cash equivalents and certificates of deposit: The carrying amounts of cash, due from banks, deposits with the Federal Home Loan Bank of Boston (FHLB), federal funds sold and certificates of deposit approximate fair values as these financial instruments have short maturities.

Securities: The fair value of securities, excluding FHLB stock, are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. The carrying value of FHLB stock approximates fair value based on the redemption provisions of the FHLB.

Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of similar remaining maturity.

FHLB advances: The fair values of these borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Accrued interest: The carrying amounts of accrued interest approximate fair value.

Off-balance-sheet instruments: The Company’s off-balance-sheet instruments consist of loan commitments. Fair values for loan commitments have not been presented as the future revenue derived from such financial instruments is not significant.

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows:

	September 30, 2011				June 30, 2011
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(In thousands)				(In thousands)
Financial assets
Cash and cash equivalents	$	3,509	$	3,509	$	3,106	$	3,106
Certificates of deposit		495		495		495		495
Investment securities available for sale		2,117		2,117		1,102		1,102
Investment securities held to maturity		1,175		1,216		972		971
Federal Home Loan Bank stock		1,252		1,252		1,252		1,252
Loans, net		66,753		69,513		67,396		70,381
Accrued interest receivable		278		278		282		282

Financial liabilities
Deposits		53,481		53,289		53,877		53,308
FHLB advances		18,847		19,450		17,634		18,118

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

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Reference 3: http://www.xbrl.org/2003/role/presentationRef

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+ Details

Auburn Bancorp, Inc. 10-Q