Audited Financial Statements NOTE 17: FAIR VALUE DISCLOSURES “Fair value” is defined by FASB ASC 820,  Fair Value Measurements and Disclosures , as the price that would be  received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the  measurement date (an exit-price approach). FASB ASC 820 establishes a hierarchy for inputs used in measuring fair value  that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs  be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability  developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that  reflect the Company’s assumptions about the inputs market participants would use in pricing the asset or liability developed  based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the  reliability of inputs as follows:  Level 1—inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active  markets.  Level 2—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets,  and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the  financial instrument.  Level 3—inputs to the valuation methodology are unobservable and significant to the fair value measurement. The Company’s assets and liabilities recorded at fair value have been categorized based upon the fair value hierarchy  within FASB ASC 820. Securities – Securities available-for-sale are recorded at fair value on a recurring basis. 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 securities such as U.S. Treasuries and exchange-traded equity securities. When instruments are traded in secondary markets and quoted market prices are not available, the Company generally  relies on prices obtained from independent vendors. Vendors compile prices from various sources and often apply matrix  pricing for similar securities. The Company has evaluated the pricing methodologies used by the vendors and maintains  internal processes that periodically test the valuations provided. Securities measured with these valuation techniques are  generally classified within Level 2 of the valuation hierarchy and often involve using quoted market prices for similar  securities, pricing models or discounted cash flow analyses using inputs observable in the market where available. Examples  include U.S. government agency securities, residential mortgage-backed securities, and securities of U.S. states and political  subdivisions. Security fair value measurements using significant inputs that are unobservable in the market due to limited activity or  a less liquid market are classified within Level 3 of the valuation hierarchy. Such measurements include securities valued  using models or a combination of valuation techniques such as weighting of models and vendor or broker pricing, where the  unobservable inputs are significant to the overall fair value measurement. Securities classified as Level 3 include pooled and  individual issuer trust preferred securities. Loans held for sale – Loans held for sale are carried at the lower of cost or estimated fair value and are subjected to  nonrecurring fair value adjustments. Estimated fair value is determined on the basis of the current market value of similar  loans. All of the Company’s loans held for sale are classified within Level 2 of the valuation hierarchy. Loans, net — Loans considered impaired under FASB ASC 310-10-35,  Receivables , are loans for which, based on  current information and events, it is probable that the Company will be unable to collect all amounts due according to the  contractual terms of the loan agreement. Impaired loans are subject to nonrecurring fair value adjustments to reflect  (1) partial write-downs that are based on the observable market price or current appraised value of the collateral, or (2) the  full charge-off of the loan carrying value. All of the Company’s impaired loans are classified within Level 3 of the valuation  hierarchy. Other real estate — Other real estate, consisting of properties obtained through foreclosure or in satisfaction of loans,  are initially recorded at the lower of the loan’s carrying amount or the fair value less costs to sell upon transfer of the loans to  other real estate. Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair  value is generally determined on the basis of current appraisals, comparable sales, and other estimates of value obtained  principally from independent sources, adjusted for estimated selling costs. All of the Company’s other real estate is classified  within Level 3 of the valuation hierarchy. page 69