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Fair Value of Financial Instruments
 3 Months Ended
Mar. 31, 2012
Fair Value of Financial Instruments  
Fair Value of Financial Instruments

Note 12 - Fair Value of Financial Instruments

 

Financial Instruments Not Measured at Fair Value

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which adjustments to measure at fair value are not reported:

 

Cash and cash equivalents:  The carrying amounts reported in the balance sheet for these instruments approximate their fair values.

 

Mortgages and loan payable: At March 31, 2012, the $223,083,000 estimated fair value of the Company’s mortgages and loan payable is more than their carrying value by approximately $9,831,000 assuming a blended market interest rate of 4.5% based on the 4.8 year weighted average remaining term of the mortgages and loan.

 

Line of credit: The $27,100,000 carrying amount of the Company’s line of credit approximates its fair value at March 31, 2012.

 

The fair value of the Company’s mortgages and loan payable and line of credit were estimated using available market information and discounted cash flow analysis based on borrowing rates the Company believes it could obtain with similar terms and maturities. These fair value measurements fall within Level 3 of the fair value hierarchy.

 

Considerable judgment is necessary to interpret market data and develop estimated fair value.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

Financial Instruments Measured at Fair Value

 

The Company measures the fair value of financial instruments based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions.  In accordance with the fair value hierarchy, Level 1 assets/liabilities are valued based on quoted prices for identical instruments in active markets, Level 2 assets/liabilities are valued based on quoted prices in active markets for similar instruments, on quoted prices in less active or inactive markets, or on other “observable” market inputs and Level 3 assets/liabilities are valued based significantly on “unobservable” market inputs.  The Company does not currently own any financial instruments that are classified as Level 3.

 

The fair values of the Company’s financial instruments were determined using the following inputs as of March 31, 2012 (dollars in thousands):

 

 

 

Carrying and

 

Fair Value Measurements
Using Fair Value Hierarchy

 

 

 

Fair Value

 

Level 1

 

Level 2

 

Financial assets:

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

Equity securities

 

$

297

 

$

297

 

$

—

 

Financial liabilities:

 

 

 

 

 

 

 

Derivative financial instruments

 

934

 

—

 

934

 

 

Available-for-sale securities

 

The Company’s available-for-sale securities have a total cost of $153,000 and are included in other assets on the balance sheet.  At March 31, 2012, unrealized gains on such securities were $145,000 and unrealized losses were $2,000. The aggregate net unrealized gain of $143,000 is included in accumulated other comprehensive loss on the balance sheet. Fair values are approximated based on current market quotes from financial sources that track such securities. All of the available-for-sale securities in an unrealized loss position are equity securities and amounts are not considered to be other than temporary impairment because the Company expects the value of these securities to recover and plans on holding them until at least such recovery occurs.

 

During the three months ended March 31, 2012, the Company sold certain available-for-sale securities for a net gain of $9,000, which is included in other income on the consolidated statement of income. At December 31, 2011, the Company recorded an impairment charge of $126,000 on such securities.

 

Derivative financial instruments

 

Fair values are approximated using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities.  At March 31, 2012 and December 31, 2011, these derivatives are included in other liabilities on the consolidated balance sheets.

 

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with it utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparty.  However, as of March 31, 2012, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.  As a result, the Company has determined that its derivative valuation is classified in Level 2 of the fair value hierarchy.