(19) Fair Value of Financial Instruments
The estimated fair values of financial instruments at December 31, 2011 and 2010 are as follows:
|
|
December 31, 2011 |
|
December 31, 2010 |
|
(In thousands) |
|
Carrying
amount |
|
Fair value |
|
Carrying
amount |
|
Fair value |
|
|
|
|
|
|
|
|
|
|
|
Financial assets |
|
|
|
|
|
|
|
|
|
Cash and short-term investments |
|
$ |
54,920 |
|
$ |
54,920 |
|
$ |
41,655 |
|
$ |
41,655 |
|
Mortgage loans held for sale |
|
4,381 |
|
4,594 |
|
12,387 |
|
12,626 |
|
Securities |
|
352,185 |
|
352,185 |
|
245,352 |
|
245,354 |
|
Federal Home Loan Bank stock and other securities |
|
5,949 |
|
5,949 |
|
5,772 |
|
5,772 |
|
Loans, net |
|
1,515,100 |
|
1,549,473 |
|
1,482,882 |
|
1,507,079 |
|
Accrued interest receivable |
|
5,964 |
|
5,964 |
|
6,288 |
|
6,288 |
|
Interest rate swap |
|
442 |
|
442 |
|
305 |
|
305 |
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
1,617,739 |
|
$ |
1,626,170 |
|
$ |
1,493,468 |
|
$ |
1,512,882 |
|
Short-term borrowings |
|
103,299 |
|
103,299 |
|
87,509 |
|
87,509 |
|
Long-term borrowings |
|
101,331 |
|
100,491 |
|
101,342 |
|
100,815 |
|
Accrued interest payable |
|
232 |
|
232 |
|
304 |
|
304 |
|
Interest rate swap |
|
442 |
|
442 |
|
305 |
|
305 |
|
|
|
|
|
|
|
|
|
|
|
Off balance sheet financial instruments |
|
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
318,907 |
|
— |
|
350,314 |
|
— |
|
Standby letters of credit |
|
13,289 |
|
(199 |
) |
9,598 |
|
(144 |
) |
Management used the following methods and assumptions to estimate the fair value of each class of financial instrument for which it is practicable to estimate the value.
Cash, Short-term investments, Accrued interest receivable/payable and Short-term borrowings
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities
For securities, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities or dealer quotes.
Federal Home Loan Bank stock and other securities
For these securities without readily available market values, the carrying amount is a reasonable estimate of fair value.
Mortgage loans held for sale
The fair value of mortgage loans held for sale is determined by market quotes for each loan based on loan type, term, rate, size and the borrower’s credit score.
Loans, net
US GAAP prescribes the exit price concept for estimating fair value of loans. Because there is not a liquid market (exit price) for trading the predominant types of loans in Bancorp’s portfolio, the fair value of loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities (e.g. entrance price).
Interest rate swaps
Fair value measurements are obtained from an outside pricing service. Prices obtained are generally based on dealer quotes, benchmark forward yield curves, and other relevant observable market data.
Deposits
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-rate certificates of deposits is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.
Long-term borrowings
The fair value of long-term borrowings is estimated by discounting the future cash flows using estimates of the current market rate for instruments with similar terms and remaining maturities.
Commitments to extend credit and standby letters of credit
The fair values of commitments to extend credit are estimated using fees currently charged to enter into similar agreements and the creditworthiness of the customers. The fair values of standby letters of credit are based on fees currently charged for similar agreements or the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.
Limitations
The fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. Because no market exists for a significant portion of Bancorp’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Therefore, the calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly affect the estimates. |