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Fair Value of Financial Instruments
12 Months Ended
Dec. 31, 2011
Fair Value of Financial Instruments  
Fair Value of Financial Instruments

(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.