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Fair Value of Financial Instruments
6 Months Ended
Jun. 30, 2014
Fair Value of Financial Instruments  
Fair Value of Financial Instruments

(16)             Fair Value of Financial Instruments

 

US GAAP requires disclosure of the fair value of financial assets and liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis.  The carrying amounts, estimated fair values, and placement in the fair value heirarchy, of Bancorp’s financial instruments are as follows:

 

(in thousands)

 

Carrying

 

 

 

 

 

 

 

 

 

June 30, 2014

 

Amount

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

95,261

 

$

95,261

 

$

95,261

 

$

 

$

 

Mortgage loans held for sale

 

4,162

 

4,244

 

 

4,244

 

 

Federal Home Loan Bank stock and other securities

 

6,347

 

6,347

 

 

6,347

 

 

Loans, net

 

1,770,030

 

1,771,669

 

 

 

1,771,669

 

Accrued interest receivable

 

5,527

 

5,527

 

5,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,987,395

 

$

1,988,817

 

$

 

$

1,988,817

 

$

 

Short-term borrowings

 

115,489

 

115,489

 

 

115,489

 

 

FHLB advances

 

36,067

 

36,599

 

 

36,599

 

 

Accrued interest payable

 

133

 

133

 

133

 

 

 

 

(in thousands)

 

Carrying

 

 

 

 

 

 

 

 

 

December 31, 2013

 

Amount

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

70,770

 

$

70,770

 

$

70,770

 

$

 

$

 

Mortgage loans held for sale

 

1,757

 

1,817

 

 

1,817

 

 

Federal Home Loan Bank stock and other securities

 

7,347

 

7,347

 

 

7,347

 

 

Loans, net

 

1,692,828

 

1,703,291

 

 

 

1,703,291

 

Accrued interest receivable

 

5,712

 

5,712

 

5,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,980,937

 

$

1,983,029

 

$

 

$

1,983,029

 

$

 

Short-term borrowings

 

117,910

 

117,910

 

 

117,910

 

 

FHLB advances

 

34,329

 

35,166

 

 

35,166

 

 

Accrued interest payable

 

128

 

128

 

128

 

 

 

 

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, carrying amount is a reasonable estimate of fair value.

 

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 similar loans 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 an active market (exit price) for trading virtually all types of loans in Bancorp’s portfolio, 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).

 

Deposits

 

Fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. Fair value of fixed-rate certificates of deposits is estimated by discounting future cash flows using the rates currently offered for deposits of similar remaining maturities.

 

Federal Home Loan Bank advances

 

Fair value of FHLB advances is estimated by discounting future cash flows using estimates of current market rate for instruments with similar terms and remaining maturities.

 

Commitments to extend credit and standby letters of credit

 

Fair values of commitments to extend credit are estimated using fees currently charged to enter into similar agreements and the creditworthiness of the customers. Fair values of standby letters of credit are based on fees currently charged for similar agreements or estimated cost to terminate them or otherwise settle obligations with counterparties at the reporting date.  Fair value of commitments to extend credit, letters of credit and lines of credit is not presented since management believes the fair value to be insignificant.

 

Limitations

 

Fair value estimates are made at a specific point in time based on relevant market information and information about 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 losses, 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, 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 estimates.