Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2011

Fair Value of Financial Instruments

Fair Value of Financial Instruments

(15) Fair Value of Financial Instruments

The estimated fair values of financial instruments are as follows:

	June 30, 2011					December 31, 2010
(In thousands)	Carrying Amount		Fair Value			Carrying Amount		Fair Value
Financial assets
Cash and short-term investments	$	44,198	$	44,198		$	41,655	$	41,655
Mortgage loans held for sale	4,439		4,477			12,387		12,626
Securities	258,280		258,280			245,352		245,354
Federal Home Loan Bank stock and other securities	5,949		5,949			5,772		5,772
Loans, net	1,511,386		1,531,700			1,482,882		1,507,079
Accrued interest receivable	5,928		5,928			6,288		6,288
Interest rate swap	319		319			305		305
Financial liabilities
Deposits	$	1,532,371	$	1,549,766		$	1,493,468	$	1,512,882
Short-term borrowings	89,027		89,027			87,509		87,509
Long-term borrowings	101,337		100,499			101,342		100,815
Accrued interest payable	179		179			304		304
Interest rate swap	319		319			305		305
Off balance sheet financial instruments
Commitments to extend credit	—		—			—		—
Standby letters of credit	—		(155		)	—		(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, Federal Home Loan Bank stock, 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.

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.