Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2012

(19) Fair Value of Financial Instruments

The following table presents the carrying amounts, estimated fair values, and placement in the fair value hierarchy of financial instruments at December 31, 2012 and 2011.

(in thousands)	Carrying amount		Fair value			Level 1		Level 2		Level 3
December 31, 2012

Financial assets
Cash and short-term investments	$	67,703	$	67,703		$	67,703	$	—	$	—
Mortgage loans held for sale	14,047		14,431			—		14,431		—
Federal Home Loan Bank stock and other securities	6,180		6,180			—		6,180		—
Loans, net	1,552,713		1,583,018			—		—		1,583,018
Accrued interest receivable	5,091		5,091			5,091		—		—

Financial liabilities
Deposits	$	1,781,693	$	1,786,046		$	—	$	1,786,046	$	—
Short-term borrowings	75,597		75,597			—		75,597		—
Long-term borrowings	62,782		62,826			—		62,826		—
Accrued interest payable	166		166			166		—		—

Off balance sheet financial instruments
Commitments to extend credit	$	386,372	$	—		$	—	$	—	$	—
Standby letters of credit	14,757		(221		)	—		—		(221		)

(in thousands)	Carrying amount		Fair value			Level 1		Level 2		Level 3
December 31, 2011

Financial assets
Cash and short-term investments	$	54,920	$	54,920		$	54,920	$	—	$	—
Mortgage loans held for sale	4,381		4,594			—		4,594		—
Federal Home Loan Bank stock and other securities	5,949		5,949			—		5,949		—
Loans, net	1,515,100		1,549,473			—		—		1,549,473
Accrued interest receivable	5,964		5,964			5,964		—		—

Financial liabilities
Deposits	$	1,617,739	$	1,626,170		$	—	1,626,170		$	—
Short-term borrowings	103,299		103,299			—		103,299		—
Long-term borrowings	101,331		100,491			—		100,491		—
Accrued interest payable	232		232			232		—		—

Off balance sheet financial instruments
Commitments to extend credit	$	318,907	$	—		$	—	$	—	$	—
Standby letters of credit	13,289		(199		)	—		—		(199		)

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.

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 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).

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.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

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Reference 3: http://www.xbrl.org/2003/role/presentationRef

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Reference 5: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

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-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 6: http://www.xbrl.org/2003/role/presentationRef

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-Topic 825

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Reference 10: http://www.xbrl.org/2003/role/presentationRef

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