NOTE 16 - Fair Values of Financial Instruments NOTE 15 - Commitments and Contingencies The Fair Value Measurements Topic (the Topic) estab- lishes a hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Topic describes three levels of inputs that may be used to measure fair value: The Bancorp is a party to financial instruments in the normal course of business to meet the financing needs of its customers. These financial instruments, which include commitments to make loans and standby letters of credit,  are not reflected in the accompanying consolidated financial statements. Such financial instruments are recorded when they are funded. The Bancorp’s exposure to credit loss in the event of non-performance by the other party to the financial instru- ment for commitments to originate loans and standby letters of credit is represented by the contractual amount of those instruments. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. The Bancorp uses the same credit policy  to make such commitments as it uses for on-balance sheet items. Since commitments to make loans may expire without being used, the amount does not necessarily represent future cash commitments. Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2:  Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.  Level 3:  Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing and asset or liability. The Bancorp had outstanding commitments to  originate loans as follows: The fair values of securities available for sale are deter- mined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges or pricing models utilizing significant observable inputs such as matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Different judgment and assumptions used in pricing could result in different estimates of value. In certain cases where market data is not readily available because of lack of market activity or little public disclosure, values may be based on unobservable inputs and classified  in Level 3 of the fair value hierarchy. At the end of each reporting period, securities held in the investment portfolio are evaluated on an individual secu- rity level for other-than-temporary impairment in accordance with the Investments – Debt and Equity Securities Topic, Section 320-10-35. Impairment is other-than-temporary  if the decline in the fair value of the security is below its amortized cost and it is probable that all amounts due according to the contractual terms of a debt security will  not be received. Significant judgments are required in  determining impairment, which include making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates. The Bancorp considers the following factors when determining other-than-temporary impairment for a security: the length of time and the extent to which the market value has been less than amortized cost; the financial condition and near-term prospects of the issuer; the underlying fundamentals of the relevant market and the outlook for such market for the near future; an assessment  of whether the Bancorp has (1) the intent to sell the debt securities or (2) more likely than not will be required to sell the debt securities before their anticipated market recovery. The $33,770,000 in fixed rate commitments outstanding at December 31, 2010 had interest rates ranging from 2.30% to 10.00%, for a period not to  exceed forty-five days. At December 31, 2009, fixed rate commitments outstanding of $40,734,000 had interest rates ranging from 2.24% to 10.00%, for a period not to exceed forty-five days. Mortgage interest rate locks are a component of real estate commitments, were treated as derivative  transactions, and valued accordingly at year-end. Standby letters of credit are conditional commitments issued by the Bancorp to guarantee the performance of a customer to a third party. At December 31, 2010 and  2009, the Bancorp had standby letters of credit totaling $7,681,000 and $8,204,000, respectively. The Bancorp evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed  necessary by the Bancorp upon extension of credit, is  based on management’s credit evaluation of the borrower. Collateral obtained may include accounts receivable,  inventory, property, land or other assets. 38 (Dollars in thousands) Fixed Variable Rate Rate Total __________ __________ __________ December 31, 2010: Commercial business................ $ 12,073. $ 26,008 $ 38,081 Real estate................................ 10,894 8,142 19,036 Consumer loans ....................... – . 15 15 Unsecured consumer overdrafts .. 10,803 – . 10,803 __________ __________ __________ Total....................................... $ 33,770 $ 34,165 $ 67,935 __________ __________ __________ December 31, 2009: Commercial business................ $ 18,267 $ 26,900 $ 45,167 Real estate................................ 11,716 10,150 21,866 Consumer loans ....................... – . 20 20 Unsecured consumer overdrafts .. 10,751 – . 10,751 __________ __________ __________ Total....................................... $ 40,734 $ 37,070 $ 77,804 __________ __________ __________