FirstMerit 1999 Annual Report

18. Fair Value Disclosure of Financial Instruments

Disclosures of fair value information about certain financial instruments, whether or not recognized in the consolidated balance sheets are provided as follows. Instruments for which quoted market prices are not available are valued based on estimates using present value or other valuation techniques whose results are significantly affected by the assumptions used, including discount rates and future cash flows. Accordingly, the values so derived, in many cases,

may not be indicative of amounts that could be realized in immediate settlement of the instrument. Also, certain financial instruments and all non-financial instruments are excluded from these disclosure requirements. For these and other reasons, the aggregate fair value amounts presented below are not intended to represent the underlying value of the Corporation.

The following methods and assumptions were used to estimate the fair values of each class of financial instrument presented:

Investment securities - Fair values are based on quoted prices, or for certain fixed maturity securities not actively traded estimated values are obtained from independent pricing services.
Federal funds sold - The carrying amount is considered a reasonable estimate of fair value.
Net loans - Fair values for loans with interest rates that fluctuate as current rates change are generally valued at carrying amounts with an appropriate discount for any credit risk. Fair values of other types of loans are estimated by discounting the future cash flows using the current rates for which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Cash and due from banks - The carrying amount is considered a reasonable estimate of fair value.
Accrued interest receivable - The carrying amount is considered a reasonable estimate of fair value.
Deposits – For deposit liabilities with no defined maturities, the fair value disclosed is the amount payable on demand as of the dates presented. The fair values for fixed maturity certificates of deposit and other time deposits are estimated using the rates currently offered for deposits of similar remaining maturities.
Securities sold under agreements to repurchase and other borrowings – Fair values are estimated using rates currently available to the Corporation for similar types of borrowing transactions.
Derivative financial instruments – The fair value of exchange–traded derivative financial instruments was based on quoted market prices or dealer quotes. These values represent the estimated amount the Corporation would receive or pay to terminate the agreements, considering current interest rates, as well as the current credit–worthiness of the counterparties. Fair value amounts consist of unrealized gains and losses, accrued interest receivable and payable, and premiums paid or received, and take into account master netting agreements.
Accrued interest payable – The carrying amount is considered a reasonable estimate of fair value.
Commitments to extend credit – The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar arrangements, taking into account the remaining terms of the agreements, the creditworthiness of the counterparties, and the difference, if any, between current interest rates and the committed rates.
Standby letters of credit and financial guarantees written – Fair values are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations.
Loans sold with recourse – Fair value is estimated based on the present value of the estimated future liability in the event of default.

The estimated fair values of the Corporation’s financial instruments based on the assumptions described above are as follows:

The Corporation is a party to financial instruments with offbalance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, financial guarantees, and loans sold with recourse.

These instruments involve, to varying degrees, elements recognized in the consolidated balance sheets. The contract or notional amount of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.

The Corporation’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. The Corporation uses the obligations as it does for on-balance-sheet instruments.

Unless noted otherwise, the Corporation does not require collateral or other security to support financial instruments with credit risk. The following table sets forth financial instruments whose contract amounts represent credit risk: