FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

12 Months Ended

Dec. 31, 2012

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

16.      FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

We are party to financial instruments with off-balance-sheet risk in the normal course of our business to meet the financing needs of our customers and to reduce our own exposure to fluctuations in interest rates.  These financial instruments include commitments to extend credit, standby letters of credit, and financial guarantees.

These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position.  The contract or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and financial guarantees written is represented by the contractual notional amount of those instruments.  We use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments.

Unless noted otherwise, we do not require collateral or other security to support financial instruments with credit risk.

	Contract Amount
	December 31, 2012		December 31, 2011
Financial instruments whose contract amounts represent credit risk:
Commitments to grant mortgage and commercial loans	$	5,260,600	$	493,500
Unfunded commitments to extend credit under existing construction equity line and commercial lines of credit	$	10,203,482	$	11,111,154
Standby letters of credit and financial guarantees written	$	530,534	$	194,488

Commitments to grant mortgage and commercial loans, which include pending applications, are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon or pending applications will be denied, the total commitment amounts do not necessarily represent future cash requirements.  Historically, approximately seventy-five percent of the agreements and pending applications are drawn upon.  We evaluate each customer’s credit-worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the counterparty. Most equity line commitments for the unfunded portion of equity lines are for a term of 12 months and commercial lines of credit are generally renewable on an annual basis.

Standby letters of credit and financial guarantees written are conditional commitments issued by us to guarantee the performance of a customer to a third party.  Those guarantees are primarily issued to support construction borrowing.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  We hold cash as collateral supporting those commitments for which collateral is deemed necessary.