Financial instruments with off-balance sheet risk

12 Months Ended

Dec. 31, 2011

Risks and Uncertainties [Abstract]

Financial instruments with off-balance sheet risk

Financial instruments with off-balance sheet risk

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, commitments to extend credit, standby letters of credit, and could involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments with credit risk.

Commitments to extend credit 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 the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis, and the amount of collateral or other security obtained is based on management’s credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support borrowing arrangements and extend for up to one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Accordingly, collateral is generally required to support the commitment.

At December 31, 2011 and 2010, the Bank had available mortgage commitments of $1.6 million and $23.1 million, unused commercial lines of credit of $8 million and $4 million, and $1.3 million and $1 million of other loan commitments, respectively. There were $23,000 of financial standby letters of credit outstanding at December 31, 2011 and $34,000 at December 31, 2010. The decline in commitments occurred because the Corporation originated very few loans during 2011 and concurrently allowed most commercial mortgage commitments to expire.