16. Contingent Liability

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

16. Contingent Liability

The Company sells first lien 1-4 family residential mortgage loans under the MPF program with FHLBB. Under this program the Company shares in the credit risk of each mortgage loan, while receiving fee income in return. The Company is responsible for a Credit Enhancement Obligation (CEO) based on the credit quality of these loans. FHLBB funds a First Loss Account (FLA) based on the Company's outstanding MPF mortgage balances. This creates a laddered approach to sharing in any losses. In the event of default, homeowner's equity and private mortgage insurance, if any, are the first sources of repayment; the FHLBB's FLA funds are then utilized, followed by the participant’s CEO, with the balance of losses absorbed by FHLBB. These loans must meet specific underwriting standards of the FHLBB. As of December 31, 2012 and 2011, the Company had $53,255,305 and $54,682,000, respectively, in loans sold through the MPF program and on which the Company had a CEO. As of December 31, 2012, the notional amount of the maximum CEO related to this program was $2,155,052 compared to $2,103,622 as of December 31, 2011. The Company had accrued a contingent liability for this CEO in the amount of $119,194 and $123,938 as of December 31, 2012 and 2011, respectively, which is calculated based on the methodology used in calculating its allowance for loan losses, adjusted to reflect the risk sharing arrangements with the FHLBB. The volume of loans sold to the MPF program and the corresponding credit obligation continue to be closely monitored by management.