8.) Commitments:

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market, forward contracts for the future purchase of mortgage-backed securities and forward contracts for the future delivery of these mortgage loans are considered derivatives. It is the Company’s practice to enter into the forward contracts for the future purchase of mortgage-backed securities when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not formally designated in hedge relationships. The Company reports the derivative assets and liabilities in other assets and other liabilities; associated income and expense is reported in mortgage banking gains.

Although residential mortgage loans originated and sold are without recourse as to performance, third parties to which the loans are sold can require repurchase of loans in the event noncompliance with the representations and warranties included in the sales agreements exists. These repurchases are typically those for which the borrower is in a nonperforming status, diminishing the prospects for future collection on the loan. The Company historically has not been required to repurchase any loans; however, provision is made for the contingent probability of this occurrence.

The following table is a summary of mortgage banking derivative commitments and the related balance sheet accounts:


	(Amounts in thousands)
	March 31, 2013	December 31, 2012

Mortgage banking derivative commitments:
Interest rate lock commitments	$ 32,606	$ 65,536
Forward contracts for the future delivery of mortgage loans	14,246	15,731
Forward contracts for the future purchase of mortgage-backed securities	20,000	52,000

Corresponding recorded balances :
Derivative asset	$ 428	$ 531
Derivative liability	99	199
Reserve for loan repurchases	537	430

The Bank is a 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 commitments to extend credit, standby letters of credit and financial guarantees. Such instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the consolidated balance sheets. The contract or notional amounts for those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

In the event of nonperformance by the other party, the Company’s exposure to credit loss on these financial instruments is represented by the contract or notional amount of the instrument. The Company uses the same credit policies in making commitments and conditional obligations as it does for instruments recorded on the balance sheet. The amount and nature of collateral obtained, if any, is based on management’s credit evaluation.

The following table is a summary of such contractual commitments:


	(Amounts in thousands)
	March 31, 2013	December 31, 2012

Commitments to extend credit:
Fixed rate	$ 14,519	$ 14,551
Variable rate	39,342	48,184
Standby letters of credit	443	477

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. Generally these financial arrangements have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. 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 Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.

The Company also offers limited overdraft protection as a non-contractual courtesy which is available to businesses as well as individually/jointly owned accounts in good standing for personal or household use. The Company reserves the right to discontinue this service without prior notice. The following table is a summary of overdraft protection for the periods indicated:


	(Amounts in thousands)
	March 31, 2013	December 31, 2012

Overdraft protection available on depositors’ accounts	$ 9,826	$ 9,814
Balance of overdrafts included in loans	98	167
Average daily balance of overdrafts	107	112
Average daily balance of overdrafts as a percentage of available	1.09 %	1.14 %