Commitments and Off-Balance Sheet Risk

6 Months Ended

Jun. 30, 2012

Commitments and Off-Balance Sheet Risk [Abstract]

COMMITMENTS AND OFF-BALANCE SHEET RISK

8. COMMITMENTS AND OFF-BALANCE SHEET RISK

Our 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 and standby letters of credit. Loan 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. Standby letters of credit are conditional commitments issued by our bank to guarantee the performance of a customer to a third party. 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, the total commitment amounts do not necessarily represent future cash requirements.

These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized, if any, in the balance sheet. Our bank’s maximum exposure to loan 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 notional amount of those instruments. Our bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Collateral, such as accounts receivable, securities, inventory, and property and equipment, is generally obtained based on our credit assessment of the borrower. If required, estimated loss exposure resulting from these instruments is expensed and is generally recorded as a liability. There was no reserve or liability balance for these instruments as of June 30, 2012. We expensed $0.5 million and $0.4 million during 2012 and 2011, respectively, through provision for loan losses in association with a particular standby letter of credit. Due to the nature of the transaction and the insignificant amount, specific reserves of $0.9 million and $0.4 million were included within the allowance for loan losses as of June 30, 2012 and December 31, 2011.

A summary of the contractual amounts of our financial instruments with off-balance sheet risk at June 30, 2012 and December 31, 2011 follows:

	June 30, 2012		December 31, 2011
Commercial unused lines of credit	$	172,367,000	$	171,683,000
Unused lines of credit secured by 1 – 4 family residential properties		24,611,000		24,663,000
Credit card unused lines of credit		7,924,000		7,565,000
Other consumer unused lines of credit		4,251,000		3,367,000
Commitments to extend credit		74,263,000		30,929,000
Standby letters of credit		10,822,000		15,923,000
	$	294,238,000	$	254,130,000

Certain of our commercial loan customers have entered into interest rate swap agreements directly with our correspondent banks. To assist our commercial loan customers in these transactions, and to encourage our correspondent banks to enter into the interest rate swap transactions with minimal credit underwriting analyses on their part, we have entered into risk participation agreements with the correspondent banks whereby we agree to make payments to the correspondent banks owed by our commercial loan customers under the interest rate swap agreement in the event that our commercial loan customers do not make the payments. We are not a party to the interest rate swap agreements under these arrangements. As of June 30, 2012, the total notional amount of the underlying interest rate swap agreements was $30.4 million, with a net fair value from our commercial loan customers’ perspective of negative $4.5 million. These risk participation agreements are considered financial guarantees in accordance with applicable accounting guidance and are therefore recorded as liabilities at fair value, generally equal to the fees collected at the time of their execution. These liabilities are accreted into income during the term of the interest rate swap agreements, generally ranging from four to fifteen years.