NOTE J - COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2011

Commitments and Contingencies Disclosure [Text Block]

NOTE J – COMMITMENTS AND CONTINGENCIES

The Company is involved in legal actions arising from normal business activities. Management, based upon the advice of legal counsel, believes that the ultimate resolution of all pending legal actions will not have a material effect on the Company’s financial position, results of its operations or its cash flows.

The Company was contingently liable under letters of credit issued on behalf of its customers in the amount of $7,426,000 and $8,741,000 at September 30, 2011 and December 31, 2010, respectively. At September 30, 2011, commercial and consumer lines of credit and real estate loans of approximately $41,988,000 and $39,259,000, respectively, were undisbursed. At December 31, 2010, commercial and consumer lines of credit and real estate loans of approximately $47,650,000 and $44,169,000, respectively, were undisbursed.

Loan commitments are typically contingent upon the borrower meeting certain financial and other covenants and such commitments typically have fixed expiration dates and require payment of a fee. As many of these commitments are expected to expire without being drawn upon, the total commitments do not necessarily represent future cash requirements. The Company evaluates each potential borrower and the necessary collateral on an individual basis. Collateral varies, but may include real property, bank deposits, debt securities, equity securities or business or personal assets.

Standby letters of credit are conditional commitments written by the Company to guarantee the performance of a customer to a third party. These guarantees are issued primarily relating to real estate projects and inventory purchases by the Company’s commercial customers and such guarantees are typically short term. Credit risk is similar to that involved in extending loan commitments to customers and the Company, accordingly, uses evaluation and collateral requirements similar to those for loan commitments. Most of such commitments are collateralized. The fair value of the liability related to these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant at September 30, 2011 and December 31, 2010. The Company recognizes these fees as revenues over the term of the commitment or when the commitment is used.

Loan commitments and standby letters of credit involve, to varying degrees, elements of credit and market risk in excess of the amounts recognized in the balance sheet and do not necessarily represent the actual amount subject to credit loss. At September 30, 2011, the Company had a reserve for unfunded commitments of $241,000.

A large portion of the loan portfolio of the Company is collateralized by real estate. At September 30, 2011 and December 31, 2010, real estate served as the principal source of collateral with respect to approximately 77% of the Company’s loan portfolio. At September 30, 2011, real estate construction loans totaled $34,885,000, or 7% of the total loan portfolio, commercial loans secured by real estate totaled $281,443,000, or 60% of the total loan portfolio, and real estate mortgage loans totaled $48,462,000, or 10% of the total loan portfolio. See the discussion under “Loan Portfolio” starting on page 31. A further decline in the state and national economy, in general, combined with further deterioration in real estate values in the Company’s primary operating market areas, would have an adverse effect on the value of real estate as well as other collateral securing loans, plus the ability of certain borrowers to repay their outstanding loans and the overall demand for new loans, and this could have a material impact on the Company’s financial position, results of operations or its cash flows.