## NOTES TO FINANCIAL STATEMENTS 

## 10. COMMITMENTS AND CONTINGENCIES  (Continued) 

## Financial Instruments with Off-Balance-Sheet Risk (Continued) 

Standby letters of credit are conditional commitments issued to guarantee the performance of a client to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to clients. 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 December 31, 2011 and 2010. The Bank recognizes these fees as revenue over the term of the commitment or when the commitment is used. 

Commercial loan commitments represent approximately 93% of total commitments and are generally unsecured or secured by collateral other than real estate and have variable interest rates. Real estate loan commitments represent approximately 3% of total commitments and are generally secured by property with a loan-to-value ratio not to exceed 75%. The majority of real estate commitments also have variable interest rates. Home equity and personal lines of credit represent the remaining 4% of total commitments and are generally secured by residential real estate and have both variable and fixed interest rates. 

## Significant Concentrations of Credit Risk 

The Bank grants real estate mortgage, real estate construction, commercial and installment loans to customers in the Bank’s geographic service area. In management’s judgment, with a nearly even balance between Commercial & Industrial Loans and Real Estate Loans at 46% and 53% of total loans, respectively, no specific concentration existed in the Bank’s loan portfolio at December 31, 2011. At December 31, 2010, Real Estate loans were approximately 58% of total loans, representing a modest concentration. Although management believes such concentrations to have no more than the normal risk of collectability, a substantial decline in the economy in general, or a decline in real estate values in the Bank’s primary market area in particular, could have an adverse impact on collectability of these loans. Personal and business income represents the primary source of repayment for a majority of these loans. 

## Deposit Concentrations 

At December 31, 2011, only two deposit relationships, a time deposit in the amount of $15,000,000, or 6.2% of total deposits and, a checking account in the amount of $19,776,627, or 8.4% of total deposits, exceeded 5% of total deposits. 

If the time deposit, which is collateralized, were not renewed, the underlying investment securities providing the collateral would become available to pledge as collateral elsewhere. The majority of the funds in the checking account are expected to be disbursed during the first quarter of 2012. 

At December 31, 2010, only one deposit relationship, a time deposit in the amount of $15,000,000, or 8.2% of total deposits, exceeded 5% of total deposits. If this time deposit, which is collateralized, were not renewed, the underlying investment securities providing the collateral would become available to pledge as collateral elsewhere. 

