Loans

12 Months Ended

Dec. 31, 2011

Loans and Allowance for Loan Losses [Abstract]

Loans

NOTE D – LOANS

Loans at year-end were as follows (in thousands):

	2011			2010
Commercial	$	70,056		$	58,763
Real estate—commercial		150,829			136,371
Real estate—construction		12,479			11,135
Consumer		8,167			10,153
Real estate mortgage		91,273			93,102
		332,804			309,524
Less allowance for loan losses		(5,412	)		(5,694	)
Loans, net	$	327,392		$	303,830

Credit Risk Elements:

Construction loans are underwritten utilizing independent appraisals, sensitivity analysis of absorption, vacancy and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. Construction loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. The Bank typically requires guarantees on these loans. The Bank’s construction loans are secured primarily by properties located in its primary market area.

The Bank originates 1 – 4 family real estate and consumer loans utilizing credit reports to supplement the underwriting process. The Bank’s manual underwriting standards for 1 – 4 family loans are generally in accordance with FHLMC and loan policy manual underwriting guidelines. Properties securing 1 – 4 family real estate loans are appraised by fee appraisers, which are independent of the loan origination function and have been approved by management. The loan-to-value ratios normally do not exceed 80% without credit enhancements such as mortgage insurance. The Bank will lend up to 100% of the lesser of the appraised value or purchase price for conventional 1 – 4 family real estate loans, provided private mortgage insurance is obtained. The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of their ability to meet existing obligations and payments on the proposed loan. To monitor and manage loan risk, policies and procedures are developed and modified, as needed by management. This activity, coupled with smaller loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, market conditions are reviewed by management on a regular basis. The Bank’s 1 – 4 family real estate loans are secured primarily by properties located in its primary market area.

Commercial and agricultural real estate loans are subject to underwriting standards and processes similar to commercial and agricultural operating loans, in addition to those unique to real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial and agricultural real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Loan to value is generally 75% of the lower of the cost or value of the assets. Appraisals on properties securing these loans are generally performed by fee appraisers approved by the Commercial Loan Committee. Because payments on commercial and agricultural real estate loans are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. Management monitors and evaluates commercial and agricultural real estate loans based on collateral and risk rating criteria. The Bank typically requires guarantees on these loans. The Bank’s commercial and agricultural real estate loans are secured primarily by properties located in its primary market area.

Commercial and agricultural operating loans are underwritten based on the Bank’s examination of current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. This underwriting includes the evaluation of cash flows of the borrower, underlying collateral, if applicable, and the borrower’s ability to manage its business activities. The cash flows of borrowers and the collateral securing these loans may fluctuate in value after the initial evaluation. A first priority lien on the general assets of the business normally secures these types of loans. Loan to value limits vary and are dependent upon the nature and type of the underlying collateral and the financial strength of the borrower. Crop and hail insurance is required for most agricultural borrowers. Loans are generally guaranteed by the principal(s). The Bank’s commercial and agricultural operating lending is principally in its primary market area.

The Bank has an internal credit analyst who reviews and validates credit risk on a periodic basis, as well as an internal loan review performed throughout the year. Results of the credit analyst are presented to management. Internal loan reviews are presented to management and the Audit Committee. The credit analysis and loan review processes complement and reinforce the risk identification and assessment decisions made by lenders and credit personnel, as well as the Bank’s policies and procedures.

At December 31, 2011 and 2010, certain directors and executive officers of the Company, including their associates and companies in which they are principal owners, were indebted to the Bank.

The following is a summary of loans (in thousands) exceeding $60,000 in the aggregate to these individuals and their associates. Other changes include adjustments for loans applicable to one reporting period that are excludable from the other reporting period.

	2011			2010
Balance at January 1	$	14,099		$	16,578
New loans, including renewals		11,230			7,805
Repayments		(11,659	)		(10,192	)
Other changes, net		(128	)		(92	)
Balance at December 31	$	13,542		$	14,099

The unpaid principal balance of mortgage loans serviced for others, which are not included on the consolidated balance sheet, was $168,025,000 and $151,125,000 at December 31, 2011 and 2010, respectively.

Activity for capitalized mortgage servicing rights, included in other assets, was as follows (in thousands):

	2011			2010			2009
Balance at January 1	$	868		$	753		$	708
Additions		412			371			269
Amortized to expense		(311	)		(256	)		(224	)
Balance at December 31	$	969		$	868		$	753

No valuation allowance for capitalized mortgage servicing rights was considered necessary at December 31, 2011, 2010 or 2009 because the estimated fair value of such rights exceeded the carrying value.