Audited Financial Statements Every loan closed by the Bank’s mortgage center is run through a government agency automated underwriting system. Any  exceptions noted during this process are remedied prior to sale. These representations and warranties also apply to  underwriting the real estate appraisal opinion of value for the collateral securing these loans. Failure by the Company to  comply with the underwriting and/or appraisal standards could result in the Company being required to repurchase the  mortgage loan or to reimburse the investor for losses incurred (make whole requests) if such failure cannot be cured by the  Company within the specified period following discovery. During 2011, 2010 and 2009, no loans were repurchased and no  reimbursements for investor losses were made by the Company. Loans are reported at their outstanding principal balances, net of any unearned income, charge-offs, and any deferred  fees or costs on originated loans. Interest income is accrued based on the principal balance outstanding. Loan origination  fees, net of certain loan origination costs, are deferred and recognized in interest income over the contractual life of the loan  using the effective interest method. Loan commitment fees are generally deferred and amortized on a straight-line basis over  the commitment period, which results in a recorded amount that approximates fair value.  The accrual of interest on loans is discontinued when there is a significant deterioration in the financial condition of the  borrower and full repayment of principal and interest is not expected or the principal or interest is more than 90 days past  due, unless the loan is both well-collateralized and in the process of collection. Generally, all interest accrued but not  collected for loans that are placed on nonaccrual status is reversed against current interest income. Interest collections on  nonaccrual loans are generally applied as principal reductions. The Company determines past due or delinquency status of a  loan based on contractual payment terms.  A loan is considered impaired when it is probable the Company will be unable to collect all principal and interest  payments due according to the contractual terms of the loan agreement. Individually identified impaired loans are measured  based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s  observable market price, or the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the  impaired loan exceeds the measure of fair value, a valuation allowance may be established as part of the allowance for loan  losses. Changes to the valuation allowance are recorded as a component of the provision for loan losses.  Impaired loans also included troubled debt restructurings (“TDRs”). In the normal course of business, management  may grant concessions to borrowers who are experiencing financial difficulty. The concessions granted most frequently for  TDRs involve reductions or delays in required payments of principal and interest for a specified time, the rescheduling of  payments in accordance with a bankruptcy plan or the charge-off of a portion of the loan. In most cases, the conditions of the  credit also warrant nonaccrual status, even after the restructuring occurs. As part of the credit approval process, the  restructured loans are evaluated for adequate collateral protection in determining the appropriate accrual status at the time of  restructuring. TDR loans may be returned to accrual status if there has been at least a six-month sustained period of  repayment performance by the borrower.  The allowance for loan losses is maintained at a level that management believes is adequate to absorb probable losses  inherent in the loan portfolio. Loan losses are charged against the allowance when they are known. Subsequent recoveries are  credited to the allowance. Management’s determination of the adequacy of the allowance is based on an evaluation of the  portfolio, current economic conditions, growth, composition of the loan portfolio, homogeneous pools of loans, risk ratings  of specific loans, historical loan loss factors, identified impaired loans and other factors related to the portfolio. This  evaluation is performed quarterly and is inherently subjective, as it requires various material estimates that are susceptible to  significant change, including the amounts and timing of future cash flows expected to be received on any impaired loans. In  addition, regulatory agencies, as an integral part of their examination process, will periodically review the Company’s  allowance for loan losses, and may require the Company to record additions to the allowance based on their judgment about  information available to them at the time of their examinations.  Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation computed on a  straight-line method over the useful lives of the assets or the expected terms of the leases, if shorter. Expected terms include  lease option periods to the extent that the exercise of such options is reasonably assured.  Other real estate owned (“OREO”) includes properties acquired through, or in lieu of, loan foreclosure that are held for  sale and are initially recorded at the lower of the loan’s carrying amount or fair value less cost to sell at the date of  Other Real Estate Owned Premises and Equipment  page 41 Allowance for Loan Losses  Loans 