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## Loans 

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Total loans, net of unearned income, were $370.3 million as of December 31, 2011, a decrease of $3.9 million, or 1%, from $374.2 million at December 31, 2010. The loan portfolio decreased slightly in 2011 as new loans were unable to offset the impact of pay-downs, charge-offs, foreclosures and other problem loan resolutions. In particular, construction and land development loans decreased by $8.0 million, or 17%, in 2011. Four loan categories represented the majority of the loan portfolio as December 31, 2011: commercial real estate mortgage loans (44%), residential real estate mortgage loans (27%), commercial and industrial loans (15%) and construction and land development loans (11%). 

Within its residential real estate mortgage portfolio, the Company had junior lien mortgages of approximately $23.9 million, or 6%, and $24.3 million, or 6%, of total loans, net of unearned income at December 31, 2011 and 2010, respectively. For residential real estate mortgage loans with a consumer purpose, approximately $1.8 million and $4.1 million required interest-only payments at December 31, 2011 and 2010, respectively. The Company’s residential real estate mortgage portfolio does not include any option ARM loans, subprime loans, or any material amount of other high-risk consumer mortgage products. 

Purchased loan participations included in the Company’s loan portfolio were approximately $3.8 million and $7.2 million as of December 31, 2011 and 2010, respectively. All purchased loan participations are underwritten by the Company independent of the selling bank. In addition, all loans, including purchased participations, are evaluated for collectability during the course of the Company’s normal loan review procedures. If the Company deems a participation loan impaired, it applies the same accounting policies and procedures as described in “CRITICAL ACCOUNTING POLICIES.” 

The average yield earned on loans and loans held for sale was 5.67% in 2011 and 5.73% in 2010. 

The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the impact of recessionary economic conditions on our borrowers’ cash flows, real estate market sales volumes, valuations, and availability and cost of financing for properties, real estate industry concentrations, deterioration in certain credits, interest rate fluctuations, reduced collateral values or non-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of laws and regulations. 

The Company attempts to reduce these economic and credit risks by adhering to loan to value (“LTV”) guidelines for collateralized loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial position. Also, we establish and periodically review our lending policies and procedures. Banking regulations limit our credit exposure by prohibiting unsecured loan relationships that exceed 10% of the capital accounts of the Bank; or 20% of the capital accounts if loans in excess of 10% are fully secured, which would approximate $14.6 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of $13.2 million. Our loan policy requires that the Loan Committee of the Board of Directors approve any loan relationships that exceed this internal limit. At December 31, 2011, the Company had no loan relationships exceeding these limits. 

