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## NOTE 7: PREMISES AND EQUIPMENT 

Premises and equipment at December 31, 2011 and 2010 is presented below. 

<img src='content_image/290758.jpg'>

Depreciation expense was approximately $328 thousand, $319 thousand, and $320 thousand for the years ended December 31, 2011, 2010 and 2009, respectively, and is a component of net occupancy and equipment expense in the consolidated statements of earnings. 

## NOTE 8: MORTGAGE SERVICING RIGHTS, NET 

Mortgage servicing rights (“MSRs”) are recognized based on the fair value of the servicing rights on the date the corresponding mortgage loans are sold. An estimate of the Company’s MSRs is determined using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Under the amortization method, MSRs are amortized in proportion to, and over the period of, estimated net servicing income. 

The Company has recorded MSRs related to loans sold without recourse to Fannie Mae. The Company generally sells conforming, fixed-rate, closed-end, residential mortgages to Fannie Mae. MSRs are included in other assets on the accompanying Consolidated Balance Sheets. 

The change in amortized MSRs and the related valuation allowance for the years ended December 31, 2011, 2010 and 2009, is presented below. 

<img src='content_image/290757.jpg'>

The Company periodically evaluates MSRs for impairment. Impairment is determined by stratifying MSRs into groupings based on predominant risk characteristics, such as interest rate and loan type. If, by individual stratum, the carrying amount of the MSRs exceeds fair value, a valuation allowance is established. The valuation allowance is adjusted as the fair value changes. Changes in the valuation allowance are recognized in earnings as a component of mortgage lending income. At December 31, 2011, the Company recorded a valuation allowance of $117,000, and at December 31, 2010, there was no valuation allowance recorded for MSRs. 

