UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-53198

Merchants & Marine Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Mississippi		26-2498567
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3118 Pascagoula Street, Pascagoula, Mississippi		39567
(Address of principal executive offices)		(Zip Code)

(228) 762-3311

N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes           o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes            o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company) þ
				(Do not check if a smaller reporting company)

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes            þ No

As of May 13, 2011, 1,330,338 shares of Common Stock were outstanding.

 

 

TABLE OF CONTENTS

Part I. Financial Information
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 4. Controls and Procedures			30
Part II. Other Information			31
Item 1. Legal Proceedings			31
Item 1A. Risk Factors			31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31
Item 3. Defaults Upon Senior Securities			31
Item 4. (Removed and Reserved)			31
Item 5. Other Information			31
Item 6. Exhibits			31
SIGNATURES			32
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Part I. Financial Information

Item 1.		Financial Statements

MERCHANTS & MARINE BANCORP, INC., AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

		(Unaudited)				(Audited)
		March 31, 2011				December 31, 2010
ASSETS
Cash and due from banks		$	44,467,280				20,010,142
Federal funds sold			97,000				3,147,000
Securities:
Available-for-sale, at fair value			178,873,975				116,333,500
Held-to-maturity, at amortized cost			96,136,578				112,981,596
Non-marketable equity securities			900,060				900,060
Loans, less allowance for loan losses of $3,268,217 and $3,268,217, respectively			215,348,812				216,470,346
Property and equipment, net of depreciation			15,490,942				15,727,476
Other real estate owned			2,799,723				2,275,723
Accrued income			2,967,097				2,401,057
Other assets			13,186,256				13,148,056
Total assets		$	570,267,723				503,394,956
LIABILITIES
Deposits:
Non-interest bearing demand		$	166,424,470				79,614,176
Interest bearing savings, demand and other time deposits			327,784,665				348,586,934
Total deposits			494,209,135				428,201,110
Federal funds purchased and securities sold under agreements to repurchase			14,253,773				13,729,528
Accrued expense and other liabilities			9,092,322				9,113,767
Total liabilities			517,555,230				451,044,405
STOCKHOLDERS’ EQUITY
Common stock — $2.50 par value per share, 1,330,560 shares authorized, 1,330,338 shares issued and outstanding			3,325,845				3,325,845
Surplus			14,500,000				14,500,000
Retained earnings			39,803,111				39,013,928
Accumulated other comprehensive income (loss)			(4,916,463	)			(4,489,222	)
Total stockholders’ equity			52,712,493				52,350,551
Total liabilities and stockholders’ equity		$	570,267,723				503,394,956

See accompanying notes to condensed consolidated financial statements.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

		Three Months Ended
		March 31,
		2011				2010
Interest income
Interest and fees on loans		$	3,336,172				3,483,863
Interest on investment securities:
Taxable			1,609,243				1,240,640
Exempt from federal and state income tax			211,661				148,518
Interest on federal funds sold			26,884				18,338
Other interest income			186				95,945
Total interest income			5,184,146				4,987,304
Interest expense
Interest on deposits			903,769				994,429
Interest on federal funds purchased and securities sold under agreements to repurchase			6,003				7,151
Total interest expense			909,772				1,001,580
Net interest income			4,274,374				3,985,724
Provision for loan losses			241,624				131,864
Net interest income after provision for loan losses			4,032,750				3,853,860
Non-interest income
Service charges on deposit accounts			1,095,616				1,003,492
Miscellaneous			358,948				563,605
Total non-interest income			1,454,564				1,567,097
Non-interest expense
Salaries and employee benefits			1,679,440				2,120,075
Premises			667,569				751,482
Services and fees expense			416,784				508,912
Miscellaneous			1,241,874				1,026,901
Total non-interest expense			4,005,667				4,407,370
Income before income taxes			1,481,647				1,013,587
Provision for income taxes			359,879				245,770
Net income		$	1,121,768				767,817
Net income per common share		$	0.84				0.58

See accompanying notes to condensed consolidated financial statements.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

		Three Months Ended
		March 31,
		2011				2010
Net income		$	1,121,768				767,817
Other comprehensive income, net of tax:
Unrealized holding gain (loss) arising during period			(427,241	)			(58,200	)
Comprehensive income		$	694,527				709,617

See accompanying notes to condensed consolidated financial statements.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

																		Accumulated
		Common Stock																Other
		Shares												Retained				Comprehensive
		Issued				Amount				Surplus				Earnings				Income (Loss)
Balance December 31, 2010			1,330,338			$	3,325,845				14,500,000				39,013,928				(4,489,222	)
Net income			—				—				—				1,121,768				—
Cash dividends, $.25 per share			—				—				—				(332,585	)			—
Change in unrealized gain (loss) on securities available-for-sale, net of taxes of $220,092			—				—				—				—				(427,241	)
Balance, March 31, 2011			1,330,338			$	3,325,845				14,500,000				39,803,111				(4,916,463	)

See accompanying notes to condensed consolidated financial statements.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

		Three Months Ended March 31,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	1,121,768				767,817
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			314,741				359,870
Provision for loan losses			241,624				131,864
Amortization of securities premium/discount			60,364				9,719
Loss on sale of securities			13,750				—
(Increase) decrease in accrued income			(566,040	)			128,289
Reinvested earnings on securities			(838	)			—
Decrease in interest payable			(53,675	)			(66,381	)
Other, net			613,224				567,643
Net cash provided by operating activities			1,744,918				1,898,821
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in federal funds sold and securities purchased under agreements to resell			3,050,000				13,900,000
Proceeds from sales and maturities of securities available-for-sale			15,486,250				16,000,000
Purchase of securities available-for-sale			(78,679,050	)			(10,185,000	)
Proceeds from maturities of securities held to maturity			17,055,000				25,583,333
Purchase of securities held-to-maturity			(278,267	)			(40,109,393	)
Net (increase) decrease in loans			355,910				(6,279,193	)
Purchase of property and equipment			(78,207	)			(42,696	)
Net cash used by investing activities			(43,088,364	)			(1,132,949	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits			66,008,025				75,410,201
Net increase in federal funds purchased and securities sold under agreements to repurchase			524,245				2,027,771
Dividends paid			(731,686	)			(731,686	)
Net cash provided by financing activities			65,800,584				76,706,286
Net increase in cash and due from banks			24,457,138				77,472,158
Cash and due from banks, beginning			20,010,142				14,451,113
Cash and due from banks, ending		$	44,467,280				91,923,271

See accompanying notes to condensed consolidated financial statements.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of and for the Three Months Ended March 31, 2011

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Statements:

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. For further information, refer to the financial statements and notes thereto of Merchants & Marine Bancorp, Inc.’s 2010 Annual Report on Form 10-K.

Certain reclassifications have been made to the 2010 consolidated financial statements to conform to the 2011 presentation.

December 31, 2010 Balance Sheet Presentation.

The condensed consolidated balance sheet at December 31, 2010 has been taken from the audited balance sheet at that date.

Use of Estimates.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

2. FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Federal Funds Sold:

For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment Securities:

Fair values for investment securities are based on quoted market price, where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities.

2. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

Loans:

Fair value for loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same maturities.

Deposits:

The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

The estimated fair values of the Company’s financial instruments were as follows (in thousands):

		March 31, 2011								December 31, 2010
		Carrying								Carrying
		Amount				Fair Value				Amount				Fair Value
Financial assets:
Cash and federal funds sold			44,467				44,467				23,157				23,157
Securities:
Available-for-sale			178,874				178,874				116,334				116,334
Held-to-maturity			96,137				97,773				112,982				114,389
Non-marketable			900				900				900				900
Loans, net of allowance			215,349				214,629				216,470				216,162
Financial liabilities:
Deposits			494,209				492,998				428,201				428,195
Federal funds purchased and securities sold under agreements to repurchase			14,254				14,254				13,730				13,730

3. DEFINED BENEFIT PENSION PLAN

The Company has a non-contributory pension plan covering all employees who qualify under length of service and other requirements. The plan calls for benefits to be paid to eligible employees at retirement based primarily upon years of service and average earnings for the five consecutive plan years, which produce the highest average. The following table presents information regarding the plan’s net periodic benefit cost for the periods presented (in thousands):

		Three Months Ended March 31,
		2011				2010
Net periodic benefit cost (income):
Service cost		$	95				101
Interest cost			150				151
Expected return on plan assets			(181	)			(165	)
Amortization (gain) loss			65				68
Net periodic pension expense		$	129				155

4. SUBSEQUENT EVENTS

The Company has evaluated subsequent events through May 10, 2011, the date of issuance of the condensed consolidated financial statements. No material subsequent events have occurred since March 31, 2011 that required recognition or disclosure in the condensed consolidated financial statements.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This Quarterly Report contains certain forward-looking statements regarding, among other things, the anticipated financial and operating results of Merchants & Marine Bancorp, Inc. (the “Company”). Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any modification or revisions to these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions investors that future financial and operating results may differ materially from those projected in forward-looking statements made by, or on behalf of, the Company. The words “expect,” “intend,” “should,” “may,” “could,” “believe,” “suspect,” “anticipate,” “seek,” “plan”, “estimate” and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical fact may also be considered forward-looking. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Risks and uncertainties that could cause actual results to differ materially include, those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, and without limitation, (i) the Company’s ability to effectively execute its business plans; (ii) greater than anticipated deterioration or lack of sustained growth in the national or local economies; (iii) rapid fluctuations or unanticipated changes in interest rates; (iv) continuation of the historically low short-term interest rate environment; (v) increased competition with other financial institutions in the markets that the Company serves; (vi) continuing consolidation in the financial services industry; (vii) losses, customer bankruptcy, claims and assessments; (viii) changes in state and federal legislation, regulations or policies applicable to banks or other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy, including implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act; and (ix) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (“FASB”) or other regulatory agencies.

Formation of Holding Company

On April 24, 2008, the Company consummated its acquisition of 100% of the outstanding shares of Merchants & Marine Bank (the “Bank”) common stock pursuant to the terms of an Agreement and Plan of Share Exchange, dated as of February 5, 2008, by and between the Company and the Bank. In connection with the Share Exchange, the holders of Bank common stock exchanged their shares of Bank common stock for a like number of shares of Company common stock. Following consummation of the Share Exchange, the Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended and is subject to regulation by the Board of Governors of the Federal Reserve Bank. The common stock of the Bank constitutes substantially all of the assets of the Company. The Company has no other subsidiaries and the Bank accounts for substantially all of the Company’s assets, liabilities, income and expenses.

Executive Summary

The Company is a one bank holding company which acquired 100% of the Bank’s common stock on April 24, 2008 and is the successor issuer to the Bank pursuant to Rule 12g-3(a) of the Securities Exchange Act of 1934, as amended. The Bank, a state-chartered institution since 1932, is a full service, federally insured bank serving Jackson and George Counties, Mississippi. The main office of the Bank is located in Pascagoula. Branch offices are located in Moss Point, Gautier, Escatawpa, Ocean Springs, Wade, Hurley, St. Martin, and Lucedale. The Bank offers commercial and individual financial services consisting of business and personal checking accounts, certificates of deposit, various forms of real estate, commercial and industrial and personal consumer financing. U.S. Banker magazine has ranked the Bank as one of the Top 200 Community Banks in the nation and Bauer Financial has given the Bank a 5-Star rating for the 70^th consecutive quarter indicating that Merchants & Marine Bank is one of the strongest banks in the nation. The Company is subject to regulation, supervision, and examination by the Mississippi Department of Banking and Consumer Finance, the Securities and Exchange Commission (the “SEC”), the Federal Reserve and the Federal Deposit Insurance Corporation (the “FDIC”). At March 31, 2011, the Company’s assets totaled $570 million and it employed 129 persons on a full-time equivalent basis.

Hurricane Katrina hit the Mississippi Gulf Coast on August 29, 2005. Katrina’s wide spread devastation will be felt for years to come. Some of the challenges still facing our service area include insurance availability and settlements, housing, building code changes, flood elevation revisions, population shifts and business and staffing needs.

Earnings Highlights

The Company’s net income for the first quarter of 2011 was $1,122,000, a 46.1% increase, when compared to $768,000 for the first quarter of 2010 and $768,000 for the first quarter of 2009. The following discussions, tables and the accompanying financial statements presented outline the change in earnings from the first quarters of 2011, 2010 and 2009. Return on average assets was 0.8%, 0.6% and 0.7%, for first quarters of 2011, 2010 and 2009, respectively. Return on average equity was 8.6%, 6.0% and 6.3%, in the first quarters of 2011, 2010 and 2009, respectively. Earnings per share were $0.84 in the first quarter of 2011, compared to $0.58 in the first quarters of 2010 and 2009.

Earning Assets

A detailed comparison of the Company’s average earning assets for the first quarters of 2011, 2010 and 2009 is presented in Table 1 of this report. The Company’s earning assets include loans, investments, Federal Reserve balances and federal funds sold. Average earning assets for the first quarter of 2011 totaled $531,076,000 compared to $426,197,000 in 2010 and $398,505,000 in 2009. Average net loans decreased by $7,550,000 in the first quarter of 2011, compared to an increase of $9,113,000 for the first quarter of 2010 and a decrease of $245,000 in first quarter of 2009. Average securities increased by $82,878,000 and $13,416,000 in the first quarters of 2011 and 2010, respectively, compared to a decrease of $5,560,000 for the first quarter of 2009. Average federal funds sold decreased by $6,199,000 or 84.7% and $27,921,000 or 79.2% in the first quarters 2011 and 2010, respectively, compared to a decrease of $7,580,000 or 17.7%, in the first quarter of 2009. Other earning assets consist of balances maintained in a Federal Reserve excess balance account. The average balance for the first quarter of 2011 totaled $53,734,000 compared to $33,084,000 for the first quarter of 2010.

Net Interest Income

The major source of the Company’s income comes from gathering funds from deposit sources and investing them in loans and securities. Net interest income is the revenue generated from earning assets less the cost of interest paid on deposits and other interest bearing liabilities. Balancing interest rate, credit, liquidity and capital risks, while managing its assets and liabilities to maximize income growth is the Company’s primary long-term objective.

A bank’s net interest margin is a prime indicator of its profitability. The net interest margin reflects the spread between interest earning asset yields and interest bearing liability costs and the percentage of interest earning assets funded by interest bearing liabilities. The net margin, on a tax equivalent basis, was 3.0%, 3.3% and 3.5% in the first quarters of 2011, 2010 and 2009, respectively. The decreases in 2011 and 2010 are attributable to the decrease in rates of return on interest earning assets. Tax equivalent net interest income increased in the first quarter of 2011 and 2010 by 9.9% and 0.8% and decreased in 2009 by 7.9%.

Average net loans increased by 3.6% and 4.5% in the first quarters of 2011 and 2010, compared to a decrease of 0.1% in the first quarter of 2009. Loan interest income decreased by 4.2%, in the first quarter of 2011, compared to an increase of 0.4% in the first quarter of 2010 and a decrease of 10.9% in the same period of 2009. Loan yields fell by 49, 27 and 82 basis points in the first quarters of 2011, 2010 and 2009, respectively. Yields on average taxable securities, in the first quarters of 2011, 2010 and 2009, equaled 2.8%, 3.2% and 4.4%, respectively. Interest earned on average taxable securities increased by 29.5% in the first quarter of 2011 compared to declines of 24.4% and 16.2% in the first quarters of 2010 and 2009, due to higher volumes. Income on average tax-exempt securities increased 42.0% and 82.9% in the first quarters of 2011 and 2010 due to increased volumes. Yields and income on average tax-exempt securities remained relatively unchanged in the first quarter of 2011 compared to the same period in 2010 and 2009. The average volume of all securities in the first quarters of 2011 and 2010, increased by 47.8% and 8.4%, respectively, compared to a decrease in 2009 of 3.4%. Total securities income increased by 30.8% in 2011 compared to a decrease of 19.3% in 2010 as a result of higher volumes. The average balance of federal funds sold decreased in the first quarters of 2011, 2010 and 2009 by 84.7%, 79.2% and 17.7%. Income from federal funds sold decreased by 75.0%, 88.9% and 130.5% in the first quarters of 2011, 2010 and 2009, respectively. This decrease is a result of lower volumes and yields.

Total average interest bearing liabilities increased by 18.1% and 22.4%, in the first quarters of 2011 and 2010 compared to a decrease of 5.7% in the first quarter of 2009. Rates paid on these funds decreased 26, 70 and 78 basis points in the first quarter of 2011, 2010 and 2009, respectively. The decrease in rates paid on these funds resulted in a decrease in interest expense of $94,000, $349,000 and $710,000 for the first quarters of 2011, 2010 and 2009. Interest bearing checking, money market fund, and savings average balances increased by 22.3% and 41.7% for the first quarters of 2011 and 2010 and decreased by 11.8% in the first quarter of 2009. The increases in 2011 and 2010 were a result of gaining public fund customers and the decrease in 2009 was primarily a result of losing a public fund depository customer that was subject to bid. Average time deposit balances increased by 6.2% in the first quarter of 2011 and decreased by 4.0% in the first quarter of 2010, compared to an increase of 11.9% in the first quarter of 2009. The average rate paid on these funds was 1.5%, 2.0% and 3.2% for the first quarters of 2011, 2010 and 2009. Interest expense on time deposits decreased by 19.8%, 39.7% and 15.6% in the first quarters of 2011, 2010 and 2009, because of lower rates paid. Average federal funds purchased and securities sold under agreements to repurchase in the first quarter of 2011 increased by 36.5% and decreased by 18.6% and 32.2% in the first quarters of 2010 and 2009. Interest rates paid on these funds decreased by 10, 4 and 250 basis points for the first quarters of 2011, 2010 and 2009. Table 1 and 2 provide more information on the Company’s net interest income and rate and volume variances.

Interest Rate Sensitivity

Managing the interest rate risk of the Company is an integral part of its financial success. The process of interest rate risk management includes the monitoring of each component of the balance sheet and its sensitivity to interest rate changes. Management monitors the day-to-day exposure to changes in interest rates in response to loan and deposit flows and makes adjustments accordingly.

The Company uses an earnings forecast model that simulates multiple interest rate scenarios and the effects on the Bank’s net margin, in addition to using traditional gap tables. The model analyzes the earnings risk by revealing the probability of reaching future income levels based on balance sheet changes caused by interest rate fluctuations. The model and traditional gap analysis indicate the Company is liability sensitive, which means that in a rising rate environment, the Company’s net interest margin will decrease. See Table 14 for a detailed analysis of the Company’s interest rate sensitivity.

The Company’s operations are not ordinarily impacted by inflationary factors. However, because the Company’s assets are largely monetary in nature its operations are subject to changes in interest rates.

Loans

One of the largest components of the Company’s earning assets is its loan portfolio. Loans are the highest yielding asset category and also contain the largest amount of risk. Meeting the credit needs of Jackson and George Counties, with special emphasis on consumer and small business loans, continues to be the primary goal of the Company.

Average loans, net of unearned income, as a percentage of average earning assets, was 41.4%, 54.0% and 45.7%, for the first quarters of 2011, 2010 and 2009, respectively. The average loan to deposit ratio was 43.6%, 52.2% and 54.3% at the end of the first quarters of 2011, 2010 and 2009, respectively. Average net loans increased by 3.6% and 4.5% in the first quarters of 2011 and 2010 and decreased by 0.1% in the first quarter of 2009. Loan interest income decreased by 4.2% at first quarter-end 2011 and increased by 0.4% at first quarter-end 2010 compared to a decrease of 10.9% in the same period of 2009.

Loan growth in the real estate portfolio resulted in an increase in loans secured by real estate from $136,680,000 at first quarter-end 2009 to $149,492,000 at first quarter-end 2010 to $162,297,000 at first quarter-end 2011. Commercial and industrial loans totaled $24,467,000, $26,386,000 and $27,648,000 at first quarter-end 2011, 2010, and 2009, respectively. Consumer loans totaled $27,822,000 at first quarter-end 2011 and $33,939,000 at first quarter-end 2010, compared to $35,527,000 at first quarter-end 2009. Other loans at first quarter-end 2011 decreased slightly when compared to the same period in 2010.

Allowance for Loan Losses

Historical losses, trends and management’s opinion of the adequacy of the allowance for loan losses determine the allocations made to the loan loss reserve. Management considers the following factors in determining the adequacy of the allowance: (1) periodic reviews of individual credits, (2) gross and net charge-offs, (3) loan portfolio growth, (4) historical levels of the allowance to total loans, (5) the value of collateral securing loans, (6) the level of past due and non-accruing loans, and (7) current and future economic conditions and their potential impact on the loan portfolio.

The allowance to total loans was 1.5% at first quarter-end 2011 and 1.4% at first quarter-end 2010, compared to 1.5% at first quarter-end 2009.

The Company immediately charges off any loan when it is determined to be uncollectible. However, experience shows that certain losses exist in the portfolio and have not been identified. The allowance is allocated to absorb losses on all loans and is not restricted to any one group of loans. The Company’s management has determined that the balance of the allowance for loan losses is adequate to cover potential future losses. If economic conditions deteriorate beyond management’s current expectations, an increase to the provision for loan losses may be necessary. See Tables 8 and 9 for a detailed analysis of the Company’s allowance for loan losses.

Critical Accounting Policies

The accounting principles the Company follows and our methods of applying these principles conform to accounting principles generally accepted in the United States and general practices within the banking industry. In connection with the application of those principles to the determination of the Company’s ALL, the Company has made judgments and estimates, which have significantly impacted our financial position and results of operations.

The Company’s management assesses the adequacy of the ALL prior to the end of each calendar quarter. This assessment includes procedures to estimate the ALL and test the adequacy and appropriateness of the resulting balance. The ALL consists of two portions: (1) an allocated amount representative of specifically identified credit exposure and exposures readily predictable by historical or comparative experience; and (2) an unallocated amount representative of inherent loss, which is not readily identifiable. Even though the ALL is composed of two components, the entire allowance is available to absorb any credit losses.

The Company establishes the allocated amount separately for two different risk groups: (1) unique loans (commercial loans, including those loans considered impaired); and (2) homogenous loans (generally consumer loans). The allocation for unique loans is done primarily on risk rating grades assigned to each of these loans as a result of our loan management and review processes. Each risk-rating grade is assigned an estimated loss ratio, which is determined based on the experience of management, discussions with banking regulators, historical and current economic conditions and our independent loan review process. Management estimates losses on impaired loans based on estimated cash flows at the loan’s original effective interest rate or the underlying collateral value. Estimated loss ratios are also assigned to our consumer portfolio. However, the estimated loss ratios for these homogenous loans are based on the historical loss rates of the category of consumer credit (e.g., automobile, residential mortgage, home equity) and not on the results of individual loan reviews.

The unallocated amount is particularly subjective and does not lend itself to exact mathematical calculation. The Company uses the unallocated amount to absorb inherent losses which may exist as of the balance sheet date for such matters as changes in the local or national economy, the depth or experience in the lending staff, any concentrations of credit in any particular industry group and new banking laws or regulations. After assessing applicable factors, management evaluates the aggregate unallocated amount based on its experience.

The resulting ALL balance is then tested by comparing the balance in the allowance account to historical trends and peer information. Management then evaluates the result of the procedures performed, including the testing results, and concludes on the appropriateness of the balance of the ALL in its entirety. The Company’s independent loan reviewer and the audit committee of our board of directors review the assessment prior to the filing of quarterly financial information.

In assessing the adequacy of the ALL, the Company also relies on an ongoing loan review process. This process is undertaken to ascertain whether there are loans in the portfolio whose credit quality has weakened over time and to assist in the overall evaluation of the risk characteristics of the entire loan portfolio. The loan review process includes the judgment of management, the input from our independent loan reviewer, who is not an employee of the Company, and reviews that may have been conducted by bank regulatory agencies as part of their usual examination process. Management estimates losses on impaired loans based on estimated cash flows, or the fair market value of the underlying loan collateral.

Management believes the reserve is adequate at this time, based on a review of the portfolio and discussions with regulatory officials. If economic conditions deteriorate beyond management’s current expectations for the ALL, an increase to the provision for loan losses may be necessary.

The Company does not use derivatives and therefore no allowance for such instruments is made on the Company’s financial statements.

Asset Quality

Non-performing assets include non-accruing loans that are 90 days or more past due and other real estate acquired through foreclosure or property purchased by the Company for future bank expansion.

Total non-performing assets totaled $8,219,000, $4,425,000 and $2,115,000, at first quarter-end 2011, 2010, and 2009, respectively. Non-performing assets, as a percentage of total loans, were 3.8% at the first quarter-end 2011, 2.0% at the first quarter-end 2010 and 1.0% at first quarter-end 2009. Non-accrual loans and accruing loans over 90 days past due totaled $5,419,000 or 2.5% of total loans, $2,278,000 or 1.0% of total loans and $1,879,000, or 0.9% of total loans, at first quarter-end 2011, 2010, and 2009, respectively. Other real estate totaled $2,800,000 or 1.3% of total loans, $2,147,000 or 1.0% of total loans and $236,000 or 0.1% of total loans at first quarter-end 2011, 2010 and 2009. The increase in non-performing assets is a result of declining economic conditions which include high unemployment, declines in real estate value, and other factors. See Table 10 for additional information concerning the Company’s non-performing assets.

Securities Available for Sale and Investment Securities

The Company’s securities portfolio is another large component of the Company’s earning assets and had book values totaling $275,910,000, $186,796,000 and $148,528,000, for the first quarter-end 2011, 2010 and 2009, respectively. The large increase in securities in 2011 and 2010 is a result of increases in deposits resulting from gaining additional public fund customers.

The securities portfolio is divided into two classifications: available-for-sale and held-to-maturity. The available for sale portion contains all securities which management believes could be subject to sale prior to their stated maturity. This category allows Company management to meet liquidity needs, as well as affording the Company the opportunity to take advantage of market shifts or anticipated changes in interest rates, yield curve changes, and inter-market spread relationships. This portion of the portfolio is also used to help manage the Company’s interest rate and credit risks in the overall balance sheet. In accordance with Accounting Standards Codification 320 Investment in debt and Equity Securities, securities in the available-for-sale category are accounted for at fair market value with unrealized gains or losses excluded from earnings and reported as separate component of stockholders’ equity until realized. Unrealized gains net of taxes of $(2,345,000), $157,000 and $4,000 were included in stockholders’ equity at first quarter-end 2011, 2010, and 2009, respectively. The held-to-maturity portion of the portfolio contains debt securities which the Company intends to hold until their contractual maturity date. These securities provide the Company with a long term, relatively stable source of income with minimal credit risk. The securities in this category are carried at their amortized costs. A portion of the Company’s investment portfolio is pledged as collateral against public deposits, treasury tax and loan on securities sold under agreements to repurchase.

Yields on average taxable securities in the first quarters of 2011 and 2010 equaled 2.8% and 3.2%, compared to 4.4% in the first quarter of 2009. Interest earned on average taxable securities increased by 29.5% in the first quarter of 2011, compared to a decline of 24.4% and 16.2% in the first quarters of 2010 and 2009. The increase in 2011 is due to higher volumes, and the decreases in 2010 and 2009 are due to lower yields. Income increased on average tax-exempt securities by 42.0% and 82.9% in the first quarters of 2011 and 2010 due to higher volumes. Yields and income on average tax-exempt securities remained relatively unchanged in the first quarter of 2009 compared to the same period of 2008. The average volume of all securities increased by 47.8% and income increased by 30.9% in the first quarter of 2011, compared to an increase of 8.4% in volume and a decrease of 19.3% in income in the first quarter of 2010, compared to a decrease of 3.4% in volume and 15.9% in income in the first quarter of 2009, as a result of lower volumes and lower rates earned in 2009. The average balance of federal funds sold decreased in the first quarters of 2011, 2010 and 2009 by 84.8%, 79.2% and 17.7%, respectively. Income from these funds decreased by 75.0%, 88.9% and 130.5% in the first quarters of 2011, 2010 and 2009, as a result of the decrease volumes and the 285 basis points drop in rates earned in 2009. The decrease in volumes in the first quarters of 2011 and 2010 are a result of excess funds being placed in a Federal Reserve Excess Balance account shown as other interest earning assets in Table 1.

See Tables 4 and 5 for more information about the Company’s securities portfolio composition yields and maturity distributions.

Deposits

The Company’s primary funding source for loans and investments is its deposit base. Deposits consist of checking, savings and certificates of deposit. The Company’s ability to maintain a strong deposit base is of utmost importance in the growth and profitability of the institution. Managing the deposit mix and pricing is designed to be flexible, so that changes in interest rate movements and liquidity needs do not conflict or have an adverse effect on the Company’s balance sheet. The Company relies on local consumer, retail, corporate and governmental agencies for its deposit base. Average total deposits increased by 23.9% and 8.9% at first quarter-end 2011 and 2010 and decreased by 4.2% at first quarter-end 2009, respectively. See Tables 11 and 12 for more information about the Company’s deposits and maturity distribution.

Liquidity

Liquidity for a financial institution can be expressed in terms of maintaining sufficient funds available to meet both expected and unanticipated obligations in a cost-effective manner. The Company closely monitors its liquidity position to ensure it has ample funds available to meet its obligations. The Company relies on maturing loans and investments, federal funds, excess funds and its core deposit base to fund its day-to-day liquidity needs. By monitoring asset and liability maturities and the levels of cash on hand, the Company is able to meet expected demands for cash. The Company also has access to federal fund lines at correspondent banks and to an inventory of readily marketable government securities.

Average federal funds purchased and securities sold under agreement to repurchase represents 2.9%, 2.6% and 3.5% of total average deposits for the years 2011, 2010 and 2009, respectively. See Table 13 for more information concerning the Company’s short-term borrowings.

Off Balance Sheet Arrangements

As of March 31, 2011, the Company had unfunded loan commitments outstanding of $19,029,000 and outstanding standby letters of credit of $830,000. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Company has the ability to liquidate federal funds sold or securities available-for-sale or on a short-term basis to borrow and purchase federal funds from other financial institutions. The Company historically has been a net seller of federal funds and a detailed statement of cash flows can be found in the accompanying notes to the financial statements.

Contractual Obligations

The Company has certain contractual obligations that arise from its normal course of business. Each category of deposit represents an obligation to pay. While certain categories of deposits, (e.g., certificates of deposit) have a contracted expiration date, checking accounts and savings are subject to immediate withdrawal. Table 15 details the Company’s deposit and contractual obligations.

The Company also enters into agreements to extend loans and issues stand by letters of credit. These contractual obligations are detailed in Table 15.

The Company also has a defined benefit plan for substantially all of its employees, as well as former employees, who have retired from the Company; consequently, the Company is contractually obligated to pay these benefits to its retired employees. As of December 31, 2010, the plan was underfunded by $2,457,000, compared to an underfunded amount of $1,907,000 at year-end 2009. The underfunded status is the result of the poor market conditions in 2008 and the resulting effect on the performance of the plan’s investment assets. Management is monitoring the funded status of its defined benefit plan closely and has begun to contribute additional funding to the plan during 2011. See Notes to Financial Statements — Note 3.

Risk-Based Capital/Stockholders’ Equity

The Company has always placed a great emphasis on maintaining its strong capital base. The Company’s management and Board of Directors continually evaluate business decisions that may have an impact on the level of stockholders’ equity. It is their goal that the Company maintains a “well-capitalized” equity position. Based on the capital levels defined by banking regulators as part of the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991, a “well-capitalized” institution is one that has at least a 10% total risk-based capital ratio, a 6% Tier 1 risk-based capital ratio and a 5% leverage ratio. The Company’s solid capital base is reflected in its regulatory capital ratios. The risk-based capital ratio was 20.7% at quarter-end 2011, 20.8% at quarter-end 2010 and 21.4% at quarter-end 2009. Tier 1 risk-based was 19.5% at quarter-end 2011, 19.7% at quarter-end 2010 and 20.1% at quarter-end 2009. The leverage ratio at quarter-end 2011, 2010 and 2009 was 9.7%, 11.0% and 11.5%, respectively.

The Company’s capital ratios surpass the minimum requirements of 8.0% for the total risk-based capital ratio, 4.0% for Tier 1 risk-based capital ratio and 4.0% for the leverage ratio.

Stockholders’ equity to total assets at first quarter-end 2011, 2010 and 2009 was 9.3%, 9.7% and 10.9%, respectively.

Non-Interest Income

Non-interest income includes service charges on deposit accounts, safe-deposit box rent, check cashing fees, commissions, charges and other fees. Service charges on deposit accounts income increased by 9.2% in the first quarter of 2011, 6.2% in the first quarter of 2010 and decreased by 12.2% in the first quarter of 2009. These fees are generated from customer accounts and are affected by the number of accounts, and the balances of accounts subject to service charges. The Company updated its pricing structure during the first quarter of 2011 and this change is reflected in the increase in service charge income. Miscellaneous income for the first quarter of 2011 decreased 36.4% compared to an increase of 14.5% at first quarter of 2010 and decreased by 21.0% for the first quarter of 2009. The decrease in 2011 is due to a gain recognized on real estate owned in the first quarter of 2010 of $116,000.

With deposit related costs constantly increasing, the Company continues to analyze means to increase non-interest income and continues to seek new sources for additional fee income.

Non-Interest Expense

The Company’s goal is to enhance customer service through efficient and effective delivery of its products and services. Enhancing operational resources, while containing overhead expenses is a top priority of the Company. While interest expense is one of the largest expenses of the Company, employees’ salaries, equipment and building expenses, legal fees, FDIC insurance, and other expenses combined make up the largest category of the Company’s expenses. Proper management of these costs is extremely important to the profitability of the Company.

Salaries and employee benefits expense decreased in the first quarter of 2011 by 20.8% and increased in the first quarters of 2010 and 2009 by 3.3% and 11.4%, respectively. The decrease in 2011 is due to a reduction in the number of full time equivalent employees, a lower defined benefit pension expense, and the number of payrolls recognized during 2011 verses 2010. The increase in 2009 is attributed to increases in employee raises and an increase in the defined benefit pension plan expense. Premise expense decreased by 11.2% in the first quarter of 2011 and increased by 2.9% and 15.5%, in the first quarters 2010 and 2009, respectively. The decrease in 2011 is attributed to a reduction in property taxes on the main branch and depreciation expense overall. The large increase in 2009 is attributable to the depreciation of several of the Company’s branches that have been remodeled. Miscellaneous expenses increased by 21.0% and 7.9% in the first quarters of 2011 and 2010 and decreased by 14.9% when comparing the first quarter of 2009 to the same period in 2008. The increase in 2011 is due to merchant fees absorbed on behalf of a public fund deposit customer. The increase in the first quarter of 2010 is primarily due to an increase in FDIC insurance assessments. The FDIC began increasing deposit premiums in 2009 in order to replenish its reserve funds.

Income Taxes

Income tax expense totaled $360,000, $246,000 and $336,000 for the first quarter-ended 2011, 2010 and 2009, respectively.

TABLE 1
COMPARATIVE AVERAGE BALANCES — YIELDS AND RATES
(Dollars in Thousands)

The following table shows the major categories of interest-earning assets and interest-bearing liabilities with their corresponding average daily balances, related interest income or expense and the resulting yield or rate for the first quarter ended March 31, 2011, 2010 and 2009:

		2011												2010												2009
						Interest				Average								Interest				Average								Interest				Average
		Average				Income/				Yield/				Average				Income/				Yield/				Average				Income/				Yield/
Assets		Balance				Expense				Rate				Balance				Expense				Rate				Balance				Expense				Rate
Interest-earning assets:
Loans, net of unearned income		$	219,836			$	3,336				6.07	%		$	212,286			$	3,484				6.56	%		$	203,173			$	3,469				6.83	%
Securities held to maturity:
Taxable			82,148				507				2.47	%			125,344				1,061				3.39	%			103,744				1,252				4.83	%
Exempt from Federal income tax			27,097				213				3.14	%			19,267				150				3.11	%			9,465				82				3.47	%
Securities available for sale:
Taxable			147,144				1,101				2.99	%			28,900				181				2.51	%			46,886				391				3.34	%
Other interest earning assets			53,734				27				0.20	%			33,084				16				0.19	%			—				—				0.00	%
Federal funds sold and securities purchased under agreements to resell			1,117				—				0.00	%			7,316				2				0.11	%			35,237				18				0.20	%
Total interest-earning assets		$	531,076			$	5,184				3.90	%		$	426,197			$	4,894				4.59	%		$	398,505			$	5,212				5.23	%
Non interest-earning assets:
Cash and due from banks			17,011												18,496												18,069
Bank premises and equipment			15,632												16,659												17,765
Other assets			15,931												15,198												13,742
Allowance for possible loan losses																											(3,093	)
Total assets		$	579,650											$	476,550											$	444,988

TABLE 2
TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS
(Dollars In Thousands)

The following table sets forth, for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in volume and changes in rates:

		Quarter ended March 31,
		2011 Compared to 2010												2010 Compared to 2009
		Increase (Decrease) Due To												Increase (Decrease) Due To
		Volume				Rate				Net				Volume				Rate				Net
Interest income on:
Loans		$	7,550				(148	)		$	7,402			$	9,113			$	(27	)		$	9,086
Investment securities:
Taxable			(43,196	)			(554	)			(43,750	)			21,600				(144	)			21,456
Exempt from Federal income tax			7,830				63				7,893				9,802				(36	)			9,766
Securities available for sale:
Taxable			118,244				920				119,164				(17,986	)			(83	)			(18,069	)
Other interest earning assets			20,650				11				20,661				33,084				16				33,100
Federal funds sold and securities purchased under agreements to resell			(6,199	)			(2	)			(6,201	)			(27,921	)			(9	)			(27,930	)
Total		$	104,879			$	290			$	105,169			$	27,692			$	(283	)		$	27,409
Interest expense on:
Int DDA’s & Savings deposits		$	56,214			$	12			$	56,226			$	74,112			$	(30	)		$	74,082
Time deposits			6,680				(105	)			6,575				(4,487	)			(117	)			(4,604	)
Federal funds purchased, and securities sold under agreements to repurchase			3,925				(1	)			3,924				(2,454	)			(4	)			(2,458	)
Total		$	66,819			$	(94	)		$	66,725			$	67,171			$	(151	)		$	67,020
Changes in net interest income-tax equivalent		$	38,060			$	384			$	38,444			$	(39,479	)		$	(132	)		$	(39,611	)

The increase (decrease) due to changes in average balances reflected in the above table was calculated by applying the preceding year’s rate to the current year’s change in the average balance. The increase (decrease) due to changes in average rates was calculated by applying the current year’s change in the average rates to the current year’s average balance. Using this method of calculating increases (decreases), any increase or decrease due to both changes in average balances and rates is reflected in the changes attributable to average rate changes.

TABLE 3
SECURITIES AVAILABLE FOR SALE AND PORTFOLIO SECURITIES
(Dollars in Thousands)

The available for sale classification of securities, established January 1, 1994 includes all portfolio securities which management believes are subject to sale prior to their contractual maturities and are stated at the lower of amortized cost or aggregate market value. Investment securities include all portfolio securities that the Company intends to hold to maturity and are carried at amortized cost. The carrying amounts of securities available for sale and portfolio securities are presented as of the dates indicated.

		March 31,
		2011				2010				2009
Securities available for sale
U. S. Treasury and other U. S. Government agencies		$	178,749			$	27,268			$	56,245
Obligations of states and political subdivisions			—				—				—
Mortgage-backed securities			—				—				—
Other securities			125				153				72
Total securities available for sale		$	178,874			$	27,421			$	56,317
Investment securities
U. S. Treasury and other U. S. Government agencies		$	66,610			$	136,205			$	82,009
Obligations of states and political subdivisions			29,526				22,270				9,602
Mortgage-backed securities			—				—				—
Other securities			900				900				600
Total investment securities			97,036				159,375				92,211
Total securities available for sale and investment securities		$	275,910			$	186,796			$	148,528

TABLE 4
MATURITY DISTRIBUTION AND YIELDS OF SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES
(Dollars in Thousands)

The following table shows the maturities and weighted average yields of the Company’s securities available for sale and investment securities at March 31, 2011:

		Maturing
										After								After 5 Yrs
		Within								1 Yr But								But Within								After 10 Yrs.
		1 Year								Within 5 Yrs								10 Yrs																Carrying
		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield				Amount
Securities available for sale
U.S. Treasury and other U.S. Government agencies		$	—				0.00	%		$	10,010				1.38	%		$	168,739				3.05	%		$	—				0.00	%		$	178,749
Other securities			125				0.00	%			—				0.00	%			—				0.00	%			—				0.00	%			125
Total securities available for sale		$	125				0.00	%		$	10,010				1.38	%		$	168,739				3.05	%		$	—				0.00	%		$	178,874
Investment securities
U.S. Treasury and other U.S. Government agencies		$	2,000				3.05	%		$	42,506				2.31	%		$	22,104				2.30	%		$	—				0.00	%		$	66,610
Obligations of states and political subdivisions			1,036				4.66	%			14,124				4.08	%			10,341				4.24	%			4,025				5.92	%			29,526
Other securities			900				0.00	%			—				0.00	%			—				0.00	%			—				0.00	%			900
Total investment securities		$	3,936				3.50	%		$	56,630				2.87	%		$	32,445				2.99	%		$	4,025				5.92	%		$	97,036
Total securities available for sale and investment securities		$	4,061				3.50	%		$	66,640				2.78	%		$	201,184				3.04	%		$	4,025				5.92	%		$	275,910

At March 31, 2011, the Company held investment securities issued by the State of Mississippi with an aggregate carrying amount of $27.9 million and a market value of $28.6 million. The yield on obligations of states and and political subdivisions has been calculated on a fully tax equivalent basis.

TABLE 5
SECURITIES ANALYSIS

		SECURITIES AVAILABLE-FOR-SALE																	SECURITIES HELD-TO-MATURITY
		MARCH 31, 2011																	MARCH 31, 2011
						GROSS				GROSS													GROSS				GROSS
						UNREALIZED				UNREALIZED													UNREALIZED				UNREALIZED
		AMORTIZED COST				GAINS				LOSSES				FAIR VALUE					AMORTIZED COST				GAINS				LOSSES				FAIR VALUE
U S GOVERNMENT AND AGENCY SECURITIES		$	182,355			$	99			$	(3,705	)		$	178,749				$	66,610			$	971			$	—			$	67,581
STATE AND MUNICIPAL SECURITIES			—				—				—				—					29,526				793				(128	)			30,191
OTHER SECURITIES			72				53				—				125					900				—				—				900
TOTAL		$	182,427			$	152			$	(3,705	)		$	178,874				$	97,036			$	1,764			$	(128	)		$	98,672
		SECURITIES AVAILABLE-FOR-SALE																	SECURITIES HELD-TO-MATURITY
		MARCH 31, 2010																	MARCH 31, 2010
						GROSS				GROSS													GROSS				GROSS
						UNREALIZED				UNREALIZED													UNREALIZED				UNREALIZED
		AMORTIZED COST				GAINS				LOSSES				FAIR VALUE					AMORTIZED COST				GAINS				LOSSES				FAIR VALUE
U S GOVERNMENT AND AGENCY SECURITIES		$	27,111			$	194			$	(37	)		$	27,268				$	136,205			$	684			$	(511	)		$	136,378
STATE AND MUNICIPAL SECURITIES			—				—				—				—					22,270				581				(98	)			22,753
OTHER SECURITIES			72				81				—				153					900				—				—				900
TOTAL		$	27,183			$	275			$	(37	)		$	27,421				$	159,375			$	1,265			$	(609	)		$	160,031
		SECURITIES AVAILABLE-FOR-SALE																	SECURITIES HELD-TO-MATURITY
		MARCH 31, 2009																	MARCH 31, 2009
						GROSS				GROSS													GROSS				GROSS
						UNREALIZED				UNREALIZED													UNREALIZED				UNREALIZED
		AMORTIZED COST				GAINS				LOSSES				FAIR VALUE					AMORTIZED COST				GAINS				LOSSES				FAIR VALUE
U S GOVERNMENT AND AGENCY SECURITIES		$	56,239			$	200			$	(215	)		$	56,224				$	82,009			$	1,552			$	—			$	83,561
STATE AND MUNICIPAL SECURITIES			—				—				—				—					9,602				276				(20	)			9,858
OTHER SECURITIES			72				22				—			$	94					600				—				—				600
TOTAL		$	56,311			$	222			$	(215	)		$	56,318				$	92,211			$	1,828			$	(20	)		$	94,019

TABLE 6
LOAN PORTFOLIO
(Dollars in Thousands)

Loans outstanding at the end of the first quarter indicated are shown in the following table classified by type of loans:

		2011				2010				2009
Commercial & Industrial		$	24,467			$	26,386			$	27,648
Real Estate			162,297				149,492				136,680
Consumer Loans			27,822				33,939				35,527
Other Loans			4,014				6,629				5,486
Total Loans		$	218,600			$	216,446			$	205,341

TABLE 7
LOAN MATURITIES & INTEREST RATE SENSITIVITY
(Dollars in Thousands)

The following table shows the amount of loans outstanding as of March 31, 2011 (excluding those in non-accrual status ) based on the scheduled repayments of principal:

Remaining Maturity Fixed Rate
3 months or less		$	24,134
Over 3 months through 12 months			31,394
Over 1 year through 5 years			148,340
Over 5 years			6,015
Over 1 year but variable rate			3,298
Total Loans		$	213,181

TABLE 8
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)

The following table outlines the activity for the allowance for loan losses for the past three years:

		Quarter ended March 31,
		2011				2010				2009
Beginning Balance		$	3,268			$	3,100			$	3,100
Charge Offs:
Commercial & Industrial			—				43				9
Real Estate			195				30				16
Consumer			157				230				117
Other			—				—				—
Total Charge Offs			352				303				142
Recoveries:
Commercial & Industrial			—				17				5
Real Estate			2				17				—
Consumer			108				137				63
Other
Total Recoveries			110				171				68
Net Charge Offs			242				132				74
Provision for Possible Losses			242				132				74
Ending Balance		$	3,268			$	3,100			$	3,100
Total Loans Outstanding		$	218,600			$	216,446			$	205,341
Average daily loans		$	219,836			$	212,286			$	203,173