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Table of Contents

 
 
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
For the quarterly period ended September 30, 2011
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
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
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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). þ 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 (Do not check if a smaller reporting company)   Smaller reporting company) þ
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 November 10, 2011, 1,330,338 shares of Common Stock were outstanding.
 
 

 

 


 

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 EX-31.1
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 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

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Part I. Financial Information
Item 1.  
Financial Statements
MERCHANTS &MARINE BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
                 
    (Unaudited)     (Audited)  
    September 30,     December 31,  
    2011     2010  
ASSETS
               
Cash and due from banks
  $ 65,025,879       20,010,142  
Federal funds sold
    97,000       3,147,000  
Securities:
               
Available-for-sale, at fair value
    120,926,893       116,333,500  
Held-to-maturity, at amortized cost
    97,981,329       112,981,596  
Non-marketable equity securities
    900,060       900,060  
Loans, less allowance for loan losses of $3,203,453 and $3,268,217, respectively
    210,422,442       216,470,346  
Property and equipment, net of depreciation
    15,115,572       15,727,476  
Other real estate owned
    2,403,923       2,275,723  
Accrued income
    2,464,423       2,401,057  
Other assets
    13,903,946       13,148,056  
 
           
Total assets
  $ 529,241,467       503,394,956  
 
           
 
               
LIABILITIES
               
Deposits:
               
Non-interest bearing demand
  $ 93,714,858       79,071,965  
Interest bearing savings, demand and other time deposits
    349,910,160       349,129,145  
 
           
Total deposits
    443,625,018       428,201,110  
Federal funds purchased and securities sold under agreements to repurchase
    17,800,775       13,729,528  
Accrued expense and other liabilities
    11,092,677       9,113,767  
 
           
Total liabilities
    472,518,470       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
    41,257,891       39,013,928  
Accumulated other comprehensive income (loss):
               
Unrealized gain (loss) on securities available for sale
    210,503       (1,917,980 )
Unrealized (loss) on defined benefit pension plan
    (2,571,242 )     (2,571,242 )
 
           
Total stockholders’ equity
    56,722,997       52,350,551  
 
           
Total liabilities and stockholders’ equity
  $ 529,241,467       503,394,956  
 
           
See accompanying notes to condensed consolidated financial statements.

 

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MERCHANTS &MARINE BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
Interest income
                               
Interest and fees on loans
  $ 3,488,935       3,452,337       10,293,580       10,446,813  
Interest on investment securities:
                               
Taxable
    1,357,917       1,336,742       4,682,944       3,920,788  
Exempt from federal and state income tax
    262,391       197,354       686,156       511,086  
Interest on federal funds sold
    21,468       12,947       59,151       52,163  
Other interest income
    14,655       8,698       17,539       115,294  
 
                       
Total interest income
    5,145,366       5,008,078       15,739,370       15,046,144  
 
                       
 
                               
Interest expense
                               
Interest on deposits
    694,561       858,791       2,403,723       2,773,932  
Interest on federal funds purchased and securities sold under agreements to repurchase
    7,435       5,610       19,215       17,634  
 
                       
Total interest expense
    701,996       864,401       2,422,938       2,791,566  
 
                       
 
                               
Net interest income
    4,443,370       4,143,677       13,316,432       12,254,578  
Provision for loan losses
    499,009       208,819       1,807,286       584,925  
 
                       
Net interest income after provision for loan losses
    3,944,361       3,934,858       11,509,146       11,669,653  
 
                       
 
                               
Non-interest income
                               
Service charges on deposit accounts
    1,173,321       1,192,559       3,441,576       3,338,876  
Miscellaneous
    762,305       1,175,848       1,779,497       2,428,374  
 
                       
Total non-interest income
    1,935,626       2,368,407       5,221,073       5,767,250  
 
                       
 
                               
Non-interest expense
                               
Salaries and employee benefits
    2,003,091       2,024,877       5,400,288       5,946,600  
Premises
    687,982       797,409       2,043,322       2,343,928  
Services and fees expense
    510,940       502,806       1,440,063       1,611,569  
Miscellaneous
    1,038,450       891,814       3,233,516       2,772,645  
 
                       
Total non-interest expense
    4,240,463       4,216,906       12,117,189       12,674,742  
 
                       
 
                               
Income before income taxes
    1,639,524       2,086,359       4,613,030       4,762,161  
Provision for income taxes
    425,779       636,055       1,304,796       1,388,414  
 
                       
Net income
  $ 1,213,745       1,450,304       3,308,234       3,373,747  
 
                       
 
                               
Net income per common share
  $ 0.91       1.09       2.49       2.54  
 
                       
See accompanying notes to condensed consolidated financial statements.

 

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MERCHANTS &MARINE BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
 
                               
Net income
  $ 1,213,745       1,450,304       3,308,234       3,373,747  
 
                               
Other comprehensive income, net of tax:
                               
Unrealized holding gain (loss) arising during period
    (189,267 )     82,019       2,128,483       102,022  
 
                       
   
Comprehensive income
  $ 1,024,478       1,532,323       5,436,717       3,475,769  
 
                       
See accompanying notes to condensed consolidated financial statements.

 

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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
                      3,308,234        
 
                                       
Cash dividends, $.25 per share
                      (1,064,271 )      
 
                                       
Change in unrealized gain (loss) on securities available-for-sale, net of taxes of $1,096,491
                            2,128,483  
 
                             
 
                                       
Balance, September 30, 2011
    1,330,338     $ 3,325,845       14,500,000       41,257,891       (2,360,739 )
 
                             
See accompanying notes to condensed consolidated financial statements.

 

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MERCHANTS &MARINE BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
                 
    Nine Months Ended September 30,  
    2011     2010  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
  $ 3,308,234       3,373,747  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    944,022       1,067,124  
Provision for loan losses
    1,807,286       584,925  
(Accretion) amortization of securities premium/discount
    99,128       75,300  
(Gain) loss on sale of assets
    17,275       (681,652 )
(Gain) on sale of securities
    (357,958 )     (350,761 )
(Increase) decrease in accrued income
    (63,366 )     105,495  
Reinvested earnings on securities
    (2,621 )     (1,581 )
(Decrease) in interest payable
    (53,675 )     (22,661 )
Other, net
    579,305       2,783,992  
 
           
Net cash provided by operating activities
    6,277,630       6,933,928  
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Net decrease in federal funds sold and securities purchased under agreements to resell
    3,050,000       6,380,000  
Proceeds from sales and maturities of securities available-for-sale
    180,766,740       66,632,500  
Purchase of securities available-for-sale
    (181,654,370 )     (138,326,691 )
Proceeds from maturities of securities held to maturity
    31,365,000       118,820,000  
Purchase of securities held-to-maturity
    (16,584,071 )     (100,186,317 )
Net (increase) decrease in loans
    3,768,618       (6,912,836 )
Purchase of property and equipment
    (332,118 )     (107,048 )
Proceeds from sale of assets
    326,525       710,940  
 
           
Net cash provided (used) by investing activities
    20,706,324       (52,989,452 )
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net increase in deposits
    15,423,908       50,774,069  
Net increase in federal funds purchased and securities sold under agreements to repurchase
    4,071,247       5,655,639  
Dividends paid
    (1,463,372 )     (1,463,372 )
 
           
Net cash provided by financing activities
    18,031,783       54,966,336  
 
           
 
               
Net increase in cash and due from banks
    45,015,737       8,910,812  
Cash and due from banks, beginning
    20,010,142       14,451,113  
 
           
Cash and due from banks, ending
  $ 65,025,879       23,361,925  
 
           
See accompanying notes to condensed consolidated financial statements.

 

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MERCHANTS &MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of and for the Nine Months Ended September 30, 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

 

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MERCHANTS &MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of and for the Nine Months Ended September 30, 2011
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):
                                 
    September 30, 2011     December 31, 2010  
    Carrying             Carrying        
    Amount     Fair Value     Amount     Fair Value  
Financial assets:
                               
Cash and federal funds sold
  $ 65,123       65,123       23,157       23,157  
Securities:
                               
Available-for-sale
    120,927       120,927       116,334       116,334  
Held-to-maturity
    97,981             112,982       114,389  
Non-marketable
    900       900       900       900  
Loans, net of allowance
    210,422             216,470       216,162  
 
                               
Financial liabilities:
                               
Deposits
    443,625             428,201       428,195  
Federal funds purchased and securities sold under agreements to repurchase
    17,801       17,801       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.

 

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MERCHANTS &MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of and for the Nine Months Ended September 30, 2011
3. DEFINED BENEFIT PENSION PLAN (Continued)
The following table presents information regarding the plan’s net periodic benefit cost for the periods presented (in thousands):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
Net periodic benefit cost (income):
                               
Service cost
  $ 95       101       286       303  
Interest cost
    150       151       449       453  
Expected return on plan assets
    (181 )     (165 )     (544 )     (495 )
Amortization (gain) loss
    65       68       194       204  
 
                       
Net periodic pension expense
  $ 129       155       385       465  
 
                       
4. BUSINESS COMBINATION
On August 3, 2011, Merchants & Marine Bank entered into a Purchase and Assumption Agreement to acquire approximately $55 million of assets and certain liabilities of the branch offices of Heritage First Bank located in Crossville and Gulf Shores, Alabama. The Agreement is subject to regulatory approvals and is expected to close during the fourth quarter of 2011.
5. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through November 10, 2011, the date of issuance of the condensed consolidated financial statements. No material subsequent events have occurred since September 30, 2011 that required recognition or disclosure in the condensed consolidated financial statements.

 

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Executive Summary
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 bankruptcies, 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.

 

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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, industrial and personal consumer financing. U.S. Banker magazine has ranked the Bank as one of the Top 200 Community Banks in the nation. Bauer Financial has given the Bank a 5-Star rating for the 72nd consecutive quarter indicating that the 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 September 30, 2011, the Company’s assets totaled $529 million and it employed 131 persons on a full-time equivalent basis.
Hurricane Katrina hit the Mississippi Gulf Coast on August 29, 2005. Katrina’s widespread 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 third quarter of 2011 was $1,214,000, compared to $1,450,000 in 2010, a decrease of 16.3%. Year-to-date net income at September 30, 2011 was $3,308,000, compared to $3,374,000 for the same period of 2010, a decrease of 2.0% and compared to $2,446,000 for the same period of 2009. The following discussions, tables and the accompanying financial statements outline the change in earnings from the first three quarters of 2011, 2010 and 2009. Return on average assets for the first three quarters of 2011, 2010 and 2009 was 0.8%, 0.9% and 0.7%, respectively. Return on average equity was 8.1%, 8.7% and 6.6%, in the first three quarters of 2011, 2010 and 2009, respectively. Year to date earnings per share in the first nine months of 2011, 2010 and 2009 were $2.49, $2.54 and $1.84, respectively.
Earning Assets
A detailed comparison of the Company’s average earning assets for the third quarters of 2011, 2010 and 2009 are presented in Table 1 of this report. The Company’s interest-earning assets include loans, investments, federal funds sold and Federal Reserve balances. Average interest-earning assets for the first three quarters of 2011 totaled $506,780,000 compared to $451,367,000 for the same period of 2010, an increase of 12.3% and compared to $405,285,000 for the same period of 2009. Average net loans increased by $5,142,000 in the first three quarters of 2011 or 2.4%, compared to increases of 3.2% and 4.3% for the same periods of 2010 and 2009, respectively. Average securities increased by $48,595,000, or 24.5% and $36,102,000 or 22.2% in the first three quarters of 2011 and 2010, compared to a decrease of 12.8% for the first three quarters of 2009, respectively. Average federal funds sold decreased by $8,523,000 or 98.9% and $26,360,000 or 75.4% for the nine months ended September 30, 2011 and 2010, compared to an increase of $4,181,000 or 13.6% at for the nine months ended September 30, 2009, respectively. Other earning assets consist of balances maintained in a Federal Reserve excess balance account. The average balance for the first three quarters of 2011 totaled $39,909,000 compared to $29,810,000 for the first three quarters of 2010. A detailed comparison of the Company’s average interest-earning assets for the first three quarters of years 2011, 2010 and 2009 is presented in Table 1 of this report.
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 interest-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.

 

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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 interest margin, on a tax equivalent basis, was 3.2%, 3.2% and 3.3% for the third quarter of 2011, 2010 and 2009, respectively. The decrease in 2010 is attributable to the decreases in rates of return on interest earning assets compared to 2009. Tax equivalent net interest income increased by 9.4% and 5.9% in the first three quarters of 2011 and 2010, compared to a decrease of 11.1% in 2009.
Average net loans increased by 2.4% in the first three quarters of 2011 and loan interest income decreased by 1.5% for the same period. Loan yields in the first three quarters of 2011 decreased by 25 basis points, compared to 2010 yields of the same period, as a result of lower market rates for the period. Loan yields respond to many factors, including cuts in the prime interest rate, Federal Reserve rate reductions and competition. Yields on taxable securities also decreased as market rates were lower for the 2011 period compared to 2010. Yields on tax-exempt securities increased by 41 basis points as maturing securities were reinvested in lower rate securities. The average volume of all securities at third quarter-end 2011 and 2010 increased by $48,595,000, or 24.5%, and $36,102,000, or 22.2%, compared to a decrease of $23,859,000, or 12.8%, for the same period in 2009. The increases in 2011 and 2010 are attributed to increases in public deposit volumes. Total securities income increased 21.2% at third quarter-end 2011, compared to decreases of 2.2% at third quarter-end 2010 and 29.3% at third quarter-end 2009, respectively. The increase in 2011 is attributed to higher volumes. The average balances of federal funds sold decreased by $8,523,000 and $26,360,000 for the third quarters of 2011 and 2010 and increased by $4,181,000 for the third quarter of 2009, respectively. Income from these funds decreased by 100.0%, 85.1% and 92.0%, in the first three quarters of 2011, 2010 and 2009, respectively. This decrease in the first three quarters of 2011 and 2010 is attributable to reinvesting a large portion of excess funds into a Federal Reserve Excess Balance Account (“EBA”) account, shown as other earning assets in Table 1.
Total average interest-bearing liabilities increased by 12.8% and 16.3% in the first three quarters of 2011 and 2010, compared to a decrease of 3.8% in the first three quarters of 2009. Rates paid on these funds decreased by 24, 65 and 60 basis points in the first three quarters of 2011, 2010 and 2009, respectively. The decrease in rates paid resulted in a decrease of interest expense of 13.2% for the first three quarters of 2011, compared to decreases of 28.5% and 29.2% for the same periods of 2010 and 2009, respectively. Interest-bearing checking, money market funds and savings accounts average balances increased by $42,712,000 at third quarter-end 2011, compared to an increase of $53,043,000 at third quarter-end 2010, compared to third quarter-end 2009. Interest expense on these funds decreased 5.0%, 28.3% and 33.3%, at third quarter-end 2011, 2010 and 2009, respectively. Average time deposit balances increased by 0.1% in the first three quarters of 2011, compared to a decrease of 1.1% in the first three quarters of 2010 and an increase of 5.8% in the first three quarters of 2010. The average rate paid on these funds was 1.5%, 1.9% and 2.9% for the first three quarters of 2011, 2010 and 2009, respectively. Interest expense on time deposits decreased 20.2%, 36.5% and 20.5% in the first three quarters of 2011, 2010 and 2009, respectively. The decreases are a result of lower rates paid. Average federal funds purchased and securities sold under agreements to repurchase increased by 30.5% in the first three quarters of 2011, compared to decreases of 9.0% and 36.2% in the first three quarters of 2010 and 2009, respectively. Rates on these funds decreased by 4, 11 and 161 basis points and interest expense increased by 5.6% in the first three quarters of 2011, compared to decreases of 41.9% and 89.3% in the first three quarters of 2010 and 2009, respectively. The increase in interest expense in 2011 is due to higher volumes. Tables 1 and 2 provide more information on the Company’s net interest income, rate and volume variances.

 

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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 Company’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 falling-rate environment, the Company’s net interest margin should increase. 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 43.3%, 47.4% and 51.3%, for the first three quarters of 2011, 2010 and 2009, respectively. The average loan-to-deposit ratio was 46.0%, 50.0% and 54.7% at the end of the first three quarters of 2011, 2010 and 2009, respectively. Average net loans increased by $5,142,000 or 2.4%, when comparing third quarter-end 2011 to 2010, while average net loans increased by $6,630,000 or 3.2%, when comparing third quarter-end 2010 to 2009.
Commercial and industrial loans decreased by $4,156,000 at third quarter-end 2011 compared to an increase of $5,733,000 at third quarter-end 2010 and a decrease of $1,101,000 at third quarter-end 2009. Real estate loans increased from $144,595,000 at third quarter-end 2009 to $154,527,000 at third quarter-end 2010 and $159,995,000 at third quarter-end 2011. Consumer loans decreased from $42,178,000 at third quarter-end 2009 to $29,330,000 at third quarter-end 2010 and decreased further to $25,327,000 at third quarter-end 2011. Other loans totaled $599,000, $1,084,000 and $375,000, for third quarter-ended 2011, 2010 and 2009, respectively. See Tables 6 and 7 for a comparison of the loan portfolio’s composition and maturity breakdown.
Allowance for Loan Losses
Historical losses, trends and management’s opinion of the adequacy of the allowance for loan losses (“ALL”) 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 the third quarter-end 2011, 1.4% at third quarter-end 2010 and 1.5% at third quarter-end 2009.

 

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The Company immediately charges off any loan when it is determined to be uncollectible. However, experience shows that certain losses exist in the portfolio that have not been identified. The allowance is allocated to absorb losses on all loans and is not restricted to any one group of loans. Company management has determined that the balance of the ALL is adequate to cover potential future losses. If economic conditions deteriorate beyond management’s current expectations for the ALL, an increase to provision for loan losses may be necessary. The provision for loan losses totaled $1,807,000 for the first three quarters of 2011, compared to $585,000 for the first three quarters of 2010 and compared to $439,000 for the first three quarters of 2009. The increase in the loan loss provision for third quarter-end 2011 was due to the write down of a few large commercial customers. See Tables 8 and 9 for a detailed analysis of the Company’s ALL.
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.
Company management assesses the adequacy of the ALL prior to the end of each 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. 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 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 on-going 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 fair value of underlying collateral.

 

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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 Company expansion.
Total non-performing assets totaled $5,910,000, $8,528,000 and $3,158,000, at third quarter-end 2011, 2010 and 2009, respectively. Non-performing assets, as a percentage of total loans, were 2.8% at third quarter-end 2011, 3.9% at third quarter-end 2010 and 1.5% at third quarter-end 2009. Non-accrual loans and accruing loans over 90 days past due totaled $3,506,000 or 1.6% of total loans, $6,517,000 or 3.0% of total loans and $2,920,000 or 1.4% of total loans, at third quarter-end 2011, 2010 and 2009, respectively. The large increase in non-accrual loans in 2010 was due to problem loans with a few commercial customers. Other real estate totaled $2,404,000 or 1.1% of total loans, at quarter-end 2011, $2,011,000 or 0.9% of total loans, at third quarter-end 2010 and $238,000 or 0.1% of total loans, at third quarter-end 2009. Due to the economic downturn, mortgage foreclosure rates contributed to the increase in other real estate in 2010 and 2011. 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. Securities had carrying values totaling $219,808,000, $231,675,000 and $190,263,000 at third quarter-end 2011, 2010 and 2009, respectively. Detailed information about the Company’s securities portfolio composition yields and maturity distribution is shown in tables 3, 4 and 5 of this report.
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 affords 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 $211,000 and $317,000 were included in stockholder’s equity at third quarter-end 2011 and 2010, compared to unrealized losses, net of taxes of $215,000, which were included in stockholders’ equity at third quarter-end 2009. 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 and securities sold under agreements to repurchase.

 

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Yields on taxable securities decreased as market rates were lower for the 2011 period compared to 2010. Yields on tax-exempt securities decreased by 41 basis points as maturing securities were reinvested in lower rate securities. The average volume of all securities, at third quarter-end 2011 and 2010, increased by $48,595,000 or 24.5% and $36,102,000 or 22.2%, compared to a decrease of $23,859,000 or 12.8% for the same period of 2009. The increases in 2011 and 2010 are attributed to increases in deposit volumes for the period. Total securities income increased 21.2% at third quarter-end 2011, compared to decreases of 2.2% and 29.3% at third quarter-end 2010 and 2009, respectively. The increase in 2011 is due to higher volumes and the decreases in 2010 and 2009 are attributed to lower rates earned. The average balance of federal funds sold decreased 98.9% and 75.4% for the first three quarters of 2011 and 2010 and increased 13.6% for the first three quarters of 2009. The decrease in the first three quarters of 2011 and 2010 are attributable to reinvesting a large portion of excess funds into a Federal Reserve EBA account. Income from these funds decreased by 100.0%, 85.1% and 92.0%, in the first three quarters of 2011, 2010 and 2009, respectively. The decreases in 2011 and 2010 are due to lower volumes where the decrease in 2009 is attributed to the 236 basis points decrease in rates earned on these funds.
Deposits
The Company’s primary funding source for loans and investments is its deposit base. Deposits consist of checking, saving 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 Bank. 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 for the first three quarters of 2011 and 2010 increased by $37,201,000 or 11.4% and $48,894,000 or 12.9%, compared to a decrease of $13,297,000 or 3.4%, in the first three quarters of 2009. The increases in 2011 and 2010 are due to new public deposit customers. 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 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 to meet unexpected cash needs and an inventory of readily marketable government securities.
Average federal funds purchases and securities sold under agreement to repurchase represented 3.1%, 2.6% and 3.4% of total average deposits for the nine months ended September 30, 2011, 2010 and 2009, respectively. See Table 13 for more information concerning the Company’s short-term borrowings.
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 lease contractual obligations. 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 under funded by $2,457,000, compared to an under-funded amount of $1,907,000 at year-end 2009. The under-funded 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.

 

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Off-Balance Sheet Arrangements
As of September 30, 2011, the Company had unfunded loan commitments outstanding of $32,287,000 and outstanding standby letters of credit of $731,000. 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 financial statements. These contractual obligations are detailed in Table 15.
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 20.0%, 19.5% and 20.8%, at third quarter-end 2011, 2010 and 2009, respectively. The Tier 1 risk-based was 18.9% at third quarter-end 2011, 18.4% at third quarter-end 2010 and 19.6% at third quarter-end 2009. The leverage ratio was 10.4% at third quarter-end 2011, 10.4% at third quarter-end 2010 and 11.6% at third quarter-end 2009.
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. The Company is considered to be well capitalized under regulatory definition.
Stockholders’ equity to total assets at third quarter-end 2011, 2010 and 2009 was 10.7%, 10.5% and 10.9%, respectively.
Non-Interest Income
Non-interest income includes service charges on deposit accounts, safe-deposit box rent, check cashing fees, data processing income, commissions and charges and other fees. Service charges on deposit accounts income increased 3.1% in the first three quarters of 2011, compared to an increase of 7.5% in the first three quarters of 2010 and a decrease of 4.8% in the first three quarters of 2009. The Company updated its pricing structure during the first quarter of 2011 and this change is reflected in the increase in service charge income in the first three quarters of 2011. The increase in 2010 is attributed to an increase in insufficient funds income. Miscellaneous income in the first three quarters of quarter-end 2011 decreased 35.2%, compared to a 2010 increase of 13.5% and a decrease of 18.3% in the first three quarters of 2009. The increase in 2010 is due to gain on the sale of other real estate owned property.
With deposit-related costs constantly increasing, the Company continues to analyze means to increase non-interest income.

 

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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.
Salary and employee benefits expense decreased 9.2% in the first three quarters of 2011, compared to increases of 1.1% and 7.9%, in the first three quarters of 2010 and 2009, respectively. The decrease in 2011 is due to a reduction in the number of full time equivalent employees and a lower defined benefit pension expense. The increases in 2010 and 2009 are attributed to increases in staffing levels, employee raises, and health insurance premiums. Premises expense decreased by 12.8% and 0.8% in the first three quarters of 2011 and 2010 and increased by 14.1% in the first three quarters of 2009. The decrease in 2011 is attributed to a reduction in property taxes on the main branch and depreciation expense overall. The increase in 2009 is due to the depreciation of two new branch offices. Miscellaneous expenses increased 16.2% at third quarter-end 2011, compared to decreases of 0.5% and 24.9% at third quarter-end 2010 and 2009, respectively. The decrease in 2011 is due to merchant fees absorbed on behalf of a public fund deposit customer. The large decrease in 2009 was due to a change in the computation of director’s deferred compensation and a reduction in professional fees.
Income Taxes
Income tax expense totaled $1,305,000, $1,388,000 and $1,106,000, for the third quarter-ended 2011, 2010 and 2009, respectively.

 

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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 three quarters ended September 30, 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
  $ 219,553     $ 10,294       6.25 %   $ 214,411     $ 10,447       6.50 %   $ 207,781     $ 10,534       6.76 %
Securities held to maturity:
                                                                       
Taxable
    72,118       1,299       2.40 %     133,322       2,974       2.97 %     97,754       3,091       4.22 %
Exempt from Federal income tax
    29,835       686       3.07 %     22,017       575       3.48 %     12,583       319       3.38 %
Securities available for sale:
                                                                       
Taxable
    145,268       3,384       3.11 %     43,287       882       2.72 %     52,187       1,122       2.87 %
Other interest earning assets
    39,909       76       0.25 %     29,810       67       0.30 %                 0.00 %
Federal funds sold and securities purchased under agreements to resell
    97             0.00 %     8,620       7       0.11 %     34,980       47       0.18 %
 
                                                     
   
Total interest-earning assets
  $ 506,780     $ 15,739       4.14 %   $ 451,467     $ 14,952       4.42 %   $ 405,285     $ 15,113       4.97 %
Non interest earning assets:
                                                                       
Cash and due from banks
    17,508                       17,138                       16,804                  
Bank premises and equipment
    15,444                       16,337                       17,568                  
Other assets
    18,936                       18,341                       14,136                  
Allowance for possible loan losses
    (3,182 )                     (3,098 )                     (3,085 )                
 
                                                                 
   
Total assets
  $ 555,486                     $ 500,185                     $ 450,708                  
 
                                                                 

 

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TABLE 1 CONTINUED
COMPARATIVE AVERAGE BALANCES — YIELDS AND RATES (continued)
(Dollars in Thousands)
                                                                         
    2011     2010     2009  
            Interest     Average             Interest     Average             Interest     Average  
    Average     Income/     Yield/     Average     Income/     Yield/     Average     Income/     Yield/  
Liabilities   Balance     Expense     Rate     Balance     Expense     Rate     Balance     Expense     Rate  
   
Interest-bearing liabilities:
                                                                       
INT DDA, MMF & Savings
  $ 283,191     $ 1,191       0.56 %   $ 240,479     $ 1,254       0.70 %   $ 187,436     $ 1,481       1.05 %
Time deposits
    108,600       1,213       1.49 %     108,531       1,520       1.87 %     109,760       2,395       2.91 %
Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings
    15,168       19       0.17 %     11,623       18       0.21 %     12,771       31       0.32 %
 
                                                     
 
                                                                       
Total interest-bearing liabilities
  $ 406,959     $ 2,423       0.79 %   $ 360,633     $ 2,792       1.03 %   $ 309,967     $ 3,907       1.68 %
 
                                                                       
Noninterest-bearing liabilities:
                                                                       
Deposits
    85,497                       79,454                       82,374                  
Other liabilities
    9,359                       8,506                       8,945                  
 
                                                                       
Total liabilities
    501,815                       448,593                       401,286                  
Stockholder’s equity
    53,671                       51,592                       49,422                  
 
                                                                 
 
                                                                       
Total liabilities and stockholders’ equity
  $ 555,486                     $ 500,185                     $ 450,708                  
 
                                                                 
 
                                                                       
Net interest income/margin-tax equivalent
          $ 13,316       3.20 %           $ 12,160       3.24 %           $ 11,206       3.32 %
 
                                                                       
Tax equivalent adjustment:
                                                                       
Loans
            87                       115                       155          
Investment securities
            686                       575                       223          
Securities available for sale
                                                                       
 
                                                                       
Total tax equivalent adjustment
            773                       690                       378          
 
                                                                 
Net interest income
          $ 12,543                     $ 11,470                     $ 10,828          
 
                                                                 

 

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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 September 30, 2011  
    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
  $ 5,142     $ (153 )   $ 4,989     $ 6,630     $ (87 )   $ 6,543  
Investment securities:
                                               
Taxable
    (61,204 )     (1,675 )     (62,879 )     35,568       (117 )     35,541  
Exempt from Federal income tax
    7,818       111       7,929       9,434       256       9,690  
Securities available for sale:
                                               
Taxable
    101,981       2,502       104,483       (8,900 )     (240 )     (9,140 )
Other interest earning assets
    10,099       9       10,108       30,710       67       30,777  
Federal funds sold and securities purchased under agreements to resell
    (8,523 )     (7 )     (8,530 )     (26,360 )     (40 )     (26,400 )
 
                                   
 
                                               
Total
  $ 55,313     $ 787     $ 56,100     $ 47,082       (161 )   $ 46,921  
 
                                   
 
                                               
Interest expense on:
                                               
Int DDA’s & Savings deposits
  $ 42,712     $ (63 )   $ 42,649     $ 53,043     $ (227 )   $ 52,816  
Time deposits
    69       (307 )     (238 )     (1,229 )     (875 )     (2,104 )
Federal funds purchased, and securities sold under agreements to repurchase
    3,545       1       3,546       (1,148 )     (13 )     (1,161 )
 
                                   
 
                                               
Total
  $ 46,326     $ (369 )   $ 45,957     $ 50,666     $ (1,115 )   $ 49,551  
 
                                   
 
                                               
Changes in net interest income-tax equivalent
  $ 8,987     $ 1,156     $ 10,143     $ (3,584 )   $ 954     $ (2,630 )
 
                                   
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 increases (decreases) 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.

 

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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.
                         
    SEPTEMBER 30,  
    2011     2010     2009  
Securities available for sale
                       
U. S. Treasury and other U. S. Government agencies
  $ 120,770     $ 105,405     $ 49,076  
Obligations of states and political subdivisions
                       
Mortgage-backed securities
                       
Other securities
    156       124       116  
 
                 
   
Total securities available for sale
  $ 120,926     $ 105,529     $ 49,192  
   
Portfolio securities
                       
U. S. Treasury and other U. S. Government agencies
  $ 52,516     $ 97,192     $ 123,456  
Obligations of states and political subdivisions
    45,466       28,054       16,715  
Mortgage-backed securities
                       
Other securities
    900       900       900  
 
                 
   
Total investment securities
  $ 98,882     $ 126,146     $ 141,071  
 
                 
   
Total securities available for sale and investment securities
  $ 219,808     $ 231,675     $ 190,263  
 
                 
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 September 30, 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 %   $       0.00 %     120,770       2.72 %           0.00 %   $ 120,770  
Other Securities
    156       0.71 %           0.00 %           0.00 %           0.00 %     156  
 
                                                     
 
                                                                       
Total securities available for sale
  $ 156       0.71 %   $       0.00 %   $ 120,770       2.72 %           0.00 %   $ 120,926  
 
                                                                       
Investment securities U.S. Treasury and other U.S. Government agencies
  $ 1,000       1.80 %   $ 31,506       1.99 %   $ 20,010       2.15 %           0.00 %   $ 52,516  
Obligations of states and political subdivisions
    1,753       4.16 %     14,568       4.03 %     14,907       4.26 %     14,238       5.25 %     45,466  
Other securities
    900       0.00 %           0.00 %           0.00 %           0.00 %     900  
 
                                                     
 
                                                                       
Total investment securities
  $ 3,653       3.49 %   $ 46,074       2.94 %   $ 34,917       3.08 %   $ 14,238       5.25 %   $ 98,882  
 
                                                     
 
                                                                       
Total securities available for sale and investment securities
  $ 3,809       3.49 %   $ 46,074       2.94 %   $ 155,687       2.80 %   $ 14,238       5.25 %   $ 219,808  
 
                                                     
At September 30, 2011, the Company held investment securities issued by the State of Mississippi with an aggregate carrying amount of $32.6 million and a market value of $34.5 million. The yield on obligations of states and political subdivisions has been calculated on a fully tax equivalent basis.

 

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TABLE 5
SECURITIES ANALYSIS
                                                                 
    SECURITIES AVAILABLE-FOR-SALE     SECURITIES HELD-TO-MATURITY  
    SEPTEMBER 30, 2011     SEPTEMBER 30, 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
  $ 120,536     $ 411     $ (177 )   $ 120,770     $ 52,516     $ 634     $     $ 53,150  
STATE AND MUNICIPAL SECURITIES
                            45,466       1,965       (113 )     47,318  
 
                                                               
OTHER SECURITIES
    72       84             156       900                   900  
 
                                               
 
                                                               
TOTAL
  $ 120,608     $ 495     $ (177 )   $ 120,926     $ 98,882     $ 2,599     $ (113 )   $ 101,368  
 
                                               
   
    SECURITIES AVAILABLE-FOR-SALE     SECURITIES HELD-TO-MATURITY  
    SEPTEMBER 30, 2010     SEPTEMBER 30, 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
  $ 104,977     $ 446     $ (18 )   $ 105,405     $ 97,192     $ 1,793     $     $ 98,985  
STATE AND MUNICIPAL SECURITIES
                            28,054       1,189       (2 )     29,241  
 
                                                               
OTHER SECURITIES
    72       52             124       900                   900  
 
                                               
 
                                                               
TOTAL
  $ 105,049     $ 498     $ (18 )   $ 105,529     $ 126,146     $ 2,982     $ (2 )   $ 129,126  
 
                                               
   
    SECURITIES AVAILABLE-FOR-SALE     SECURITIES HELD-TO-MATURITY  
    SEPTEMBER 30, 2009     SEPTEMBER 30, 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
  $ 48,787     $ 340     $ (51 )   $ 49,076     $ 123,456     $ 1,339     $ (38 )   $ 124,757  
STATE AND MUNICIPAL SECURITIES
                            16,715       592       (4 )     17,303  
 
                                                               
OTHER SECURITIES
    72       44             116       900                   900  
 
                                               
 
                                                               
TOTAL
  $ 48,859     $ 384     $ (51 )   $ 49,192     $ 141,071     $ 1,931     $ (42 )   $ 142,960  
 
                                               

 

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TABLE 6
LOAN PORTFOLIO
(Dollars in Thousands)
Loans outstanding at the end of the third quarter indicated are shown in the following table classified by type of loans:
                         
    2011     2010     2009  
 
                       
Commercial & Industrial
  $ 27,709     $ 31,868     $ 26,135  
Real Estate
    159,995       154,527       144,595  
Consumer Loans
    25,327       29,330       42,178  
Other Loans
    599       1,084       375  
 
                 
   
Total Loans
  $ 213,630     $ 216,809     $ 213,283  
 
                 
TABLE 7
LOAN MATURITIES & INTEREST RATE SENSITIVITY
(Dollars in Thousands)
The following table shows the amount of loans outstanding as of September 30, 2011 (excluding those in non-accrual status ) based on the scheduled repayments of principal:
         
Remaining Maturity Fixed Rate
       
3 months or less
  $ 17,437  
Over 3 months through 12 months
    38,495  
Over 1 year through 5 years
    141,390  
Over 5 years
    8,895  
   
Over 1 year but variable rate
    3,919  
 
     
 
       
Total loans
  $ 210,136  
 
     

 

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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 September 30,  
    2011     2010     2009  
   
Beginning Balance
  $ 3,268     $ 3,100     $ 3,100  
   
Charge Offs:
                       
Commercial & Industrial
          128       61  
Real Estate
    1,627       237       104  
Consumer
    502       762       515  
Other
                 
 
                 
Total Charge Offs
    2,129       1,127       680  
 
                       
Recoveries:
                       
Commercial & Industrial
    1       95       29  
Real Estate
    6       21        
Consumer
    250       387       212  
Other
                 
 
                 
Total Recoveries
    257       503       241  
 
                       
Net Charge Offs
    1,872       624       439  
Provision for Possible Losses
    1,807       585       439  
 
                 
 
                       
Ending Balance
  $ 3,203     $ 3,061     $ 3,100  
 
                 
 
                       
Total Loans Outstanding
  $ 213,630     $ 216,809     $ 213,283  
 
                 
Average daily loans
  $ 219,553     $ 214,411     $ 207,781  
 
                 
                         
    2011     2010     2009  
Percentages:
                       
Allowance for loan losses to end of quarter total loans
    1.5 %     1.4 %     1.5 %
Allowance for loan losses to average loans
    1.5 %     1.4 %     1.5 %
Allowance for loan losses to nonperforming assets
    54.2 %     35.9 %     98.2 %
Net charge offs to average loans
    0.9 %     0.3 %     0.2 %

 

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TABLE 9
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)
The following table represents the allocation of the allowance for loan losses by loan categories and is based on an analysis of individual credits, historical losses and other factors. This allocation is for analytical purposes only as the aggregate allowance is available to absorb losses on any and all loans.
                                                 
    September 30,  
    2011     2010     2009  
    % Gross     Loan Loss     % Gross     Loan Loss     % Gross     Loan Loss  
    Loans     Allowance     Loans     Allowance     Loans     Allowance  
    Outstanding     Allocation     Outstanding     Allocation     Outstanding     Allocation  
   
Commercial & Industrial
    6.01     $ 311       6.01     $ 184       7.00     $ 217  
Real Estate
    66.02       2,504       66.02       2,021       47.33       1,467  
Consumer
    24.11       328       24.11       738       36.34       1,126  
Other
    3.85       60       3.85       118       2.22       69  
Unallocated
                            7.12       221  
 
                                   
 
    100 %   $ 3,203       100 %   $ 3,061       100 %   $ 3,100  
 
                                         
TABLE 10
NONPERFORMING ASSETS
(Dollars in Thousands)
This table summarizes the amount of nonperforming assets at the end of the third quarter of the years indicated.
                         
    September 30,  
    2011     2010     2009  
Non-accrual Loans & Accruing Loans Past Due 90 Days or more
  $ 3,506     $ 6,517     $ 2,920  
Other Real Estate
    2,404       2,011       238  
 
                 
 
  $ 5,910     $ 8,528     $ 3,158  
 
                 
 
                       
Nonperforming Assets as % of Total Loans
    2.77 %     3.93 %     1.48 %
Non-accrual Loans & Loans Past Due 90 Days or More as % of Total Loans
    1.64 %     3.01 %     1.37 %

 

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TABLE 11
AVERAGE DEPOSITS
(Dollars in Thousands)
The daily average amounts of deposits for the periods indicated are summarized in the following table:
                         
    Quarter Ended September 30,  
    2011     2010     2009  
 
                       
Non-interest bearing deposits
  $ 85,497     $ 79,454     $ 82,374  
Interest-bearing deposits
    283,191       240,479       187,436  
Interest-bearing time deposits
    108,600       108,531       109,760  
 
                 
 
                       
Total
  $ 477,288     $ 428,464     $ 379,570  
 
                 
TABLE 12
TIME DEPOSITS OF $100,000 OR MORE, MATURITY DISTRIBUTION
(Dollars in Thousands)
Maturities of time certificates of deposits $100,000 or more outstanding at September 30, 2011 are summarized in the following table:
         
Time remaining until maturity
       
3 months or less
  $ 16,571  
Over 3 through 12 months
    35,930  
Over 12 months
    8,667  
 
     
 
       
Total
  $ 61,168  
 
     

 

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TABLE 13
SHORT-TERM BORROWINGS
(Dollars in Thousands)
The following table presents a summary of the Company’s short-term borrowings at September 30, for each of the last three years and the corresponding interest rates:
                                 
            Daily     Average     Maximum  
    September     Average     Interest     Month-End  
    Balance     Balance     Rate     Balance  
 
                               
2011
                               
Federal funds purchased and securities sold under agreements to repurchase
  $ 17,801     $ 15,168       0.17 %   $ 17,801  
 
                               
2010
                               
Federal funds purchased and securities sold under agreements to repurchase
  $ 14,089     $ 11,623       0.21 %   $ 14,089  
 
                               
2009
                               
Federal funds purchased and securities sold under agreements to repurchase
  $ 8,054     $ 12,771       0.32 %   $ 8,054  

 

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TABLE 14
INTEREST SENSITIVITY
(Dollars in Thousands)
The following table reflects the interest sensitivity of the Company over various periods as of September 30, 2011 based on contractual maturities as of that date:
                                         
    0-3     4-12     1-5     Over 5        
    Months     Months     Years     Years     Total  
   
Assets
                                       
Interest-earning assets:
                                       
Loans, net of unearned income
  $ 19,774     $ 39,196     $ 144,771     $ 9,889     $ 213,630  
Investment securities
    1,275       2,379       46,074       49,154       98,882  
Securities available for sale
    156                   120,770       120,926  
Other interest earnings assets
    50,251                         50,251  
Federal funds sold and securities purchased under agreements to resell
    97                         97  
 
                             
 
                                       
Total interest-earning assets
  $ 71,553     $ 41,575     $ 190,845     $ 179,813     $ 483,786  
 
                             
Noninterest-earning assets
                            45,455       45,455  
 
                                       
Total assets
  $ 71,553     $ 41,575     $ 190,845     $ 225,268     $ 529,241  
 
                             
 
                                       
Liabilities and stockholders’ equity
                                       
Interest-bearing liabilities:
                                       
Int DDAs, MMF, Savings deposits
  $ 29,470     $ 93,322     $ 122,793     $     $ 245,585  
Time deposits
    25,858       59,756       18,711             104,325  
Federal funds purchased, and securities sold under agreements to repurchase
    17,801                         17,801  
 
                             
 
                                       
Total interest-bearing liabilities
  $ 73,129     $ 153,078     $ 141,504     $     $ 367,711  
Noninterest-bearing deposits
    11,246       35,612       46,857             93,715  
Other liabilities
                            11,092       11,092  
Stockholders’ equity
                            56,723       56,723  
 
                             
 
                                       
Total liabilities and stockholders’ equity
  $ 84,375     $ 188,690     $ 188,361     $ 67,815     $ 529,241  
 
                             
 
                                       
Interest sensitive gap
  $ (12,822 )   $ (147,115 )   $ 2,484     $ 157,453          
Cumulative interest sensitive gap
  $ (14,061 )   $ (161,176 )   $ (158,692 )   $ (1,239 )        
Cumulative interest sensitive gap as a percent of total assets
    -2.66 %     -30.45 %     -29.98 %     -0.23 %        

 

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TABLE 15
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES, AND OFF-BALANCE SHEET ARRANGEMENTS
(Dollars In Thousands)
The following table presents, as of September 30, 2011, significant fixed and determinable contractual obligations to third parties by payment date:
                                         
    PAYMENTS DUE IN        
    ONE YEAR OR     ONE TO     THREE TO     OVER FIVE        
    LESS     THREE YEARS     FIVE YEARS     YEARS     TOTAL  
 
                                       
Deposits without a stated maturity
  $ 169,650     $ 84,825     $ 84,825     $     $ 339,300  
Consumer certificates of deposit
    85,614       13,101       5,610             104,325  
Federal funds borrowed & repurchase agreements
    17,801                         17,801  
Operating leases
                             
Purchase obligations
                             
 
                                       
COMMITMENTS
The following table details the amounts and expected maturities of significant commitments as of September 30, 2011:
                                         
    ONE YEAR OR     ONE TO     THREE TO     OVER FIVE        
    LESS     THREE YEARS     FIVE YEARS     YEARS     TOTAL  
 
                                       
Commitments to extend credit:
                                       
Commercial
  $ 6,009     $ 11     $     $     $ 6,020  
Residential real estate
    2,471                         2,471  
Revolving home equity and credit card lines
    10       586       410             1,006  
Other
    23,319       83                   23,402  
Standby letters of credit
    731                         731  

 

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Item 4.  
Controls and Procedures
Evaluation of disclosure controls and procedures — The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective.
Changes in Internal Controls — There were no changes in the Company’s internal control over financial reporting for the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Part II. Other Information
Item 1.  
Legal Proceedings
Other than ordinary routine litigation incidental to the business of the Company, there are no pending legal proceedings with regard to the Company as of the date hereof.
Item 1A.  
Risk Factors
There were no material changes to the Company’s risk factors as previously disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Item 2.  
Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3.  
Defaults Upon Senior Securities
None
Item 4.  
(Removed and Reserved)
Item 5.  
Other Information
None
Item 6.  
Exhibits
         
  31.1    
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  31.2    
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  32.1    
Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
 
  32.2    
Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
 
  101    
Interactive Data File

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  MERCHANTS & MARINE BANCORP, INC.
 
 
Date: November 14, 2011  By:   /s/ Royce Cumbest    
    Royce Cumbest, Chairman of the Board   
    President and Chief Executive Officer   
 
Date: November 14, 2011  By:   /s/ Elise Bourgeois    
    Elise Bourgeois, Senior Vice President,   
    Cashier and Chief Financial Officer   

 

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