MNMB Merchants and Marine Bancorp Inc (QX)

 

 

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

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). 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.

 

 

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			11
Item 4. Controls and Procedures			32
Part II. Other Information
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 3. Defaults Upon Senior Securities			33
Item 4. (Removed and Reserved)			33
Item 5. Other Information			33
Item 6. Exhibits			33
SIGNATURES			34
EX-31.1
EX-31.2
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

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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

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.

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