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EX-32 - EXHIBIT 32 - BOL BANCSHARES INCex32.htm
EX-31.1 - EXHIBIT 31.1 - BOL BANCSHARES INCex31_1.htm
EX-31.2 - EXHIBIT 31.2 - BOL BANCSHARES INCex31_2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
 
FORM 10-K
 
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010
COMMISSION FILE NUMBER 0-16934
 
BOL BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

LOUISIANA
 
72-1121561
(STATE OF INCORPORATION)
 
(IRS EMPLOYER IDENTIFICATION NO.)
 
   300 ST. CHARLES AVENUE, NEW ORLEANS, LA  70130
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
 
(504) 889-9400
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
   
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
 
Common Stock, par value $1.00 per share
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes o   No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o   No x
 
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 past 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.
Yes  x    No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company in Rule 12b-2 of the Exchange Act. 
 
  Large accelerated filer o Accelerated filer o  
  Non-accelerated filer o Smaller reporting company x  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).              Yes o    No x
 
As of March 29, 2011, the aggregate market value of the voting common equity stock held by non-affiliates of the registrant was $1,963,895.  For this purpose, certain executive officers and directors are considered affiliates.
 
The number of shares of Common Stock outstanding as of March 29, 2011 was 179,145.
 


 
 

 
 
       
   
Page
       
Part I
     
       
2
 
6
 
7
 
7
 
       
Part II
     
       
8
 
8
 
34
 
70
 
70
 
71
 
       
Part III
     
       
71
 
72
 
73
 
74
 
   
 
74
 
 
74
 
74
 
 
75
 
       
       
 
 
1

 
Here and after BOL Bancshares, Inc. shall be referred to as the Company and subsidiary Bank of Louisiana shall be referred to as the Bank.
 
History and General Business
The Company was organized as a Louisiana corporation on May 7, 1981, for the purpose of becoming a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”).  The Company remained inactive until April 29, 1988, when it acquired the Bank in a three-bank merger of the Bank of Louisiana in New Orleans (the “Old Bank”), Bank of the South (“South Bank”), and Fidelity Bank & Trust Company, all Louisiana state-chartered banks.  The Old Bank was the surviving bank in the merger and subsequently changed its name to the Bank’s current name.  The merger was originally accounted for as a “purchase”, but after discussions with the Securities and Exchange Commission, the accounting treatment of the merger was changed to a manner similar to a “pooling of interests”.  [Since the change in accounting treatment, the Company has recast its financial statements, to reflect “pooling” accounting.]  In addition, at the time of the bank’s merger, the Company merged with BOS Bancshares, Inc., a Louisiana corporation, and the registered bank holding company for South Bank.  The Company was the surviving entity in that merger.  The Company is the sole shareholder and registered bank holding company of the Bank. 
 
Other than owning and operating the Bank, the Company may also engage, directly or through subsidiary corporations, in those activities closely related to banking that are specifically permitted under the BHC Act.  See “Supervision and Regulation Enforcement Action”.  The Company, after acquiring the requisite approval of the Board of Governors of the Federal Reserve System (the “FRB”) and any other appropriate regulatory agency, may seek to engage de novo in such activities or to acquire companies already engaged in such activities.  The Bank has formed BOL Assets, LLC to engage in the permissible activity of holding real estate from loans which were in default and held past the FDIC’s time limits.  There can be no assurance, however, that the Company will not form or acquire any other entity in the future.  
 
 
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If the Company attempts to form or acquire other entities and engage in activities closely related to banking, the Company will be competing with other bank holding companies and companies currently engaged in the line of business or permissible activity in which the Company might engage, many of which have far greater assets and financial resources than the Company and a greater capacity to raise additional debt and equity capital.  See “Territory Served and Competition”.
 
Forward-Looking Statements are Subject to Change
We make certain statements in this document as to what we expect may happen in the future.  These statements usually contain the words “believe”, “estimate”, “project”, “expect”, “anticipate”, “intend” or similar expressions.  Because these statements look to the future, they are based on our current expectations and beliefs.  Actual results or events may differ materially from those reflected in the forward-looking statements.  You should be aware that our current expectations and beliefs as to future events are subject to change at any time, and we can give no assurances that the future events will actually occur.
 
Critical Accounting Policies
In reviewing and understanding financial information of the Company, you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements.  These policies are described in Note A of the notes to our consolidated financial statements included in this Form 10-K.  Our accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry.  Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available.  These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented.  The following policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results.  These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.
 
 
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Allowance for Loan Losses.  
We have identified the evaluation of the allowance for loan losses as a critical accounting policy where amounts are sensitive to material variation.  The allowance for loan losses is established through a provision for loan losses charged to expense.  Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely.  Subsequent recoveries are added to the allowance.  The allowance is an amount that management believes will cover known and inherent losses in the loan portfolio, based on evaluations of the collectability of loans.  The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions.  This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impacted loans, value of collateral, estimated losses on our commercial and residential loan portfolios and general amounts for historical loss experience.  All of these estimates may be susceptible to significant change.
 
Banking Industry
The Company derives its revenues largely from dividends from the Bank when the Bank upstreams dividends.  As is the case with any financial institution, the profitability of the Bank is subject, among other things, to fluctuating availability of money, loan demand, changes in interest rates, actions of fiscal and monetary authorities, and economic conditions in general.  See “Banking Products and Services”, “Supervision and Regulation Enforcement Action”, and “Management’s Discussion and Analysis”.
 
Banking Products and Services
The Bank is a full service commercial bank that provides a wide range of banking services for its customers.  Some of the major services that it offers include checking accounts, negotiable order of withdrawal (“NOW”) accounts, individual retirement accounts (“IRAs”), savings and other time deposits of various types, and business, real-estate, personal use, home improvement, automobile, and a variety of other loans, as discussed more fully below.  Other services include letters of credit, safe deposit boxes, traveler’s checks, credit cards, wire transfer, e-banking, night deposit, and drive-in facilities.  Prices and rates charged for services offered are competitive with the area’s existing financial institutions in the Bank’s primary market area.
 
The Bank offers a wide variety of fixed and variable rate loans to qualified borrowers.  With regard to interest rates, the Bank continues to meet legal standards while remaining competitive with the existing financial institutions in its market area.  The specific types of loans that the Bank offers include the following:
 
Consumer Loans.  The Bank’s consumer loans consist of automobile, mobile home, recreational vehicle, and boat loans; home improvement and second-mortgage loans; secured and unsecured personal expense loans; and educational loans.
 
Real Estate Loans.  The Bank’s real estate loans consist of residential first and second mortgage loans on one-to-four family homes; construction and development loans; multiple dwelling unit loans; housing rehabilitation loans; loans to purchase developed real property; and commercial real estate loans.
 
 
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Commercial Loans (Secured and Unsecured).  The Bank’s commercial loans consist of working capital loans, secured and unsecured lines of credit, and small equipment loans.
 
Credit Cards.  The Bank offers a variety of nationally recognized credit cards, in addition to its own Mr. Bol credit card, and private label credit cards for use at retail establishments nationwide.  As of December 31, 2010 the Bank held $6,321,000 in credit card debt.
 
The Bank has a number of proprietary accounts it services which is included above.  These accounts consist largely of small to medium sized merchants who have issued their own private-label credit cards.  The Bank acquires these credit card accounts, typically with reserves posted, and requires the merchant to repurchase accounts 180 days or more past due.  As of December 31, 2010 the Bank held $318,000 in proprietary accounts.
 
Territory Served and Competition
Market Area.  The market area for the Bank is defined in the Bank’s Community Reinvestment Act Statement as the greater New Orleans metropolitan area.  This area includes all of the City of New Orleans and surrounding Parishes.  The Bank has branch offices in Orleans, Jefferson, and St. Tammany Parishes.
 
Population.  The U.S. Census Bureau’s latest count on the population of New Orleans stands at 343,829 residents a slight increase than estimated. About 1.17 million residents were counted in 2010 in the seven-parish metropolitan area.  
 
Competition.  The Bank competes with other commercial banks, savings and loan associations, credit unions, and other types of financial services providers in the New Orleans metropolitan area. The Bank is one of the smallest commercial banks in New Orleans in terms of assets and deposits.
 
Economy.  While there is still a long way to go, considerable measurable progress is being made towards New Orleans region’s gradual economic recovery in the aftermath of the widespread devastation wreaked by Hurricanes Katrina (August 29, 2005) and Rita (September 24, 2005), thanks to the convergence of a number of factors; education reform, an influx of young entrepreneurial talent, a motivated labor force and a business-friendly government.
 
Governmental agencies and coalitions have crafted and embraced comprehensive plans for rebuilding New Orleans and its surrounding parishes for the near, medium and long term.  Our communities and citizens are working hard to make a solid come-back.  Our vision is one of a more livable, sustainable and safer future for New Orleans, which will include all the rich cultural and architectural heritage that has made the region so beloved to natives and visitors alike.
 
The recession in the broader economy could have an adverse effect on Bank of Louisiana’s financial condition.  Recessionary conditions and a subsequent period of slow recovery in the broader economy could adversely affect the financial capacity of businesses and individuals in our market area.  These conditions could, among other consequences, increase the credit risk inherent in the current loan portfolio, restrain new loan demand from creditworthy borrowers, prompt the Bank to tighten its underwriting criteria and reduce liquidity in the Bank’s customer base and the level of deposits that they maintain.  These economic conditions could also delay the correction of the imbalance of supply and demand in certain real estate markets. Legislative and regulatory actions taken in response to these conditions could impose additional restrictions and requirements on the Bank.  The current and further deterioration in the residential construction and commercial real estate markets may lead to increased nonperforming assets in Bank of Louisiana’s portfolio and increased provisions for losses on loans, which could have a material adverse effect on our capital, financial condition and results of operation.
 
 
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Employees. As of December 31, 2010, the Bank had 67 full-time and approximately 11 part-time employees, including executive officers, loan and other banking officers, branch personnel, operations personnel and other support personnel.  The Bank considers its relationship with its employees to be very good.  The employee benefit programs provided by the Bank include group life and health insurance, paid vacations, sick leave, and a Section 401(k) savings plan.  The Company has no employees who are not employees of the Bank.  See “Executive Compensation”.
 
Item 2 Description of Property.  In addition to its main office, the Bank has five branch locations and an operations center.  Set forth below is a description of the offices of the Bank.
Main Office.  The main office of the Company is located at 300 St. Charles Avenue in the central business district of New Orleans, Louisiana.  The building consists of approximately 13,100 square feet of office space, and parking is provided on the streets and commercial lots nearby.  The Bank occupies the ground floor and the fourth floor.  The second and third floors are leased to a single entity.  Rental income received is $2,543 per month.  The lease commenced December 15, 2003 and terminates on December 15, 2018.  The Bank owns the building.
 
Severn Branch.  The Severn Branch of the Bank is located in the central business district of Metairie at 3340 Severn Avenue, Metairie, Louisiana.  The premises consist of approximately 4,600 total square feet of office space on the first floor of a four-story office building, and parking is provided for approximately 100 cars.  Rental income received during 2010 and 2009 was $267,386 and $260,464, respectively.
 
Oakwood Branch.  The Oakwood Branch of the Bank is located in the Oakwood Shopping Center at 197 Westbank Expressway, Gretna, Louisiana.  The premise consists of approximately 3,730 total square feet of office space, which includes 1,560 square feet designated for its drive-in facility.  The Bank leases the lobby and drive-in facility from Oakwood Shopping Center, Ltd.  There was heavy storm damage to this shopping center and the Bank has relocated its branch to another location within the shopping center and reopened during the 4th quarter of 2007.  The lease will expire November 14, 2016 with a monthly lease amount of $13,905 per month.
 
Lapalco Branch.  The Lapalco Branch of the Bank is located in the Belle Meade Plaza Shopping Center at 605 Lapalco Boulevard, Gretna, Louisiana.  The premises consist of approximately 2,500 square feet of office space in a one-story building, and parking is provided by the shopping center.  The lease will expire March, 2017 with a monthly lease amount of $6,384 per month.  
 
Gause Branch.  The Gause Branch of the Bank is located in the central business district of Slidell at 636 Gause Boulevard, Slidell, Louisiana.  The building consists of approximately 13,800 total square feet of office space in a three-story office building, and parking is provided for approximately 50 cars.  The Bank owns the building and underlying land upon which it is situated.  The Bank occupies approximately 3,300 square feet in this building and leases the remaining space to various tenants for varying rental rates and terms.  Rental income received during 2010 totaled $70,931.
 
 
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Tammany Mall Branch.  The Tammany Mall Branch of the Bank is located at 3180 Pontchartrain, Slidell, Louisiana.  The premises consist of approximately 4,000 total square feet of office space, and parking is provided for approximately 40 cars.  The Bank owns the building.
Operations Center.  The Bank’s operations center, which houses its accounting, audit, data processing, credit card, bookkeeping, and marketing departments, is located at 3340 Severn Avenue, Metairie, Louisiana.  The building consists of approximately 44,500 total square feet of space in a four-story office building, and parking is provided for approximately 200 cars.  
 
Because of the nature of the banking industry in general, the Company and the Bank are each party from time to time to litigation and other proceedings in the ordinary course of business, none of which (other than those described below), either individually or in the aggregate, have a material effect on the Company’s and/or the Bank’s financial condition.  Reserves for such litigation, if the Company deems such litigation to have sufficient merit or which may subject the Company to significant exposure have been posted and are reflected in the Company’s consolidated financial statements.
 
The following actions, however, have been brought against the Bank and, if the claimants were wholly successful on the merits, could result in significant exposure to the Bank:
 
1. The Bank is a defendant in a lawsuit involving the clearing of a safety deposit box at the Gause branch by a notary with authority from the court to do so in the succession of the owner of the box. This matter is pending on appeal to the First Circuit Court of Appeals in Baton Rouge. The appeal process has just begun and the matter will probably pend for at least 12 months. The appeal has absolutely no merit and its doubtful that the Bank has any exposure.
 
2.  The Bank entered into an agreement with a company for disaster protection.  The company had a contract to provide technical and physical backup in the event the Bank’s data systems were impaired by a natural disaster.  When Katrina hit, however, the company woefully failed to provide the services agreed and the Bank made a demand for payment of $901,992.50.  The Bank filed suit and the case resulted in a judgment in favor of the company. In May of 2010 a final settlement was reached and the Bank paid $90,000.  
 
3.  The Bank originally sued for declaratory relief regarding the Bank’s right to suspend some of the lease payments made for the Oakwood branch due to damages caused by Katrina. The stay on this litigation is no longer applicable since the owner’s parent company has reorganized in the bankruptcy proceedings. Recently the owner’s parent company’s counsel made an offer to resolve this litigation on a business proposition. In this case there is no exposure and the matter is simply one of renegotiating the lease payment schedule to hopefully place as much of the payment at the tail of the lease.
 
There were no matters submitted, during the fourth quarter of fiscal year 2010 to a vote of security holders, through the solicitation of proxies.
  
 
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There is no established trading market in the shares of Bank Stock, as the Company owns 100% of the issued and outstanding shares of Bank Stock.  There is no established trading market in the shares of Company Common Stock.  The Company Common Stock is not listed or quoted on any stock exchange or automated quotation system.  Management is aware, however, that Dorsey & Company, New Orleans, Louisiana does make a market in the Company Common Stock.  The following table sets forth the range of high and low sales prices of Company Common Stock since 2009, as determined by the Company based on trading records of Dorsey & Company.  The following table does not purport to be a listing of all trades in Company Common Stock during the time periods indicated, but only those trades of which Dorsey and Company has informed the Company.  The prices indicated below do not reflect mark-ups, mark-downs, or commissions, but do represent actual transactions.  Finally, the prices listed below are not necessarily indicative of the prices at which shares of Company Stock would trade.  As of December 31, 2010, the Company had approximately 576 shareholders of record.  There were no dividends declared on the Company common stock for the years ended 2010 or 2009.
 
    2010     2009  
                         
   
High
   
Low
   
High
   
Low
 
First Quarter
                       
Second Quarter
                       
Third Quarter
    31.50       27.75              
Fourth Quarter
                32.00       25.65  
                                 
 
No dividends were paid on shares of Company Common stock in 2010 or 2009.
 
Annual Shareholders Meeting
The Annual Meeting of the shareholders of Registrant will be held at 300 St. Charles Avenue, 4th Floor, New Orleans, Louisiana, on Tuesday April 12,2011 at 3:30 p.m.
 
Independent Auditors
LaPorte, Sehrt, Romig & Hand, 111 Veterans Memorial Blvd., Suite 600, Metairie, LA 70005-4958.
 
The following discussion and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of BOL Bancshares, Inc. (the “Company”) and its bank subsidiary, (the “Bank”) for the years ending December 31, 2010, 2009, and 2008.  This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes, and selected financial data appearing elsewhere in this report.
 
 
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This discussion may contain certain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those stated.  Readers are cautioned not to place undue reliance on these forward-looking statements.
 
Quantitative and Qualitative Disclosures about Market Risk, Catastrophic Events, and Future Growth
Management considers interest rate risk to be a market risk that could have a significant effect on the financial condition of the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results.  Difficult conditions in the financial services markets may materially and adversely affect the business and results of operations of the Bank and the Company.
 
Dramatic declines in the housing market during the past year, along with falling home prices and increasing foreclosures and unemployment, have resulted in significant write downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks.  These write-downs, initially of mortgage-backed securities by spreading to credit default swaps and other derivative securities, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions, and, in some cases, to fail.  Many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers, including other financial institutions.  This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility, and widespread reduction of business activity generally, which could have a material adverse effect on our business and operations.  A worsening of these conditions would likely exacerbate any adverse effects of these difficult market conditions on us and others in the financial institutions industry.  As a rule however, the majority of small community banks, such as Bank of Louisiana, have strong reserve positions and are well capitalized.
 
The occurrence of catastrophic events such as hurricanes, tropical storms, earthquakes, windstorms, floods, severe winter weather, fires and other catastrophes could adversely affect our consolidated financial condition or results of operations.  Unpredictable natural and other disasters could have an adverse effect on us in that such events could materially disrupt our operations or the ability or willingness of our customers to access financial services offered by us.  The incidence and severity of catastrophic events could nevertheless reduce our earnings and cause volatility in our financial results for any fiscal quarter or year and have a material adverse effect on our financial condition or results of operation.
 
The Company is a customer-focused organization.  Future growth is expected to be driven in a large part by the relationships maintained with customers.  While the Company has assembled an experienced management team, and has management development plans in place, the unexpected loss of key employees could have a material adverse effect on the Company’s business and may result in lower revenues.
 
 
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Hurricane Katrina Disclosure
Insurance proceeds received for storm damages caused by Hurricane Katrina has covered the damages sustained to the Bank’s branches.  Of the 7 branch locations that were affected by Hurricane Katrina, only the Carrollton branch was not reopened. The remaining funds totaling $817,077 were taken into income in 2009 after the completion of all repairs.  
 
Overview
The Company provides a full range of quality financial services in selected market areas.  As of December 31, 2010, the Company’s total assets were $94,376,000 as compared to $92,652,000 at December 31, 2009.  This is due to deposits returning to their pre-Katrina levels absent of FEMA and insurance proceeds.  
 
Loans comprise the largest single component of the Bank’s interest-earning assets and provide a far more favorable return than other categories of earnings assets.  The Bank’s loans totaled $60,236,000, and $58,303,000 net of unearned discount and Allowance for Loan Losses at December 31, 2010, and 2009.  The Bank’s net interest margin was 6.86% for the year ended December 31, 2010 as compared to 6.79% for the year ended December 31, 2009.
 
Historically, credit card loans have been an important part of the Bank’s total loan portfolio.  However, the Bank has been diversifying its earning assets into commercial and installment loans.  At December 31, 2010, credit card loans were $6,321,000 and represented 10.49% of the Bank’s net loan portfolio of $60,236,000.
 
At December 31, 2009, credit card loans were $7,113,000 and represented 12.20% of the Bank’s loan portfolio of $58,303,000.  
 
The Bank’s current strategy is to continue to grow its traditional banking operations primarily in the metropolitan New Orleans area and to expand its proprietary accounts, so long as it can maintain the minimum required Tier 1 leverage ratio required.  The Bank focuses on providing its customers with the financial sophistication and breadth of products of a regional bank while successfully retaining the local appeal and level of service of a community bank.
 
Results of Operations
 
Net Income - December 31, 2010 Compared to December 31, 2009
 
The Company’s net income for the year 2010 was $299,000, or $1.67 per share, an increase of $164,000, or an increase of $0.92 per share from the Company’s net income of $135,000 in 2009.  
 
Net interest income which is total interest income (including fees) less total interest expense was $5,613,000 in 2010 compared to $5,627,000 in 2009.   
 
Interest on earning assets decreased $51,000 from $6,111,000 in 2009 to $6,060,000 in 2010.  Interest income on investment securities decreased $25,000 from $34,000 earned in 2009 to $9,000 in 2010. This interest decrease was due to the yields derived on security investments falling from an average of 1.35% received in 2009 to an average interest rate of 0.42% in 2010.  In addition, due to the falling rates, the Bank reduced the average amount invested in securities from $2,510,000 in 2009 down to $2,036,000 in 2010, until such time as the market improves. Interest income generated by the loan portfolio decreased a total of $18,000 from $5,994,000 in 2009 to $5,976,000 in 2010, due to the decrease in rates charged from 10.09% in 2009 to 9.77% charged in 2010. Federal funds interest income decreased by $5,000 and certificate of deposits decrease by $3,000.
 
 
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Interest on deposits decreased $18,000 from $391,000 in 2009 to $373,000 in 2010.   This decrease resulted primarily from a decrease in the average rates paid on deposits from an average rate of 0.87% in 2009 to 0.79% in 2010, even with an increase in the average balance of interest bearing deposits from $44,654,000 in 2009 to $44,936,000 in 2010.
 
The provision for loan losses decreased $231,000 from $536,000 in 2009 to $305,000 in 2010. In 2010 Personal loans ended with a net charge-off of $6,736, Commercial loans had a net recovery of $22,168, Overdrafts had a net charge-off of $14,240 and Credit cards with a net charge-off of $305,879.
 
Non-interest income decreased $496,000 from $1,989,000 in 2009 to $1,493,000 in 2010. This decrease was due to a mix of a decrease in Other income of $929,000 due primarily to Katrina insurance proceeds remaining and taken into income in 2009 and a decrease of $13,000 in Cardholder income, Membership fees and Other commissions and fees. The overall decrease was offset by an increase in Service charges of $14,000, an increase in NSF charges of $47,000, and a net increase of $385,000 on income from ORE pertaining to the sale of three lots on Morrison Road.
 
Non-interest expense decreased $291,000.  The major components were a decrease of $150,000 in Salaries and Employee Benefits, a decrease in Insurance and Assessments of $44,000, a decrease in Miscellaneous Losses of $156,000 and a decrease in Other operating expenses of $241,000. The primary offset to the decreases were an increase in the maintenance, repairs and upkeep of ORE properties of $203,000, an increase in Professional fees of $30,000, an increase in Outsourcing fees of $30,000, an increase in Occupancy expense of $20,000 and Other expenses of $17,000.
  
The Company recognized an income tax benefit of $76,023 for 2010, as compared to income tax expense of $77,182 for 2009. The income tax benefit for 2010 was a result of an increase in the Company’s dividend received deduction, as well as adjustments to the Company’s current and deferred income tax liability accounts.
 
Net Income - December 31, 2009 Compared to December 31, 2008
 
The Company’s net income for the year 2009 was $135,000, or $0.75 per share, a decrease of $589,000, or a decrease of $3.29 per share, from the Company’s net income of $724,000 in 2008.  
 
Net interest income, which is total interest income (including fees) less total interest expense, was $5,627,000 in 2009 compared to $6,358,000 in 2008.   
 
 
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Interest on earning assets decreased $1,105,000 from $7,216,000 in 2008 to $6,111,000 in 2009.  $623,000 of the interest reduction on earning assets was due to the decrease in interest income earned on the sale of Federal Funds from $648,000 earned in 2008 to $25,000 earned in 2009.  This interest income reduction was due in part by the Federal Reserve’s adoption of a Zero Interest Rate Policy thereby decreasing the rates earned on Federal Funds Sold from an average of 2.00% paid in 2008 down to an average of 0.15% paid in 2009.  In addition, the average amount of Federal Funds available to sell in 2009 decreased from $32,448,000 in 2008 to $16,677,000 in 2009. Interest income on investments decreased $74,000 from $108,000 earned in 2008 to $34,000 in 2009. This interest income decrease was due to the yields derived on security investments falling from an average of 2.73% received in 2008 to 1.35% received in 2009.  In addition, due to the falling rates, the Bank reduced the average amount invested in securities from $3,957,000 in 2008 down to $2,510,000 in 2009, until such time as the market improves. As an alternative investment the Bank invested in several time deposits with various banks totaling an average of $4,294,000 earning $58,000 due to a yield of 1.35%. Interest income generated by the loan portfolio decreased a total of $461,000 from $6,460,000 in 2008 to $5,994,000 in 2009, due to the decrease in rates charged from 11.24% in 2008 to 10.09% charged in 2009.
 
Interest on deposits decreased $354,000 from $745,000 in 2008 to $391,000 in 2009.  This decrease was due to a drop in interest bearing deposits of $4,702,000, from $49,356,000 in 2008 as compared to $44,654,000 in 2009.  In addition the average rates paid on deposits decreased from an average of 1.51% in 2008 to 0.87% in 2009.
 
The provision for loan losses increased $279,000 from $257,000 in 2008 to $536,000 in 2009.  Net charge-offs on Commercial loans increased $157,000 from a net recovery of ($20,000) in 2008 to a net charge-off of $137,000 in 2009.  Credit Card net charge-offs increased $112,000 from $268,000 in 2008 to $380,000 in 2009.
 
Non-interest income increased $273,000 from $1,716,000 in 2008 to $1,989,000 in 2009.  This increase was due to a mix of an increase of $387,000 in the other miscellaneous income category, from $580,000 in 2008 due to a gain on the sale of Visa stock, to $967,000 in 2009 which consisted primarily of Katrina insurance proceeds remaining and taken into income, after all storm damage repairs were completed, and a decrease of $88,000 in service charge income from $505,000 in 2008 to $417,000 in 2009.  In addition, credit card fees decreased $70,000 from $294,000 in 2008 to $224,000 in 2009 and other credit card income decreased $87,000 from $492,000 in 2008 to $405,000 in 2009.  The decreases in credit card noninterest income are due to a decrease in outstanding credit card balances totaling approximately $1,575,000 from an average of $8,602,000 average outstanding in 2008 to an average of $7,027,000 outstanding in 2009.
 
 
12

 
Non-interest expense increased $212,000 from $6,656,000 in 2008 to $6,868,000 in 2009.  This increase was primarily due to an increase in salaries and benefits, which increased $67,000 from $2,697,000 in 2008 to $2,764,000 in 2009, as well as an increase in insurance and assessments, which increased $131,000 from $93,000 in 2008 to $224,000 in 2009, due to the special assessments imposed by the FDIC for failed banks.  In addition, other losses increased $180,000 in part due to the Bank having to pay a contract for services to a major company designated as a back-up during Katrina disaster.  When the company failed to perform according to the contract, the Bank sued for breach of contract.  However, the judge ruled from the bench that the Bank was liable to pay the remainder of the service contract in the amount of $84,000.  Additional other loses incurred by the Bank included $24,000 in fraud at the branch level and credit card fraud of $21,000 during 2009.  These increases were partially offset by a decrease in outsourcing expense of $147,000, from $1,468,000 in 2008 to $1,321,000 in 2009, as a result of the reduction in outstanding credit card balances for 2009.
 
The following table shows interest income on earning assets and related average yields, as well as interest expense on interest bearing liabilities and related average rates paid for the years 2010, 2009 and 2008.
 
TABLE 1 Average Balances, Interests and Yields
 
    2010             2009     2008  
(Dollars in Thousands)
 
Average Balance
   
Interest
   
Yield/Rate
   
Average Balance
   
Interest
   
Yield/Rate
   
Average Balance
   
Interest
   
Yield/Rate
 
                                                                         
ASSETS
                                                                       
INTEREST-EARNING ASSETS:
                                                                       
Loans, net of Unearned income (1)(2)
    61,173       5,976       9.77 %     59,382       5,994       10.09 %     57,456       6,460       11.24 %
Certificates of Deposits
    4,672       55       1.17 %     4,294       58       1.35 %     0       0       0.00 %
Investment securities
    2,036       9       0.42 %     2,510       34       1.35 %     3,957       108       2.73 %
Federal funds sold
    13,915       20       0.14 %     16,677       25       0.15 %     32,448       648       2.00 %
Total Interest-Earning Assets
    81,797       6,060       7.41 %     82,863       6,111       7.37 %     93,861       7,216       7.69 %
                                                                         
Cash and due from banks
    2,950                       3,021                       3,431                  
Allowance for loan Losses
    (1,797 )                     (1,794 )                     (1,813 )                
Premises and equipment
    6,003                       6,332                       6,811                  
Other Real Estate
    2,812                       1,398                       1,077                  
Other assets
    1,280                       1,071                       1,311                  
TOTAL ASSETS
    93,045                       92,893                       104,678                  
                                                                         
LIABILITIES AND SHAREHOLDERS EQUITY
                                                         
INTEREST-BEARING LIABILITIES:
                                                                       
Deposits:
                                                                       
Demand Deposits
    15,402       89       0.58 %     13,649       75       0.55 %     15,802       150       0.95 %
Savings deposits
    20,753       75       0.36 %     21,441       79       0.37 %     22,918       215       0.94 %
Time deposits
    10,781       209       1.94 %     9,564       238       2.49 %     10,636       380       3.57 %
Total Int-Bearing Deposits
    46,936       373       0.79 %     44,654       391       0.87 %     49,356       745       1.51 %
                                                                         
Long-Term debt
    1,144       74       6.43 %     1,410       94       6.65 %     1,543       113       7.32 %
  Total Interest-Bearing Liabilities
    48,080       447       0.93 %     46,065       484       1.05 %     50,899       858       1.69 %
                                                                         
Non-interest-bearing deposits
    32,274                       33,967                       40,168                  
Other liabilities
    911                       1,270                       2,185                  
Shareholders equity
    11,779                       11,591                       11,426                  
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    93,045                       92,893                       104,678                  
Net Interest Income
            5,613                       5,627                       6,358          
Net Interest Spread
                    6.48 %                     6.32 %                     6.00 %
Net Interest Margin
                    6.86 %                     6.79 %                     6.77 %
(1) Fee income relating to loans of $343,000 in 2010, $374,000 in 2009 and $513,000 in 2008 is included in interest income.
                         
(2) Non-accrual loans are included in average balances and income on such loans, if recognized, is recognized on the cash basis.
                         
 
 
13

 
The below table presents changes in interest income and interest expense, and distinguishes between the changes related to increases or decreases in average outstanding balances of interest-earning assets and interest-bearing liabilities (volume), and the changes related to increases or decreases in average interest rates on such assets and liabilities (rate) for the years ended December 31.
 
Table 2 Rate/Volume Analyses (1)
                                     
    
2010 vs 2009
         
2009 vs 2008
       
   
Increase (Decrease)
         
Increase (Decrease)
       
   
 
                         
   
Due to Change in:
         
Due to Change in:
       
(Dollars in Thousands)
 
Rate
   
Volume
   
Total
   
Rate
   
Volume
   
Total
 
                                     
Net Loans
    (199 )     181       (18 )     (682 )     217       (466 )
Cert of Deposits
    (8 )     5       (3 )     58       0       58  
Investment Securities
    (19 )     (6 )     (25 )     (35 )     (40 )     (74 )
Federal Funds Sold
    (1 )     (4 )     (5 )     (308 )     (315 )     (623 )
Total Interest Income
    (227 )     176       (51 )     (967 )     (138 )     (1,105 )
                                                 
Deposits:
                                               
Demand Deposits
    4       10       14       (56 )     (20 )     (76 )
Savings Deposits
    (1 )     (3 )     (4 )     (122 )     (14 )     (136 )
Time Deposits
    (59 )     30       (29 )     (104 )     (38 )     (142 )
Total Int-Bearing Dep
    (56 )     37       (19 )     (282 )     (72 )     (354 )
Long-Term Debt
    (2 )     (18 )     (20 )     (10 )     (10 )     (20 )
Total Interest
                                               
Expense
    (58 )     19       (39 )     (292 )     (82 )     (374 )
Change in net interest income
    (169 )     157       (12 )     (675 )     (56 )     (731 )
 
 
14

 
Interest Sensitivity Gap Analysis
The major elements management utilizes monthly to manage interest rate risk include the mix of fixed and variable rate assets and liabilities and the maturity pattern of assets and liabilities.  It is the Bank’s policy not to invest in derivatives in the ordinary course of business.  The Bank performs a quarterly review of assets and liabilities that reprice and the time bands within which the repricing occurs.  Balances are reported in the time band that corresponds to the instruments’ next repricing date or contractual maturity, whichever occurs first.  Through such analysis, the Bank monitors and manages its interest sensitivity gap to minimize the effects of changing interest rates.
 
The interest rate sensitivity structure within the Company’s balance sheet at December 31, 2010, has a net interest sensitive asset gap of 28.54% when projecting out one year.  In the near term, defined as 90 days, the Company currently has a net interest sensitive liability gap of -2.36%.  The information represents a general indication of repricing characteristics over time; however, the sensitivity of certain deposit products may vary during extreme swings in the interest rate cycle.  Since all interest rates and yields do not adjust at the same velocity, the interest rate sensitivity gap is only a general indicator of the potential effects of interest rate changes on net interest income.
 
The following table illustrates the Bank’s interest rate sensitivity analysis at December 31, 2010, as well as the cumulative position at December 31, 2010:
 
TABLE 3 Asset/Liability and Gap Analysis
 
               
December 31, 2010
                   
    1-30     31-60     61-90     91-365    
1 Year-
   
Over
       
    Days    
Days
   
Days
   
Days
   
5 Years
   
5 Years
   
Total
 
(Dollars in Thousands)
                                                 
                                                   
Earning Assets
                                                 
                                                         
Securities-HTM
                                         
                                                         
Securities - AFS
                                  31       31  
                                                         
Loans
    10,906       4,735       4,195       30,978       9,111       313       60,238  
                                                         
Cert of Deposits
    990                       2,715       498             4,203  
                                                         
Federal Funds sold
    14,950                                     14,950  
                                                         
Total Earning Assets
    26,846       4,735       4,195       33,693       9,609       344       79,422  
                                                         
Non Earning Assets
                                  14,011       14,011  
                                                         
TOTAL ASSETS
    26,846       4,735       4,195       33,693       9,609       14,355       93,433  
                                                         
                                                         
Interest-Bearing Liabilities
                                                 
                                                         
Savings & Now accounts
    31,853                                     31,853  
Money market
    3,705                                     3,705  
                                                         
CD’s < $100,000
    604       781       394       3,481       5,002             10,262  
                                                         
CD’s > $100,000
    441       206             1,335       1,174             3,156  
                                                         
Total Interest-
                                                       
Bearing Liabilities
    36,603       987       394       4,816       6,176             48,976  
Non-Costing Liabilities
    209                               44,248       44,457  
                                                         
TOTAL LIABILITIES AND EQUITY
    36,812       987       394       4,816       6,176       44,248       93,433  
                                                         
Interest Sensitivity Gap
    (9,757 )     3,748       3,801       28,877       3,433       344       30,446  
                                                         
Cumulative Gap
    (9,757 )     (6,009 )     (2,208 )     26,669       30,102       30,446          
Cumulative Gap/
                                                       
Total Assets
    -10.44 %     -6.43 %     -2.36 %     28.54 %     32.22 %     32.59 %        
 
 
15

 
Provision for Loan Losses
Management’s policy is to maintain the allowance for possible loan losses at a level sufficient to absorb estimated losses inherent in the loan portfolio.  The allowance is increased by the provision for loan losses and decreased by charge-offs, net of recoveries.  Management’s evaluation process to determine potential losses includes consideration of the industry, specific conditions of individual borrowers, historical loan loss experience, and the general economic environment.  As these factors change, the level of loan loss provision changes.
 
At December 31, 2010 and December 31, 2009 the allowance for possible loan losses was $1,800,000.  In 2010, the provision for loan losses was $305,000 compared to $536,000 in 2009.  Net charge-offs were $305,000 in 2010 compared to $536,000 in 2009.  Based on the volume of credit card charges and payments, the credit card portfolio turns over every eight to nine months, requiring a provision to loan loss allowance less than annual charge-offs due to recoveries being contemporaneously made.
 
TABLE 4 Allowance for Loan Losses
 
   
2010
   
2009
 
   
(Dollars in Thousands)
 
             
Balance at beginning of period
  $ 1,800     $ 1,800  
Charge-Offs:
               
Commercial
    0       86  
Real estate
    4       57  
Consumer
    23       18  
Credit Cards
    477       540  
Total Charge-offs
    505       702  
Recoveries:
               
Commercial
    25       6  
Real estate
    1       1  
Consumer
    2       23  
Credit Cards
    171       137  
Total Recoveries
    200       167  
Net charge-offs
    305       536  
Provision for loan losses
    305       536  
                 
Balance at end of period
  $ 1,800     $ 1,800  
Ratio of net charge-offs during period to average loans outstanding
    0.50 %     0.90 %
Allowance for possible loan losses as a percentage of loans
    2.90 %     2.99 %
 
Non-interest Income
An important source of the Company’s revenue is derived from non-interest income.  
 
For the year 2010 non-interest income decreased $496,000. This decrease was due to a mix of a decrease in Cardholder & Other Credit Card Income of $8,000, Other Comm & Fees of $7,000 and the largest being Other Income of $928,000 primarily due to Katrina insurance proceeds in the amount of $817,077 remaining after all storm damage repairs were completed. Offset by increases in Services Charges of $14,000, NSF Charges of $47,000 and Gain on Sale of ORE of $386,000 on the sale of three lots on Morrison Rd.
 
For the year 2009 non-interest income increased $273,000. This increase was due to a mix of an increase in the Other Income category, the largest being Katrina insurance proceeds in the amount of $817,077 remaining after all storm damage repairs were completed. Services Charges decreased by $37,000, NSF Charges by $62,000, Cardholder by $67,000 and Other Comm & Fees by $18,000.
 
 
16

 
The following table sets forth the major components of non-interest income for the last two years.
 
TABLE 5 Non-interest Income
 
   
December 31,
       
   
2010
   
2009
   
$ Change
 
     (Dollars in Thousands)  
                   
Service Charges
    214       200       14  
NSF Charges
    253       206       47  
Gain on Sale of Securities
    0       0       0  
Cardholder & Other Cr Card Inc
    423       431       (8 )
Other Comm. & Fees
    48       55       (7 )
ORE Income
    0       0       0  
Gain on Sale of ORE
    395       9       386  
Gain on Insurance Settlement
    0       0       0  
Other Income
    160       1,088       (928 )
                         
Total Non-interest Income
  $ 1,493     $ 1,989     ($ 496 )
 
Non-interest Expense
The major categories of non-interest expense include salaries and employee benefits, occupancy and equipment expenses and other operating costs associated with the day-to-day operations of the Company.
 
For the year 2010 non-interest expense decrease $291,000. The major components were a decrease of $150,000 in Salaries and Employee Benefits, a decrease in Insurance and Assessments of $44,000, a decrease in Miscellaneous Losses of $242,000, a decrease in Other operating expenses of $119,000 and a decrease of $25,000 on all other expenses. The primary offset to the decreases were an increase in maintenance, repairs and upkeep of ORE properties of $ 201,000, an increase in Professional fees of $30,000, an increase in Outsourcing fees of $30,000, an increase in Occupancy expense of $20,000 and all other expenses of $8,000.
 
For the year 2009 non-interest expense increased $212,000. The major components of this increase were an increase of $68,000 in salaries and employee benefits, an increase of $132,000 in insurance and assessments due to FDIC’s increase in rate assessments and an increase of $246,000 in misc Losses in part due to the Bank having to pay a contract for services to a major company designated as a back up during Katrina disaster.  When the company failed to perform according to the contract, the Bank sued for breach of contract.  However, the judge ruled from the bench that the Bank was liable to pay the remainder of the service contract in the amount of $84,000.  Additional other loses incurred by the Bank included $24,000 in fraud at the branch level and credit card fraud of $21,000 during 2009. The offsets being Occupancy expense with a decrease of $104,000, Outsourcing fees, a decrease of $146,000 and Other Operating expense a decrease of $82,000.
 
 
17

 
The following table sets forth the major components of non-interest expense for the last two years:
 
TABLE 6 Non-interest Expenses
 
   
December 31,
       
   
2010
   
2009
   
$ Change
 
    (Dollars in Thousands)      
                   
Salaries & Benefits
    2,615       2,765       (150 )
Occupancy Expense
    1,060       1,040       20  
Estimated Loss (Recovery) Contingency
    0       0       0  
Loan & Credit Card Expense
    116       126       (10 )
Communications
    216       219       (3 )
Outsourcing Fees
    1,352       1,322       30  
Stationery, Forms & Supply
    84       92       (8 )
Professional Fees
    287       257       30  
Insurance & Assessments
    181       225       (44 )
Advertising Expense
    11       2       9  
Misc. Losses
    3       245       (242 )
Promotional Expenses
    57       61       (4 )
ORE Expenses
    335       134       201  
Other Operating Expense
    261       380       (119 )
Total Non-interest Expense
  $ 6,577     $ 6,868     ($ 291 )
 
Provision for Income Taxes
The Company recognized an income tax benefit of $ 76,000 for 2010, as compared to income tax expense of $77,000 for 2009. The income tax benefit for 2010 was a result of an increase in the Company’s dividend received deduction, as well as adjustments to the Company’s current and deferred income tax liability accounts.
 
Financial Condition
The Bank manages its assets and liabilities to maximize long-term earnings opportunities while maintaining the integrity of its financial position and the quality of earnings.  To accomplish this objective, management strives to effect efficient management of interest rate risk and liquidity needs.  The primary objectives of interest-sensitivity management are to minimize the effect of interest rate changes on the net interest margin and to manage the exposure to risk while maintaining net interest income at acceptable levels.  Liquidity is provided by carefully structuring the balance sheet.  The Bank’s asset liability committee meets regularly to review both the interest rate sensitivity position and liquidity.
 
 
18

 
Liquidity
The purpose of liquidity management is to ensure that there is sufficient cash flow to satisfy demands for credit, deposit withdrawals, and other corporate needs.  Traditional sources of liquidity include asset maturities and growth in core deposits.  These are sources of liquidity that the Bank has not fully utilized.  The Bank, nevertheless, has maintained adequate liquidity through the sale of federal funds.  Traditionally, liquidity sources for the Bank are generated from operating activities and financing activities.
 
Net cash from operating activities primarily results from net income adjusted for the following non-cash items:  the provision for loan losses; depreciation and amortization; fair value adjustments on foreclosed property; and deferred income taxes or benefits.  
 
Significant financing activities generally include core deposits, securities sold under agreements to repurchase, and long-term debt.  The Bank anticipates capital needs will be met from the growth in retained earnings.
 
Financing activity cash flows from deposits increased 1.88% to $80,577,000 in 2010 from $79,087,000 in 2009, or $1,490,000 and short term investments and other marketable assets decreased, resulting in a slight decrease in liquidity.  The Bank has unused sources of liquidity in the form of unused federal funds lines of $4,400,000 from a correspondent bank, and borrowing availability from the FRB discount window equal to the Bank’s principal amount of unpledged investment securities.  The Bank manages asset and liability growth through pricing strategies within regulatory capital constraints.  Management believes that its core deposit strength minimizes the risk of deposit runoff.
 
Loans
The loan portfolio is the largest category of the Bank’s earning assets.  The following table summarizes the composition of the loan portfolio for the last two years:
 
TABLE 7 Loans Net by Category
 
   
2010
   
2009
 
   
(Dollars in Thousands)
 
             
Real estate-mortgage
    51,520       48,939  
Commercial, financial, & agricultural
    2,726       2,444  
Consumer
    1,191       1,371  
Credit cards
    6,321       7,113  
Overdrafts
    276       235  
                 
Loans
    62,036       60,103  
                 
Less:
               
Allowance for possible loan losses
    1,800       1,800  
 Loans, net
  $ 60,236     $ 58,303  
                 
 
 
19

 
At December 31, 2010 total loans outstanding, net of allowance for loan losses, were $60,236,000 and $58,303,000 at December 31, 2009.  Average total loans during 2010 increased $1,791,000, or 3.02%, to $61,173,000 from $59,382,000 at December 31, 2009.
 
The Bank experienced an increase of $2,581,000 in real estate loans from $48,939,000 in 2009 to $51,520,000 in 2010, which was offset by a decrease in credit card loans of $792,000, and a decrease in consumer loans of $180,000.  
 
The following table shows the maturity distribution and interest rate sensitivity of the Bank’s loan portfolio at December 31, 2010:
 
TABLE 8 Loan Maturity and Interest Rate Sensitivity
                         
   
December 31, 2010
 
         
Maturing
             
   
Within
   
One To
   
Over
       
   
One Year
   
5 Years
   
5 Years
   
Total
 
    (Dollars in Thousands)  
Loan Maturity by Type
                       
Real estate construction, land & land dev.
    43,587       7,302       631       51,521  
Commercial, financial & agricultural
    2,291       436       0       2,726  
All other loans
    1,373       6,416       0       7,788  
Total
  $ 47,251     $ 14,154     $ 631     $ 62,036  
                                 
Rate Sensitivity of Loans
                               
Loans:
                               
Fixed rate loans
    43,554       14,154       631       58,339  
Variable rate loans
    1,421       0       0       1,421  
Non-Accrual Loans
    2,276       0       0       2,276  
Total
  $ 47,251     $ 14,154     $ 631     $ 62,036  
 
As of December 31, 2010 and 2009, the Bank’s recorded investment in loans that are considered impaired totaled $2,276,000 and $1,158,000, respectively.
 
Non-performing Assets
Non-performing assets consist of non-accrual and restructured loans and other real estate owned.  Non-accrual loans are loans on which the interest accruals have been discontinued when it appears that future collection of principal or interest according to the contractual terms may be doubtful.  Interest on these loans is reported on the cash basis as received when the full recovery of principal is anticipated or after full principal has been recovered when collection of interest is in question.  Restructured loans are those loans whose terms have been modified, because of economic or legal reasons related to the debtors’ financial difficulties, to provide for a reduction in principal, change in terms, or fixing of interest rates at below market levels.  Other real estate owned is real property acquired by foreclosure or deed taken in lieu of foreclosure.
 
Non-performing assets at December 31, 2010 were $5,413,000 and $3,170,000 at December 31, 2009.  During 2010, non-accrual loans increased by $1,118,000 and other real estate owned increased $1,125,000 due to foreclosure on loans which defaulted.  At December 31, 2010, and 2009, there were no restructured loans.  
 
The ratio of past due loans to total loans has increased from 2.60% at December 31, 2009 to 3.05% at December 31, 2010.  During that time, the Bank increased its ratio of non-performing assets to loans and other real estate owned from a low of 5.10% at December 31, 2009, to a high of 8.31% at December 31, 2010.  The allowance for possible loan losses as a percent of net period-end loans decreased to 2.90% at December 31, 2010, compared to 2.99% at December 31, 2009.  Management believes the allowance for possible loan losses is adequate to provide for losses inherent in the loan portfolio.
 
When a loan is classified as non-accrual, previously accrued interest is reversed and interest income is decreased to the extent of all interest accrued in the current year.  If any portion of the accrued interest had been accrued in the previous years, accrued interest is decreased and a charge for that amount is made to the allowance for possible loan losses.  The gross amount of interest income that would have been recorded on non-accrual loans, if all such loans had been accruing interest at the original contract rate, at December 31, 2010 was $222,000 compared to December 31, 2009 was $117,000.
 
TABLE 9 Non-performing Assets
 
   
2010
   
2009
 
(Dollars in Thousands)
           
             
Non-accrual Loans
    2,276       1,158  
Restructured Loans
    0       0  
Other Real Estate Owned
    3,137       2,012  
Total Non-performing Assets
  $ 5,413     $ 3,170  
Loans past due 90 days or more
    1,895       1,564  
Ratio of past due loans to loans
    3.05 %     2.60 %
Ratio of non-performing assets to loans and other real estate owned
    8.31 %     5.10 %
 
 
20

 
Allocation of Allowance for Possible Loan Losses
Allocation of the allowance for loan losses is based primarily on previous credit loss experience, adjusted for changes in the risk characteristics of each category.  Additional amounts are allocated based on the evaluation of the loss potential of individual troubled loans and the anticipated effect of economic conditions on both individual loans and loan categories.  Since the allocation is based on estimates and subjective judgment, it is not necessarily indicative of the specific amounts of loan categories in which losses may ultimately occur.
 
Approved credit card accounts are reviewed on a monthly basis to assure compliance with the Bank’s credit policy.  Review procedures include determination that the appropriate verification process has been completed, recalculation of the borrower’s debt ratio, and analyses of the borrower’s credit history to determine if it meets established Bank criteria.  Policy exceptions are carefully analyzed monthly.  Delinquent accounts are monitored daily and charged off before 180 days, which is the industry standard.  Prior to charge-off, interest on credit card loans continue to accrue.  A monthly provision for credit card losses is included in the Bank’s overall provision for loan losses.
 
Table 10 Allocation of Allowance for Possible Loan Losses
 
   
December 31, 2010
   
December 31, 2009
 
   
Allowance
      % *    
Allowance
      % *  
   
(Dollars in Thousands)
         
Non-accrual loans
    255       3.67 %     122       1.93 %
Substandard/Impaired/Doubtful
    1,042       4.02 %     1,011       25.49 %
Construction loans
          0.00 %     71       9.84 %
Commercial, financial and agricultural
    89       71.68 %     151       41.86 %
Consumer loans
    15       9.99 %     68       8.65 %
Credit Cards
    368       10.19 %     364       11.83 %
Overdrafts
    31       0.45 %     13       0.39 %
Total
    1,800               1,800          
                                 
* Percentage of respective loan type to total loans.
                         
 
Investment Securities
The Company’s investment portfolio policy is to maximize income consistent with liquidity, asset quality, regulatory constraints, and asset/liability objectives.  The Bank’s Board of Directors reviews such policy not less than annually.  The levels of taxable and tax-exempt securities and short-term investments reflect the Company’s strategy of maximizing portfolio yields while providing for liquidity needs.  The investment securities totaled $5,081,000 at December 31, 2010, and $6,008,000 at December 31, 2009.  The majority of the holdings are backed by U.S. Government or federal agency guarantees limiting the credit risks associated with these securities.  Although credit risks are minimal, interest rates and their respective interest income is subject to risk due to fluctuating interest rates.  The average maturity of the securities portfolio was one year or less at December 31, 2010.  At year-end 2010, $878,000 of the Company’s investment securities were classified as available-for-sale, compared to $814,000 at December 31, 2009.  The gross unrealized holding gains on these securities at December 31, 2010 were $576,000 and $512,000 at December 31, 2009.
 
 
21

 
There were no investments and no obligations of any one state or municipality at December 31, 2010, or 2009.
 
At December 31, 2010, and 2009 the Bank had no U.S. Treasury securities or obligations of U. S. government corporations or federal agencies, as available for sale.
 
The following table sets forth the carrying and approximate market values of investment securities for the last two years:
 
TABLE 11 Investment Securities
 
         
December 31,
       
   
2010
   
2009
 
   
Amortized
   
Fair
   
Amortized
   
Fair
 
   
Cost
   
Value
   
Cost
   
Value
 
   
(Dollars in Thousands)
       
                         
Certificate of Deposit
    4,203       4,203       5,194       5,194  
U.S. Treasury securities and obligations of U.S. government corporations and agencies
                1,000       1,000  
Other investments
    302       878       302       814  
Total
  $ 4,505     $ 5,081     $ 6,496     $ 7,008  
 
TABLE 12 Securities Maturities and Yields
                   
   
December 31, 2010
       
   
Amortized
   
Fair
   
Average
 
   
Cost
   
Value
   
Yield (2)
 
(Dollars in Thousands)
                 
                   
Available-for-Sale
                 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
                 
Due in 1 year or less
                0.00 %
Due 1-5 years
                0.00 %
    Total
                0.00 %
                         
Held-to-Maturity
                       
Certificate of Deposit
                       
Due in 1 year or less
    4,203       4,203       1.03 %
U.S. Treasury securities and obligations of U.S. government corporations and agencies
                       
Due in 1 year or less
                0.00 %
Due 1-5 years
                       
Total
  $ 4,203     $ 4,203       1.03 %
 
 
22

 
Below is a table of equity securities at fair value that are included in Investment Securities at December 31, 2010 (dollars in thousands):
 
TABLE 13 Other Securities      
 
Mississippi River Bank
    765  
Liberty Financial Services, Inc.
    82  
Business Resource Capital
    20  
MasterCard International
    11  
Total Other Securities
  $ 878  
 
Deposits
Total deposits at December 31, 2010 were $80,577,000 which represented an increase of $1,490,000, or 1.88%, from $79,087,000 at December 31, 2009.  During 2010, interest bearing deposits increased by $1,730,000.  Core deposits, the Bank’s largest source of funding, consist of all interest bearing and non-interest bearing deposits except certificates of deposits over $100,000.  Core deposits are obtained from a broad range of customers.  Average core deposits increased $592,000, or .78%, to $76,156,000 from $75,564,000 in 2009.  Average market rate core deposits, primarily CD’s of less than $100,000 and money market accounts, increased $2,182,000 from $9,448,000 in 2009 to $11,630,000 in 2010.  
 
Non-interest bearing deposits are comprised of business accounts, including correspondent bank accounts, escrow deposits, as well as individual accounts.  Average non-interest bearing demand deposits represented 42.38% of average core deposits in 2010 compared to 44.95% in 2009.
 
The average amount of, and average rate paid on deposits by category for the period shown are presented below:
 
TABLE 14 Selected Statistical Information
 
         
December 31,
       
   
2010
         
2009
       
   
Average
         
Average
       
   
Amount
   
Rate
   
Amount
   
Rate
 
   
(Dollars in Thousands)
       
                         
Non-interest-bearing Deposits
  $ 32,274       N/A     $ 33,967       N/A  
Interest-bearing Demand Deposits
    15,402       0.58 %     13,649       0.55 %
Savings Deposits
    20,753       0.36 %     21,441       0.37 %
Time Deposits
    10,781       1.94 %     9,564       2.49 %
Total Average Deposits
  $ 79,210             $ 78,621          
 
 
23

 
The composition of average deposits for the last two years is presented below:
 
TABLE 15 Deposit Composition
 
DEPOSIT COMPOSITION
   
December 31,
 
   
2010
   
2009
 
         
(Dollars in Thousands)
 
   
Average
   
% Of
   
Average
   
% Of
 
   
Balances
   
Deposits
   
Balances
   
Deposits
 
Demand, non-interest-bearing
    32,274