Overview

Net income increased approximately $520,000 or 17.4% and earnings per share increased $0.15 or 17.9% when comparing the first quarters of 2012 and 2011. For the first three months of 2012, net income totaled $3.5 million compared to $3.0 million in first quarter 2011. Increased earnings in 2012 were primarily the result of decreased provision for loan losses. The Company recorded no provision for loan losses during first quarter 2012 compared to approximately $575,000 in first quarter 2011. No provision for loan losses was necessary due to modest loan growth of 1%, stability in overall quality of the loan portfolio, and net recoveries in excess of loans charged off totaling approximately $396,000. Allowance for losses on loans as a percent of total loans was 1.58% as of March 31, 2012 compared to 1.52% as of March 31, 2011 and 1.52% as of December 31, 2011.

The Company also remains steadfast in its commitment to quality growth balanced with strong liquidity and capital positions. Deposits increased $20.2 million or 2.4% from December 31, 2011 to March 31, 2012. Other borrowings consisting primarily of advances from the Federal Home Loan Bank ("FHLB") were flat from December 31, 2011 to March 31, 2012. Capital increased $2.9 million or 2.9% from December 31, 2011 to March 31, 2012 as a result of undistributed net income of $2.6 million and increase of approximately $331,000 in accumulated other comprehensive income due to overall appreciation of the investment portfolio in the most recent quarter. Strong deposit growth resulted in total assets growth of $19.9 million or 1.9% in first quarter 2012 compared to year-end 2011. Deposit growth was used to fund an increase of $18 million in the fed funds sold, an increase of $7.3 million in available-for-sale securities, and an increase of $5.7 million in loans.

Key performance metrics for the Company reflect preservation of capital and the impact of increased net income in first quarter 2012 compared to first quarter of prior years. Such key metrics are as follows:

2012 2011 2010 2009 2008 Net income to average total assets 1.34% 1.22% 0.92% 0.78% 0.97% Net income to average shareholders' equity 13.36% 13.37% 10.22% 9.14% 11.65%

    Dividends declared to net income           25.77% 24.20% 25.08% 59.08% 49.32%
    Average equity to average assets           10.02% 10.11%  9.77%  9.30%  8.45%
    Total equity to total assets                9.91%  9.26%  9.11%  8.54%  8.49%

The efficiency ratio is a measure of non-interest expense as a percentage of total revenue. The Company computes the efficiency ratio by dividing non-interest expense by the sum of net interest income on a tax equivalent basis and non-interest income. This is a non-GAAP financial measure, which we believe provides investors with important information regarding our operational efficiency. Comparison of our efficiency ratio with those of other companies may not be possible because other companies may calculate the efficiency ratio differently. The efficiency ratios for first quarter ended March 31, 2012, 2011 and 2010 were 59.65%, 59.96%, and 58.22%, respectively.

The tangible common equity ratio is a non-GAAP measure used by management to evaluate capital adequacy. Tangible common equity is total equity less net accumulated other comprehensive income ("OCI"), goodwill and deposit-based intangibles. Tangible assets are total assets less goodwill and deposit-based intangibles. The tangible common equity ratio is 8.05% for first quarter ended March 31, 2012 compared to 7.85% and 7.39% for first quarter ended March 31, 2011 and 2010, respectively.

A reconciliation of non-GAAP measures of efficiency ratio and tangible common equity is provided as follows for the quarter ended March 31, 2012, 2011 and 2010:

                                           At or for the Quarter Ended March 31,
                                             2012            2011          2010
  Efficiency ratio:
  Net interest income(1)                       $9,501          $9,248       $9,182
  Non-interest income(2)                        3,344           3,207        3,218
      Total revenue                            12,845          12,455       12,400
  Non-interest expense                          7,662           7,468        7,219
  Efficiency ratio                             59.65%          59.96%       58.22%
  Tangible common equity ratio:
  Total equity capital                       $106,413      $   92,847      $87,018
  Less:
  Accumulated other comprehensive income        9,132           3,193        5,311
  Goodwill                                     11,825          11,825       11,825
  Other intangible assets                          14              99          183
  Tangible common equity                      $85,442         $77,730      $69,699
  Total assets                             $1,073,457      $1,002,619     $954,969
  Less:
  Goodwill                                     11,825          11,825       11,825
  Other intangible assets                          14              99          183
  Tangible assets                          $1,061,618        $990,695     $942,961
  Tangible common equity ratio                  8.05%           7.85%        7.39%


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Net interest income includes interest and rates on securities that are
(1) non-taxable for federal income tax purposes that are presented on a taxable equivalent basis based on federal statutory rate of 34%. Non-interest income is presented net of any credit component of
(2) other-than-temporary impairment on available-for-sale securities recognized against earnings for the years presented.

Expansion

The Company, through its strategic planning process, intends to seek profitable opportunities that utilize excess capital and maximize income in Tennessee. If the Company decides to acquire other banking institutions, its objective would be for asset growth and diversification into other market areas. Acquisitions and de novo branches might afford the Company increased economies of scale within the operation functions and better utilization of human resources. The Company would only pursue an acquisition or de novo branch if the board of directors determines it to be in the best interest of the Company and its shareholders. The Company does not currently have plans to acquire other banking institutions.

The Company owns two lots in Jackson, Tennessee, that are intended for construction of full service branches but construction has been temporarily on hold because of current economic conditions. Construction for the site near Union University is expected to commence within the next year and construction for the other site is expected to commence within the next two to three years.

Forward-Looking Statements

Information contained herein includes forward-looking statements with respect to the beliefs, plans, risks, goals and estimates of the Company. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant banking, economic, and competitive uncertainties, many of which are beyond management's control. When used in this discussion, the words "anticipate," "project," "expect," "believe," "should," "will," "intend," "is likely," "going forward," "may" and other expressions are intended to identify forward-looking statements. These forward-looking statements are within the meaning of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. Such statements may include, but are not limited to, capital resources, strategic planning, acquisitions or de novo branching, ability to meet capital guidelines, legislation and governmental regulations affecting financial services companies, construction of new branch locations, dividends, critical accounting policies, allowance for loan losses, fair value estimates, goodwill, occupancy and depreciation expense, held-to-maturity securities, available-for-sale securities, trading securities, cash flows, core deposit intangibles, diversification in the real estate loan portfolio, interest income, maturity of loans, loan impairment, loan ratings, charge-offs, other real estate owned, maturity and re-pricing of deposits, borrowings with call features, dividend payout ratio, off-balance sheet arrangements, the impact of recently issued accounting standards, changes in funding sources, liquidity, interest rate sensitivity, net interest margins, debt securities, non-accrual status of loans, contractual maturities of mortgage-backed securities and collateralized mortgage obligations, other-than-temporary impairment of securities, amortization expense, deferred tax assets, independent appraisals for collateral, property enhancement or additions, efficiency ratio, ratio of assets to employees, net income, changes in interest rates, loan policies, categorization of loans, maturity of FHLB borrowings and the effectiveness of internal control over financial reporting.

Forward-looking statements are based upon information currently available and represent management's expectations or predictions of the future. As a result of risks and uncertainties involved, actual results could differ materially from such forward-looking statements. The potential factors that could affect the Company's results include but are not limited to:

º Changes in general economic and business conditions;

º Changes in market rates and prices of securities, loans, deposits and other financial instruments;

º Changes in legislative or regulatory developments affecting financial institutions in general, including changes in tax, banking, insurance, securities or other financial service related laws;

º Changes in government fiscal and monetary policies;

º The ability of the Company to provide and market competitive products and services;

º Concentrations within the loan portfolio;

º Fluctuations in prevailing interest rates and the effectiveness of the Company's interest rate hedging strategies;

º The Company's ability to maintain credit quality;

º The effectiveness of the Company's risk monitoring systems;

º The ability of the Company's borrowers to repay loans;

º The availability of and costs associated with maintaining and/or obtaining adequate and timely sources of liquidity;

º Geographic concentration of the Company's assets and susceptibility to economic downturns in that area;

º The ability of the Company to attract, train and retain qualified personnel;

º Changes in consumer preferences; and

º Other factors generally understood to affect financial results of financial services companies.

The Company undertakes no obligation to update its forward-looking statements to reflect events or circumstances that occur after the date of this quarterly report on Form 10-Q.

Critical Accounting Policies

The accounting and reporting of the Company and its subsidiaries conform to accounting principles generally accepted in the United States ("GAAP") and follow general practices within the industry. Preparation of financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Management believes that the Company's estimates are reasonable under the facts and circumstances based on past experience and information supplied from professionals, regulators and others. Accounting estimates are considered critical if (i) management is required to make assumptions or judgments about items that are highly uncertain at the time estimates are made and (ii) different estimates reasonably could have been used during the current period, or changes in such estimates are reasonably likely to occur from period to period, that could have a material impact on presentation of the Company's Consolidated Financial Statements.

The development, selection and disclosure of critical accounting policies are discussed and approved by the Audit Committee of the Bank's Board of Directors. Because of the potential impact on the financial condition or results of operations and the required subjective or complex judgments involved, management believes its critical accounting policies consist of the allowance for loan losses, fair value of financial instruments and goodwill.

Allowance for Loan Losses

The allowance for losses on loans represents management's best estimate of inherent losses in the existing loan portfolio. Management's policy is to maintain the allowance for loan losses at a level sufficient to absorb reasonably estimated and probable losses within the portfolio. Management believes the allowance for loan loss estimate is a critical accounting estimate because: (i) changes can materially affect provision for loan loss expense on the income statement, (ii) changes in the borrower's cash flows can impact the allowance, and (iii) management makes estimates at the balance sheet date and also into the future in reference to the allowance. While management uses the best information available to establish the allowance for loan losses, future adjustments may be necessary if economic or other conditions change materially. In addition, federal regulatory agencies as a part of their examination process periodically review the Bank's loans and allowances for loan losses and may require the Bank to recognize adjustments based on their judgment about information available to them at the time of their examination. See Note 1 of the Company's Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for more information.

Fair Value of Financial Instruments

Certain assets and liabilities are required to be carried on the balance sheet at fair value. Further, the fair value of financial instruments must be disclosed as a part of the notes to the consolidated financial statements for other assets and liabilities. Fair values are volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates, the shape of yield curves and the credit worthiness of counter parties.

Fair values for the majority of the Bank's available-for-sale investment securities are based on observable market prices obtained from independent asset pricing services that are based on observable transactions but not quoted market prices.

Fair value of derivatives (if any) held by the Company is determined using a combination of quoted market rates for similar instruments and quantitative models based on market inputs including rate, price and index scenarios to generate continuous yield or pricing curves and volatility factors. Third party vendors are used to obtain fair value of available-for-sale securities and derivatives (if any). For more information, see Note 11 in the Company's Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Goodwill

The Company's policy is to review goodwill for impairment at the reporting unit level on an annual basis unless an event occurs that could potentially impair the goodwill amount. Goodwill represents the excess of the cost of an acquired entity over fair value assigned to assets and liabilities. Management believes accounting estimates associated with determining fair value as part of the goodwill test are critical because estimates and assumptions are made based on prevailing market factors, historical earnings and multiples and other contingencies. For more information, see Note 9 in the Consolidated Financial Statements included elsewhere this Quarterly Report on Form 10-Q.

Results of Operations

Earnings per share totaled $0.97 per share in first quarter 2012 compared to $0.83 per share in first quarter 2011. The increase in earnings per share is primarily a result of decreased provision for loan losses and stable net interest income. Non-interest income and non-interest expense components are discussed in detail below.

Net interest income is the principal source of earnings for the Company and is defined as the amount of interest generated by earning assets minus interest cost to fund those assets. Net interest income increased 2.6% and totaled $9.0 million in first quarter 2012 compared to $8.8 million in first quarter 2011.
The net yield on average earning assets for the first quarters of 2012 and 2011 were 4.88% and 5.41%, respectively. The decrease of 53 basis points in yield on earning assets is due to a combination of the continued historically low interest rate environment and due to a shift in the balance sheet. Strong deposit growth over the past two years was invested primarily into lower yielding fed funds sold, interest bearing deposits in other banks and available-for-sale investment securities while loan demand has been weak. Thus, average loans as a percent of total interest earning assets trended lower and totaled 55%, 62% and 68% for the first quarter ended March 31, 2012, 2011 and 2010, respectively.

Cost of interest bearing liabilities decreased from 1.27% in first quarter 2011 to 1.00% in first quarter 2012. Net interest margin for first quarter 2012 was 4.01% compared to 4.27% in first quarter 2011 and 4.28% for the year ended December 31, 2011. First quarter 2012 net interest margin decreased as cost of interest-bearing liabilities decreased less than the decreased yield on interest-earning assets.

Average earning assets to total average assets was 90% as of March 31, 2012 consistent with prior period ranges of 85-90%. The dilution is caused by significant investments in fixed assets and Bank-owned life insurance (BOLI) policies, which total $51 million or 4.8% of total assets as of March 31, 2012. The statement of cash flows reflects fixed assets purchases of approximately $277,000 in first quarter 2012 and $134,000 during first quarter 2011. Earnings on BOLI policies are included in other non-interest income and totaled approximately $160,000 in first quarter 2012 compared to $184,000 in first quarter 2011.

Average interest-bearing deposits in first quarter 2012 compared to the same period in 2011 reflect an increase of $39 million or 5.5%. Cost of interest bearing deposits decreased 26 basis points from first quarter 2011 to first quarter 2012.

The following quarterly average balances, interest, and average rates are presented in the following table (dollars in thousands):

                                                                        AVERAGE BALANCES AND RATES
                                                       2012                        2011                       2010
                                              Balance   Interest Rate     Balance  Interest Rate     Balance   Interest Rate
Assets
Interest earning assets:
  Loans (1)(2)(3)                              $518,258   $8,029 6.20%    $536,078   $8,506 6.35%     $571,865   $9,179 6.42%
  Investment securities:
   Taxable                                      257,802    1,778 2.76%     198,980    1,580 3.18%      160,597    1,707 4.25%
   Tax exempt (4)                               115,870    1,711 5.91%     102,165    1,626 6.37%       90,808    1,474 6.49%
  Interest earning deposits                      34,892       21 0.24%      16,507       10 0.24%        3,256        3 0.37%
  Federal funds sold                             20,480       15 0.29%      13,328       10 0.30%       18,864       10 0.21%
    Total interest earning assets               947,302   11,554 4.88%     867,058   11,732 5.41%      845,390   12,373 5.85%
Non-interest earning assets:
  Cash and due from banks                        14,122                     16,368                      14,355
  Premises and equipment                         29,758                     30,139                      30,517
  Other assets                                   66,707                     66,033                      64,049
      Total assets                           $1,056,444                   $979,598                    $954,311
Liabilities and shareholders' equity
Interest bearing liabilities:
  Interest bearing deposits                    $742,603   $1,670 0.90%    $703,935   $2,042 1.16%     $650,773   $2,241 1.38%
  Federal funds purchased and other interest
bearing liabilities                              81,549      383 1.88%      79,594      442 2.22%      114,247      950 3.33%
      Total interest bearing liabilities        824,152    2,053 1.00%     783,529    2,484 1.27%      765,020    3,191 1.67%
Non-interest bearing liabilities
  Demand deposits                               116,165                    100,723                      96,402
  Other liabilities                              10,283                      4,495                       6,818
      Total liabilities                         950,600                    888,747                     868,240
Total shareholders' equity                      105,844                     90,851                      86,071
  Total liabilities and shareholders' equity $1,056,444                   $979,598                   $954,311
Net interest income                                       $9,501                     $9,248                      $9,182
Net yield on average earning assets                              4.01%                      4.27%                       4.34%

(1) Loan totals are loans held for investments and net of unearned income and loan loss reserves.
(2) Fee income on loans held for investment is included in interest income and computations of the yield.
(3) Includes loans on non-accrual status. Interest and rates on securities that are non-taxable for federal income tax
(4) purposes are presented on a taxable equivalent basis based on the Company's statutory federal tax rate of 34%.

No provision for loan losses was recorded in first quarter 2012 compared to approximately $575,000 in first quarter 2011. Recoveries net of charged-off loans for first quarter 2012 totaled approximately $396,000 compared to net loans charged off totaling approximately $298,000 in first quarter 2011. Allowance for losses on loans as a percent of total loans was 1.58% as of March 31, 2012 compared to 1.52% as of March 31, 2012 and as of December 31, 2011. See also Nonperforming Loans and Allowance for Loan Losses section below.

Non-interest income represents fees and other income derived from sources other than interest-earning assets. Non-interest income increased approximately $137,000 or 4.3% when comparing first quarters 2012 and 2011. Non-interest income contributed 23.3% of total revenue in first quarter 2012 compared to 22.2% of total revenue in first quarter 2012.

Increased non-interest income in first quarter 2012 is a result of increased mortgage banking income, increased service charges on deposit accounts, and reduced net losses on sale or write down of foreclosed property. Income from fiduciary activities was flat at approximately $183,000 in first quarter 2012 compared to $187,000 in first quarter 2011. Mortgage banking income increased approximately $144,000 or 88% due to higher volume of mortgage originations in first quarter 2012 compared to first quarter 2011. Service charges on deposits increased approximately $115,000 or 7.2% due to increased fee and interchange income related to ATM and debit card usage. Brokerage fees decreased approximately $10,000 from first quarter 2011 to first quarter 2012. Loss on sale of foreclosed property consists of losses on the sale of other real estate and valuation adjustments made subsequent to foreclosures and totaled approximately $151,000 in net losses for first quarter 2012 compared to net losses of $353,000 in first quarter 2011. In first quarter 2011, the Company realized a gain on disposition of property of approximately $273,000 resulting from the sale of the Bank's real property in Union City, Tennessee. The Union City property previously served as a limited service facility for the Bank through January 2009.

Income from White and Associates/First Citizens Insurance, LLC, a full-service insurance agency ("WAFCI"), was included in Income from Insurance Activities in the Consolidated Statements of Income. Non-interest income generated by WAFCI for first quarter 2012, 2011 and 2010 totaled approximately $246,000, $197,000 and $218,000, respectively. Income from insurance activities also includes commissions from sale of credit life policies and the Company's proportionate share of income from the Bank's other 50% owned insurance agency,

The following table compares non-interest income for first quarter of 2012, 2011 and 2010 (dollars in thousands):

                                                Total      Increase (Decrease)     Total      Increase (Decrease)     Total
                                                 2012     Amount          %         2011     Amount          %         2010
  Mortgage banking income                         $307       $144         88.34%     $163      ($25)        -13.30%     $188
  Income from fiduciary activities                 183         -4         -2.14%      187         16          9.36%      171
  Service charges on deposit accounts            1,722        115          7.16%    1,607        -35         -2.13%    1,642
  Brokerage fees                                   293        -10         -3.30%      303         -9         -2.88%      312
  Earnings on bank owned life insurance            160        -24        -13.04%      184         -8         -4.17%      192
  Gain (loss) on sale of foreclosed property      -151        202        -57.22%     -353       -337       2106.25%      -16
  Gain on sale of available-for-sale securities    401        -61        -13.20%      462        -10         -2.12%      472
  Income from insurance activities                 250         47         23.15%      203        -29        -12.50%      232
  Gain on disposition of property                    0       -273       -100.00%      273        273              -        0
  Other non-interest income                        179          1          0.56%      178        -11         -5.82%      189
      Total non-interest income                 $3,344       $137          4.27%   $3,207     ($175)         -5.17%   $3,382

No other-than-temporary impairment losses were recognized in first quarter 2011 or 2012. See Investment Securities section for additional information.

Non-interest expense represents operating expenses of the Company and increased $194,000 or 2.6% first quarter 2012 compared to first quarter 2011. Salary and benefits expense is the largest component of non-interest expense and increased approximately $296,000 or 7.25% from first quarter 2011 to first quarter 2012. Increased salary and benefit expense is a result of overall increase in base salaries of approximately 1% and increased employee benefit expense related to accruals for discretionary contributions to the Bank's Employee Stock Ownership Plan. Average full-time equivalent employees for the Bank were 252 for three months ended March 31, 2012 compared to 250 for three months ended March 31, 2011.

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