President's Message

In the First Quarter of 2010 we continued through the problems brought about by the ongoing economic turmoil of the last two years. At times it seems never ending, but we are making progress. On the other hand there are opportunities brought about by that same turmoil. In this report we will discuss both problems and opportunities.

Initially I will touch on our financial performance for the First Quarter which continues to be positive as demonstrated by Net Income for the quarter of $ 2,339,000. Our Balance Sheet at quarter end shows Total Assets about even with the prior quarter end and with that of a year ago. However, there have been significant balance sheet changes as we continue to grow lower cost core deposits and reduce our dependence on wholesale funding. Loan demand continues subdued. When loan demand improves, as we expect it will as the economy improves, we can resume balance sheet growth and fund that growth with core deposits. While our financial performances is modest compared to a few years ago, it is quite strong on a comparative, peer group basis.

One opportunity realized recently was the opening of our new Farmerville Office. The building domiciling this new office was a former County Bank Office and going way back it was the original home of the old Farmers State Bank which started in the late 1970's. We viewed bringing back an active branch banking office to Farmersville as a significant market opportunity for us. We completely re-modeled this office, re-landscaped the grounds, and we now have one of the best looking buildings in Farmersville and indeed within the whole County. The challenge now is to capitalize on this opportunity and build a strong and loyal customer base. We are optimistic. We also anticipate announcing, very soon, another similar branch office acquisition in another community, but still within our four county footprint.

Another opportunity for us in this period is to strengthen and deepen the managerial talent factor within the bank. To that end we have made significant managerial changes within the Area Managers and again in Credit Administration. These changes have been publicly announced so I will not repeat them here, but all changes have resulted in much more effective and capable managers in key roles, both in the markets where changes have been made and again in Credit Administration, where we have increased staffing to address special assets disposition including real estate owned.

Yet another opportunity during this period of limited loan growth is time to review policy, process, procedure, and internal controls so that we will be better able to move forward when the economy improves and loan growth resumes. One specific action is that we have been developing a specialty loan product not normally seen in a bank our size. We have already established a modest business base and we are now ready to start a more aggressive marketing effort. This, we think, can and will result in significant loan growth even in a stagnant economy. More on that in future reports.

And so we begin another year with expectations for a gradually improving economy, but also realizing we are still facing a protracted period of recovery lasting perhaps into the last half of 2011. We are positioned well to take advantage of opportunities as they present themselves, and we are well staffed to address the asset quality problems that we have and that we will continue to have as economic recovery proceeds. We have the internal strength and talent to do both at the same time. It is a matter of balancing and discipline By doing so we can emerge from this recession a stronger, a more talented, and a better performing bank. I look forward to reporting on our progress through the remainder of the year.

Sincerely

James C. Holly

President, CEO and Director