Item 1. Financial Statements

SKAGIT STATE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET (Unaudited)

(dollars in thousands except share data)	March 31, 2012			December 31, 2011
ASSETS
ASSETS
Cash and due from banks	$	16,040		$	11,119
Federal funds sold	55,783			41,895
Investment securities
Available-for-sale, at fair value	273,284			265,388
Held-to-maturity, at amortized cost	33,766			34,662
Loans held for sale	317			521
Loans	349,357			353,769
Allowance for loan losses	(5,356		)	(5,183		)
Net loans	344,001			348,586
Bank premises and equipment, net	11,033			11,036
Other real estate owned	3,576			4,397
Accrued interest receivable	2,585			2,638
Other assets	3,728			3,147
TOTAL ASSETS	$	744,113		$	723,389
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits
Interest-bearing	$	546,683		$	528,989
Non-interest-bearing	94,843			91,303
Total deposits	641,526			620,292
Other borrowings	30,178			31,334
Other liabilities	1,015			1,339
Total liabilities	672,719			652,965
COMMITMENTS AND CONTINGENCIES (Note 8)

STOCKHOLDERS’ EQUITY
Common stock no par value, 5,000,000 shares authorized, 580,054 and 581,529 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively	12,642			12,644
Accumulated other comprehensive income, net of tax	3,408			3,769
Retained earnings	55,344			54,011
Total stockholders’ equity	71,394			70,424
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	744,113		$	723,389

See accompanying notes to these consolidated financial statements

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SKAGIT STATE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

	Three months ended March 31,
(dollars in thousands except per share data)	2012		2011

INTEREST INCOME
Interest and fees on loans	$	4,727	$	4,905
Investment securities
Taxable	1,313		1,108
Exempt from federal income tax	241		257
Federal funds sold	32		52
Total interest income	6,313		6,322
INTEREST EXPENSE
Deposits	774		1,180
Other borrowings	50		74
Total interest expense	824		1,254
NET INTEREST INCOME	5,489		5,068
Provision for loan losses	300		325
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	5,189		4,743
NON-INTEREST INCOME
Service charges on deposits	828		787
Other	217		175
Gains on sale of assets and loans	119		78
Total non-interest income	1,164		1,040
NON-INTEREST EXPENSES
Compensation and employee benefits	2,435		2,335
Provision for other real estate owned losses	2		213
Occupancy and equipment	377		369
Data processing	439		431
B&O tax expense	97		107
Consulting and professional fees	99		74
Loan collection and OREO expenses	96		135
Advertising	208		220
Deposit Insurance	160		246
Other	449		462
Total non-interest expenses	4,362		4,592
INCOME BEFORE PROVISION FOR INCOME TAX	1,991		1,191
PROVISION FOR INCOME TAX
Current	445		216
Total provision for income tax	445		216
NET INCOME	$	1,546	$	975
BASIC EARNINGS PER SHARE	$	2.66	$	1.66
DILUTED EARNINGS PER SHARE	$	2.66	$	1.66

See accompanying notes to these consolidated financial statements

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SKAGIT STATE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

Three months ended March 31, 2012 and 2011

						Accum. Other						Total
	Common Stock					Comprehensive			Retained			Stockholders’
(dollars in thousands except share and per share amounts)	Shares		Amount			Income			Earnings			Equity
BALANCE, January 1, 2011	587,377		$	12,541		$	1,639		$	51,792		$	65,972
Net income	—		—			—			975			975
Other comprehensive income (loss)	—		—			(145		)	—			(145		)
Stock compensation expense and restricted stock awards	262		60			—			—			60
BALANCE, March 31, 2011	587,639		$	12,601		$	1,494		$	52,767		$	66,862

BALANCE, January 1, 2012	581,529		$	12,644		$	3,769		$	54,011		$	70,424
Net income	—		—			—			1,546			1,546
Other comprehensive income (loss)	—		—			(361		)	—			(361		)
Common stock redemption	(1,722	)	(37		)	—			(213		)	(250		)
Stock compensation expense and restricted stock awards	247		35			—			—			35
BALANCE, March 31, 2012	580,054		$	12,642		$	3,408		$	55,344		$	71,394

See accompanying notes to these consolidated financial statements

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SKAGIT STATE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

(dollars in thousands)
Three months ended March 31,	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,546		$	975
Adjustments to reconcile net income to net cash flows from operating activities
Provision for loan losses	300			325
Provision for other real estate owned losses	2			213
Depreciation	145			156
Gains on sale of other real estate owned	(53		)	(18		)
Gains on loans held for sale	(66		)	(60		)
Amortization of investment security premiums and discounts, net	236			91
Stock compensation for employee services	35			60
Changes in operating assets and liabilities
Origination of loans held for sale	(2,714		)	(2,256		)
Proceeds from sale of loans held for sale	2,984			2,394
(Increase) decrease in interest receivable	53			121
Decrease (increase) in other assets	(396		)	(39		)
(Decrease) increase in other liabilities	(324		)	(428		)
Net cash flows from operating activities	1,748			1,534
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, calls, and principal payments of investment securities — available-for-sale	27,059			13,417
Purchases of investment securities — available-for-sale	(35,737		)	(47,274		)
Proceeds from maturities, calls, and principal payments of investment securities — held-to-maturity	1,504			61
Purchases of investment securities — held-to-maturity	(608		)	—
Net (increase) decrease in federal funds sold	(13,888		)	9,246
Net decrease in loans	3,985			7,576
Purchase of premises and equipment	(142		)	(55		)
Proceeds from sale of other real estate owned	1,172			—
Net cash flows from investing activities	(16,655		)	(17,029		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, money market, NOW and savings accounts	24,781			20,546
Net increase (decrease) in time deposits	(3,547		)	(5,099		)
Amount paid for redemption of common stock	(250		)	—
Net increase (decrease) in other borrowings	(1,156		)	346
Net cash flows from financing activities	19,828			15,793
NET CHANGE IN CASH AND DUE FROM BANKS	4,921			298
CASH AND DUE FROM BANKS, beginning of period	11,119			10,461
CASH AND DUE FROM BANKS, end of period	$	16,040		$	10,759
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for income taxes	$	—		$	—
Cash paid during the period for interest	$	819		$	1,273
NONCASH FINANCING AND INVESTING TRANSACTIONS
Property taken in settlement of loans	$	300		$	126
Property sold through seller financing	$	—		$	1,409

See accompanying notes to these consolidated financial statements

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SKAGIT STATE BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statement Presentation: The accompanying consolidated financial statements include the accounts of Skagit State Bancorp, Inc. and its subsidiary Skagit State Bank, (collectively, “Company” or “Bancorp”). All significant inter-company accounts and transactions have been eliminated. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results anticipated for the year ending December 31, 2012. For additional information, refer to the audited financial statements and footnotes for the most recent annual period ended December 31, 2011 contained in the Annual Report on Form 10-K. All dollar amounts in tables, except share and per share information, are stated in thousands.

Critical Accounting Policies: Bancorp’s financial statements are based upon the selection and application of significant accounting policies which by their nature are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Bancorp considers accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on Bancorp’s consolidated financial statements. Management has identified specific accounting policies that due to judgments, estimates, assumptions and economic assumptions, that may prove inaccurate or are subject to variation, which may significantly affect our reported results of operations and financial positions for the periods presented or in future periods. These policies relate to the determination of the allowance for loan losses, deferred income taxes, the valuation of real estate owned and investment securities. These policies and the judgments, estimates and assumptions are described in the Annual Report on Form 10-K for the year ended December 31, 2011.

Reclassifications: Certain reclassifications have been made to the 2011 financial statements to conform to the 2012 presentation. Such classifications have no effect on reported amounts of financial condition, earnings, cash flow, or net income.

Subsequent Events: Subsequent events are events or transactions that occur after the balance sheet date, but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet. Non-recognized subsequent events are events that provided evidence about conditions that did not exist at the date of the balance sheet, but arose after that date. Bancorp has evaluated subsequent events for potential recognition or disclosure through the date the financial statements were issued.

Loans Held-for-Sale: Loans originated and intended for sale are carried at the lower of aggregate cost or fair value. Gains and losses on the sale of mortgage loans are recognized as the difference between the selling price and the carrying value of the related mortgage loans sold.

Loans: Loans are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, including commitment fees and direct loan origination costs, are capitalized and the net amount is amortized into interest income as an adjustment to the loan yield.

Risk-Rating System: The Bank risk rates the commercial loan portfolio on a nine scale system and the Bank’s consumer loans are risk rated on a four scale system. Risk ratings in both scales are based on levels of risk as defined by the internal risk rating guidance within the Bank’s Loan Policy. A commercial loan’s risk rating may change as risk factors change throughout the life of the loan. In contrast, consumer loan ratings are based on an individual borrower’s overall credit history at loan origination and are therefore, primarily based on payment performance. Consumer loans retain their original risk rating during the life of the loan, unless payment performance or other information indicates the loans should be moved to nonaccrual, at which time the loan is risk rated substandard. Risk ratings are reviewed through various channels including the loan approval process, the loan reporting process, an external loan review process and through the regulatory review process. For risk-rating purposes, commercial, commercial real estate, other real estate and real estate construction segments are typically graded using the commercial risk ratings.

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Note 2: NEW ACCOUNTING PRONOUNCEMENTS

In June 2011, the FASB issued ASU 2011-05 which amends Comprehensive Income (Topic 220). The amendments require that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The objective is to improve the comparability, consistency and transparency of financial reporting, and to increase the prominence of items reported in other comprehensive income. These amendments are to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Disclosures required by ASU 2011-02 are included in Consolidated Statement of Comprehensive Income. The adoption of the disclosure requirements had no material impact on Bancorp’s consolidated financial position, results of operations, and earnings per share.

ASU 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 was effective for annual periods beginning after December 15, 2011. The adoption of this amendment had no material impact on Bancorp’s consolidated financial position, results of operations, and earnings per share.

Note 3: EARNINGS PER SHARE

Basic earnings per share amounts are computed based on the weighted average number of shares outstanding. Diluted earnings per share is calculated by dividing net income by diluted weighted average shares outstanding, which includes common stock equivalents outstanding using the treasury stock method.

	Three months ended
	March 31,
(dollars in thousands except share and per share amounts)	2012		2011
Numerator:
Net income	$	1,546	$	975
Denominator:
Denominator for basic earnings per share - Weighted average shares outstanding	581,026		587,496
Effect of dilutive securities:
Stock options and unvested restricted stock grants	380		850
Denominator for diluted earning per share - Weighted average shares outstanding	581,406		588,346
Basic earnings per share	$	2.66	$	1.66
Diluted earnings per share	$	2.66	$	1.66

Note 4: STOCK-BASED COMPENSATION

Bancorp has one share-based payment plan, which is shareholder approved, and permits the grant of share-based awards to its employees and directors up to 100,000 shares. As of March 31, 2012 there were 72,707 common shares available for grant. Total equity compensation expense was $35,000 for the three months ended March 31, 2012 and $60,000 for the like period in 2011.

Stock Options: No options were awarded for the three months ended March 31, 2012 or the twelve months ended December 31, 2011. The unrecognized share-based compensation cost relating to stock option expense at March 31, 2012 was $144,000, which will be recognized over the remaining vesting schedule through 2014.

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The following table summarizes the activity related to options outstanding during the three months ended March 31, 2012. The aggregate intrinsic value represents the total pretax intrinsic value (amount by which the fair value of the underlying stock exceeds the exercise price of an option, times the number of shares):

(dollars in thousands except share and per share amounts)	Shares	Weighted Average Exercise/Grant Price		Weighted Average Remaining Contractual Terms	Aggregate Intrinsic Value
Outstanding at January 1, 2012	24,917	$	179.58	6.01	$	—
Granted	—
Exercised	—
Forfeited	—
Outstanding at March 31, 2012	24,917	$	179.58	5.76	$	—
Exercisable at March 31, 2012	20,073	$	176.14	5.53	$	—

Stock Awards: Recipients of restricted stock awards do not pay any cash consideration to Bancorp for the shares and receive all dividends with respect to all such shares, whether or not shares have vested. The awards vest over a five year period. Bancorp measures the fair value of each stock award at the date of the grant and recognizes compensation expense based on the market price of Bancorp’s common stock on the date of grant.

The unrecognized share-based compensation cost relating to restricted stock awards expense at March 31, 2012 was $41,000, which will be recognized over the remaining years of the original five year vesting period of the awards. There were no awards granted for the three months ended March 31, 2012 or for the twelve months ended December 31, 2011. The total intrinsic value of stock awards exercised and vested during the three months ended March 31, 2012 was $36,000.

The aggregate intrinsic value in the table below represents the total pretax intrinsic value (amount by which the fair value of the underlying stock exceeds the exercise price of an award, times the number of shares). The following table summarizes the activity relating to restricted stock awards outstanding for the three months ended March 31, 2012.

(dollars in thousands except share and per share amounts)	Shares	Weighted Average Remaining Contractual Terms (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2012	494	1.14	$	73
Granted	—
Vested	247		36
Forfeited	—
Outstanding at March 31, 2012	247	0.89	$	36

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Note 5: INVESTMENT SECURITIES

The following tables summarize the aggregate amortized cost and estimated fair value of investment securities as of the dates indicated.

March 31, 2012

	Amortized		Gross Unrealized				Estimated
(dollars in thousands)	Cost		Gains		Losses		Fair Value
Available-For-Sale Securities
U.S. government agencies	$	120,756	$	1,192	$	28	$	121,920
Residential mortgage-backed securities and collateralized mortgage obligations	132,533		3,756		143		136,146
State and political subdivisions	14,830		432		44		15,218
Total available-for-sale	268,119		5,380		215		273,284
Held-To-Maturity Securities
State and political subdivisions	33,766		2,018		—		35,784
Total held-to-maturity	33,766		2,018		—		35,784
Total investment securities	$	301,885	$	7,398	$	215	$	309,068

December 31, 2011

	Amortized		Gross Unrealized				Estimated
(dollars in thousands)	Cost		Gains		Losses		Fair Value
Available-For-Sale Securities
U.S. government agencies	$	128,231	$	1,428	$	20	$	129,639
Residential mortgage-backed securities and collateralized mortgage obligations	120,578		3,875		34		124,419
State and political subdivisions	10,869		466		5		11,330
Total available-for-sale	259,678		5,769		59		265,388
Held-To-Maturity Securities
State and political subdivisions	34,662		1,576		0		36,238
Total held-to-maturity	34,662		1,576		0		36,238
Total investment securities	$	294,340	$	7,345	$	59	$	301,626

The following tables show the gross unrealized losses and fair value of investments with unrealized losses that are not deemed to be other-than-temporarily impaired as of the dates indicated;

March 31, 2012

	Less Than 12 Months				12 Months or Greater				Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available-For-Sale Securities
U.S. government agencies	$	6,970	$	27	$	3,002	$	1	$	9,972	$	28
Residential mortgage-backed securities and collateralized mortgage obligations	29,717		143		—		—		29,717		143
State and political subdivisions	2,441		44		—		—		2,441		44
Total available-for-sale	39,128		214		3,002		1		42,130		215
Held-To-Maturity Securities
State and political subdivisions	—		—		—		—		—		—
Total held-to-maturity	—		—		—		—		—		—
Total investment securities	$	39,128	$	214	$	3,002	$	1	$	42,130	$	215

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December 31, 2011

	Less Than 12 Months				12 Months or Greater				Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available-For-Sale Securities
U.S. government agencies	$	8,005	$	20	$	—	$	—	$	8,005	$	20
Residential mortgage-backed securities and collateralized mortgage obligations	7,815		34		—		—		7,815		34
State and political subdivisions	374		5		—		—		374		5
Total available-for-sale	16,194		59		—		—		16,194		59
Held-To-Maturity Securities
State and political subdivisions	—		—		—		—		—		—
Total held-to-maturity	—		—		—		—		—		—
Total investment securities	$	16,194	$	59	$	—	$	—	$	16,194	$	59

At March 31, 2012, Bancorp held one security that had an unrealized loss for more than one year. Bancorp does not intend to sell securities that are identified as temporarily impaired nor does available evidence suggest it is more likely than not that management will be required to sell any impaired securities. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. Management believes the nature of the securities in the investment portfolio present a high probability of collecting all contractual amounts due. Based on the evaluation, management has determined that no investment security in Bancorp’s investment portfolio is other-than-temporarily impaired. There were twenty securities in an unrealized loss position for less than twelve months as of March 31, 2012.

Available-for-sale investment securities with a carrying value of $106.6 million and $116.9 million as of March 31, 2012 and December 31, 2011, were pledged as collateral for public fund deposits, securities sold under agreement to repurchase and Federal Reserve Bank discount window borrowings. There were no sales of securities for the three months ended March 31, 2012 and March 31, 2011.

The amortized cost and estimated fair value of investment securities at March 31, 2012, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayments penalties. Mortgage-backed securities and collateralized mortgage obligations are not all due at a single maturity date, therefore, they are disclosed separately.

	2012
	Available-For-Sale				Held-To-Maturity
	Amortized		Estimated		Amortized		Estimated
(dollars in thousands)	Cost		Fair Value		Cost		Fair Value
0-1 year	$	36,780	$	36,987	$	6,422	$	6,448
1-5 years	78,364		79,554		9,656		10,057
5-10 years	7,368		7,451		12,742		13,501
Over 10 years	13,074		13,146		4,946		5,778
Residential mortgage-backed securities and collateralized mortgage obligations	132,533		136,146		—		—
Total investment securities	$	268,119	$	273,284	$	33,766	$	35,784

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Note 6: LOANS

The major segments and classes of loans, as of the dates indicated, are as follows:

(dollars in thousands)	March 31, 2012			December 31, 2011
Commercial	$	61,875		$	65,408
Commercial real estate
Raw land and land development	37,559			36,332
Other commercial real estate	64,692			62,363
Other real estate
Residential	34,286			34,066
Farmland and owner occupied nonfarm nonresidential	107,385			111,484
Real estate construction
Commercial	—			1,456
Residential	6,565			5,242
Consumer
Home equity	21,489			22,070
Credit cards and other consumer	15,942			15,803
	349,793			354,224
Less deferred loan fees	(436		)	(455		)
Total Loans	$	349,357		$	353,769

Bancorp’s primary lending activities includes real estate loans, commercial loans, which include agriculture production loans, and consumer purpose loans. Most of Bancorp’s business activity is with customers located within Skagit, Snohomish and Whatcom Counties.

Commercial Loans: Commercial loans, secured and unsecured, are made primarily for commercial and industrial purposes to small and medium-sized businesses including farms operating within Skagit, Snohomish and Whatcom Counties. These loans are available for general operating purposes, acquisition of fixed assets, purchases of equipment and machinery, financing of inventory and accounts receivable, and other business purposes. Bancorp originates Small Business Administration (SBA) loans, including 504 and 7A loans. These loans may have short or long term maturities. Such loans include working capital advances, term loans and loans to individuals for business purposes. Term loans may involve greater risk than do short term loans because the length of time the credit is outstanding increases the probability a future event may impact identified repayment sources. Term loans are generally secured because of this potential for greater risk.

Commercial Real Estate: Commercial real estate loans consist of real estate secured loans advanced for non-owner occupied commercial real estate, which includes, but is not limited to; office buildings, retail centers, multifamily and warehouses. These loans are typically term loans and are made to purchase or refinance non-owner occupied commercial real estate. Commercial real estate loans also include real estate secured raw land loans and land development loans which are made to acquire land or finance development preparatory to erecting residential or commercial structures. The primary repayment source for non-owner occupied real estate comes from the rental or lease income and the underlying cash flows generated by the occupant tenant. Risks include the tenants ability to pay rents, and because of the length of time the term loan is outstanding, this increases the probability that future events may impact these identified repayment sources.

Land development financing usually involves the purchase of land and lot development in anticipation of further construction or sale of the property. The full value of the collateral does not exist at the time the land development loan is granted and completion of the project within specified costs and time limits results in additional risk. The primary repayment source for a land development loan is dependent on the value of the underlying real estate which is subject to value variation resulting from various economic conditions.

Bancorp monitors concentrations of commercial real estate for which the cash flow from the real estate is the primary source of repayment rather than loans to a borrower for which real estate collateral is taken as a secondary source of repayment. These types of commercial real estate loans have risk profiles which are more sensitive to changes in market demand, vacancy rates, rents or changes in capitalization rates.

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Other Real Estate Loans: Other real estate loans are typically made for, the purchase of or refinance of, residential real estate, real estate used for agricultural purposes including timberland, and owner-occupied real estate utilized by small to medium sized businesses and individuals for their business operations. They are typically term loans secured by the property being purchased or refinanced. Repayment comes from the cash flow of the ongoing operations and activities conducted by the party, or affiliate of the party, or individual who owns the property. Term loans involve risk because the length of time the loan is outstanding increases the probability that a future event may impact identified repayment sources or the underlying real estate collateral values may change.

Real Estate Construction: Real estate construction loans are short term loans made for the construction period required for both commercial construction projects and residential construction projects. These loans are generally secured by the real estate project being constructed.

Commercial construction loans are available for owner-occupied real estate utilized by small to medium sized businesses and individuals for their business operations and for non-owner occupied real estate. Repayment for construction loans is generally from a long term loan either provided by the Bank or another lender.

Residential construction loans may be made to builders on a speculative basis or with a prearranged sale in place. These loans also may be made to individuals for the purpose of constructing their own residence. The full value of the collateral does not exist at the time the loan is granted and the construction project must be monitored to ensure it is completed within specified costs and time frames. Because of the short term nature of these loans collateral valuation changes is less typical.

Consumer Loans: Bancorp makes secured and unsecured consumer loans including loans to individuals, primarily customers of Bancorp, for various purposes, including home equity loans, purchases of automobiles, mobile homes, boats and other recreational vehicles, home improvement loans and loans for education and personal investments. The primary risk in consumer loans resides in the home equity portfolio which is secured by housing assets, the value of which has historically performed well; however, housing asset valuations are subject to economic conditions which may impact these values.

Bancorp originates both variable and fixed-rate loans. At March 31, 2012 and December 31, 2011, $150.0 million and $154.3 million of loans outstanding were variable rate loans, respectively. Loans participations sold to others totaled $2.1 million and $2.3 million as of March 31, 2012 and December 31, 2011, respectively. Bancorp does originate loans intended for sale which are carried at the lower of aggregate cost or fair value. As of March 31, 2012 and December 31, 2011, Bancorp held $317,000 and $521,000 as loans held-for-sale. There were no sales of loans, other than loans originated as loans held-for-sale. In addition, no loans were reclassified to held-for-sale and Bancorp acquired no loans with deteriorated credit quality.

Troubled Debt Restructures (TDR): Troubled debt restructures are loans on which, due to the borrower’s financial difficulties, Bancorp has granted a concession that would it would not otherwise consider. Examples of such concessions include forgiveness of principal or accrued interest or providing a lower interest rate than market for loans of similar risk. Interest income on restructured loans is recognized pursuant to the terms of a new loan agreement if the restructured loan qualifies for accrual status. At March 31, 2012 there was $10.8 million in troubled debt restructures with $478,000 in commitments to lend additional funds to borrowers whose terms have been modified in a troubled debt restructuring.

The following table presents troubled debt restructurings that occurred during the three months ended March 31, 2012.

(dollars in thousands)

Troubled Debt Restructurings

	Number			Increases (decreases)		Charge-offs
	of	Recorded		in the Allowance		to the Allowance
	Contracts	Investment		for Loan Losses		for Loan Losses
Commercial real estate
Raw land and land development	4	$	1,240	$	—	$	—
Other real estate
Residential	3	821		—		—
Total	7	$	2,061	$	—	$	—

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The recorded investment in the table above are period end balances that are inclusive of all partial pay-downs and charge-offs since the modification date. Loans modified in a TDR that were fully paid down, charged-off, or foreclosed upon by period end are not reported.

All TDR’s in the table above were the result of interest deferral, restructure of payments and extension of maturity. Bancorp has not forgiven any principal on the above loans. Loans modified in a TDR are typically already on a non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR for Bancorp may have the financial effect of increasing the specific allowance associated with the loan.

Bancorp had two loans modified in a TDR within the previous 12 months that subsequently defaulted and were taken into other real estate owned. A subsequent default of a TDR is defined as a TDR that is 60 days or more past due at any time subsequent to the modification.

The following table is an aging analysis of past due loans as of March 31, 2012 and December 31, 2011:

March 31, 2012

(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days and Accruing		Total Past Due		Non-accrual		Current		Total Loan Receivables
Commercial	$	18	$	—	$	—	$	18	$	254	$	61,603	$	61,875
Commercial real estate
Raw land and land development	—		—		—		—		6,968		30,591		37,559
Other commercial real estate	362		—		—		362		6		64,324		64,692
Other real estate
Residential	—		—		—		—		1,908		32,378		34,286
Farmland and owner occupied nonfarm nonresidential	122		—		—		122		6,380		100,883		107,385
Real estate construction
Commercial	—		—		—		—		—		—		—
Residential	—		—		—		—		798		5,767		6,565
Consumer
Home equity	—		—		—		—		34		21,455		21,489
Credit cards and other consumer	151		44		—		195		26		15,721		15,942
Total	$	653	$	44	$	—	$	697	$	16,374	$	332,722	$	349,793

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December 31, 2011

(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days and Accruing		Total Past Due		Non-accrual		Current		Total Loan Receivables
Commercial	$	38	$	—	$	—	$	38	$	267	$	65,103	$	65,408
Commercial real estate
Raw land and land development	—		—		—		—		7,179		29,153		36,332
Other commercial real estate	—		—		—		—		10		62,353		62,363
Other real estate
Residential	79		34		—		113		1,600		32,353		34,066
Farmland and owner occupied nonfarm nonresidential	—		—		—		—		6,649		104,835		111,484
Real estate construction
Commercial	—		—		—		—		—		1,456		1,456
Residential	—		—		—		—		658		4,584		5,242
Consumer
Home equity	—		—		—		—		88		21,982		22,070
Credit cards and other consumer	147		33		—		180		30		15,593		15,803
Total	$	264	$	67	$	—	$	331	$	16,481	$	337,412	$	354,224

The following is a summary of impaired loans as of the dates indicated:

	March 31, 2012
(dollars in thousands)	Unpaid Principal Balance		Recorded Investment with No Related Allowance		Recorded Investment with Related Allowance		Related Allowance		Total Recorded Investment
Commercial	$	934	$	886	$	—	$	—	$	886
Raw land and land development	8,877		5,477		1,953		234		7,430
Other commercial real estate	368		368		—		—		368
Residential	2,471		2,291		—		—		2,291
Farmland and owner occupied nonfarm nonresidential	6,629		6,592		37		37		6,629
Construction-commercial	—		—		—		—		—
Construction-residential	798		798		—		—		798
Consumer-home equity	99		34		52		20		86
Credit cards and other consumer	42		26		—		—		26
Total	$	20,218	$	16,472	$	2,042	$	291	$	18,514

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	December 31, 2011
(dollars in thousands)	Unpaid Principal Balance		Recorded Investment with No Related Allowance		Recorded Investment with Related Allowance		Related Allowance		Total Recorded Investment
Commercial	$	943	$	725	$	170	$	40	$	895
Raw land and land development	9,086		6,850		788		75		7,638
Other commercial real estate	374		11		363		20		374
Residential	2,092		1,984		—		—		1,984
Farmland and owner occupied nonfarm nonresidential	6,935		6,935		—		—		6,935
Construction-commercial	—		—		—		—		—
Construction-residential	658		658		—		—		658
Consumer-home equity	101		34		54		20		88
Credit cards and other consumer	45		30		—		—		30
Total	$	20,234	$	17,227	$	1,375	$	155	$	18,602

	March 31, 2012				December 31, 2011
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial	$	891	$	11	$	1,796	$	8
Raw land and land development	7,535		9		6,468		35
Other commercial real estate	371		8		893		17
Residential	2,138		6		1,404		4
Farmland and owner occupied nonfarm nonresidential	6,782		5		6,553		7
Construction-commercial	—		—		—		—
Construction-residential	728		—		738		0
Consumer-home equity	87		—		128		—
Credit cards and other consumer	28		—		43		—
Total	$	18,560	$	39	$	18,023	$	71

Risk Rating System: An effective risk rating system provides information for use in determining the overall level of the allowance for loan loss. Accurate and timely risk rating recognition is a primary component of an effective risk rating system. Risk ratings are reviewed through various channels including the loan approval process, the loan approval and reporting process, an external loan review process and through the regulatory review process. Bancorp risk rates the commercial loan portfolio on a nine scale system and Bancorp’ consumer loans are risk rated on a four scale system. Risk ratings in both scales are based on levels of risk as defined by the internal risk rating guidance within the bank’s loan policy. A commercial loan’s risk rating may change as risk factors change throughout the life of the loan, while with consumer loans the original risk rating assigned at loan origination remains for the life of the loan except when a consumer loan is moved to nonaccrual at which time it is risk rated a substandard loan.

For risk-rating purposes, commercial, commercial real estate, other real estate and real estate construction segments are typically graded using commercial risk ratings. The risk ratings used for commercial loans are as follows:

Pass: This group includes four distinct risk rating categories. The lowest level of risk in the pass categories are loans that are substantially free of risk, primarily because these loans are secured by deposits held at the bank, to the highest level of risk category in the pass categories, which have been identified as loans that have acceptable levels of risk. Loans in this last category are acceptable, but also susceptible to deterioration. Loans in this category represent the typical borrower for the Bank and are considered to be representative of the majority of borrowers in the bank’s market place.

Watch: These are loans in which the borrower is performing; however, some characteristics exist that require Bancorp to apply more than the usual management attention to an acceptable loan. This risk rating indicates that according to current information the borrower has the capacity to perform according to the terms of the loan documents; however, some level of uncertainty exists. This is typically a temporary risk rating with the identified characteristics that caused this Watch risk rating likely to be clearer in the near term.

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The following tables present Bancorp’s risk rating loan balances by class as of the dates indicated:

March 31, 2012

			Commercial Credit Indicator
(dollars in thousands)	Pass		Watch		Special Mention		Substandard		Non-Rated		Total
Commercial	$	54,592	$	2,802	$	2,481	$	2,000	$	—	$	61,875
Commercial real estate
Raw land and land development	26,874		0		559		9,232		42		36,707
Other commercial real estate	59,507		0		847		4,323		15		64,692
Other real estate
Residential	16,700		402		853		2,291		446		20,692
Farmland and owner occupied nonfarm nonresidential	91,385		2,436		2,578		10,738		28		107,165
Real estate construction
Commercial	—		—		—		—		—		—
Residential	916		—		—		798		—		1,714
Consumer
Home equity	1,095		—		499		138		—		1,732
Credit cards and other consumer	—		—		—		26		—		26
Total	$	251,069	$	5,640	$	7,817	$	29,546	$	531	$	294,603

			Consumer Credit Indicator
	A		B		C		D		Non-Rated		Total
Commercial	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate
Raw land and land development	474		315		63		—		—		852
Other commercial real estate	—		—		—		—		—		—
Other real estate
Residential	9,229		2,837		989		539		—		13,594
Farmland and owner occupied nonfarm nonresidential	220		—		—		—		—		220
Real estate construction
Commercial	—		—		—		—		—		—
Residential	3,567		520		4		760		—		4,851
Consumer
Home equity	14,021		3,305		1,528		826		77		19,757
Credit cards and other consumer	7,612		1,557		535		509		5,703		15,916
Total	$	35,123	$	8,534	$	3,119	$	2,634	$	5,780	$	55,190

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December 31, 2011

			Commercial Credit Indicator
(dollars in thousands)	Pass		Watch		Special Mention		Substandard		Non-Rated		Total
Commercial	$	57,590	$	3,536	$	2,155	$	2,127	$	—	$	65,408
Commercial real estate
Raw land and land development	25,351		0		562		9,508		42		35,463
Other commercial real estate	57,470		50		492		4,336		15		62,363
Other real estate
Residential	17,215		607		864		1,600		463		20,749
Farmland and owner occupied nonfarm nonresidential	94,520		2,935		2,753		10,909		127		111,244
Real estate construction
Commercial	1,456		—		—		—		—		1,456
Residential	562		—		—		658		—		1,220
Consumer
Home equity	1,106		—		499		88		—		1,693
Credit cards and other consumer	—		—		—		30		—		30
Total	$	255,270	$	7,128	$	7,325	$	29,256	$	647	$	299,626

			Consumer Credit Indicator
	A		B		C		D		Non-Rated		Total
Commercial	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate
Raw land and land development	487		317		65		—		—		869
Other commercial real estate	—		—		—		—		—		—
Other real estate
Residential	8,600		3,004		818		895		—		13,317
Farmland and owner occupied nonfarm nonresidential	240		—		—		—		—		240
Real estate construction
Commercial	—		—		—		—		—		—
Residential	2,795		467		—		760		—		4,022
Consumer
Home equity	14,380		3,415		1,650		861		71		20,377
Credit cards and other consumer	7,241		1,582		616		540		5,794		15,773
Total	$	33,743	$	8,785	$	3,149	$	3,056	$	5,865	$	54,598

Note 7: ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses represents management’s best estimate of losses inherent in the portfolio and is evaluated on a regular basis and reviewed by the Board of Directors. In analyzing the adequacy of the allowance for loan losses, we utilize a comprehensive loan grading system to determine the risk potential in the portfolio and also consider the results of independent third party credit reviews. Bancorp’s process is designed to account for credit deterioration as it occurs. The allowance is based upon Bancorp’s evaluation of the pertinent factors underlying the quality and composition of the loan portfolio, levels and trends in losses and delinquencies, current economic conditions, specific industry conditions and estimated value of any underlying collateral. These evaluations are inherently subjective and it requires management to make numerous assumptions, estimates and judgments that are susceptible to significant revision as more information becomes available.

While Bancorp believes that it uses the best information available to determine the allowance for loan losses and that our processes adequately address the various components that could potentially result in credit losses, the processes and various components include features that may be susceptible to significant change. There are numerous components that enter into the evaluation of the allowance for loan losses. Some are quantitative while others require Bancorp to make qualitative judgments. Unforeseen market conditions and unfavorable differences

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The following is an analysis of the changes in the allowance for loan losses as of the dates indicated:

(dollars in thousands)

Allowance for loan losses:

	Three months ended March 31, 2012
	Commercial			Commercial Real Estate		Other Real Estate			Real Estate Construction		Consumer			Unallocated		Total
Balance, beginning of year	$	1,204		$	1,586	$	1,115		$	97	$	670		$	511	$	5,183
Loans charged off	(1		)	—		(133		)	—		(62		)	—		(196		)
Recoveries	11			—		33			—		25			—		69
Provision (benefit)	(108		)	151		110			3		(33		)	177		300
Balance, end of period	$	1,106		$	1,737	$	1,125		$	100	$	600		$	688	$	5,356

Ending balance: individually evaluated for impairment	$	—		$	234	$	37		$	—	$	20		$	—	$	291
Ending balance: collectively evaluated for impairment	$	1,106		$	1,503	$	1,088		$	100	$	580		$	688	$	5,065

Loans Receivables:
Ending balance	$	61,875		$	102,251	$	141,671		$	6,565	$	37,431				$	349,793
Ending balance: individually evaluated for impairment	$	886		$	7,798	$	8,920		$	798	$	112				$	18,514
Ending balance: collectively evaluated for impairment	$	60,989		$	94,453	$	132,751		$	5,767	$	37,319				$	331,279

(dollars in thousands)

Allowance for loan losses:

	Three months ended March 31, 2011
	Commercial		Commercial Real Estate			Other Real Estate			Real Estate Construction		Consumer			Unallocated		Total
Balance, beginning of year	$	1,494	$	2,564		$	1,400		$	67	$	855		$	699	$	7,079
Loans charged off	—		—			—			—		(92		)	—		(92		)
Recoveries	3		—			—			—		31			—		34
Provision (benefit)	659		(243		)	(125		)	23		10			1		325
Balance, end of period	$	2,156	$	2,321		$	1,275		$	90	$	804		$	700	$	7,346

Ending balance: individually evaluated for impairment	$	1,260	$	445		$	39		$	—	$	25		$	—	$	1,769
Ending balance: collectively with deteriorated credit quality	$	896	$	1,876		$	1,236		$	90	$	779		$	700	$	5,577

Loans Receivables:
Ending balance	$	65,202	$	102,966		$	146,870		$	4,346	$	40,276				$	359,660
Ending balance: individually evaluated for impairment	$	3,801	$	6,938		$	7,460		$	1,032	$	149				$	19,380
Ending balance: collectively evaluated for impairment	$	61,401	$	96,028		$	139,410		$	3,314	$	40,127				$	340,280

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Note 8: COMMITMENTS AND CONTINGENCIES

Bancorp is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans, provide funds under existing lines of credit, standby letters of credit and municipal warrants. Those instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the balance sheet. Bancorp uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Commitments to originate loans, provide funds under existing lines of credit or to fund municipal warrants are agreements to lend to a customer as long as there is no violation of conditions established in the loan documents. Commitments generally have fixed expiration dates or other termination clauses. Total commitment amounts may not necessarily represent future cash-flow requirements. Standby letters of credit are conditional commitments issued by Bancorp to guarantee the performance of a customer to a third party. Commercial and standby letters of credit are granted primarily to commercial borrowers and are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Bancorp has not incurred any losses on its letter of credit commitments in 2012 or 2011.

The following is a summary of the off-balance-sheet financial instruments or contracts outstanding as of March 31, 2012: (dollars in thousands)

Unfunded commitments to extend credit	$	67,067
Credit card arrangements	$	11,523
Commitments to fund municipal warrants	$	3,850
Standby letters of credit	$	2,022

Note 9: INCOME TAXES

Bancorp files a consolidated federal income tax return. Bancorp accounts for income taxes using the liability method and deferred taxes are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. Deferred taxes result from temporary differences in the recognition of certain income and expense amounts between Bancorp’s financial statements and its tax returns. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

The effective tax rate is lower than the statutory rate due to tax credits from tax-exempt bonds and nontaxable income generated from tax-exempt municipal bonds and warrants. For the three months ended March 31, 2012, Bancorp had $241,000 in tax-exempt income. In addition, Bancorp had $18.6 million in Qualified Zone Academy Bonds as of March 31, 2012. In lieu of receiving periodic interest payments on Qualified Zone Academy Bonds, Bancorp receives an annual income tax credit until maturity of the bond. The tax credits are available one year after the bond is issued and each successive one year period thereafter until maturity.

Note 10: FAIR VALUE MEASUREMENTS

Disclosures regarding the fair value of financial asset and liabilities, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis are required disclosures. The estimated fair values have been determined by Bancorp using available market information and appropriate valuation methodologies and considerable judgment is necessary to interpret market data in the development of the estimates of fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In that regard, the fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement on the instrument. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of Bancorp.

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The carrying amounts and estimated fair values of Bancorp’s financial instruments are as follows:

	March 31, 2012				December 31, 2011
	Carrying				Carrying
(dollars in thousands)	Amount		Fair Value		Amount		Fair Value
Financial Assets
Cash and due from banks (Level 1)	$	16,040	$	16,040	$	11,119	$	11,119
Federal funds sold (Level 1)	55,783		55,783		41,895		41,895
Investment securities (Level 2)	307,050		309,068		300,050		301,626
Loans held for sale (Level 2)	317		317		521		521
Net loans (Level 3)	344,001		326,529		348,586		331,484
Accrued interest receivable (Level 2)	2,585		2,585		2,638		2,638
Financial Liabilities
Demand and savings deposits (Level 2)	446,073		446,073		421,292		421,292
Time deposits (Level 3)	195,453		196,226		199,000		199,956
Other borrowings (Level 2)	30,178		30,178		31,334		31,334
Accrued interest payable (Level 2)	161		161		156		156

The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed below.

Investment Securities Available for Sale — Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, Bancorp obtains fair value measurements from an independent pricing service. The fair value measurements include considerable observable data that may include dealer quotes, market spreads, cash flows, the treasury yield curve, yield/spread relationships, consensus prepayment rates, and the bonds terms and conditions, among other things.

Impaired Loans — The recorded net investment in impaired loans, including accrued interest, is limited to the present value of the expected cash flows of the impaired loan, the observable fair market value of the loan or the estimated fair value of the loan’s collateral.

Other Real Estate Owned — Other real estate owned includes properties acquired through foreclosure and other properties owned but no longer used for banking purposes. These properties are recorded at the lower of the recorded amount of the loan, or estimated fair value less estimated costs to sell based on periodic evaluations using Level 3 inputs. Valuation of the property occurs when it is foreclosed upon and annually thereafter. Write-downs arising from the acquisition of property, in full or partial satisfaction of loans, are charged to the allowance for loan losses. Subsequent write-downs after acquisition, identified through management’s periodic valuations, are written down through non-interest expenses.

There were no transfers between levels during 2012. The following table shows assets measured at fair value on a recurring basis as of the dates indicated.

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(dollars in thousands)			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
March 31, 2012
Available-for-sale securities
U.S. Treasury and government agencies	$	121,920	$	—	$	121,920	$	—
Residential mortgage-backed securities and collateralized mortgage obligations	136,146		—		136,146		—
State and political subdivisions	15,218		—		15,218		—
Total	$	273,284	$	—	$	273,284	$	—

December 31, 2011
Available-for-sale securities
U.S. Treasury and government agencies	$	129,639	$	—	$	129,639	$	—
Residential mortgage-backed securities and collateralized mortgage obligations	124,419		—		124,419		—
State and political subdivisions	11,330		—		11,330		—
Total	$	265,388	$	—	$	265,388	$	—

The table below shows assets measured at fair value on a non-recurring basis as of the dates indicated.

(dollars in thousands)			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Gains/(Losses) for the Three Months
Description	Total		(Level 1)		(Level 2)		(Level 3)		Ended
March 31, 2012
Impaired loans
Commercial	$	886	$	—	$	—	$	886	$	40
Commercial real estate	7,564		—		—		7,564		(139		)
Other real estate	8,883		—		—		8,883		(121		)
Real estate construction	798		—		—		798		—
Consumer	92		—		—		92		—
Other real estate owned	3,576		—		—		3,576		(2		)
Total	$	21,799	$	—	$	—	$	21,799	$	(222	)

			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Gains/(Losses) for the Twelve
Description	Total		(Level 1)		(Level 2)		(Level 3)		Months Ended
December 31, 2011
Impaired loans
Commercial	$	855	$	—	$	—	$	855	$	40
Commercial real estate	7,917		—		—		7,917		(1,387		)
Other real estate	8,919		—		—		8,919		(96		)
Real estate construction	658		—		—		658		—
Consumer	98		—		—		98		(6		)
Other real estate owned	4,397		—		—		4,397		(816		)
Total	$	22,844	$	—	$	—	$	22,844	$	(2,265	)

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Gains and losses on impaired loans in the table above are the result of charge-offs and/or changes to specific valuation allowances recorded to the allowance for loan losses for the period specified.

Gains and losses on other real estate owned in the table above are the result of increases, and/or decreases, to the provision for other real estate losses which are charged against earnings for the period specified.

Note 11: SUBSEQUENT EVENT

The JOBS Act was enacted on April 5, 2012, which, among other things, increased the threshold requiring SEC registration with the SEC for issuers with less than 2,000 shareholders and provided that bank holding companies could deregister its shares and therefore, be exempt from the reporting requirements if it had less than 1,200 shareholders, and met certain other criteria. Bancorp currently has 776 shareholders, satisfies the other criteria to qualify for deregistration, and as a result, Bancorp is reviewing its options and may file a Form 15 to deregister its shares from registration with the SEC. Such deregistration would become effective 90 days from filing the Form 15.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto presented elsewhere in this report. For additional information, refer to the financial statements and footnotes for the year ended December 31, 2011 in the Annual Report on Form 10-K.

FORWARD LOOKING STATEMENTS

This Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about management’s plans, objectives, expectations and intentions that are not historical facts, and other statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates” or words of similar meaning. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond Bancorp’s control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations in the forward-looking statements, including those set forth in this Form 10-Q, or the documents incorporated by reference:

· the risks associated with lending and potential adverse changes in the credit quality of loans in our portfolio, including results of declines in the housing and real estate markets in our market areas;

· increased loan delinquency rates;

· the risks presented by a continued economic downturn, which could adversely affect credit quality, loan collateral values, investment values, liquidity levels, and loan originations;

· changes in market interest rates, which could adversely affect our net interest income and profitability;

· legislative or regulatory changes that adversely affect our business or our ability to complete pending or prospective future acquisitions;

· reduced demand for banking products and services;

· competition from other financial services companies in our markets; and

· Bancorp’s success in managing risks involved in the foregoing.

Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in Risk Factors in Item 1A. Please take into account that forward-looking statements speak only as of the date of this Form 10-Q or documents incorporated by reference. Bancorp does not undertake any obligation to publicly correct or update any forward-looking statement if we later become aware that actual results are likely to differ materially from these expressed in such forward looking statement.

BUSINESS

Skagit State Bancorp, Inc. is a bank holding company with one wholly owned subsidiary - Skagit State Bank (collectively, “Company” or “Bancorp”). Skagit State Bank began operations in 1958 and is headquartered in Burlington (Skagit County), Washington. The Bank provides a full range of banking services and products to both businesses and individuals through 12 full service banking offices located in Skagit, Snohomish and Whatcom counties.

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Condensed Average Balance Sheets

(dollars in thousands except share data)

	2012						2011
	Average				Yield		Average				Yield
Three months ended March 31,	Balance		Interest		/Cost		Balance		Interest		/Cost
Assets
Federal funds sold	$	51,097	$	32	0.25	%	$	82,491	$	52	0.26	%
Taxable investment securities	253,811		1,313		2.08		183,916		1,108		2.44
Tax exempt securities	46,811		241		2.07		46,960		257		2.22
Loans	345,216		4,727		5.51		352,932		4,905		5.64
Total interest-earning assets	696,935		6,313		3.64	%	666,299		6,322		3.85	%
Non-interest earning assets	30,830						32,748
Total assets	$	727,765					$	699,047

Liabilities and Stockholders’ Equity
Interest-bearing demand	$	121,000	$	92	0.31	%	$	108,782	$	125	0.47	%
Savings and money market	213,398		210		0.40		197,296		297		0.61
Certificates of deposit	197,081		472		0.96		215,606		758		1.43
Total interest-bearing deposits	531,479		774		0.59		521,684		1,180		0.92
Other borrowings	33,744		50		0.60		34,655		74		0.87
Total interest-bearing deposits & liabilities	565,223		824		0.59	%	556,339		1,254		0.91	%
Non interest-bearing demand deposits	90,226						75,242
Other non-interest-bearing liabilities	1,083						1,331
Total liabilities	656,532						632,912
Stockholders’ equity	71,233						66,135
Total liabilities and stockholders equity	$	727,765					$	699,047
Net interest income			$	5,489					$	5,068
Interest rate spread					3.06	%					2.93	%
Net interest margin					3.17	%					3.08	%

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The following table sets forth information on changes in net interest income which are attributable to changes in interest rates and changes in volume for the periods indicated. Changes attributable to the combined effect of volume and interest rates have been allocated proportionately.

Analysis of Changes in Interest Income and Expense Due to Changes in Volume and Rate

	Three months ended
	March 31,
	2012 vs. 2011
	Increase (Decrease) Due to
(dollars in thousands)	Volume			Rate			Total
Interest-Earning Assets
Federal funds sold	$	(19	)	$	(1	)	$	(20	)
Investment securities	1,106			(917		)	189
Loans	(87		)	(91		)	(178		)
Total net change in income on interest-earning assets	1,000			(1,009		)	(9		)
Interest-Bearing Liabilities
Deposits	86			(492		)	(406		)
Other borrowings	(2		)	(22		)	(24		)
Total net change in expense on interest-bearing liabilities	84			(514		)	(430		)
Net change in net interest income	$	916		$	(495	)	$	421

PROVISION FOR LOAN LOSSES The provision for loan losses was $300,000 for the quarter ended March 31, 2012 compared to $325,000 for the like period in 2011. For the quarter ended March 31, 2012, net charge-offs were $127,000 compared to $58,000 for the like period in 2011.

The provision for loan losses is highly dependent upon Bancorp’s ability to manage asset quality and control the level of net-charge-offs through prudent underwriting standards. In the future, continued growth of the loan portfolio may or further declines in economic conditions could increase future provisions for loan losses and impact Bancorp’s net income. Additional discussion on loan quality and the allowance for loan losses is provided under Allowance for Loan Losses and Asset Quality.

NON-INTEREST INCOME Non-interest income, which consists primarily of fees and service charges on deposits and other income, increased to $1.2 million for the quarter ended March 31, 2012 compared to $1.0 million for the quarter ended March 31, 2011. This was a result of increases in service charges on deposits and gains on sale of other real estate owned.

NON-INTEREST EXPENSE Non-interest expense was $4.4 million for the quarter ended March 31, 2012 compared to $4.6 million for the like period in 2011. This decrease was primarily the result of a $211,000 decrease in provision for other real estate owned losses and an $86,000 decrease in deposit insurance.

The efficiency ratio is computed by dividing total operating expenses by non-interest income and net interest income before provision for loan losses. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same or greater volume of income. The efficiency ratio for the quarter ended March 31, 2012 was 65.6 percent compared to 75.2 percent for the same time period in 2011.

INCOME TAX EXPENSE Income tax expense for the quarter ended March 31, 2012 was $445,000 and compared to $216,000 for the quarter ended March 31, 2011, respectively. Bancorp’s effective tax rates were 22.4 percent and 18.1 percent for the three months ended March 31, 2012 and 2011, respectively.

The effective tax rate is lower than the statutory rate due to tax credits from tax-exempt bonds and due to nontaxable income generated from tax-exempt municipal bonds and warrants. For the three months ended March 31, 2012, Bancorp had $241,000 in tax-exempt income from tax-exempt bonds and warrants. In addition, Bancorp had $18.6 million in Qualified Zone Academy Bonds as of March 31, 2012. In lieu of receiving periodic interest payments on Qualified Zone Academy Bonds, Bancorp receives an annual income tax credit until maturity of the bond. The tax credits are available one year after the bond is issued and each successive one year period thereafter until maturity.

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REVIEW OF FINANCIAL CONDITION

Total assets increased to $744.1 million at March 31, 2012 compared to $723.4 million at December 31, 2011. This increase was primarily due to a $21.2 million increase in deposits. Net loans decreased $4.6 million to $344.0 million during the same time period.

INVESTMENT SECURITIES AND FEDERAL FUNDS SOLD Investment securities and federal funds sold increased $20.9 million to $362.8 million at March 31, 2012 and within the total, federal funds sold increased to $55.8 million at March 31, 2012 compared to $41.9 million at December 31, 2011. Total investment securities, including federal funds sold as a percentage of total assets increased to 49% at March 31, 2012, compared to 47% as of December 31, 2011.

Securities classified as available for sale are reported at estimated fair value, with unrealized gains and losses (net of income taxes) reported as accumulated other comprehensive income, a separate component of stockholders’ equity. At March 31, 2012, the available-for-sale investment portfolio was comprised of 49.8 percent Government Sponsored Agency and Government Agency residential mortgage-backed pass-through securities and collateralized mortgage obligations, 5.6 percent of state and municipals and 44.6 percent of Government Sponsored Agencies and Government Agencies securities. The held-to-maturity portfolio was concentrated in municipal securities and Qualified Zone Academy Bonds. Security purchases totaled $36.3 million for the three months ended March 31, 2012, while maturities, security calls and principal pay downs totaled $28.6 million.

The following table presents the carrying value of the portfolio of investments securities as of the dates indicated.

	March 31, 2012		December 31, 2011

Held-To-Maturity
State and political subdivisions	$	33,766	$	34,662
Total	$	33,766	$	34,662
Available-For-Sale
U.S. government agencies	$	121,920	$	129,639
Residential mortgage-backed securities and collateralized mortgage obligations	136,146		124,419
State and political subdivisions	15,218		11,330
Total	$	273,284	$	265,388

LOANS Net loans decreased $4.6 million to $344.0 million at March 31, 2012 from $348.6 million at December 31, 2011. Net loans represented 46 percent of total assets at March 31, 2012. Bancorp continues to originate and fund loans to credit-worthy customers within our markets. However, decreased loan balances reflect the current economic conditions which results in lower loan demand and lower availability of quality loans. Bancorp’s primary lending activities includes real estate loans, commercial loans which include agriculture production loans and consumer purpose loans.

Commercial Loans: These loans were 17% of our portfolio as of March 31, 2012 compared to 18% at December 31, 2011. Commercial loans, secured and unsecured, are made primarily for commercial and industrial purposes to small and medium-sized businesses including farms operating within Skagit, Snohomish and Whatcom Counties. These loans are available for general operating purposes, acquisition of fixed assets, purchases of equipment and machinery, financing of inventory and accounts receivable, and other business purposes. Bancorp originates Small Business Administration (SBA) loans, including 504 and 7A loans.

Commercial Real Estate: Commercial real estate loans were 29% of our portfolio as of March 31, 2012 compared to 28% at December 31, 2011. Commercial real estate loans consist of real estate secured loans advanced for non-owner occupied commercial real estate which includes, but is not limited to, office buildings, retail centers, multifamily and warehouses. These loans are typically term loans and are made to purchase or refinance non-owner occupied commercial real estate. Commercial real estate loans also include real estate secured raw land loans and land development loans which are made to acquire land or finance development preparatory to erecting residential or commercial structures.

Other Real Estate Loans: Other real estate loans comprised 41% of our portfolio as of March 31, 2012 and December 31, 2011. Other real estate loans are typically made for, the purchase of or refinance of, residential real estate, real estate used for agricultural purposes including timberland, and owner-occupied real estate utilized by small to medium sized businesses and individuals for their business operations. They are typically term loans secured by the property being purchased or refinanced.

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Real Estate Construction: These loans comprised 2% of our portfolio as of March 31, 2012 and December 31, 2011. Real Estate construction loans are short term loans made for the construction period required for both commercial construction projects and residential construction projects. These loans are generally secured by the real estate project being constructed. Commercial construction loans are available for owner-occupied real estate utilized by small to medium sized businesses and individuals for their business operations and for non-owner occupied real estate.

Consumer Loans: Consumer loans comprise 11% of our portfolio as of March 31, 2012 and December 31, 2011.Bancorp makes secured and unsecured consumer loans including loans to individuals, primarily customers of Bancorp, for various purposes, including home equity loans, purchases of automobiles, mobile homes, boats and other recreational vehicles, home improvement loans and loans for education and personal investments.

Concentrations: While Bancorp has a diversification of loan types and type of security, Bancorp does have a concentration of loans in commercial and residential real estate and as such we are not immune to either the current economic conditions or how these economic conditions may affect a borrower’s ability to meet the stated repayment terms. Loans secured by real estate compose 78% of the total loan portfolio and 37% of total assets as of March 31, 2012. Further declines in the performance of the economy, in general, or further declines in real estate values in our market areas, in particular, could have an adverse impact on collectability, increase the level of real estate non-performing loans or have other adverse effects which alone or in aggregate could have a material adverse effect on our business, financial condition, results of operation and cash flows.

In addition, Bancorp has a high concentration of loans to a relatively small group of large borrowers, which could adversely affect Bancorp’s earnings if some of those customers cease doing business with us or certain of those larger loans incur problems. Approximately 47% of our loan portfolio as of March 31, 2012 was comprised of loans to a group of approximately 42 entities related through ownership or guaranties, but generally with unrelated repayment sources.

Also, most of Bancorp’s business activity is with customers located within Skagit, Snohomish and Whatcom Counties. While Bancorp has these concentrations, Bancorp believes that its lending policies and concentration policies are sufficient to minimize risks. Management employs risk management practices, including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through stress testing.

The following table presents the composition of loans for Bancorp as of the dates indicated.

Loan Composition

(dollars in thousands)	March 31, 2012			December 31, 2011
Commercial	$	61,875		$	65,408
Commercial real estate
Raw land and land development	37,559			36,332
Other commercial real estate	64,692			62,363
Other real estate
Residential	34,286			34,066
Farmland and owner occupied nonfarm nonresidential	107,385			111,484
Real estate construction
Commercial	—			1,456
Residential	6,565			5,242
Consumer
Home equity	21,489			22,070
Credit cards and other consumer	15,942			15,803
	349,793			354,224
Less deferred loan fees	(436		)	(455		)
Total Loans	$	349,357		$	353,769

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Management employs risk management practices, including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through stress testing. In addition, Bancorp monitors concentrations of commercial real estate for which the cash flow from the real estate is the primary source of repayment rather than loans to a borrower for which real estate collateral is taken as a secondary source of repayment. These types of commercial real estate loans have risk profiles which are more sensitive to changes in market demand, vacancy rates, rents or changes in capitalization rates. Included in these commercial real estate concentrations are loans for construction, land development, raw land, multifamily, and nonfarm nonresidential non-owner occupied properties. Excluded from these commercial real estate concentrations are nonfarm nonresidential owner occupied properties where the primary source of repayment is the cash flow from the ongoing operations and activities conducted by the party, or affiliate of the party, who owns the property.

ALLOWANCE FOR LOAN LOSSES The allowance for loan losses was $5.4 million or 1.56 percent of net loans as of March 31, 2012 compared to $5.2 million or 1.49 percent of net loans as of December 31, 2011. Additions to the allowance, in the form of provision, are reflected in current operating results, while charge-offs to the allowance are made when a loss is determined to have occurred. The provision for loan losses was $300,000 for the quarter ended March 31, 2012 compared to $325,000 for the like period in 2011. For the quarter ended March 31, 2012, net charge-offs were $127,000 compared to $58,000 for the like period in 2011.

Bancorp has a high concentration of loans to a relatively small group of large borrowers which can impact the level of non-performing loans when one of these loans is classified as non-performing. In some cases, non-performing loans may be well collateralized with no loss of principal balance envisioned. As a result, increases to non-performing loans balances do not necessarily result in an increase to the allowance for loan losses under Bancorp’s methodology for estimating the allowance for loan losses. Also, prior to loans being classified as non-performing these loans are typically already risk rated as substandard or special mention and receive a general allowance allocation based on historical loan loss experience for that particular loan types and risk ratings. Substandard and special mention loans moved to non-performing status can result in a net decrease to the allowance for loan losses if the particular loan is well secured and no loss of principal is envisioned under Bancorp’s methodology for estimating the allowance for loan losses.

The allowance for loan losses (“ALLL”) represents management’s best estimate of losses inherent in the portfolio, consists of specific, general and unallocated components. The allowance consists of specific, general and unallocated components; (i) a specific valuation allowance based on a review of substandard or non-accrual loans for specific weaknesses and evaluation of those loans for impairment and loss exposure; (ii) a general allowance which is based on historical loan loss experience for different loan types and different risk gradings with adjustments for current events and conditions. Bancorp’s process is designed to account for credit deterioration as it occurs. The adjustments are a result of management’s judgment about risks inherent in the portfolio and include such factors as loan quality trends, levels of and trends of non-accrual loans, past due loans, potential problem loans, criticized loan balances, net charge-offs and current economic and business conditions, among other factors and (iii) unallocated general allowances determined based on general economic conditions and other qualitative risk factors. The unallocated allowance provides for other credit losses inherent in the loan portfolio that may not have been contemplated in the general and specific components of the allowance. The unallocated amount is reviewed periodically based on trends in credit losses, the results of credit reviews and overall economic trends. Further information regarding Bancorp’s policies and methodology used to estimate the allowance for possible loan losses is presented in Note 7 — Allowance for Loan Losses in the accompanying notes to the consolidated financial statements found elsewhere in this report.

The following table presents Bancorp’s allocation of the allowance for loan losses by loan category as of the dates indicated. (dollars in thousands)

	March 31, 2012		December 31, 2011
Commercial	$	1,106	$	1,204
Commercial real estate	1,737		1,586
Other real estate	1,125		1,115
Real estate construction	100		97
Consumer	600		670
Unallocated	688		511
Total	$	5,356	$	5,183

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The following table presents the activity in the allowance for loan losses for the dates indicated.

Allowance for Loan Losses Activity

	Three months ended
	March 31,
(dollars in thousands)	2012			2011
Allowance as of beginning of period	$	5,183		$	7,079
Provision for loan losses	300			325
Charge-offs	(196		)	(92		)
Recoveries	69			34
Net charge-offs	(127		)	(58		)
Balance at end of period	$	5,356		$	7,346
Ratio of net charge-offs to average loans during the period	0.15		%	0.07		%
Ratio of allowance to net loans at end of period	1.56		%	2.09		%
Ratio of non-performing loans to allowance	305.71		%	249.77		%

ASSET QUALITY Non-performing assets consist of nonaccrual loans, accruing loans past due 90 days or more, and other real estate owned. At March 31, 2012, non-performing assets decreased to $20.0 million or 2.68 percent of total assets compared to $20.9 million or 2.89 percent as of December 31, 2011. The decrease was mainly the result of an $821,000 decrease in other real estate owned during the three months ended March 31, 2012.

Non-accrual loans - It is Bancorp’s policy to discontinue the accrual of interest on all loans that are 90 days or more past due or when there are otherwise serious doubts about the collectability of principal or interest within the existing terms of the loan and place them on non-accrual. When a loan is placed on non-accrual status, any accrued but unpaid interest on that date is removed from interest income. Non-accruing loans were $16.4 million as of March 31, 2012 compared to $16.5 million as of December 31, 2011.

Troubled Debt Restructurings — Loans are considered troubled debt restructures on loans for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral or forgiveness, of interest or principal, have been granted due to the borrower’s weakened financial condition. Restructured loans included in impaired loans were $10.8 million as of March 31, 2012 of which, $8.7 million was included in non-accrual loans. Restructured loans included in impaired loans were $8.8 million as of December 31, 2011, of which, $6.7 million was included in non-accrual loans.

Other real estate owned — Other real estate owned decreased $821,000 to $3.6 million compared to $4.3 million at December 31, 2011. During 2012, four real estate properties totaling $1.2 million were sold with a net gain of $51,000. In addition, three properties for a total of $300,000 were transferred to other real estate owned. As of March 31, 2012, Bancorp held eleven properties which represent four separate land development projects with a carrying balance of $2.3 million, one commercial real estate property with a carrying balance of $119,000, one farmland property with a carrying balance of $58,000 and five residential properties with a carrying balance of $1.1 million.

Valuation of the property occurs when it is foreclosed upon and annually thereafter. Based on current appraisals received for the three months ended March 31, 2012 and 2011 and the decrease in fair market values of these real estate properties, Bancorp recorded a write-down on other real estate owned of $2,000 and $213,000, respectively. It is Bancorp’s plan to continue its collection efforts and liquidation of collateral, as necessary, to recover as large a portion of other real estate owned as possible.

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The following table presents non-performing asset information related to loans accounted for on a non-accrual basis, accruing loans 90 days or more past due and other real estate owned for the dates indicated.

Non-Performing Assets

(dollars in thousands)	March 31, 2012			December 31, 2011
Non-accrual loans	$	16,374		$	16,481
Loans past due 90 days or more still accruing	—			—
Total non-performing loans	16,374			16,481
Other real estate owned	3,576			4,397
Total non-performing assets	$	19,950		$	20,878
Total non-performing loans to net loans	4.76		%	4.73		%
Total non-performing loans to total assets	2.20		%	2.28		%
Total non-performing assets to total assets	2.68		%	2.89		%

Impaired loans - At March 31, 2012, impaired loans decreased minimally to $18.5 million compared to $18.6 million at December 31, 2011. Four credit relationships totaling $12.0 million, accounted for 65 percent of impaired loans as of March 31, 2012.

A loan is considered impaired when management determines that it is probable that Bancorp will be unable to collect all amounts of principal and interest according to contractual terms. Factors considered by management in determining impairment include payment status, and the probability of collecting scheduled principal and interest payments when due. Impaired loans include loans in nonaccrual status, troubled debt restructures and other loans that management considers to be impaired. Other loans include loans that management has reviewed for impairment and has determined to be impaired even though the loan may be current and performing in accordance with the contractual loan terms. As a result, these other impaired loans continue to remain on accrual status and are not considered non-performing assets. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

Other potential problem loans — Potential problem loans consist of risk rated substandard loans that are currently performing, are not on nonaccrual status, restructured or impaired, but for which management have identified as having a well-defined weakness or weaknesses and which there are sufficient doubts as to the borrower’s future ability to comply with repayment terms. These loans are identified through our internal risk grading processes and management monitors these loans closely and reviews their performance on a regular basis. As of March 31, 2012 and December 31, 2011, Bancorp had classified $11.0 million as potential problem loans.

Credit Risk Management

The extension of credit to individuals and businesses is a significant portion of Bancorp’s principal business activity and requires ongoing portfolio and credit management. Bancorp has established lending policies and procedures to manage and monitor risk. These lending policies and procedures include guidelines for concentrations of credit, loan terms, loan-to-value ratios, collateral appraisals, borrower lending limits and loan approval limits. In addition, Bancorp monitors its loan portfolio for potential risk of loss according to an internal risk-grading system and monitors its credit quality to identify potential problem credits and any loss exposure in a timely manner. Bancorp has assessed and will continue to assess on an on-going basis, the impact of the economy on the credit risk in the loan portfolio.

Risk Rating System: An effective risk rating system provides information for use in determining the overall level of the Allowance for Loan Loss. Accurate and timely risk rating recognition is a primary component of an effective risk rating system. Risk ratings are reviewed through various channels including the loan approval process, the loan reporting process for approved loans, an external loan review process and through the regulatory review process. The Bank risk rates the commercial loan portfolio on a nine scale system, while the Bank’s consumer loans are risk rated on a four scale system. Risk ratings in both scales are based on levels of risk as defined by the internal risk rating guidance within the Bank’s Loan Policy. A commercial loan’s risk rating may change as risk factors change throughout the life of the loan, while with consumer loans the original risk rating assigned at loan origination remains for the life of the loan except when a consumer loan is moved to nonaccrual at which time it is risk rated a substandard loan. For risk-rating purposes, commercial, commercial real estate, other real estate and real estate construction segments are typically graded using the commercial risk ratings.

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DEPOSITS Bancorp offers a full range of deposit services including checking accounts, savings accounts, money market accounts and various types of certificates of deposit. The transaction accounts and certificates of deposit are tailored to Bancorp’s primary market area at rates competitive with those offered in the area. Bancorp offers both interest and non-interest bearing checking accounts.

Total deposits increased $21.2 million to $641.5 million at March 31, 2012 compared to $620.3 million at December 31, 2011. Within the total, core deposits increased $24.8 million while time deposits decreased $3.5 million. As a result, core deposits as a percentage of total deposits increased to 70% at March 31, 2012 compared to 68% at December 31, 2011. Core deposits consist of non- interest and interest bearing demand accounts, money market accounts, and saving accounts.

The following table presents the balance and percent of total deposits in the various categories of deposits offered by Bancorp as of the dates indicated.

Deposit Composition

	March 31, 2012				December 31, 2011
(dollars in thousands)	Amount		% of Total		Amount		% of Total
Non-interest bearing demand	$	94,843	14.8	%	$	91,303	14.7	%
Interest bearing demand	129,632		20.2	%	119,229		19.2	%
Money market	97,675		15.2	%	93,767		15.1	%
Savings	123,923		19.3	%	116,993		18.9	%
Time	174,804		27.2	%	183,347		29.6	%
Brokered time deposits (CDARS)	20,649		3.3	%	15,653		2.5	%
Total deposits	$	641,526	100.0	%	$	620,292	100.0	%

OTHER BORROWINGS Borrowings consist of federal funds purchased, discount window borrowings from the Federal Reserve Bank of San Francisco and securities sold under agreements to repurchase. At March 31, 2012 and December 31, 2011, securities sold under agreements to repurchase were $30.2 million and $31.3 million, respectively. These borrowings decrease or increase primarily based on the availability of funds and the current competitive interest rate offered. These borrowings are collateralized by securities with an estimated fair value exceeding the face value of the borrowings. Periodically, Bancorp uses federal funds purchased and Federal Reserve borrowings as a funding source. Bancorp had no Federal Reserve borrowings at March 31, 2012 and December 31, 2011.

CAPITAL RESOURCES Stockholders’ equity increased to $71.4 million at March 31, 2012 from $70.4 million at December 31, 2011. Book value per share at March 31, 2012 was $123.08 compared to $121.10 at December 31, 2011.

Bancorp has only one class of stock, which is common stock and at March 31, 2012, there were 776 shareholders of record. Bancorp’s stock is not actively traded or quoted and no broker currently makes a market in the stock. However, sales and transfers of the stock do occur. Skagit State Bank acts as transfer agent for Bancorp stock. To facilitate trading, the Bank maintains a list of persons interested (known to the Bank) in either purchasing or selling Bancorp stock. Purchasers and sellers then negotiate their own transactions with the Bank acting as transfer agent for those transactions.

From time to time, Bancorp repurchases shares of its common stock. The number of shares of stock that will be repurchased and the price that will be paid is the result of many factors including market and economic conditions, the number of shares available, Bancorp’s liquidity and capital needs and regulatory requirements. For the three months ended March 31, 2012, Bancorp repurchased 1,722 shares of stock for $250,000 at a price of $145 per share. No shares were repurchased for the three months ended March 31, 2011.

Skagit State Bancorp and Skagit State Bank are both subject to various regulatory capital requirements administered by the Federal Reserve and the FDIC under which risk percentages are assigned to various categories of asset and off-balance sheet items to calculate a risk-adjusted capital ratio. The federal regulations set forth the qualifications necessary for bank holding companies and banks to be classified as “well capitalized”. Failure to be well —capitalized can impact a bank’s insurance premium rates, can negatively impact a bank’s ability to expand and engage in certain activities. At March 31, 2012, Skagit State Bancorp and the Bank both exceeded regulatory capital requirements and were “well-capitalized” pursuant to such regulations.

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									To Be Well
									Capitalized Under
					For Capital				Prompt Corrective
	Actual				Adequacy Purposes				Action Provisions
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of March 31, 2012
Total Capital
(to Risk-Weighted Assets)
Skagit State Bank	$	73,193	16.65	%	$	35,164	> 8.00	%	$	43,956	> 10.00	%
Skagit State Bancorp, Inc.	$	73,413	16.69	%	$	35,181	> 8.00	%	$	43,976	> 10.00	%
Tier I Capital
(to Risk-Weighted Assets)
Skagit State Bank	$	67,766	15.42	%	$	17,582	> 4.00	%	$	26,373	> 6.00	%
Skagit State Bancorp, Inc.	$	67,986	15.46	%	$	17,590	> 4.00	%	$	26,386	> 6.00	%
Tier I Capital
(to Average Assets)
Skagit State Bank	$	67,766	9.31	%	$	29,107	> 4.00	%	$	36,383	> 5.00	%
Skagit State Bancorp, Inc.	$	67,986	9.34	%	$	29,107	> 4.00	%	$	36,383	> 5.00	%

As of December 31, 2011
Total Capital
(to Risk-Weighted Assets)
Skagit State Bank	$	71,574	16.34	%	$	35,042	> 8.00	%	$	43,802	> 10.00	%
Skagit State Bancorp, Inc.	$	71,909	16.41	%	$	35,054	> 8.00	%	$	43,818	> 10.00	%
Tier I Capital
(to Risk-Weighted Assets)
Skagit State Bank	$	66,320	15.14	%	$	17,521	> 4.00	%	$	26,281	> 6.00	%
Skagit State Bancorp, Inc.	$	66,655	15.21	%	$	17,527	> 4.00	%	$	26,291	> 6.00	%
Tier I Capital
(to Average Assets)
Skagit State Bank	$	66,320	9.20	%	$	28,836	> 4.00	%	$	36,045	> 5.00	%
Skagit State Bancorp, Inc.	$	66,655	9.25	%	$	28,836	> 4.00	%	$	36,045	> 5.00	%

LIQUIDITY

Bancorp has a formal liquidity policy that establishes liquidity guidelines and the maintenance of contingency liquidity plans that provide for actions and timely responses to liquidity stress situations and that are in accordance with regulatory guidance. The objective of liquidity risk management is to ensure that Bancorp has the continuing ability to maintain cash flows that are adequate to fund operations including day to day cash flow requirements of either its depositors wanting to withdraw funds or to provide for customers credit needs. The majority of our funding comes from customer deposits within the Bank’s market area. In addition, funding needs are met through loan repayments, investment securities repayments and earnings. Liquidity may also be obtained by borrowing through pre-approved credit lines and by marketable securities that can be readily converted to cash or pledged as collateral for additional borrowings. For the future there can be no guarantee that these unsecured lines of credit will remain available or that securities can be converted to cash with or without loss. Bancorp uses deposits to fund loans and investments that are typically longer in term.

As of March 31, 2012 Bancorp had approximately $27.0 million in approved unsecured credit lines from various financial institutions and had securities with a market value of $53.2 million pledged as collateral for borrowing at the Federal Reserve Discount Window, and unpledged marketable securities with a market value of $166.7 million available for funding needs. Because the Bank’s primary sources and uses of funds are deposits and loans, the relationship between net loans and total deposits provides one measure of the Bank’s liquidity. The Bank’s loan to deposit ratio decreased to 54 percent at March 31, 2012 compared to 56 percent at December 31, 2011, as a result of the increase in deposits and the decrease in loans.

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The analysis of liquidity also includes a review of the statement of cash flows. The cash flows detail Bancorp’s operating, investing and financing activities during the year. Cash flows from operations contribute to liquidity as well as proceeds from the maturities of securities, loan repayments and increasing customer deposits. As indicated in the Consolidated Statement of Cash Flows, net cash flows from operating and financing activities contributed $1.7 million and $19.8 million to liquidity, respectively, for the three months ended March 31, 2012. The net use of cash from investing activities of $16.7 million was primarily for the net purchase of $36.3 million in investment securities.

Skagit State Bancorp, Inc. is a separate legal entity from the Bank and must provide for its own liquidity. Substantially all of Bancorp’s revenues are obtained from dividends declared and paid by the Bank. Skagit State Bank’s ability to pay dividends is limited by its earnings, financial condition and capital requirements, as well as regulatory restrictions.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The results of operations for financial institutions are largely dependent upon the financial institution’s ability to manage market risks which includes interest rate risk. Interest rate risk refers to the exposure of earnings and capital arising from changes in interest rates.

Asset Liability Management: Bancorp maintains an asset/liability management program which is the responsibility of the Asset Liability Committee. The objective of asset liability management is to manage, protect and stabilize Bancorp’s net interest income from undue interest rate risk through various interest rate cycles within the constraints of credit quality, interest rate risk policies, levels of capital and adequate levels of liquidity. The committee meets to monitor the composition of the balance sheet, to review projected earnings trends, and to formulate strategies consistent with these objectives for liquidity, interest rate risk and capital adequacy. Bancorp believes that there have not been any material changes about Bancorp’s market risk from the information that was provided in the Form 10-K for the year ended December 31, 2011.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Bancorp’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures, required by Exchange Act Rules 13(a) - 15(b), as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that Bancorp’s current disclosure controls and procedures are effective and timely, providing them with material information relating to Bancorp required to be disclosed in the reports we file or submit under the Exchange Act.

Changes in Internal Controls

There have not been any significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Bancorp did not identify nor implement any corrective actions with regard to any significant deficiencies or material weaknesses in its internal controls.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, Bancorp may be a plaintiff and/or defendant in certain claims and legal actions arising in the ordinary course of commercial banking involving real estate lending transactions and other ordinary routine litigation incidental to the business of Bancorp. Bancorp is not a party to any pending legal proceedings that Bancorp believes would have a material adverse effect on the financial condition of Bancorp.

Item 1A. Risk Factors

There are certain risks inherent to Bancorp’s business. The material risks and uncertainties that management believes affect Bancorp are described below. Although we have risk management policies, procedures and verification procedures in place, additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair Bancorp’s business operations. If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected.

The continued challenging economic environment could have a material adverse effect on our future results of operations or trading price of our stock.

The national economy, and the financial services sector in particular, are still facing significant challenges. Substantially all of our loans are to businesses and individuals in Skagit, Snohomish or Whatcom Counties, Washington, markets facing many of the same challenges as the national economy, including continued

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unemployment and declines in commercial and residential real estate. Although some economic indicators are improving both nationally and in the markets we serve, unemployment remains high and there remains substantial uncertainty regarding when and how strongly a sustained economic recovery will occur. A further deterioration in economic conditions in the nation as a whole or in the markets we serve or a protracted recovery period could result in the following consequences, any of which could have an adverse impact, which may be material, on our business, financial condition, results of operations and prospects, and could also cause the market price of our stock to decline:

· economic conditions may worsen, increasing the likelihood of credit defaults by borrowers;

· loan collateral values, especially as they relate to commercial and residential real estate, may decline further, thereby increasing the severity of loss in the event of loan defaults;

· demand for banking products and services may decline, including services for low cost and non-interest-bearing deposits; and

· changes and volatility in interest rates may negatively impact the yields on earning assets and the cost of interest-bearing liabilities.

Bancorp’s concentration in real estate loans could adversely affect Bancorp’s earnings in an economic downturn.

Real estate related loans, including those loans that are collateralized by real estate, comprise the largest category of loans, representing 78 percent of Bancorp’s total loans. Our real estate portfolio consists of commercial and residential lending. These loans are secured by property such as office buildings, commercial business properties, healthcare buildings, agricultural land, timber land and residential properties. Commercial and commercial real estate loans generally are viewed as having more risk of default than residential real estate loans or certain other types of loans or investments. Typically, these types of loans are larger than residential real estate loans and other loans. Because the loan portfolio contains a number of commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming loans. An increase in nonperforming loans could result in a loss of earnings from these loans, an increase in the provision for loan losses or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition.

The Bank has a high concentration of loans to a relatively small group of large borrowers, which could adversely affect Bancorp’s earnings if some of those customers cease doing business with us or certain of those larger loans incur problems. Approximately 47% of our loan portfolio as of March 31, 2012 was comprised of loans to a group of approximately 42 entities related through ownership or guaranties, but generally with unrelated repayment sources. If any material portion of those entities ceased doing business with the Bank, it could have a materially adverse effect on Bancorp’s earnings and financial condition.

Our allowance for loan losses may not be adequate to cover actual loan losses, which could adversely affect our earnings.

Bancorp maintains an allowance for loan losses in an amount that we believe is adequate to provide for losses inherent in the loan portfolio. While we strive to carefully manage and monitor credit quality and to identify loans that may become nonperforming, at any time there are loans included in the portfolio that will result in losses, but that have not been identified as nonperforming or potential problem loans. By closely monitoring our credit quality, we attempt to identify deteriorating loans before they become nonperforming assets and adjust the loan loss reserve accordingly. However, because future events are uncertain, and if adverse economic conditions continue to persist, there may be loans that deteriorate to a nonperforming status in an accelerated time frame. As a result, future additions to the allowance may be necessary. Because the loan portfolio contains a number of loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming loans, requiring an increase to the loan loss allowance. As a result, future additions to the allowance at elevated levels may be required based on changes in the mix of loans comprising the portfolio, changes in the financial condition of borrowers, which may result from changes in economic conditions, or as a result of actual events being different from assumptions used by management in determining the allowance. Additionally, banking regulators, as an integral part of their supervisory function, periodically review our loan portfolio and the adequacy of our allowance for loan losses. These regulatory agencies may require us to recognize further loan loss provisions or charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance for loan losses could have a negative effect on our financial condition and results of operation.

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A continued tightening of the credit markets may make it difficult to obtain adequate funding for loan growth, which could adversely affect our earnings.

A continued tightening of the credit markets and the inability to obtain or retain adequate funds for continued loan growth at an acceptable cost may negatively affect our asset growth and liquidity position, and therefore, our earnings capability. In addition to core deposit growth, maturity of investment securities and loan payments, Bancorp also relies on alternative funding sources through correspondent banking and borrowing lines with the Federal Reserve Bank to fund loans. In the event the current economic downturn continues, particularly in the housing market, these resources could be negatively affected, both as to price and availability, which would limit and or raise the cost of the funds available to Bancorp.

We may be required, in the future, to recognize impairment with respect to investment securities.

Our securities portfolio currently includes securities with unrecognized losses. We may continue to observe declines in the fair market value of these securities. Securities issued by certain states and municipalities have recently come under scrutiny due to concerns about credit quality. Although management believes the credit quality of Bancorp’s state and municipal securities portfolio to be good, there can be no assurance that the credit quality of these securities will not decline in the future. We evaluate the securities portfolio for any other than temporary impairment each reporting period, as required by generally accepted accounting principles in the United States of America, and as of March 31, 2012, Bancorp did not recognize any securities as other-than-temporarily impaired. There can be no assurance, however, that future evaluations of the securities portfolio will not require Bancorp to recognize an impairment charge with respect to these and other holdings.

Fluctuating interest rates can adversely affect Bancorp’s profitability.

Bancorp’s profitability and cash flows are dependent to a large extent upon net interest income. Net interest income is the difference (or “spread”) between the interest earned on loans, securities and other interest-earning assets and Bancorp’s cost of funds, primarily interest expense on deposits and borrowings. Interest rates are highly sensitive to many factors that are beyond our control including, but not limited to, general economic conditions and policies of various governmental and regulatory agencies. Changes in monetary policy, including changes in interest rates, impact the level of loans, deposits and investments, the credit profile of existing loans and the rates received on loans and investment securities and the rates paid on deposits and borrowings. If the interest paid on deposits increases at a faster rate than the interest received on loans and investment securities, Bancorp’s net interest income, and therefore earnings could be adversely affected. Earnings could also be adversely affected if interest received on loans and investments decreases faster than interest paid on deposits.

Competition in our market area may limit Bancorp’s future success.

Commercial banking is a highly competitive business. Bancorp competes with other commercial banks, savings and loan associations, credit unions and finance companies operating in our market area. We are subject to substantial competition for loans and deposits from other financial institutions. Some of our competitors are not subject to the same degree of regulation and restriction as we are. Some of our competitors have greater financial resources than we do. We compete for funds with other financial institutions that, in most cases, are larger and able to provide a greater variety of services than we do and thus may obtain deposits at lower rates of interest. If we are unable to effectively compete in our market area, our business and results of operations could be adversely affected.

We operate in a highly regulated environment and changes of or increases in, or supervisory enforcement of, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us.

Bancorp is subject to extensive regulation, supervision and examination by federal and state banking authorities. In addition, as a publicly reporting company, Bancorp is subject to regulation by the Securities and Exchange Commission. Any change in applicable regulations, or federal, state or local legislation, or in policies or interpretations or regulatory approaches to compliance and enforcement, income tax laws and accounting principles could have a substantial impact on Bancorp and its operations. Changes in laws and regulations may also increase Bancorp’s expenses by imposing additional fees or taxes or restrictions on its operations. Additional legislation and regulations that could significantly affect Bancorp’s powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on Bancorp’s financial condition and results of operations. Failure to appropriately comply with any such laws, regulations or principles could result in sanctions by regulatory agencies or damage to Bancorp’s reputation, all of which could adversely affect our business, financial condition or results of operations.

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In that regard, sweeping financial regulatory reform legislation was enacted in July 2010. Among other provisions, the new legislation (i) creates a new Bureau of Consumer Financial Protection with broad powers to regulate consumer financial products such as credit cards and mortgages, (ii) creates a Financial Stability Oversight Council comprised of the heads of other regulatory agencies, (iii) will lead to new capital requirements from federal banking agencies, (iv) places new limits on electronic debt card interchange fees, and (v) will require the Securities and Exchange Commission and national stock exchanges to adopt significant new corporate governance and executive compensation reforms. The new legislation and regulations are expected to increase the overall costs of regulatory compliance.

Further, regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties. Recently, these powers have been utilized more frequently due to the serious national, regional and local economic conditions we continue to face. The exercise of regulatory authority may have a negative impact on Bancorp’s financial condition and results of operations. Additionally, Bancorp’s business is affected significantly by the fiscal and monetary policies of the U.S. federal government and its agencies, including the Federal Reserve Board.

Bancorp cannot accurately predict the full effects of recent legislation or the various other governmental, regulatory, monetary and fiscal initiatives which have been and may be enacted on the financial markets, on Bancorp and on the Bank. The terms and costs of these activities, or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity and a continuation or worsening of current financial market and economic conditions could materially and adversely affect our business, financial condition, results of operations, and the trading price of our common stock.

Our ability to access markets for funding and acquire and retain customers could be adversely affected by the deterioration of other financial institutions or to the extent the financial service industry’s reputation is damaged.

Reputation risk is the risk to liquidity, earnings and capital arising from negative publicity regarding the financial services industry. The financial services industry continues to be featured in negative headlines about the global and national credit crisis and the resulting stabilization legislation enacted by the U.S. federal government. These reports can be damaging to the industry’s image and potentially erode consumer confidence in insured financial institutions, such as our banking subsidiary. In addition, our ability to engage in routine funding and other transactions could be adversely affected by the actions and financial condition of other financial institutions.

Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry in general, could lead to market-wide liquidity problems, losses of depositors, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions. We could experience material changes in the level of deposits as a direct or indirect result of other banks’ difficulties or failure, which could affect the amount of capital we need.

The FDIC has increased insurance premiums to restore and maintain the federal deposit insurance fund, and there may be additional future premium increases and special assessments.

In 2009, the FDIC imposed a special deposit insurance assessment of five basis points on all insured institutions, and also required insured institutions to prepay estimated quarterly risk-based assessments through 2012.

The Dodd-Frank Act established 1.35% as the minimum deposit insurance fund reserve ratio. The FDIC has determined that the fund reserve ratio should be 2.0% and has adopted a plan under which it will meet the statutory minimum fund reserve ratio of 1.35% by the statutory deadline of September 30, 2020. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum fund reserve ratio to 1.35% from the former statutory minimum of 1.15%. The FDIC has not announced how it will implement this offset or how larger institutions will be affected by it.

Despite the FDIC’s actions to restore the deposit insurance fund, the fund will suffer additional losses in the future due to failures of insured institutions. There can be no assurance that there will not be additional significant deposit insurance premium increases, special assessments or prepayments in order to restore the insurance fund’s reserve ratio. Any significant premium increases or special assessments could have a material adverse effect on the Company’s financial condition and results of operations.

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There is little trading activity in Bancorp’s stock.

There is no active market for our outstanding shares, and it is unlikely that an established market for our shares will develop in the near future. We presently do not intend to seek listing of the shares on any securities exchange. It is not known whether significant trading activity will take place for several years, if at all. Accordingly, our shares should be considered as a long-term investment.

There are restrictions on changes in control of Bancorp that could decrease our shareholders’ chance to realize a premium on their shares.

Provisions in our Articles of Incorporation include a staggered Board of Directors, and non-monetary factor provisions and an affirmative vote of two-thirds of shares (entitled to be counted) to approve an interested shareholder transaction, any or all of which could have the effect of hindering, delaying or preventing a takeover bid.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

For the quarter ended March 31, 2012, Bancorp repurchased 1,722 shares of stock for an average price of $145 per share.

Period	Total Number of Shares Purchase	Average Price Paid per Share
January 1 - 31, 2012	—	$	—
February 1 - 29, 2012	477	$	145.00
March 1 - 31, 2012	1,245	$	145.00

Bancorp has not adopted an official repurchase plan or established maximum shares that may be repurchased.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

Item 6. Exhibits

(a) Exhibits.

31.1		Certification of CEO, Pursuant to Exchange Act Rule 13a-14 (as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
31.2		Certification Chief Financial Officer Pursuant to Exchange Act Rule 13a-14 (as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
32		Certifications Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		The following financial information from Skagit State Bancorp’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 is formatted in XBRL: (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Changes in Shareholder’s Equity and comprehensive Income, (iv) the Unaudited Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Consolidated Financial Statements, tagged as blocks of text.

WASHINGTON		20-5048602
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller Reporting Company x

PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Consolidated Balance Sheet as of March 31, 2012 and December 31, 2011	Page 3

		Consolidated Statement of Income for the three months ended March 31, 2012 and 2011	Page 4

		Consolidated Statement of Comprehensive Income for the three months ended March 31, 2012 and 2011	Page 5

		Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2012 and 2011	Page 6

		Consolidated Statement of Cash Flows for the three months ended March 31, 2012 and 2011	Page 7

		Notes to Consolidated Financial Statements	Pages 8-28

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	Pages 28-39

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	Page 39

	Item 4.	Controls and Procedures	Page 39

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	Page 39

	Item 1 A.	Risk Factors	Page 39-43

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	Page 43

	Item 3.	Defaults Upon Senior Securities	Page 43

	Item 4.	Mine Safety Disclosures	Page 43

	Item 5.	Other Information	Page 43

	Item 6.	Exhibits	Page 43

		Signatures	Pages 44-47

		SKAGIT STATE BANCORP, INC.
		(Registrant)


Dated:	May 10, 2012	/s/ Cheryl R. Bishop
		Cheryl R. Bishop
		President and Chief Executive Officer


Dated:	May 10, 2012	/s/ Carla F. Tucker
		Carla F. Tucker
		Executive Vice-President
		Chief Financial Officer