ASSOCIATED ESTATES REALTY CORPORATION

Index

PART 1.  FINANCIAL INFORMATION
ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

ASSOCIATED ESTATES REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

1.         BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Except as the context otherwise requires, all references to "we," "our," "us," "AERC" and the "Company" in this report collectively refer to Associated Estates Realty Corporation and its consolidated subsidiaries.

Business

We are a fully-integrated, self-administered and self-managed equity real estate investment trust ("REIT") specializing in multifamily ownership, operation, acquisition, development, construction, disposition and property management activities.  Our primary source of income is rental revenue.  Additional income is derived primarily from construction services.  We own a taxable REIT subsidiary that performs construction services for our own account and for third parties.  As of March 31, 2011, our operating property portfolio consisted of 52 apartment communities containing 13,662 units in eight states that are owned either directly or indirectly through subsidiaries.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and applicable rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments, consisting only of normal and recurring adjustments considered necessary for a fair statement, have been included.  The reported results of operations are not necessarily indicative of the results that may be expected for the full year.  These financial statements should be read in conjunction with the audited financial statements and accompanying notes in our Annual Report on Form 10-K for the year ended December 31, 2010.

Segment Reporting

All of our properties are multifamily communities that have similar economic characteristics.  Management evaluates the performance of our properties on an individual basis.  Our multifamily properties provided approximately 89.2% of our consolidated revenue for the three months ended March 31, 2011.  Our subsidiary, Merit Enterprises, Inc. ("Merit"), is a general contractor that acts as our in-house construction division and provides general contracting and construction management services to third parties.  For the three months ended March 31, 2011, construction services provided approximately 10.8% of our consolidated revenue.  These two segments, multifamily properties and construction and other services, represent our two reportable segments.

Share-Based Compensation

During the three months ended March 31, 2011 and 2010, we recognized total share-based compensation cost of $959,000 and $880,000, respectively, in "General and administrative expense" in the Consolidated Statements of Operations.

Stock Options.  There were no stock options awarded or exercised during the three months ended March 31, 2011 and 2010, respectively.

Restricted Shares.  The following table represents restricted share activity for the three months ended March 31, 2011:

At March 31, 2011, there was $3.7 million of unrecognized compensation cost related to non-vested restricted share awards that we expect to recognize over a weighted average period of 2.5 years.

Derivative Instruments and Hedging Activities

We record all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation.  Derivatives used to hedge the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges.  Derivatives used to hedge the exposure to variability in expected future cash flows or other types of forecasted transactions are considered cash flow hedges.

For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item relating to the hedged risk are recognized in earnings.  For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings.  Hedge ineffectiveness is measured by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction.  For derivatives not designated as hedges, changes in fair value are recognized in earnings.

We do not use derivatives for trading or speculative purposes.  Further, we have a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors.  When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, we have not sustained a material loss from these hedges.

We have utilized interest rate swaps and caps to add stability to interest expense and to manage our exposure to interest rate movements.  Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount.  Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts if interest rates rise above a certain level in exchange for an upfront premium.

At March 31, 2011 and December 31, 2010, we had no derivates outstanding.  During the three months ended March 31, 2010, we had two interest rate swaps that were executed in 2007 to hedge the cash flows of two existing variable rate loans.  In January 2010, we prepaid one of these loans but we did not terminate the corresponding interest rate swap and as a result reclassified the fair value of the related interest rate swap of $777,000 from other comprehensive income to earnings.  This derivative matured in June 2010, and the change in fair value was recorded in earnings.

The following table presents the effect of our prior derivative financial instruments on the Consolidated Statements of Operations (see Note 6 for additional information regarding the effect of these derivative instruments on total comprehensive income):

Real Estate and Depreciation

Real estate assets are stated at cost less accumulated depreciation.  Depreciation is provided on a straight-line basis over the estimated useful lives of the assets as follows:

We capitalize replacements and improvements, such as HVAC equipment, structural replacements, windows, appliances, flooring, carpeting and kitchen/bath replacements and renovations.  Ordinary repairs and maintenance, such as unit cleaning, painting and appliance repairs are expensed when incurred.

We capitalize interest costs on funds used in construction, real estate taxes and insurance from the commencement of development activity through the time the property is ready for leasing.  We also capitalize direct and indirect internal costs directly attributable to the construction of a property or asset.  Such costs are included in construction in progress during the development period.  All capitalized costs related to construction are transferred to buildings and improvements and furniture and fixtures, respectively, upon substantial completion of the project.

Classification of Fixed Asset Additions

We define recurring fixed asset additions to a property to be capital expenditures made to replace worn out assets to maintain the property's value.  Revenue enhancing/non-recurring fixed asset additions are defined as capital expenditures that increase the value of the property and/or enable us to increase rents.  Acquisition/development fixed asset additions are defined as capital expenditures for the purchase or construction of new properties to be added to our portfolio, or fixed asset additions identified at the time of purchase that are not made until subsequent periods.

Reclassifications

Certain reclassifications have been made to the 2010 financial statements to conform to the 2011 presentation.

2.         DEVELOPMENT AND CONSTRUCTION ACTIVITY

Development Activity

During 2010 we began development on Vista Germantown, a 242-unit apartment community located in Nashville, Tennessee.  The total cost as of March 31, 2011 of this development is $9.9 million.  During the three months ended March 31, 2011, we recorded capitalized interest of $117,000.  See Note 5 for additional information related to this development.

During 2010, we completed construction of a 60-unit expansion of the existing 240-unit River Forest apartment community located in the Richmond, Virginia metropolitan market area.  Capitalized interest related to this expansion for the three months ended March 31, 2010 was $81,000.

Construction Activity

Our subsidiary, Merit, is engaged as a general contractor and construction manager that acts as our in-house construction division and also provides general contracting and construction management services to third parties.  We account for construction contracts using the percentage-of-completion method.  Under this method, we recognize revenue in the ratio of costs incurred to total estimated costs, with any changes in estimates recognized in the period in which they are known on a prospective basis.  We recognized $4.7 million in revenue under this method during the three months ended March 31, 2011 and $1.1 million in revenue under this method during the three months ended March 31, 2010.  At March 31, 2011 and 2010, respectively, we had $6.0 million and $638,000 still owed to us, which was included in accounts receivable on the Consolidated Balance Sheets.  For the three months ended March 31, 2011, under the percentage of completion method, we reported costs of $4.6 million of which $3.4 million remained unpaid and was included in accounts payable and other liabilities.  For the three months ended March 31, 2010, under this method, we reported $1.0 million of costs with $570,000 unpaid.

3.         DEBT

The following table identifies our total debt outstanding and weighted average interest rates:

Mortgage Notes Payable

The following table provides information on mortgage loans repaid during 2011:

During 2008, 2007 and 2006, we defeased 21 CMBS loans.  These loans were defeased pursuant to the terms of the underlying loan documents.  In accordance with GAAP, we removed those financial assets and the mortgage loans from our financial records.  All risk of loss associated with these defeasances have been transferred from us to the successor borrower and any ongoing relationship between the successor borrower and us was deemed inconsequential at the time of completion of the respective transfers.  However, we subsequently learned that for certain defeasance transactions completed prior to June 2007, the successor borrower may be able to prepay the loans thus enabling us to receive a refund of a portion of the costs incurred in connection with the transaction.  We received defeasance refunds of $554,000 for the three months ended March 31, 2010, which were included as a reduction to interest expense.

Cash paid for interest, excluding $117,000 and $81,000 of capitalized interest, was $7.6 million and $7.8 million for the three months ended March 31, 2011 and 2010, respectively.  Included in cash paid for interest was the defeasance refund received of $554,000 for the three months ended March 31, 2010, as discussed above.

4.         GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

We have a policy of completing our annual review of goodwill during the first quarter of each year and more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable.  The review that was completed during the three months ended March 31, 2011, determined that goodwill was not impaired and as such there were no changes to the carrying value of goodwill as of March 31, 2011.  In performing this analysis, we use a multiple of revenues to the range of potential alternatives.  We then assign a probability to the various alternatives under our consideration.  Should the estimates used to determine alternatives or the probabilities of the occurrence thereof change, impairment may result which could materially impact our results of operations for the period in which it is recorded.

Intangible Assets

We allocate a portion of the total purchase price of a property acquisition to any intangible assets identified, such as existing leases and tenant relationships.  The intangible assets are amortized over the remaining lease terms or estimated life of the tenant relationship, which is approximately 12 months.  Due to the short term nature of residential leases, we believe that existing lease rates approximate market rates; therefore, no allocation is made for above/below market leases.

5.         INVESTMENT IN PARTNERSHIP

On September 24, 2010, we entered into a partnership agreement with Bristol Development Group, an unrelated third-party, for the development of Vista Germantown, a 242-unit apartment community located in downtown Nashville, Tennessee.  We contributed $9.4 million to the partnership and hold a 90.0% equity interest.  We have determined that this entity is not a variable interest entity and that we hold a controlling financial interest in the entity.  As such, this entity is included in our consolidated financial statements.  We have also determined that the noncontrolling interest in this entity meets the criterion to be classified as a component of permanent equity.

6.         EQUITY

The following table provides a reconciliation of activity in equity accounts:

The following table identifies total comprehensive (loss) income:

7.         EARNINGS PER SHARE

There were approximately 770,000 and 1.4 million options to purchase common shares outstanding at March 31, 2011 and 2010, respectively.  The dilutive effect of these options were not included in the calculation of diluted earnings per share for the periods presented as their inclusion would be anti-dilutive to the net loss applicable to common shares.

The exchange of operating partnership non-controlling interests into common shares was also not included in the computation of diluted EPS because we intend to settle these OP units in cash.

The following table presents a reconciliation of basic and diluted earnings per common share:

8.         FAIR VALUE

Accounts and notes receivable, other assets, accounts payable, accrued expenses and other liabilities are carried at amounts that reasonably approximate corresponding fair values.

Mortgage notes payable, revolving debt and other unsecured debt with an aggregate carrying value of $558.1 million and $555.7 million at March 31, 2011 and December 31, 2010, respectively, have an estimated aggregate fair value of $580.2 million and $570.2 million, respectively.  Estimated fair value is based on interest rates available to us as of the dates reported for issuance of debt with similar terms and remaining maturities.  Considerable judgment is necessary to interpret market data and develop estimated fair values.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts for which we could be liable upon disposition of the financial instruments.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

9.         CONTINGENCIES

Legal Proceedings

We are subject to legal proceedings, lawsuits and other claims, including proceedings by government authorities (collectively "Litigation").  Litigation is subject to uncertainties and outcomes are difficult to predict.  We believe any current Litigation will not have a material adverse impact on us after final disposition.  However, because of the uncertainties of Litigation, one or more lawsuits could ultimately result in a material obligation.

10.        SEGMENT REPORTING

            We have two reportable segments, which are multifamily properties and construction and other services.  Our multifamily segment owns and manages multifamily communities and our construction and other services segment is a general contractor that acts as our in-house construction division and provides general contracting and construction management services to third parties.

            The accounting policies of our segments are the same as those described in Note 1, "Basis of Presentation and Accounting Policies." All of our properties are multifamily communities that have similar economic characteristics.  We evaluate the performance of our properties on an individual and segment basis based on property Net Operating Income ("NOI").  We evaluate the performance of our construction and other services segment based on income from construction services, which includes direct as well as allocated general and administrative expenses.

            Segment information for the three months ended March 31, 2011 and 2010, respectively, is as follows:

11.        SUBSEQUENT EVENTS

Mortgage Notes Payable

On April 7, 2011, we closed on a $47.6 million loan with Fannie Mae.  The loan has a seven year term, requires interest-only payments and carries a 4.6% fixed interest rate.  Proceeds from this loan were used to pay down outstanding borrowings on our unsecured revolver.

Dividends

On May 2, 2011, we paid a dividend of $0.17 per common share to shareholders of record on April 15, 2011, which was declared on March 22, 2011.

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 included in Part I, Item 1 of this report on Form 10-Q.  This discussion may contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to vary from those projected, including but not limited to, expectations regarding our 2011 performance that are based on certain assumptions.  Accordingly, readers are cautioned not to place undue reliance on forward-looking statements that speak only as of the date of the document.  These forward-looking statements are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  The words "expects," "projects," "believes," "plans," "anticipates" and similar expressions are intended to identify forward-looking statements.  Investors are cautioned that these forward-looking statements involve risks and uncertainty that could cause actual results to differ from estimates or projections contained in these forward-looking statements, including without limitation the following:

Overview.

We are engaged primarily in the ownership and operation of multifamily apartment units. Our subsidiary, Merit, is a general contractor that acts as our in-house construction division and provides general contracting and construction management services to third parties.  Our two primary sources of cash and revenue from operations are rents from the leasing of apartment units, which represented approximately 89.2% of our consolidated revenue and construction services, which represented approximately 10.8% of our consolidated revenue for the three months ended March 31, 2011.

The operating performance of our properties is affected by general economic trends including, but not limited to, factors such as household formation, job growth, unemployment rates, population growth, immigration, the supply of new multifamily rental communities and in certain markets the supply of other housing alternatives, such as condominiums, single and multifamily rental homes and owner occupied single and multifamily homes.  Additionally, our performance may be affected by access to, and cost of, debt and equity.

Rental revenue collections are impacted by rental rates, occupancy levels and rent concessions.  We adjust our rental rates and concessions in our continuing efforts to adapt to changing market conditions and maximize rental revenue.  We continuously monitor physical occupancy and net collected rent per unit to track our success in maximizing rental revenue.  These indicators are more fully described in the Results of Operations comparison.  Additionally, we consider property NOI and Funds from Operations ("FFO") to be important indicators of our overall performance.  Property NOI (property operating revenue less property operating and maintenance expenses) is a measure of the profitability of our properties and has the largest impact on our financial condition and operating results.  FFO is used in the real estate industry as a supplemental measure of the operating performance of real estate companies because it excludes charges such as real estate depreciation that are generally considered not to be reflective of the actual value of real estate assets over time.  Additionally, gains and losses from the sale of most real estate assets and certain other items are also excluded from FFO.

Property NOI is determined by deducting property operating and maintenance expenses from property revenue (excluding amounts classified as discontinued operations).  We consider property NOI to be an appropriate supplemental measure of our performance because it reflects the operating performance of our real estate portfolio and is used to assess regional property level performance.  Property NOI should not be considered (i) as an alternative to net income (determined in accordance with GAAP), (ii) as an indicator of financial performance, (iii) as an alternative to cash flow from operating activities (determined in accordance with GAAP) or (iv) as a measure of liquidity; nor is it necessarily indicative of sufficient cash flow to fund all of our needs.  Other real estate companies may define property NOI in a different manner. 

A reconciliation of property NOI to total consolidated net (loss) income attributable to AERC is as follows:

We calculate FFO in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT").  This definition includes all operating results, both recurring and non-recurring, except those results defined as "extraordinary items" under GAAP, adjusted for depreciation on real estate assets and amortization of intangible assets, gains on insurance recoveries and gains and losses from the disposition of properties and land.  We calculate FFO per share using the weighted average shares outstanding amounts used in the calculation of basic and diluted earnings per share in accordance with GAAP.  FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to net income, as an indicator of our operating performance or as an alternative to cash flow as a measure of liquidity.  FFO is used in the real estate industry as a supplemental measure of the operating performance of real estate companies because it excludes charges such as real estate depreciation that are generally considered not to be reflective of the actual value of real estate assets over time.  Other real estate companies may define FFO in a different manner.

We calculate FFO as adjusted as FFO, as defined above, as reduced by refunds on previously defeased loans of $(554,000) for the three months ended March 31, 2010.  In accordance with GAAP, these refunds on previously defeased loans are included as an offset to interest expense in our Consolidated Statement of Operations.  We are providing this calculation as an alternative FFO calculation as we consider it a more appropriate measure of comparing the operating performance of a company’s real estate between periods or as compared to different REITs.

A reconciliation of net (loss) income attributable to AERC to FFO and FFO as adjusted is as follows:

Updated 2011 Expectations.

Forecast Qualification.  Uncertainties relating to the broader domestic economic and financial conditions impact our ability to forecast future performance.  We believe that the apartment industry is better situated to weather a delayed recovery than other real estate sectors.  However, our 2011 expectations may be adversely impacted by unanticipated changes to the Federal Reserve’s interest rate policy, or if Congress were to take immediate steps to curtail Fannie Mae or Freddie Mac financing support to the apartment industry.  Moreover, unless and until meaningful job and wage growth occurs in our markets, significant rental growth may be limited.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows and Liquidity.  Significant sources and uses of cash during the three months ended March 31, 2011 and 2010 are summarized as follows:

Our primary sources of liquidity are cash flow provided by operations, short-term borrowings on the unsecured revolver, project specific loans and the sale of debt or equity securities.  Our scheduled debt maturities for 2011 consisted of seven mortgage loans totaling approximately $53.3 million.  We have repaid all of these loans with proceeds from borrowings on our unsecured revolver.  On April 7, 2011, we closed on a $47.6 million mortgage loan secured by The Ashborough property.  This loan has a fixed interest rate of 4.6% and matures on May 1, 2018.  The proceeds from the funding of this loan were used to pay down borrowings on our unsecured revolver.  

In December 2009, we entered into a credit facility agreement with Wells Fargo Multifamily Corporation on behalf of Freddie Mac.  Pursuant to the terms of the facility, we have the potential to borrow up to $100.0 million over a two-year period ending in December 2011 with obligations being secured by nonrecourse, non cross-collateralized fixed or variable rate mortgages having terms of five, seven or ten years.  We currently have $64.0 million of availability under this facility.  Our $250.0 million unsecured revolver, which matures October 18, 2013, provides us additional financial flexibility.  On May 2, 2011, we had $144.0 million of availability under this facility. 

We anticipate that cash flow provided by operations for the remainder of the year will continue to meet normal business operations and liquidity requirements for the upcoming year.  We believe that if net cash provided by operations is below projections, other sources such as the unsecured revolver, secured and unsecured borrowings are or can be made available and should be sufficient to meet our normal business operations and liquidity requirements.  We anticipate that we will continue paying our regular quarterly dividends in cash.  Funds to be used for the repayment of debt, property acquisitions, development or other capital expenditures are expected to be provided primarily by proceeds from the refinancing of debt borrowings, our unsecured revolver and possibly the sale of common shares.  The partnership in which we are a 90.0% partner is developing a 242-unit apartment community that is expected to be completed during 2012.  We are financing the construction costs through a construction loan, which the partnership has already obtained.

Cash flow provided by operations increased during the three months ended March 31, 2011, compared to the three months ended March 31, 2010, primarily due to an increase in property NOI as a result of the addition during 2010 of four new properties and the completion of a 60-unit expansion of one of our existing properties.  See the discussion under results of operations for further information concerning the contribution to our results by these five properties.

During the remainder of 2011, we anticipate incurring an additional $8.2 million in capital expenditures.  This includes replacement of worn carpet and appliances, parking lots and similar items in accordance with our current property expenditure plan, as well as commitments for revenue enhancing and non-recurring expenditures.  These capital expenditures are expected to be funded with cash provided by operating activities and borrowings on our unsecured revolver.

RESULTS OF OPERATIONS

Comparison of the three months ended March 31, 2011 to the three months ended March 31, 2010:

Our Same Community portfolio represents operating properties that we have owned for all of the comparison periods.  For the three months ended March 31, 2011 and 2010, the Same Community portfolio consisted of 48 owned properties containing 12,108 units.  Acquired properties represent four operating properties that we acquired during 2010, and the development property represents a 60-unit expansion of a Virginia property.

The net loss for the three month comparison period increased $176,000.  The increase was primarily due to the net of the following:  an increase in property revenue, an increase in property operating and maintenance expense and an increase in depreciation and amortization expense, all primarily due to the results provided by the acquisition and development properties.  Also, an increase in construction revenues and construction expenses, an increase in general and administrative expenses and a decline in interest expense had an effect on the results of operations.  See the following discussion for a detailed description of the changes in these line items.

The following table reflects the amount and percentage change in line items that are relevant to the changes in overall operating performance:

Property NOI increased primarily due to the contributions by the acquired properties.  Property NOI for the Same Community properties increased primarily due to increased revenues across the portfolio.

The following table presents property NOI results by region:

Property revenue.  Property revenue is impacted by a combination of rental rates, rent concessions and occupancy levels, i.e., net collected rent per unit.  Physical occupancy at the end of each period and net collected rent per unit are presented in the following tables:

The following table presents property revenue results:

The increase in property revenue was primarily due to increases in the revenue across the portfolio for the same community properties and the acquisition and development properties.

Property operating and maintenance expenses.  The property operating and maintenance expenses increase was primarily due to the acquisition and development properties.    

Depreciation and amortization.  The depreciation and amortization expense increase was primarily due to the acquisition and development properties. 

General and administrative expense.  General and administrative expenses increased primarily due to increases in payroll expense, consulting fees and cost involved with potential property acquisitions that did not occur.

Construction and other services.  Construction revenue and related expenses are recorded on the percentage of completion method.  The increase in both revenue and expenses was primarily due to our recording activity for seven projects during the current quarter compared to only three projects during the same quarter one year ago.

CONTINGENCIES

For a discussion of contingencies, see Note 9 of the Notes to Consolidated Financial Statements presented in Part I, Item 1 of this report on Form 10-Q.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to interest rate changes associated with variable rate debt and the refinancing risk on our fixed-rate debt.  Based on our variable rate debt outstanding at March 31, 2011 and 2010, an interest rate change of 100 basis points would impact interest expense approximately $1.8 million and $551,000 on an annual basis, respectively. We occasionally use derivative instruments to manage our exposure to interest rates.  See Note 1 of the Notes to Consolidated Financial Statements presented in Part I, Item 1 of this report on Form 10-Q for additional information regarding derivative instruments and "Item 7A Qualitative and Quantitative Disclosures About Market Risk" of our Annual Report on Form 10-K for the year ended December 31, 2010, for a more complete discussion of interest rate sensitive assets and liabilities.

ITEM 4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.  We have evaluated the design and operations of our disclosure controls and procedures to determine they are effective in ensuring that the disclosure of required information is timely made in accordance with the Securities Exchange Act of 1934 ("Exchange Act") and the rules and forms of the Securities and Exchange Commission.  This evaluation was made under the supervision and with the participation of management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as of the end of the period covered by this report on Form 10-Q.  The CEO and CFO have concluded, based on their review, that our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), are effective to ensure that information required to be disclosed in reports that we file under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate, to allow timely decisions regarding disclosure.

Changes in Internal Control over Financial Reporting.  There were no changes in our internal control over financial reporting during the first quarter of 2011 that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

We believe that because of its inherent limitations, internal control over financial reporting may not always prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II.     OTHER INFORMATION

ITEM 1.       LEGAL PROCEEDINGS

For information related to legal proceedings, see Note 9 of the Notes to Consolidated Financial Statements presented in Part I, Item 1 of this report on Form 10-Q.

ITEM 1A.    RISK FACTORS

See "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010.

ITEM 2.       UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There is a total of $26.3 million remaining on our Board of Director authorizations to repurchase our common shares.  Additionally, we have a policy which allows employees to pay their portion of the income taxes related to restricted share vesting by surrendering a number of shares to us equal in value on the day of vesting to the amount of taxes due up to the minimum statutory withholding amount.  All of the shares we purchased during the three months ended March 31, 2011 were purchased under our restricted share income tax withholding policy. 

ITEM 6.            EXHIBITS

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.