Unassociated Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO
 SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended June 30, 2009

Commission file number 0-14237

First United Corporation
(Exact name of registrant as specified in its charter)

Maryland
  
52-1380770
(State or other jurisdiction of
  
(I. R. S. Employer Identification No.)
incorporation or organization)
  
 

19 South Second Street, Oakland, Maryland    21550-0009
       (Address of principal executive offices)        (Zip Code)

(800) 470-4356
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes R  No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes £ No £ (Not Applicable)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer £
  
Accelerated filer R
Non-accelerated filer £ (Do not check if a smaller reporting company)
  
Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes £ No R

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  6,121,549 shares of common stock, par value $.01 per share, as of July 31, 2009.

 
 
 

INDEX TO QUARTERLY REPORT
FIRST UNITED CORPORATION

PART I.  FINANCIAL INFORMATION
3
   
Item 1.    Financial Statements (unaudited)
3
   
Consolidated Statements of Financial Condition – June 30, 2009 and December 31, 2008
3
   
Consolidated Statements of Income - for the six months and three months ended June 30, 2009 and 2008
4
   
Consolidated Statements of Changes in Shareholders’ Equity - for the six months ended June 30, 2009 and year ended December 31, 2008
6
   
Consolidated Statements of Cash Flows - for the six months ended June 30, 2009 and 2008
7
   
Notes to Consolidated Financial Statements
8
   
Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
23
   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
37
   
Item 4.    Controls and Procedures
38
   
PART II. OTHER INFORMATION
38
   
Item 1.    Legal Proceedings
38
   
Item 1A. Risk Factors
38
   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
38
   
Item 3.    Defaults Upon Senior Securities
38
   
Item 4.    Submission of Matters to a Vote of Security Holders
39
   
Item 5.    Other Information
39
   
Item 6.    Exhibits
39
   
SIGNATURES
40
   
EXHIBIT INDEX
41

 
2
 

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

FIRST UNITED CORPORATION
Consolidated Statements of Financial Condition
(In thousands, except per share and percentage data)

   
June 30,
2009
    
December 31,
2008
  
   
(Unaudited)
  
Assets
            
Cash and due from banks
   $ 28,160     $ 18,423  
Interest bearing deposits in banks
     20,472       882  
Cash and cash equivalents
     48,632       19,305  
Investment securities - trading (at fair value)
     13       -  
Investment securities - available-for-sale (at fair value)
     326,765       354,595  
Federal Home Loan Bank stock, at cost
     13,861       13,933  
Loans
     1,128,626       1,134,546  
Allowance for loan losses
     (14,357 )     (14,347 )
Net loans
     1,114,269       1,120,199  
Premises and equipment, net
     32,441       31,124  
Goodwill and other intangible assets, net
     15,904       16,322  
Bank owned life insurance
     30,010       29,743  
Deferred tax assets
     33,058       31,407  
Accrued interest receivable and other assets
     19,427       22,476  
                 
Total Assets
   $ 1,634,380     $ 1,639,104  
                 
Liabilities and Shareholders' Equity
                
Liabilities:
                
Non-interest bearing deposits
   $ 103,275     $ 107,749  
Interest bearing deposits
     1,098,583       1,115,140  
Total deposits
     1,201,858       1,222,889  
Short-term borrowings
     37,271       50,495  
Long-term borrowings
     276,878       277,403  
Accrued interest payable and other liabilities
     16,037       14,529  
Dividends payable
     1,227       1,098  
Total Liabilities
     1,533,271       1,566,414  
                 
Shareholders' Equity:
                
Preferred stock —no par value;
                
Authorized 2,000 shares of which 30 shares of Series A, $1,000 per share  liquidation preference, 5% cumulative increasing to 9% cumulative on February 15, 2014, were issued and outstanding on June 30, 2009 (discount of $290 and $0, respectively)
     29,710       -  
Common Stock – par value $.01 per share;
                
Authorized 25,000 shares; issued and outstanding 6,122 shares at June 30, 2009 and 6,113 shares at December 31, 2008
     61       61  
Surplus
     21,062       20,520  
Retained earnings
     93,588       93,092  
Accumulated other comprehensive loss
     (43,312 )     (40,983 )
Total Shareholders' Equity
     101,109       72,690  
                 
Total Liabilities and Shareholders' Equity
   $ 1,634,380     $ 1,639,104  

See accompanying notes to the consolidated financial statements.

 
3
 

FIRST UNITED CORPORATION
Consolidated Statements of Income
(In thousands, except per share data)

   
Six Months Ended 
June 30,
  
   
2009
    
2008
  
   
(Unaudited)
  
Interest income
            
Interest and fees on loans
   $ 34,510     $ 37,438  
Interest on investment securities:
                
  Taxable
     7,275       8,170  
 Exempt from federal income tax
     1,957       1,691  
Total investment income
     9,232       9,861  
Other
     4       410  
Total interest income
     43,746       47,709  
Interest expense
                
Interest on deposits
     10,550       16,641  
Interest on short-term borrowings
     155       623  
Interest on long-term borrowings
     5,852       5,192  
Total interest expense
     16,557       22,456  
Net interest income
     27,189       25,253  
Provision for loan losses
     3,920       2,353  
Net interest income after provision for loan losses
     23,269       22,900  
Other operating income
                
Service charges
     2,703       3,146  
Trust department
     1,687       2,018  
Total other-than-temporary security impairment
                
losses
     (5,796 )     —  
Less: Portion of loss recognized in other
                
comprehensive income (before taxes)
     3,615       —  
Net securities impairment losses recognized in earnings
     (2,181 )     —  
Securities losses - trading
     (373 )     —  
Securities gains
     96       476  
Insurance commissions
     1,441       1,081  
Bank owned life insurance
     267       447  
Other income
     1,515       1,742  
Total other operating income
     5,155       8,910  
Other operating expenses
                
Salaries and employee benefits
     11,847       11,222  
Occupancy, equipment and data processing
     4,258       3,845  
Other expense
     7,431       5,938  
Total other operating expenses
     23,536       21,005  
Income before income taxes
     4,888       10,805  
Applicable income taxes
     1,360       3,556  
Net Income
     3,528       7,249  
Accumulated preferred stock dividends and discount  accretion
     (652 )     —  
Net Income Available to Common Shareholders
   $ 2,876     $ 7,249  
Basic net income per common share
   $ .47     $ 1.19  
Diluted net income per common share
   $ .47     $ 1.19  
Dividends per common share
   $ .40     $ .40  
Weighted average number of  common shares outstanding
     6,108       6,118  
Weighted average number of diluted shares outstanding
     6,117       6,118  

See accompanying notes to the consolidated financial statements.

 
4
 

FIRST UNITED CORPORATION
Consolidated Statements of Income
(In thousands, except per share data)

   
Three Months Ended
June 30,
  
   
2009
    
2008
  
   
(Unaudited)
  
Interest income
            
Interest and fees on loans
   $ 16,937     $ 18,484  
Interest on investment securities:
                
  Taxable
     3,416       4,292  
 Exempt from federal income tax
     1,000       844  
Total investment income
     4,416       5,136  
Other
     20       231  
Total interest income
     21,373       23,851  
Interest expense
                
Interest on deposits
     5,001       7,525  
Interest on short-term borrowings
     80       288  
Interest on long-term borrowings
     2,929       2,814  
Total interest expense
     8,010       10,627  
Net interest income
     13,363       13,224  
Provision for loan losses
     1,871       966  
Net interest income after provision for loan losses
     11,492       12,258  
Other operating income
                
Service charges
     1,388       1,699  
Trust department
     857       986  
Total other-than-temporary security impairment
                
losses
     (2,454 )     —  
Less: Portion of loss recognized in other
                
comprehensive income (before taxes)
     1,023       —  
Net securities impairment losses recognized in earnings
     (1,431 )     —  
Securities losses - trading
     (6 )     —  
Securities gains
     54       77  
Insurance commissions
     718       530  
Bank owned life insurance
     130       183  
Other income
     855       1,095  
Total other operating income
     2,565       4,570  
Other operating expenses
                
Salaries and employee benefits
     5,948       5,438  
Occupancy, equipment and data processing
     2,207       1,939  
Other expense
     4,395       3,274  
Total other operating expenses
     12,550       10,651  
Income before income taxes
     1,507       6,177  
Applicable income taxes
     358       2,063  
Net Income
     1,149       4,114  
Accumulated preferred stock dividends and discount accretion
     (393 )     —  
Net Income Available to Common Shareholders
   $ 756     $ 4,114  
Basic net income per common share
   $ .12     $ .68  
Diluted net income per common share
   $ .12     $ .68  
Dividends per common share
   $ .20     $ .20  
Weighted average number of  common shares outstanding
     6,116       6,109  
Weighted average number of diluted shares outstanding
     6,116       6,127  

See accompanying notes to the consolidated financial statements.

 
5
 

FIRST UNITED CORPORATION
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except per share data)

   
Preferred
Stock
    
Common
Stock
    
Surplus
    
Retained
Earnings
    
Accumulated
Other
Comprehensive
Loss
    
Total
Shareholders’
Equity
  
Balance at January 1, 2008
   $ -     $ 61     $ 21,400     $ 88,859     $ (5,655 )   $ 104,665  
                                                 
Comprehensive income:
                                                
Net income
                             8,871               8,871  
Unrealized loss on securities available-for- sale, net of income taxes of $20,748
                                     (30,660 )     (30,660 )
Change in accumulated unrealized losses for pension and SERP obligations, net of income taxes of $2,784
                                     (4,668 )     (4,668 )
Comprehensive loss
                                             (26,457 )
Issuance of 25,814 shares of common stock under dividend reinvestment plan
                     362                       362  
Repurchase of common stock
                     (1,391 )                     (1,391 )
Stock based compensation
                     149                       149  
Cash dividends declared - $.80 per share
                             (4,638 )             (4,638 )
                                                 
Balance at December 31, 2008
     -       61       20,520       93,092       (40,983 )     72,690  
                                                 
Comprehensive income:
                                                
Net income
                             3,528               3,528  
Unrealized loss on securities available-for-sale, net of income taxes of $2,304
                                     (3,006 )     (3,006 )
Unrealized gain on securities available-for-sale related to impairment charges, net of income taxes of $458
                                     677       677  
Comprehensive income
                                             1,199  
Issuance of 21,474 shares of common stock under dividend reinvestment plan
                     245                       245  
Stock based compensation
                     (16 )                     (16 )
Preferred stock issued pursuant to TARP – 30,000 shares
     29,687                                       29,687  
Preferred stock discount accretion
     23                       (23 )             -  
Warrant issued pursuant to TARP
                     313                       313  
Preferred stock dividends
                             (438 )             (438 )
Cash dividends declared on common stock- $.40 per share
                             (2,571 )             (2,571 )
                                                 
Balance at June 30, 2009
   $ 29,710     $ 61     $ 21,062     $ 93,588     $ (43,312 )   $ 101,109  

See accompanying notes to the consolidated financial statements.

 
6
 

FIRST UNITED CORPORATION
Consolidated Statements of Cash Flows
(In thousands)

   
Six Months Ended
June 30,
  
   
2009
    
2008
  
   
(Unaudited)
  
Operating activities
            
Net income
   $ 3,528     $ 7,249  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Provision for loan losses
     3,920       2,353  
Depreciation
     1,353       1,421  
Stock compensation
     (16 )     70  
Amortization of intangible assets
     418       342  
Loss on other real estate owned
     88       —  
Net amortization /(accretion) of investment securities discounts and  premiums
     88       (257 )
Other-than-temporary-impairment loss
     2,181       —  
Loss on investment securities- held for trading
     373       —  
(Gain) on investment securities-Available for Sale
     (96 )     (476 )
Decrease (increase) in accrued interest receivable and other assets
     1,374       (3,370 )
Increase in deferred tax assets
     (74 )     (64 )
Increase in accrued interest payable and other liabilities
     1,508       2,338  
Earnings on bank owned life insurance
     (267 )     (447 )
Net cash provided by operating activities
     14,378       9,159  
Investing activities
                
Proceeds from maturities of investment securities available-for-sale
     56,836       49,598  
Proceeds from sales of investment securities available-for-sale
     29,368       15,270  
Purchases of investment securities available-for-sale
     (64,839 )     (145,252 )
Purchases of investment securities held to maturity
     —       (8,700 )
Proceeds from sales of other real estate owned
     783       —  
Net decrease (increase) in loans
     2,814       (36,560 )
Net decrease (increase) in FHLB stock
     72       (4,228 )
Purchases of premises and equipment
     (2,670 )     (1,424 )
Net cash provided by/(used in) investing activities
     22,364       (131,296 )
Financing activities
                
Net decrease in short-term borrowings
     (13,224 )     (13,665 )
Payments on long-term borrowings
     (525 )     (15,524 )
Proceeds from long-term borrowings
     —       115,000  
Net (decrease) increase in deposits
     (21,031 )     37,457  
Proceeds from issuance of preferred stock and warrant
     30,000       —  
Cash dividends paid
     (2,442 )     (2,450 )
Preferred stock dividends paid
     (438 )     —  
Proceeds from issuance of common stock
     245       231  
Stock repurchase
     —       (944 )
Net cash (used in)/provided by financing activities
     (7,415 )     120,105  
Increase (decrease) in cash  and cash equivalents
     29,327       (2,032 )
Cash and cash equivalents at beginning of the year
     19,305       25,802  
Cash and cash equivalents at end of period
   $ 48,632     $ 23,770  
Supplemental information
                
Interest paid
   $ 17,730     $ 22,459  
Taxes paid   $ 600     $ 2,720  
Non-cash Investing Activities:
                
Transfers from loans to other real estate owned
   $ 804     $ 86  
See accompanying notes to the consolidated financial statements.

 
7
 

FIRST UNITED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2009

Note A – Basis of Presentation

The accompanying unaudited consolidated financial statements of First United Corporation (the “Corporation”) and its consolidated subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all the information and footnotes required for complete financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring items, have been included.  Operating results for the three- and six-month periods ended June 30, 2009 are not necessarily indicative of the results that may be expected for the full year or for any other interim period.  These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008.  For purposes of comparability, certain prior period amounts have been reclassified to conform to the 2009 presentation.  Such reclassifications had no impact on net income.

The Corporation has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2009, for items that should potentially be recognized or disclosed in these financial statements.  The evaluation was conducted through August 10, 2009, the date these financial statements were issued.

Note B – Earnings per Common Share

Basic earnings per common share is derived by dividing net income available to common shareholders by the weighted-average number of common shares outstanding, and does not include the impact of any potentially dilutive common stock equivalents. The diluted earnings per share is derived by dividing net income by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding non-vested employee stock awards and the outstanding warrant as well as any adjustment to income that would result from the assumed issuance. The number of potential shares issued was determined using the treasury stock method.  The outstanding warrant did not have a dilutive effect under the treasury stock method because the average market price of the common stock, $10.72 per share, during the second quarter and $10.86 during the six months ended June 30, 2009 did not exceed the exercise price of the warrant ($13.79 per share).

The following table sets forth the calculation of basic and diluted earnings per common share for the six- and three-month periods ended June 30, 2009 and 2008 (in thousands, except for per share amounts):

   
For the six months ended
  
   
June 30, 2009
    
June 30, 2008
  
   
Income
    
Average
Shares
    
Per
Share
Amount
    
Income
    
Average
Shares
    
Per
Share
Amount
  
Basic Earnings Per Share:
                                    
Net income
   $ 3,528                 $ 7,249              
Accumulated preferred stock dividends
     (629 )                 —              
Discount accretion on preferred stock
     (23 )                 —              
Net income available to common shareholders
   $ 2,876       6,108     $ .47     $ 7,249       6,118     $ 1.19  
                                                 
Diluted Earnings Per Share:
                                                
Net income available to common shareholders
   $ 2,876       6,108     $ .47     $ 7,249       6,118     $ 1.19  
Non-vested Employee Stock Award
             18 1                      18          
Diluted net income available to common shareholders
   $ 2,876       6,117     $ .47     $ 7,249       6,136     $ 1.19  
___________________
1
The 18,520 shares were outstanding for the first quarter of 2009.
 
 
8
 

   
For the three months ended
  
   
June 30, 2009
    
June 30, 2008
  
   
Income
    
Average
Shares
    
Per
Share
Amount
    
Income
    
Average
Shares
    
Per
Share
Amount
  
Basic Earnings Per Share:
                                    
Net income
   $ 1,149                 $ 4,114              
Accumulated preferred stock dividends
     (379 )                 —              
Discount accretion on preferred stock
     (14 )                 —              
Net income available to common shareholders
   $ 756       6,116     $ .12     $ 4,114       6,109     $ .68  
                                                 
Diluted Earnings Per Share:
                                                
Net income available to common shareholders
   $ 756       6,116     $ .12     $ 4,114       6,109     $ .68  
Non-vested Employee Stock Award
                                     18          
Diluted net income available to common shareholders
   $ 756       6,116     $ .12     $ 4,114       6,127     $ .68  

Note C – Investments

Securities held for trading: Securities that are held principally for resale in the near future are reported at their fair values (See Note F) as investment securities – trading, with changes in fair value reported in earnings.  Interest and dividends on trading securities are included in interest income from investments.

Securities available-for-sale: Securities classified as available-for-sale are stated at their fair values (See Note F), with the unrealized gains and losses, net of tax, reported as a separate component of accumulated other comprehensive income (loss) in shareholders’ equity.   The fair values of investments are based upon information that is currently available and may not necessarily represent amounts that will ultimately be realized, which depend on future events and circumstances that are beyond the control of the Corporation.

The amortized cost of debt securities classified as available-for-sale is adjusted for the amortization of premiums to the first call date, if applicable, or to maturity, and for the accretion of discounts to maturity, or, in the case of mortgage-backed securities, over the estimated life of the security.  Such amortization and accretion is included in interest income from investments.  Interest and dividends are included in interest income from investments.  Gains and losses on the sale of securities are recorded using the specific identification method.

Management systematically evaluates securities for impairment on a quarterly basis.  Based upon application of the Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. FAS 115-2 and FAS 124-2 (“FSP No. FAS 115-2 and FAS 124-2”) Recognition and Presentation of Other-Than-Temporary Impairments, which was early adopted effective March 31, 2009, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that the Corporation will be required to sell the security prior to its anticipated recovery.  If neither applies, then declines in the fair values of securities below their cost that are considered other-than-temporary declines are split into two components.  The first is the loss attributable to declining credit quality.  Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made.  The second component consists of all other losses.  The other losses are recognized in other comprehensive loss.  Further discussion about FSP No. FAS 115-2 and FAS 124-2 and its application can be found in Item 2 of Part I of this report under the heading “Investment Securities”.  In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the security, (4) changes in the rating of a security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest payments, and (7) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future.

 
9
 

Management also monitors cash flow projections for certain securities in accordance with Emerging Issues Task Force (“EITF”) Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (EITF 99-20) which was amended in FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF 99-20”, effective for interim and annual reporting periods ending after December 15, 2008.
 
The following table shows a comparison of amortized cost and fair values of investment securities available-for-sale, at June 30, 2009 and December 31, 2008 (in thousands):
 
   
Amortized
Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Fair
 Value
  
June 30, 2009
                        
U.S. government agencies
   $ 103,848     $ 1,036     $ 567     $ 104,317  
Residential mortgage-backed agencies
     69,026       2,571       —       71,597  
Collateralized mortgage obligations
     45,240       —       9,132       36,108  
Obligations of states and political subdivisions
     99,895       1,061       2,887       98,069  
Collateralized debt obligations
     68,311       —        51,637       16,674  
                                 
Totals
   $ 386,320     $ 4,668     $ 64,223     $ 326,765  
                                 
December 31, 2008
                                
U.S. government agencies
   $ 111,938     $ 1,885     $ 178     $ 113,645  
Residential mortgage-backed agencies
     80,354       2,222       15       82,561  
Collateralized mortgage obligations
     51,753       —       11,115       40,638  
Obligations of states and political subdivisions
     95,876       705       3,096       93,485  
Collateralized debt obligations
     70,324       —        46,058       24,266  
                                 
Totals
   $ 410,245     $ 4,812     $ 60,462     $ 354,595  
 
The following table shows the Corporation’s securities available-for-sale with gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized position, at June 30, 2009 and December 31, 2008 (in thousands):
 
   
June 30, 2009
  
   
Less than 12 months
    
12 months or more
  
   
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
  
                         
U.S. government agencies
   $ 36,759     $ (300 )   $ 14,733     $ (267 )
Residential mortgage-backed agencies
     —       —       —       —  
Collateralized mortgage obligations
     —       —       36,108       (9,132 )
Obligations of states and political subdivisions
     52,921       (2,053 )     9,075       (834 )
Collateralized debt obligations
     —       —       16,674       (51,637 )
    $ 89,680     $ (2,353 )   $ 76,590     $ (61,870 )

 
10
 

   
December 31, 2008
  
   
Less than 12 months
    
12 months or more
  
   
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
  
                         
U.S. government agencies
   $ 19,822     $ (178 )   $ —     $ —  
Residential mortgage-backed agencies
     806       (15 )     —       —  
Collateralized mortgage obligations
     37,423       (9,927 )      3,216       (1,188 ) 
Obligations of states and political subdivisions
     66,735       (2,781 )     3,632       (315 )
Collateralized debt obligations
     2,159       (5,393 )     21,724       (40,665 )
    $ 126,945     $ (18,294 )   $ 28,572     $ (42,168 )

U.S. Government Agencies – The unrealized losses on the Corporation’s investments in U.S. government agencies are attributable to the lower interest rate environment and call features associated with the securities with premiums paid at the time of purchase.  All of these securities are of the highest investment grade.  The fair value of one security has been impaired for over 12 months and the fair values of five securities have been impaired for less than 12 months.  Contractually, the issuers are not permitted to settle the securities at a price less than the amortized cost basis of the individual investments.  The Corporation does not intend to sell these investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity.  Accordingly, management does not consider these investments to be other-than-temporarily impaired at June 30, 2009.

Residential Mortgage-Backed Agencies - The residential mortgage-backed agencies are in an unrealized gain position of $2.6 million at June 30, 2009.  All of these securities are of the highest investment grade.  Therefore, management does not consider these investments to be other-than-temporarily impaired at June 30, 2009.

Collateralized Mortgage Obligations – The collateralized mortgage obligations are in an unrealized loss position of $9.1 million at June 30, 2009.  All nine of these securities are private label mortgage-backed securities and have been in an unrealized loss position for 12 months or more.  These securities are reviewed for factors such as loan to value ratio, credit support levels, borrower FICO scores, geographic concentration, prepayment speeds, delinquencies, coverage ratios and credit ratings.  Management believes that all of the securities continue to demonstrate collateral coverage ratios that are adequate to support the Corporation’s investment.  The Corporation purchased all of these securities at a discount relative to their face amounts.  All of these securities were of the highest investment grade at the time of purchase.  As of June 30, 2009 two have been downgraded to one level below investment grade and three have been downgraded more than one level below investment grade.  All of these securities continue to perform as expected at the time of purchase.  The Corporation does not intend to sell these investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity.  Accordingly, management does not consider these investments to be other-than-temporarily impaired at June 30, 2009.

Obligations of State and Political Subdivisions – The unrealized losses on the Corporation’s investments in state and political subdivisions were in an unrealized loss position of $2.9 million at June 30, 2009.  Twelve securities carried a fair value less than amortized cost basis for over 12 months and 94 securities have been in an unrealized loss position for less than 12 months (41 for two months or less).  All of the Corporation’s investments in states and other political subdivisions are of investment grade as determined by the major rating agencies.  This portfolio is well-diversified throughout the United States and all bonds continue to perform according to their contractual terms.  The Corporation does not intend to sell these investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity.  Accordingly, management does not consider these investments to be other-than-temporarily impaired at June 30, 2009.

Collateralized Debt Obligations - The total $51.6 million in unrealized losses reported for collateralized debt obligations at June 30, 2009 relates to 24 trust preferred securities.  See Note F for management’s methods used to determine the fair values of these securities, and see Item 2 of Part I of this report under the heading “Investment Securities” for a full discussion of the other-than-temporary analysis performed on this portfolio.  Based upon a review of credit quality and the cash flow tests performed, management determined that one of the collateralized debt obligations in the Corporation’s portfolio was other-than-temporarily impaired for the second quarter of 2009.  As a result of this assessment, the Corporation recorded a $1.4 million other-than-temporary impairment loss on this security as of June 30, 2009.  Year to date, $2.2 million of other-than-temporary losses have been recognized in earnings on two trust preferred securities and $.4 million of losses have been recognized as a result of moving two securities to trading.  The unrealized losses on the remaining investment securities are primarily attributable to factors such as changes in market interest rates, marketability, liquidity and the current economic environment.

 
11
 
 
The following tables present a roll-forward of the amount of other-than-temporary impairment related to credit losses which have been recognized in earnings for the six and three months ended June 30, 2009.

   
Total Other-
Than-
Temporary
Impairment
Loss
    
Other-Than-
Temporary
Impairment
Credit Losses
recorded in
Earnings
    
Other-Than-
Temporary
Impairment
Losses
recorded in
Other
Comprehensive
Income
  
Beginning balance January 1, 2009
   $ 0     $ 0     $ 0  
Other-than-temporary losses recognized during the Period
     5,796        2,181       3,615  
                         
Ending balance June 30, 2009
   $ 5,796     $ 2,181     $ 3,615  

   
Total Other-
Than-
Temporary
Impairment
Loss
    
Other-Than-
Temporary
Impairment
Credit Losses
recorded in
Earnings
    
Other-Than-
Temporary
Impairment
Losses
recorded in
Other
Comprehensive
Income
  
Beginning balance April 1, 2009
   $ 3,342     $ 750     $ 2,592  
Other-than-temporary losses recognized during the Period
     2,454        1,431       1,023  
                         
Ending balance June 30, 2009
   $ 5,796     $ 2,181     $ 3,615  
 
Note D – Cash and Cash Equivalents

Cash and due from banks, which represents vault cash in the retail offices and invested cash balances at the Federal Reserve, is carried at fair value.
   
June 30,
2009
    
December 31,
2008
  
             
Cash and due from banks
   $ 28,160     $ 18,423  

Interest bearing deposits in banks, which represents funds invested at a correspondent bank, is carried at fair value and, as of June 30, 2009 and December 31, 2008, consists of daily funds invested at the Federal Home Loan Bank (“FHLB”) of Atlanta.

   
June 30,
2009
    
December 31,
2008
  
             
FHLB Daily investments, interest rate of .08% (at June 30, 2009)
   $ 20,472     $ 882  

 
12
 

Note E - Restricted Investment in Bank Stock

Restricted stock, which represents required investments in the common stock of a correspondent bank, is carried at cost and, as of June 30, 2009 and December 31, 2008, consists of the common stock of the FHLB of Atlanta and Atlantic Central Bankers Bank.

Management evaluates the restricted stock for impairment in accordance with FASB Statement of Position (“SOP”) 01-6, “Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others.”  Management’s determination of whether these investments are impaired is based on management’s assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability of the cost of an investment is influenced by criteria such as (1) the significance of the decline in net assets of the issuing bank as compared to the capital stock amount for that bank and the length of time this situation has persisted, (2) commitments by the issuing bank to make payments required by law or regulation and the level of such payments in relation to the operating performance of that bank, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the issuing bank.

On June 3, 2009 the FHLB of Atlanta announced that it would not pay a dividend for the first quarter 2009.  On March 25, 2009, they had announced that they would not pay a dividend for the fourth quarter of 2008.  The Corporations has not accrued any dividends during 2009.

Management believes that no impairment charge in respect of the restricted stock is necessary as of June 30, 2009.

Note F – Fair Value of Financial Instruments

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP No. FAS 107-1 and APB 28-1”).  This FSP amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  The Corporation early adopted FSP No. FAS 107-1 for the period ending March 31, 2009.  This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. As required, the following table presents fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that value.  Fair value is best determined by values quoted through active trading markets.  Active trading markets are characterized by numerous transactions of similar financial instruments between willing buyers and willing sellers.  Because no active trading market exists for various types of financial instruments, many of the fair values disclosed were derived using present value discounted cash flow or other valuation techniques as described below.  As a result, the Corporation’s ability to actually realize these derived values cannot be assumed.

The fair values disclosed under SFAS No. 107 may vary significantly between institutions based on the estimates and assumptions used in the various valuation methodologies.  The derived fair values are subjective in nature and involve uncertainties and significant judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could significantly impact the derived estimates of fair value.  SFAS No. 107 excludes disclosure of non financial assets such as buildings as well as certain financial instruments such as leases.  Accordingly, the aggregate fair values presented do not represent the underlying value of the Corporation.

 
13
 

The actual carrying amounts and estimated fair values of the Corporation’s financial instruments that are included in the statement of financial condition are as follows (in thousands):

   
June 30,
    
December 31,
  
   
2009
    
2008
  
   
Carrying
Amount
    
Fair
Value
    
Carrying
Amount
    
Fair
Value
  
Financial Assets:
                        
Cash and due from banks
   $ 28,160     $ 28,160     $ 18,423     $ 18,423  
Interest bearing deposits in banks
     20,472       20,472       882       882  
Investment securities (AFS and trading)
     326,778       326,778       354,595       354,595  
Federal Home Loan Bank stock
     13,861       13,861       13,933       13,933  
Loans, net
     1,114,269       1,119,871       1,120,199       1,125,029  
Accrued interest receivable
     6,892       6,892       7,713       7,713  
                                 
Financial Liabilities:
                                
Deposits
     1,201,858       1,209,773       1,222,889       1,229,834  
Borrowed funds
     314,149       326,207       327,898       346,110  
Accrued interest payable
     3,122       3,122       4,295       4,295  
Off Balance Sheet Financial Instruments
     —       —       —       —  

The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments:

Cash and due from banks:  The carrying amounts as reported in the statement of financial condition for cash and due from banks approximate their fair values.

Interest bearing deposits in banks:  The carrying amount of interest bearing deposits approximates their fair values.

Investment securities: The Corporation measures fair values of its investments based on the FASB Statement No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements.  SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements.  The Corporation measures fair values based on the fair value hierarchy established in SFAS 157.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of inputs that may be used to measure fair value under SFAS 157 are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities.  This level is the most reliable source of valuation.

Level 2: Quoted prices that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.  Level 2 inputs include “inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates).”  It also includes “inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).”  Several sources are utilized for valuing these securities including a contracted valuation service, Standard & Poor’s (S&P) evaluations and pricing services, and other valuation matrices.

Level 3: Prices or valuation techniques that require inputs that are both significant to the valuation assumptions and that are not readily observable in the market (i.e., supported with little or no market activity).  These Level 3 instruments are valued based on the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 
14
 

In December 2007, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”).  FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years.

FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, was issued on October 10, 2008 and is effective for current and prior periods.  The objective of FSP 157-3 is to clarify FASB Statement No. 157, Fair Value Measurements, in a market that is not active and to illustrate key considerations that may be used to determine the fair value of a financial asset when the market for that asset is not active.

In April 2009, FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP No. FAS 157-4”).  This standard provides additional guidance on determining when the volume and level of activity for the asset or liability has significantly decreased. The FSP also includes guidance on identifying circumstances when a transaction may not be considered orderly.

FSP No. FAS 157-4 provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with FASB Statement No. 157.

FSP No. FAS 157-4 clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The FSP provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

FSP No. FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  An entity early adopting FSP No. FAS 157-4 must also early adopt FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP No. FAS 115-2 and FAS 124-2”).  The Corporation elected to early adopt this standard for its March 31, 2009 financial statements.

For assets measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2009 and December 31, 2008 are as follows:

 
15
 

       
Fair Value Measurements at
June 30, 2009 Using
(Dollars in Thousands)
  
Description
  
Assets
Measured
at Fair
Value
06/30/09
  
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
 (Level 2)
    
Significant
Unobservable
Inputs
 (Level 3)
  
                     
Investment securities - trading
   $ 13             $ 13  
Investment securities available-for-sale:
                        
U.S. Government Agencies
   $ 104,317       $ 104,317          
Residential Mortgage-backed agencies
   $ 71,597       $ 71,597          
Collateralized mortgage obligations
   $ 36,108       $ 36,108          
Obligations of states and political subdivisions
   $ 98,069       $ 98,069          
Collateralized debt obligations
   $ 16,674               $ 16,674  
Impaired loans¹
   $ 11,118               $ 11,118  
Foreclosed Real Estate
   $ 2,357               $ 2,357  

¹ The impaired loans fair value consists of impaired loans net of the $3,675 valuation allowance.

       
Fair Value Measurements at 
December 31, 2008 Using
(Dollars in Thousands)
  
Description
  
Assets
Measured
at Fair
Value
12/31/08
  
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
  
Investment securities available-for-sale:
                    
U.S. Government Agencies
   $ 113,645       $ 113,645        
Residential Mortgage-backed agencies
   $ 82,561       $ 82,561        
Collateralized mortgage obligations
   $ 40,638       $ 40,638        
Obligations of states and political subdivisions
   $ 93,485       $ 93,485        
Collateralized debt obligations
   $ 24,266               $ 24,266  
Impaired loans¹
   $ 11,760               $ 11,760  
Foreclosed Real Estate
   $ 2,424               $ 2,424  

¹ The impaired loans fair value consists of impaired loans net of the $4,759 valuation allowance.

The Corporation believes that its valuation techniques are appropriate and consistent with other market participants.  However, the use of different methodologies and assumptions could result in a different estimate of fair values at the reporting date.  The following valuation techniques were used to measure the fair value of assets in the table above which are measured on a recurring and non-recurring basis as of June 30, 2009.

Investments held for trading – The fair value of investments held for trading was determined using a market approach. The level 3 investments consisted of two trust preferred securities, which are preferred term securities issued by trust subsidiaries of financial institutions and insurance companies and collateralized by junior subordinated debentures issued to those trusts by the parent institution. These securities were deemed to be other-than-temporarily impaired at December 31, 2008 and were moved to trading during the first quarter of 2009.  The Corporation obtained fair values for these securities from an experienced independent third-party pricing provider, Moody’s Analytics.  Information such as performance of the underlying collateral, deferral/default rates, cash flow projections, related relevant trades, models and other analytical tools are utilized by the third-party in determining individual security valuations in accordance with proper accounting guidance.  A full explanation of the pricing methodology used by Moody’s Analytics is presented in the next section, under Investments available for sale.

 
16
 

Investments available for sale – The fair value of investments available-for-sale was determined using a market approach.  As of June 30, 2009, Level 2 investment securities available-for-sale included U.S. Government Agencies and residential mortgage-backed securities, private label residential mortgage-backed securities and municipal bonds which are not as actively traded.  Their fair values were determined based upon market-corroborated inputs and valuation matrices which are obtained through third party data service providers or securities brokers through which the Corporation has historically transacted both purchases and sales of investment securities. The Level 3 investments consisted of trust preferred securities.  The Corporation obtained fair values for these securities from Moody’s Analytics.  Information such as performance of the underlying collateral, deferral/default rates, cash flow projections, related relevant trades, models and other analytical tools are utilized by the third-party in determining individual security valuations in accordance with proper accounting guidance.

At June 30, 2009, the Bank owned 24 pooled trust preferred securities with a par value of $68.3 million and a fair value of $16.7 million. Based upon application of FSP No. FAS 157-4, management has determined that there has been a significant decrease in the volume and level of activity in these securities.  The market for trust preferred securities continues to be non-existent.  There were no new pooled trust preferred issuances during 2008 and there have been none to date in 2009.  Trading activity for the trust preferred securities indicates only three total trades during the first quarter of 2009 and zero trades during the second quarter of 2009, compared to a high of 116 trades in the first quarter of 2008.  The volume has declined from a high of $376 million in the first quarter of 2007 to $0 during the second quarter of 2009.  The trading and issuance data presented, along with information from traders, indicates that there is currently an inactive and inefficient market in trust preferred securities which is contributing to the depressed pricing on these securities.

Observable prices for these securities are available based upon broker models and these inputs have been considered in the pricing models used by Moody’s Analytics.  However, the few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at June 30, 2009.  Accordingly, the trust preferred securities portion of the Corporation’s investment portfolio will be classified within Level 3 of the fair value hierarchy because management determined that significant adjustments are required to determine fair value at the measurement date.

In determining the fair values of the securities, Moody’s Analytics utilized an income valuation approach (present value technique) which maximizes the use of observable inputs and minimizes the use of unobservable inputs.  This approach is more indicative of fair value than the market approach that has been used historically, and involves several steps.  The credit quality of the collateral was estimated using the average probability of default values for each underlying issuer, adjusted for credit ratings.  The default probabilities also considered the potential for correlation among issuers within the same industry, such as banks with other banks.  The loss given default was assumed to be 95%, allowing for a 5% recovery of collateral.  Management elected to utilize the option assuming that there were no defaults or deferrals for a two-year time period for those banks who have publicly announced participation in the Treasury’s Capital Purchase Program. The cash flows for the securities were forecast for the underlying collateral and applied to each tranche in the structure to determine the resulting distribution among the securities.  These expected cash flows were then discounted to calculate the present value of the security.  The effective discount rate utilized by Moody’s Analytics for the various securities in the present value calculation was the three-month LIBOR plus 200 basis points (a risk free rate plus a premium for illiquidity).  The resulting prices are highly dependent upon the credit quality of the collateral, the relative position of the tranche in the capital structure of the security and the prepayment assumptions.   Moody’s Analytics modeled the calculations in several thousand scenarios using a Monte Carlo engine and the average price was used for valuation purposes.  Due to the current market conditions as well as the limited trading activity of these securities, the market value of the securities is highly sensitive to assumption changes and market volatility.

Impaired loans – Loans included in the table below are those that are accounted for under FASB Statement No. 114 (“SFAS 114”), Accounting by Creditors for Impairment of a Loan, for which the Corporation has measured impairment generally based on the fair value of the loan’s collateral.  Fair value is generally determined based upon independent third-party appraisals of the collateral or discounted cash flows based upon the expected proceeds.  These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.  The fair value consists of the loan balance less its valuation allowance as determined under SFAS 114.

 
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Foreclosed real estate – Fair value of foreclosed assets was based on independent third-party appraisals of the properties.  These values were determined based on the sales prices of similar properties in the approximate geographic area.

The following tables show a reconciliation of the beginning and ending balances for fair valued assets measured using Level 3 significant unobservable inputs for the six and three months ended June 30, 2009:

   
Fair Value Measurements Using Significant 
Unobservable inputs 
(Level 3) 
(Dollars in Thousands)
  
   
Investment
Securities
Available for Sale
    
Investment
Securities -
Trading
    
Impaired 
Loans
    
Foreclosed
Real
Estate
  
Beginning balance January 1, 2009
   $ 24,266     $ —     $ 11,760     $ 2,424  
Total gains/(losses) realized/unrealized:
                                
Included in earnings (or changes in net assets)
     (2,181 )     (373 )     —       (88 )
Included in other comprehensive loss
     (5,025 )     —       —       —  
Purchases, issuances, and settlements
     —       —       —       —  
Transfers from Available for Sale to Trading
     (386 )     386       —       —  
Transfers in and/or out of Level 3
     —       —       —       —  
Sales
     —       —       —       (783 )
Payments/credits
     —       —       (7,999 )     —  
Properties/loans added
     —       —       7,357       804  
Ending balance June 30, 2009
   $ 16,674     $ 13     $ 11,118     $ 2,357  
                                 
The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in realized/ unrealized gains or losses related to assets still held at the reporting date
   $ (2,181 )   $ (373 )   $ —     $ (88 )

   
Fair Value Measurements Using Significant 
Unobservable inputs 
(Level 3) 
(Dollars in Thousands)
  
   
Investment
Securities
Available for Sale
    
Investment
Securities -
Trading
    
Impaired 
Loans
    
Foreclosed
Real
Estate
  
Beginning balance April 1, 2009
   $ 10,203     $ 19     $ 6,778     $ 2,513  
Total gains/(losses) realized/unrealized:
                                
Included in earnings (or changes in net assets)
     (1,431 )     (6 )     —       (88 )
Included in other comprehensive loss
     7,902       —       —       —  
Purchases, issuances, and settlements
     —       —       —       —  
Transfers from Available for Sale to Trading
     —       —       —       —  
Transfers in and/or out of Level 3
     —       —       —       —  
Sales
     —       —       —       (441 )
Payments/credits
     —       —       (1,079 )     —  
Properties/loans added
     —       —       5,419       373  
Ending balance June 30, 2009
   $ 16,674     $ 13     $ 11,118     $ 2,357