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

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended March 31, 2011

¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______________ to ________________

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 þ  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 ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company þ

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  6,166,037 shares of common stock, par value $.01 per share, as of April 30, 2011.

 
 
 

INDEX TO QUARTERLY REPORT
FIRST UNITED CORPORATION

PART I.  FINANCIAL INFORMATION
    
     
Item 1.
Financial Statements (unaudited)
     3
       
 
Consolidated Statements of Financial Condition – March 31, 2011 and December 31, 2010
     3
       
 
Consolidated Statements of Operations - for the three months ended March 31, 2011 and 2010
     4
       
 
Consolidated Statements of Changes in Shareholders’ Equity - for the three months ended March 31, 2011 and year ended December 31, 2010
     5
       
 
Consolidated Statements of Cash Flows - for the three months ended March 31, 2011 and 2010
     6
       
 
Notes to Consolidated Financial Statements
     7
       
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
     29
       
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
     47
       
Item 4.
Controls and Procedures
     47
       
PART II. OTHER INFORMATION
    
       
Item 1.
Legal Proceedings
     48
       
Item 1A. 
Risk Factors
     48
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
     48
       
Item 3.
Defaults Upon Senior Securities
     48
       
Item 4.
[Removed and Reserved]
     48
       
Item 5.
Other Information
     48
       
Item 6.
Exhibits
     48
     
SIGNATURES
     48
     
EXHIBIT INDEX
  
  
 
 
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)

   
March 31,
2011
    
December 31,
2010
  
   
(Unaudited)
  
Assets
            
Cash and due from banks
   $ 88,414     $ 184,830  
Interest bearing deposits in banks
     64,949       114,483  
Cash and cash equivalents
     153,363       299,313  
Investment securities – available-for-sale (at fair value)
     225,729       229,687  
Restricted investment in bank stock, at cost
     12,449       12,449  
Loans Held for Sale
     44,502       —  
Loans
     936,040       1,009,753  
Allowance for loan losses
     (21,409 )     (22,138 )
Net loans
     914,631       987,615  
Premises and equipment, net
     32,367       32,945  
Goodwill and other intangible assets, net
     14,633       14,700  
Bank owned life insurance
     30,659       30,405  
Deferred tax assets
     27,229       26,400  
Other real estate owned
     18,032       18,072  
Accrued interest receivable and other assets
     42,957       44,859  
Total Assets
   $ 1,516,551     $ 1,696,445  
                 
Liabilities and Shareholders’ Equity
                
Liabilities:
                
Non-interest bearing deposits
   $ 128,998     $ 121,142  
Interest bearing deposits
     998,582       1,180,504  
Total deposits
     1,127,580       1,301,646  
                 
Short-term borrowings
     42,998       39,139  
Long-term borrowings
     232,836       243,100  
Accrued interest payable and other liabilities
     16,173       16,920  
Total Liabilities
     1,419,587       1,600,805  
                 
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 March 31, 2011 and December 31, 2010 (discount of $187 and $202, respectively)
     29,813       29,798  
Common Stock – par value $.01 per share;
Authorized 25,000 shares; issued and outstanding 6,166 shares at March 31, 2011 and 6,166 shares at December 31, 2010
     62       62  
Surplus
     21,454       21,422  
Retained earnings
     64,742       64,179  
Accumulated other comprehensive loss
     (19,107 )     (19,821 )
Total Shareholders’ Equity
     96,964       95,640  
Total Liabilities and Shareholders’ Equity
   $ 1,516,551     $ 1,696,445  

See accompanying notes to the consolidated financial statements.

 
3
 

FIRST UNITED CORPORATION
Consolidated Statements of Operations
(In thousands, except per share data)
   
Three Months Ended
March 31,
  
   
2011
    
2010
  
  
 
(Unaudited)
  
Interest income
     
Interest and fees on loans
   $ 13,855     $ 15,854  
Interest on investment securities
                
Taxable
     705       2,643  
Exempt from federal income tax
     862       932  
Total investment income
     1,567       3,575  
Other
     147       92  
Total interest income
     15,569       19,521  
Interest expense
                
Interest on deposits
     3,671       4,615  
Interest on short-term borrowings
     61       66  
Interest on long-term borrowings
     2,426       2,847  
Total interest expense
     6,158       7,528  
Net interest income
     9,411       11,993  
Provision for loan losses
     1,344       3,555  
Net interest income after provision for loan losses
     8,067       8,438  
Other operating income
                
Changes in fair value on impaired securities
     691       (11,217 )
Portion of (gain)/loss recognized in other comprehensive income (before taxes)
     (710 )     3,703  
Net securities impairment losses recognized in operations
     (19 )     (7,514 )
Net gains/(losses) – other
     101       (2,088 )
Total net gains/(losses)
     82       (9,602 )
Service charges
     925       1,118  
Trust department
     1,064       986  
Insurance commissions
     623       623  
Debit card income
     608       363  
Bank owned life insurance
     254       250  
Other
     347       243  
Total other income
     3,821       3,583  
Total other operating income/(loss)
     3,903       (6,019 )
Other operating expenses
                
Salaries and employee benefits
     5,132       5,596  
FDIC premiums
     895       876  
Equipment
     815       830  
Occupancy
     738       736  
Data processing
     702       749  
Other
     2,631       2,358  
Total other operating expenses
     10,913       11,145  
Income/(Loss) before income tax expense/(benefit)
     1,057       (8,726 )
Applicable income tax expense/(benefit)
     100       (3,615 )
Net Income/(Loss)
     957       (5,111 )
Accumulated preferred stock dividends and discount accretion
   $ (394 )   $ (390 )
Net Income Available to/(Loss Attributable to) Common Shareholders
   $ 563     $ (5,501 )
Basic net income/(loss) per common share
   $ .09     $ (.90 )
Diluted net income/(loss) per common share
   $ .09     $ (.90 )
Dividends declared per common share
   $ —     $ .01  
Weighted average number of common and diluted shares outstanding
     6,166       6,144  

See accompanying notes to the consolidated financial statements.

 
4
 

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

   
Preferred
Stock
    
Common
Stock
    
Surplus
    
Retained
Earnings
    
Accumulated
Other
Comprehensive
Loss
    
Total
Shareholders’
Equity
  
Balance at January 1, 2010
   $ 29,739     $ 61     $ 21,305     $ 76,120     $ (26,659 )   $ 100,566  
                                                 
Comprehensive loss:
                                                
Net loss for the year
                             (10,197 )             (10,197 )
Unrealized gain on securities available-for-sale, net of reclassifications and income taxes of $4,052
                                     5,987       5,987  
Change in accumulated unrealized losses for pension and SERP obligations, net of income taxes of $887
                                     1,311       1,311  
Unrealized loss on derivatives, net of income taxes of $312
                                     (460 )     (460 )
Comprehensive loss
                                             (3,359 )
Issuance of 9,924 shares of common stock under dividend reinvestment plan
             1       47                       48  
Stock based compensation
                     70                       70  
Preferred stock discount accretion
     59                       (59 )             —  
Preferred stock dividends paid
                             (1,125 )             (1,125 )
Preferred stock dividends declared
                             (375 )             (375 )
Common stock dividends declared - $.03 per share
                             (185 )             (185 )
                                                 
Balance at December 31, 2010
     29,798       62       21,422       64,179       (19,821 )     95,640  
                                                 
Comprehensive income:
                                                
Net income for the period
                             957               957  
Unrealized gain on securities available-for-sale, net of reclassifications and income taxes of $416
                                     613       613  
Unrealized gain on derivatives, net of income taxes of $68
                                     101       101  
Comprehensive income
                                             1,671  
Stock based compensation
                     32                       32  
Preferred stock discount accretion
     15                       (15 )             —  
Preferred stock dividends declared
                             (379 )             (379 )
                                                 
Balance at March 31, 2011
   $ 29,813     $ 62     $ 21,454     $ 64,742     $ (19,107 )   $ 96,964  

See accompanying notes to the consolidated financial statements.

 
5
 

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

   
Three Months Ended
March 31,
  
   
2011
    
2010
  
  
 
(Unaudited)
  
Operating activities
                
Net income/(loss)
   $ 957     $ (5,111 )
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
                
Provision for loan losses
     1,344       3,555  
Depreciation
     640       649  
Stock compensation
     32       33  
Amortization of intangible assets
     67       209  
Loss on sales of other real estate owned
     7       63  
Write-downs of other real estate owned
     63       34  
Loss on disposal of fixed assets
     3       —  
Net amortization of investment securities discounts and premiums
     610       40  
Other-than-temporary-impairment loss on securities
     19       7,514  
Proceeds from sales of investment securities trading
     —       1  
Gain on trading securities
     —       (1 )
Gain on sales of investment securities – available-for-sale
     (155 )     (262 )
Loss on transfers of available-for-sale securities to trading
     —       2,254  
Decrease/(increase) in accrued interest receivable and other assets
     2,071       (2,426 )
Deferred tax benefit
     (1,313 )     (1,670 )
(Decrease)/increase in accrued interest payable and other liabilities
     (1,126 )     518  
Earnings on bank owned life insurance
     (254 )     (250 )
Net cash (used in)/provided by operating activities
     2,965       5,150  
                 
Investing activities
                
Proceeds from maturities/calls of investment securities available-for-sale
     20,230       29,356  
Proceeds from sales of investment securities available-for-sale
     22,048       2,268  
Purchases of investment securities available-for-sale
     (37,765 )     (33,748 )
Proceeds from sales of other real estate owned
     532       362  
Net decrease in loans
     26,576       16,435  
Purchases of premises and equipment
     (65 )     (160 )
Net cash provided by investing activities
     31,556       14,513  
                 
Financing activities
                
Net (decrease)/ increase in deposits
     (174,066 )     52,998  
Net increase/(decrease) in short-term borrowings
     3,859       (5,815 )
Proceeds from long-term borrowings
     —       3,609  
Payments on long-term borrowings
     (10,264 )     (10,263 )
Cash dividends paid on common stock
     —       (614 )
Preferred stock dividends paid
     —       (375 )
Net cash (used in)/provided by financing activities
     (180,471 )     39,540  
(Decrease)/increase in cash and cash equivalents
     (145,950 )     59,203  
Cash and cash equivalents at beginning of the year
     299,313       189,671  
Cash and cash equivalents at end of period
   $ 153,363     $ 248,874  
                 
Supplemental information
                
Interest paid
   $ 5,283     $ 7,896  
Non-cash investing activities:
                
Transfers from loans to other real estate owned
   $ 562     $ 3,119  
Transfers from loans to loans held-for-sale
   $ 44,502     $ —  
Transfers from available-for-sale to trading
   $ —     $ 117,078  

See accompanying notes to the consolidated financial statements.

 
6
 

FIRST UNITED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER ENDED MARCH 31, 2011

Note A – Basis of Presentation
 
The accompanying unaudited consolidated financial statements of First United Corporation and its consolidated subsidiaries, including First United Bank & Trust (the “Bank”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 270, Interim Reporting, 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 annual 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-month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the full year or for any future interim period.  These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010.  For purposes of comparability, certain prior period amounts have been reclassified to conform to the 2011 presentation.  Such reclassifications had no impact on net income/(loss) or equity.

First United Corporation has evaluated events and transactions occurring subsequent to the statement of financial condition date of March 31, 2011 for items that should potentially be recognized or disclosed in these financial statements as prescribed by ASC Topic 855, Subsequent Events.

As used in these notes to consolidated financial statements, First United Corporation and its consolidated subsidiaries are sometimes collectively referred to as the “Corporation”.

Note B – Earnings/(Loss) Per Common Share

Basic earnings/(loss) per common share is derived by dividing net income available to/(loss attributable to) common shareholders by the weighted-average number of common shares outstanding during the period and does not include the effect of any potentially dilutive common stock equivalents.  Diluted earnings/(loss) per share is derived by dividing net income available to/(loss attributable to) common shareholders by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding common stock equivalents.  There were no common stock equivalents at March 31, 2011.  There is no dilutive effect on the earnings per share during loss periods.

The following table sets forth the calculation of basic and diluted earnings/(loss) per common share for the three-month periods ended March 31, 2011 and 2010:

   
For the three months ended March 31,
  
   
2011
  
2010
  
(in thousands, except for per share amount)
  
Income
  
Average
Shares
  
Per Share
Amount
  
Loss
  
Average
Shares
  
Per Share
Amount
  
Basic and Diluted Earnings Per Share:
                          
Net income/(loss)
   $ 957           $ (5,111 )        
Preferred stock dividends paid
     —             (375 )        
Preferred stock dividends deferred
     (379 )           —          
Discount accretion on preferred stock
     (15 )           (15 )        
Net income available to/(loss attributable to) common shareholders
   $ 563  
6,166
   $
.09
   $ (5,501 )
6,144
   $
(.90
 ) 
 
 
7
 

Note C – Net Gains/(Losses)

The following table summarizes the gain/(loss) activity for the three-month periods ended March 31, 2011 and 2010:

   
Three months ended
March 31,
  
(in thousands)
  
2011
    
2010
  
Other-than-temporary impairment charges:
            
Available-for-sale securities
   $ (19 )   $ (7,514 )
                 
Net gains/(losses) – other:
                
Available-for-sale securities:
                
Realized gains
     237       262  
Realized losses
     (82 )     —  
Transfers of available-for-sale securities to trading:
                
Gains recognized in earnings
     —       2,852  
Losses recognized in earnings
     —       (5,106 )
Trading securities:
                
Gross gains on sales
     —       1  
Loss on sales of other real estate owned
     (7 )     (63 )
Write-down of other real estate owned
     (63 )     (34 )
Gain on sale of mortgage loans
     19       —  
Loss on disposal of fixed assets
     (3 )     —  
Net gains/(losses) – other
     101       (2,088 )
Net gains/(losses)
   $ 82     $ (9,602 )

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.
       
March 31,
2011
    
December 31,
2010
  
Cash and due from banks, weighted average interest rate of 0.25% (at March 31, 2011)
   $ 88,414     $ 184,830  

Interest bearing deposits in banks, which represent funds invested at a correspondent bank, are carried at fair value and, as of March 31, 2011 and December 31, 2010, consisted of daily funds invested at the Federal Home Loan Bank (“FHLB”) of Atlanta, First Tennessee Bank (“FTN”), Merchants and Traders (“M&T”) and Community Bankers Bank (“CBB”).

   
March 31,
2011
    
December 31,
2010
  
FHLB daily investments, interest rate of 0.01% (at March 31, 2011)
   $ 27,546     $ 77,102  
FTN daily investments, interest rate of 0.10% (at March 31, 2011)
     1,350       1,350  
M&T Fed Funds sold, interest rate of 0.30% (at March 31, 2011)
     6,010       6,004  
CBB Fed Funds sold, interest rate of 0.22% (at March 31, 2011)
     30,043       30,027  
    $ 64,949     $ 114,483  

 
8
 

Note E – Investments

The investment portfolio is classified and accounted for based on the guidance of ASC Topic 320, Investments – Debt and Equity Securities.
 
The following table shows a comparison of amortized cost and fair values of investment securities available-for-sale at March 31, 2011 and December 31, 2010:
 
(in thousands)
  
Amortized
Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Fair
Value
    
OTTI in
AOCI
  
March 31, 2011
                              
U.S. government agencies
   $ 24,420     $ 45     $ 280     $ 24,185     $ —  
Residential mortgage-backed agencies
     108,532       1,700       229       110,003       —  
Collateralized mortgage obligations
     729       —       82       647       —  
Obligations of states and political subdivisions
     79,653       1,168       589       80,232       —  
Collateralized debt obligations
     36,147       —       25,485       10,662       17,441  
Totals
   $ 249,481     $ 2,913     $ 26,665     $ 225,729     $ 17,441  
                                         
December 31, 2010
                                        
U.S. government agencies
   $ 24,813     $ 101     $ 64     $ 24,850     $ —  
Residential mortgage-backed agencies
     98,109       1,703       199       99,613       —  
Collateralized mortgage obligations
     763       —       101       662       —  
Obligations of states and political subdivisions
     94,250       1,011       537       94,724       —  
Collateralized debt obligations
     36,533       —       26,695       9,838       18,151  
Totals
   $ 254,468     $ 2,815     $ 27,596     $ 229,687     $ 18,151  

Proceeds from sales of securities and the realized gains and losses are as follows:
 
   
Three Months Ended
March 31,
  
(in thousands)
  
2011
    
2010
  
Proceeds
   $ 22,048     $ 2,268  
Realized gains
     237       262  
Realized losses
     82       —  

The following table shows the Corporation’s available-for-sale securities with gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2011 and December 31, 2010:

 
9
 
 
   
Less than 12 months
    
12 months or more
  
(in thousands)
  
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
  
March 31, 2011
                        
U.S. government agencies
   $ 12,440     $ 280     $ —     $ —  
Residential mortgage-backed agencies
     38,331       229       —       —  
Collateralized mortgage obligations
     —       —       647       82  
Obligations of states and political subdivisions
     25,313       589       —       —  
Collateralized debt obligations
     —       —       10,662       25,485  
Totals
   $ 76,084     $ 1,098     $ 11,309     $ 25,567  
                                 
December 31, 2010
                                
U.S. government agencies
   $ 13,044     $ 64     $ —     $ —  
Residential mortgage-backed agencies
     19,453       199       —       —  
Collateralized mortgage obligations
     —       —       662       101  
Obligations of states and political subdivisions
     26,887       537       —       —  
Collateralized debt obligations
     —       —       9,838       26,695  
Totals
   $ 59,384     $ 800     $ 10,500     $ 26,796  

Management systematically evaluates securities for impairment on a quarterly basis.  Management assesses whether (a) it has the intent to sell a security being evaluated 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, which are recognized in other comprehensive loss.  In estimating other-than-temporary impairment (“OTTI”) 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 fair value of the security, (4) changes in the rating of the 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 or principal 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.  Management also monitors cash flow projections for securities that are considered beneficial interests under the guidance of ASC Subtopic 325-40, Investments – Other – Beneficial Interests in Securitized Financial Assets, (ASC Section 325-40-35). Further discussion about the evaluation of securities for impairment can be found in Item 2 of Part I of this report under the heading “Investment Securities”.

Management believes that the valuation of certain securities is a critical accounting policy that requires significant estimates in preparation of its consolidated financial statements.  Management utilizes an independent third party to prepare both the impairment valuations and fair value determinations for its collateralized debt obligation (“CDO”) portfolio consisting of pooled trust preferred securities.  Management reviews the assumptions and results and does not believe that there were any material differences in the valuations between March 31, 2011 and December 31, 2010.

U.S. Government Agencies - Two U.S. government agencies have been in a slight unrealized loss position for less than 12 months as of March 31, 2011.  The securities are of the highest investment grade and the Corporation does not intend to sell them, and it is not more likely than not that the Corporation will be required to sell them before recovery of their amortized cost basis, which may be at maturity. Therefore, no OTTI exists at March 31, 2011.

Residential Mortgage-Backed Agencies - Six residential mortgage-backed agencies have been in a slight unrealized loss position for less than 12 months as of March 31, 2011.  The securities are of the highest investment grade and the Corporation does not intend to sell them, and it is not more likely than not that the Corporation will be required to sell them before recovery of their amortized cost basis, which may be at maturity. Therefore, no OTTI exists at March 31, 2011.

 
10
 

Collateralized Mortgage Obligations – The collateralized mortgage obligation portfolio, consisting of one security at March 31, 2011, has been in an unrealized loss position for 12 months or more.  This security is a private label residential mortgage-backed security and is 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 this security continues to demonstrate collateral coverage ratios that are adequate to support the Corporation’s investment.  At the time of purchase, this security was of the highest investment grade and was purchased at a discount relative to its face amount.  As of March 31, 2011, this security remains at investment grade and continues to perform as expected at the time of purchase.  The Corporation does not intend to sell this security and it is not more likely than not that the Corporation will be required to sell the investment before recovery of its amortized cost basis, which may be at maturity.  Accordingly, management does not consider this investment to be other-than-temporarily impaired at March 31, 2011.

Obligations of State and Political Subdivisions – The unrealized losses on the Corporation’s investments in state and political subdivisions were $589,000 at March 31, 2011.  Sixteen securities have been in an unrealized loss position for less than 12 months.  All of these investments are of investment grade as determined by the major rating agencies and management reviews the ratings of the underlying issuers.  Management believes that 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 basis, which may be at maturity.  Accordingly, management does not consider these investments to be other-than-temporarily impaired at March 31, 2011.

Collateralized Debt Obligations - The $25.5 million in unrealized losses greater than 12 months at March 31, 2011 relates to 18 pooled trust preferred securities that comprise the CDO portfolio.  See Note H for a discussion of the methodology used by management to determine the fair values of these securities.  Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that there was one security that had credit-related non-cash OTTI charges during the first quarter of 2011.  As a result of this assessment, the Corporation recorded $19,000 in credit-related non-cash OTTI charges for the three-months ended March 31, 2011.  The unrealized losses on the remaining securities in the portfolio are primarily attributable to continued depression in market interest rates, marketability, liquidity and the current economic environment.
 
The following tables present a cumulative roll-forward of the amount of non-cash OTTI charges related to credit losses which have been recognized in earnings for debt securities held and not intended to be sold for the three-month periods ended March 31, 2011 and 2010:

(in thousands)
  
March 31,
2011
    
March 31,
2010
  
Balance of credit-related OTTI at January 1
   $ 14,653     $ 10,765  
Additions for credit-related OTTI not previously recognized
     —       1,402  
Additional increases for credit-related OTTI previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost basis
     19       6,112  
Decreases for previously recognized credit-related OTTI because there was an  intent to sell
     —       (4,369 )
Reduction for increases in cash flows expected to be collected
     (55 )     —  
Balance of credit-related OTTI at March 31
   $ 14,617     $ 13,910  
 
The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at March 31, 2011 and December 31, 2010 are shown in the following table.  Actual maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 
11
 


   
March 31, 2011
    
December 31, 2010
  
(in thousands)
  
Amortized
Cost
    
Fair
Value
    
Amortized
Cost
    
Fair
Value
  
Contractual Maturity
                        
Due in one year or less
   $ —     $ —     $ 2,500     $ 2,421  
Due after one year through five years
     11,700       11,745       16,470       16,573  
Due after five years through ten years
     33,911       33,499       19,293       19,492  
Due after ten years
     94,609       69,835       117,333       90,926  
      140,220       115,079       155,596       129,412  
Residential mortgage-backed agencies
     108,532       110,003       98,109       99,613  
Collateralized mortgage obligations
     729       647       763       662  
    $ 249,481     $ 225,729     $ 254,468     $ 229,687  

Note F - Restricted Investment in Bank Stock

Restricted stock, which represents required investments in the common stock of the FHLB of Atlanta, Atlantic Central Bankers Bank (“ACBB”) and CBB, is carried at cost and is considered a long-term investment.

Management evaluates the restricted stock for impairment in accordance with ASC Industry Topic 942, Financial Services – Depository and Lending, (ASC Section 942-325-35).  Management’s evaluation of potential impairment is based on management’s assessment of the ultimate recoverability of the cost of the restricted stock rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability is influenced by criteria such as (a) 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, (b) 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 (c) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the issuing bank.

The Corporation recognizes dividends on a cash basis.  For the three months ended March 31, 2011, dividends of $25,040 were recognized in earnings.  For the comparable period of 2010, dividends of $9,400 were recognized in earnings.

Management has evaluated the restricted stock for impairment and believes that no impairment charge is necessary as of March 31, 2011.

Note G – Loans and Related Allowance for Loan Losses

The following table summarizes the primary segments of the loan portfolio as of March 31, 2011 and December 31, 2010:

(in thousands)
  
Commercial
Real Estate
    
Acquisition
and
Development
    
Commercial
and
Industrial
    
Residential
Mortgage
    
Consumer
    
Total
  
March 31, 2011
                                    
Total loans
   $ 327,380     $ 155,476     $ 72,362     $ 353,617     $ 27,205     $ 936,040  
Individually evaluated for impairment
     24,204       31,072       13,771       7,991       39       77,077  
Collectively evaluated for impairment
     303,176       124,404       58,591       345,626       27,166       858,963  
                                                 
December 31, 2010
                                                
Total loans
   $ 348,584     $ 156,892     $ 69,992     $ 356,742     $ 77,543     $ 1,009,753  
Individually evaluated for impairment
     16,270       31,196       5,131       9,854       152       62,603  
Collectively evaluated for impairment
     332,314       125,696       64,861       346,888       77,391       947,150  
 
 
12
 

The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance.  The commercial real estate (“CRE”) loan segment is further disaggregated into two classes. Non-owner occupied CRE loans, which include loans secured by non-owner occupied nonfarm nonresidential properties, generally have a greater risk profile than all other CRE loans, which include loans secured by farmland, multifamily structures and owner-occupied commercial structures.  The acquisition and development (“A&D”) loan segment is further disaggregated into two classes. One-to-four family residential construction loans are generally made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built.  All other A&D loans are generally made to developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures.  These loans have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the A&D loan.  The commercial and industrial (“C&I”) loan segment consists of loans made for the purpose of financing the activities of commercial customers.  The residential mortgage loan segment is further disaggregated into two classes: amortizing term loans, which are primarily first liens, and home equity lines of credit, which are generally second liens.  The consumer loan segment consists primarily of installment loans (direct and indirect) and overdraft lines of credit connected with customer deposit accounts.

Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $500,000 or is part of a relationship that is greater than $750,000, and if the loan either is in nonaccrual status, or is risk rated Substandard and is greater than 60 days past due.  Loans are considered to be impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  The Corporation does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of larger relationship that is impaired, or are classified as a troubled debt restructuring agreement.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods:  (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs.  The method is selected on a loan-by loan basis, with management primarily utilizing the fair value of collateral method.  The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis.  The Corporation’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of March 31, 2011 and December 31, 2010:

    
Impaired Loans with 
Specific Allowance
    
Impaired
Loans with
No Specific
Allowance
    
Total Impaired Loans
  
(in thousands)
  
Recorded
Investment
    
Related
Allowance
    
Recorded
Investment
    
Recorded
Investment
    
Unpaid
Principal
Balance
  
March 31, 2011
                              
Commercial real estate
                              
Non owner-occupied
   $ 13,568     $ 2,636     $ 3,950     $ 17,518     $ 17,518  
All other CRE
     —       —       6,686       6,686       6,711  
Acquisition and development
                                        
1-4 family residential construction
     2,915       889       139       3,054       3,054  
All other A&D
     7,492       1,283       20,526       28,018       30,679  
Commercial and industrial
     9,400       940       4,371       13,771       15,180  
Residential mortgage
                                        
Residential mortgage - term
     576       18       6,634       7,210       7,387  
Residential mortgage – home equity
     —       —       781       781       781  
Consumer
     —       —       39       39       39  
Total impaired loans
   $ 33,951     $ 5,766     $ 43,126     $ 77,077     $ 81,349  
                                         
December 31, 2010
                                        
Commercial real estate
                                        
Non owner-occupied
   $ 8,183     $ 2,768     $ 4,635     $ 12,818     $ 12,818  
All other CRE
     713       80       2,740       3,453       3,478  
Acquisition and development
                                        
1-4 family residential construction
     2,823       334       622       3,445       3,491  
All other A&D
     7,269       1,141       20,482       27,751       31,284  
Commercial and industrial
     —       —       5,131       5,131       6,540  
Residential mortgage
                                        
Residential mortgage - term
     725       43       8,606       9,331       10,086  
Residential mortgage – home equity
     —       —       522       522       522  
Consumer
     —       —       152       152       153  
Total impaired loans
   $ 19,713     $ 4,366     $ 42,890     $ 62,603     $ 68,372  
 
 
13
 
 
The following table presents the average recorded investment in impaired loans by class and related interest income recognized for the periods indicated:

    
Three months ended
March 31, 2011
    
Three months ended
March 31, 2010
  
(in thousands)
  
Average
investment
    
Interest
income
recognized
on an
accrual
basis
    
Interest
income
recognized
on a cash
basis
    
Average
investment
    
Interest
income
recognized
on an
accrual
basis
    
Interest
income
recognized
on a cash
basis
  
Commercial real estate
                                    
Non owner-occupied
   $ 15,168     $ 19     $ —     $ 10,912     $ 117     $ —  
All other CRE
     5,070       69       —       20,518       277       —  
Acquisition and development
                                                
1-4 family residential construction
     3,250       27       —       364       —       —  
All other A&D
     27,885       145       —       68,721       398       —  
Commercial and industrial
     9,451       38       —       11,775       143       —  
Residential mortgage
                                                
Residential mortgage - term
     8,271       43       —       8,892       119       —  
Residential mortgage – home equity
     652       4       —       3,892       34       —  
Consumer
     99       —       —       —       —       —  
Total
   $ 69,846     $ 345     $ —     $ 125,074     $ 1,088     $ —  

Management uses a 10 point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification.  Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected.  All loans greater than 90 days past due are considered Substandard.  The portion of any loan that represents a specific allocation of the allowance for loan losses is placed in the Doubtful category.  Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event.  The Bank’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis.  The Credit Quality Department performs an annual review of all commercial relationships $500,000 or greater.  Confirmation of the appropriate risk grade is included in the review on an ongoing basis.  The Bank has an experienced Loan Review Department that continually reviews and assesses loans within the portfolio.  The Bank engages an external consultant to conduct loan reviews on at least an annual basis. Generally, the external consultant reviews commercial relationships greater than $750,000 and/or criticized relationships greater than $500,000.  Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis.  Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

 
14
 

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of March 31, 2011 and December 31, 2010:

(in thousands)
  
Pass
    
Special
Mention
    
Substandard
    
Doubtful
    
Total
  
March 31, 2011
                              
Commercial real estate
                              
Non owner-occupied
   $ 118,892     $ 9,266     $ 28,080     $ 2,636     $ 158,874  
All other CRE
     110,506       8,168       49,832       —       168,506  
Acquisition and development
                                        
1-4 family residential construction
     8,080       —       5,977       889       14,946  
All other A&D
     85,612       3,765       49,870       1,283       140,530  
Commercial and industrial
     51,603       2,125       17,694       940       72,362  
Residential mortgage
                                        
Residential mortgage - term
     253,670       2,532       17,957       18       274,177  
Residential mortgage – home equity
     75,398       —       4,042       —       79,440  
Consumer
     26,563       36       606       —       27,205  
Total
   $ 730,324     $ 25,892     $ 174,058     $ 5,766     $ 936,040  
                                         
December 31, 2010
                                        
Commercial real estate
                                        
Non owner-occupied
   $ 121,144     $ 9,541     $ 33,914     $ 2,768     $ 167,367  
All other CRE
     123,115       8,995       49,027       80       181,217  
Acquisition and development
                                        
1-4 family residential construction
     7,038       —       6,876       334       14,248  
All other A&D
     86,352       4,664       50,487       1,141       142,644  
Commercial and industrial
     46,760       2,933       20,299       —       69,992  
Residential mortgage
                                        
Residential mortgage - term
     255,916       2,634       18,576       43       277,169  
Residential mortgage – home equity
     76,828       —       2,745       —       79,573  
Consumer
     76,736       23       784       —       77,543  
Total
   $ 793,889     $ 28,790     $ 182,708     $ 4,366     $ 1,009,753  

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due.  The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans as of March 31, 2011 and December 31, 2010:

 
15
 

(in thousands)
  
Current
    
30-59 Days
Past Due
    
60-89 Days
Past Due
    
90 Days+
Past Due
    
Total Past
Due and still
accruing
    
Non-Accrual
    
Total Loans
  
March 31, 2011
                                          
Commercial real estate
                                          
Non owner-occupied
   $ 140,853     $ 1,032     $ 450     $ —     $ 1,482     $ 16,539     $ 158,874  
All other CRE
     166,875       941       —       —       941       690       168,506  
Acquisition and development
                                                        
1-4 family residential construction
     14,724       83       —       —       83       139       14,946  
All other A&D
     115,703       8,609       —       —       8,609       16,218       140,530  
Commercial and industrial
     71,335       195       263       —       458       569       72,362  
Residential mortgage
                                                        
Residential mortgage - term
     257,998       10,566       1,407       324       12,297       3,882       274,177  
Residential mortgage – home equity
     78,483       66       359       —       425       532       79,440  
Consumer
     25,313       1,300       528       26       1,854       38       27,205  
Total
   $ 871,284     $ 22,792     $ 3,007     $ 350     $ 26,149     $ 38,607     $ 936,040  
                                                         
December 31, 2010
                                                        
Commercial real estate
                                                        
Non owner-occupied
   $ 146,470     $ 892     $ 8,801     $ —     $ 9,693     $ 11,204     $ 167,367  
All other CRE
     179,661       581       286       —       867       689       181,217  
Acquisition and development
                                                        
1-4 family residential construction
     13,626       —       —       —       —       622       14,248  
All other A&D
     124,731       1,950       188       128       2,266       15,647       142,644  
Commercial and industrial
     67,688       883       22       44       949       1,355       69,992  
Residential mortgage
                                                        
Residential mortgage - term
     253,225       12,168       4,455       2,359       18,982       4,962       277,169  
Residential mortgage – home equity
     78,533       559       129       78       766       274       79,573  
Consumer
     74,392       2,116       700       183       2,999       152       77,543  
Total
   $ 938,326     $ 19,149