Edgar Filing: FIRST UNITED CORP/MD/

Unassociated Document

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 June 30, 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 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 R No £

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 R

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: 6,182,757 shares of common stock, par value $.01 per share, as of July 31, 2011.

INDEX TO QUARTERLY REPORT

FIRST UNITED CORPORATION

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

	Consolidated Statements of Financial Condition – June 30, 2011 and December 31, 2010	3

	Consolidated Statements of Operations - for the three and six months ended June 30, 2011 and 2010	4

	Consolidated Statements of Changes in Shareholders’ Equity - for the six months ended June 30, 2011 and year ended December 31, 2010	6

	Consolidated Statements of Cash Flows - for the six months ended June 30, 2011 and 2010	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52

Item 4.	Controls and Procedures	52

PART II. OTHER INFORMATION		53

Item 1.	Legal Proceedings	53

Item 1A. Risk Factors		53

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 3.	Defaults Upon Senior Securities	53

Item 4.	[Removed and Reserved]	53

Item 5.	Other Information	53

Item 6.	Exhibits	53

SIGNATURES		53

EXHIBIT INDEX		54

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, 2011			December 31, 2010
	(Unaudited)
Assets
Cash and due from banks	$	93,336		$	184,830
Interest bearing deposits in banks		40,113			114,483
Cash and cash equivalents		133,449			299,313
Investment securities – available-for-sale (at fair value)		239,348			229,687
Restricted investment in bank stock, at cost		11,712			12,449
Loans		936,398			1,009,753
Allowance for loan losses		(21,001	)		(22,138	)
Net loans		915,397			987,615
Premises and equipment, net		31,840			32,945
Goodwill and other intangible assets, net		14,566			14,700
Bank owned life insurance		30,914			30,405
Deferred tax assets		27,023			26,400
Other real estate owned		19,143			18,072
Accrued interest receivable and other assets		40,130			44,859
Total Assets	$	1,463,522		$	1,696,445

Liabilities and Shareholders’ Equity
Liabilities:
Non-interest bearing deposits	$	128,741		$	121,142
Interest bearing deposits		975,825			1,180,504
Total deposits		1,104,566			1,301,646

Short-term borrowings		35,875			39,139
Long-term borrowings		207,572			243,100
Accrued interest payable and other liabilities		17,413			16,920
Total Liabilities		1,365,426			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 June 30, 2011 and December 31, 2010 (discount of $172 and $202, respectively)		29,828			29,798
Common Stock – par value $.01 per share; Authorized 25,000 shares; issued and outstanding 6,183 shares at June 30, 2011 and 6,166 shares at December 31, 2010		62			62
Surplus		21,474			21,422
Retained earnings		65,475			64,179
Accumulated other comprehensive loss		(18,743	)		(19,821	)
Total Shareholders’ Equity		98,096			95,640
Total Liabilities and Shareholders’ Equity	$	1,463,522		$	1,696,445

See accompanying notes to the consolidated financial statements.

FIRST UNITED CORPORATION

Consolidated Statements of Operations

(In thousands, except per share data)

	Six Months Ended June 30,
	2011			2010
	(Unaudited)
Interest income
Interest and fees on loans	$	27,163		$	31,361
Interest on investment securities
Taxable		1,795			4,403
Exempt from federal income tax		1,552			1,806
Total investment income		3,347			6,209
Other		239			224
Total interest income		30,749			37,794
Interest expense
Interest on deposits		6,903			9,222
Interest on short-term borrowings		127			139
Interest on long-term borrowings		4,701			5,603
Total interest expense		11,731			14,964
Net interest income		19,018			22,830
Provision for loan losses		4,605			7,186
Net interest income after provision for loan losses		14,413			15,644
Other operating income
Changes in fair value on impaired securities		793			(10,798	)
Portion of (gain)/loss recognized in other comprehensive income (before taxes)		(812	)		2,733
Net securities impairment losses recognized in operations		(19	)		(8,065	)
Net gains/(losses) – other		668			(2,698	)
Total net gains/(losses)		649			(10,763	)
Service charges		1,803			2,330
Trust department		2,143			2,038
Insurance commissions		1,288			1,325
Debit card income		1,112			797
Bank owned life insurance		509			499
Other		725			442
Total other income		7,580			7,431
Total other operating income/(loss)		8,229			(3,332	)
Other operating expenses
Salaries and employee benefits		10,158			10,937
FDIC premiums		1,387			2,074
Equipment		1,575			1,646
Occupancy		1,425			1,441
Data processing		1,387			1,304
Other		5,071			5,003
Total other operating expenses		21,003			22,405
Income/(Loss) before income tax benefit		1,639			(10,093	)
Applicable income tax benefit		(451	)		(4,066	)
Net Income/(Loss)		2,090			(6,027	)
Accumulated preferred stock dividends and discount accretion	$	(794	)	$	(779	)
Net Income Available to/(Loss Attributable to) Common Shareholders	$	1,296		$	(6,806	)
Basic net income/(loss) per common share	$	.21		$	(1.11	)
Diluted net income/(loss) per common share	$	.21		$	(1.11	)
Dividends declared per common share	$	.00		$	.02
Weighted average number of common and diluted shares outstanding		6,172			6,149

See accompanying notes to the consolidated financial statements.

FIRST UNITED CORPORATION

Consolidated Statements of Operations

(In thousands, except per share data)

	Three Months Ended June 30,
	2011			2010
	(Unaudited)
Interest income
Interest and fees on loans	$	13,249		$	15,507
Interest on investment securities
Taxable		1,090			1,760
Exempt from federal income tax		690			874
Total investment income		1,780			2,634
Other		92			132
Total interest income		15,121			18,273
Interest expense
Interest on deposits		3,232			4,607
Interest on short-term borrowings		66			73
Interest on long-term borrowings		2,275			2,756
Total interest expense		5,573			7,436
Net interest income		9,548			10,837
Provision for loan losses		3,261			3,631
Net interest income after provision for loan losses		6,287			7,206
Other operating income
Changes in fair value on impaired securities		102			419
Portion of gain recognized in other comprehensive income (before taxes)		(102	)		(970	)
Net securities impairment losses recognized in operations		0			(551	)
Net gains/(losses) – other		567			(610	)
Total net gains/(losses)		567			(1,161	)
Service charges		937			1,212
Trust department		1,079			1,052
Insurance commissions		665			702
Debit card income		504			434
Bank owned life insurance		255			249
Other		378			199
Total other income		3,818			3,848
Total other operating income		4,385			2,687
Other operating expenses
Salaries and employee benefits		5,026			5,341
FDIC premiums		492			1,198
Equipment		760			816
Occupancy		687			705
Data processing		685			555
Other		2,440			2,645
Total other operating expenses		10,090			11,260
Income/(Loss) before income tax benefit		582			(1,367	)
Applicable income tax benefit		(551	)		(451	)
Net Income/(Loss)		1,133			(916	)
Accumulated preferred stock dividends and discount accretion	$	(400	)	$	(389	)
Net Income Available to/(Loss Attributable to) Common Shareholders	$	733		$	(1,305	)
Basic net income/(loss) per common share	$	.12		$	(.21	)
Diluted net income/(loss) per common share	$	.12		$	(.21	)
Dividends declared per common share	$	.00		$	.01
Weighted average number of common and diluted shares outstanding		6,177			6,154

See accompanying notes to the consolidated financial statements.

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	)					0
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								2,090						2,090
Unrealized gain on securities available-for-sale, net of reclassifications and income taxes of $764											1,128			1,128
Unrealized loss on derivatives, net of income taxes of $34											(50	)		(50	)
Comprehensive income														3,168
Stock based compensation						52								52
Preferred stock discount accretion		30						(30	)					0
Preferred stock dividends declared								(764	)					(764	)

Balance at June 30, 2011	$	29,828	$	62	$	21,474	$	65,475		$	(18,743	)	$	98,096

See accompanying notes to the consolidated financial statements.

FIRST UNITED CORPORATION

Consolidated Statements of Cash Flows

(In thousands)

	Six Months Ended June 30,
	2011			2010
	(Unaudited)
Operating activities
Net income/(loss)	$	2,090		$	(6,027	)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Provision for loan losses		4,605			7,186
Depreciation		1,236			1,281
Stock compensation		52			70
Amortization of intangible assets		134			416
Loss on sales of other real estate owned		44			221
Write-downs of other real estate owned		952			89
Proceeds from sale of loans held for sale		33,902			0
Gain on sale of loans held for sale		(1,366	)		0
(Gain)/loss on loan sales		(41	)		156
Loss/(gain) on disposal of fixed assets		9			(11	)
Net amortization of investment securities discounts and premiums		1,015			109
Other-than-temporary-impairment loss on securities		19			8,065
Proceeds from sales of investment securities trading		0			99,626
Proceeds from maturities/calls of investment securities trading		0			17,167
Loss on trading securities		0			251
Gain on sales of investment securities – available-for-sale		(266	)		(262	)
Loss on transfers of available-for-sale securities to trading		0			2,254
Decrease in accrued interest receivable and other assets		4,645			9,086
Deferred tax benefit		(1,353	)		(1,648	)
(Decrease)/increase in accrued interest payable and other liabilities		(271	)		679
Earnings on bank owned life insurance		(509	)		(499	)
Net cash provided by operating activities		44,897			138,209

Investing activities
Proceeds from maturities/calls of investment securities available-for-sale		28,904			55,177
Proceeds from sales of investment securities available-for-sale		29,115			2,268
Purchases of investment securities available-for-sale		(66,556	)		(130,668	)
Proceeds from sales of other real estate owned		2,189			1,137
Proceeds from loan sales		5,048			3,416
Net decrease in loans		25,814			27,105
Net decrease/(increase) in FHLB stock		737			(59	)
Purchases of premises and equipment		(140	)		(1,179	)
Net cash provided by/(used in) investing activities		25,111			(42,803	)

Financing activities
Net (decrease)/ increase in deposits		(197,080	)		69,556
Net decrease in short-term borrowings		(3,264	)		(10,076	)
Proceeds from long-term borrowings		0			3,609
Payments on long-term borrowings		(35,528	)		(30,526	)
Cash dividends paid on common stock		0			(676	)
Proceeds from issuance of common stock		0			18
Preferred stock dividends paid		0			(750	)
Net cash (used in)/provided by financing activities		(235,872	)		31,155
(Decrease)/increase in cash and cash equivalents		(165,864	)		126,561
Cash and cash equivalents at beginning of the year		299,313			189,671
Cash and cash equivalents at end of period	$	133,449		$	316,232

Supplemental information
Interest paid	$	10,192		$	15,483
Taxes paid	$	0		$	70
Non-cash investing activities:
Transfers from loans to other real estate owned	$	4,256		$	5,499
Transfers from loans to loans held-for-sale	$	32,536		$	1,954
Transfers from available-for-sale to trading	$	0		$	117,078

See accompanying notes to the consolidated financial statements.

FIRST UNITED CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE QUARTER ENDED MARCH 31, 2011

Note 1 – 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- and six-month periods ended June 30, 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 June 30, 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 2 – 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 June 30, 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 six- and three-month periods ended June 30, 2011 and 2010:

	For the six months ended June 30,
	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/(Loss) Per Share:
Net income/(loss)	$	2,090						$	(6,027	)
Preferred stock dividends paid		0							(750	)
Preferred stock dividends deferred		(764	)						0
Discount accretion on preferred stock		(30	)						(29	)
Net income available to/(loss attributable to) common shareholders	$	1,296			6,172	$	.21	$	(6,806	)		6,149	$	(1.11	)

	For the three months ended June 30,
	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/(Loss) Per Share:
Net income/(loss)	$	1,133						$	(916	)
Preferred stock dividends paid		0							(375	)
Preferred stock dividends deferred		(385	)						0
Discount accretion on preferred stock		(15	)						(14	)
Net income available to/(loss attributable to) common shareholders	$	733			6,177	$	.12	$	(1,305	)		6,154	$	(.21	)

Note 3 – Net Gains/(Losses)

The following table summarizes the gain/(loss) activity for the six- and three-month periods ended June 30, 2011 and 2010:

	Six months ended June 30,
(in thousands)	2011			2010
Other-than-temporary impairment charges:
Available-for-sale securities	$	(19	)	$	(8,065	)

Net gains/(losses) – other:
Available-for-sale securities:
Realized gains		367			262
Realized losses		(101	)		0
Transfers of available-for-sale securities to trading:
Gains recognized in earnings		0			2,852
Losses recognized in earnings		0			(5,106	)
Trading securities:
Gross gains on sales		0			972
Gross losses on sales		0			(1,223	)
Loss on sales of other real estate owned		(44	)		(221	)
Write-down of other real estate owned		(952	)		(89	)
Gain/(loss) on sale of loans		41			(156	)
Gain on sale of indirect auto loans		1,366			0
(Loss)/gain on disposal of fixed assets		(9	)		11
Net gains/(losses) – other		668			(2,698	)
Net gains/(losses)	$	649		$	(10,763	)

	Three months ended June 30,
(in thousands)	2011			2010
Other-than-temporary impairment charges:
Available-for-sale securities	$	0		$	(551	)

Net gains/(losses) – other:
Available-for-sale securities:
Realized gains		130			0
Realized losses		(19	)		0
Transfers of available-for-sale securities to trading:
Gains recognized in earnings		0			0
Losses recognized in earnings		0			0
Trading securities:
Gross gains on sales		0			971
Gross losses on sales		0			(1,223	)
Loss on sales of other real estate owned		(37	)		(158	)
Write-down of other real estate owned		(889	)		(55	)
Gain/(loss) on sale of loans		22			(156	)
Gain on sale of indirect auto loans		1,366			0
(Loss)/gain on disposal of fixed assets		(6	)		11
Net gains/(losses) – other		567			(610	)
Net gains/(losses)	$	567		$	(1,161	)

Note 4 – 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, 2011				December 31, 2010
Cash and due from banks, weighted average interest rate of 0.22% (at June 30, 2011)		$	93,336			$	184,830

Interest bearing deposits in banks, which represent funds invested at a correspondent bank, are carried at fair value and, as of June 30, 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”).

	June 30, 2011		December 31, 2010
FHLB daily investments, interest rate of 0.01% (at June 30, 2011)	$	2,690	$	77,102
FTN daily investments, interest rate of 0.07% (at June 30, 2011)		1,350		1,350
M&T Fed Funds sold, interest rate of 0.30% (at June 30, 2011)		6,014		6,004
CBB Fed Funds sold, interest rate of 0.22% (at June 30, 2011)		30,059		30,027
	$	40,113	$	114,483

Note 5 – 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 June 30, 2011 and December 31, 2010:

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI
June 30, 2011
U.S. government agencies	$	34,422	$	141	$	87	$	34,476	$	0
Residential mortgage-backed agencies		118,183		1,903		256		119,830		0
Collateralized mortgage obligations		686		0		98		588		0
Obligations of states and political subdivisions		72,736		1,324		332		73,728		0
Collateralized debt obligations		36,210		0		25,484		10,726		17,339
Totals	$	262,237	$	3,368	$	26,257	$	239,348	$	17,339

December 31, 2010
U.S. government agencies	$	24,813	$	101	$	64	$	24,850	$	0
Residential mortgage-backed agencies		98,109		1,703		199		99,613		0
Collateralized mortgage obligations		763		0		101		662		0
Obligations of states and political subdivisions		94,250		1,011		537		94,724		0
Collateralized debt obligations		36,533		0		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:

	Six Months Ended June 30,				Three Months Ended June 30,
(in thousands)	2011		2010		2011		2010
Proceeds	$	29,115	$	2,268	$	7,067	$	0
Realized gains		367		262		130		0
Realized losses		101		0		19		0

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 June 30, 2011 and December 31, 2010:

	Less than 12 months				12 months or more
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2011
U.S. government agencies	$	12,618	$	87	$	0	$	0
Residential mortgage-backed agencies		40,528		256		0		0
Collateralized mortgage obligations		0		0		588		98
Obligations of states and political subdivisions		21,974		332		0		0
Collateralized debt obligations		0		0		10,726		25,484
Totals	$	75,120	$	675	$	11,314	$	25,582

December 31, 2010
U.S. government agencies	$	13,044	$	64	$	0	$	0
Residential mortgage-backed agencies		19,453		199		0		0
Collateralized mortgage obligations		0		0		662		101
Obligations of states and political subdivisions		26,887		537		0		0
Collateralized debt obligations		0		0		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 June 30, 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 June 30, 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 June 30, 2011.

Residential Mortgage-Backed Agencies - Eight residential mortgage-backed agencies have been in a slight unrealized loss position for less than 12 months as of June 30, 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 June 30, 2011.

Collateralized Mortgage Obligations – The collateralized mortgage obligation portfolio, consisting of one security at June 30, 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 June 30, 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 June 30, 2011.

Obligations of State and Political Subdivisions – The unrealized losses on the Corporation’s investments in state and political subdivisions were $332,000 at June 30, 2011. Fifteen 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 June 30, 2011.

Collateralized Debt Obligations - The $25.5 million in unrealized losses greater than 12 months at June 30, 2011 relates to 18 pooled trust preferred securities that comprise the CDO portfolio. See Note 8 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 were no securities that had credit-related non-cash OTTI charges during the second quarter of 2011. The Corporation has recorded $19,000 in credit-related non-cash OTTI charges for the six-months ended June 30, 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 six- and three-month periods ended June 30, 2011 and 2010:

	Six months ended
(in thousands)	June 30, 2011			June 30, 2010
Balance of credit-related OTTI at January 1	$	14,653		$	10,765
Additions for credit-related OTTI not previously recognized		0			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			6,663
Decreases for previously recognized credit-related OTTI because there was an intent to sell		0			(4,369	)
Reduction for increases in cash flows expected to be collected		(101	)		0
Balance of credit-related OTTI at June 30	$	14,571		$	14,461

	Three months ended
(in thousands)	June 30, 2011			June 30, 2010
Balance of credit-related OTTI at April 1	$	14,617		$	13,910
Additions for credit-related OTTI not previously recognized		0			0
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		0			551
Decreases for previously recognized credit-related OTTI because there was an intent to sell		0			0
Reduction for increases in cash flows expected to be collected		(46	)		0
Balance of credit-related OTTI at June 30	$	14,571		$	14,461

The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at June 30, 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.

	June 30, 2011				December 31, 2010
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Contractual Maturity
Due in one year or less	$	1,700	$	1,731	$	2,500	$	2,421
Due after one year through five years		20,017		20,127		16,470		16,573
Due after five years through ten years		35,494		35,619		19,293		19,492
Due after ten years		86,157		61,453		117,333		90,926
		143,368		118,930		155,596		129,412
Residential mortgage-backed agencies		118,183		119,830		98,109		99,613
Collateralized mortgage obligations		686		588		763		662
	$	262,237	$	239,348	$	254,468	$	229,687

Note 6 - 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 six months ended June 30, 2011, dividends of $49,700 were recognized in earnings. For the comparable period of 2010, dividends of $18,300 were recognized in earnings.

Management has evaluated the restricted stock for impairment and believes that no impairment charge is necessary as of June 30, 2011.

Note 7 – Loans and Related Allowance for Loan Losses

The following table summarizes the primary segments of the loan portfolio as of June 30, 2011 and December 31, 2010:

(in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Residential Mortgage		Consumer		Total
June 30, 2011
Total loans	$	320,322	$	152,007	$	71,699	$	351,078	$	41,292	$	936,398
Individually evaluated for impairment		20,768		27,690		14,083		5,921		20		68,482
Collectively evaluated for impairment		299,554		124,317		57,616		345,157		41,272		867,916

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

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: (a) amortizing term loans, which are primarily first liens; and (b) 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 June 30, 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
June 30, 2011
Commercial real estate
Non owner-occupied	$	1,219	$	227	$	11,544	$	12,763	$	17,072
All other CRE		832		165		7,173		8,005		8,030
Acquisition and development
1-4 family residential construction		2,693		1,063		0		2,693		2,693
All other A&D		10,359		2,609		14,638		24,997		27,740
Commercial and industrial		9,400		1,185		4,683		14,083		15,531
Residential mortgage
Residential mortgage - term		574		79		4,645		5,219		5,904
Residential mortgage – home equity		0		0		702		702		702
Consumer		0		0		20		20		21
Total impaired loans	$	25,077	$	5,328	$	43,405	$	68,482	$	77,693

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		0		0		5,131		5,131		6,540
Residential mortgage
Residential mortgage - term		725		43		8,606		9,331		10,086
Residential mortgage – home equity		0		0		522		522		522
Consumer		0		0		152		152		153
Total impaired loans	$	19,713	$	4,366	$	42,890	$	62,603	$	68,372

The following tables present the average recorded investment in impaired loans by class and related interest income recognized for the periods indicated:

	Six months ended June 30, 2011						Six months ended June 30, 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	$	14,366	$	35	$	61	$	11,058	$	150	$	78
All other CRE		6,048		130		50		17,951		346		26
Acquisition and development
1-4 family residential construction		3,064		53		0		356		0		10
All other A&D		26,922		290		81		65,063		505		158
Commercial and industrial		10,995		77		0		10,463		168		0
Residential mortgage
Residential mortgage - term		7,254		84		6		6,932		143		90
Residential mortgage – home equity		668		7		3		3,746		44		0
Consumer		73		0		0		0		0		3
Total	$	69,390	$	676	$	201	$	115,569	$	1,356	$	365

	Three months ended June 30, 2011						Three months ended June 30, 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	$	15,140	$	16	$	61	$	11,020	$	33	$	78
All other CRE		7,345		61