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 September 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 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 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 October 31, 2011.

 
 
 

INDEX TO QUARTERLY REPORT
FIRST UNITED CORPORATION

PART I.  FINANCIAL INFORMATION
  
     
Item 1.
Financial Statements (unaudited)
3
     
 
Consolidated Statements of Financial Condition – September 30, 2011 and December 31, 2010
3
     
 
Consolidated Statements of Operations - for the three and nine months ended September 30, 2011 and 2010
4
     
 
Consolidated Statements of Changes in Shareholders’ Equity - for the nine months ended September 30, 2011 and year ended December 31, 2010
6
     
 
Consolidated Statements of Cash Flows - for the nine months ended September 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
37
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
55
     
Item 4.
Controls and Procedures
56
     
     
PART II. OTHER INFORMATION
56
     
Item 1.
Legal Proceedings
56
     
Item 1A.
 Risk Factors
56
     
Item 2.  
 Unregistered Sales of Equity Securities and Use of Proceeds
57
     
Item 3.  
 Defaults Upon Senior Securities
57
     
Item 4.  
 [Removed and Reserved]
57
     
Item 5.  
 Other Information
57
     
Item 6.  
 Exhibits
57
     
SIGNATURES
  
 
57
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)

   
September 30,
2011
    
December 31,
2010
  
   
(Unaudited)
  
Assets
            
Cash and due from banks
   $ 44,022     $ 184,830  
Interest bearing deposits in banks
     40,874       114,483  
Cash and cash equivalents
     84,896       299,313  
Investment securities – available-for-sale (at fair value)
     277,819       229,687  
Restricted investment in bank stock, at cost
     11,240       12,449  
Loans
     919,023       1,009,753  
Allowance for loan losses
     (20,135 )     (22,138 )
Net loans
     898,888       987,615  
Premises and equipment, net
     31,298       32,945  
Goodwill and other intangible assets, net
     14,499       14,700  
Bank owned life insurance
     31,174       30,405  
Deferred tax assets
     27,116       26,400  
Other real estate owned
     17,508       18,072  
Accrued interest receivable and other assets
     39,666       44,859  
Total Assets
   $ 1,434,104     $ 1,696,445  
                 
Liabilities and Shareholders’ Equity
                
Liabilities:
                
Non-interest bearing deposits
   $ 150,756     $ 121,142  
Interest bearing deposits
     915,464       1,180,504  
Total deposits
     1,066,220       1,301,646  
                 
Short-term borrowings
     44,462       39,139  
Long-term borrowings
     207,308       243,100  
Accrued interest payable and other liabilities
     17,786       16,920  
Total Liabilities
     1,335,776       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 September 30, 2011 and December 31, 2010 (discount of $156 and $202, respectively)
              29,844                29,798  
Common Stock – par value $.01 per share;
    Authorized 25,000 shares; issued and outstanding 6,183 shares at September 30, 2011 and 6,166 shares at December 31, 2010
        62          62  
Surplus
     21,487       21,422  
Retained earnings
     65,757       64,179  
Accumulated other comprehensive loss
     (18,822 )     (19,821 )
Total Shareholders’ Equity
     98,328       95,640  
Total Liabilities and Shareholders’ Equity
   $ 1,434,104     $ 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)
   
Nine Months Ended
September 30,
  
   
2011
    
2010
  
   
(Unaudited)
  
Interest income
  
 
  
Interest and fees on loans
   $ 39,801     $ 46,595  
Interest on investment securities
                
Taxable
     2,922       5,356  
Exempt from federal income tax
     2,182       2,689  
Total investment income
     5,104       8,045  
Other
     327       407  
Total interest income
     45,232       55,047  
Interest expense
                
Interest on deposits
     9,724       13,904  
Interest on short-term borrowings
     177       207  
Interest on long-term borrowings
     6,888       8,205  
Total interest expense
     16,789       22,316  
Net interest income
     28,443       32,731  
Provision for loan losses
     5,939       10,653  
Net interest income after provision for loan losses
     22,504       22,078  
Other operating income
                
Changes in fair value on impaired securities
     204       (10,401 )
Portion of (gain)/loss recognized in other comprehensive income (before taxes)
     (223 )      2,126  
Net securities impairment losses recognized in operations
     (19 )     (8,275 )
Net losses – other
     (125 )     (3,396 )
Total net losses
     (144 )     (11,671 )
Service charges
     2,728       3,449  
Trust department
     3,237       2,978  
Insurance commissions
     1,936       2,003  
Debit card income
     1,598       1,198  
Bank owned life insurance
     769       754  
Other
     930       1,070  
Total other income
     11,198       11,452  
Total other operating income/(loss)
     11,054       (219 )
Other operating expenses
                
Salaries and employee benefits
     15,185       16,321  
FDIC premiums
     1,818       3,054  
Equipment
     2,310       2,384  
Occupancy
     2,138       2,208  
Data processing
     2,042       1,966  
Other
     7,661       7,864  
Total other operating expenses
     31,154       33,797  
Income/(Loss) before income tax benefit
     2,404       (11,938 )
Applicable income tax benefit
     (372 )     (6,233 )
Net Income/(Loss)
     2,776       (5,705 )
Accumulated preferred stock dividends and discount accretion
   $ (1,198 )   $ (1,169 )
Net Income Available to/(Loss Attributable to) Common Shareholders
   $ 1,578     $ (6,874 )
Basic net income/(loss) per common share
   $ .26     $ (1.12 )
Diluted net income/(loss) per common share
   $ .26     $ (1.12 )
Dividends declared per common share
   $ .00     $ .03  
Weighted average number of basic and diluted shares outstanding
     6,175       6,153  

See accompanying notes to the consolidated financial statements.

 
4
 

FIRST UNITED CORPORATION
Consolidated Statements of Operations
(In thousands, except per share data)
   
Three Months Ended
September 30,
  
   
2011
    
2010
  
   
(Unaudited)
  
Interest income
  
 
  
Interest and fees on loans
   $ 12,638     $ 15,234  
Interest on investment securities
                
Taxable
     1,127       953  
Exempt from federal income tax
     630       883  
Total investment income
     1,757       1,836  
Other
     88       183  
Total interest income
     14,483       17,253  
Interest expense
                
Interest on deposits
     2,821       4,682  
Interest on short-term borrowings
     50       68  
Interest on long-term borrowings
     2,187       2,602  
Total interest expense
     5,058       7,352  
Net interest income
     9,425       9,901  
Provision for loan losses
     1,334       3,467  
Net interest income after provision for loan losses
     8,091       6,434  
Other operating income
                
Changes in fair value on impaired securities
     (589 )     397  
Portion of (gain)/loss recognized in other comprehensive income (before taxes)
      589       (607 )
Net securities impairment losses recognized in operations
     0       (210 )
Net losses – other
     (793 )     (687 )
Total net losses
     (793 )     (897 )
Service charges
     925       1,119  
Trust department
     1,094       940  
Insurance commissions
     648       678  
Debit card income
     486       401  
Bank owned life insurance
     260       255  
Other
     205       457  
Total other income
     3,618       3,850  
Total other operating income
     2,825       2,953  
Other operating expenses
                
Salaries and employee benefits
     5,027       5,384  
FDIC premiums
     431       980  
Equipment
     735       738  
Occupancy
     713       767  
Data processing
     655       662  
Other
     2,590       2,701  
Total other operating expenses
     10,151       11,232  
Income/(Loss) before income tax expense/(benefit)
     765       (1,845 )
Applicable income tax expense/(benefit)
     79       (2,167 )
Net Income
     686       322  
Accumulated preferred stock dividends and discount accretion
   $ (404 )   $ (390 )
Net Income Available to/(Loss Attributable to) Common Shareholders
   $ 282     $ (68 )
Basic net income/(loss) per common share
   $ .05     $ (.01 )
Diluted net income/(loss) per common share
   $ .05     $ (.01 )
Dividends declared per common share
   $ .00     $ .01  
Weighted average number of basic and diluted shares outstanding
     6,183       6,160  

See accompanying notes to the consolidated financial statements.

 
5
 

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 deferred
                             (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
                             2,776               2,776  
Unrealized gain on securities available-for-sale, net of reclassifications and income taxes of $801
                                      1,184       1,184  
Unrealized loss on derivatives, net of income taxes of $125
                                     (185 )     (185 )
Comprehensive income
                                             3,775  
Stock based compensation
                     65                       65  
Preferred stock discount accretion
     46                       (46 )             0  
Preferred stock dividends deferred
                             (1,152 )             (1,152 )
                                                 
Balance at September 30, 2011
   $ 29,844     $ 62     $ 21,487     $ 65,757     $ (18,822 )   $ 98,328  

See accompanying notes to the consolidated financial statements.

 
6
 

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

   
Nine Months Ended
September 30,
  
   
2011
    
2010
  
   
(Unaudited)
  
Operating activities
            
Net income/(loss)
   $ 2,776     $ (5,705 )
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
                
Provision for loan losses
     5,939       10,653  
Depreciation
     1,801       1,899  
Stock compensation
     65       70  
Amortization of intangible assets
     201       622  
Loss on sales of other real estate owned
     244       275  
Write-downs of other real estate owned
     1,875       563  
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
     (60 )     156  
Loss/(gain) on disposal of fixed assets
     8       (11 )
Net amortization of investment securities discounts and premiums
     1,310       578  
Other-than-temporary-impairment loss on securities
     19       8,275  
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
     (576 )     (92 )
Loss on transfers of available-for-sale securities to trading
     0       2,254  
Decrease in accrued interest receivable and other assets
     4,883       6,604  
Deferred tax benefit
     (1,392 )     (1,178 )
Decrease in accrued interest payable and other liabilities
     (286 )     (627 )
Earnings on bank owned life insurance
     (769 )     (754 )
Net cash provided by operating activities
     48,574       140,626  
                 
Investing activities
                
Proceeds from maturities/calls of investment securities available-for-sale
     61,236       95,795  
Proceeds from sales of investment securities available-for-sale
     62,833       12,297  
Purchases of investment securities available-for-sale
     (170,969 )     (186,911 )
Proceeds from sales of other real estate owned
     3,561       2,007  
Proceeds from loan sales
     7,390       1,764  
Net decrease in loans
     37,806       58,619  
Net decrease in FHLB stock
     1,209       930  
Purchases of premises and equipment
     (162 )     (2,156 )
Net cash provided by/(used in) investing activities
     2,904       (17,655 )
                 
Financing activities
                
Net (decrease)/ increase in deposits
     (235,426 )     82,263  
Net increase/(decrease) in short-term borrowings
     5,323       (3,641 )
Proceeds from long-term borrowings
     0       3,609  
Payments on long-term borrowings
     (35,792 )     (30,789 )
Cash dividends paid on common stock
     0       (737 )
Proceeds from issuance of common stock
     0       29  
Preferred stock dividends paid
     0       (1,125 )
Net cash (used in)/provided by financing activities
     (265,895 )     49,609  
(Decrease)/increase in cash and cash equivalents
     (214,417 )     172,580  
Cash and cash equivalents at beginning of the year
     299,313       189,671  
Cash and cash equivalents at end of period
   $ 84,896     $ 362,251  
                 
Supplemental information
                
Interest paid
   $ 14,448     $ 22,731  
Taxes paid
   $ 0     $ 70  
Non-cash investing activities:
                
Transfers from loans to other real estate owned
   $ 5,116     $ 10,865  
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.

 
7
 

FIRST UNITED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER ENDED SEPTEMBER 30, 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 8-03 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 nine-month periods ended September 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 September 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 September 30, 2011.  There is no dilutive effect on the earnings/(loss) per share during loss periods.

The following table sets forth the calculation of basic and diluted earnings/(loss) per common share for the nine- and three-month periods ended September 30, 2011 and 2010:

   
For the nine months ended September 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)
   $ 2,776                     $ (5,705 )                
Preferred stock dividends paid
     0                       (1,125 )                
Preferred stock dividends deferred
     (1,152 )                     0                  
Discount accretion on preferred stock
     (46 )                     (44 )                
Net income available to/(loss attributable to) common shareholders
   $ 1,578       6,175     $ .26     $ (6,874 )     6,153     $ (1.12 )

 
8
 

   
For the three months ended September 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
   $ 686                     $ 322                  
Preferred stock dividends paid
     0                       (375 )                
Preferred stock dividends deferred
     (389 )                     0                  
Discount accretion on preferred stock
     (15 )                     (15 )                
Net income available to/(loss attributable to) common shareholders
   $ 282       6,183     $ .05     $ (68 )     6,160     $ (.01 )

Note 3 – Net Gains/(Losses)

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

   
Nine months ended
September 30,
  
(in thousands)
  
2011
    
2010
  
Other-than-temporary impairment charges:
            
Available-for-sale securities
   $ (19 )   $ (8,275 )
                 
Net gains/(losses) – other:
                
Available-for-sale securities:
                
Realized gains
     773       262  
Realized losses
     (197 )     (170 )
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
     (244 )     (275 )
Write-down of other real estate owned
     (1,875 )     (563 )
Gain/(loss) on sale of consumer loans
     60       (156 )
Gain on sale of indirect auto loans
     1,366       0  
(Loss)/gain on disposal of fixed assets
     (8 )     11  
Net losses – other
     (125 )     (3,396 )
Net losses
   $ (144 )   $ (11,671 )

 
9
 

   
Three months ended
September 30,
  
(in thousands)
  
2011
    
2010
  
Other-than-temporary impairment charges:
            
Available-for-sale securities
   $ 0     $ (210 )
                 
Net gains/(losses) – other:
                
Available-for-sale securities:
                
Realized gains
     406       0  
Realized losses
     (96 )     (170 )
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       0  
Gross losses on sales
     0       0  
Loss on sales of other real estate owned
     (200 )     (54 )
Write-down of other real estate owned
     (923 )     (474 )
Gain on sale of consumer loans
     19       0  
Gain on sale of indirect auto loans
     0       0  
Gain on disposal of fixed assets
     1       11  
Net losses – other
     (793 )     (687 )
Net losses
   $ (793 )   $ (897 )

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.
   
September 30,
2011
    
December 31,
2010
  
Cash and due from banks, weighted average interest rate of 0.25% (at September 30, 2011)
   $ 44,022     $ 184,830  

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

   
September 30,
2011
    
December 31,
2010
  
FHLB daily investments, interest rate of 0.005% (at September 30, 2011)
   $ 3,431     $ 77,102  
FTN daily investments, interest rate of 0.06% (at September 30, 2011)
     1,350       1,350  
M&T Fed Funds sold, interest rate of 0.25% (at September 30, 2011)
     6,018       6,004  
CBB Fed Funds sold, interest rate of 0.21% (at September 30, 2011)
     30,075       30,027  
    $ 40,874     $ 114,483  

 
10
 

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 September 30, 2011 and December 31, 2010:
 
(in thousands)
  
Amortized
Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Fair
Value
    
OTTI in
AOCI
  
September 30, 2011
                              
U.S. treasuries
   $ 8,000     $ 0     $ 0     $ 8,000     $ 0  
U.S. government agencies
     35,057       307       216       35,148       0  
Residential mortgage-backed agencies
     152,553       1,898       300       154,151       0  
Collateralized mortgage obligations
     683       0       117       566       0  
Obligations of states and political subdivisions
     68,042       2,557       17       70,582       0  
Collateralized debt obligations
     36,280       0       26,908       9,372       17,928  
Totals
   $ 300,615     $ 4,762     $ 27,558     $ 277,819     $ 17,928  
                                         
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:
 
   
Nine Months Ended
September 30,
    
Three Months Ended
September 30,
  
(in thousands)
  
2011
    
2010
    
2011
    
2010
  
Proceeds
   $ 62,833     $ 12,297     $ 33,719     $ 10,029  
Realized gains
     773       262       406       0  
Realized losses
     197       170       96       170  
 
The following table shows the Corporation’s available-for-sale securities with gross unrealized losses and fair values at September 30, 2011 and December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
 
   
Less than 12 months
    
12 months or more
  
 
(in thousands)
  
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
  
September 30, 2011
                        
U.S. treasuries
   $ 8,000     $ 0 *   $ 0     $ 0  
U.S. government agencies
     18,584       216       0       0  
Residential mortgage-backed agencies
     54,465       280       5,062       20  
Collateralized mortgage obligations
     0       0       566       117  
Obligations of states and political subdivisions
     2,466       14       2,812       3  
Collateralized debt obligations
     0       0       9,372       26,908  
Totals
   $ 83,515     $ 510     $ 17,812     $ 27,048  

*Not meaningful

 
11
 

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 September 30, 2011 and December 31, 2010.

U.S. Treasuries - One U.S. treasury  bond was in a slight unrealized loss position for less than 12 months as of September 30, 2011.  This bond is of the highest investment grade.  The bond is very short-term in nature and the Corporation does not intend to sell it, and it is not more likely than not that the Corporation will be required to sell it before recovery of its amortized cost basis, which may be at maturity. Therefore, no OTTI exists at September 30, 2011.

U.S. Government Agencies - Two U.S. government agencies have been in a slight unrealized loss position for less than 12 months as of September 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 September 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 September 30, 2011.  One residential mortgage-backed agency has been in slight unrealized loss position for 12 months or more.  The security is of the highest investment grade and the Corporation does not intend to sell it, and it is not more likely than not that the Corporation will be required to sell it before recovery of their amortized cost basis, which may be at maturity. Therefore, no OTTI exists at September 30, 2011.

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

 
12
 

Obligations of State and Political Subdivisions – The unrealized losses on the Corporation’s investments in state and political subdivisions were $18,000 at September 30, 2011.  Two securities have been in an unrealized loss position for less than 12 months.  Two additional securities have been in a slight unrealized loss position for 12 months or more.  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 September 30, 2011.

Collateralized Debt Obligations - The $26.9 million in unrealized losses greater than 12 months at September 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 third quarter of 2011.  The Corporation has recorded $19,000 in credit-related non-cash OTTI charges for the nine-months ended September 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 the trust preferred securities in the CDO portfolio held and not intended to be sold for the nine- and three-month periods ended September 30, 2011 and 2010:

   
Nine months ended
  
(in thousands)
  
September 30,
2011
    
September 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        6,873  
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
     (159 )     (33 )
Balance of credit-related OTTI at September 30
   $ 14,513     $ 14,638  
 
   
Three months ended
  
(in thousands)
  
September 30,
2011
    
September 30,
2010
  
Balance of credit-related OTTI at July 1
   $ 14,571     $ 14,461  
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        210  
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
     (58 )     (33 )
Balance of credit-related OTTI at September 30
   $ 14,513     $ 14,638  

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

 
13
 

   
September 30, 2011
    
December 31, 2010
  
 
(in thousands)
  
Amortized
Cost
    
Fair
Value
    
Amortized
Cost
    
Fair
Value
  
Contractual Maturity
                        
Due in one year or less
   $ 9,700     $ 9,723     $ 2,500     $ 2,421  
Due after one year through five years
     5,000       5,219       16,470       16,573  
Due after five years through ten years
     49,048       49,492       19,293       19,492  
Due after ten years
     83,631       58,668       117,333       90,926  
      147,379       123,102       155,596       129,412  
Residential mortgage-backed agencies
     152,553       154,151       98,109       99,613  
Collateralized mortgage obligations
     683       566       763       662  
    $ 300,615     $ 277,819     $ 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. Management has evaluated the restricted stock for impairment and believes that no impairment charge is necessary as of September 30, 2011.

The Corporation recognizes dividends on a cash basis.  For the nine months ended September 30, 2011, dividends of $73,500 were recognized in earnings.  For the comparable period of 2010, dividends of $33,600 were recognized in earnings.

Note 7 – Loans and Related Allowance for Loan Losses

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

 
 
(in thousands)
  
Commercial
Real Estate
    
Acquisition
and
Development
    
Commercial
and
Industrial
    
Residential
Mortgage
    
Consumer
    
Total
  
September 30, 2011
                                    
Total loans
   $ 321,352     $ 147,580     $ 70,541     $ 345,525     $ 34,025     $ 919,023  
Individually evaluated for impairment
     18,938       27,810       13,767       5,815       26       66,356  
Collectively evaluated for impairment
     302,414       119,770       56,774       339,710       33,999       852,667  
                                                 
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 then segregated 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 segregated 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 segregated 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.

 
14
 

During the second quarter of 2011, the Bank sold $32.5 million of the indirect auto portfolio that is included in the consumer loan class.

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.   At December 2010, the portion of any loan that represented a specific allocation of the allowance for loan losses was placed in the Doubtful category.  Based upon consultation with the regulators, beginning with June 30, 2011, only the portion of a specific allocation of the allowance for loan losses that management believes is associated with a pending event that could trigger loss in the short term will be classified 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 the commercial segments 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 as part of the review process on an ongoing basis.  The Bank has an experienced Credit Quality and Loan Review Department that continually reviews and assesses loans within the portfolio.  In addition, 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.

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 September 30, 2011 and December 31, 2010:

 
(in thousands)
  
Pass
    
Special
Mention
    
Substandard
    
Doubtful
    
Total
  
September 30, 2011
                              
Commercial real estate
                              
Non owner-occupied
   $ 104,551     $ 9,035     $ 33,624     $ 0     $ 147,210  
All other CRE
     119,402       14,631       40,109       0       174,142  
Acquisition and development
                                        
1-4 family residential construction
     11,160       0       6,151       0       17,311  
All other A&D
     82,092       1,642       46,535       0       130,269  
Commercial and industrial
     51,580       768       18,193       0       70,541  
Residential mortgage
                                        
Residential mortgage - term
     249,826       3,097       13,915       0       266,838  
Residential mortgage – home equity
     75,724       34       2,929       0       78,687  
Consumer
     33,578       63       384       0       34,025  
Total
   $ 727,913     $ 29,270     $ 161,840     $ 0     $ 919,023  
                                         
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       0       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       0       69,992  
Residential mortgage
                                        
Residential mortgage - term
     255,916       2,634       18,576       43       277,169  
Residential mortgage – home equity
     76,828       0       2,745       0       79,573  
Consumer
     76,736       23       784       0       77,543  
Total
   $ 793,889     $ 28,790     $ 182,708     $ 4,366     $ 1,009,753  

 
15
 

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.  A loan is considered to be past due when a payment has not been received for 30 days past its contractual due date.  For all loan segments, the accrual of interest is discontinued when principal or interest is delinquent for 90 days or more unless the loan is well-secured and in the process of collection.  All non-accrual loans are considered to be impaired.  Interest payments received on non-accrual loans are applied as a reduction of the loan principal balance.  Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.  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 the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans as of September 30, 2011 and December 31, 2010:

(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
  
September 30, 2011
                                          
Commercial real estate
                                          
Non owner-occupied
   $ 131,425     $ 682     $ 4,854     $ 0     $ 5,536     $ 10,249     $ 147,210  
All other CRE
     166,717       472       5,232       0       5,704       1,721       174,142  
Acquisition and development
                                                        
1-4 family residential construction
     17,311       0       0       0       0       0       17,311  
All other A&D
     112,349       930       4,807       173       5,910       12,010       130,269  
Commercial and industrial
     60,241       246       3       1       250       10,050       70,541  
Residential mortgage
                                                        
Residential mortgage - term
     257,653       1,745       3,742       580       6,067       3,118       266,838  
Residential mortgage – home equity
     77,285       1,016       101       0       1,117       285       78,687  
Consumer
     32,391       1,160       375       73       1,608       26       34,025  
Total
   $ 855,372     $ 6,251     $ 19,114     $ 827     $ 26,192     $ 37,459     $ 919,023  
December 31, 2010
                                                        
Commercial real estate
                                                        
Non owner-occupied
   $ 146,470     $ 892     $ 8,801     $ 0     $ 9,693     $ 11,204