f10q0910_firstunited.htm
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 EXCHANGEACT OF 1934
For quarterly period ended September 30, 2010

o           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
 incorporation or organization)
   (I. R. S. Employer Identification No.)
 
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 x  No o

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 o No o (Not Applicable)

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

Large accelerated filer o                                                                                                           Accelerated filer x
Non-accelerated filer o (Do not check if a smaller reporting company)                           Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes £ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  6,161,410 shares of common stock, par value $.01 per share, as of October 31, 2010.
 
 
 
 
 
INDEX TO QUARTERLY REPORT
FIRST UNITED CORPORATION
 
PART I.  FINANCIAL INFORMATION
   
Item 1. Financial Statements (unaudited)
   
  Consolidated Statements of Financial Condition –September 30, 2010 and December 31, 2009
   
  Consolidated Statements of Operations - for the three and nine months ended September 30, 2010 and 2009
   
  Consolidated Statements of Changes in Shareholders’ Equity - for the nine months ended September 30, 2010 and year ended December 31, 2009
   
  Consolidated Statements of Cash Flows - for the nine months ended September 30, 2010 and 2009
   
  Notes to Consolidated Financial Statements
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
  Controls and Procedures
   
Item 4.  
   
   
PART II. OTHER INFORMATION
   
Item 1.  Legal Proceedings
   
Item 1A. Risk Factors
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
Item 3. Defaults Upon Senior Securities
   
Item 4. [Removed and Reserved]
   
Item 5. Other Information
   
Item 6. Exhibits
   
SIGNATURES
   
EXHIBIT INDEX
  
 
 
 
 
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,
2010
    
December 31,
2009
  
   
(Unaudited)
  
Assets
            
  Cash and due from banks
   $ 253,433     $ 139,169  
  Interest bearing deposits in banks
     108,818       50,502  
     Cash and cash equivalents
     362,251       189,671  
  Investment securities – available-for-sale (at fair value)
     239,257       273,784  
  Restricted investment in bank stock, at cost
     12,931       13,861  
  Loans
     1,044,024       1,121,884  
  Allowance for loan losses
     (24,288 )     (20,090 )
     Net loans
     1,019,736       1,101,794  
  Premises and equipment, net
     31,987       31,719  
  Goodwill and other intangible assets, net
     14,808       15,241  
  Bank owned life insurance
     30,140       29,386  
  Deferred tax assets
     24,917       29,189  
  Other real estate owned
     15,612       7,591  
  Accrued interest receivable and other assets
     43,589       51,560  
Total Assets
   $ 1,795,228     $ 1,743,796  
                 
Liabilities and Shareholders’ Equity
                
Liabilities:
                
   Non-interest bearing deposits
   $ 121,433     $ 106,976  
   Interest bearing deposits
     1,264,996       1,197,190  
      Total deposits
     1,386,429       1,304,166  
                 
   Short-term borrowings
     43,922       47,563  
   Long-term borrowings
     243,364       270,544  
   Accrued interest payable and other liabilities
     19,715       20,342  
   Dividends payable
     64       615  
Total Liabilities
     1,693,494       1,643,230  
                 
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, 2010 and December 31, 2009 (discount of $217
     and $261, respectively)
              29,783                29,739  
   Common Stock – par value $.01 per share;
     Authorized 25,000 shares; issued and outstanding 6,161 shares at
     September 30, 2010 and 6,144 at December 31, 2009
        62          61  
   Surplus
     21,403       21,305  
   Retained earnings
     69,060       76,120  
   Accumulated other comprehensive loss
     (18,574 )     (26,659 )
   Total Shareholders’ Equity
     101,734       100,566  
Total Liabilities and Shareholders’ Equity
   $ 1,795,228     $ 1,743,796  

See accompanying notes to the consolidated financial statements.

 
1
 
 
FIRST UNITED CORPORATION
Consolidated Statements of Operations
(In thousands, except per share data)
 
   
Nine Months Ended
September 30,
  
   
2010
    
2009
  
   
(Unaudited)
  
Interest income
      
  Interest and fees on loans
   $ 46,595     $ 51,571  
  Interest on investment securities
                
     Taxable
     5,356       10,316  
     Exempt from federal income tax
     2,689       2,932  
     Total investment income
     8,045       13,248  
  Other
     407       65  
  Total interest income
     55,047       64,884  
Interest expense
                
  Interest on deposits
     13,904       15,385  
  Interest on short-term borrowings
     207       237  
  Interest on long-term borrowings
     8,205       8,768  
     Total interest expense
     22,316       24,390  
  Net interest income
     32,731       40,494  
  Provision for loan losses
     10,653       10,837  
     Net interest income after provision for loan losses
     22,078       29,657  
Other operating income
                
  Changes in fair value on impaired securities
     (10,401 )     (18,334 )
  Portion of loss recognized in other comprehensive
     income (before taxes)
      2,126        7,492  
  Net securities impairment losses recognized in operations
     (8,275 )     (10,842 )
  Net losses – other
     (3,396 )     (272 )
     Total net losses
     (11,671 )     (11,114 )
  Service charges
     3,449       4,163  
  Trust department
     2,978       2,631  
  Insurance commissions
     2,003       2,123  
  Debit card income
     1,198       1,029  
  Bank owned life insurance
     754       401  
  Other
     840       1,392  
     Total other income
     11,222       11,739  
     Total other operating (loss)/income
     (449 )     625  
Other operating expenses
                
  Salaries and employee benefits
     16,321       17,398  
  FDIC premiums
     3,054       2,589  
  Equipment
     2,384       2,568  
  Occupancy
     2,208       2,097  
  Data processing
     1,966       1,829  
  Other
     7,634       8,555  
     Total other operating expenses
     33,567       35,036  
  Loss before income taxes
     (11,938 )     (4,754 )
  Applicable income tax benefit
     (6,233 )     (2,696 )
Net Loss
     (5,705 )     (2,058 )
     Accumulated preferred stock dividends and discount accretion
   $ (1,169 )   $ (1,041 )
Net Loss Attributable to Common Shareholders
   $ (6,874 )   $ (3,099 )
Basic net loss per common share
   $ (1.12 )   $ (.51 )
Diluted net loss per common share
   $ (1.12 )   $ (.51 )
Dividends declared per common share
   $ .03     $ .60  
Weighted average number of common shares outstanding
     6,153       6,116  
Weighted average number of diluted shares outstanding
     6,153       6,116  
 
See accompanying noted to the consolidated financial statements.

 
2
 
 
  FIRST UNITED CORPORATION
Consolidated Statements of Operations
(In thousands, except per share data)
   
Three Months Ended
September 30,
  
   
2010
    
2009
  
Interest income
  
(Unaudited)
  
  Interest and fees on loans
   $ 15,234     $ 17,061  
  Interest on investment securities
                
     Taxable
     953       3,041  
     Exempt from federal income tax
     883       975  
     Total investment income
     1,836       4,016  
  Other
     183       61  
  Total interest income
     17,253       21,138  
Interest expense
                
  Interest on deposits
     4,682       4,835  
  Interest on short-term borrowings
     68       82  
  Interest on long-term borrowings
     2,602       2,916  
     Total interest expense
     7,352       7,833  
  Net interest income
     9,901       13,305  
  Provision for loan losses
     3,467       6,917  
     Net interest income after provision for loan losses
     6,434       6,388  
Other operating income
                
  Changes in fair value on impaired securities
     397       (12,538 )
  Portion of loss recognized in other comprehensive
     income (before taxes)
     (607 )      3,877  
  Net securities impairment losses recognized in operations
     (210 )     (8,661 )
  Net losses – other
     (687 )     132  
     Total net losses
     (897 )     (8,529 )
  Service charges
     1,119       1,460  
  Trust department
     940       944  
  Insurance commissions
     678       682  
  Debit card income
     401       363  
  Bank owned life insurance
     255       133  
  Other
     387       417  
     Total other income
     3,780       3,999  
     Total other operating income/(loss)
     2,883       (4,530 )
Other operating expenses
                
  Salaries and employee benefits
     5,384       5,551  
  FDIC premiums
     980       838  
  Equipment
     738       862  
  Occupancy
     767       709  
  Data processing
     662       665  
  Other
     2,631       2,875  
     Total other operating expenses
     11,162       11,500  
  Loss before income taxes
     (1,845 )     (9,642 )
  Applicable income tax benefit
     (2,167 )     (4,056 )
Net Income/(Loss)
     322       (5,586 )
     Accumulated preferred stock dividends and discount accretion
   $ (390 )   $ (389 )
Net Loss Attributable to Common Shareholders
   $ (68 )   $ (5,975 )
Basic net loss per common share
   $ (.01 )   $ (.97 )
Diluted net loss per common share
   $ (.01 )   $ (.97 )
Dividends declared per common share
   $ .01     $ .20  
Weighted average number of common shares outstanding
     6,160       6,132  
Weighted average number of diluted shares outstanding
     6,160       6,132  
 
See accompanying notes to the consolidated financial statements.

 
3
 
 
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, 2009
   $ -     $ 61     $ 20,520     $ 93,092     $ (40,983 )   $ 72,690  
                                                 
Comprehensive income:
                                                
  Net loss for the year
                             (11,324 )             (11,324 )
  Unrealized gain on securities available-for-sale, net of reclassifications and income taxes of $8,407
                                      12,422        12,422  
  Change in accumulated unrealized losses for pension and SERP obligations, net of income taxes of $1,311
                                        1,938          1,938  
  Unrealized loss on derivatives, net of income taxes of $24
                                     (36 )     (36 )
     Comprehensive income
                                             3,000  
  Issuance of 43,680 shares of common stock under dividend reinvestment plan
                      488                        488  
  Stock based compensation
                     (16 )                     (16 )
  Preferred stock issued pursuant to TARP-30,000 shares
     29,687                                       29,687  
  Preferred stock discount accretion
     52                       (52 )             --  
  Warrant issued pursuant to TARP
                     313                       313  
  Preferred stock dividends
                             (1,186 )             (1,186 )
  Common stock dividends declared - $.70 per share
                             (4,410 )             (4,410 )
                                                 
  Balance at December 31, 2009
   $ 29,739     $ 61     $ 21,305     $ 76,120     $ (26,659 )   $ 100,566  
                                                 
  Comprehensive income:
                                                
  Net loss year-to-date
                             (5,705 )             (5,705 )
  Unrealized gain on securities available-for-sale, net of reclassifications and income taxes of $5,938
                                      8,775        8,775  
  Unrealized loss on derivatives, net of income taxes of $467
                                     (690 )     (690 )
  Comprehensive income
                                             2,380  
  Issuance of 5,297 shares of common stock under dividend reinvestment plan
             1        28                        29  
  Stock based compensation
                     70                       70  
  Preferred stock discount accretion
     44                       (44 )             --  
  Preferred stock dividends
                             (1,125 )             (1,125 )
  Common stock dividends declared - $.03 per share
                             (186 )             (186 )
                                                 
  Balance at September 30, 2010
   $ 29,783     $ 62     $ 21,403     $ 69,060     $ (18,574 )   $ 101,734  


See accompanying notes to the consolidated financial statements.

 
4
 
 
FIRST UNITED CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
 
   
Nine Months Ended
September 30,
  
   
2010
    
2009
  
Operating activities
  
(Unaudited)
  
Net loss
   $ (5,705 )   $ (2,058 )
Adjustments to reconcile net loss to net cash provided by operating activities:
                
     Provision for loan losses
     10,653       10,837  
     Depreciation
     1,899       2,046  
     Stock compensation
     70       (16 )
     Amortization of intangible assets
     622       867  
     Loss on sales of foreclosed real estate
     838       114  
     Loss on loan sales
     156       --  
     (Gain)/loss on disposal of fixed assets
     (11 )     63  
     Net amortization of investment securities discounts and premiums
     578       161  
     Other-than-temporary-impairment loss on securities
     8,275       10,842  
     Proceeds from sales of investment securities trading
     99,626       --  
     Proceeds from maturities/calls of investment securities trading
     17,167       --  
     Loss on trading securities
     251       226  
     Loss/(gain) on sales of investment securities – available-for-sale
     2,162       (131 )
     Decrease/(increase) in accrued interest receivable and other assets
     6,604       (1,425 )
     Deferred tax benefit
     (1,178 )     (437 )
     (Decrease)/increase in accrued interest payable and other liabilities
     (627 )     255  
     Earnings on bank owned life insurance
     (754 )     (401 )
Net cash provided by operating activities
     140,626       20,943  
                 
Investing activities
                
Proceeds from maturities/calls of investment securities available- for-sale
     95,795       73,738  
Proceeds from sales of investment securities available-for-sale
     12,297       37,878  
Purchases of investment securities available-for-sale
     (186,911 )     (70,170 )
Proceeds from sales of foreclosed real estate
     2,007       1,148  
Proceeds from loan sales
     1,764       --  
Proceeds from disposal of fixed assets
     11       --  
Net decrease/(increase) in loans
     58,619       (14,974 )
Net decrease in bank stock
     930       72  
Purchases of premises and equipment
     (2,167 )     (3,348 )
Net cash (used in)/provided by investing activities
     (17,655 )     24,344  
                 
Financing activities
                
Net increase in deposits
     82,263       14,245  
Net decrease in short-term borrowings
     (3,641 )     (4,266 )
Proceeds from long-term borrowings
     3,609       --  
Payments on long-term borrowings
     (30,789 )     (788 )
Proceeds from issuance of preferred stock and warrants
     --       30,000  
Cash dividends paid on common stock
     (737 )     (3,665 )
Proceeds from issuance of common stock
     29       366  
Preferred stock dividends paid
     (1,125 )     (813 )
Net cash provided by financing activities
     49,609       35,079  
Increase in cash and cash equivalents
     172,580       80,366  
     Cash and cash equivalents at beginning of the year
     189,671       19,305  
Cash and cash equivalents at end of period
   $ 362,251     $ 99,671  
                 
Supplemental information
                
Interest paid
   $ 22,731     $ 25,679  
Taxes paid
   $ 70     $ 1,750  
Non-cash investing activities:
                
     Transfers from loans to foreclosed real estate
   $ 10,865     $ 2,899  
     Transfers from available-for-sale to trading
   $ 117,078     $ 409  
 
See accompanying notes to the consolidated financial statements.

 
5
 
 
FIRST UNITED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER ENDED SEPTEMBER 30, 2010

Note A – Basis of Presentation

The accompanying unaudited consolidated financial statements of First United Corporation and its consolidated subsidiaries, including First United Bank & Trust (the “Bank”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 270, Interim Reporting, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all the information and footnotes required for annual financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring items, have been included.  Operating results for the three- and nine-month periods ended September 30, 2010 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, 2009.  For purposes of comparability, certain prior period amounts have been reclassified to conform to the 2010 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, 2010 for items that should potentially be recognized or disclosed in these financial statements as prescribed by ASC Topic 855, Subsequent Events.

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

Note B – Earnings/(Loss) Per Common Share

Basic loss per common share is derived by dividing net 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 loss per share is derived by dividing net loss attributable to common shareholders by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding common stock equivalents.  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 per common share for the nine- and three-month periods ended September 30, 2010 and 2009 (in thousands, except for per share amounts):

   
For the nine months ended September 30,
  
   
2010
    
2009
  
                                     
   
Income
    
Average
Shares
    
Per Share
Amount
    
Income
    
Average
Shares
    
Per Share
Amount
  
Basic Earnings Per Share:
                                    
Net loss
   $ (5,705 )               $ (2,058 )            
Accumulated preferred stock dividends
     (1,125 )                 (1,004 )            
Discount accretion on preferred stock
     (44 )                 (37 )            
Net loss attributable to common
   shareholders
   $ (6,874 )     6,153     $ (1.12 )   $ (3,099 )     6,116     $ (.51 )
                                                 
Diluted Earnings Per Share:
                                                
Net loss attributable to common
   shareholders
   $ (6,874 )     6,153     $ (1.12 )   $ (3,099 )     6,116     $ (.51 )
Diluted net loss attributable to common
   shareholders
   $ (6,874 )     6,153     $ (1.12 )   $ (3,099 )     6,116     $ (.51 )

 
6
 
 
   
For the three months ended September 30,
  
   
2010
    
2009
  
                                     
   
Income
    
Average
Shares
    
Per Share
Amount
    
Income
    
Average
Shares
    
Per Share
Amount
  
Basic Earnings Per Share:
                                    
Net income/(loss)
   $ 322                 $ (5,586 )            
Accumulated preferred stock dividends
     (375 )                 (375 )            
Discount accretion on preferred stock
     (15 )                 (14 )            
Net loss attributable to common
   shareholders
   $ (68 )     6,160     $ (.01 )   $ (5,975 )     6,132     $ (.97 )
                                                 
Diluted Earnings Per Share:
                                                
Net loss attributable to common
   shareholders
   $ (68 )     6,160     $ (.01 )   $ (5,975 )     6,132     $ (.97 )
Diluted net loss attributable to common
   shareholders
   $ (68 )     6,160     $ (.01 )   $ (5,975 )     6,132     $ (.97 )


Note C – Net Losses

The following table summarizes the gain/loss activity for the nine- and three-month periods ended September 30, 2010 and 2009 (in thousands):
 
   
Nine months ended
September 30,
  
   
2010
    
2009
  
Available-for-sale securities:
            
     Other-than-temporary impairment charges
   $ (8,275 )   $ (10,842 )
     Realized gains
     262       131  
     Realized losses
     (170 )     --  
     Transfers of available-for-sale securities to trading:
                
       Gains recognized in earnings
     2,852       --  
       Losses recognized in earnings
     (5,106 )     --  
         Net (loss)/gain recognized on available-for-sale securities
     (2,162 )     131  
                 
Trading securities:
                
     Gross gains on sales
     972       --  
     Gross losses on sales
     (1,223 )     --  
       Net loss recognized on sales
     (251 )     --  
     Unrealized loss recognized on trading securities still held
     --       (226 )
       Net loss on trading securities
     (251 )     (226 )
Loss on loan sales
     (156 )     --  
Loss on foreclosed real estate
     (838 )     (114 )
Gain/(loss) on disposal of fixed assets
     11       (63 )
       Net losses
   $ (11,671 )   $ (11,114 )

 
7
 
 
   
Three months ended
September 30,
  
   
2010
    
2009
  
Available-for-sale securities:
            
     Other-than-temporary impairment charges
   $ (210 )   $ (8,661 )
     Realized gains
     --       35  
     Realized losses
     (170 )     --  
     Transfers of available-for-sale securities to trading:
                
       Gains recognized in earnings
     --       --  
       Losses recognized in earnings
     --       --  
         Net (loss)/gain recognized on available-for-sale securities
     (170 )     35  
                 
Trading securities:
                
     Gross gains on sales
     --       --  
     Gross losses on sales
     --       --  
       Net loss recognized on sales
     --       --  
     Unrealized gain recognized on trading securities still held
     --       147  
       Net gain on trading securities
     --       147  
Loss on loan sales
     --       --  
(Loss)/gain on foreclosed real estate
     (528 )     13  
Gain/(loss) on disposal of fixed assets
     11       (63 )
       Net losses
   $ (897 )   $ (8,529 )

Note D – Cash and Cash Equivalents

Cash and due from banks, which represents vault cash in the retail offices and invested cash balances at the Federal Reserve, is carried at fair value.

   
September 30,
2010
    
December 31,
2009
  
Cash and due from banks, weighted average interest rate of 0.18%
  (at September 30, 2010)
   $ 253,433     $ 139,169  

Interest bearing deposits in banks, which represent funds invested at a correspondent bank, are carried at fair value and, as of September 30, 2010 and December 31, 2009, consisted of daily funds invested at the Federal Home Loan Bank (“FHLB”) of Atlanta, First Tennessee Bank (“FTN”) and Community Bankers Bank (“CBB”).

   
September 30,
2010
    
December 31,
2009
  
FHLB daily investments, interest rate of 0.10% (at September 30, 2010)
   $ 77,657     $ 49,727  
FTN daily investments, interest rate of 0.15% (at September 30, 2010)
     1,150       700  
FTN Fed Funds sold, interest rate of 0.25% (at September 30, 2010)
     --       75  
CBB Fed Funds sold, interest rate of 0.22% (at September 30, 2010)
     30,011       --  
    $ 108,818     $ 50,502  

Note E – Investments

The investment portfolio is classified and accounted for based on the guidance of ASC Topic 320, Investments – Debt and Equity Securities.
The following table shows a comparison of amortized cost and fair values of investment securities available-for-sale at September 30, 2010 and December 31, 2009 (in thousands):
 
 
8
 
 
   
Amortized
Cost
    
Gross Unrealized Gains
    
Gross Unrealized Losses
    
Fair
Value
    
OTTI in
AOCI
  
September 30, 2010
                              
U.S. government agencies
   $ 31,827     $ 228     $ 3     $ 32,052     $ --  
Residential mortgage-backed agencies
     96,852       1,891       284       98,459       --  
Collateralized mortgage obligations
     838       --       101       737       --  
Obligations of states and political subdivisions
     93,465       5,116       171       98,410       --  
Collateralized debt obligations
     36,382       --       26,783       9,599       17,827  
Totals
   $ 259,364     $ 7,235     $ 27,342     $ 239,257     $ 17,827  
                                         
December 31, 2009
                                        
U.S. government agencies
   $ 68,487     $ 274     $ 498     $ 68,263     $ --  
Residential mortgage-backed agencies
     59,640       2,946       13       62,573       --  
Collateralized mortgage obligations
     40,809       --       7,612       33,197       1,574  
Obligations of states and political subdivisions
     95,190       2,501       388       97,303       --  
Collateralized debt obligations
     44,478       --       32,030       12,448       14,127  
Totals
   $ 308,604     $ 5,721     $ 40,541     $ 273,784     $ 15,701  

 
Proceeds from sales of securities and the realized gains and losses for the nine- and three-month periods ended September 30, 2010 and 2009 are as follows (in thousands):
 
   
Nine Months Ended
September 30,
    
Three Months Ended
September 30,
  
   
2010
    
2009
    
2010
    
2009
  
Proceeds
   $ 12,297     $ 37,878     $ 10,029     $ 8,510  
Realized gains
     262       131       --       35  
Realized losses
     170       --       170       --  

 
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 September 30, 2010 and December 31, 2009 (in thousands):
 
   
Less than 12 months
    
12 months or more
  
   
Fair
Value
    
Unrealized Losses
    
Fair
Value
    
Unrealized
Losses
  
September 30, 2010
                        
U.S. government agencies
   $ 10,019     $ 3     $ --     $ --  
Residential mortgage-backed agencies
     23,080       284       --       --  
Collateralized mortgage obligations
     --       --       737       101  
Obligations of states and political subdivisions
     6,152       171       --       --  
Collateralized debt obligations
     --       --       9,599       26,783  
Totals
   $ 39,251     $ 458     $ 10,336     $ 26,884  
                                 
December 31, 2009
                                
U.S. government agencies
   $ 36,090     $ 371     $ 14,873     $ 127  
Residential mortgage-backed agencies
     589       13       --       --  
Collateralized mortgage obligations
     --       --       33,197       7,612  
Obligations of states and political subdivisions
     12,154       123       8,075       265  
Collateralized debt obligations
     --       --       12,448       32,030  
Totals
   $ 48,833     $ 507     $ 68,593     $ 40,034  
 
 
9
 
 
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.  Beginning in the first quarter of 2010, management utilized 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. In previous periods, management performed internal impairment valuations and utilized a third party service for the portfolio pricing.  Management will continue to review the assumptions and results and does not believe that there were any material differences in the valuations between December 31, 2009 and September 30, 2010.

Residential Mortgage-Backed Agencies - Three residential mortgage-backed agencies have been in a slight unrealized loss position for less than 12 months as of September 30, 2010.  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, 2010.

Collateralized Mortgage Obligations – The collateralized mortgage obligation portfolio, consisting of one security at September 30, 2010, 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, 2010, this security remains at investment grade and continues to perform as expected at the time of purchase.  During the third quarter 2010, two private label residential mortgage backed securities were sold in order to enhance the credit quality of the investment portfolio and to minimize the risks associated with further declines in the residential mortgage markets.  The Corporation does not intend to sell the remaining 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, 2010.
 
Obligations of State and Political Subdivisions – The unrealized losses on the Corporation’s investments in state and political subdivisions were $171 thousand at September 30, 2010.  Four 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 September 30, 2010.

Collateralized Debt Obligations - The $26.8 million in unrealized losses greater than 12 months at September 30, 2010 relates to 18 pooled trust preferred securities that comprise the CDO portfolio.  See Note H for a discussion of the methodology used by management to determine the fair values of these securities.  Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that there were two securities that had additional credit-related OTTI charges during the third quarter of 2010 and 11 securities with previously recorded OTTI charges that had no further impairment.  As a result of this assessment, the Corporation recorded $8.3 million in credit-related OTTI losses on these securities for the nine months ended September 30, 2010.  The unrealized losses on the remaining five securities in the portfolio are primarily attributable to continued depression in market interest rates, marketability, liquidity and the current economic environment.
 
 
10
 
 
The following tables present a cumulative roll-forward of the amount of OTTI charges related to credit losses which have been recognized in earnings for debt securities held and not intended to be sold for the nine- and three-month periods ended September 30, 2010 and September 30, 2009 (in thousands):

   
September 30,
2010
    
September 30,
2009
  
Balance of credit-related OTTI at January 1
   $ 10,765     $ 2,724  
Additions for credit-related OTTI not previously recognized
     1,402       7,925  
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
      6,873        2,917  
Decreases for previously recognized credit-related OTTI because there is current
     intent to sell
     (4,369 )     (7,845 )
Reduction for increases in cash flows expected to be collected
     (33 )     --  
Balance of credit-related OTTI at September 30
   $ 14,638     $ 5,721  
                 
Balance of credit-related OTTI at July 1
   $ 14,461     $ 2,181  
Additions for credit-related OTTI not previously recognized
     --       5,744  
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
      210        2,917  
Decreases for previously recognized credit-related OTTI because there is current
     intent to sell
      --       (5,121 )
Reduction for increases in cash flows expected to be collected
     (33 )     --  
Balance of credit-related OTTI at September 30
   $ 14,638     $ 5,721  
 
 
The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at September 30, 2010 and December 31, 2009 are shown in the following table (in thousands).  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.
 
   
September 30,
2010
    
December 31,
2009
  
   
Amortized
Cost
    
Fair
Value
    
Amortized
Cost
    
Fair
Value
  
Contractual Maturity
                        
Due in one year or less
   $ --     $ --     $ --     $ --  
Due after one year through five years
     14,221       14,166       14,095       14,294  
Due after five years through ten years
     29,174       29,737       26,687       27,367  
Due after ten years
     118,279       96,158       167,373       136,353  
      161,674       140,061       208,155       178,014  
Residential mortgage-backed agencies
     96,852       98,459       59,640       62,573  
Collateralized mortgage obligations
     838       737       40,809       33,197  
    $ 259,364     $ 239,257     $ 308,604     $ 273,784  
 
Note F - Restricted Investment in Bank Stock

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

The Company recognizes dividends on a cash basis.  For the nine months ended September 30, 2010, dividends of $33,600 were recognized in earnings.  For the comparable period of 2009, dividends of $29,000 were recognized in earnings.
 
 
11
 
 
Management has evaluated the restricted stock for impairment and believes that no impairment charge is necessary as of September 30, 2010.

Note G – Loans and Related Allowance for Loan Losses

The following table summarizes the primary segments of the loan portfolio as of September 30, 2010 and December 31, 2009 (in thousands):

   
Commercial Real Estate
    
Acquisition and Development
    
Commercial and Industrial
    
Residential Mortgage
    
 
Consumer
    
 
Total
  
September 30, 2010
                                    
Total loans
   $ 351,594     $ 172,330     $ 71,446     $ 362,473     $ 86,181     $ 1,044,024  
   Individually evaluated for impairment
     18,646       44,196       6,341       12,296       154       81,633  
   Collectively evaluated for impairment
     332,948       128,134       65,105       350,177       86,027       962,391  
                                                 
December 31, 2009
                                                
Total loans
   $ 326,826     $ 231,724     $ 81,256     $ 373,223     $ 108,855     $ 1,121,884  
   Individually evaluated for impairment
     33,597       72,047       12,254       13,332       --       131,230  
   Collectively evaluated for impairment
     293,229       159,677       69,002       359,891       108,855       990,654  


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

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

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

 
12
 

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 September 30, 2010 and December 31, 2009 (in thousands):

   
 
Impaired Loans with
Specific Allowance
    
Impaired Loans with No Specific Allowance
    
 
 
Total Impaired Loans
  
   
Recorded Investment
    
Related Allowance
    
Recorded Investment
    
Recorded Investment
    
Unpaid Principal Balance
  
September 30, 2010
                              
  Commercial real estate
                              
     Non owner-occupied
   $ 1,137     $ 197     $ 6,029     $ 7,166     $ 7,166  
     All other CRE
     713       80       10,767       11,480       11,680  
  Acquisition and development
                                        
     1-4 family residential construction
     2,902       245       442       3,344       3,390  
     All other A&D
     20,197       6,688       20,655       40,852       41,063  
  Commercial and industrial
     29       9       6,312       6,341       7,125  
  Residential mortgage
                                        
     Residential mortgage - term
     798       41       9,637       10,435       11,212  
     Residential mortgage – home equity
     --       --       1,861       1,861       1,861  
  Consumer
     --       --       154       154       172  
        Total impaired loans
   $ 25,776     $ 7,260     $ 55,857     $ 81,633     $ 83,669  
                                         
December 31, 2009
                                        
  Commercial real estate
                                        
     Non owner-occupied
   $ 1,424     $ 356     $ 9,218     $ 10,642     $ 10,642  
     All other CRE
     1,570       362       21,385       22,955       23,257  
  Acquisition and development
                                        
     1-4 family residential construction
     583       48       --       583       583  
     All other A&D
     18,760       6,085       52,704       71,464       75,965  
  Commercial and industrial
     821       335       11,433       12,254       13,038  
  Residential mortgage
                                        
     Residential mortgage - term
     5,519       438       3,836       9,355       9,981  
     Residential mortgage – home equity
     --       --       3,977       3,977       4,011  
  Consumer
     --       --       --       --       --  
        Total impaired loans
   $ 28,677     $ 7,624     $ 102,553     $ 131,230     $ 137,477  

 
13
 

The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated (in thousands):
 
   
Nine months ended
 September 30,
    
Three months ended
 September 30,
  
   
2010
    
2009
    
2010
    
2009
  
Average investment in impaired loans
   $ 105,769     $ 78,715     $ 86,463     $ 81,662  
Interest income recognized on an accrual
   basis on impaired loans
   $ 1,889     $ 3,443     $ 533     $ 1,229  
Interest income recognized on a cash basis
   on impaired loans
   $ -     $ 704     $ -     $ 251  


           The following table presents impaired loans that are troubled debt restructurings as of September 30, 2010 and December 31, 2009 (in thousands):

   
Troubled Debt Restructurings at
Period End
    
New Troubled Debt Restructurings in
YTD Period
    
Troubled Debt Restructurings that Subsequently Defaulted during Prior 12 Months
  
   
Number of Contracts
    
Recorded Investment
    
Number of Contracts
    
Recorded Investment
    
Number of Contracts
    
Recorded Investment
  
September 30, 2010
                                    
  Commercial real estate
                                    
     Non owner-occupied
     3     $ 3,804       1     $ 2,175       3     $ 3,502  
     All other CRE
     --       --       --       --       --       --  
  Acquisition and development
                                                
     1-4 family residential construction
     1       324       1       324       --       --  
     All other A&D
     10       9,310       2       1,010       --       --  
  Commercial and industrial
     3       2,855       --       --       --       --  
  Residential mortgage
                                                
     Residential mortgage - term
     9       2,270       4       621       1       249  
     Residential mortgage – home equity
     --       --       --       --       --       --  
  Consumer
     --       --       --       --       --       --  
        Total
     24     $ 18,563       8     $ 4,130       4     $ 3,751  
                                                 
December 31, 2009