Exhibit 99.2

MIDCAROLINA FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 

 

		March 31, 2011 (Unaudited)				December 31, 2010(*)
		(Dollars in thousands, except Share data)
ASSETS
Cash and due from banks		$	1,666			$	1,510
Federal funds sold and interest-earning deposits			28,088				12,196
Investment securities available for sale			88,100				90,152
Loans held for sale			683				2,958
Loans			386,873				399,829
Allowance for loan losses			(9,691	)			(9,226	)
NET LOANS			377,182				390,603
Investment in stock of Federal Home Loan Bank of Atlanta			2,075				2,075
Investment in life insurance			8,592				8,514
Premises and equipment, net			6,536				6,652
Foreclosed real estate			10,201				7,244
Other assets			8,963				9,296
TOTAL ASSETS		$	532,086			$	531,200
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand deposits		$	54,291			$	38,951
Interest-bearing demand deposits			230,453				227,944
Savings			14,436				14,197
Time			172,631				184,781
TOTAL DEPOSITS			471,811				465,873
Long-term debt			18,764				23,764
Accrued expenses and other liabilities			897				1,139
TOTAL LIABILITIES			491,472				490,776
Shareholders’ equity:
Noncumulative, perpetual preferred stock, no par value, liquidation value of $1,000 per share, 20,000,000 shares authorized; 5,000 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively			4,819				4,819
Common stock, no par value; 80,000,000 shares authorized; 4,927,828 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively			15,215				15,162
Retained earnings			21,660				21,418
Accumulated other comprehensive loss			(1,080	)			(975	)
TOTAL SHAREHOLDERS’ EQUITY			40,614				40,424
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	532,086			$	531,200

* Derived from audited consolidated financial statements.

See accompanying notes.

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MIDCAROLINA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

 

 

		Three Months Ended March 31,
		2011				2010
		(Amounts in thousands, except per share data)
INTEREST INCOME
Loans and loan fees		$	5,294			$	5,856
Investment securities:
Taxable			373				442
Tax-exempt			294				301
Federal funds sold and interest-earning deposits			15				5
TOTAL INTEREST INCOME			5,976				6,604
INTEREST EXPENSE
Demand deposits			518				617
Savings			19				13
Time			802				1,270
Long-term borrowings			168				290
TOTAL INTEREST EXPENSE			1,507				2,190
NET INTEREST INCOME			4,469				4,414
PROVISION FOR LOAN LOSSES			1,200				2,600
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			3,269				1,814
NON-INTEREST INCOME
Service charges on deposits accounts			150				194
Gain on sale of loans			116				118
Income from brokerage activities			69				60
Increase in cash surrender value of life insurance			78				99
Gain on sale of available for sale investments			-				45
Total other-than-temporary impairment loss			(50	)			(443	)
Portion of loss recognized in other comprehensive income			50				425
Net impairment loss recognized in earnings			-				(18	)
Other (Note G)			127				183
TOTAL NON-INTEREST INCOME			540				681
NON-INTEREST EXPENSE
Salaries and employee benefits			1,332				1,280
Occupancy and equipment			380				380
Other outside services			184				122
Data processing			302				260
Office supplies and postage			45				99
Deposit and other insurance			339				215
Professional and other services			86				197
Advertising			49				87
Loss on sale and costs of foreclosed real estate			229				9
Other (Note G)			477				193
TOTAL NON-INTEREST EXPENSE			3,423				2,842
INCOME BEFORE INCOME TAXES			386				(347	)
INCOME TAXES			94				(113	)
NET INCOME (LOSS)			292				(234	)
Dividends on preferred stock			(50	)			(104	)
Net income (loss) available to common shareholders		$	242			$	(338	)
NET INCOME (LOSS) PER COMMON SHARE
Basic		$	.05			$	(.07	)
Diluted		$	.05			$	(.07	)

See accompanying notes.

 

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MIDCAROLINA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

 

 

 

		Three Months Ended March 31,
		2011				2010
		(Dollars in thousands)
Net income (loss)		$	292			$	(234	)
Other comprehensive income (loss):
Securities available for sale:
Unrealized holding gains (losses) on available-for-sale securities			(121	)			216
Tax effect			47				(83	)
Reclassification of net (gains) losses recognized in net income			-				(45	)
Tax effect			-				17
Reclassification of impairment loss recognized in net income			-				18
Tax effect			-				(7	)
Portion of other-than-temporary impairment loss recognized in other comprehensive income			(50	)			(425	)
Tax effect			19				164
Total other comprehensive income (loss)			(105	)			(145	)
COMPREHENSIVE INCOME (LOSS)		$	187			$	(379	)

See accompanying notes.

 

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MIDCAROLINA FINANCIAL CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (Unaudited)

 

 

 

		Preferred stock								Common stock								Retained				Accumulated other com- prehensive				Total shareholders’
		Shares				Amount				Shares				Amount				earnings				income (loss)				equity
		(Amounts in thousands, except share data)
Balance at December 31, 2010			5,000			$	4,819				4,927,828			$	15,162			$	21,418			$	(975	)		$	40,424
Net income			-				-				-				-				292				-				292
Other comprehensive income			-				-				-				-				-				(105	)			(105	)
Stock based compensation			-				-				-				53				-				-				53
Preferred dividends paid			-				-				-				-				(50	)			-				(50	)
Balance at March 31, 2011			5,000			$	4,819				4,927,828			$	15,215			$	21,660			$	(1,080	)		$	40,614

See accompanying notes.

 

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MIDCAROLINA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

 

		Three Months Ended March 31,
		2011				2010
		(Dollars in thousands)
Operating Activities
Net income (loss)		$	292			$	(234	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			116				226
Amortization on investment securities available for sale			103				-
Provision for loan losses			1,200				2,600
Gain on sale of investment securities available for sale			-				(45	)
Other-than-temporary impairment on investment securities available for sale			-				18
Deferred tax expense (benefit)			(66	)			(91	)
Gain on sale of loans			(116	)			(118	)
Origination of loans held for sale			(5,881	)			(6,511	)
Proceeds from sales of loans held for sale			8,272				5,764
Increase in cash surrender value life insurance			(78	)			(99	)
Loss on sale and costs of foreclosed real estate			229				9
Stock based compensation expense			53				57
Changes in assets and liabilities:
(Increase) decrease in other assets			397				(342	)
Increase (decrease) in accrued expenses and other liabilities			(176	)			(93	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			4,345				1,141
Investing Activities
Purchases of investment securities available for sale			-				(21,772	)
Principal paydowns on investment securities available for sale			1,780				2,015
Sales of investment securities available for sale			-				18,666
Net (increase) decrease in loans from originations and principal repayments			7,587				3,331
Purchases of premises and equipment			-				(27	)
Proceeds from sale of foreclosed real estate			1,448				214
NET CASH PROVIDED BY INVESTING ACTIVITIES			10,815				2,427
Financing Activities
Net increase in deposits			5,938				29,210
Net decrease in short-term borrowings			-				(520	)
Net decrease in long-term borrowings			(5,000	)			(4,000	)
Preferred stock dividends paid			(50	)			(104	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			888				24,586
NET INCREASE IN CASH AND CASH EQUIVALENTS			16,048				28,154
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			13,706				9,429
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	29,754			$	37,583
Supplemental disclosure of cash flow information
Cash paid for interest		$	1,713			$	2,175
Loans transferred to foreclosed real estate		$	4,634			$	406

See accompanying notes.

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

NOTE A - BASIS OF PRESENTATION

The consolidated financial statements include the accounts and transactions of MidCarolina Financial Corporation (the “Company”) and its wholly-owned subsidiary MidCarolina Bank (the “Bank”). All intercompany transactions and balances have been eliminated in consolidation. In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of March 31, 2011 and for the three month periods ended March 31, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America.

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. Actual results could differ from those estimates. Operating results for the three month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011.

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the consolidated financial statements filed as part of the Company’s annual report on Form 10-K. This quarterly report should be read in conjunction with such annual report.

NOTE B - COMMITMENTS

At March 31, 2011, loan commitments were as follows (in thousands):

 

Commitments to extend credit		$	25,944
Undisbursed lines of credit			32,032
Standby letters of credit			2,187
Commitments to sell loans held for sale			683

NOTE C - PER SHARE DATA

Diluted earnings per share reflect additional shares of common stock that would have been outstanding if dilutive potential shares had been issued. For the three-month period ended March 31, 2011 there were 346,116 options that were antidilutive due to the average share price for the quarter being in excess of the grant price. For the three-month period ended March 31, 2010 all options were antidilutive due to the net loss.

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE C - PER SHARE DATA (Continued)

The weighted average number of shares of common stock outstanding or assumed to be outstanding are summarized below:

 

		Three Months Ended March 31,
		2011				2010
Weighted average number of common shares used in computing basic net income per share			4,927,828				4,927,828
Effect of dilutive stock options			3,986				-
Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share			4,931,814				4,927,828

NOTE D - INVESTMENT SECURITIES

The following is a summary of investment securities by major classification at March 31, 2011 and December 31, 2010:

 

		March 31, 2011
		Amortized cost				Gross unrealized gains				Gross unrealized losses				Fair value
		(Amounts in thousands)
Securities available for sale:
U.S. government agency securities		$	10,564			$	38			$	136			$	10,466
Mortgage-backed securities			38,118				118				465				37,771
GSE CMO’s			8,092				40				56				8,076
Private Label CMO’s			792				-				50				742
State and municipal			31,792				94				1,156				30,730
Subordinated debentures			500				-				185				315
Total		$	89,858			$	290			$	2,048			$	88,100
		December 31, 2010
		Amortized cost				Gross unrealized gains				Gross unrealized losses				Fair value
		(Amounts in thousands)
Securities available for sale:
U.S. government agency securities		$	10,590			$	45			$	130			$	10,505
Mortgage-backed securities			39,278				299				363				39,214
GSE CMO’s			8,757				29				93				8,693
Private label CMO’s			810				-				84				726
State and municipal			31,804				72				1,172				30,704
Subordinated debentures			500				-				190				310
Total		$	91,739			$	446			$	2,032			$	90,152

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE D - INVESTMENT SECURITIES (Continued)

The following tables show investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2011 and December 31, 2010. The Company had 53 securities with gross unrealized losses at March 31, 2011. These securities include three US Agency securities, twelve mortgaged-backed securities, one private label collateralized mortgage obligation, three government sponsored enterprise (GSE) collateralized mortgage obligations, thirty three state and municipal securities and one subordinated debenture. The Company had 54 securities with gross unrealized losses at December 31, 2010. These securities include three U.S. government agency securities, twelve mortgage-backed securities, three government sponsored enterprise (GSE) collateralized mortgage obligations, one private label collateralized mortgage obligations, thirty three state and municipal securities and one subordinated debenture. The GSE collateralized mortgage obligations were comprised of three GNMA securities. Management feels that the unrealized loss is attributable to a limited market for trading these types of securities and the interest rate spreads. None of the unrealized losses identified as temporarily impaired securities as of March 31, 2011 or December 31, 2010 relate to the issuers’ ability to honor redemption obligations or the marketability of the securities. The bond ratings of the municipal securities include two AAA-rated bonds, twenty-six AA-rated bonds and five A-rated securities. No municipal securites have a rating below A. The municipal securites portfolio is geographically diversified. Management believes it is more likely than not that these securities will not need to be sold prior to recovery.

 

		March 31, 2011
		Less Than 12 Months								12 Months or More								Total
		Fair value				Unrealized losses				Fair value				Unrealized losses				Fair value				Unrealized losses
		(Amounts in thousands)
Securities available for sale:
U.S. government agency securities		$	5,382			$	136			$	-			$	-			$	5,382			$	136
Mortgage-backed securities			21,081				465				-				-				21,081				465
GSE CMO’s			3,994				56				-				-				3,994				56
State and municipal.			20,993				658				2,282				498				23,275				1,156
Subordinated debentures			-				-				315				185				315				185
Total temporarily impaired securities		$	51,450			$	1,315			$	2,597			$	683			$	54,047			$	1,998
Other than temporary impairment Private label CMO’s		$	-			$	-			$	742			$	50			$	742			$	50
Total other than temporarily impaired securities		$	-			$	-			$	742			$	50			$	742			$	50

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE D - INVESTMENT SECURITIES (Continued)

 

		December 31, 2010
		Less Than 12 Months								12 Months or More								Total
		Fair value				Unrealized losses				Fair value				Unrealized losses				Fair value				Unrealized losses
		(Amounts in thousands)
Securities available for sale:
U.S. government agency securities		$	7,434			$	130			$	-			$	-			$	7,434			$	130
Mortgage-backed securities			17,236				363				-				-				17,236				363
GSE CMO’s			4,031				93				-				-				4,031				93
State and municipal			23,177				811				2,415				361				25,592				1,172
Subordinated debentures			-				-				310				190				310				190
Total temporarily impaired securities		$	51,878			$	1,397			$	2,725			$	551			$	54,603			$	1,948
Other than temporary impairment Private label CMO’s		$	-			$	-			$	726			$	84			$	726			$	84
Total other than temporarily impaired securities		$	-			$	-			$	726			$	84			$	726			$	84

The aggregate amortized cost and fair value of debt securities at March 31, 2011, by remaining contractual maturity, are shown below. Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.

 

		Available for Sale
		Amortized cost				Fair value
		(Amounts in thousands)
U.S. Agency securities:
Due within 1 year		$	4,544			$	4,453
Due in 1 year through 5 years			5,020				5,041
Due after 5 years through 10 years			1,000				972
Due after 10 years			-				-
State and municipal securities:
Due within 1 year			-				-
Due in 1 year through 5 years			7,871				7,746
Due after 5 years through 10 years			12,143				12,091
Due after 10 years			11,778				10,893
Other:
Due in 5 year through 10			500				315
Due after 10 years			-				-
GSE CMOs			8,092				8,076
Private label CMOs			792				742
Mortgage-backed securities			38,118				37,771
Total		$	89,858			$	88,100

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE D - INVESTMENT SECURITIES (Continued)

There were no sales of investment securities in the three month period ended March 31, 2011 and $18.7 million for the three months ended March 31, 2010. Gross realized gains from the sale of investment securities available for sale amounted to $45,000 for the three months ended March 31, 2010. Net realized gains from the sales of securities available for sale amounted to $45,000 for the three months ended March 31, 2010. Realized losses from the impairment of private label mortgage backed securities amounted to $18,000 for the three months ended March 31, 2010 resulting from increased default rates on underlying collateral payments and credit rating deterioration. There was no impairment related to credit losses on private label mortgage backed securities for the three months ended March 31, 2011.

Investment securities with amortized cost of $29.1 million and fair value of $28.8 million at March 31, 2011 were pledged to secure public monies on deposit as required by law.

Debt securities were divided into two groups: those rated investment grade by at least one nationally-recognized rating agency and those rated below investment grade by all nationally-recognized agencies. Impairment of debt securities consistently rated investment grade is considered temporary unless specific contrary information is identified. None of the debt securities consistently rated investment grade were considered to be other-than-temporarily impaired at March 31, 2011. One debt security rated below investment grade (a private label collateralized mortgage obligation) was considered to be other-than-temporarily impaired at March 31, 2011.

At March 31, 2011, the aggregate unrealized loss on the private label collateralized mortgage obligation totaled $50,000 before recognition of any other-than-temporary impairment charges. Impairment of this security was evaluated to determine if we expect to not recover the entire amortized cost basis of the security. This evaluation was based on projections of estimated cash flows on individual loans underlying each security using current and anticipated changes in unemployment and default rates, decreases in housing prices and increases in loss severity at foreclosure. No impairment charges related to credit were recognized in the statements of operations for the three month period ended March 31, 2011.

The primary assumptions used in this evaluation were:

Prepayment - starting with current refinancing and payoff prepayment vector statistics based on information derived from the trustee. The bond’s prepayment vector anticipates a VPR for 9 months and then returning to historical norms of 4 VPR to maturity

Loss severity - the estimated foreclosure rate is 45% through 2011 and 35% thereafter, through maturity. Loss severity includes estimated holding and disposal expenses.

Default rate - The model takes the consumer default rate from the mortgage backed bond’s 2 month average default rate from 16.5% over the next 24 months and down to 4% through maturity.

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE D - INVESTMENT SECURITIES (Continued)

Discount rate - estimated cash flows were discounted at 6.00% based on our purchase yield.

The evaluation uses an adjusted loan-to-value ratio as part of our evaluation of whether the unrealized losses on these securities are temporary or other-than-temporary. The adjusted loan to value ratio is based on the original loan to value ratio inherent in the security, adjusted for changes in housing prices, prepayment speeds, default rates and credit enhancements. A higher adjusted loan to value ratio indicates a greater likelihood that projected cash flows may result in losses. A shortfall between our current amortized cost and the present value of expected cash flows we are likely to collect, based on all available information, is referred to as the credit loss, which is the amount recognized in net income.

Based on our evaluation, no portion of the unrealized loss for the security was identified as credit impairment and charged to earnings for the three months ended March 31, 2011.

The following table shows a roll forward of the amount related to credit losses recognized on debt securities held by the Company for which a portion of an other-than-temporary impairment was recognized in other comprehensive income.

 

		Three Months Ended March 31,
		2011				2010
		(Amounts in thousands)
Balance of credit losses on debt securities at the beginning of the period		$	177			$	148
Additional increase related to the credit loss for which an other-than-temporary impairment was previously recognized			-				18
Balance of credit losses on debt securities at the end of the current period		$	177			$	166

At March 31, 2011, the balance of Federal Home Loan Bank (“FHLB”) of Atlanta stock held by the Company is $2.1 million. On May 11, 2010 the FHLB announced that it would pay a dividend for the first quarter of 2010. On June 30, 2010, the FHLB also announced its intentions of repurchasing up to $300 million of its stockholders’ capital that its “members” owned in excess of amounts the members are required to own. This repurchase was transacted on July 15, 2010. On July 29, 2010 the FHLB announced that it would pay a dividend for the second quarter of 2010. On October 29, 2010 the FHLB announced that it would pay a dividend for the third quarter of 2010. The FHLB also announced on October 29, 2010 its intentions of repurchasing up to $300 million of its stockholders’ capital that its “members” owned in excess of amounts the members are required to own. This repurchase did take place on November 15, 2010. On March 29, 2011 a dividend in the amount of $4,000 was paid for the 4^th quarter of 2010. On April 8, 2011 the FHLB redeemed $105,000 of its outstanding stock representing excess capital. Given this, management believes that its investment in FHLB stock was not other-than-temporarily impaired as of March 31, 2011. However, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not also cause a change in the value of the FHLB stock held by the Company.

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE E - LOANS

Following is a summary of loans at March 31, 2011 and December 31, 2010:

 

The recorded investment in loans on nonaccrual status was $3.9 million as of March 31, 2011 and $9.1 million as of December 31, 2010. At March 31, 2011 the recorded investment in loans considered impaired totaled $14.2 million. At December 31, 2010 the recorded investment in loans considered impaired totaled $20.2 million. Impaired loans of $7.7 million at March 31, 2011 had corresponding valuation allowances of $810,000. Impaired loans of $6.7 million at December 31, 2010 had corresponding valuation allowances of $695,000. At March 31, 2011, $4.2 million of the $14.2 million of impaired loans was attributed to ten troubled debt restructurings (TDRs) and represented $113,000 of the $810,000 valuation allowance. Eight of the ten TDRs were accruing interest as of March 31, 2011. At December 31, 2010 $4.6 million of the $20.2 million of impaired loans was attributed to twelve TDRs and represented $273,000 of the $695,000 valuation allowance. Eight of the twelve TDRs were accruing interest as of December 31, 2010. Impaired loans of $6.5 million at March 31, 2011 had no valuation allowances. Impaired loans of $13.4 million at December 31, 2010 had no valuation allowances.

Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial and industrial loans are underwritten after evaluating and understanding the borrowers’ ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable, inventory or equipment and usually incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of the funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE E - LOANS (Continued)

Commercial real estate and commercial mortgage loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in real estate markets or the general economy. The properties securing the Corporation’s commercial real estate portfolio are diverse in terms of type. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At March 31, 2011, approximately 50.3% of the outstanding principal balance of the Company’s commercial real estate loans were secured by owner-occupied properties.

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have an existing relationship with Company and have a proven record of success. Commercial and Residential Construction loans are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with the repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation, general economic conditions and the availability of long-term financing.

Most residential mortgage loans originated by the Company are sold into the secondary market adhering to secondary market underwriting requirements. However, residential mortgage loans retained in-house are underwritten with a preference for first liens against the borrowers’ primary residence, generally located in the Company’s target market area. In-house residential mortgages must meet loan-to-value appraisal and debt ratio guidelines.

The Company originates consumer loans utilizing a computer-based credit score analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimize risk. Additionally, trend and outlook reports are reviewed by management on a regular basis.

Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 90%, collection remedies, the number of such loans a borrower can have at one time and documentation requirements.

The Company maintains an independent loan review function that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process compliments and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Concentrations of Credit. Most of the Company’s lending activity occurs within Alamance and Guilford Counties and surrounding areas in the state of North Carolina. The majority of the Company’s loan portfolio consists of commercial and industrial and commercial real estate loans. As of March 31, 2011, there was one concentration of loans related to a single industry, residential real estate, in excess of 11% of total loans.

 

13

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE E - LOANS (Continued)

The Company had loan and deposit relationships with most of its directors and executive officers and with companies with which certain directors and executive officers are associated. The following is a reconciliation of loans directly outstanding to executive officers, directors and their affiliates (amounts in thousands):

 

As a matter of policy, these loans and credit lines are approved by the Bank’s Board of Directors and are made with interest rates, terms, and collateral requirements comparable to those required of other borrowers. In the opinion of management, these loans do not involve more than the normal risk of collectability.

Non-Accrual and Past Due Loans. The following past due and nonaccrual policy applies to all classes of loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all principal and interest amounts contractually are brought current and future payments are reasonably assured.

Charge-off of Uncollectible Loans. When any loan or portion thereof becomes uncollectible, the loan will be charged down or charged off against the allowance for loan and lease losses. Residential mortgages are charged-off or written down to fair value when the loan has been foreclosed and the balance exceeds the market value of the collateral. Home equity lines of credit are either charged-off or written down to fair value, when it is determined that there is not sufficient equity in the loan to cover the Company’s exposure. Loans in any portfolio may be charged-off prior to the policies described above when a loss confirming event occurred, such as bankruptcy (unsecured), continued delinquency, or receipt of an asset valuation indicating collateral deficiency for an asset serving as the sole source of repayment.

Age Analysis of Past Due Loans

As of March 31, 2011 (in thousands)

 

		30 - 89 Days Past Due				Greater than 90 Days Past Due (1)				Total Past Due				Current				Total Loans				Recorded Investment > 90 Days and Accruing
Loans
Commercial construction loans		$	120			$	801			$	921			$	7,998			$	8,919			$	-
Commercial mortgage loans			456				1,780				2,236				164,199				166,435				-
Commercial and industrial loans			396				186				583				59,226				59,808				-
Residential construction loans			-				245				245				28,991				29,236				-
Residential mortgage loans			350				713				1,063				73,963				75,026				-
Consumer loans			74				32				106				4,268				4,374				-
Home equity lines of credit			631				174				805				42,270				43,075				-
Total		$	2,027			$	3,931			$	5,958			$	380,915			$	386,873			$	-

(1) As the Company had no loans past due 90 or more days and still accruing, this category only includes non-accrual loans.

 

14

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE E - LOANS (Continued)

Age Analysis of Past Due Loans

As of December 31, 2010 (in thousands)

 

		30 - 89 Days Past Due				Greater than 90 Days Past Due (1)				Total Past Due				Current				Total Loans				Recorded Investment > 90 Days and Accruing
Loans:
Commercial construction loans		$	195			$	-			$	195			$	9,214			$	9,409			$	-
Commercial mortgage loans			362				4,868				5,230				168,045				173,275				-
Commercial and industrial loans			311				99				410				60,820				61,230				-
Residential construction loans			-				3,383				3,383				31,142				34,525				-
Residential mortgage loans			807				455				1,262				71,119				72,381				-
Consumer loans			184				53				237				5,161				5,398				-
Home equity lines of credit			33				221				254				43,357				43,611				-
Total		$	1,892			$	9,079			$	10,971			$	388,858			$	399,829			$	-

(1) As the Company had no loans past due 90 or more days and still accruing, this category only includes non-accrual loans.

Impaired Loans. The following impaired loan policy applies to all classes of loans. Impaired loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectable. Year-end impaired loans are set forth in the following tables.

For the three months ended March 31, 2011 (in thousands)

 

		Unpaid Principal Balance				Recorded Investment				Related Allowance				Average Recorded Investment				Interest Income Recognized
With no related allowance recorded:
Commercial construction loans		$	245			$	245			$	-			$	123			$	-
Commercial mortgage loans			2,491				2,491				-				4,437				10
Commercial and industrial loans			1,002				1,002				-				2,184				13
Residential construction loans			1,990				1,990				-				2,501				-
Residential mortgage loans			585				585				-				473				-
Consumer loans			11				11				-				43				-
Home equity lines of credit			143				143				-				183				-
Subtotal			6,467				6,467				-				9,944				23
With a related allowance recorded:
Commercial construction loans			909				909				5				454				10
Commercial mortgage loans			2,496				2,496				267				2,201				34
Commercial and Industrial loans			83				83				20				862				-
Residential construction loans			2,929				2,929				448				2,481				35
Residential mortgage loans			1,205				1,205				58				1,179				5
Consumer loans			-				-				-				3				-
Home equity lines of credit			74				74				12				37				12
Subtotal			7,696				7,696				810				7,217				96
Totals
Commercial construction loans			1,154				1,154				5				577				10
Commercial mortgage loans			4,987				4,987				267				6,638				44
Commercial and Industrial loans			1,085				1,085				20				3,046				13
Residential construction loans			4,919				4,919				448				4,982				35
Residential mortgage loans			1,790				1,790				58				1,652				5
Consumer loans			11				11				-				46				-
Home equity lines of credit			217				217				12				220				12
Grand total		$	14,163			$	14,163			$	810			$	17,161			$	119

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE E - LOANS (Continued)

Of the $6.5 million of impaired loans with no related allowance recorded, $1.0 million was recorded at fair value after previous recognition of $717,000 of charge-offs prior to quarter-end.

For the twelve months ended December 31, 2010 (in thousands)

 

		Unpaid Principal Balance				Recorded Investment				Related Allowance				Average Recorded Investment				Interest Income Recognized
With no related allowance recorded:
Commercial construction loans		$	-			$	-			$	-			$	-			$	-
Commercial mortgage loans			6,382				6,382				-				7,332				289
Commercial and industrial loans			3,365				3,365				-				4,549				144
Residential construction loans			3,013				3,013				-				3,635				172
Residential mortgage loans			362				362				-				402				26
Consumer loans			75				75				-				69				5
Home equity lines of credit			223				223				-				446				20
Subtotal			13,420				13,420				-				16,433				656
With a related allowance recorded:
Commercial construction loans			-				-				-				-				-
Commercial mortgage loans			1,907				1,907				352				1,796				92
Commercial and Industrial loans			1,640				1,640				40				1,784				98
Residential construction loans			2,032				2,032				253				2,038				100
Residential mortgage loans			1,152				1,152				46				1,059				72
Consumer loans			7				7				4				-				-
Home equity lines of credit			-				-				-				-				-
Subtotal			6,738				6,738				695				6,677				362
Totals
Commercial construction loans			-				-				-				-				-
Commercial mortgage loans			8,289				8,289				352				9,129				381
Commercial and Industrial loans			5,005				5,005				40				6,333				242
Residential construction loans			5,045				5,045				253				5,673				272
Residential mortgage loans			1,514				1,514				46				1,461				98
Consumer loans			82				82				4				69				5
Home equity lines of credit			223				223				-				445				20
Grand total		$	20,158			$	20,158			$	695			$	23,110			$	1,018

Of the $13.4 million of impaired loans with no related allowance recorded, $7.0 million was recorded at fair value after previous recognition of $2.1 million of charge-offs prior to year-end.

Credit Quality Indicators. As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted–average risk grade of commercial loans, (ii) the level of classified commercial loans, (iii) net charge-offs, (iv) non-performing loans (see details above) and (v) the general economic conditions in the state of North Carolina.

The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 grades is as follows:

 

•

Grade 1 – Virtually no risk – Credits in this grade are virtually risk-free. Credits are secured by assignment of certificates of deposits issued by the Company, US Treasury notes or properly margined, readily marketable securities. Positive control must be maintained by the Company. The repayment program is well-defined and achievable and repayment sources numerous.

 

•

Grade 2 – Minimal credit risk – This grade is reserved for new and existing loans where the borrower has documented significant overall financial strength. A liquid financial statement with substantial liquid assets, particularly relative to the debts. Borrowers are required to show excellent sources of repayment, with no significant identifiable risk of collection.

 

•

Grade 3 – Average credit risk – These loans have excellent sources of repayment, with no significant identifiable risk of collection. The borrowers have documented historical cash flow that meets or exceeds required minimum Company’s guidelines. The borrower must have adequate secondary sources to liquidate the debt, or liquidation value for the net worth of the borrower or guarantor.

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE E - LOANS (Continued)

 

•

Grade 4 – Average credit risk – These loans have adequate sources of repayment, with little identifiable risk of collection.

 

•

Grade 5 – Above average credit risk – These loans show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss.

 

•

Grade 6 – Special mention – These loans have clearly defined weaknesses in primary source of repayment that, if not corrected, could cause a loss to the Company. The loans constitute an undue and unwarranted credit risk to the Company, but are not considered so severe as to meet the definition of Substandard.

 

•

Grade 7 – Substandard – This grade includes loans that are inadequately protected by the current net worth and paying capacity of the obligator or of the collateral pledged. The loans have well defined weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

•

Grade 8 – Doubtful – This category has the weaknesses inherent in substandard loans and the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable. The loans are not yet graded as loss because certain events may occur that could salvage the outstanding debt such as the injection of capital, alternative financing is obtained, or the pledging of additional collateral. Doubtful is a temporary grade where loss is anticipated but is not quantified with any degree of accuracy.

 

•

Grade 9 – Loss – These loans are considered uncollectable and of such little value that their continuance as a bankable asset is not warranted. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.

Commercial Credit Exposure

Credit Risk Profile by Internally Assigned Grade

For the three months ended March 31, 2011 (in thousands)

 

Grade		Commercial Construction				Commercial Mortgage				Commercial and Industrial
Virtually no credit risk		$	-			$	-			$	835
Minimal credit risk			-				-				1,671
Good credit risk			-				10,153				6,183
Acceptable credit risk			1,741				89,977				32,643
Above average credit risk			3,942				52,141				12,093
Special mention			1,508				10,035				5,129
Substandard			1,728				4,129				1,254
Doubtful			-				-				-
Loss			-				-				-
		$	8,919			$	166,435			$	59,808

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE E - LOANS (Continued)

Consumer Credit Exposure

Credit Risk Profile by Creditworthiness Category

For the three months ended March 31, 2011 (in thousands)

 

Grade		Residential Construction				Residential Mortgage				Consumer				Home Equity Lines of Credit
Virtually no credit risk		$	-			$	-			$	-			$	-
Minimal credit risk			-				626				67				25
Good credit risk			884				3,962				224				538
Acceptable credit risk			4,732				41,375				3,539				39,998
Above average credit risk			10,968				22,644				517				1,950
Special mention			6,809				4,381				17				468
Substandard			5,843				2,038				10				96
Doubtful			-				-				-				-
Loss			-				-				-				-
		$	29,236			$	75,026			$	4,374			$	43,075

Consumer and Commercial Credit Exposure

Credit Risk Profile Based on Payment History

For the three months ended March 31, 2011 (in thousands)

 

Status		Construction				Commercial Mortgage				Home Equity Lines of Credit				Residential Mortgage				Commercial and Industrial				Consumer
Performing		$	37,109			$	164,655			$	42,901			$	74,313			$	59,622			$	4,342
Nonperforming			1,046				1,780				174				713				186				32
		$	38,155			$	166,435			$	43,075			$	75,026			$	59,808			$	4,374

Commercial Credit Exposure

Credit Risk Profile by Internally Assigned Grade

For the twelve months ended December 31, 2010 (in thousands)

 

Code		Commercial Construction				Commercial Mortgage				Commercial and Industrial
Virtually no credit risk		$	-			$	-			$	692
Minimal credit risk			-				-				983
Good credit risk			-				11,364				9,808
Acceptable credit risk			2,061				94,969				30,997
Above average credit risk			3,954				43,906				13,857
Special mention			1,567				12,911				3,443
Substandard			1,827				10,125				1,450
Doubtful			-				-				-
Loss			-				-				-
		$	9,409			$	173,275			$	61,230

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE E - LOANS (Continued)

Consumer Credit Exposure

Credit Risk Profile by Creditworthiness Category

For the twelve months ended December 31, 2010 (in thousands)

 

Grade		Residential Construction				Residential Mortgage				Consumer				Home Equity Lines of Credit
Virtually no credit risk		$	-			$	-			$	-			$	-
Minimal credit risk			-				639				70				26
Good credit risk			967				708				207				444
Acceptable credit risk			6,300				43,149				4,800				40,660
Above average credit risk			12,644				21,407				294				1,886
Special mention			8,575				4,496				26				456
Substandard			6,039				1,989				1				139
Doubtful			-				-				-				-
Loss			-				-				-				-
		$	34,525			$	72,389			$	5,398			$	43,611

Consumer and Commercial Credit Exposure

Credit Risk Profile Based on Payment History

For the twelve months ended December 31, 2010 (in thousands)

 

Status		Construction				Commercial Mortgage				Home Equity Lines of Credit				Residential Mortgage				Commercial and Industrial				Consumer
Performing		$	40,551			$	168,407			$	43,390			$	71,915			$	61,131			$	5,345
Nonperforming			3,383				4,868				221				455				99				53
		$	43,934			$	173,275			$	43,611			$	72,370			$	61,230			$	5,398

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE F - ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company’s allowance for possible loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, Receivables, and loan allowance allocations calculated in accordance with ASC Topic 450, Contingencies. Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of the allowance for possible loan losses is designed to account for credit deterioration as it occurs. The provision for possible loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for possible loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for possible loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.

The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

The Company’s allowance for possible loan losses consists of three elements: (i) specific valuation allowance determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general conditions and other qualitative risk factors both internal and external to the Company.

The allowance established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things; (i) obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all commercial loans. When a loan has a calculated grade of 7 or higher a special assets officer analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for possible loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things.

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are periodically updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based on the product of the historical loss ratio and the total dollar amount of the loans in the pool. The Company’s pools of similar loans include similar risk-graded groups of commercial and industrial loans, commercial real estate loans, consumer real estate loans and consumer and other loans.

 

20

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE F - ALLOWANCE FOR LOAN LOSSES (Continued)

General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Company. In general, such valuation allowances are determined by evaluating among other things; (i) the experience, ability and effectiveness of the Bank’s lending management and staff; (ii) the effectiveness of the Company’s loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring and pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental risks on portfolio risks: and (ix) the impact of rising interest rates on portfolio risk. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, moderate or low degree of risk. The results are then input into a “general allocation matrix” to determine an appropriate general valuation allowance.

Included in the general valuation allowances are allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management. Concentration risk limits have been established, among other things, for certain industry concentrations, large balance and highly leveraged credit relationships that exceed specified risk grades, and loans originated with policy exceptions that exceed specified risk grades.

Loans identified as losses by management, internal loan review and/or bank examiners are charged-off. Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirements.

An analysis of activity in the allowance for loan losses for the three months ended March 31, 2011 and 2010 follows:

 

 

21

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE F - ALLOWANCE FOR LOAN LOSSES (Continued)

Allowance for Loan Losses and Recorded Investment in Loans

For the Three Months Ended March 31, 2011 (in thousands)

 

		Real Estate
		Construction Loans				Commercial Mortgage Loans				Home Equity Lines of Credit				Residential Mortgage Loans				Commercial and Industrial Loans				Consumer Loans				Total
Allowance for loan losses
Beginning balance		$	2,079			$	3,239			$	810			$	1,563			$	1,397			$	138			$	9,226
Charge-offs			(231	)			(320	)			(64	)			(48	)			(112	)			(10	)			(785	)
Recoveries			2				4				-				22				19				3				50
Provision			600				240				72				120				156				12				1,200
Ending balance		$	2,450			$	3,163			$	818			$	1,657			$	1,460			$	143			$	9,691
Portion of ending balance:
Individually evaluated for impairment		$	452			$	267			$	12			$	59			$	20			$	-			$	810
Collectively evaluated for impairment			1,998				2,896				806				1,598				1,440				143				8,881
Total loans evaluated for impairment		$	2,450			$	3,163			$	818			$	1,657			$	1,460			$	143			$	9,691
Loans
Ending balance		$	38,155			$	166,435			$	43,075			$	75,026			$	59,808			$	4,374			$	386,873
Portion of ending balance:
Individually evaluated for impairment		$	6,073			$	4,988			$	216			$	1,790			$	1,085			$	11			$	14,163
Collectively evaluated for impairment			32,082				161,447				42,859				73,236				58,723				4,363				372,710
Total loans evaluated for impairment		$	38,155			$	166,435			$	43,075			$	75,026			$	59,808			$	4,374			$	386,873

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE F - ALLOWANCE FOR LOAN LOSSES (Continued)

Allowance for Loan Losses and Recorded Investment in Loans

For the Twelve Months Ended December 31, 2010 (in thousands)

 

		Real Estate
		Construction Loans				Commercial Mortgage Loans				Home Equity Lines of Credit				Residential Mortgage Loans				Commercial and Industrial Loans				Consumer Loans				Total
Allowance for loan losses
Beginning balance		$	1,127			$	2,918			$	744			$	1,358			$	1,071			$	89			$	7,307
Charge-offs			(2,388	)			(965	)			(319	)			(462	)			(611	)			(65	)			(4,810	)
Recoveries			131				2				-				25				103				50				311
Provision			3,209				1,284				385				642				834				64				6,418
Ending balance		$	2,079			$	3,239			$	810			$	1,563			$	1,397			$	138			$	9,226
Portion of ending balance:
Individually evaluated for impairment		$	253			$	352			$	-			$	46			$	40			$	4			$	695
Collectively evaluated for impairment			1,826				2,887				810				1,517				1,357				134				8,531
Total loans evaluated for impairment		$	2,079			$	3,239			$	810			$	1,563			$	1,397			$	138			$	9,226
Loans
Ending balance		$	43,934			$	173,275			$	43,611			$	72,381			$	61,230			$	5,398			$	399,829
Portion of ending balance:
Individually evaluated for impairment		$	5,045			$	8,289			$	223			$	1,514			$	5,005			$	82			$	20,158
Collectively evaluated for impairment			38,889				164,986				43,388				70,867				56,225				5,316				379,671
Total loans evaluated for impairment		$	43,934			$	173,275			$	43,611			$	72,381			$	61,230			$	5,398			$	399,829

NOTE G - NON-INTEREST INCOME AND NON-INTEREST EXPENSE

The major components of other non-interest income are as follows:

 

		Three Months Ended March 31,
		2011				2010
		(In thousands)
Debit card income		$	76			$	63
ATM interchange income			2				1
Safe deposit rent			4				3
Check upcharge			7				7
Income from rental property			9				13
Insurance claim proceeds			-				80
Other			29				16
Total		$	127			$	183

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE G - NON-INTEREST INCOME AND NON-INTEREST EXPENSE (Continued)

The major components of other non-interest expense are as follows:

 

		Three Months Ended March 31,
		2011				2010
		(In thousands)
Travel		$	9			$	12
Contributions			4				10
Director fees			43				46
Dues and memberships			4				3
Credit reports and filing fees			4				5
Franchise tax			30				30
Appraisals			70				20
Deposit charge offs			8				1
Loan collection expense			267				46
CDARS expense			15				18
Other			23				2
Total		$	477			$	193

NOTE H - FAIR VALUE MEASUREMENTS

The Company adopted FASB’s Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, effective January 1, 2009, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. From time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale and other certain assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting write-downs of individual assets.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. Agency securities, mortgage-backed securities issued by government sponsored entities, municipal bonds, private label collateralized mortgage obligations and corporate debt securities. Securities classified as Level 3 include asset-backed securities and corporate debt securities in less liquid markets.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans subject to nonrecurring fair value adjustments as Level 2.

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE H - FAIR VALUE MEASUREMENTS (Continued)

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as impaired, management measures impairment on an individual basis. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2011, the Company identified impaired loans of $14.2 million. Of this total, $1.8 million required a specific allowance totaling $717,000, which was charged off resulting in a net fair value of $1.0 million, in addition to $7.7 million in impaired loans maintaining a specific reserve of $810,000 at quarter end for a combined net fair value of impaired loans of $7.9 million. At December 31, 2010, the Company identified impaired loans of $20.2 million. Of this total, $9.1 million required a specific allowance totaling $2.1 million, which was charged off prior to year-end resulting in a net fair value of $7.0 million, in addition to $6.7 million in impaired loans maintaining a specific reserve of $695,000 at year-end for a net fair value of impaired loans of $13.0 million. The determination of impairment was based on the estimated fair market value of collateral for each loan determined through the use of appraisals and subjected to further discounts by management for age of appraisals, geography of the collateral and historical experience in selling similar types of collateral, which are considered to be Level 3 inputs.

Foreclosed Real Estate

Foreclosed real estate is initially recorded at the lesser of fair value or the balance of the foreclosed loan, less cost to sell, at the date of foreclosure. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed real estate as nonrecurring Level 2. In situations where current appraised values are unavailable or it is determined that the fair value of the collateral is further impaired below the appraised value and there is no observable market price, management will rely on significant discounts to account for the age of the most current appraised value available, geography of the foreclosed real estate and historical experience in selling similar types of foreclosed real estate. The Company records the foreclosed real estate under these significant unobservable inputs as nonrecurring Level 3.

Their were no significant transfers between the valuation of financial assets or liabilities between Levels 1 and 2 in the valuation hierarchy below. The following table summarizes quantitative disclosures about the fair value measurement for each category of assets carried at fair value as of March 31, 2011 (in thousands):

 

						Fair Value Measurements at March 31, 2011
Description		March 31, 2011				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Input (Level 2)				Significant Unobservable Inputs (Level 3)
Available for sale securities:
U.S Agency securities		$	10,466			$	-			$	10,466			$	-
Mortgage backed securities			37,771				-				37,771				-
GSE CMO’s			8,076				-				8,076				-
Private label CMO’s			742				-				742				-
State and municipal securities			30,730				-				30,730				-
Subordinated debenture			315								-				315
			88,100				-				87,785				315
Impaired loans			7,938				-				-				7,938
Foreclosed real estate			10,201				-				-				10,201

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE H - FAIR VALUE MEASUREMENTS (Continued)

There were no transfers between Level 1 and Level 2 for the year-ended December 31, 2010. The following table summarizes quantitative disclosures about the fair value measurement for each category of assets carried at fair value as of December 31, 2010 (in thousands):

 

						Fair Value Measurements at December 31, 2010
Description		December 31, 2010				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Input (Level 2)				Significant Unobservable Inputs (Level  3)
Available for sale securities:
U.S. Agency securities		$	10,505			$	-			$	10,505			$	-
Mortgage backed securities			39,214				-				39,214				-
Government enterprise CMO’s			8,693				-				8,693				-
Private label CMO’s			726				-				726				-
State and municipal securities			30,704				-				30,704				-
Subordinated debenture			310				-				-				310
			90,152				-				89,842				310
Impaired loans			13,037				-				-				13,037
Other real estate owned			7,244				-				-				7,244

The table below presents reconciliation for the three months ended March 31, 2011 and 2010 for all Level 3 assets that are measured at fair value on a recurring basis.

 

		Available-for-sale Securities
		2011				2010
		(Dollars in thousands)
Beginning Balance		$	310			$	148
Total realized and unrealized gains or (losses):
Included in earnings			-				-
Included in other comprehensive income			5				18
Purchases, issuances and settlements			-				-
Transfers in (out) of Level 3			-				-
Ending Balance		$	315			$	166

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE I - FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC Topic 825 Financial Instruments, requires a company to disclose on an interim and annual basis the fair value of its financial instruments whether or not recognized in the balance sheet, where it is practical to estimate that value.

Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holding of a particular financial instrument. In cases where quoted market prices are not available, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. Finally, the fair value estimates presented herein are based on pertinent information available to management as of March 31, 2011 and December 31, 2010, respectively.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Due from Banks, Federal Funds Sold and Interest-Earning Deposits

The carrying amounts for cash and due from banks, federal funds sold and interest-earning deposits approximate fair value because of the short maturities of those instruments. These instruments are considered cash and cash equivalents.

Investment Securities

Fair value for investment securities is based on quoted market price if such information is available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions.

Loans Held for Sale

Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.

Loans

For certain homogeneous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. However, the values derived likely do not represent exit prices due to the distressed market conditions; therefore, incremental market risks and liquidity discounts of approximately 8% were subtracted to reflect the illiquid and distressed conditions at March 31, 2011 and December 31, 2010.

Investment in Life Insurance

The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurer.

Deposits, Short-term Borrowings and Long-term Debt

Deposits and short-term borrowings without a stated maturity, or insignificant term to maturity, including demand, interest bearing demand, savings accounts and FHLB borrowings are reported at their carrying value. No value has been assigned to the core intangible value of deposits. For other types of deposits and long-term debt, with fixed rates and longer maturities is estimated based upon the discounted value of projected future cash outflows using the rates currently offered for instruments of similar remaining maturities.

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE I - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Accrued Interest Receivable and Accrued Interest Payable

The carrying amounts of accrued interest receivable and accrued interest payable are assumed to approximate fair values.

Financial Instruments with Off-Balance Sheet Risk

With regard to financial instruments with off-balance sheet risk discussed in Note B, it is not practicable to estimate the fair value of future financing commitments.

The following table presents the carrying values and estimated fair values of the Company’s financial instruments at March 31, 2011 and December 31, 2010:

 

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE J - RECENT ACCOUNTING PRONOUNCEMENTS

The FASB has issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:

•

A reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and

•

In the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements.

In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures:

•

For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and

•

A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.

ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted. The adoption of this standard did not have an impact on our financial position or results of operations.

ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, will help investors assess the credit risk of a company’s receivables portfolio and the adequacy of its allowance for credit losses held against the portfolios by expanding credit risk disclosures. This ASU requires more information about the credit quality of financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure.

The amendments in this update apply to all public and nonpublic entities with financing receivables. Financing receivables include loans and trade accounts receivable. However, short-term trade accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure amendments. The effective date of ASU 2010-20 differs for public and nonpublic companies. For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. The Company has fully adopted all of the provisions within this standard and has provided all required credit quality disclosures as of the end of this reporting period March 31, 2011.

On April 5, 2011, FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring, which amends Subtopic 310-40, Receivables: Troubled Debt Restructurings by Creditors. The objective of this ASU is to provide greater clarity and guidance to assist creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. For public entities, the amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.

The ASU also states that as a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. An entity should disclose the total amount of receivables and the allowance for credit losses as of the end of the period of

 

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 

 

 

NOTE J - RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

adoption related to those receivables that are newly considered impaired under Section 310-10-35 for which impairment was previously measured under Subtopic 450-20, Contingencies: Loss Contingencies. An entity should disclose certain information required by and previously deferred by ASU 2011-01, for interim and annual periods beginning on or after June 15, 2011. The Company is currently evaluating the impact of this standard on the financial statements and related disclosures.

NOTE K - SHAREHOLDERS’ EQUITY

During June 2010, the Bank’s Board of Directors entered into an agreement called a Memorandum of Understanding (the “Memorandum”) with the FDIC and North Carolina Commissioner of Banks under which the Bank will move in good faith to take various actions designed to improve the Bank’s lending procedures and other conditions related to its operations. The Memorandum provides for the Board to (i) review and formulate objectives relative to liquidity and growth, including a reduction in reliance on volatile liabilities, (ii) formulate plans for the reduction and improvement in adversely classified assets, (iii) review compliance with and, as necessary, modify written policies regarding asset/liability, investment and funds management, (iv) oversee and enforce loan underwriting procedures and implement policies regarding other real estate and an effective loan documentation system, (v) not pay any dividend without the approval of the regulators, (vi) review officer performance and consider additional staffing needs, and (vii) provide progress reports and submit various other information to the regulators.

During October 2010, the Company’s Board of Directors entered into a separate Memorandum of Understanding with the Federal Reserve Bank of Richmond (the “FRB”) under which the Company agreed, among other things, that it will not receive dividends from the Bank, pay dividends on the Company’s common or preferred stock or payments on its trust preferred securities, incur additional debt, or redeem any outstanding stock, without the FRB’s prior written approval.

 

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