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EX-31.1 - CEO CERTIFICATION - MIDSOUTH BANCORP INCcert_31-1.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - MIDSOUTH BANCORP INCcert_32-2.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - MIDSOUTH BANCORP INCcert_32-1.htm
EX-31.2 - CFO CERTIFICATION - MIDSOUTH BANCORP INCcert_31-2.htm



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

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____

COMMISSION FILE NUMBER 1-11826
MIDSOUTH BANCORP, INC.
(Exact name of registrant as specified in its charter)

Louisiana
72 –1020809
(State of other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

102 Versailles Boulevard, Lafayette, Louisiana 70501
 (Address of principal executive offices, including zip code)
(337) 237-8343
(Registrant’s telephone number, including area code)

Indicate by checkmark 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 period 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   ¨
 
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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
YES   ¨   NO   ¨
   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.
Large accelerated filer ¨                                                                Accelerated filer ¨                                   Non-accelerated filer x Small reporting company ¨
   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
YES   ¨   NO   x
 
As of November 8, 2010, there were 9,725,252 shares of the registrant’s Common Stock, par value $0.10 per share, outstanding.
 
 



 
 
 
 
 
 
 

 

 
 
 
 
 
 
Part I – Financial Information
 
 
Item 1. Financial Statements.
MidSouth Bancorp, Inc. and Subsidiaries
 
(dollars in thousands, except share data)
 
   
September 30,
2010
(unaudited)
   
December 31,
2009*
(audited)
 
Assets
           
Cash and due from banks, including required reserves of $4,006 and $3,460, respectively
  $ 20,916     $ 22,842  
Interest-bearing deposits in banks
    28,857       509  
Federal funds sold
    3,606       -  
Time deposits held in banks
    5,060       26,122  
Securities available-for-sale, at fair value (cost of $264,821 at September 30, 2010 and $265,892 at December 31, 2009)
    274,291       271,808  
Securities held-to-maturity (fair value of $1,617 at September 30, 2010 and $3,121 at December 31, 2009)
    1,588       3,043  
Other investments
    5,065       4,902  
Loans
    598,311       585,042  
Allowance for loan losses
    (8,446 )     (7,995 )
Loans, net
    589,865       577,047  
Bank premises and equipment, net
    36,814       38,737  
Accrued interest receivable
    4,989       4,808  
Goodwill and intangibles
    9,406       9,483  
Cash surrender value of life insurance
    4,661       4,540  
Other assets
    7,711       8,301  
Total assets
  $ 992,829     $ 972,142  
                 
Liabilities and Stockholders’ Equity
               
Liabilities:
               
Deposits:
               
Non-interest-bearing
  $ 195,496     $ 175,173  
Interest bearing
    584,110       598,112  
Total deposits
    779,606       773,285  
Securities sold under agreements to repurchase
    53,091       47,059  
Federal funds purchased
    -       1,700  
Junior subordinated debentures
    15,465       15,465  
Other liabilities
    6,970       5,356  
Total liabilities
    855,132       842,865  
Stockholders’ Equity:
               
Preferred stock, no par value; 5,000,000 shares authorized, 20,000 shares issued and outstanding at September 30, 2010 and at December 31, 2009
    19,359       19,211  
Common stock, $0.10 par value; 30,000,000 shares authorized, 9,875,729 issued and 9,725,252 outstanding at September 30, 2010 and 9,488,933 issued and 9,318,268 outstanding at December 31, 2009
    988       949  
Additional paid-in capital
    89,823       85,263  
Unearned ESOP shares
    (133 )     (217 )
Accumulated other comprehensive income
    6,249       3,904  
Treasury stock – 150,477 shares at September 30, 2010 and 170,665 shares at December 31, 2009, at cost
    (3,286 )     (3,544 )
Retained earnings
    24,697       23,711  
Total stockholders’ equity
    137,697       129,277  
Total liabilities and stockholders’ equity
  $ 992,829     $ 972,142  
                 
See notes to unaudited consolidated financial statements.
* Derived from audited financial statements.
               


 
-2-
 


MidSouth Bancorp, Inc. and Subsidiaries
 
(in thousands, except per share data)
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Interest income:
                       
Loans, including fees
  $ 10,104     $ 10,426     $ 29,832     $ 31,119  
Securities and other investments:
                               
Taxable
    925       898       2,816       3,046  
Nontaxable
    986       1,068       3,009       3,305  
Federal funds sold
    3       10       4       29  
Time deposits in other banks
    46       56       182       187  
Other investments and interest bearing deposits
    56       40       145       102  
Total interest income
    12,120       12,498       35,988       37,788  
                                 
Interest expense:
                               
Deposits
    1,325       2,014       4,316       6,228  
Securities sold under agreements to repurchase
    249       303       713       775  
Federal funds purchased
    -       -       2       5  
Other borrowed money
    -       -       3       23  
Junior subordinated debentures
    247       249       731       777  
Total interest expense
    1,821       2,566       5,765       7,808  
                                 
Net interest income
    10,299       9,932       30,223       29,980  
Provision for loan losses
    1,500       1,000       4,150       4,100  
Net interest income after provision for loan losses
    8,799       8,932       26,073       25,880  
                                 
Non-interest income:
                               
Service charges on deposits
    2,427       2,736       7,485       7,700  
ATM and debit card income
    859       770       2,489       2,310  
Other charges and fees
    450       466       1,427       1,350  
Total non-interest income
    3,736       3,972       11,401       11,360  
                                 
Non-interest expenses:
                               
Salaries and employee benefits
    5,118       5,505       15,306       16,257  
Occupancy expense
    2,177       2,287       6,709       6,916  
FDIC insurance
    334       328       986       1,380  
Other
    3,488       3,206       10,019       9,171  
Total non-interest expenses
    11,117       11,326       33,020       33,724  
                                 
Income before income taxes
    1,418       1,578       4,454       3,516  
Provision for income taxes
    179       147       530       107  
                                 
Net earnings
    1,239       1,431       3,924       3,409  
Dividends on preferred stock and accretion of warrants
    300       299       898       875  
Net earnings available to common shareholders
  $ 939     $ 1,132     $ 3,026     $ 2,534  
                                 
Earnings per share:
                               
Basic
  $ 0.09     $ 0.17     $ 0.31     $ 0.38  
Diluted
  $ 0.09     $ 0.17     $ 0.31     $ 0.38  
                                 
See notes to unaudited consolidated financial statements.
 
 
 
 
-3-
 
 
 
MidSouth Bancorp, Inc. and Subsidiaries
 
 
For the Nine Months Ended September 30, 2010
(in thousands, except share and per share data)
 
   
Preferred Stock
   
Common Stock
   
Additional Paid-in
   
Unearned ESOP
   
Accumulated Other Comprehensive
   
Treasury
   
Retained
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Shares
   
Income
   
Stock
   
Earnings
   
Total
 
Balance- January 1, 2010
    20,000     $ 19,211       9,488,933     $ 949     $ 85,263     $ (217 )   $ 3,904     $ (3,544 )   $ 23,711     $ 129,277  
Net earnings
    -       -       -       -       -       -       -       -       3,924       3,924  
Net change in unrealized gains on securities available-for-sale, net of taxes
    -       -       -       -       -       -       2,345       -       -       2,345  
Comprehensive income
    -       -       -       -       -       -       -       -       -       6,269  
Issuance of common and treasury stock due to overallotment, net of discount and offering expenses
    -       -       384,811       39       4,472       -       -       258       -       4,769  
Dividends on preferred stock and accretion of common stock warrants
    -       148       -       -       -       -       -       -       (898 )     (750 )
Dividends on common stock, $0.21 per share
    -       -       -       -       -       -       -       -       (2,040 )     (2,040 )
Exercise of stock options
    -       -       1,985       -       17       -       -       -       -       17  
 ESOP compensation expense
    -       -       -       -       43       84       -       -       -       127  
Stock option expense
                                    5                                       5  
Restricted stock compensation expense
    -       -       -       -       23       -       -       -       -       23  
Balance- September 30, 2010
    20,000     $ 19,359       9,875,729     $ 988     $ 89,823     $ (133 )   $ 6,249     $ (3,286 )   $ 24,697     $ 137,697  
   
See notes to unaudited consolidated financial statements.
 
 
 
 
-4-
 
 
 
MidSouth Bancorp, Inc. and Subsidiaries
 
(in thousands)
 
   
For the Nine Months Ended September 30,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net earnings
  $ 3,924     $ 3,409  
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation and amortization
    2,623       2,797  
Provision for loan losses
    4,150       4,100  
Provision for deferred tax benefit
    (838 )     (459 )
Amortization of premiums on securities, net
    909       642  
Stock option expense
    5       19  
Restricted stock expense
    23       -  
Net loss on sale of other real estate owned
    146       23  
Net loss on sale of premises and equipment
    62       16  
Change in accrued interest receivable
    (181 )     73  
Change in accrued interest payable
    (300 )     (591 )
Other, net
    2,563       2,676  
Net cash provided by operating activities
    13,086       12,705  
                 
Cash flows from investing activities:
               
Net decrease (increase) in time deposits in other banks
    21,062       (7,000 )
Proceeds from maturities and calls of securities available-for-sale
    26,278       63,249  
Proceeds from maturities and calls of securities held-to-maturity
    1,456       3,277  
Purchases of securities available-for-sale
    (26,107 )     (51,687 )
Purchases of other investments
    (173 )     (124 )
Net change in loans
    (18,067 )     15,869  
Purchase of premises and equipment
    (689 )     (1,195 )
Proceeds from sale of premises and equipment
    3       9  
Proceeds from sales of other real estate owned
    766       122  
Purchase of other real estate owned
    (450 )     -  
Net cash provided by investing activities
    4,079       22,520  
                 
Cash flows from financing activities:
               
Change in deposits
    6,320       5,387  
Change in repurchase agreements
    6,032       30,390  
Change in federal funds purchased
    (1,700 )     (14,900 )
Change in Federal Reserve Discount Window borrowings
    -       (36,000 )
Net proceeds from the issuance of preferred stock
    -       19,954  
Issuance of common stock and treasury stock, net of offering expenses
    4,769       -  
Payment of dividends on preferred stock
    (750 )     (600 )
Payment of dividends on common stock
    (1,825 )     (1,654 )
Proceeds from exercise of stock options
    17       -  
Excess tax benefit from stock option exercises, net adjustment
    -       (3 )
Net cash provided by financing activities
    12,863       2,574  
                 
Net increase in cash and cash equivalents
    30,028       37,799  
                 
Cash and cash equivalents, beginning of period
    23,351       24,786  
                 
Cash and cash equivalents, end of period
  $ 53,379     $ 62,585  
                 
Supplemental information- Noncash items
               
Accretion of warrants
    148       148  
Transfer of loans to other real estate owned
    1,183       599  
Net change in loan to ESOP
    (84 )     227  
                 
See notes to unaudited consolidated financial statements.
               
 
 
 
-5-
 
 
 
MidSouth Bancorp, Inc. and Subsidiaries
September 30, 2010
(Unaudited)

1.     Basis of Presentation
 
The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America, the financial position of the Company and its subsidiaries as of September 30, 2010 and the results of their operations and their cash flows for the periods presented. The interim financial information should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s 2009 Annual Report on Form 10-K.
 
The results of operations for the nine month period ended September 30, 2010 are not necessarily indicative of the results to be expected for the entire year.
 
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
 
Summary of Significant Accounting Policies — The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America and general practices within the banking industry.  There have been no material changes or developments in the application of accounting principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies and Estimates as disclosed in our 2009 Annual Report on Form 10-K.
 
Recent Accounting Pronouncements — In July 2010 FASB issued Accounting Standards Update No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20), which is intended to improve transparency in financial reporting by public and nonpublic companies that hold financing receivables, which include loans, lease receivables, and other long-term receivables by requiring companies to provide more information in disclosures about the credit quality of financing receivables and the credit reserves held against receivables.  Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable.  Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required.  The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance.  For public companies, the amendments that require disclosure 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.  As ASU 2010-20 amends only the disclosure requirements for loans and leases and the allowance for credit losses, the adoption will have no impact on our consolidated financial statements.  To provide greater transparency on non-performing assets, additional disclosures that will be required by ASU 2010-20 have been included in Note 4 – Credit Quality of Loans and Allowance for Loan Losses for the period ended September 30, 2010.
 
ASU No. 2010-06, Improving Disclosures About Fair Value Measurements (“ASU 2010-06”).  ASU 2010-06 amends FASB Accounting Standards Codification topic 820-10-50, Fair Value Measurements and Disclosures, to require additional information to be disclosed principally regarding Level 3 measurements and transfers to and from Level 1 and Level 2.   In addition, enhanced disclosure is required concerning inputs and valuation techniques used to determine Level 2 and Level 3 measurements.  This guidance is generally effective for interim and annual reporting periods beginning after December 15, 2009; however requirements to disclose separately purchases, sales, issuances and settlements in the Level 3 reconciliation are effective for fiscal years beginning after December 15, 2010 (and for interim periods within such years). As required by ASU 2010-06, additional disclosure concerning inputs and valuation techniques has been included in Note 8 – Fair Value Measurement  for the quarter ended September 30, 2010.
 
 
 
-6-
 

 
Reclassifications—Certain reclassifications have been made to the prior years’ financial statements in order to conform to the classifications adopted for reporting in 2010.  The reclassifications had no impact on stockholders’ equity or net income.

2.  Investment Securities
 
The portfolio of securities consisted of the following (in thousands):
 
   
September 30, 2010
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Available-for-sale:
                       
U.S. Government agencies
  $ 116,729     $ 1,545     $ -     $ 118,274  
Obligations of state and political subdivisions
    108,815       6,202       -       115,017  
GSE mortgage-backed securities
    11,319       809       -       12,128  
Collateralized mortgage obligations
    27,886       923       15       28,794  
Financial institution equity security
    72       6       -       78  
    $ 264,821     $ 9,485     $ 15     $ 274,291  
 
 
   
December 31, 2009
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Available-for-sale:
                       
U.S. Government agencies
  $ 102,249     $ 459     $ 185     $ 102,523  
Obligations of state and political subdivisions
    113,232       4,180       111       117,301  
GSE mortgage-backed securities
    14,888       746       -       15,634  
Collateralized mortgage obligations
    35,451       870       43       36,278  
Financial institution equity security
    72       -       -       72  
    $ 265,892     $ 6,255     $ 339     $ 271,808  
 
 
   
September 30, 2010
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Held-to-maturity:
                       
Obligations of state and political subdivisions
  $ 1,588     $ 29     $ -     $ 1,617  
                                 
 
 
   
December 31, 2009
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Held-to-maturity:
                       
Obligations of state and political subdivisions
  $ 3,043     $ 78     $ -     $ 3,121  

 
With the exception of two private-label collateralized mortgage obligations (“CMOs”) with a combined balance remaining of $126,000 at September 30, 2010, all of the Company’s CMOs are government-sponsored enterprise securities.
 

 
-7-
 
 
 
The amortized cost and fair value of debt securities at September 30, 2010 by contractual maturity are shown in the following table (in thousands).  Except for mortgage-backed securities, expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 

   
Amortized
Cost
   
Fair
Value
 
Available-for-sale:
           
Due in one year or less
  $ 31,374     $ 31,700  
Due after one year through five years
    136,531       140,357  
Due after five years through ten years
    42,205       44,990  
Due after ten years
    15,434       16,244  
Mortgage-backed securities and collateralized mortgage obligations
    39,205       40,922  
Equity securities with readily determinable market values
    72       78  
    $ 264,821     $ 274,291  
 

 
   
Amortized
Cost
   
Fair
Value
 
Held-to-maturity:
           
Due in one year or less
  $ 900     $ 907  
Due after one year through five years
    688       710  
    $ 1,588     $ 1,617  
                 
 
 
Details concerning investment securities with unrealized losses are as follows (in thousands):
 
   
September 30, 2010
 
   
Securities with losses
under 12 months
   
Securities with losses
over 12 months
   
Total
 
Available-for-sale:
 
Fair Value
   
Gross Unrealized
Loss
   
Fair Value
   
Gross Unrealized Loss
   
Fair Value
   
Gross Unrealized Loss
 
Collateralized mortgage obligations
  $ -     $ -     $ 238     $ 15     $ 238     $ 15  
 
 
 
   
December 31, 2009
 
   
Securities with losses
under 12 months
   
Securities with losses
over 12 months
   
Total
 
Available-for-sale:
 
Fair Value
   
Gross Unrealized
Loss
   
Fair Value
   
Gross Unrealized Loss
   
Fair Value
   
Gross Unrealized Loss
 
U.S. Government agencies
  $ 50,041     $ 185     $ -     $ -     $ 50,041     $ 185  
Obligations of state and political subdivisions
    7,694       111       -       -       7,694       111  
Collateralized mortgage obligations
    1,528       22       277       21       1,805       43  
    $ 59,263     $ 318     $ 277     $ 21     $ 59,540     $ 339  
 
Management evaluates each quarter whether unrealized losses on securities represent impairment that is other than temporary. For debt securities, the Company considers its intent to sell the securities or if it is more likely than not the Company will be required to sell the securities.  If such impairment is identified, based upon the intent to sell or the more likely than not threshold, the carrying amount of the security is reduced to fair value with a charge to earnings. Upon the

 
 
-8-
 

 
result of the aforementioned review, management then reviews for potential other than temporary impairment based upon other qualitative factors.  In making this evaluation, management considers changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, performance of the debt security, and changes in the market’s perception of the issuer’s financial health and the security’s credit quality.  If determined that a debt security has incurred other than temporary impairment, then the amount of the credit related impairment is determined.  If a credit loss is evident, the amount of the credit loss is charged to earnings and the non-credit related impairment is recognized through other comprehensive income.
 
The unrealized losses on debt securities at September 30, 2010 resulted from changing market interest rates over the yields available at the time the underlying securities were purchased, which were related to two collateralized mortgage obligations. Management identified no impairment related to credit quality.  At September 30, 2010, management had no intent to sell the securities and determined it was more likely than not that the Company would not have to sell the securities and no other than temporary impairment was evident.  As a result, no other than temporary impairment losses were recognized during the nine months ended September 30, 2010.
 
At September 30, 2010, the Company held one equity security with an unrealized gain of $6,000 that was charged down in the fourth quarter of 2009 to $72,000 from the original value of $250,000.  The equity security is an investment in a portfolio of common stocks of community bank holding companies.  The Company did not recognize any impairment on the equity security for the nine months ended September 30, 2010 and it was subsequently liquidated on October 27, 2010 at a market value of $76,000.
 
During the nine months ended September 30, 2010 and year ended December 31, 2009, respectively, the Company did not sell any securities.  Securities with an aggregate carrying value of approximately $150,728,000 and $108,505,000 at September 30, 2010 and December 31, 2009, respectively, were pledged to secure public funds on deposit and for other purposes required or permitted by law.

3.  Other Investments

The Company is required to own stock in the Federal Reserve Bank of Atlanta (“FRB-Atlanta”) and as a member of the Federal Home Loan Bank system, owns stock in the Federal Home Loan Bank of Dallas (“FHLB-Dallas”).  The Company accounts for FRB-Atlanta and FHLB-Dallas stock as other investments along with stock ownership in two correspondent banks and a Community Reinvestment Act (“CRA”) investment in a Senior Housing Crime Prevention program in Louisiana. The CRA investment consisted of three government-sponsored agency mortgage-backed securities purchased by the Company and held by the Senior Housing Crime Prevention program.  The majority of the interest earned on the securities provides income to the program.

For impairment analysis, the Company reviews financial statements and regulatory capital ratios for each of the banks in which the Company owns stock to verify financial stability and regulatory compliance with capital requirements.  As of September 30, 2010 and December 31, 2009, based upon quarterly reviews, management determined that there was no impairment in the bank stocks held as other investments.

The aggregate carrying amount of other investments consisted of the following (in thousands):

   
September 30, 2010
   
December 31, 2009
 
             
FRB-Atlanta
  $ 1,624     $ 1,473  
FHLB-Dallas
    584       562  
Other bank stocks
    713       713  
CRA investment
    2,144       2,154  
    $ 5,065     $ 4,902  
 
 
 
-9-
 

 
4.  Credit Quality of Loans and Allowance for Loan Losses
 
A summary of the activity in the allowance for loan losses is as follows (in thousands):
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Balance, beginning of period
  $ 8,471     $ 8,039     $ 7,995     $ 7,586  
Provision for loan losses
    1,500       1,000       4,150       4,100  
Recoveries
    58       68       209       200  
Loans charged-off
    (1,583 )     (1,092 )     (3,908 )     (3,871 )
Balance, end of period
  $ 8,446     $ 8,015     $ 8,446     $ 8,015  

The Company’s loans individually evaluated for impairment were approximately $29.3 million at September 30, 2010 and $23.2 million at December 31, 2009.  Specific reserves totaling $2.7 million were established for $10.8 million of impaired loans reported at September 30, 2010.  At December 31, 2009, specific reserves totaling $2.3 million were established for $12.3 million of impaired loans reported for the fourth quarter 2009.  Interest recognized on impaired loans totaled $71,000 at September 30, 2010, which includes interest of $54,000 for a loan that was repaid during the third quarter of 2010 and interest of $17,000 recognized on the $10.8 million of impaired loans.  Two small commercial loans totaling $661,000 were classified as troubled debt restructurings during the third quarter of 2010 due to a reduction in the monthly payments granted to the borrowers.  The $1.2 million in troubled debt restructurings at June 30, 2010 represented one commercial loan that paid off in August 2010.

To provide greater transparency on non-performing assets, additional disclosures that will be required by ASU 2010-20 have been included below.  Allowance for loan losses is reported by portfolio segment and further detail of credit quality indicators are provided by class of loans.
 
 
Allowance for Loan Losses and Recorded Investment in Loans
 
For the Nine Months Ended September 30, 2010 (in thousands)
 
         
Real Estate
                         
   
Coml, Fin, and Agric
   
Construction
   
Commercial
   
Residential
   
Consumer
   
Finance Leases Coml
   
Other
   
Total
 
Allowance for loan losses:
                                               
Beginning balance
  $ 2,105     $ 2,240     $ 1,683     $ 631     $ 1,315     $ 21     $ -     $ 7,995  
Charge-offs
    1,094       1,478       51       127       1,157       1       -       3,908  
Recoveries
    19       1       -       58       130       1       -       209  
Provision
    719       1,500       1,025       274       624       7       1       4,150  
Ending balance
  $ 1,749     $ 2,263     $ 2,657     $ 836     $ 912     $ 28     $ 1     $ 8,446  
Ending balance: individually evaluated for impairment
  $ 95     $ 1,456     $ 1,000     $ 20     $ 87     $ -     $ -     $ 2,658  
                                                                 
Loans:
                                                               
Ending balance
  $ 194,729     $ 47,407     $ 208,491     $ 74,820     $ 66,544     $ 5,192     $ 1,128     $ 598,311  
Ending balance: individually evaluated for impairment
  $ 7,618     $ 10,807     $ 9,004     $ 1,668     $ 210     $ -     $ -     $ 29,307  
 
 
 
-10-
 
 
 
Credit Quality Indicators
As of September 30, 2010 (in thousands)
                   
Commercial Credit Exposure
                 
Credit Risk Profile by Internally Assigned Grade
                 
   
Commercial, Financial, and Agricultural
   
Commercial Real Estate- Construction
   
Commercial Real Estate -Other
 
Prime
  $ 6,823     $ 29     $ 3,276  
Excellent
    6,596       2,613       7,557  
Above average
    37,828       4,765       33,004  
Satisfactory
    129,549       18,967       146,452  
Other assets especially mentioned
    2,512       4,011       3,973  
Substandard
    11,063       12,080       14,229  
Doubtful
    358       -       -  
Loss
    -       -       -  
    $ 194,729     $ 42,465     $ 208,491  
                         
Consumer Credit Exposure
                       
Credit Risk Profile by Creditworthiness Category
                       
   
Residential - Construction
   
Residential -
Prime
   
Residential -
Subprime
 
Grade:
                       
Pass
  $ 4,890     $ 69,551     $ -  
Special mention
    -       2,318       -  
Substandard
    52       2,951       -  
    $ 4,942     $ 74,820     $ -  
 
                                 
Consumer and Commercial Credit Exposure
                               
Credit Risk Profile Based on Payment Activity
                               
   
Consumer -
Credit Card
   
Consumer -
Other
   
Finance Leases Commercial
     
Other Loans
 
Performing
  $ 4,896     $ 61,402     $ 5,192     1,128  
Nonperforming
    26       220       -      
            -
 
    $ 4,922     $ 61,622     $ 5,192      $
   1,128
 
 
 
 
-11-
 
 
 
Age Analysis of Past Due Loans
 
As of September 30, 2010 (in thousands)
 
                                     
   
30-89 Days
Past Due
   
Greater than
90 Days
Past Due
   
Total
Past Due
   
Current
   
Total
Loans
   
Recorded Investment > 90 days and Accruing
 
Commercial, financial, and agricultural
  $ 1,140     $ 3,374     $ 4,514     $ 190,215     $ 194,729     $ 42  
Commercial real estate - construction
    3,577       3,324       6,901       35,564       42,465       -  
Commercial real estate - other
    7,389       830       8,219       200,272       208,491       -  
Consumer - credit card
    29       26       55       4,867       4,922       26  
Consumer - other
    557       231       788       60,834       61,622       60  
Residential - construction
    -       -       -       4,942       4,942       -  
Residential - prime
    934       1,232       2,166       72,654       74,820       496  
Residential - subprime
    -       -       -       -       -       -  
Other loans
    147       -       147       981       1,128       -  
Finance leases commercial
    43       -       43       5,149       5,192       -  
    $ 13,816     $ 9,017     $ 22,833     $ 575,478     $ 598,311     $ 624  
 
 
Impaired Loans
 
For the Quarter Ended September 30, 2010 (in thousands)
 
                               
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
With no related allowance recorded:
                             
Commercial, financial, and agricultural
  $ 7,212     $ 7,428     $ -     $ 6,872     $ 17  
Commercial real estate – construction
    7,435       10,691       -       5,339       123  
Commercial real estate – other
    2,222       2,222       -       2,728       92  
Consumer – other
    42       42       -       115       -  
Residential – prime
    1,557       1,618       -       1,596       43  
Subtotal:
  $ 18,468     $ 22,001     $ -     $ 16,650     $ 275  
With an allowance recorded:
                                       
Commercial
    407       407       95       536       1  
Commercial real estate – construction
    3,371       3,371       1,456       4,150       15  
Commercial real estate – other
    6,782       6,782       1,000       6,807       1  
Consumer – other
    167       172       87       161       -  
Residential – prime
    111       111       20       81       -  
Subtotal:
  $ 10,838     $ 10,843     $ 2,658     $ 11,735     $ 17  
Totals:
                                       
Commercial
    27,429       30,901       2,551       26,432       249  
Consumer
    209       214       87       276       -  
Residential
    1,668       1,729       20       1,677       43  
Grand Total:
  $ 29,306     $ 32,844     $ 2,658     $ 28,385     $ 292  
 
 
 
-12-
 
 
 
Modifications
 
As of September 30, 2010 (in thousands)
 
                   
   
Number of Contracts
   
Pre-Modification Outstanding Recorded Investment
   
Post-Modification Outstanding Recorded Investment
 
Troubled debt restructuring occurring during the quarter ended September 30, 2010:
                 
Commercial, financial, and agricultural
    2     $ 661     $ 661  
                         
 
 
 
Loans on Nonaccrual Status
 
As of September 30, 2010 (in thousands)
 
       
Commercial, financial, and agricultural
  $ 7,342  
Commercial real estate - construction
    8,211  
Commercial real estate - other
    7,070  
Consumer - credit card
    -  
Consumer - other
    210  
Residential - construction
    -  
Residential - prime
    736  
Residential - subprime
    -  
Other loans
    -  
Finance leases commercial
    -  
    $ 23,569  
 
 
5.     Earnings Per Common Share
 
Following is a summary of the information used in the computation of earnings per common share (in thousands):
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net earnings available to common shareholders
  $ 939     $ 1,132     $ 3,026     $ 2,534  
Weighted average number of common shares outstanding used in computation of basic earnings per common share
    9,709       6,592       9,697       6,596  
Effect of dilutive securities:
                               
Stock options and warrants
    16       20       18       17  
Weighted average number of common shares outstanding plus effect of dilutive securities – used in computation of diluted earnings per share
    9,725       6,612       9,715       6,613  
 
 
 
-13-
 

 
For the quarter and nine months ended September 30, 2010, 21,366 shares of restricted stock and options to acquire 127,719 shares and 23,335 shares, respectively, were not included in computed diluted earnings because the effect of these shares was anti-dilutive.  As a result of the completion of a qualified equity offering in December 2009, warrants issued to the U. S. Department of the Treasury (the “Treasury”) to purchase 208,768 shares of our common stock were reduced to 104,384 shares.  The remaining 104,384 shares subject to the warrants are included in the computation of diluted earnings per share.

6.     Declaration of Dividends
 
A first quarter dividend of $0.07 per share for holders of common stock of record on March 17, 2010 was declared on January 27, 2010 and was paid on April 1, 2010.  On April 21, 2010, the Company declared a second quarter dividend of $0.07 per share for holders of common stock of record on June 16, 2010, and was paid on July 1, 2010.  A third quarter dividend was declared on July 14, 2010 in the amount of $0.07 per share for holders of common stock of record on September 16, 2010, and was paid on October 1, 2010.  A fourth quarter dividend was declared on October 26, in the amount of $0.07 per share for holders of common stock of record on December 15, 2010, to be paid on January 4, 2011.
 
The Company’s ability to declare and pay dividends on its common stock is subject to first having paid all accrued cumulative preferred dividends that are due.  For three years following the issuance of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”) to the Treasury on January 9, 2009, the Company may not increase its per share common stock dividend rate above $0.28 without the Treasury’s consent, unless the Treasury has transferred all the Series A Preferred Stock to third parties.
 
7. Employee Stock Plans
 
On June 30, 2010, the Personnel Committee of the Board of Directors of the Company made grants of 22,047 shares of restricted stock under the Company’s 2007 Omnibus Incentive Compensation Plan to certain officers and employees of the Company.  The restricted shares of stock, which are subject to the terms of a Restricted Stock Grant Agreement between the Company and each recipient, will fully vest on the third anniversary of the grant date.  Prior to vesting, the recipient will be entitled to vote the shares and receive dividends, if any, declared by the Company with respect to its common stock.  Compensation expense for restricted stock is based on the fair value of the restricted stock awards at the time of the grant, which is equal to the market value of the Company’s common stock on the date of grant.  The value of restricted stock grants that are expected to vest is amortized monthly into compensation expense over the three year vesting period.
 
The restricted shares had a fair value of $12.77 per share, or $281,540, on the date of issuance.  During the third quarter of 2010, 681 unvested awards were forfeited thereby reducing the amount of compensation expense to be recognized by $8,696.  For the nine months ended September 30, 2010, compensation expense of $22,737 was recognized related to restricted stock awards.  As of September 30, 2010, there was $250,107 of unrecognized compensation cost related to non-vested restricted stock awards granted under the plan.

8.     Fair Value Measurement
 
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  These levels are:
 
Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
 
Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
 
Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market.  These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
 
Following is a description of valuation methodologies used for assets and liabilities which are either recorded or disclosed at fair value.
 
Cash and cash equivalents—The carrying value of cash and cash equivalents is a reasonable estimate of fair value.
 
Time Deposits in Other Banks—Fair values for fixed-rate time deposits are estimated using a discounted cash flow analysis that applies interest rates currently being offered on time deposits of similar terms of maturity.
 
Securities Available-for-Sale—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
 
 
 
-14-
 
 
 
independent pricing models or other model-based valuation techniques such as the 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 and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter market funds.  Securities are classified as Level 2 within the valuation hierarchy when the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things. Level 2 inputs are used to value U.S. Agency securities, mortgage-backed securities, municipal securities, single issue trust preferred securities, certain pooled trust preferred securities, and certain equity securities that are not actively traded.
 
Other investments—The carrying value of other investments is a reasonable estimate of fair value.
 
Loans—For disclosure purposes, the fair value of fixed rate 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.  For variable rate loans, the carrying amount is a reasonable estimate of fair value.  The Company does not record loans at fair value on a recurring basis.  No adjustment to fair value is taken related to illiquidity discounts.  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 individually impaired, management measures impairment using one of three methods, including collateral value, market value of similar debt, 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.  Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and adjusts the appraisal value by taking an additional discount for market conditions and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
 
For non-performing loans, collateral valuations currently in file are reviewed for acceptability in terms of timeliness and applicability.  Although each determination is made based on the facts and circumstances of each credit, generally valuations are no longer considered acceptable when there has been physical deterioration of the property from when it was last appraised, or there has been a significant change in the underlying assumptions of the appraisal.  If the valuation is deemed to be unacceptable, a new appraisal is ordered.  New appraisals are typically received within 4-6 weeks.  While awaiting new appraisals, the valuation in file is utilized, net of discounts.  Discounts are derived from available relevant market data, selling costs, taxes, and insurance.  Any perceived collateral deficiency utilizing the discounted value is specifically reserved (as required by FAS 114) until the new appraisal is received or charged off.  Thus, provisions or charge-offs are recognized in the period the credit is identified as non-performing.
 
The following sources are utilized to set appropriate discounts: market real estate agents, current local sales data, bank history for devaluation of similar property, Sheriff’s valuations and buy/sell contracts.  If a real estate agent is used to market and sell the property, values are discounted 6% for selling costs and an additional 4% for taxes, insurance and maintenance costs.  Additional discounts may be applied if research from the above sources indicates a discount is appropriate given devaluation of similar property from the time of the initial valuation.
 
Other Real Estate—Other real estate properties are adjusted to fair value upon transfer of the loans to other real estate, and annually thereafter to insure other real estate assets are carried at the lower of carrying value or fair value.  Exceptions to obtaining initial appraisals are properties where a buy/sell agreement exists for the loan value or greater, or where we have received a Sheriff’s valuation for properties liquidated through a Sheriff sale.  Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the other real estate as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and adjusts the appraisal value by taking an additional discount for market conditions and there is no observable market prices, the Company records the other real estate asset as nonrecurring Level 3.
 
Cash Surrender Value of Life Insurance Policies—Fair value for life insurance cash surrender value is based on cash surrender values indicated by the insurance companies.
 
 
 
-15-
 
 
 
Deposits—The fair value of demand deposits, savings accounts, NOW accounts, and money market deposits is the amount payable on demand at the reporting date.  The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.  The estimated fair value does not include customer related intangibles.
 
Borrowings—The fair value approximates the carrying value of repurchase agreements, federal funds purchased, Federal Home Loan Bank advances, and Federal Reserve Discount Window borrowings due to their short-term nature.
 
Junior Subordinated Debentures—For junior subordinated debentures that bear interest on a floating basis, the carrying amount approximates fair value.  For junior subordinated debentures that bear interest on a fixed rate basis, the fair value is estimated using a discounted cash flow analysis that applies interest rates currently being offered on similar types of borrowings.
 
Commitments to Extend Credit, Standby Letters of Credit and Credit Card Guarantees—Because commitments to extend credit and standby letters of credit are generally short-term and made using variable rates, the carrying value and estimated fair value associated with these instruments are immaterial.

Assets Recorded at Fair Value
 
Below is a table that presents information about certain assets and liabilities measured at fair value on a recurring basis (in thousands):
 
   
Assets / Liabilities Measured at
Fair Value at
   
Fair Value Measurements at
September 30, 2010 using:
 
Description
 
 September 30, 2010
   
Level 1
   
Level 2
   
Level 3
 
Available-for-sale securities:
                       
U.S. Government agencies
  $ 118,274     $ -     $ 118,274     $ -  
Obligations of state and political subdivisions
    115,017       -       115,017       -  
GSE mortgage-backed securities
    12,128       -       12,128       -  
Collateralized mortgage obligations
    28,794       -       28,794       -  
Financial institution equity security
    78       78       -       -  
 

Certain assets and liabilities are measured at fair value on a nonrecurring basis and are included in the table below (in thousands).  Impaired loans are level 2 assets at fair value less costs to sell, measured using appraisals of the collateral from external parties.  Other real estate owned are also level 2 assets at fair value less costs to sell measured using appraisals from external parties.
 
   
Assets / Liabilities Measured at
Fair Value at
   
Fair Value Measurements at
September 30, 2010 using:
 
Description
 
September 30, 2010
   
Level 1
   
Level 2
   
Level 3
 
Impaired loans
  $ 8,181     $ -     $ 8,181     $ -  
Other real estate owned
    1,401       -       1,401       -  

 
Limitations
 
Fair value estimates are made at a specific point in time, based on relevant market information and 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 holdings of a particular financial instrument.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments.  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.
 
 
 
-16-
 
 
Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment.  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.
 
The estimated fair values of the Company’s financial instruments are as follows at September 30, 2010 and December 31, 2009 (in thousands):
 
 
 
   
September 30, 2010
   
December 31, 2009
 
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
Financial assets:
                       
Cash and cash equivalents
  $ 53,379     $ 53,379     $ 23,351     $ 23,351  
Time deposits held in banks
    5,060       5,129       26,122       26,122  
Securities available-for-sale
    274,291       274,291       271,808       271,808  
Securities held-to-maturity
    1,588       1,617       3,043       3,121  
    Other investments     5,065       5,065       4,902       4,902  
Loans, net
    589,865       598,113       577,047       583,142  
Cash surrender value of life insurance policies
    4,661       4,661       4,540       4,540  
Financial liabilities:
                               
Non-interest-bearing deposits
    195,496       195,496       175,173       175,173  
Interest-bearing deposits
    584,110       585,389       598,112       598,932  
Borrowings
    53,091