MIDCAROLINA FINANCIAL CORP - FORM 10-K/A

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EX-31.1 - SECTION 302 CEO CERTIFICATION - MIDCAROLINA FINANCIAL CORP	dex311.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - MIDCAROLINA FINANCIAL CORP	dex312.htm

U. S. Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K/A

AMENDMENT NO. 1

ANNUAL REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

Commission File Number 000-49848

MIDCAROLINA FINANCIAL CORPORATION

(Name of Issuer in Its Charter)


North Carolina		55-6144577
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

3101 South Church Street Burlington, North Carolina		27215
(Address of Principal Executive Offices)		(Zip Code)

(336) 538-1600

(Issuer’s Telephone Number, Including Area Code)

Securities Registered Under Section 12(b) of the Act: None

Securities Registered Under Section 12(g) of the Act: common stock, no par value

Title of Class

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ¨ No x

The aggregate market value of the Registrant’s voting and non-voting common equity, held by non affiliates, computed by reference to the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter was $15.3 million.

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.

4,927,828 shares of common stock, no par value, as of March 10, 2011.

Documents Incorporated by Reference

None

EXPLANATORY NOTE

This Amendment Number 1 on Form 10-K/A amends the original Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (the “2010 Form 10-K”) filed by the Registrant, MidCarolina Financial Corporation (“MidCarolina”), with the Commission on March 15, 2011. The purpose of this amendment is to correct certain inadvertent errors in numbers contained Items 6 and 7, and to insert disclosures required under Items 10 through 14 which the 2010 Form 10-K indicated would be incorporated by reference from MidCarolina’s definitive proxy statement filed with the Commission. In accordance with Rule 12b-15 of the Securities Exchange Act of 1934 (the “Exchange Act”), Items 6 and 7, and Items 10 through 14, of the 2010 Form 10-K appear herein in their entirety as amended and restated. No changes are being made in other Items of MidCarolina’s 2010 Form 10-K, including its financial statements contained in Item 8 of the 2010 Form 10-K, and those other Items are not included herein. Except as stated herein, no other revisions are being made to the 2010 Form 10-K.

As required by Rule 12b-15 under the Exchange Act, new certifications of MidCarolina’s principal executive officer and principal financial officer pursuant to Rule 13a-14(a) of the Exchange Act are filed as exhibits to this Form 10-K/A under Item 15 hereof.

This Form 10-K/A does not reflect events occurring after the filing of the 2010 Form 10-K on March 15, 2011, and no attempt has been made to update other disclosures as presented in the 2010 Form 10-K. Accordingly, this Form 10-K/A should be read in conjunction with the 2010 Form 10-K and MidCarolina’s other filings with the SEC subsequent to December 31, 2010.

When used in this Form 10-K/A, the term “MidCarolina” refers to the Registrant, MidCarolina Financial Corporation, and the term “MidCarolina Bank” refers to the Registrant’s banking subsidiary.

Disclaimer Regarding “Forward Looking Statements”

Statements in this report and its exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts, may be forward-looking statements as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors which include, but are not limited to, factors discussed in MidCarolina’s Annual Report on Form 10-K and in other documents it files with the Securities and Exchange Commission from time to time. Copies of those reports are available directly through the SEC’s Internet website at www.sec.gov or through MidCarolina Bank’s Internet website at www.midcarolinabank.com. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “feels,” “believes,” “estimates,” “predicts,” “forecasts,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of MidCarolina’s management about future events. Factors that could influence the accuracy of forward-looking statements in this report include, but are not limited to (a) pressures on MidCarolina’s earnings, capital and liquidity resulting from current and future conditions in the credit and capital markets, (b) continued or unexpected increases in credit losses in MidCarolina Bank’s loan portfolio, (c) continued adverse conditions in the economy and in the real estate market in MidCarolina Bank’s banking markets (particularly those conditions that affect its loan portfolio, the abilities of its borrowers to repay their loans, and the values of collateral that secures its loans),(d) the financial success or changing strategies of customers, (e) actions of government regulators, or change in laws, regulations or accounting standards, that adversely affect MidCarolina’s business, (f) changes in the interest rate environment and the level of market interest rates that reduce MidCarolina Bank’s net interest margins and/or the values of loans it makes and securities it holds, (g) changes in competitive pressures among depository and other financial institutions or in MidCarolina Bank’s ability to compete effectively against other financial institutions in its banking markets, and (h) other developments or changes in our business that MidCarolina does not expect. Although MidCarolina believes that the expectations reflected in the forward-looking statements included in this report are reasonable, they represent its management’s judgments only as of the date they are made, and it cannot guarantee future results, levels of activity, performance or achievements. As a result, readers are cautioned not to place undue reliance on these forward-looking statements. All forward-looking statements attributable to MidCarolina are expressly qualified in their entirety by the cautionary statements in this paragraph. MidCarolina has no obligation, and does not intend, to update these forward-looking statements.

PART II

ITEM 6.

SELECTED FINANCIAL DATA

The following table sets forth certain summary consolidated financial data, performance ratios and other data at, or for the periods indicated. As this information is only a summary, you should read it in conjunction with the historical financial statements (and related notes) of the Company and “Item 7. - Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

MidCarolina Financial Corporation

Table 1

Selected Consolidated Financial Information and Other Data

($ in thousands, except per share and nonfinancial data)


	At or for the Year Ended December 31,
	2010			2009		2008		2007		2006		2005
	(Amounts in thousands, except per share information)
Results of Operations:
Interest income	$	25,726		$	27,583	$	29,616	$	31,053	$	27,061	$	19,208
Interest expense		8,123			10,440		15,294		17,721		14,241		8,327

Net interest income		17,603			17,143		14,322		13,332		12,820		10,881
Provision for loan losses		6,418			4,455		1,665		425		394		1,373

Net interest income after provision for loan losses		11,185			12,688		12,657		12,907		12,426		9,508
Noninterest income		2,659			2,787		2,220		2,627		2,304		2,683
Noninterest expenses		12,881			12,281		9,462		8,305		9,077		8,546

Income before income taxes		963			3,194		5,415		7,229		5,653		3,645
Income tax (benefit) \expense		(14	)		818		1,741		2,342		1,757		1,277

Net income		977			2,376		3,674		4,887		3,896		2,368
Dividends on preferred stock		364			417		417		417		417		104

Net income available to common shareholders	$	613		$	1,959	$	3,257	$	4,470	$	3,479	$	2,264


Financial Condition:
Total Assets	$	531,200		$	541,004	$	540,847	$	467,186	$	420,850	$	370,440
Loans, net of unearned income		399,829			438,087		434,662		371,714		313,572		279,962
Securities		90,152			70,719		71,124		70,801		73,795		58,373
Deposits		465,873			465,020		467,948		373,897		339,275		300,262
Shareholders’ equity		40,424			40,185		37,196		33,150		28,259		23,093
Shareholders’ equity, tangible		40,424			40,185		37,196		33,150		28,259		23,093

Per Share Data (4):
Earnings per common share, basic	$	0.12		$	0.40	$	0.66	$	0.98	$	0.80	$	0.53
Earnings per common share, diluted		0.12			0.40		0.66		0.92		0.73		0.48
Cash dividends paid on common		—			—		—		—		—		—
Book value		7.23			7.18		6.57		6.13		5.20		4.25
Book value, tangible		7.23			7.18		6.57		6.13		5.20		4.25
Weighted average shares outstanding, basic		4,927,828			4,927,828		4,915,350		4,548,565		4,348,128		4,299,522
Weighted average shares outstanding, diluted		4,927,828			4,930,310		4,916,876		4,851,738		4,775,853		4,669,601

MidCarolina Financial Corporation

Table 1

Selected Consolidated Financial Information and Other Data

($ in thousands, except per share and nonfinancial data)


	At or for the Year Ended December 31,
	2010			2009			2008			2007			2006			2005
	(Amounts in thousands, except per share information)
Selected Ratios:
Return on average assets		0.18	%		0.43	%		0.73	%		1.09	%		0.98	%		0.72	%
Return on average common equity (1)		1.70	%		5.80	%		10.50	%		17.82	%		17.63	%		12.64	%
Return on average tangible equity (1)(2)		1.70	%		5.80	%		10.50	%		17.82	%		17.63	%		12.64	%
Common stock dividend payout ratio		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Efficiency ratio (2)		63.57	%		61.62	%		57.20	%		52.04	%		60.02	%		63.01	%
Net interest margin		3.34	%		3.27	%		2.94	%		3.12	%		3.38	%		3.51	%

Asset Quality Ratios:
Allowance for loan losses to period end loans		2.31	%		1.67	%		1.30	%		1.20	%		1.35	%		1.46	%
Allowance for loan losses to period end non-performing loans		101.62	%		99.50	%		180.34	%		637.43	%		531.74	%		1725.74	%
Non-performing assets to total assets		3.18	%		1.89	%		0.88	%		0.21	%		0.74	%		0.83	%
Net charge-offs to average loans		1.07	%		0.63	%		0.12	%		0.05	%		0.05	%		0.09	%

Capital Ratios:
Total risk-based capital ratio		13.03	%		11.93	%		11.19	%		11.48	%		11.28	%		11.34	%
Tier 1 risk-based capital ratio		11.77	%		10.67	%		9.97	%		10.37	%		10.12	%		9.90	%
Tier 1 leverage ratio		9.03	%		8.79	%		8.68	%		8.95	%		8.73	%		8.64	%
Equity to assets ratio (3)		6.71	%		6.54	%		5.98	%		6.06	%		5.57	%		4.93	%

(1)	Return on average tangible common equity is calculated by dividing net income available to common shareholders less amortization of intangibles by averate common equity less average intangibles.

(2)	The efficiency ratio is calculated by dividing noninterest expense by the sum of net interest income plus noninterest income.

(3)	Equity to assets ratio is calculated by dividing period-end common equity less period-end intangibles by period-end assets less period-end intangibles.

(4)	All per share data has been restated to reflect stock splits effected in the form of a 25% and 10% stock dividend in 2007 and 2006, respectively.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion and analysis that follows is intended to assist readers in the understanding and evaluation of the financial condition and results of operations of MidCarolina. It should be read in conjunction with the audited consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K and the supplemental financial data appearing throughout this discussion and analysis. Because the MidCarolina’s primary asset is the Bank, the discussion that follows focuses on the Bank’s business and operations.

EXECUTIVE OVERVIEW

Significant accomplishments. In the opinion of its management, MidCarolina’s most significant accomplishments during 2010, which are discussed in more detail in this Item 7, were as follows:

•

Remained profitable during a difficult economic environment for the community bank industry

•

Reduced concentration of wholesale funding by $35.1 million or 19.2%

•

Reduced concentration of construction loan portfolio by 35.0% or $23.7 million

•

Improved interest margin to 3.34% from 3.27%

Challenges. The Bank has achieved significant growth without acquisitions or mergers since first opening its doors in 1997. The financial industry in general is faced with many uncertainties and challenges. As management plans its strategic goals and objectives, future expectations of economic activity, and how these uncertainties could impact MidCarolina’s performance, must be taken into consideration. The challenges that we believe are most likely to have an impact on the operations of MidCarolina in the foreseeable future are presented below:

•

Sustaining profitable growth

•

Managing margins in an abnormally low interest rate environment

•

Competition from bank and non-bank entities, including fierce price competition

•

Uncertainty of real estate values

•

Maintaining liquidity during an uncertain economic environment

•

Managing equity in an unpredictable capital market

•

Managing asset quality during a period of economic uncertainty

FINANCIAL CONDITION

DECEMBER 31, 2010 AND 2009

The MidCarolina’s total assets were $531.2 million at year-end 2010, a decrease of $9.9 million, or 1.83%, when compared to year-end 2009. Loans, excluding those held for sale, decreased by $38.3 million, or 8.73%, from $438.1 million at the beginning of the year to $399.8 million at year end. The change in loans was composed principally of decreases of $23.7 million in construction loans, $1.0 million in home equity lines of credit, $1.7 million in commercial mortgage loans, $9.0 million in residential mortgage loans and $2.9 million in commercial and industrial loans, all of which are segments of lending MidCarolina targets and intends to continue targeting in differing magnitudes in the future. Investment securities increased by $19.4 million, or 27.48%, from $70.7 million to $90.2 million. Liquid assets, consisting of cash and demand balances due from banks, interest-earning deposits in other banks and investment securities, were 19.56% of total assets, at December 31, 2010 and 14.82% at December 31, 2009. The Bank, as a member of the FHLB of Atlanta, has an investment of $2.1 million in FHLB stock. The Bank’s investment in life insurance used to offset the cost of employee benefit plans, increased by $335 thousand during 2010 to $8.5 million. The increase was due to an increase in the cash surrender value of the policies. Other assets increased $4.2 million over 2009. Other real estate owned (OREO) was the component of other assets that incurred significant change. OREO increased $4.4 million or 154.1% over 2009 year-end, reflecting the distressed economy affecting the industry.

Deposits increased a modest $853,000 during 2010. However, the mix of deposits showed significant improvement as total transactional accounts comprised of noninterest-bearing demand accounts and interest-bearing demand accounts increased $80.4 million or 50.89%, from $186.5 million at December 31, 2009 to $266.9 million at December 31, 2010. Individually, noninterest-bearing demand accounts decreased $2.7 million, or 6.49%, interest

bearing demand accounts increased $83.1 million, or 57.38%, savings accounts increased $5.9 million or 71.75%, and time deposits decreased $85.5 million, or 31.63%, over the amount of these deposits at December 31, 2009. The Bank also used wholesale brokered certificates of deposit and advances from the FHLB of Atlanta, Georgia as funding sources during 2010 to serve as a secondary source of funding asset growth. Borrowings from the FHLB decreased $10.0 million to $15.0 million at December 31, 2010. Wholesale brokered certificates of deposit decreased $1.2 million or 1.16% and comprised approximately 21.73% of total deposit balances. Typically brokered certificates of deposit have similar terms to retail certificates of deposit issued in the Bank’s local markets, with rates marginally lower than local market certificate of deposit rates.

Total shareholders’ equity increased by $239,000, or 0.59%, during 2010. All capital ratios continue to place MidCarolina and the Bank in excess of the minimum required to be a well-capitalized institution by regulatory measures. The MidCarolina issued $4.8 million in Non-Cumulative Perpetual Preferred Stock on August 15, 2005 and $8.5 million in Trust Preferred Securities during prior years, so as to remain “well capitalized” under regulatory capital guidelines without diluting existing shareholders’ ownership. The Trust Preferred Securities and Preferred Stock should provide sufficient capital to retain a “well-capitalized” designation as defined by regulatory capital guidelines for the foreseeable future. The Trust Preferred Securities qualify as Tier 1 regulatory capital and are reported in Federal Reserve regulatory reports as a qualifying security in a consolidated subsidiary. The junior subordinated debentures issued to guarantee the Trust Preferred Securities do not qualify as Tier 1 regulatory capital.

Net Interest Income. Similar to most financial institutions, the primary component of earnings for the Bank is net interest income. Net interest income is the difference between interest income, principally from the loan and investment securities portfolios, and interest expense, principally on deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, “volume” refers to the average dollar level of interest-earning assets and interest-bearing liabilities, “spread” refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and “margin” refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as levels of non-interest-bearing liabilities. During the years ended December 31, 2010, 2009 and 2008, average interest-earning assets were $526.8 million, $523.7 million and $487.0 million, respectively. During these same years, the Bank’s net yields on average interest-earning assets were 3.34%, 3.27% and 2.94%, respectively. The increase in net yields from 2009 to 2010 is a reflection of decreases in interest rates over the year. An overall increase in spread which is the difference between yields earned on interest bearing assets less the interest paid on interest bearing liabilities was strongly influenced by the Bank’s concerted effort to increase transactional accounts during 2010. The Bank’s balance sheet is well positioned for changes in interest rates. When interest rates change, the Bank’s earnings and net yields remain stable as the Bank’s ratio of interest-earning assets to interest-bearing liabilities is well matched under all interest rate environments and time periods measured by the Bank.

Table 2 following this discussion presents an analysis of the Bank’s net interest income for 2010, 2009 and 2008.

Table 3 following this discussion shows the amounts of changes in net interest income due to changes in volume and rates and illustrates that the change in the average rate of loans was offset by the decrease in average deposit rates. These two variables were the predominant factors in the higher amount of net interest income realized by the Bank in 2010, when compared to 2009.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2010 AND 2009

Overview. MidCarolina reported net income available to common shareholders of $613,000, or $0.12 per diluted common share, for the year ended December 31, 2010, compared to net income available to shareholders of $2.0 million, or $0.40 per diluted common share, for 2009, a decrease of $1.3 million or $0.28 per diluted share.

Net Interest Income. Net interest income increased to $17.6 million for the year ended December 31, 2010, a $468,000 or 2.73% increase from the $17.1 million earned in 2009. Total interest income benefited from moderate growth in the level of average earning assets offset by significantly lower rates paid on liabilities caused by abnormally low interest rates during the year. The rates earned on a significant portion of the Bank’s loans adjust immediately when indexes like the prime rate change. Conversely, a large portion of interest-bearing liabilities, including certificates of deposit and bank borrowings, have rates fixed until maturity. As a result, interest rate reductions will generally result in an immediate drop in the Bank’s interest income on loans, with a more delayed

impact on interest expense because reductions in interest costs will only occur upon renewals of certificates of deposit or borrowings. Interest rate increases will generally result in an immediate increase in the Bank’s interest income on loans, with a more delayed impact on interest expense because increases in interest costs will only occur upon renewals of certificates of deposit or borrowings. Average total interest-earning assets increased $3.1 million, or 0.59%, during 2010 compared to 2009, while the average yield decreased by 39 basis points from 5.27% to 4.88%. As interest rates remained very low during 2010, the average rate on loans repriced and decreased year over year. The average rate on investment securities decreased in 2010 compared to 2009 reflecting the lower reinvestment yields available for securities purchased or reinvested during the year. Average total interest-bearing liabilities increased by $2.3 million, or 0.48%, a slightly lower growth rate than average interest-earning asset balances. The average cost of interest-bearing liabilities decreased by 50 basis points from 2.23% to 1.73%. With the cost on interest bearing liabilities decreasing more significantly than the yield on earning assets, the Bank’s net interest margin increased by 7 basis points. For the year ended December 31, 2010, the net interest margin was 3.34%, while for the year ended December 31, 2009, the net interest margin was 3.27%. Table 3 following this discussion reflects the volume and rate variances from 2010 as compared to 2009.

Provision for Loan Losses. The Bank recorded $6.4 million in the provision for loan losses in 2010, an increase of $2.0 million from the $4.5 million provision made in 2009. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. For 2010, large provisions were made each quarter in response to the weakened economy and real estate market. Specifically, builder/construction loans experienced a significant deterioration in their collateral values and many developers experienced decreased rates of building lot inventory turn-over. Although the Bank reduced its total exposure to construction loans by $23.7 million or 35.0% from $67.6 million at December 31, 2009 to $43.9 million at December 31, 2010, significant risk to property value depreciation continues to persist in the MidCarolina’s construction loan portfolio. Real estate developers’ ability to service debt for extended time periods remains tentative as cash flows have deteriorated. Total loans outstanding, net of loans held for sale, decreased $38.3 million in 2010 and increased $3.4 million in 2009. At December 31, 2010, the allowance for loan losses was $9.2 million, an increase of $1.9 million, or 26.27%, from the $7.3 million at the end of 2009. The allowance represented 2.31% and 1.67%, respectively, of loans outstanding at the end of 2010 and 2009, net of loans held for sale. The increase in the allowance is reflective of the on going economic and real estate market deterioration experienced locally as well as nationally and internationally. At December 31, 2010, the Bank had $9.1 million in non-accrual loans. In 2009, the Bank had $7.3 million in non-accrual loans. For a more detailed discussion of the provision of loan losses and the established reserve, see the section entitled “Analysis of Allowance for Loan Losses.”

Non-Interest Income. Non-interest income decreased to $2.7 million for the year ended December 31, 2010 compared to $2.8 million for the year ended December 31, 2009, a decrease of $128,000 or 4.59%. A significant factor in the decrease in total non-interest income was the reduction in service charges levied on deposit accounts. The banking industry is reevaluating the methodology in which overdrawn deposit account customers are service charged. The restructuring of service charge routines in part caused by newly implemented Regulation E, effective July 1, 2010, caused the company to incur a $198,000 decrease in service charge income from $910,000 in 2009 to $712,000 for 2010, or 21.76%. Mortgage operations income decreased to $786,000 in 2010, from $800,000 in 2009, reflecting the impact of the discontinuance of government initiated first time home buyer incentives. During 2010 the portion of OTTI expense (other than temporary impairment) that was determined to be credit-related and thus recognized in earnings as an expense was $29,000, a decrease of $119,000 or 80.41% compared to $148,000 OTTI expense for 2009. Other non-interest income decreased $75,000 in 2010 reflecting the absence of a one-time insurance claim recognized in 2009. Table 4, following this discussion, is a comparative analysis of the components of non-interest income for 2010, 2009 and 2008.

Non-Interest Expenses. Non-interest expenses totaled $12.9 million for the year ended December 31, 2010, an increase of $572,000 over the $12.3 million reported for 2009. Salaries and employee benefits decreased $365,000 primarily resulting from down sizing 5 staff positions during 2010. Professional and other services decreased $236,000 or 32.15% primarily due to a reduction in expenses incurred related to legal proceedings completed during 2009. Other outside services increased $368,000 or 98.40% resulting from expenses incurred during 2010 for merger related activities. Deposit and other insurance expense decreased $27,000 or 2.11% because of increased FDIC premiums. Occupancy and equipment expense decreased by $76,000 due to decreases in software licensure expenses that were absorbed by a third party information technology vendor resulting from the transfer of

related management, hardware and software information technology responsibilities. Data processing and other outside services increased $278,000, or 29.86%, due primarily to costs associated with the reconfiguration and relocation of the Bank’s data processing servers as well as the implementation of a significantly enhanced business and disaster recovery plan. Advertising expense decreased $10,000. Loss on sale of OREO increased $269,000 from $339,000 in 2009 to $618,000 in 2010, reflecting continued activity related to the disposition of foreclosed real estate. Table 5, following this discussion, presents a comparative analysis of the components of non-interest expenses for 2010, 2009 and 2008.

Income Taxes. An income tax benefit of $14,000 was recognized in 2010 and a provision for income tax expense in the amount of $818,000 was recognized in 2009. The effective tax rates were (1.45%) and 25.6%, respectively, on income before income taxes. The decrease in the effective tax rate for 2010 reflects an increase in the proportion of tax-exempt income to total income for 2010 over 2009.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2009 AND 2008

Overview. MidCarolina reported net income available to common shareholders of $2.0 million, or $0.40 per diluted common share, for the year ended December 31, 2009, compared with net income available to shareholders of $3.3 million, or $0.66 per diluted common share, for 2008, a decrease of $1.3 million or $0.26 per diluted share.

Net Interest Income. Net interest income increased to $17.1 million for the year ended December 31, 2009, a $2.8 million or 19.70% increase from the $14.3 million earned in 2008. Total interest income benefited from moderate growth in the level of average earning assets offset by significantly lower rates paid on liabilities caused by historically low interest rates during the year. The rates earned on a significant portion of the Bank’s loans adjust immediately when indexes like the prime rate change. Conversely, a large portion of interest-bearing liabilities, including certificates of deposit and Bank borrowings, have rates fixed until maturity. As a result, interest rate reductions will generally result in an immediate drop in the Bank’s interest income on loans, with a more delayed impact on interest expense because reductions in interest costs will only occur upon renewals of certificates of deposit or borrowings. Interest rate increases will generally result in an immediate increase in the Bank’s interest income on loans, with a more delayed impact on interest expense because increases in interest costs will only occur upon renewals of certificates of deposit or borrowings. Average total interest-earning assets increased $36.7 million, or 7.53%, during 2009 compared to 2008, while the average yield decreased by 81 basis points from 6.08% to 5.27%. As interest rates remained very low during 2009, the average rate on loans repriced and decreased year over year. The average rate on investment securities decreased in 2009 compared to 2008 reflecting the lower reinvestment yields available for securities purchased or reinvested during the year. Average total interest-bearing liabilities increased by $34.9 million, or 8.07%, a slightly higher growth rate than average interest-earning asset balances. The average cost of interest-bearing liabilities decreased by 131 basis points from 3.54% to 2.23%. With the cost on interest bearing liabilities decreasing more significantly than the yield on earning assets, the Bank’s net interest margin increased by 33 basis points. For the year ended December 31, 2009, the net interest margin was 3.27%, while for the year ended December 31, 2008, the net interest margin was 2.94%. Table 3 following this discussion reflects the volume and rate variances from 2009 as compared to 2008.

Provision for Loan Losses. The Bank recorded $4.5 million in the provision for loan losses in 2009, an increase of $2.8 million from the $1.7 million provision made in 2008. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. For 2009, large provisions were made each quarter in response to the weakened economy and real estate market. Specifically, builder/construction loans experienced a significant deterioration in their collateral values and many developers experienced decreased rates of building lot inventory turn-over. Although the Bank reduced its total exposure to construction loans by $24.3 million or 26.4% from $91.9 million at December 31, 2008 to $67.6 million at December 31, 2009, significant risk to property value depreciation continues to persist in the Company’s construction loan portfolio. Real estate developers’ ability to service debt for extended time periods remains tentative as cash flows have deteriorated. Total loans outstanding, net of loans held for sale, increased by $3.4 million in 2009 and by $62.9 million in 2008. At December 31, 2009, the allowance for loan losses was $7.3 million, an increase of $1.7 million, or 29.74%, from the $5.6 million at the end of 2008. The allowance represented 1.67% and 1.30%, respectively, of loans outstanding at the end of 2009 and 2008, net of loans held for sale. The increase in the allowance is reflective of the on going economic and real estate market deterioration experienced

locally as well as nationally and internationally. At December 31, 2009, the Bank had $7.3 million in non-accrual loans. In 2008, the Bank had $3.1 million in non-accrual loans. For a more detailed discussion of the provision of loan losses and the established reserve, see the section entitled “Analysis of Allowance for Loan Losses.”

Non-Interest Income. Non-interest income increased to $2.8 million for the year ended December 31, 2009 compared to $2.2 million for the year ended December 31, 2008, an increase of $567,000 or 25.54%. A significant factor in the increase in total non-interest income was the reduction in Other Than Temporary Impairment (OTTI) of private label collateralized mortgage obligation securities. OTTI recognized in 2009 was $148,000, which is a decrease of $342,000, a 69.79% improvement compared to the 2008 OTTI write down of $490,000. The decrease in the determination of OTTI was influenced by the adoption of ASC Topic 320-10-65-1 (formerly referred to as FSP FAS 115-2) effective January 1, 2009. Prior to January 1, 2009, if an investment was determined to be other than temporarily impaired, then the difference between the book value and market value was recognized as an OTTI loss in earnings. Beginning January 1, 2009, if an investment in a debt security was deemed to be other than temporarily impaired, then the difference between the book value and market value was further evaluated to identify the portion that related to credit deterioration. Only the portion related to credit deterioration is recognized through earnings. The cumulative effect of the change in accounting principle was an opening adjustment of $211,000, net of tax, to increase retained earnings. During 2009 the portion of OTTI that was determined to be credit-related and thus recognized in earnings was $148,000. Mortgage operations income increased to $800,000 in 2009, from $571,000, reflecting the impact of government initiated first time home buyer incentives and attractive refinancing rates available in the mortgage origination market. Service charges on deposit accounts in 2009 were $910,000, a decrease of $242,000, or 21.01%, compared to $1.2 million in 2008 reflecting the competitive market for attracting and retaining demand deposit accounts. Other non-interest income increased $272,000 in 2009 reflecting a receipt of a one time insurance claim for $252,000. Table 4, following this discussion, is a comparative analysis of the components of non-interest income for 2009, 2008 and 2007.

Non-Interest Expenses. Non-interest expenses totaled $12.3 million for the year ended December 31, 2009, an increase of $2.8 million over the $9.5 million reported for 2008. Noninterest expense of $12.3 million, excluding the effect of the $349,000 loss on sale of other real estate, increased $1.9 million for 2009, compared to noninterest expense of $9.5 million, excluding the effect of the $536,000 gain on sale of other real estate in 2008. Salaries and employee benefits increased $239,000 primarily resulting from increases in fair value expenses due to Stock Options issued in 2009. Professional and other services increased $184,000 or 33.45% primarily due increases in audit and legal fees and proceedings. Deposit and other insurance expense increased $848,000 or 196.30% because of increased FDIC premiums and the special assessment imposed during 2009. Occupancy and equipment expense increased by $449,000 due to increases in maintenance costs and additional lease expense incurred with the relocation of our Green Valley Office located in Greensboro and new software licensure expenses. Data processing and other outside services increased $144,000, or 18.30%, due primarily to costs associated with the reconfiguration and relocation of the Bank’s data processing servers as well as the implementation of a significantly enhanced business and disaster recovery plan. Advertising expense decreased $49,000 reflecting new marketing strategies and programs during 2009. Table 5, following this discussion, presents a comparative analysis of the components of non-interest expenses for 2010, 2009 and 2008.

Income Taxes. The provision for income tax was $818,000 in 2009 and $1.7 million in 2008. The effective tax rates were 25.6% and 32.2%, respectively, on income before income taxes. The decrease in the effective tax rate for 2009 reflects an increase in the proportion of tax-exempt income to total income for 2009 over 2008.

LIQUIDITY

The Bank’s sources of liquidity are customer deposits, cash and demand balances due from other banks, interest-earning deposits in other banks and investment securities available for sale. These funds, together with loan and securities repayments, are used to fund loans and continuing operations. At December 31, 2010, the Bank had credit availability with the Federal Reserve Bank of $51.1 million and the FHLB of $165.4 million, with $15.0 million outstanding.

Total deposits were $465.9 million and $465.0 million at December 31, 2010 and 2009, respectively. The Bank’s deposits increased 0.18% in 2010. Because the Bank’s organic deposit growth was sufficient in amount to meet the total funding needs of the Bank, the Bank reduced its exposure to alternative funding sources during 2010. The Bank reduced its total wholesale funding sources in 2010 by $35.1 million or 19.21%. Total wholesale funding was $183.0 million at December 31, 2009 compared to $147.8 million at December 31, 2010. The Bank will

continue to evaluate all funding sources for cost, accessibility, dependability and efficiency. Brokered certificates of deposits decreased $1.2 million during 2010, from $102.4 million in 2009 to $101.2 million in 2010, a decrease of 1.16%. Brokered certificates of deposits as a percent of assets decreased from 18.92% in 2009 to 18.56% in 2010.

At December 31, 2010 and 2009, time deposits represented 39.67% and 58.12%, respectively, of the Bank’s total deposits. Certificates of deposit of $100,000 or more represented 34.1% and 48.8%, respectively, of the Bank’s total deposits at December 31, 2010 and 2009. At December 31, 2010, the Bank had $26.4 million in public deposits and $101.2 million in brokered time deposits. These sources of funds are generally considered to be less stable than deposits from the Bank’s local markets. However, management believes that other non-traditional funding time deposits are relationship oriented. While the Bank appreciates the need to pay competitive rates to retain these deposits, other subjective factors also influence deposit retention. Based upon prior experience, the Bank anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity. The Bank’s aggregate wholesale funding comprised of brokered CD’s, wholesale NOW accounts, FHLB advances, FRB discount window borrowings and CDARS accounts (Certificate of Deposit Account Registry Service) as a percentage of total assets decreased to 31.7% in 2010 from 33.9% in 2009. The wholesale funding aggregate decrease is due primarily to an increase in traditional deposits resulting from our customer base’s recognition of MidCarolina’s consistent performance during a difficult economic period.

Management anticipates that the Bank will continue to utilize non-local market funding sources such as wholesale NOW accounts, CDARS, FHLB advances, FRB advances and brokered certificates of deposits as a less costly diversified funding source to complement the Bank’s local market deposits. Deposits, loan repayments, mortgage-backed securities prepayments, bond maturities, FHLB advances, FRB discount window borrowings and current earnings will be employed to provide liquidity, generate loans, purchase securities, procure fixed assets and meet other operating needs incurred in normal banking activities.

In the normal course of business there are various outstanding contractual obligations of the Bank that will require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit that may or may not require future cash outflows. Table 6 following this discussion summarizes the Bank’s contractual obligations and commitments as of December 31, 2010.

CAPITAL RESOURCES

At December 31, 2010 and 2009, shareholders’ equity totaled $40.4 million and $40.2 million, respectively. MidCarolina’s equity to asset ratio on those dates was 7.61% and 7.42%, respectively, reflecting MidCarolina’s moderate negative asset growth during 2010. MidCarolina and the Bank are subject to minimum capital requirements. See “PART 1, ITEM 1 - DESCRIPTION OF BUSINESS — SUPERVISION AND REGULATION.” Because MidCarolina’s only significant asset is its investment in the Bank, information concerning capital ratios is essentially the same for the MidCarolina and the Bank.

All capital ratios place the Bank in excess of minimum requirements to be classified as “well capitalized’ by regulatory measures. The Bank’s Tier-1 leverage ratio was 9.03% at December 31, 2010.

Note Q to the accompanying consolidated financial statements presents an analysis of the Bank’s regulatory capital position as of December 31, 2010 and 2009. Management anticipates that the Bank will remain “well-capitalized” for regulatory purposes throughout 2011.

ASSET/LIABILITY MANAGEMENT

The Bank’s results of operations depend substantially on its net interest income. Like most financial institutions, the Bank’s interest income and cost of funds are affected by general economic conditions and by competition in the market place. The purpose of asset/liability management is to provide stable net interest income growth by protecting the Bank’s earnings from undue interest rate risk, which arises from volatile interest rates and changes in the balance sheet mix, and by managing the risk/return relationships between liquidity, interest rate risk, market risk and capital adequacy. The Bank maintains, and has complied with, an asset/liability management policy approved by the board of directors of MidCarolina and the Bank that provides guidelines for controlling exposure to interest rate risk by utilizing the following ratios and trend analysis: liquidity, equity, volatile liability dependence, portfolio maturities, maturing assets and maturing liabilities. The Bank’s policy is to control the exposure of its

earnings to changing interest rates by generally endeavoring to maintain a position within a range around an “earnings neutral position,” which is defined as the mix of assets and liabilities that generate a net interest margin that is least affected by interest rate changes.

When suitable lending opportunities are not sufficient to utilize available funds, the Bank has generally invested such funds in securities, primarily securities issued by U.S. governmental agencies, mortgage-backed securities and securities issued by local governmental municipalities. The securities portfolio contributes to the Bank’s profits and plays an important part in the overall interest rate management. However, management of the securities portfolio alone cannot balance overall interest rate risk. The securities portfolio must be used in combination with other asset/liability techniques to actively manage the balance sheet. The primary objectives in the overall management of the securities portfolio are safety, liquidity, yield, asset/liability management (interest rate risk) and investing in securities that can be pledged for public deposits or as collateral for FHLB advances.

In reviewing the needs of the Bank with regard to proper management of its asset/liability program, the Bank’s management estimates its future needs, taking into consideration historical periods of high loan demand and low deposit balances, estimated loan and deposit increases (due to increased demand through marketing) and forecasted interest rate changes. A number of measures are used to monitor and manage interest rate risk, including income simulations and interest sensitivity (gap) analyses. An income simulation model is the primary tool used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Key assumptions in the model include prepayments on loan and loan-backed assets, cash flows and maturities of other investment securities, loan and deposit volumes and pricing. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors.

Based on the results of the income simulation model, as of December 31, 2010, due to the extremely low interest rate environment, the Bank would expect a decrease in net interest income of $709,000 if interest rates increase from current rates by an instantaneous 100 basis points and an increase in net interest income of $23,000 thousand if interest rates decrease from current rates by an instantaneous 100 basis points.

The analysis of an institution’s interest rate gap (the difference between the repricing of interest-earning assets and interest-bearing liabilities during a given period of time) is another standard tool for the measurement of the exposure to interest rate risk. Management believes that because interest rate gap analysis does not address all factors that can affect earnings performance, it should be used in conjunction with other methods of evaluating interest rate risk.

Table 7 following this discussion sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2010, which are projected to reprice or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown which reprice or mature within a particular period were determined in accordance with the contractual terms of the assets or liabilities. Loans with adjustable rates are shown as being due at the end of the next upcoming adjustment period. Money market deposit accounts are considered rate sensitive and are placed in the shortest period. Negotiable order of withdrawal or other transaction accounts are also assumed to be rate sensitive and are placed in the shortest period. In making the gap computations, none of the assumptions sometimes made regarding prepayment rates and deposit decay rates are used for any interest-earning assets or interest-bearing liabilities. In addition, the table does not reflect scheduled principal payments that will be received throughout the lives of the loans. The interest rate sensitivity of the Bank’s assets and liabilities illustrated in the table would vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions.

Table 7 illustrates that if assets and liabilities reprice in the time intervals indicated in the table, the Bank is liability sensitive within three months, liability sensitive over three months to twelve months, liability sensitive within twelve months and asset sensitive thereafter. As stated above, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. For instance, while the table is based on the assumption that money market accounts are immediately sensitive to movements in rates, the Bank expects that in a changing rate environment the amount of the adjustment in interest rates for such accounts would be less than the adjustment in categories of assets that are considered to be immediately sensitive. The same is true for

all other interest-bearing transaction accounts. Additionally, certain assets have features that restrict changes in the interest rates of such assets both on a short-term basis and over the lives of such assets. Further, in the event of a change in market interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an increase in market interest rates. Due to these shortcomings, the Bank places primary emphasis on its income simulation model when managing its exposure to changes in interest rates. The Bank does not normally make interest rate predictions, or take undue risk on potential changes in interest rate direction.

LENDING ACTIVITIES

General. The Bank provides to its customers a full range of short- to medium-term commercial, mortgage, construction and personal loans, both secured and unsecured. The Bank also makes real estate mortgage and construction loans.

The Bank’s loan policies and procedures establish the basic guidelines governing its lending operations. Generally, the guidelines address the types of loans that the Bank seeks, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws and regulations. All loans or credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrower’s total outstanding indebtedness to the Bank, including the indebtedness of any guarantor. The policies are reviewed and approved at least annually by the board of directors of the Bank. The Bank supplements its own supervision of the loan underwriting and approval process with periodic loan audits by internal loan examiners and outside professionals experienced in loan review work. The Bank has focused its portfolio lending activities on typically higher yielding commercial, construction and consumer loans. The Bank also originates one-to-four family mortgages that are typically sold into the secondary market, servicing released.

Table 8 following this discussion provides an analysis of the Bank’s loan portfolio composition by type of loan as of the end of each of the last five years.

Table 9 following this discussion presents, at December 31, 2010, (i) the aggregate maturities or re-pricings of commercial, industrial and commercial mortgage loans and of real estate constructions loans and (ii) the aggregate amounts of such loans by variable and fixed rates.

Commercial and Industrial Loans. At December 31, 2010, the Bank’s commercial and industrial loan portfolio equaled $61.2 million, or 15.3% of total loans, as compared with $64.2 million, or 14.6% of total loans, at December 31, 2009. Commercial and industrial loans include both secured and unsecured loans for working capital, expansion and other business purposes. Short-term working capital loans generally are secured by accounts receivable, inventory and/or equipment. The Bank also makes term commercial loans secured by equipment and real estate. Lending decisions are based on an evaluation of the financial strength, management and credit history of the borrower, and the quality of the collateral securing the loan. With few exceptions, the Bank requires personal guarantees and secondary sources of repayment.

Commercial and industrial loans generally provide greater yields and reprice more frequently than other types of loans, such as real estate loans, as most commercial loan yields are tied to the prime rate index. Therefore, yields on most commercial loans adjust with changes in the prime rate.

Real Estate Loans. Real estate loans are originated for the purpose of purchasing, constructing or refinancing one-to-four family, five-or-more family and commercial properties. The Bank offers fixed and adjustable rate options. The Bank provides customers access to long-term conventional real estate loans through its mortgage loan department which makes Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Company (“FHLMC”) and Government National Mortgage Association (“GNMA”) conforming loans that are originated with a commitment from a correspondent Bank to purchase the loan within 30 to 45 days of closing.

Residential one-to-four family loans are classified into two categories: conforming loans, that are originated under the underwriting guidelines established by FNMA, FHLMC or GNMA and held for sale and nonconforming loans that are originated and retained in the Bank’s loan portfolio. The terms “conforming” and “nonconforming” do not refer to credit quality, but rather to whether the loan is underwritten so that it can be sold in the secondary market. At December 31, 2010, the Bank had $3.0 million in loans held for sale, while nonconforming loans held in the Bank’s permanent portfolio amounted to $425,000. The Bank’s permanent residential mortgage loans are generally secured by properties located within the Bank’s market area. Most of the one-to-four family residential mortgage loans that the Bank makes are conforming loans and are sold within 30 days of closing to a correspondent

Bank. The Bank originated 233 loans in the amount of $35.8 million for sale in the secondary market during 2010. The Bank receives a fee for each loan originated, with fees aggregating $786,000 for the year ended December 31, 2010 and $800,000 for the year ended December 31, 2009. The Bank anticipates that it will continue to be an active originator of residential loans. Nonconforming residential mortgage loans that are retained in the Bank’s loan portfolio generally have rate terms of five years or less, with amortizations up to 20 years.

The Bank has made, and may continue to make, under qualifying circumstances, commercial real estate loans. Commercial real estate loan outstandings amounted to $173.3 million at December 31, 2010. These loans are secured principally by commercial buildings for office, storage and warehouse space, commercial and residential real estate developments and agricultural properties. Generally in underwriting commercial real estate loans, the Bank requires the personal guarantee of borrowers and a demonstrated cash flow capability sufficient to service the debt. Loans secured by commercial real estate usually involve a greater degree of risk than one-to-four family residential mortgage loans. Payments on such loans are often dependent on successful operation or management of the properties.

The Bank originates one-to-four family residential construction loans for the construction of custom homes (where the home buyer is the borrower) and provides financing to builders and consumers for the construction of pre-sold homes. The Bank generally receives a pre-arranged permanent financing commitment from an outside entity prior to financing the construction of pre-sold homes. The Bank lends to builders who have demonstrated a favorable record of performance and profitable operations and who are building in markets that management believes it understands and in which it is comfortable with the economic conditions. The Bank also makes commercial real estate construction loans, generally for owner-occupied properties. The Bank further endeavors to limit its construction lending risk through adherence to established underwriting procedures. The Bank generally requires documentation for all draw requests and utilizes loan officers to inspect the project prior to honoring draw requests from the builder. With few exceptions, the Bank requires personal guarantees and secondary sources of repayment on construction loans.

Consumer Loans and Home Equity Lines of Credits. Loans to individuals include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans and miscellaneous secured and unsecured personal loans. Consumer loans generally can carry significantly greater risks than other loans, even if secured, if the collateral consists of rapidly depreciating assets such as automobiles and equipment. Repossessed collateral securing a defaulted consumer loan may not provide an adequate source of repayment of the loan. Consumer loan collections are sensitive to job loss, illness and other personal factors. The Bank attempts to manage the risks inherent in consumer lending by following established credit guidelines and underwriting practices designed to minimize risk of loss.

Loan Approvals. The Bank’s loan policies and procedures establish the basic guidelines governing its lending operations. Generally, the guidelines address the type of loans that the Bank seeks, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws and regulations. All loans or credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrower’s total outstanding indebtedness to the Bank, including the indebtedness of any guarantor. The policies are reviewed and approved at least annually by the board of directors of the Bank. The Bank supplements its own supervision of the loan underwriting and approval process with periodic loan audits by independent, outside professionals experienced in loan review analysis.

Responsibility for loan production rests with the Senior Commercial Lending Officer in each market. The responsibility for loan underwriting, loan processing and approval is with the Chief Credit Officer. The board of directors of the Bank reviews the President’s lending authority annually. The board, in turn delegates loan authority to the Chief Credit Officer and other loan officers of the Bank. Delegated authorities may include loans, letters of credit, overdrafts, uncollected funds and such other authority as determined by the board of directors or the President.

The President and the Chief Credit Officer each have the authority to approve loans up to $400,000. The President in conjunction with the Chief Credit Officer have the combined authority to approve loans up to $2.0 million which is the maximum staff, in-house lending limit set by the board of directors. The board’s Loan Committee approves all loans in excess of the staff’s in-house lending limit. The Committee consists of the President, the Chairman and Vice Chairman of the Bank’s board and six outside directors as appointed by the board

Additionally, all loans of $50,000 or greater and all loans with relationship exposure of $200,000 or above

are reviewed by the Management Loan Committee comprised of the President, Chief Credit Officer, and the Senior Commercial Loan Officers for Alamance County and Guilford County. The Bank’s Loan Committee reviews all loans with total exposure of $1.0 million or greater and approves all loans with total exposure of $2.0 million or greater. The Bank’s legal lending limit was $14.6 million at December 31, 2010. The Bank seldom makes loans approaching its legal lending limit.

COMMITMENTS TO EXTEND CREDIT

In the ordinary course of business, the Bank enters into various types of transactions that include commitments to extend credit that are not included in loans receivable, net, presented on MidCarolina’s consolidated balance sheets. The Bank applies the same credit standards to these commitments as it uses in all its lending activities and has included these commitments in its lending risk evaluations. The Bank’s exposure to credit loss under commitments to extend credit is represented by the amount of these commitments. See Note P to the accompanying consolidated financial statements and Table 6 following this discussion.

ASSET QUALITY

The Bank considers asset quality to be of primary importance, and employs a formal internal loan review process to ensure adherence to the lending policy as approved by the Bank’s board of directors. It is the responsibility of each loan officer to assign an appropriate risk grade to loans when originated. Credit Administration, through the loan review process, validates the accuracy of the initial risk grade assessment. In addition, as a given loan’s credit quality changes, it is the responsibility of Credit Administration to change the borrower’s risk grade accordingly. The process of determining the allowance for loan losses is fundamentally driven by the risk grade system. In determining the allowance for loan losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to historical loan loss experience, the value and adequacy of collateral, economic conditions in the Bank’s market area and other factors. For loans determined to be impaired, the allowance is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. At December 31, 2010 the Bank had 53 impaired loans totaling $20.2 million comprised of 15 builder/construction loans totaling $9.3 million, 17 commercial and industrial loans for $9.1 million and 21 residential mortgage loans for $1.8. The allowance for loan losses represents management’s estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio.

The Bank’s policy regarding past due loans normally requires a prompt charge-off to the allowance for loan losses following timely collection efforts and a thorough review. Further efforts are then pursued through various means available. Loans carried in a non-accrual status are generally collateralized and are considered in the determination of the allowance for loan losses.

NONPERFORMING ASSETS

MidCarolina’s total nonperforming assets increased $6.1 million to $16.3 million at December 31, 2010, from $10.2 million at December 31, 2009, reflecting the distressed economy mentioned previously. Non-accrual loans, a subset of nonperforming assets, comprised 56% of total nonperforming assets or $9.1 million. Other real estate owned comprised the remaining significant component of nonperforming assets in the amount of $7.2 million or 44% of total nonperforming assets. Nonperforming restructured loans at December 31, 2010, which were included in total nonperforming assets, consisted of three construction loans in the amount of $656,000 and one home equity line of credit in the amount of $73,000. Performing restructured loans at December 31, 2010 which were not included in nonperforming assets, consisted of eight construction loans in the amount of $3.3 million and one commercial mortgage loan in the amount of $710,000.

Table 10 following this discussion sets forth, for the last five years, information with respect to the Bank’s nonperforming assets.

MidCarolina’s consolidated financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on loans, unless a loan is placed on non-accrual basis. For all classes of loans, loans are accounted for on a non-accrual basis when management has serious concerns about the collectibility of principal or interest. Generally, the Bank’s policy is to place a loan on non-accrual status when the loan becomes 90 days past due. Loans are also placed on non-accrual status in cases where management is uncertain whether the

borrower can satisfy the contractual terms of the loan agreement. Payments received on non-accrual loans generally are applied to principal first, and then to interest after all principal payments have been satisfied. Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal, have been granted due to the borrower’s weakened financial condition. The Bank accrues interest on restructured loans at the restructured rate when management anticipates that no loss of original principal will occur. Potential problem loans are defined as loans currently performing that are not included in non-accrual or restructured loans, but are loans as to which management has concerns as to the borrower’s ability to comply with present repayment terms. These loans could potentially deteriorate to non-accrual, past due or restructured loans status. Therefore, management quantifies the risk associated with problem loans in assessing the adequacy of the allowance for loan losses. At December 31, 2010, the Bank identified $9.1 million in non-accrual loans. At December 31, 2009, the Bank identified $7.4 million in non-accrual loans.

Other real estate owned consists of foreclosed, repossessed and idled properties. At December 31, 2010, there were $7.2 million assets classified as real estate owned. At December 31, 2009, there were $2.9 million in assets classified as real estate owned.

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged-off against the allowance when management believes that the collectability of principal is unlikely. Recoveries of amounts previously charged-off are credited to the allowance.

The allowance for loan losses relating to loans that are determined to be impaired is based on discounted cash flows using the loan’s initial effective interest rate or the estimated fair value of the collateral, less costs to sell, for certain collateral dependent loans. Large groups of smaller balance homogeneous loans that are collectively evaluated for impairment (such as residential mortgage and consumer installment loans) are excluded from impairment evaluation, and their allowance for loan losses is calculated in accordance with the allowance for loan losses policy described below.

The provision for loan losses charged to operating expense is based on factors which, in management’s judgment, deserve current recognition in estimating probable loan losses. Such factors considered by management include growth and composition of the loan portfolio, the relationship of the allowance for loan losses to outstanding loans, historical charge off activity, current and probable future local, regional and national economic conditions and an in depth assessment of the status of certain individual borrowers’ ability to meet repayment obligations. While management uses the best information available to make evaluations, this evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The provision contributed to the allowance for loan losses segregated by major loan category during 2010 is:


Loan Category	Contribution (in $000)		% of Total Provision
Construction loans	$	3,209		50.00
Commercial mortgage loans		1,284		20.00
Home equity lines of credit		385		6.00
Residential mortgage loans		642		10.00
Commercial and Industrial loans		834		13.00
Consumer loans		64		1.00

In addition, various regulatory agencies, as an integral part of their examination process, periodically review MidCarolina’s allowance for loan losses. Such agencies may require the MidCarolina to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.

Growth in loans outstanding has, throughout the Bank’s history, been the primary reason for increases in the Bank’s allowance for loan losses and the resultant provisions for loan losses necessary to provide for those increases. This growth has been spread among the Bank’s major loan categories, with the concentrations of major loan categories being relatively consistent. Between December 31, 2009 and December 31, 2010, the range of each major category of loans as a percentage of total loans outstanding is as follows: residential mortgage loans – 18.7% to 18.0%; commercial mortgage loans – 39.9% to 43.0%; construction loans – 15.4% to 10.9%; commercial and industrial loans – 14.6% to 15.2%; loans to individuals – 1.2% to 1.3%; and home equity lines of credit – 10.2% to 10.8%. Net loan charge-offs in the past five years ranged from 0.05% to 1.07% of average loans outstanding. In

2009 and 2010, net charge offs were .63% and 1.07% of average loans, respectively, reflecting the deterioration of economic conditions. Charge offs are typically recognized when it is the opinion of management that all or a portion of an outstanding loan becomes uncollectible. Loan repayment may be realized through a contractual agreement, or through liquidation of assets pledged as collateral. Net charge-offs totaled $2.8 million or 0.63% of outstanding loans for 2009 and $4.5 million or 1.07% of outstanding loans for 2010. Charge-offs incurred by major loan category during 2010 are:


Loan Category	Charge-offs (in $000)		% of Charge-offs
Construction loans	$	2,388		49.65
Commercial mortgage		965		20.07
Commercial and industrial loans		611		12.71
Residential mortgage loans		462		9.61
Home equity Lines of credit		319		6.64
Consumer loans		65		1.36

The Bank’s allowance for loan losses at December 31, 2009 of $7.3 million represents 1.67% of total loans outstanding, net of loans held for sale. The Bank’s allowance for loan losses at December 31, 2010 was $9.2 million or 2.31% of outstanding loans, net of loans held for sale. The allowance for loan losses as a percentage of loans outstanding increased in 2010 compared to 2009 due to increases in net charge offs as well as nonperforming loans, reflecting the decline in the local, national and international economic environment. The ending balance of the allowance for loan losses (ALLR) by major loan category and the major category’s ALLR balance as a percentage of its outstanding loan balance at December 31, 2010 are:


Loan Category	ALLR balance (in $000)		ALLR as % of category loan balance outstanding
Construction loans	$	2,079		4.74
Commercial mortgage		3,239		1.87
Commercial and industrial loans		1,397		2.29
Residential mortgage loans		1,563		2.19
Home equity Lines of credit		810		1.86
Consumer loans		138		2.56

Nonperforming loans increased $1.7 million during 2010 to $9.1 million compared to $7.3 million at December 31, 2009 and $4.9 million of the non performing loans at December 31, 2010, or 65.2%, were concentrated in commercial real estate.

Table 11 following this discussion presents the allocation of the allowance for loan losses at the end of each of the last five years. The allocation is based on an evaluation of defined loan problems, historical ratios of loan losses and other factors that may affect future loan losses in the categories of loans shown.

Table 12 following this discussion sets forth for each of the last five years information regarding changes in the Bank’s allowance for loan losses.

INVESTMENT ACTIVITIES

The Bank’s portfolio of investment securities, all of which are available for sale, consists primarily of U.S. government agency securities, mortgage-backed securities, government sponsored enterprise collateralized mortgage obligations, private label collateralized mortgage obligations and securities issued by local governments. Securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and carried at fair value, with any unrealized gains or losses reflected as an adjustment to stockholders’ equity. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates and/or significant prepayment risks. It is the Bank’s policy to classify its investment securities as available for sale. Table 13 following this discussion summarizes investment securities by type at December 31, 2010, 2009 and 2008.

Table 14 following this discussion summarizes the amortized costs, fair values and weighted average yields of the Bank’s investment securities at December 31, 2010, by contractual maturity groups.

The Bank does not engage in, nor does it presently intend to engage in, securities trading activities and therefore does not maintain a trading account. At December 31, 2010, there were no securities of any issuer (other

than governmental agencies) held in the Bank’s portfolio that exceeded 10% of MidCarolina’s shareholders’ equity.

SOURCES OF FUNDS

Deposit Activities. The Bank provides a range of deposit services, including non-interest-bearing checking accounts, interest-bearing checking and savings accounts, money market accounts and certificates of deposit. These accounts generally earn interest at rates established by management based on competitive market factors and management’s desire to increase or decrease certain types or maturities of deposits. As described under the caption “Liquidity” above, the Bank uses wholesale deposits as a funding source. However, the Bank strives to establish customer relations to attract core deposits in non-interest-bearing transactional accounts and thus to reduce the Bank’s costs of funds.

Table 15 following this discussion sets forth for the for the years ended December 31, 2010, 2009 and 2008 the average balances outstanding and average interest rates for each major category of deposits.

Table 16 following this discussion presents maturities of certificates of deposit with balances of $100,000 or more at December 31, 2010.

Borrowings. As additional sources of funding, the Bank uses advances from the FHLB under a line of credit equal to 30% of the Bank’s total assets, subject to qualifying collateral. The available aggregate line of credit was $165.4 million at December 31, 2010. Outstanding advances at December 31, 2010 totaled $15.0 million, of which $5.0 million matures in 2011 at 2.37% and $10 million matures in 2018 at 2.98%. The Bank had no daily rate credit advances outstanding at December 31, 2010. Pursuant to collateral agreements with the FHLB, at December 31, 2010, advances are secured by loans with a carrying amount of $50.2 million, which approximates market value. Advances outstanding at December 31, 2009 totaled $25.0 million.

The Bank also has a line of credit with the FRB through their discount window in the amount of $51.1 million. No borrowings were outstanding at December 31, 2010. The line of credit is secured by loans with a carrying amount of $62.8 million, which approximates market value.

In addition to FHLB advances, MidCarolina has issued $8.8 million of junior subordinated debentures to its wholly owned capital trusts, MidCarolina I and MidCarolina Trust II, to fully and unconditionally guarantee the preferred securities issued by the Trusts. These long term obligations, which currently qualify as Tier I capital for MidCarolina, constitute a full and unconditional guarantee by MidCarolina of the Trusts’ obligations under the capital trust securities.

CRITICAL ACCOUNTING POLICIES

We have established various accounting policies that govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Significant accounting policies are described in Note B to the audited consolidated financial statements. A critical accounting policy is one that is both very important to the portrayal of the MidCarolina’s financial condition and results, and requires management’s most difficult, subjective or complex judgments. What makes these judgments difficult, subjective and/or complex is the need to make estimates about the effects of matters that are inherently uncertain. These policies may involve significant judgments and estimates that have a material impact on the carrying value of certain assets and liabilities. Different assumptions made in the application of these policies could result in material changes in our financial position and results of operations.

Allowance for Loan Losses. MidCarolina’s most significant critical accounting policy is the determination of the Bank’s allowance for loan losses. If the mix and amount of future write-offs differ significantly from those assumptions used in making a determination, the allowance for loan losses and provision for loan losses on the income statement could be materially affected. For further discussion of the allowance for loan losses and a detailed description of the methodology used in determining the adequacy of the allowance, see the sections of this discussion titled “Asset Quality,” “Analysis of Allowance for Loan Losses” and Note B to the consolidated financial statements contained in this Annual Report.

Other Than Temporary Impairment. We evaluate securities for other-than-temporary impairment at least on a monthly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the anticipated outlook for changes in the general level of interest

rates, (4) whether, for debt securities, it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, and (5) whether, for equity securities, our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

MidCarolina Financial Corporation

Table 2

Average Balances and Net Interest Income (1)

($ in thousands)


	Year Ended December 31, 2010								Year Ended December 31, 2009								Year Ended December 31, 2008
	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate
Interest-earning assets:
Loans, net (1)	$	421,947		$	22,943		5.44	%	$	441,704		$	24,160		5.47	%	$	405,119		$	25,763		6.36	%
Investment securities (2)		76,114			2,706		3.56	%		70,289			3,378		4.81	%		69,728			3,561		5.11	%
Interest-earning cash deposits		26,468			48		0.18	%		9,387			21		0.22	%		9,678			131		1.35	%
Other		2,250			29		1.29	%		2,312			24		1.04	%		2,454			161		6.56	%


Total interest-earning assets		526,779			25,726		4.88	%		523,692			27,583		5.27	%		486,979			29,616		6.08	%


Other assets		25,439								26,915								19,602


Total assets	$	552,218							$	550,607							$	506,581


Interest-bearing liabilities:
Deposits:
Demand deposits		208,977			2,733		1.31	%		112,438			1,510		1.34	%		74,531			1,275		1.71	%
Savings deposits		11,691			78		0.67	%		6,663			20		0.30	%		5,772			29		0.50	%
Fixed maturity deposits		219,836			4,344		1.98	%		312,282			7,648		2.45	%		308,562			12,192		3.95	%
Short term borrowed funds		—			—		—			2,225			15		0.67	%		9,807			288		2.94	%
Long term borrowed funds		29,106			968		3.33	%		33,764			1,247		3.69	%		33,764			1,510		4.47	%


Total interest-bearing liabilities		469,610			8,123		1.73	%		467,372			10,440		2.23	%		432,436			15,294		3.54	%


Noninterest-bearing deposits		40,545								43,629								36,925
Other liabilities		1,137								992								1,390
Stockholders’ equity		40,926								38,614								35,830


Total liabilities and stockholders’ equity	$	552,218							$	550,607							$	506,581


Net interest income and interest rate spread (3)				$	17,603		3.15	%				$	17,143		3.03	%				$	14,322		2.54	%


Net interest margin (4)							3.34	%							3.27	%							2.94	%


Ratio of average interest-earning assets to average interest-bearing liabilities		112.17	%							112.05	%							112.61	%

(1)	Average loans include non-accruing loans and loans held for sale.

(2)	Tax exempt income is not computed on a tax equivalent basis.

(3)	Interest rate spread equals the earning asset yield minus the interest-bearing liability rate.

(4)	Net interest margin is computed by dividing net interest income by total earning assets.

MidCarolina Financial Corporation

Table 3

Volume and Rate Variance Analysis

(In Thousands)


	Year Ended December 31, 2010 vs. 2009									Year Ended December 31, 2009 vs. 2008
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume			Rate			Total			Volume			Rate			Total

Interest income:
Loans, net	$	(1,077	)	$	(140	)	$	(1,217	)	$	2,164		$	(3,767	)	$	(1,603	)
Investment securities		244			(916	)		(672	)		28			(211	)		(183	)
Interest-earning cash deposits		35			(8	)		27			(2	)		(108	)		(110	)
Other		(1	)		6			5			(5	)		(132	)		(137	)


Total interest income		(799	)		(1,058	)		(1,857	)		2,185			(4,218	)		(2,033	)


Interest expense:
Deposits
Demand deposits		1,280			(57	)		1,223			579			(344	)		235
Savings deposits		24			34			58			4			(13	)		(9	)
Fixed maturity deposits		(2,045	)		(1,259	)		(3,304	)		119			(4,663	)		(4,544	)
Short term borrowed funds		(15	)		0			(15	)		(137	)		(136	)		(273	)
Long term borrowed funds		(163	)		(116	)		(279	)		—			(263	)		(263	)


Total interest expense		(919	)		(1,398	)		(2,317	)		565			(5,419	)		(4,854	)


Net interest income increase (decrease)	$	120		$	340		$	460		$	1,620		$	1,201		$	2,821

MidCarolina Financial Corporation

Table 4

Noninterest Income

(In thousands)


	Year Ended December 31,
	2010			2009			2008

Service charges on deposit accounts	$	712		$	910		$	1,152
Mortgage operations		786			800			571
Investment brokerage fees		248			245			300
Increase in cash surrender value of life insurance		335			286			299


Core noninterest income		2,081			2,241			2,322

Securities gains, net		51			63			29
Impairment on investment securities		(29	)		(148	)		(490	)
Other noninterest income		556			631			359


Total noninterest income	$	2,659		$	2,787		$	2,220

MidCarolina Financial Corporation

Table 5

Noninterest Expenses

(In thousands)


	Year Ended December 31,
	2010		2009		2008

Salaries	$	4,313	$	4,564	$	4,338
Employee benefits		948		1,062		1,049


Total salaries and benefits		5,261		5,626		5,387

Occupancy expense		1,003		979		699
Equipment expense		503		603		434
Other outside services		742		374		307
Data processing		1,209		931		787
Office supplies and postage		346		341		350
Deposit and other insurance		1,253		1,280		432
Professional and other services		498		734		550
Advertising		328		338		387
Other real estate owned related costs, net		734		349		(536	)
Other		1,004		726		665


Total noninterest expenses	$	12,881	$	12,281	$	9,462

MidCarolina Financial Corporation

Table 6

Contractual Obligations and Commitments

($ in thousands)


	Payments Due by Period
Contractual Obligations	Total		On Demand or Within 1 Year		2 -3 Years		4 -5 Years		After 5 Years

Short-term borrowings	$	—	$	—	$	—	$	—	$	—
Long-term debt		23,764		5,000		—		10,000		8,764
Operating leases		3,269		417		808		728		1,316

Total contractual cash obligations excluding deposits		27,033		5,417		808		10,728		10,080

Time deposits		184,781		133,644		51,137		—		—


Total contractual cash obligations	$	211,814	$	139,061	$	51,945	$	10,728	$	10,080


	Amount of Commitment Expiration Per Period
Commercial Commitments	Total Amounts Committed		Within 1 Year		2 -3 Years		4 -5 Years		After 5 Years
			$	—
Lines of credit and loan commitments (1)	$	59,474	$	25,000	$	2,739	$	31,735		—

(1)	includes financial standby letters of credit, net

MidCarolina Financial Corporation

Table 7

Interest Rate Sensitivity Analysis

($ in thousands)


	At December 31, 2010
	3 Months or Less			Over 3 Months to 12 Months			Total Within 12 Months			Over 12 Months			Total

Interest-earning assets:
Loans and loans held for sale	$	226,321		$	53,285		$	279,606		$	120,223		$	399,829
Securities available for sale		1,536			9,926			11,462			78,690			90,152
Other earning assets		15,154			—			15,154			—			15,154

Total interest-earning assets	$	243,011		$	63,211		$	306,222		$	198,913		$	505,135


Interest-bearing liabilities
Fixed maturity deposits	$	42,971			90,694			133,665		$	51,116		$	184,781
All other deposits		242,141			—			242,141			—			242,141
Borrowings		13,500			—			13,500			10,264			23,764

	$	298,612		$	90,694		$	389,306		$	61,380		$	450,686


Interest sensitivity gap	$	(55,601	)	$	(27,483	)	$	(83,084	)	$	137,533		$	54,449
Cumulative interest sensitivity gap		(55,601	)		(83,084	)		(83,084	)		54,449			54,449
Cumulative interest sensitivity gap as a percent of total interest-earning assets		-11.01	%		-16.45	%		-16.45	%		10.78	%		10.78	%
Cumulative ratio of interest-sensitive assets to interest-sensitive liabilities		81.38	%		78.66	%		78.66	%		112.08	%		112.08	%

MidCarolina Financial Corporation

Table 8

Loan Portfolio Composition

($ in thousands)


	At December 31,
	2010					2009						2008						2007						2006
	Amount		% of Total Loans			Amount			% of Total Loans			Amount			% of Total Loans			Amount			% of Total Loans			Amount			% of Total Loans

Real Estate:
Construction loans	$	43,934		10.99	%	$	67,635			15.44	%	$	91,933			21.15	%	$	80,051			21.53	%	$	71,348			22.75	%
Commercial mortgage loans		173,275		43.35	%		174,926			39.94	%		156,333			35.97	%		140,198			37.71	%		124,385			39.67	%
Home equity lines of credit		43,611		10.91	%		44,627			10.19	%		43,290			9.96	%		41,479			11.16	%		33,090			10.55	%
Residential mortgage loans		72,370		18.10	%		81,377			18.57	%		73,595			16.93	%		57,342			15.42	%		37,163			11.85	%

Total real estate loans		333,190		83.35	%		368,565			84.13	%		365,151			84.01	%		319,070			85.83	%		265,986			84.82	%
Commercial and industrial loans		61,230		15.31	%		64,173			14.65	%		63,239			14.55	%		46,893			12.61	%		38,965			12.43	%
Loans to individuals for household, family and other personal expenditures		5,398		1.34	%		5,383			1.22	%		6,306			1.44	%		5,796			1.55	%		8,625			2.75	%

Loans, gross		399,818		100.00	%		438,121			100.00	%		434,696			100.00	%		371,759			100.00	%		313,576			100.00	%


Less net deferred loan origination (fees) costs		11					(34	)					(34	)					(45	)					(4	)


Residential mortgage loans held for sale		2,958		0.74	%		228			0.05	%		—			0.00	%		823			0.22	%		2,016			0.63	%


Total loans	$	402,787				$	438,315					$	434,662					$	372,537					$	315,588

MidCarolina Financial Corporation

Table 9

Loan Maturities

(In thousands)


	At December 31, 2010
	Due within one year					Due after one year but within five					Due after five years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
By loan type:
Construction	$	39,899		4.87	%	$	3,229		5.94	%	$	806		4.64	%	$	43,934		4.94	%

Commercial and industrial and commercial mortgage		82,910		4.61	%		146,523		5.51	%		5,071		6.59	%		234,505		4.92	%


Total	$	122,809		4.69	%	$	149,753		5.52	%	$	5,877		6.32	%	$	278,439		4.92	%


By interest rate type:
Fixed rate loans	$	86,222				$	149,000				$	5,877				$	241,098
Variable rate loans		36,588					753					—					37,341

	$	122,809				$	149,753				$	5,877				$	278,439

The above table is based on contractual scheduled maturities. Early repayment of loans or renewals at maturity are not considered in this table.

MidCarolina Financial Corporation

Table 10

Nonperforming Assets

($ in thousands)


	At December 31,
	2010			2009			2008			2007			2006
Nonperforming loans
Construction	$	3,383		$	4,301		$	188		$	700		$	794
Commercial mortgage		4,868			2,557			2,547			—			—
Home equity lines of credit		221
Residential mortgage		455			486			362			—			—
Commercial and industrial		99			—			26			—			—
Individual		53			—			—			—			—

Total nonperforming loans		9,079			7,344			3,123			700			794

Repossessed Assets		4			14			47			—			—
Other real estate owned		7,244			2,862			1,608			264			2,337


Total nonperforming assets	$	16,327		$	10,220		$	4,778		$	964		$	3,131


Accruing loans past due 90 days or more	$	—		$	—		$	—		$	—		$	—
Allowance for loan losses		9,226			7,307			5,632			4,462			4,222
Nonperforming loans to year end loans		2.27	%		1.68	%		0.72	%		0.19	%		0.25	%
Allowance for loan losses to year end loans		2.31	%		1.67	%		1.30	%		1.20	%		1.35	%
Nonperforming assets to loans and other real estate		4.01	%		2.32	%		1.11	%		0.27	%		0.99	%
Nonperforming assets to total assets		3.18	%		1.89	%		0.88	%		0.21	%		0.74	%
Allowance for loan losses to nonperforming loans		101.62	%		99.50	%		180.34	%		637.43	%		531.74	%
Restructured loans not include in the categories above		4,014			2,619			—			—			—

MidCarolina Financial Corporation

Table 11

Allocation of the Allowance for Loan Losses

(In thousands)


	2010					2009					2008					2007					2006
	Amount		% of Total Loans (1)			Amount		% of Total Loans (1)			Amount		% of Total Loans (1)			Amount		% of Total Loans (1)			Amount		% of Total Loans (1)

Real estate loans:
Construction loans	$	2,079		10.99	%	$	1,127		15.44	%	$	1,191		21.15	%	$	961		21.53	%	$	961		22.75	%
Commercial mortgage loans		3,239		43.36	%		2,918		39.94	%		2,026		35.97	%		1,683		37.71	%		1,675		39.67	%
Home equity lines of credit		810		10.91	%		744		10.19	%		561		9.96	%		498		11.16	%		446		10.55	%
Residential mortgage loans		1,563		18.10	%		1,358		18.57	%		933		16.56	%		678		15.42	%		500		11.85	%

Total real estate loans		7,691		83.35	%		6,147		84.13	%		4,711		84.01	%		3,820		85.83	%		3,582		84.82	%
Commercial and industrial loans		1,397		15.31	%		1,071		14.65	%		832		14.55	%		661		12.61	%		623		12.43	%
Loans to individuals		138		1.34	%		89		1.22	%		81		1.44	%		69		1.55	%		116		2.75	%

	$	9,226		100.00	%	$	7,307		100.00	%	$	5,632		100.00	%	$	4,462		100.00	%	$	4,222		100.00	%

(1)	Represents total of all outstanding loans in each category as a percent of total loans outstanding

MidCarolina Financial Corporation

Table 12

Loan Loss and Recovery Experience

($ in thousands)


	At or for the Year Ended December 31,
	2010			2009			2008			2007			2006

Loans held to maturity, outstanding at the end of the year	$	399,829		$	438,087		$	434,662		$	371,714		$	313,572


Average loans outstanding during the year	$	421,947		$	441,704		$	405,119		$	344,620		$	301,405


Allowance for loan losses at beginning of year	$	7,307		$	5,632		$	4,462		$	4,222		$	4,090
Provision for loan losses		6,418			4,455			1,665			425			394

		13,725			10,087			6,127			4,647			4,484

Loans charged off:
Real estate loans		(4,134	)		(1,502	)		(411	)		(268	)		(214	)
Commercial and industrial loans		(611	)		(1,396	)		(106	)		—			(87	)
Loans to individuals		(65	)		(127	)		(16	)		(28	)		(17	)

Total charge-offs		(4,810	)		(3,025	)		(533	)		(296	)		(318	)


Recoveries of loans previously charged off:
Real estate loans		158			32			11			66			2
Commercial and industrial loans		103			208			26			38			46
Loans to individuals		50			5			1			7			8

Total recoveries		311			245			38			111			56


Net charge-offs		(4,499	)		(2,780	)		(495	)		(185	)		(262	)


Allowance for loan losses at end of year	$	9,226		$	7,307		$	5,632		$	4,462		$	4,222


Ratios:
Net charge-offs as a percent of average loans		1.07	%		0.63	%		0.12	%		0.05	%		0.09	%
Allowance for loan losses as a percent of loans at end of year		2.31	%		1.67	%		1.30	%		1.20	%		1.35	%

MidCarolina Financial Corporation

Table 13

Securities Portfolio Composition

(In thousands)


	At December 31
	2010		2009		2008
Securities available for sale:
U. S. Government agencies	$	10,505	$	12,057	$	2,533
Mortgage-backed securities		39,214		24,917		50,431
State and municipal governments		30,704		28,449		17,607
GSE CMO’s		8,693		—		—
Private label CMO’s		726		4,976		—
Other		310		320		553

Total securities available for sale	$	90,152	$	70,719	$	71,124

MidCarolina Financial Corporation

Table 14

Securities Portfolio Composition

($ in thousands)


	Amortized Cost		Fair Value		Book Yield
Securities available for sale:
U. S. Government agencies
Due within one year	$	6,566	$	6,451		1.10	%
Due after one but within five years		3,024		3,075		1.90	%
Due after five but within ten years		1,000		979		3.00	%

		10,590		10,505		1.51	%


State and municipal securities
Due within one year		—		—		—
Due after one but within five years		7,398		7,178		5.59	%
Due after five but within ten years		11,638		11,474		5.38	%
Due after ten years		12,768		12,052		5.78	%

		31,804		30,704		5.59	%


Other
Due after five but within ten years		500		310		4.03	%

		500		310		4.03	%


Total securities available for sale
Due within one year		6,566		6,451		1.10	%
Due after one but within five years		10,422		10,253		4.48	%
Due after five but within ten years		13,138		12,763		5.16	%
Due after ten years		12,768		12,052		5.78	%
GSE CMO’s		8,757		8,693		2.78	%
Private label collateralized mortgage obligations		810		726		7.25	%
Mortgage-backed securities		39,278		39,214		2.49	%

	$	91,739	$	90,152		3.44	%

Yields on tax exempt securities are stated on a federal tax equivalent basis.

MidCarolina Financial Corporation

Table 15

Average Deposits

($ in thousands)


	For the Year Ended December 31,
	2010					2009					2008
	Average Amount		Average Rate			Average Amount		Average Rate			Average Amount		Average Rate

Demand deposits	$	208,977		1.31	%	$	112,438		1.34	%	$	74,531		1.71	%
Savings deposits		11,691		0.67	%		6,663		0.30	%		5,772		0.50	%
Fixed maturity deposits		219,836		1.98	%		312,282		2.45	%		308,562		3.95	%


Total interest-bearing deposits		440,504		1.62	%		431,383		2.13	%		388,865		3.47	%

Noninterest-bearing deposits		40,545		—			43,629		—			36,925		—


Total deposits	$	481,049		1.49	%	$	475,012		1.93	%	$	425,790		3.17	%

MidCarolina Financial Corporation

Table 16

Maturities of Time Deposits of $100,000 or More

(In thousands)


	At December 31, 2010
	3 Months or Less		Over 3 Months to 6 Months		Over 6 Months to 12 Months		Over 12 Months		Total

Time Deposits of $100,000 or more	$	36,856	$	47,635	$	25,858	$	48,478	$	158,827

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Board of Directors

MidCarolina’s Bylaws provide that its board of directors:

•

consists of not less than five nor more than 20 members, with MidCarolina’s board of directors being authorized to set and change the actual number of directors from time to time within those limits; and

•

is divided into three classes with directors being elected to staggered three-year terms, and that each year the terms of the directors in one class expire and directors in that class are elected for three-year terms or until their respective successors have been duly elected and qualified.

The number of members of MidCarolina’s board of directors currently is set at 15, and the names and information about the current 15 directors is contained in the following table.


Name and Age	Positions with MidCarolina Financial and MidCarolina Bank (1)	First Elected/ Current Term Expires (2)	Principal Occupation and Business Experience

Dexter R. Barbee, Sr. 71	Director	1997 / 2012	Sales Agent, Mount Vernon Mills, Inc. (since 2008) (textiles); President, Barbee Holdings, Inc. Manager, (since 2005) (real estate investment), Barbee Properties LLC (since 2005) (property management); previously, Chairman, CPC Chemical Holdings (2005-2008) and Chairman, Apollo Chemical Corp. (1968-2005) (textile chemical production)

H. Thomas Bobo 66	Director	1997 / 2011	Chairman, Fairystone Fabrics, Inc. (textile manufacturing)

Charles T. Canaday, Jr. (2) 49	Director; President and Chief Executive Officer	2007 / 2012	Executive officer of MidCarolina and MidCarolina Bank

Thomas E. Chandler 75	Director	1997 / 2012	Chairman, Chandler Concrete Co., Inc. (concrete producer)

James R. Copland III 70	Chairman	1997 / 2013	Chairman, Copland Industries, Inc. and Copland Fabrics, Inc. (textiles)

James B. Crouch, Jr. (2) 62	Director	2008 / 2012	Vice President, Harris, Crouch, Long, Scott & Miller, Inc. (insurance brokerage)

John (Tony) A. Holt, Sr. (2) 48	Director	2007 / 2013	President and Chief Executive Officer, Dynayarn USA, LLC (yarn manufacturer)

F. D. Hornaday III 61	Vice Chairman	1997 / 2011	President and Chief Executive Officer, Knit Wear Fabrics, Inc. (circular knit manufacturer)

Teena M. Koury 53	Director	1997 / 2011	Co-owner, Carolina Hosiery Mills, Inc. (textiles)

John H. Love 51	Director	1997 / 2011	President, W. E. Love & Associates, Inc. (insurance brokerage)

James B. Powell 72	Director	1997 / 2011	Manager, Allemanni, LLC (personal investments) (since 2000); previously, Owner and Lab Director, Paladin Laboratories (clinical laboratory) (2005-2007)


Name and Age	Positions with MidCarolina Financial and MidCarolina Bank (1)	First Elected/ Current Term Expires (2)	Principal Occupation and Business Experience

John K. Roberts 61	Director	1997 / 2013	Chief Executive Officer, Eagle Affiliates, Inc. (real estate consulting and management); Chief Executive Officer, Lake Area Development, Inc. (real estate development); previously, Chief Executive Officer, Final Frontier, Inc. (closet factory franchise) (2003-2006)

James H. Smith, Jr. 55	Director	1997 / 2012	Chairman and President, Villane, Inc. (real estate development and investment management); Chairman, Trust Company of the South (investment management)

George C. Waldrep, Jr. (2) 71	Director	2008 / 2013	Retired

Robert A. Ward 70	Director	1997 / 2013	Retired; previously, Executive Vice President and Chief Financial Officer, Unifi, Inc. (textiles) (1971-2005)

(1)

Messrs. Roberts (Chairman), Holt, Hornaday, Love and Smith currently serve on the board’s Audit Committee. Messrs. Love (Chairman), Barbee, Chandler, Crouch, Roberts and Ward and Ms. Koury currently serve on the board’s Nominating and Corporate Governance Committee. Messrs Ward (Chairman), Barbee, Chandler, Hornaday, Love, Roberts and Smith currently serve on the board’s Compensation Committee. Messrs. Copland (Chairman), Hornaday, Chandler, Love, Roberts and Ward currently serve on the board’s Executive Committee.

(2)

“First elected” refers to the year in which each individual first became a director of MidCarolina or, if earlier, of MidCarolina Bank. With the exception of Messrs. Canaday, Crouch, Holt and Waldrep, each person first became a director of MidCarolina during 2002 in connection with its organization as MidCarolina Bank’s holding company and previously had served as a director of MidCarolina Bank.

Factors Bearing on Selection of Nominees

The experience, qualifications, attributes, skills and other factors that have led MidCarolina’s board to conclude that each current director listed in the table above should serve or continue to serve as a director are described below.

Dexter R. Barbee first became a director of MidCarolina in 2002 in connection with its organization as MidCarolina Bank’s holding company, and previously had served as a founding director of MidCarolina Bank since 1997. Mr. Barbee is a lifelong Burlington resident and a graduate of Elon University with a double major in Biology and Chemistry. His principal occupations are his roles as (i) Chairman of Barbee Holdings, Inc., a real estate investment company, where he has served as Chairman since 2005 and as President from 2005 to 2009; (ii) manager and owner of Barbee Properties LLC, a property management company where he has served since 2005; (iii) Chief Executive Officer of DGT Properties, LLC, a real estate investment company where he has served since 2010; and (iv) Vice President and Treasurer of Liquest Labs, LLC, a commercial fluid valve control manufacturer, where he has served since 2009. Previously, Mr. Barbee served as Sales Agent at Mount Vernon Mills, Inc. from 2008 to 2010, as Chairman of CPC Chemical Holdings from 2005 to 2008, and as founder and Chairman of Apollo Chemical Corp. from 1968 to 2005, all of which were textile chemical production companies. Mr. Barbee managed all phases of Apollo Chemical’s growth from its founding in 1968 through 2008, when it had reached $38 million dollars in assets. Mr. Barbee has acquired companies, merged companies, and sold his ownership in Apollo Chemical in 2008, and he continues to handle the major accounts on behalf of Apollo’s new owner. Mr. Barbee also demonstrates a commitment to continuing to increase his knowledge and skills by regularly participating in director continuing education opportunities in order to stay informed of issues facing the banking industry. Mr. Barbee has demonstrated the ability to handle sales growth, improve profitability, purchase, sell and combine companies, and effectively lead a corporation, and the board believes that these skills and experiences qualify him to serve as a director.

H. Thomas Bobo first became a director of MidCarolina in 2002 in connection with its organization as MidCarolina Bank’s holding company, and previously had served as a founding director of MidCarolina Bank since 1997. His principal occupation is Chairman and owner of Fairystone Fabrics, Inc., a textile manufacturing company, where he has served since 1973. Mr. Bobo attended Duke University and the University of North Carolina at Chapel Hill. His previous banking experience includes five years as Assistant Vice President with First Citizens Bank. Mr. Bobo also demonstrates a commitment to continuing to increase his knowledge and skills by regularly participating in director continuing education opportunities in order to stay abreast of emerging trends in the banking industry. Our board believes that Mr. Bobo’s 35 years of experience in the textile manufacturing industry, and knowledge of corporate risk management, along with his financial background, qualify him to serve as a director.

Charles T. Canaday, Jr. first became a director of MidCarolina and MidCarolina Bank when he was elected as Chief Executive Officer in 2007. He previously served as MidCarolina and MidCarolina Bank’s Chief Operating Officer and Executive Vice President from 2004 until 2007 and as MidCarolina Bank’s Vice President and Senior Commercial Lender from 2000 until 2004. He has a total of 26 years of banking experience. A native of Myrtle Beach, South Carolina, Mr. Canaday received a degree in Business Administration from Coastal Carolina University in 1983 and entered into the management training program with BB&T in that year. He served as Senior Vice President and Senior Commercial Lender for 8 years with FirstSouth Bank in Burlington, N.C. He has completed continuing education programs including RMA Commercial Lending Analysis and the North Carolina School of Banking Advanced Management Course to stay abreast of emerging trends in the banking industry. As a director, he has attended the North Carolina Bankers Association’s Directors Assembly and the North Carolina Commissioner of Banks’ Advanced Directors’ College. Mr. Canaday’s knowledge of MidCarolina’s local business environment is extensive, and he has been a leader in a number of local organizations including past President of the Alamance County Chamber of Commerce, past President of the Salvation Army, member of Boys and Girls Club advisory board, past President of Alamance Business Club, and has been involved in the Alamance Community College Foundation, United Way and similar organizations. The board believes that these factors, in addition to Mr. Canaday’s knowledge of MidCarolina’s business, the local banking market and his extensive local relationships developed over 22 years, qualify him to serve as a director.

Thomas E. Chandler first became director of MidCarolina in 2002 in connection with its organization as MidCarolina Bank’s holding company, and previously had served as a founding director of MidCarolina Bank since 1997. His principal occupation is his role as Chairman of Chandler Concrete Co., Inc. A longtime Burlington resident, Mr. Chandler received a degree in Economics from Lynchburg College in Lynchburg, Virginia. His previous banking experience includes seven years as Assistant Vice President with Wachovia Bank and service as a member of BB&T’s Burlington advisory board. Mr. Chandler also demonstrates a commitment to continuing to increase his knowledge and skills by regularly participating in director continuing education opportunities. The board believes that Mr. Chandler’s business experience in the construction industry, and his knowledge in the various markets MidCarolina Bank serves, along with his financial background and knowledge of key areas affecting MidCarolina Bank’s performance, such as asset quality, liquidity position and risk management, are attributes that qualify him to serve as a director and as chairman of MidCarolina Bank’s Loan Committee.

James R. Copland III first became a director of MidCarolina in 2002 in connection with its organization as MidCarolina Bank’s holding company, and previously had served as a founding director of MidCarolina Bank since 1997. His principal occupation is his service as the Chairman of Copland Industries, Inc. and Copland Fabrics, Inc. Mr. Copland is a Burlington native and holds a degree in Business Administration from the University of North Carolina at Chapel Hill. He gained experience as a bank director through his service on the board of directors of Northwestern Bank for 23 years and as a founding director of FirstSouth Bank, a locally-owned community bank in Burlington from 1988 to 1996. Mr. Copland also demonstrates a commitment to continuing to increase his knowledge and skills by regularly participating in director continuing education opportunities in order to stay abreast of emerging

trends in the banking industry. Mr. Copland’s financial background and level of knowledge and experience in the banking industry, along with his dedication to create long-term shareholder value, are attributes that the board believes qualify him to lead and serve as a director.

James B. Crouch, Jr. served as a founding director of MidCarolina Bank beginning in 1997, and as a director of MidCarolina beginning with its organization as MidCarolina Bank’s holding company in 2002, until 2003. He returned to MidCarolina’s and MidCarolina Bank’s boards in 2008. His principal occupation is Vice President of Harris, Crouch, Long, Scott & Miller, Inc., an insurance brokerage firm dealing in estate planning and executive benefits. Mr. Crouch grew up in Burlington, North Carolina and received his Bachelors degree from the University of North Carolina at Chapel Hill in 1971. His prior financial background includes eight years of serving as a founding director of FirstSouth Bank, a locally-owned community bank located in Burlington from 1988 to 1996. The board believes his knowledge and experience in the sales and marketing of insurance products qualifies him to assist MidCarolina Bank in developing marketing strategies in its banking products and services and, along with his other skills and experience, qualifies him to serve as a director.

John (Tony) A. Holt, Sr. first became a director of MidCarolina in 2007. His principal occupation is President, Chief Financial Officer and partner, of DynaYarn USA, LLC, a yarn manufacturing business. Mr. Holt is a lifelong Burlington resident and earned a degree in Economics from Davidson College in 1985 before joining the U.S. Navy where he served as a lieutenant. Following his service in the Navy, Mr. Holt earned a Master of Business Administration and Juris Doctor from the University of North Carolina at Chapel Hill. Mr. Holt also demonstrates a commitment to continuing to increase his knowledge and skills by regularly participating in director continuing education opportunities in order to stay abreast of emerging trends in the banking industry. As President and Chief Financial Officer of DynaYarn, he has acquired knowledge and experience regarding financial, accounting and risk management issues which the board believes qualify him to serve as a director.

F.D. Hornaday, III serves as Vice Chairman and first became a director of MidCarolina in 2002 in connection with its organization as MidCarolina Bank’s holding company, and previously had served as a founding director of MidCarolina Bank since 1997. His principal occupation is President and Chief Executive Officer of Knit Wear Fabrics, Inc., a circular knit manufacturer. A lifelong Burlington resident, Mr. Hornaday received a degree in Industrial Relations from the University of North Carolina at Chapel Hill in 1971 and began his career in textiles the following year. He is currently a board member of the Trust Company of the South, North Carolina’s oldest non-depository trust company, and he also serves as the current Chairman of the Alamance Regional Medical Center Board overseeing the management of the hospital’s strategic, business and regulatory environment. Mr. Hornaday also demonstrates a commitment to continuing to increase his knowledge and skills by regularly participating in director continuing education opportunities in order to stay abreast of emerging trends in the banking industry. The board believes that Mr. Hornaday’s level of knowledge and experience in the textile industry, along with his leadership of the local hospital board, are attributes that qualify him to serve as a director.

Teena M. Koury first became a director of MidCarolina in 2002 in connection with its organization as MidCarolina Bank’s holding company, and previously had served as a founding director of MidCarolina Bank since 1997. Her principal occupation is co-owner of Carolina Hosiery Mills, Inc., a textile manufacturing company, and Alamance Industrial Park, Inc., a real estate holding company. A lifelong Burlington resident, Ms. Koury received a degree in Business Administration from Queens College. She currently serves as Vice Chair of the North Carolina Wildlife Habitat Foundation and the Burlington/Alamance County YMCA Board. She has 30 years experience, at an executive level, dealing with daily operating business decisions in her family-owned company. She also has significant knowledge of the commercial real estate market and lends valuable insight into real estate issues faced by MidCarolina Bank. The board believes that her experience as a business operator in the community strengthens MidCarolina Bank’s role in the community and, along with her other skills and experience, qualifies her to serve as a director.

John H. Love first became a director of MidCarolina in 2002 in connection with its organization as MidCarolina Bank’s holding company, and previously had served as a founding director of MidCarolina Bank since 1997. His principal occupation is President of W. E. Love & Associates, Inc., an insurance brokerage firm. A Burlington native, Mr. Love received a degree in Business Administration from the University of South Carolina in 1982 and began working in his family’s business, where he remains today. Mr. Love also demonstrates a commitment to continuing to increase his knowledge and skills by regularly participating in director continuing education opportunities in order to stay informed of emerging trends in the banking industry. The board believes that his background in overall risk evaluation and statistical analysis of risk, and his experience dealing with multiple regulatory agencies in his own profession, qualify him to serve as a director.

Dr. James B. Powell first became a director of MidCarolina in 2002 in connection with its organization as MidCarolina Bank’s holding company, and previously had served as a founding director of MidCarolina Bank since 1997. He is retired from full-time employment, and was previously employed as manager of Allemanni, LLC, a personal investment company, from 2000 through 2009, and as owner and laboratory director at Paladin Laboratories, a clinical laboratory, from 2005 to 2007. A Burlington native, Dr. Powell was educated at Virginia Military Institute and graduated from Duke University Medical School in 1964. He served as President and Chief Executive Officer from 1969 to 1996, and as a director from 1995 to 2004, of Laboratory Corp of America, a publicly-traded, multi-national laboratory testing service. He has served as director on numerous boards including FirstSouth Bank, a locally-owned community bank located in Burlington from 1988 until 1996, as well as the North Carolina Trust Company, Duke University Medical Center, Elon University and the Alamance Foundation. The board believes that Dr. Powell’s level of knowledge and past business experience qualifies him to serve as a director.

John K. Roberts first became a director of MidCarolina in 2002 in connection with its organization as MidCarolina Bank’s holding company, and previously had served as a founding director of the MidCarolina Bank since 1997. His principal occupations are his roles as Chief Executive Officer and owner of Eagle Affiliates Inc., a real estate consulting and management firm, and as Chief Executive officer of Lake Area Development, Inc., a real estate development business. A longtime Burlington resident, Mr. Roberts received a bachelor’s degree from the University of North Carolina at Chapel Hill and a Master of Business Administration from the University of Virginia with an emphasis in finance. Previously, Mr. Roberts served as the Chief Executive Officer of Final Frontier, Inc., a closet organization system design and installation company, from 2003 to 2006. His business experience also includes serving as an analyst for Holiday Inn, where he specialized in budgeting, investor relations and mergers and acquisitions. Mr. Roberts has also served as owner and operator of several entrepreneurial companies including 22 years as franchisee of Wendy’s International, Inc. He has served as trustee on the Wendy’s National Advisory Board and also served, over a 19 year period, as Executive Board member, President and Treasurer of the Old North State Council of the Boy Scouts of America. As chairman of the Audit Committee, Mr. Roberts plays a major role in identifying and managing risk. Mr. Roberts also demonstrates a commitment to continuing to increase his knowledge and skills by regularly participating in director continuing education opportunities in order to stay informed of emerging trends in the banking industry. The board believes that Mr. Roberts’ familiarity with MidCarolina’s internal controls and knowledge of examination and reporting procedures, along with his business background, qualify him to serve as a director.

James H. Smith, Jr. first became a director of MidCarolina in 2002 in connection with its organization as MidCarolina Bank’s holding company, and previously had served as a founding director of MidCarolina Bank since 1997. His principal occupations are Chairman and President of Villane Inc., a real estate development and investment management firm, and Chairman of The Trust Company of the South, an investment management and trust company. A Burlington native, he received a degree in Business Administration from the University of North Carolina at Chapel Hill and a master’s degree in Finance from the University of Arizona. Mr. Smith also demonstrates a commitment to continuing to increase his knowledge and skills by regularly participating in director continuing education opportunities

in order to stay abreast of emerging trends in the banking industry. The board believes that his strong financial background, as well as his risk analysis skills, are often effectively brought to bear on issues facing MidCarolina and qualify him to serve as a director.

George C. Waldrep Jr. first became a director of MidCarolina in 2008. He is retired from full-time employment, and formerly served as Group Vice President of Burlington Industries, Inc., a textile business. A longtime resident of Guilford County, he also chairs our Greensboro local advisory board. Mr. Waldrep received a Bachelor of Science degree in Textile Management from Clemson University and was employed as Executive Vice President of manufacturing at Burlington Industries Inc. for 38 years. Mr. Waldrep also demonstrates a commitment to continuing to increase his knowledge and skills by regularly participating in director continuing education opportunities in order to stay abreast of emerging trends in the banking industry. His depth and breadth of knowledge in corporate management and the textile industry, in addition to his thorough knowledge of the Guilford County market, are attributes that our board believes qualify him to serve as a director.

Robert A. Ward first became a director of MidCarolina in 2002 in connection with its organization as MidCarolina Bank’s holding company, and previously had served as a founding director of MidCarolina Bank since 1997. He is retired from full-time employment, and previously served as Executive Vice President and Chief Financial Officer of Unifi, Inc., a textile company listed on the NYSE, from 1971 to 2005, where his duties included significant responsibility in the areas of accounting and risk management oversight, shareholder relations, SEC and NYSE compliance, foreign exchange matters, international operations, employee benefits and general corporate administration. A longtime Burlington resident, he received a Bachelor of Science degree from East Carolina University in 1962 and became a Certified Public Accountant in 1964. Mr. Ward has served as Chairman of the Board of Trustees of East Carolina University, a member of the Board of Trustees of Elon University, on a local advisory board for NationsBank, and as president of the Carolinas chapter of the Financial Executives Institute. The board believes these experiences and attributes qualify him to serve as a director and as chairman of the Compensation Committee.

Executive Officers

The individuals listed below have been designated as the executive officers of MidCarolina and MidCarolina Bank.

Charles T. Canaday, Jr., age 49, serves as President and Chief Executive Officer of MidCarolina and MidCarolina Bank. He previously served as Chief Operating Officer and Executive Vice President from 2004 until 2007 and as MidCarolina Bank’s Vice President and Senior Commercial Lender from 2000 until 2004. He has a total of 26 years of banking experience.

Christopher B. Redcay, age 58, has served as Chief Financial Officer and Senior Vice President, Treasurer and Corporate Secretary of MidCarolina and MidCarolina Bank since 2003, as Senior Vice President since 2004 and as Corporate Secretary since 2006. He has a total of 26 years of banking experience.

R. Craig Patterson, age 49, has served as Chief Credit Officer and Senior Vice President of MidCarolina since 2004 and as MidCarolina Bank’s Chief Credit Officer and Senior Vice President since its inception in 1997. He has a total of 22 years of banking experience.

Audit Committee

MidCarolina’s board of directors has a standing Audit Committee that operates under a written charter approved by MidCarolina’s board that sets out the Committee’s composition, authority, duties and responsibilities. A current copy of the charter of the Audit Committee is available on MidCarolina’s website at www.midcarolinabank.com. We believe that each member of the Committee is an “independent director” as that term is defined by the listing standards of The Nasdaq Stock Market.

The current members of the Audit Committee are listed in the following table.


Audit Committee

John K. Roberts - Chairman
John Anthony Holt, Sr.		John H. Love
F. D. Hornaday III		James H. Smith, Jr.

The Audit Committee is a joint committee of MidCarolina and MidCarolina Bank’s boards of directors. Under its charter, the Committee is responsible for:

•

appointing MidCarolina’s independent accountants and approving their fees and the terms of their engagement;

•

approving services proposed to be provided by the independent accountants; and

•

monitoring and overseeing the quality and integrity of our accounting and financial reporting process and systems of internal controls.

The Committee reviews various reports from MidCarolina’s independent accountants (including its annual audit report on MidCarolina’s consolidated financial statements), financial reports MidCarolina files under the Securities Exchange Act of 1934, as well as reports of examinations by MidCarolina’s regulatory agencies, and it generally oversees MidCarolina’s internal audit program. The Committee met three times during 2010.

Audit Committee Financial Expert

Mr. John K. Roberts, the Audit Committee Chairman, previously served as a financial analyst for a Fortune 500 company where his responsibilities included the review and analysis of financial statements of that company and of potential acquisition targets. Based on that prior experience, MidCarolina’s board of directors believes that Mr. Roberts is an “audit committee financial expert” as that term is defined by rules of the Securities and Exchange Commission.

Code of Ethics

MidCarolina’s board of directors has adopted a Code of Business Conduct and Ethics which applies to MidCarolina’s directors and executive officers, including its senior financial officers, and, among other things, is intended to promote:

•

honest and ethical conduct;

•

the ethical handling of actual or apparent conflicts of interests between personal and professional relationships;

•

full, fair, accurate, timely and understandable disclosure in reports and documents that MidCarolina files with the Securities and Exchange Commission and in other public communications it makes;

•

compliance with applicable governmental laws, rules and regulations;

•

the internal reporting of violations of the Code to an appropriate person and

•

accountability for adherence to the code.

A copy of the Code is posted on MidCarolina’s Internet website at www.midcarolinabank.com.

Section 16(a) Beneficial Ownership Reporting Compliance

MidCarolina’s directors and executive officers are required by federal law to file reports with the Securities and Exchange Commission regarding the amounts of and changes in their beneficial ownership of MidCarolina common stock. Based on its review of copies of those reports, MidCarolina’s proxy statements are required to disclose failures to report shares beneficially owned or changes in beneficial ownership, and failures to timely file required reports, during previous years. MidCarolina’s management currently is not aware of any required reports which were not filed, or which were filed late, during 2010.

Item 11.

EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

Summary

The following table shows the cash and other compensation paid or provided to or deferred by MidCarolina’s named executive officers for 2010, 2009 and 2008. Executive officers are compensated by MidCarolina Bank for their services as its officers, and they receive no separate salaries or other cash compensation from MidCarolina.

SUMMARY COMPENSATION TABLE


Name and Principal Position	Year		Salary (2)		Bonus (3)		Option Awards (4)		Change in Pension Value (5)		All Other Compensation (6)		Total

Charles T. Canaday, Jr. (1)		2010	$	230,000	$	-0-	$	-0-	$	20,343	$	18,065	$	268,408
President and		2009		230,000		-0-		28,660		19,066		17,585		295,311
Chief Executive Officer		2008		230,000		65,000		-0-		17,869		22,593		335,462

Christopher B. Redcay		2010	$	151,200	$	-0-	$	-0-	$	51,945	$	8,921	$	212,066
Senior Vice President and		2009		151,200		-0-		7,165		48,685		10,464		217,514
Chief Financial Officer		2008		148,400		45,000		-0-		45,629		13,231		252,260

R. Craig Patterson		2010	$	143,000	$	-0-	$	-0-	$	19,889	$	6,270	$	169,159
Senior Vice President and		2009		143,000		-0-		7,165		18,642		6,486		175,293
Chief Credit Officer		2008		139,750		45,000		-0-		17,471		8,952		211,173

(1)	Mr. Canaday is a member of MidCarolina’s and MidCarolina Bank’s boards of directors, but he receives no additional compensation for his service as a director.

(2)	Includes amounts deferred at each officer’s election under MidCarolina Bank’s Section 401(k) plan.

(3)	Represents discretionary bonuses paid for each year.

(4)

Reflects the aggregate grant date fair value, as computed under FASB ASC Topic 178, of stock options granted to each officer during each year. A discussion of material assumptions made in our valuation of outstanding stock options is contained in Notes B and M to MidCarolina’s consolidated financial statements.

(5)	Reflects the increase during each year in the present value of each officer’s future benefits under their Salary Continuation Agreements described below under the caption “Retirement Benefits.”

(6)	The following table describes each officer’s “Other Compensation” for 2010.


Description	Mr. Canaday		Mr. Redcay		Mr. Patterson

MidCarolina Bank’s matching contributions for the officers’ accounts under its Section 401(k) plan	$	6,900	$	4,536	$	4,290
Automobile expense allowance paid in cash		4,800		1,800		—
Club dues paid by MidCarolina Bank		4,364		—		—
Cell Phone Reimbursement		1,620		1,620		1,620
Value officers are treated as receiving related to death benefit under split-dollar insurance policies (a)		381		965		360

(a)

As described below under the caption “Life Insurance Benefits,” the named officers are covered by split-dollar life insurance policies that are owned by MidCarolina Bank and for which it paid lump-sum premiums in prior years. No premiums were paid on those policies during 2010, and no premiums on those policies are included in the table.

MidCarolina Bank also provides its officers with group life, health, medical and other insurance coverages that are generally available to all salaried employees, and the cost of that insurance is not included in the table.

Employment Agreements

The three officers named in the Summary Compensation Table above are employed by MidCarolina Bank under written agreements entered into during May 2008.

Mr. Canaday. Mr. Canaday is employed pursuant to an employment agreement that provides for:

•

an initial “rolling term” of three years that, at the end of each year, is extended by one additional year unless either MidCarolina Bank or Mr. Canaday gives notice that the agreement will not be extended;

•

annual base salary (originally $230,000) which is subject to review and periodic increase by MidCarolina Bank’s board;

•

payment of monthly country club dues and a $400 per month automobile allowance; and

•

the right to participate in bonus or incentive plans and other benefits made available by MidCarolina Bank to its executive officers.

If Mr. Canaday’s employment is terminated without cause, MidCarolina Bank will be obligated to continue to pay his base salary for the remaining term of his agreement. Additionally, MidCarolina Bank may elect to enforce a covenant contained in the agreement that would prohibit Mr. Canaday from competing against it within a specified geographic area during a two-year restriction period following his termination (the “Covenant Not to Compete”). If MidCarolina Bank elected to do that, it would be obligated to make additional monthly payments to Mr. Canaday for two years in an aggregate amount equal to two times his “Average Annual Total Cash Compensation,” which is defined in the agreement as the average of his base salary plus cash bonuses for the three calendar years preceding the year in which the termination of his employment occurs.

If, within two years following a change in control of MidCarolina or MidCarolina Bank:

•

Mr. Canaday’s employment is terminated without cause, or

•

he terminates his own employment with “good reason” (as defined below),

MidCarolina Bank will be obligated to pay him an aggregate amount (payable in monthly payments for three years) equal to three times his Average Annual Total Cash Compensation, and the Covenant Not to Compete automatically would apply. Those payments would be in lieu of any other payments under his agreement.

As defined in the agreement, a “change in control” will occur if:

•

a person or group accumulates ownership of MidCarolina’s or MidCarolina Bank’s stock that amounts to more than 50% of the total fair market value or total voting power of all outstanding shares;

•

a majority of MidCarolina’s board of directors are replaced during any 12-month period by directors whose appointment or election is not endorsed in advance by a majority of the board; or

•

a person or group acquires assets from MidCarolina Bank with a total gross fair market value exceeding 50% of the total fair market value of all of its assets.

Under the agreement, Mr. Canaday would have “good reason” to terminate his own employment following a change in control if there was:

•

a material reduction in his base compensation, in his authority, duties or responsibilities, or in the budget over which he has authority;

•

a material change in the geographic location at which the officer must perform services; or

•

a material breach by MidCarolina Bank under the employment agreement.

In the case of a voluntary termination by Mr. Canaday of his own employment without good reason following a change in control, or his voluntary termination for any reason other than after a change in control, MidCarolina Bank could elect to enforce the Covenant Not to Compete. If MidCarolina Bank did that, it would be obligated to make monthly payments to Mr. Canaday for two years in an aggregate amount equal to two times his Average Annual Total Cash Compensation.

Under the Covenant Not to Compete, while Mr. Canaday received the above payments he could not directly or indirectly compete with MidCarolina Bank in any county where it had an office, in any contiguous county, or within a 15 mile radius of any of MidCarolina Bank’s full-service banking offices.

Messrs. Redcay and Patterson. The agreements with Mr. Redcay and Mr. Patterson provide for:

•

terms of employment that do not obligate MidCarolina Bank to employ them for any particular length of time and that may be terminated by MidCarolina Bank for any reason at any time upon 90 days written notice in the case of Mr. Redcay’s agreement and without notice in the case of Mr. Patterson’s agreement;

•

annual base salaries (originally $151,200 for Mr. Redcay and $143,000 for Mr. Patterson) which are subject to review and periodic increase by MidCarolina Bank’s board, and, in the case of Mr. Redcay’s agreement, a $150 per month automobile allowance; and

•

the right to participate in bonus or incentive plans and other benefits made available by MidCarolina Bank to its executive officers.

Since the agreements with Messrs. Redcay and Patterson do not obligate MidCarolina Bank to employ them for any particular period of time, they would not be entitled to any payments if their employment was terminated involuntarily, with or without cause, other than as provided below following a change in control or, in the case of Mr. Redcay, unless the termination was without at least 90 days written notice. However, under Mr. Redcay’s agreement, if MidCarolina Bank terminated his employment with or without cause, it could elect to enforce the Covenant Not to Compete contained in his agreement (which is the same as the similar provision described above in Mr. Canaday’s agreement). If MidCarolina Bank elected to do that, it would be obligated to make monthly payments to Mr. Redcay for two years in an aggregate amount equal to two times his Average Annual Total Cash Compensation.

If, within two years following a change in control of MidCarolina or MidCarolina Bank:

•

their employment is terminated without cause, or

•

they terminate their own employment with “good reason” (as defined below),

MidCarolina Bank would be obligated to pay each of them an aggregate amount (payable in monthly payments for two years) equal to, in the case of Mr. Redcay, two times his Average Annual Total Cash Compensation, and, in the case of Mr. Patterson, two times the sum of his then-current annual base salary rate plus the average of cash bonuses paid to him for the three preceding calendar years. In either case, the Covenant Not to Compete contained in their agreements automatically would apply.

Both agreements provide that, in the case of a voluntary termination by the officers of their own employment without good reason following a change in control, MidCarolina Bank could elect to enforce the Covenant Not to Compete. If MidCarolina Bank elected to do that, it would be obligated to make monthly payments to the officers for two years in an aggregate amount equal to, in the case of Mr. Redcay, two times his Average Annual Total Cash Compensation and, in the case of Mr. Patterson, two times the sum of his then-current annual base salary plus the average of cash bonuses paid to him for the three preceding calendar years. Under Mr. Redcay’s agreement, MidCarolina Bank may make the same election following a voluntary termination when there has not been a change in control.

The terms “change in control” and “good reason” are defined in Messrs. Redcay’s and Patterson’s agreements the same as they are in Mr. Canaday’s agreement above. Also, the restrictions under the Covenant Not to Compete in their agreements also are the same as in Mr. Canaday’s agreement.

Potential Payments upon Termination of Employment or a Change of Control. The following table lists aggregate payments to Messrs. Canaday, Redcay and Patterson that would have been called for under their agreements described above if their employment had terminated under various circumstances on December 31, 2010.


Type of Termination Event and Description of Payment	Mr. Canaday			Mr. Redcay		Mr. Patterson

*Involuntary Termination Without Cause, Other Than After a Change in Control:*
Base salary for remaining term of Employment Agreement	$	555,833	(1)		—		—
Base salary for 90 days if termination is without prior written notice		—		$	37,800		—
Payments if Covenant Not to Compete is enforced (2)		503,333			330,533		—	(4)

*Involuntary Termination Without Cause, or Voluntary Termination With Good Reason, After a Change in Control* (3)		755,000			330,533	$	316,000

*Voluntary Termination Without Good Reason After a Change in Control:*
Payments if Covenant Not to Compete is enforced (2)		503,333			330,533		316,000

*Voluntary Termination Other Than After a Change in Control*
Payments if Covenant Not to Compete is enforced (2)		503,333			330,533		—	(4)

(1)	Reflects the aggregate amount of monthly payments that would be made during the remaining term of Mr. Canaday’s Employment Agreement (approximately 29 months on December 31, 2010).

(2)

Reflects the aggregate amount of monthly payments that would be made to each officer over a period of two years if MidCarolina Bank elected to enforce the Covenant Not to Compete contained each officer’s Employment Agreement. These payments would not be made if MidCarolina Bank did not make that election.

(3)	Reflects the aggregate amount of monthly payments that would be made to each officer over a period of three years in the case of Mr. Canady, and two years in the case of Messrs. Redcay and Patterson.

(4)	MidCarolina Bank may not enforce the Covenant Not to Compete in the case of a termination of Mr. Patterson’s employment under these circumstances. As a result, no payments would be made.

Plan-Based Awards

General. MidCarolina Financial has two compensation plans under which stock options have been granted, or from time to time in the future could be granted, to its and MidCarolina Bank’s executive officers. They are:

•

the Employee Stock Option Plan (the “Old Plan”) which has expired but under which options to buy shares of MidCarolina’s common stock previously have been granted and remain outstanding; and

•

the Omnibus Stock Ownership and Long Term Incentive Plan (the “New Plan”) under which options to purchase MidCarolina common stock have been granted and under which restricted stock awards, long-term incentive compensation units, stock appreciation rights and book value shares could be granted in the future.

Stock options give the officers to whom they are granted the right to buy shares of MidCarolina common stock during a stated period of time (ordinarily ten years) at a fixed price per share equal to the fair market value of the stock as determined under the terms of the plans on the dates of grant. Options usually vest and become exercisable at intervals as to portions of the shares they cover based on a vesting schedule. They generally terminate immediately on the date of, or after a stated number of days following, the termination of an officer’s employment. Options may be granted as “incentive stock

options” that qualify for special tax treatment under the Internal Revenue Code, or they may be “non-qualified stock options” that do not qualify for that special tax treatment.

In addition to stock options, the New Plan authorizes the grant of other types of awards, including restricted stock awards (conditional grants of shares of our common stock to officers subject to restrictions), long-term incentive compensation units (under which shares of our common stock and cash may be paid to employees based on the extent to which performance goals or criteria set by the Compensation Committee are achieved), stock appreciation rights (under which payments may be made to officers based on increases in the market value of a specified number of shares of common stock during the term of the awards), and book value shares (under which payments may be made to officers based on increases in the book value of a specified number of shares of common stock during the term of the awards). However, no such other awards have been granted.

Stock options granted under the Old Plan and New Plan have not included any performance-based conditions. The price per share and vesting schedules of stock options are determined by MidCarolina’s board of directors based on the recommendation of the Compensation Committee at the time they are granted. The Committee has used its own judgment in determining the levels of awards that it considers to be reasonable, and there are no specific measures or criteria on which the Committee has determined the amounts of stock options that have been granted to executive officers.

In the event of a change in control transaction (as defined below), stock options granted under the New Plan would terminate if provision is not made in connection with the transaction for the options to be assumed by a successor company or otherwise to continue in effect. However, in any such event, the options would become immediately exercisable in full, without regard to any vesting schedule, and could be exercised on the date of the change of control, unless accelerating exercisability of the options would result in an excess parachute payment under Section 280G of the Internal Revenue Code. As defined in the agreements, a “change of control transaction” would occur if:

•

a person or group accumulated ownership of MidCarolina’s or MidCarolina Bank’s stock that amounts to more than 50% of the total fair market value or 35% or more of the total voting power of all outstanding shares;

•

a majority of MidCarolina’s board of directors were replaced during any 12-month period by directors whose appointment or election was not endorsed in advance by a majority of the board; or

•

a person or group acquired assets from MidCarolina Bank with a total gross fair market value exceeding 40% of the total fair market value of all of MidCarolina Bank’s assets.

Option Grants and Exercises During 2010. During 2010, no new stock options were granted to either of Messrs. Canaday, Redcay or Patterson, and none of them exercised any stock options.

Outstanding Stock Options. The following table contains information about all stock options held on December 31, 2010, by Messrs. Canaday, Redcay and Patterson.

OUTSTANDING EQUITY AWARDS AT 2010 YEAR END


	Option Awards
Name	Number of Securities Underlying Unexercised Stock options (Exercisable)		Number of Securities Underlying Unexercised Stock Options (Unexercisable)			Option Exercise Price		Option Expiration Date

Charles T. Canaday, Jr.		23,375		-0-		$	10.29		12/23/2015
		2,000		8,000	(1)		7.25		01/20/2019

Christopher B. Redcay		12,375		-0-			7.78		07/15/2013
		500		2,000	(1)		7.25		01/20/2019

R. Craig Patterson		23,375		-0-			10.29		12/23/2015
		500		2,000	(1)		7.25		01/20/2019

(1)

The options became exercisable as to 25% of the remaining covered shares on January 20, 2011, and the remaining 75% become exercisable in three equal annual installments beginning on January 20, 2012. Under the terms of the New Plan, the unexercisable options listed in the table for each officer on December 31, 2010, would have accelerated and become immediately exercisable if there had been a change in control transaction on that date.

Retirement Benefits.

MidCarolina Bank has entered into Salary Continuation Agreements with Messrs. Canaday, Redcay and Patterson under which it will pay an annual retirement benefit of $70,000 to the officers, in monthly payments, for their lifetimes following the termination of their employment on or after age 65.

Under generally excepted accounting principles, MidCarolina Bank accrues a liability on its books each year for its obligation to each officer under his agreement. These accruals are in amounts such that, at each officer’s normal retirement age, his “accrual balance” will equal the then-current present value of the officer’s normal retirement benefits for his expected lifetime. Each officer’s accrual balance increases each year by a level principal amount, plus interest at an assumed discount rate. The discount rate for 2010 was 6.50%. It may be changed from time to time in the future to maintain the rate within reasonable standards under generally accepted accounting principles. An officer’s accrual balance at the time of any termination of employment prior to normal retirement age will be the amount accrued on MidCarolina Bank’s books at that time for its liability to the officer.

If an officer’s employment terminates before age 65 for any reason other than death, termination for cause or following a change in control, MidCarolina Bank will pay a reduced benefit to the officer for life in an amount calculated to fully amortize the officer’s accrual balance at the time of termination over a period beginning at the officer’s normal retirement age for his expected lifetime (taking into account interest on that balance during the payment period). Those payments will begin on the later of the first day of (1) the seventh month after termination of the officer’s employment, or (2) the month after the officer reaches age 65. In the case of termination as a result of an officer’s disability, payments will begin following the expiration of six months from the termination of the officer’s employment. If an officer dies while employed by MidCarolina Bank, or following termination of his employment under circumstances such that he is entitled to a benefit under his Agreement, his or her beneficiaries would receive a lump-sum payment in an amount equal to the officer’s accrual balance at the time of death.

If, within 12 months following a “change of control” (as defined below) of MidCarolina or MidCarolina Bank, an officer’s employment is terminated involuntarily without cause, or the officer terminates his own employment with “good reason” (as defined below), MidCarolina Bank will be obligated to pay to the officer, in a lump sum, an amount equal to his projected accrual balance at age 65, without discount for the time-value of money. If a change in control occurs after an officer has begun receiving benefit payments, or following termination of his employment but before the commencement of benefit payments, the officer will be entitled to receive, in a lump sum, the amount of his remaining accrual balance.

An officer’s Agreement will terminate automatically, and his right to payments will be forfeited, if his employment is terminated for cause.

As defined in the agreements, a “change of control” will occur if, in general:

•

a person or group accumulates ownership of MidCarolina’s or MidCarolina Bank’s stock that amounts to more than 50% of the total fair market value or total voting power of all outstanding shares;

•

a majority of MidCarolina’s board of directors are replaced during any 12-month period by directors whose appointment or election is not endorsed in advance by a majority of the board; or

•

a person or group acquires assets from us with a total gross fair market value exceeding 50% of the total fair market value of all of MidCarolina Bank’s assets.

An officer will have “good reason” to terminate his own employment following a change in control if there is:

•

a material reduction in the officer’s base compensation, in his authority, duties or responsibility, or in the budget over which he has authority;

•

a material change in the geographic location at which the officer must perform services; or

•

a material breach by MidCarolina Bank in any employment agreement between it and the officer.

The following table shows the amount of the accrual balance on MidCarolina Bank’s books at December 31, 2010, for its obligation to each of the named executive officers under his Salary Continuation Agreement.


Name	Accrual Balance (1)

Charles T. Canaday, Jr.	$	166,729
Christopher B. Redcay		275,687
R. Craig Patterson		165,051

(1)

Each officer’s “accrual balance” reflects the total amount accrued by MidCarolina Bank on its books for its liability to that officer for benefits under the officer’s agreement.

The following table lists the actual amounts of payments that would have been made to the named executive officers under their Salary Continuation Agreements if their employment had been terminated under the specified circumstances as of December 31, 2010.


Name	Monthly payment following termination at age 65 (1)		Monthly payment following termination or disability before age 65 (2)		Lump-sum payment following death (3)		Lump-sum payment following change in control (4)

Charles T. Canaday, Jr.	$	5,833	$	3,654	$	166,729	$	723,065
Christopher B. Redcay		5,833		3,426		275,687		723,065
R. Craig Patterson		5,833		3,570		165,051		723,065

(1)	Payment amounts assume termination of each officer’s employment on December 31, 2010, at age 65. Payments would be made monthly for life.

(2)

Reduced payments are payable for life following termination of employment before age 65 for any reason other than death, termination for cause, or termination following a change in control. Each officer’s payment amount in the table assumes termination of employment on December 31, 2010, and is the amount calculated to amortize the officer’s actual accrual balance on that date over a period beginning at age 65 and for his expected lifetime. Each officer’s payments would begin on the first day of the later of the seventh month following termination of his employment or of the month after he reaches age 65, or, in the case of disability, after six months following termination of his employment, and would be made monthly for life.

(3)	Each officer’s lump-sum payment amount equals his accrual balance on December 31, 2010.

(4)

A lump-sum payment would be made if, within 12 months following a change in control, an officer’s employment is terminated involuntarily without cause, or an officer terminates his own employment with good reason. Each officer’s lump-sum payment amount equals his currently projected accrual balance at age 65, without discount for the time value of money.

Life Insurance Benefits

MidCarolina Bank has purchased life insurance policies on the lives of each of its named executive officers, and has entered into an Endorsement Split-Dollar Agreement with each of them. The policies are owned by MidCarolina Bank. Under the agreements, upon an officer’s death while he remained employed by MidCarolina Bank, 80% of the “net death proceeds” of that officer’s policy would be paid to his designated beneficiary. The net death proceeds of a policy would equal the total death benefit payable under the policy minus the cash surrender value of the policy. MidCarolina Bank would receive the remainder of the death benefits, including the full cash surrender value of the policy.

On December 31, 2010, the amount of the net death proceeds of the policies that would have been paid to each officer’s beneficiary following his death on that day was as follows: Mr. Canaday — $567,746; Mr. Redcay — $802,586; and Mr. Patterson — $532,088.

Under MidCarolina Bank’s group life insurance plan that is available on the same terms to all full-time employees, each named officer is entitled to death benefits equal to his annual salary at the time of death. Benefits payable to each name officer’s beneficiary following his death on December 31, 2010, would have been as follows: Mr. Canaday — $230,000; Mr. Redcay — $151,200; Mr. Patterson — $143,000.

DIRECTOR COMPENSATION

General

Directors’ Fees. MidCarolina’s outside directors are compensated for their services as directors of MidCarolina Bank, and they receive no additional cash compensation for their services as MidCarolina’s directors. Mr. Canaday is compensated as an officer of MidCarolina Bank, and he receives no additional compensation for his service as a director. The following table describes MidCarolina Bank’s current standard schedule of fees paid to outside directors.


Description	Amount

Monthly fee paid to the Chairman of MidCarolina Bank’s board	$	1,600
Monthly fee paid to the Vice Chairman of MidCarolina Bank’s board		1,500
Monthly fee paid to Chairmen of the Audit and Loan Committees		600
Per diem fee for attendance at meetings of MidCarolina Bank’s board (1)		400
Per diem fee for attendance at Executive Committee meetings (1)		400
Per diem fee for attendance at other committee meetings (1) (2)		300

(1)	The Chairman, Mr. Copland, and Vice Chairman, Mr. Hornaday, do not receive additional fees for attendance at meetings of MidCarolina Bank’s board or its committees.

(2)	The Chairmen of the Audit and Loan Committees do not receive any additional fees for attendance at meetings of those committees.

Director Compensation for 2010. The following table summarizes the compensation received by outside directors for 2010.

2010 DIRECTOR COMPENSATION


Name (1)	Fees Earned or Paid in Cash (2)		Option Awards (3)		Total

Dexter R. Barbee, Sr.	$	13,150	$	-0-	$	13,150
H. Thomas Bobo		10,500		-0-		10,500
Thomas E. Chandler		15,400		-0-		15,400
James R. Copland III		19,200		-0-		19,200
James B. Crouch, Jr.		9,800		-0-		9,800
John Anthony Holt, Sr.		13,600		-0-		13,600
F. D. Hornaday III		18,000		-0-		18,000


Name (1)	Fees Earned or Paid in Cash (2)		Option Awards (3)		Total

Teena Marie Koury		9,200		-0-		9,200
John H. Love		11,800		-0-		11,800
James B. Powell		8,300		-0-		8,300
John K. Roberts		17,600		-0-		17,600
James H. Smith, Jr.		10,300		-0-		10,300
Robert A. Ward		12,200		-0-		12,200
George C. Waldrep, Jr.		11,750		-0-		11,750

(1)	Mr. Canaday is not listed in the table. He is compensated as an officer and employee of MidCarolina Bank and receives no separate compensation for his service as a director.

(2)	In addition to fees paid under the standard arrangement described above, Messrs. Barbee and Waldrep serve on one of MidCarolina Bank’s local advisory boards. The amount listed for each of them includes $750 for attendance at meetings of that group during 2010.

(3)

The 2008 Director Stock Option Plan authorizes grants of options from time to time to directors to purchase shares of MidCarolina common stock. Options generally are granted for a stated term (ordinarily ten years) at a fixed price per share that is equal to the market value of the underlying stock on the date the option is granted, and the options may include terms that provide for options to “vest,” or become exercisable, at intervals over a period of time. The Plan authorizes the issuance of an aggregate of up to 250,000 shares of MidCarolina common stock upon the exercise of stock options. No stock options were granted to directors during 2010. On December 31, 2010, outside directors listed in the table held stock options covering the following aggregate numbers of shares: Messrs. Barbee, Chandler, Love, Roberts, and Ward — 12,500 shares each; Messrs. Bobo, Holt, Powell, Smith and Ms. Koury — 7,500 share each; Messrs. Crouch and Waldrep — 5,000 shares each; and Messrs. Copland and Hornaday — 17,500 shares each.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Beneficial Ownership of MidCarolina Common Stock

Management of MidCarolina is not aware of anyone who owned, beneficially or of record, 5% or more of its outstanding common stock on March 31, 2011.

The following table describes the beneficial ownership of MidCarolina common stock on March 31, 2011 by its directors and certain named executive officers, individually, and by all directors and executive officers as a group.


Name of Beneficial Owner	Amount and Nature of Beneficial Ownership (1)		Percent of Class (2)

Dexter R. Barbee, Sr.		55,354		1.12	%
H. Thomas Bobo		53,766		1.09	%
James B. Crouch, Jr.		115,383		2.34	%
Charles T. Canaday, Jr.		64,725		1.31	%
Thomas E. Chandler		109,121		2.21	%
James R. Copland III		113,410		2.30	%
John (Tony) A. Holt, Sr.		26,415		0.54	%
F. D. Hornaday III		69,610		1.41	%
Teena Marie Koury		45,859		0.93	%
John H. Love		38,643		0.78	%
R. Craig Patterson		86,969		1.76	%
James B. Powell		90,543		1.84	%
Christopher B. Redcay		33,563		0.68	%
John K. Roberts		79,359		1.61	%


James H. Smith, Jr.	37,532	0.76	%
Robert A. Ward	66,280	1.34	%
George C. Waldrep, Jr.	6,900	0.14	%
All current directors and executive officers as a group (17 persons)	1,093,432	21.41	%

(1)

Except as otherwise noted, and to the best of our knowledge, the individuals named and included in the group exercise sole voting and investment power with respect to all listed shares. The listed shares include the following numbers of shares with respect to which individuals named and included in the group have shared voting and investment power: Mr. Bobo — 14,633 shares; Mr. Crouch — 18,520 shares; Mr. Chandler — 8,167 shares; Mr. Copland — 39,910 shares; Mr. Holt — 16,332 shares; Mr. Hornaday — 6,282 shares; Mr. Patterson — 40,837 shares; Mr. Powell — 20,418 shares; Mr. Roberts — 14,290 shares; Mr. Smith — 15,305 shares; Mr. Ward — 40,000 shares; all current directors and executive officers as a group — 234,694 shares. The listed shares also include the following numbers of shares that could be acquired by individuals named and included in the group pursuant to stock options that could be exercised within 60 days following March 31, 2011 and with respect to which shares they may be deemed to have sole investment power only: Messrs. Copland and Hornaday — 13,500 shares; Messrs. Barbee, Chandler, Love, Roberts, and Ward — 10,500 shares; Messrs. Bobo, Holt, Powell, Smith, and Ms. Koury — 5,500 shares; Messrs. Crouch, and Waldrep — 3,500; Mr. Canaday — 27,375 shares; Mr. Patterson — 24,375 shares; Mr. Redcay — 13,375 shares; and all current directors and executive officers as a group — 179,125 shares. Shares listed for certain of the named individuals have been pledged as security for loans as follows: Mr. Holt — 4,083 shares.

(2)

Percentages are calculated based on 4,927,828 total outstanding shares plus, in the case of each named individual and the group, the number of additional shares (if any) that could be purchased by that individual or by persons included in the group pursuant to stock options that could be exercised within 60 days following March 31, 2011.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table summarizes all compensation plans and individual compensation arrangements which were in effect on December 31, 2010, and under which shares of MidCarolina’s common stock have been authorized for issuance.


EQUITY COMPENSATION PLAN INFORMATION
Plan category	(a) Number of shares to be issued upon exercise of outstanding options (1)	(b) Weighted-average exercise price of outstanding options	(c) Number of shares remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a))

Equity compensation plans approved by security holders (1)	371,504	$8.70	425,050
Equity compensation plans not approved by security holders	N/A	N/A	N/A
Total	371,504	$8.70	425,050

(1)	Of the 371,504 stock options outstanding under the Plans, a total of 317,168 of those stock options had vested or were exercisable within 60 days after December 31, 2010.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Transactions with Related Persons

MidCarolina’s board of directors has adopted a written policy under which its Nominating and Corporate Governance Committee, on an ongoing basis, will review and approve certain transactions, arrangements or relationships in which MidCarolina or MidCarolina Bank is a participant and in which any of their “related persons” has a material interest. Those related persons include MidCarolina’s directors, nominees for election as directors, executive officers, beneficial owners of more than 5% of a class of voting stock, and members of the immediate family of one of those persons.

Except as described below, the policy covers:

•

any transactions, arrangement or relationships, or series of transactions, arrangements or relationships, that are required to be disclosed in our proxy statements under rules of the Securities and Exchange Commission (in general, those in which the dollar amount involved exceeds or will exceed an aggregate of $120,000, including all periodic payments) (“Related Person Transactions”); and

•

any other transactions, arrangements or relationships in which the dollar amount involved exceeds or will exceed an aggregate of $20,000 (including all periodic payments) and that would fall in the first category above except for their amount being less than the $120,000 dollar threshold specified above (“Other Transactions”).

The Committee will review and pre-approve Related Person Transactions, and Other Transactions will be reported to the Committee but need not be pre-approved. In the case of ongoing arrangements or relationships under which MidCarolina or MidCarolina Bank regularly obtains products or services related to their business operations, the Committee need not approve each separate transaction, but will review and approve each new arrangement or relationship and then monitor transactions on an ongoing basis. The transactions covered by the policy generally include loans, but the policy does not cover loans made by MidCarolina Bank in the ordinary course of its business that are subject to banking regulations relating to “insider loans” and that are required to be approved by a majority of MidCarolina Bank’s board of directors. The policy also does not cover the provision of services by MidCarolina Bank as a depositary of funds or similar banking services in the ordinary course of its business, or compensation paid to executive officers, or to an immediate family member of a related person, that has been reviewed and approved, or recommended to MidCarolina’s board of directors for approval, by the board’s Compensation Committee.

In its review of Related Person Transactions, the policy provides that the Committee should exercise independent judgment and should not approve any proposed transaction unless and until it has concluded to its satisfaction that the transaction:

•

has been or will be agreed to or engaged in on an arm’s-length basis;

•

is or will be on terms that are fair and reasonable to MidCarolina or MidCarolina Bank; and

•

is in to MidCarolina’s or MidCarolina Bank’s best interests.

There were no transactions during 2010 with related persons that were required to be approved by the Nominating and Corporate Governance Committee. However, MidCarolina Bank has had, and expects to have in the future, banking transactions in the ordinary course of its business with certain directors, executive officers and other related persons. All loans included in those transactions during 2010 were made in the ordinary course of MidCarolina Bank’s business on substantially the same terms, including interest rates, repayment terms and collateral, as those prevailing at the time the loans were made for comparable transactions with other persons, and those loans did not involve more than the normal risk of collectability or present other unfavorable features.

Director Independence

Each year, MidCarolina’s board of directors reviews transactions, relationships and other arrangements involving its directors and determines which directors the board considers to be “independent.” In making those determinations, the board applies the independence criteria contained in the listing requirements of The Nasdaq Stock Market. The board has directed its Nominating and Corporate Governance Committee to assess each outside director’s independence and report its findings to the board in connection with the board’s periodic determinations, and to monitor the status of each director on an ongoing basis and inform the board of changes in factors or circumstances that may affect a director’s ability to exercise independent judgment.

The following table lists directors who, based on its most recent determination, the board believes are “independent” directors under Nasdaq’s criteria.


Dexter R. Barbee, Sr.	John Anthony Holt, Sr.	James B. Powell
H. Thomas Bobo	F. D. Hornaday III	John K. Roberts
Thomas E. Chandler	Teena M. Koury	James H. Smith, Jr.
James R. Copland III	John H. Love	George C. Waldrep, Jr.
James B. Crouch, Jr.		Robert A. Ward

In addition to the specific Nasdaq criteria, in assessing the independence of directors the Committee and the board consider whether they believe any other transactions, relationships, arrangements or other factors could impair a director’s ability to exercise independent judgment. In its determination that the above directors are independent, those other factors considered by the Committee and the board included MidCarolina Bank’s lending relationships with each of the listed directors.

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

MidCarolina’s independent accounting firm for 2010 was Dixon Hughes PLLC which, effective April 1, 2011, merged with another firm and changed its name to Dixon Hughes Goodman LLP (“Dixon Hughes”). Except as described below, under its current procedures the Audit Committee specifically pre-approves all audit services and other services provided by MidCarolina’s independent accountants. In the case of tax services and other permissible non-audit services, the Committee has delegated authority to its Chairman to pre-approve services between Committee meetings. Any approval of services by the Chairman is communicated to the full Committee at its next regularly scheduled meeting. The Committee also may authorize management to obtain tax services from MidCarolina’s accountants from time to time during the year up to a specified aggregate amount of fees. Requests for advice in addition to that amount would require further approval.

As MidCarolina’s independent accountants for 2010 and 2009, Dixon Hughes provided various audit and other professional services for which MidCarolina and MidCarolina Bank were billed, or expect to be billed, for fees as further described below. MidCarolina’s Audit Committee considers whether the provision of non-audit services by MidCarolina’s independent accounting firm is compatible with maintaining its independence. The Committee believes that the provision of non-audit services by Dixon Hughes during 2010 did not affect its independence.

The following table lists the aggregate amounts of fees paid, or that MidCarolina and MidCarolina Bank expects to pay, to Dixon Hughes for audit services for 2010 and 2009, and fees for other services they provided during 2010 and 2009.


Type of Fees and Description of Services	2010		2009

*Audit Fees*, including fess for audits of our consolidated financial statements, reviews of our condensed interim consolidated financial statements included in our quarterly reports	$	138,580	$	152,700

*Audit-Related Fees*, including consultation regarding proposed business combination		2,000		-0-

*Tax Fees*, including fess for preparation of our tax returns		29,440		11,400

*All Other Fees*		-0-		-0-

Part IV

Item 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Financial Statements.

All financial statements were filed in Item 8 of MidCarolina’s original Annual Report on Form 10-K.

(b) Exhibits.

An index listing exhibits that are being filed or furnished with, or incorporated by reference into, this Report appears immediately following the signature page and is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	MIDCAROLINA FINANCIAL CORPORATION

Date: April 12, 2011	By:	/s/ CHARLES T. CANADAY, JR.
		Charles T. Canaday, Jr.
		President and Chief Executive Officer

INDEX TO EXHIBITS


Exhibit No.		Description

Exhibit 3.1		Amended and Restated Articles of Incorporation, incorporated herein by reference to Exhibit 3(i) to the Form 8-A12G filed with the SEC on June 5, 2002, as amended on August 15, 2005 by Articles of Amendment, incorporated herein by reference to Exhibit 3(i) to the Form 8-K filed with the SEC on August 29, 2005.

Exhibit 3.2		Bylaws, incorporated herein by reference to Exhibit 3(ii) to the Form 8-A12G filed with the SEC on June 5, 2002.

Exhibit 4.1		Form of Stock Certificate, incorporated herein by reference to the Form 10-QSB filed with the SEC on November 12, 2002.

Exhibit 4.2		Certain instruments defining the rights of the holders of long-term debt of the Company and of a subsidiary, involving a total amount of indebtedness not in excess of 10% of the total assets of the Company and its subsidiaries on a consolidated basis, have not been filed as exhibits. The Company hereby agrees to furnish a copy of any of these agreements to the SEC upon request.

Exhibit 10.1		Bank Employee Stock Option Plan, incorporated herein by reference to Exhibit 6(ii) to the Form 10-SB filed with the FDIC on April 30, 1998.

Exhibit 10.2		Land Lease dated October 15, 1997 between the Bank and Crescent Center Associates, incorporated herein by reference to Exhibit 10(iv) to the Form 10-KSB for the fiscal year ended December 31, 1998.

Exhibit 10.3		Lease dated June 27, 2000 between the Bank and Cum-Park Plaza, LLC incorporated herein by reference to Exhibit 10(v) to the Form 10-KSB, filed with the SEC for the fiscal year ended December 31, 2000.

Exhibit 10.4		Form of stock option award agreements for incentive stock options and nonqualified stock options granted under the Omnibus Stock Ownership and Long-Term Incentive Plan, incorporated herein by reference to Exhibit 10.7 to the Form 10-KSB, filed with the SEC on March 29, 2006.

Exhibit 10.5		Amendment of Stock Option Agreements granted under the Bank Employee Stock Option Plan, incorporated herein by reference to Exhibit 99.2 to the Form 8-K, filed with the SEC on December 27, 2005.

Exhibit 10.6		Amendment of Stock Option Agreement, with resale restrictions, granted under the Bank Employee Stock Option Plan, incorporated herein by reference to Exhibit 99.3 to the Form 8-K, filed with the SEC on December 27, 2005.

Exhibit 10.7		Employment Agreement dated May 27, 2008 between the Company and Charles T. Canaday, incorporated herein by reference to Exhibits to Form 10-Q for the quarter ended June 30, 2008.

Exhibit 10.8		Employment Agreement dated May 27, 2008 between the Company and Christopher Redcay, incorporated herein by reference to Exhibits to Form 10-Q for the quarter ended June 30, 2008.

Exhibit 10.9		Employment Agreement dated May 27, 2008 between the Company and R. Craig Patterson, incorporated herein by reference to Exhibits to the Form 10-Q for the quarter ended June 30, 2008.

Exhibit 10.10		Salary Continuation Agreement dated May 27, 2008 between the Company and Charles T. Canaday, incorporated herein by reference to Exhibits to the Form 10-Q for the quarter ended June 30, 2008.

Exhibit 10.11		Salary Continuation Agreement dated May 27, 2008 between the Company and Christopher Redcay, incorporated herein by reference to Exhibits to the Form 10-Q for the quarter ended June 30, 2008.

Exhibit 10.12		Salary Continuation Agreement dated May 27, 2008 between the Company and R. Craig Patterson, Incorporated herein by reference to Exhibits to the Form 10-Q for the quarter ended June 30, 2008.



Exhibit 10.13		Indemnification Agreement with directors, incorporated herein by reference to Exhibit 99.1 to the Form 8-K, filed with the SEC on December 27, 2005.

Exhibit 10.14		2008 Director Stock Option Plan, incorporated by reference from appendices to registrant’s Definitive Proxy Statement filed with the Commission in connection with its 2008 Annual Meeting.

Exhibit 10.15		Omnibus Stock Ownership and Long Term Incentive Plan, as amended and restated as of January 1, 2005, and as further amended on May 27, 2008, incorporated by reference from appendices to registrant’s Definitive Proxy Statement filed with the Commission in connection with its 2008 Annual Meeting.

Exhibit 10.16		Form of Amendment to Endorsement Split Dollar Agreement, between MidCarolina Bank and (i) Charles T. Canaday; and (ii) Christopher B. Redcay, dated December 7, 2007, incorporated herein by reference to Exhibit 10.01 to the Form 8-K, filed with the SEC on March 21, 2008.

Exhibit 10.17		Form of Amendment to Endorsement Split Dollar Agreement, between MidCarolina Bank and R. Craig. Patterson; dated December 7, 2007 incorporated herein by reference to Exhibit 10.01 to the Form 8-K, filed with the SEC on March 21, 2008.

Exhibit 14		Code of Ethics incorporated herein by reference to Exhibit 14 to the Form 10-KSB for the fiscal year ended December 31, 2003.

Exhibit 21		Schedule of Subsidiaries incorporated herein by reference to Exhibit 21 to the Form 10-K for the fiscal year ended December 31, 2009.

Exhibit 23*		Consent of Dixon Hughes PLLC

Exhibit 31.1		Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer, filed herewith

Exhibit 31.2		Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer, filed herewith

Exhibit 32*		Section 1350 Certifications

*	Previously filed with original Annual Report on Form 10-K for the year ended December 31, 2010, as filed on March 15, 2011.

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