Midcarolina Financial (MCFI) 10-Q 2010 Q3 Quarterly report

United States Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

x Quarterly Report Under Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010

¨ Transition Report Under Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the transition period ended                                    

Commission File Number        000-49848        

MidCarolina Financial Corporation

(Exact name of registrant as specified 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	27216
(Address of principal executive offices)	(Zip Code)

(336) 538-1600

(Registrant’s telephone number, including area code)

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 223.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

Large accelerated filer  ¨	Accelerated filer  ¨
Non-accelerated filer  ¨	Smaller reporting company  x

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  yes    no  x

As of November 11, 2010, the registrant had outstanding 4,927,828 shares of Common Stock, no par value.

		Page No.
Part I.	FINANCIAL INFORMATION
Item 1 -	Financial Statements (Unaudited)
	Consolidated Balance Sheets September 30, 2010 and December 31, 2009		3
	Consolidated Statements of Operations Three Months and Nine Months Ended September 30, 2010 and 2009		4
	Consolidated Statements of Comprehensive Income Three Months and Nine Months Ended September 30, 2010 and 2009		5
	Consolidated Statement of Shareholders’ Equity Nine Months Ended September 30, 2010		6
	Consolidated Statements of Cash Flows Nine Months Ended September 30, 2010 and 2009		7
	Notes to Consolidated Financial Statements		8
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3 -	Quantitative and Qualitative Disclosures About Market Risk		32
Item 4 -	Controls and Procedures		32
Part II.	OTHER INFORMATION
Item 6 -	Exhibits		34

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Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements

MIDCAROLINA FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

	September 30, 2010 (Unaudited)			December 31, 2009(*)
	(Dollars in thousands, except Share data)
ASSETS
Cash and due from banks	$	1,551		$	1,581
Federal funds sold and interest-earning deposits		32,246			7,848
Investment securities available for sale		78,240			70,719
Loans held for sale		2,526			228
Loans		410,261			438,087
Allowance for loan losses		(8,816	)		(7,307	)
NET LOANS		401,445			430,780
Investment in stock of Federal Home Loan Bank of Atlanta		2,156			2,322
Investment in life insurance		8,435			8,179
Premises and equipment, net		6,772			7,063
Other assets		18,928			12,284
TOTAL ASSETS	$	552,299		$	541,004
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Noninterest-bearing demand deposits	$	42,400		$	41,655
Interest-bearing demand deposits		233,514			144,839
Savings		13,740			8,266
Time		194,818			270,260
TOTAL DEPOSITS		484,472			465,020
Short-term borrowings		-			520
Long-term borrowings		23,764			33,764
Accrued expenses and other liabilities		2,110			1,515
TOTAL LIABILITIES		510,346			500,819
Shareholders’ equity:
Noncumulative, perpetual preferred stock, no par value, 20,000,000 shares authorized; 5,000 shares issued and outstanding at September 30, 2010 and December 31, 2009		4,819			4,819
Common stock, no par value; 80,000,000 shares authorized; 4,927,828 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively		15,118			14,958
Retained earnings		21,368			20,805
Accumulated other comprehensive income (loss)		648			(397	)
TOTAL SHAREHOLDERS’ EQUITY		41,953			40,185
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	552,299		$	541,004

* Derived from audited consolidated financial statements.

See accompanying notes.

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MIDCAROLINA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(Amounts in thousands, except per share data)
INTEREST INCOME
Loans and loan fees	$	5,741		$	6,154		$	17,427		$	18,149
Investment securities:
Taxable		367			502			1,231			1,769
Tax-exempt		272			334			861			848
Federal funds sold and interest-earning deposits		22			17			50			21
TOTAL INTEREST INCOME		6,402			7,007			19,569			20,787
INTEREST EXPENSE
Demand deposits		769			390			2,140			1,022
Savings		27			4			56			14
Time		993			1,753			3,445			6,152
Short-term borrowings		-			-			-			15
Long-term borrowings		233			307			767			943
TOTAL INTEREST EXPENSE		2,022			2,454			6,408			8,146
NET INTEREST INCOME		4,380			4,553			13,161			12,641
PROVISION FOR LOAN LOSSES		1,543			950			5,018			2,885
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		2,837			3,603			8,143			9,765
NON-INTEREST INCOME
Service charges on deposits accounts		171			214			533			703
Gain on sale of loans		238			169			501			590
Income from brokerage activities		58			109			178			213
Increase in cash surrender value of life insurance		79			36			256			178
Gain (loss) on sale of available for sale investments		(11	)		12			23			198
Impairment on nonmarketable investments		-			-			-			(126	)
Total other-than-temporary impairment loss		(114	)		(678	)		(188	)		(1,076	)
Portion of loss recognized in other comprehensive income		111			624			159			946
Net impairment loss recognized in earnings		(3	)		(54	)		(29	)		(130	)
Other (Note F)		113			273			424			451
TOTAL NON-INTEREST INCOME		645			759			1,886			2,077
NON-INTEREST EXPENSE
Salaries and employee benefits		1,297			1,301			3,898			4,277
Occupancy and equipment		358			388			1,127			1,179
Other outside services		172			101			482			272
Data processing		324			236			907			647
Office supplies and postage		78			96			260			259
Deposit and other insurance		283			356			732			830
Professional and other services		100			129			412			499
Advertising		71			60			268			272
(Gain) loss on sale and costs of foreclosed real estate		26			72			126			68
Other (Note F)		367			193			755			554
TOTAL NON-INTEREST EXPENSE		3,076			2,932			8,967			8,857
INCOME BEFORE INCOME TAXES		406			1,430			1,062			2,976
INCOME TAXES		17			484			186			871
NET INCOME		389			946			876			2,105
Dividends on preferred stock		104			104			313			313
Net income available to common shareholders	$	285		$	842		$	563		$	1,792
NET INCOME PER COMMON SHARE
Basic	$	.06		$	.17		$	.11		$	.36
Diluted	$	.06		$	.17		$	.11		$	.36

See accompanying notes.

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MIDCAROLINA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Net income	$	389		$	946		$	876		$	2,105
Other comprehensive income:
Securities available for sale:
Unrealized holding gains on available-for-sale securities		1,360			2,317			1,853			3,039
Tax effect		(524	)		(893	)		(714	)		(1,172	)
Reclassification of net (gains) losses recognized in net income		11			(12	)		(23	)		(198	)
Tax effect		(4	)		5			9			76
Reclassification of impairment loss recognized in net income		3			54			29			130
Tax effect		(1	)		(21	)		(11	)		(50	)
Portion of other-than-temporary impairment loss recognized in other comprehensive income		(111	)		(624	)		(159	)		(946	)
Tax effect		43			237			61			365
Total other comprehensive income		776			1,063			1,045			1,244
COMPREHENSIVE INCOME	$	1,165		$	2,009		$	1,921		$	3,349

See accompanying notes.

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MIDCAROLINA FINANCIAL CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (Unaudited)

	Preferred stock				Common stock				Retained earnings			Accumulated other com- prehensive income (loss)			Total shareholders’ equity
	Shares		Amount		Shares		Amount
	(Amounts in thousands, except share data)
Balance at December 31, 2009		5,000	$	4,819		4,927,828	$	14,958	$	20,805		$	(397	)	$	40,185
Net income		-		-		-		-		876			-			876
Other comprehensive income		-		-		-		-		-			1,045			1,045
Stock based compensation		-		-		-		160		-			-			160
Preferred dividends paid		-		-		-		-		(313	)		-			(313	)
Balance at September 30, 2010		5,000	$	4,819		4,927,828	$	15,118	$	21,368		$	648		$	41,953

See accompanying notes.

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MIDCAROLINA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended September 30,
	2010			2009
	(Amounts in thousands)
Operating Activities
Net income	$	876		$	2,105
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		430			430
(Accretion) amortization on investment securities available for sale		21			(12	)
Provision for loan losses		5,018			2,885
Gain on sale of investment securities available for sale		(23	)		(198	)
Impairment on nonmarketable investment		-			126
Other-than-temporary impairment on investment securities available for sale		29			130
Deferred tax expense		625			991
Gain on sale of loans		(501	)		(590	)
Origination of loans held for sale		(23,388	)		(32,598	)
Proceeds from sales of loans held for sale		21,591			31,976
Increase in cash surrender value life insurance		(256	)		(178	)
Net loss on sale foreclosed real estate		126			68
Stock based compensation expense		160			293
Changes in assets and liabilities:
(Increase) decrease in other assets		(3,192	)		(1,856	)
Increase (decrease) in accrued expenses and other liabilities		(63	)		(387	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		1,453			3,185
Investing Activities
Purchases of investment securities available for sale		(62,490	)		(30,889	)
Maturities and calls of investment securities available for sale		-			834
Principal paydowns on investment securities available for sale		5,185			7,301
Sales of investment securities available for sale		51,460			24,394
Net (increase) decrease in loans from originations and principal repayments		18,898			(11,255	)
(Purchase) redemption of FHLB stock		166			(353	)
Purchases of premises and equipment		(133	)		(158	)
Proceeds from sale of foreclosed real estate		1,210			933
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES		14,296			(9,193	)
Financing Activities
Net increase in deposits		19,452			13,920
Net decrease in short-term borrowings		(520	)		-
Net decrease in long-term borrowings		(10,000	)		-
Preferred stock dividends paid		(313	)		(313	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		8,619			13,607
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		24,368			7,599
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		9,429			15,734
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	33,797		$	23,333
Supplemental disclosure of cash flow information
Cash paid for interest	$	6,531		$	8,146
Loans transferred to foreclosed real estate	$	5,419		$	2,764

See accompanying notes.

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

NOTE A - BASIS OF PRESENTATION

The consolidated financial statements include the accounts and transactions of MidCarolina Financial Corporation (the “Company”) and its wholly-owned subsidiary MidCarolina Bank (the “Bank”). All intercompany transactions and balances have been eliminated in consolidation. In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of September 30, 2010 and for the three month and nine month periods ended September 30, 2010 and 2009, in conformity with accounting principles generally accepted in the United States of America.

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. Actual results could differ from those estimates. Operating results for the three month and nine month periods ended September 30, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2010.

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

Prior period amounts may have been reclassified for proper presentation. The Company reclassified $72,000 of net loss on sale of foreclosed real estate for the three month period ended September 30, 2009 and $68,000 of net loss on sale of foreclosed real estate for the nine month period ended September 30, 2009, respectively, from non-interest income to non-interest expense. The reclassification did not impact net income for the period.

NOTE B - COMMITMENTS

At September 30, 2010, loan commitments were as follows (in thousands):

Commitments to extend credit	$	6,206
Undisbursed lines of credit		49,876
Standby letters of credit		2,596
Commitments to sell loans held for sale		2,526

NOTE C - PER SHARE DATA

Diluted earnings per share reflect additional shares of common stock that would have been outstanding if dilutive potential shares had been issued. For the three month and nine month periods ended September 30, 2010 there were 371,504 options that were antidilutive. For the three month and nine month periods ended September 30, 2009 there were 268,571 options that were antidilutive.

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

NOTE C - PER SHARE DATA (Continued)

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Weighted average number of shares used in computing basic net income per share		4,927,828		4,927,828		4,927,828		4,927,828
Effect of dilutive stock options		-		4,264		-		3,458
Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share		4,927,828		4,932,092		4,927,828		4,931,286

NOTE D - INVESTMENT SECURITIES

The following is a summary of investment securities by major classification at September 30, 2010 and December 31, 2009:

	September 30, 2010
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
	(Amounts in thousands)
Securities available for sale:
U.S. government agency securities	$	13,079	$	114	$	-	$	13,193
Mortgage-backed securities		27,355		351		19		27,687
GSE CMO’s		3,758		76		-		3,834
Private Label CMO’s		858		-		111		747
State and municipal		31,635		962		123		32,474
Subordinated debentures		500		-		195		305
Total	$	77,185	$	1,503	$	448	$	78,240
	December 31, 2009
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
	(Amounts in thousands)
Securities available for sale:
U.S. government agency securities	$	12,113	$	13	$	69	$	12,057
Mortgage-backed securities		23,690		1,246		19		24,917
Private label CMO’s		5,683		6		713		4,976
State and municipal		29,379		191		1,121		28,449
Subordinated debentures		500		-		180		320
Total	$	71,365	$	1,456	$	2,102	$	70,719

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

NOTE D - INVESTMENT SECURITIES (Continued)

The following tables show investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 2010 and December 31, 2009. The Company had 8 securities with gross unrealized losses at September 30, 2010. These securities include three mortgaged-backed securities, one private label collateralized mortgage obligation, three state and municipal securities and one subordinated debenture. The Company had 33 securities with gross unrealized losses at December 31, 2009. These securities include three U.S. government agency securities, one mortgage-backed security, seven private label collateralized mortgage obligations, 21 state and municipal securities and one subordinated debenture. At September 30, 2010 two of the state and municipal securities, one mortgage backed security and one subordinated debenture reported unrealized losses for 12 consecutive months or longer. Management feels that the unrealized loss is attributable to a limited market for trading these types of securities and the interest rate spreads. Except as noted in the table below, all unrealized losses on investment securities are considered by management to be temporarily impaired given the credit ratings on these investment securities and/or the short duration of the unrealized loss.

	September 30, 2010
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
	(Amounts in thousands)
Securities available for sale:
U.S. government agency securities	$	-	$	-	$	-	$	-	$	-	$	-
Mortgage-backed securities		3,956		19		-		-		3,956		19
State and municipal.		884		12		2,669		111		3,553		123
Subordinated debentures		-		-		305		195		305		195
Total temporarily impaired securities	$	4,840	$	31	$	2,974	$	306	$	7,814	$	337
Other than temporary impairment
Private label CMO’s	$	-	$	-	$	747	$	111	$	747	$	111
Total other than temporarily impaired securities	$	-	$	-	$	747	$	111	$	747	$	111

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

NOTE D - INVESTMENT SECURITIES (Continued)

	December 31, 2009
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
	(Amounts in thousands)
Securities available for sale:
U.S. government agency securities	$	7,095	$	69	$	-	$	-	$	7,095	$	69
Mortgage-backed securities		2,039		19		-		-		2,039		19
Private label CMO’s		-		-		2,295		405		2,295		405
State and municipal.		9,042		273		7,384		848		16,426		1,121
Subordinated debentures		-		-		320		180		320		180
Total temporarily impaired securities	$	18,176	$	361	$	9,999	$	1,433	$	28,175	$	1,794
Other than temporary impairment
Private label CMO’s	$	1,051	$	153	$	729	$	155	$	1,780	$	308
Total other than temporarily impaired securities	$	1,051	$	153	$	729	$	155	$	1,780	$	308

The aggregate amortized cost and fair value of debt securities at September 30, 2010, by remaining contractual maturity, are shown below. Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.

	Available for Sale
	Amortized cost		Fair value
	(Amounts in thousands)
U.S. Agency securities:
Due within 1 year	$	7,010	$	7,016
Due in 1 year through 5 years		5,069		5,168
Due after 5 years through 10 years		1,000		1,009
Due after 10 years		-		-
State and municipal securities:
Due within 1 year		-		-
Due in 1 year through 5 years		6,575		6,689
Due after 5 years through 10 years		13,367		13,920
Due after 10 years		11,693		11,865
Other:
Due in 5 year through 10 years		500		305
Due after 10 years		-		-
GSE CMOs		3,758		3,833
Private label CMOs		858		748
Mortgage-backed securities		27,355		27,687
Total	$	77,185	$	78,240

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

NOTE D - INVESTMENT SECURITIES (Continued)

Proceeds from sales of investment securities available for sale amounted to $51.4 million and $24.4 million for the nine months ended September 30, 2010 and September 30, 2009, respectively. Gross realized gains from the sale of investment securities available for sale amounted to $853,000 and $241,000 for the nine months ended September 30, 2010 and September 30, 2009, respectively. Aggregate realized losses from the sale of investment securities available for sale amounted to $830,000 and $43,000 for the nine months ended September 30, 2010 and September 30, 2009, respectively. Net realized gains from the sales of securities available for sale amounted to $23,000 and $198,000 for the nine months ended September 30, 2010 and September 30, 2009, respectively. An impairment charge of $126,000 on a nonmarketable investment was realized during the nine month period ended September 30, 2009. Realized losses from the impairment of private label mortgage backed securities amounted to $29,000 for the nine months ended September 30, 2010 and $130,000 for the nine months ended September 30, 2009 resulting from increased default rates on underlying collateral payments and credit rating deterioration.

Gross gains on available for sale securities for the three month period ended September 30, 2010 were $301,000. For the three month period ended September 30, 2009 gross gains on available for sale securities were $54,000. Gross losses on available for sale securities for the three month period ended September 30, 2010 were $312,000. For the three month period ended September 30, 2009 gross losses on available for sale securities were $43,000. Net realized losses from the sales of securities available for sale amounted to $11,000 for the three months ended September 30, 2010 and net realized gains from the sales of securities available for sale amounted to $12,000 for the three months ended September 30, 2009.

Investment securities with amortized cost of $26.2 million and fair value of $26.5 million at September 30, 2010 were pledged to secure public monies on deposit as required by law.

Debt securities were divided into two groups: those rated investment grade by at least one nationally-recognized rating agency and those rated below investment grade by all nationally-recognized agencies. Impairment of debt securities consistently rated investment grade is considered temporary unless specific contrary information is identified. None of the debt securities consistently rated investment grade were considered to be other-than-temporarily impaired at September 30, 2010. The Company elected to sell a private label CMO with a book value of $1.0 million that was rated below investment grade for a loss of $233,000 during the third quarter of 2010 which is included in the three and nine month results ended September 30, 2010 above. One debt security rated below investment grade (a private label CMO) was considered to be other-than-temporarily impaired at September 30, 2010.

At September 30, 2010, the aggregate unrealized loss on the private label mortgage-backed security totaled $114,000 before recognition of any other-than-temporary impairment charges. Impairment of this security was evaluated to determine if we expect to not recover the entire amortized cost basis of the security. This evaluation was based on projections of estimated cash flows on individual loans underlying each security using current and anticipated changes in unemployment and default rates, decreases in housing prices and increases in loss severity at foreclosure. Impairment charges totaled $29,000 for the nine month period ended September 30, 2010.

The primary assumptions used in this evaluation were:

Prepayment - starting with current refinancing and payoff prepayment vector statistics based on information derived from the trustee. The bond’s prepayment vector anticipates a 6 VPR for 3 months and then returning to historical norms of 4 VPR to maturity

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

NOTE D - INVESTMENT SECURITIES (Continued)

Loss severity - the estimated foreclosure rate is 45% through 2010 and 35% thereafter, through maturity. Loss severity includes estimated holding and disposal expenses.

Default rate - The model takes the consumer default rate from the mortgage backed bonds 2 month average default rate from 17.3% over the next 24 months and down to 4% through maturity.

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

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

Based on our evaluation, a portion of the unrealized loss for one security was identified as credit impairment and charged to earnings for the three months ended September 30, 2010.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(Amounts in thousands)
Balance of credit losses on debt securities at the beginning of the period	$	174	$	76	$	148	$	-
Additional increase related to the credit loss for which an other-than-temporary impairment was previously recognized		3		54		29		130
Balance of credit losses on debt securities at the end of the current period	$	177	$	130	$	177	$	130

At September 30, 2010, the balance of Federal Home Loan Bank (“FHLB”) of Atlanta stock held by the Company is $2.2 million. On May 11, 2010 the FHLB announced that it would pay a dividend for the first quarter of 2010. On June 30, 2010, the FHLB also announced its intentions of repurchasing up to $300 million of its stockholders’ capital that its “members” owned in excess of amounts the members are required to own. This repurchase was transacted on July 15, 2010. On July 29, 2010 the FHLB announced that it would pay a dividend for the second quarter of 2010. On October 29, 2010 the FHLB announced that it would pay a dividend for the third quarter of 2010. The FHLB also announced on October 29, 2010 its intentions of repurchasing up to $300 million of its stockholders’ capital that its “members” owned in excess of amounts the members are required to own. This repurchase is to take place on November 15, 2010. Given this, management believes that its investment in FHLB stock was not other-than-temporarily impaired as of September 30, 2010. However, there can be no assurance that

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

NOTE D - INVESTMENT SECURITIES (Continued)

the impact of recent or future legislation on the Federal Home Loan Banks will not also cause a change in the value of the FHLB stock held by the Company.

NOTE E - LOANS

Following is a summary of loans at each of the balance sheet dates presented:

	At September 30, 2010				At December 31, 2009
	Amount		Percent of Total		Amount			Percent of Total
	(In thousands)
Construction loans	$	49,797		12.14%	$	67,635			15.44%
Commercial mortgage loans		173,226		42.22%		174,926			39.93%
Home equity lines of credit		44,503		10.85%		44,627			10.19%
Residential mortgage loans		76,525		18.65%		81,377			18.57%
Total real estate		344,051				368,565
Commercial and industrial loans		60,253		14.69%		64,173			14.65%
Loans to individuals		5,949		1.45%		5,383			1.22%
Subtotal		410,253		100.00%		438,121			100.00%
Net deferred loan fees		8				(34	)
Loans	$	410,261			$	438,087

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

NOTE F - NON-INTEREST INCOME AND NON-INTEREST EXPENSE

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(In thousands)
Debit card income	$	74	$	63	$	210	$	174
ATM interchange income		2		2		6		6
Safe deposit rent		5		3		11		10
Check upcharge		8		6		22		19
Income from rental property		8		5		35		17
Insurance claim proceeds		-		194		90		194
Other		16		-		50		31
Total	$	113	$	273	$	424	$	451

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(In thousands)
Travel	$	16	$	13	$	48	$	52
Contributions		4		2		25		24
Director fees		53		39		141		129
Dues and memberships		16		6		22		18
Credit reports and filing fees		6		4		16		13
Franchise tax		30		31		90		82
Appraisals		29		1		84		17
Deposit charge offs		5		5		7		22
Loan collection expense		199		73		283		115
CDARS expense		2		17		21		60
Other		7		2		18		22
Total	$	367	$	193	$	755	$	554

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

NOTE G - FAIR VALUE MEASUREMENTS

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

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

Investment Securities Available-for-Sale

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

Loans Held for Sale

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

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as impaired, management measures impairment on an individual basis. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2010 loans with a carrying value of $29.8 million were evaluated for impairment. Of this total $ 11.0 million required a charge-off of $430,000, prior to period end and a specific allowance of $600,000, for a net fair value of $10.0 million at September 30, 2010. At December 31, 2009, the Company identified impaired loans of $11.0 million. Of this total, $8.2 million required a specific allowance totaling $1.2 million for a net fair value of $7.0 million. The determination of impairment was based on the estimated fair market value of collateral for each loan determined through the use of appraisals and subjected to further discounts by management for age of appraisals, geography of the collateral and historical experience in selling similar types of collateral, which are considered to be Level 3 inputs.

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

NOTE G - FAIR VALUE MEASUREMENTS (Continued)

Foreclosed Real Estate

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

Their were no significant transfers between the valuation of financial assets or liabilities between Levels 1 and 2 in the valuation hierarchy below. The following table summarizes quantitative disclosures about the fair value measurement for each category of assets carried at fair value as of September 30, 2010 (in thousands):

			Fair Value Measurements at September 30, 2010
Description	September 30, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Input (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities:
U.S. Agency securities	$	13,193	$	-	$	13,193	$	-
Mortgage backed securities		27,687		-		27,687		-
GSE CMO’s		3,834		-		3,834		-
Private label CMO’s		747		-		747		-
State and municipal securities		32,474		-		32,474		-
Subordinated debenture		305		-		-		305
		78,240		-		77,935		305
Impaired loans		9,970		-		-		9,970
Foreclosed real estate		6,944		-		-		6,944

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

NOTE G - FAIR VALUE MEASUREMENTS (Continued)

The table below presents the balances of assets and liabilities measured at fair value, as of December 31, 2009 (in thousands):

			Fair Value Measurements at December 31, 2009
Description	December 31, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Input (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities:
U.S. Agency securities	$	12,057	$	-	$	12,057	$	-
Mortgage backed securities		24,917		-		24,917		-
CMO’s		4,976		-		4,976		-
State and municipal securities		28,449		-		28,449		-
Subordinated debenture		320		-		-		320
		70,719		-		70,399		320
Impaired loans		7,042		-		-		7,042
Foreclosed real estate		2,876		-		-		2,876

The table below presents reconciliation for the period of December 31, 2009 to September 30, 2010 for all Level 3 assets that are measured at fair value on a recurring basis.

	Available-for-sale securities
	(Dollars in thousands)
Beginning Balance December 31, 2009	$	320
Total realized and unrealized gains or (losses):
Included in earnings		-
Included in other comprehensive income		(15	)
Purchases, issuances and settlements
Transfers in (out) of Level 3		-
Ending Balance September 30, 2010	$	305

NOTE H - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holding of a particular financial instrument. In cases where quoted market prices are not available, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

NOTE H - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. Finally, the fair value estimates presented herein are based on pertinent information available to management as of September 30, 2010 and December 31, 2009, respectively.

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

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

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

Investment Securities

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

Loans Held for Sale

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

Loans

For certain homogeneous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. However, the values derived likely do not represent exit prices due to the distressed market conditions; therefore, incremental market risks and liquidity discounts of approximately 8% were subtracted to reflect the illiquid and distressed conditions at September 30, 2010 and approximately 2% at December 31, 2009.

Investment in Life Insurance

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

Deposits, Short-term Borrowings and Long-term Debt

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

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

NOTE H - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Accrued Interest Receivable and Accrued Interest Payable

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

Financial Instruments with Off-Balance Sheet Risk

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

The following table presents the carrying values and estimated fair values of the Company’s financial instruments at September 30, 2010 and December 31, 2009:

	Carrying value		Estimated fair value
	(Amounts in thousands)
As of September 30, 2010
Financial assets:
Cash and cash equivalents	$	33,797	$	33,797
Investment securities available for sale		78,240		78,240
Loans held for sale		2,526		2,526
Loans, net of allowance		401,445		369,301
Federal Home Loan Bank stock		2,156		2,156
Investment in life insurance		8,435		8,435
Accrued interest receivable		1,797		1,797
Financial liabilities:
Deposits	$	484,472	$	489,801
Long-term debt		23,764		24,643
Accrued interest payable		362		362
As of December 31, 2009
Financial assets:
Cash and cash equivalents	$	9,429	$	9,429
Investment securities available for sale		70,719		70,719
Loans held for sale		228		228
Loans, net		430,780		424,087
Federal Home Loan Bank stock		2,322		2,322
Investment in life insurance		8,179		8,179
Accrued interest receivable		2,150		2,150
Financial liabilities:
Deposits	$	465,020	$	462,740
Short-term borrowings		520		520
Long-term debt		33,674		34,684
Accrued interest payable		485		485

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

NOTE I - RECENT ACCOUNTING PRONOUNCEMENTS

The FASB has issued the following updates since January 1, 2010:

Accounting Standards Update (ASU) No. 2010-09, Subsequent Events (“ASC 855”): Amendments to Certain Recognition and Disclosure Requirements. The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC’s literature.

ASU No. 2010-06, Fair Value Measurements and Disclosures (“ASC 820”): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:

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

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

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

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

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

ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. Management has included required disclosures within the financial statements.

ASU 2010-20, Receivables (“ASC 310-30”): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.The objective of this ASU is for an entity to provide disclosures that facilitate financial statement users’ evaluation of the following:

• The nature of credit risk inherent in the entity’s portfolio of financing receivables;

• How that risk is analyzed and assessed in arriving at the allowance for credit losses; and

• The changes and reasons for those changes in the allowance for credit losses.

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MIDCAROLINA FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

NOTE I - RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

To achieve these objectives, an entity should provide disclosures on a disaggregated basis on two defined levels: (1) portfolio segment; and (2) class of financing receivable. The ASU makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including:

• Credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables;

• The aging of past due financing receivables at the end of the reporting period by class of financing receivables; and

• The nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses.

For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. These disclosures will be included in year-end 2010 reporting as applicable.

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

NOTE J - SHAREHOLDERS’ EQUITY

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

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

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 our Annual Report on Form 10-K and in other documents we file with the Securities and Exchange Commission from time to time. Copies of those reports are available directly through the SEC’s Internet website atwww.sec.gov or through our Internet website atwww.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 our management about future events. Factors that could influence the accuracy of forward-looking statements include, but are not limited to (a) pressures on our 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 our loan portfolio, (c) continued adverse conditions in the economy and in the real estate market in our banking markets (particularly those conditions that affect our loan portfolio, the abilities of our borrowers to repay their loans, and the values of collateral that secures our loans), (d) the financial success or changing strategies of our customers, (e) actions of government regulators, or change in laws, regulations or accounting standards, that adversely affect our business, (f) changes in the interest rate environment and the level of market interest rates that reduce our net interest margins and/or the values of loans we make and securities we hold, (g) changes in competitive pressures among depository and other financial institutions or in our ability to compete effectively against other financial institutions in our banking markets, and (h) other developments or changes in our business that we do not expect. Although we believe that the expectations reflected in the forward-looking statements included in this report are reasonable, they represent our management’s judgments only as of the date they are made, and we 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 us are expressly qualified in their entirety by the cautionary statements in this paragraph. We have no obligation, and do not intend, to update these forward-looking statements.

Recent Developments

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, into law. This new legislation makes extensive changes to the laws regulating financial products and services as well as firms and companies offering financial products and services. The Dodd-Frank Act also alters certain corporate governance matters affecting public companies. The legislation requires substantial rulemaking and mandates numerous additional studies, the results of which could impact future legislative and regulatory action. We are in the process of evaluating this new legislation and determining the extent to which it will impact our current and future operations.

Among other things that could have an impact on our operations and activities, the Dodd-Frank Act amends the manner for calculating the assessment base for deposit insurance premiums paid to the FDIC, and it requires the federal banking agencies to issue new rules to implement new minimum leverage and risk-based capital requirements for insured depository institutions. It also requires the Securities and Exchange Commission to complete studies and develop rules or approve stock exchange rules regarding various investor protection issues, including shareholder access to the proxy process, and various matters pertaining to executive compensation and compensation committee oversight. Additionally, the Act establishes the Consumer Financial Protection Bureau, or Bureau, as a new, independent federal agency,

- 23 -

which will have broad rulemaking, supervisory and enforcement authority over financial institutions providing consumer financial products and services. Examples of such products and services include deposit products, residential mortgages, home-equity loans and credit cards. Under the Dodd-Frank Act, states are permitted to adopt more stringent consumer protection laws, and state attorneys general can enforce those laws as well as consumer protection rules issued by the Bureau.

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

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

Financial Condition at September 30, 2010 and December 31, 2009

During the nine-month period ending September 30, 2010, our total assets increased by $11.3 million to $552.3 million from $541.0 million at December 31, 2009. At September 30, 2010, loans totaled $410.3 million, a decrease of $27.8 million, or 6.35%, for the nine months. Our loan portfolio experienced decreases in real estate and commercial loans in the amount of $24.5 million and $3.9 million respectively. Consumer loans increased $566,000. Federal funds sold and interest-earning deposits increased by $24.4 million, to $32.2 million.

Our total liquid assets, which include cash and due from banks, federal funds sold and interest-earning deposits at Federal Home Loan Bank (“FHLB”) of Atlanta, investment securities available for sale and loans held for sale increased $34.2 million during the nine months, to $114.5 million or 20.74% of total assets at September 30, 2010 versus $80.4 million, or 14.86% of total assets, at December 31, 2009. At September 30, 2010, investment securities available for sale totaled $78.2 million, an increase of $7.5 million, or 10.64%, compared to December 31, 2009.

Deposits continue to be our primary funding source. At September 30, 2010, deposits totaled $484.5 million, an increase of $19.5 million, or 4.18%, from year-end 2009. Included in the deposit balances are $101.2 million of brokered certificates of deposit, a decrease of $1.2 million, or 1.08%, from year-end. We also utilize borrowings from the FHLB and Federal Reserve Bank (“FRB”) to support balance sheet management and growth. Borrowings from the FHLB decreased $10.0 million or 40.0% to $15.0 million at September 30, 2010, from $25.0 million at year-end 2009. We had no outstanding balances with the FRB at September 30, 2010 or December 31, 2009.

Our capital position remains strong, with all of our regulatory capital ratios at levels that categorize us as “well capitalized” under federal bank regulatory capital guidelines. At September 30, 2010, our

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shareholders’ equity totaled $42.0 million, an increase of $1.8 million from the December 31, 2009 balance. The increase resulted primarily from net income available to common shareholders of $563,000 for the nine months ended September 30, 2010. Accumulated other comprehensive income increased $1.0 million to $648,000 at September 30, 2010.

Comparison of Results of Operations for the

Three Months Ended September 30, 2010 and 2009

Net Income. Our net income available to common shareholders for the three months ended September 30, 2010 was $285,000, a decrease of $557,000, or 66.27%, from net income available to common shareholders of $842,000 for the same three-month period in 2009. Net income per diluted share of $0.06 for the three-month period ended September 30, 2010 decreased $0.11 when compared to the prior period. Our average asset balances increased $4.5 million or 0.81 percent, as total assets averaged $556.5 million during the current three-month period compared to $552.0 million in the comparative prior year period. Our interest rate spread and net yield on average interest-earning assets decreased 11 basis points and 15 basis points, respectively. Net interest income decreased $173,000, non-interest income for the quarter ended September 30, 2010 decreased in the amount of $111,000, the provision for loan losses increased $593,000, and non-interest expenses increased $144,000, as compared to the amounts of those items for the comparative period.

Net Interest Income. Net interest income decreased by $173,000, or 3.80%, to $4.4 million for the three-months ended September 30, 2010. Our decrease in net interest income reflects a $605,000 decrease in interest income off-set by a $432,000 decrease in interest expense. The rates earned on a significant portion of our loans adjust immediately when index rates such as prime rate change. Conversely, most of our interest-bearing liabilities, including certificates of deposit and borrowings, have rates fixed until maturity. As a result, interest rate reductions will generally result in an immediate drop in our 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 fixed rate FHLB advances. Conversely, interest rate increases should result in an immediate increase in our interest income on loans, with a more delayed impact on interest expense because increases in interest costs will occur upon renewals of certificates of deposits or borrowings.

Average interest-earning assets during the second quarter of 2010 increased $2.7 million, or 0.52%, as compared with the same period in 2009. Our average yield on total interest-earning assets decreased by 48 basis points from 5.28% to 4.80%. Our average total interest-bearing liabilities increased by $18.9 million, or 4.04%. Our average cost of total interest-bearing liabilities decreased 38 basis points from 2.08% to 1.70%. Our markets are extremely competitive for deposits. For the three months ended September 30, 2010, our net interest spread was 3.10% and our net interest margin was 3.28%. For the three months ended September 30, 2009, our net interest rate spread was 3.21% and our net interest margin was 3.43%.

Provision for Loan Losses. The Bank recorded $1.5 million in the provision for loan losses for the three- month period ended September 30, 2010, an increase of $593,000 from the $950,000 provision made in the third quarter of 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, level of impaired loans, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. The 2010 provision was significantly impacted by the on-going weakened economy and real estate market causing a heightened level of charge-offs. Specifically, builder/construction loans continue to experience a significant deterioration in their collateral values as developers experience decreased rates of building lot inventory turnover. Although the Bank reduced its total exposure to construction loans by $17.8 million or 26.37% from

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$67.6 million at December 31, 2009 to $49.8 million at September 30, 2010, significant risk to property value depreciation continues to persist in the Bank’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 $27.8 million in 2010 compared to December 31, 2009. At September 30, 2010, the allowance for loan losses was $8.8 million, an increase of $1.5 million, or 17.33%, from the $7.3 million at the end of 2009. The allowance represented 2.15% and 1.67%, respectively, of loans outstanding at September 30, 2010 and December 31, 2009, net of loans held for sale. The increase in the allowance is reflective of the ongoing economic and real estate market deterioration experienced locally as well as nationally. At September 30, 2010, the Bank had $10.7 million in nonaccrual loans. At year-end 2009, the Bank had $7.3 million in nonaccrual loans.

Non-Interest Income. For the third quarter of 2010, non-interest income decreased $114,000, or 15.02%, to $645,000 from $759,000 for the same period the prior year. Changes for the three months ended September 30, 2010 include a decrease of $43,000 in service charges and fees on deposits (reflecting the movement in the industry to reduce service charge fees on certain debit card and ATM transactions), a loss on sale of investments in the amount of $11,000 for the third quarter of 2010 compared to a gain on sale of investments in the amount of $12,000 for the third quarter of 2009, an increase in cash value of life insurance of $43,000 resulting from moving several insurance policies to a higher rated carrier, an increase in gains on sale of loan activities of $69,000 (which is a reflection of very low interest rates in general), a decrease in income from brokerage services of $51,000, an increase of $51,000 resulting from a decrease in impairment on available for sale securities, and a decrease in all other non-interest income of $160,000 which is primarily the result of proceeds received from insurance claims during the 2009 period.

Non-Interest Expense. For the third quarter of 2010, non-interest expense increased $144,000, or 4.91%, to $3.1 million from $2.9 million for the same period the prior year. Changes for the three months ended September 30, 2010 include a decrease of $4,000 in salaries and employee benefits, a decrease of $30,000 in occupancy and equipment expense resulting from moving to leased information technology hardware, an increase in other outside service expense of $71,000 reflecting increased information technology consulting expenses, an increase of $88,000 in data processing expense reflecting the cost of leasing information technology hardware and increased back-up, redundancy and security of hardware and data, a decrease in deposit and other insurance expense of $73,000, a decrease in professional and other services of $29,000 related to decreased attorney and accounting fees, a decrease of $46,000 in net losses on sale of foreclosed real estate, an increase in advertising expense of $11,000, and an increase in all other non-interest expense of $174,000, primarily resulting from loan collection activities.

Provision for Income Taxes.Our provision for income tax expense, as a percentage of income before income taxes, was 4.19% and 33.85%, respectively, for the three months ended September 30, 2010 and 2009. The effective tax rate for the three-month period ended September 30, 2010 was lower due to a higher concentration of tax-exempt interest income in earnings as compared to the three-month period ended September 30, 2009.

Comparison of Results of Operations for the

Nine Months Ended September 30, 2010 and 2009

Net Income. Our net income available to common shareholders for the nine months ended September 30, 2010 was $563,000, a decrease of $1.2 million, or 68.58%, from net income available to common shareholders of $1.8 million for the same nine-month period in 2009. Net income per diluted share of $0.11 for the nine-month period ended September 30, 2010 decreased $0.25 when compared to the prior period. Our average balances showed modest increases as total assets averaging $554.3 million during the current nine-month period compared to $547.9 million in the comparative prior year period, a $6.4

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million increase or 1.17%. Our interest rate spread and net yield on average interest-earning assets increased 16 basis points and 10 basis points, respectively. Net interest income increased $520,000, non-interest income for the nine months ended September 30, 2010 decreased in the amount of $191,000, the provision for loan losses increased $2.1 million, and non-interest expenses increased $110,000, as compared to the amounts of those items for the comparative period.

Net Interest Income. Net interest income increased by $520,000, or 4.11%, to $13.2 million for the nine months ended September 30, 2010. Our increase in net interest income reflects a $1.2 million decrease in interest income off set by a $1.7 million decrease in interest expense. The rates earned on a significant portion of our loans adjust immediately when index rates such as prime rate change. Conversely, most of our interest-bearing liabilities, including certificates of deposit and borrowings, have rates fixed until maturity. As a result, interest rate reductions will generally result in an immediate drop in our 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 fixed rate FHLB advances. Conversely, interest rate increases should result in an immediate increase in our interest income on loans, with a more delayed impact on interest expense because increases in interest costs will occur upon renewals of certificates of deposits or borrowings.

Average interest-earning assets during the nine months of 2010 increased $5.3 million, or 1.02%, as compared with the same period in 2009. Our average yield on total interest-earning assets decreased by 36 basis points from 5.30% to 4.94%. Our average total interest-bearing liabilities increased by $6.5 million, or 1.39%. Our average cost of total interest-bearing liabilities decreased 52 basis points from 2.33% to 1.81%. Our markets are extremely competitive for deposits. For the nine months ended September 30, 2010, our net interest spread was 3.13% and our net interest margin was 3.32%. For the nine months ended September 30, 2009, our net interest rate spread was 3.22% and our net interest margin was 3.12%.

Provision for Loan Losses. The Bank recorded $5.0 million in the provision for loan losses for the period ended September 30, 2010, an increase of $2.1 million from the $2.9 million provision made in the first three quarters of 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, level of impaired loans, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. The 2010 provision was significantly impacted by the on-going weakened economy and real estate market causing a heightened level of charge-offs. Specifically, builder/construction loans continue to experience a significant deterioration in their collateral values as developers experience decreased rates of building lot inventory turn-over. Although the Bank reduced its total exposure to construction loans by $17.8 million or 26.37% from $67.6 million at December 31, 2009 to $49.8 million at September 30, 2010, significant risk to property value depreciation continues to persist in the Bank’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 by $27.8 million in 2010 compared to December 31, 2009. At September 30, 2010, the allowance for loan losses was $8.8 million, an increase of $1.5 million, or 17.33%, from the $7.3 million at the end of 2009. The allowance represented 2.15% and 1.67%, respectively, of loans outstanding at September 30, 2010 and December 31, 2009, net of loans held for sale. The increase in the allowance is reflective of the ongoing economic and real estate market deterioration experienced locally as well as nationally. At September 30, 2010, the Bank had $10.7 million in nonaccrual loans. At year-end 2009, the Bank had $7.3 million in non-accrual loans.

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Non-Interest Income. For the first nine months of 2010, non-interest income decreased $191,000, or 9.20%, to $1.9 million from $2.1 million for the same period the prior year. Changes for the nine months ended September 30, 2010 include a decrease of $170,000 in service charges and fees on deposits (reflecting the movement in the industry to reduce service charge fees on certain debit card and ATM transactions), a decrease of $175,000 in gain on sale of investments, an increase in cash value of life insurance of $78,000 resulting from moving several insurance policies to a higher rated carrier, a decrease in gains on sale of loan activities of $89,000 (which is a reflection of the real estate market in general), a decrease in income from brokerage services of $35,000, an increase of $101,000 resulting from a decrease in impairment on available for sale securities, an increase of $126,000 due to no impairment on a nonmarketable investments and a decrease in all other non-interest income of $27,000 which is primarily the result of proceeds received from insurance claims in 2009.

Non-Interest Expense. For the first nine months of 2010, non-interest expense decreased $110,000, or 1.24%, to $9.0 million from $8.9 million for the same period the prior year. Changes for the nine months ended September 30, 2010 include a decrease of $379,000 in salaries and employee benefits resulting from downsizing of several positions, a decrease of $52,000 in occupancy expense, an increase in other outside service expense of $210,000 reflecting increased information technology consulting expenses, an increase of $260,000 in data processing expense, a decrease in deposit and other insurance expense of $98,000 primarily related to decreases in FDIC premiums in 2010 compared to 2009, a decrease in professional and other services of $87,000 related to decreased attorney and accounting fees, an increase of $58,000 in net losses on sale of foreclosed real estate, a decrease in advertising expense of $4,000 and an increase in all other non-interest expense of $201,000 resulting primarily from costs incurred from loan collections.

Provision for Income Taxes.Our provision for income tax expense or benefit, as a percentage of income before income taxes, was 17.52% and 29.27%, respectively, for the nine months ended September 30, 2010 and 2009. The effective tax rate for the nine month period ended September 30, 2010 was lower due to a higher concentration of tax-exempt interest income in earnings as compared to the nine month period ended September 30, 2009.

Allowance for Loan Losses and Problem Loans

Determining the allowance for loan losses is based on a number of factors, many of which are subject to judgments made by management. At the origination of each commercial loan, management assesses the relative risk of the loan and assigns a corresponding risk grade. To ascertain that the credit quality is maintained after the loan is booked, a loan review officer performs an annual review of all unsecured loans over a predetermined amount, a sample of loans within a lender’s authority, and a sample of the entire loan pool. Loans are reviewed for credit quality, sufficiency of credit and collateral documentation, proper loan approval, covenant, policy and procedure adherence and continuing accuracy of the loan grade. The Loan Review Manager reports directly to the Chief Credit Officer and the Audit Committee of the Company’s Board of Directors.

The allowance for loan losses is an amount that management believes will be adequate to absorb probable losses inherent in existing loans, based on evaluations of the collectability of loans and prior loan loss experience. The allowance calculation consists of two primary components: (1) a component for individual impairment and (2) a general reserve applied to all other loans, which is comprised of a quantitative component based on historical data and a qualitative component based on qualitative factors. The allowance is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely.

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Based on the quarterly allowance calculation, management recorded a provision of $5.0 million for the nine months ended Sept 30, 2010 compared to $2.9 million for the nine months ended September 30, 2009. Net charge-offs for the nine months ended September 30, 2010 were $3.5 million or 0.82% of average loans, compared to $1.6 million, or 0.38% of average loans, for the nine months ended September 30, 2009.

An analysis of the allowance for loan losses is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(In thousands)
Balance at beginning of period	$	8,539	$	6,482	$	7,307	$	5,632
Provision charged to operations		1,543		950		5,018		2,885
Net charge-offs:
Loans charged off:
Construction loans		426		454		2,264		588
Commercial mortgage loans		461		-		540		488
Home equity lines of credit		65		25		233		108
Residential mortgage loans		192		31		428		58
Commercial and industrial loans		75		43		105		568
Consumer loans		51		21		65		33
Total charge-offs		1,270		574		3,635		1,843
Recoveries of loans previously charged-off:
Construction loans		4		-		73		-
Commercial mortgage loans		-		2		1		4
Home equity lines of credit		-		-		-		-
Residential mortgage loans		-		-		25		-
Commercial and industrial loans		-		6		7		185
Consumer loans		-		1		20		4
Total recoveries		4		9		126		193
Net charge-offs		1,266		565		3,509		1,650
Balance at end of period	$	8,816	$	6,867	$	8,816	$	6,867
Net charge-offs to average loans during the period		0.31%		0.13%		0.82%		0.38%
Allowance to loans, net of loans held for sale at end of period		2.15%		1.56%		2.15%		1.56%

The evaluation of the allowance for loan losses is inherently subjective. Management uses the best information available to establish this estimate. However, if factors such as economic conditions differ substantially from assumptions, or if amounts and timing of future cash flows expected to be received on impaired loans vary substantially from estimates, future adjustments to the allowance for loan losses may be necessary. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. These agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about all relevant

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information available to them at the time of their examination. Any adjustments to original estimates are made in the period in which the factors and other considerations indicate that adjustments to the allowance for loan losses are necessary.

The following is a summary of nonperforming assets and past due loans for the periods ended as presented:

	September 30, 2010		December 31, 2009
	(In thousands)
Nonaccrual loans
Construction	$	4,127	$	4,301
Commercial mortgage		4,732		2,557
Home equity lines		119		-
Residential mortgage		1,588		486
Commercial and industrial		71		-
Loans to individuals		58		-
		10,695		7,344
Foreclosed real estate
Construction		4,781		1,018
Commercial mortgage		1,629		1,510
Home equity lines		-		-
Residential mortgage		534		177
Commercial and industrial		-		157
Loans to individuals		-		-
		6,944		2,862
Repossessed Assets		-		14
Total nonperforming assets	$	17,639	$	10,220
Past due loans1
Construction	$	1,237	$	2,515
Commercial mortgage		1,675		329
Home equity lines		461		176
Residential mortgage		1,864		531
Commercial and industrial		149		109
Loans to individuals		312		11
Total past due loans	$	5,698	$	3,671
Nonperforming loans to gross loans		2.61%		1.68%
Nonperforming assets to total assets		3.19%		1.89%
Past due loans to gross loans		1.39%		0.83%
Allowance coverage of nonperforming loans		82.44%		99.50%

¹ Past due loans include all loans that are 30-89 days past due and still accruing

Foreclosed assets which include foreclosed real estate and other real property held for sale, increased to $6.9 million at September 30, 2010, from $2.9 million at December 31, 2009. The Company is actively marketing all of its foreclosed real properties. Foreclosed assets are initially recorded at the lesser of fair value or the balance of the foreclosed loan, less costs to sell at date of foreclosure. Subsequent declines in fair value are charged to earnings. The Company obtains updated appraisals and/or valuations for all foreclosed assets.

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Impaired loans primarily consist of nonperforming loans and troubled debt restructurings (“TDRs”) but can include other loans identified by management as being impaired. As of September 30, 2010, the Bank identified impaired loans of $29.8 million. Of these impaired loans, $7.0 million were identified to have a specific allowance impairment of $600,000. At December 31, 2009, $11.0 million of loans were determined to be impaired. Of this total, $8.2 million required a specific allowance totaling $1.2 million. The increase in impaired loans is due to the ongoing weakness experienced in the economy and real estate markets. For impaired loans where legal action has been taken to foreclose, the loan is charged down to estimated fair value, and a specific reserve is not established

The following table summarizes TDRs, which are all classified as impaired loans for purposes of the loan loss allowance calculation, as of September 30, 2010 and December 31, 2009.

	September 30, 2010		December 31, 2009
	(In thousands)
Performing TDRs
Construction	$	57	$	1,901
Commercial mortgage		714		-
Home equity lines		-		-
Residential mortgage		3,786		-
Commercial and industrial		-		718
Loans to individuals		-		-
Total performing TDRs		4,557		2,619
Non-performing TDRs
Construction		428		-
Commercial mortgage		-		-
Home equity lines		-		-
Residential mortgage		1,180		-
Commercial and industrial		-		-
Individual		-		-
Total non-performing TDRs		1,608		-
Total TDRs	$	6,165	$	2,619

Loans are classified as TDRs by the Company when certain modifications are made to the loan terms and concessions are granted to the borrowers due to financial difficulty experienced by those borrowers. Of the $6.2 million of TDRs at September 30, 2010, loans totaling $4.6 million were accruing interest and were not included in nonperforming loans. The Company only restructures loans for borrowers in financial difficulty that have a designed viable business plan to fully pay off all obligations, including outstanding debt, interest and fees, either by generating additional revenue from the business or through liquidation of assets. Generally these are restructured to provide the borrower additional time to execute their plans. The performing TDRs were performing prior to restructuring. They were not not placed in nonaccrual status prior to the restructuring, and since the Company expects the borrowers to perform after the restructuring (based on modified note terms), the loans continue to accrue interest at the restructured rate. The Company will continue to closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue to perform based on the restructured note terms. The non-performing TDR’s were performing prior to restructuring and deteriorated after they were modified. All TDRs are considered to be impaired and are evaluated as such in the quarterly allowance calculation.

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Liquidity and Capital Resources

Market and public confidence in our financial strength and in the strength of financial institutions in general will largely determine our access to appropriate levels of liquidity. This confidence is significantly dependent on our ability to maintain sound asset quality and appropriate levels of capital resources.

Liquidity is defined as our ability to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis. Management measures our liquidity position by giving consideration to both on-and off-balance sheet sources of, and demands for, funds on a daily and weekly basis.

Sources of liquidity include cash and cash equivalents, net of federal requirements to maintain reserves against deposit liabilities; investment securities eligible for pledging to secure borrowings from dealers and customers pursuant to securities sold under repurchase agreements; investments available for sale; loan repayments; loan sales; deposits; and borrowings from the FHLB and FRB and from correspondent banks under overnight federal funds credit lines. In addition to interest rate-sensitive deposits, the Bank’s primary demand for liquidity is anticipated fundings under credit commitments to customers as well as meeting the fluctuations of normal deposit withdrawals.

We have maintained an adequate position of liquidity in the form of cash, interest-earning bank deposits, federal funds sold, investment securities and loans held for sale. These aggregated $114.6 million at September 30, 2010 compared to $80.4 million at December 31, 2009. Supplementing customer deposits as a source of funding, we have the ability to borrow up to $165.4 million from the FHLB, subject to collateral constraints, with $15.0 million outstanding at September 30, 2010 and $25.0 million outstanding at December 31, 2009. All borrowings with FHLB must be adequately collateralized. We also have the ability to borrow up to $53.8 million from the FRB, subject to collateral constraints. We had no borrowings outstanding with the FRB at September 30, 2010 or December 31, 2009. We believe that our combined aggregate liquidity position is sufficient to meet the funding requirements of loan demand and deposit maturities and withdrawals in the near term.

At September 30, 2010, the Company’s average equity to average asset ratio was 7.37%, and all of the Bank’s capital ratios exceeded the minimums established for a well-capitalized bank by regulatory measures. The Bank’s total risk-based capital ratio at September 30, 2010 was 12.60%.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We believe there has not been any significant change in the overall analysis of financial instruments considered market risk sensitive, as measured by the factors of contractual maturities, average interest rates and the difference between estimated fair values and book values, since the analysis prepared and presented in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Item 4. Controls and Procedures

MidCarolina Financial Corporation’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2010. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures where effective, as of September 30, 2010, to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

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In conjunction with the above evaluation of the Company’s disclosure controls and procedures, no change in our internal control over financial reporting was identified that occurred during the quarterly period ended September 30, 2010, and that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 6. Exhibits

An Exhibit 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.

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SIGNATURES

Under the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MIDCAROLINA FINANCIAL CORPORATION
Date: November 12, 2010	By:	/s/ Charles T. Canaday, Jr.
		Charles T. Canaday, Jr.
		President and Chief Executive Officer

Date: November 12, 2010	By:	/s/ Christopher B. Redcay
		Christopher B. Redcay
		Chief Financial Officer

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Exhibit Index

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 32.1	Section 1350 Certification by Chief Executive Officer (filed herewith)
Exhibit 32.2	Section 1350 Certification by Chief Financial Officer (filed herewith)