EX-13 2 d852585dex13.htm EX-13 EX-13

Exhibit 13

Uwharrie Capital Corp

2014

ANNUAL REPORT TO SHAREHOLDERS

 

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Description of Business

Uwharrie Capital Corp (the “Company”) is a North Carolina bank holding company. The Company was incorporated on February 24, 1993 to become the bank holding company for Uwharrie Bank (the “Bank”), formerly, known as Bank of Stanly a North Carolina commercial bank chartered on September 28, 1983, and its three wholly-owned subsidiaries, The Strategic Alliance Corporation, BOS Agency, Inc., and Gateway Mortgage, Inc., a mortgage origination company. The Company also owns two non-bank subsidiaries, Strategic Investment Advisors, Inc., and Uwharrie Mortgage, Inc.

The Bank engages in retail and commercial banking, with six banking offices in Stanly County, North Carolina. The Bank provides a wide range of banking services including deposit accounts, commercial, consumer, home equity and residential mortgage loans, safe deposit boxes, and electronic banking services.

On January 19, 2000, the Company completed its acquisition of Anson Bancorp, Inc. and its subsidiary, Anson Savings Bank. The savings bank retained its North Carolina savings bank charter and became a wholly-owned subsidiary of Uwharrie Capital Corp as Anson Bank & Trust Co. (“Anson”) and provided financial services to customers through one banking office in Anson County until September 1, 2013 when it was consolidated with and into the Bank. The former Anson office is now operated by the Bank.

On April 10, 2003, the Company capitalized a new wholly-owned subsidiary bank, Cabarrus Bank & Trust Company (“Cabarrus”), located in Concord, North Carolina. As of that date, Cabarrus purchased two branch offices located in Cabarrus County from the Bank to begin its operation. Cabarrus operated as a commercial bank and provided a full range of banking services. Cabarrus was consolidated into the Bank effective September 1, 2013. The former Cabarrus offices are now operated as branches of the Bank.

The Company and its subsidiaries are located in Stanly County, Anson County and Cabarrus County. However, the Company intends to prudently expand its service area to include the entire Uwharrie Lakes Region of North Carolina.

Depository services offered by the Bank include personal and commercial checking, savings, money market, certificates of deposit accounts and individual retirement accounts, all tailored to meet customers’ needs. The bank provides fixed and variable rate loans, which include mortgage, home equity, lines of credit, consumer and commercial loans. The bank also offers internet banking, mobile banking, and 24-hour telephone banking, providing customers the convenience of access to account information, rate information and accessibility of funds transfers between accounts. Other services include MasterCard® credit cards and a Visa® check card which functions as a point-of-sale (POS) and automated teller machine (ATM) card. Customers can use the check card for purchases at virtually any merchant accepting Visa® and ATMs displaying the STAR® or CIRRUS® networks regionally and worldwide, respectively.

Strategic Investment Advisors Inc. provides portfolio management services to its customers. The Strategic Alliance Corporation (Strategic Alliance®) is a registered broker-dealer with the Financial Industry Regulatory Authority (FINRA). BOS Agency provides insurance products and is licensed in the state of North Carolina. Through Strategic Investment Group, a DBA for financial consultants registered with Private Client Services LLC., securities and insurance products are offered including fixed annuities, long-term care, Medicare supplement products and life insurance products. Group insurance products are offered through an arrangement with Burchfield Insurance Group, Inc.

Strategic Investment Group: Securities and insurance products are offered through Private Client Services, LLC, 2225 Lexington Rd , Louisville, KY 40206, ph: 502-451-0600, Member FINRA and SIPC. Private Client Services, LLC and Uwharrie Capital Corp along with its affiliates and/or subsidiaries are separate, distinct, and unaffiliated entities. It is important to note that securities and insurance products are; NOT BANK DEPOSITS – NOT INSURED BY THE FDIC OR ANY FEDERAL GOVERNMENT AGENCY – NOT OBLICATIONS OF OR GUARANTEED BY ANY FINANCIAL INSTITUTION – SUBJECT TO RISK AND MAY LOSE VALUE.

Uwharrie Bank, Member FDIC, Equal Housing Lender.

 

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Financial Highlights

 

                 Percent  
                 Increase  
(Dollars in thousands, except per share amounts)    2014     2013     (Decrease)  

For the year:

      

Net income

   $ 1,679      $ 954        76.00

Net income (loss) available to common shareholders

   $ 1,088      $ 151        620.53

Basic net income (loss) per common share (1)

   $ 0.15      $ 0.02        665.00

Diluted net income (loss) per common share (1)

   $ 0.15      $ 0.02        665.00

Weighted average common shares outstanding (diluted)

     7,300,988        7,422,286        -1.63

At year-end:

      

Total assets

   $ 518,464      $ 517,320        0.22

Total earning assets

     473,157        472,075        0.23

Loans held for investment

     310,853        307,348        1.14

Total interest-bearing liabilities

     390,609        395,887        -1.33

Shareholders’ equity

     42,262        40,509        4.33

Book value per common share (1)

   $ 4.55      $ 3.94        15.45

Averages for the year:

      

Total assets

   $ 513,676      $ 527,693        -2.66

Total earning assets

     470,948        485,219        -2.94

Loans held for investment

     309,338        317,274        -2.50

Total interest-bearing liabilities

     386,237        407,857        -5.30

Shareholders’ equity

     41,681        43,994        -5.26

Financial ratios (in percentage):

      

Return on average assets

     0.33     0.18  

Return on average shareholders’ equity

     4.03     2.17  

Average equity to average assets

     8.11     8.34  

Net interest margin (fully tax equivalent basis)

     3.60     3.52  

Allowance as % of loans at year-end

     1.20     1.66  

Allowance as % of nonperforming loans

     166.43     108.02  

Nonperforming loans to total loans

     0.72     1.53  

Nonperforming assets to total assets

     1.56     2.30  

Net loan charge-offs (recoveries) to average loans

     0.31     0.55  

 

(1) Net income per share, book value per share and shares outstanding at year-end for 2013 have been adjusted to reflect the 2% stock dividend in 2014.

Market for the Company’s Common Stock and Related Security Holder Matters

It is the philosophy of Uwharrie Capital Corp to promote a strong base of local shareholders. While bid and asked prices for the Company’s common stock are quoted on the OTCQB marketplace operated by OTC Markets Group Inc. under the symbol UWHR, trading is sporadic with trades also taking place in privately negotiated transactions. Management makes every reasonable effort to match willing buyers with willing sellers as they become known for the purpose of private negotiations for the purchase and sale of the Company’s common stock.

Shareholders needing information about purchasing or selling shares of Uwharrie Capital Corp should contact Tamara M. Singletary or Lisa E. Hartsell, Investor Relations at Uwharrie Capital Corp, 132 N. First Street, Post Office Box 338, Albemarle, NC 28002.

The Board of Directors adopts a dividend policy on an annual basis. For 2014, Uwharrie Capital Corp declared a 2% stock dividend on its outstanding common stock. There was not a dividend declared in 2013. The Board of Directors will determine an appropriate dividend, if any, on an annual basis, consistent with the capital needs of the Company.

 

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LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

Uwharrie Capital Corp

Albemarle, North Carolina

We have audited the accompanying consolidated balance sheets of Uwharrie Capital Corp and Subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Uwharrie Capital Corp and Subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

/s/ Dixon Hughes Goodman LLP

Asheville, North Carolina

February 27, 2015

 

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2014 and 2013

 

 

 

     2014     2013  
     (dollars in thousands)  

ASSETS

    

Cash and due from banks

   $ 6,807      $ 7,947   

Interest-earning deposits with banks

     43,984        64,447   

Securities available for sale, at fair value

     112,824        100,280   

Securities held to maturity, at amortized cost (fair value $5,450,000)

     5,496        —     

Loans held for sale

     2,147        1,139   

Loans:

    

Loans held for investment

     310,853        307,348   

Less allowance for loan losses

     (3,738     (5,095
  

 

 

   

 

 

 

Net loans held for investment

     307,115        302,253   
  

 

 

   

 

 

 

Premises and equipment, net

     14,858        13,781   

Interest receivable

     1,747        1,747   

Restricted stock

     1,038        1,184   

Bank owned life insurance

     6,645        6,516   

Other real estate owned

     5,865        7,170   

Prepaid assets

     969        490   

Other assets

     8,969        10,366   
  

 

 

   

 

 

 

Total assets

   $ 518,464      $ 517,320   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Demand noninterest-bearing

   $ 80,069      $ 74,493   

Interest checking and money market accounts

     243,116        228,933   

Savings deposits

     39,091        41,512   

Time deposits, $100,000 and over

     38,912        44,690   

Other time deposits

     55,247        64,080   
  

 

 

   

 

 

 

Total deposits

     456,435        453,708   
  

 

 

   

 

 

 

Short-term borrowed funds

     4,685        5,509   

Long-term debt

     9,558        11,163   

Interest payable

     180        224   

Other liabilities

     4,783        4,491   
  

 

 

   

 

 

 

Total liabilities

     475,641        475,095   
  

 

 

   

 

 

 

Off balance sheet items, commitments and contingencies (Note 13)

    

Redeemable common stock held by the Employee Stock Ownership Plan (ESOP) (Note 17)

     561        1,716   

SHAREHOLDERS’ EQUITY

    

Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and outstanding 6,961,484 and 7,445,931

     8,702        9,307   

Additional paid-in capital

     11,712        11,922   

Unearned ESOP compensation

     —          (989

Undivided profits

     10,974        10,289   

Accumulated other comprehensive income (loss)

     305        (562
  

 

 

   

 

 

 

Total Uwharrie Capital shareholders’ equity

     31,693        29,967   

Noncontrolling interest

     10,569        10,542   
  

 

 

   

 

 

 

Total shareholders’ equity

     42,262        40,509   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 518,464      $ 517,320   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

35


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2014, 2013 and 2012

 

 

 

     2014     2013     2012  
    

(dollars in thousands, except share

and per share data)

 

Interest Income

      

Loans, including fees

   $ 16,336      $ 17,573      $ 19,724   

Investment securities:

      

US Treasury

     361        397        581   

US Government agencies and corporations

     1,271        1,066        1,105   

State and political subdivisions

     321        252        324   

Interest-earning deposits with banks and federal funds sold

     168        177        137   
  

 

 

   

 

 

   

 

 

 

Total interest income

     18,457        19,465        21,871   
  

 

 

   

 

 

   

 

 

 

Interest Expense

      

Interest checking and money market accounts

     299        439        542   

Savings deposits

     57        171        197   

Time deposits $100,000 and over

     471        592        802   

Other time deposits

     526        708        1,008   

Short-term borrowed funds

     34        160        353   

Long-term debt

     573        664        796   
  

 

 

   

 

 

   

 

 

 

Total interest expense

     1,960        2,734        3,698   
  

 

 

   

 

 

   

 

 

 

Net interest income

     16,497        16,731        18,173   

Provision for (recovery of) loan losses

     (389     28        1,832   
  

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     16,886        16,703        16,341   
  

 

 

   

 

 

   

 

 

 

Noninterest Income

      

Service charges on deposit accounts

     1,467        1,627        1,723   

Other service fees and commissions

     3,928        3,399        3,178   

Gain (loss) on sale of securities (includes reclassification of ($2,000) and ($523,000) from accumulated comprehensive income)

     (2     (523     1,286   

Income from mortgage loan sales

     1,001        2,113        3,740   

Other income

     927        971        748   
  

 

 

   

 

 

   

 

 

 

Total noninterest income

     7,321        7,587        10,675   
  

 

 

   

 

 

   

 

 

 

Noninterest Expense

      

Salaries and employee benefits

     12,051        12,423        12,891   

Net occupancy expense

     1,107        1,098        1,155   

Equipment expense

     680        734        733   

Data processing costs

     729        784        889   

Office supplies and printing

     273        358        334   

Foreclosed real estate expense

     1,246        1,647        2,994   

Professional fees and services

     847        680        588   

Marketing and donations

     762        728        691   

Electronic banking expense

     939        999        951   

Software amortization and maintenance

     535        541        576   

FDIC insurance

     425        518        693   

Goodwill Impairment

     —          —          987   

Other noninterest expense

     2,286        2,484        2,765   
  

 

 

   

 

 

   

 

 

 

Total noninterest expense

     21,880        22,994        26,247   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     2,327        1,296        769   

Income taxes (includes reclassification of ($1,000 and $202,000) from accumulated other comprehensive income, respectively)

     648        342        365   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 1,679      $ 954      $ 404   
  

 

 

   

 

 

   

 

 

 

Consolidated net income

   $ 1,679      $ 954      $ 404   

Less: Net income attributable to noncontrolling interest

     (591     (478     —     
  

 

 

   

 

 

   

 

 

 

Net income attributable to Uwharrie Capital Corp

     1,088        476        404   

Dividends on preferred stock

     —          (325     (645
  

 

 

   

 

 

   

 

 

 

Net Income (loss) available to common shareholders

   $ 1,088      $ 151      $ (241
  

 

 

   

 

 

   

 

 

 

Net income (loss) per common share

      

Basic

   $ 0.15      $ 0.02      $ (0.03
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.15      $ 0.02      $ (0.03
  

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

      

Basic

     7,300,988        7,422,286        7,519,100   

Diluted

     7,300,988        7,422,286        7,519,100   

The accompanying notes are an integral part of the consolidated financial statements.

 

36


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2014, 2013 and 2012

 

 

 

     2014     2013     2012  
     (dollars in thousands)  

Net Income

   $ 1,679      $ 954      $ 404   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

      

Unrealized gains (losses) on available for sale securities

     1,311        (3,662     2,356   

Related tax effect

     (445     1,292        (859

Reclassification of losses (gains) recognized in net income

     2        523        (1,286

Related tax effect

     (1     (202     496   
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     867        (2,049     707   
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     2,546        (1,095     1,111   

Less: Comprehensive income attributable to noncontrolling interest

     (591     (478     —     
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Uwharrie Capital

   $ 1,955      $ (1,573   $ 1,111   
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

37


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended December 31, 2014, 2013 and 2012

 

 

 

    Number of
Common
Shares
Issued
    Preferred
Stock
Series A
    Preferred
Stock
Series B
    Discount on
Preferred
Stock
    Common
Stock
    Additional
Paid-in
Capital
    Unearned
ESOP
Compensation
    Undivided
Profits
    Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interest
    Total  
    (dollars in thousands, except share data)  

Balance, December 31, 2011

    7,593,929      $ 10,000      $ 500      $ (200   $ 9,492      $ 12,661      $ (772   $ 10,379      $ 2,194      $ —        $ 44,254   

Net Income

    —          —          —          —          —          —          —          404        —          —          404   

Repurchase of common stock

    (90,260     —          —          —          (113     (191     —          —          —          —          (304

Retirement of common stock

    (1,173     —          —          —          (1     1        —          —          —          —          —     

Other comprehensive loss

    —          —          —          —          —          —          —          —          (707     —          (707

Release of ESOP shares

    —          —          —          —          —          (39     87        —          —          —          48   

Increase in ESOP notes receivable

    —          —          —          —          —          —          (190     —          —          —          (190

Reclass of redeemable ESOP stock

    —          —          —          —          —          (235     —          —          —          —          (235

Stock compensation expense

    —          —          —          —          —          4        —          —          —          —          4   

Record preferred stock dividend and discount accretion

    —          —          —          100        —          —          —          (645     —          —          (545
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2012

    7,502,496      $ 10,000      $ 500      $ (100   $ 9,378      $ 12,201      $ (875   $ 10,138      $ 1,487      $ —        $ 42,729   

Net Income

    —          —          —          —          —          —          —          476        —          478        954   

Repurchase of common stock

    (56,565     —          —          —          (71     (98     —          —          —          —          (169

Other comprehensive loss

    —          —          —          —          —          —          —          —          (2,049     —          (2,049

Release of ESOP shares

    —          —          —          —          —          (49     94        —          —          —          45   

Increase in ESOP notes receivable

    —          —          —          —          —          —          (208     —          —          —          (208

Reclass to mezzanine capital

    —          —          —          —          —          (132     —          —          —          —          (132

Repayment of preferred stock series A

    —          (10,000     (500     —          —          —          —          —          —          —          (10,500

Issuance of preferred stock (noncontrolling interest)

    —          —          —          —          —          —          —          —          —          10,655        10,655   

Record costs of preferred stock (noncontrolling interest)

    —          —          —          —          —          —          —          —          —          (137     (137

Record preferred stock dividend (noncontrolling interest)

    —          —          —          —          —          —          —          —          —          (454     (454

Record preferred stock dividend and discount accretion

    —          —          —          100        —          —          —          (325     —          —          (225
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2013

    7,445,931      $ —        $ —        $ —        $ 9,307      $ 11,922      $ (989   $ 10,289      $ (562   $ 10,542      $ 40,509   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

38


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY Continued

Years Ended December 31, 2014, 2013 and 2012

 

 

 

    Number of
Common
Shares
Issued
    Preferred
Stock
Series A
    Preferred
Stock
Series B
    Discount on
Preferred
Stock
    Common
Stock
    Additional
Paid-in
Capital
    Unearned
ESOP
Compensation
    Undivided
Profits
    Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interest
    Total  
    (dollars in thousands, except share data)  

Balance, December 31, 2013

    7,445,931      $ —        $ —        $ —        $ 9,307      $ 11,922      $ (989   $ 10,289      $ (562   $ 10,542      $ 40,509   

Net Income

    —          —          —          —          —          —          —          1,088        —          591        1,679   

Repurchase of common stock

    (374,130     —          —          —          (468     (942     —          —          —          —          (1,410

2% stock dividend

    142,129        —          —          —          178        221        —          (399     —          —          —     

Cash paid – fractional shares

    —          —          —          —          —          —          —          (4     —          —          (4

Other comprehensive income

    —          —          —          —          —          —          —          —          867        —          867   

Release of ESOP shares

    —          —          —          —          —          5        16        —          —          —          21   

Repayment of ESOP notes receivable

    (252,446     —          —          —          (315     (649     973        —          —          —          9   

Reclass from mezzanine capital

    —          —          —          —          —          1,155        —          —          —          —          1,155   

Record preferred stock dividend series B (noncontrolling interest)

    —          —          —          —          —          —          —          —          —          (416     (416

Record preferred stock dividend series C (noncontrolling interest)

    —          —          —          —          —          —          —          —          —          (148     (148
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2014

    6,961,484      $ —        $ —        $ —        $ 8,702      $ 11,712      $ —        $ 10,974      $ 305      $ 10,569      $ 42,262   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

39


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2014, 2013 and 2012

 

 

 

     2014     2013     2012  
     (dollars in thousands)  

Cash flows from operating activities

      

Net income

   $ 1,679      $ 954      $ 404   

Adjustments to reconcile net income to net cash Provided (used) by operating activities:

      

Depreciation

     922        914        954   

Net amortization of security premiums/discounts AFS

     1,050        1,420        1,334   

Net amortization of security premiums/discounts HTM

     2        —          —     

Impairment of goodwill

     —          —          987   

Net amortization of mortgage servicing rights

     709        801        831   

Impairment of foreclosed real estate

     647        921        2,365   

Provision for (recovery of) loan losses

     (389     28        1,832   

Deferred income taxes

     593        438        (1,134

Stock compensation

     —          —          4   

Net realized (gains) loss on sales / calls available for sale securities

     2        523        (1,286

Income from mortgage loan sales

     (1,001     (2,113     (3,740

Proceeds from sales of loans held for sale

     39,012        77,544        126,189   

Origination of loans held for sale

     (39,019     (71,197     (125,864

Gain on sale of premises, equipment and other assets

     (142     (233     (252

Increase in cash surrender value of life insurance

     (129     (122     (223

Gain on sales of foreclosed real estate

     (398     (290     55   

Release of ESOP Shares

     21        45        48   

Net change in interest receivable

     —          6        331   

Net change in other assets

     (663     (810     (3,655

Net change in interest payable

     (44     (46     (31

Net change in other liabilities

     349        424        431   
  

 

 

   

 

 

   

 

 

 

Net cash provided (used) by operating activities

     3,201        9,207        (420
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

      

Proceeds from sales, maturities, calls and paydowns of securities available for sale

     18,839        32,969        57,274   

Purchase of securities available for sale

     (31,122     (46,693     (61,369

Purchase of securities held to maturity

     (5,498     —          —     

Net (increase) decrease in loans

     (5,445     16,282        32,739   

Proceeds from sale of premises, equipment and other assets

     368        949        5,169   

Purchase of premises and equipment

     (2,225     (488     (830

Proceeds from sales of foreclosed real estate

     2,028        4,731        1,844   

Investment in other assets

     (366     (357     (346

Net change in restrictive stock

     146        1,081        1,024   
  

 

 

   

 

 

   

 

 

 

Net cash provided (used) by investing activities

     (23,275     8,474        35,505   
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

      

Net increase (decrease) in deposit accounts

     2,727        (3,904     26,274   

Net decrease in short-term borrowed funds

     (824     (13,181     (2,101

Net decrease in long-term debt

     (1,605     (1,510     (12,560

Proceeds from preferred stock offering, net of costs

     —          3,136        7,382   

Repayment preferred stock, series A

     —          (10,500     —     

Increase in unearned ESOP compensation

     —          (208     (190

Repurchase of common stock, net

     (1,401     (169     (304

Dividend and discount accretion on preferred stock

     (422     (679     (545

Cash paid for fractional shares

     (4     —          —     
  

 

 

   

 

 

   

 

 

 

Net cash provided (used) by financing activities

     (1,529     (27,015     17,956   
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (21,603     (9,334     53,041   

Cash and cash equivalents, beginning of year

     72,394        81,728        28,687   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of year

   $ 50,791      $ 72,394      $ 81,728   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information

      

Interest paid

   $ 2,004      $ 2,780      $ 3,729   

Income taxes paid

     41        648        270   

Supplemental schedule of non-cash activities

      

Net change in fair value of securities available for sale, net of tax

     867        (2,049     (707

Loans transferred to foreclosed real estate

     972        4,032        2,907   

Company financed sales of other real estate owned

     (65     (213     (188

Mortgage servicing rights capitalized

     386        763        1,237   

Preferred stock dividend accrued

     (142     (142     (68

Net change in ESOP liability

     1,155        132        235   

The accompanying notes are an integral part of the consolidated financial statements.

 

40


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies

Nature of Business

Uwharrie Capital Corp (the “Company”) was incorporated under North Carolina law for the purpose of becoming the holding company for Bank of Stanly (“Stanly”). On July 1, 1993, Stanly became a wholly-owned subsidiary of the Company through a one-for-one exchange of the common stock of Stanly for common stock of the Company. On September 1, 2013, Bank of Stanly changed its name to Uwharrie Bank (“Uwharrie”).

Uwharrie was incorporated on September 28, 1983, under the laws of the State of North Carolina and began operations on January 26, 1984 in Albemarle, North Carolina. Deposits with Uwharrie are insured by the Federal Deposit Insurance Corporation (“FDIC”). Uwharrie is under regulation of the Federal Reserve, the FDIC and the North Carolina Commissioner of Banks. Through its six branch locations in Stanly County, Uwharrie provides a wide range of deposit accounts, commercial, consumer, home equity and residential mortgage loans, safe deposit boxes and automated banking.

In 1987, Uwharrie established a wholly-owned subsidiary, BOS Agency, Inc. (“BOS Agency”), which engages in insurance product sales. In 1989, Uwharrie established a second wholly-owned subsidiary, BOS Financial Corporation, for the purpose of conducting business as a “broker dealer” in securities. During 1993, BOS Financial Corporation changed its name to The Strategic Alliance Corporation (“Strategic Alliance”) and was registered as a “broker dealer” and is regulated by the Financial Industry Regulatory Authority (“FINRA”).

The Company formed a new subsidiary, Strategic Investment Advisors, Inc. (“SIA”), during 1998 to provide investment advisory and asset management services. This subsidiary is registered as an investment advisor with the Securities and Exchange Commission.

On January 19, 2000, the Company completed its acquisition of Anson BanCorp, Inc. and its subsidiary, Anson Savings Bank. The savings bank retained its North Carolina savings bank charter and became a wholly-owned subsidiary of Uwharrie Capital Corp as Anson Bank & Trust Company (“Anson”), operating out of its main office branch in Wadesboro. Anson was consolidated into Uwharrie Bank effective September 1, 2013.

On August 4, 2000, Uwharrie acquired another subsidiary, Gateway Mortgage, Inc. (“Gateway”), a mortgage origination company. This company is currently inactive and does not affect the consolidated financials.

On April 10, 2003, the Company capitalized a new wholly-owned subsidiary bank, Cabarrus Bank & Trust Company (“Cabarrus”), located in Concord, North Carolina. As of that date, Cabarrus purchased two branch offices located in Cabarrus County from Uwharrie to begin its operation. Cabarrus operated as a commercial bank and provided a full range of banking services. Cabarrus was consolidated into Uwharrie Bank effective September 1, 2013.

On April 7, 2004 Uwharrie Mortgage, Inc. was established as a subsidiary of the Company to serve in the capacity of trustee and substitute trustee under deeds of trust.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, Uwharrie, SIA and Uwharrie’s subsidiaries, BOS Agency and Strategic Alliance. All significant intercompany transactions and balances have been eliminated in consolidation.

 

41


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

Use of Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America (“GAAP”), requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses.

Cash and Cash Equivalents

For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions “Cash and due from banks” and “Interest-earning deposits with banks.”

Investment Securities Available for Sale

Investment securities available for sale consist of United States Treasuries, United States Government agencies, Government Sponsored Enterprise (GSE) mortgage backed securities and collateralized mortgage obligations (CMOs), corporate bonds and state and political subdivision bonds. Unrealized holding gains and losses on available for sale securities are reported as a net amount in other comprehensive income, net of income taxes. Gains and losses on the sale of available for sale securities are determined using the specific identification method. Declines in the fair value of individual available for sale securities below their cost that are other than temporary would result in write-downs of the individual securities, to their fair value. Such write-downs would be included in earnings as realized losses. Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the period to maturity.

Investment Securities Held to Maturity

Investment securities held to maturity consist of United States Government agencies, and corporate bonds. The Company has both the intent and ability to hold the securities to maturity. These securities are reported at amortized cost.

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. The allowance, if any, would not have a material impact on the financial statements.

Loans

The Company divides the loans it grants into two segments, commercial and noncommercial loans. Commercial loans are broken down into the following classes: commercial loans, real estate commercial loans and other real estate construction loans. Noncommercial loans are divided into the following classes: real estate 1-4 family construction, real estate 1-4 family residential loans, home equity loans, consumer loans and other loans. The ability of the Company’s borrowers to honor their contracts is largely dependent upon the real estate and

 

42


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

general economic conditions in the Company’s market area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the effective interest method. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Credit card loans and other personal loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. The exception to this policy is credit card loans that remain in accrual status 90 days or more until they are paid current or charged off.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these impaired loans is accounted for on the cash-basis until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Generally a minimum of six months of sustained performance is required.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses. The provision for loan losses is expensed to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Company has different specific risks identified within the loan segments. Specific risks within the commercial loan segment arise with borrowers that are experiencing diminished operating cash flows, depreciated collateral values or prolonged sales and rental absorption periods. Concentrations within the portfolio if unmanaged, pose additional risk. Occasionally, the Company will purchase participation loans from other institutions and if not independently underwritten by the Bank, could carry additional risk. Generally, owner-occupied commercial real estate loans carry less risk than non-owner occupied. Specific risks within the non-commercial portfolio tend to be tied to economic factors including high unemployment and decreased real estate values. Risk to the Company is greater as home values deteriorate more rapidly than amortization in a loan, leaving little to no equity in properties, especially in junior lien positions. Concentration in the portfolio, such as home equity lines of credit, could pose additional risk if not appropriately managed.

The allowance for loan losses is evaluated both individually and collectively by loan class on a regular basis by management. Loans are collectively evaluated based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. Individually evaluated loans are based upon discounted cash flows or the underlying value of the collateral. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. In addition, regulatory examiners may require the Company to recognize adjustments to the allowance for loan losses based on their judgment about information available to them at the time of their assessment.

 

43


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Homogeneous loans are collectively evaluated by loan class for impairment. However, homogeneous loans will be evaluated individually for impairment if such a loan is deemed impaired.

Troubled debt restructure loans (TDR) are modifications of a loan when a borrower is experiencing financial difficulty and the modification involves providing a concession to the existing loan contract. TDRs are considered to be impaired loans and are individually evaluated for impairment.

The portion of the Company’s allowance for loan loss model related to general reserves captures the mean loss of individual loans and the rare event of severe loss that can occur within the loan portfolio. Specifically, the Company calculates probable losses on loans by computing a probability of loss and expected loss scenario by FDIC call report codes. Together, these expected components, as well as a level of more extreme unexpected losses form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.

Mortgage Servicing Rights

The Company capitalizes mortgage servicing rights when loans are sold and the loan servicing is retained. The cost of servicing rights is amortized in proportion to and over the estimated period of net servicing revenues is expected to be received based on projections of the amount and timing of estimated future cash flows. The amortization of servicing rights is recognized in the statement of income as an offset to other noninterest income. Servicing assets are periodically evaluated for impairment based upon their fair value. Fair value is based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance and charged to other expense.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

 

44


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

Foreclosed Real Estate

Real estate properties acquired through foreclosure or other proceedings are initially recorded at fair value upon foreclosure, establishing a new cost basis less costs to sell. Annually, valuations are performed and the foreclosed property is adjusted to the lower of cost or fair value of the properties, less costs to sell. Any write-down at the time of transfer to foreclosed properties is charged to the allowance for loan losses. Subsequent write-downs are charged to other expenses, and costs related to the improvement of the property are capitalized if the current fair value will allow it. If not, these costs are expensed also.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Land is carried at cost. Additions and major replacements or betterments which extend the useful lives of premises and equipment are capitalized. Maintenance, repairs and minor improvements are expensed as incurred. Depreciation is computed principally by the straight-line method over estimated useful lives, except in the case of leasehold improvements, which are amortized over the term of the leases, if shorter. Useful lives range from five to seven years for furniture, fixtures and equipment, to ten to thirty-nine years for leasehold improvements and buildings, respectively. Upon retirement or other disposition of the assets, the cost and the related accumulated depreciation are removed from the accounts and any gains or losses are reflected in income.

Restricted Stock

As a requirement for membership, the bank invests in the stock of the Federal Home Loan Bank of Atlanta (“FHLB”) and Federal Reserve Bank (“FRB”). These investments are carried at cost. Due to the redemption provisions of these investments, the Company estimated that fair value approximates cost and that this investment was not impaired.

Stock-Based Compensation

The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). ASC 718 also requires measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award. Excess tax benefits are reported as financing cash inflows in the consolidated statement of cash flows.

Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return and separate North Carolina income tax returns. The provision for income taxes in the accompanying consolidated financial statements is provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold. The tax returns for the Company are subject to audit for the 2011 fiscal year and thereafter. It is the Company’s policy to recognize interest and penalties associated with uncertain tax positions as components of other expenses in the income statement; however, if interest becomes a material amount, it would be reclassified as interest expense. There were no interest or penalties accrued during the years ended December 31, 2014, 2013 and 2012.

 

45


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

Fair Value of Financial Instruments

Accounting Standards Codification (ASC) 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. ASC 820 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation.

ASC 820 defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which those assets or liabilities are sold and considers assumptions that market participants would use when pricing those assets or liabilities. Fair values determined using Level 1 inputs rely on active and observable markets to price identical assets or liabilities. In situations where identical assets and liabilities are not traded in active markets, fair values may be determined based on Level 2 inputs, which exist when observable data exists for similar assets and liabilities. Fair values for assets and liabilities for which identical or similar assets and liabilities are not actively traded in observable markets are based on Level 3 inputs, which are considered to be unobservable.

Among the Company’s assets and liabilities, investment securities available for sale are reported at their fair values on a recurring basis. Certain other assets are adjusted to their fair value on a nonrecurring basis, including other real estate owned, impaired loans, loans held for sale, which are carried at the lower of cost or market; loan servicing rights, where fair value is determined using similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions; and goodwill, which is periodically tested for impairment. Deposits, short-term borrowings and long-term obligations are not reported at fair value.

Prices for US Treasury securities are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the ‘Level 1 input’ column. Prices for government agency securities, mortgage-backed securities and for state, county and municipal securities are obtained for similar securities, and the resulting fair values are shown in the ‘Level 2 input’ column. Prices for all other non-marketable investments are determined based on various assumptions that are not observable. The fair values for these investment securities are shown in the ‘Level 3 input’ column. Non-marketable investment securities, which are carried at their purchase price, include those that may only be redeemed by the issuer. The changes in securities between Level 1 and Level 2 were related to the purchase and sale of several securities and not the transfer of securities.

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 individually impaired, management measures impairment by using one of several methods including collateral value, fair value of similar debt or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected

 

46


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

repayments or fair value of collateral exceed the recorded investments in such loans. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an internal assessment of fair value based upon market data issued or management determines the fair value of the underlying collateral is further impaired below the appraised value, the Company records the impaired loan as nonrecurring Level 3.

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at the estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an internal assessment of fair value based upon market data issued or management determines the fair value of the underlying collateral is further impaired below the appraised value, the Company records the impaired loan as nonrecurring Level 3.

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate, based on secondary market prices. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. These loans are recorded in Level 2

Servicing assets are evaluated for impairment based upon the fair value. Fair value is determined based upon discounted cash flows using market-based assumptions. Servicing assets are recorded in Level 3.

Comprehensive Income

The Company reports as comprehensive income all changes in shareholders’ equity during the year from sources other than shareholders. Other comprehensive income refers to all components (revenues, expenses, gains, and losses) of comprehensive income that are excluded from net income. The Company’s only component of other comprehensive income is unrealized gains and losses, net of income tax, on investment securities available for sale. The following table presents the changes in accumulated other comprehensive income for the years ended December 31, 2014 and 2013:

 

     Year ended December 31,  
     2014      2013  
     (dollars in thousands)  

Beginning balance

   $ (562    $ 1,487   

Other comprehensive income (loss) before reclassifications, net of $(445,000) and $1,292,000 tax effect

     866         (2,370

Amounts reclassified from accumulated other comprehensive income, net of $1,000 and $202,000 tax effect

     1         321   
  

 

 

    

 

 

 

Net current-period other comprehensive income (loss)

     867         (2,049
  

 

 

    

 

 

 

Ending Balance

   $ 305       $ (562
  

 

 

    

 

 

 

 

47


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

As of December 31, 2014 and December 31, 2013, total accumulated other comprehensive income (loss) was $305,000 and ($562,000), respectively.

Earnings per Common Share

The Company had stock options outstanding covering 12,607 shares of common stock at December 31, 2014 and 94,341 shares of common stock at both December 31, 2013 and 2012. All of these options were anti-dilutive.

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The ESOP effect is the average of the unallocated ESOP shares.

The computation of weighted average shares used in the calculation of basic and dilutive earnings per share is summarized below:

 

     2014      2013      2012  

Weighted average number of common shares used in computing basic net income per common share

     7,343,921         7,633,365         7,652,546   

Effect of ESOP shares

     (42,933      (211,079      (133,446
  

 

 

    

 

 

    

 

 

 

Adjusted weighted average number of common shares used in computing basic net income per common share

     7,300,988         7,422,286         7,519,100   

Effect of dilutive stock options

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per common share

     7,300,988         7,422,286         7,519,100   
  

 

 

    

 

 

    

 

 

 

During the first quarter of 2014, the board of directors of the Company voted to terminate the ESOP effective March 1, 2014. As of February 28, 2014, the ESOP held 740,530 shares, or 9.95% of the Company’s total outstanding shares of common stock, of which 252,446 shares were unallocated to participants in the ESOP.

The Company originally made a term loan to the ESOP in 1999. In addition, the Company established a $500,000 line of credit to the ESOP in 2010 and established a second $500,000 line of credit to the ESOP in 2013. The ESOP used the proceeds of the term loan and lines of credit to purchase shares of the Company’s common stock for the benefit of qualified employees. The unallocated shares of stock held by the ESOP were pledged as collateral for the term loan and lines of credit. As debt payments were made on the term loan and lines of credit, unallocated shares associated with those debt payments were released to the ESOP and allocated among participants.

 

48


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

In connection with the termination of the ESOP, the ESOP trustees transferred the 252,446 remaining unallocated shares to the Company in partial satisfaction of the outstanding balance on the term loan and lines of credit. The fair value of these unallocated shares was insufficient to repay the term loan and lines of credit in full. As a result, the Company forgave the remaining balance. Upon the transfer of the unallocated shares to the Company, these shares were cancelled and returned to the Company’s pool of authorized but unissued shares of common stock.

The Company filed a request for a favorable determination letter from the Internal Revenue Service as to the tax-qualified status of the ESOP on its termination.

The Company received the favorable determination letter dated September 5, 2014 from the Internal Revenue Service and during the fourth quarter of 2014 distributed the allocated shares to the participants.

Noncontrolling Interest

In January 2013 the Company’s subsidiary banks issued a total of $7.9 million of Fixed Rate Noncumulative Perpetual Preferred Stock, Series B. The preferred stock qualified as Tier 1 capital at each bank and pays dividends at an annual rate of 5.30%. The preferred stock has no voting rights. This capital is presented as noncontrolling interest in the consolidated balance sheets. Dividends declared on this preferred stock are presented as earnings allocated to the noncontrolling interest in the consolidated statements of income. Effective September 1, 2013, the Fixed Rate Noncumulative Perpetual Preferred Stock, Series B was rolled into one issue under Uwharrie Bank in connection with the consolidation and name change.

During 2013, the Company’s subsidiary bank, Uwharrie Bank, raised $2.8 million of Fixed Rate Noncumulative Perpetual Preferred Stock, Series C. The preferred stock qualifies as Tier 1 capital at the bank and pays dividends at an annual rate of 5.30%. The preferred stock has no voting rights.

Recent Accounting Pronouncements

In January 2014, the FASB issued ASU 2014-04, an update to ASC 310 “Receivables – Trouble Debt Restructurings by Creditors”. The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The update is effective for reporting periods beginning after December 15, 2014. The adoption of this update will not have a significant impact on the Company’s financial statements except for added disclosures.

 

49


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

From time to time the FASB issues exposure drafts of proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.

Reclassification

Certain amounts in the 2013 financial statements have been reclassified to conform to the 2014 presentation. These reclassifications do not have a material impact on net income or shareholders’ equity.

Note 2 - Investment Securities

Carrying amounts and fair values of securities available for sale are summarized below:

 

December 31, 2014

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  
     (dollars in thousands)  

Securities available for sale

           

U.S. Treasury

   $ 19,030       $ 362       $ 6       $ 19,386   

U.S. Government agencies

     50,969         96         290         50,775   

GSE - Mortgage-backed securities and CMO’s

     27,748         133         309         27,572   

State and political subdivisions

     11,575         505         —           12,080   

Corporate bonds

     3,040         —           29         3,011   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 112,362       $ 1,096       $ 634       $ 112,824   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  
     (dollars in thousands)  

Securities held to maturity

           

U.S. Government agencies

   $ 2,085       $ —         $ 32       $ 2,053   

Corporate bonds

     3,411         —           14         3,397   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $ 5,496       $ —         $ 46       $ 5,450   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  
     (dollars in thousands)  

Securities available for sale

           

U.S. Treasury

   $ 20,992       $ 502       $ 208       $ 21,286   

U.S. Government agencies

     40,245         150         809         39,586   

GSE - Mortgage-backed securities and CMO’s

     32,557         116         953         31,720   

State and political subdivisions

     7,337         351         —           7,688   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 101,131       $ 1,119       $ 1,970       $ 100,280   
  

 

 

    

 

 

    

 

 

    

 

 

 

At both December 31, 2014 and 2013, the Company owned Federal Reserve Bank stock reported at cost of $506,000 and $467,000, respectively. Also at December 31, 2014 and 2013, the Company owned Federal Home Loan Bank Stock (FHLB) of $532,000 and $717,000, respectively. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership and borrowings with these banks.

 

50


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 2 - Investment Securities (Continued)

 

Results from sales and calls of securities available for sale for the years ended December 31, 2014, 2013 and 2012 are as follows:

 

     2014      2013      2012  
     (dollars in thousands)  

Gross proceeds from sales and calls

   $ 11,592       $ 20,182       $ 42,889   
  

 

 

    

 

 

    

 

 

 

Realized gains from sales

   $ 28       $ 41       $ 1,398   

Realized losses from sales

     (30      (564      (112
  

 

 

    

 

 

    

 

 

 

Net realized gains (losses)

   $ (2    $ (523    $ 1,286   
  

 

 

    

 

 

    

 

 

 

At December 31, 2014, 2013 and 2012 securities available for sale with a carrying amount of $84.7 million, $63.1 million and $48.8 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2014 and 2013. The unrealized losses on investment securities are a result of temporary fluctuations in the market prices due to a rise in interest rates, which will adjust if rates decline in a volatile market and are in no way a reflection of the credit quality of the investments. At December 31, 2014, the unrealized losses on available for sale securities related to one United States Treasury note, thirteen government agency securities, eight government sponsored enterprise (GSE) mortgage backed securities and two corporate bonds. At December 31, 2014, the unrealized losses on held to maturity securities related to one government agency security and two corporate bonds. At December 31, 2013 the unrealized losses related to one United States Treasury note, thirteen government agency securities and ten government sponsored enterprise (GSE) mortgage backed securities.

 

     Less than 12 Months      12 Months or More      Total  

December 31, 2014

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (dollars in thousands)                

Securities available for sale temporary impairment

                 

U.S. Treasury

   $ 3,143       $ 6       $ —         $ —         $ 3,143       $ 6   

U.S. Gov’t agencies

     9,690         23         17,776         267         27,466         290   

GSE-Mortgage-backed securities and CMO’s

     1,990         4         14,168         305         16,158         309   

Corporate bonds

     3,011         29         —           —           3,011         29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 17,834       $ 62       $ 31,944       $ 572       $ 49,778       $ 634   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12 Months      12 Months or More      Total  

December 31, 2014

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (dollars in thousands)                

Held to maturity temporary impairment

                 

U.S. Gov’t agencies

   $ 2,053       $ 32       $ —         $ —         $ 2,053       $ 32   

Corporate bonds

     3,397         14         —           —           3,397         14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $ 5,450       $ 46       $ —         $ —         $ 5,450       $ 46   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

51


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 2 - Investment Securities (Continued)

 

     Less than 12 Months      12 Months or More      Total  

December 31, 2013

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
            (dollars in thousands)                       

Securities available for sale temporary impairment

                 

U.S. Treasury

   $ 4,722       $ 208       $ —         $ —         $ 4,722       $ 208   

U.S. Gov’t agencies

     32,406         809         —           —           32,406         809   

GSE-Mortgage-backed securities and CMO’s

     18,947         809         3,849         144         22,796         953   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 56,075       $ 1,826       $ 3,849       $ 144       $ 59,924       $ 1,970   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company did have seven government agency securities and seven GSE mortgage backed securities that had been in a loss position for more than twelve months. Declines in the fair value of the investment portfolio are believed by management to be temporary in nature. When evaluating an investment for other-than-temporary impairment management considers among other things, the length of time and the extent to which the fair value has been in a loss position, the financial condition of the issuer and the intent and the ability of the Company to hold the investment until the loss position is recovered.

Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of quality but that the losses are temporary in nature. At December 31, 2014, the Company does not intend to sell and is not likely to be required to sell the available for sale securities that were in a loss position prior to full recovery.

The following table shows contractual maturities of the entire investment portfolio as of December 31, 2014:

 

     Amortized      Estimated  
     Cost      Fair Value  
     (dollars in thousands)  

Due within one year

   $ 5,147       $ 5,175   

Due after one but within five years

     57,711         58,043   

Due after five but within ten years

     21,537         21,603   

Due after ten years

     5,715         5,881   

Mortgage backed securities

     27,748         27,572   
  

 

 

    

 

 

 
   $ 117,858       $ 118,274   
  

 

 

    

 

 

 

The mortgage-backed securities are shown separately as they are not due at a single maturity date.

 

52


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 3 - Loans Held for Investment

The composition of net loans held for investment by class as of December 31, 2014 and 2013 is as follows:

 

     2014      2013  
     (dollars in thousands)  

Commercial

     

Commercial

   $ 47,418       $ 47,436   

Real estate – commercial

     92,517         95,922   

Other real estate construction loans

     22,362         17,583   

Noncommercial

     

Real estate 1 – 4 family construction

     3,888         3,418   

Real estate – residential

     89,374         87,463   

Home equity

     46,360         45,231   

Consumer loans

     8,460         9,623   

Other loans

     481         612   
  

 

 

    

 

 

 
     310,860         307,288   

Less:

     

Allowance for loan losses

     (3,738      (5,095

Deferred loan (fees) costs, net

     (7      60   
  

 

 

    

 

 

 

Loans held for investment, net

   $ 307,115       $ 302,253   
  

 

 

    

 

 

 

Although the subsidiary bank loan portfolio is diversified, there is a concentration of mortgage real estate loans, primarily 1 to 4 family residential mortgage loans, which represent 44.91% of total loans. Additionally, there is concentration in commercial loans secured primarily by real estate, shopping center locations, commercial land development, commercial buildings and equipment that represent 52.21% of total loans. There is not a concentration of a particular type of credit in this group of commercial loans.

Total recorded investment in impaired loans, which consisted of nonaccrual loans and other loans identified by management as impaired, totaled $7.6 million and $17.6 million at December 31, 2014 and 2013, respectively. There were no loans 90 days past due and still accruing at December 31, 2014 or at December 31, 2013.

Restructured loans at December 31, 2014 totaled $6.0 million and are included in the impaired loan total, compared to $6.4 million of which all $6.4 million were included in impaired loans at December 31, 2013. The carrying value of foreclosed properties held as other real estate was $5.9 million and $7.2 million at December 31, 2014 and 2013, respectively.

The Company had loans of $128.9 million and $150.4 million pledged to borrowings at Federal Home Loan Bank and the Federal Reserve Bank at December 31, 2014 and 2013, respectively.

The Company’s loan policies are written to address loan-to-value ratios and collateralization methods with respect to each lending category. Consideration is given to the economic and credit risk of lending areas and customers associated with each category.

 

53


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 4 - Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31, 2014, 2013 and 2012 are presented below:

 

Commercial

   2014      2013      2012  
     (dollars in thousands)  

Balance, beginning of year

   $ 2,665       $ 2,791       $ 2,904   

Provision (recovery) charged to operations

     (302      784         985   

Charge-offs

     (749      (1,005      (1,167

Recoveries

     102         96         69   
  

 

 

    

 

 

    

 

 

 

Net (charge-offs)

     (647      (909      (1,098
  

 

 

    

 

 

    

 

 

 

Other

     —           (1      —     
  

 

 

    

 

 

    

 

 

 

Balance, end of year

   $ 1,716       $ 2,665       $ 2,791   
  

 

 

    

 

 

    

 

 

 

Non-Commercial

   2014      2013      2012  
     (dollars in thousands)  

Balance, beginning of year

   $ 2,430       $ 4,010       $ 3,911   

Provision (recovery) charged to operations

     (87      (756      847   

Charge-offs

     (482      (966      (824

Recoveries

     161         146         76   
  

 

 

    

 

 

    

 

 

 

Net (charge-offs)

     (321      (820      (748
  

 

 

    

 

 

    

 

 

 

Other

     —           (4      —     
  

 

 

    

 

 

    

 

 

 

Balance, end of year

   $ 2,022       $ 2,430       $ 4,010   
  

 

 

    

 

 

    

 

 

 

Total

   2014      2013      2012  
     (dollars in thousands)  

Balance, beginning of year

   $ 5,095       $ 6,801       $ 6,815   

Provision (recovery) charged to operations

     (389      28         1,832   

Charge-offs

     (1,231      (1,971      (1,991

Recoveries

     263         242         145   
  

 

 

    

 

 

    

 

 

 

Net (charge-offs)

     (968      (1,729      (1,846
  

 

 

    

 

 

    

 

 

 

Other

     —           (5      —     
  

 

 

    

 

 

    

 

 

 

Balance, end of year

   $ 3,738       $ 5,095       $ 6,801   
  

 

 

    

 

 

    

 

 

 

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at December 31, 2014 and 2013:

 

December 31, 2014                  
     Individually Evaluated      Collectively Evaluated      Total  
     Reserve      Loans      Reserve      Loans      Reserve      Loans  
     (dollars in thousands)                

Commercial

   $ 179       $ 2,125       $ 1,537       $ 160,172       $ 1,716       $ 162,297   

Non-Commercial

     277         5,436         1,745         143,120         2,022         148,556   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 456       $ 7,561       $ 3,282       $ 303,292       $ 3,738       $ 310,853   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2013                  
      Individually Evaluated      Collectively Evaluated      Total  
     Reserve      Loans      Reserve      Loans      Reserve      Loans  
     (dollars in thousands)                

Commercial

   $ 1,519       $ 8,700       $ 1,146       $ 152,241       $ 2,665       $ 160,941   

Non-Commercial

     868         8,853         1,562         137,554         2,430         146,407   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,387       $ 17,553       $ 2,708       $ 289,795       $ 5,095       $ 307,348   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

54


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 4 - Allowance for Loan Losses (Continued)

The Company made two changes made to the allowance for loan loss general reserve during 2014. First, the process of assigning the probability of default to commercial loans was changed to be based on internally determined loan grades instead of the beacon credit scores of the related underlying individual guarantor or borrower. Second, it was decided that a more accurate and stable measure of the risk in the portfolio would be achieved by a “through the cycle” probability of default or the likelihood that the borrower would pay as agreed. The probabilities of default are sampled from the prior two years making the previous method of estimating default a severely lagging statistic. These changes increased the Allowance by approximately $1.3 million. Management believes these better quantify probable losses within the loan portfolio.

Past due loan information is used by management when assessing the adequacy of the allowance for loan loss. The following tables summarize the past due information of the loan portfolio by class:

 

December 31, 2014                  
     Loans
30-89 Days
Past Due
     Loans
90 Days
or More
Past due
and Non -
Accrual
     Total Past
Due Loans
     Current
Loans
     Total
Loans
     Accruing
Loans 90 or
More Days
Past Due
 
            (dollars in thousands)                

Commercial

   $ 42       $ —         $ 42       $ 47,376       $ 47,418       $ —     

Real estate – commercial

     77         794         871         91,646         92,517         —     

Other real estate construction

     —           342         342         22,020         22,362         —     

Real estate construction

     —           —           —           3,888         3,888         —     

Real estate – residential

     1,673         1,097         2,770         86,597         89,367         —     

Home equity

     89         13         102         46,258         46,360         —     

Consumer loan

     123         —           123         8,337         8,460         —     

Other loans

     —           —           —           481         481         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,004       $ 2,246       $ 4,250       $ 306,603       $ 310,853       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2013                  
      Loans
30-89 Days
Past Due
     Loans
90 Days
or More
Past due
and Non -
Accrual
     Total Past
Due Loans
     Current
Loans
     Total
Loans
     Accruing
Loans 90 or
More Days
Past Due
 
            (dollars in thousands)                

Commercial

   $ 143       $ 204       $ 347       $ 47,089       $ 47,436       $ —     

Real estate – commercial

     165         1,064         1,229         94,693         95,922         —     

Other real estate construction

     145         1,637         1,782         15,801         17,583         —     

Real estate construction

     —           —           —           3,418         3,418         —     

Real estate – residential

     1,426         1,564         2,990         84,533         87,523         —     

Home equity

     207         248         455         44,776         45,231         —     

Consumer loan

     55         —           55         9,568         9,623         —     

Other loans

     —           —           —           612         612         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,141       $ 4,717       $ 6,858       $ 300,490       $ 307,348       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Once a loan becomes 90 days past due, the loan is automatically transferred to a nonaccrual status. The exception to this policy is credit card loans that remain in accrual status 90 days or more until they are paid current or charged off.

 

55


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 4 - Allowance for Loan Losses (Continued)

 

The composition of nonaccrual loans by class as of December 31, 2014 and 2013 is as follows:

 

     2014      2013  
     (dollars in thousands)  

Commercial

   $ —         $ 204   

Real estate – commercial

     794         1,064   

Other real estate construction

     342         1,637   

Real estate 1-4 family construction

     —           —     

Real estate – residential

     1,097         1,564   

Home equity

     13         248   

Consumer loans

     —           —     

Other loans

     —           —     
  

 

 

    

 

 

 
   $ 2,246       $ 4,717   
  

 

 

    

 

 

 

Management uses a risk-grading program to facilitate the evaluation of probable inherent loan losses and to measure the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by the loan officers and reviewed and monitored by the lenders and credit administration on an ongoing basis. The program has eight risk grades summarized in five categories as follows:

Pass: Loans that are pass grade credits include loans that are fundamentally sound and risk factors are reasonable and acceptable. They generally conform to policy with only minor exceptions and any major exceptions are clearly mitigated by other economic factors.

Watch: Loans that are watch credits include loans on management’s watch list where a risk concern may be anticipated in the near future.

Substandard: Loans that are considered substandard are loans that are inadequately protected by current sound net worth, paying capacity of the obligor or the value of the collateral pledged. All nonaccrual loans are graded as substandard.

Doubtful: Loans that are considered to be doubtful have all weaknesses inherent in loans classified substandard, plus the added characteristic that the weaknesses make the collection or liquidation in full on the basis of current existing facts, conditions and values highly questionable and improbable.

Loss: Loans that are considered to be a loss are considered to be uncollectible and of such little value that their continuance as bankable assets is not warranted.

 

56


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 4 - Allowance for Loan Losses (Continued)

 

The tables below summarize risk grades of the loan portfolio by class as of December 31, 2014 and 2013:

 

December 31, 2014

                                  
                   Sub-                
     Pass      Watch      standard      Doubtful      Total  
            (dollars in thousands)                

Commercial

   $ 46,734       $ 614       $ 70       $ —         $ 47,418   

Real estate – commercial

     82,846         5,513         4,158         —           92,517   

Other real estate construction

     19,724         1,925         713         —           22,362   

Real estate 1-4 family construction

     3,888         —           —           —           3,888   

Real estate – residential

     75,859         10,090         3,418         —           89,367   

Home equity

     44,799         1,458         103         —           46,360   

Consumer loans

     8,175         277         8         —           8,460   

Other loans

     481         —           —           —           481   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 282,506       $ 19,877       $ 8,470       $ 0       $ 310,853   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2013               
                   Sub-                
     Pass      Watch      standard      Doubtful      Total  
            (dollars in thousands)                

Commercial

   $ 46,520       $ 635       $ 281       $ —         $ 47,436   

Real estate – commercial

     80,679         9,396         5,847         —           95,922   

Other real estate construction

     12,898         2,465         1,385         835         17,583   

Real estate 1-4 family construction

     3,418         —           —           —           3,418   

Real estate – residential

     70,407         12,911         4,205         —           87,523   

Home equity

     43,830         1,005         396         —           45,231   

Consumer loans

     9,216         361         46         —           9,623   

Other loans

     612         —           —           —           612   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 267,580       $ 26,773       $ 12,160       $ 835       $ 307,348   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. During 2014, nonperforming loans decreased from $4.7 million at December 31, 2013 to $2.2 million at December 31, 2014, a decrease of $2.5 million. There were several loans that were foreclosed on during 2014 with the related property being moved into other real estate owned.

 

57


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 4 - Allowance for Loan Losses (Continued)

 

The following tables show the breakdown between performing and nonperforming loans by class as of December 31, 2014 and 2013:

 

December 31, 2014         
            Non-         
     Performing      Performing      Total  
     (dollars in thousands)  

Commercial

   $ 47,418       $ —         $ 47,418   

Real estate – commercial

     91,723         794         92,517   

Other real estate construction

     22,020         342         22,362   

Real estate 1-4 family construction

     3,888         —           3,888   

Real estate – residential

     88,270         1,097         89,367   

Home equity

     46,347         13         46,360   

Consumer loans

     8,460         —           8,460   

Other loans

     481         —           481   
  

 

 

    

 

 

    

 

 

 

Total

   $ 308,607       $ 2,246       $ 310,853   
  

 

 

    

 

 

    

 

 

 
December 31, 2013         
            Non-         
     Performing      Performing      Total  
     (dollars in thousands)  

Commercial

   $ 47,232       $ 204       $ 47,436   

Real estate – commercial

     94,858         1,064         95,922   

Other real estate construction

     15,946         1,637         17,583   

Real estate 1-4 family construction

     3,418         —           3,418   

Real estate – residential

     85,959         1,564         87,523   

Home equity

     44,983         248         45,231   

Consumer loans

     9,623         —           9,623   

Other loans

     612         —           612   
  

 

 

    

 

 

    

 

 

 

Total

   $ 302,631       $ 4,717       $ 307,348   
  

 

 

    

 

 

    

 

 

 

 

58


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 4 - Allowance for Loan Losses (Continued)

 

Loans are considered impaired when, based on current information and events it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired, a valuation analysis is performed and a specific reserve is allocated if necessary. The tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class as of December 31, 2014 and 2013 (unpaid principal balance was grossed up for chargeoffs):

 

                                 Year ended  
     As of December 31, 2014      December 31, 2014  
            Recorded      Recorded                       
     Unpaid      Investment      Investment             Average         
     Principal      With No      With      Related      Recorded      Interest  
     Balance      Allowance      Allowance      Allowance      Investment      Income  
            (dollars in thousands)                

Commercial

   $ 98       $ 68       $ 30       $ 30       $ 117       $ 7   

Real estate – commercial

     1,820         1,242         389         145         2,641         73   

Other real estate construction

     934         342         54         4         1,108         6   

Real estate 1 -4 family construction

     20         —           20         1         109         1   

Real estate – residential

     5,298         1,865         3,433         257         5,865         268   

Home equity

     49         30         19         19         73         2   

Consumer loans

     69         29         40         —           83         4   

Other loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,288       $ 3,576       $ 3,985       $ 456       $ 9,996       $ 361   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                                 Year ended  
     As of December 31, 2013      December 31, 2013  
            Recorded      Recorded                       
     Unpaid      Investment      Investment             Average         
     Principal      With No      With      Related      Recorded      Interest  
     Balance      Allowance      Allowance      Allowance      Investment      Income  
            (dollars in thousands)                

Commercial

   $ 377       $ 291       $ 86       $ 67       $ 845       $ 21   

Real estate – commercial

     6,808         3,962         2,375         507         7,089         328   

Other real estate construction

     2,034         247         1,739         945         2,078         17   

Real estate 1 -4 family construction

     374         25         349         16         380         23   

Real estate – residential

     8,197         4,619         3,329         530         8,507         300   

Home equity

     415         58         357         279         819         8   

Consumer loans

     116         61         55         43         156         14   

Other loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,321       $ 9,263       $ 8,290       $ 2,387       $ 19,874       $ 711   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                                 Year ended  
     As of December 31, 2012      December 31, 2012  
            Recorded      Recorded                       
     Unpaid      Investment      Investment             Average         
     Principal      With No      With      Related      Recorded      Interest  
     Balance      Allowance      Allowance      Allowance      Investment      Income  
            (dollars in thousands)                

Commercial

   $ 1,977       $ 388       $ 1,470       $ 616       $ 1,440       $ 66   

Real estate – commercial

     11,299         6,341         2,895         411         11,607         473   

Other real estate construction

     3,935         2,437         1,448         401         4,055         202   

Real estate 1 -4 family construction

     840         713         127         127         1,053         43   

Real estate – residential

     8,985         3,994         4,991         1,215         11,442         427   

Home equity

     1,068         521         547         159         1,200         32   

Consumer loans

     235         39         196         105         308         14   

Other loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28,339       $ 14,433       $ 11,674       $ 3,034       $ 31,105       $ 1,257   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

59


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 5 - Troubled Debt Restructures

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification involves providing a concession to the existing loan contract. The Company offers various types of concessions when modifying loans to troubled borrowers, however, forgiveness of principal is rarely granted. Concessions offered are term extensions, capitalizing accrued interest, reducing interest rates to below current market rates or a combination of any of these. Combinations from time to time may include allowing a customer to be placed on interest-only payments. The presentations below in the “other” category are TDR’s with a combination of concessions. At the time of a TDR, additional collateral or a guarantor may be requested.

Loans modified as TDRs are typically already on nonaccrual status and in some cases, partial chargeoffs may have already been taken against the outstanding loan balance. The Company classifies TDR loans as impaired loans and evaluates the need for an allowance for loan loss on a loan-by-loan basis. An allowance is based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the estimated fair value of the underlying collateral less any selling costs, if the loan is deemed to be collateral dependent.

For the twelve months ended December 31, 2014, 2013 and 2012, the following table presents a breakdown of the types of concessions made by loan class:

 

     Year ended December 31, 2014  
            Pre-Modification      Post-Modification  
     Number      Outstanding Recorded      Outstanding Recorded  
     of Contracts      Investment      Investment  
            (dollars in thousands)         

Extend payment terms:

        

Commercial

     —         $ —         $ —     

Real estate – commercial

     —           —           —     

Other real estate construction

     —           —           —     

Real estate 1-4 family construction

     —           —           —     

Real estate – residential

     —           —           —     

Home equity

     —           —           —     

Consumer loans

     1         32         32   

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     1       $ 32       $ 32   
  

 

 

    

 

 

    

 

 

 

Other:

        

Commercial

     —         $ —         $ —     

Real estate – commercial

     3         424         424   

Other real estate construction

     —           —           —     

Real estate 1-4 family construction

     —           —           —     

Real estate – residential

     6         870         870   

Home equity

     —           —           —     

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     9       $ 1,294       $ 1,294   
  

 

 

    

 

 

    

 

 

 

Total

     10       $ 1,326       $ 1,326   
  

 

 

    

 

 

    

 

 

 

 

60


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 5 - Troubled Debt Restructures (Continued)

 

     Year ended December 31, 2013  
            Pre-Modification      Post-Modification  
     Number      Outstanding Recorded      Outstanding Recorded  
     of Contracts      Investment      Investment  
            (dollars in thousands)         

Extend payment terms:

        

Commercial

     —         $ —         $ —     

Real estate – commercial

     —           —           —     

Other real estate construction

     —           —           —     

Real estate 1-4 family construction

     —           —           —     

Real estate – residential

     —           —           —     

Home equity

     —           —           —     

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     —         $ —         $ —     
  

 

 

    

 

 

    

 

 

 

Other:

        

Commercial

     —         $ —         $ —     

Real estate – commercial

     1         356         341   

Other real estate construction

     —           —           —     

Real estate 1-4 family construction

     —           —           —     

Real estate – residential

     8         895         875   

Home equity

     1         18         18   

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     10       $ 1,269       $ 1,234   
  

 

 

    

 

 

    

 

 

 

Total

     10       $ 1,269       $ 1,234   
  

 

 

    

 

 

    

 

 

 

 

61


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 5 - Troubled Debt Restructures (Continued)

 

     Year ended December 31, 2012  
            Pre-Modification      Post-Modification  
     Number      Outstanding Recorded      Outstanding Recorded  
     of Contracts      Investment      Investment  
            (dollars in thousands)         

Extend payment terms:

        

Commercial

     1       $ 33       $ 32   

Real estate – commercial

     —           —           —     

Other real estate construction

     1         49         49   

Real estate 1-4 family construction

     —           —           —     

Real estate – residential

     2         30         30   

Home equity

     —           —           —     

Consumer loans

     1         45         42   

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     5       $ 157       $ 153   
  

 

 

    

 

 

    

 

 

 

Other:

        

Commercial

     1       $ 68       $ 68   

Real estate – commercial

     1         116         112   

Other real estate construction

     —           —           —     

Real estate 1-4 family construction

     1         32         31   

Real estate – residential

     6         939         933   

Home equity

     —           —           —     

Consumer loans

     1         17         17   

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     10       $ 1,172       $ 1,161   
  

 

 

    

 

 

    

 

 

 

Total

     15       $ 1,329       $ 1,314   
  

 

 

    

 

 

    

 

 

 

The following table presents loans that were modified as troubled debt restructurings within the previous twelve months and for which there was a payment default during the twelve months ended December 31, 2014, 2013 and 2012:

 

     Year ended      Year ended  
     December 31, 2014      December 31, 2013  
     Number      Recorded      Number      Recorded  
     of Loans      Investment      of Loans      Income  

Extend payment terms:

           

Commercial

     —         $ —           —         $ —     

Real estate – commercial

     —           —           —           —     

Other real estate construction

     —           —           —           —     

Real estate 1-4 family construction

     —           —           —           —     

Real estate – residential

     —           —           —           —     

Home equity

     —           —           —           —     

Consumer loans

     —           —           —           —     

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

62


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 5 - Troubled Debt Restructures (Continued)

 

     Year ended
December 31, 2014
     Year ended
December 31, 2013
 
     Number
of Loans
     Recorded
Investment
     Number
of Loans
     Recorded
Income
 

Other:

           

Commercial

     —         $ —           —         $ —     

Real estate – commercial

     —           —           —           —     

Other real estate construction

     —           —           —           —     

Real estate 1-4 family construction

     —           —           —           —     

Real estate – residential

     —           —           —           —     

Home equity

     —           —           —           —     

Consumer loans

     —           —           —           —     

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Year ended
December 31, 2012
 
     Number
of Loans
     Recorded
Investment
 

Extend payment terms:

     

Commercial

     1       $ 31   

Real estate – commercial

     —           —     

Other real estate construction

     1         49   

Real estate 1-4 family construction

     —           —     

Real estate – residential

     2         30   

Home equity

     —           —     

Consumer loans

     —           —     

Other loans

     —           —     
  

 

 

    

 

 

 

Total

   $ 4       $ 110   
  

 

 

    

 

 

 

Other:

     

Commercial

     —         $ —     

Real estate – commercial

     —           —     

Other real estate construction

     —           —     

Real estate 1-4 family construction

     —           —     

Real estate – residential

     1         238   

Home equity

     —           —     

Consumer loans

     1         17   

Other loans

     —           —     
  

 

 

    

 

 

 
   $ 2       $ 255   
  

 

 

    

 

 

 

Total

   $ 6       $ 365   
  

 

 

    

 

 

 

A default on a troubled debt restructure is defined as being past due 90 days or being out of compliance with the modification agreement. As previously mentioned, the Company considers TDRs to be impaired loans and has $373,000 in the allowance for loan loss as of December 31, 2014, as a direct result of these TDRs. At December 31, 2013 there was $420,000 in the allowance for loan loss related to TDRs.

 

63


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 5 - Troubled Debt Restructures (Continued)

 

The following table presents the successes and failures of the types of modifications within the previous twelve months as of December 31, 2014, 2013 and 2012:

 

     Paid In Full      Paying as restructured      Converted to nonaccrual      Foreclosure/ Default  
     Number of
Loans
     Recorded
Investments
     Number of
Loans
     Recorded
Investments
     Number of
Loans
     Recorded
Investments
     Number of
Loans
     Recorded
Investments
 
     (dollars in thousands)  

December 31, 2014

                       

Extended payment terms

     —         $ —           1       $ 32         —         $ —           —         $ —     

Other

     1         112         8         1,182         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 112         9       $ 1,214         —         $ —           —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Paid In Full      Paying as restructured      Converted to nonaccrual      Foreclosure/ Default  
     Number of
Loans
     Recorded
Investments
     Number of
Loans
     Recorded
Investments
     Number of
Loans
     Recorded
Investments
     Number of
Loans
     Recorded
Investments
 
     (dollars in thousands)  

December 31, 2013

                       

Extended payment terms

     —         $ —           —         $ —           —         $ —           —         $ —     

Other

     —           —           10         1,234         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           10       $ 1,234         —         $ —           —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Paid In Full      Paying as restructured      Converted to nonaccrual      Foreclosure/ Default  
     Number of      Recorded      Number of      Recorded      Number of      Recorded      Number of      Recorded  
     Loans      Investments      Loans      Investments      Loans      Investments      Loans      Investments  
     (dollars in thousands)  
December 31, 2012                        

Extended payment terms

     —         $ —           —         $ —           —         $ —           4       $ 110   

Other

     —           —           9         949         —           —           2         255   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           9       $ 949         —         $ —           6       $ 365   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 6 - Mortgage Servicing Assets

The principal balance of loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were approximately $396 million and $406 million at December 31, 2014 and 2013, respectively. The carrying value of capitalized servicing rights, net of valuation allowances, is included in other assets. A summary of mortgage servicing rights follows:

 

     2014      2013      2012  
     (dollars in thousands)  

Beginning of year mortgage servicing rights:

   $ 2,356       $ 2,394       $ 2,142   

Amounts capitalized

     386         763         1,237   

Amortization

     (709      (801      (908

Impairment

     39         —           (77
  

 

 

    

 

 

    

 

 

 

End of year

   $ 2,072       $ 2,356       $ 2,394   
  

 

 

    

 

 

    

 

 

 

 

64


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 6 - Mortgage Servicing Assets (Continued)

 

Amortization expense is estimated as follows:

 

Year ending December 31,  
(dollars in thousands)  
2015   $ 489   
2016     424   
2017     358   
2018     292   
2019     226   
Thereafter     283   
 

 

 

 
Total   $ 2,072   
 

 

 

 

The amortization does not anticipate or pro-forma loan prepayments.

The fair value of mortgage servicing rights was $3.2 million at December 31, 2014 and $3.1 million at December 31, 2013. The key assumptions used to value mortgage servicing rights were as follows:

 

     2014     2013  

Weighted average remaining life

     256 months        260 months   

Weighted average discount rate

     10     12

Weighted average coupon

     3.98     4.01

Weighted average prepayment speed

     187     187

Note 7 - Premises and Equipment

The major classes of premises and equipment and the total accumulated depreciation at December 31, 2014 and 2013 are listed below:

 

     2014      2013  
     (dollars in thousands)  

Land

   $ 3,302       $ 3,454   

Building and improvements

     12,701         11,096   

Furniture and equipment

     8,439         7,937   
  

 

 

    

 

 

 

Total fixed assets

     24,442         22,487   

Less accumulated depreciation

     9,584         8,706   
  

 

 

    

 

 

 

Net fixed assets

   $ 14,858       $ 13,781   
  

 

 

    

 

 

 

Note 8 - Leases

The Company’s subsidiary, Uwharrie Bank had entered into a noncancelable operating lease for an administrative office location in Concord that would have expired in 2017. The lease requires annual rental payments of $62,120 and contained two five-year renewal options at the expiration of the initial term. During 2014, the Company purchased this location.

Total rental expense related to the operating leases was $16,230, $61,914, and $60,929 for the years ended December 31, 2014, 2013 and 2012, respectively, and is included in occupancy expense.

 

65


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 9 - Deposits

The composition of deposits at December 31, 2014 and 2013 is as follows:

 

     2014     2013  
     Amount      Percentage
of Total
    Amount      Percentage
of Total
 
     (dollars in thousands)  

Demand noninterest-bearing

   $ 80,069         18   $ 74,493         16

Interest checking and money market

     243,116         53     228,933         51

Savings

     39,091         9     41,512         9

Time deposits $250,000 and over

     9,865         2     11,083         2

Other time deposits

     84,294         18     97,687         22
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 456,435         100   $ 453,708         100
  

 

 

    

 

 

   

 

 

    

 

 

 

The maturities of fixed-rate time deposits at December 31, 2014 are reflected in the table below:

 

Year ending December 31,

   Time
Deposits
$250,000
and Over
     Other
Time
Deposits
 
     (dollars in thousands)  

2015

   $ 4,452       $ 49,311   

2016

     3,537         26,405   

2017

     1,876         6,605   

2018

     —           956   

2019

     —           875   

Thereafter

     —           142   
  

 

 

    

 

 

 

Total

   $ 9,865       $ 84,294   
  

 

 

    

 

 

 

Note 10 - Short-Term Borrowed Funds

The following tables set forth certain information regarding the amounts, year-end weighted average rates, average balances, weighted average rate, and maximum month-end balances for short-term borrowed funds, at and during 2014 and 2013:

 

     2014     2013  
     Amount      Rate     Amount      Rate  
     (dollars in thousands)  

At year-end

          

Master notes and other short term borrowing

   $ 3,674         0.25   $ 3,998         0.25

Notes payable

     11         6.00     11         6.00

Short-term line of credit

     1,000         3.75     —           0.00

Short-term advances from FHLB

     —           0.00     1,500         4.80
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 4,685         1.01   $ 5,509         1.30
  

 

 

    

 

 

   

 

 

    

 

 

 
     2014     2013  
     Amount      Rate     Amount      Rate  
     (dollars in thousands)  

Average for the year

          

Federal funds purchased

   $ 2         0.79   $ 4         0.79

Master notes and other short term borrowing

     4,250         0.44     5,617         0.41

Notes payable

     11         6.00     10         6.00

Short-term line of credit

     57         3.75     —           0.00

Short-term advances from FHLB

     510         4.08     5,026         2.61
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 4,830         0.88   $ 10,657         1.34
  

 

 

    

 

 

   

 

 

    

 

 

 

 

66


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 10 - Short-Term Borrowed Funds (Continued)

 

     2014      2013  
     (dollars in thousands)  

Maximum month-end balance

     

Federal funds purchased

   $ —         $ —     

Master notes and other short term borrowing

     4,640         6,736   

Notes payable

     11         11   

Short-term line of credit

     1,000         —     

Short-term advances from FHLB

     1,500         9,500   

Federal funds purchased represent unsecured overnight borrowings from other financial institutions. Master notes and other secured borrowings represent an overnight investment in commercial paper issued by the Company to customers of its subsidiary bank, where an agreement is in place.

The Company has a short term line of credit with $1.0 million outstanding at December 31, 2014. The line of credit has an interest rate of 3.75% and matures March 10, 2015. This line is collateralized by Uwharrie Bank Stock.

The subsidiary bank has combined available lines of credit for federal funds and Federal Reserve discount window availability in the amount of $36.1 million at December 31, 2014.

Note 11 - Long-Term Debt

The Company has a line of credit with the Federal Home Loan Bank secured by qualifying first lien and second mortgage loans and commercial real estate loans with eligible collateral value of $67.0 million with remaining availability of $55.5 million at December 31, 2014. There were no long-term advances under this line at December 31, 2014 and at December 31, 2013. The subsidiary bank also has standby letters of credit issued by the Federal Home Loan Bank to be used as collateral for public funds deposits. The aggregate amount of the letters of credit was $11.5 million at December 31, 2014.

During the second and third quarters of 2010, the Company conducted a private placement offering of fixed rate junior subordinated debt securities at $1,000 per security with a required minimum investment of $50,000. The offering raised $11.1 million, of which the entire $11.1 million was outstanding at December 31, 2013. These securities had a final maturity date of December 31, 2018 and may be redeemed by the Company after December 31, 2013. The junior subordinated debt paid interest quarterly at an annual fixed rate of 5.75%. All proceeds of this private placement qualify and are included in the calculation of Tier 2 capital. Once the final maturity drops under five years, the Company must impose a twenty percent annual reduction per year of the amount of the proceeds from the sale of these securities that are eligible to be counted as Tier 2 capital. The Company would have had a twenty percent reduction beginning at March 31, 2014. On March 31, 2014, the Company called its entire $11.1 million of this subordinated debt.

During the first quarter of 2014, the Company conducted a private placement offering of fixed rate junior subordinated debt securities at $1,000 per security with a required minimum investment of $50,000. The offering raised $9.5 million, of which the entire $9.5 million was outstanding at December 31, 2014. These securities have a final maturity date of March 31, 2024 and may be redeemed by the Company after March 31, 2019. The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.75%. All proceeds of this private placement qualify and are included in the calculation of Tier 2 capital. Once the final maturity

 

67


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 11 - Long-Term Debt (Continued)

 

drops under five years, the Company must impose a twenty percent annual reduction per year of the amount of the proceeds from the sale of these securities that are eligible to be counted as Tier 2 capital. The Company would have a twenty percent reduction beginning at March 31, 2019.

These two events resulted in a net reduction of $1.6 million in the outstanding junior subordinated debt securities and in total long term borrowings at December 31, 2014.

On November 19, 2002, the Company executed a mortgage in the amount of $129,000 for the purchase of property for branch expansion. This loan bears interest at 6.00% and is to be paid in 60 quarterly installments of $3,277. The outstanding principal balance on this note was $35,738 at December 31, 2014 down from $46,301 at December 31, 2013.

As of December 31, 2014, the scheduled maturities of these long term borrowings are as follows:

 

Year ending December 31,  
(dollars in thousands)  
2016   $ 12   
2017     12   
2018     —     
2019     —     
2020     —     
Thereafter     9,534   
 

 

 

 
Total   $ 9,558   
 

 

 

 

Note 12 - Income Tax Matters

The significant components of income tax expense (benefit) for the years ended December 31, 2014, 2013 and 2012 are summarized as follows:

 

     2014      2013      2012  
     (dollars in thousands)  

Current tax expense (benefit):

        

Federal

   $ 11       $ (98    $ 1,243   

State

     44         2         256   
  

 

 

    

 

 

    

 

 

 

Total

     55         (96      1,499   
  

 

 

    

 

 

    

 

 

 

Deferred tax expense (benefit):

        

Federal

     458         285         (946

State

     135         153         (188
  

 

 

    

 

 

    

 

 

 

Total

     593         438         (1,134
  

 

 

    

 

 

    

 

 

 

Net provision for income taxes

   $ 648       $ 342       $ 365   
  

 

 

    

 

 

    

 

 

 

 

68


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 12 - Income Tax Matters (Continued)

 

The difference between the provision for income taxes and the amounts computed by applying the statutory federal income tax rate of 34% to income before income taxes is summarized below:

 

     2014      2013      2012  
     (dollars in thousands)  

Tax computed at the statutory federal rate

   $ 791       $ 441       $ 262   

Increases (decrease) resulting from:

        

Tax exempt interest, net

     (252      (229      (250

State income taxes, net of federal benefit

     118         102         45   

Impairment of goodwill

     —           —           336   

Other

     (9      28         (28
  

 

 

    

 

 

    

 

 

 

Provision for income taxes

   $ 648       $ 342       $ 365   
  

 

 

    

 

 

    

 

 

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred taxes at December 31, 2014, 2013 and 2012 are as follows:

 

     2014      2013      2012  
     (dollars in thousands)  

Deferred tax assets relating to:

        

Allowance for loan losses

   $ 1,395       $ 1,934       $ 2,514   

Deferred compensation

     975         853         696   

Other

     701         856         1,030   

Net unrealized loss on securities available for sale

     —           289         —     
  

 

 

    

 

 

    

 

 

 

Total deferred tax assets

     3,071         3,932         4,240   

Deferred tax liabilities relating to:

        

Net unrealized gain on securities available for sale

     (157      —           (801

Premises and equipment

     (371      (487      (651

Deferred loans fees and costs

     (198      (199      (187

Loan servicing

     (182      (201      (208
  

 

 

    

 

 

    

 

 

 

Total deferred tax liabilities

     (908      (887      (1,847
  

 

 

    

 

 

    

 

 

 

Net recorded deferred tax asset

   $ 2,163       $ 3,045       $ 2,393   
  

 

 

    

 

 

    

 

 

 

The net deferred tax asset is included in other assets on the accompanying consolidated balance sheets.

Note 13 - Commitments and Contingencies

Financial Instruments with Off-Balance Sheet Risk

The subsidiary bank is party to financial instruments with off-balance sheet risks in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, lines of credit and standby letters of credit. These instruments involve elements of credit risk in excess of amounts recognized in the accompanying financial statements.

 

69


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 13 - Commitments and Contingencies (Continued)

 

The subsidiary bank’s risk of loss with the unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments under such instruments as it does for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, real estate and time deposits with financial institutions. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are unsecured.

As of December 31, 2014 and 2013, outstanding financial instruments whose contract amounts represent credit risk were as follows:

 

     2014      2013  
     (dollars in thousands)  

Commitments to extend credit

   $ 75,573       $ 67,865   

Credit card commitments

     8,754         8,016   

Standby letters of credit

     2,224         1,100   
  

 

 

    

 

 

 
   $ 86,551       $ 76,981   
  

 

 

    

 

 

 

Contingencies

In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements.

Financial Instruments with Concentration of Credit Risk

The subsidiary bank makes commercial, agricultural, real estate mortgage, home equity and consumer loans primarily in Stanly, Anson and Cabarrus counties. A substantial portion of the Company’s customers’ ability to honor their contracts is dependent on the economy in these counties.

Although the Company’s composition of loans is diversified, there is some concentration of mortgage loans in the total portfolio. The Bank’s policy is to abide by real estate loan-to-value margin limits corresponding to guidelines issued by the federal supervisory agencies on March 19, 1993. Lending policy for all loans requires that they be supported by sufficient cash flows at the time of origination.

Note 14 - Related Party Transactions

The Company has granted loans to certain directors and executive officers and their related interests. Such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers and, in management’s opinion, do not involve more than the normal risk of collectability. All loans to directors and executive officers or their interests are submitted to the Board of Directors for approval. A summary of loans to directors, executive officers and their related interests follows:

 

     (dollars in thousands)  

Balance at December 31, 2013

   $ 12,667   

Disbursements during the year

     12,901   

Collections during the year

     (3,848
  

 

 

 

Balance at December 31, 2014

   $ 21,720   
  

 

 

 

 

70


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 14 - Related Party Transactions (Continued)

 

At December 31, 2014, the Company had approved, but unused lines of credit, totaling $4.5 million to executive officers and directors, and their related interests.

Note 15 – Shareholders’ Equity and Regulatory Matters

The Company and its banking subsidiary are subject to certain requirements imposed by state and federal banking statutes and regulations. These requirements, among other things, establish minimum levels of capital, restrict the amount of dividends that may be distributed, and require that reserves on deposit liabilities be maintained in the form of vault cash or deposits with the Federal Reserve Bank.

The Company and its subsidiary bank are subject to federal regulatory risk-based capital guidelines for banks and bank holding companies. Each must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices which measure Total and Tier 1 Capital to risk-weighted assets and Tier 1 Capital to average assets. Quantitative measures established by regulation to ensure capital adequacy and the Company’s consolidated capital ratios are set forth in the table below. The Company expects to meet or exceed these minimums without altering current operations or strategy.

 

     Actual     Minimum
For Capital
Requirement
    Minimum to Be Well
Capitalized Under
Prompt Corrective
Action  Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (Dollars in thousands)               

December 31, 2014

               

Total Capital to Risk

               

Weighted Assets:

               

Consolidated

   $ 55,229         16.1   $ 27,469         8.0   $ N/A         —  

Uwharrie Bank

     54,933         16.1     27,362         8.0     34,202         10.0

Tier 1 Capital to Risk

               

Weighted Assets:

               

Consolidated

     41,957         12.2     13,735         4.0     N/A         —  

Uwharrie Bank

     51,195         15.0     13,681         4.0     20,521         6.0

Tier 1 Capital to

               

Average Assets:

               

Consolidated

     41,957         8.1     20,765         4.0     N/A         —  

Uwharrie Bank

     51,195         9.9     20,716         4.0     25,895         5.0

 

71


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 15 - Shareholders’ Equity and Regulatory Matters (Continued)

 

     Actual     Minimum
For Capital
Requirement
    Minimum to Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (Dollars in thousands)               

December 31, 2013

               

Total Capital to Risk

               

Weighted Assets:

               

Consolidated

   $ 56,439         16.7   $ 27,071         8.0   $ N/A         —  

Uwharrie Bank

     54,503         16.2     26,955         8.0     33,694         10.0

Tier 1 Capital to Risk

               

Weighted Assets:

               

Consolidated

     41,071         12.1     13,536         4.0     N/A         —  

Uwharrie Bank

     50,280         15.0     13,478         4.0     20,216         6.0

Tier 1 Capital to

               

Average Assets:

               

Consolidated

     41,071         7.8     21,126         4.0     N/A         —  

Uwharrie Bank

     50,280         9.6     21,067         4.0     26,334         5.0

As of December 31, 2014, the most recent notification from the Federal Deposit Insurance Corporation categorized the Company’s subsidiary bank as being well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since such notification that management believes would have changed the categorization.

On December 23, 2008, the Company entered into a letter agreement with the United States Department of Treasury to sell 10,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Senior Preferred”) with a redemption value of $10.0 million under the capital purchase program (“CPP”). The Company also issued a warrant to the Treasury that was immediately exercised for 500 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the “Warrant Preferred”) with a redemption value of $500,000. Combined proceeds received for the issuance of both the Senior Preferred and the Warrant Preferred was $10.0 million, resulting in a net discount that has been allocated between the two issues based upon their relative fair values. As a condition of the Cumulative Perpetual Preferred Stock, the Company must obtain consent from the holder to repurchase its common stock or to pay a cash dividend.

The Senior Preferred qualified as Tier 1 capital and paid cumulative dividends at a rate of 5% per year, for the first five years, and 9% per year thereafter. Under the terms of the agreement, the Senior Preferred may be redeemed with prior approval from the Federal Reserve in the first three years with the proceeds from the issuance of certain qualifying Tier 1 capital or after three years at par value plus accrued and unpaid dividends.

The Warrant Preferred also qualified as Tier 1 capital and paid cumulative dividends at a rate of 9% per year. Under the terms of the agreement, the Warrant Preferred may be redeemed after the Senior Preferred has been completely redeemed, at par value plus accrued and unpaid dividends. It is the Company’s intention to redeem both issues of preferred stock no later than the fifth anniversary of their issuance. Accordingly, the net discount of $500,000 was amortized over five years.

 

72


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 15 - Shareholders’ Equity and Regulatory Matters (Continued)

 

During the fourth quarter of 2013, the Company repaid the entire $10.5 million of Series A and Series B Fixed Rate Cumulative Perpetual Preferred Stock, at par, to the United States Department of Treasury.

During 2012, each of the Company’s subsidiary banks began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series B. The preferred stock qualifies as Tier 1 capital at the subsidiary bank and pays dividends at a rate of 5.30%. The sale ended on December 31, 2012 raising $7.9 million less issuance costs of $113,000. These funds were held in an escrow account at December 31, 2012 and the new preferred stock was issued in January 2013. Effective September 1, 2013, the Fixed Rate Noncumulative Perpetual Preferred Stock, Series B was rolled into one issue under Uwharrie Bank in connection with the consolidation and name change.

During 2013, the Company’s subsidiary bank, Uwharrie Bank, raised $2.8 million of Fixed Rate Noncumulative Perpetual Preferred Stock, Series C. The preferred stock qualifies as Tier 1 capital at the bank and pays dividends at an annual rate of 5.30%. The preferred stock has no voting rights. The offering ended September 15, 2013 with Uwharrie raising $2.8 million in new capital less total issuance costs of $23,000.

The total net amount of capital raised from Fixed Rate Noncumulative Perpetual Preferred Stock, Series B and Series C issues at the subsidiary bank level is presented as noncontrolling interest in the consolidated balance sheets.

All of the Company’s aforementioned investment in its subsidiary bank qualifies for Tier 1 capital treatment for the bank and is included as such in its year end capital ratios.

For the reserve maintenance period in effect at December 31, 2014, the subsidiary bank was required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank in the aggregate amount of $4.5 million as reserves on deposit liabilities.

Stock Repurchase Program

On February 21, 1995, the Company’s Board of Directors authorized and approved a Stock Repurchase Program, to be reaffirmed annually, pursuant to which the Company may repurchase shares of the Company’s common stock for the primary purpose of providing liquidity to its shareholders. After receiving approval the Company repurchased 56,565 shares of outstanding common stock in 2013. During 2014 the Company repurchased 374,130 shares of outstanding common stock.

Pursuant to the terms of the United States Department of the Treasury’s investment in the Company’s preferred stock under the CPP, the Company must obtain the prior consent of the United States Department of the Treasury to repurchase its common stock under the Stock Purchase Plan or otherwise or to pay a cash dividend. With the repayment in full to United States Department of the Treasury in fourth quarter of 2013, this consent is no longer needed.

 

73


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 16 - Stock Based Compensation

During 1996, the Company adopted the 1996 Incentive Stock Option Plan (“SOP”) and the Employee Stock Purchase Plan (“SPP”), under which options to purchase shares of the Company’s common stock may be granted to officers and eligible employees. Options granted under the SOP are exercisable in established increments according to vesting schedules, generally three to five years, and will expire if not exercised within ten years of the date of grant. Options granted under the SPP are fully vested at the date of grant and expire if not exercised within two years of the grant date. Both of these plans expired in 2006. At December 31, 2014, the SOP and the SPP had no options outstanding.

During 2006, the Company adopted the 2006 Incentive Stock Option Plan (“SOP II”) and the Employee Stock Purchase Plan (“SPP II”), under which options to purchase shares of the Company’s common stock may be granted to officers and eligible employees. Options granted under the SOP II are exercisable in established increments according to vesting schedules, generally three to five years, and will expire if not exercised within ten years of the date of grant. Options granted under the SPP II are fully vested at the date of grant and expire if not exercised within two years of the grant date. At December 31, 2014, the SOP II had 12,607 options outstanding and the SPP II had no options outstanding.

Employee Stock Plans

The following is a summary of stock option activity for the year ended December 31, 2014:

 

     Shares      Weighted
Average

Exercise
Price
     Aggregate
Intrinsic Value

(in thousands)
 

Options outstanding at the beginning of the year

     94,341       $ 5.24       $ —     
        

 

 

 

Options granted

     —           —        

Options exercised

     —           —        

Forfeitures

     (81,734      5.24      
  

 

 

    

 

 

    

Options outstanding at the end of the year

     12,607       $ 5.24       $ —     
  

 

 

    

 

 

    

 

 

 

Options exercisable at the end of the year

     12,607       $ 5.24       $ —     
  

 

 

    

 

 

    

 

 

 

Total options outstanding and exercisable at December 31, 2014 were 12,607 at an exercise price of $5.24 per share with a weighted average expected term of 3.12 years. At December 31, 2014, authorized shares of common stock reserved for future grants of options totaled 158,071 under the SOP II and 105,299 under the SPP II.

 

74


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 16 - Stock Based Compensation (Continued)

 

The fair market value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. There were no shares granted during the years ended December 31, 2014 and 2013 under the SOP II.

As of December 31, 2014, there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all of the Company’s stock benefit plans.

The Company funds the option shares from authorized but unissued shares. The Company does not typically purchase shares to fulfill the obligations of the stock benefit plans. Company policy does allow option holders to exercise options with seasoned shares.

There were no options exercised in 2012, 2013 or 2014.

Note 17 - Employee and Director Benefit Plans

Employees’ 401(k) Retirement Plan

The Company has established an associate tax deferred savings plan under Section 401(k) of the Internal Revenue Code of 1986. All associates are eligible to make elective deferrals on the first day of the calendar month coincident or next following the date the associate attains the age of 18, completes one year of eligibility service and completes at least 1,000 hours of service and is 100% vested in the plan once they enroll.

The Company’s annual contribution to the plan was $330,448 in 2014, $317,281 in 2013 and $323,545 in 2012, determined as follows:

 

   

The Company will contribute a safe harbor matching contribution in an amount equal to: (i) 100% of the matched employee contributions that are not in excess of 3% of compensation, plus (ii) 50% of the amount of the matched employee contributions that exceed 3% of compensation, but do not exceed 5% of compensation.

 

   

A discretionary contribution, subject to approval by the Board of Directors, limited to an amount not to exceed the maximum amount deductible for income tax purposes.

 

75


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 17 - Employee and Director Benefit Plans (Continued)

 

Employee Stock Ownership Plan

During the first quarter of 2014, the board of directors of the Company voted to terminate the ESOP effective March 1, 2014. As of February 28, 2014, the ESOP held 740,530 shares, or 9.95% of the Company’s total outstanding shares of common stock, of which 252,446 shares were unallocated to participants in the ESOP.

The Company originally made a term loan to the ESOP in 1999. In addition, the Company established a $500,000 line of credit to the ESOP in 2010 and established a second $500,000 line of credit to the ESOP in 2013. The ESOP used the proceeds of the term loan and lines of credit to purchase shares of the Company’s common stock for the benefit of qualified employees. The unallocated shares of stock held by the ESOP were pledged as collateral for the term loan and lines of credit. As debt payments were made on the term loan and lines of credit, unallocated shares associated with those debt payments were released to the ESOP and allocated among participants.

In connection with the termination of the ESOP, the ESOP trustees transferred the 252,446 remaining unallocated shares to the Company in partial satisfaction of the outstanding balance on the term loan and lines of credit. The fair value of these unallocated shares was insufficient to repay the term loan and lines of credit in full. As a result, the Company expensed the remaining balance of $8,600. Upon the transfer of the unallocated shares to the Company, these shares were cancelled and returned to the Company’s pool of authorized but unissued shares of common stock.

The Company filed a request for a favorable determination letter from the Internal Revenue Service as to the tax-qualified status of the ESOP on its termination.

The Company received the favorable determination letter dated September 5, 2014 from the Internal Revenue Service and during the fourth quarter all shares under the ESOP were distributed to the participants.

The Company did have expense of approximately 2% of eligible compensation as a contribution to the ESOP Plan during the first part of 2014, the same as 2013 and 2012. Expenses of $45,693, $223,283 and $209,434 during the years ended December 31, 2014, 2013 and 2012, respectively, were incurred in connection with the ESOP.

The ESOP had a put option that allowed the employee to put their shares back to the Company. The Company has a liability set aside at fair value in the amount of approximately $561,000 for shares that can be put back to the Company during the first half of 2015. After this time, the put option will expire and there will no longer be a liability for the Company. This liability was reclassified from additional paid in capital and is presented separately on the Company’s balance sheet.

Supplemental Executive Retirement Plan

The Company has implemented a non-qualifying deferred compensation plan for certain executive officers. Certain of the plan benefits will accrue and vest during the period of employment and will be paid in fixed monthly benefit payments for up to ten years upon separation from service. The plan also provides for payment of death benefits and for payment of disability benefits in the event the officer becomes permanently disabled prior to separation from service.

 

76


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 17 - Employee and Director Benefit Plans (Continued)

 

Effective December 31, 2008, this plan was amended and restated to comply with Section 409A of the Internal Revenue Code. The participants’ account liability balances as of December 31, 2008 could be transferred into a trust fund, where investments will be participant-directed.

The plan is structured as a defined contribution plan and the Company’s expected annual funding contribution for the participants has been calculated through the participant’s expected retirement date. Under terms of the agreement, the Company has reserved the absolute right, at its sole discretion, to either fund or refrain from funding the plan. The plan also provides for payment of death benefits and for payment of disability benefits in the event the officer becomes permanently disabled prior to separation from service.

During 2014, 2013 and 2012, $316,800, $336,800 and $266,800, respectively was expensed each year for benefits provided under the plans The liability accrued for deferred compensation under the plan amounted to $3.3 million and $2.8 million at December 31, 2014 and 2013, respectively.

Split-Dollar Life Insurance

The Company has entered into Life Insurance Endorsement Method Split-Dollar Agreements with certain officers. Under these agreements, upon death of the officer, the Company first recovers the cash surrender value of the contract and then shares the remaining death benefits from insurance contracts, which are written with different carriers, with the designated beneficiaries of the officers. The death benefit to the officers’ beneficiaries is a multiple of base salary at the time of the agreements. The Company, as owner of the policies, retains an interest in the life insurance proceeds and a 100% interest in the cash surrender value of the policies. During 2014 and 2013, the expense associated with these policies was $112,176 and $63,732 respectively.

 

77


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 18 - Fair Values of Financial Instruments and Interest Rate Risk

ASC 825, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or non-recurring basis.

The fair value estimates presented at December 31, 2014 and December 31, 2013, are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price a liability could be settled for. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of December 31, 2014 and December 31, 2013:

 

December 31, 2014               
     Carrying      Estimated                       
     Value      Fair Value      Level 1      Level 2      Level 3  
     (dollars in thousands)         

FINANCIAL ASSETS

              

Cash and cash equivalents

   $ 50,791       $ 50,826       $ 47,605       $ 3,221       $ —     

Securities available for sale

     112,824         112,824         19,386         93,438         —     

Securities held to maturity

     5,496         5,450         2,053         3,397         —     

Loans held for investment, net

     307,115         321,295         —           —           321,295   

Loans held for sale

     2,147         2,147         —           2,147      

Restricted stock

     1,038         1,038         1,038         —           —     

Bank-owned life insurance

     6,645         6,645         —           —           6,645   

Accrued interest receivable

     1,747         1,747         —           —           1,747   

FINANCIAL LIABILITIES

              

Deposits

   $ 456,435       $ 442,655       $ —         $ —         $ 442,655   

Short-term borrowings

     4,685         4,685         —           4,685         —     

Long-term borrowings

     24         24         —           24      

Junior subordinated debt

     9,534         9,703         —           —           9,703   

Accrued interest payable

     180         180         —           —           180   

 

78


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 18 - Fair Values of Financial Instruments and Interest Rate Risk (Continued)

 

December 31, 2013

 

     Carrying      Estimated                       
     Value      Fair Value      Level 1      Level 2      Level 3  
     (dollars in thousands)         

FINANCIAL ASSETS

              

Cash and cash equivalents

   $ 72,394       $ 72,443       $ 70,951       $ 1,492       $ —     

Securities available for sale

     100,280         100,280         21,286         78,994         —     

Loans held for investment, net

     302,253         308,112         —           —           308,112   

Loans held for sale

     1,139         1,139         —           1,139         —     

Restricted stock

     1,184         1,184         1,184         —           —     

Bank-owned life insurance

     6,516         6,516         —           —           6,516   

Accrued interest receivable

     1,747         1,747         —           —           1,747   

FINANCIAL LIABILITIES

              

Deposits

   $ 453,708       $ 438,593       $ —         $ —         $ 438,593   

Short-term borrowings

     5,509         5,509         —           5,509         —     

Long-term borrowings

     36         36         —           36         —     

Junior subordinated debt

     11,127         11,271         —           —           11,271   

Accrued interest payable

     224         224         —           —           224   

The following methods and assumptions were used by the Company in estimating the fair value of financial instruments:

 

   

Cash and cash equivalents - The carrying amount of cash and cash equivalents approximate their fair values due to the short period of time until their expected realization and are recorded in Level 1.

 

   

Securities available for sale - Securities available for sale are carried at fair value based on quoted and observable market prices and are recorded in Levels 1 and 2. Also see discussion in note 9.

 

   

Loans - The fair value of loans is estimated based on discounted expected cash flows using the current interest rates at which similar loans would be made and carried in level 3. Loans held for sale, which represent current mortgage production forward sales not yet delivered, are valued based on secondary market prices. The fair value of loans does not consider the lack of liquidity and uncertainty in the market that would affect the valuation. Loans held for sale are recorded in Level 2.

 

   

Restricted stock - It is not practicable to determine fair value of restricted stock which is comprised of Federal Home Loan Bank and Federal Reserve Bank stock due to restrictions placed on its transferability and it is presented at its carrying value and is recorded in Level 1 due to the redemption provisions of the Federal Home Loan Bank and the Federal Reserve Bank.

 

   

Bank-owned life insurance - The carrying amount of bank-owned life insurance is the current cash surrender value and is recorded in level 3.

 

   

Accrued interest receivable and payable - Both accrued interest receivable and payable are recorded in Level 3, as there are not active markets for these.

 

79


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 18 - Fair Values of Financial Instruments and Interest Rate Risk (Continued)

 

   

Deposits - The fair value of deposits is estimated based on discounted cash flow analyses using offered market rates and is recorded in Level 3. The fair value of deposits does not consider any customer related intangibles.

 

   

Borrowings - The fair value disclosed for short-term borrowings, which are composed of overnight borrowings and debt due within one year approximate the carrying value for such debt and is recorded in Level 2. The estimated fair value for long-term borrowings are estimated based on discounted cash flow analyses using offered market rates. Total borrowings are carried in Level 2. Junior subordinated debt is fair valued based on discounted cash flow analyses and is recorded in Level 3.

At December 31, 2014, the subsidiary bank had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, they were deemed to have no current fair value. See Note 13.

The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 and 2013:

 

     December 31, 2014  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Securities available for sale:

           

US Treasury

   $ 19,386       $ 19,386       $ —         $ —     

US Gov’t

     50,775         —           50,775         —     

Mortgage-backed securities and CMO’s

     27,572         —           27,572         —     

State and political subdivisions

     12,080         —           12,080         —     

Corporate bonds

     3,011         —           3,011      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 112,824       $ 19,386       $ 93,438       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2013  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Securities available for sale:

           

US Treasury

   $ 21,286       $ 21,286       $ —         $ —     

US Gov’t

     34,300         —           34,300         —     

Mortgage-backed securities and CMO’s

     37,006         —           37,006         —     

State and political subdivisions

     7,688         —           7,688         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 100,280       $ 21,286       $ 78,994       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

80


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 18 - Fair Values of Financial Instruments and Interest Rate Risk (Continued)

 

Prices for US Treasury securities are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the ‘Level 1 input’ column. Prices for mortgage-backed securities, government agency securities and for state, county and municipal securities are obtained for similar securities, and the resulting fair values are shown in the ‘Level 2 input’ column. Prices for non-marketable investments are determined based on various assumptions that are not observable. The fair values for these investment securities are shown in the ‘Level 3 input’ column. Non-marketable investment securities, which are carried at their purchase price, include those that may only be redeemed by the issuer.

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of December 31, 2014 and December 31, 2013:

 

      December 31, 2014  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Impaired loans

   $ 1,854       $ —         $ —         $ 1,854   

Loans held for sale

     2,147         —           2,147         —     

Other real estate owned

     3,290         —           —           3,290   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 7,291       $ —         $ 2,147       $ 5,144   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
      December 31, 2013  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Impaired loans

   $ 5,903       $ —         $ —         $ 5,903   

Loans held for sale

     1,139         —           1,139         —     

Other real estate owned

     3,533         —           —           3,533   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 10,575       $ —         $ 1,139       $ 9,436   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2014

 

               General
    

Valuation Technique

  

Unobservable Input

   Range

Nonrecurring measurements:

        

Impaired loans

  

Discounted appraisals and broker price opinions

  

Expected loss rates

   0 – 25%

OREO

  

Discounted appraisals

  

Collateral discounts and estimated costs to sell

   0 – 10%

 

81


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 18 - Fair Values of Financial Instruments and Interest Rate Risk (Continued)

 

December 31, 2013

 

               General
    

Valuation Technique

  

Unobservable Input

   Range

Nonrecurring measurements:

        

Impaired loans

  

Discounted appraisals

  

Collateral discounts and estimated costs to sell

   0 – 10%

OREO

  

Discounted appraisals

  

Collateral discounts and estimated costs to sell

   0 – 10%

ASC 825 allows an entity to elect to measure certain financial assets and liabilities at fair value with changes in fair value recognized in the income statement each period. The statement also requires additional disclosures to identify the effects of an entity’s fair value election on its earnings. Upon the adoption of ASC 825, the Company did not elect to report any assets and liabilities at fair value.

Interest Rate Risk

The Company assumes interest rate risk (the risk that general interest rate levels will change) in the course of its normal operations. As a result, fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are more likely to prepay in a falling rate environment and less likely to prepay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

 

82


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 19 - Parent Company Financial Data

The following is a summary of the condensed financial statements of Uwharrie Capital Corp:

Condensed Balance Sheets

 

     December 31,  
     2014      2013  
     (dollars in thousands)  

Assets

     

Cash and demand deposits

   $ 297       $ 1,858   

Interest-earning deposits

     3,674         3,998   

Investments in:

     

Bank subsidiaries

     40,931         39,176   

Nonbank subsidiaries

     594         618   

Other assets

     1,115         1,229   
  

 

 

    

 

 

 

Total assets

   $ 46,611       $ 46,879   
  

 

 

    

 

 

 

Liabilities and shareholders’ equity

     

Master notes

   $ 3,674       $ 3,998   

Short term debt

     1,000         —     

Junior subordinated debentures

     9,534         11,127   

Other liabilities

     149         71   
  

 

 

    

 

 

 

Total liabilities

     14,357         15,196   
  

 

 

    

 

 

 

Redeemable common stock held by the Employee Stock Ownership Plan (ESOP)

     561         1,716   

Shareholders’ equity

     31,693         29,967   
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 46,611       $ 46,879   
  

 

 

    

 

 

 

 

83


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 19 - Parent Company Financial Data (Continued)

 

Condensed Statements of Income

 

     2014     2013     2012  
     (dollars in thousands)  

Equity in undistributed earnings of subsidiaries

   $ 1,456      $ (1,053   $ 1,100   

Dividends received from subsidiaries

     1,000        2,719        —     

Interest income

     11        21        41   

Management and service fees

     —          4,347        6,937   

Other income

     87        166        102   

Interest expense

     (583     (659     (670

Other operating expense

     (624     (4,881     (7,428

Income tax benefit

     332        294        322   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 1,679      $ 954      $ 404   
  

 

 

   

 

 

   

 

 

 

Consolidated net income

   $ 1,679      $ 954      $ 404   

Less: Net income attributable to noncontrolling interest

     (591     (478     —     
  

 

 

   

 

 

   

 

 

 

Net income attributable to Uwharrie Capital Corp

     1,088        476        404   

Dividends – preferred stock

     —          (325     (645
  

 

 

   

 

 

   

 

 

 

Net Income (loss) available to common shareholders

   $ 1,088      $ 151      $ (241
  

 

 

   

 

 

   

 

 

 

Net income (loss) per common share

      

Basic

   $ 0.15      $ 0.02      $ (0.03
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.15      $ 0.02      $ (0.03
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

      

Basic

     7,300,988        7,422,286        7,519,100   

Diluted

     7,300,988        7,422,286        7,519,100   

 

 

84


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 19 - Parent Company Financial Data (Continued)

 

Condensed Statements of Cash Flows

 

     2014     2013     2012  
     (dollars in thousands)  

Cash flows from operating activities

      

Net income

   $ 1,679      $ 954      $ 404   

Adjustments to reconcile net income to net cash used by operating activities:

      

Equity in undistributed earnings of subsidiaries

     (1,456     1,053        (1,100

(Increase) decrease in other assets

     136        2,298        (734

Increase (decrease) in other liabilities

     78        (305     (97
  

 

 

   

 

 

   

 

 

 

Net cash provided (used) by operating activities

     437        4,000        (1,527
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

      

Net decrease in master notes

     (324     (1,453     (757

Net increase in short-term debt

     1,000        —          —     

Net repayment of issuance of junior subordinated debentures

     (1,593     —          —     

Repurchase of common stock, net

     (1,401     (169     —     

Repayment of series A preferred stock

     —          (10,500     —     

Preferred stock redeemed by from bank subsidiary

     —          7,800        —     

Increase in unearned ESOP compensation

     —          (114     (103

Dividends on preferred stock

     —          (225     (545

Cash paid for fractional shares

     (4     —          —     
  

 

 

   

 

 

   

 

 

 

Net cash used by financing activities

     2,322        (4,661     (1,405
  

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (1,885     (661     (2,932

Cash and cash equivalents at beginning of year

     5,856        6,517        9,449   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 3,971      $ 5,856      $ 6,517   
  

 

 

   

 

 

   

 

 

 

 

85


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Selected Financial Data

 

 

 

Selected Financial Data

(dollars in thousands except ratios, per share and shares outstanding information)

 

      2014     2013     2012     2011     2010  

Summary of Operations

          

Interest income

   $ 18,457      $ 19,465      $ 21,871      $ 23,822      $ 24,487   

Interest expense

     1,960        2,734        3,698        4,737        5,951   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     16,497        16,731        18,173        19,085        18,536   

Provision for (recovery of) loan losses

     (389     28        1,832        3,456        4,919   

Noninterest income

     7,321        7,587        10,675        8,256        9,898   

Noninterest expense

     21,880        22,994        26,247        22,789        22,651   

Income taxes

     648        342        365        196        151   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,679      $ 954      $ 404      $ 900      $ 713   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Common Share

          

Net income – basic(1)

   $ 0.15      $ 0.02      $ (0.03   $ 0.03      $ 0.01   

Net income (loss) – diluted(1)

     0.15        0.02        (0.03     0.03        0.01   

Book value(1)

     4.55        3.94        4.23        4.38        4.29   

Weighted Average Shares

          

Outstanding:

          

Basic(1)

     7,300,988        7,422,286        7,519,100        7,616,744        7,635,248   

Diluted(1)

     7,300,988        7,422,286        7,519,100        7,616,744        7,635,248   

Ratios

          

Return on average assets

     0.33     0.18     0.08     0.17     0.14

Return on average equity

     4.03     2.17     0.90     2.02     1.57

Average equity to average assets

     8.11     8.34     8.52     8.39     8.83

Selected Year-end Balances

          

Assets

   $ 518,464      $ 517,320      $ 545,007      $ 526,902      $ 535,426   

Loans held for investment

     310,853        307,348        329,183        366,675        387,769   

Securities

     118,320        100,280        91,638        88,661        96,395   

Deposits

     456,435        453,708        457,612        431,338        434,033   

Borrowed funds

     14,243        16,672        31,363        46,024        54,543   

Shareholders’ equity

     42,262        40,509        42,729        44,254        43,493   

Selected Average Balances

          

Assets

   $ 513,676      $ 527,693      $ 526,361      $ 529,970      $ 514,425   

Loans held for investment

     309,338        317,274        347,762        381,419        375,381   

Securities

     109,056        116,333        102,686        90,701        86,780   

Deposits

     451,160        455,146        440,274        430,998        406,304   

Borrowed funds

     14,782        22,340        35,543        50,529        58,291   

Shareholders’ equity

     41,681        43,994        44,868        44,462        45,425   

 

(1) Net income per share, book value per share, weighted average shares outstanding and shares outstanding at year-end for years 2010 through 2013 have been adjusted to reflect the 2% stock dividend in 2014.

 

86


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

 

 

 

A discussion and analysis of the Company’s operating results and financial condition are presented in the following narrative and financial tables. The comments are intended to supplement and should be reviewed in conjunction with the consolidated financial statements and notes thereto appearing on pages 36-86 of this Annual Report. References to changes in assets and liabilities represent end of period balances unless otherwise noted. Statements contained in this Annual Report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Amounts herein could vary because of market and other factors. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the Securities and Exchange Commission periodically. Such forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “might,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Company that are subject to various factors, which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services.

Financial Condition at December 31, 2014 and December 31, 2013

The Company’s total assets increased $1.2 million from $517.3 million at December 31, 2013 to $518.5 million at December 31, 2014. This increase resulted primarily from a $3.5 million increase in loans held for investment and an increase in investment securities available for sale of $12.5 million and securities held to maturity of $5.5 million. These increases were offset by a decrease in cash and cash equivalents of $21.6 million.

Cash and cash equivalents decreased $21.6 million during the year ended December 31, 2014. Cash and due from banks declined $1.1 million, while interest-earning deposits with banks decreased $20.5 million. Throughout 2014, the Company purchased $31.1 million in new securities, had growth in loans held for investment of $3.5 million and repaid $3.1 million in borrowings. All of these factors related to the decline in interest-earning deposits.

Investment securities consist of securities available for sale and securities held to maturity. Investment securities increased $18.0 million or 18.0%, from $100.3 million at December 31, 2013 to $118.3 million combined at December 31, 2014. During the year, in an effort to improve our concentration risk in various sectors as well as to reduce our extension risk in a rising interest rate environment, management made the decision to sell $7.2 million of investment securities, including $6.9 million of US Treasuries and government agency bonds and $328,000 of mortgage-backed securities. There were also $4.4 million in securities called during 2014. The Company realized a net loss of $2,000 on these transactions. The Company is reinvesting the proceeds from these sales and calls and purchasing new securities that are lower duration securities as well as variable rate securities. These investments should provide better protection in a rising rate environment and mitigate the downside risk embedded in the current portfolio. At December 31, 2014, the Company had net unrealized gains on the securities available for sale of $462,000.

 

87


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

 

 

 

Loans held for investment increased $3.5 million from $307.3 million at December 31, 2013 to $310.8 million at December 31, 2014. The growth in the portfolio was spread across several loan portfolio classes with other real estate construction experiencing the largest growth of $4.8 million or 27.2%. The real estate one to four family class, home equity class and the real estate one to four family construction all experienced appreciable growth. This growth was offset by declines in the commercial real estate loan class and both the commercial and consumer classes, with commercial real estate seeing the greatest decline of $3.4 million or 3.6%. Loans held for sale increased 88.5% or $1.0 million compared to the prior year. The allowance for loan losses was $3.7 million at December 31, 2014, which represents 1.20% of the loan portfolio, a decrease from 1.66% at December 31, 2013. Net chargeoffs decreased from $1.7 million at December 31, 2013 to $968,000 at December 31, 2014.

Other changes in our consolidated assets are related to premises and equipment, restricted stock, bank owned life insurance, other real estate owned, and other assets. Bank owned life insurance increased $129,000 while premises and equipment increased $1.1 million. The increase in premises and equipment was related to the purchase of an office that the Company was currently leasing. The building was purchased for $1.6 million; The Company did sell two pieces of property that had been purchased for future use. The two properties were sold for $376,000, with the Company realizing a gain on the sales of $138,000. During 2014, other real estate owned declined $1.3 million, from $7.2 million at December 31, 2013 to $5.9 million at December 31, 2014. Throughout 2014, the Company sold seventeen pieces of property totaling $2.3 million and resulting in a net gain on the sale of other real estate owned of $398,000. Also during 2014, the Company had additional write downs and changes in reserves of $647,000 resulting from new appraisals and evaluations. These declines were offset by the addition of thirteen pieces of property foreclosed on totaling $1.3 million. Restricted stock which is comprised of Federal Home Loan Bank stock and Federal Reserve Bank stock decreased $146,000 because member institutions are required to increase or decrease their ownership as their utilization of FHLB borrowings change. The Company’s required ownership in Federal Reserve Bank stock increased $39,000 in 2014, while the required ownership in Federal Home Loan Bank stock declined $185,000. Other assets decreased $1.4 million primarily from changes in deferred taxes.

Customer deposits continued to be our principal funding source in 2014. At December 31, 2014, deposits from our customers totaled $456.4 million, an increase of $2.7 million from $453.7 million at December 31, 2013. Demand noninterest bearing checking increased $5.5 million, while interest checking and money market accounts increased $14.2 million during 2014. These increases were offset by declines in savings deposits of $2.4 million, time deposits over $100,000 of $5.8 million and other time deposits of $8.8 million respectively during 2014. In the current low rate environment, customers are continuing to stay in short term deposit products and are continuing to shift away from time deposits.

During 2014 the Company’s net borrowings decreased by $2.4 million. Borrowings consist of both short-term and long-term borrowed funds. The Company utilizes both short-term and long-term advances from the Federal Home Loan Bank. The Company repaid $1.5 million of Federal Home Loan Bank advances that matured during 2014. At December 31, 2014, there were no advances outstanding in the total borrowings of $14.2 million. Other components of total borrowings include $9.5 million in junior subordinated debt and $4.7 million in master notes and other secured borrowings.

During the first quarter of 2014, the Company conducted a private placement offering of fixed rate junior subordinated debt securities at $1,000 per security with a required minimum investment of $50,000. The offering raised $9.5 million. These securities have a final maturity date of March 31, 2024 and may be redeemed by the Company after March 31, 2019. The subordinated debt pays interest quarterly at an annual fixed rate of 5.75%. All proceeds of this

 

88


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

 

 

 

private placement were issued and outstanding at December 31, 2014. All proceeds also qualify for and are included in the calculation of Tier 2 capital. On March 31, 2014, the Company called its entire $11.1 million private outstanding issue of fixed rate subordinated debt that had a final maturity of December 31, 2018.

Other liabilities increased from $4.5 million at December 31, 2013 to $4.8 million at December 31, 2014, an increase of $300,000

The Company has historically had an Employee Stock Ownership Plan (ESOP) in place. Late in 2011, the Internal Revenue Service issued IRS notice 2011-19 that drew a clear line between what stock exchanges are considered public and which are not. The Company’s stock trades on the OTC Bulletin Board, which is a publically traded exchange, however, the IRS no longer recognizes the Bulletin Board as a public exchange. The result of this ruling is that companies that have ESOP plans in place are required to set aside funds to handle allocated shares put back to the company. The plan that the Company has includes a put option that requires the Company to repurchase allocated shares of participants at the participants’ option. The Company reclassed capital from additional paid-in capital to set aside the liability to cover all allocated shares that the Company may be required to buy back.

As disclosed in Note 17 to the financial statements filed with in this report, the Company voted to terminate its ESOP effective March 1, 2014. In connection with this termination, the ESOP trustees transferred the 252,446 remaining unallocated shares to the Company to partially satisfy the term loan and lines of credit the ESOP had outstanding at the time. The effect this had on equity was minimal with total outstanding shares being reduced. The remaining balance of $8,600 on the loans was expensed by the Company to completely satisfy the loans.

During the fourth quarter of 2014, all allocated shares were distributed to the ESOP participants. At December 31, 2014, there was $561,000 set aside to cover the liability for shares that could be put back to the Company during the first six months of 2015. After that time, the put option will expire and this liability will no longer exist.

At December 31, 2014, total shareholders’ equity was $42.3 million, an increase of $1.8 million from December 31, 2013. Net income for the period was $1.7 million. Unrealized gains and losses on investment securities net of tax increased $867,000. With the aforementioned termination of the ESOP, the unearned ESOP compensation of $989,000 was repaid and $1.2 million of the liability set aside to cover the ESOP repurchase obligation was reallocated back to shareholders’ equity. The Company did repurchase 374,130 of outstanding common stock for $1.4 million. Of the shares repurchased, 339,269 shares were related to the ESOP termination. The Company also has $591,000 in dividends attributed to noncontrolling interest. At December 31, 2014, the Company and its subsidiary bank exceeded all applicable regulatory capital requirements.

Results of Operations for the Years Ended December 31, 2014 and 2013

Earnings

Uwharrie Capital Corp reported net income of $1.7 million for the twelve months ended December 31, 2014, as compared to $954,000 for the twelve months ended December 31, 2013, an increase of $725,000. Net income available to common shareholders was $1.1 million or $0.15 per common share at December 31, 2014, compared to net income available to common shareholders of $151,000 or $0.02 per common share at December 31, 2013. Net income available to common shareholders is net income less any dividends and discount

 

89


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

 

 

 

accretions on preferred stock related to the $10 million of capital received from the United States Department of the Treasury under the Capital Purchase Program in December 2008 that was repaid in 2013 and dividends on the aforementioned noncontrolling interest.

Net Interest Income

As with most financial institutions, the primary component of earnings for our subsidiary bank is net interest income. Net interest income is the difference between interest income, principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and wholesale 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. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as levels of noninterest bearing liabilities and capital.

Net interest income decreased $234,000 to $16.5 million for 2014 compared to the $16.7 million earned in 2013. During the year ended December 31, 2014, our decline in the volume of interest-earning assets outpaced the decline in interest-bearing liabilities by $208,000. The average yield on our interest-earning assets decreased 8 basis points to 4.01%, while the average rate we paid for our interest-bearing liabilities decreased 16 basis points. These decreases resulted in an increase of 10 basis points in our interest rate spread, from 3.41% in 2013 to 3.51% in 2014. Our net interest margin for 2014 was 3.60%, compared to 3.52% in 2013. A portion of the Company’s loan portfolio has interest rate floors and caps in place on the loans. The interest rate floor feature has allowed the Company to maintain a good interest margin despite a decline in rates; however, the interest rate cap could hurt the margin in a rising rate environment. Financial Table 1 on page 102 presents a detailed analysis of the components of the Company’s net interest income, while Financial Table 2 on page 103 summarizes the effects on net interest income from changes in interest rates and in the dollar volume of the components of interest-earning assets and interest bearing liabilities.

Provision for Loan Losses

The provision for loan losses was a recovery of ($389,000) and provisions of $28,000 for the twelve months ended December 31, 2014 and 2013, respectively. There were net loan charge-offs of $968,000 for the twelve months ended December 31, 2014 as compared with net loan charge-offs of $1.7 million during the same period of 2013. Refer to the Asset Quality discussion beginning on page 94 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, diversification of our earnings base is of major importance to our long term success. Noninterest income decreased 3.5%, from $7.6 million in 2013, to $7.3 million in 2014, a decrease of $266,000. While the Company did benefit from another good year of income from mortgage loan sales, income from mortgage loan sales decreased $1.1 million to $1.0 million for 2014 compared to $2.1 million during 2013. Service charges on deposit accounts produced earnings of $1.5 million, a decrease of 9.8%. The primary contributing factor is a decrease in NSF (non-sufficient funds) fees due in large part to changes in regulatory governance. Other service fees and commissions experienced a 15.7% increase during 2014. This is related to an increase of $290,000 in fees from assets under management. The Company had realized losses on the

 

90


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

 

 

 

sale of investments in the amount of $2,000 for the twelve months ending December 31, 2014, as compared to realized losses of $523,000 for the same period in 2013. The Company also had realized gains on the sale of other real estate owned of $398,000 compared to realized gains of $290,000 for the twelve months ended December 31, 2014 and 2013, respectively.

Noninterest Expense

Noninterest expense for the year ended December 31, 2014 was $21.9 million compared to $23.0 million for the same period of 2013, a decrease of $1.1 million. Salaries and employee benefits, the largest component of noninterest expense, decreased $372,000, from $12.4 million for the period ending December 31, 2013 to $12.1 million for the same period in 2014. This decrease is attributable to a reduction in staff related to the consolidation of the Company’s subsidiary banks during 2013. Net occupancy and equipment expense had a combined decrease of $45,000. Professional fees and services increased $167,000 for the twelve month period. Marketing and donations that included expenditures associated with advertising, business development and public relations, donations to local charities, sponsorships of local community events and economic development increased $34,000 from the prior year, while premiums paid for FDIC insurance decreased $93,000 for the same period. Data processing costs declined $55,000, a decrease related to the aforementioned bank consolidation. Foreclosed real estate expense, another major component of noninterest expense, decreased $401,000, from $1.6 million in 2013 to $1.2 million during 2014. The primary factor relating to this decrease was a reduction in write downs on properties held in other real estate owned. These write downs were attributed to updated appraisals and the lowering of list prices during the year totaling $647,000 compared to $921,000 for the same period in 2013. Other noninterest expense experienced a decrease totaling $198,000 for the comparable twelve month period. The table on page 106 reflects the additional breakdown of other noninterest expense.

Income Tax Expense

The Company had an income tax expense of $648,000 for 2014 at an effective tax rate of 27.85% compared to income tax expense of $342,000 in 2013 with an effective tax rate of 26.39%.

Results of Operations for the Years Ended December 31, 2013 and 2012

Earnings

Uwharrie Capital Corp reported net income of $954,000 for the twelve months ended December 31, 2013, as compared to $404,000 for the twelve months ended December 31, 2012, an increase of $550,000. Net income available to common shareholders was $151,000 or $0.02 per common share at December 31, 2013, compared to net loss available to common shareholders of $(241,000) or $(0.03) per common share at December 31, 2012. Net income available to common shareholders is net income less any dividends and discount accretions on preferred stock related to the $10 million of capital received from the United States Department of the Treasury under the Capital Purchase Program in December 2008 and dividends on the aforementioned noncontrolling interest.

Net Interest Income

As with most financial institutions, the primary component of earnings for our subsidiary bank is net interest income. Net interest income is the difference between interest income, principally

 

91


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

 

 

 

from loan and investment securities portfolios, and interest expense, principally on customer deposits and wholesale 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. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as levels of noninterest bearing liabilities and capital.

Net interest income decreased $1.5 million to $16.7 million for 2013 compared to the $18.2 million earned in 2012. During the year ended December 31, 2013, our decline in the volume of interest-earning assets outpaced the decline in interest-bearing liabilities by $928,000. The average yield on our interest-earning assets decreased 58 basis points to 4.09%, while the average rate we paid for our interest-bearing liabilities decreased 24 basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve Open Market Committee adjusts interest rates while interest-bearing time deposits adjust at the time of maturity. These decreases resulted in a decrease of 35 basis points in our interest rate spread, from 3.76% in 2012 to 3.41% in 2013. Our net interest margin for 2013 was 3.52%, compared to 3.90% in 2012. A portion of the Company’s loan portfolio has interest rate floors and caps in place on the loans. The interest rate floor feature has allowed the Company to maintain a good interest margin despite a decline in rates; however, the interest rate cap could hurt the margin in a rising rate environment. Financial Table 1 on page 102 presents a detailed analysis of the components of the Company’s net interest income, while Financial Table 2 on page 103 summarizes the effects on net interest income from changes in interest rates and in the dollar volume of the components of interest-earning assets and interest bearing liabilities.

Provision for Loan Losses

The provision for loan losses was $28,000 and $1.8 million for the twelve months ended December 31, 2013 and 2012, respectively. There were net loan charge-offs of $1.7 million for the twelve months ended December 31, 2013 as compared with net loan charge-offs of $1.8 million during the same period of 2012. Refer to the Asset Quality discussion beginning on page 94 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, diversification of our earnings base is of major importance to our long term success. Noninterest income decreased 28.9%, from $10.7 million in 2012, to $7.6 million in 2013, a decrease of $3.1 million. While the Company did benefit from another strong year of income from mortgage loan sales, income from mortgage loan sales decreased $1.6 million to $2.1 million for 2013 compared to $3.7 million during 2012. Service charges on deposit accounts produced earnings of $1.6 million, a decrease of 5.9%. The primary contributing factor is a decrease in NSF (non-sufficient funds) fees due in large part to changes in regulatory governance. Other service fees and commissions experienced a 6.9% increase during 2013. This is related to an increase of $90,000 in fees from assets under management. The Company also realized losses on the sale of investments in the amount of $523,000 for the twelve months ending December 31, 2013, as compared to realized gains of $1.3 million for the same period in 2012, a $1.8 million reduction in net income.

 

92


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

 

 

 

Noninterest Expense

Noninterest expense for the year ended December 31, 2013 was $23.0 million compared to $26.2 million for the same period of 2012, a decrease of $3.2 million. Salaries and employee benefits, the largest component of noninterest expense, decreased $468,000, from $12.9 million for the period ending December 31, 2012 to $12.4 million for the same period in 2013. This decrease is attributable to a reduction in staff related to aforementioned consolidation of the Company’s subsidiary banks during 2013. Net occupancy and equipment expense had a combined decrease of $56,000. Professional fees and services increased $92,000 for the twelve month period. This increase in other professional fees and services was directly related to reimbursement of prior period legal fees totaling $360,000 that reduced professional fees and services during 2012. Of that amount, $270,000 was related to a reimbursement for legal services under the Company’s employment practices liability insurance policy and $90,000 associated with a previously closed government guaranteed loan. Marketing and donations that included expenditures associated with advertising, business development and public relations, donations to local charities, sponsorships of local community events and economic development increased $37,000 from the prior year, while premiums paid for FDIC insurance also decreased $175,000 for the same period. Data processing costs declined $105,000, a decrease related to the aforementioned bank consolidation. Foreclosed real estate expense, another major component of noninterest expense, decreased $1.4 million, from $3.0 million in 2012 to $1.6 million during 2013. The primary factor relating to this decrease was a reduction in write downs on properties held in other real estate owned. These write downs were attributed to updated appraisals and the lowering of list prices during the year totaling $1.0 million compared to $2.4 million for the same period in 2012. During 2012, the Company had a goodwill impairment charge that resulted in an expense of $989,000. Other noninterest expense experienced a decrease totaling $281,000 for the comparable twelve month period. The table on page 106 reflects the additional breakdown of other noninterest expense.

Income Tax Expense

The Company had an income tax expense of $342,000 for 2013 at an effective tax rate of 26.39% compared to income tax expense of $365,000 in 2012 with an effective tax rate of 47.46%. The higher effective rate for 2012 is related to the tax effect of the goodwill impairment.

Asset Quality

The Company’s allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. The allowance is increased by provisions charged to operations and decreased by recoveries of amounts previously charged off and is reduced by recovery of provisions and loans charged off. Management continuously evaluates the adequacy of the allowance for loan losses. In evaluating the adequacy of the allowance, management considers the following: the 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. The Company’s credit administration function, through a review process, periodically validates the accuracy of the initial risk grade assessment. In addition, as a given loan’s credit quality improves or deteriorates, the credit administration department has the responsibility to change the borrower’s risk grade accordingly. For loans determined to be impaired, the allowance is based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the estimated fair value of the underlying collateral less the selling costs. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of

 

93


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

 

 

 

future cash flows expected to be received on impaired loans, which may be susceptible to significant change. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require additions for estimated losses based upon judgments different from those of management.

Management uses a risk-grading program designed to evaluate the credit risk in the loan portfolio. In this program, risk grades are initially assigned by loan officers then reviewed and monitored by credit administration. This process includes the maintenance of an internally classified loan list that is designed to help management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history and the current delinquent status. Because of this process, certain loans are deemed as impaired and evaluated as an impaired loan.

The allowance for loan losses represents management’s best estimate of an appropriate amount to provide for probable credit risk inherent in the loan portfolio in the normal course of business. While management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ from the assumptions used in making the determinations. Furthermore, while management believes it has established the allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that banking regulators, in reviewing the Company’s portfolio, will not require an adjustment to the allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary, should the quality of any loans deteriorate because of the factors discussed herein. Any material increase in the allowance for loan losses may adversely affect the Company’s financial condition and results of operations.

At December 31, 2014 the levels of our impaired loans, which includes all loans in nonaccrual status, TDRs and other loans deemed by management to be impaired, were $7.6 million compared to $17.6 million at December 31, 2013, a net decrease of $10.0 million. Total nonaccrual loans, which are a component of impaired loans, decreased from $4.7 million at December 31, 2013 to $2.2 million at December 31, 2014. During the second quarter of 2014, the Company performed a comprehensive review of all impaired loans. This review resulted in $6.9 million in loans with previously identified specific reserves of $419,000 being removed from impaired status. These loans were initially considered impaired during a period of heightened uncertainty in which each loan was experiencing significant delinquency stemming from reductions in cash flow attributed to the slow economy. Management reevaluated each of these loans and determined they have now performed under the original terms of the loan and remained in current or non-delinquent status for a sufficient amount of time to remove the loans from the impaired loan category. Therefore, management determined the previously identified credit weaknesses have been remediated and, while most of these loans currently retain their substandard risk grade status, they were all removed from the impaired loan status as management expects to collect the current balance due in accordance with the original terms of the loan. Also, the transfer of loans totaling $972,000 from impaired loans to other real estate owned, the Bank’s receipt $2.0 million in loan principal payments, and charge-offs of principal that had previously established specific reserves of $1.0 million, were additional factors contributing to the decrease in impaired loans. These decreases were offset by the addition of ten relationships, in the amount of $1.8 million, that were added to impaired loans during 2014.

 

94


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

 

 

 

Along with changes to the balance of impaired loans, the Company reevaluated its impairment measurement techniques to determine whether the most relevant method was being utilized for each impaired loan. The remaining impaired loans primarily consist of performing TDRs. This resulted in all the remaining impaired loans moving from the collateral method to the cash flow method with the exception of three relationships deemed to be collateral dependent. The switch from evaluating impaired loans under the collateral method to the cash flow method resulted in the reversal of $334,000 in previously established specific reserves. Due to the nature of the modifications the Company enters into with Borrowers, while payments may be reduced and time extended significant interest rate concessions were not entered into and loan to life cash flows are not significantly altered. Given this and the uncertainty at the time these modifications occurred and the reserves were established, management didn’t believe the cash flow method provided adequate levels of reserves. This reversal, along with the removal of specific reserves associated with loan upgrades discussed above in the amount of $419,000, payoffs on loans with specific reserves of $363,000 and updated appraisals on one of the collateral dependent relationships, lowering the impairment by $349,000, resulted in $1.9 million being removed from specific reserves during 2014.

The allowance expressed as a percentage of gross loans held for investment decreased 46 basis points from 1.66% at December 31, 2013 to 1.20% at December 31, 2014. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 0.93% at December 31, 2013 and 1.08% at December 31, 2014, while the individually evaluated allowance as a percentage of individually evaluated loans decreased from 13.60% to 6.04% for the same periods. The portion of the Company’s allowance for loan loss model related to general reserves captures the mean loss of individual loans and the rare event of severe loss that can occur within the loan portfolio. Specifically, the Company calculates probable losses on loans by computing a probability of loss and expected loss scenario by FDIC call report codes. Together, these expected components as well as a level of more extreme unexpected losses form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.

The Company assesses the probability of losses inherent in the loan portfolio using probability of default data, acquired from a third party vendor representing a one year loss horizon for each obligor. The Company updates the data inputs into the model; specifically the loss given default and the probability of defaults obtained from the vendor annually during the second quarter. The Company updates the beacon scores that are one of the components used within the allowance model semi-annually, during the first and third quarters. For the first time in several updates, beacon scores experienced significant improvement during 2013. This trend continued during the first nine months of 2014 with beacon scores continuing to show improvement. The average beacon score increased fifteen points from 702 to 717 during 2014.

During the second quarter of 2014, the allocation for general reserves increased $1.1 million from the previous quarter. Two changes were made to the model’s inputs that resulted in this increase. First, the process of assigning the probability of default to commercial loans was changed to be based on internally determined loan grades instead of the credit scores of the underlying individual borrower This change added approximately $260,000 to general reserves. Second, it was decided that a more accurate and stable measure of the risk in the portfolio would be achieved by a “through the cycle” probability of default. The probabilities of default are sampled from the prior two years making the previous method of estimating default a severely lagging statistic. Credit quality is currently improving and has been for the last several years; but there is no guarantee that a large negative economic shock won’t occur, increasing the credit risk in the portfolio. Using an average probability of default that is derived from both adverse and favorable economic conditions more accurately represents the range of possible risks to the loan portfolio. We used all available historical defaults to compute this average, dating back to the 2009-2011 default windows. This change added nearly $1.0 million to general reserves.

 

95


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

 

 

 

Nonperforming loans, which consist of nonaccrual loans and loans past due 90 days and still accruing, to total loans decreased from 1.53% at December 31, 2013, to 0.72% at December 31, 2014.

Other real estate owned decreased $1.3 million during 2014. The Company sold seventeen pieces of foreclosed property totaling $2.3 million realizing net gains of $398,000. The Company also had write downs and changes in reserves totaling $647,000 on the remaining existing property. These decreases in other real estate owned were offset by thirteen new pieces of property being foreclosed on totaling $1.3 million.

Management believes the current level of the allowance for loan losses is appropriate in light of the risk inherent in the loan portfolio.

Restructured loans at both December 31, 2014 and December 31, 2013 totaled $6.4 million.

The following nonperforming loan table shows the comparison for the past five years:

Nonperforming Assets

(dollars in thousands)

 

     At December 31,  
     2014     2013     2012     2011     2010  

Nonperforming Assets:

          

Nonaccrual loans past due 90 days or more

   $ —        $ —        $ —        $ —        $ 407   

Nonaccrual loans

     2,246        4,717        9,480        7,862        19,730   

Other real estate owned

     5,865        7,170        8,713        10,258        2,022   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 8,111      $ 11,887      $ 18,193      $ 18,120      $ 22,159   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses

   $ 3,738      $ 5,095      $ 6,801      $ 6,815      $ 9,067   

Nonperforming loans to total loans

     0.72     1.53     2.88     2.14     5.19

Allowance for loan losses to total loans

     1.20     1.66     2.07     1.86     2.34

Nonperforming assets to total assets

     1.56     2.30     3.34     3.44     4.14

Allowance for loan losses to nonperforming loans

     166.48     108.02     71.74     86.88     45.03

Capital Resources

The Company continues to maintain capital ratios that support its asset growth. The capital position is maintained through the retention of earnings and controlled growth. Regulatory agencies divide capital into Tier 1 (consisting of shareholders’ equity less ineligible intangible assets and accumulated other comprehensive income and allowable portions of trust preferred securities) and Tier 2 (consisting of the allowable portion of the reserve for loan losses and certain long-term debt) and measure capital adequacy by applying both capital levels to a banking company’s risk-adjusted assets and off-balance sheet items. In addition to these capital ratios, regulatory agencies have established a Tier 1 leverage ratio that measures Tier 1 capital to average assets less ineligible intangible assets.

 

96


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

 

 

 

Regulatory guidelines require a minimum of total capital to risk-adjusted assets ratio of 8% with one-half consisting of tangible common shareholders’ equity and a minimum Tier 1 leverage ratio of 4%. Banks, which meet or exceed a Tier 1 ratio of 6%, a total capital ratio of 10% and a Tier 1 leverage ratio of 5% are considered well capitalized by regulatory standards. At December 31, 2014, the Company’s subsidiary bank was well capitalized.

During 2012, each of the Company’s subsidiary banks began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series B to be issued by each subsidiary bank. The preferred stock qualifies as Tier 1 capital at each bank and pays dividends at a rate of 5.30%. The offering raised $7.9 million less issuance costs of $113,000. Effective September 1, 2013, the Fixed Rate Noncumulative Perpetual Preferred Stock, Series B was rolled into one issue under Uwharrie Bank in connection with the consolidation and name change.

During 2013, the Company’s subsidiary bank, Uwharrie Bank, began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series C to be issued by the subsidiary bank. The preferred stock qualifies as Tier 1 capital at the bank and pays dividends at an annual rate of 5.30%. The preferred stock has no voting rights. The campaign raised $2.8 million less issuance costs of $23,000. Also during 2013, the Company redeemed at par $10.0 million of Fixed Rate Cumulative Perpetual Preferred Stock, Series A and $500,000 of Fixed Rate Cumulative Perpetual Preferred Stock, Series B.

The Company expects to continue to exceed required minimum capital ratios without altering current operations or strategy. Note 15 to the Consolidated Financial Statements presents additional information regarding the Company’s and its subsidiary banks’ capital ratios.

Dividends

The Board of Directors of Uwharrie Capital Corp declared a 2% stock dividend in 2014. All references in this Annual Report to net income per share and weighted average common and common equivalent shares outstanding reflect the effects of these stock dividends. There were no dividends paid in 2013 or 2012.

Liquidity

Liquidity, the ability to raise cash when needed without adversely affecting profits, is managed primarily by the selection of asset mix and the maturity mix of liabilities. Maturities and the marketability of securities and other funding sources provide a source of liquidity to meet deposit fluctuations. Maturities in the securities portfolio, presented in Financial Table 3 on page 104, are supported by cash flows from mortgage-backed securities that have longer-term contractual maturities.

Other funding sources at year-end 2014 included $15.8 million in federal funds lines of credit from correspondent banks and approximately $55.5 million of remaining credit availability from the Federal Home Loan Bank. The Company may also borrow from the Federal Reserve Bank discount window with credit availability of $20.3 million. Growth in deposits is typically the primary source of funding for loans, supported by long-term credit available from the Federal Home Loan Bank.

At December 31, 2014, borrowings from federal funds lines and the issuance of commercial paper amounted to $3.7 million. The Company also had a short-term line of credit totaling $1.0 million. Long-term debt at that date consisted of junior subordinated debt of $9.5 million and a mortgage payable of $25,000.

 

97


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

 

 

 

Management believes that the Company’s current sources of funds provide adequate liquidity for its current cash flow needs.

Contractual Obligations

The following table reflects the contractual obligations of the Company outstanding as of December 31, 2014.

 

     Payments Due by Period (in thousands)  
     Total      On Demand
or less
than 1 year
     1-3 Years      4-5 Years      After
5 Years
 

Contractual Obligations

              

Short-term debt

   $ 4,685       $ 4,685       $ —         $ —         $ —     

Long-term debt

     9,558         —           24         9,534         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations, excluding deposits

     14,243         4,685         24         9,534         —     

Deposits

     456,435         416,039         38,423         1,831         142   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations, including deposits

   $ 470,678       $ 420,724       $ 38,447       $ 11,365       $ 142   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Critical Accounting Policy

A critical accounting policy is one that is both very important to the portrayal of the Company’s financial condition and results, and requires management’s most difficult, subjective and/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. Refer to Note 1 in the consolidated financial statements for more information about these and other accounting policies utilized by the Company.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated both individually and collectively by loan class on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experiences. The nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay; estimated value of any underlying collateral and prevailing economic conditions are the key factors. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. In addition, regulatory examiners may require the Company to recognize adjustments to the allowance for loan losses based on their judgment about information available to them at the time of their assessment.

 

98


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

 

 

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Income Taxes

The calculation of the Company’s income tax expense is complex and requires the use of many estimates and judgments in its determination. Management’s determination of the realization of the net deferred tax asset is based upon management’s evaluation of positive and negative evidence related to cumulative pretax earnings over a three year period and projected earnings trends. This evidence is reviewed to determine if it is more likely than not that the net deferred tax asset will be realized.

Valuation of Foreclosed Assets

Assets acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at fair value less estimated cost to sell at the date of foreclosure, establishing a new cost basis. Principal and interest losses existing at the time of acquisition of such assets are charged against the allowance for loan losses and interest income, respectively. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell.

Off-Balance Sheet Arrangements

The Company has various financial instruments (outstanding commitments) with off-balance sheet risk that are issued in the normal course of business to meet the financing needs of its customers. See Note 13 to the consolidated financial statements for more information regarding these commitments and contingent liabilities.

Interest Rate Sensitivity

Net Interest Income (Margin) is the single largest component of revenue for the Company. Net Interest Margin is the difference between the yield on earning assets and interest paid on costing liabilities. The margin can vary over time as interest rates change. The variance fluctuates based on both the timing (repricing) and magnitude of maturing assets and liabilities.

To identify interest rate sensitivity, a common measure is a gap analysis, which reflects the difference or gap between rate sensitive assets and liabilities over various periods. While management reviews this information, it has implemented the use of an income simulation model, which calculates expected future Net Interest Income (Margin) based on projected interest-earning assets, interest-bearing liabilities and forecasted interest rates along with multiple other forecasted assumptions. Management believes this provides a more relevant

 

99


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

 

 

 

view of interest rate risk sensitivity than the traditional gap analysis because the gap analysis ignores optionality embedded in the balance sheet. The income simulation model allows a comparison of flat, rising and falling rate scenarios to determine the interest rate sensitivity of earnings in varying interest rate environments.

The Company models immediate rising and declining rate shocks of up to 4% (in 1% intervals) on its subsidiary bank, using a no growth and most likely balance sheet growth, for a two year horizon, as preferred by regulators. The most recent consolidated 2% rate shock projections using the most likely balance sheet growth for a one-year horizon, indicates a negative impact of (6.79%) on Net Interest Income (Margin) in a rates down scenario and a positive impact of 18.27% on Net Interest Income (Margin) in a rates up scenario. Based on the most recent twelve month forecast, the subsidiary bank is asset sensitive and may experience some negative impact to earnings should interest rates decline. While many interest bearing assets would reprice in a declining interest rate environment; many liabilities are already approaching 0% interest rates. The subsidiary bank has the potential to benefit from a rising interest rate environment, but current market deposit pricing and embedded options in the balance sheet may limit the upside potential.

The principal goals for asset liability management for the Company are to maintain adequate levels and sources of liquidity and to manage interest rate risk. Interest rate risk management attempts to balance the effects of interest rate changes on both interest-sensitive assets and interest-sensitive liabilities to protect Net Interest Income (Margin) from wide fluctuations as a result from changes in market interest rates. To that end, management has recommended and the board has approved policy limits that minimize the downside risk from interest rate shifts. The aforementioned ratios are within those stated limits of -18% for the respective modeled scenarios at the subsidiary bank and combined. Managing interest rate risk is an important factor to the long-term viability of the Company since Net Interest Income (Margin) is such a large component of earnings. The Company’s Asset Liability Management Committee (ALCO) monitors market changes in interest rates and assists with the pricing of loans and deposit products while considering the funding source needs, asset growth projections, and necessary operating liquidity.

 

100


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

 

 

 

Financial Table 1

Average Balances and Net Interest Income Analysis

(dollars in thousands)

 

     2014     2013     2012  
     Average
Balance
     Interest
Income/
Expense
     Average
Yield/
Rate (1)
    Average
Balance
     Interest
Income/
Expense
     Average
Yield/
Rate (1)
    Average
Balance
     Interest
Income
Expense
     Average
Yield
Rate (1)
 

Interest-earning assets

                        

Taxable securities

   $ 98,549         1,632         1.66   $ 108,767         1,464         1.35   $ 93,170         1,686         1.81

Non-taxable securities (1)

     10,507         321         4.92     7,566         251         5.40     9,516         324         5.54

Short-term investments

     52,554         168         0.32     51,612         177         0.34     26,735         137         0.51

Taxable loans (2)

     295,004         15,903         5.39     303,698         17,134         5.64     336,189         19,286         5.74

Non-taxable loans (1)

     14,974         433         4.66     15,451         439         4.62     13,021         438         5.47
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     471,588         18,457         4.01     487,094         19,465         4.09     478,631         21,871         4.67
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Non-earning assets

                        

Cash and due from banks

     5,898              2,172              6,704         

Premises and equipment, net

     14,806              14,127              15,024         

Interest receivable and other

     21,384              24,300              26,002         
  

 

 

         

 

 

         

 

 

       

Total non-earning assets

     42,088              40,599              47,730         
  

 

 

         

 

 

         

 

 

       

Total assets

   $ 513,676            $ 527,693            $ 526,361         
  

 

 

         

 

 

         

 

 

       

Interest-bearing liabilities

                        

Savings deposits

   $ 38,751       $ 57         0.15   $ 45,706       $ 171         0.37   $ 41,822       $ 197         0.47

Interest checking & MMDA

     230,779         299         0.13     220,663         439         0.20     192,123         542         0.28

Time deposits

     101,925         997         0.98     119,149         1,300         1.09     138,871         1,810         1.30
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total deposits

     371,455         1,353         0.36     385,518         1,910         0.50     372,816         2,549         0.68
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Short-term borrowed funds

     4,830         34         0.70     10,657         160         1.50     18,591         353         1.90

Long-term debt

     9,952         573         5.76     11,683         664         5.68     16,952         796         4.70
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     386,237         1,960         0.51     407,858         2,734         0.67     408,359         3,698         0.91
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Noninterest liabilities

                        

Transaction deposits

     79,705              69,628              67,458         

Interest payable and other

     6,053              6,213              4,331         
  

 

 

         

 

 

         

 

 

       

Total liabilities

     471,995              483,699              480,148         
  

 

 

         

 

 

         

 

 

       

Shareholders’ equity

     41,681              43,994              46,213         
  

 

 

         

 

 

         

 

 

       

Total liabilities and shareholders equity

   $ 513,676            $ 527,693            $ 526,361         
  

 

 

         

 

 

         

 

 

       

Interest rate spread

           3.51           3.41           3.76
        

 

 

         

 

 

         

 

 

 

Net interest income and net interest margin

      $ 16,497         3.60      $ 16,731         3.52      $ 18,173         3.90
     

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

 

1) Yields related to securities and loans exempt from federal and/or state income taxes are stated on a fully tax-equivalent basis, assuming a 34.00% tax rate.
2) Nonaccrual loans are included in loans, net of unearned income.

 

 

101


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

 

 

 

Financial Table 2

Volume and Rate Variance Analysis

(dollars in thousands)

 

     2014 Versus 2013     2013 Versus 2012  
                 Net                 Net  
     Volume     Rate     Change     Volume     Rate     Change  

Interest-earning assets

            

Taxable securities

   $ (153   $ 321      $ 168      $ 246      $ (468   $ (222

Non-taxable securities

     94        (24     70        (66     (7     (73

Short-term investments

     3        (12     (9     106        (66     40   

Taxable loans

     (480     (751     (1,231     (1,848     (304     (2,152

Non-taxable loans

     (14     8        (6     75        (74     1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     (550     (458     (1,008     (1,487     (919     (2,406
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities

            

Savings deposits

     (18     (96     (114     16        (42     (26

Transaction and MMDA deposits

     17        (157     (140     69        (172     (103

Other time deposits

     (178     (125     (303     (236     (274     (510

Short-term borrowed funds

     (64     (62     (126     (135     (58     (193

Long-term debt

     (99     8        (91     (273     141        (132
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     (342     (432     (774     (559     (405     (964
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ (208   $ (26   $ (234   $ (928   $ (514   $ (1,442
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The above table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in volume multiplied by the prior period’s rate), (ii) changes attributable to rate (changes in rate multiplied by the prior period’s volume), and (iii) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) has been allocated equally to the change attributable to volume and the change attributable to rate.

 

102


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

 

 

 

Financial Table 3

Investment Securities Portfolio Analysis

(dollars in thousands)

 

     December 31, 2014  
     Amortized      Estimated      Book  
     Cost      Fair Value      Yield(1)  

Securities available for sale

        

U. S. Treasury

        

Due after one but within five years

     19,030         19,386         1.86
  

 

 

    

 

 

    

 

 

 
     19,030         19,386         1.86
  

 

 

    

 

 

    

 

 

 

U.S. Government agencies

        

Due within one year

     4,972         4,998         2.77

Due after one but within five years

     36,292         36,116         1.30

Due after ten years

     9,705         9,661         0.96
  

 

 

    

 

 

    

 

 

 
     50,969         50,775         1.38
  

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

        

Due after one but within five years

     4,192         4,151         1.52

Due after five but within ten year

     3,003         3,046         2.43

Due after ten years

     20,553         20,375         2.00
  

 

 

    

 

 

    

 

 

 
     27,748         27,572         1.98
  

 

 

    

 

 

    

 

 

 

State and political

        

Due within one year

     175         177         4.62

Due after one but within five years

     2,389         2,541         4.96

Due after five but within ten year

     3,296         3,481         4.89

Due after ten years

     5,715         5,881         4.36
  

 

 

    

 

 

    

 

 

 
     11,575         12,080         4.64
  

 

 

    

 

 

    

 

 

 

Corporate Bonds

        

Due after five but within ten years

     3,040         3,011         1.24
  

 

 

    

 

 

    

 

 

 
     3,040         3,011         1.24
  

 

 

    

 

 

    

 

 

 

Total Securities available for sale

        

Due within one year

     5,147         5,175         2.83

Due after one but within five years

     61,903         62,194         1.63

Due after five but within ten year

     19,044         19,199         3.72

Due after ten years

     26,268         26,256         2.03
  

 

 

    

 

 

    

 

 

 
   $ 112,362       $ 112,824         1.94
  

 

 

    

 

 

    

 

 

 

 

1) Yields on securities and investments exempt from federal and/or state income taxes are stated on a fully tax- equivalent basis, assuming a 34.00% tax rate.

 

103


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

 

 

 

Financial Table 3

Investment Securities Portfolio Analysis (Continued)

(dollars in thousands)

 

     December 31, 2014  
     Amortized      Estimated      Book  
     Cost      Fair Value      Yield(1)  

Securities held to maturity

        

U.S. Government agencies

        

Due after five but within ten years

     2,085         2,053         2.29
  

 

 

    

 

 

    

 

 

 
     2,085         2,053         2.29
  

 

 

    

 

 

    

 

 

 

Corporate Bonds

        

Due after five but within ten years

     3,411         3,397         2.76
  

 

 

    

 

 

    

 

 

 
     3,411         3,397         2.76
  

 

 

    

 

 

    

 

 

 

Total Securities held to maturity

        

Due after five but within ten years

     5,496         5,450         2.58
  

 

 

    

 

 

    

 

 

 
   $ 5,496       $ 5,450         2.58
  

 

 

    

 

 

    

 

 

 

 

1) Yields on securities and investments exempt from federal and/or state income taxes are stated on a fully tax- equivalent basis, assuming a 34.00% tax rate.

 

104


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

 

 

 

Financial Table 4

Noninterest Income

(dollars in thousands)

 

     Year Ended December 31,  
     2014      2013      2012  

Service charges on deposit accounts

   $ 1,467       $ 1,627       $ 1,723   

Other banking fees

     1,917         1,589         1,455   

Asset management fees

     1,732         1,624         1,533   

Brokerage commissions

     279         186         190   

Other noninterest income

     388         448         552   

Income from mortgage loan sales

     1,001         2,113         3,740   

Security gains (losses)

     (2      (523      1,286   

Gains (losses) from sale of OREO

     398         290         (55

Other gains (losses) from sale of assets

     141         233         251   
  

 

 

    

 

 

    

 

 

 

Total noninterest income

   $ 7,321       $ 7,587       $ 10,675   
  

 

 

    

 

 

    

 

 

 

 

Financial Table 5         
Other Noninterest Expense         

(dollars in thousands)

        

 

     Year Ended December 31,  
     2014      2013      2012  

Postage

   $ 184       $ 171       $ 211   

Telephone and data lines

     145         162         180   

Loan collection cost

     139         352         232   

Shareholder relations expense

     234         164         175   

Dues and subscriptions

     127         139         166   

Other

     1,457         1,496         1,801   
  

 

 

    

 

 

    

 

 

 

Total other noninterest expense

   $ 2,286       $ 2,484       $ 2,765   
  

 

 

    

 

 

    

 

 

 

 

105


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

 

 

 

Financial Table 6

Loan Portfolio Composition

(dollars in thousands)

 

     At December 31,  
     2014     2013     2012  
           % of Total           % of Total           % of Total  
     Amount     Loans     Amount     Loans     Amount     Loans  

Loan type:

            

Commercial

   $ 47,418        15.25   $ 47,436        15.44   $ 41,390        12.58

Real estate - construction

     26,250        8.44     21,001        6.83     28,132        8.55

Real estate - residential

     135,734        43.67     132,694        43.18     142,444        43.28

Real estate - commercial

     92,517        29.76     95,922        31.22     103,304        31.39

Consumer

     8,460        2.72     9,623        3.13     12,986        3.95

Other

     481        0.16     612        0.20     822        0.25
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     310,860        100.00     307,288        100.00     329,078        100.00
    

 

 

     

 

 

     

 

 

 

Less:

            

Allowance for loan losses

     (3,738       (5,095       (6,801  

Unearned net loan fees

     (7       60          105     
  

 

 

     

 

 

     

 

 

   

Net loans

   $ 307,115        $ 302,253        $ 322,382     
  

 

 

     

 

 

     

 

 

   

 

     At December 31,  
     2011     2010  
            % of Total            % of Total  
     Amount      Loans     Amount      Loans  

Loan type:

          

Commercial

   $ 45,907         12.52   $ 51,679         14.63

Real estate - construction

     37,144         10.13     56,602         12.72

Real estate - residential

     153,260         41.82     155,814         40.77

Real estate - commercial

     114,944         31.36     105,123         27.13

Consumer

     14,710         4.01     17,721         4.70

Other

     602         0.16     739         0.05
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

     366,567         100.00     387,678         100.00
     

 

 

      

 

 

 

Less:

          

Allowance for loan losses

     (6,815        (9,067   

Unearned net loan fees

     108           91      
  

 

 

      

 

 

    

Net loans

   $ 359,860         $ 378,702      
  

 

 

      

 

 

    

 

106


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

 

 

 

Financial Table 7

Selected Loan Maturities

(dollars in thousands)

 

     December 31, 2014  
     One Year      One to      Over Five         
     or Less      Five Years      Years      Total  

Commercial and agricultural

   $ 12,369       $ 20,038       $ 15,011       $ 47,418   

Real estate – construction

     6,321         19,929         —           26,250   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total selected loans

   $ 18,690       $ 39,967       $ 15,011       $ 73,668   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed rate loans

   $ 16,785       $ 78,229       $ 70,298       $ 165,312   
  

 

 

    

 

 

    

 

 

    

 

 

 

Sensitivity to rate changes:

           

Variable interest rates

   $ 26,403       $ 43,487       $ 75,651       $ 145,541   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

107


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

 

 

 

Financial Table 8

Activity in the Allowance for Loan Loss

(dollars in thousands)

 

     At or for the Year Ended December 31,  
     2014     2013     2012     2011     2010  

Allowance for loan losses at beginning of year

   $ 5,095      $ 6,801      $ 6,815      $ 9,067      $ 5,276   

Provision for (recovery of) loan losses

     (389     28        1,832        3,456        4,919   

Other

     —          (5     —          (5     17   

Loan charge-offs:

          

Commercial

     8        571        322        336        59   

Real estate

     1,140        1,225        1,427        5,110        924   

Consumer

     83        175        242        390        206   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     1,231        1,971        1,991        5,836        1,189   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries of loans previously charged off:

          

Commercial

     81        14        43        4        3   

Real estate

     138        180        66        28        4   

Consumer

     44        48        36        101        37   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     263        242        145        133        44   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     968        1,729        1,846        5,703        1,145   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses at end of year

   $ 3,738      $ 5,095      $ 6,801      $ 6,815      $ 9,067   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs) recoveries as a percent of average loans

     0.31     0.55     0.53     1.50     0.31

 

108


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

 

 

 

Financial Table 9

Allocation of the Allowance for Loan Losses

(dollars in thousands)

 

     At December 31,  
     2014     2013     2012  
            % of Total            % of Total            % of Total  
     Amount      Loans (1)     Amount      Loans (1)     Amount      Loans (1)  

Commercial

   $ 790         21.13   $ 722         14.17   $ 1,180         17.35

Real estate - construction

     223         5.97     1,203         23.61     719         10.57

Real estate - residential

     1,775         47.50     2,025         39.75     3,020         44.41

Real estate - commercial

     738         19.74     890         17.47     1,040         15.29

Consumer loans

     212         5.66     255         5.00     842         12.38

Other

     —           0.00     —           —       —           —  

Unallocated

     —           0.00     —           —       —           —  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

   $ 3,738         100.00   $ 5,095         100.00   $ 6,801         100.00
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     At December 31,  
     2011     2010  
            % of Total            % of Total  
     Amount      Loans (1)     Amount      Loans (1)  

Commercial

   $ 1,127         12.52   $ 966         13.33

Real estate – construction

     557         10.13     2,190         14.60

Real estate – residential

     2,924         41.81     2,629         40.19

Real estate – commercial

     1,459         31.37     2,240         27.12

Consumer

     667         4.01     984         4.57

Other

     81         0.16     58         0.19

Unallocated

     —           —       —           —  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

   $ 6,815         100.00   $ 9,067         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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

 

109


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

 

 

 

Financial Table 10

Maturities of Time Deposits

(dollars in thousands)

 

            Over 3      Over 6                
     3 Months      Months to      Months to      Over         
     or Less      6 Months      12 Months      12 Months      Total  

Time Deposits of $ 100,000 or more

   $ 4,180       $ 4,185       $ 11,738       $ 18,809       $ 38,912   

Other Time Deposits

     9,402         7,517         16,741         21,587         55,247   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 13,582       $ 11,702       $ 28,479       $ 40,396       $ 94,159   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial Table 11

Performance Ratios

 

     At December 31,  
     2014     2013     2012     2011     2010  

Return on average assets

     0.33     0.18     0.08     0.17     0.14

Return on average equity

     4.03     2.17     0.90     2.02     1.57

Equity to average assets ratio

     8.11     8.34     8.52     8.39     8.83

 

110


UWHARRIE CAPITAL CORP

Board of Directors

 

W. Stephen Aldridge, III    Charles F. Geschickter, III    Barry S. Moose
President/Funeral Director    President and    Vice President
Stanly Funeral Home, Inc.    Chief Executive Officer    Operations and Maintenance
   JTG Racing, Inc.;    Director
   ST Motorsports, Inc.   

SEPI Engineering & Construction Co.

Nadine B. Bowers    Thomas M. Hearne, Jr.    Cynthia L. Mynatt
Retired - Strategic Investment    Retired – North Carolina    President
Advisors, Inc. and Bank of Stanly    Department of Transportation    Ben Mynatt Buick - GMC
Joe S. Brooks    Charles D. Horne    James E. Nance
Board Vice Chairman    President    Founder and Managing Member
Owner and Manager    Hornwood, Inc.    North State Negotiations, LLC &
Brothers Precision Tool Co.      

North State Acquisitions, LLC

Ronald T. Burleson    W. Kenneth Huntley    S. Todd Swaringen
Partner    President and Owner    Partner
Thurman Burleson and Sons Farm    Huntley Oil & Gas Co., Inc.   

Beane Swaringen &
Company, PLLC

Bill C. Burnside, DDS    Lee Roy Lookabill, Jr.    Edward B. Tyson
Retired – General Dentist    President    Retired - Superintendent of
  

Anson Real Estate and
Insurance Co., Inc.

   Kannapolis City Schools
Raymond R. Cranford, Jr.    W. Chester Lowder    Dusty W. West
Vice President    Board Chairman    President
Crook Motor Co., Inc.    Director of Livestock Program    Dean’s Ready Mixed, Inc.
   Public Policy Division   
  

NC Farm Bureau
Federation, Inc.

  
Executive Officers
Roger L. Dick    R. David Beaver, III    Jeffrey M. Talley
President and    Chief Financial Officer    President
Chief Executive Officer    Uwharrie Capital Corp    Strategic Investment
Uwharrie Capital Corp;    and Uwharrie Bank    Advisors, Inc.;

Chief Executive Officer

Uwharrie Bank

     

Executive Vice President

Uwharrie Bank

Brendan P. Duffey    Christy D. Stoner   
Chief Operating Officer and    Chief Executive Officer   
Chief Risk Officer    Strategic Investment   
Uwharrie Capital Corp;   

Advisors, Inc.;

  
President Uwharrie Bank   

Executive Vice President

Uwharrie Bank

  

 

111