10-Q 1 d243632d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGEACT OF 1934

For the quarterly period ended September 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGEACT OF 1934

For the transition period from             to             .

COMMISSION FILE NUMBER 000-22062

 

 

UWHARRIE CAPITAL CORP

(Exact name of registrant as specified in its charter)

 

 

 

NORTH CAROLINA   56-1814206

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

132 NORTH FIRST STREET

ALBEMARLE, NORTH CAROLINA

 

28001

 
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone number, including area code: (704) 983-6181

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   x    No   ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

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

Indicate the number of shares outstanding of each of the classes of common stock issuer’s as of the latest practicable date: 7,593,929 shares of common stock outstanding as of November 7, 2011.

 

 

 


Table of Contents

Table of Contents

 

          Page No.

Part I. FINANCIAL INFORMATION

  
Item 1 -   

Financial Statements (Unaudited)

  
  

Consolidated Balance Sheets September 30, 2011 and December 31, 2010

     3
  

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010

     4
  

Consolidated Statements of Changes in Shareholders’ Equity Nine Months Ended September 30, 2011

     5
  

Consolidated Statements of Cash Flows Nine Months Ended September 30, 2011 and 2010

     6
  

Notes to Consolidated Financial Statements

     7
Item 2 -   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   27
Item 3 -   

Quantitative and Qualitative Disclosures about Market Risk

   36
Item 4 -   

Controls and Procedures

   36

Part II. OTHER INFORMATION

  
Item 1 -   

Legal Proceedings

   37
Item 1A -   

Risk Factors

   37
Item 2 -   

Unregistered Sales of Equity Securities and Use of Proceeds

   37
Item 3 -   

Defaults Upon Senior Securities

   37
Item 4 -   

Reserved

   37
Item 5 -   

Other Information

   37
Item 6 -   

Exhibits

   38
  

Exhibit Index

   40

 

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Table of Contents

Part I. FINANCIAL INFORMATION

Item 1—Financial Statements

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

 

     September 30,
2011
(Unaudited)
    December 31,
2010*
 
       
     (dollars in thousands)  

ASSETS

    

Cash and due from banks

   $ 7,455      $ 4,948   

Interest-earning deposits with banks

     9,524        8,676   

Securities available for sale, at fair value

     91,793        96,395   

Loans held for sale

     1,787        6,286   

Loans:

    

Loans held for investment

     380,828        387,769   

Less allowance for loan losses

     (7,666     (9,067
  

 

 

   

 

 

 

Net loans held for investment

     373,162        378,702   
  

 

 

   

 

 

 

Premises and equipment, net

     15,073        14,554   

Interest receivable

     1,918        2,408   

Federal Home Loan Bank stock

     2,741        3,252   

Bank owned life insurance

     6,119        5,975   

Goodwill

     987        987   

Other real estate owned

     8,898        2,022   

Prepaid assets

     1,686        2,088   

Other assets

     9,180        9,133   
  

 

 

   

 

 

 

Total assets

   $ 530,323      $ 535,426   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Demand noninterest-bearing

   $ 58,027      $ 54,837   

Interest checking and money market accounts

     175,545        187,493   

Savings deposits

     39,765        37,624   

Time deposits, $100,000 and over

     58,994        59,431   

Other time deposits

     91,838        94,648   
  

 

 

   

 

 

 

Total deposits

     424,169        434,033   
  

 

 

   

 

 

 

Short-term borrowed funds

     30,080        20,482   

Long-term debt

     26,236        34,061   

Interest payable

     307        342   

Other liabilities

     3,634        3,015   
  

 

 

   

 

 

 

Total liabilities

     484,426        491,933   
  

 

 

   

 

 

 

Off balance sheet items, commitments and contingencies (Note 8)

    

SHAREHOLDERS’ EQUITY

    

Preferred stock, no par value: 10,000,000 shares authorized;

    

10,000 shares of series A issued and outstanding

     10,000        10,000   

500 shares of series B issued and outstanding

     500        500   

Discount on preferred stock

     (225     (300

Common stock, $1.25 par value: 20,000,000 shares authorized; 7,593,929 shares issued and outstanding

     9,492        9,492   

Additional paid-in capital plus stock option surplus

     14,038        14,034   

Unearned ESOP compensation

     (726     (692

Undivided profits

     10,813        10,124   

Accumulated other comprehensive income

     2,005        335   
  

 

 

   

 

 

 

Total shareholders’ equity

     45,897        43,493   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 530,323      $ 535,426   
  

 

 

   

 

 

 

 

(*) Derived from audited consolidated financial statements

See accompanying notes

 

 

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Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Operations (Unaudited)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2011     2010     2011     2010  
     (in thousands, except share and per share data)  

Interest Income

        

Loans, including fees

   $ 5,499      $ 5,393      $ 16,258      $ 16,187   

Investment securities

        

US Treasury

     152        168        594        327   

US Government agencies and corporations

     294        482        796        1,652   

State and political subdivisions

     92        72        279        243   

Interest-earning deposits with banks and federal funds sold

     21        9        39        27   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     6,058        6,124        17,966        18,436   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

        

Interest checking and money market accounts

     202        245        645        723   

Savings deposits

     82        87        246        239   

Time deposits, $100,000 and over

     278        297        844        901   

Other time deposits

     282        406        883        1,304   

Short-term borrowed funds

     89        176        271        474   

Long-term debt

     259        267        807        815   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,192        1,478        3,696        4,456   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     4,866        4,646        14,270        13,980   
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loan losses

     483        2,053        2,012        3,096   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     4,383        2,593        12,258        10,884   

Noninterest Income

        

Service charges on deposit accounts

     476        583        1,369        1,712   

Other service fees and commissions

     885        782        2,651        2,211   

Gain on sale of securities

     —          1,520        933        1,484   

Loss fixed assets/other assets

     (51     (1     (56     (61

Income from mortgage loan sales

     407        880        1,121        1,616   

Other income

     82        173        287        401   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     1,799        3,937        6,305        7,363   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Expense

        

Salaries and employee benefits

     3,071        2,975        9,166        8,689   

Net occupancy expense

     305        322        888        860   

Equipment expense

     179        210        579        568   

Data processing costs

     213        212        630        623   

Office supplies and printing

     76        91        247        268   

Foreclosed real estate expense

     355        112        480        243   

Professional fees and services

     414        297        1,160        928   

Marketing and donations

     127        243        424        625   

Electronic banking expense

     228        211        656        588   

Software amortization and maintenance

     145        129        421        359   

FDIC insurance

     171        195        575        547   

Other noninterest expense

     594        809        1,757        1,895   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     5,878        5,806        16,983        16,193   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     304        724        1,580        2,054   

Income taxes

     49        227        407        687   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 255      $ 497      $ 1,173      $ 1,367   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 255      $ 497      $ 1,173      $ 1,367   

Dividends – preferred stock

     (161     (161     (484     (484
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 94      $ 336      $ 689      $ 883   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share

        

Basic

   $ 0.01      $ 0.04      $ 0.09      $ 0.12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.01      $ 0.04      $ 0.09      $ 0.12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

        

Basic

     7,464,970        7,490,196        7,472,411        7,487,875   

Diluted

     7,464,970        7,490,196        7,472,411        7,487,875   

See accompanying notes

 

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Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

 

     Number
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
     Total  
     (in thousands, except share data)  

Balance, December 31, 2010

     7,593,929       $ 10,000       $ 500       $ (300   $ 9,492       $ 14,034       $ (692   $ 10,124      $ 335       $ 43,493   

Net income

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

Other comprehensive income

     —           —           —           —          —           —           —          —          1,670         1,670   

Release of ESOP shares

     —           —           —           —          —           —           60        —          —           60   

Increase in ESOP notes receivable

     —           —           —           —          —           —           (94     —          —           (94

Stock compensation expense

     —           —           —           —          —           4         —          —          —           4   

Record preferred stock dividend and discount accretion

     —           —           —           75        —           —           —          (484     —           (409
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance, September 30, 2011

     7,593,929       $ 10,000       $ 500       $ (225   $ 9,492       $ 14,038       $ (726   $ 10,813      $ 2,005       $ 45,897   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

 

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Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

     Nine Months Ended
September 30,
 
     2011     2010  
     (dollars in thousands)  

Cash flows from operating activities

    

Net income

   $ 1,173      $ 1,367   

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

    

Depreciation

     615        595   

Net amortization of security premiums/discounts

     603        265   

Net amortization of mortgage servicing rights

     416        537   

Impairment of foreclosed real estate

     31        76   

Provision for loan losses

     2,012        3,096   

Stock compensation

     4        2   

Net realized gains on sales / calls available for sales securities

     (933     (1,484

Income from mortgage loan sales

     (1,121     (1,616

Proceeds from sales of loans held for sale

     42,793        56,388   

Origination of loans held for sale

     (37,173     (55,823

Loss on disposal of premises, equipment and other assets

     13        10   

Increase in cash surrender value of life insurance

     (144     (188

Loss on sales of foreclosed real estate

     43        51   

Release of ESOP shares

     60        56   

Net change in interest receivable

     490        (102

Net change in other assets

     (751     (982

Net change in interest payable

     (35     (16

Net change in other liabilities

     619        (453
  

 

 

   

 

 

 

Net cash provided by operating activities

     8,715        1,779   
  

 

 

   

 

 

 

Cash flows from investing activities

    

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

     35,497        52,070   

Purchase of securities available for sale

     (28,020     (61,964

Net change in loans

     (3,999     (34,419

Purchase of premises and equipment

     (1,147     (1,505

Proceeds from sales of foreclosed real estate

     577        799   

Investment in other assets

     (185     (216

Net (increase) decrease in Federal Home Loan Bank stock

     511        (178
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     3,234        (45,413
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net increase (decrease) in deposit accounts

     (9,864     48,775   

Net increase (decrease) in short-term borrowed funds

     9,598        (4,930

Net increase (decrease) in long-term debt

     (11,533     5,944   

Proceeds from issuance of new junior subordinated debt

     4,438        —     

Repayment of junior subordinated debt

     (730     —     

Increase in unearned ESOP compensation

     (94     (100

Dividends on preferred stock

     (409     (409
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (8,594     49,280   
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     3,355        5,646   

Cash and cash equivalents, beginning of period

     13,624        10,859   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 16,979      $ 16,505   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information

    

Interest paid

   $ 3,731      $ 2,985   

Income taxes paid

     216        93   

Supplemental Schedule of Non-Cash Activities

    

Loans transferred to foreclosured real estate

     7,527        475   

Increase in fair value of securities for sale, net of tax

     1,670        1,570   

See accompanying notes

 

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Table of Contents

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1—Basis of Presentation

The financial statements and accompanying notes are presented on a consolidated basis including Uwharrie Capital Corp (the “Company”) and its subsidiaries, Bank of Stanly (“Stanly”), Anson Bank & Trust Co. (“Anson”), Cabarrus Bank & Trust Company (“Cabarrus”), Strategic Investment Advisors, Inc. (“SIA”), and Uwharrie Mortgage Inc. Stanly consolidates its subsidiaries, the Strategic Alliance Corporation, BOS Agency, Inc. and Gateway Mortgage, Inc., each of which is wholly-owned by Stanly.

The information contained in the consolidated financial statements is unaudited. In the opinion of management, the consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and material adjustments necessary for a fair presentation of results of interim periods, all of which are of a normal recurring nature, have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for an entire year. Management is not aware of economic events, outside influences or changes in concentrations of business that would require additional clarification or disclosure in the consolidated financial statements.

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to consolidated financial statements filed as part of the Company’s 2010 Annual Report on Form 10-K. This Quarterly report should be read in conjunction with such Annual Report.

Note 2 – Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  
     (in thousands)  

Net Income

   $ 255      $ 497      $ 1,173      $ 1,367   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

        

Unrealized gain (losses) on available for sale securities

     2,332        995        3,477        3,353   

Related tax effect

     (808     (367     (1,234     (1,177

Reclassification of loss (gains)recognized in net income

     —          (1,520     (933     (1,484

Related tax effect

     —          586        360        572   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     1,524        (306     1,670        1,264   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 1,779      $ 191      $ 2,843      $ 2,631   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Note 3 – Per Share Data

Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for stock dividends. Diluted net income per common share 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 net income of the Company. For the three and nine months ended September 30, 2011 and 2010, the Company’s 123,570 and 180,571 stock outstanding options respectively, did not have a dilutive effect on per share results because the exercise prices exceeded the average share values for each period.

Basic and diluted net income per common share have been computed based upon net income available to common shareholders as presented in the accompanying consolidated statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding. The computation of basic and dilutive earnings per share is summarized below:

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2011     2010     2011     2010  

Weighted average number of common shares outstanding

     7,593,929        7,593,929        7,593,929        7,593,929   

Effect of ESOP shares

     (128,959     (103,733     (121,518     (106,054
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     7,464,970        7,490,196        7,472,411        7,487,875   

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

     7,464,970        7,490,196        7,472,411        7,487,875   
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 4 – Investment Securities

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

 

            Gross      Gross         
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 
September 30, 2011            
     (dollars in thousands)  

U.S. Treasury

   $ 32,167       $ 1,271       $ —         $ 33,438   

U.S. Government agencies

     19,806         857         —           20,663   

GSE—Mortgage-backed securities and CMO’s

     26,653         412         71         26,994   

State and political subdivisions

     10,091         607         —           10,698   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 88,717       $ 3,147       $ 71       $ 91,793   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-8-


Table of Contents
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
           

December 31, 2010

           
     (dollars in thousands)  

U.S. Treasury

   $ 51,622       $ 746       $ 1,220       $ 51,148   

U.S. Government agencies

     24,862         766         165         25,463   

GSE—Mortgage-backed securities and CMO’s

     8,655         294         49         8,900   

State and political subdivisions

     10,725         267         108         10,884   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 95,864       $ 2,073       $ 1,542       $ 96,395   
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2011 and December 31, 2010 the Company owned Federal Reserve stock reported at cost of $802,850 and $778,850, respectively, and included in other assets. Also at September 30, 2011 and December 31, 2010, the Company owned Federal Home Loan Bank Stock (FHLB) of $2.7 million and $3.3 million, respectively. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership and borrowings with these banks. These investments are carried at cost since there is no ready market and historically redemption has been made at par value. The Company estimated that the fair value approximated cost and that these investments were not impaired at September 30, 2011.

Results from sales of securities available for sale for the three month and nine month period ended September 30, 2011 and September 30, 2010 are as follows:

 

    

Three Months Ended

September 30,

 
     2011      2010  
     (dollars in thousands)  

Gross proceeds from sales

   $ —         $ 29,875   
  

 

 

    

 

 

 

Realized gains from sales

   $ —         $ 1,733   

Realized losses from sales

     —           (213
  

 

 

    

 

 

 

Net realized gains

   $ —         $ 1,520   
  

 

 

    

 

 

 

 

    

Nine Months Ended

September 30,

 
     2011      2010  
     (dollars in thousands)  

Gross proceeds from sales

   $ 25,568       $ 42,306   
  

 

 

    

 

 

 

Realized gains from sales

   $ 933       $ 1,957   

Realized losses from sales

     —           (473
  

 

 

    

 

 

 

Net realized gains

   $ 933       $ 1,484   
  

 

 

    

 

 

 

At September 30, 2011 and December 31, 2010 securities available for sale with a carrying amount of $39.2 million and $40.7 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 September 30, 2011 and December 31, 2010. These unrealized losses on investment securities are a result of temporary fluctuations in the market prices due to market volatility and a rise in interest rates, which will adjust if rates decline, and are in no way a reflection of the quality of the investments. At September 30, 2011 the unrealized losses related to three mortgage backed securities. At December 31, 2010, the unrealized losses related to six U.S. Treasury Notes, two U.S. Government Agencies, three mortgage backed securities and eight North Carolina municipal bonds.

 

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Table of Contents
     Less than 12 Months      12 Months or More      Total  
September 30, 2011           Unrealized             Unrealized             Unrealized  
     Fair Value      Losses      Fair Value      Losses      Fair Value      Losses  
     (dollars in thousands)  

Securities available for sale temporary impairment

                 

GSE—Mortgage-backed securities and CMO’s

   $ 11,596       $ 71       $ —         $ —         $ 11,596       $ 71   

State and political subdivisions

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 11,596       $ 71       $ —         $ —         $ 11,596       $ 71   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12 Months      12 Months or More      Total  
December 31, 2010           Unrealized             Unrealized             Unrealized  
     Fair Value      Losses      Fair Value      Losses      Fair Value      Losses  
     (dollars in thousands)  

Securities available for sale temporary impairment

                 

U.S. Treasury

   $ 26,138       $ 1,220       $ —         $ —         $ 26,138       $ 1,220   

U.S. Gov’t agencies

     5,736         165         —           —           5,736         165   

GSE—Mortgage-backed securities and CMO’s

     2,900         49         —           —           2,900         49   

State and political subdivisions

     4,522         108         —           —           4,522         108   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 39,296       $ 1,542       $ —         $ —         $ 39,296       $ 1,542   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2011, the Company did not intend to sell and was not likely to be required to sell the available for sale securities that were in a loss position prior to full recovery.

 

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Table of Contents

The aggregate amortized cost and fair value of the available for sale securities portfolio at September 30, 2011 and December 31, 2010 by remaining contractual maturity are as follows:

 

      September 30, 2011  
      Amortized
Cost
     Estimated
Fair Value
     Book
Yield (1)
 

Securities available for sale

        

U.S. Treasury

        

Due within one year

   $ 999       $ 1,011         1.50

Due after one but within five years

     4,076         4,381         2.59

Due after five but within ten years

     27,092         28,046         1.80
  

 

 

    

 

 

    

 

 

 
     32,167         33,438         1.90
  

 

 

    

 

 

    

 

 

 

U.S. Government agencies

        

Due within one year

     954         970         4.19

Due after one but within five years

     18,852         19,693         2.43
  

 

 

    

 

 

    

 

 

 
     19,806         20,663         2.51
  

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

        

Due after five but within ten years

     3,484         3,668         3.27

Due after ten years

     23,169         23,326         3.24
  

 

 

    

 

 

    

 

 

 
     26,653         26,994         3.24
  

 

 

    

 

 

    

 

 

 

State and political

        

Due within one year

     837         853         3.59

Due after one but within five years

     2,928         3,086         2.34

Due after five but within ten years

     4,721         5,046         3.07

Due after ten years

     1,605         1,713         4.14
  

 

 

    

 

 

    

 

 

 
     10,091         10,698         3.07
  

 

 

    

 

 

    

 

 

 

Total Securities available for sale

        

Due within one year

     2,790         2,834         3.05

Due after one but within five years

     25,856         27,160         2.44

Due after five but within ten years

     35,297         36,760         2.12

Due after ten years

     24,774         25,039         3.30
  

 

 

    

 

 

    

 

 

 
   $ 88,717       $ 91,793         2.57
  

 

 

    

 

 

    

 

 

 

 

      December 31, 2010  
      Amortized
Cost
     Estimated
Fair Value
     Book
Yield (1)
 

Securities available for sale

        

U.S. Treasury

        

Due within one year

   $ 1,000       $ 1,006         0.90

Due after one but within five years

     2,018         2,066         1.70

Due after five but within ten years

     48,604         48,076         2.28
  

 

 

    

 

 

    

 

 

 
     51,622         51,148         2.23
  

 

 

    

 

 

    

 

 

 

U.S. Government agencies

        

Due within one year

     504         519         3.96

Due after one but within five years

     18,457         19,208         2.84

Due after five but within ten years

     5,901         5,736         1.84
  

 

 

    

 

 

    

 

 

 
     24,862         25,463         2.62
  

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

        

Due after five but within ten years

     2,498         2,633         3.97

Due after ten years

     6,157         6,267         4.22
  

 

 

    

 

 

    

 

 

 
     8,655         8,900         4.15
  

 

 

    

 

 

    

 

 

 

State and political

        

Due within one year

     576         577         2.36

Due after one but within five years

     3,286         3,437         4.21

Due after five but within ten years

     4,860         4,859         3.03

Due after ten years

     2,003         2,011         4.18
  

 

 

    

 

 

    

 

 

 
     10,725         10,884         3.57
  

 

 

    

 

 

    

 

 

 

Total Securities available for sale

        

Due within one year

     2,080         2,102         2.05

Due after one but within five years

     23,761         24,711         2.93

Due after five but within ten years

     61,863         61,304         2.37

Due after ten years

     8,160         8,278         4.21
  

 

 

    

 

 

    

 

 

 
   $ 95,864       $ 96,395         2.66
  

 

 

    

 

 

    

 

 

 

 

1) Yields on securities and investments exempt from federal and/or state income taxes are stated on a fully tax-equivalent basis, assuming a 38.55% tax rate.

 

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Table of Contents

Note 5 – Loans Held for Investment

The composition of net loans held for investment by class as of September 30, 2011 and December 31, 2010 is as follows:

 

     September 30,
2011
    December 31,
2010
 
  

 

 

   

 

 

 
     (dollars in thousands)  

Commercial

    

Commercial

   $ 48,849      $ 51,679   

Real estate – commercial

     113,230        105,123   

Other real estate construction loans

     40,757        52,270   

Noncommercial

    

Real estate 1-4 family construction

     5,430        4,332   

Real estate – residential

     104,677        103,781   

Home equity

     51,498        52,034   

Consumer loans

     15,711        17,721   

Other loans

     589        739   
  

 

 

   

 

 

 
     380,741        387,679   

Less:

    

Allowance for loan losses

     (7,666     (9,067

Deferred loan (fees) costs, net

     87        90   
  

 

 

   

 

 

 

Loans held for investment, net

   $ 373,162      $ 378,702   
  

 

 

   

 

 

 

Note 6—Allowance for Loan Losses

Changes in the allowance for loan losses for the three and nine month periods ended September 30, 2011 and 2010 are presented below:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
  

 

 

   

 

 

 
     2011        2010        2011        2010   
  

 

 

   

 

 

   

 

 

   

 

 

 
           (in thousands)        

Balance, beginning of period

   $ 7,274      $ 5,635      $ 9,067      $ 5,276   

Provision charged to operations

     483        2,053        2,012        3,096   

Charge-offs

     (118     (246     (3,514     (947

Recoveries

     28        20        101        37   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs)

     (90     (226     (3,413     (910

Other

     (1     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 7,666      $ 7,462      $ 7,666      $ 7,462   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following tables discuss the allowance and related activities for the loss by loan class as of and for the three and nine months at September 30, 2011:

For the three months

ended September 30, 2011

 

     Beginning
Balance
     Provisions      Other     Chargeoffs     Recoveries      Ending
Balance
 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     (dollars in thousands)   

Commercial

   $ 1,005       $ 7       $ (1   $ —        $ 1       $ 1,012   

Real estate – commercial

     1,360         362         —          —          3         1,725   

Other real estate construction

     1,297         1         —          —          —           1,298   

Real estate construction

     24         7         —          —          —           31   

Real estate – residential

     1,746         75         —          (39     —           1,782   

Home equity

     1,021         14         —          (1     2         1,036   

Consumer loan

     772         8         —          (78     22         724   

Other loans

     49         9         —          —          —           58   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 7,274       $ 483       $ (1   $ (118   $ 28       $ 7,666   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

-12-


Table of Contents

For the nine months

ended September 30, 2011

 

     Beginning
Balance
     Provisions     Other      Chargeoffs     Recoveries      Ending
Balance
 
     (dollars in thousands)  

Commercial

   $ 966       $ 201      $ —         $ (159   $ 4       $ 1,012   

Real estate – commercial

     2,240         280        —           (799     4         1,725   

Other real estate construction

     2,157         703        —           (1,562     —           1,298   

Real estate construction

     33         7        —           (15     6         31   

Real estate – residential

     1,658         431        —           (307     —           1,782   

Home equity

     971         476        —           (413     2         1,036   

Consumer loan

     984         (86     —           (259     85         724   

Other loans

     58         —          —           —          —           58   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 9,067       $ 2,012      $ —         $ (3,514   $ 101       $ 7,666   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following tables show period-end loans and reserve balances by loan class both individually and collectively evaluated for impairment at September 30, 2011 and December 31, 2010:

September 30, 2011

 

     Individually Evaluated      Collectively Evaluated      Total  
     Reserve      Loans      Reserve      Loans      Reserve      Loans  
     (dollars in thousands)  

Commercial

   $ 438       $ 1,999       $ 574       $ 46,850       $ 1,012       $ 48,849   

Real estate – commercial

     621         11,455         1,104         101,775         1,725         113,230   

Other real estate construction

     1,056         6,850         242         33,907         1,298         40,757   

Real estate construction

     —           1,490         31         3,940         31         5,430   

Real estate – residential

     826         11,119         956         93,558         1,782         104,677   

Home equity

     218         1,609         818         49,889         1,036         51,498   

Consumer loan

     172         309         552         15,402         724         15,711   

Other loans

     —           —           58         589         58         589   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,331       $ 34,831       $ 4,335       $ 345,910       $ 7,666       $ 380,741   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

 

     Individually Evaluated      Collectively Evaluated      Total  
     Reserve      Loans      Reserve      Loans      Reserve      Loans  
     (dollars in thousands)  

Commercial

   $ 399       $ 1,439       $ 567       $ 50,240       $ 966       $ 51,679   

Real estate – commercial

     1,384         20,321         856         84,802         2,240         105,123   

Other real estate construction

     1,818         10,355         339         41,915         2,157         52,270   

Real estate construction

     —           950         33         3,382         33         4,332   

Real estate – residential

     762         8,884         896         94,897         1,658         103,781   

Home equity

     136         1,065         835         50,969         971         52,034   

Consumer loan

     132         241         852         17,480         984         17,721   

Other loans

     —           —           58         739         58         739   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,631       $ 43,255       $ 4,436       $ 344,424       $ 9,067       $ 387,679   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-13-


Table of Contents

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

September 30, 2011

 

      Loans
30-89 Days
Past Due
     Loans
90 Days
or More
Past due
     Total Past
Due Loans
     Current
Loans
     Total
Loans
     Accruing
Loans 90 or
More Days
Past Due
 
     (dollars in thousands)  

Commercial

   $ 237       $ 262       $ 499       $ 48,350       $ 48,849       $ —     

Real estate—commercial

     695         1,982         2,677         110,553         113,230         —     

Other real estate construction

     848         4,639         5,487         35,270         40,757         —     

Real estate 1 -4 family construction

     —           —           —           5,430         5,430         —     

Real estate—residential

     1,500         2,710         4,210         100,467         104,677         —     

Home equity

     178         316         494         51,004         51,498         —     

Consumer loans

     188         35         223         15,488         15,711         —     

Other loans

     —           —           —           589         589         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,646       $ 9,944       $ 13,590       $ 367,151       $ 380,741       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

 

      Loans
30-89 Days
Past Due
     Loans
90 Days
or More
Past due
     Total Past
Due Loans
     Current
Loans
     Total
Loans
     Accruing
Loans 90 or
More Days
Past Due
 
     (dollars in thousands)  

Commercial

   $ 666       $ 501       $ 1,167       $ 50,512       $ 51,679       $ —     

Real estate—commercial

     1,728         8,702         10,430         94,693         105,123         —     

Other real estate construction

     206         7,975         8,181         44,089         52,270         —     

Real estate 1 -4 family construction

     —           500         500         3,832         4,332         —     

Real estate—residential

     1,648         2,337         3,985         99,796         103,781         —     

Home equity

     110         75         185         51,849         52,034         —     

Consumer loans

     267         46         313         17,408         17,721         10   

Other loans

     —           —           —           739         739         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,625       $ 20,136       $ 24,761       $ 362,918       $ 387,679       $ 10   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

The composition of nonaccrual loans by class as of September 30, 2011 and December 31, 2010 is as follows:

 

      September 30,
2011
     December 31,
2010
 
     (dollars in thousands)  

Commercial

   $ 262       $ 501   

Real estate—commercial

     1,982         8,702   

Other real estate construction

     4,639         7,975   

Real estate 1 – 4 family construction

     —           500   

Real estate – residential

     2,710         2,337   

Home equity

     316         75   

Consumer loans

     35         36   

Other loans

     —           —     
  

 

 

    

 

 

 
   $ 9,944       $ 20,126   
  

 

 

    

 

 

 

 

-14-


Table of Contents

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. 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.

The tables below summarize risk grades of the loan portfolio by class at September 30, 2011 and December 31 2010:

September 30, 2011

 

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

Commercial

   $ 45,677       $ 1,552       $ 1,525       $ 95       $ 48,849   

Real estate – commercial

     96,974         4,854         10,664         738         113,230   

Other real estate construction

     33,316         102         7,339         —           40,757   

Real estate 1 – 4 family construction

     4,480         —           950         —           5,430   

Real estate – residential

     93,171         2,942         8,564         —           104,677   

Home equity

     49,707         664         1,127         —           51,498   

Consumer loans

     15,233         198         268         12         15,711   

Other loans

     589         —           —           —           589   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 339,147       $ 10,312       $ 30,437       $ 845       $ 380,741   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

 

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

Commercial

   $ 50,108       $ 185       $ 1,386       $ —         $ 51,679   

Real estate – commercial

     81,410         4,520         18,455         738         105,123   

Other real estate construction

     41,709         301         10,260         —           52,270   

Real estate 1 – 4 family construction

     3,381         —           951         —           4,332   

Real estate – residential

     94,077         1,787         7,917         —           103,781   

Home equity

     50,902         158         974         —           52,034   

Consumer loans

     17,458         102         129         32         17,721   

Other loans

     739         —           —           —           739   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 339,784       $ 7,053       $ 40,072       $ 770       $ 387,679   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. The following tables show the performing and nonperforming loans by class at September 30, 2011 and December 31, 2010:

September 30, 2011

 

     Performing      Non-
Performing
     Total  
  

 

 

    

 

 

    

 

 

 
     (dollars in thousands)  

Commercial

   $ 48,587       $ 262       $ 48,849   

Real estate – commercial

     111,248         1,982         113,230   

Other real estate construction

     36,118         4,639         40,757   

Real estate 1 – 4 family construction

     5,430         —           5,430   

Real estate – residential

     101,967         2,710         104,677   

Home equity

     51,182         316         51,498   

Consumer loans

     15,676         35         15,711   

Other loans

     589         —           589   
  

 

 

    

 

 

    

 

 

 

Total

   $ 370,797       $ 9,944       $ 380,741   
  

 

 

    

 

 

    

 

 

 

December 31, 2010

 

     Performing      Non-
Performing
     Total  
  

 

 

    

 

 

    

 

 

 
     (dollars in thousands)  

Commercial

   $ 51,178       $ 501       $ 51,679   

Real estate – commercial

     96,421         8,702         105,123   

Other real estate construction

     44,295         7,975         52,270   

Real estate 1 – 4 family construction

     3,832         500         4,332   

Real estate – residential

     101,444         2,337         103,781   

Home equity

     51,959         75         52,034   

Consumer loans

     17,675         46         17,721   

Other loans

     739         —           739   
  

 

 

    

 

 

    

 

 

 

Total

   $ 367,543       $ 20,136       $ 387,679   
  

 

 

    

 

 

    

 

 

 

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 specific calculation 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 at September 30, 2011 and December 31, 2010:

September 30, 2011

 

            Recorded      Recorded             For the Quarter Ended      Year to Date  
     Unpaid
Principal
Balance
     Investment
With No
Allowance
     Investment
With
Allowance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
     Average
Recorded
Investment
     Interest
Income
 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     (dollars in thousands)  

Commercial

   $ 1,999       $ 836       $ 1,163       $ 438       $ 1,912       $ 32       $ 1,529       $ 75   

Real estate – commercial

     13,432         9,256         2,199         622         12,496         167         16,162         430   

Other real estate construction

     7,228         2,721         4,129         1,056         6,749         48         8,456         79   

Real estate 1 – 4 family construction

     1,490         1,490         —           —           1,490         31         1,347         57   

Real estate – residential

     11,119         7,053         4,066         825         10,522         43         9,947         368   

Home Equity loans

     1,610         1,037         572         218         1,435         24         1,348         46   

Consumer loans

     309         40         269         172         321         4         297         14   

Other Loans

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 37,187       $ 22,433       $ 12,398       $ 3,331       $ 34,925       $ 349       $ 39,086       $ 1,069   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-16-


Table of Contents

December 31, 2010

 

     Unpaid
Principal
Balance
     Recorded
Investment
With No
Allowance
    

Recorded
Investment

With
Allowance

     Related
Allowance
 
  

 

 

    

 

 

    

 

 

    

 

 

 
     (dollars in thousands)  

Commercial

   $ 1,439       $ 918       $ 521       $ 399   

Real estate – commercial

     21,985         16,088         4,233         1,384   

Other real estate construction

     10,357         2,585         7,770         1,818   

Real estate 1 – 4 family construction

     950         950         —           —     

Real estate – residential

     8,884         5,118         3,766         762   

Home Equity loans

     1,066         677         388         136   

Consumer loans

     241         23         218         132   

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 44,922       $ 26,359       $ 16,896       $ 4,631   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 7 – Troubled Debts 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 a TDR are typically already on nonaccrual status and partial chargeoffs may have in some cases 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.

 

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Table of Contents

For the three and nine months ended September 30, 2011, the following table presents a breakdown of the types of concessions made by loan class:

For the three months

ended September 30, 2011

 

            Pre-Modification      Post-Modification  
     Number      Outstanding Recorded      Outstanding Recorded  
     of Contracts      Investment      Investment  
     (dollars in thousands)  

Other:

        

Commercial

     —         $ —         $ —     

Real estate – commercial

     —           —           —     

Other real estate construction

     —           —           —     

Real estate 1 – 4 family construction

     —           —           —     

Real estate – residential

     2         348         347   

Home equity

     —           —           —     

Consumer loans

     1         5         5   

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     3       $ 353       $ 352   
  

 

 

    

 

 

    

 

 

 

Total

     3       $ 353       $ 352   
  

 

 

    

 

 

    

 

 

 

 

-18-


Table of Contents

For the nine months

ended September 30, 2011

 

     Number
of Contracts
     Pre-Modification
Outstanding  Recorded
Investment
     Post-Modification
Outstanding  Recorded
Investment
 
     (dollars in thousands)  

Below market interest rate:

        

Commercial

     —         $ —         $ —     

Real estate – commercial

     —           —           —     

Other real estate construction

     —           —           —     

Real estate 1 – 4 family construction

     —           —           —     

Real estate – residential

     2         331         330   

Home equity

     —           —           —     

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     2       $ 331       $ 330   
  

 

 

    

 

 

    

 

 

 

Extended payment terms:

        

Commercial

     —         $ —         $ —     

Real estate – commercial

     —           —           —     

Other real estate construction

     —           —           —     

Real estate 1 – 4 family construction

     —           —           —     

Real estate – residential

     2         135         135   

Home equity

     —           —           —     

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     2       $ 135       $ 135   
  

 

 

    

 

 

    

 

 

 

Other:

        

Commercial

     1       $ 42       $ 36   

Real estate – commercial

     —           —           —     

Other real estate construction

     —           —           —     

Real estate 1 – 4 family construction

     —           —           —     

Real estate – residential

     14         1,803         1,784   

Home equity

     —           —           —     

Consumer loans

     4         109         100   

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     19       $ 1,954       $ 1,920   
  

 

 

    

 

 

    

 

 

 

Total

     23       $ 2,420       $ 2,385   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table presents loans that were modified as troubled debt restructurings within the previous twelve months, from October 1, 2010 and for which there was a payment default during the three and nine months ended September 30, 2011:

 

     Three months ended
September 30, 2011
     Nine months ended
September 30, 2011
 
     Number
of Loans
     Recorded
Investment
     Number
of Loans
     Recorded
Investment
 
     (dollars in thousands)  

Below market interest rate:

           

Commercial

     —         $ —           —         $ —     

Real estate – commercial

     —           —           —           —     

Other real estate construction

     —           —           —           —     

Real estate 1 – 4 family construction

     —           —           —           —     

Real estate – residential

     —           —           1         210   

Home Equity loans

     —           —           —           —     

Consumer loans

     —           —           —           —     

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     —         $ —           1       $ 210   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other:

           

Commercial

     —         $ —           —         $ —     

Real estate – commercial

     —           —           —           —     

Other real estate construction

     —           —           —           —     

Real estate 1 – 4 family construction

     —           —           —           —     

Real estate – residential

     —           —           3         349   

Home Equity loans

     —           —           —           —     

Consumer loans

     —           —           2         85   

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     —         $ —           5       $ 434   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           6       $ 644   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 mentioned, the Company considers TDRs to be impaired loans. A default generally leads to a partial chargeoff or further impairment. If this happens the chargeoff is included in the expected loss calculation “in the loans collectively evaluated” portion of our allowance for loan loss model.

The following table presents the successes and failures of the types of modifications within the previous twelve months as of September 30, 2011:

 

     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)  

Below market interest rate

     —         $ —           2       $ 330         —         $ —           —         $ —     

Extended payment terms

     —           —           2         135         —           —           —           —     

Other Loans

     —           —           15         1,546         4         374         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           19       $ 2,011         4       $ 374         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 8—Commitments and Contingencies

The subsidiary banks are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their 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.

 

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Table of Contents

The banks’ 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 banks use the same credit policies in making commitments under such instruments as they do for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. 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. At September 30, 2011, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

(in thousands)       

Commitments to extend credit

   $ 64,826   

Credit card commitments

     8,458   

Standby letters of credit

     1,545   
  

 

 

 

Total commitments

   $ 74,829   
  

 

 

 

Note 9 – Fair Value Disclosures

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 impaired loans: loans held for sale, which are carried at the lower of cost or market: other real estate owned and 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; foreclosed real estate, which is carried at lower of cost or fair market value 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 and government agency 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 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 migration of securities between levels.

 

-21-


Table of Contents

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 and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected repayments or fair value of collateral exceed the recorded investments in such loans. At September 30, 2011, substantially all of the total impaired loans were evaluated based on the fair value of the underlying collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the 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 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 appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset 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. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

Servicing assets are evaluated for impairment based upon the fair value. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.

The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010:

 

     September 30, 2011  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Securities available for sale:

           

US Treasury

   $ 33,438       $ 33,438       $ —         $ —     

US Government Agencies

     20,663         20,663         —           —     

GSE – Mortgage-backed securities and CMO’s

     26,994         —           26,994         —     

State and political subdivisions

     10,698         —           10,698         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 91,793       $ 54,101       $ 37,692       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-22-


Table of Contents
     December 31, 2010  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Securities available for sale:

           

US Treasury

   $ 51,148       $ 51,148       $ —         $ —     

US Government Agencies

     25,463         25,463         —           —     

GSE – Mortgage-backed securities and CMO’s

     8,900         —           8,900         —     

State and political subdivisions

     10,884         —           10,884         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 96,395       $ 76,611       $ 19,784       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2011 and December 31, 2010:

 

     September 30, 2011  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Impaired loans

   $ 9,067       $ —         $ —         $ 9,067   

Loans held for sale

     1,787         —           1,787         —     

Other real estate owned

     248         —           —           248   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 11,102       $ —         $ 1,787       $ 9,315   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2010  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Impaired loans

   $ 12,265       $ —         $ —         $ 12,265   

Loans held for sale

     6,286         —           6,286         —     

Other real estate owned

     275         —           —           275   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 18,826       $ —         $ 6,286       $ 12,540   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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Table of Contents

Note 10—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 September 30, 2011 and December 31, 2010, are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price for which an asset could be sold 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 that 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 September 30, 2011 and December 31, 2010:

 

     September 30, 2011      December 31, 2010  
     Carrying      Estimated      Carrying      Estimated  
     Amount      Fair Value      Amount      Fair Value  
     (dollars in thousands)  

Financial Assets

           

Cash and cash equivalents

   $ 16,979       $ 16,979       $ 13,624       $ 13,624   

Securities available for sale

     91,793         91,793         96,395         96,395   

Loans held for investment, net

     373,162         389,628         378,702         392,017   

Loans held for sale

     1,787         1,787         6,286         6,286   

FHLB Stock and FRB Stock

     3,543         3,543         4,031         4,031   

Bank-owned life insurance

     6,119         6,119         5,975         5,975   

Mortgage servicing rights

     2,092         2,313         2,134         2,522   

Accrued interest receivables

     1,918         1,918         2,408         2,408   

Financial Liabilities

           

Deposits

   $ 424,169       $ 422,452       $ 434,033       $ 439,298   

Short-term borrowings

     30,080         30,080         20,482         20,482   

Long-term debt

     26,236         27,230         34,061         35,625   

Accrued interest payable

     307         307         342         342   

The carrying amount of cash and cash equivalents and accrued interest approximate their fair values due to the short period of time until their expected realization. Securities available for sale are carried at fair value based on quoted market prices. The carrying amount of bank-owned life insurance is the current cash surrender value. It is not practicable to determine fair value of Federal Home Loan Bank and Federal Reserve Bank stock due to restrictions placed on its transferability, so it is presented at its carrying value.

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

 

   

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. Loans held for sale, which represent current mortgage production forward sales not yet delivered, are valued based on current market prices. The fair value of loans does not consider the lack of liquidity and uncertainty in the market that would effect the valuation.

 

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Deposits – The fair value of checking, savings and money market deposits is deemed equal to the amount payable on demand. The fair value of certificates of deposit is estimated based on discounted cash flow analyses using offered market rates. 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. The estimated fair value for long-term borrowings are estimated based on discounted cash flow analyses using offered market rates.

At September 30, 2011, the subsidiary banks 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 8.

Note 11 – Recent Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06, an update to ASC 820-10, “Fair Value Measurements.” This update adds a new requirement to disclose transfers in and out of level 1 and level 2, along with the reasons for the transfers, and requires a gross presentation of purchases and sales of level 3 activities. Additionally, the update clarifies that entities provide fair value measurement disclosures for each class of assets and liabilities and that entities provide enhanced disclosures around level 2 valuation techniques and inputs. The Company adopted the disclosure requirements for level 1 and level 2 transfers and the expanded fair value measurement and valuation disclosures effective January 1, 2010. The disclosure requirements for level 3 activities are effective for the Company on January 1, 2011. The adoption of the disclosure requirements for level 1 and level 2 transfers and the expanded qualitative disclosures, had no impact on the Company’s financial position, results of operations, and EPS. The Company adopted the level 3 disclosure requirements in the first quarter of 2011 and it had no impact on its financial position, results of operations, and EPS.

In July 2010, the FASB issued ASU 2010-20, an update to ASC 310 “Receivables”. The update to ASC 310 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a roll forward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 became effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period became effective for the Company’s financial statements beginning on January 1, 2011. The Company has adopted this update and included the disclosure in the notes to the financial statements.

In April 2011, the FASB issued ASU No. 2011-02, an update to ASC 310 “Receivables”. The update to ASC 310 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties.

 

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ASU 2011-02 will be effective for the Company on July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011. Adoption of ASU 2011-02 did not have a material impact on the Company’s financial statements.

In June 2011, the FASB issued ASU 2011-05, an update to ASC 220, “Comprehensive Income.” This update requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

In September 2011, the FASB issued ASU 2011-08, an update to ASC 350 “Intangibles—Goodwill and Other.” This update gives entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-08 is effective for annual and interim impairment tests beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

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.

 

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

This Quarterly Report on Form 10-Q may contain certain forward-looking statements consisting of estimates with respect to the financial condition, 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. Any use of “we” or “our” in the following discussion refers to the Company.

Comparison of Financial Condition at September 30, 2011 and December 31, 2010.

During the nine months ended September 30, 2011, the Company’s total assets decreased $5.1 million, from $535.4 million to $530.3 million. During the same period, loans held for investment decreased $7.0 million and investment securities decreased $4.6 million.

Cash and cash equivalents increased $3.4 million during the nine months ended September 30, 2011. Cash and due from banks increased $2.5 million, while interest-earning deposits with banks increased $848,000.

Investment securities decreased $4.6 million to $91.8 million for the nine months ended September 30, 2011. During the first nine months of 2011 in an effort to improve our interest rate risk position, management made the decision to shorten the duration of our investment portfolio by selling $24.6 million of securities, including $22.7 million of US Treasuries and government agency bonds and $1.9 million of small mortgage backed securities. The Company realized a gain of $933,000 on these transactions. The proceeds from these sales are being reinvested in defensive duration mortgage backed securities which will provide a shorter maturity and a monthly cash flow and protection in a rising rate environment. On September 30, 2011, the Company had net unrealized gains of $3.1 million.

Loans held for investment decreased from $387.8 million to $380.8 million, a decrease of $7.0 million. Contributing to this decrease was a significant pay down of $4.5 million with one customer relationship. The Company also had net loan chargeoffs of $3.4 million during the first nine months of 2011 and transferred $7.5 million to other real estate owned. The Company experienced positive growth trends in its commercial real estate loans as well as in both the one-to-four family residential real estate and residential construction areas of the loan portfolio. Commercial real estate experienced the largest growth increasing 7.7% or $8.1 million. This growth was largely due to one customer relationship with a construction loan converting to a permanent loan totaling $5.5 million. All remaining areas of the loan portfolio decreased during the first nine months of 2011. Loans held for sale decreased 71.6% or $4.5 million during the period. The decrease was attributed to an increase in mortgage rates and a decrease in demand. The allowance for loan losses was $7.7 million at September 30, 2011, which represented 2.01% of the loan portfolio.

Other changes in our consolidated assets are related to premises and equipment, interest receivable, Federal Home Loan Bank stock, bank owned life insurance, other real estate owned, prepaid assets and other assets. Premises and equipment, bank owned life insurance and other real estate owned increased $519,000, $144,000 and $6.9 million, respectively. The Company foreclosed on several loans during the period, with two relationships totaling $5.1 million contributing largely to the increase in other real estate owned. Accrued interest receivable and prepaid assets declined $490,000 and $402,000, respectively. Federal Home Loan Bank stock decreased $511,000 because member institutions are required to increase or decrease their ownership as their utilization of FHLB borrowings change. Other assets increased $47,000 during the nine month period.

 

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Customer deposits, our primary funding source, experienced a $9.9 million decrease during the period ended September 30, 2011, decreasing from approximately$434.0 million to $424.2 million. Demand noninterest-bearing checking increased $3.2 million, while savings deposits increased $2.1 million for the period. Time deposits $100,000 and over decreased $437,000, while other time deposits declined $2.8 million during the first nine months of 2011. Interest checking and money market deposits decreased $12.0 million. This decrease is attributable to decreases in two relationships, one of which is public fund money, where the balances maintained are seasonal in nature and have declined to their annual low point.

Total borrowings, which consist of both short-term and long-term borrowed funds primarily from the Federal Home Loan Bank, increased $1.8 million for the period. At September 30, 2011, $35.5 million of the $56.3 million in total borrowings were comprised of Federal Home Loan Bank advances.

At September 30, 2011, total shareholders’ equity was $45.9 million, an increase of $2.4 million from December 31, 2010. Net income for the period was $1.2 million. Unrealized gains and losses on investment securities, net of tax, increased $1.7 million. These increases were offset as the Company also recorded $409,000 in dividends on its outstanding series A and B preferred stock for the nine month period. The Company also made principal payments totaling $60,000 and released 12,216 ESOP shares, while drawing down a $94,000 advance on the ESOP line of credit. These transactions had a net effect of a $34,000 decrease in equity. At September 30, 2011, the Company and its subsidiary banks exceeded all applicable regulatory capital requirements.

Comparison of Results of Operations For the Three Months Ended September 30, 2011 and 2010.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $255,000 for the three months ended September 30, 2011, as compared to $497,000 for the three months ended September 30, 2010, a decrease of $242,000. Net income available to common shareholders was $94,000 or $0.01 per common share at September 30, 2011, compared at $336,000 or $0.04 per common share at September 30, 2010. Net income available to common shareholders is net income less any dividends on preferred stock related to the $10.0 million of capital received from the United States Department of the Treasury under the Capital Purchase Program in December 2008.

Net Interest Income

As with most financial institutions, the primary component of earnings for our banks 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 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 by levels of noninterest-bearing liabilities and capital.

Net interest income for the three months ended September 30, 2011 was $4.9 million as compared with $4.6 million during the quarter ending September 30, 2010, resulting in an increase of $220,000. During the current quarter the volume of interest-earning assets and the

 

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volume of our interest-bearing liabilities decreased. The decrease in the volume of interest-bearing liabilities outpaced the decrease in our assets by $31,000. The average yield on our interest-earning assets decreased four basis points to 5.08%, while the average rate we paid for our interest-bearing liabilities decreased 27 basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve adjusts interest rates, while interest-bearing time deposits adjust at the time of maturity. These changes resulted in a increase of 23 basis points in our interest rate spread, from 3.73% for the first three months of 2010 to 3.96% for the corresponding period in 2011. Our net interest margin was 4.10% and 3.90% for the comparable periods in 2011 and 2010, respectively.

The following table presents average balance sheets and a net interest income analysis for the three months ended September 30, 2011 and 2010:

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended September 30,

 

(in thousands)                                         
     Average Balance      Income/Expenses      Rate/Yield  
     2011      2010      2011      2010      2011     2010  

Interest-earning assets:

                

Taxable securities

   $ 80,236       $ 84,066       $ 446       $ 650         2.21  </