EX-13 2 d444035dex13.htm EX-13 EX-13

Exhibit 13

Uwharrie Capital Corp

2012

ANNUAL REPORT TO SHAREHOLDERS

 

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35


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Description of Business

Uwharrie Capital Corp (the “Company”) is a North Carolina bank holding company. The Company was organized on July 1, 1993 to become the bank holding company for the Bank of Stanly (“Stanly”), a North Carolina commercial bank chartered on September 28, 1983, and its three wholly-owned subsidiaries, The Strategic Alliance Corporation, BOS Agency, Inc., and Gateway Mortgage, Inc., a mortgage origination company. The Company also owns two non-bank subsidiaries, Strategic Investment Advisors, Inc., and Uwharrie Mortgage, Inc.

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

On January 19, 2000, the Company completed its acquisition of Anson BanCorp, Inc. and its subsidiary, Anson Savings Bank. The savings bank retained its North Carolina savings bank charter and became a wholly-owned subsidiary of Uwharrie Capital Corp as Anson Bank & Trust Co. (“Anson”) and provides financial services to customers through one banking office in Anson County.

On April 10, 2003, the Company capitalized a new wholly-owned subsidiary bank, Cabarrus Bank & Trust Company (“Cabarrus”), located in Concord, North Carolina. As of that date, Cabarrus purchased two branch offices located in Cabarrus County from Stanly to begin its operation. Cabarrus operates as a commercial bank and provides a full range of banking services.

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

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

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

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

Bank of Stanly, Member FDIC, Equal Housing Lender.

Anson Bank & Trust Co., Member FDIC, Equal Housing Lender.

Cabarrus Bank & Trust Company, Member FDIC, Equal Housing Lender.

 

36


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Financial Highlights

 

(Dollars in thousands, except per share amounts)    2012     2011     Percent
Increase
(Decrease)
 

For the year:

      

Net income

   $ 404      $ 900        -55.11

Net income (loss) available to common shareholders

   $ (241   $ 255        -194.51

Basic net (loss) income per common share

   $ (0.03   $ 0.03        -200.00

Diluted net (loss) income per common share

   $ (0.03   $ 0.03        -200.00

Weighted average common shares outstanding (diluted)

     7,371,667        7,467,396        -1.28

At year-end:

      

Total assets

   $ 545,007      $ 526,902        3.44

Total earning assets

     499,045        478,494        4.29

Loans held for investment

     329,183        366,675        -10.22

Total interest-bearing liabilities

     418,628        415,023        0.87

Shareholders’ equity

     42,729        44,254        -3.45

Book value per common share

   $ 4.31      $ 4.47        -3.58

Averages for the year:

      

Total assets

   $ 526,361      $ 529,970        -0.68

Total earning assets

     478,630        486,550        -1.63

Loans held for investment

     347,762        381,419        -8.82

Total interest-bearing liabilities

     408,358        423,794        -3.64

Shareholders’ equity

     44,868        44,462        3.94

Financial ratios (in percentage):

      

Return on average assets

     0.08     0.17  

Return on average shareholders’ equity

     0.90     2.02  

Average equity to average assets

     8.52     8.39  

Net interest margin (fully tax equivalent basis)

     3.90     4.01  

Allowance as % of loans at year-end

     2.07     1.86  

Allowance as % of nonperforming loans

     71.74     86.68  

Nonperforming loans to total loans

     2.88     2.14  

Nonperforming assets to total assets

     3.34     3.44  

Net loan charge-offs (recoveries) to average loans

     0.53     1.50  

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

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

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

The Board of Directors adopts a dividend policy on an annual basis. For 2012 and 2011, Uwharrie Capital Corp did not declare a dividend. The Board of Directors will determine an appropriate dividend, if any, on an annual basis, consistent with the capital needs of the Company.

 

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38


LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

Uwharrie Capital Corp

Albemarle, North Carolina

We have audited the accompanying consolidated balance sheets of Uwharrie Capital Corp and Subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Uwharrie Capital Corp and Subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

 

LOGO

Asheville, North Carolina

March 28, 2013

 

39


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2012 and 2011

 

 

 

     2012     2011  
     (dollars in thousands)  

ASSETS

    

Cash and due from banks

   $ 8,877      $ 7,487   

Interest-earning deposits with banks

     72,851        21,200   

Securities available for sale, at fair value

     91,638        88,661   

Loans held for sale

     5,373        1,958   

Loans:

    

Loans held for investment

     329,183        366,675   

Less allowance for loan losses

     (6,801     (6,815
  

 

 

   

 

 

 

Net loans held for investment

     322,382        359,860   
  

 

 

   

 

 

 

Premises and equipment, net

     14,952        15,076   

Interest receivable

     1,753        2,084   

Restricted stock

     2,265        2,486   

Bank owned life insurance

     6,394        6,171   

Goodwill

     —          987   

Other real estate owned

     8,713        10,258   

Prepaid assets

     635        1,347   

Other assets

     9,174        9,327   
  

 

 

   

 

 

 

Total assets

   $ 545,007      $ 526,902   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Demand noninterest-bearing

   $ 70,347      $ 62,339   

Interest checking and money market accounts

     211,066        185,539   

Savings deposits

     43,336        39,273   

Time deposits, $100,000 and over

     53,449        58,274   

Other time deposits

     79,414        85,913   
  

 

 

   

 

 

 

Total deposits

     457,612        431,338   
  

 

 

   

 

 

 

Short-term borrowed funds

     18,690        20,791   

Long-term debt

     12,673        25,233   

Interest payable

     270        301   

Other liabilities

     11,449        3,636   
  

 

 

   

 

 

 

Total liabilities

     500,694        481,299   
  

 

 

   

 

 

 

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

    

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

     1,584        1,349   

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

     (100     (200

Common stock, $1.25 par value: 20,000,000 shares authorized; 7,502,496 and 7,593,929 shares issued and outstanding

     9,378        9,492   

Additional paid-in capital

     12,201        12,661   

Unearned ESOP compensation

     (875     (772

Undivided profits

     10,138        10,379   

Accumulated other comprehensive income

     1,487        2,194   
  

 

 

   

 

 

 

Total shareholders’ equity

     42,729        44,254   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 545,007      $ 526,902   
  

 

 

   

 

 

 

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

 

40


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2012, 2011 and 2010

 

 

 

     2012     2011     2010  
    

(dollars in thousands, except share

and per share data)

 

Interest Income

      

Loans, including fees

   $ 19,724      $ 21,609      $ 21,616   

Investment securities:

      

US Treasury

     581        742        612   

US Government agencies and corporations

     1,105        1,035        1,896   

State and political subdivisions

     324        371        319   

Interest-earning deposits with banks and federal funds sold

     137        65        44   
  

 

 

   

 

 

   

 

 

 

Total interest income

     21,871        23,822        24,487   
  

 

 

   

 

 

   

 

 

 

Interest Expense

      

Interest checking and money market accounts

     542        785        971   

Savings deposits

     197        286        327   

Time deposits $100,000 and over

     802        1,106        1,192   

Other time deposits

     1,008        1,138        1,684   

Short-term borrowed funds

     353        354        693   

Long-term debt

     796        1,068        1,084   
  

 

 

   

 

 

   

 

 

 

Total interest expense

     3,698        4,737        5,951   
  

 

 

   

 

 

   

 

 

 

Net interest income

     18,173        19,085        18,536   

Provision for loan losses

     1,832        3,456        4,919   
  

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     16,341        15,629        13,617   
  

 

 

   

 

 

   

 

 

 

Noninterest Income

      

Service charges on deposit accounts

     1,723        1,837        2,219   

Other service fees and commissions

     3,178        3,409        2,883   

Gain (loss) on sale of securities

     1,286        933        1,484   

Income from mortgage loan sales

     3,740        1,806        3,172   

Other income

     748        271        140   
  

 

 

   

 

 

   

 

 

 

Total noninterest income

     10,675        8,256        9,898   
  

 

 

   

 

 

   

 

 

 

Noninterest Expense

      

Salaries and employee benefits

     12,891        12,121        11,648   

Net occupancy expense

     1,155        1,165        1,193   

Equipment expense

     733        758        769   

Data processing costs

     889        858        853   

Office supplies and printing

     334        337        384   

Foreclosed real estate expense

     2,994        489        387   

Professional fees and services

     588        1,488        1,230   

Marketing and donations

     691        769        1,291   

Electronic banking expense

     951        875        811   

Software amortization and maintenance

     576        573        542   

FDIC insurance

     693        750        795   

Goodwill Impairment

     987        —          —     

Other noninterest expense

     2,765        2,606        2,748   
  

 

 

   

 

 

   

 

 

 

Total noninterest expense

     26,247        22,789        22,651   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     769        1,096        864   

Income taxes

     365        196        151   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 404      $ 900      $ 713   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 404      $ 900      $ 713   

Dividends on preferred stock

     (645     (645     (645
  

 

 

   

 

 

   

 

 

 

Net Income (loss) available to common shareholders

   $ (241   $ 255      $ 68   
  

 

 

   

 

 

   

 

 

 

Net income (loss) per common share

      

Basic

   $ (0.03   $ 0.03      $ 0.01   
  

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.03   $ 0.03      $ 0.01   
  

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

      

Basic

     7,371,667        7,467,396        7,485,373   

Diluted

     7,371,667        7,467,396        7,485,373   

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

 

41


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2012, 2011 and 2010

 

 

 

     2012     2011     2010  
     (dollars in thousands)  

Net Income

   $ 404      $ 900      $ 713   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

      

Unrealized gains on available for sale securities

     2,356        3,759        390   

Related tax effect

     (859     (1,327     (156

Reclassification of losses (gains) recognized in net income

     (1,286     (933     (1,484

Related tax effect

     496        360        572   
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     707        1,859        (678
  

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 1,111      $ 2,759      $ 35   
  

 

 

   

 

 

   

 

 

 

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

 

42


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended December 31, 2012, 2011 and 2010

 

 

 

     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(Loss)
    Total  
     (dollars in thousands, except share data)              

Balance, December 31, 2009

     7,593,929      $ 10,000       $ 500       $ (400   $ 9,492      $ 14,030      $ (667   $ 10,056      $ 1,013      $ 44,024   

Net income

     —          —           —           —          —          —          —          713        —          713   

Other comprehensive loss

     —          —           —           —          —          —          —          —          (678     (678

Release of ESOP shares

     —          —           —           —          —          —          75        —          —          75   

Increase in ESOP notes receivable

     —          —           —           —          —          —          (100     —          —          (100

Stock compensation expense

     —          —           —           —          —          4        —          —          —          4   

Record preferred stock dividend and discount accretion

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

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2010

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

Net income

     —          —           —           —          —          —          —          900        —          900   

Other comprehensive income

     —          —           —           —          —          —          —          —          1,859        1,859   

Release of ESOP shares

     —          —           —           —          —          (28     81        —          —          53   

Increase in ESOP notes receivable

     —          —           —           —          —          —          (161     —          —          (161

Reclass of redeemable ESOP stock

     —          —           —           —          —          (1,349     —          —          —          (1,349

Stock compensation expense

     —          —           —           —          —          4        —          —          —          4   

Record preferred stock dividend and discount accretion

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

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

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

Net income

     —          —           —           —          —          —          —          404        —          404   

Repurchase of common stock

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

Retirement of common stock

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

Other comprehensive loss

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

Release of ESOP shares

     —          —           —           —          —          (39     87        —          —          48   

Increase in ESOP notes receivable

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

Stock compensation expense

     —          —           —           —          —          4        —          —          —          4   

Reclass of redeemable ESOP stock

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

Record preferred stock dividend and discount accretion

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

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2012

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

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

43


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2012, 2011 and 2010

 

 

 

     2012     2011     2010  
     (dollars in thousands)  

Cash flows from operating activities

      

Net income

   $ 404      $ 900      $ 713   

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

      

Depreciation

     954        838        815   

Net amortization of security premiums/discounts

     1,334        865        412   

Impairment of goodwill

     987        —          —     

Net amortization of mortgage servicing rights

     908        670        869   

Impairment of foreclosed real estate

     2,365        212        125   

Provision for loan losses

     1,832        3,456        4,919   

Deferred income taxes

     (1,134     1,000        (1,091

Stock compensation

     4        4        4   

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

     (1,286     (933     (1,484

Income from mortgage loan sales

     (3,740     (1,806     (3,172

Proceeds from sales of loans held for sale

     126,189        70,251        110,374   

Origination of loans held for sale

     (125,864     (64,116     (111,973

(Gain) loss on sale of premises, equipment and other assets

     (252     13        71   

Increase in cash surrender value of life insurance

     (223     (196     (261

Loss on sales of foreclosed real estate

     55        68        332   

Release of ESOP Shares

     48        53        75   

Net change in interest receivable

     331        324        (331

Net change in other assets

     (3,742     (1,910     (532

Net change in interest payable

     (31     (41     (54

Net change in other liabilities

     431        621        (54
  

 

 

   

 

 

   

 

 

 

Net cash provided (used) by operating activities

     (420     10,273        (243
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

      

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

     57,274        38,648        53,013   

Purchase of securities available for sale

     (61,369     (28,020     (71,430

Net (increase) decrease in loans

     32,739        6,259        (34,866

Proceeds from sale of premises, equipment and other assets

     5,169        —          —     

Purchase of premises and equipment

     (830     (1,373     (1,725

Proceeds from sales of foreclosed real estate

     1,844        611        733   

Investment in other assets

     (346     (181     (240

Net (increase) decrease in Federal Home Loan Bank stock

     1,024        766        (51
  

 

 

   

 

 

   

 

 

 

Net cash provided (used) by investing activities

     35,505        16,710        (54,566
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

      

Net increase (decrease) in deposit accounts

     26,274        (2,695     57,259   

Net increase (decrease) in short-term borrowed funds

     (2,101     309        (6,458

Net increase (decrease) in long-term debt

     (12,560     (10,060     4,942   

Net proceeds from issuance of junior subordinated debt

     —          1,962        2,476   

Proceeds from preferred stock offering

     7,382        —          —     

Repayment of junior subordinated debt

     —          (730     —     

Increase in unearned ESOP compensation

     (190     (161     (100

Repurchase of common stock

     (304     —          —     

Dividend and discount accretion on preferred stock

     (545     (545     (545
  

 

 

   

 

 

   

 

 

 

Net cash provided (used) by financing activities

     17,956        (11,920     57,574   
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     53,041        15,063        2,765   

Cash and cash equivalents, beginning of year

     28,687        13,624        10,859   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of year

   $ 81,728      $ 28,687      $ 13,624   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information

      

Interest paid

   $ 3,729      $ 4,778      $ 6,005   

Income taxes paid

     270        220        1,274   

Supplemental schedule of non-cash activities

      

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

     (707     1,859        (678

Loans transferred to foreclosed real estate

     2,907        9,127        2,148   

Company financed sales of other real estate owned

     (188     —          (2,450

Mortgage servicing rights capitalized

     1,237        679        1,113   

Preferred stock dividend accrued

     (68     (68     (68

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

 

44


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies

Nature of Business

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

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

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

The Company formed a new subsidiary, Strategic Investment Advisors, Inc. (“SIA”), during 1999 to provide investment advisory and asset management services. This subsidiary is registered as an investment advisor with the Securities and Exchange Commission.

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

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

On April 10, 2003, the Company capitalized a new wholly-owned subsidiary bank, Cabarrus Bank & Trust Company (“Cabarrus”), located in Concord, North Carolina. As of that date, Cabarrus purchased two branch offices located in Cabarrus County from Stanly to begin its operation. Cabarrus operates as a commercial bank and provides a full range of banking services.

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

Principles of Consolidation

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

 

45


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

Use of Estimates

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

Cash and Cash Equivalents

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

Investment Securities Available for Sale

Investment securities available for sale consist of bonds, mortgage backed securities and collateralized mortgage obligations (CMOs) not classified as trading securities nor as held to maturity securities. Unrealized holding gains and losses on available for sale securities are reported as a net amount in other comprehensive income, net of income taxes. Gains and losses on the sale of available for sale securities are determined using the specific identification method. Declines in the fair value of individual available for sale securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. Such write-downs would be included in earnings as realized losses. Premiums and discounts are recognized in interest income using the interest method over the period to maturity.

Loans Held for Sale

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

Loans

The Company divides the loans it grants into two segments, commercial and noncommercial loans. Commercial loans are broken down into the following classes: commercial loans, real estate commercial loans and other real estate construction loans. Noncommercial loans are divided into the following classes: real estate 1-4 family construction, real estate 1-4 family residential loans, home equity loans, consumer loans and other loans. The ability of the Company’s borrowers to honor their contracts is largely dependent upon the real estate and general economic conditions in the Company’s market area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

 

46


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Credit card loans and other personal loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

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

Allowance for Loan Losses

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

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

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

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the

 

47


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

borrower, including the length of the delay, amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Troubled debt restructure loans (TDR) are considered to be impaired loans and are individually evaluated for impairment.

Homogeneous loans are collectively evaluated by loan class for impairment. However, homogeneous loans will be evaluated individually for impairment if such a loan is deemed impaired.

The portion of the Company’s allowance for loan loss model related to general reserves captures the mean loss of individual loans and the rare event of severe loss that can occur within the loan portfolio. Specifically, the Company calculates probable losses on loans by computing a probability of loss and expected loss scenario by FDIC call report codes. Together, these components created from Ordinary Least Squares (OLS) Regression of historical losses against multiple Macro-Economic factors make up the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.

In the fourth quarter of 2012, the Company updated its allowance for loan loss model to more accurately assess the probability of losses inherent in the loan portfolio as of December 31, 2012. The probabilities of default that the Company acquires from a third party vendor are associated with a two year horizon, while the allowance for loan loss is deemed to have a one year horizon. Therefore, we updated the model to account for this horizon; converting the two year probability of default into a one year probability of default for each obligator. At this time the Company also updated the data inputs into the model; specifically the OLS regression coefficient and the probability of defaults obtained from a third party vendor. The net result of these changes was to lower the allowance for loan loss by approximately $176,000.

Mortgage Servicing Rights

The Company capitalizes mortgage servicing rights when loans are either securitized or sold and the loan servicing is retained. The cost of servicing rights is amortized in proportion to and over the estimated period of net servicing revenues. The amortization of servicing rights is recognized in the statement of income as an offset to other noninterest 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. Impairment is recognized through a valuation allowance.

Transfers of Financial Assets

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

 

48


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

Foreclosed Real Estate

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

Premises and Equipment

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

Restricted Stock

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

Goodwill

The Goodwill on the Company’s Balance sheet was a result of the acquisition of Anson Bancorp, Inc. and its subsidiary, Anson Savings Bank in 2000. Goodwill is evaluated for impairment annually or more frequently if circumstances indicate potential impairment. During the annual impairment testing in the fourth quarter of 2012, the $987 thousand of Goodwill was evaluated, deemed impaired and the full amount was written off. The Company’s goodwill impairment was driven by the continued low interest rate environment, slowed loan growth, and increased regulatory costs of conducting banking business. These factors combined, affected our future estimated earnings projections, and had a direct impact on the impairment of goodwill. Using the income approach (1), the Company’s step 1 analysis indicated goodwill was impaired. Upon initial indication of impairment in step 1, GAAP requires management to perform a step 2 evaluation that consists of valuing each asset and liability on the balance sheet to determine if the recorded goodwill is impaired. Management determined impairment could be traced to the perceived credit and liquidity discount inherent within the balance sheet.

Stock-Based Compensation

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

 

(1)  The income approach is the present value of future benefits (either earnings or net cash flows) that can be estimated by discounting them back to the present at a rate determined to be appropriate for an investment entity such as a reporting unit, when evaluating Goodwill. Management used a discount rate of 14.2%.

 

49


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return and separate North Carolina income tax returns. The provision for income taxes in the accompanying consolidated financial statements is provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The tax returns for the Company are subject to audit for the 2009 fiscal year and thereafter. The Company records penalties and interest related to income taxes as a component of income tax expense.

Fair Value of Financial Instruments

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

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

Among the Company’s assets and liabilities, investment securities available for sale are reported at their fair values on a recurring basis. Certain other assets are adjusted to their fair value on a nonrecurring basis, including 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 are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the ‘Level 1 input’ column. Prices for mortgage-backed securities, government agency securities and for state, county and municipal securities are obtained for similar securities, and the resulting fair values are shown in the ‘Level

 

50


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

2 input’ column. Prices for all other non-marketable investments are determined based on various assumptions that are not observable. The fair values for these investment securities are shown in the ‘Level 3 input’ column. Non-marketable investment securities, which are carried at their purchase price, include those that may only be redeemed by the issuer. The changes in securities between Level 1 and Level 2 were related to the purchase and sale of several securities and not the transfer of securities.

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment by using one of several methods including collateral value, fair value of similar debt or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected repayments or fair value of collateral exceed the recorded investments in such loans. At December 31, 2012, 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 write downs, 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.

Mortgage 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.

Comprehensive Income

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

 

51


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

As of December 31, 2012 and December 31, 2011, total accumulated other comprehensive income was $1.4 million and $2.2 million, respectively.

Earnings per Common Share

The Company had stock options outstanding of 92,491, 123,570 and 180,571 at December 31, 2012, 2011 and 2010 respectively. All of these options were anti-dilutive.

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

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

 

     2012     2011     2010  

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

     7,502,496        7,593,969        7,593,969   

Effect of ESOP shares

     (130,829     (126,573     (108,596
  

 

 

   

 

 

   

 

 

 

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

     7,371,667        7,467,396        7,485,373   

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

     7,371,667        7,467,396        7,485,373   
  

 

 

   

 

 

   

 

 

 

Recent Accounting Pronouncements

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurement”. The purpose of the standard is to clarify and combine fair value measurements and disclosure requirements for U.S. generally accepted accounting principles, or GAAP, and international financial reporting standards, or IFRS. The new standard provides amendments and wording changes used to describe certain requirements for measuring fair value and for disclosing information about fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011, and should be applied prospectively to the beginning of the annual period of adoption. The adoption of this statement did not have a material impact on the consolidated financial statements.

 

52


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

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 did not 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 did not have a significant impact on the Company’s financial statements.

In July 2012, the FASB issued ASU 2012-02, an update to ASC 350 “Intangibles Goodwill and Other”. The amendments in the Update are intended to reduce cost and complexity by providing an entity the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The Update also enhances consistency of impairment testing guidance among long-lived asset categories by permitting entities to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing for impairment, which is equivalent to the impairment testing requirements for other long-lived assets. In conducting a qualitative assessment, an entity should consider the extent to which relevant circumstances and events, both individually and in the aggregate, could have affected the significant inputs used to determine the fair value of the indefinite-lived intangible asset since the last assessment. Consideration should also be given as to whether there have been changes to the carrying amount of the indefinite-lived intangible asset when evaluating whether it is more likely than not that the indefinite-lived asset is impaired. Positive and mitigating events and circumstances that could affect its determination of whether it is more likely than not that the indefinite-lived asset is impaired should also be considered. The Update is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this update is not expected to have a significant impact on the Company’s financial statements.

In August 2012, the FASB issued ASU 2012-03: Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22. The amendments in the Update codify various amendments and corrections, and are effective upon issuance (August 27, 2012). The adoption of these changes did not have a significant impact on the Company’s financial statements.

 

53


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

In October 2012, the FASB issued ASU 2012-04, Technical Corrections and Improvements. The amendments in this Update cover a wide range of Topics in the Codification, related to technical corrections and improvements and conforming amendments related to fair value measurements. The amendments in this Update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice. Certain of the amendments are subject to transition guidance, and will be effective for public entities for fiscal periods beginning after December 15, 2012. The adoption of these changes did not 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.

Reclassification

Certain amounts in the 2011 financial statements have been reclassified to conform to the 2012 presentation. The reclassifications had no effect on net income but shareholders’ equity was restated due to the reclass to mezzanine capital for the ESOP put option.

Note 2 - Investment Securities

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

 

December 31, 2012

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

U.S. Treasury

   $ 18,731       $ 846       $ 1       $ 19,576   

U.S. Government agencies

     21,689         485         —           22,174   

GSE - Mortgage-backed securities and CMO’s

     40,766         379         123         41,022   

State and political subdivisions

     8,165         701         —           8,866   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 89,351       $ 2,411       $ 124       $ 91,638   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2011

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

U.S. Treasury

   $ 32,073       $ 1,459       $ —         $ 33,532   

U.S. Government agencies

     19,142         855         —           19,997   

GSE - Mortgage-backed securities and CMO’s

     24,016         332         85         24,263   

State and political subdivisions

     10,071         798         —           10,869   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 85,302       $ 3,444       $ 85       $ 88,661   
  

 

 

    

 

 

    

 

 

    

 

 

 

At both December 31, 2012 and 2011, the Company owned Federal Reserve stock reported at cost of $802,850 and is included in other assets. Also at December 31, 2012 and 2011, the Company owned Federal Home Loan Bank Stock (FHLB) of $1.5 million and $2.5 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.

 

54


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 2 - Investment Securities (Continued)

 

Results from sales and calls of securities available for sale for the years ended December 31, 2012, 2011 and 2010 are as follows:

 

     2012     2011      2010  
     (dollars in thousands)  

Gross proceeds from sales and calls

   $ 42,889      $ 25,568       $ 40,623   
  

 

 

   

 

 

    

 

 

 

Realized gains from sales

   $ 1,398      $ 933       $ 1,960   

Realized losses from sales

     (112     —           (476
  

 

 

   

 

 

    

 

 

 

Net realized gains (losses)

   $ 1,286      $ 933       $ 1,484   
  

 

 

   

 

 

    

 

 

 

At December 31, 2012, 2011 and 2010 securities available for sale with a carrying amount of $48.8 million, $37.7 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 December 31, 2012 and 2011. These unrealized losses on investment securities are a result of temporary fluctuations in the market prices due to a rise in interest rates, which will adjust if rates decline in a volatile market and are in no way a reflection of the credit quality of the investments. At December 31, 2012, the unrealized losses related to one United States Treasury note and seven mortgage backed securities and at December 31, 2011 the unrealized losses related to three mortgage backed securities.

 

     Less than 12 Months      12 Months or More      Total  

December 31, 2012

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

Securities available for sale temporary impairment

                 

U.S. Treasury

   $ 2,485       $ 1       $ —         $ —         $ 2,485       $ 1   

U.S. Gov’t agencies

     —           —           —           —           —           —     

Mortgage-backed securities and CMO’s

     21,355         123         —           —           21,355         123   

State and political subdivisions

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 23,840       $ 124       $ —         $ —         $ 23,840       $ 124   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Less than 12 Months      12 Months or More      Total  

December 31, 2011

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

Securities available for sale temporary impairment

                 

U.S. Treasury

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

U.S. Gov’t agencies

     —           —           —           —           —           —     

Mortgage-backed securities and CMO’s

     9,734         85         —           —           9,734         85   

State and political subdivisions

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 9,734       $ 85       $ —         $ —         $ 9,734       $ 85   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

55


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 2 - Investment Securities (Continued)

 

Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of quality but that the losses are temporary in nature. At December 31, 2012, 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.

The following table shows contractual maturities of the investment portfolio as of December 31, 2012:

 

     Amortized
Cost
     Estimated
Fair Value
 
     (dollars in thousands)  

Due within one year

   $ 350       $ 352   

Due after one but within five years

     36,756         38,145   

Due after five but within ten years

     9,980         10,494   

Due after ten years

     1,499         1,625   

Mortgage backed securities

     40,766         41,022   
  

 

 

    

 

 

 
   $ 89,351       $ 91,638   
  

 

 

    

 

 

 

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

Note 3 - Loans Held for Investment

The composition of net loans held for investment by class as of December 31, 2012 and 2011 is as follows:

 

     2012     2011  
     (dollars in thousands)  

Commercial

    

Commercial

   $ 41,390      $ 45,907   

Real estate - commercial

     103,304        114,944   

Other real estate construction loans

     25,052        31,601   

Noncommercial

    

Real estate 1-4 family construction

     3,080        5,543   

Real estate - residential

     93,927        101,847   

Home equity

     48,517        51,413   

Consumer loans

     12,986        14,710   

Other loans

     822        602   
  

 

 

   

 

 

 
     329,078        366,567   

Less:

    

Allowance for loan losses

     (6,801     (6,815

Deferred loan (fees) costs, net

     105        108   
  

 

 

   

 

 

 

Loans held for investment, net

   $ 322,382      $ 359,860   
  

 

 

   

 

 

 

Although the subsidiary banks’ loan portfolios are diversified, there is a concentration of mortgage real estate loans, primarily one to four family residential mortgage loans, which

 

56


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 3 - Loans Held for Investment (Continued)

 

represent 44.22% of total loans. Additionally, there is concentration in commercial loans secured primarily by real estate, shopping center locations, commercial land development, commercial buildings and equipment that comprise 51.58% of total loans. There is not a concentration of a particular type of credit in this group of commercial loans.

Total recorded investment in impaired loans, which consisted of nonaccrual loans and other loans identified by management as impaired, totaled $26.1 million and $33.1 million at December 31, 2012 and 2011, respectively. The nonaccrual status of these loans had the effect of reducing net interest income by $420,805 in 2012 and $571,722 in 2011. Of the $26.1 million in impaired loans at December 31, 2012, $15.0 million were in the commercial segment and carried allowances totaling $1.4 million while $11.1 million were in the noncommercial segment and carried allowances totaling $1.6 million. Of the $33.1 million in impaired loans at December 31, 2011, $18.9 million were in the commercial segment and carried allowances totaling $1.1 million while $14.2 million were in the noncommercial segment and carried allowances totaling $1.5 million. There were no loans 90 past due and still accruing at December 31, 2012 or at December 31, 2011.

Restructured loans at December 31, 2012 totaled $6.8 million of which all $6.8 million are included in the impaired loan total, compared to $6.0 million of which all $6.0 million were included in impaired loans. The carrying value of foreclosed properties held as other real estate was $8.7 million and $10.3 million at December 31, 2012 and 2011, respectively.

The Company had loans of $137.2 million and $143.5 million pledged to borrowings at Federal Home Loan Bank and the Federal Reserve Bank at December 31, 2012 and 2011, respectively.

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

Note 4 - Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31, 2012, 2011 and 2010 are presented below:

 

Commercial

   2012     2011     2010  
     (dollars in thousands)  

Balance, beginning of year

   $ 2,904      $ 5,363      $ 3,195   

Provision (recovery) charged to operations

     985        1,947        2,737   

Charge-offs

     (1,167     (4,417     (586

Recoveries

     69        11        3   
  

 

 

   

 

 

   

 

 

 

Net (charge-offs)

     (1,098     (4,406     (583
  

 

 

   

 

 

   

 

 

 

Other

     —          —          14   

Balance, end of year

   $ 2,791      $ 2,904      $ 5,363   
  

 

 

   

 

 

   

 

 

 

 

57


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 4 - Allowance for Loan Losses (Continued)

 

Non-Commercial

   2012     2011     2010  
     (dollars in thousands)  

Balance, beginning of year

   $ 3,911      $ 3,704      $ 2,081   

Provision (recovery) charged to operations

     847        1,509        2,182   

Charge-offs

     (824     (1,419     (603

Recoveries

     76        122        41   
  

 

 

   

 

 

   

 

 

 

Net (charge-offs)

     (748     (1,297     (562
  

 

 

   

 

 

   

 

 

 

Other

     —          (5     3   

Balance, end of year

   $ 4,010      $ 3,911      $ 3,704   
  

 

 

   

 

 

   

 

 

 

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at December 31, 2012 and 2011:

December 31, 2012

 

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

Commercial

   $ 1,428       $ 14,979       $ 1,363       $ 154,767       $ 2,791       $ 169,746   

Non-Commercial

     1,606         11,128         2,404         148,309         4,010         159,437   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,034       $ 26,107       $ 3,767       $ 303,076       $ 6,801       $ 329,183   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

 

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

Commercial

   $ 1,137       $ 18,882       $ 1,767       $ 173,570       $ 2,904       $ 192,452   

Non-Commercial

     1,446         14,207         2,465         159,908         3,911         174,115   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,583       $ 33,089       $ 4,232       $ 333,478       $ 6,815       $ 366,567   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

 

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

Commercial

   $ 3,601       $ 32,115       $ 1,762       $ 176,957       $ 5,363       $ 209,072   

Non-Commercial

     1,030         11,140         2,674         167,467         3,704         178,607   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

58


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 4 - Allowance for Loan Losses (Continued)

 

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

December 31, 2012

 

     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

   $ 98       $ 437       $ 535       $ 40,855       $ 41,390       $ —     

Real estate - commercial

     708         3,032         3,740         99,564         103,304         —     

Other real estate construction

     12         2,945         2,957         22,095         25,052         —     

Real estate construction

     —           —           —           3,080         3,080         —     

Real estate - residential

     1,309         2,507         3,816         90,216         94,032         —     

Home equity

     162         558         720         47,797         48,517         —     

Consumer loan

     218         1         219         12,767         12,986         —     

Other loans

     —           —           —           822         822         —     

Deferred cost/fees

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,507       $ 9,480       $ 11,987       $ 317,196       $ 329,183       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 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

   $ 212       $ 329       $ 541       $ 45,366       $ 45,907       $ —     

Real estate - commercial

     2,396         2,742         5,138         109,806         114,944         —     

Other real estate construction

     358         2,084         2,442         29,159         31,601         —     

Real estate construction

     —           —           —           5,543         5,543         —     

Real estate - residential

     2,341         2,441         4,782         97,065         101,847         —     

Home equity

     298         255         553         50,860         51,413         —     

Consumer loan

     208         11         219         14,491         14,710         —     

Other loans

     —           —           —           602         602         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,813       $ 7,862       $ 13,675       $ 352,892       $ 366,567       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

59


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 4 - Allowance for Loan Losses (Continued)

 

The composition of nonaccrual loans by class as of December 31, 2012 and 2011 is as follows:

 

     2012      2011  
     (dollars in thousands)  

Commercial

   $ 437       $ 329   

Real estate - commercial

     3,032         2,742   

Other real estate construction

     2,945         2,084   

Real estate 1 - 4 family construction

     —           —     

Real estate - residential

     2,507         2,441   

Home equity

     558         255   

Consumer loans

     1         11   

Other loans

     —           —     
  

 

 

    

 

 

 
   $ 9,480       $ 7,862   
  

 

 

    

 

 

 

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

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

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

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

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

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

 

60


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 4 - Allowance for Loan Losses (Continued)

 

The tables below summarize risk grades of the loan portfolio by class as of December 31, 2012 and 2011:

December 31, 2012

 

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

Commercial

   $ 39,800       $ 836       $ 754       $ —         $ 41,390   

Real estate - commercial

     84,748         9,337         9,219         —           103,304   

Other real estate construction

     20,684         577         3,477         314         25,052   

Real estate 1 - 4 family construction

     3,080         —           —           —           3,080   

Real estate - residential

     78,115         9,728         6,189         —           94,032   

Home equity

     46,590         914         1,013         —           48,517   

Consumer loans

     12,360         512         114         —           12,986   

Other loans

     822         —           —           —           822   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 286,199       $ 21,904       $ 20,766       $ 314       $ 329,183   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

 

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

Commercial

   $ 42,892       $ 1,670       $ 1,345       $ —         $ 45,907   

Real estate - commercial

     95,699         7,971         11,274         —           114,944   

Other real estate construction

     26,256         745         4,600         —           31,601   

Real estate 1 - 4 family construction

     5,538         5         —           —           5,543   

Real estate - residential

     89,209         4,269         8,369         —           101,847   

Home equity

     49,743         861         809         —           51,413   

Consumer loans

     13,970         332         408         —           14,710   

Other loans

     602         —           —           —           602   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 323,909       $ 15,853       $ 26,805       $ —         $ 366,567   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. During 2012 nonperforming loans increased from $7.7 million at December 31, 2011 to $9.5 million at December 31, 2012, a increase of $1.8 million. The major contributor to this increase was two loan relationships totaling $1.7 million that were placed in nonaccrual at December 31, 2012.

 

61


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 4 - Allowance for Loan Losses (Continued)

 

The following tables show the breakdown between performing and nonperforming loans by class as of December 31, 2012 and 2011:

December 31, 2012

 

     Performing      Non-
Performing
     Total  
     (dollars in thousands)  

Commercial

   $ 40,953       $ 437       $ 41,390   

Real estate - commercial

     100,272         3,032         103,304   

Other real estate construction

     22,107         2,945         25,052   

Real estate 1 - 4 family construction

     3,080         —           3,080   

Real estate - residential

     91,525         2,507         94,032   

Home equity

     47,959         558         48,517   

Consumer loans

     12,985         1         12,986   

Other loans

     822         —           822   
  

 

 

    

 

 

    

 

 

 

Total

   $ 319,703       $ 9,480       $ 329,183   
  

 

 

    

 

 

    

 

 

 

December 31, 2011

 

     Performing      Non-
Performing
     Total  
     (dollars in thousands)  

Commercial

   $ 45,578       $ 329       $ 45,907   

Real estate - commercial

     112,202         2,742         114,944   

Other real estate construction

     29,517         2,084         31,601   

Real estate 1 - 4 family construction

     5,543         —           5,543   

Real estate - residential

     99,406         2,441         101,847   

Home equity

     51,158         255         51,413   

Consumer loans

     14,699         11         14,710   

Other loans

     602         —           602   
  

 

 

    

 

 

    

 

 

 

Total

   $ 358,705       $ 7,862       $ 366,567   
  

 

 

    

 

 

    

 

 

 

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 valuation is done and a specific reserve is allocated if necessary. The tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class as of December 31, 2012 and 2011 (unpaid principal balance was grossed up for chargeoffs):

December 31, 2012

 

     Unpaid
Principal
Balance
     Recorded
Investment
With No
Allowance
     Recorded
Investment
With
Allowance
     Related
Allowance
     Recorded
Investment
Accruing
Loans 90 or
More Days
Past Due
     Recorded
Investment
Loans in
Non-accrual
 
            (dollars in thousands)                

Commercial

   $ 1,977       $ 388       $ 1,470       $ 616       $ —         $ 437   

Real estate - commercial

     11,299         6,341         2,895         411         —           3,032   

Other real estate construction

     3,935         2,437         1,448         401         —           2,945   

Real estate 1 - 4 family construction

     840         713         127         127         —           —     

Real estate - residential

     8,985         3,994         4,991         1,215         —           2,507   

Home equity

     1,068         521         547         159         —           558   

Consumer loans

     235         39         196         105         —           1   

Other loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28,339       $ 14,433       $ 11,674       $ 3,034       $ —         $ 9,480   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

62


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 4 - Allowance for Loan Losses (Continued)

 

December 31, 2012

 

     Average
Recorded
Investment
     Interest
Income
 
     (dollars in thousands)  

Commercial

   $ 1,440       $ 66   

Real estate - commercial

     11,607         473   

Other real estate construction

     4,055         202   

Real estate 1 - 4 family construction

     1,053         43   

Real estate - residential

     11,442         427   

Home equity

     1,200         32   

Consumer loans

     308         14   

Other loans

     —           —     
  

 

 

    

 

 

 

Total

   $ 31,105       $ 1,257   
  

 

 

    

 

 

 

December 31, 2011

 

     Unpaid
Principal
Balance
     Recorded
Investment
With No
Allowance
     Recorded
Investment
With
Allowance
     Related
Allowance
     Recorded
Investment
Accruing
Loans 90 or
More Days
Past Due
     Recorded
Investment
Loans in
Non-accrual
 
            (dollars in thousands)                

Commercial

   $ 2,099       $ 889       $ 1,091       $ 578       $ —         $ 329   

Real estate - commercial

     14,951         11,365         1,523         452         —           2,742   

Other real estate construction

     4,016         2,644         1,370         107         —           2,084   

Real estate 1 - 4 family construction

     1,095         501         594         202         —           —     

Real estate - residential

     11,877         7,231         4,646         1,001         —           2,441   

Home equity

     993         753         240         124         —           255   

Consumer loans

     242         49         193         119         —           11   

Other loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 35,273       $ 23,432       $ 9,657       $ 2,583       $ —         $ 7,862   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

 

     Average
Recorded
Investment
     Interest
Income
 
     (dollars in thousands)  

Commercial

   $ 1,525       $ 93   

Real estate - commercial

     16,520         716   

Other real estate construction

     7,746         236   

Real estate 1 - 4 family construction

     1,249         53   

Real estate - residential

     10,137         616   

Home equity

     1,194         37   

Consumer loans

     280         16   

Other loans

     —           —     
  

 

 

    

 

 

 

Total

   $ 38,651       $ 1,767   
  

 

 

    

 

 

 

 

63


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 5 - 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.

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

 

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

Extend payment terms:

        

Commercial

     1       $ 33       $ 32   

Real estate - commercial

     —           —           —     

Other real estate construction

     1         49         49   

Real estate 1 - 4 family construction

     —           —           —     

Real estate - residential

     2         30         30   

Home equity

     —           —           —     

Consumer loans

     1         45         42   

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     5       $ 157       $ 153   
  

 

 

    

 

 

    

 

 

 

Other:

        

Commercial

     1       $ 68       $ 68   

Real estate - commercial

     1         116         112   

Other real estate construction

     —           —           —     

Real estate 1 - 4 family construction

     1         32         31   

Real estate - residential

     6         939         933   

Home equity

     —           —           —     

Consumer loans

     1         17         17   

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     10       $ 1,172       $ 1,161   
  

 

 

    

 

 

    

 

 

 

Total

     15       $ 1,329       $ 1,314   
  

 

 

    

 

 

    

 

 

 

 

64


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 5 - Troubled Debts Restructures (Continued)

 

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

 

     Twelve months ended
December 31, 2012
 
     Number
of Loans
     Recorded
Investment
 
     (dollars in thousands)  

Extended payment terms:

     

Commercial

     1       $ 31   

Real estate - commercial

     —           —     

Other real estate construction

     1         49   

Real estate 1 - 4 family construction

     —           —     

Real estate - residential

     —           —     

Home Equity loans

     2         30   

Consumer loans

     —           —     

Other loans

     —           —     
  

 

 

    

 

 

 
     4       $ 110   
  

 

 

    

 

 

 

Other:

     

Commercial

     —         $ —     

Real estate - commercial

     —           —     

Other real estate construction

     —           —     

Real estate 1 - 4 family construction

     —           —     

Real estate - residential

     1         238   

Home Equity loans

     —           —     

Consumer loans

     1         17   

Other loans

     —           —     
  

 

 

    

 

 

 
     2       $ 255   
  

 

 

    

 

 

 

Total

     6       $ 365   
  

 

 

    

 

 

 

A default on a troubled debt restructure is defined as being past due 90 days or being out of compliance with the modification agreement. As mentioned, the Company considers TDRs to be impaired loans.

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

 

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

Below market interest rate

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

Other Loans

     —           —           15         738         —           —           2         511   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           15       $ 738         —         $ —           2       $ 511   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

65


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 6 - Mortgage Servicing Assets

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were approximately $386 million and $346 million at December 31, 2012 and 2011, respectively. The carrying value of capitalized servicing rights, net of valuation allowances, is included in other assets. A summary of mortgage servicing rights follows:

 

     2012     2011     2010  
     (dollars in thousands)  

Beginning of year mortgage servicing rights:

   $ 2,142      $ 2,134      $ 1,890   

Amounts capitalized

     1,237        679        1,113   

Amortization

     (908     (671     (869

Impairment

     (77     —          —     
  

 

 

   

 

 

   

 

 

 

End of year

   $ 2,394      $ 2,142      $ 2,134   
  

 

 

   

 

 

   

 

 

 

Amortization expense is estimated as follows:

 

Year ending December 31,  
(dollars in thousands)  
2013   $ 565   
2014     489   
2015     414   
2016     338   
2017     261   
Thereafter     327   
 

 

 

 
Total   $ 2,394   
 

 

 

 

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

The fair value of mortgage servicing rights was $2.4 million at December 31, 2012 and $2.5 million at December 31, 2011. The key assumptions used to value mortgage servicing rights as of December 31, 2012 were as follows; weighted average remaining life 264 months, weighted average discount rate 12.0%, weighted average coupon 4.22% and weighted average prepayment speed 325%.

Note 7 - Premises and Equipment

The major classes of premises and equipment and the total accumulated depreciation at December 31, 2012 and 2011 are listed below:

 

     2012      2011  
     (dollars in thousands)  

Land

   $ 4,101       $ 4,094   

Building and improvements

     11,129         10,856   

Furniture and equipment

     7,583         7,254   
  

 

 

    

 

 

 

Total fixed assets

     22,813         22,204   

Less accumulated depreciation

     7,861         7,128   
  

 

 

    

 

 

 

Net fixed assets

   $ 14,952       $ 15,076   
  

 

 

    

 

 

 

Note 8 - Leases

The Company’s subsidiary, Cabarrus Bank and Trust has entered into a noncancelable operating lease for an administrative office location in Concord that expires in 2017 with annual rental payments of $61,286. The lease has two five-year renewal options at the expiration of the initial term.

 

66


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 8 - Leases (Continued)

 

Future minimum lease payments under these leases for years subsequent to December 31, 2012 are as follows:

 

Year ending December 31,  
(dollars in thousands)  
2013   $ 61   
2014     61   
2015     61   
2016     61   
2017     42   
Thereafter     —     
 

 

 

 
Total   $ 286   
 

 

 

 

Total rental expense related to the operating leases was $60,929, $60,450, and $85,538 for the years ended December 31, 2012, 2011 and 2010, respectively, and is included in occupancy expense.

Note 9 - Deposits

The composition of deposits at December 31, 2012 and 2011 is as follows:

 

     2012     2011  
     Amount      Percentage
of Total
    Amount      Percentage
of Total
 
     (dollars in thousands)  

Demand deposits

   $ 70,347         15   $ 62,339         15

Interest checking and money market

     211,066         46     185,539         43

Savings

     43,336         10     39,273         9

Time deposits $100,000 and over

     53,449         12     58,274         13

Other time deposits

     79,414         17     85,913         20
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 457,612         100   $ 431,338         100
  

 

 

    

 

 

   

 

 

    

 

 

 

The maturities of fixed-rate time deposits at December 31, 2012 are reflected in the table below:

 

Year ending December 31,

   Time
Deposits
$100,000
and Over
     Other
Time
Deposits
 
     (dollars in thousands)  

2013

   $ 29,200       $ 47,234   

2014

     5,914         11,917   

2015

     4,714         7,471   

2016

     10,396         10,198   

2017

     3,056         2,594   

Thereafter

     169         —     
  

 

 

    

 

 

 

Total

   $ 53,449       $ 79,414   
  

 

 

    

 

 

 

 

67


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 10 - Short-Term Borrowed Funds

The following tables set forth certain information regarding the amounts, year-end weighted average rates, average balances, weighted average rate, and maximum month-end balances for short-term borrowed funds, at and during 2012 and 2011:

 

     2012     2011  
     Amount      Rate     Amount      Rate  
     (dollars in thousands)  

At year-end

          

Master notes and other short term borrowing

   $ 6,180         0.92   $ 7,732         0.94

Notes payable

     10         6.00     59         3.80

Short-term advances from FHLB

     12,500         2.30     13,000         2.04
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 18,690         1.84   $ 20,791         1.64
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     2012     2011  
     Amount      Rate     Amount      Rate  
     (dollars in thousands)  

Average for the year

          

Federal funds purchased

   $ 5         0.80   $ 4         0.74

Master notes and other short term borrowing

     7,464         0.90     9,556         1.13

Notes payable

     29         4.37     59         3.82

Short-term advances from FHLB

     11,503         2.46     14,629         1.78
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 19,001         1.85   $ 24,248         1.53
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     2012      2011  
     (dollars in thousands)  

Maximum month-end balance

     

Federal funds purchased

   $ —         $ —     

Master notes and other short term borrowing

     7,491         11,110   

Notes payable

     59         59   

Short-term advances from FHLB

     13,500         20,450   

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

The subsidiary banks have combined available lines of credit for federal funds and Federal Reserve discount window availability in the amount of $53.0 million at December 31, 2012.

Note 11 - Long-Term Debt

The Company has a line of credit with the Federal Home Loan Bank secured by qualifying first lien and second mortgage loans, commercial real estate loans and investment securities with eligible collateral value of $64.0 million with remaining availability of $38.5 million at December 31, 2012. The long-term advances under this line amounted to $1.5 million and $14.0 million at December 31, 2012 and 2011, respectively. Interest rate was 4.08% in 2012 and from 0.44% to 4.08% in 2011. The subsidiary banks also have standby letters of credit issued by the Federal Home Loan Bank to be used as collateral for public funds deposits. The amount of the letters of credit was $11.5 million at December 31, 2012.

 

68


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 11 - Long-Term Debt (Continued)

 

During the second and third quarters of 2010, the Company began a private placement of fixed rate junior subordinated debt securities at $1,000 per security with a required minimum investment of $50,000. These securities have a final maturity date of December 31, 2018 and may be redeemed by the Company after December 31, 2013. The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.75%. The proceeds of this private placement qualify and are included in the calculation of Tier 2 capital. At the end of the offering period the Company had raised $11.1 million that was outstanding at December 31, 2011. Once the final maturity drops under five years, the Company must impose a twenty percent reduction per year of the amount of the proceeds from the sale of these securities that is eligible to be counted as Tier 2 capital. At December 31, 2012 the entire $11.1 million was included as Tier 2 capital.

On November 19, 2002, the Company executed a mortgage in the amount of $129,000 for the purchase of property for branch expansion. This loan bears interest at 6.00% and is to be paid in 60 quarterly installments of $3,277. The outstanding principal balance on this note was $56,254 at December 31, 2012 down from $65,621 at December 31, 2011.

On May 13, 2009, the Company executed a note payable in the amount of $200,000 for the purchase of existing leased office space. The note bears interest at 3.43% and is to be paid in four equal annual payments of $50,000. The outstanding balance of this note was $100,000 at December 31, 2011. This note was paid in full during the first quarter of 2012.

As of December 31, 2012, the scheduled maturities of these advances and notes payable are as follows:

 

Year ending December 31,  
(dollars in thousands)  
2014   $ 1,511   
2015     11   
2016     12   
2017     12   
2018     12   
Thereafter     11,127   
 

 

 

 
Total   $ 12,673   
 

 

 

 

Note 12 - Income Tax Matters

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

 

     2012     2011     2010  
     (dollars in thousands)  

Current tax expense (benefit):

      

Federal

   $ 1,243      $ (838   $ 1,021   

State

     256        34        221   
  

 

 

   

 

 

   

 

 

 

Total

     1,499        (804     1,242   
  

 

 

   

 

 

   

 

 

 

Deferred tax expense (benefit):

      

Federal

     (946     890        (891

State

     (188     110        (200
  

 

 

   

 

 

   

 

 

 

Total

     (1,134     1,000        (1,091
  

 

 

   

 

 

   

 

 

 

Net provision for income taxes

   $ 365      $ 196      $ 151   
  

 

 

   

 

 

   

 

 

 

 

69


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 12 - Income Tax Matters (Continued)

 

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

 

     2012     2011     2010  
     (dollars in thousands)  

Tax computed at the statutory federal rate

   $ 262      $ 373      $ 294   

Increases (decrease) resulting from:

      

Tax exempt interest, net

     (250     (247     (179

State income taxes, net of federal benefit

     45        94        14   

Impairment of goodwill

     336        —          —     

Other

     (28     (24     22   
  

 

 

   

 

 

   

 

 

 

Provision for income taxes

   $ 365      $ 196      $ 151   
  

 

 

   

 

 

   

 

 

 

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

 

     2012     2011     2010  
     (dollars in thousands)  

Deferred tax assets relating to:

      

Allowance for loan losses

   $ 2,514      $ 2,439      $ 3,253   

Deferred compensation

     696        595        518   

Other

     1,026        261        194   

Valuation allowance

     4        3        4   
  

 

 

   

 

 

   

 

 

 

Total deferred tax assets

     4,240        3,298        3,969   

Deferred tax liabilities relating to: