10-Q 1 d521116d10q.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

COMMISSION FILE NUMBER 000-22062

 

 

UWHARRIE CAPITAL CORP

(Exact name of registrant as specified in its charter)

 

 

 

 

NORTH CAROLINA   56-1814206
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)
132 NORTH FIRST STREET  
ALBEMARLE, NORTH CAROLINA   28001
(Address of Principal Executive Offices)   (Zip Code)

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

N/A

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

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   ¨

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 7,484,771 shares of common stock outstanding as of May 6, 2013.

 

 

 


Table of Contents

Table of Contents

 

         Page No.  

Part I.

  FINANCIAL INFORMATION   

Item 1 –

  Financial Statements (Unaudited)   
 

Consolidated Balance Sheets March 31, 2013 and December 31, 2012

     3   
 

Consolidated Statements of Income for the Three Months Ended March 31, 2013 and 2012

     4   
 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2013 and 2012

     5   
 

Consolidated Statements of Changes in Shareholders’ Equity Three Months Ended March 31, 2013

     6   
 

Consolidated Statements of Cash Flows Three Months Ended March 31, 2013 and 2012

     7   
 

Notes to Consolidated Financial Statements

     8   

Item 2 –

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      26   

Item 3 –

  Quantitative and Qualitative Disclosures about Market Risk      33   

Item 4 –

  Controls and Procedures      34   

Part II.

  OTHER INFORMATION   

Item 1 –

  Legal Proceedings      34   

Item 1A –

  Risk Factors      34   

Item 2 –

  Unregistered Sales of Equity Securities and Use of Proceeds      35   

Item 3 –

  Defaults Upon Senior Securities      35   

Item 4 –

  Mine Safety Disclosures      35   

Item 5 –

  Other Information      36   

Item 6 –

  Exhibits      36   
  Exhibit Index      39   

 

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Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

Part I. FINANCIAL INFORMATION

Item 1 – Financial Statements

 

     March 31,
2013
(Unaudited)
    December 31,
2012*
 
     (dollars in thousands)  

ASSETS

    

Cash and due from banks

   $ 7,350      $ 8,877   

Interest-earning deposits with banks

     65,112        72,851   

Securities available for sale, at fair value

     112,070        91,638   

Loans held for sale

     1,045        5,373   

Loans:

    

Loans held for investment

     323,764        329,183   

Less allowance for loan losses

     (5,973     (6,801
  

 

 

   

 

 

 

Net loans held for investment

     317,791        322,382   
  

 

 

   

 

 

 

Premises and equipment, net

     14,150        14,952   

Interest receivable

     1,646        1,753   

Restricted stock

     1,938        2,265   

Bank owned life insurance

     6,426        6,394   

Other real estate owned

     10,922        8,713   

Prepaid assets

     598        635   

Other assets

     7,873        9,174   
  

 

 

   

 

 

 

Total assets

   $ 546,921      $ 545,007   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Demand noninterest-bearing

   $ 72,237      $ 70,347   

Interest checking and money market accounts

     220,744        211,066   

Savings deposits

     45,639        43,336   

Time deposits, $100,000 and over

     50,534        53,449   

Other time deposits

     75,321        79,414   
  

 

 

   

 

 

 

Total deposits

     464,475        457,612   
  

 

 

   

 

 

 

Short-term borrowed funds

     12,127        18,690   

Long-term debt

     12,671        12,673   

Interest payable

     262        270   

Other liabilities

     12,681        11,449   
  

 

 

   

 

 

 

Total liabilities

     502,216        500,694   
  

 

 

   

 

 

 

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

     1,639        1,584   

Off balance sheet items, commitments and contingencies (Note 9)

    

SHAREHOLDERS’ EQUITY

    

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

    

2,258 and 10,000 shares of series A issued and outstanding;

     2,258        10,000   

500 shares of series B issued and outstanding

     500        500   

Discount on preferred stock

     (75     (100

Common stock, $1.25 par value: 20,000,000 shares issued authorized; shares issued and outstanding 7,484,771 and 7,502,496 shares, respectively

     9,356        9,378   

Additional paid-in capital

     12,103        12,201   

Unearned ESOP compensation

     (851     (875

Undivided profits

     10,637        10,138   

Accumulated other comprehensive income

     1,396        1,487   
  

 

 

   

 

 

 

Total Uwharrie Capital shareholders’ equity

     35,324        42,729   

Noncontrolling interest

     7,742        —     
  

 

 

   

 

 

 

Total shareholders’ equity

     43,066        42,729   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 546,921      $ 545,007   
  

 

 

   

 

 

 

 

(*) Derived from audited consolidated financial statements

See accompanying notes

 

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Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

     Three Months Ended
March 31,
 
     2013     2012  
     (in thousands, except share
and per share data)
 

Interest Income

    

Loans, including fees

   $ 4,427      $ 5,207   

Investment securities

    

US Treasury

     93        147   

US Government agencies and corporations

     179        189   

State and political subdivisions

     66        91   

Interest-earning deposits with banks and federal funds sold

     55        32   
  

 

 

   

 

 

 

Total Interest income

     4,820        5,666   
  

 

 

   

 

 

 

Interest Expense

    

Interest checking and money market accounts

     116        151   

Savings deposits

     42        52   

Time deposits, $100,000 and over

     174        215   

Other time deposits

     213        264   

Short-term borrowed funds

     80        74   

Long-term debt

     171        242   
  

 

 

   

 

 

 

Total interest expense

     796        998   
  

 

 

   

 

 

 

Net interest income

     4,024        4,668   

Provision for (recovery of) loan losses

     (369     340   
  

 

 

   

 

 

 

Net interest income after provision (recovery of) for loan losses

     4,393        4,328   
  

 

 

   

 

 

 

Noninterest Income

    

Service charges on deposit accounts

     405        432   

Other service fees and commissions

     793        730   

Gain on sale of securities (includes reclassification of $14 from accumulated other comprehensive income)

     14        —     

Gain on sale of other assets

     247        271   

Income from mortgage loan sales

     840        809   

Other income

     115        120   
  

 

 

   

 

 

 

Total noninterest income

     2,414        2,362   
  

 

 

   

 

 

 

Noninterest Expense

    

Salaries and employee benefits

     3,092        3,106   

Net occupancy expense

     274        285   

Equipment expense

     168        188   

Data processing costs

     200        211   

Office supplies and printing

     63        71   

Foreclosed real estate expense

     175        468   

Professional fees and services

     238        45   

Marketing and donations

     173        186   

Electronic banking expense

     222        229   

Software amortization and maintenance

     144        142   

FDIC insurance

     171        174   

Other noninterest expense

     709        661   
  

 

 

   

 

 

 

Total noninterest expenses

     5,629        5,766   
  

 

 

   

 

 

 

Income before income taxes

     1,178        924   

Income taxes (includes reclassification of $5 from accumulated other comprehensive income)

     415        224   
  

 

 

   

 

 

 

Net income

   $ 763      $ 700   
  

 

 

   

 

 

 

Consolidated net income

   $ 763      $ 700   

Less: Net Income attributable to noncontrolling interest

     (103     —     
  

 

 

   

 

 

 

Net income attributable to Uwharrie Capital

     660        700   

Dividends – preferred stock

     (161     (161
  

 

 

   

 

 

 

Net income available to common shareholders

   $ 499      $ 539   
  

 

 

   

 

 

 

Net income per common share

    

Basic

   $ 0.07      $ 0.07   

Diluted

     0.07        0.07   

Weighted average common shares outstanding

    

Basic

     7,307,912        7,438,137   

Diluted

     7,307,912        7,438,137   

See accompanying notes

 

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Table of Contents

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Three Months Ended
March 31,
 
     2013     2012  
     (in thousands)  

Net Income

   $ 763      $ 700   
  

 

 

   

 

 

 

Unrealized gain (loss) on available for sale securities

     (124     (414

Related tax effect

     42        139   

Reclassification of (gain) loss recognized in net income

     (14     —     

Related tax effect

     5        —     
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     (91     (275
  

 

 

   

 

 

 

Comprehensive income

     672        425   
  

 

 

   

 

 

 

Less: Comprehensive income attributable to noncontrolling interest

     (103     —     
  

 

 

   

 

 

 

Comprehensive income attributable to Uwharrie Capital

   $ 569      $ 425   
  

 

 

   

 

 

 

See accompanying notes

 

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Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

 

    Number
Common
Shares
Issued
    Preferred
Stock
Series A
    Preferred
Stock
Series B
    Discount
on
Preferred
Stock
    Non-
controlling
Interest
    Common
Stock
    Additional
Paid-in
Capital
    Unearned
ESOP
Compensation
    Undivided
Profits
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  

Balance, December 31, 2012

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

Net Income

    —          —          —          —          103        —          —          —          660        —          763   

Repurchase of common stock

    (17,725     —          —          —          —          (22     (30     —          —          —          (52

Other comprehensive loss

    —          —          —          —          —          —          —          —          —          (91     (91

Release of ESOP shares

    —          —          —          —          —          —          (13     24        —          —          11   

Increase in ESOP notes receivable

    —          —          —          —          —          —          —          —          —          —          —     

Stock compensation expense

    —          —          —          —          —          —          —          —          —          —          —     

Reclass to mezzanine capital

    —          —          —          —          —          —          (55     —          —          —          (55

Repayment of preferred stock series A

    —          (7,742     —          —          —          —          —          —          —          —          (7,742

Issuance of preferred stock series B by (noncontrolling interest)

    —          —          —          —          7,855        —          —          —          —          —          7,855   

Record costs of series B preferred stock (noncontrolling interest)

    —          —          —          —          (113     —          —          —          —          —          (113

Record preferred stock dividend series B (noncontrolling interest)

    —          —          —          —          (103     —          —          —          —          —          (103

Record preferred stock dividend and discount accretion

    —          —          —          25        —          —          —          —          (161     —          (136
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2013

    7,484,771      $ 2,258      $ 500      $ (75   $ 7,742      $ 9,356      $ 12,103      $ (851   $ 10,637      $ 1,396      $ 43,066   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

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Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

     Three Months Ended
March 31,
 
     2013     2012  
     (dollars in thousands)  

Cash flows from operating activities

    

Net income

   $ 763      $ 700   

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

    

Depreciation

     236        237   

Net amortization of security premiums/discounts

     430        278   

Net amortization of mortgage servicing rights

     237        249   

Impairment of foreclosed real estate

     30        352   

Provision for (recovery of) loan losses

     (369     340   

Stock compensation

     —          1   

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

     (14     —     

Income from mortgage loan sales

     (840     (809

Proceeds from sales of loans held for sale

     31,214        27,946   

Origination of loans held for sale

     (26,046     (27,202

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

     (229     (276

Increase in cash surrender value of life insurance

     (32     (59

(Gain) loss on sales of foreclosed real estate

     (18     5   

Release of ESOP shares

     11        10   

Net change in interest receivable

     107        257   

Net change in other assets

     1,415        (3,146

Net change in interest payable

     (8     (12

Net change in other liabilities

     866        (656
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     7,753        (1,785
  

 

 

   

 

 

 

Cash flows from investing activities

    

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

     4,748        3,420   

Purchase of securities available for sale

     (25,734     —     

Net decrease in loans

     2,721        9,124   

Proceeds from sales of premises, equipment and other assets

     949        —     

Purchase of premises and equipment

     (154     (206

Proceeds from sales of foreclosed real estate

     18        1,116   

Investment in other assets

     (267     (272

Net decrease in restricted stock

     327        —     
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (17,392     13,182   
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net increase in deposit accounts

     6,863        2,762   

Net decrease in short-term borrowed funds

     (6,563     (4,659

Net decrease in long-term debt

     (2     (6,052

Proceeds from preferred stock series B issued by subsidiaries

     366        —     

Repurchase of common stock

     (52     —     

Dividends on preferred stock

     (136     (136

Dividend on noncontrolling interest

     (103     —     
  

 

 

   

 

 

 

Net cash provided by (used in) in financing activities

     373        (8,085
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (9,266     3,312   

Cash and cash equivalents, beginning of period

     81,728        28,687   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 72,462      $ 31,999   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information

    

Interest paid

   $ 804      $ 1,010   

Income taxes paid

     280        —     

Supplemental Schedule of Non-Cash Activities

    

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

   $ (91   $ (275

Loans transferred to foreclosed real estate

     2,239        714   

Company financed sales of other real estate owned

     —          —     

Net change in ESOP liability

     55        —     

Funds moved from escrow liability to noncontrolling interest, subsidiary issued series B preferred stock net of cost

     7,376        —     

Redemption of preferred stock series A to other liabilities

     (7,742     —     

See accompanying notes

 

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Table of Contents

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Basis of Presentation

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

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

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to consolidated financial statements filed as part of the Company’s 2012 Annual Report on Form 10-K. This Quarterly Report should be read in conjunction with such Annual Report.

Note 2 – Comprehensive Income

The Company reports as comprehensive income all changes in shareholders’ equity during the year from sources other than shareholders. Other accumulated 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 accumulated other comprehensive income is unrealized gains and losses, net of income tax, on investment securities available for sale. The following table presents the changes in accumulated other comprehensive income for the three months ending March 31, 2013:

 

     Unrealized holding gains
On available-for-sale
Securities (net)
 
     (dollars in thousands)  

Beginning balance

   $ 1,487   

Other comprehensive income before reclassifications, net of $43,000 tax effect

     (82

Amounts reclassified from accumulated other comprehensive income, net of $5,000 tax effect

     (9
  

 

 

 

Net current-period other comprehensive loss

     (91
  

 

 

 

Ending Balance

   $ 1,396   
  

 

 

 

 

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Table of Contents

Note 3 – Noncontrolling Interest

During the third quarter of 2012, each of the Company’s subsidiary banks began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series B to be issued by each subsidiary bank. The preferred stock will qualify as Tier 1 capital at each bank and will pay dividends at a rate of 5.30%. The preferred stock has no voting rights. The sale ended on December 31, 2012 with Stanly raising $4.5 million, Anson raising $1.5 million and Cabarrus raising $1.9 million in new capital less total issuance costs of $113,000. These funds were held in an escrow account at December 31, 2012 and the new preferred stock was issued in January 2013. The total net amount is $7.7 million at the subsidiary bank level which consolidates up to the Company and is presented as noncontrolling interest in the consolidated balance sheet. Dividends declared on this preferred stock are presented as earnings allocated to noncontrolling interest in the consolidated statement of income.

Note 4 – Per Share Data

Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for stock dividends. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. For the three months ended March 31, 2013, the Company’s 92,491 stock options outstanding did not have a dilutive effect on per share results because the exercise prices exceeded the share values for each period. The Company had 122,341 stock options outstanding at March 31, 2012, and they did not have a dilutive effect.

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

 

    

Three Months Ended

March 31,

 
     2013     2012  

Weighted average number of common shares outstanding

     7,502,496        7,593,929   

Effect of unreleased ESOP shares

     (194,584     (155,792
  

 

 

   

 

 

 

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

     7,307,912        7,438,137   

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

     7,307,912        7,438,137   
  

 

 

   

 

 

 

 

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Table of Contents

Note 5 – Investment Securities

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

 

March 31, 2013

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

U.S. Treasury

   $ 23,607       $ 868       $ 5       $ 24,470   

U.S. Government agencies

     31,616         417         31         32,002   

GSE – Mortgage-backed securities and CMO’s

     47,087         390         107         47,370   

State and political subdivisions

     7,611         617         —           8,228   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 109,921       $ 2,292       $ 143       $ 112,070   
  

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

At both March 31, 2013 and December 31, 2012, the Company owned Federal Reserve stock reported at cost of $793,800 and $802,850, respectively that is included in other assets. Also at March 31, 2013 and December 31, 2012, the Company owned Federal Home Loan Bank Stock (FHLB) of $1.1 million and $1.5 million, respectively. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership in, and borrowings, with these banks. These investments are carried at cost since there is no ready market and historically redemption has been made at par value. The Company estimated that the fair value approximated cost and that these investments were not impaired at March 31, 2013.

Results from sales of securities available for sale for the three month period ended March 31, 2013 and March 31, 2012 are as follows:

 

    

Three Months Ended

March 31,

 
     2013      2012  
     (dollars in thousands)  

Gross proceeds from sales

   $ 426       $ —     
  

 

 

    

 

 

 

Gross realized gains from sales

   $ 14       $ —     

Gross realized losses from sales

     —           —     
  

 

 

    

 

 

 

Net realized gains

   $ 14       $ —     
  

 

 

    

 

 

 

At March 31, 2013 and December 31, 2012 securities available for sale with a carrying amount of $53.3 million and $48.8 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2013 and December 31, 2012. 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, and a volatile market and are in no way a reflection of the quality of the investments. At March 31, 2013, the unrealized losses related to

 

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Table of Contents

one United States Treasury note, three government agency bonds and six mortgage backed securities. At December 31, 2012, the unrealized losses related to one United States Treasury note and seven mortgage backed securities.

 

     Less than 12 Months      12 Months or More      Total  

March 31, 2013

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

Securities available for sale temporary impairment

                 

U.S. Treasury

   $ 2,483       $ 5       $ —         $ —         $ 2,483       $ 5   

U.S. Gov’t agencies

     9,976         31         —           —           9,976         31   

Mortgage-backed securities and CMO’s

     12,185         107         —           —           12,185         107   

State and political subdivisions

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 24,644       $ 143       $ —         $ —         $ 24,644       $ 143   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 losses, 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 the Company has to hold the investment until the loss position is recovered.

Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. At March 31, 2013, the Company had no intent to sell and not more likely than not to be required to sell the available for sale securities that were in a loss position prior to full recovery

 

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Table of Contents

The aggregate amortized cost and fair value of the available for sale securities portfolio at March 31, 2013 by remaining contractual maturity are as follows:

 

     March 31, 2013  
     Amortized
Cost
     Estimated
Fair Value
     Book
Yield (1)
 

Securities available for sale

        

U. S. Treasury

        

Due after one but within five years

     16,198         17,005         1.91

Due after five but within ten years

     7,409         7,465         1.27
  

 

 

    

 

 

    

 

 

 
     23,607         24,470         1.71
  

 

 

    

 

 

    

 

 

 

U.S. Government agencies

        

Due within twelve months

     5,005         5,105         2.27

Due after one but within five years

     13,886         14,183         1.54

Due after five but within ten years

     12,725         12,714         0.98
  

 

 

    

 

 

    

 

 

 
     31,616         32,002         1.43
  

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

        

Due after one but within five years

     2,833         2,809         1.31

Due after five but within ten years

     5,914         6,067         1.84

Due after ten years

     38,340         38,494         1.70
  

 

 

    

 

 

    

 

 

 
     47,087         47,370         1.70
  

 

 

    

 

 

    

 

 

 

State and political subdivisions

        

Due within twelve months

     225         225         2.73

Due after one but within five years

     1,144         1,200         3.47

Due after five but within ten years

     4,743         5,187         3.10

Due after ten years

     1,499         1,616         4.12
  

 

 

    

 

 

    

 

 

 
     7,611         8,228         3.35
  

 

 

    

 

 

    

 

 

 

Total Securities available for sale

        

Due within twelve months

     5,230         5,330         2.29

Due after one but within five years

     34,061         35,197         1.76

Due after five but within ten years

     30,791         31,433         1.55

Due after ten years

     39,839         40,110         1.80
  

 

 

    

 

 

    

 

 

 
   $ 109,921       $ 112,070         1.74
  

 

 

    

 

 

    

 

 

 

 

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

Note 6 – Loans Held for Investment

The composition of net loans held for investment by class as of March 31, 2013 and December 31, 2012 are as follows:

 

     March 31,
2013
    December 31,
2012
 
     (dollars in thousands)  

Commercial

    

Commercial

   $ 44,640      $ 41,390   

Real estate – commercial

     102,541        103,304   

Other real estate construction loans

     22,002        25,052   

Noncommercial

    

Real estate 1-4 family construction

     3,333        3,080   

Real estate – residential

     91,509        93,927   

Home equity

     47,252        48,517   

Consumer loans

     11,625        12,986   

Other loans

     745        802   
  

 

 

   

 

 

 
     323,647        329,078   

Less:

    

Allowance for loan losses

     (5,973     (6,801

Deferred loan (fees) costs, net

     117        105   
  

 

 

   

 

 

 

Loans held for investment, net

   $ 317,791      $ 322,382   
  

 

 

   

 

 

 

 

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Note 7 – Allowance for Loan Losses

The following table shows the change in the allowance for loss losses by loan segment for the three months ended March 31, 2013 and 2012, respectively:

 

Commercial

   Three Months Ended
March 31,
 
     2013     2012  
     (dollars in thousands)  

Balance, beginning of period

   $ 2,791      $ 2,904   

Provision (recovery) charged to operations

     (268     190   

Charge-offs

     (271     (312

Recoveries

     5        41   
  

 

 

   

 

 

 

Net (charge-offs)

     (266     (271

Balance at end of period

   $ 2,257      $ 2,823   
  

 

 

   

 

 

 

Non-Commercial

   Three Months Ended
March 31,
 
     2013     2012  
     (dollars in thousands)  

Balance, beginning of period

   $ 4,010      $ 3,911   

Provision (recovery) charged to operations

     (101     150   

Charge-offs

     (224     (122

Recoveries

     31        12   
  

 

 

   

 

 

 

Net (charge-offs)

     (193     (110

Balance at end of period

   $ 3,716      $ 3,951   
  

 

 

   

 

 

 

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at March 31, 2013 and December 31, 2012:

 

     Individually Evaluated      Collectively Evaluated      Total  

March 31, 2013

   Reserve      Loans      Reserve      Loans      Reserve      Loans  
     (dollars in thousands)  

Commercial

   $ 1,125       $ 11,359       $ 1,132       $ 157,824       $ 2,257       $ 169,183   

Non-Commercial

     1,507         10,277         2,209         144,304         3,716         154,581   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,632       $ 21,636       $ 3,341       $ 302,128       $ 5,973       $ 323,764   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Individually Evaluated      Collectively Evaluated      Total  

December 31, 2012

   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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

March 31, 2013

   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

   $ —         $ 579       $ 579       $ 44,061       $ 44,640       $ —     

Real estate – commercial

     84         3,474         3,558         98,983         102,541         —     

Other real estate construction

     117         1,599         1,716         20,286         22,002         —     

Real estate 1-4 family construction

     —           —           —           3,333         3,333         —     

Real estate – residential

     1,169         1,644         2,813         88,813         91,626         —     

Home equity

     281         620         901         46,351         47,252         —     

Consumer loans

     32         —           32         11,593         11,625         —     

Other loans

     17         1         18         727         745         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,700       $ 7,917       $ 9,617       $ 314,147       $ 323,764       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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. Also, mortgage loans that were originated for sale but were not sold and are being held in the loan portfolio remain in an accruing status until they are foreclosed.

The composition of nonaccrual loans by class as of March 31, 2013 and December 31, 2012 is as follows:

 

     March 31,
2013
     December 31,
2012
 
     (dollars in thousands)  

Commercial

   $ 579       $ 437   

Real estate – commercial

     3,474         3,032   

Other real estate construction

     1,599         2,945   

Real estate 1-4 family construction

     —           —     

Real estate – residential

     1,644         2,507   

Home equity

     620         558   

Consumer loans

     —           1   

Other loans

     1         —     
  

 

 

    

 

 

 
   $ 7,917       $ 9,480   
  

 

 

    

 

 

 

 

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Table of Contents

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

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

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

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

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

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

The tables below summarize risk grades of the loan portfolio by class at March 31, 2013 and December 31 2012:

 

March 31, 2013

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

Commercial

   $ 43,137       $ 710       $ 793       $ —         $ 44,640   

Real estate – commercial

     85,390         9,526         7,625         —           102,541   

Other real estate construction

     19,000         818         2,184         —           22,002   

Real estate 1-4 family construction

     3,326         7         —           —           3,333   

Real estate – residential

     73,641         12,851         5,134         —           91,626   

Home equity

     45,064         1,172         1,016         —           47,252   

Consumer loans

     11,002         523         100         —           11,625   

Other loans

     745         —           —           —           745   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 281,305       $ 25,607       $ 16,852       $ —         $ 323,764   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

     78,114         9,728         6,189         —           94,031   

Home equity

     46,591         914         1,013         —           48,518   

Consumer loans

     12,360         512         114         —           12,986   

Other loans

     822         —           —           —           822   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. The following tables show the breakdown between performing and nonperforming loans by class at March 31, 2013 and December 31, 2012:

 

-15-


Table of Contents

 

March 31, 2013

   Performing      Non-
Performing
     Total  
     (dollars in thousands)  

Commercial

   $ 44,061       $ 579       $ 44,640   

Real estate – commercial

     99,067         3,474         102,541   

Other real estate construction

     20,403         1,599         22,002   

Real estate 1-4 family construction

     3,333         —           3,333   

Real estate – residential

     89,982         1,644         91,626   

Home equity

     46,632         620         47,252   

Consumer loans

     11,625         —           11,625   

Other loans

     744         1         745   
  

 

 

    

 

 

    

 

 

 

Total

   $ 315,847       $ 7,917       $ 323,764   
  

 

 

    

 

 

    

 

 

 

 

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

     91,524         2,507         94,031   

Home equity

     47,960         558         48,518   

Consumer loans

     12,985         1         12,986   

Other loans

     822         —           822   
  

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

 

Loans are considered impaired when, based on current information and events it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired, a specific calculation is performed and a specific reserve is allocated, if necessary. The tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class at March 31, 2013 and December 31, 2012:

 

March 31, 2013

   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

   $ 1,270       $ 304       $ 847       $ 613       $ —         $ 579   

Real estate – commercial

     10,128         4,663         3,402         428         —           3,474   

Other real estate construction

     2,193         1,958         185         84         —           1,599   

Real estate 1-4 family construction

     395         378         17         14         —           —     

Real estate – residential

     8,627         3,696         4,931         1,200         —           1,644   

Home equity

     1,044         724         320         199         —           620   

Consumer loans

     210         49         161         94         —           —     

Other loans

     1         1         —           —           —           1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,868       $ 11,773       $ 9,863       $ 2,632       $ —         $ 7,917   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-16-


Table of Contents

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months ended      Three Months ended  
     March 31, 2013      March 31, 2012  
     Average
Recorded
Investment
     Interest
Income
     Average
Recorded
Investment
     Interest
Income
 
     (dollars in thousands)  

Commercial

   $ 1,504       $ 11       $ 1,830       $ 14   

Real estate – commercial

     8,651         75         12,795         185   

Other real estate construction

     3,014         6         4,007         52   

Real estate 1-4 family construction

     617         5         1,219         6   

Real estate – residential

     8,806         89         11,649         137   

Home equity

     1,056         5         1,029         10   

Consumer loans

     223         3         276         4   

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,871       $ 194       $ 32,805       $ 408   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 8 – Troubled Debt Restructures

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

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

 

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For the three months ended March 31, 2013 and 2012 the following tables present a breakdown of the types of concessions made by loan class:

 

     Three months ended March 31, 2013  
     Number
of
Contracts
     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 
     (dollars in thousands)  

Other:

        

Commercial

     —         $ —         $ —     

Real estate – commercial

     —           —           —     

Other real estate construction

     —           —           —     

Real estate 1-4 family construction

     —           —           —     

Real estate – residential

     2         65         65   

Home equity

     —           —           —     

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     2       $ 65       $ 65   
  

 

 

    

 

 

    

 

 

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

Other:

        

Commercial

     1       $ 10       $ 9   

Real estate – commercial

     2         619         618   

Other real estate construction

     —           —           —     

Real estate 1-4 family construction

     —           —           —     

Real estate – residential

     1         24         24   

Home equity

     —           —           —     

Consumer loans

     1         52         51   

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     5       $ 705       $ 702   
  

 

 

    

 

 

    

 

 

 

 

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The following tables’ present loans that were modified as troubled debt restructurings within the previous twelve months ending March 31, 2013 and 2012 for which there was a payment default:

 

     Twelve months ended
March 31, 2013
 
     Number
of Loans
     Recorded
Investment
 
     (dollars in thousands)  

Extend payment terms:

     

Commercial

     —         $ —     

Real estate – commercial

     —           —     

Other real estate construction

     —           —     

Real estate 1-4 family construction

     —           —     

Real estate – residential

     3         266   

Home Equity loans

     —           —     

Consumer loans

     —           —     

Other loans

     —           —     
  

 

 

    

 

 

 
     3       $ 266   
  

 

 

    

 

 

 

Other:

     

Commercial

     —         $ —     

Real estate – commercial

     —           —     

Other real estate construction

     —           —     

Real estate 1-4 family construction

     —           —     

Real estate – residential

     1         25   

Home Equity loans

     —           —     

Consumer loans

     —           —     

Other loans

     —           —     
  

 

 

    

 

 

 
     1       $ 25   
  

 

 

    

 

 

 

Total

     4       $ 291   
  

 

 

    

 

 

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

Below market interest rate:

     

Commercial

     —         $ —     

Real estate – commercial

     —           —     

Other real estate construction

     —           —     

Real estate 1-4 family construction

     —           —     

Real estate – residential

     1         207   

Home Equity loans

     —           —     

Consumer loans

     —           —     

Other loans

     —           —     
  

 

 

    

 

 

 
     1       $ 207   
  

 

 

    

 

 

 

Other:

     

Commercial

     1       $ 9   

Real estate – commercial

     3         712   

Other real estate construction

     —           —     

Real estate 1-4 family construction

     —           —     

Real estate – residential

     5         442   

Home Equity loans

     —           —     

Consumer loans

     1         5   

Other loans

     —           —     
  

 

 

    

 

 

 
     10       $ 1,168   
  

 

 

    

 

 

 

Total

     11       $ 1,375   
  

 

 

    

 

 

 

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 and has $708,000 in allowance for loan loss as of March 31, 2013, as a direct result of these TDR’s.

 

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The following tables present the successes and failures of the types of modifications within the previous twelve months ending March 31, 2013 and 2012:

 

 

     Paid In Full      Paying as restructured      Converted to nonaccrual      Foreclosure/ Default  

March 31, 2013

   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

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

Extended payment terms

     —           —           6         386         —           —           —           —     

Forgiveness of Principal

     —           —           —           —           —           —           —           —     

Other Loans

     —           —           9         851         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           15       $ 1,237         —         $ —           —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

     Paid In Full      Paying as restructured      Converted to nonaccrual      Foreclosure/ Default  

March 31, 2012

   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

     —         $ —           —         $ —           —         $ —           1       $ 207   

Other Loans

     —           —           6         514         2         244         8         717   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           6       $ 514         2       $ 244         9       $ 924   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company has not committed to fund any additional disbursements for TDR’s.

Note 9 – Commitments and Contingencies

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

The banks’ risk of loss with the unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The banks use the same credit policies in making commitments under such instruments as they do for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are unsecured. At March 31, 2013, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

(in thousands)       

Commitments to extend credit

   $ 70,110   

Credit card commitments

     8,060   

Standby letters of credit

     1,175   
  

 

 

 

Total commitments

   $ 79,345   
  

 

 

 

Note 10 – Fair Value Disclosures

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

 

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

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

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

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment by using one of several methods including collateral value, fair value of similar debt and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected repayments or fair value of collateral exceed the recorded investments in such loans. At March 31, 2013, 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 internal assessment of fair value based upon market data issued or management determines the fair value of the underlying collateral is further impaired below the appraised value, the Company records the impaired loan as nonrecurring Level 3.

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial

 

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recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an internal assessment of fair value based upon market data issued or management determines the fair value of the underlying collateral is further impaired below the appraised value, the Company records the impaired loan as nonrecurring Level 3.

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

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

The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012:

 

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

Securities available for sale:

           

US Treasury

   $ 24,470       $ 24,470       $ —         $ —     

US Government Agencies

     32,002         —           32,002         —     

GSE – Mortgage-backed securities and CMO’s

     47,370         —           47,370         —     

State and political subdivisions

     8,228         —           8,228         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 112,070       $ 24,470       $ 87,600       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2012  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Securities available for sale:

           

US Treasury

   $ 19,576       $ 19,576       $ —         $ —     

US Gov’t

     22,174         —           22,174         —     

Mortgage-backed securities and CMO’s

     41,022         —           41,022         —     

State and political subdivisions

     8,866         —           8,866         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 91,638       $ 19,576       $ 72,062       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of March 31, 2013 and December 31, 2012:

 

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

Impaired loans

   $ 7,230       $ —         $ —         $ 7,230   

Loans held for sale

     1,045         —           1,045         —     

Other real estate owned

     6,175         —           —           6,175   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 14,450       $ —         $ 1,045       $ 13,405   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2012  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Impaired loans

   $ 8,640       $ —         $ —         $ 8,640   

Loans held for sale

     5,373         —           5,373         —     

Other real estate owned

     5,596         —           —           5,596   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 19,609       $ —         $ 5,373       $ 14,236   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

    

Valuation Technique

  

Unobservable Input

   General
Range
 

Nonrecurring measurements:

     

OREO

   Discounted appraisals    Collateral discounts and Estimated costs to sell      0 – 10

Impaired loans

   Discounted appraisals    Collateral discounts      0 – 30

Note 11 – Fair Values of Financial Instruments and Interest Rate Risk

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

The fair value estimates presented at March 31, 2013 and December 31, 2012, are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price a liability could be settled for. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of March 31, 2013 and December 31, 2012:

 

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Table of Contents

 

March 31, 2013

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

FINANCIAL ASSETS

              

Cash and cash equivalents

   $ 72,462       $ 72,462       $ 72,462       $ —         $ —     

Securities available for sale

     112,070         112,070         24,470         87,600         —     

Loans held for investment, net

     317,791         327,175         —           —           327,175   

Loans held for sale

     1,045         1,045         —           1,045         —     

Restricted stock

     1,938         1,938         1,938         —           —     

Bank-owned life insurance

     6,426         6,426         —           —           6,426   

Mortgage servicing rights

     2,461         2,461         —           —           2,461   

Accrued interest receivable

     1,646         1,646         —           —           1,646   

FINANCIAL LIABILITIES

              

Deposits

   $ 464,475       $ 462,731       $ —         $ —         $ 462,731   

Short-term borrowings

     12,127         12,127         —           12,127         —     

Long-term borrowings

     1,544         1,628         —           1,628         —     

Junior subordinated debt

     11,127         11,260         —           —           11,260   

Accrued interest payable

     262         262         —           —           262   

 

December 31, 2012

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

FINANCIAL ASSETS

              

Cash and cash equivalents

   $ 81,728       $ 81,728       $ 81,728       $ —         $ —     

Securities available for sale

     91,638         91,638         19,576         72,062         —     

Loans held for investment, net

     322,382         331,386         —           —           331,386   

Loans held for sale

     5,373         5,373         —           5,373         —     

Restricted stock

     2,265         2,265         2,265         —           —     

Bank-owned life insurance

     6,394         6,394         —           —           6,394   

Mortgage servicing rights

     2,394         2,394         —           —           2,394   

Accrued interest receivable

     1,753         1,753         —           —           1,753   

FINANCIAL LIABILITIES

              

Deposits

   $ 457,612       $ 446,669       $ —         $ —         $ 446,669   

Short-term borrowings

     18,690         18,690         —           18,690         —     

Long-term borrowings

     1,546         1,702         —           1,702         —     

Junior subordinated debt

     11,127         11,268         —           —           11,268   

Accrued interest payable

     270         270         —           —           270   

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

 

   

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

 

   

Securities available for sale – Securities available for sale are carried at fair value based on quoted and observable market prices and are recorded in Levels 1 and 2. Also see discussion in Note 10.

 

   

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

 

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Table of Contents
   

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

 

   

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

 

   

Mortgage serving rights – Fair value is determined based upon discounted cash flows using market-based assumptions and is recorded in Level 3.

 

   

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

 

   

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

 

   

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

At March 31, 2013, the subsidiary banks had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, they were deemed to have no current fair value. See Note 9.

Note 12 – Recent Accounting Pronouncements

In February 2013, The FASB issued ASU 2013-02, an update to ASC 220 “Comprehensive Income”. The amendments in this update do not change the current reporting requirements for net income or other comprehensive income (OCI), but finalize reporting requirements related to reclassifications out of accumulated other comprehensive income (AOCI). Presentation requirements were originally addressed in ASU 2011-05, but delayed by ASU 2011-12 as a result of feedback received and have been modified in this Update to address those concerns. This Update requires entities to provide information about significant amounts reclassified out of AOCI. If the reclassified amount is required to be reclassified in its entirety to net income in the same reporting period, the entity is required to present, either on the face of the income statement or in the notes, the impact of the reclassification on the respective line items of net income. For other amounts that are reclassified partially to the balance sheet and partially to the income statement (i.e. those amounts that are not reclassified in their entirety to net income in the same reporting period), the entity must cross-reference to other disclosures that provide additional detail about those amounts. The update is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this update did not have a significant impact on the Company’s financial statements except for the added disclosures.

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

 

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Note 13 – Subsequent Events

On March 26, 2013, the Company received approval to repurchase at par value, $7.7 million, or 742 shares, of Fixed Rate Cumulative Perpetual Preferred Stock, Series A issued to the United States Treasury under the Capital Purchase Program in December of 2008. This stock was repurchased on April 3, 2013. At March 31, 2013, the $7.7 million was reclassed out of shareholders equity and into other liabilities.

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

This Quarterly Report on Form 10-Q may contain certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services. Any use of “we” or “our” in the following discussion refers to the Company on a consolidated basis.

Comparison of Financial Condition at March 31, 2013 and December 31, 2012.

During the three months ended March 31, 2013, the Company’s total assets increased $1.9 million, from $545.0 million to $546.9 million. During the same period, cash and cash equivalents decreased $9.3 million and loans held for investment decreased $5.4 million, while, securities available for sale increased $20.4 million.

Cash and cash equivalents decreased $9.3 million, during the three months ended March 31, 2013. Cash and due from banks decreased $1.5 million, while interest-earning deposits with banks decreased $7.8 million.

Investment securities increased $20.4 million to $112.1 million for the three months ended March 31, 2013. During the first three months of 2013, the Company purchased securities of $25.7 million. The increase from new purchases was reduced by maturities and calls of $125,000, sales of $426,000 and normal reductions stemming from principal payments on mortgage backed securities. The Company is investing the funds generated from the pay downs in the loan portfolio and the increase in deposits, in lower duration securities as well as variable rate securities. These sectors will provide protection in a rising rate environment and mitigate the downside risk embedded in the current portfolio and improve the yield on earning assets. At March 31, 2013, the Company had net unrealized gains of $2.1 million.

Loans held for investment decreased from $323.8 million to $329.2 million, a decrease of $5.4 million. All areas of the loan portfolio decreased during the first quarter of 2012 with the exception of commercial loans that grew by $3.3 million. Other real estate construction loans experienced the largest decline of $3.1 million during the period. The Company had one relationship that was foreclosed on for $1.3 million. The remainder of the decrease has related to payoffs and construction loans being converted to permanent loans. Loans held for sale decreased 80.5% or $4.3 million. The allowance for loan losses was $6.0 million, at March 31, 2013, which represented 1.84% of the loan portfolio.

 

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Other changes in our consolidated assets are related to premises and equipment, interest receivable, restricted stock, bank owned life insurance, other real estate owned prepaid assets and other assets. Bank owned life insurance increased $32,000. Accrued interest receivable, prepaid assets and premises and equipment declined $107,000, $37,000 and $802,000, respectively. The decrease in premises and equipment was related to the sale of a piece of property that had been purchased for further use. The property was sold for $949,000, with the Company realizing a gain on the sale of $229,000. Restricted stock which is comprised of Federal Home Loan Bank stock and Federal Reserve Bank stock decreased $327,000. Federal Home Loan Bank member institutions are required to increase or decrease their ownership as their utilization of FHLB borrowings change. The Company’s required ownership in Federal Reserve Bank stock decreased $9,000 to $794,000 during the first quarter of 2013. Other real estate owned increased $2.2 million. The Company foreclosed on four loan relationships during the first quarter of 2013. Two of these loan relationships resulted in twenty-two pieces of foreclosed real estate totaling $2.0 million being added to other real estate owned. The Company recorded net valuation write-down adjustments of $30,000. Other assets decreased $1.3 million.

Customer deposits, our primary funding source, experienced a $6.9 million increase during the three months ended March 31, 2013, increasing from $457.6 million to $464.5 million. Demand noninterest bearing checking increased $1.9 million and interest checking and money market accounts increased $9.7 million, while savings deposits increased $2.3 million for the period. These increases were offset by declines in time deposits over $100,000 of $2.9 million and other time deposits of $4.1 million.

Total borrowings decreased $6.6 million for the period and consist of both short-term and long-term borrowed funds, primarily from the Federal Home Loan Bank. The maturity of $6.5 million in Federal Home Loan Bank advances played a major part in the decrease. At March 31, 2013, $8.0 million of the total borrowings of $24.8 million were comprised of Federal Home Loan Bank advances. Other components of total borrowings include $11.1 million in junior subordinated debt and $5.6 in master notes and other secured borrowings.

Other liabilities increased from $11.4 million at December 31, 2012 to $12.7 million at March 31, 2013, an increase of $1.3 million.

The Company has an Employee Stock Ownership Plan (ESOP) in place. Late in 2011, the Internal Revenue Service issued IRS notice 2011-19 that drew a clear line between what stock exchanges are considered public and which are not. The Company historically trades its stock on the Bulletin Board, which is a publically traded exchange, however, the IRS no longer recognizes the Bulletin Board as a public exchange. The result of this ruling is that companies that have ESOP plans in place are required to set aside funds to handle allocated shares put back to the company. The plan that the Company has, does include a put option that requires the Company to repurchase allocated shares of participants at the participants’ option. The Company reclassed capital from additional paid-in capital to set aside the liability to cover all allocated shares that the Company may be requested to buy back. During the first quarter of 2013, the Company reclassed an additional $55,000 to this liability from additional paid-in capital.

At March 31, 2013, total shareholders’ equity was $43.0 million, an increase of $337,000 from December 31, 2012. Net income for the period was $763,000. Unrealized gains and losses on investment securities, net of tax decreased $91,000. The Company also recorded $161,000 in dividends on its series A and B preferred stock for the three month period ended March 31, 2013. The Company also has $103,000 in dividends attributed to noncontrolling interest. The Company did repurchase at par, $7.7 million of its series A preferred stock that was issued to the United States Treasury. The Company’s subsidiary banks issued $7.8 million of series B preferred stock that is presented less issuance costs, as noncontrolling interest. The Company, after receiving approval from the United States Department of the Treasury and the Federal Reserve Bank, repurchased common stock totaling $52,000. At March 31, 2013, the Company and its subsidiary banks exceeded all applicable regulatory capital requirements.

 

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Comparison of Results of Operations for the Three Months Ended March 31, 2013 and 2012.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $763,000 for the three months ended March 31, 2013, as compared to $700,000 for the three months ended March 31, 2012, an increase of $63,000. Net income available to common shareholders was $499,000 or $0.07 per common share at March 31, 2013, compared at $539,000 or $0.07 per common share at March 31, 2012. Net income available to common shareholders is net income less any dividends on preferred stock related to the $10.0 million of capital received from the United States Department of the Treasury under the Capital Purchase Program in December 2008 and dividends on the aforementioned noncontrolling interest.

Net Interest Income

As with most financial institutions, the primary component of earnings for our banks is net interest income. Net interest income is the difference between interest income, principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and wholesale borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by levels of noninterest-bearing liabilities and capital.

Net interest income for the three months ended March 31, 2013 and March 31, 2012 was $4.0 million and $4.7 million, respectively, a decrease of $700,000. During the current quarter, our decline in the volume of interest-earning assets outpaced the volume of interest-bearing liabilities by $326,000. The average yield on our interest–earning assets decreased 98 basis points to 4.01%, while the average rate we paid for our interest-bearing liabilities decreased 23 basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve Open Market Committee adjusts interest rates, while interest-bearing time deposits adjust at the time of maturity. The aforementioned decreases resulted in a decrease of 67 basis points in our interest rate spread, from 3.91% in 2012 to 3.24% in 2013. Our net interest margin was 3.35% and 4.05% for the comparable periods in 2013 and 2012, respectively.

The following table presents average balance sheets and a net interest income analysis for the three months ended March 31, 2013 and 2012:

 

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Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended March 31,

 

     Average Balance      Income/Expenses      Rate/Yield  
(in thousands)    2013      2012      2013      2012      2013     2012  

Interest-earning assets:

                

Taxable securities

   $ 98,792       $ 77,600       $ 272       $ 336         1.12     1.74

Nontaxable securities (1)

     7,393         9,474         66         91         5.90     6.31

Short-term investments

     63,337         21,792         55         32         0.35     0.59

Taxable loans

     314,693         353,094         4,324         5,094         5.57     5.80

Non-taxable loans (1)

     14,210         12,792         103         113         4.80     5.77
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest-earning assets

     498,536         474,752         4,820         5,666         4.01     4.91
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Interest-bearing liabilities:

                

Interest-bearing deposits

     388,197         364,367         545         682         0.57     0.75

Short-term borrowed funds

     17,033         18,339         80         74         1.90     1.62

Long-term debt

     12,674         23,796         171         242         5.47     4.09
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest bearing liabilities

     417,904         406,502         796         998         0.77     0.99
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net interest spread

   $ 80,632       $ 68,250       $ 4,024       $ 4,668         3.24     3.92
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net interest margin (1)
(% of earning assets)

              3.35     4.05
              

 

 

   

 

 

 

 

(1) Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 38.55% tax rate.

Provision and Allowance for Loan Losses

The Company recovered $(369,000) for the three months ending March 31, 2013 compared to adding $340,000 of additional provision for the same period in 2012. There were net loan charge-offs of $458,000 for the three months ended March 31, 2013, as compared with net loan charge-offs of $381,000 during the same period of 2012. Refer to the Asset Quality discussion on page 30 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like all financial institutions, diversification of our revenue base is of major importance in our long term success. Total noninterest income increased $52,000 for the three month period ending March 31, 2013 as compared to the same period in 2012. The Company realized a gain on the aforementioned sale of a piece of property being held in premises and equipment in the amount of $229,000 in the first quarter of 2013 and the Company also realized gains on the sale of investment securities during the three months ended March 31, 2013 of $14,000 as compared to no realized gains for the same period in 2012. Income from mortgage loan sales increased $31,000 from $809,000 for the quarter ended March 31, 2012 to $840,000 for the same period in 2013. Service charges on deposit accounts produced revenue of $405,000, a decrease of $27,000 for the three months ended March 31, 2013. The primary factor leading to this decrease was an increase in NSF fees for the comparable periods. Other service fees and commissions experienced a $63,000 or 8.6% increase for the comparable three month period, primarily due to a decrease in brokerage commissions and asset management fees.

 

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Noninterest Expense

Noninterest expense for the quarter ended March 31, 2013 was $5.6 million compared to $5.8 million for the same period of 2012, a decrease of $137,000. Salaries and employee benefits, the largest component of noninterest expense, decreased $14,000 for the quarter ending March 31, 2013. Foreclosed real estate expense decreased $293,000 for the three months ending March 31, 2013. The major factor related to the decrease in foreclosed real estate expense was write-downs on properties held in other real estate owned. These write downs are attributed to updated appraisals and the lowering of list prices. Total write-downs for the three month period in 2013 were $30,000 compared to $352,000 for the same period in 2012. Professional fees and services increased $193,000 during the three months ending March 31, 2013 as compared to the same period in 2012. The variance in professional fees and services was directly related to reimbursement of prior period legal fees totaling $267,000 during the first quarter of 2012 that reduced professional fees and services for the three months March 31, 2012 to $45,000. Of this amount, $177,000 was related to a reimbursement for legal services under the Company’s director and officer liability insurance policy and $90,000 associated with a previous closed government guaranteed loan. Other noninterest expense increased $48,000 for the comparable three month periods. The table below reflects the composition of other noninterest expense.

Other noninterest expense

 

     Three Months Ended  
     March 31,  
     2013      2012  
     (in thousands)  

Postage

   $ 47       $ 57   

Telephone and data lines

     54         51   

Loan collection expense

     85         89   

Shareholder relations expense

     42         54   

Dues and subscriptions

     40         49   

Other

     441         361   
  

 

 

    

 

 

 

Total

   $ 709       $ 661   
  

 

 

    

 

 

 

Income Tax Expense

The Company had income tax expense of $415,000 for the three months ended March 31, 2013 resulting in an effective tax rate of 35.23% compared to income tax expense of $224,000 and an effective tax rate of 24.24% in the 2012 period. Income taxes computed at statutory rate are reduced primarily by eligible amount of interest earned on state and municipal securities, tax free municipal loans and income earned on bank owned life insurance. The level of taxable income for the three months ended March 31, 2013 is $253,000 higher than the three months ended March 31, 2012.

Asset Quality

The Company’s allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. The allowance is increased by provisions charged to operations and by recoveries of amounts previously charged off and is reduced by loans charged off. Management continuously evaluates the adequacy of the allowance for loan losses. In evaluating the adequacy of the allowance, management considers the following: the growth, composition and industry diversification of the portfolio; historical loan loss experience; current delinquency levels; adverse situations that may affect a borrower’s ability to repay; estimated value of any underlying collateral; prevailing economic conditions and other relevant factors. The Company’s credit administration function, through a review process, periodically validates the accuracy of the initial risk grade assessment. In addition, as a given loan’s credit quality improves or deteriorates, the credit administration department has the responsibility to change the borrower’s risk grade accordingly. For loans determined to be impaired, the

 

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allowance is based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the estimated fair value of the underlying collateral less the selling costs. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans, which may be susceptible to significant change. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require additions for estimated losses based upon judgments different from those of management.

Management uses a risk-grading program to facilitate the evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by loan officers and reviewed and monitored by credit administration. The Company strives to maintain its loan portfolio in accordance with conservative loan underwriting policies that result in loans specifically tailored to the needs of its market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies. The Company has no foreign loans and does not engage in significant lease financing or highly leveraged transactions. The Company follows a loan review program designed to evaluate the credit risk in the loan portfolio. This process includes the maintenance of an internally classified watch list that is designed to help management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history and the current delinquent status. Because of this process, certain loans are categorized as substandard, doubtful or loss and reserves are allocated based on management’s judgment and historical experience.

The recovery of loan losses was $(369,000) for the quarter ended March 31, 2013 as compared to provision of $340,000 for the same period in 2012. At March 31, 2013 the levels of our impaired loans, which includes all loans in nonaccrual status and other loans deemed by management to be impaired, were $21.6 million compared to $26.1 million at December 31, 2012, a decrease of $4.5 million. Total nonaccrual loans, which are a component of impaired loans, decreased from $9.5 million at December 31, 2012 to $7.9 million at March 31, 2013. The Company foreclosed on and transferred two loan relationships totaling $2.0 million into other real estate owned during the first quarter. This was the major factor behind the decrease in nonaccrual loans during the quarter. The Company had net loan charge-offs for the first quarter of 2013 of $458,000 compared to net loan charge-offs of $381,000 for the same period in 2012.

The allowance expressed as a percentage of gross loans held for investment decreased 23 basis points from 2.07% at December 31, 2012 to 1.84% at March 31, 2013. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 1.22% at December 31, 2012 and 0.97% at March 31, 2013, while the individually evaluated allowance as a percentage of individually evaluated loans increased from 11.62% to 14.03%. While the amount of impaired loans decline due to the related transfer of foreclosed loans to other real estate owned, these loans while impaired only had minimal specific reserve dollars. The larger decline in impaired loan balances compared to the lower decline in specific loan reserves was behind the increase in the individually evaluated percentage. 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. During 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. 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

 

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loss is deemed to have a one year horizon. Therefore, the Company altered the model to account for this horizon; converting the two year probability of default into a one year probability of default for each obligor. 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 the vendor. The net result of these alterations had minimal effect on the loan loss provision. During the first quarter of 2013 the Company updated the beacon scores that are one of the components used within the allowance model. Beacon scores are updated semi-annually. For the first time in several updates beacon scores experienced significant improved. This improvement coupled with a continued decline in loans relating to pay downs and a decline in unemployment rates, another component of the model were the major factors behind the decrease in general reserves. Nonperforming loans, which consist of nonaccrual loans and loans past due 90 days and still accruing, to total loans decreased from 2.88% at December 31, 2012, to 2.45% at March 31, 2013. Management believes the current level of the allowance for loan losses is appropriate in light of the risk inherent in the loan portfolio.

Restructured loans at March 31, 2013 totaled $6.0 million and $6.8 million at December 31, 2012, respectively and are included in impaired loans.

The following nonperforming loan table shows the comparison of March 31, 2013 to December 31, 2012:

Nonperforming Assets

(dollars in thousands)

 

     March 31,     December 31,  
     2013     2012  

Nonperforming assets:

    

Loans past due 90 days or more

   $ —        $ —     

Nonaccrual loans

     7,919        9,480   

Other real estate owned

     10,922        8,713   
  

 

 

   

 

 

 

Total nonperforming assets

   $ 18,841      $ 18,193   
  

 

 

   

 

 

 

Allowance for loans losses

   $ 5,973      $ 6,801   

Nonperforming loans to total loans

     2.45     2.88

Allowance for loan losses to total loans

     1.84     2.07

Nonperforming assets to total assets

     3.44     3.34

Allowance for loan losses to nonperforming loans

     78.43     71.74

During the first three months of 2013, the Company had a net increase of $2.2 million in other real estate owned. The Company foreclosed on four loan relationships during first quarter of 2013. Two of these loan relationships resulted in twenty-two pieces of foreclosed real estate totaling $2.0 million being added to other real estate owned. The Company recorded net valuation write-down adjustments of $30,000.

Liquidity and Capital Resources

The objective of the Company’s liquidity management policy is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on any opportunities for expansion. Liquidity management addresses the ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature and to fund new loans and investments as opportunities arise.

 

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The Company’s primary sources of internally generated funds are principal and interest payments on loans, cash flows generated from operations and cash flow generated by investments. Growth in deposits is typically the primary source of funds for loan growth. The Company and its subsidiary banks have multiple funding sources, in addition to deposits that can be used to increase liquidity and provide additional financial flexibility. These sources are the subsidiary banks’ established federal funds lines with correspondent banks aggregating $23.8 million at March 31, 2013, with available credit of $23.8 million; established borrowing relationships with the Federal Home Loan Bank, with available credit of $47.2 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of $35.1 million and the issuance of commercial paper. The Company has also secured long-term debt from other sources. Total debt from these sources aggregated $24.8 million at March 31, 2013, compared to $31.4 million at December 31, 2012.

Banks and bank holding companies, as regulated institutions, must meet required levels of capital. The Federal Reserve, the primary federal regulator of the Company and its subsidiary banks, has adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets.

Regulatory guidelines require a minimum of total capital to risk-adjusted assets ratio of 8 percent and a Tier 1 leverage ratio of 4 percent. Banks are considered “well capitalized” by regulatory standards when they meet or exceed a Tier 1 risk-based capital ratio of 6 percent, a total risk-based capital ratio of 10 percent and a leverage ratio of 5 percent. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with those guidelines.

The Company and its subsidiary banks have each maintained capital levels exceeding minimum levels for “well capitalized” banks and bank holding companies. The Company expects to continue to exceed minimum capital requirements without altering current operations or strategy. As previously discussed, each of the Company’s subsidiary banks had a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series B that was issued by each subsidiary bank. The preferred stock qualifies as Tier 1 capital at each bank and will pay dividends at a rate of 5.30%. Stanly raised $4.5 million, Anson raised $1.5 million and Cabarrus raised $1.9 million in new capital less total issuance costs of $113,000. The net total of $7.7 million is presented as noncontrolling interest at the Company level and does qualify as Tier 1 capital at the Company. At March 31, 2013, the Company had $11.1 million in subordinated debt and $2.3 million remaining in preferred stock issued to the United States Department of the Treasury after the repayment of $7.7 million to the United States Treasury. The Company has made all interest and dividend payments in a timely manner.

Accounting and Regulatory Matters

Management is not aware of any known trends, events, uncertainties or current recommendations by regulatory authorities that will have or that are reasonably likely to have a material effect on the Company’s liquidity, capital resources, or other operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s primary market risk is interest rate risk. Interest rate risk is the result of differing maturities or repricing intervals of interest-earning assets and interest-bearing liabilities and the fact that rates on these financial instruments do not change uniformly. These conditions may impact the earnings generated by the Company’s interest earning assets or the cost of its interest-bearing liabilities, thus directly impacting the Company’s overall earnings. The Company’s management actively monitors and manages interest rate risk. One way this is accomplished is through the development of and adherence to the Company’s asset/liability policy. This policy sets forth management’s strategy for matching the risk characteristics of the Company’s interest-earning assets and liabilities so as to mitigate the effect of changes in the rate environment. In management’s opinion, the Company’s market risk profile has not changed significantly since December 31, 2012.

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act (“Exchange Act”) Rule 13a-15.

Based upon that evaluation, the principal executive officer and principal financial officer concluded that in their opinion, the Company’s disclosure controls and procedures were effective (1) to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

Management of the Company has evaluated, with the participation of the Company’s principal executive officer and principal financial officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a -15(f) and 15d – 15(f) of the Exchange Act) during the first quarter of 2013. In connection with such evaluation, the Company has determined that there were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensuring that the Company’s systems evolve with its business.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

Neither the Company nor its subsidiaries, nor any of their properties are subject to any material legal proceedings. From time to time, the Banks are engaged in ordinary routine litigation incidental to their business.

Item 1A. Risk Factors

Disclosure under this item is not required for smaller reporting companies.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information with respect to shares of common stock repurchased by the Company during the three months ended March 31, 2013.

 

     (a) Total
Number
of Shares
Purchased
     (b)
Average
Price
Paid
per
Share
     (c) Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Program
(1)
     (d)
Maximum
Dollar
Value of
Shares
that May
Yet Be
Purchased
Under the
Plans
(2)(3)
 

January 1, 2013 Through January 31, 2013

     —         $ —           —         $  —     

February 1, 2013 Through February 28, 2013

     —         $ —           —         $ —     

March 1, 2013 Through March 31, 2013

     17,725       $ 2.94         —         $ —     

Total

     17,725       $ 2.94         —         $ —     

 

(1) Trades of the Company’s stock occur in the Over-the-Counter market from time to time. The Company also has in place a Stock Repurchase Plan that provides liquidity to its shareholders in the event a willing buyer is not available to purchase shares that are offered for sale. The Company is under no obligation to purchase shares offered; however, it will accommodate such offers as its Stock Repurchase Plan allows. This plan was initially adopted in 1995 and is approved annually by resolution of the Board of Directors or the Executive Committee of the Board.

Pursuant to the terms of the United States Department of the Treasury’s investment in the Company’s preferred stock under the Capital Purchase Program (“CPP”), the Company must obtain the prior consent of the United States Department of the Treasury to repurchase its common stock under the Stock Purchase Plan or to pay a cash dividend.

(2) On June 26, 2012 the Board of Directors of Uwharrie Capital Corp, after receiving approval from the United States Department of Treasury and the Federal Reserve Bank, its primary regulator, approved the repurchase of up to $400,000 of outstanding common stock. On August 16, 2012, 6,250 shares were repurchased for $20,000. On September 29, 2012, 38,653 shares were repurchased for $154,612. On December 20, 2012, 20,406 shares were repurchased for $61,218. On March 21, 2013, 7,273 shares were repurchased for $20,001. On March 27, 2013, 10,452 shares were repurchased for $ 32,041. As of March 31, 2013, there was $43,514 for repurchase under the approved plan.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

 

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Item 5. Other Information

None