10-Q 1 d800293d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2014

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

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

132 NORTH FIRST STREET  
ALBEMARLE, NORTH CAROLINA   28001
(Address of Principal Executive Offices)   (Zip Code)

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

N/A

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

 

 

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

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

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 7,301,375 shares of common stock outstanding as of October 20, 2014.

 

 

 


Table of Contents

Table of Contents

 

         Page No.  

Part I.

 

FINANCIAL INFORMATION

  

Item 1 -

 

Financial Statements (Unaudited)

  
 

Consolidated Balance Sheets September 30, 2014 and December 31, 2013

     3   
 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2014 and 2013

     4   
 

Consolidated Statements of Comprehensive Income for the Three And Nine Months Ended September  30, 2014 and 2013

     5   
 

Consolidated Statements of Changes in Shareholders’ Equity Nine Months Ended September 30, 2014

     6   
 

Consolidated Statements of Cash Flows Nine Months Ended September 30, 2014 and 2013

     7   
 

Notes to Consolidated Financial Statements

     8   

Item 2 -

 

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

     29   

Item 3 -

 

Quantitative and Qualitative Disclosures about Market Risk

     39   

Item 4 -

 

Controls and Procedures

     40   

Part II.

 

OTHER INFORMATION

  

Item 1 -

 

Legal Proceedings

     40   

Item 1A -

 

Risk Factors

     40   

Item 2 -

 

Unregistered Sales of Equity Securities and Use of Proceeds

     41   

Item 3 -

 

Defaults Upon Senior Securities

     41   

Item 4 -

 

Mine Safety Disclosures

     41   

Item 5 -

 

Other Information

     41   

Item 6 -

 

Exhibits

     42   
 

Exhibit Index

     45   

 

-2-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

 

Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements

 

     September 30,        
     2014     December 31,  
     (Unaudited)     2013*  
     (dollars in thousands)  

ASSETS

    

Cash and due from banks

   $ 5,715      $ 7,947   

Interest-earning deposits with banks

     49,087        64,447   

Securities available for sale, at fair value

     113,924        100,280   

Loans held for sale

     1,402        1,139   

Loans:

     309,978        307,348   

Less allowance for loan losses

     (3,466     (5,095
  

 

 

   

 

 

 

Net loans held for investment

     306,512        302,253   
  

 

 

   

 

 

 

Premises and equipment, net

     15,008        13,781   

Interest receivable

     1,498        1,747   

Restricted stock

     1,038        1,184   

Bank owned life insurance

     6,615        6,516   

Other real estate owned

     5,858        7,170   

Other assets

     10,371        10,856   
  

 

 

   

 

 

 

Total assets

   $ 517,028      $ 517,320   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Demand noninterest-bearing

   $ 81,024      $ 74,493   

Interest checking and money market accounts

     237,549        228,933   

Savings deposits

     38,148        41,512   

Time deposits, $100,000 and over

     40,223        44,690   

Other time deposits

     57,318        64,080   
  

 

 

   

 

 

 

Total deposits

     454,262        453,708   
  

 

 

   

 

 

 

Short-term borrowed funds

     3,771        5,509   

Long-term debt

     9,561        11,163   

Interest payable

     182        224   

Other liabilities

     5,498        4,491   
  

 

 

   

 

 

 

Total liabilities

     473,274        475,095   
  

 

 

   

 

 

 

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

    

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

     1,820        1,716   

SHAREHOLDERS’ EQUITY

    

Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and outstanding 7,301,375 and 7,445,931 shares, respectively

     9,127        9,307   

Additional paid-in capital

     11,325        11,922   

Unearned ESOP compensation

     —          (989

Undivided profits

     10,976        10,289   

Accumulated other comprehensive gain (loss)

     (56     (562
  

 

 

   

 

 

 

Total Uwharrie Capital shareholders’ equity

     31,372        29,967   

Noncontrolling interest

     10,562        10,542   
  

 

 

   

 

 

 

Total shareholders’ equity

     41,934        40,509   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 517,028      $ 517,320   
  

 

 

   

 

 

 

 

(*) Derived from audited consolidated financial statements

See accompanying notes

 

-3-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  
     (in thousands, except share and per share data)  

Interest Income

        

Loans, including fees

   $ 4,120      $ 4,368      $ 12,285      $ 13,244   

Investment securities

        

US Treasury

     94        103        281        296   

US Government agencies and corporations

     310        322        968        703   

State and political subdivisions

     87        61        232        189   

Corporate bonds

     7        —          7        —     

Interest-earning deposits with banks and federal funds sold

     36        24        120        133   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     4,654        4,878        13,893        14,565   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

        

Interest checking and money market accounts

     70        110        228        338   

Savings deposits

     11        47        47        131   

Time deposits, $100,000 and over

     117        135        358        462   

Other time deposits

     131        162        409        557   

Short-term borrowed funds

     2        19        29        142   

Long-term debt

     139        164        434        501   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     470        637        1,505        2,131   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     4,184        4,241        12,388        12,434   

Provision for (recovery of) loan losses

     (271     227        (756     (547
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     4,455        4,014        13,144        12,981   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Income

        

Service charges on deposit accounts

     367        408        1,104        1,205   

Other service fees and commissions

     986        870        2,893        2,504   

Gain/(loss) on sale of securities (includes reclassification of $5,000, $26,000 and $14,000 from accumulated other comprehensive income)

     5        —          26        14   

Gain (loss) on fixed assets and other assets

     231        53        471        278   

Income from mortgage loan sales

     282        361        701        1,843   

Other income

     92        118        283        342   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     1,963        1,810        5,478        6,186   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Expense

        

Salaries and employee benefits

     3,093        3,037        9,079        9,189   

Net occupancy expense

     278        295        823        845   

Equipment expense

     164        180        511        534   

Data processing costs

     181        186        551        578   

Office supplies and printing

     74        76        202        187   

Foreclosed real estate expense

     610        134        1,037        1,257   

Professional fees and services

     210        306        560        787   

Marketing and donations

     183        181        476        557   

Electronic banking expense

     214        258        689        729   

Software amortization and maintenance

     140        132        396        413   

FDIC insurance

     109        124        330        421   

Other noninterest expense

     572        649        1,726        1,975   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     5,828        5,558        16,380        17,472   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     590        266        2,242        1,695   

Income taxes (includes reclassification of $2,000, $10,000 and $5,000 from accumulated other other comprehensive income)

     191        48        710        557   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 399      $ 218      $ 1,532      $ 1,138   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

   $ 399        218        1,532        1,138   

Less: net income attributable to noncontrolling Interest

     (149     (111     (442     (328
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Uwharrie Capital Corp

     250        107        1,090        810   

Dividends – preferred stock

     —          (64     —          (290
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 250      $ 43      $ 1,090      $ 520   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share

        

Basic

   $ 0.03      $ 0.01      $ 0.15      $ 0.07   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.03      $ 0.01      $ 0.15      $ 0.07   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

        

Basic

     7,310,169        7,414,138        7,326,957        7,433,232   

Diluted

     7,310,169        7,414,138        7,326,957        7,433,232   

See accompanying notes

 

-4-


Table of Contents

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  
     (in thousands)  

Net Income

   $ 399      $ 218      $ 1,532      $ 1,138   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

        

Unrealized gain (loss) on available for sale securities

     (461     (104     792        (2,641

Related tax effect

     156        43        (270     929   

Reclassification of (gain) loss recognized in net income

     (5     —          (26     (14

Related tax effect

     2        —          10        5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (308     (61     506        (1,721
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     91        157        2,038        (583

Less: Comprehensive income (loss) attributable to noncontrolling interest

     (149     (111     (442     (328
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Uwharrie Capital

   $ (58   $ 46      $ 1,596      $ (911
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

-5-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

 

 

     Number
Common
Shares
Issued
    Common
Stock
    Additional
Paid-in
Capital
    Unearned
ESOP
Compensation
    Undivided
Profits
    Accumulated
Other
Comprehensive
Income (Loss)
    Non
Controlling
Interest
    Total  
     (dollars in thousands, except share data)  

Balance, December 31, 2013

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

Net Income

     —          —          —          —          1,090        —          442        1,532   

Repurchase of common stock

     (34,239     (43     (70     —          —          —          —          (113

2% stock dividend

     142,129        178        221        —          (399     —          —          —     

Cash paid – fractional shares

     —          —          —          —          (4     —          —          (4

Other comprehensive Income

     —          —          —          —          —          506        —          506   

Release of ESOP shares

     —          —          5        16        —          —          —          21   

Repayment of ESOP notes receivable

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

Reclass to mezzanine capital

     —          —          (104     —          —          —          —          (104

Record preferred stock dividend Series B (noncontrolling interest)

     —          —          —          —          —          —          (311     (311

Record preferred stock dividend Series C (noncontrolling interest)

     —          —          —          —          —          —          (111     (111
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2014

     7,301,375      $ 9,127      $ 11,325      $ —        $ 10,976      $ (56   $ 10,562      $ 41,934   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

-6-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

     Nine Months Ended  
     September 30,  
     2014     2013  
     (dollars in thousands)  

Cash flows from operating activities

    

Net income

   $ 1,532      $ 1,138   

Adjustments to reconcile net income to net cash

    

Provided by (used in) operating activities:

    

Depreciation

     687        584   

Net amortization of security premiums/discounts

     746        1,163   

Net amortization of mortgage servicing rights

     532        619   

Impairment of foreclosed real estate

     574        745   

Impairment of (recovery of) other assets

     —          (75

Recovery of loan losses

     (756     (547

Net realized gain on sales / calls available for sales securities

     (26     (14

Income from mortgage loan sales

     (701     (1,843

Proceeds from sales of loans held for sale

     27,278        67,218   

Origination of loans held for sale

     (26,840     (60,562

Gain on sale of premises, equipment and other assets

     (146     (229

Increase in cash surrender value of life insurance

     (99     (92

Gain on sales of foreclosed real estate

     (325     (18

Release of ESOP shares

     30        34   

Net change in interest receivable

     249        135   

Net change in other assets

     (60     (576

Net change in interest payable

     (42     (39

Net change in other liabilities

     1,007        3,454   
  

 

 

   

 

 

 

Net cash provided by operating activities

     3,640        11,095   
  

 

 

   

 

 

 

Cash flows from investing activities

    

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

     10,113        11,413   

Purchase of securities available for sale

     (23,711     (46,693

Net (increase) decrease in loans

     (3,957     12,768   

Proceeds from sales of premises, equipment and other assets

     273        949   

Purchase of premises and equipment

     (2,041     (237

Proceeds from sales of foreclosed real estate

     1,517        1,994   

Investment in other assets

     (250     (356

Net decrease in restricted stock

     146        946   
  

 

 

   

 

 

 

Net cash used in investing activities

     (17,910     (19,216
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net increase in deposit accounts

     554        5,372   

Net decrease in short-term borrowed funds

     (1,735     (12,686

Net decrease in long-term debt

     (1,602     (1,508

Proceeds from preferred stock series B issued by subsidiaries

     —          360   

Repayment of preferred stock series A

     —          (7,742

Increase in unearned ESOP compensation

     —          (69

Repurchase of common stock

     (113     (92

Dividend and discount accretion on preferred stock

     —          (215

Dividend and cost accretion on noncontrolling interest

     (422     (311

Cash paid for fractional shares

     (4     —     
  

 

 

   

 

 

 

Net cash provided (used in) in financing activities

     (3,322     (16,891
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (17,592     (25,012

Cash and cash equivalents, beginning of period

     72,394        81,728   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 54,802      $ 56,716   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information

    

Interest paid

   $ 1,547      $ 2,170   

Income taxes paid

     21        648   

Supplemental Schedule of Non-Cash Activities

    

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

   $ 506      $ (1,721

Loans transferred to foreclosed real estate

     454        3,272   

Company financed sales of other real estate owned

     —          (213

Net change in ESOP liability

     104        102   

Exchange of unearned ESOP shares for ESOP debt

     973        63   

See accompanying notes

 

-7-


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, Uwharrie Bank (the “Bank”), Strategic Investment Advisors, Inc. (“SIA”), and Uwharrie Mortgage Inc. The Bank consolidates its subsidiaries, the Strategic Alliance Corporation, BOS Agency, Inc. and Gateway Mortgage, Inc., each of which is wholly-owned by the Bank.

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 2013 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 comprehensive income refers to all components (revenues, expenses, gains, and losses) of comprehensive income that are excluded from net income. The Company’s only component of other comprehensive income is unrealized gains and losses, net of income tax, on investment securities available for sale. The following table presents the changes in accumulated other comprehensive income for the three and nine months ended September 30, 2014 and 2013:

 

     Unrealized holding gains on available-for-sale securities  (net)  
     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  
     (dollars in thousands)  

Beginning Balance

   $ 252      $ (173   $ (562   $ 1,487   

Other Comprehensive income (loss) before reclassifications, net of $157,000 $43,000, ($270,000) and $929,000 tax effect, respectively

     (305     (61     522        (1,712

Amounts reclassified from accumulated Other comprehensive income, net of $2,000, $10,000 and $5,000 tax effect

     (3     —          (16     (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive Income (loss)

     (308     (61     506        (1,721
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ (56   $ (234   $ (56   $ (234
  

 

 

   

 

 

   

 

 

   

 

 

 

 

-8-


Table of Contents

Note 3 – Noncontrolling Interest

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

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

Note 4 – Per Share Data

On July 15, 2014, the Company’s Board of Directors declared a 2% stock dividend payable on August 15, 2014 to shareholders of record on July 30, 2014. All information presented in the accompanying interim consolidated financial statements regarding earnings per share and weighted average number of shares outstanding has been computed giving effect to this stock dividend.

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 both the three and nine months ended September 30, 2013, the Company’s 94,341 stock options outstanding did not have a dilutive effect on per share results because the exercise prices exceeded the share values for each period. For the three and nine months ended September 30, 2014, the Company had 12,607 stock options outstanding which did not have a dilutive effect. The line item for effect of Employee Stock Ownership Plan, (“ESOP”) shares shows the average of the unallocated ESOP shares.

 

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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     Nine Months Ended  
     September 30,     September 30,  
     2014      2013     2014      2013  

Weighted average number of common shares outstanding

     7,310,169         7,623,381        7,326,957         7,623,381   

Effect of ESOP shares

     —           (209,243     —           (190,149
  

 

 

    

 

 

   

 

 

    

 

 

 

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

     7,310,169         7,414,138        7,326,957         7,433,232   

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

     7,310,169         7,414,138        7,326,957         7,433,232   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

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

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

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

The Company received the favorable determination letter dated September 5, 2014 from the Internal Revenue Service and is currently in the process of distributing the allocated shares to the participants.

 

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Note 5 – Investment Securities

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

 

            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  

September 30, 2014

   Cost      Gains      Losses      Value  
     (dollars in thousands)  

U.S. Treasury

   $ 20,864       $ 394       $ 124       $ 21,134   

U.S. Government agencies

     40,734         60         469         40,325   

GSE - Mortgage-backed securities and CMO’s

     37,755         111         579         37,287   

State & political subdivisions

     11,615         550         —           12,165   

Corporate bonds

     3,041         —           28         3,013   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 114,009       $ 1,115       $ 1,200       $ 113,924   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  

December 31, 2013

   Cost      Gains      Losses      Value  
     (dollars in thousands)  

U.S. Treasury

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

U.S. Government agencies

     34,931         145         776         34,300   

GSE - Mortgage-backed securities and CMO’s

     37,871         121         986         37,006   

State and political subdivisions

     7,337         351         —           7,688   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

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

 

 

    

 

 

    

 

 

    

 

 

 

At both September 30, 2014 and December 31, 2013, the Company owned Federal Reserve Bank stock reported at cost of $506,000 and $467,000, respectively, that is included in other assets. Also at September 30, 2014 and December 31, 2013, the Company owned Federal Home Loan Bank Stock (FHLB) of $532,000 and $717,000, respectively. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership in, and borrowings with, these banks. These investments are carried at cost since there is no ready market and redemption has historically been made at par value. The Company estimated that the fair value approximated cost and that these investments were not impaired at September 30, 2014.

Results from sales and calls of securities available for sale for the three and nine month periods ended September 30, 2014 and September 30, 2013 are as follows:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014      2013      2014      2013  
     (dollars in thousands)  

Gross proceeds from sales and calls

   $ 4,405       $ —         $ 4,733       $ 426   
  

 

 

    

 

 

    

 

 

    

 

 

 

Realized gains from sales and calls

   $ 5       $ —         $ 26       $ 14   

Realized losses from sales and calls

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Realized gains

   $ 5       $ —         $ 26       $ 14   
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2014 and December 31, 2013, securities available for sale with a carrying amount of $88.7 million and $63.1 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2014 and December 31, 2013. These unrealized losses on investment securities are a result of temporary fluctuations in market prices due to a rise in interest rates, which will adjust if rates decline, and in a volatile market.

 

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Management does not believe these fluctuations are a reflection of the quality of the investments. At September 30, 2014, the unrealized losses for securities less than twelve months related to six government agency bonds, six government sponsored enterprise (GSE) mortgage backed securities and two corporate bonds. The Company had one United States Treasury note, four government agency bonds and nine GSE mortgage backed securities that had been in a loss position for more than twelve months. At December 31, 2013, the unrealized losses less than twelve months related to one United States Treasury note, ten government agency bonds and eleven government sponsored enterprise (GSE) mortgage backed securities. The Company had two GSE mortgage backed securities that had been in a loss position for more than twelve months at December 31, 2013.

 

     Less than 12 Months      12 Months or More      Total  

September 30, 2014

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

Securities available for sale temporary impairment

                 

U.S. Treasury

   $ —         $ —         $ 4,814       $ 124       $ 4,814       $ 124   

U.S. Gov’t agencies

     8,504         75         16,761         394         25,265         469   

GSE-Mortgage-backed securities and CMO’s

     8,134         113         15,445         466         23,579         579   

Corporate bonds

     3,013         28         —           —           3,013         28   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 19,651       $    216       $ 37,020       $ 984       $ 56,671       $ 1,200   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Less than 12 Months      12 Months or More      Total  

December 31, 2013

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

Securities available for sale temporary impairment

                 

U.S. Treasury

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

U.S. Gov’t agencies

     29,147         776         —           —           29,147         776   

GSE-Mortgage-backed securities and CMO’s

     22,206         842         3,849         144         26,055         986   

State and political subdivisions

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

At September 30, 2014, the Company had one United States Treasury note, four government agency bonds and nine GSE mortgage backed securities that had been in a loss position for twelve months or more. The unrealized losses are not likely to reverse unless market interest rates decline to the levels that existed when the securities were purchased. None of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. At September 30, 2014, the Company had no intent to sell and was 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. For the three and nine months ended September 30, 2014, there were no available for sale securities deemed to be other than temporarily impaired.

 

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The aggregate amortized cost and fair value of the available for sale securities portfolio at September 30, 2014 by remaining contractual maturity are as follows:

 

     September 30, 2014  
     Amortized      Estimated      Book  
     Cost      Fair Value      Yield  
     (dollars in thousands)  

Securities available for sale

        

U. S. Treasury

        

Due after one but within five years

     15,926         16,320         1.91

Due after five but within ten years

     4,938         4,814         1.37
  

 

 

    

 

 

    

 

 

 
     20,864         21,134         1.79
  

 

 

    

 

 

    

 

 

 

U.S. Government agencies

        

Due within twelve months

     4,981         5,041         2.77

Due after one but within five years

     33,805         33,358         1.26

Due after five but within ten years

     1,948         1,926         1.90
  

 

 

    

 

 

    

 

 

 
     40,734         40,325         1.48
  

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

        

Due after one but within five years

     4,488         4,417         1.51

Due after five but within ten years

     1,357         1,392         3.01

Due after ten years

     31,910         31,478         1.91
  

 

 

    

 

 

    

 

 

 
     37,755         37,287         1.90
  

 

 

    

 

 

    

 

 

 

State and political subdivisions

        

Due within twelve months

     175         178         4.62

Due after one but within five years

     2,396         2,572         4.96

Due after five but within ten years

     3,529         3,734         4.97

Due after ten years

     5,515         5,681         4.29
  

 

 

    

 

 

    

 

 

 
     11,615         12,165         4.64
  

 

 

    

 

 

    

 

 

 

Corporate Bonds

        

Due after five but within ten years

     3,041         3,013         1.24
  

 

 

    

 

 

    

 

 

 
     3,041         3,013         1.24
  

 

 

    

 

 

    

 

 

 

Total Securities available for sale

        

Due within twelve months

     5,156         5,219         2.83

Due after one but within five years

     56,615         56,667         1.62

Due after five but within ten years

     14,813         14,879         2.42

Due after ten years

     37,425         37,159         2.26
  

 

 

    

 

 

    

 

 

 
   $ 114,009       $ 113,924         1.99
  

 

 

    

 

 

    

 

 

 

Note 6 – Loans Held for Investment

The composition of net loans held for investment by class as of September 30, 2014 and December 31, 2013 are as follows:

 

     September 30,     December 31,  
     2014     2013  
     (dollars in thousands)  

Commercial

    

Commercial

   $ 47,632      $ 47,436   

Real estate - commercial

     89,732        95,922   

Other real estate construction loans

     23,194        17,583   

Noncommercial

    

Real estate 1-4 family construction

     3,895        3,418   

Real estate - residential

     90,752        87,463   

Home equity

     45,773        45,231   

Consumer loans

     8,479        9,623   

Other loans

     542        612   
  

 

 

   

 

 

 
     309,999        307,288   

Less:

    

Allowance for loan losses

     (3,466     (5,095

Deferred loan (fees) costs, net

     (21     60   
  

 

 

   

 

 

 

Loans held for investment, net

   $ 306,512      $ 302,253   
  

 

 

   

 

 

 

 

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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 and nine month period ended September 30, 2014 and 2013, respectively:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
Commercial    2014      2013     2014     2013  
     (dollars in thousands)  

Balance, beginning of period

   $ 1,570       $ 2,542      $  2,665      $ 2,791   

Provision (recovery) charged to operations

     33         (259     (378     (152

Charge-offs

     —           (217     (744     (612

Recoveries

     35         20        95        59   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net (charge-offs)

     35         (197     (649     (553
  

 

 

    

 

 

   

 

 

   

 

 

 

Other

     —           (1     —          (1
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 1,638       $ 2,085      $ 1,638      $ 2,085   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
Non-Commercial    2014     2013     2014     2013  
     (dollars in thousands)  

Balance, beginning of period

   $ 2,130      $ 2,939      $  2,430      $  4,010   

Provision (recovery) charged to operations

     (304     486        (378     (395

Charge-offs

     (60     (257     (357     (522

Recoveries

     62        10        133        85   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs)

     2        (247     (224     (437
  

 

 

   

 

 

   

 

 

   

 

 

 

Other

     —          (4     —          (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 1,828      $ 3,174      $ 1,828      $ 3,174   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
Total    2014     2013     2014     2013  
     (dollars in thousands)  

Balance, beginning of period

   $ 3,700      $ 5,481      $ 5,095      $ 6,801   

Provision (recovery) charged to operations

     (271     227        (756     (547

Charge-offs

     (60     (474     (1,101     (1,134

Recoveries

     97        30        228        144   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs)

     37        (444     (873     (990
  

 

 

   

 

 

   

 

 

   

 

 

 

Other

     —          (5     —          (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 3,466      $ 5,259      $ 3,466      $ 5,259   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at September 30, 2014 and December 31, 2013:

 

September 30, 2014                  
     Individually Evaluated      Collectively Evaluated      Total  
     Reserve      Loans      Reserve      Loans      Reserve      Loans  
                   (dollars in thousands)                

Commercial

   $ —         $ 3,029       $ 1,638       $ 157,529       $ 1,638       $ 160,558   

Non-Commercial

     59         5,059         1,769         144,361         1,828         149,420   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $      59       $   8,088       $ 3,407       $ 301,890       $ 3,466       $ 309,978   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Commercial

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

Non-Commercial

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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:

September 30, 2014

 

     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

   $ 62       $ —         $ 62       $ 47,570       $ 47,632       $ —     

Real estate - commercial

     78         531         609         89,123         89,732         —     

Other real estate construction

     12         1,030         1,042         22,152         23,194         —     

Real estate 1 - 4 family construction

     —           —           —           3,895         3,895         —     

Real estate - residential

     2,205         1,113         3,318         87,413         90,731         —     

Home equity

     170         13         183         45,590         45,773         —     

Consumer loans

     28         —           28         8,451         8,479         —     

Other loans

     —           —           —           542         542         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,555       $ 2,687       $ 5,242       $ 304,736       $ 309,978       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 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

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

Real estate - commercial

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

Other real estate construction

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

Real estate construction

     —           —           —           3,418         3,418         —     

Real estate - residential

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

Home equity

     207         248         455         44,776         45,231         —     

Consumer loan

     55         —           55         9,568         9,623         —     

Other loans

     —           —           —           612         612         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 September 30, 2014 and December 31, 2013 is as follows:

 

     September 30,      December 31,  
     2014      2013  
     (dollars in thousands)  

Commercial

   $ —         $ 204   

Real estate - commercial

     531         1,064   

Other real estate construction

     1,030         1,637   

Real estate 1 – 4 family construction

     —           —     

Real estate – residential

     1,113         1,564   

Home equity

     13         248   

Consumer loans

     —           —     

Other loans

     —           —     
  

 

 

    

 

 

 
   $ 2,687       $ 4,717   
  

 

 

    

 

 

 

Management uses a risk-grading program to facilitate the evaluation of probable inherent loan losses and to measure the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by the loan officers and reviewed and monitored by the lenders and credit administration. 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.

 

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Table of Contents

The tables below summarize risk grades of the loan portfolio by class at September 30, 2014 and December 31, 2013:

September 30, 2014

 

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

Commercial

   $ 46,922       $ 652       $ 58       $ —         $ 47,632   

Real estate - commercial

     79,522         6,082         4,128         —           89,732   

Other real estate construction

     19,522         2,001         1,671         —           23,194   

Real estate 1 - 4 family construction

     3,895         —           —           —           3,895   

Real estate - residential

     74,890         11,447         4,394         —           90,731   

Home equity

     44,373         1,287         113         —           45,773   

Consumer loans

     8,167         279         33         —           8,479   

Other loans

     542         —           —           —           542   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 277,833       $ 21,748       $ 10,397       $ —         $ 309,978   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

 

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

Commercial

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

Real estate - commercial

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

Other real estate construction

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

Real estate 1 - 4 family construction

     3,418         —           —           —           3,418   

Real estate - residential

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

Home equity

     43,830         1,005         396         —           45,231   

Consumer loans

     9,216         361         46         —           9,623   

Other loans

     612         —           —           —           612   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. At both September 30, 2014 and December 31, 2013 there were no loans 90 days past due and still accruing. The following tables show the breakdown between performing and nonperforming loans by class at September 30, 2014 and December 31, 2013:

September 30, 2014

 

            Non-         
     Performing      Performing      Total  
     (dollars in thousands)  

Commercial

   $ 47,632       $ —         $ 47,632   

Real estate - commercial

     89,201         531         89,732   

Other real estate construction

     22,164         1,030         23,194   

Real estate 1 – 4 family construction

     3,895         —           3,895   

Real estate – residential

     89,618         1,113         90,731   

Home equity

     45,760         13         45,773   

Consumer loans

     8,479         —           8,479   

Other loans

     542         —           542   
  

 

 

    

 

 

    

 

 

 

Total

   $ 307,291       $ 2,687       $ 309,978   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

December 31, 2013

 

            Non-         
     Performing      Performing      Total  
     (dollars in thousands)  

Commercial

   $ 47,232       $ 204       $ 47,436   

Real estate - commercial

     94,858         1,064         95,922   

Other real estate construction

     15,946         1,637         17,583   

Real estate 1 – 4 family construction

     3,418         —           3,418   

Real estate – residential

     85,959         1,564         87,523   

Home equity

     44,983         248         45,231   

Consumer loans

     9,623         —           9,623   

Other loans

     612         —           612   
  

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

 

Loans are considered impaired when, based on current information and events it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired, a specific calculation is performed and a specific reserve is allocated, if necessary. The tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class at September 30, 2014 and December 31, 2013.

September 30, 2014

 

     Unpaid
Principal
Balance
     Recorded
Investment
With No
Allowance
     Recorded
Investment
With
Allowance
     Related
Allowance
     Recorded
Investment
Loans in
Non-accrual
 
     (dollars in thousands)  

Commercial

   $ 73       $ 73       $ —         $ —         $ —     

Real estate - commercial

     2,061         1,872         —           —           531   

Other real estate construction

     1,622         1,084         —           —           1,030   

Real estate 1 - 4 family construction

     21         21         —           —           —     

Real estate - residential

     5,182         4,698         235         59         1,113   

Home equity

     31         31         —           —           13   

Consumer loans

     74         74         —           —           —     

Other loans

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,064       $ 7,853       $ 235       $ 59       $ 2,687   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

 

     Unpaid
Principal
Balance
     Recorded
Investment
With No
Allowance
     Recorded
Investment
With
Allowance
     Related
Allowance
 
            (dollars in thousands)         

Commercial

   $ 377       $ 291       $ 86       $ 67   

Real estate - commercial

     6,808         3,962         2,375         507   

Other real estate construction

     2,034         247         1,739         945   

Real estate 1 - 4 family construction

     374         25         349         16   

Real estate - residential

     8,197         4,619         3,329         530   

Home equity

     415         58         357         279   

Consumer loans

     116         61         55         43   

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,321       $ 9,263       $ 8,290       $ 2,387   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-18-


Table of Contents
     Three Months ended      Three Months ended  
     September 30, 2014      September 30, 2013  
     Average             Average         
     Recorded      Interest      Recorded      Interest  
     Investment      Income      Investment      Income  
     (dollars in thousands)  

Commercial

   $ 102       $ 1       $ 926       $ 3   

Real estate - commercial

     1,754         19         6,978         48   

Other real estate construction

     1,058         2         2,091         3   

Real estate 1 - 4 family construction

     21         —           376         7   

Real estate - residential

     5,379         43         8,727         52   

Home equity

     32         1         908         4   

Consumer loans

     77         3         148         2   

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,423       $ 69       $ 20,154       $ 119   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months ended      Nine Months ended  
     September 30, 2014      September 30, 2013  
     Average             Average         
     Recorded      Interest      Recorded      Interest  
     Investment      Income      Investment      Income  
     (dollars in thousands)  

Commercial

   $ 123       $ 4       $ 1,001       $ 11   

Real estate - commercial

     2,978         54         7,340         186   

Other real estate construction

     1,346         2         2,108         16   

Real estate 1 - 4 family construction

     138         1         383         18   

Real estate - residential

     6,054         156         8,693         273   

Home equity

     81         1         954         17   

Consumer loans

     87         5         169         6   

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,807       $ 223       $ 20,648       $ 527   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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Table of Contents

For the three and nine months ended September 30, 2014 and 2013, the following table presents a breakdown of the types of concessions made by loan class:

 

     For the three months ended September 30, 2014  
            Pre-Modification      Post-Modification  
     Number      Outstanding Recorded      Outstanding Recorded  
     of Contracts      Investment      Investment  
     (dollars in thousands)  

Extend payment terms:

        

Commercial

     —         $ —         $ —     

Real estate - commercial

     —           —           —     

Other real estate construction

     —           —           —     

Real estate 1 – 4 family construction

     —           —           —     

Real estate – residential

     —           —           —     

Home equity

     —           —           —     

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     —         $ —         $ —     
  

 

 

    

 

 

    

 

 

 

Other:

        

Commercial

     —         $ —         $ —     

Real estate - commercial

     1         187         187   

Other real estate construction

     —           —           —     

Real estate 1 – 4 family construction

     —           —           —     

Real estate – residential

     1         18         18   

Home equity

     —           —           —     

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     2       $ 205       $ 205   
  

 

 

    

 

 

    

 

 

 

Total

     2       $ 205       $ 205   
  

 

 

    

 

 

    

 

 

 

 

     For the three months ended September 30, 2013  
            Pre-Modification      Post-Modification  
     Number      Outstanding Recorded      Outstanding Recorded  
     of Contracts      Investment      Investment  
            (dollars in thousands)         

Other:

        

Commercial

     —         $ —         $ —     

Real estate - commercial

     —           —           —     

Other real estate construction

     —           —           —     

Real estate 1 – 4 family construction

     —           —           —     

Real estate – residential

     2         269         268   

Home equity

     —           —           —     

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     2       $ 269       $ 268   
  

 

 

    

 

 

    

 

 

 

 

-20-


Table of Contents
     For the nine months ended September 30, 2014  
     Number
of Contracts
     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding 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

     —           —           —     

Home equity

     —           —           —     

Consumer loans

     1         32         30   

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     1       $ 32       $ 30   
  

 

 

    

 

 

    

 

 

 

Other:

        

Commercial

     —         $ —         $ —     

Real estate - commercial

     2         299         298   

Other real estate construction

     —           —           —     

Real estate 1 – 4 family construction

     —           —           —     

Real estate – residential

     5         636         632   

Home equity

     —           —           —     

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     7       $ 935       $ 930   
  

 

 

    

 

 

    

 

 

 

Total

     8       $ 967       $ 960   
  

 

 

    

 

 

    

 

 

 

 

     For the nine months ended September 30, 2013  
            Pre-Modification      Post-Modification  
     Number      Outstanding Recorded      Outstanding Recorded  
     of Contracts      Investment      Investment  
     (dollars in thousands)  

Other:

        

Commercial

     —         $ —         $ —     

Real estate - commercial

     1         357         342   

Other real estate construction

     —           —           —     

Real estate 1 – 4 family construction

     —           —           —     

Real estate – residential

     4         468         458   

Home equity

     —           —           —     

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     5       $ 825       $ 800   
  

 

 

    

 

 

    

 

 

 

 

-21-


Table of Contents

The following table presents loans that were modified as TDRs within the previous twelve months and for which there was a payment default during the twelve months ended September 30, 2014 and September 30, 2013:

 

     Twelve months ended      Twelve months ended  
     September 30, 2014      September , 2013  
     Number      Recorded      Number      Recorded  
     of Loans      Investment      of Loans      Investment  
     (dollars in thousands)  

Other:

           

Commercial

     —         $ —           —         $ —     

Real estate - commercial

     —           —           —           —     

Other real estate construction

     —           —           —           —     

Real estate 1 - 4 family construction

     —           —           —           —     

Real estate - residential

     —           —           —           —     

Home equity

     —           —           —           —     

Consumer loans

     —           —           —           —     

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     —         $ —           —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

A default on a TDR is defined as being past due 90 days or being out of compliance with the modification agreement. As previously mentioned the Company considers TDRs to be impaired loans and has $59,000 in the allowance for loan loss as of September 30, 2014, as a direct result of these TDRs. At September 30, 2013, there was $639,000 in the allowance for loan loss related to TDRs.

The following table presents the successes and failures of the types of modifications within the previous twelve months as of September 30, 2014 and 2013:

 

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

September 30, 2014

                                                       

Below market Interest rate

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

Extended payment Terms

     —           —           1         30         —           —           —           —     

Forgiveness of Principal

                       

Other

     —           —           9         1,084         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           10       $ 1,114         —         $ —           —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

September 30, 2013

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

Below market interest rate

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

Extended payment terms

     —           —           —           —           —           —           —           —     

Forgiveness of Principal

     —           —           10         1,578         —           —           —           —     

Other Loans

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           10       $ 1,578         —         $ —           —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company has not committed to fund any additional disbursements for TDRs.

 

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Table of Contents

Note 9 – Commitments and Contingencies

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

The bank’s risk of loss with the unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The bank uses the same credit policies in making commitments under such instruments as it does for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are unsecured. At September 30, 2014, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

     (dollars in thousands)  

Commitments to extend credit

   $ 74,137   

Credit card commitments

     8,081   

Standby letters of credit

     1,788   
  

 

 

 

Total commitments

   $ 84,006   
  

 

 

 

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.

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

 

-23-


Table of Contents

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

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 June 30, 2014, 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 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 is used 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.

 

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The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013:

 

     September 30, 2014  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Securities available for sale:

           

US Treasury

   $ 21,134       $ 21,134       $ —         $ —     

US Government Agencies

     40,325         —           40,325         —     

GSE - Mortgage-backed securities and CMO’s

     37,287         —           37,287         —     

State and political subdivisions

     12,165         —           12,165         —     

Corporate bonds

     3,013         —           3,013         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 113,924       $ 21,134       $ 92,790       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Securities available for sale:

           

US Treasury

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

US Gov’t

     34,300         —           34,300         —     

Mortgage-backed securities and CMO’s

     37,006         —           37,006         —     

State and political subdivisions

     7,688         —           7,688         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

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

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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 less cost of sell at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of September 30, 2014 and December 31, 2013:

 

     September 30, 2014  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Impaired loans

   $ 1,631       $ —         $ —         $ 1,631   

Loans held for sale

     1,402         —           1,402         —     

Other real estate owned

     3,753         —           —           3,753   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $   6,786       $ —         $ 1,402       $ 5,384   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Impaired loans

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

Loans held for sale

     1,139         —           1,139         —     

Other real estate owned

     3,533         —           —           3,533   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

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

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

September 30, 2014

 

Valuation Technique

 

Unobservable Input

   Range

Nonrecurring measurements:

      

Impaired loans

  Discounted expected cash flows   Expected loss rates    0 – 25%

OREO

  Discounted appraisals   Collateral discounts and estimated costs to sell    0 – 10%

 

December 31, 2013

 

Valuation Technique

 

Unobservable Input

   Range

Nonrecurring measurements:

      

Impaired loans

  Discounted appraisals   Collateral discounts and estimated costs to sell    0 – 10%

OREO

  Discounted appraisals   Collateral discounts and estimated costs to sell    0 – 10%

At September 30, 1014, impaired loans were being evaluated with discounted expected cash flows and discounted appraisals were not being used.

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.

 

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The fair value estimates presented at September 30, 2014 and December 31, 2013, are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price at which a liability could be settled. 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 September 30, 2014 and December 31, 2013:

September 30, 2014

 

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

FINANCIAL ASSETS

              

Cash and cash equivalents

   $ 54,802       $ 54,802       $ 54,802       $ —         $ —     

Securities available for sale

     113,924         113,924         21,134         92,790         —     

Loans held for investment, net

     309,978         322,566         —           —           322,566   

Loans held for sale

     1,402         1,402         —           1,402         —     

Restricted stock

     1,038         1,038         1,038         —           —     

Bank-owned life insurance

     6,615         6,615         —           —           6,615   

Mortgage servicing rights

     2,262         3,261         —           —           3,261   

Accrued interest receivable

     1,498         1,498         —           —           1,498   

FINANCIAL LIABILITIES

              

Deposits

   $ 454,262       $ 446,687       $ —         $ —         $ 446,687   

Short-term borrowings

     3,771         3,771         —           3,771         —     

Long-term borrowings

     27         27         —           27         —     

Junior subordinated debt

     9,534         9,705         —           —           9,705   

Accrued interest payable

     182         182         —           —           182   

December 31, 2013

 

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

FINANCIAL ASSETS

              

Cash and cash equivalents

   $ 72,394       $ 72,394       $ 72,394       $ —         $ —     

Securities available for sale

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

Loans held for investment, net

     302,253         308,112         —           —           308,112   

Loans held for sale

     1,139         1,139         —           1,139         —     

Restricted stock

     1,184         1,184         1,184         —           —     

Bank-owned life insurance

     6,516         6,516         —           —           6,516   

Mortgage servicing rights

     2,356         3,085         —           —           3,085   

Accrued interest receivable

     1,747         1,747         —           —           1,747   

FINANCIAL LIABILITIES

              

Deposits

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

Short-term borrowings

     5,509         5,509         —           5,509         —     

Long-term borrowings

     36         36         —           36         —     

Junior subordinated debt

     11,127         11,271         —           —           11,271   

Accrued interest payable

     224         224         —           —           224   

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

 

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

 

    Securities available for sale – Securities available for sale are carried at fair value based on quoted and observable market prices and are recorded in Levels 1 and 2. Also see discussion in Note 5.

 

    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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    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 September 30, 2014, the subsidiary bank had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, they were deemed to have no current fair value. See Note 9.

Note 12 – Recent Accounting Pronouncements

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

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

 

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

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

Comparison of Financial Condition at September 30, 2014 and December 31, 2013.

During the nine months ended September 30, 2014, the Company’s total assets decreased $300,000, from $517.3 million to $517.0 million.

Cash and cash equivalents decreased $17.6 million during the nine months ended September 30, 2014. Cash and due from banks decreased $2.2 million, while interest-earning deposits with banks decreased $15.4 million. These decreases are directly related to the growth in both investment securities and loans held for sale.

Investment securities increased $13.6 million to $113.9 million for the period ended September 30, 2014. During the first nine months of 2014, the Company purchased securities of $23.7 million. The increase from new purchases was reduced by sales and calls of $4.7 million maturities of $480,000, and normal reductions stemming from principal payments on mortgage backed securities. The Company is investing in lower duration securities as well as variable rate securities. These sectors should provide better protection in a rising rate environment, and mitigate the downside risk embedded in the current portfolio and improve the yield on earning assets. At September 30, 2014, the Company had net unrealized losses of $85,000.

Loans held for investment increased from $307.3 million to $310.0 million, an increase of $2.7 million. The commercial, commercial real estate, home equity and consumer loan segments of the loan portfolio decreased during the first nine months of 2014 with the home equity segment experiencing the largest decline of 11.9%. The Company experienced growth in the remaining segments of its loan portfolio during the first nine months of 2014 with the other real estate construction segment having the largest increase of 31.9%, primarily consisting of owner occupied properties. The Company had seven relationships that were foreclosed on for a total of $800,000. Loans held for sale increased 23.1% or $263,000. The allowance for loan losses was $3.5 million at September 30, 2014, which represented 1.12% of the loan portfolio.

Other changes in our consolidated assets are related to premises and equipment, interest receivable, restricted stock, bank owned life insurance, other real estate owned and other assets. Bank owned life insurance increased $99,000, while premises and equipment increased $1.2 million. The increase in premises and equipment was related to the purchase of a piece of property that was currently being leased. Accrued interest receivable declined $249,000. Restricted stock which is comprised of Federal Home Loan Bank stock and Federal Reserve Bank stock decreased $146,000. 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 FHLB stock decreased $211,000, while the Company’s required ownership in Federal Reserve Bank stock increased $65,000 to $532,000 during the first nine months of 2014. Other real estate owned decreased $1.3 million. During the nine months ended September 30, 2014, the Company foreclosed on seven loan relationships totaling $800,000 and sold fifteen pieces of property totaling $1.5 million. The Company recorded net valuation write-down adjustments of $574,000. Other assets decreased $485,000.

 

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Customer deposits, our primary funding source, experienced a $554,000 increase during the nine month period ended September 30, 2014, increasing from $453.7 million to $454.3 million. Demand noninterest bearing checking increased $6.5 million while interest checking and money market accounts increased $8.6 million. These increases were offset by declines in savings deposits of $3.4 million, time deposits over $100,000 of $4.4 million and other time deposits of $6.7 million.

Total borrowings decreased $3.3 million for the period and consist of both short-term and long-term borrowed funds. During the first quarter of 2014, the Company conducted a private placement offering of fixed rate junior subordinated debt securities at $1,000 per security with a required minimum investment of $50,000. The offering raised $9.5 million. These securities have a final maturity date of March 31, 2024 and may be redeemed by the Company after March 31, 2019. The subordinated debt pays interest quarterly at an annual fixed rate of 5.75%. All proceeds of this private placement were issued and outstanding at September 30, 2014. All proceeds also qualify for and are included in the calculation of Tier 2 capital. On March 31, 2014, the Company called its entire $11.1 million private outstanding issue of fixed rate subordinated debt that had a final maturity of December 31, 2018. These two events had a net reduction in total borrowings of $1.6 million at September 30, 2014. Other components of total borrowings include $3.8 million in master notes and other secured borrowings.

Other liabilities increased from $4.5 million at December 31, 2013 to $5.5 million at September 30, 2014, an increase of $1.0 million.

The Company has historically had an Employee Stock Ownership Plan (ESOP) in place. Late in 2011, the Internal Revenue Service issued IRS notice 2011-19 that drew a clear line between what stock exchanges are considered public and which are not. The Company’s stock trades on the OTC Bulletin Board, which is a publically traded exchange, however, the IRS no longer recognizes the Bulletin Board as a public exchange. The result of this ruling is that companies that have ESOP plans in place are required to set aside funds to handle allocated shares put back to the company. The plan that the Company has includes a put option that requires the Company to repurchase allocated shares of participants at the participants’ option. The Company reclassed capital from additional paid-in capital to set aside the liability to cover all allocated shares that the Company may be required to buy back. During the first nine months of 2014, the Company reclassed an additional $104,000 to this liability from additional paid-in capital.

As disclosed in Note 4 to the financial statements filed with as this report, the Company voted to terminate its ESOP effective March 1, 2014. In connection with this termination, the ESOP trustees transferred the 252,446 remaining unallocated shares to the Company to partially satisfy the term loan and lines of credit the ESOP had outstanding at the time. The effect this had on equity was minimal with total outstanding shares being reduced. The remaining balance of $8,600 on the loans was expensed by the Company to completely satisfy the loans. At September 30, 2014, the Company and its subsidiary bank exceeded all applicable regulatory capital requirements.

At September 30, 2014, total shareholders’ equity was $41.9 million, an increase of $1.4 million from December 31, 2013. Net income for the nine month period was $1.5 million. Unrealized gains and losses on investment securities, net of tax, increased $506,000. The Company repurchased common stock totaling $113,000. The Company paid $442,000 in dividends attributed to noncontrolling interest.

 

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Comparison of Results of Operations for the Three Months Ended September 30, 2014 and 2013.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $399,000 for the three months ended September 30, 2014, as compared to $218,000 for the three months ended September 30, 2013, an increase of $181,000. Net income available to common shareholders was $250,000 or $0.03 per common share for the three months ended September 30, 2014, compared to $43,000 or $0.01 per common share for the three months ended September 30, 2013. 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. The entire $10.0 million of Capital Purchase Program preferred stock was redeemed and retired during 2013.

Net Interest Income

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

Net interest income for both of the three months ended September 30, 2014 and September 30, 2013 was $4.2 million. During the current quarter, our decline in the volume of interest-earning assets outpaced the volume of interest-bearing liabilities by $56,000. The average yield on our interest–earning assets decreased 10 basis points to 4.02%, while the average rate we paid for our interest-bearing liabilities decreased 14 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 an increase of four basis points in our interest rate spread, from 3.49% in 2013 to 3.53% in 2014. Our net interest margin was 3.62% and 3.59% for the comparable periods in 2014 and 2013, respectively.

 

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The following table presents average balance sheets and a net interest income analysis for the three months ended September 30, 2014 and 2013:

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended September 30,

 

(dollars in thousands)    Average Balance      Income/Expense      Rate/Yield  
   2014      2013      2014      2013      2014     2013  

Interest-earning assets:

                

Taxable securities

   $ 101,692       $ 116,491       $ 412       $ 425         1.61     1.45

Nontaxable securities (1)

     11,541         7,659         86         61         4.77     4.49

Short-term investments

     46,862         39,633         36         24         0.30     0.24

Taxable loans

     294,976         300,609         4,017         4,257         5.40     5.62

Non-taxable loans (1)

     15,928         15,959         103         111         4.14     4.49
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest-earning assets

     470,999         480,351         4,654         4,878         4.02     4.12

Interest-bearing liabilities:

                

Interest-bearing deposits

     370,770         384,966         329         454         0.35     0.47

Short-term borrowed funds

     3,953         8,014         2         19         0.20     0.94

Long-term debt

     9,562         11,167         139         164         5.77     5.83
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest bearing liabilities

     384,285         404,147         470         637         0.49     0.63
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net interest spread

   $ 86,714       $ 76,204       $ 4,184       $ 4,241         3.53     3.49
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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

                 3.62     3.59
              

 

 

   

 

 

 

 

(1) Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 37.96% tax rate in 2014 and a 38.55% tax rate in 2013.

Provision and Allowance for Loan Losses

The Company recovered $(271,000) for the three months ending September 30, 2014 compared to an expense of $227,000 for the same period in 2013. There were net loan recoveries of $(37,000) for the three months ended September 30, 2014, as compared with net loan charge-offs of $444,000 during the same period of 2013. Refer to the Asset Quality discussion on page 36 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 to our long term success. Total noninterest income increased $153,000 for the three month period ending September 30, 2014 as compared to the same period in 2013. Income from mortgage loan sales decreased $79,000 from $361,000 for the quarter ended September 30, 2013 to $282,000 for the same period in 2014. Service charges on deposit accounts produced revenue of $367,000, a decrease of $41,000 for the three months ended September 30, 2014. The primary factor leading to this decrease was a decrease in NSF fees for the comparable periods. Other service fees and commissions experienced a $116,000 or 13.3% increase for the comparable three month period, primarily due to an increase in brokerage commissions and asset management fees. The Company realized gains on the sale of other real estate owned of $231,000 for the three months ended September 30, 2014 compared to realized gains of $22,000 for the same period in 2013.

Noninterest Expense

Noninterest expense for the quarter ended September 30, 2014 was $5.8 million compared to $5.6 million for the same period of 2013, an increase of $270,000. Salaries and employee benefits, the largest component of noninterest expense, increased $56,000 for the quarter ending September 30, 2014. Foreclosed real estate expense increased $476,000 for the three

 

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months ending September 30, 2014. The major factor related to the increase in foreclosed real estate expense was an increase in write-downs and reserves on properties held in other real estate owned. These write-downs and reserves are attributed to updated appraisals and the lowering of list prices. There were $572,000 in write-downs and reserves for the three month period in 2014 compared to $63,000 for the same period in 2013. Professional fees and services were $210,000 during the three months ending September 30, 2014 as compared to $306,000 for the same period in 2013. Other noninterest expense increased $77,000 for the comparable three month period. The table below reflects the composition of other noninterest expense.

Other noninterest expense

 

     Three Months Ended
September 30,
 
     2014      2013  
     (dollars in thousands)  

Postage

   $ 51       $ 46   

Telephone and data lines

     39         51   

Loan collection expense

     21         102   

Shareholder relations expense

     62         44   

Dues and subscriptions

     32         31   

Other

     367         375   
  

 

 

    

 

 

 

Total

   $ 572       $ 649   
  

 

 

    

 

 

 

Income Tax Expense

The Company had income tax expense of $191,000 for the three months ended September 30, 2014 resulting in an effective rate of 32.37% compared to income tax expense of $48,000 and an effective rate of 18.05% in the 2013 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 income before taxes was significantly lower in for the three months ending September 30, 2013 than the current period.

Comparison of Results of Operations For the Nine Months Ended September 30, 2014 and 2013.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $1.5 million for the nine months ended September 30, 2014, as compared to $1.1 million for the nine months ended September 30, 2013, an increase of $394,000. Net income available to common shareholders was $1.1 million or $0.15 per common share for the nine months ended September 30, 2014, compared to $520,000 or $0.07 per common share for the nine months ended September 30, 2013. Net income available to common shareholders is net income less any dividends on preferred stock related to the 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. The entire $10.0 million of Capital Purchase Program preferred stock was redeemed and retired during 2013.

Net Interest Income

Net interest income for both of the nine months ended September 30, 2014 and 2013 was $12.4 million. During the nine months ending September 30, 2014, the decline in the volume of interest-earning assets outpaced the decline in growth of our interest-bearing liabilities by $392,000. The average yield on our interest–earning assets decreased three basis points to 4.05%, while the average rate we paid for our interest-bearing liabilities decreased seventeen

 

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basis points to 0.52%. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve adjusts interest rates, while interest-bearing time deposits adjust at the time of maturity. The aforementioned changes resulted in an increase of fourteen basis points in our interest rate spread of 3.53% for the first nine months of 2014, compared to 3.39% for the first nine months of 2013. Our net interest margin was 3.63% and 3.49% for the comparable nine month periods in 2014 and 2013, respectively. A portion of the Company’s loan portfolio has interest rate floors and caps in place on the loans. Interest rate floors can provide margin protection in a down rate environment. The interest rate floors that are in place have helped the Company maintain a relatively favorable interest margin, while there has been a decline in rates over the past several years.

The following table presents average balance sheets and a net interest income analysis for the nine months ended September 30, 2014 and 2013:

Average Balance Sheet and Net Interest Income Analysis

For the Nine Months Ended September 30,

(dollars in thousands)

 

     Average Balance      Income/Expense      Rate/Yield  
     2014      2013      2014      2013      2014     2013  

Interest-earning assets:

                

Taxable securities

   $ 99,011       $ 107,025       $ 1,256       $ 999         1.70     1.25

Nontaxable securities (1)

     9,957         7,639         232         189         5.01     5.39

Short-term investments

     51,228         50,719         120         133         0.31     0.35

Taxable loans

     293,900         307,594         11,955         12,924         5.44     5.62

Non-taxable loans (1)

     15,611         14,959         330         320         4.56     4.65
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest-earning assets

     469,707         487,936         13,893         14,565         4.05     4.08

Interest-bearing liabilities:

                

Interest-bearing deposits

     370,332         385,991         1,042         1,488         0.38     0.52

Short-term borrowed funds

     4,923         12,103         29         142         0.79     1.57

Long-term debt

     10,085         11,857         434         501         5.75     5.65
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest bearing liabilities

     385,340         409,951         1,505         2,131         0.52     0.69
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net interest spread

   $ 84,367       $ 77,985       $ 12,388       $ 12,434         3.53     3.39
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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

                 3.63     3.49
              

 

 

   

 

 

 

 

(1) Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 37.96% tax rate in 2014 and a 38.55% tax rate in 2013.

Provision and Allowance for Loan Losses

The Company had a recovery of allowance for loan losses of $(756,000) for the nine months ending September 30, 2014 compared to a recovery of $(547,000) for the same period in 2013. There were net loan charge-offs of $873,000 for the nine months ended September 30, 2014 compared to net loan charge-offs of $1.0 million for the same period in 2013. Refer to the Asset Quality discussion on page 36 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like all financial institutions, diversification of our earnings base is of major importance to our long term success. Total noninterest income decreased $708,000 for the nine month period ending September 30, 2014 as compared to the same period in 2013. Income from mortgage loan sales was $701,000 for the nine months ended September 30, 2014 as compared to $1.8 million for the same period in 2013, a decrease of $1.1 million. Service charges on deposit accounts produced earnings of $1.1 million for the nine months ended September 30, 2014, a decrease of $101,000. The primary contributing factor was a decrease in NSF fees due in large

 

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part to changes in regulatory governance. Other service fees and commissions experienced a 15.5% increase for the comparable nine month period. This increase was directly related to brokerage commissions and asset management fees increasing. Gain on sale of other assets was $146,000 for the nine months ended September 30, 2014 compared to $278,000 for the same period in 2013. Gains realized on the sale of securities were $26,000 for the first nine months in 2014 compared to $14,000 for the same period in 2013.

Noninterest Expense

Noninterest expense for the nine months ended September 30, 2014 was $16.3 million compared to $17.5 million for the same period in 2013, a decrease of $1.1 million. Salaries and employee benefits, the largest component of noninterest expense, decreased $110,000 to $9.1 million for the nine month period ending September 30, 2014. Net occupancy and equipment expense had a combined decrease of $46,000. Professional fees and services decreased $227,000. Foreclosed real estate expense decreased $220,000. The major factor related to the decrease in foreclosed real estate expense was write downs on properties held in other real estate owned. These net write downs were attributed to updated appraisals and the lowering of list prices during the first nine months of 2014 totaling $574,000 compared to $745,000 in net write downs for the same period in 2013. Other noninterest expense decreased $249,000 for the comparable nine month periods. The table below reflects the composition of other noninterest expense.

Other noninterest expense

 

     Nine Months Ended
September 30,
 
     2014      2013  
     (in thousands)  

Postage

   $ 149       $ 150   

Telephone and data lines

     115         143   

Loan collection expense

     108         296   

Shareholder relations expense

     174         131   

Dues and subscriptions

     108         114   

Other

     1,072         1,141   
  

 

 

    

 

 

 

Total

   $ 1,726       $ 1,975   
  

 

 

    

 

 

 

Income Tax Expense

The Company had income tax expense of $710,000 for the six months ended September 30, 2014 resulting in an effective tax rate of 31.67%, compared to income tax expense of $557,000 and an effective rate of 32.86% in the 2013 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 increase in tax free income coupled with the reduction in the state tax rate attributed to this decrease in effective tax rate.

Asset Quality

The Company’s allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. The allowance is increased by provisions charged to operations and decreased by recoveries of amounts previously charged off and is reduced by recovery of provisions and loans charged off. Management continuously evaluates the adequacy of the allowance for loan losses. In evaluating the adequacy of the allowance, management considers the following: the growth, composition and industry diversification of the portfolio; historical loan loss experience; current delinquency levels; adverse situations that may affect a borrower’s ability to repay; estimated value of any underlying collateral; prevailing economic conditions and other relevant factors. The Company’s credit administration function,

 

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through a review process, periodically validates the accuracy of the initial risk grade assessment. In addition, as a given loan’s credit quality improves or deteriorates, the credit administration department has the responsibility to change the borrower’s risk grade accordingly. For loans determined to be impaired, the allowance is based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the estimated fair value of the underlying collateral less the selling costs. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans, which may be susceptible to significant change. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require additions for estimated losses based upon judgments different from those of management.

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

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

At September 30, 2014 the levels of our impaired loans, which includes all loans in nonaccrual status, TDRs and other loans deemed by management to be impaired, were $8.1 million compared to $17.6 million at December 31, 2013, a net decrease of $9.5 million. Total nonaccrual loans, which are a component of impaired loans, decreased from $4.7 million at December 31, 2013 to $2.7 million at September 30, 2014. During the second quarter of 2014, the Company performed a comprehensive review of all impaired loans. This review resulted in $6.9 million in loans with previously identified specific reserves of $419,000 being removed from impaired status. These loans were initially considered impaired during a period of heightened uncertainty in which each loan was experiencing significant delinquency stemming from reductions in cash flow attributed to the slow economy. Management reevaluated each of these loans and determined they have now performed under the original terms of the loan and remained in current or non-delinquent status for a sufficient amount of time to remove the loans from the impaired loan category. Therefore, management determined the previously identified credit weaknesses have been remediated and, while most of these loans currently retain their substandard risk grade status, they were all removed from the impaired loan status as management expects to collect the current balance due in accordance with the original terms of the loan. Also, the transfer of loans totaling $461,000 from impaired loans to other real estate owned, the Bank’s receipt $2.0 million in loan principal payments, and charge-offs of principal that had previously established specific reserves of $852,000, were additional factors

 

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contributing to the decrease in impaired loans. These decreases were offset by the addition of six relationships, in the amount of $682,000, that were added to impaired loans during the nine month period.

Along with changes to the balance of impaired loans, the Company reevaluated its impairment measurement techniques to determine whether the most relevant method was being utilized for each impaired loan. The remaining impaired loans primarily consist of performing TDRs. This resulted in all the remaining impaired loans moving from the collateral method to the cash flow method with the exception of three relationships deemed to be collateral dependent. The switch from evaluating impaired loans under the collateral method to the cash flow method resulted in the reversal of $489,000 in previously established specific reserves. Due to the nature of the modifications the Company enters into with Borrowers, while payments may be reduced, significant concessions are not entered into and loan to life cash flows are not significantly altered. Given this and the uncertainty at the time these modifications occurred and the reserves were established, management didn’t believe the cash flow method provided adequate levels of reserves. This reversal, along with the removal of specific reserves associated with loan upgrades discussed above in the amount of $419,000, payoffs on loans with specific reserves of $363,000 and updated appraisals on one of the collateral dependent relationships, lowering the impairment by $349,000, resulted in $2.3 million being removed from specific reserves during the first nine months of 2014.

The allowance expressed as a percentage of gross loans held for investment decreased 54 basis points from 1.66% at December 31, 2013 to 1.12% at September 30, 2014. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 0.93% at December 31, 2013 and 1.13% at September 30, 2014, while the individually evaluated allowance as a percentage of individually evaluated loans decreased from 13.60% to 0.74% for the same periods. The portion of the Company’s allowance for loan loss model related to general reserves captures the mean loss of individual loans and the rare event of severe loss that can occur within the loan portfolio. Specifically, the Company calculates probable losses on loans by computing a probability of loss and expected loss scenario by FDIC call report codes. Together, these expected components as well as a level of more extreme unexpected losses form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.

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

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

 

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risks to the loan portfolio. We used all available historical defaults to compute this average, dating back to the 2009-2011 default windows. This change added nearly $1.0 million to general reserves.

Nonperforming loans, which consist of nonaccrual loans and loans past due 90 days and still accruing, to total loans decreased from 1.53% at December 31, 2013, to 0.87% at September 30, 2014.

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

Other real estate owned decreased $65,000 during the first half of 2014. The Company sold nine pieces of foreclosed property totaling $744,000 realizing a gain of $94,000 The Company also had write downs and changes in reserves totaling $73,000 on the remaining existing property. During the first nine months of 2014, the Company did foreclose on five new pieces of property totaling $641,000, which included paying through a first lien of $346,000 upon foreclosure of a second lien that the Company held.

Restructured loans at September 30, 2014 totaled $6.1 million compared to $6.4 million at December 31, 2013 and are included in impaired loans.

The following table shows the comparison of nonperforming assets at September 30, 2014 to December 31, 2013:

Nonperforming Assets

(dollars in thousands)

 

     September 30,
2014
    December 31,
2013
 

Nonperforming assets:

    

Loans past due 90 days or more

   $ —        $ —     

Nonaccrual loans

     2,688        4,717   

Other real estate owned

     5,858        7,170   
  

 

 

   

 

 

 

Total nonperforming assets

   $ 8,546      $ 11,887   
  

 

 

   

 

 

 

Allowance for loans losses

   $ 3,466      $ 5,095   

Nonperforming loans to total loans

     0.87     1.53

Allowance for loan losses to total loans

     1.12     1.66

Nonperforming assets to total assets

     1.65     2.30

Allowance for loan losses to nonperforming loans

     128.97     108.02

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.

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 bank have multiple funding sources, in addition to deposits that can

 

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be used to increase liquidity and provide additional financial flexibility. These sources are the subsidiary bank’s established federal funds lines with correspondent banks aggregating $15.8 million at September 30, 2014, with available credit of $15.8 million; established borrowing relationships with the Federal Home Loan Bank, with available credit of $57.8 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of $26.2 million and the issuance of commercial paper. The Company has also secured long-term debt from other sources. Total debt from these sources aggregated $13.3 million at September 30, 2014, compared to $16.7 million at December 31, 2013.

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 bank, 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 bank 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, the Company’s subsidiary bank has a net total of $10.5 million in outstanding fixed Rate Noncumulative Perpetual Preferred Stock. The preferred stock qualifies as Tier 1 capital at the bank and will pay dividends at an annual rate of 5.30%. The net total of $10.5 million is presented as noncontrolling interest at the Company level and does qualify as Tier 1 capital at the Company. At September 30, 2014, the Company had $9.5 million in subordinated debt outstanding that qualifies as Tier 2 capital. The Company has made all interest and dividend payments in a timely manner.

 

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, 2013.

 

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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 third quarter of 2014. 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 Company’s subsidiary bank is engaged in ordinary routine litigation incidental to its 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 September 30, 2014.

 

     (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)
 

July 1, 2014 Through July 31, 2014

     1,544       $ 2.95         —         $ —     

August 1, 2014 Through August 31, 2014

     2,341       $ 3.34         —         $ —     

September 1, 2014 Through September 30, 2014

     6,061       $ 3.28         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     9,946       $ 3.24         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Trades of the Company’s stock occur in the Over-the-Counter Bulletin Board 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.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

 

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Item 6. Exhibits

 

Exhibit
Number

  

Description of Exhibit

    3.1    Registrant’s Articles of Incorporation (1)
    3.2    Registrant’s By-laws (6)
    3.2    Articles of Amendment dated December 19, 2008 (5)
    4.1    Form of stock certificate (1)
    4.2    Form of Security Holders Agreement (8)
  10.1    Incentive Stock Option Plan, as amended (1)
  10.2    Employee Stock Ownership Plan and Trust (2)
  10.3    2006 Incentive Stock Option Plan (3)
  10.4    2006 Employee Stock Purchase Plan (3)
  10.5    Amendment to the Employee Stock Ownership Plan and Trust (4)
  10.6    Relocation Assistance Agreement dated February 9, 2009, between the Registrant and Brendan P. Duffey (6)
  10.7    Nonqualified Deferred Compensation Plan and Supplemental Retirement Plan Agreement dated December 31, 2008, between the Registrant and Roger L. Dick, Brendan P. Duffey, and Christy D. Stoner (6)
  31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
  31.2    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
  32    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
101    Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014, in XBRL (eXtensible Business Reporting Language) (7)

 

(1) Incorporated by reference from exhibits to Registrant’s Registration Statement on Form S-4 (Reg. No. 33-58882).
(2) Incorporated by reference to Registrant’s Annual Report on Form 10-KSB for the Fiscal year ended 1999.
(3) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2007.
(4) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2008.

 

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(5) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2009.
(6) Incorporated by reference to Registrant’s Annual Report on Form 10-K for the Fiscal year ended 2009.
(7) Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.
(8) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2011.

 

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Signatures

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

 

    UWHARRIE CAPITAL CORP
    (Registrant)
Date: November 4, 2014     By:  

/s/ Roger L. Dick

    Roger L. Dick
    President and Chief Executive Officer
Date: November 4, 2014     By:  

/s/ R. David Beaver, III

    R. David Beaver, III
    Principal Financial Officer

 

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EXHIBIT INDEX

 

Exhibit
Number

  

Description of Exhibit

    3.1    Registrant’s Articles of Incorporation (1)
    3.2    Registrant’s By-laws (6)
    3.3    Articles of Amendment dated December 19, 2008 (5)
    4.1    Form of stock certificate (1)
    4.2    Form of Security Holders Agreement (8)
  10.1    Incentive Stock Option Plan, as amended (1)
  10.2    Employee Stock Ownership Plan and Trust (2)
  10.3    2006 Incentive Stock Option Plan (3)
  10.4    2006 Employee Stock Purchase Plan (3)
  10.5    Amendment to the Employee Stock Ownership Plan and Trust (4)
  10.6    Relocation Assistance Agreement dated February 9, 2009, between the Registrant and Brendan P. Duffey (6)
  10.7    Nonqualified Deferred Compensation Plan and Supplemental Retirement Plan Agreement dated December 31, 2008, between the Registrant and Roger L. Dick, Brendan P. Duffey, and Christy D. Stoner (6)
  31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
  31.2    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
  32    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
101    Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014, in XBRL (eXtensible Business Reporting Language) (7)

 

(1) Incorporated by reference from exhibits to Registrant’s Registration Statement on Form S-4 (Reg. No. 33-58882).
(2) Incorporated by reference to Registrant’s Annual Report on Form 10-KSB for the Fiscal year ended 1999.

 

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(3) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2007.
(4) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2008.
(5) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2009.
(6) Incorporated by reference to Registrant’s Annual Report on Form 10-K for the Fiscal year ended 2009.
(7) Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.
(8) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2011.

 

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