10-Q 1 uwhr-10q_20160930.htm 10-Q uwhr-10q_20160930.htm

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2016

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.      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      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

 

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 6,925,408 shares of common stock outstanding as of October 26, 2016.

 

 

 

 


 

Table of Contents

 

 

 

 

 

Page No.

 

 

 

 

 

Part I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1 -

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets September 30, 2016 and December 31, 2015

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2016 and 2015

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015

 

5

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2016

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015

 

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2 -

 

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

 

27

 

 

 

 

 

Item 3 -

 

Quantitative and Qualitative Disclosures about Market Risk

 

34

 

 

 

 

 

Item 4 -

 

Controls and Procedures

 

34

 

 

 

 

 

Part II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1 -

 

Legal Proceedings

 

34

 

 

 

 

 

Item 1A -

 

Risk Factors

 

34

 

 

 

 

 

Item 2 -

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

35

 

 

 

 

 

Item 3 -

 

Defaults Upon Senior Securities

 

35

 

 

 

 

 

Item 4 -

 

Mine Safety Disclosures

 

35

 

 

 

 

 

Item 5 -

 

Other Information

 

35

 

 

 

 

 

Item 6 -

 

Exhibits

 

36

 

 

 

 

 

 

 

Exhibit Index

 

38

 

-2-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

 

Part I. Financial Information

Item 1

Financial Statements

 

 

 

September 30,

2016

(Unaudited)

 

 

December 31,

2015*

 

 

 

(dollars in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

7,400

 

 

$

7,038

 

Interest-earning deposits with banks

 

 

49,187

 

 

 

61,895

 

Securities available for sale, at fair value

 

 

100,513

 

 

 

89,258

 

Securities held to maturity, at amortized cost (fair value $12,289 and $11,242, respectively)

 

 

12,023

 

 

 

11,242

 

Loans held for sale

 

 

2,538

 

 

 

5,922

 

Loans:

 

 

 

 

 

 

 

 

Loans held for investment

 

 

344,542

 

 

 

320,132

 

Less allowance for loan losses

 

 

(2,849

)

 

 

(2,884

)

Net loans held for investment

 

 

341,693

 

 

 

317,248

 

Premises and equipment, net

 

 

14,224

 

 

 

14,666

 

Interest receivable

 

 

1,520

 

 

 

1,564

 

Restricted stock

 

 

1,052

 

 

 

1,040

 

Bank owned life insurance

 

 

6,861

 

 

 

6,762

 

Other real estate owned

 

 

4,435

 

 

 

4,994

 

Prepaid assets

 

 

1,007

 

 

 

764

 

Other assets

 

 

9,759

 

 

 

9,809

 

Total assets

 

$

552,212

 

 

$

532,202

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Demand noninterest-bearing

 

$

104,877

 

 

$

92,524

 

Interest checking and money market accounts

 

 

274,591

 

 

 

252,345

 

Savings deposits

 

 

41,865

 

 

 

40,436

 

Time deposits, $250,000 and over

 

 

7,337

 

 

 

8,148

 

Other time deposits

 

 

60,385

 

 

 

74,280

 

Total deposits

 

 

489,055

 

 

 

467,733

 

Short-term borrowed funds

 

 

1,786

 

 

 

5,758

 

Long-term debt

 

 

9,537

 

 

 

9,547

 

Interest payable

 

 

150

 

 

 

168

 

Other liabilities

 

 

6,884

 

 

 

5,682

 

Total liabilities

 

 

507,412

 

 

 

488,888

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and

   outstanding 6,925,408 and 6,983,017

 

 

8,657

 

 

 

8,729

 

Common stock distributable

 

 

173

 

 

 

 

 

Additional paid-in capital

 

 

12,571

 

 

 

12,308

 

Undivided profits

 

 

12,586

 

 

 

11,893

 

Accumulated other comprehensive income (loss)

 

 

197

 

 

 

(212

)

Total Uwharrie Capital shareholders’ equity

 

 

34,184

 

 

 

32,718

 

Noncontrolling interest

 

 

10,616

 

 

 

10,596

 

Total shareholders’ equity

 

 

44,800

 

 

 

43,314

 

Total liabilities and shareholders’ equity

 

$

552,212

 

 

$

532,202

 

 

(*)

Derived from audited consolidated financial statements

See accompanying notes  

 

 

-3-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(in thousands, except share and per share data)

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

4,025

 

 

$

3,936

 

 

$

11,820

 

 

$

11,784

 

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury

 

 

11

 

 

 

33

 

 

 

34

 

 

 

184

 

US Government agencies and corporations

 

 

313

 

 

 

331

 

 

 

939

 

 

 

991

 

State and political subdivisions

 

 

125

 

 

 

121

 

 

 

375

 

 

 

290

 

Interest-earning deposits with banks and federal funds sold

 

 

78

 

 

 

47

 

 

 

236

 

 

 

126

 

Total interest income

 

 

4,552

 

 

 

4,468

 

 

 

13,404

 

 

 

13,375

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking and money market accounts

 

 

82

 

 

 

69

 

 

 

229

 

 

 

207

 

Savings deposits

 

 

12

 

 

 

12

 

 

 

35

 

 

 

33

 

Time deposits, $250,000 and over

 

 

14

 

 

 

25

 

 

 

44

 

 

 

49

 

Other time deposits

 

 

59

 

 

 

176

 

 

 

255

 

 

 

586

 

Short-term borrowed funds

 

 

3

 

 

 

17

 

 

 

32

 

 

 

44

 

Long-term debt

 

 

139

 

 

 

139

 

 

 

412

 

 

 

411

 

Total interest expense

 

 

309

 

 

 

438

 

 

 

1,007

 

 

 

1,330

 

Net interest income

 

 

4,243

 

 

 

4,030

 

 

 

12,397

 

 

 

12,045

 

Provision for (recovery of) loan losses

 

 

240

 

 

 

(323

)

 

 

70

 

 

 

(620

)

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

 

 

4,003

 

 

 

4,353

 

 

 

12,327

 

 

 

12,665

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

309

 

 

 

338

 

 

 

904

 

 

 

979

 

Other service fees and commissions

 

 

1,055

 

 

 

1,040

 

 

 

3,330

 

 

 

3,055

 

Gain/(loss) on sale of securities (includes reclassification of $2,000

   $0, $544,000 and $502,000 from accumulated other

   comprehensive income)

 

 

2

 

 

 

 

 

 

544

 

 

 

502

 

Gain (loss) on fixed assets and other assets

 

 

(1

)

 

 

5

 

 

 

(3

)

 

 

 

Income from mortgage loan sales

 

 

1,111

 

 

 

706

 

 

 

2,769

 

 

 

1,699

 

Other income

 

 

117

 

 

 

161

 

 

 

389

 

 

 

309

 

Total noninterest income

 

 

2,593

 

 

 

2,250

 

 

 

7,933

 

 

 

6,544

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

3,626

 

 

 

3,460

 

 

 

10,792

 

 

 

9,778

 

Net occupancy expense

 

 

327

 

 

 

272

 

 

 

850

 

 

 

824

 

Equipment expense

 

 

159

 

 

 

184

 

 

 

488

 

 

 

524

 

Data processing costs

 

 

161

 

 

 

194

 

 

 

529

 

 

 

553

 

Office supplies and printing

 

 

34

 

 

 

58

 

 

 

117

 

 

 

160

 

Foreclosed real estate expense

 

 

29

 

 

 

144

 

 

 

204

 

 

 

418

 

Professional fees and services

 

 

171

 

 

 

173

 

 

 

541

 

 

 

457

 

Marketing and donations

 

 

224

 

 

 

221

 

 

 

651

 

 

 

592

 

Electronic banking expense

 

 

303

 

 

 

265

 

 

 

884

 

 

 

775

 

Software amortization and maintenance

 

 

174

 

 

 

142

 

 

 

508

 

 

 

426

 

FDIC insurance

 

 

86

 

 

 

85

 

 

 

257

 

 

 

284

 

Other noninterest expense

 

 

534

 

 

 

621

 

 

 

1,934

 

 

 

1,761

 

Total noninterest expense

 

 

5,828

 

 

 

5,819

 

 

 

17,755

 

 

 

16,552

 

Income before income taxes

 

 

768

 

 

 

784

 

 

 

2,505

 

 

 

2,657

 

Income taxes (includes reclassification $1,000, $0, $210,000 and

   $194,000 from accumulated other comprehensive income)

 

 

228

 

 

 

223

 

 

 

745

 

 

 

799

 

Net income

 

$

540

 

 

$

561

 

 

$

1,760

 

 

$

1,858

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated net income

 

$

540

 

 

$

561

 

 

$

1,760

 

 

$

1,858

 

Less: net income attributable to noncontrolling Interest

 

 

(149

)

 

 

(149

)

 

 

(444

)

 

 

(442

)

Net income attributable to Uwharrie Capital Corp

 

 

391

 

 

 

412

 

 

 

1,316

 

 

 

1,416

 

Dividends – preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$

391

 

 

$

412

 

 

$

1,316

 

 

$

1,416

 

Net income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.06

 

 

$

0.06

 

 

$

0.19

 

 

$

0.20

 

Diluted

 

$

0.06

 

 

$

0.06

 

 

$

0.19

 

 

$

0.20

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

7,095,112

 

 

 

7,174,221

 

 

 

7,111,733

 

 

 

7,212,308

 

Diluted

 

 

7,095,112

 

 

 

7,174,221

 

 

 

7,111,733

 

 

 

7,212,308

 

 

See accompanying notes  

 

 

-4-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

540

 

 

$

561

 

 

$

1,760

 

 

$

1,858

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available for sale securities

 

 

(268

)

 

 

555

 

 

 

1,165

 

 

 

493

 

Related tax effect

 

 

90

 

 

 

(188

)

 

 

(422

)

 

 

(191

)

Reclassification of (gain) loss recognized in net income

 

 

(2

)

 

 

 

 

 

(544

)

 

 

(502

)

Related tax effect

 

 

1

 

 

 

 

 

 

210

 

 

 

194

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

 

(179

)

 

 

367

 

 

 

409

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

361

 

 

 

928

 

 

 

2,169

 

 

 

1,852

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive income attributable to noncontrolling

   interest

 

 

(149

)

 

 

(149

)

 

 

(444

)

 

 

(442

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to Uwharrie Capital

 

$

212

 

 

$

779

 

 

$

1,725

 

 

$

1,410

 

 

See accompanying notes

 

 

-5-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

 

 

 

 

Number

Common

Shares

Issued

 

 

Common

Stock

 

 

Common Stock

Dividend

Distributable

 

 

Additional

Paid-in

Capital

 

 

Undivided

Profits

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Non

Controlling

Interest

 

 

Total

 

 

 

(dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

 

 

6,983,017

 

 

$

8,729

 

 

$

 

 

$

12,308

 

 

$

11,893

 

 

$

(212

)

 

$

10,596

 

 

$

43,314

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,316

 

 

 

 

 

 

444

 

 

 

1,760

 

2% stock dividend declaration

 

 

 

 

 

 

 

 

173

 

 

 

450

 

 

 

(623

)

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock

 

 

(57,609

)

 

 

(72

)

 

 

 

 

 

(187

)

 

 

 

 

 

 

 

 

 

 

 

(259

)

Other comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

409

 

 

 

 

 

 

409

 

Record preferred stock dividend Series B

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(313

)

 

 

(313

)

Record preferred stock dividend Series C

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(111

)

 

 

(111

)

Balance, September 30, 2016

 

 

6,925,408

 

 

$

8,657

 

 

$

173

 

 

$

12,571

 

 

$

12,586

 

 

$

197

 

 

$

10,616

 

 

$

44,800

 

 

See accompanying notes

 

 

-6-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

 

(dollars in thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

1,760

 

 

$

1,858

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

Provided (used) by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

615

 

 

 

690

 

Net amortization of security premiums/discounts AFS

 

 

745

 

 

 

767

 

Net amortization of security premiums/discounts HTM

 

 

103

 

 

 

102

 

Net amortization of mortgage servicing rights

 

 

756

 

 

 

513

 

Impairment of foreclosed real estate

 

 

15

 

 

 

217

 

Provision/ (recovery) of loan losses

 

 

70

 

 

 

(620

)

Net realized gain on sales / calls available for sales securities

 

 

(544

)

 

 

(502

)

Income from mortgage loan sales

 

 

(2,769

)

 

 

(1,699

)

Proceeds from sales of loans held for sale

 

 

88,222

 

 

 

48,436

 

Origination of loans held for sale

 

 

(82,825

)

 

 

(45,008

)

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

 

 

3

 

 

 

 

Increase in cash surrender value of life insurance

 

 

(98

)

 

 

(88

)

(Gain) on sales of foreclosed real estate

 

 

(20

)

 

 

(114

)

Net change in interest receivable

 

 

44

 

 

 

281

 

Net change in other assets

 

 

(256

)

 

 

(582

)

Net change in interest payable

 

 

(18

)

 

 

(4

)

Net change in other liabilities

 

 

1,202

 

 

 

1,077

 

Net cash provided by operating activities

 

 

7,005

 

 

 

5,324

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

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

 

 

28,763

 

 

 

40,533

 

Proceeds from sales, maturities and calls of securities held to maturity

 

 

143

 

 

 

154

 

Purchase of securities available for sale

 

 

(39,597

)

 

 

(24,910

)

Purchase of securities held to maturity

 

 

(1,027

)

 

 

(6,034

)

Net (increase) in loans

 

 

(24,515

)

 

 

(13,923

)

Proceeds from sales of premise, equipment and other assets

 

 

150

 

 

 

 

Purchase of premises and equipment

 

 

(324

)

 

 

(584

)

Proceeds from sales of foreclosed real estate

 

 

880

 

 

 

1,623

 

Investment in other assets

 

 

(468

)

 

 

(409

)

Net change in restricted stock

 

 

(12

)

 

 

(2

)

Net cash used by investing activities

 

 

(36,007

)

 

 

(3,552

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net decrease in deposit accounts

 

 

21,322

 

 

 

5,914

 

Net increase (decrease) in short-term borrowed funds

 

 

(3,972

)

 

 

547

 

Net decrease in long-term debt

 

 

(10

)

 

 

(8

)

Repurchase of common stock

 

 

(260

)

 

 

(324

)

Dividend and discount accretion on noncontrolling interest

 

 

(424

)

 

 

(422

)

Net cash provided by financing activities

 

 

16,656

 

 

 

5,707

 

Increase (decrease) in cash and cash equivalents

 

 

(12,346

)

 

 

7,479

 

Cash and cash equivalents, beginning of period

 

 

68,933

 

 

 

50,791

 

Cash and cash equivalents, end of period

 

$

56,587

 

 

$

58,270

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

 

 

Interest paid

 

$

1,025

 

 

$

1,334

 

Income taxes paid

 

 

252

 

 

 

451

 

Supplemental Schedule of Non-Cash Activities

 

 

 

 

 

 

 

 

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

 

$

(410

)

 

$

(6

)

Loans transferred to foreclosed real estate

 

 

315

 

 

 

1,803

 

Mortgage servicing rights capitalized

 

 

756

 

 

 

488

 

Net Change in ESOP liability

 

 

 

 

 

(561

)

 

See accompanying notes

 

 

-7-


 

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”), Uwharrie Investment Advisors, Inc. (“UIA”), 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 2015 Annual Report on Form 10-K. This Quarterly Report should be read in conjunction with such Annual Report.

Use of Estimates

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

 

 

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, 2016 and 2015:

 

 

 

Unrealized holding gains on available-for-sale securities (net)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

376

 

 

$

(68

)

 

$

(212

)

 

$

305

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive income (loss) before reclassifications,

   net of $90,000, ($188,000), ($422,000) and ($191,000)

   tax effect, respectively

 

 

(178

)

 

 

367

 

 

 

743

 

 

 

302

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other

   comprehensive income, net of $1,000, $0,

   $210,000 and $194,000 tax effect

 

 

(1

)

 

 

 

 

 

(334

)

 

 

(308

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive income (loss)

 

 

(179

)

 

 

367

 

 

 

409

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

 

$

197

 

 

$

299

 

 

$

197

 

 

$

299

 

 

 

-8-


 

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 October 18, 2016, the Company’s Board of Directors declared a 2% stock dividend payable on November 23, 2016 to shareholders of record on November 9, 2016. 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. The Company had stock options outstanding covering 12,859 shares of common stock at both September 30, 2016 and December 31, 2015. All of these options were anti-dilutive.

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 diluted earnings per share is summarized below:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

7,095,112

 

 

 

7,174,221

 

 

 

7,111,733

 

 

 

7,212,308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

7,095,112

 

 

 

7,174,221

 

 

 

7,111,733

 

 

 

7,212,308

 

 

 

Note 5 – Investment Securities

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

 

September 30, 2016

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

4,020

 

 

$

25

 

 

$

 

 

$

4,045

 

U.S. Government agencies

 

 

42,872

 

 

 

155

 

 

 

75

 

 

 

42,952

 

GSE - Mortgage-backed securities and CMO’s

 

 

34,101

 

 

 

271

 

 

 

142

 

 

 

34,230

 

State and political subdivisions

 

 

14,164

 

 

 

119

 

 

 

40

 

 

 

14,243

 

Corporate bonds

 

 

5,057

 

 

 

10

 

 

 

24

 

 

 

5,043

 

Total securities available for sale

 

$

100,214

 

 

$

580

 

 

$

281

 

 

$

100,513

 

-9-


 

 

September 30, 2016

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

1,757

 

 

$

28

 

 

$

 

 

$

1,785

 

State and political subdivisions

 

 

6,985

 

 

 

173

 

 

 

 

 

 

7,158

 

Corporate bonds

 

 

3,281

 

 

 

65

 

 

 

 

 

 

3,346

 

Total securities held to maturity

 

$

12,023

 

 

$

266

 

 

$

 

 

$

12,289

 

 

December 31, 2015

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

4,026

 

 

$

 

 

$

14

 

 

$

4,012

 

U.S. Government agencies

 

 

36,159

 

 

 

99

 

 

 

188

 

 

 

36,070

 

GSE - Mortgage-backed securities and CMO’s

 

 

30,269

 

 

 

53

 

 

 

549

 

 

 

29,773

 

State and political subdivisions

 

 

13,691

 

 

 

351

 

 

 

3

 

 

 

14,039

 

Corporate bonds

 

 

5,435

 

 

 

 

 

 

71

 

 

 

5,364

 

Total securities available for sale

 

$

89,580

 

 

$

503

 

 

$

825

 

 

$

89,258

 

 

December 31, 2015

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

1,911

 

 

$

 

 

$

5

 

 

$

1,906

 

State and political subdivisions

 

 

5,993

 

 

 

30

 

 

 

5

 

 

 

6,018

 

Corporate bonds

 

 

3,338

 

 

 

 

 

 

20

 

 

 

3,318

 

Total securities held to maturity

 

$

11,242

 

 

$

30

 

 

$

30

 

 

$

11,242

 

 

At both September 30, 2016 and December 31, 2015, the Company owned Federal Reserve Bank stock reported at cost of $507,000and Federal Home Loan Bank Stock (FHLB) of $545,000 and $533,000, 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 and classified as restricted stock on the consolidated balance sheet. 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, 2016.

Results from sales of securities available for sale for the three and nine month periods ended September 30, 2016 and September 30, 2015 are as follows:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(dollars in thousands)

 

Gross proceeds from sales

 

$

 

 

$

 

 

$

20,225

 

 

$

29,739

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized gains from sales

 

$

2

 

 

$

 

 

$

544

 

 

$

502

 

Realized losses from sales

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gains

 

$

2

 

 

$

 

 

$

544

 

 

$

502

 

 

There were no sales of securities during the three months ended September 30, 2016; however, a $2 thousand adjustment from a second quarter security sale transaction was realized during the third quarter.

At September 30, 2016 and December 31, 2015, securities available for sale with a carrying amount of $77.9 million and $68.8 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

-10-


 

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, 2016 and December 31, 2015. 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 and are in no way a reflection of the credit quality of the investments. Management does not believe these fluctuations are a reflection of the quality of the investments. At September 30, 2016, the unrealized losses on available for sale securities less than twelve months related to three government agency bonds, six government sponsored enterprise (GSE) mortgage backed securities, and four state and political bonds. The Company had six government agency bonds, three GSE mortgage backed securities, and two corporate bonds that had been in a loss position for more than twelve months. At September 30, 2016, there were no unrealized losses on held to maturity securities. At December 31, 2015, the unrealized losses on available for sale securities less than twelve months related to one U.S. Treasury, five government agency bonds, eight government sponsored enterprise (GSE) mortgage backed securities, two corporate bonds and one state and political subdivision bond. At December 31, 2015, the unrealized losses on held to maturity securities related to one government agency security, two corporate bonds and two state and political subdivision bonds.

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

September 30, 2016

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Securities available for sale temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Gov’t agencies

 

$

7,094

 

 

$

18

 

 

$

4,422

 

 

$

57

 

 

$

11,516

 

 

$

75

 

GSE-Mortgage-backed securities and CMO’s

 

 

8,837

 

 

 

70

 

 

 

4,371

 

 

 

72

 

 

 

13,208

 

 

 

142

 

State and political

 

 

7,187

 

 

 

40

 

 

 

 

 

 

 

 

 

7,187

 

 

 

40

 

Corporate bonds

 

 

 

 

 

 

 

 

3,005

 

 

 

24

 

 

 

3,005

 

 

 

24

 

Total securities available for sale

 

$

23,118

 

 

$

128

 

 

$

11,798

 

 

$

153

 

 

$

34,916

 

 

$

281

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2015

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Securities available for sale temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

4,013

 

 

$

14

 

 

$

 

 

$

 

 

$

4,013

 

 

$

14

 

U.S. Gov’t agencies

 

 

16,692

 

 

 

128

 

 

 

5,048

 

 

 

60

 

 

 

21,740

 

 

 

188

 

GSE-Mortgage-backed securities and CMO’s

 

 

15,620

 

 

 

290

 

 

 

7,230

 

 

 

259

 

 

 

22,850

 

 

 

549

 

State and political

 

 

465

 

 

 

3

 

 

 

 

 

 

 

 

 

465

 

 

 

3

 

Corporate bonds

 

 

4,566

 

 

 

55

 

 

 

798

 

 

 

16

 

 

 

5,364

 

 

 

71

 

Total securities available for sale

 

$

41,356

 

 

$

490

 

 

$

13,076

 

 

$

335

 

 

$

54,432

 

 

$

825

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2015

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Held to maturity temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Gov’t agencies

 

$

1,906

 

 

$

5

 

 

$

 

 

$

 

 

$

1,906

 

 

$

5

 

State and political

 

 

3,318

 

 

 

5

 

 

 

 

 

 

 

 

 

3,318

 

 

 

5

 

Corporate bonds

 

 

1,312

 

 

 

20

 

 

 

 

 

 

 

 

 

1,312

 

 

 

20

 

Total securities held to maturity

 

$

6,536

 

 

$

30

 

 

$

 

 

$

 

 

$

6,536

 

 

$

30

 

 

Declines in the fair value of the investment portfolio are believed by management to be temporary in nature. When evaluating an investment for other-than-temporary impairment management considers among other things, the length of time and the extent to which the fair value has been in a loss position, the financial condition of the issuer and the intent and the ability of the Company to hold the investment until the loss position is recovered.

Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of quality but that the losses are temporary in nature. At September 30, 2016, the Company does not intend to sell and is not likely to be required to sell the available for sale securities that were in a loss position prior to full recovery.

-11-


 

The aggregate amortized cost and fair value of the available for sale securities portfolio at September 30, 2016 by remaining contractual maturity are as follows:

 

 

 

September 30, 2016

 

 

 

Amortized

Cost

 

 

Estimated

Fair Value

 

 

Book

Yield

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. Treasury

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

$

4,020

 

 

$

4,045

 

 

 

1.13

%

 

 

 

4,020

 

 

 

4,045

 

 

 

1.13

%

U.S. Government agencies

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

25,213

 

 

 

25,344

 

 

 

1.24

%

Due after five but within ten years

 

 

8,344

 

 

 

8,339

 

 

 

1.97

%

Due after ten years

 

 

9,315

 

 

 

9,269

 

 

 

1.35

%

 

 

 

42,872

 

 

 

42,952

 

 

 

1.40

%

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

3,557

 

 

 

3,602

 

 

 

1.98

%

Due after five but within ten years

 

 

13,564

 

 

 

13,678

 

 

 

2.04

%

Due after ten years

 

 

16,980

 

 

 

16,950

 

 

 

1.93

%

 

 

 

34,101

 

 

 

34,230

 

 

 

1.98

%

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

1,873

 

 

 

1,962

 

 

 

4.78

%

Due after five but within ten years

 

 

1,604

 

 

 

1,619

 

 

 

6.31

%

Due after ten years

 

 

10,687

 

 

 

10,662

 

 

 

2.30

%

 

 

 

14,164

 

 

 

14,243

 

 

 

3.08

%

Corporate Bonds

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

2,839

 

 

 

2,832

 

 

 

2.15

%

Due after five but within ten years

 

 

2,218

 

 

 

2,211

 

 

 

1.50

%

 

 

 

5,057

 

 

 

5,043

 

 

 

1.86

%

Total Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

37,502

 

 

 

37,785

 

 

 

1.54

%

Due after five but within ten years

 

 

25,730

 

 

 

25,847

 

 

 

2.24

%

Due after ten years

 

 

36,982

 

 

 

36,881

 

 

 

1.89

%

 

 

$

100,214

 

 

$

100,513

 

 

 

1.85

%

 

 

 

September 30, 2016

 

 

 

Amortized

Cost

 

 

Estimated

Fair Value

 

 

Book

Yield

 

 

 

(dollars in thousands)

 

Held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. Government agencies

 

 

 

 

 

 

 

 

 

 

 

 

Due after five but within ten years

 

$

1,757

 

 

$

1,785

 

 

 

2.49

%

 

 

 

1,757

 

 

 

1,785

 

 

 

2.49

%

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

2,956

 

 

 

3,007

 

 

 

2.21

%

Due after five but within ten years

 

 

4,029

 

 

 

4,151

 

 

 

2.95

%

 

 

 

6,985

 

 

 

7,158

 

 

 

2.63

%

Corporate Bonds

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

3,281

 

 

 

3,346

 

 

 

2.76

%

 

 

 

3,281

 

 

 

3,346

 

 

 

2.76

%

Total Securities held for maturity

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

6,237

 

 

 

6,353

 

 

 

2.50

%

Due after five but within ten years

 

 

5,786

 

 

 

5,936

 

 

 

2.81

%

 

 

$

12,023

 

 

$

12,289

 

 

 

2.65

%

 

-12-


 

 

Note 6 – Loans Held for Investment

The composition of net loans held for investment by class as of September 30, 2016 and December 31, 2015 are as follows:

 

 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

(dollars in thousands)

 

Commercial

 

 

 

 

 

 

 

 

Commercial

 

$

54,878

 

 

$

52,311

 

Real estate - commercial

 

 

109,498

 

 

 

101,198

 

Other real estate construction loans

 

 

27,219

 

 

 

17,692

 

Noncommercial

 

 

 

 

 

 

 

 

Real estate 1-4 family construction

 

 

4,794

 

 

 

5,629

 

Real estate - residential

 

 

85,258

 

 

 

83,379

 

Home equity

 

 

51,403

 

 

 

49,420

 

Consumer loans

 

 

9,715

 

 

 

8,982

 

Other loans

 

 

1,732

 

 

 

1,481

 

 

 

 

344,497

 

 

 

320,092

 

Less:

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(2,849

)

 

 

(2,884

)

Deferred loan (fees) costs, net

 

 

45

 

 

 

40

 

 

 

 

 

 

 

 

 

 

Loans held for investment, net

 

$

341,693

 

 

$

317,248

 

 

 

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 periods ended September 30, 2016 and 2015, respectively:

 

Commercial

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,346

 

 

$

1,553

 

 

$

1,310

 

 

$

1,716

 

Provision (recovery) charged to operations

 

 

271

 

 

 

(212

)

 

 

342

 

 

 

(501

)

Charge-offs

 

 

(69

)

 

 

(18

)

 

 

(131

)

 

 

(79

)

Recoveries

 

 

12

 

 

 

10

 

 

 

39

 

 

 

197

 

Net (charge-offs)

 

 

(57

)

 

 

(8

)

 

 

(92

)

 

 

118

 

Balance at end of period

 

$

1,560

 

 

$

1,333

 

 

$

1,560

 

 

$

1,333

 

 

Non-Commercial

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,360

 

 

$

1,774

 

 

$

1,574

 

 

$

2,022

 

Provision (recovery) charged to operations

 

 

(31

)

 

 

(111

)

 

 

(272

)

 

 

(119

)

Charge-offs

 

 

(118

)

 

 

(84

)

 

 

(198

)

 

 

(385

)

Recoveries

 

 

78

 

 

 

49

 

 

 

185

 

 

 

110

 

Net (charge-offs)

 

 

(40

)

 

 

(35

)

 

 

(13

)

 

 

(275

)

Balance at end of period

 

$

1,289

 

 

$

1,628

 

 

$

1,289

 

 

$

1,628

 

-13-


 

 

Total

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

2,706

 

 

$

3,327

 

 

$

2,884

 

 

$

3,738

 

Provision (recovery) charged to operations

 

 

240

 

 

 

(323

)

 

 

70

 

 

 

(620

)

Charge-offs

 

 

(187

)

 

 

(102

)

 

 

(329

)

 

 

(464

)

Recoveries

 

 

90

 

 

 

59

 

 

 

224

 

 

 

307

 

Net (charge-offs)

 

 

(97

)

 

 

(43

)

 

 

(105

)

 

 

(157

)

Balance at end of period

 

$

2,849

 

 

$

2,961

 

 

$

2,849

 

 

$

2,961

 

 

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at September 30, 2016 and December 31, 2015:

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated

 

 

Collectively Evaluated

 

 

Total

 

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

17

 

 

$

1,087

 

 

$

1,543

 

 

$

190,508

 

 

$

1,560

 

 

$

191,595

 

Non-Commercial

 

 

108

 

 

 

4,749

 

 

 

1,181

 

 

 

148,198

 

 

 

1,289

 

 

 

152,947

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

125

 

 

$

5,836

 

 

$

2,724

 

 

$

338,706

 

 

$

2,849

 

 

$

344,542

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated

 

 

Collectively Evaluated

 

 

Total

 

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

18

 

 

$

1,019

 

 

$

1,292

 

 

$

170,182

 

 

$

1,310

 

 

$

171,201

 

Non-Commercial

 

 

163

 

 

 

4,459

 

 

 

1,411

 

 

 

144,472

 

 

 

1,574

 

 

 

148,931

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

181

 

 

$

5,478

 

 

$

2,703

 

 

$

314,654

 

 

$

2,884

 

 

$

320,132

 

 

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, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

13

 

 

$

 

 

$

13

 

 

$

54,865

 

 

$

54,878

 

 

$

 

Real estate - commercial

 

 

89

 

 

 

395

 

 

 

484

 

 

 

109,014

 

 

 

109,498

 

 

 

 

Other real estate construction

 

 

 

 

 

191

 

 

 

191

 

 

 

27,028

 

 

 

27,219

 

 

 

 

Real estate 1-4 family construction

 

 

 

 

 

 

 

 

0

 

 

 

4,794

 

 

 

4,794

 

 

 

 

Real estate - residential

 

 

1,226

 

 

 

576

 

 

 

1,802

 

 

 

83,501

 

 

 

85,303

 

 

 

 

Home equity

 

 

75

 

 

 

22

 

 

 

97

 

 

 

51,306

 

 

 

51,403

 

 

 

 

Consumer loans

 

 

98

 

 

 

 

 

 

98

 

 

 

9,617

 

 

 

9,715

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

1,732

 

 

 

1,732

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,501

 

 

$

1,184

 

 

$

2,685

 

 

$

341,857

 

 

$

344,542

 

 

$

 

-14-


 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

30-89 Days

Past Due

 

 

Loans

90 Days

or More

Past due

and Non -

Accrual

 

 

Total Past

Due Loans

 

 

Current

Loans

 

 

Total

Loans

 

 

Accruing

Loans 90 or

More Days

Past Due

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

46

 

 

$

34

 

 

$

80

 

 

$

52,231

 

 

$

52,311

 

 

$

 

Real estate - commercial

 

 

74

 

 

 

 

 

 

74

 

 

 

101,124

 

 

 

101,198

 

 

 

 

Other real estate construction

 

 

110

 

 

 

195

 

 

 

305

 

 

 

17,387

 

 

 

17,692

 

 

 

 

Real estate construction

 

 

 

 

 

 

 

 

0

 

 

 

5,629

 

 

 

5,629

 

 

 

 

Real estate - residential

 

 

1,580

 

 

 

541

 

 

 

2,121

 

 

 

81,298

 

 

 

83,419

 

 

 

 

Home equity

 

 

75

 

 

 

13

 

 

 

88

 

 

 

49,332

 

 

 

49,420

 

 

 

 

Consumer loan

 

 

39

 

 

 

 

 

 

39

 

 

 

8,943

 

 

 

8,982

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

0

 

 

 

1,481

 

 

 

1,481

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,924

 

 

$

783

 

 

$

2,707

 

 

$

317,425

 

 

$

320,132

 

 

$

 

 

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 Company had $1.4 million in foreclosed residential real estate and $347,000 of residential real estate in process of foreclosure at September 30, 2016.

The composition of nonaccrual loans by class as of September 30, 2016 and December 31, 2015 is as follows:

 

 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

 

$

34

 

Real estate - commercial

 

 

395

 

 

 

 

Other real estate construction

 

 

191

 

 

 

195

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

Real estate – residential

 

 

576

 

 

 

541

 

Home equity

 

 

22

 

 

 

13

 

Consumer loans

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

$

1,184

 

 

$

783

 

 

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.

-15-


 

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

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

The tables below summarize risk grades of the loan portfolio by class at September 30, 2016 and December 31, 2015:

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

Watch

 

 

Sub-

standard

 

 

Doubtful

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

53,579

 

 

$

1,279

 

 

$

20

 

 

$

 

 

$

54,878

 

Real estate - commercial

 

 

104,956

 

 

 

2,051

 

 

 

2,491

 

 

 

 

 

 

109,498

 

Other real estate construction

 

 

24,766

 

 

 

1,922

 

 

 

531

 

 

 

 

 

 

27,219

 

Real estate 1 - 4 family construction

 

 

4,794

 

 

 

 

 

 

 

 

 

 

 

 

4,794

 

Real estate - residential

 

 

73,930

 

 

 

9,251

 

 

 

2,122

 

 

 

 

 

 

85,303

 

Home equity

 

 

50,363

 

 

 

1,015

 

 

 

25

 

 

 

 

 

 

51,403

 

Consumer loans

 

 

9,562

 

 

 

150

 

 

 

3

 

 

 

 

 

 

9,715

 

Other loans

 

 

1,732

 

 

 

 

 

 

 

 

 

 

 

 

1,732

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

323,682

 

 

$

15,668

 

 

$

5,192

 

 

$

 

 

$

344,542

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

Watch

 

 

Sub-

standard

 

 

Doubtful

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

52,096

 

 

$

130

 

 

$

85

 

 

$

 

 

$

52,311

 

Real estate - commercial

 

 

97,506

 

 

 

1,161

 

 

 

2,531

 

 

 

 

 

 

101,198

 

Other real estate construction

 

 

15,163

 

 

 

1,994

 

 

 

535

 

 

 

 

 

 

17,692

 

Real estate 1 - 4 family construction

 

 

5,526

 

 

 

103

 

 

 

 

 

 

 

 

 

5,629

 

Real estate - residential

 

 

71,736

 

 

 

9,398

 

 

 

2,285

 

 

 

 

 

 

83,419

 

Home equity

 

 

48,195

 

 

 

1,209

 

 

 

16

 

 

 

 

 

 

49,420

 

Consumer loans

 

 

8,583

 

 

 

394

 

 

 

5

 

 

 

 

 

 

8,982

 

Other loans

 

 

1,481

 

 

 

 

 

 

 

 

 

 

 

 

1,481

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

300,286

 

 

$

14,389

 

 

$

5,457

 

 

$

 

 

$

320,132

 

 

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. At both September 30, 2016 and December 31, 2015 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, 2016 and December 31, 2015:

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

Non-

Performing

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

54,878

 

 

$

 

 

$

54,878

 

Real estate - commercial

 

 

109,103

 

 

 

395

 

 

 

109,498

 

Other real estate construction

 

 

27,028

 

 

 

191

 

 

 

27,219

 

Real estate 1 – 4 family construction

 

 

4,794

 

 

 

 

 

 

4,794

 

Real estate – residential

 

 

84,727

 

 

 

576

 

 

 

85,303

 

Home equity

 

 

51,381

 

 

 

22

 

 

 

51,403

 

Consumer loans

 

 

9,715

 

 

 

 

 

 

9,715

 

Other loans

 

 

1,732

 

 

 

 

 

 

1,732

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

343,358

 

 

$

1,184

 

 

$

344,542

 

-16-


 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

Non-

Performing

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

52,277

 

 

$

34

 

 

$

52,311

 

Real estate - commercial

 

 

101,198

 

 

 

 

 

 

101,198

 

Other real estate construction

 

 

17,497

 

 

 

195

 

 

 

17,692

 

Real estate 1 – 4 family construction

 

 

5,629

 

 

 

 

 

 

5,629

 

Real estate – residential

 

 

82,878

 

 

 

541

 

 

 

83,419

 

Home equity

 

 

49,407

 

 

 

13

 

 

 

49,420

 

Consumer loans

 

 

8,982

 

 

 

 

 

 

8,982

 

Other loans

 

 

1,481

 

 

 

 

 

 

1,481

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

319,349

 

 

$

783

 

 

$

320,132

 

 

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, 2016 and December 31, 2015.

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

With No

Allowance

 

 

Recorded

Investment

With

Allowance

 

 

Related

Allowance

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

30

 

 

$

 

 

$

30

 

 

$

2

 

Real estate - commercial

 

 

761

 

 

 

471

 

 

 

290

 

 

 

9

 

Other real estate construction

 

 

834

 

 

 

192

 

 

 

104

 

 

 

6

 

Real estate 1 - 4 family construction

 

 

8

 

 

 

 

 

 

8

 

 

 

 

Real estate - residential

 

 

4,640

 

 

 

2,269

 

 

 

2,371

 

 

 

108

 

Home equity

 

 

36

 

 

 

36

 

 

 

 

 

 

 

Consumer loans

 

 

65

 

 

 

65

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

6,374

 

 

$

3,033

 

 

$

2,803

 

 

$

125

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

With No

Allowance

 

 

Recorded

Investment

With

Allowance

 

 

Related

Allowance

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

97

 

 

$

80

 

 

$

17

 

 

$

2

 

Real estate - commercial

 

 

620

 

 

 

498

 

 

 

122

 

 

 

9

 

Other real estate construction

 

 

840

 

 

 

195

 

 

 

107

 

 

 

7

 

Real estate 1 - 4 family construction

 

 

13

 

 

 

 

 

 

13

 

 

 

 

Real estate - residential

 

 

4,343

 

 

 

1,507

 

 

 

2,836

 

 

 

163

 

Home equity

 

 

28

 

 

 

28

 

 

 

 

 

 

 

Consumer loans

 

 

75

 

 

 

75

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

6,016

 

 

$

2,383

 

 

$

3,095

 

 

$

181

 

-17-


 

 

 

 

Three Months ended

September 30, 2016

 

 

Three Months ended

September 30, 2015

 

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

31

 

 

 

 

 

$

83

 

 

 

 

Real estate - commercial

 

 

620

 

 

 

9

 

 

 

968

 

 

 

14

 

Other real estate construction

 

 

297

 

 

 

1

 

 

 

270

 

 

 

1

 

Real estate 1- 4 family construction

 

 

9

 

 

 

1

 

 

 

16

 

 

 

1

 

Real estate - residential

 

 

4,542

 

 

 

65

 

 

 

4,639

 

 

 

53

 

Home equity

 

 

46

 

 

 

 

 

 

51

 

 

 

 

Consumer loans

 

 

71

 

 

 

2

 

 

 

24

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,616

 

 

$

78

 

 

$

6,051

 

 

$

69

 

 

 

 

Nine Months ended

September 30, 2016

 

 

Nine Months ended

September 30, 2015

 

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

48

 

 

$

1

 

 

$

81

 

 

$

3

 

Real estate - commercial

 

 

624

 

 

 

28

 

 

 

1,374

 

 

 

42

 

Other real estate construction

 

 

299

 

 

 

4

 

 

 

304

 

 

 

2

 

Real estate 1- 4 family construction

 

 

11

 

 

 

1

 

 

 

18

 

 

 

1

 

Real estate - residential

 

 

4,522

 

 

 

176

 

 

 

5,037

 

 

 

154

 

Home equity

 

 

47

 

 

 

1

 

 

 

55

 

 

 

1

 

Consumer loans

 

 

74

 

 

 

5

 

 

 

36

 

 

 

1

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,625

 

 

$

216

 

 

$

6,905

 

 

$

204

 

 

 

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 TDRs 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.

At September 30, 2016, the Company had $4.1 million in TDRs outstanding, of which all were on an accruing basis.

-18-


 

For the three and nine months ended September 30, 2016 and 2015, the following table presents a breakdown of the types of concessions made by loan class:

 

 

 

For the three months ended September 30, 2016

 

 

 

Number

of Contracts

 

 

Pre-Modification

Outstanding Recorded

Investment

 

 

Post-Modification

Outstanding Recorded

Investment

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

$

 

 

$

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

Other real estate construction

 

 

 

 

 

 

 

 

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

 

 

 

Real estate – residential

 

 

2

 

 

 

226

 

 

 

214

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

2

 

 

$

226

 

 

$

214

 

 

 

 

For the three months ended September 30, 2015

 

 

 

Number

of Contracts

 

 

Pre-Modification

Outstanding Recorded

Investment

 

 

Post-Modification

Outstanding Recorded

Investment

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

$

 

 

$

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

Other real estate construction

 

 

 

 

 

 

 

 

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

 

 

 

Real estate – residential

 

 

1

 

 

 

76

 

 

 

76

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

1

 

 

$

76

 

 

$

76

 

 

 

 

For the nine months ended September 30, 2016

 

 

 

Number

of Contracts

 

 

Pre-Modification

Outstanding Recorded

Investment

 

 

Post-Modification

Outstanding Recorded

Investment

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

$

 

 

$

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

Other real estate construction

 

 

 

 

 

 

 

 

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

 

 

 

Real estate – residential

 

 

4

 

 

 

555

 

 

 

482

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

4

 

 

$

555

 

 

$

482

 

-19-


 

 

 

 

For the nine months ended September 30, 2015

 

 

 

Number

of Contracts

 

 

Pre-Modification

Outstanding Recorded

Investment

 

 

Post-Modification

Outstanding Recorded

Investment

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1

 

 

$

48

 

 

$

29

 

Real estate - commercial

 

 

1

 

 

 

265

 

 

 

123

 

Other real estate construction

 

 

 

 

 

 

 

 

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

 

 

 

Real estate – residential

 

 

5

 

 

 

482

 

 

 

471

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

7

 

 

$

795

 

 

$

623

 

 

During the twelve months ended September 30, 2016 and September 30, 2015, there were no TDRs for which there was a payment default.

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 $106,000 in the allowance for loan loss as of September 30, 2016, as a direct result of these TDRs. At September 30, 2015, there was $188,000 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, 2016 and 2015:

 

 

 

Paid In Full

 

 

Paying as restructured

 

 

Converted to nonaccrual

 

 

Foreclosure/ Default

 

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

 

(dollars in thousands)

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Below market

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

Extended payment Terms

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forgiveness of Principal Other

 

 

6

 

 

 

433

 

 

 

8

 

 

 

501

 

 

 

 

 

 

 

 

 

4

 

 

 

59

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

6

 

 

$

433

 

 

 

8

 

 

$

501

 

 

 

 

 

$

 

 

 

4

 

 

$

59

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Below market

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

Extended payment Terms

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forgiveness of Principal Other

 

 

 

 

 

 

 

 

7

 

 

 

795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

 

 

 

7

 

 

$

795

 

 

 

 

 

$

 

 

 

 

 

$

 

 

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

 

 

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 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-

-20-


 

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, 2016, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

 

 

(dollars in thousands)

 

Commitments to extend credit

 

$

84,397

 

Credit card commitments

 

 

9,718

 

Standby letters of credit

 

 

1,658

 

Total commitments

 

$

95,773

 

 

Additionally, during the third quarter of 2016 Uwharrie Bank entered into a five-year operating lease for commercial property. The term expires on September 30, 2021. The annual cost of the lease is $151,875 with a 2.625% annual adjustor.

 

 

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

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment by using one of several methods including collateral value, fair value of similar debt or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected repayments or fair value of collateral exceed the recorded investments in such loans. The Company typically bases the fair value of the collateral on appraised values which the Company considers Level 3 valuations.

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

-21-


 

appraised values of the collateral or management’s estimation of the value of the collateral. The Company typically bases the fair value of the collateral on appraised values which the Company considers Level 3 valuations.

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

The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015:

 

 

 

September 30, 2016

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury

 

$

4,045

 

 

$

4,045

 

 

$

 

 

$

 

US Government Agencies

 

 

42,952

 

 

 

 

 

 

42,952

 

 

 

 

GSE - Mortgage-backed securities and CMO’s

 

 

34,230

 

 

 

 

 

 

34,230

 

 

 

 

State and political subdivisions

 

 

14,243

 

 

 

 

 

 

14,243

 

 

 

 

Corporate bonds

 

 

5,043

 

 

 

 

 

 

5,043

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

100,513

 

 

$

4,045

 

 

$

96,468

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities at fair value

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

December 31, 2015

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury

 

$

4,012

 

 

$

4,012

 

 

$

 

 

$

 

US Gov’t

 

 

36,070

 

 

 

 

 

 

36,070

 

 

 

 

Mortgage-backed securities and CMO’s

 

 

29,773

 

 

 

 

 

 

29,773

 

 

 

 

State and political subdivisions

 

 

14,039

 

 

 

 

 

 

14,039

 

 

 

 

Corporate bonds

 

 

5,364

 

 

 

 

 

 

5,364

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

89,258

 

 

$

4,012

 

 

$

85,246

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 to 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, 2016 and December 31, 2015:

 

 

 

September 30, 2016

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

2,870

 

 

$

 

 

$

 

 

$

2,870

 

Other real estate owned

 

 

2,309

 

 

 

 

 

 

 

 

 

2,309

 

Total assets at fair value

 

$

5,179

 

 

$

 

 

$

 

 

$

5,179

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities at fair value

 

$

 

 

$

 

 

$

 

 

$

 

-22-


 

 

 

 

December 31, 2015

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

3,108

 

 

$

 

 

$

 

 

$

3,108

 

Other real estate owned

 

 

2,909

 

 

 

 

 

 

 

 

 

2,909

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

6,017

 

 

$

 

 

$

 

 

$

6,017

 

Total liabilities at fair value

 

$

 

 

$

 

 

$

 

 

$

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

September 30, 2016

 

 

 

 

 

 

 

 

Valuation Technique

 

Unobservable Input

 

General

Range

Nonrecurring measurements:

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

Discounted appraisals

 

Collateral discounts and

   Estimated costs to sell

 

0 – 25%

 

 

Discounted cash flows

 

Discount Rate

 

4%-8.75%

 

 

 

 

 

 

 

OREO

 

Discounted appraisals

 

Collateral discounts and

   Estimated costs to sell

 

0 – 10%

 

December 31, 2015

 

 

 

 

 

 

 

 

Valuation Technique

 

Unobservable Input

 

General

Range

Nonrecurring measurements:

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

Discounted appraisals

 

Collateral discounts and

   Estimated costs to sell

 

0 – 25%

 

 

Discounted cash flows

 

Discount rates

 

4%-8.75%

 

 

 

 

 

 

 

OREO

 

Discounted appraisals

 

Collateral discounts and

   Estimated costs to sell

 

0 – 10%

 

At September 30, 2016, impaired loans were being evaluated with discounted expected cash flows and discounted appraisals were being used on collateral dependent loans.

 

 

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.

-23-


 

The fair value estimates presented at September 30, 2016 and December 31, 2015 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, 2016 and December 31, 2015:

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

Value

 

 

Estimated

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(dollars in thousands)

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

56,587

 

 

$

56,673

 

 

$

54,097

 

 

$

2,576

 

 

$

 

Securities available for sale

 

 

100,513

 

 

 

100,513

 

 

 

4,045

 

 

 

96,468

 

 

 

 

Securities held to maturity

 

 

12,023

 

 

 

12,289

 

 

 

 

 

 

12,289

 

 

 

 

Loans held for investment, net

 

 

341,693

 

 

 

341,169

 

 

 

 

 

 

 

 

 

341,169

 

Loans held for sale

 

 

2,538

 

 

 

2,556

 

 

 

 

 

 

2,556

 

 

 

 

Restricted stock

 

 

1,052

 

 

 

1,052

 

 

 

1,052

 

 

 

 

 

 

 

Accrued interest receivable

 

 

1,520

 

 

 

1,520

 

 

 

 

 

 

 

 

 

1,520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

489,055

 

 

$

466,243

 

 

$

 

 

$

466,243

 

 

$

 

Short-term borrowings

 

 

1,786

 

 

 

1,786

 

 

 

 

 

 

1,786

 

 

 

 

Long-term borrowings

 

 

3

 

 

 

3

 

 

 

 

 

 

3

 

 

 

 

Junior subordinated debt

 

 

9,534

 

 

 

9,680

 

 

 

 

 

 

 

 

 

9,680

 

Accrued interest payable

 

 

150

 

 

 

150

 

 

 

 

 

 

 

 

 

150

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

Value

 

 

Estimated

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(dollars in thousands)

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

68,933

 

 

$

68,973

 

 

$

65,198

 

 

$

3,775

 

 

$

 

Securities available for sale

 

 

89,258

 

 

 

89,258

 

 

 

4,012

 

 

 

85,246

 

 

 

 

Securities held to maturity

 

 

11,242

 

 

 

11,242

 

 

 

 

 

 

11,242

 

 

 

 

Loans held for investment, net

 

 

317,248

 

 

 

313,649

 

 

 

 

 

 

 

 

 

313,649

 

Loans held for sale

 

 

5,922

 

 

 

5,922

 

 

 

 

 

 

5,922

 

 

 

 

Restricted stock

 

 

1,040

 

 

 

1,040

 

 

 

1,040

 

 

 

 

 

 

 

Accrued interest receivable

 

 

1,564

 

 

 

1,564

 

 

 

 

 

 

 

 

 

1,564

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

467,733

 

 

$

442,619

 

 

$

 

 

$

442,619

 

 

$

 

Short-term borrowings

 

 

5,758

 

 

 

5,758

 

 

 

 

 

 

5,758

 

 

 

 

Long-term borrowings

 

 

13

 

 

 

13

 

 

 

 

 

 

13

 

 

 

 

 

Junior subordinated debt

 

 

9,534

 

 

 

9,688

 

 

 

 

 

 

 

 

 

9,688

 

Accrued interest payable

 

 

168

 

 

 

168

 

 

 

 

 

 

 

 

 

168

 

 

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 with the exception of time deposits due from banks that are in Level 2.

 

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.

 

Securities held to maturity – Securities held to maturity are carried at amortized cost and are recorded in Level 2.

-24-


 

 

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

 

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

 

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 2. 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, 2016, 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, the fair value is the fee the bank is expected to receive. This amount is deemed immaterial by management. See Note 9.

 

 

Note 12 – Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers, Topic 606 (“ASU 2014-09”)”. The new standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under existing guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August of 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, Topic 606: Deferral of the Effective Date, deferring the effective date of ASU 2014-09 until annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this new guidance recognized at the date of initial application. The Company is currently evaluating the provisions of ASU 2014-09 to determine the potential impact the new standard will have to the Company’s financial statements.

In February 2015, the FASB issued ASU 2015-02, “Consolidation, Topic 810 (“ASU-2015-02”)”. The amendments to this standard improve targeted areas of consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard places more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE), and changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs. The amendments in this ASU are effective for fiscal years beginning after December 15, 2015 for public business entities, including interim periods within those fiscal years. We adopted the guidance effective in the first quarter of 2016. The initial adoption had no impact on our consolidated financial position and consolidated results of operations.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in this ASU address certain aspects of recognition, measurement, presentation and disclosure. The amendments in this ASU (i) require equity investments to be measured at fair value with changes in fair value recognized in net income; (ii) simplify the impairment assessment of equity investments without readily determinable fair value; (iii) require public business entities to use exit prices, rather than entry prices, when measuring fair value of financial instruments for disclosure purposes; (iv) require separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; (v) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet; (vi) require separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; and (vii) state that a valuation

-25-


 

allowance on deferred tax assets related to available-for-sale securities should be evaluated in combination with other deferred tax assets. The amendments in this ASU are effective for public business entities for fiscal periods beginning after December 15, 2017, including interim periods within those fiscal years. The ASU only permits early adoption of the instrument-specific credit risk provision. We are currently evaluating the impact of the new standard.

In February 2016, the FASB issued ASU 2016-02, “Leases, Topic 842 (“ASU 2016-02”)”. This ASU increases the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The key difference between existing standards and this ASU is the requirement for lessees to recognize on their balance sheet all lease contracts with lease terms greater than 12 months, including operating leases. Both a right-of-use asset, representing the right to use the leased asset, and a lease liability, representing the contractual obligation, are required to be recognized on the balance sheet of the lessee at lease commencement. Further, this ASU requires lessees to classify leases as either operating or finance leases, which are substantially similar to the current operating and capital leases classifications. The distinction between these two classifications under the new standard does not relate to balance sheet treatment, but relates to treatment in the statements of income and cash flows. Lessor guidance remains largely unchanged with the exception of how a lessor determines the appropriate lease classification for each lease to better align the lessor guidance with revised lessee classification guidance. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the new standard, which we anticipate we will adopt during the first quarter of 2019.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. Entities will apply the standard’s provisions as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently assessing the impact of the new guidance on the Company’s consolidated financial statements.

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

Reclassification

Certain amounts in the 2015 financial statements have been reclassified to conform to the 2016 presentation. These reclassifications do not have an impact on net income or shareholders’ equity.

Subsequent Events

 

On October 18, 2016, the Company’s Board of Directors declared a 2% stock dividend payable on November 23, 2016 to shareholders of record on November 9, 2016. 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.  

 

 

-26-


 

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, 2016 and December 31, 2015.

During the nine months ended September 30, 2016, the Company’s total assets increased $20.0 million, from $532.2 million to $552.2 million.

Cash and cash equivalents decreased $12.3 million during the nine months ended September 30, 2016. Cash and due from banks increased $362 thousand, while interest-earning deposits with banks decreased $12.7 million. These decreases are directly related to the increase in the investment portfolio, as well as an increase in loans held for investment of $24.4 million for the first nine months of 2016.

Investment securities consist of securities available for sale and securities held to maturity. Investment securities increased $12.0 million to $112.5 million for the nine-month period ended September 30, 2016. During the third quarter of 2016, the Company made the decision to purchase $10 million of investment securities in a continued effort to maintain the diversity of the investment portfolio. At September 30, 2016, the Company had net unrealized gains on securities available for sale of $299,000.

Loans held for investment increased from $320.1 million to $344.5 million, an increase of $24.4 million or 7.62%. The Company experienced growth in all segments of its loan portfolio during the first nine months of 2016, with the exception of one to four family real estate construction, which declined $835 thousand. Other real estate construction has the largest increase in the portfolio of 53.85% or $9.5 million. Loans held for sale decreased 57.14%, or $3.4 million. The allowance for loan losses was $2.8 million at September 30, 2016, which represented 0.82% of the loan portfolio.

Other changes in our consolidated assets are primarily related to premises and equipment, bank owned life insurance, and other real estate owned. Bank owned life insurance increased $99,000 from earnings on the insurance investments while premises and equipment decreased $442,000 from depreciation combined with the sale of a building that was bank-owned property. Other real estate owned decreased $559,000. During the nine months ended September 30, 2016, the Company sold eighteen pieces of property totaling $878,000. The Company recorded net valuation write-down adjustments of $40,000.

Customer deposits, our primary funding source, experienced a $21.3 million increase during the nine-month period ended September 30, 2016, increasing from $467.7 million to $489.1 million or 4.58%. Demand noninterest bearing checking increased $12.4 million, interest checking and money market accounts increased $22.2 million, and savings deposits increased $1.4 million. This increase was offset by declines in time deposits of $250 thousand and over of $811 thousand and other time deposits of $13.9 million.

Total borrowings decreased $4.0 million for the period and consist of both short-term and long-term borrowed funds.

Other liabilities increased from $5.8 million at December 31, 2015 to $7.0 million at September 30, 2016, an increase of $1.2 million.

At September 30, 2016, total shareholders’ equity was $44.8 million, an increase of $1.5 million from December 31, 2015. Net income for the nine-month period was $1.7 million. Unrealized gains and losses on investment securities, net of tax, increased by $409 thousand. The Company also repurchased common stock totaling $260 thousand. The Company paid $424 thousand in dividends attributed to noncontrolling interest.

On October 18, 2016, the Company’s Board of Directors declared a 2% stock dividend payable on November 23, 2016 to shareholders of record on November 9, 2016. 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.  

-27-


 

Comparison of Results of Operations for the Three Months Ended September 30, 2016 and 2015.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $540,000 for the three months ended September 30, 2016, as compared to $561,000 for the three months ended September 30, 2015, a decrease of $21,000. Net income available to common shareholders was $391,000 or $0.06 per common share at September 30, 2016, compared to $412,000 or $0.06 per common share at September 30, 2015. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.

Net Interest Income

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

Net interest income for the three months ended September 30, 2016 was $4.2 million compared to $4.0 million for the three months ended September 30, 2015, an increase of $213 thousand. During the third quarter, the average yield on our interest–earning assets decreased six basis points to 3.75%, while the average rate we paid for our interest-bearing liabilities decreased fourteen basis points to 0.32%. A portion of the Company’s loan portfolio has interest rate floors and caps in place on the loans. The interest rate floor feature has allowed the Company to maintain a more favorable interest margin despite a decline in rates; however, the interest rate cap could hurt the margin in a rising rate environment. The aforementioned changes resulted in an increase of seven basis points in our interest rate spread, from 3.35% in the third quarter of 2015 to 3.42% in the third quarter of 2016. Our net interest margin was 3.48% and 3.43% for the comparable periods in 2016 and 2015, respectively.

The following table presents average balance sheets and a net interest income analysis for the three months ended September 30, 2016 and 2015:

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended September 30,

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balance

 

 

Income/Expenses

 

 

Rate/Yield

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

$

87,217

 

 

$

94,959

 

 

$

324

 

 

$

398

 

 

 

1.48

%

 

 

1.66

%

Nontaxable securities (1)

 

 

19,440

 

 

 

14,072

 

 

 

125

 

 

 

87

 

 

 

4.20

%

 

 

3.95

%

Short-term investments

 

 

48,799

 

 

 

50,003

 

 

 

78

 

 

 

47

 

 

 

0.64

%

 

 

0.37

%

Taxable loans

 

 

327,457

 

 

 

302,786

 

 

 

3,929

 

 

 

3,834

 

 

 

4.77

%

 

 

5.02

%

Non-taxable loans (1)

 

 

15,296

 

 

 

15,989

 

 

 

96

 

 

 

102

 

 

 

4.18

%

 

 

4.08

%

Total interest-earning assets

 

 

498,209

 

 

 

477,809

 

 

 

4,552

 

 

 

4,468

 

 

 

3.75

%

 

 

3.81

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

370,622

 

 

 

365,743

 

 

 

167

 

 

 

282

 

 

 

0.18

%

 

 

0.31

%

Short-term borrowed funds

 

 

2,183

 

 

 

2,968

 

 

 

3

 

 

 

17

 

 

 

0.55

%

 

 

2.27

%

Long-term debt

 

 

9,538

 

 

 

11,382

 

 

 

139

 

 

 

139

 

 

 

5.80

%

 

 

4.85

%

Total interest bearing liabilities

 

 

382,343

 

 

 

380,093

 

 

 

309

 

 

 

438

 

 

 

0.32

%

 

 

0.46

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

$

115,866

 

 

$

97,716

 

 

$

4,243

 

 

$

4,030

 

 

 

3.42

%

 

 

3.35

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.48

%

 

 

3.44

%

 

(1)

Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 34.00% tax rate.

-28-


 

Provision and Allowance for Loan Losses

The provision for loan losses was $240,000 for the three months ending September 30, 2016 compared to a recovery of ($323,000) for the same period in 2015. There were net loan charge-offs of $97,000 for the three months ended September 30, 2016, as compared with net loan charge-offs of $43,000 during the same period of 2015. Refer to the Asset Quality discussion on page 32 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like all financial institutions, diversification of our revenue base is of major importance in our long term success. Total noninterest income increased $343,000 for the three-month period ending September 30, 2016 as compared to the same period in 2015. The primary factor contributing to the overall increase was an increase in income from mortgage loan sales of $405,000, increasing from $706,000 for the quarter ended September 30, 2015 to $1.1 million for the same period in 2016. During 2015, the Company expanded its mortgage operation into a neighboring market. This expansion and the resulting increase in mortgage loan origination volume was the driving force behind the growth in income from loan sales. Service charges on deposit accounts produced revenue of $309,000, a decrease of $29,000 for the three months ended September 30, 2016. The primary factor leading to this decrease was a decrease in NSF (non-sufficient funds) fees for the comparable periods.

Noninterest Expense

Noninterest expense for the quarter ended September 30, 2016 was $5.8 million compared to the same value for the same period of 2015. Salaries and employee benefits, the largest component of noninterest expense, increased $166,000 for the quarter ending September 30, 2016. The majority of this increase is attributable to the increase in staffing and commissions related to the expansion of the mortgage department. Foreclosed real estate expense decreased $115,000 for the three months ending September 30, 2016 compared to the same period in 2015. We continue to focus on reducing the number of foreclosed properties through sales, which lowers the ongoing maintenance expense, as well as the annual taxes and insurance. Other noninterest expense decreased $87,000 for the comparable three-month periods. The table below reflects the composition of other noninterest expense.

Other noninterest expense

 

 

 

Three Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Postage

 

$

45

 

 

$

46

 

Telephone and data lines

 

 

41

 

 

 

40

 

Insurance

 

 

134

 

 

 

124

 

Shareholder relations expense

 

 

33

 

 

 

18

 

Dues and subscriptions

 

 

49

 

 

 

42

 

Other

 

 

232

 

 

 

351

 

Total

 

$

534

 

 

$

621

 

 

Income Tax Expense

The Company had income tax expense of $228,000 for the three months ended September 30, 2016 at an effective tax rate of 29.69% compared to income tax expense of $223,000 with an effective tax rate of 28.44% in the 2015 period. Income taxes computed at the statutory rate are affected primarily by the eligible amount of interest earned on state and municipal securities, tax-free municipal loans and income earned on bank owned life insurance. The effective tax rate increased as we had less interest income from tax-free bonds and loans. 

During the third quarter of 2016, period ended September 30, 2016, the North Carolina State tax rate dropped to 3%, which called for a rate revaluation of our deferred tax asset. The impact is immaterial to the presented financials.

-29-


 

Comparison of Results of Operations for the Nine Months Ended September 30, 2016 and 2015.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $1.8 million for the nine months ended September 30, 2016, as compared to $1.9 million for the nine months ended September 30, 2015, a decrease of $98,000. Net income available to common shareholders was $1.3 million or $0.19 per common share for the nine months ended September 30, 2016, compared to $1.4 million or $0.20 per common share for the nine months ended September 30, 2015. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.

Net Interest Income

Net interest income for the nine months ended September 30, 2016 was $12.4 million compared to $12.0 million for the nine months ending September 30, 2015. During the nine months ending September 30, 2016, the volume of interest-earning assets increased, outpacing the decline in volume of interest-bearing liabilities by $628,000. The average yield on our interest–earning assets declined six basis points to 3.80%, while the average rate we paid for our interest-bearing liabilities decreased eleven basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve adjusts interest rates, while interest-bearing time deposits adjust at the time of maturity. The aforementioned changes resulted in an increase of five basis points in our interest rate spread to 3.44% for the first nine months of 2016, compared to 3.39% for the first nine months of 2015. Our net interest margin was 3.52% and 3.48% for the comparable nine-month periods in 2016 and 2015, respectively. A portion of the Company’s loan portfolio has interest rate floors and caps in place on the loans. This feature has allowed the Company to maintain a stronger interest margin, while there has been a decline in rates; however, this feature could hurt the margin in a rising rate environment.

The following table presents average balance sheets and a net interest income analysis for the nine months ended September 30, 2016 and 2015:

Average Balance Sheet and Net Interest Income Analysis

For the Nine Months Ended September 30,

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balance

 

 

Income/Expenses

 

 

Rate/Yield

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

$

85,149

 

 

$

99,979

 

 

$

973

 

 

$

1,175

 

 

 

1.53

%

 

 

1.57

%

Nontaxable securities (1)

 

 

19,291

 

 

 

14,569

 

 

 

375

 

 

 

290

 

 

 

4.20

%

 

 

4.98

%

Short-term investments

 

 

49,458

 

 

 

48,109

 

 

 

235

 

 

 

126

 

 

 

0.63

%

 

 

0.35

%

Taxable loans

 

 

316,102

 

 

 

300,062

 

 

 

11,506

 

 

 

11,453

 

 

 

4.86

%

 

 

5.10

%

Non-taxable loans (1)

 

 

16,405

 

 

 

14,330

 

 

 

315

 

 

 

331

 

 

 

4.21

%

 

 

4.28

%

Total interest-earning assets

 

 

486,405

 

 

 

477,049

 

 

 

13,404

 

 

 

13,375

 

 

 

3.80

%

 

 

3.86

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

363,839

 

 

 

367,527

 

 

 

563

 

 

 

875

 

 

 

0.21

%

 

 

0.32

%

Short-term borrowed funds

 

 

3,582

 

 

 

3,326

 

 

 

32

 

 

 

44

 

 

 

1.19

%

 

 

1.77

%

Long-term debt

 

 

9,543

 

 

 

10,932

 

 

 

412

 

 

 

411

 

 

 

5.77

%

 

 

5.02

%

Total interest bearing liabilities

 

 

376,964

 

 

 

381,785

 

 

 

1,007

 

 

 

1,330

 

 

 

0.36

%

 

 

0.47

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

$

109,441

 

 

$

95,264

 

 

$

12,397

 

 

$

12,045

 

 

 

3.44

%

 

 

3.39

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.52

%

 

 

3.48

%

 

(1)

Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 34% tax rate in 2016.

Provision and Allowance for Loan Losses

The Company had a provision of $70,000 for the nine months ending September 30, 2016 compared to $(620,000) recovered for the same period in 2015. There were net loan charge-offs of $105,000 for the nine months ended September 30, 2016 as compared with net loan charge-offs of $156,000 during the same period of 2015. Refer to the Asset Quality discussion beginning on page 32 for further information.

-30-


 

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 in our long-term success. Total noninterest income increased $1.4 million for the nine-month period ending September 30, 2016 as compared to the same period in 2015. Income from mortgage loan sales was $2.8 million for the nine months ended September 30, 2016 compared to $1.7 million for the same period in 2015. Service charges on deposit accounts produced revenue of $904,000 for the nine months ended September 30, 2016, a decrease of $75,000 compared to the same period in 2015. Other service fees and commissions experienced a 9.0% increase for the comparable nine-month period. This increase was directly related to increased brokerage commissions. Gains realized on the sale of securities were $544,000 for the first nine months in 2016 compared to $502,000 for the same period in 2015.

Noninterest Expense

Noninterest expense for the nine months ended September 30, 2016 was $17.8 million compared to $16.6 million for the same period of 2015; an increase of $1.2 million. Salaries and employee benefits, the largest component of noninterest expense, increased $1.0 million for the nine months ending September 30, 2016. The majority of this increase is attributable to the increase in staffing and commissions paid related to the expansion of the mortgage department. Electronic banking expense increased $109,000 during the nine months ending September 30, 2016 as compared to the same period in 2015. Professional fees and services increased $84,000 during the nine months ending September 30, 2016 as compared to the same period in 2015. FDIC deposit insurance premiums declined $27,000 for the comparable periods. Foreclosed real estate expense decreased $214,000 for the nine months ending September 30, 2016 compared to the same period in 2015. The driver of this decline is the overall decline in outstanding other real estate owned. Other noninterest expense increased $173,000 for the comparable nine-month periods. The table below reflects the composition of other noninterest expense.

Other noninterest expense

 

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

 

(dollars in thousands)

 

Postage

 

$

145

 

 

$

148

 

Telephone and data lines

 

 

125

 

 

 

124

 

Insurance expense

 

 

364

 

 

 

393

 

Shareholder relations expense

 

 

100

 

 

 

106

 

Dues and subscriptions

 

 

146

 

 

 

127

 

Other

 

 

1,054

 

 

 

863

 

Total

 

$

1,934

 

 

$

1,761

 

 

Income Tax Expense

The Company had income tax expense of $745,000 for the nine months ended September 30, 2016 resulting in an effective tax rate of 29.74%, compared to income tax expense of $799,000 and an effective rate of 30.07% in the 2015 period.

Asset Quality

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

-31-


 

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 to be 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, 2016 the levels of our impaired loans, which includes all loans in nonaccrual status, TDRs and other loans deemed by management to be impaired, were $5.8 million compared to $5.5 million at December 31, 2015, a net increase of $358,000. Total nonaccrual loans, which are a component of impaired loans, increased from $783,000 at December 31, 2015 to $1.2 million at September 30, 2016. During the nine months of 2016, six relationships totaling $1.3 million were added to impaired loans. These additions were offset in part by three impaired relationships totaling $95,000 being charged off and net pay downs of $123,000.

The allowance, expressed as a percentage of gross loans held for investment, decreased seven basis points from 0.90% at December 31, 2015 to 0.83% at September 30, 2016. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans decreased from 0.86% at December 31, 2015 to 0.80% at September 30, 2016, which is attributable to an increase in non-impaired loans of $24.1 million as a result of net loan growth. Intuitively growth in the loan portfolio would indicate an increase in the reserve; however, the overall quality of performing loans in the loan portfolio has improved.  New loan production has credit metrics that indicate a lower probability of default, thus lowering the expected loss associated with those credits compared to the overall loan portfolio. The combined (current book and new production) loan portfolio is less risky; therefore, as current loans contractually pay down and new production is booked – growing the overall portfolio, the allowance as a percentage of loans, declines, similar to the expected loss of the overall blended portfolio. The individually evaluated allowance as a percentage of individually evaluated loans decreased from 3.31% to 2.14% for the same periods due to an increase of individually evaluated loans that are sufficiently collateralized, therefore requiring no additional allowance. 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 credit scores which is one of the components used within the allowance model semi-annually, during the first and third quarters. The probability of default associated with each credit score is the major driver in the overall decrease in the allowance for loan losses, thus reducing the balance of the allowance.

Nonperforming loans, which consist of nonaccrual loans and loans past due 90 days and still accruing, to total loans increased from 0.24% at December 31, 2015, to 0.34% at September 30, 2016.

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 $559,000 during the third quarter of 2016. The Company sold five pieces of foreclosed property totaling $123,000 realizing a loss of ($14,000). The Company had no write-downs or changes in reserves on the remaining existing property, except an $18,000 decrease in reserves on one property where a small piece was sold. The majority of the property is still held by the Bank. There was one loan foreclosed on during the third quarter with a book value of $198,000.

-32-


 

Troubled debt restructured loans at September 30, 2016 totaled $4.1 million compared to $4.5 million at December 31, 2015 and are included in impaired loans. At September 30, 2016, there were no troubled debt restructured loans in nonaccrual status.

The following table shows the comparison of nonperforming assets at September 30, 2016 to December 31, 2015:

Nonperforming Assets

(dollars in thousands)

 

 

 

September 30,

2016

 

 

December 31,

2015

 

Nonperforming assets:

 

 

 

 

 

 

 

 

Loans past due 90 days or more

 

$

 

 

$

 

Nonaccrual loans

 

 

1,184

 

 

 

783

 

Other real estate owned

 

 

4,435

 

 

 

4,994

 

Total nonperforming assets

 

$

5,619

 

 

$

5,777

 

 

 

 

 

 

 

 

 

 

Allowance for loans losses

 

$

2,849

 

 

$

2,884

 

Nonperforming loans to total loans

 

 

0.34

%

 

 

0.24

%

Allowance for loan losses to total loans

 

 

0.83

%

 

 

0.90

%

Nonperforming assets to total assets

 

 

1.02

%

 

 

1.09

%

Allowance for loan losses to nonperforming loans

 

 

240.51

%

 

 

368.23

%

 

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 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 $28 million at September 30, 2016, with available credit of $28 million; established borrowing relationships with the Federal Home Loan Bank, with available credit of $52.7 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of $26.3 million and the issuance of commercial paper. The Company has also secured long-term debt from other sources. Total debt from these sources aggregated $9.5 million at September 30, 2016, compared to $15.3 million at December 31, 2015.

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.

The Company continues to maintain capital ratios that support its asset growth. Bank regulatory agencies approved regulatory capital guidelines (“Basel III”) aimed at strengthening existing capital requirements for banking organizations. Under the final rules, minimum requirements increase for both the quantity and quality of capital held by the Company. The rules include a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.50%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.00% to 6.00%, require a minimum ratio of total capital to risk-weighted assets of 8.00%, and require a minimum Tier 1 leverage ratio of 4.00%. A new capital conservation buffer, comprised of common equity Tier 1 capital, was also established above the regulatory minimum capital requirements. This capital conservation buffer will be phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increase each subsequent year by an additional 0.625% until reaching its final level of 2.50% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. The final rules also revise the definition and calculation of Tier 1 capital, total capital, and risk-weighted assets.

The phase-in period for the final rules became effective for the Company and its subsidiary bank on January 1, 2015, with full compliance of all the final rules’ requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019. As of September 30, 2016, the Company and its subsidiary bank continue to exceed minimum capital standards and remain well-capitalized under the new rules.

-33-


 

As previously discussed, the Company’s subsidiary bank has a net total of $10.6 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 $10.6 million is presented as noncontrolling interest at the Company level and qualifies as Tier 1 capital at the Company. At September 30, 2016, 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, 2015.

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 2016. 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.

-34-


 

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, 2016.

 

 

 

(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, 2016 Through July 31, 2016

 

 

 

 

$

 

 

 

 

 

$

 

August 1, 2016 Through August 31, 2016

 

 

24,623

 

 

$

4.46

 

 

 

 

 

$

 

September 1, 2016 Through September 30, 2016

 

 

22,123

 

 

$

4.62

 

 

 

 

 

$

 

Total

 

 

46,746

 

 

$

4.54

 

 

 

 

 

$

 

 

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.

 

 

-35-


 

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, 2016, 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.

(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)

Incorporated by reference to Registrant’s Annual Report on Form 10-Q for the Quarter ended June 30, 2011.

(8)

Incorporated by reference to Registrant’s Current Report on Form 8-K dated June 30, 2015.

(9)

Incorporated by reference to Registrant’s Registration Statement on Form S-8 dated October 27, 2015.

 

 

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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 8, 2016

 

By:

 

/s/ Roger L. Dick

 

 

 

 

Roger L. Dick

 

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

Date:

 

November 8, 2016

 

By:

 

/s/ R. David Beaver, III

 

 

 

 

R. David Beaver, III

 

 

 

 

Principal Financial Officer

 

 

-37-


 

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, 2016, 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.

(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)

Incorporated by reference to Registrant’s Annual Report on Form 10-Q for the Quarter ended June 30, 2011.

(8)

Incorporated by reference to Registrant’s Current Report on Form 8-K dated June 30, 2015.

(9)

Incorporated by reference to Registrant’s Registration Statement on Form S-8 dated October 27, 2015.

 

 

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