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UWHARRIE CAPITAL CORP - Quarter Report: 2012 September (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2012

OR

 

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

For the transition period from          to         .

COMMISSION FILE NUMBER 000-22062

 

 

UWHARRIE CAPITAL CORP

(Exact name of registrant as specified in its charter)

 

 

 

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

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

N/A

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

 

 

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

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

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 7,522,902 shares of common stock outstanding as of November 5, 2012.

 

 

 


Table of Contents

Table of Contents

 

         Page No.  
Part I.  

FINANCIAL INFORMATION

  
Item 1 -  

Financial Statements (Unaudited)

  
 

Consolidated Balance Sheets September 30, 2012 and December 31, 2011

     3   
 

Consolidated Statements of Income for the Three and Nine Months Ended September, 2012 and 2011

     4   
 

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011

     5   
 

Consolidated Statements of Changes in Shareholders’ Equity Nine Months Ended September 30, 2012

     6   
 

Consolidated Statements of Cash Flows Nine Months Ended September 30, 2012 and 2011

     7   
 

Notes to Consolidated Financial Statements

     8   
Item 2 -  

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

     26   
Item 3 -  

Quantitative and Qualitative Disclosures about Market Risk

     34   
Item 4 -  

Controls and Procedures

     35   
Part II.  

OTHER INFORMATION

  
Item 1 -  

Legal Proceedings

     35   
Item 1A -  

Risk Factors

     35   
Item 2 -  

Unregistered Sales of Equity Securities and Use of Proceeds

     36   
Item 3 -  

Defaults Upon Senior Securities

     36   
Item 4 -  

Mine Safety Disclosures

     36   
Item 5 -  

Other Information

     36   
Item 6 -  

Exhibits

     37   
 

Exhibit Index

     40   

 

-2-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

 

Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements

 

     September 30,        
     2012     December 31,  
     (Unaudited)     2011*  
     (dollars in thousands)  

ASSETS

    

Cash and due from banks

   $ 6,766      $ 7,487   

Interest-earning deposits with banks

     19,431        21,200   

Securities available for sale, at fair value

     130,274        88,661   

Loans held for sale

     1,025        1,958   

Loans:

    

Loans held for investment

     339,343        366,675   

Less allowance for loan losses

     (6,883     (6,815
  

 

 

   

 

 

 

Net loans held for investment

     332,460        359,860   
  

 

 

   

 

 

 

Premises and equipment, net

     14,968        15,076   

Interest receivable

     1,935        2,084   

Restricted stock

     2,265        3,289   

Bank owned life insurance

     6,354        6,171   

Goodwill

     987        987   

Other real estate owned

     8,947        10,258   

Prepaid assets

     928        1,347   

Other assets

     8,563        8,524   
  

 

 

   

 

 

 

Total assets

   $ 534,903      $ 526,902   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Demand noninterest-bearing

   $ 66,630      $ 62,339   

Interest checking and money market accounts

     203,098        185,539   

Savings deposits

     43,392        39,273   

Time deposits, $100,000 and over

     55,746        58,274   

Other time deposits

     81,534        85,913   
  

 

 

   

 

 

 

Total deposits

     450,400        431,338   
  

 

 

   

 

 

 

Short-term borrowed funds

     20,635        20,791   

Long-term debt

     12,676        25,233   

Interest payable

     277        301   

Other liabilities

     4,509        3,636   
  

 

 

   

 

 

 

Total liabilities

     488,497        481,299   
  

 

 

   

 

 

 

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

    

SHAREHOLDERS’ EQUITY

    

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

    

10,000 shares of series A issued and outstanding

     10,000        10,000   

500 shares of series B issued and outstanding

     500        500   

Discount on preferred stock

     (125     (200

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

    

7,522,902 and 7,593,929 shares, respectively

     9,404        9,492   

Additional paid-in capital plus stock option surplus

     13,828        14,010   

Unearned ESOP compensation

     (883     (772

Undivided profits

     11,258        10,379   

Accumulated other comprehensive income

     2,424        2,194   
  

 

 

   

 

 

 

Total shareholders’ equity

     46,406        45,603   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 534,903      $ 526,902   
  

 

 

   

 

 

 

 

(*) Derived from audited consolidated financial statements

See accompanying notes

 

-3-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  
     (in thousands, except share and per share data)  

Interest Income

        

Loans, including fees

   $ 4,809      $ 5,499      $ 14,957      $ 16,258   

Investment securities

        

US Treasury

     145        152        432        594   

US Government agencies and corporations

     375        294        768        796   

State and political subdivisions

     75        92        255        279   

Interest-earning deposits with banks and federal funds sold

     29        21        101        39   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     5,433        6,058        16,513        17,966   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

        

Interest checking and money market accounts

     129        202        414        645   

Savings deposits

     49        82        154        246   

Time deposits, $100,000 and over

     195        278        610        844   

Other time deposits

     250        282        770        883   

Short-term borrowed funds

     98        89        253        271   

Long-term debt

     180        259        621        807   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     901        1,192        2,822        3,696   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     4,532        4,866        13,691        14,270   

Provision for loan losses

     391        483        1,094        2,012   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     4,141        4,383        12,597        12,258   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Income

        

Service charges on deposit accounts

     450        476        1,318        1,369   

Other service fees and commissions

     801        885        2,392        2,651   

Gain (loss) on sale of securities

     —          —          16        933   

Gain (loss) on fixed assets and other assets

     (80     (51     216        (56

Income from mortgage loan sales

     1,102        407        2,578        1,121   

Other income

     107        82        345        287   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     2,380        1,799        6,865        6,305   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Expense

        

Salaries and employee benefits

     3,215        3,071        9,478        9,166   

Net occupancy expense

     293        305        863        888   

Equipment expense

     185        179        556        579   

Data processing costs

     204        213        638        630   

Office supplies and printing

     93        76        245        247   

Foreclosed real estate expense

     547        355        1,357        480   

Professional fees and services

     295        414        467        1,160   

Marketing and donations

     146        127        484        424   

Electronic banking expense

     227        228        681        656   

Software amortization and maintenance

     140        145        423        421   

FDIC insurance

     173        171        518        575   

Other noninterest expense

     632        594        1,828        1,757   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     6,150        5,878        17,538        16,983   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     371        304        1,924        1,580   

Income taxes

     109        49        561        407   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 262      $ 255      $ 1,363      $ 1,173   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 262        255        1,363        1,173   

Dividends – preferred stock

     (161     (161     (484     (484
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 101      $ 94      $ 879      $ 689   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share

        

Basic

   $ 0.01      $ 0.01      $ 0.12      $ 0.09   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.01      $ 0.01      $ 0.12      $ 0.09   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

        

Basic

     7,354,468        7,464,970        7,397,130        7,472,411   

Diluted

     7,354,468        7,464,970        7,397,130        7,472,411   

See accompanying notes

 

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Table of Contents

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
        2012             2011             2012             2011      
    (in thousands)  

Net Income

  $ 262      $ 255      $ 1,363      $ 1,173   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

       

Unrealized gain on available for sale securities

    414        2,332        366        3,477   

Related tax effect

    (143     (808     (126     (1,234

Reclassification of (gain) loss recognized in net income

    —          —          (16     (933

Related tax effect

    —          —          6        360   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

    271        1,524        230        1,670   
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 533      $ 1,779      $ 1,593      $ 2,843   
 

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

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Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

 

 

    Number of                                               Accumulated        
    Common     Preferred     Preferred     Discount on           Additional     Unearned           Other        
    Shares     Stock     Stock     Preferred     Common     Paid-in     ESOP     Undivided     Comprehensive        
    Issued     Series A     Series B     Stock     Stock     Capital     Compensation     Profits     Income (Loss)     Total  
    (in thousands, except share data)  

Balance, December 31, 2011

    7,593,929      $ 10,000      $ 500      $ (200   $ 9,492      $ 14,010      $ (772   $ 10,379      $ 2,194      $ 45,603   

Net income

    —          —          —          —          —          —          —          1,363        —          1,363   

Repurchase of common stock

    (69,854     —          —          —          (87     (156     —          —          —          (243

Retirement of common stock

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

Other comprehensive income

    —          —          —          —          —          —          —          —          230        230   

Release of ESOP shares

    —          —          —          —          —          (30     65        —          —          35   

Increase in ESOP notes receivable

    —          —          —          —          —          —          (176     —          —          (176

Stock compensation expense

    —          —          —          —          —          3        —          —          —          3   

Record preferred stock dividend and discount accretion

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012

    7,522,902      $ 10,000      $ 500      $ (125   $ 9,404      $ 13,828      $ (883   $ 11,258      $ 2,424      $ 46,406   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

-6-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

     Nine Months Ended  
     September 30,  
     2012     2011  
     (dollars in thousands)  

Cash flows from operating activities

  

Net income

   $ 1,363      $ 1,173   

Adjustments to reconcile net income to net cash

    

Provided by operating activities:

    

Depreciation

     718        615   

Net amortization of security premiums/discounts

     907        603   

Net amortization of mortgage servicing rights

     609        416   

Impairment of foreclosed real estate

     988        31   

Impairment of other assets

     50        —     

Provision for loan losses

     1,094        2,012   

Stock compensation

     3        4   

Net realized gain on sales / calls of available for sale securities

     (16     (933

Income from mortgage loan sales

     (2,578     (1,121

Proceeds from sales of loans held for sale

     89,969        42,793   

Origination of loans held for sale

     (86,458     (37,173

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

     (276     13   

Increase in cash surrender value of life insurance

     (183     (144

Loss on sales of foreclosed real estate

     60        43   

Release of ESOP shares

     35        60   

Net change in interest receivable

     149        490   

Net change in other assets

     137        (751

Net change in interest payable

     (24     (35

Net change in other liabilities

     873        619   
  

 

 

   

 

 

 

Net cash provided by operating activities

     7,420        8,715   
  

 

 

   

 

 

 

Cash flows from investing activities

    

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

     19,215        35,497   

Purchase of securities available for sale

     (61,369     (28,020

Net change in loans

     24,845        (3,999

Purchase of premises and equipment

     (610     (1,147

Proceeds from sales of foreclosed real estate

     1,724        577   

Investment in other assets

     (260     (185

Net decrease in restricted stock

     1,024        511   
  

 

 

   

 

 

 

Net cash provided by investing activities

     (15,431     3,234   
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net increase (decrease) in deposit accounts

     19,062        (9,864

Net increase (decrease) in short-term borrowed funds

     (156     9,598   

Net decrease in long-term debt

     (12,557     (11,533

Proceeds from issuance of new junior subordinated debt

     —          4,438   

Repayment of junior subordinated debt

     —          (730

Repurchase of common stock

     (243     —     

Increase in unearned ESOP compensation

     (176     (94

Dividends on preferred stock

     (409     (409
  

 

 

   

 

 

 

Net cash used in financing activities

     5,521        (8,594
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (2,490     3,355   

Cash and cash equivalents, beginning of period

     28,687        13,624   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 26,197      $ 16,979   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information

    

Interest paid

   $ 2,846      $ 3,731   

Income taxes paid

     78        216   

Supplemental Schedule of Non-Cash Activities

    

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

     230        7,527   

Loans transferred to foreclosed real estate

     1,649        1,670   

Company financed sales of other real estate owned

     (188     —     

See accompanying notes

 

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Table of Contents

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 - Basis of Presentation

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

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

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to consolidated financial statements filed as part of the Company’s 2011 Annual Report on Form 10-K. This Quarterly Report should be read in conjunction with such Annual Report.

Note 2 – Comprehensive Income

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

Note 3 – Per Share Data

Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for stock dividends. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. For the nine months ended September 30, 2012, the Company’s 122,341 stock options outstanding did not have a dilutive effect on per share results because the exercise prices exceeded the share values for each period. The Company had 123,570 stock options outstanding at September 30, 2011 and they did not have a dilutive effect.

 

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Table of Contents

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

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Weighted average number of common shares outstanding

     7,524,075        7,593,929        7,524,075        7,593,929   

Effect of ESOP shares

     (169,607     (128,959     (126,945     (121,518
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     7,354,468        7,464,970        7,397,130        7,472,411   

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

     7,354,468        7,464,970        7,397,130        7,472,411   
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 4 – Investment Securities

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

 

            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  

September 30, 2012

   Cost      Gains      Losses      Value  
     (dollars in thousands)  

U.S. Treasury

   $ 33,263       $ 1,777       $ —         $ 35,040   

U.S. Government agencies

     35,484         937         14         36,407   

GSE - Mortgage-backed securities and CMO’s

     49,636         393         139         49,890   

State and political subdivisions

     8,182         755         —           8,937   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 126,565       $ 3,862       $ 153       $ 130,274   
  

 

 

    

 

 

    

 

 

    

 

 

 
            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  

December 31, 2011

   Cost      Gains      Losses      Value  
     (dollars in thousands)  

U.S. Treasury

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

U.S. Government agencies

     19,142         855         —           19,997   

GSE - Mortgage-backed securities and CMO’s

     24,016         332         85         24,263   

State and political subdivisions

     10,071         798         —           10,869   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

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

 

 

    

 

 

    

 

 

    

 

 

 

At both September 30, 2012 and December 31, 2011 the Company owned Federal Reserve stock reported at cost of $802,850 and is included in other assets. Also at September 30, 2012 and December 31, 2011, the Company owned Federal Home Loan Bank Stock (FHLB) of $1.5 million and $2.5 million, respectively. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership in, and borrowings, with these banks. These investments are carried at cost since there is no ready market and historically redemption has been made at par value. The Company estimated that the fair value approximated cost and that these investments were not impaired at September 30, 2012.

 

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Table of Contents

Results from sales of securities available for sale for the three and nine month period ended September 30, 2012 and September 30, 2011 are as follows:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2012      2011      2012     2011  
     (dollars in thousands)  

Gross proceeds from sales

   $ —         $ —         $ 8,996      $ 25,568   
  

 

 

    

 

 

    

 

 

   

 

 

 

Realized gains from sales

   $ —         $ —         $ 128      $ 933   

Realized losses from sales

     —           —           (112     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Realized gains

   $ —         $ —         $ 16      $ 933   
  

 

 

    

 

 

    

 

 

   

 

 

 

At September 30, 2012 and December 31, 2011 securities available for sale with a carrying amount of $46.4 million and $37.7 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2012 and December 31, 2011. These unrealized losses on investment securities are a result of temporary fluctuations in the market prices due to a rise in interest rates, which will adjust if rates decline, and a volatile market and are in no way a reflection of the quality of the investments. At September 30, 2012, the unrealized losses related to one government agency bond and seven mortgage backed securities. At December 31, 2011, the unrealized losses related to three mortgage backed securities.

 

     Less than 12 Months      12 Months or More      Total  
            Unrealized             Unrealized             Unrealized  

September 30, 2012

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

Securities available for sale temporary impairment

                 

U.S. Government agencies

   $ 2,807       $ 14       $ —         $ —         $ 2,807       $ 14   

GSE - Mortgage-backed securities and CMO’s

     23,902         139         —           —           23,902         139   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 26,709       $ 153       $ —         $ —         $ 26,709       $ 153   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12 Months      12 Months or More      Total  
            Unrealized             Unrealized             Unrealized  

December 31, 2011

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

Securities available for sale temporary impairment

                 

GSE - Mortgage-backed securities and CMO’s

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. At September 30, 2012, the Company had no intent to sell and not more likely than not to be required to sell the available for sale securities that were in a loss position prior to full recovery

 

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Table of Contents

The aggregate amortized cost and fair value of the available for sale securities portfolio at September 30, 2012 by remaining contractual maturity are as follows:

 

     September 30, 2012  
     Amortized      Estimated      Book  

Securities available for sale

   Cost      Fair Value      Yield (1)  

U. S. Treasury

        

Due after one but within five years

     16,290         17,210         1.90

Due after five but within ten years

     16,973         17,830         1.76
  

 

 

    

 

 

    

 

 

 
     33,263         35,040         1.83
  

 

 

    

 

 

    

 

 

 

U.S. Government agencies

        

Due after one but within five years

     26,648         27,479         1.84

Due after five but within ten years

     8,836         8,928         1.43
  

 

 

    

 

 

    

 

 

 
     35,484         36,407         1.73
  

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

        

Due after five but within ten years

     7,008         7,141         3.50

Due after ten years

     42,628         42,749         2.89
  

 

 

    

 

 

    

 

 

 
     49,636         49,890         2.98
  

 

 

    

 

 

    

 

 

 

State and political subdivisions

        

Due within twelve months

     351         354         3.63

Due after one but within five years

     1,562         1,648         3.51

Due after five but within ten years

     4,771         5,296         3.10

Due after ten years

     1,498         1,639         4.12
  

 

 

    

 

 

    

 

 

 
     8,182         8,937         3.39
  

 

 

    

 

 

    

 

 

 

Total Securities available for sale

        

Due within twelve months

     351         354         3.63

Due after one but within five years

     44,500         46,337         1.92

Due after five but within ten years

     37,588         39,195         2.18

Due after ten years

     44,126         44,388         2.93
  

 

 

    

 

 

    

 

 

 
   $ 126,565       $ 130,274         2.35
  

 

 

    

 

 

    

 

 

 

 

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

Note 5 – Loans Held for Investment

The composition of net loans held for investment by class as of September 30, 2012 and December 31, 2011 are as follows:

 

     September 30,     December 31,  
     2012     2011  
     (dollars in thousands)  

Commercial

    

Commercial

   $ 41,628      $ 45,907   

Real estate - commercial

     106,628        114,944   

Other real estate construction loans

     26,379        31,601   

Noncommercial

    

Real estate 1-4 family construction

     2,827        5,543   

Real estate - residential

     97,286        101,847   

Home equity

     50,432        51,413   

Consumer loans

     13,309        14,710   

Other loans

     768        602   
  

 

 

   

 

 

 
     339,257        366,567   

Less:

    

Allowance for loan losses

     (6,883     (6,815

Deferred loan (fees) costs, net

     86        108   
  

 

 

   

 

 

 

Loans held for investment, net

   $ 332,460      $ 359,860   
  

 

 

   

 

 

 

 

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Table of Contents

Note 6 - 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, 2012 and 2011, respectively:

 

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

Commercial

   2012     2011     2012     2011  
     (dollars in thousands)  

Balance, beginning of period

   $ 2,650      $ 3,662      $ 2,904      $ 5,363   

Provision (recovery) charged to operations

     424        370        476        1,184   

Charge-offs

     (367     (1     (721     (2,520

Recoveries

     5        4        53        8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs)

     (362     3        (668     (2,512

Balance at end of period

   $ 2,712      $ 4,035      $ 2,712      $ 4,035   
  

 

 

   

 

 

   

 

 

   

 

 

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

Non-Commercial

   2012     2011     2012     2011  
     (dollars in thousands)  

Balance, beginning of period

   $ 4,419      $ 3,612      $ 3,911      $ 3,704   

Provision (recovery) charged to operations

     (33     113        618        828   

Charge-offs

     (229     (118     (400     (994

Recoveries

     14        24        42        93   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs)

     (215     (94     (358     (901
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 4,171      $ 3,631      $ 4,171      $ 3,631   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at September 30, 2012 and December 31, 2011:

 

     Individually Evaluated      Collectively Evaluated      Total  

September 30, 2012

   Reserve      Loans      Reserve      Loans      Reserve      Loans  
     (dollars in thousands)  

Commercial

   $ 1,240       $ 17,308       $ 1,472       $ 157,777       $ 2,712       $ 175,085   

Non-Commercial

     1,428         15,149         2,743         149,023         4,171         164,172   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,668       $ 32,457       $ 4,215       $ 306,800       $ 6,883       $ 339,257   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Individually Evaluated      Collectively Evaluated      Total  

December 31, 2011

   Reserve      Loans      Reserve      Loans      Reserve      Loans  
     (dollars in thousands)  

Commercial

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

Non-Commercial

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

            Loans                           Accruing  
     Loans      90 Days                           Loans 90 or  
     30-89 Days      or More      Total Past      Current      Total      More Days  

September 30, 2012

   Past Due      Past due      Due Loans      Loans      Loans      Past Due  
     (dollars in thousands)  

Commercial

   $ 428       $ 37       $ 465       $ 41,163       $ 41,628       $ —     

Real estate - commercial

     629         2,235         2,864         103,764         106,628         —     

Other real estate construction

     250         3,193         3,443         22,936         26,379         —     

Real estate 1 -4 family construction

     —           —           —           2,827         2,827         —     

Real estate - residential

     1,549         2,845         4,394         92,892         97,286         —     

Home equity

     690         306         996         49,436         50,432         —     

Consumer loans

     203         1         204         13,105         13,309         —     

Other loans

     —           —           —           768         768         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,749       $ 8,617       $ 12,366       $ 326,891       $ 339,257       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
            Loans                           Accruing  
     Loans      90 Days                           Loans 90 or  
     30-89 Days      or More      Total Past      Current      Total      More Days  

December 31, 2011

   Past Due      Past due      Due Loans      Loans      Loans      Past Due  
     (dollars in thousands)  

Commercial

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

Real estate - commercial

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

Other real estate construction

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

Real estate construction

     —           —           —           5,543         5,543         —     

Real estate - residential

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

Home equity

     298         255         553         50,860         51,413         —     

Consumer loan

     208         11         219         14,491         14,710         —     

Other loans

     —           —           —           602         602         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Once a loan becomes 90 days past due, the loan is automatically transferred to a nonaccrual status. The exception to this policy is credit card loans that remain in accruing 90 days or more until they are paid current or charged off. Also, mortgage loans that were originated for sale but were not sold and are being held in the loan portfolio remain in an accruing status until they are foreclosed.

The composition of nonaccrual loans by class as of September 30, 2012 and December 31, 2011 is as follows:

 

     September 30,      December 31,  
     2012      2011  
     (dollars in thousands)  

Commercial

   $ 37       $ 329   

Real estate - commercial

     2,235         2,742   

Other real estate construction

     3,193         2,084   

Real estate 1 – 4 family construction

     —           —     

Real estate – residential

     2,845         2,441   

Home equity

     306         255   

Consumer loans

     1         11   

Other loans

     —           —     
  

 

 

    

 

 

 
   $ 8,617       $ 7,862   
  

 

 

    

 

 

 

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

 

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Table of Contents

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

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

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

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

The tables below summarize risk grades of the loan portfolio by class at September 30, 2012 and December 31 2011:

 

                   Sub-                

September 30, 2012

   Pass      Watch      standard      Doubtful      Total  
     (dollars in thousands)  

Commercial

   $ 39,828       $ 1,113       $ 687       $ —         $ 41,628   

Real estate - commercial

     88,921         8,469         9,238         —           106,628   

Other real estate construction

     21,279         480         4,620         —           26,379   

Real estate 1 - 4 family construction

     2,827         —           —           —           2,827   

Real estate - residential

     81,621         7,613         8,052         —           97,286   

Home equity

     48,481         702         1,249         —           50,432   

Consumer loans

     12,617         493         199         —           13,309   

Other loans

     768         —           —           —           768   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 296,342       $ 18,870       $ 24,045       $ —         $ 339,257   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                   Sub-                

December 31, 2011

   Pass      Watch      standard      Doubtful      Total  
     (dollars in thousands)  

Commercial

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

Real estate - commercial

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

Other real estate construction

     26,256         745         4,600         —           31,601   

Real estate 1 - 4 family construction

     5,538         5         —           —           5,543   

Real estate - residential

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

Home equity

     49,743         861         809         —           51,413   

Consumer loans

     13,970         332         408         —           14,710   

Other loans

     602         —           —           —           602   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. The following tables show the breakdown between performing and nonperforming loans by class at September 30, 2012 and December 31, 2011:

 

            Non-         

September 30, 2012

   Performing      Performing      Total  
     (dollars in thousands)  

Commercial

   $ 41,591       $ 37       $ 41,628   

Real estate - commercial

     104,393         2,235         106,628   

Other real estate construction

     23,186         3,193         26,379   

Real estate 1 – 4 family construction

     2,827         —           2,827   

Real estate – residential

     94,441         2,845         97,286   

Home equity

     50,126         306         50,432   

Consumer loans

     13,308         1         13,309   

Other loans

     768         —           768   
  

 

 

    

 

 

    

 

 

 

Total

   $ 330,640       $ 8,617       $ 339,257   
  

 

 

    

 

 

    

 

 

 
            Non-         

December 31, 2011

   Performing      Performing      Total  
     (dollars in thousands)  

Commercial

   $ 45,578       $ 329       $ 45,907   

Real estate - commercial

     112,202         2,742         114,944   

Other real estate construction

     29,517         2,084         31,601   

Real estate 1 – 4 family construction

     5,543         —           5,543   

Real estate – residential

     99,406         2,441         101,847   

Home equity

     51,158         255         51,413   

Consumer loans

     14,699         11         14,710   

Other loans

     602         —           602   
  

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

 

Loans are considered impaired when, based on current information and events it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired, a specific 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, 2012 and December 31, 2011:

 

            Recorded      Recorded         
     Unpaid      Investment      Investment         
     Principal      With No      With      Related  

September 30, 2012

   Balance      Allowance      Allowance      Allowance  
     (dollars in thousands)  

Commercial

   $ 1,221       $ 765       $ 337       $ 247   

Real estate - commercial

     14,105         8,073         3,969         829   

Other real estate construction

     4,166         2,712         1,452         164   

Real estate 1 -4 family construction

     720         617         103         103   

Real estate - residential

     12,696         7,235         5,461         1,007   

Home equity

     1,405         885         520         180   

Consumer loans

     328         57         271         138   

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 34,641       $ 20,344       $ 12,113       $ 2,668   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-15-


Table of Contents
            Recorded      Recorded         
     Unpaid      Investment      Investment         
     Principal      With No      With      Related  

December 31, 2011

   Balance      Allowance      Allowance      Allowance  
     (dollars in thousands)  

Commercial

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

Real estate - commercial

     14,951         11,365         1,523         452   

Other real estate construction

     4,016         2,644         1,370         107   

Real estate 1 -4 family construction

     1,095         501         594         202   

Real estate - residential

     11,877         7,231         4,646         1,001   

Home equity

     993         753         240         124   

Consumer loans

     242         49         193         119   

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 35,273       $ 23,432       $ 9,657       $ 2,583   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months ended      Three Months ended  
     September 30, 2012      September 30, 2011  
     Average             Average         
     Recorded      Interest      Recorded      Interest  
     Investment      Income      Investment      Income  
     (dollars in thousands)  

Commercial

   $ 1,112       $ 23       $ 1,912       $ 32   

Real estate - commercial

     12,245         153         12,496         167   

Other real estate construction

     4,168         55         6,749         48   

Real estate 1 -4 family construction

     1,014         15         1,490         31   

Real estate - residential

     12,680         166         10,522         43   

Home equity

     1,333         18         1,435         24   

Consumer loans

     343         4         321         4   

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,895       $ 434       $ 34,925       $ 349   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months ended      Nine Months ended  
     September 30, 2012      September 30, 2011  
     Average             Average         
     Recorded      Interest      Recorded      Interest  
     Investment      Income      Investment      Income  
     (dollars in thousands)  

Commercial

   $ 1,301       $ 50       $ 1,529       $ 75   

Real estate - commercial

     12,397         493         16,162         430   

Other real estate construction

     4,112         180         8,456         79   

Real estate 1 -4 family construction

     1,124         31         1,347         57   

Real estate - residential

     12,261         477         9,947         368   

Home equity

     1,244         42         1,348         46   

Consumer loans

     332         14         297         14   

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,771       $ 1,287       $ 39,086       $ 1,069   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 7 – Troubled Debt Restructures

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

 

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

For the three and nine months ended September 30, 2012 the following table presents a breakdown of the types of concessions made by loan class:

 

            Pre-Modification      Post-Modification  
For the three months    Number      Outstanding Recorded      Outstanding Recorded  

ended September 30, 2012

   of Contracts      Investment      Investment  
            (dollars in thousands)  

Other:

        

Commercial

     1       $ 33       $ 33   

Real estate - commercial

     —           —           —     

Other real estate construction

     1         49         49   

Real estate 1 – 4 family construction

     —           —           —     

Real estate – residential

     4         217         217   

Home equity

     —           —           —     

Consumer loans

     2         62         62   

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     8       $ 361       $ 361   
  

 

 

    

 

 

    

 

 

 
            Pre-Modification      Post-Modification  
For the nine months    Number      Outstanding Recorded      Outstanding Recorded  

ended September 30, 2012

   of Contracts      Investment      Investment  
            (dollars in thousands)  

Other:

        

Commercial

     3       $ 111       $ 101   

Real estate - commercial

     2         619         113   

Other real estate construction

     1         49         49   

Real estate 1 – 4 family construction

     —           —           —     

Real estate – residential

     5         242         240   

Home equity

     —           —           —     

Consumer loans

     3         114         108   

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     14       $ 1,135       $ 611   
  

 

 

    

 

 

    

 

 

 

 

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The following table presents loans that were modified as troubled debt restructurings within the previous twelve months ending September 30, 2012 for which there was a payment default:

 

     Twelve months ended  
     September 30, 2012  
     Number      Recorded  
     of Loans      Investment  
     (dollars in thousands)  

Other:

     

Commercial

     1       $ 33   

Real estate – commercial

     —           —     

Other real estate construction

     1         49   

Real estate 1 – 4 family construction

     —           —     

Real estate – residential

     5         240   

Home Equity loans

     —           —     

Consumer loans

     2         64   

Other loans

     —           —     
  

 

 

    

 

 

 
     9       $ 386   
  

 

 

    

 

 

 

Total

     9       $ 386   
  

 

 

    

 

 

 

A default on a troubled debt restructure is defined as being past due 90 days or being out of compliance with the modification agreement. As mentioned, the Company considers TDRs to be impaired loans and has $491,777 in allowance for loan loss as of September 30, 2012, a direct result of these TDR’s.

The following table presents the successes and failures of the types of modifications within the previous twelve months ending September 30, 2012:

 

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

September 30, 2012

   Loans      Investments      Loans      Investments      Loans      Investments      Loans      Investments  
     (dollars in thousands)  

Below market interest rate

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

Other Loans

     —           —           15         738         —           —           2         511   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

Note 8 - Commitments and Contingencies

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

The banks’ risk of loss with the unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The banks use the same credit policies in making commitments under such instruments as they do for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are unsecured. At September 30, 2012, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

(in thousands)       

Commitments to extend credit

   $ 64,319   

Credit card commitments

     7,922   

Standby letters of credit

     1,345   
  

 

 

 

Total commitments

   $ 73,586   
  

 

 

 

 

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Note 9 – Fair Value Disclosures

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

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

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

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

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment by using one of several methods including collateral value, fair value of similar debt and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected repayments or fair value of collateral exceed the recorded investments in such loans. At September 30, 2012, substantially all of the total impaired loans were evaluated based on the

 

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fair value of the underlying collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an internal assessment of fair value based upon market data issued or management determines the fair value of the underlying collateral is further impaired below the appraised value, the Company records the impaired loan as nonrecurring Level 3.

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an internal assessment of fair value based upon market data issued or management determines the fair value of the underlying collateral is further impaired below the appraised value, the Company records the impaired loan as nonrecurring Level 3.

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

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

The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011:

 

     September 30, 2012  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Securities available for sale:

           

US Treasury

   $ 35,040       $ 35,040       $ —         $ —     

US Government Agencies

     36,407         —           36,407         —     

GSE - Mortgage-backed securities and CMO’s

     49,890         —           49,890         —     

State and political subdivisions

     8,937         —           8,937         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 130,274       $ 35,040       $ 95,234       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     December 31, 2011  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Securities available for sale:

           

US Treasury

   $ 33,532       $ 33,532       $ —         $ —     

US Gov’t

     19,997         —           19,997         —     

Mortgage-backed securities and CMO’s

     24,263         —           24,263         —     

State and political subdivisions

     10,869         —           10,869         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 88,661       $ 33,532       $ 55,129       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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 below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of September 30, 2012 and December 31, 2011:

 

     September 30, 2012  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Impaired loans

   $ 9,445       $ —         $ —         $ 9,445   

Loans held for sale

     1,025         —           1,025         —     

Other real estate owned

     6,011         —           —           6,011   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 16,481       $ —         $ 1,025       $ 15,456   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Impaired loans

   $ 7,074       $ —         $ —         $ 7,074   

Loans held for sale

     1,958         —           1,958         —     

Other real estate owned

     1,464         —           —           1,464   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 10,496       $ —         $ 1,958       $ 8,538   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 10 - Fair Values of Financial Instruments and Interest Rate Risk

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

The fair value estimates presented at September 30, 2012 and December 31, 2011, are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price a liability could be settled for. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of

 

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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, 2012 and December 31, 2011:

 

     Carrying      Estimated                       

September 30, 2012

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

FINANCIAL ASSETS

              

Cash and cash equivalents

   $ 26,197       $ 26,197       $ 26,197       $ —         $ —     

Securities available for sale

     130,274         130,274         35,040         95,234         —     

Loans held for investment, net

     332,460         341,994         —           —           341,994   

Loans held for sale

     1,025         1,025         —           1,025         —     

Restricted stock

     2,265         2,265         2,265         —           —     

Bank-owned life insurance

     6,354         6,354         —           —           6,354   

Mortgage servicing rights

     2,404         2,512         —           —           2,512   

Accrued interest receivable

     1,935         1,935         —           —           1,935   

FINANCIAL LIABILITIES

              

Deposits

   $ 450,400       $ 452,034       $ —         $ —         $ 452,034   

Short-term borrowings

     20,635         20,635         —           20,635         —     

Long-term borrowings

     1,549         1,788         —           1,788         —     

Junior subordinated debt

     11,127         11,272         —           —           11,272   

Accrued interest payable

     277         277         —           —           277   

 

     Carrying      Estimated  

December 31, 2011

   Value      Fair Value  
     (dollars in thousands)  

FINANCIAL ASSETS

     

Cash and cash equivalents

   $ 28,687       $ 28,687   

Securities available for sale

     88,661         88,661   

Loans held for investment, net

     359,860         374,636   

Loans held for sale

     1,958         1,958   

Restricted stock

     3,289         3,289   

Bank-owned life insurance

     6,171         6,171   

Mortgage servicing rights

     2,128         2,494   

Accrued interest receivable

     2,084         2,084   

FINANCIAL LIABILITIES

     

Deposits

   $ 431,338       $ 430,641   

Short-term borrowings

     20,791         20,791   

Long-term borrowings

     14,106         14,611   

Junior subordinated debt

     11,127         11,283   

Accrued interest payable

     301         301   

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

 

   

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

 

   

Securities available for sale – Securities available for sale are carried at fair value based on quoted and observable market prices and are recorded in Levels 1 and 2. Also see discussion in note 9.

 

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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.

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

At September 30, 2012, the subsidiary banks had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, they were deemed to have no current fair value. See Note 8.

Note 11 – Recent Accounting Pronouncements

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

In June 2011, the FASB issued ASU 2011-05, an update to ASC 220, “Comprehensive Income.” This update requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other

 

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comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 is effective for annual periods beginning after December 15, 2011, and did not have a significant impact on the Company’s financial statements.

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

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

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

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

 

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

 

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

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

Comparison of Financial Condition at September 30, 2012 and December 31, 2011.

During the nine months ended September 30, 2012, the Company’s total assets increased $8.0 million, from $526.9 million to $534.9 million. During the same period, loans held for investment decreased $27.4 million to $339.3 million, while, securities available for sale increased $41.6 million.

Cash and cash equivalents decreased $2.5 million, during the nine months ended September 30, 2012. Cash and due from banks decreased $721,000, while interest-earning deposits with banks decreased $1.8 million.

Investment securities increased $41.6 million to $130.3 million for the nine months ended September 30, 2012. During the first nine months of 2012, the Company purchased securities of $61.4 million. The increase from new purchases was reduced by maturities and calls of $825,000, sales of $9.0 million and normal reductions stemming from principal payments on mortgage backed securities. During the third quarter the Company purchased $35.3 million in additional securities to improve the yield on earning assets, which was funded in part from the paydowns in the loan portfolio and in part from an increase in deposits. At September 30, 2012, the Company had net unrealized gains of $3.7 million.

Loans held for investment decreased from $366.7 million to $339.3 million, a decrease of $27.4 million. Contributing to this decrease was the sale of a government guaranteed portion of a loan of approximately $4.9 million. All areas of the loan portfolio decreased during the third quarter. Commercial real estate experienced the largest decline of $8.3 million reflecting the sale of the aforementioned loan. Loans held for sale decreased 47.7% or $933,000 during the period. The allowance for loan losses was $6.9 million, at September 30, 2012, which represented 2.03% of the loan portfolio.

Other changes in our consolidated assets are related to premises and equipment, interest receivable, restricted stock, bank owned life insurance, other real estate owned, prepaid assets and other assets. Bank owned life insurance increased $183,000. Accrued interest receivable, prepaid assets and premises and equipment declined $149,000, $419,000 and $108,000, respectively. The Company’s restricted stock, which is required ownership in Federal Reserve Bank stock, remained at $803,000, while Federal Home Loan Bank stock decreased $239,000 to $1.5 million during the first nine months of 2012. The Company also owns $250,000 of Randolph Bank and Trust preferred stock. Management was been monitoring this stock for a period of time and during third quarter deemed it necessary to take a $50,000 impairment. Other real estate owned decreased $1.3 million. The Company sold ten properties totaling $2.0 million and had valuation write down adjustments of $988,000. These decreases were offset by the addition of ten new foreclosed properties totaling $1.6 million. Other assets increased $39,000.

 

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Customer deposits, our primary funding source, experienced a $19.1 million increase during the nine months ended September 30, 2012, increasing from $431.3 million to $450.4 million. Demand noninterest bearing checking increased $4.3 million and interest checking and money market accounts increased $17.6 million, while savings deposits increased $4.1 million for the period. These increases were offset by declines in time deposits over $100,000 of $2.5 million and other time deposits of $4.4 million.

Total borrowings decreased $12.7 million for the period and consist of both short-term and long-term borrowed funds, primarily from the Federal Home Loan Bank. The maturity of $10.0 million in Federal Home Loan Bank advances played a major part in the decrease. At September 30, 2012, $15.0 million of the total borrowings of $33.3 million were comprised of Federal Home Loan Bank advances.

Other liabilities increased from $3.6 million at December 31, 2011 to $4.5 million at September 30, 2012, an increase of $873,000.

At September 30, 2012, total shareholders’ equity was $46.4 million, an increase of $803,000 from December 31, 2011. Net income for the period was $1.4 million. Unrealized gains and losses on investment securities, net of tax increased $230,000. Net income was offset by an increase in unearned ESOP compensation of $111,000 resulting from a net increase in the ESOP note receivable. The Company also recorded $483,750 in dividends on its series A and B preferred stock for the nine month period ended September 30, 2012. The Company, after receiving approval from the United States Department of the Treasury and the Federal Reserve Bank repurchased common stock totaling $243,000. At September 30, 2012, the Company and its subsidiary banks exceeded all applicable regulatory capital requirements.

Comparison of Results of Operations for the Three Months Ended September 30, 2012 and 2011.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $262,000 for the three months ended September 30, 2012, as compared to $255,000 for the three months ended September 30, 2011, an increase of $7,000. Net income available to common shareholders was $101,000 or $0.01 per common share for the three month period ended September 30, 2012, compared to $94,000 or $0.01 per common share for the comparative period ended September 30, 2011. Net income available to common shareholders is net income less any dividends on preferred stock related to the $10.0 million of capital received from the United States Department of the Treasury under the Capital Purchase Program in December 2008.

Net Interest Income

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

Net interest income for the three months ended September 30, 2012 was $4.5 million, a decrease of $334,000. During the third quarter, the decline in the volume of interest-earning assets outpaced the decline in volume of interest-bearing liabilities by $247,000. The average

 

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yield on our interest–earning assets decreased 47 basis points to 4.61%, while the average rate we paid for our interest-bearing liabilities decreased 24 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 decreases resulted in a decrease of 23 basis points in our interest rate spread, from 3.96% in 2011 to 3.73% in 2012. Our net interest margin was 3.86% and 4.10% for the comparable periods in 2012 and 2011, respectively.

The following table presents average balance sheets and a net interest income analysis for the three months ended September 30, 2012 and 2011:

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended September 30,

 

     Average Balance      Income/Expenses      Rate/Yield  
(in thousands)    2012      2011      2012      2011      2012     2011  

Interest-earning assets:

                

Taxable securities

   $ 109,611       $ 80,236       $ 520       $ 446         1.89     2.21

Nontaxable securities (1)

     10,212         10,611         75         92         4.76     5.60

Short-term investments

     16,208         11,149         29         21         0.71     0.75

Taxable loans

     330,705         369,370         4,702         5,392         5.66     5.81

Non-taxable loans (1)

     12,319         11,442         107         107         5.60     6.02
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest-earning assets

     479,055         482,808         5,433         6,058         4.61     5.08

Interest-bearing liabilities:

                

Interest-bearing deposits

     374,426         372,969         623         844         0.66     0.90

Short-term borrowed funds

     19,509         25,878         98         89         2.00     1.37

Long-term debt

     14,003         24,274         180         259         5.11     4.24
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest bearing liabilities

     407,938         423,121         901         1,192         0.88     1.12
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net interest spread

   $ 71,117       $ 59,687       $ 4,532       $ 4,866         3.73     3.96
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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

                 3.86     4.10
              

 

 

   

 

 

 

 

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

Provision and Allowance for Loan Losses

The provision for loan losses was $391,000 for the three months ending September 30, 2012 compared to $483,000 for the same period in 2011. There were net loan charge-offs of $577,000 for the three months ended September 30, 2012, as compared with net loan charge-offs of $90,000 during the same period of 2011. Refer to the Asset Quality discussion on page 31 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 $581,000 for the three month period ending September 30, 2012 as compared to the same period in 2011. The Company did not realize any gains or losses on the sale of investment securities during the three months ended September 30, 2012 or 2011. Income from mortgage loan sales increased $695,000 from $407,000 for the quarter ended September 30, 2011 to $1.1 million for the same period in 2012. Service charges on deposit accounts produced revenue of $450,000, a decrease of $26,000 for the three months ended September 30, 2012. The primary factor leading to this decrease was a decrease in non-sufficient funds or NSF fees for the comparable periods. Other service fees and commissions experienced a 9.49% decrease for the comparable three month period, primarily related to a reduction in the write-down of servicing assets due to the refinancing of mortgage loans.

 

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Noninterest Expense

Noninterest expense for the quarter ended September 30, 2012 was $6.2 million compared to $5.9 million for the same period of 2011, an increase of $272,000. Salaries and employee benefits, the largest component of noninterest expense, increased $144,000 for the quarter ending September 30, 2012. Foreclosed real estate expense increased $192,000 while professional fees and service fees decreased $119,000 for the three months ending September 30, 2012. The major factor related to the increase in foreclosed real estate expense was write downs on properties held in other real estate owned. These write downs were attributed to updated appraisals and the lowering of list prices in the third quarter of 2012 totaling $461,000 compared to no write downs for the same period in 2011. The decrease in other professional fees and services was directly related to reimbursement of prior period legal fees totaling $93,000 that was related to a reimbursement for legal services under the Company’s employment practices liability insurance policy. Other noninterest expense increased $38,000 for the comparable three month periods. The table below reflects the composition of other noninterest expense.

Other noninterest expense

 

     Three Months Ended  
     September 30,  
     2012      2011  
     (in thousands)  

Postage

   $ 44       $ 50   

Telephone and data lines

     41         40   

Loan collection expense

     81         68   

Shareholder relations expense

     51         57   

Dues and subscriptions

     39         35   

Other

     376         344   
  

 

 

    

 

 

 

Total

   $ 632       $ 594   
  

 

 

    

 

 

 

Income Tax Expense

The Company had income tax expense of $109,000 for the three months ended September 30, 2012 compared to income tax expense of $49,000 in the 2011 period.

Comparison of Results of Operations for the Nine Months Ended September 30, 2012 and 2011.

Net Income and Net Income Available to Common Shareholders

The Company reported net income of $1.4 million for the nine months ended September 30, 2012, as compared to $1.2 for the nine months ended September 30, 2011, an increase of $190,000. Net income available to common shareholders was $879,000 or $0.12 per common share during the nine month period ending September 30, 2012, compared to $689,000 or $0.09 per common share for the comparative 2011 period. Net income available to common shareholders is net income less any dividends on preferred stock related to the $10.0 million of capital received from the United States Department of the Treasury under the Capital Purchase Program in December 2008.

Net Interest Income

Net interest income for the nine months ended September 30, 2012 was $13.7 million as compared with $14.3 million during the nine months ended September 30, 2011, resulting in a

 

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decrease of $579,000. During the nine months ending September 30, 2012, the decline in the volume of interest-earning assets outpaced the decline in growth of our interest-bearing liabilities by $880,000. The average yield on our interest–earning assets decreased 27 basis points to 4.76%, while the average rate we paid for our interest-bearing liabilities decreased 23 basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve adjusts interest rates, while interest-bearing time deposits adjust at the time of maturity. The aforementioned changes resulted in a decrease of four basis points in our interest rate spread to 3.83% for the first nine months of 2012, compared to 3.87% for the first nine months of 2011. Our net interest margin was 3.97% and 4.01% for the comparable nine month periods in 2012 and 2011, 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 strong 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, 2012 and 2011:

Average Balance Sheet and Net Interest Income Analysis

For the Nine Months Ended September 30,

 

     Average Balance      Income/Expenses      Rate/Yield  
(in thousands)    2012      2011      2012      2011      2012     2011  

Interest-earning assets:

                

Taxable securities

   $ 85,607       $ 80,317       $ 1,201       $ 1,391         1.87     2.31

Nontaxable securities(1)

     9,966         10,593         254         278         5.55     5.72

Short-term investments

     24,717         12,054         101         39         0.55     0.43

Taxable loans

     340,693         374,484         14,629         15,989         5.74     5.70

Non-taxable loans(1)

     12,489         9,501         328         269         5.70     6.16
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest-earning assets

     473,472         486,949         16,513         17,966         4.76     5.03

Interest-bearing liabilities:

                

Interest-bearing deposits

     369,210         374,564         1,948         2,618         0.70     0.93

Short-term borrowed funds

     18,078         24,254         253         271         1.87     1.49

Long-term debt

     18,389         26,503         621         807         4.51     4.07
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest bearing liabilities

     405,677         425,321         2,822         3,696         0.93     1.16
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net interest spread

   $ 67,795       $ 61,628       $ 13,692       $ 14,270         3.83     3.87
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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

                 3.97     4.01
              

 

 

   

 

 

 

 

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

Provision and Allowance for Loan Losses

The provision for loan losses was $1.1 million for the nine months ending September 30, 2012 compared to $2.0 million for the same period in 2011. There were net loan charge-offs of $1.0 million for the nine months ended September 30, 2012 as compared with net loan charge-offs of $3.4 million during the same period of 2011. Refer to the Asset Quality discussion on page 31 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like all financial institutions, diversification of our earnings base is of major importance in our long term success. Total noninterest income increased $560,000 for the nine month period ending September 30, 2012 as compared to the same period in 2011. Income from mortgage loan sales increased $1.5 million from $1.1 million for the nine months ended September 30, 2011 to $2.6 million for

 

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the same period in 2012. Mortgage loan rates continued to decline during 2012 allowing customers to refinance again at even lower rates. Service charges on deposit accounts produced earnings of $1.3 million for the nine months ended September 30, 2012, a decrease of $51,000 from the comparative period in 2011. The primary contributing factor is a decrease in NSF fees due in large part to changes in the regulatory governance. Other service fees and commissions experienced a 9.78% decrease for the comparable nine month period. This is related to acceleration in the write-down of servicing assets due to the refinancing of mortgage loans. The Company realized a gain on the aforementioned government guaranteed loan in the amount of $276,000. The Company also realized gains on the sale of investments in the amount of $16,000 in the first nine months of 2012, as compared to realized gains of $933,000 for the same period in 2011.

Noninterest Expense

Noninterest expense for the nine months ended September 30, 2012, was $17.5 million compared to $17.0 million for the same period of 2011; an increase of $555,000. Salaries and employee benefits, the largest component of noninterest expense, increased $312,000 to $9.5 million for the period ending September 30, 2012. Net occupancy and equipment expense had a combined decrease of $48,000. Professional fees and services decreased $693,000. Foreclosed real estate expense increased $877,000. The major factor related to the increase in foreclosed real estate expense was write downs on properties held in other real estate owned. These write downs were attributed to updated appraisals and the lowering of list prices during the first nine months of 2012 totaling $988,000 compared to no write downs for the same period in 2011. The decrease in other professional fees and services was directly related to reimbursement of prior period legal fees totaling $360,000. Of this amount, $270,000 was related to a reimbursement for legal services under the Company’s employment practices liability insurance policy and $90,000 associated with a previous closed government guaranteed loan. Other noninterest expense increased $71,000 for the comparable nine month periods. The table below reflects the composition of other noninterest expense.

Other noninterest expense

 

     Nine Months Ended  
     September 30,  
     2012      2011  
     (in thousands)  

Postage

   $ 148       $ 148   

Telephone and data lines

     130         133   

Loan collection expense

     225         214   

Shareholder relations expense

     129         136   

Dues and subscriptions

     128         137   

Other

     1,068         989   
  

 

 

    

 

 

 

Total

   $ 1,828       $ 1,757   
  

 

 

    

 

 

 

Income Tax Expense

The Company had income tax expense of $561,000 for the nine months ended September 30, 2012 resulting in an effective tax rate of 29.16%, compared to income tax expense of $407,000 and an effective rate of 25.76% in the 2011 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 by recoveries of amounts previously charged off and is reduced by loans

 

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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.

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

The allowance for loan losses represents management’s best estimate of an appropriate amount to provide for inherent risk 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 as a result 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.

The provision for loan losses was $1.1 million for the nine month period ended September 30, 2012 as compared to $2.0 million for the same period in 2011. At September 30, 2012, the levels of our impaired loans, which includes all loans in nonaccrual status and other loans deemed by management to be impaired, were $32.5 million compared to $33.1 million at December 31, 2011, an decrease of $631,000. Total nonaccrual loans, which are a component of impaired loans, increased from $7.9 million at December 31, 2011 to $8.6 million at September 30, 2012. The Company had net loan charge-offs for the first nine months of 2012 of $1.0 million compared to net loan charge-offs of $3.4 million for the same period in 2011.

 

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The allowance expressed as a percentage of gross loans held for investment increased 17 basis points from 1.86% at December 31, 2011 to 2.03% at September 30, 2012. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 1.27% at December 31, 2011 and 1.37% at September 30, 2012; while the individually evaluated allowance as a percentage of individually evaluated loans increased from 7.81% to 8.22%, an increase of 41 basis points.

Our allowance for loan loss model captures not only the mean loss of individual loans but also 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 call codes. Together, these components created from Ordinary Least Squares (OLS) Regression of historical losses against multiple Macro-Economic factors make up the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations. The Company also has a section within the model to account for other qualitative and/or environmental factors. During the second quarter of 2012, the Company completed an extensive review of its home equity portfolio that resulted in an additional $179,000 being added in the qualitative section of the model. Nonperforming loans, which consist of nonaccrual loans and loans past due 90 days and still accruing, to total loans increased from 2.14% at December 31, 2011, to 2.54% at September 30, 2012. Management believes the current level of the allowance for loan losses is appropriate in light of the risk inherent in the loan portfolio.

Restructured loans at September 30, 2012 totaled $5.7 million and $6.0 million at December 31, 2011 and are included in impaired loans.

The following nonperforming loan table shows the comparison of September 30, 2012 to December 31, 2011:

Nonperforming Assets

 

     September 30,     December 31,  
(dollars in thousands)    2012     2011  

Nonperforming assets:

    

Loans past due 90 days or more

   $ —        $ —     

Nonaccrual loans

     8,617        7,862   

Other real estate owned

     8,947        10,258   
  

 

 

   

 

 

 

Total nonperforming assets

   $ 17,564      $ 18,120   
  

 

 

   

 

 

 

Allowance for loan losses

   $ 6,883      $ 6,815   

Nonperforming loans to total loans

     2.54     2.14

Allowance for loan losses to total loans

     2.03     1.86

Nonperforming assets to total assets

     3.28     3.44

Allowance for loan losses to nonperforming loans

     79.88     86.88

During the first nine months of 2012, the Company had a net decrease of $1.3 million in other real estate owned. The decrease was due to the sale of ten pieces of property totaling $2.0 million and valuation write downs of $988,000. These decreases were offset by the addition of ten pieces of property totaling $1.6 million.

 

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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 banks have multiple funding sources, in addition to deposits that can be used to increase liquidity and provide additional financial flexibility. These sources are the subsidiary banks’ established federal funds lines with correspondent banks aggregating $23.8 million at September 30, 2012, with available credit of $23.8 million; established borrowing relationships with the Federal Home Loan Bank, with available credit of $27.2 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of $25.0 million and the issuance of commercial paper. The Company has also secured long-term debt from other sources. Total debt from these sources aggregated $33.3 million at September 30, 2012, compared to $46.0 million at December 31, 2011.

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

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

The Company and its subsidiary banks have each maintained capital levels exceeding minimum levels for “well capitalized” banks and bank holding companies. The Company expects to continue to exceed minimum capital requirements without altering current operations or strategy. At September 30, 2012, the Company had $11.1 million in subordinated debt and $10.0 million in preferred stock issued to the United States Department of the Treasury and has made all interest and dividend payments in a timely manner.

Accounting and Regulatory Matters

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s primary market risk is interest rate risk. Interest rate risk is the result of differing maturities or repricing intervals of interest-earning assets and interest-bearing liabilities and the fact that rates on these financial instruments do not change uniformly. These conditions may impact the earnings generated by the Company’s interest earning assets or the cost of its interest-bearing liabilities, thus directly impacting the Company’s overall earnings. The

 

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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, 2011.

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 2012. In connection with such evaluation, the Company has determined that there were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensuring that the Company’s systems evolve with its business.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

 

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

The following table sets forth information with respect to shares of common stock repurchased by the Company during the three months ended September 30, 2012.

 

     (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, 2012 Through July 31, 2012

     —         $ —           —         $ —     

August 1, 2012 Through August 31, 2012

     6,250       $ 3.20         —         $ —     

September 1, 2012 Through September 30, 2012

     38,653       $ 4.00         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     44,903       $ 3.89         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

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

 

(2) On June 26, 2012 the Board of Directors of Uwharrie Capital Corp, after receiving approval from the United States Department of Treasury and the Federal Reserve Bank, its primary regulator, approved the repurchase of up to $400,000 of outstanding common stock. On August 16, 2012, 6,250 shares were repurchased for $20,000. On September 29, 2012, 38,653 shares were repurchased for $154,612. As of September 30, 2012, there was $156,773 for repurchase under the approved plan.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

 

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Item 6. Exhibits

 

Exhibit
Number

  

Description of Exhibit

    3.1

   Registrant’s Articles of Incorporation (1)

    3.2

   Registrant’s By-laws (6)

    3.2

   Articles of Amendment dated December 19, 2008, regarding Series A and Series B Preferred Stock (5)

    4

   Form of stock certificate (1)

    4.2

   Form of certificate for the Series A Preferred stock (5)

    4.3

   Form of certificate for the Series B Preferred stock (5)

    4.4

   Warrant dated December 23, 2008, for purchase of share of Series B Preferred stock (5)

    4.5

   Form of Security Holders Agreement (9)

  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

   Letter Agreement dated December 23, 2008, between the Registrant and the United States Department of the Treasury (5)

  10.7

   Relocation Assistance Agreement dated February 9, 2009, between the Registrant and Brendan P. Duffey (7)

  10.8

   Nonqualified Deferred Compensation Plan and Supplemental Retirement Plan Agreement dated December 31, 2008, between the Registrant and Roger L. Dick, Brendan P. Duffey, Christy D. Stoner, and Jimmy L. Strayhorn (7)

  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)

 

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  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, 2012, in XBRL (eXtensible Business Reporting Language) (8)

 

(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 current report on Form 8-K, filed with the Securities and Exchange Commission on December 23, 2008.
(6) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2009.
(7) Incorporated by reference to Registrant’s Annual Report on Form 10-K for the Fiscal year ended 2009.
(8) Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.
(9) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2011.

 

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Signatures

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

 

  UWHARRIE CAPITAL CORP
  (Registrant)
Date: November 14, 2012   By:  

/s/ Roger L. Dick

  Roger L. Dick
  President and Chief Executive Officer
Date: November 14, 2012   By:  

/s/ Robert O. Bratton

  Robert O. Bratton
  Principal Financial Officer

 

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EXHIBIT INDEX

 

Exhibit     

Number

  

Description of Exhibit

    4.1

   Registrant’s Articles of Incorporation (1)

    3.2

   Registrant’s By-laws (6)

    3.2

   Articles of Amendment dated December 19, 2008, regarding Series A and Series B Preferred Stock (5)

    5

   Form of stock certificate (1)

    4.2

   Form of certificate for the Series A Preferred stock (5)

    4.3

   Form of certificate for the Series B Preferred stock (5)

    4.4

   Warrant dated December 23, 2008, for purchase of share of Series B Preferred stock (5)

    4.5

   Form of Security Holders Agreement (9)

  10.9

   Incentive Stock Option Plan, as amended (1)

  10.10

   Employee Stock Ownership Plan and Trust (2)

  10.11

   2006 Incentive Stock Option Plan (3)

  10.12

   2006 Employee Stock Purchase Plan (3)

  10.13

   Amendment to the Employee Stock Ownership Plan and Trust (4)

  10.14

   Letter Agreement dated December 23, 2008, between the Registrant and the United States Department of the Treasury (5)

  10.15

   Relocation Assistance Agreement dated February 9, 2009, between the Registrant and Brendan P. Duffey (7)

  10.16

   Nonqualified Deferred Compensation Plan and Supplemental Retirement Plan Agreement dated December 31, 2008, between the Registrant and Roger L. Dick, Brendan P. Duffey, Christy D. Stoner, and Jimmy L. Strayhorn (7)

  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)

 

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101

   Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012, in XBRL (eXtensible Business Reporting Language) (8)

 

(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 current report on Form 8-K, filed with the Securities and Exchange Commission on December 23, 2008.
(6) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2009.
(7) Incorporated by reference to Registrant’s Annual Report on Form 10-K for the Fiscal year ended 2009.
(8) Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.
(9) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2011.

 

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