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UWHARRIE CAPITAL CORP - Quarter Report: 2013 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, 2013

OR

 

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

For the transition period from                      to                     .

COMMISSION FILE NUMBER 000-22062

 

 

UWHARRIE CAPITAL CORP

(Exact name of registrant as specified in its charter)

 

 

 

NORTH CAROLINA   56-1814206

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

132 NORTH FIRST STREET

ALBEMARLE, NORTH CAROLINA

  28001
(Address of Principal Executive Offices)   (Zip Code)

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

N/A

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

 

 

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

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

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 7,471,204 shares of common stock outstanding as of November 4, 2013.

 

 

 


Table of Contents

Table of Contents

 

         Page No.  
Part I.  

FINANCIAL INFORMATION

  
Item 1 –  

Financial Statements (Unaudited)

  
 

Consolidated Balance Sheets September 30, 2013 and December 31, 2012

     3   
 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2013 and 2012

     4   
 

Consolidated Statements of Comprehensive Income for the Three And Nine Months Ended September  30, 2013 and 2012

     5   
 

Consolidated Statements of Changes in Shareholders’ Equity Nine Months Ended September 30, 2013

     6   
 

Consolidated Statements of Cash Flows Nine Months Ended September 30, 2013 and 2012

     7   
 

Notes to Consolidated Financial Statements

     8   
Item 2 –  

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

     27   
Item 3 –  

Quantitative and Qualitative Disclosures about Market Risk

     37   
Item 4 –  

Controls and Procedures

     38   
Part II.  

OTHER INFORMATION

  
Item 1 –  

Legal Proceedings

     39   
Item 1A –  

Risk Factors

     39   
Item 2 –  

Unregistered Sales of Equity Securities and Use of Proceeds

     39   
Item 3 –  

Defaults Upon Senior Securities

     40   
Item 4 –  

Mine Safety Disclosures

     40   
Item 5 –  

Other Information

     40   
Item 6 –  

Exhibits

     40   
 

Exhibit Index

     43   

 

-2-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

 

Part I. FINANCIAL INFORMATION

Item 1 – Financial Statements

 

     September 30,
2013
(Unaudited)
    December 31,
2012*
 
     (dollars in thousands)  

ASSETS

    

Cash and due from banks

   $ 7,065      $ 8,877   

Interest-earning deposits with banks

     49,651        72,851   

Securities available for sale, at fair value

     123,126        91,638   

Loans held for sale

     560        5,373   

Loans:

    

Loans held for investment

     312,148        329,183   

Less allowance for loan losses

     (5,259     (6,801
  

 

 

   

 

 

 

Net loans held for investment

     306,889        322,382   
  

 

 

   

 

 

 

Premises and equipment, net

     13,885        14,952   

Interest receivable

     1,618        1,753   

Restricted stock

     1,319        2,265   

Bank owned life insurance

     6,486        6,394   

Other real estate owned

     9,264        8,713   

Prepaid assets

     782        635   

Other assets

     10,337        9,174   
  

 

 

   

 

 

 

Total assets

   $ 530,982      $ 545,007   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Demand noninterest-bearing

   $ 78,694      $ 70,347   

Interest checking and money market accounts

     225,546        211,066   

Savings deposits

     46,928        43,336   

Time deposits, $100,000 and over

     45,910        53,449   

Other time deposits

     65,906        79,414   
  

 

 

   

 

 

 

Total deposits

     462,984        457,612   
  

 

 

   

 

 

 

Short-term borrowed funds

     6,004        18,690   

Long-term debt

     11,165        12,673   

Interest payable

     231        270   

Other liabilities

     7,521        11,449   
  

 

 

   

 

 

 

Total liabilities

     487,905        500,694   
  

 

 

   

 

 

 

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

     1,647        1,584   

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

    

SHAREHOLDERS’ EQUITY

    

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

    

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

     2,258        10,000   

500 shares of series B issued and outstanding

     500        500   

Discount on preferred stock

     (25     (100

Common stock, $1.25 par value: 20,000,000 shares issued authorized; shares issued and outstanding 7,471,204 and 7,502,496 shares, respectively

     9,339        9,378   

Additional paid-in capital

     12,049        12,201   

Unearned ESOP compensation

     (874     (875

Undivided profits

     10,658        10,138   

Accumulated other comprehensive income (loss)

     (234     1,487   
  

 

 

   

 

 

 

Total Uwharrie Capital shareholders’ equity

     33,671        42,729   

Noncontrolling interest

     7,759        —     
  

 

 

   

 

 

 

Total shareholders’ equity

     41,430        42,729   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 530,982      $ 545,007   
  

 

 

   

 

 

 

 

(*) 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
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  
     (in thousands, except share and per share data)  

Interest Income

        

Loans, including fees

   $ 4,368      $ 4,809      $ 13,244      $ 14,957   

Investment securities

        

US Treasury

     103        145        296        432   

US Government agencies and corporations

     322        375        703        768   

State and political subdivisions

     61        75        189        255   

Interest-earning deposits with banks and federal funds sold

     24        29        133        101   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     4,878        5,433        14,565        16,513   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

        

Interest checking and money market accounts

     110        129        338        414   

Savings deposits

     47        49        131        154   

Time deposits, $100,000 and over

     135        195        462        610   

Other time deposits

     162        250        557        770   

Short-term borrowed funds

     19        98        142        253   

Long-term debt

     164        180        501        621   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     637        901        2,131        2,822   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     4,241        4,532        12,434        13,691   

Provision for (recovery of) loan losses

     227        391        (547     1,094   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     4,014        4,141        12,981        12,597   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Income

        

Service charges on deposit accounts

     408        450        1,205        1,318   

Other service fees and commissions

     870        801        2,504        2,392   

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

     —          —          14        16   

Gain (loss) on fixed assets and other assets

     53        (80     278        216   

Income from mortgage loan sales

     361        1,102        1,843        2,578   

Other income

     118        107        342        345   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     1,810        2,380        6,186        6,865   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Expense

        

Salaries and employee benefits

     3,037        3,215        9,189        9,478   

Net occupancy expense

     295        293        845        863   

Equipment expense

     180        185        534        556   

Data processing costs

     186        204        578        638   

Office supplies and printing

     76        93        187        245   

Foreclosed real estate expense

     134        547        1,257        1,357   

Professional fees and services

     306        295        787        467   

Marketing and donations

     181        146        557        484   

Electronic banking expense

     258        227        729        681   

Software amortization and maintenance

     132        140        413        423   

FDIC insurance

     124        173        421        518   

Other noninterest expense

     649        632        1,975        1,828   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     5,558        6,150        17,472        17,538   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     266        371        1,695        1,924   

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

     48        109        557        561   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 218      $ 262      $ 1,138      $ 1,363   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

   $ 218        262        1,138        1,363   

Less: net income attributable to noncontrolling Interest

     (111     —          (328     0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Uwharrie Capital Corp

     107        262        810        1,363   

Dividends – preferred stock

     (64     (161     (290     (484
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 43      $ 101      $ 520      $ 879   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share

        

Basic

   $ 0.01      $ 0.01      $ 0.07      $ 0.12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.01      $ 0.01      $ 0.07      $ 0.12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

        

Basic

     7,268,763        7,379,657        7,287,482        7,416,453   

Diluted

     7,268,763        7,379,657        7,287,482        7,416,453   

See accompanying notes

 

-4-


Table of Contents

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  
     (in thousands)  

Net Income

   $ 218      $ 262      $ 1,138      $ 1,363   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

        

Unrealized gain (loss) on available for sale securities

     (91     414        (2,641     366   

Related tax effect

     30        (143     916        (126

Reclassification of (gain) loss recognized in net income

     —          —          (14     (16

Related tax effect

     —          —          5        6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (61     271        (1,734     230   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     157        533        (596     1,593   

Less: Comprehensive income (loss) attributable to noncontrolling interest

     (111     —          (328     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Uwharrie Capital

   $ 46      $ 533      $ (924   $ 1,593   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

-5-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

 

 

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

Balance, December 31, 2012

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

Net Income

    —          —          —          —          —          —          —          810        —          328        1,138   

Repurchase of common stock

    (31,292     —          —          —          (39     (53     —          —          —          —          (92

Other comprehensive loss

    —          —          —          —          —          —          —          —          (1,721     —          (1,721

Release of ESOP shares

    —          —          —          —          —          (36     70        —          —          —          34   

Increase in ESOP notes receivable

    —          —          —          —          —          —          (69     —          —          —          (69

Reclass to mezzanine capital

    —          —          —          —          —          (63     —          —          —          —          (63

Repayment of preferred stock series A

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

Issuance of preferred stock series B (noncontrolling interest)

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

Record costs of series B preferred stock (noncontrolling interest)

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

Record preferred stock dividend series B (noncontrolling interest)

    —          —          —          —          —          —          —          —          —          (311     (311

Record preferred stock dividend and discount accretion

    —          —          —          75        —          —          —          (290     —          —          (215
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2013

    7,471,204      $ 2,258      $ 500      $ (25   $ 9,339      $ 12,049      $ (874   $ 10,658      $ (234   $ 7,759      $ 41,430   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

-6-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

     Nine Months Ended
September 30,
 
     2013     2012  
     (dollars in thousands)  

Cash flows from operating activities

    

Net income

   $ 1,138      $ 1,363   

Adjustments to reconcile net income to net cash

    

Provided by (used in) operating activities:

    

Depreciation

     584        718   

Net amortization of security premiums/discounts

     1,163        907   

Net amortization of mortgage servicing rights

     619        609   

Impairment of foreclosed real estate

     745        988   

Impairment of (recovery of) other assets

     (75     50   

Provision for (recovery of) loan losses

     (547     1,094   

Stock compensation

     —          3   

Net realized gain on sales / calls available for sales securities

     (14     (16

Income from mortgage loan sales

     (1,843     (2,578

Proceeds from sales of loans held for sale

     67,218        89,969   

Origination of loans held for sale

     (60,562     (86,458

Gain on sale of premises, equipment and other assets

     (229     (276

Increase in cash surrender value of life insurance

     (92     (183

(Gain) loss on sales of foreclosed real estate

     (18     60   

Release of ESOP shares

     34        35   

Net change in interest receivable

     135        149   

Net change in other assets

     (576     137   

Net change in interest payable

     (39     (24

Net change in other liabilities

     3,454        873   
  

 

 

   

 

 

 

Net cash provided by operating activities

     11,095        7,420   
  

 

 

   

 

 

 

Cash flows from investing activities

    

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

     11,413        19,215   

Purchase of securities available for sale

     (46,693     (61,369

Net decrease in loans

     12,768        24,845   

Proceeds from sales of premises, equipment and other assets

     949        —     

Purchase of premises and equipment

     (237     (610

Proceeds from sales of foreclosed real estate

     1,994        1,724   

Investment in other assets

     (356     (260

Net decrease in restricted stock

     946        1,024   
  

 

 

   

 

 

 

Net cash used in investing activities

     (19,216     (15,431
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net increase in deposit accounts

     5,372        19,062   

Net decrease in short-term borrowed funds

     (12,686     (156

Net decrease in long-term debt

     (1,508     (12,557

Proceeds from preferred stock series B issued by subsidiaries

     360        —     

Repayment of preferred stock series A

     (7,742     —     

Increase in unearned ESOP compensation

     (69     (176

Repurchase of common stock

     (92     (243

Dividend and discount accretion on preferred stock

     (215     (409

Dividend and cost accretion on noncontrolling interest

     (311     —     
  

 

 

   

 

 

 

Net cash provided (used in) in financing activities

     (16,891     5,521   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (25,012     (2,490

Cash and cash equivalents, beginning of period

     81,728        28,687   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 56,716      $ 26,197   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information

    

Interest paid

   $ 2,170      $ 2,846   

Income taxes paid

     648        78   

Supplemental Schedule of Non-Cash Activities

    

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

   $ (1,721   $ 230   

Loans transferred to foreclosed real estate

     3,272        1,649   

Company financed sales of other real estate owned

     (213     (188

Net change in ESOP liability

     63        —     

See accompanying notes

 

-7-


Table of Contents

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Basis of Presentation

The financial statements and accompanying notes are presented on a consolidated basis including Uwharrie Capital Corp (the “Company”) and its subsidiaries, 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. On September 1, 2013, Anson and Cabarrus were consolidated into Stanly and effective September 1, 2013, Stanly’s name was changed to Uwharrie Bank (“Uwharrie”).

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

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

Note 2 – Comprehensive Income

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

 

     Unrealized holding gains
on available-for-sale Securities (net)
 
     Three months
ended
September 30,
2013
    Nine months
ended
September 30,
2013
 
     (dollars in thousands)  

Beginning Balance

   $ (173   $ 1,487   

Other comprehensive income (loss) before reclassifications, net of $30,000 and $916,000 tax effect, respectively

     (61     (1,712

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

     —          (9
  

 

 

   

 

 

 

Net current-period other comprehensive loss

     (61     (1,721
  

 

 

   

 

 

 

Ending Balance

   $ (234   $ (234
  

 

 

   

 

 

 

 

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Table of Contents

Note 3 – Noncontrolling Interest

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

During the third quarter of 2013, the Company’s subsidiary bank, Uwharrie Bank, began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series C to be issued by the subsidiary bank. The preferred stock qualifies as Tier 1 capital at the bank and will pay dividends at an annual rate of 5.30%. The preferred stock has no voting rights. The offering ended September 15, 2013 with Uwharrie raising $2.8 million in new capital less total issuance costs of $23,000. At September 30, 2013, these funds were held in an escrow account and the new preferred stock was issued on October 1, 2013.

Note 4 – Per Share Data

Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for stock dividends. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. For the three and nine months ended September 30, 2013, the Company’s 92,491 stock options outstanding did not have a dilutive effect on per share results because the exercise prices exceeded the share values for each period. The Company had 122,341 stock options outstanding for the three and nine months ended September 30, 2012, and they did not have a dilutive effect.

 

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

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2013     2012     2013     2012  

Weighted average number of common shares outstanding

     7,473,903        7,563,255        7,473,903        7,563,255   

Effect of ESOP shares

     (205,140     (183,598     (186,421     (146,802
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     7,268,763        7,379,657        7,287,482        7,416,453   

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

     7,268,763        7,379,657        7,287,482        7,416,453   
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 5 – Investment Securities

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

 

September 30, 2013

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

U.S. Treasury

   $ 23,522       $ 572       $ 222       $ 23,872   

U.S. Government agencies

     52,384         243         946         51,681   

GSE – Mortgage-backed securities and CMO’s

     40,235         229         630         39,834   

State and political subdivisions

     7,353         386         —           7,739   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 123,494       $ 1,430       $ 1,798       $ 123,126   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2012

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

U.S. Treasury

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

U.S. Government agencies

     21,689         485         —           22,174   

GSE – Mortgage-backed securities and CMO’s

     40,766         379         123         41,022   

State and political subdivisions

     8,165         701         —           8,866   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

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

 

 

    

 

 

    

 

 

    

 

 

 

At both September 30, 2013 and December 31, 2012, the Company owned Federal Reserve Bank stock reported at cost of $467,000 and $803,000, respectively that is included in other assets. Also at September 30, 2013 and December 31, 2012, the Company owned Federal Home Loan Bank Stock (FHLB) of $852,000 and $1.5 million, respectively. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership in, and borrowings with, these banks. These investments are carried at cost since there is no ready market and historically redemption has been made at par value. The Company estimated that the fair value approximated cost and that these investments were not impaired at September 30, 2013.

 

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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, 2013 and September 30, 2012 are as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  
     (dollars in thousands)  

Gross proceeds from sales

   $ —         $ —         $ 426       $ 8,996   
  

 

 

    

 

 

    

 

 

    

 

 

 

Realized gains from sales

   $ —         $ —         $ 14       $ 128   

Realized losses from sales

     —           —           —           (112
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Realized gains

   $ —         $ —         $ 14       $ 16   
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2013 and December 31, 2012, securities available for sale with a carrying amount of $63.2 million and $48.8 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2013 and December 31, 2012. These unrealized losses on investment securities are a result of temporary fluctuations in the market prices due to a rise in interest rates, which will adjust if rates decline, and a volatile market. Management does not believe these fluctuations are a reflection of the quality of the investments. At September 30, 2013, the unrealized losses for securities less than twelve months related to two United States Treasury notes, ten government agency bonds and ten government sponsored enterprise (GSE) mortgage backed securities. The Company did have two GSE mortgage backed securities that had been in a loss position for more than twelve months. At December 31, 2012, the unrealized losses related to two United States Treasury notes and seven mortgage backed securities.

 

     Less than 12 Months      12 Months or More      Total  

September 30, 2013

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

Securities available for sale temporary impairment

                 

U.S. Treasury

   $ 7,193       $ 222       $ —         $ —         $ 7,193       $ 222   

U.S. Gov’t agencies

     37,420         946         —           —           37,420         946   

GSE-Mortgage-backed securities and CMO’s

     18,706         533         4,077         97         22,783         630   

State and political subdivisions

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 63,319       $ 1,701       $ 4,077       $ 97       $ 67,396       $ 1,798   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Less than 12 Months      12 Months or More      Total  

December 31, 2012

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

Securities available for sale temporary impairment

                 

U.S. Treasury

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

U.S. Gov’t agencies

     —           —           —           —           —           —     

GSE-Mortgage-backed securities and CMO’s

     21,355         123         —           —           21,355         123   

State and political subdivisions

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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Table of Contents

At September 30, 2013, the Company had two GSE mortgage backed securities that had been in a loss position for twelve months or more. The unrealized losses are not likely to reverse unless market interest rates decline to the levels that existed when the securities were purchased. None of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. At September 30, 2013, the Company had no intent to sell and was not more likely than not to be required to sell the available for sale securities that were in a loss position prior to full recovery. For the three and nine months ended September 30, 2013, there were no available for sale securities deemed to be other than temporarily impaired.

The aggregate amortized cost and fair value of the available for sale securities portfolio at September 30, 2013 by remaining contractual maturity are as follows:

 

     September 30, 2013         
     Amortized
Cost
     Estimated
Fair Value
     Book
Yield
 

Securities available for sale

                    

U. S. Treasury

        

Due after one but within five years

     16,107         16,679         1.91

Due after five but within ten years

     7,415         7,193         1.27
  

 

 

    

 

 

    

 

 

 
     23,522         23,872         1.71
  

 

 

    

 

 

    

 

 

 

U.S. Government agencies

        

Due within twelve months

     5,002         5,050         2.27

Due after one but within five years

     28,422         28,247         1.32

Due after five but within ten years

     18,960         18,384         1.36
  

 

 

    

 

 

    

 

 

 
     52,384         51,681         1.43
  

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

        

Due after one but within five years

     2,630         2,545         1.66

Due after five but within ten years

     5,069         5,170         1.83

Due after ten years

     32,536         32,119         1.59
  

 

 

    

 

 

    

 

 

 
     40,235         39,834         1.62
  

 

 

    

 

 

    

 

 

 

State and political subdivisions

        

Due within twelve months

     481         489         3.28

Due after one but within five years

     1,129         1,218         3.75

Due after five but within ten years

     4,725         4,983         3.12

Due after ten years

     1,018         1,049         4.18
  

 

 

    

 

 

    

 

 

 
     7,353         7,739         3.37
  

 

 

    

 

 

    

 

 

 

Total Securities available for sale

        

Due within twelve months

     5,483         5,539         2.36

Due after one but within five years

     48,288         48,689         1.59

Due after five but within ten years

     36,169         35,730         1.64

Due after ten years

     33,554         33,168         1.67
  

 

 

    

 

 

    

 

 

 
   $ 123,494       $ 123,126         1.66
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Note 6 – Loans Held for Investment

The composition of net loans held for investment by class as of September 30, 2013 and December 31, 2012 are as follows:

 

     September 30,
2013
    December 31,
2012
 
     (dollars in thousands)  

Commercial

    

Commercial

   $ 46,001      $ 41,390   

Real estate – commercial

     96,745        103,304   

Other real estate construction loans

     19,435        25,052   

Noncommercial

    

Real estate 1 – 4 family construction

     3,610        3,080   

Real estate – residential

     90,714        93,927   

Home equity

     46,133        48,517   

Consumer loans

     8,757        12,986   

Other loans

     690        822   
  

 

 

   

 

 

 
     312,085        329,078   

Less:

    

Allowance for loan losses

     (5,259     (6,801

Deferred loan (fees) costs, net

     63        105   
  

 

 

   

 

 

 

Loans held for investment, net

   $ 306,889      $ 322,382   
  

 

 

   

 

 

 

Note 7 – Allowance for Loan Losses

The following table shows the change in the allowance for loss losses by loan segment for the three and nine months periods ended September 30, 2013 and 2012, respectively:

 

Commercial

   Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  
     (dollars in thousands)  

Balance, beginning of period

   $ 2,542      $ 2,650      $ 2,791      $ 2,904   

Provision (recovery) charged to operations

     (259     424        (152     476   

Charge-offs

     (217     (367     (612     (721

Recoveries

     20        5        59        53   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs)

     (197     (362     (553     (668
  

 

 

   

 

 

   

 

 

   

 

 

 

Other

     (1     —          (1     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 2,085      $ 2,712      $ 2,085      $ 2,712   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Non-Commercial

   Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  
     (dollars in thousands)  

Balance, beginning of period

   $ 2,939      $ 4,419      $ 4,010      $ 3,911   

Provision (recovery) charged to operations

     486        (33     (395     618   

Charge-offs

     (257     (229     (522     (400

Recoveries

     10        14        85        42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs)

     (247     (215     (437     (358
  

 

 

   

 

 

   

 

 

   

 

 

 

Other

     (4     —          (4     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 3,174      $ 4,171      $ 3,174      $ 4,171   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at September 30, 2013 and December 31, 2012:

 

September 30, 2013

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

Commercial

   $ 1,278       $ 8,732       $ 807       $ 153,449       $ 2,085       $ 162,181   

Non-Commercial

     1,559         10,355         1,615         139,612         3,174         149,967   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,837       $ 19,087       $ 2,422       $ 293,061       $ 5,259       $ 312,148   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2012

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

Commercial

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

Non-Commercial

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

September 30, 2013

                                         
     Loans
30-89 Days
Past Due
     Loans
90 Days
or More
Past due
     Total Past
Due Loans
     Current
Loans
     Total
Loans
     Accruing
Loans 90 or
More Days
Past Due
 
     (dollars in thousands)  

Commercial

   $ —         $ 307       $ 307       $ 45,694       $ 46,001       $ —     

Real estate – commercial

     40         2,259         2,299         94,446         96,745         —     

Other real estate construction

     —           1,581         1,581         17,854         19,435         —     

Real estate 1 – 4 family construction

     115         —           115         3,495         3,610         —     

Real estate – residential

     1,587         1,842         3,429         87,348         90,777         —     

Home equity

     333         213         546         45,587         46,133         —     

Consumer loans

     73         —           73         8,684         8,757         —     

Other loans

     —           —           —           690         690         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,148       $ 6,202       $   8,350       $ 303,798       $ 312,148       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2012

                                         
     Loans
30-89 Days
Past Due
     Loans
90 Days
or More
Past due
     Total Past
Due Loans
     Current
Loans
     Total
Loans
     Accruing
Loans 90 or
More Days
Past Due
 
     (dollars in thousands)  

Commercial

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

Real estate – commercial

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

Other real estate construction

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

Real estate construction

     —           —           —           3,080         3,080         —     

Real estate – residential

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

Home equity

     162         558         720         47,797         48,517         —     

Consumer loan

     218         1         219         12,767         12,986         —     

Other loans

     —           —           —           822         822         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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Table of Contents

The composition of nonaccrual loans by class as of September 30, 2013 and December 31, 2012 is as follows:

 

     September 30,
2013
     December 31,
2012
 
     (dollars in thousands)  

Commercial

   $ 307       $ 437   

Real estate – commercial

     2,259         3,032   

Other real estate construction

     1,581         2,945   

Real estate 1 – 4 family construction

     —           —     

Real estate – residential

     1,842         2,507   

Home equity

     213         558   

Consumer loans

     —           1   

Other loans

     —           —     
  

 

 

    

 

 

 
   $ 6,202       $ 9,480   
  

 

 

    

 

 

 

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

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

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

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

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

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

The tables below summarize risk grades of the loan portfolio by class at September 30, 2013 and December 31 2012:

 

September 30, 2013

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

Commercial

   $ 45,189       $ 385       $ 427       $ —         $ 46,001   

Real estate – commercial

     84,513         6,450         5,782         —           96,745   

Other real estate construction

     16,640         630         2,165         —           19,435   

Real estate 1 – 4 family construction

     3,451         159         —           —           3,610   

Real estate – residential

     73,276         12,437         5,064         —           90,777   

Home equity

     44,525         922         686         —           46,133   

Consumer loans

     8,324         360         73         —           8,757   

Other loans

     690         —           —           —           690   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 276,608       $ 21,343       $ 14,197       $ —         $ 312,148   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-15-


Table of Contents

December 31, 2012

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

Commercial

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

Real estate – commercial

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

Other real estate construction

     20,684         577         3,477         314         25,052   

Real estate 1 – 4 family construction

     3,080         —           —           —           3,080   

Real estate – residential

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

Home equity

     46,590         914         1,013         —           48,517   

Consumer loans

     12,360         512         114         —           12,986   

Other loans

     822         —           —           —           822   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2013 and December 31, 2012:

 

September 30, 2013

                    
     Performing      Non-
Performing
     Total  
     (dollars in thousands)  

Commercial

   $ 45,694       $ 307       $ 46,001   

Real estate – commercial

     94,486         2,259         96,745   

Other real estate construction

     17,854         1,581         19,435   

Real estate 1 – 4 family construction

     3,610         —           3,610   

Real estate – residential

     88,935         1,842         90,777   

Home equity

     45,920         213         46,133   

Consumer loans

     8,757         —           8,757   

Other loans

     690         —           690   
  

 

 

    

 

 

    

 

 

 

Total

   $ 305,946       $ 6,202       $ 312,148   
  

 

 

    

 

 

    

 

 

 

 

December 31, 2012

                    
     Performing      Non-
Performing
     Total  
     (dollars in thousands)  

Commercial

   $ 40,953       $ 437       $ 41,390   

Real estate – commercial

     100,272         3,032         103,304   

Other real estate construction

     22,107         2,945         25,052   

Real estate 1 – 4 family construction

     3,080         —           3,080   

Real estate – residential

     91,524         2,507         94,031   

Home equity

     47,960         558         48,518   

Consumer loans

     12,985         1         12,986   

Other loans

     822         —           822   
  

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

 

 

-16-


Table of Contents

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, 2013 and December 31, 2012:

 

September 30, 2013

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

Commercial

   $ 648       $ —         $ 529       $ 449       $ —         $ 307   

Real estate – commercial

     8,222         4,040         2,119         487         —           2,259   

Other real estate construction

     2,093         301         1,742         342         —           1,581   

Real estate 1 – 4 family construction

     375         26         349         16         —           —     

Real estate – residential

     9,078         4,144         4,934         1,127         —           1,842   

Home equity

     754         273         481         347         —           213   

Consumer loans

     148         79         69         69         —           —     

Other loans

     1         1         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 21,319       $ 8,864       $ 10,223       $ 2,837       $ —         $ 6,202   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2012

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

Commercial

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

Real estate – commercial

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

Other real estate construction

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

Real estate 1 – 4 family construction

     840         713         127         127         —           —     

Real estate – residential

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

Home equity

     1,068         521         547         159         —           558   

Consumer loans

     235         39         196         105         —           1   

Other loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months ended
September 30, 2013
     Three Months ended
September 30, 2012
 
     Average
Recorded
Investment
     Interest
Income
     Average
Recorded
Investment
     Interest
Income
 
     (dollars in thousands)  

Commercial

   $ 926       $ 3       $ 1,112       $ 23   

Real estate – commercial

     6,978         48         12,245         153   

Other real estate construction

     2,091         3         4,168         55   

Real estate 1 – 4 family construction

     376         7         1,014         15   

Real estate – residential

     8,727         52         12,680         166   

Home equity

     908         4         1,333         18   

Consumer loans

     148         2         343         4   

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,154       $ 119       $ 32,895       $ 434   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-17-


Table of Contents
     Nine Months ended
September 30, 2013
     Nine Months ended
September 30, 2012
 
     Average
Recorded
Investment
     Interest
Income
     Average
Recorded
Investment
     Interest
Income
 
     (dollars in thousands)  

Commercial

   $ 1,001       $ 11       $ 1,301       $ 50   

Real estate – commercial

     7,340         186         12,397         493   

Other real estate construction

     2,108         16         4,112         180   

Real estate 1 – 4 family construction

     383         18         1,124         31   

Real estate – residential

     8,693         273         12,261         477   

Home equity

     954         17         1,244         42   

Consumer loans

     169         6         332         14   

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,648       $ 527       $ 32,771       $ 1,287   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 8 – Troubled Debt Restructures

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

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

For the three and nine months ended September 30, 2013 and 2012 the following tables present a breakdown of the types of concessions made by loan class:

 

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

Other:

        

Commercial

     —         $ —         $ —     

Real estate – commercial

     —           —           —     

Other real estate construction

     —           —           —     

Real estate 1 – 4 family construction

     —           —           —     

Real estate – residential

     2         269         268   

Home equity

     —           —           —     

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     2       $ 269       $ 268   
  

 

 

    

 

 

    

 

 

 

 

-18-


Table of Contents
     Three months ended September 30, 2012  
     Number
of Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
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   
  

 

 

    

 

 

    

 

 

 

 

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

Other:

        

Commercial

     —         $ —         $ —     

Real estate – commercial

     1         357         342   

Other real estate construction

     —           —           —     

Real estate 1 – 4 family construction

     —           —           —     

Real estate – residential

     4         468         458   

Home equity

     —           —           —     

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     5       $ 825       $ 800   
  

 

 

    

 

 

    

 

 

 

 

     Nine months ended September 30, 2012  
     Number
of Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
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   
  

 

 

    

 

 

    

 

 

 

 

-19-


Table of Contents

The following tables present loans that were modified as troubled debt restructurings within the previous twelve months ending September 30, 2013 and 2012 for which there was a payment default:

 

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

Other:

     

Commercial

     —         $ —     

Real estate – commercial

     —           —     

Other real estate construction

     —           —     

Real estate 1 – 4 family construction

     —           —     

Real estate – residential

     —           —     

Home Equity loans

     —           —     

Consumer loans

     —           —     

Other loans

     —           —     
  

 

 

    

 

 

 

Total

     —         $ —     
  

 

 

    

 

 

 

 

     Twelve months ended
September 30, 2012
 
     Number
of Loans
     Recorded
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

     —           —     
  

 

 

    

 

 

 

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 $639,000 in allowance for loan loss as of September 30, 2013, as a direct result of these TDR’s.

The following tables present the successes and failures of the types of modifications within the previous twelve months ending September 30, 2013 and 2012:

 

September 30, 2013

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

Below market interest rate

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

Extended payment terms

       —            —            —            —            —            —            —            —    

Forgiveness of Principal

       —            —            10          1,578          —            —            —            —    

Other Loans

       —            —            —            —            —            —            —            —    
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total

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

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

-20-


Table of Contents

September 30, 2012

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

Below market interest rate

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

Other Loans

       —            —            6          352          —            —            11          897  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total

       —          $ —            6        $ 352          —          $ —            11        $ 897  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

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

Note 9 – Commitments and Contingencies

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

The bank’s risk of loss with the unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The bank uses the same credit policies in making commitments under such instruments as it does for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are unsecured. At September 30, 2013, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

     (dollars in thousands)  

Commitments to extend credit

   $ 62,112   

Credit card commitments

     8,102   

Standby letters of credit

     1,100   
  

 

 

 

Total commitments

   $ 71,314   
  

 

 

 

Note 10 – Fair Value Disclosures

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

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

 

-21-


Table of Contents

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, 2013, substantially all of the total impaired loans were evaluated based on the fair value of the underlying collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an internal assessment of fair value based upon market data issued or management determines the fair value of the underlying collateral is further impaired below the appraised value, the Company records the impaired loan as nonrecurring Level 3.

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

 

-22-


Table of Contents

The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012:

 

     September 30, 2013  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Securities available for sale:

           

US Treasury

   $ 23,872       $ 23,872       $ —         $ —     

US Government Agencies

     51,681         —           51,681         —     

GSE – Mortgage-backed securities and CMO’s

     39,834         —           39,834         —     

State and political subdivisions

     7,739         —           7,739         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 123,126       $ 23,872       $ 99,254       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Securities available for sale:

           

US Treasury

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

US Gov’t Agencies

     22,174         —           22,174         —     

GSE – Mortgage-backed securities and CMO’s

     41,022         —           41,022         —     

State and political subdivisions

     8,866         —           8,866         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

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

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2013 and December 31, 2012:

 

     September 30, 2013  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Impaired loans

   $ 7,386       $ —         $ —         $ 7,386   

Loans held for sale

     560         —           560         —     

Other real estate owned

     4,206         —           —           4,206   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 12,152       $ —         $ 560       $ 11,592   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Impaired loans

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

Loans held for sale

     5,373         —           5,373         —     

Other real estate owned

     5,596         —           —           5,596   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

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

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

    

Valuation Technique

  

Unobservable Input

   General
Range

Nonrecurring measurements:

        

OREO

   Discounted appraisals   

Collateral discounts and Estimated costs to sell

   0 – 10%

Impaired loans

   Discounted appraisals   

Collateral discounts and Estimated costs to sell

   0 – 30%

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

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

 

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The fair value estimates presented at September 30, 2013 and December 31, 2012, are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price at which a liability could be settled. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of September 30, 2013 and December 31, 2012:

 

September 30, 2013

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

FINANCIAL ASSETS

              

Cash and cash equivalents

   $ 56,716       $ 56,716       $ 56,716       $ —         $ —     

Securities available for sale

     123,126         123,126         23,872         99,254         —     

Loans held for investment, net

     306,889         315,061         —           —           315,061   

Loans held for sale

     560         560         —           560         —     

Restricted stock

     1,319         1,319         1,319         —           —     

Bank-owned life insurance

     6,486         6,486         —           —           6,486   

Mortgage servicing rights

     2,436         3,010         —           —           3,010   

Accrued interest receivable

     1,618         1,618         —           —           1,618   

FINANCIAL LIABILITIES

              

Deposits

   $ 462,984       $ 450,552       $ —         $ —         $ 450,552   

Short-term borrowings

     6,004         6,038         —           6,038         —     

Long-term borrowings

     38         38         —           38         —     

Junior subordinated debt

     11,127         11,252         —           —           11,252   

Accrued interest payable

     231         231         —           —           231   

 

December 31, 2012

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

FINANCIAL ASSETS

              

Cash and cash equivalents

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

Securities available for sale

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

Loans held for investment, net

     322,382         331,386         —           —           331,386   

Loans held for sale

     5,373         5,373         —           5,373         —     

Restricted stock

     2,265         2,265         2,265         —           —     

Bank-owned life insurance

     6,394         6,394         —           —           6,394   

Mortgage servicing rights

     2,394         2,394         —           —           2,394   

Accrued interest receivable

     1,753         1,753         —           —           1,753   

FINANCIAL LIABILITIES

              

Deposits

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

Short-term borrowings

     18,690         18,690         —           18,690         —     

Long-term borrowings

     1,546         1,702         —           1,702         —     

Junior subordinated debt

     11,127         11,268         —           —           11,268   

Accrued interest payable

     270         270         —           —           270   

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

 

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

 

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

 

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

 

    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.

 

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

Note 12 – Recent Accounting Pronouncements

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

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

 

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Note 13 – Subsequent Events

On October 3, 2013, the Company received approval to repurchase at par value, the remaining $2.3 million, or 258 shares, of Fixed Rate Cumulative Perpetual Preferred Stock, Series A issued to the United States Treasury under the Capital Purchase Program in December of 2008. This completed the Company’s repurchase at par value of the total $10.0 million of preferred stock issued in December of 2008.

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

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

Comparison of Financial Condition at September 30, 2013 and December 31, 2012.

During the nine months ended September 30, 2013, the Company’s total assets decreased $14.0 million, from $545.0 million to $531.0 million. The decrease was related entirely to the decline in loans held for investment.

Cash and cash equivalents decreased $25.0 million, during the nine months ended September 30, 2013. Cash and due from banks decreased $1.8 million, while interest-earning deposits with banks decreased $23.2 million. The Company has continued to invest excess cash into securities to maximize the yield.

Investment securities increased $31.5 million to $123.1 million for the nine months ended September 30, 2013. During the first nine months of 2013, the Company purchased securities of $46.7 million. The increase from new purchases was reduced by maturities and calls of $350,000, sales of $405,000 and normal reductions stemming from principal payments on mortgage backed securities. The Company is investing the funds generated from the pay downs in the loan portfolio and the increase in deposits, in lower duration securities as well as variable rate securities. These sectors should provide better protection from interest rate risk in a rising rate environment, mitigate the downside risk embedded in the current portfolio and improve the yield on earning assets. At September 30, 2013, the Company’s securities portfolio had net unrealized losses of $368,000.

Loans held for investment decreased from $329.2 million to $312.1 million, a decrease of $17.1 million. All areas of the loan portfolio decreased during the first nine months of 2013 with the exception of commercial loans and real estate one to four family construction that grew by $4.6 million and $530,000, respectively. Commercial real estate loans experienced the largest decline of $6.6 million during the period. Other real estate construction also experienced a $5.6 million decrease for the same period. The Company had two commercial real estate relationships that were foreclosed on for $2.1 million. The remainder of the decrease was related to payoffs and construction loans being converted to permanent loans. Loans held for sale decreased 89.6% or $4.8 million. The allowance for loan losses was $5.3 million, at September 30, 2013, which represented 1.68% of the loan portfolio compared to $6.8 million or 2.1% at December 31, 2012.

 

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Other changes in our consolidated assets are related to premises and equipment, interest receivable, restricted stock, bank owned life insurance, other real estate owned, prepaid assets, and other assets. Bank owned life insurance and prepaid assets increased $92,000 and $147,000, respectively, while accrued interest declined $135,000. Premises and equipment declined $1.1 million. The decrease in premises and equipment was related to the sale of a piece of property that had been purchased for further use. The property was sold for $949,000, with the Company realizing a gain on the sale of $229,000. Restricted stock which is comprised of Federal Home Loan Bank stock and Federal Reserve Bank stock decreased $946,000. Federal Home Loan Bank member institutions are required to increase or decrease their ownership as their utilization of FHLB borrowings change. The Company’s required ownership in Federal Reserve Bank stock decreased $336,000 to $467,000, while the required ownership in Federal Home Loan Bank decreased $610,000 to $852,000 during the first nine months of 2013. Other real estate owned increased $551,000. The Company foreclosed on nine loan relationships totaling $3.3 million during the first nine months of 2013. Two of these loan relationships resulted in twenty-two pieces of foreclosed real estate totaling $2.0 million being added to other real estate owned. The Company sold twenty-one pieces, or $2.0 million, of other real estate owned resulting in realized gains of $18,000. The Company recorded net valuation write-down adjustments of $745,000. The majority, or $678,000, of the write-downs was attributed to one piece of property. Other assets increased $1.1 million, primarily resulting from an increase in deferred tax assets due to the reduction in unrealized gains in the available for sale securities portfolio.

Customer deposits, our primary funding source, experienced a $5.4 million increase during the nine months ended September 30, 2013, increasing from $457.6 million to $463.0 million. Demand noninterest bearing checking increased $8.3 million and interest checking and money market accounts increased $14.5 million, while savings deposits increased $3.6 million for the period. These increases were offset by declines in time deposits over $100,000 of $7.5 million and other time deposits of $13.5 million.

Total borrowings decreased $14.2 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 $12.5 million in Federal Home Loan Bank advances played a major part in the decrease. At September 30, 2013, $1.5 million of the total borrowings of $17.2 million were comprised of Federal Home Loan Bank advances. Other components of total borrowings include $11.1 million in junior subordinated debt and $4.5 million in master notes and other secured borrowings.

Other liabilities decreased from $11.4 million at December 31, 2012 to $7.5 million at September 30, 2013, a decrease of $3.9 million. At December 31, 2012, the Company had a combined total of $7.9 million being held in escrow related to the Company’s subsidiary banks’ preferred stock offering in the last half of 2012. This preferred stock was issued in the first quarter of 2013. At September 30, 2013, the Company had $2.8 million being held in escrow related to the Company’s subsidiary bank’s preferred stock offering during the third quarter of 2013. This preferred stock was issued on October 1, 2013.

The Company has an Employee Stock Ownership Plan (ESOP) in place. Late in 2011, the Internal Revenue Service issued IRS notice 2011-19 that drew a clear line between what stock exchanges are considered public and which are not. The Company historically trades its stock on the Bulletin Board, which is a publically traded exchange, however, the IRS no longer recognizes the Bulletin Board as a public exchange. The result of this ruling is that companies that have ESOP plans in place are required to set aside funds to handle allocated shares put back to the company. The plan that the Company has includes a put option that requires the Company to repurchase allocated shares of participants at the participants’ option. The Company reclassed capital from additional paid-in capital to set aside the liability to cover all allocated shares that the Company may be requested to buy back. During the third quarter of 2013, the Company reclassed an additional $63,000 to this liability from additional paid-in capital.

 

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At September 30, 2013, total shareholders’ equity was $41.4 million, a decrease of $1.3 million from December 31, 2012. Net income for the period was $1.1 million. Unrealized gains and losses on investment securities net of tax decreased $1.7 million. The Company also recorded $290,000 in dividends on its series A and B preferred stock for the nine month period ended September 30, 2013. The Company also has $328,000 in dividends attributed to noncontrolling interest. The Company repurchased at par, $7.7 million of its series A preferred stock that was issued to the United States Treasury. The Company’s subsidiary banks issued $7.8 million of series B preferred stock that is presented less issuance costs, as noncontrolling interest. The Company, after receiving approval from the United States Department of the Treasury and the Federal Reserve, repurchased common stock totaling $92,000. At September 30, 2013, the Company and its subsidiary bank exceeded all applicable regulatory capital requirements.

Comparison of Results of Operations for the Three Months Ended September 30, 2013 and 2012.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $218,000 for the three months ended September 30, 2013, as compared to $262,000 for the three months ended September 30, 2012, a decrease of $44,000. Net income available to common shareholders was $43,000 or $0.01 per common share for the three months ended September 30, 2013, compared to $101,000 or $0.01 per common share for the three months ended September 30, 2012. Net income available to common shareholders is net income less any dividends on preferred stock related to the $10.0 million of capital received from the United States Department of the Treasury under the Capital Purchase Program in December 2008 and dividends on the aforementioned noncontrolling interest.

Net Interest Income

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

Net interest income for the three months ended September 30, 2013 and September 30, 2012 was $4.2 million and $4.5 million, respectively, a decrease of $291,000. During the current quarter, our decline in the volume of interest-earning assets outpaced the volume of interest-bearing liabilities by $296,000. The average yield on our interest–earning assets decreased 49 basis points to 4.12%, while the average rate we paid for our interest-bearing liabilities decreased 25 basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve Open Market Committee adjusts interest rates, while interest-bearing time deposits adjust at the time of maturity. The aforementioned decreases resulted in a decrease of 24 basis points in our interest rate spread, from 3.73% in 2012 to 3.49% in 2013. Our net interest margin was 3.59% and 3.86% for the comparable periods in 2013 and 2012, respectively.

 

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The following table presents average balance sheets and a net interest income analysis for the three months ended September 30, 2013 and 2012:

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended September 30,

 

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

Interest-earning assets:

                

Taxable securities

   $ 116,491       $ 109,611       $ 425       $ 520         1.45     1.89

Nontaxable securities (1)

     7,659         10,212         61         75         4.49     4.76

Short-term investments

     39,633         16,208         24         29         0.24     0.71

Taxable loans

     300,609         330,705         4,257         4,702         5.62     5.66

Non-taxable loans (1)

     15,959         12,319         111         107         4.49     5.60
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest-earning assets

     480,351         479,055         4,878         5,433         4.12     4.61

Interest-bearing liabilities:

                

Interest-bearing deposits

     384,966         374,426         454         623         0.47     0.66

Short-term borrowed funds

     8,014         19,509         19         98         0.94     2.00

Long-term debt

     11,167         14,003         164         180         5.83     5.11
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest bearing liabilities

     404,147         407,938         637         901         0.63     0.88
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net interest spread

   $ 76,204       $ 71,117       $ 4,241       $ 4,532         3.49     3.73
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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

                 3.59     3.86
              

 

 

   

 

 

 

 

(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 loss was $227,000 for the three months ending September 30, 2013 compared to $391,000 for the same period in 2012. There were net loan charge-offs of $444,000 for the three months ended September 30, 2013, as compared with net loan charge-offs of $577,000 during the same period of 2012. Refer to the Asset Quality discussion on page 33 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like all financial institutions, diversification of our revenue base is of major importance to our long term success. Total noninterest income decreased $570,000 for the three month period ending September 30, 2013 as compared to the same period in 2012. Income from mortgage loan sales decreased $741,000 from $1.1 million for the quarter ended September 30, 2012 to $361,000 for the same period in 2013. Service charges on deposit accounts produced revenue of $408,000, a decrease of $42,000 for the three months ended September 30, 2013. The primary factor leading to this decrease was a decrease in NSF fees for the comparable periods. Other service fees and commissions experienced a $69,000 or 8.6% increase for the comparable three month period, primarily due to an increase in brokerage commissions and asset management fees. The Company realized gains on the sale of other real estate owned of $22,000 for the three months ended September 30, 2013 compared to realized losses of $80,000 for the same period in 2012.

Noninterest Expense

Noninterest expense for the quarter ended September 30, 2013 was $5.6 million compared to $6.2 million for the same period of 2012, a decrease of $592,000. Salaries and employee benefits, the largest component of noninterest expense, decreased $178,000 for the quarter ending September 30, 2013. Foreclosed real estate expense decreased $413,000 for the three months ending September 30, 2013. The major factor related to the decrease in foreclosed real estate expense was a decline in write-downs on properties held in other real estate owned. These write-downs are attributed to updated appraisals and the lowering of list prices. There were no write-downs for the three month period in 2013 compared to $461,000 for the same

 

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period in 2012. Professional fees and services were $306,000 during the three months ending September 30, 2013 as compared to $295,000 for the same period in 2012. Other noninterest expense increased $34,000 for the comparable three month period. The table below reflects the composition of other noninterest expense.

Other noninterest expense

 

     Three Months Ended
September 30,
 
     2013      2012  
     (dollars in thousands)  

Postage

   $ 46       $ 44   

Telephone and data lines

     51         41   

Loan collection expense

     102         81   

Shareholder relations expense

     44         51   

Dues and subscriptions

     31         39   

Other

     375         376   
  

 

 

    

 

 

 

Total

   $ 649       $ 632   
  

 

 

    

 

 

 

Income Tax Expense

The Company had income tax expense of $48,000 for the three months ended September 30, 2013 compared to income tax expense of $109,000 in the 2012 period.

Comparison of Results of Operations For the Nine Months Ended September 30, 2013 and 2012.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $1.1 million for the nine months ended September 30, 2013, as compared to $1.4 million for the nine months ended September 30, 2012, a decrease of $225,000. Net income available to common shareholders was $520,000 or $0.07 per common share at September 30, 2013, compared to $879,000 or $0.12 per common share at September 30, 2012. Net income available to common shareholders is net income less any dividends on preferred stock related to the capital received from the United States Department of the Treasury under the Capital Purchase Program in December 2008 and dividends on the aforementioned noncontrolling interest.

Net Interest Income

Net interest income for the nine months ended September 30, 2013 was $2.1 million as compared to $2.8 million during the nine months ended September 30, 2012, resulting in a decrease of $691,000. During the nine months ending September 30, 2013, the decline in the volume of interest-earning assets outpaced the decline in growth of our interest-bearing liabilities by $820,000. The average yield on our interest–earning assets decreased 68 basis points to 4.08%, 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 changes resulted in a decrease of 44 basis points in our interest rate spread to 3.39% for the first nine months of 2013, compared to 3.83% for the first nine months of 2012. Our net interest margin was 3.49% and 3.97% for the comparable nine month periods in 2013 and 2012, respectively. A portion of the Company’s loan portfolio has interest rate floors and caps in place on the loans. Interest rate floors can provide margin protection in a down rate environment. The interest rate floors that are in place have helped the Company maintain a relatively favorable interest margin, while there has been a decline in rates over the past several years.

 

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The following table presents average balance sheets and a net interest income analysis for the nine months ended September 30, 2013 and 2012:

Average Balance Sheet and Net Interest Income Analysis

For the Nine Months Ended September 30,

 

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

Interest-earning assets:

                

Taxable securities

   $ 107,025       $ 85,607       $ 999       $ 1,201         1.25     1.87

Nontaxable securities (1)

     7,639         9,966         189         254         5.39     5.55

Short-term investments

     50,719         24,717         133         101         0.35     0.55

Taxable loans

     307,594         340,693         12,924         14,629         5.62     5.74

Non-taxable loans (1)

     14,959         12,489         320         328         4.65     5.70
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest-earning assets

     487,936         473,472         14,565         16,513         4.08     4.76

Interest-bearing liabilities:

                

Interest-bearing deposits

     385,991         369,210         1,488         1,948         0.52     0.70

Short-term borrowed funds

     12,103         18,078         142         253         1.57     1.87

Long-term debt

     11,857         18,389         501         621         5.65     4.51
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest bearing liabilities

     409,951         405,677         2,131         2,822         0.69     0.93
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net interest spread

   $ 77,985       $ 67,795       $ 12,434       $ 13,691         3.39     3.83
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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

                 3.49     3.97
              

 

 

   

 

 

 

 

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

Provision and Allowance for Loan Losses

The Company had a recovery of allowance for loan losses of $547,000 for the nine months ending September 30, 2013 compared to adding $1.1 of additional provision for the same period in 2012. There were net loan charge-offs of $1.0 million for both the nine months ended September 30, 2013 and 2012, respectively. Refer to the Asset Quality discussion on page 33 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like all financial institutions, diversification of our earnings base is of major importance to our long term success. Total noninterest income decreased $679,000 for the nine month period ending September 30, 2013 as compared to the same period in 2012. Income from mortgage loan sales was $1.8 million for the nine months ended September 30, 2013 as compared to $2.6 million for the same period in 2012, a decrease of $735,000. Service charges on deposit accounts produced earnings of $1.2 for the nine months ended September 30, 2013, a decrease of $113,000. The primary contributing factor was a decrease in NSF fees due in large part to changes in regulatory governance. Other service fees and commissions experienced a 4.6% increase for the comparable nine month period. This increase was directly related to brokerage commissions and asset management fees increasing. Gain on sale of other assets was $278,000 for the nine months ended September 30, 2013 compared to $216,000 for the same period in 2012. The Company realized a gain on the aforementioned sale of a piece of property being held in premises and equipment in the amount of $229,000 in the first quarter of 2013 and during the first quarter of 2012 the Company realized a gain on the sale of a government guaranteed loan of $276,000. Gains realized on the sale of securities were $14,000 for the first nine months in 2013 compared to $16,000 for the same period in 2012.

 

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Noninterest Expense

Noninterest expense for both the nine months ended September 30, 2013 and 2012 was $17.5 million. Salaries and employee benefits, the largest component of noninterest expense, decreased $289,000 to $9.2 million for the period ending September 30, 2013. Net occupancy and equipment expense had a combined decrease of $40,000. Professional fees and services increased $320,000. Foreclosed real estate expense decreased $100,000. The major factor related to the decrease in foreclosed real estate expense was write downs on properties held in other real estate owned. These net write downs were attributed to updated appraisals and the lowering of list prices during the first nine months of 2013 totaling $745,000 compared to $988,000 in net write downs for the same period in 2012. The increase in other professional fees and services was directly related to reimbursement of prior period legal fees totaling $360,000 during the first nine months of 2012. 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 previously closed government guaranteed loan. The Company did receive final reimbursement totaling $40,000 of prior period legal fees. Other noninterest expense increased $147,000 for the comparable nine month periods. The table below reflects the composition of other noninterest expense.

Other noninterest expense

 

     Nine Months Ended
September 30,
 
     2013      2012  
     (in thousands)  

Postage

   $ 150       $ 148   

Telephone and data lines

     143         130   

Loan collection expense

     296         225   

Shareholder relations expense

     131         129   

Dues and subscriptions

     114         128   

Other

     1,141         1,068   
  

 

 

    

 

 

 

Total

   $ 1,975       $ 1,828   
  

 

 

    

 

 

 

Income Tax Expense

The Company had income tax expense of $557,000 for the nine months ended September 30, 2013 resulting in an effective tax rate of 32.86%, compared to income tax expense of $561,000 and an effective rate of 29.16% in the 2012 period. The reduction of tax free income as a percentage of total income attributed to this increase in effective tax rate.

Asset Quality

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

 

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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 loan list that is designed to help management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history and the current delinquent status. Because of this process, certain loans are deemed as impaired and evaluated as an impaired loan.

The recovery of loan losses was $547,000 for the nine months ended September 30, 2013 as compared to provision of $1.1 million for the same period in 2012. At September 30, 2013 the levels of our impaired loans, which includes all loans in nonaccrual status and other loans deemed by management to be impaired, were $19.1 million compared to $26.1 million at December 31, 2012, a decrease of $7.0 million. Total nonaccrual loans, which are a component of impaired loans, decreased from $9.5 million at December 31, 2012 to $6.2 million at September 30, 2013. The Company foreclosed on and transferred eight loan relationships totaling $3.3 million into other real estate owned during the first the year. This was the major factor behind the decrease in nonaccrual loans during the year. The Company had net loan charge-offs for the first nine months of both 2013 and 2012 of $1.0 million.

The allowance expressed as a percentage of gross loans held for investment decreased 39 basis points from 2.07% at December 31, 2012 to 1.68% at September 30, 2013. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 1.24% at December 31, 2012 and 0.83% at September 30, 2013, while the individually evaluated allowance as a percentage of individually evaluated loans increased from 11.62% to 14.86%. While the amount of impaired loans declined due to the related transfer of foreclosed loans to other real estate owned, these loans while impaired only had minimal specific reserve dollars. The larger decline in impaired loan balances compared to the lower decline in specific loan reserves was behind the increase in the individually evaluated percentage. The portion of the Company’s allowance for loan loss model related to general reserves captures the mean loss of individual loans and the rare event of severe loss that can occur within the loan portfolio. Specifically, the Company calculates probable losses on loans by computing a probability of loss, a loss given default, and an estimated exposure by FDIC call report codes. The loans that are impaired and included in the specific reserve are excluded from these calculations. During the fourth quarter of 2012, the Company updated its allowance for loan loss model to more accurately assess the probability of losses inherent in the loan portfolio. The probabilities of default that the Company acquires from a third party vendor are associated with a two year horizon, while the allowance for loan loss is deemed to have a one year horizon. Therefore, the Company altered the model to account for this horizon; converting the two year probability of default into a one year probability of default for each obligor. At this time, the Company also updated the data inputs into the model; specifically the loss given default and the probability of defaults obtained from the vendor. The net result of these alterations had minimal effect on the loan loss provision. The Company updates the beacon scores that are one of the components used within the allowance model semi-annually, during the first and third quarters. For the first

 

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time in several updates, beacon scores experienced significant improvement during 2013. This improvement coupled with a $17.0 million decline in loans resulting from pay downs resulted in approximately $575,000 of recovery in general reserves. During the second quarter of 2013, the Company updated the probability of default statistics that are used in the model. These statistics are updated periodically and like the beacon scores in the first quarter experienced significant improvement. In a continued effort to improve the model’s inputs, the methodology for computing loss given default was updated in the third quarter of 2013. Nonperforming loans, which consist of nonaccrual loans and loans past due 90 days and still accruing, to total loans decreased from 2.88% at December 31, 2012, to 1.99% at September 30, 2013. Loans past due 30 to 89 days decreased $359,000, from $2.5 million at December 31, 2012 to $2.1 million at September 30, 2013. Management believes the current level of the allowance for loan losses is appropriate in light of the risk inherent in the loan portfolio.

Restructured loans at September 30, 2013 totaled $6.3 million compared to $6.8 million at December 31, 2012, and are included in impaired loans.

The following nonperforming loan table shows the comparison of September 30, 2013 to December 31, 2012:

Nonperforming Assets

(dollars in thousands)

 

     September 30,
2013
    December 31,
2012
 

Nonperforming assets:

    

Loans past due 90 days or more

   $ —        $ —     

Nonaccrual loans

     6,202        9,480   

Other real estate owned

     9,264        8,713   
  

 

 

   

 

 

 

Total nonperforming assets

   $ 15,466      $ 18,193   
  

 

 

   

 

 

 

Allowance for loans losses

   $ 5,259      $ 6,801   

Nonperforming loans to total loans

     1.99     2.88

Allowance for loan losses to total loans

     1.68     2.07

Nonperforming assets to total assets

     2.91     3.34

Allowance for loan losses to nonperforming loans

     84.79     71.74

During the first nine months of 2013, the Company had a net increase of $551,000 in other real estate owned. The Company foreclosed on nine loan relationships during the first nine months of 2013. Two of these loan relationships resulted in twenty-two pieces of foreclosed real estate totaling $2.0 million being added to other real estate owned. The Company sold twenty-one pieces, or $2.0 million, of other real estate owned resulting in realized gains of $18,000. The Company recorded net valuation write-down adjustments of $745,000.

Liquidity and Capital Resources

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

 

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The Company’s primary sources of internally generated funds are principal and interest payments on loans, cash flows generated from operations and cash flow generated by investments. Growth in deposits is typically the primary source of funds for loan growth. The Company and its subsidiary bank have multiple funding sources, in addition to deposits that can be used to increase liquidity and provide additional financial flexibility. These sources are the subsidiary bank’s established federal funds lines with correspondent banks aggregating $17.3 million at September 30, 2013, with available credit of $17.3 million; established borrowing relationships with the Federal Home Loan Bank, with available credit of $52.8 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of $36.9 million and the issuance of commercial paper. The Company has also secured long-term debt from other sources. Total debt from these sources aggregated $17.2 million at September 30, 2013, compared to $31.4 million at December 31, 2012.

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

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

The Company and its subsidiary bank have each maintained capital levels exceeding minimum levels for “well capitalized” banks and bank holding companies. The Company expects to continue to exceed minimum capital requirements without altering current operations or strategy. As previously discussed, each of the Company’s subsidiary banks had a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series B that was issued by each subsidiary bank. The preferred stock qualifies as Tier 1 capital at each bank and will pay dividends at an annual rate of 5.30%. Stanly raised $4.5 million, Anson raised $1.5 million and Cabarrus raised $1.9 million in new capital less total issuance costs of $113,000. The net total of $7.7 million is presented as noncontrolling interest at the Company level and does qualify as Tier 1 capital at the Company. At September 30, 2013, the Company had $11.1 million in subordinated debt outstanding and $2.7 million remaining in preferred stock issued to the United States Department of the Treasury after the repayment of $7.7 million to the United States Treasury. The Company has made all interest and dividend payments in a timely manner.

During the third quarter of 2013, the Company’s subsidiary, Uwharrie Bank began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series C. The preferred stock qualifies as Tier 1 capital at the bank and will pay dividends at an annual rate of 5.30%. The proceeds of this campaign will be used to repurchase the remaining $2.7 million in preferred stock issued to the United States Department of the Treasury. This campaign was completed in September and after receiving approval the remaining preferred stock was repurchased from the United States Department of the Treasury.

Accounting and Regulatory Matters

On July 2, 2013, the Federal Reserve and the Office of the Comptroller of the Currency adopted a final rule that will revise the current risk-based and leverage capital requirements for banking organizations. The final rule is a continuation of joint notices of proposed rulemaking originally published in the Federal Register during August, 2012.

The final rule implements a revised definition of regulatory capital, a new common equity tier 1 minimum capital requirement, and a higher overall minimum tier 1 capital requirement,

 

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incorporating these new requirements into the existing prompt corrective action (PCA) framework. It also establishes limits on a banking organization’s capital distributions and certain discretionary bonus payments if the organization does not hold a specified amount of common equity tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements. This additional capital is referred to as the “capital conservation buffer”. The “countercyclical capital buffer” provisions from the proposed rule have also been adopted, however, they apply only to large financial institutions (banks and bank holding companies with total consolidated assets of $250 billion or more) implementing the “advanced approaches” framework and are not applicable to the Company or its subsidiary bank.

The final rule permanently grandfathers the tier 1 capital treatment for certain non-qualifying capital instruments, including trust preferred securities, outstanding as of May 19, 2010.

Under the proposed rules released last August, banking organizations would have been required to recognize in regulatory capital all components of accumulated other comprehensive income (excluding accumulated net gains and losses on cash-flow hedges that relate to the hedging of items that are not recognized at fair value on the balance sheet). The final rule carries this requirement forward, with an exception for smaller banking organizations, such as the Company, which are not subject to the “advanced approaches” rule. Such organizations may make a one-time election not to include most elements of accumulated other comprehensive income (including unrealized gains and losses on securities designated as available-for-sale) in regulatory capital under the final rule. Organizations making this election will be permitted to use the currently existing treatment under the general risk-based capital rules that exclude most accumulated other comprehensive income elements from regulatory capital. The election must be made with the first call report or FR Y-9 report filed after the banking organization becomes subject to the final rule (January 2015 in the Company’s case).

The new rule also amends the existing methodologies for determining risk-weighted assets for all banking organizations. Specifically, the final rule assigns a 50% or 100% risk weight to mortgage loans secured by one-to-four family residential properties. Generally, residential mortgage loans secured by a first lien on a one- to-four family residential property that are prudently underwritten and that are performing according to their original terms receive a 50% risk weight. All other one-to-four family residential mortgage loans, including loans secured by a junior lien on residential property, are assigned a 100% risk weight.

The mandatory compliance date for the Company and its subsidiary bank will be January 1, 2015, with a transition period for the capital conservation buffer until January 1, 2016, and additional transition periods for certain other measures under the new rule.

Management will continue to evaluate the potential effect of the new final rule over the coming quarters. As of the date of this report, management is not aware of any other known trends, events, uncertainties or current recommendations by regulatory authorities that will have or that are reasonably likely to have a material effect on the Company’s liquidity, capital resources, or other operations.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

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

 

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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, Uwharrie is engaged in ordinary routine litigation incidental to their business.

 

Item 1A. Risk Factors

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

 

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, 2013.

 

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

July 1, 2013 Through July 31, 2013

    —        $ —          —        $ —     

August 1, 2013 Through August 31, 2013

    —        $ —          —        $ —     

September 1, 2013 Through September 30, 2013

    6,900      $ 2.90        —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    6,900      $ 2.90        —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 June 27, 2012, 24,951 shares were repurchased for $68,615. On August 16, 2012, 6,250 shares were repurchased for $20,000. On September 29, 2012, 38,653 shares were repurchased for $154,612. On December 20,

 

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  2012, 20,406 shares were repurchased for $61,218. On March 21, 2013, 7,273 shares were repurchased for $20,001. On March 27, 2013, 10,452 shares were repurchased for $32,041. On May 28, 2013, 6,667 shares were repurchased for $20,000. On September 3, 2013, 6,900 shares were repurchased for $20,010, As of September 30, 2013; there was $3,503 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

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)

 

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  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, and Christy D. Stoner (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)
101    Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013, 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 8, 2013     By:  

/s/ Roger L. Dick

    Roger L. Dick
    President and Chief Executive Officer
Date: November 8, 2013     By:  

/s/ R. David Beaver, III

    R. David Beaver, III
    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, and Christy D. Stoner (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)
101    Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013, in XBRL (eXtensible Business Reporting Language) (8)

 

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Table of Contents
(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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