UWHARRIE CAPITAL CORP - Quarter Report: 2014 September (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2014

¨	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.

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

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

Table of Contents


		Page No.

Part I.	FINANCIAL INFORMATION

Item 1 -	Financial Statements (Unaudited)

	Consolidated Balance Sheets September 30, 2014 and December 31, 2013		3

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2014 and 2013		4

	Consolidated Statements of Comprehensive Income for the Three And Nine Months Ended September 30, 2014 and 2013		5

	Consolidated Statements of Changes in Shareholders’ Equity Nine Months Ended September 30, 2014		6

	Consolidated Statements of Cash Flows Nine Months Ended September 30, 2014 and 2013		7

	Notes to Consolidated Financial Statements		8

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29

Item 3 -	Quantitative and Qualitative Disclosures about Market Risk		39

Item 4 -	Controls and Procedures		40

Part II.	OTHER INFORMATION

Item 1 -	Legal Proceedings		40

Item 1A -	Risk Factors		40

Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds		41

Item 3 -	Defaults Upon Senior Securities		41

Item 4 -	Mine Safety Disclosures		41

Item 5 -	Other Information		41

Item 6 -	Exhibits		42

	Exhibit Index		45

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Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements


	September 30,
	2014			December 31,
	(Unaudited)			2013*
	(dollars in thousands)
ASSETS
Cash and due from banks	$	5,715		$	7,947
Interest-earning deposits with banks		49,087			64,447
Securities available for sale, at fair value		113,924			100,280
Loans held for sale		1,402			1,139
Loans:		309,978			307,348
Less allowance for loan losses		(3,466	)		(5,095	)

Net loans held for investment		306,512			302,253

Premises and equipment, net		15,008			13,781
Interest receivable		1,498			1,747
Restricted stock		1,038			1,184
Bank owned life insurance		6,615			6,516
Other real estate owned		5,858			7,170
Other assets		10,371			10,856

Total assets	$	517,028		$	517,320


LIABILITIES
Deposits:
Demand noninterest-bearing	$	81,024		$	74,493
Interest checking and money market accounts		237,549			228,933
Savings deposits		38,148			41,512
Time deposits, $100,000 and over		40,223			44,690
Other time deposits		57,318			64,080

Total deposits		454,262			453,708

Short-term borrowed funds		3,771			5,509
Long-term debt		9,561			11,163
Interest payable		182			224
Other liabilities		5,498			4,491

Total liabilities		473,274			475,095


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

Redeemable common stock held by the Employee Stock Ownership Plan (ESOP)		1,820			1,716

SHAREHOLDERS’ EQUITY
Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and outstanding 7,301,375 and 7,445,931 shares, respectively		9,127			9,307
Additional paid-in capital		11,325			11,922
Unearned ESOP compensation		—			(989	)
Undivided profits		10,976			10,289
Accumulated other comprehensive gain (loss)		(56	)		(562	)

Total Uwharrie Capital shareholders’ equity		31,372			29,967
Noncontrolling interest		10,562			10,542

Total shareholders’ equity		41,934			40,509

Total liabilities and shareholders’ equity	$	517,028		$	517,320

(*)	Derived from audited consolidated financial statements

See accompanying notes

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
	(in thousands, except share and per share data)
Interest Income
Loans, including fees	$	4,120		$	4,368		$	12,285		$	13,244
Investment securities
US Treasury		94			103			281			296
US Government agencies and corporations		310			322			968			703
State and political subdivisions		87			61			232			189
Corporate bonds		7			—			7			—
Interest-earning deposits with banks and federal funds sold		36			24			120			133

Total interest income		4,654			4,878			13,893			14,565


Interest Expense
Interest checking and money market accounts		70			110			228			338
Savings deposits		11			47			47			131
Time deposits, $100,000 and over		117			135			358			462
Other time deposits		131			162			409			557
Short-term borrowed funds		2			19			29			142
Long-term debt		139			164			434			501

Total interest expense		470			637			1,505			2,131

Net interest income		4,184			4,241			12,388			12,434
Provision for (recovery of) loan losses		(271	)		227			(756	)		(547	)

Net interest income after provision (recovery of) for loan losses		4,455			4,014			13,144			12,981


Noninterest Income
Service charges on deposit accounts		367			408			1,104			1,205
Other service fees and commissions		986			870			2,893			2,504
Gain/(loss) on sale of securities (includes reclassification of $5,000, $26,000 and $14,000 from accumulated other comprehensive income)		5			—			26			14
Gain (loss) on fixed assets and other assets		231			53			471			278
Income from mortgage loan sales		282			361			701			1,843
Other income		92			118			283			342

Total noninterest income		1,963			1,810			5,478			6,186


Noninterest Expense
Salaries and employee benefits		3,093			3,037			9,079			9,189
Net occupancy expense		278			295			823			845
Equipment expense		164			180			511			534
Data processing costs		181			186			551			578
Office supplies and printing		74			76			202			187
Foreclosed real estate expense		610			134			1,037			1,257
Professional fees and services		210			306			560			787
Marketing and donations		183			181			476			557
Electronic banking expense		214			258			689			729
Software amortization and maintenance		140			132			396			413
FDIC insurance		109			124			330			421
Other noninterest expense		572			649			1,726			1,975

Total noninterest expense		5,828			5,558			16,380			17,472

Income before income taxes		590			266			2,242			1,695
Income taxes (includes reclassification of $2,000, $10,000 and $5,000 from accumulated other other comprehensive income)		191			48			710			557

Net income	$	399		$	218		$	1,532		$	1,138

Consolidated net income	$	399			218			1,532			1,138
Less: net income attributable to noncontrolling Interest		(149	)		(111	)		(442	)		(328	)

Net income attributable to Uwharrie Capital Corp		250			107			1,090			810
Dividends – preferred stock		—			(64	)		—			(290	)

Net income available to common shareholders	$	250		$	43		$	1,090		$	520

Net income per common share
Basic	$	0.03		$	0.01		$	0.15		$	0.07

Diluted	$	0.03		$	0.01		$	0.15		$	0.07

Weighted average shares outstanding
Basic		7,310,169			7,414,138			7,326,957			7,433,232
Diluted		7,310,169			7,414,138			7,326,957			7,433,232

See accompanying notes

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


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

Net Income	$	399		$	218		$	1,532		$	1,138

Other comprehensive income (loss)
Unrealized gain (loss) on available for sale securities		(461	)		(104	)		792			(2,641	)
Related tax effect		156			43			(270	)		929
Reclassification of (gain) loss recognized in net income		(5	)		—			(26	)		(14	)
Related tax effect		2			—			10			5


Total other comprehensive income (loss)		(308	)		(61	)		506			(1,721	)

Comprehensive income (loss)		91			157			2,038			(583	)

Less: Comprehensive income (loss) attributable to noncontrolling interest		(149	)		(111	)		(442	)		(328	)


Comprehensive income (loss) attributable to Uwharrie Capital	$	(58	)	$	46		$	1,596		$	(911	)

See accompanying notes

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)


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

Balance, December 31, 2013		7,445,931		$	9,307		$	11,922		$	(989	)	$	10,289		$	(562	)	$	10,542		$	40,509
Net Income		—			—			—			—			1,090			—			442			1,532
Repurchase of common stock		(34,239	)		(43	)		(70	)		—			—			—			—			(113	)
2% stock dividend		142,129			178			221			—			(399	)		—			—			—
Cash paid – fractional shares		—			—			—			—			(4	)		—			—			(4	)
Other comprehensive Income		—			—			—			—			—			506			—			506
Release of ESOP shares		—			—			5			16			—			—			—			21
Repayment of ESOP notes receivable		(252,446	)		(315	)		(649	)		973			—			—			—			9
Reclass to mezzanine capital		—			—			(104	)		—			—			—			—			(104	)
Record preferred stock dividend Series B (noncontrolling interest)		—			—			—			—			—			—			(311	)		(311	)
Record preferred stock dividend Series C (noncontrolling interest)		—			—			—			—			—			—			(111	)		(111	)

Balance, September 30, 2014		7,301,375		$	9,127		$	11,325		$	—		$	10,976		$	(56	)	$	10,562		$	41,934

See accompanying notes

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)


	Nine Months Ended
	September 30,
	2014			2013
	(dollars in thousands)
Cash flows from operating activities
Net income	$	1,532		$	1,138
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation		687			584
Net amortization of security premiums/discounts		746			1,163
Net amortization of mortgage servicing rights		532			619
Impairment of foreclosed real estate		574			745
Impairment of (recovery of) other assets		—			(75	)
Recovery of loan losses		(756	)		(547	)
Net realized gain on sales / calls available for sales securities		(26	)		(14	)
Income from mortgage loan sales		(701	)		(1,843	)
Proceeds from sales of loans held for sale		27,278			67,218
Origination of loans held for sale		(26,840	)		(60,562	)
Gain on sale of premises, equipment and other assets		(146	)		(229	)
Increase in cash surrender value of life insurance		(99	)		(92	)
Gain on sales of foreclosed real estate		(325	)		(18	)
Release of ESOP shares		30			34
Net change in interest receivable		249			135
Net change in other assets		(60	)		(576	)
Net change in interest payable		(42	)		(39	)
Net change in other liabilities		1,007			3,454

Net cash provided by operating activities		3,640			11,095

Cash flows from investing activities
Proceeds from sales, maturities and calls of securities available for sale		10,113			11,413
Purchase of securities available for sale		(23,711	)		(46,693	)
Net (increase) decrease in loans		(3,957	)		12,768
Proceeds from sales of premises, equipment and other assets		273			949
Purchase of premises and equipment		(2,041	)		(237	)
Proceeds from sales of foreclosed real estate		1,517			1,994
Investment in other assets		(250	)		(356	)
Net decrease in restricted stock		146			946

Net cash used in investing activities		(17,910	)		(19,216	)

Cash flows from financing activities
Net increase in deposit accounts		554			5,372
Net decrease in short-term borrowed funds		(1,735	)		(12,686	)
Net decrease in long-term debt		(1,602	)		(1,508	)
Proceeds from preferred stock series B issued by subsidiaries		—			360
Repayment of preferred stock series A		—			(7,742	)
Increase in unearned ESOP compensation		—			(69	)
Repurchase of common stock		(113	)		(92	)
Dividend and discount accretion on preferred stock		—			(215	)
Dividend and cost accretion on noncontrolling interest		(422	)		(311	)
Cash paid for fractional shares		(4	)		—

Net cash provided (used in) in financing activities		(3,322	)		(16,891	)

Decrease in cash and cash equivalents		(17,592	)		(25,012	)
Cash and cash equivalents, beginning of period		72,394			81,728

Cash and cash equivalents, end of period	$	54,802		$	56,716

Supplemental Disclosures of Cash Flow Information
Interest paid	$	1,547		$	2,170
Income taxes paid		21			648
Supplemental Schedule of Non-Cash Activities
Net change in fair value securities available for sale, net of tax	$	506		$	(1,721	)
Loans transferred to foreclosed real estate		454			3,272
Company financed sales of other real estate owned		—			(213	)
Net change in ESOP liability		104			102
Exchange of unearned ESOP shares for ESOP debt		973			63

See accompanying notes

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Basis of Presentation

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

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

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to consolidated financial statements filed as part of the Company’s 2013 Annual Report on Form 10-K. This Quarterly Report should be read in conjunction with such Annual Report.

Note 2 – Comprehensive Income

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


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

Beginning Balance	$	252		$	(173	)	$	(562	)	$	1,487

Other Comprehensive income (loss) before reclassifications, net of $157,000 $43,000, ($270,000) and $929,000 tax effect, respectively		(305	)		(61	)		522			(1,712	)

Amounts reclassified from accumulated Other comprehensive income, net of $2,000, $10,000 and $5,000 tax effect		(3	)		—			(16	)		(9	)


Net current-period other comprehensive Income (loss)		(308	)		(61	)		506			(1,721	)


Ending Balance	$	(56	)	$	(234	)	$	(56	)	$	(234	)

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Note 3 – Noncontrolling Interest

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

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

Note 4 – Per Share Data

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

Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for stock dividends. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. For both the three and nine months ended September 30, 2013, the Company’s 94,341 stock options outstanding did not have a dilutive effect on per share results because the exercise prices exceeded the share values for each period. For the three and nine months ended September 30, 2014, the Company had 12,607 stock options outstanding which did not have a dilutive effect. The line item for effect of Employee Stock Ownership Plan, (“ESOP”) shares shows the average of the unallocated ESOP shares.

-9-

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


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

Weighted average number of common shares outstanding		7,310,169		7,623,381			7,326,957		7,623,381

Effect of ESOP shares		—		(209,243	)		—		(190,149	)


Adjusted weighted average number of common shares used in computing basic net income per common share		7,310,169		7,414,138			7,326,957		7,433,232

Effect of dilutive stock options		—		—			—		—


Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per common share		7,310,169		7,414,138			7,326,957		7,433,232

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

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

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

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

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

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Note 5 – Investment Securities

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


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2014	Cost		Gains		Losses		Value
	(dollars in thousands)
U.S. Treasury	$	20,864	$	394	$	124	$	21,134
U.S. Government agencies		40,734		60		469		40,325
GSE - Mortgage-backed securities and CMO’s		37,755		111		579		37,287
State & political subdivisions		11,615		550		—		12,165
Corporate bonds		3,041		—		28		3,013

Total securities available for sale	$	114,009	$	1,115	$	1,200	$	113,924


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2013	Cost		Gains		Losses		Value
	(dollars in thousands)
U.S. Treasury	$	20,992	$	502	$	208	$	21,286
U.S. Government agencies		34,931		145		776		34,300
GSE - Mortgage-backed securities and CMO’s		37,871		121		986		37,006
State and political subdivisions		7,337		351		—		7,688

Total securities available for sale	$	101,131	$	1,119	$	1,970	$	100,280

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

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


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

Gross proceeds from sales and calls	$	4,405	$	—	$	4,733	$	426


Realized gains from sales and calls	$	5	$	—	$	26	$	14
Realized losses from sales and calls		—		—		—		—

Net Realized gains	$	5	$	—	$	26	$	14

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

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

-11-

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


	Less than 12 Months				12 Months or More				Total
September 30, 2014	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
					(dollars in thousands)
Securities available for sale temporary impairment
U.S. Treasury	$	—	$	—	$	4,814	$	124	$	4,814	$	124
U.S. Gov’t agencies		8,504		75		16,761		394		25,265		469
GSE-Mortgage-backed securities and CMO’s		8,134		113		15,445		466		23,579		579
Corporate bonds		3,013		28		—		—		3,013		28

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


	Less than 12 Months				12 Months or More				Total
December 31, 2013	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
			(dollars in thousands)
Securities available for sale temporary impairment
U.S. Treasury	$	4,722	$	208	$	—	$	—	$	4,722	$	208
U.S. Gov’t agencies		29,147		776		—		—		29,147		776
GSE-Mortgage-backed securities and CMO’s		22,206		842		3,849		144		26,055		986
State and political subdivisions		—		—		—		—		—		—

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

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

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

-12-

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


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

U. S. Treasury
Due after one but within five years		15,926		16,320		1.91	%
Due after five but within ten years		4,938		4,814		1.37	%

		20,864		21,134		1.79	%

U.S. Government agencies
Due within twelve months		4,981		5,041		2.77	%
Due after one but within five years		33,805		33,358		1.26	%
Due after five but within ten years		1,948		1,926		1.90	%

		40,734		40,325		1.48	%

Mortgage-backed securities
Due after one but within five years		4,488		4,417		1.51	%
Due after five but within ten years		1,357		1,392		3.01	%
Due after ten years		31,910		31,478		1.91	%

		37,755		37,287		1.90	%

State and political subdivisions
Due within twelve months		175		178		4.62	%
Due after one but within five years		2,396		2,572		4.96	%
Due after five but within ten years		3,529		3,734		4.97	%
Due after ten years		5,515		5,681		4.29	%

		11,615		12,165		4.64	%

Corporate Bonds
Due after five but within ten years		3,041		3,013		1.24	%

		3,041		3,013		1.24	%

Total Securities available for sale
Due within twelve months		5,156		5,219		2.83	%
Due after one but within five years		56,615		56,667		1.62	%
Due after five but within ten years		14,813		14,879		2.42	%
Due after ten years		37,425		37,159		2.26	%

	$	114,009	$	113,924		1.99	%

Note 6 – Loans Held for Investment

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


	September 30,			December 31,
	2014			2013
	(dollars in thousands)
Commercial
Commercial	$	47,632		$	47,436
Real estate - commercial		89,732			95,922
Other real estate construction loans		23,194			17,583
Noncommercial
Real estate 1-4 family construction		3,895			3,418
Real estate - residential		90,752			87,463
Home equity		45,773			45,231
Consumer loans		8,479			9,623
Other loans		542			612

		309,999			307,288
Less:
Allowance for loan losses		(3,466	)		(5,095	)
Deferred loan (fees) costs, net		(21	)		60


Loans held for investment, net	$	306,512		$	302,253

-13-

Note 7 – Allowance for Loan Losses

The following table shows the change in the allowance for loss losses by loan segment for the three and nine month period ended September 30, 2014 and 2013, respectively:


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

Balance, beginning of period	$	1,570	$	2,542		$	2,665		$	2,791
Provision (recovery) charged to operations		33		(259	)		(378	)		(152	)
Charge-offs		—		(217	)		(744	)		(612	)
Recoveries		35		20			95			59

Net (charge-offs)		35		(197	)		(649	)		(553	)

Other		—		(1	)		—			(1	)

Balance at end of period	$	1,638	$	2,085		$	1,638		$	2,085


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

Balance, beginning of period	$	2,130		$	2,939		$	2,430		$	4,010
Provision (recovery) charged to operations		(304	)		486			(378	)		(395	)
Charge-offs		(60	)		(257	)		(357	)		(522	)
Recoveries		62			10			133			85

Net (charge-offs)		2			(247	)		(224	)		(437	)

Other		—			(4	)		—			(4	)

Balance at end of period	$	1,828		$	3,174		$	1,828		$	3,174


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

Balance, beginning of period	$	3,700		$	5,481		$	5,095		$	6,801
Provision (recovery) charged to operations		(271	)		227			(756	)		(547	)
Charge-offs		(60	)		(474	)		(1,101	)		(1,134	)
Recoveries		97			30			228			144

Net (charge-offs)		37			(444	)		(873	)		(990	)

Other		—			(5	)		—			(5	)

Balance at end of period	$	3,466		$	5,259		$	3,466		$	5,259

-14-

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


September 30, 2014

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

Commercial	$	—	$	3,029	$	1,638	$	157,529	$	1,638	$	160,558
Non-Commercial		59		5,059		1,769		144,361		1,828		149,420


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


December 31, 2013

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

Commercial	$	1,519	$	8,700	$	1,146	$	152,241	$	2,665	$	160,941
Non-Commercial		868		8,853		1,562		137,554		2,430		146,407


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

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

September 30, 2014


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

Commercial	$	62	$	—	$	62	$	47,570	$	47,632	$	—
Real estate - commercial		78		531		609		89,123		89,732		—
Other real estate construction		12		1,030		1,042		22,152		23,194		—
Real estate 1 - 4 family construction		—		—		—		3,895		3,895		—
Real estate - residential		2,205		1,113		3,318		87,413		90,731		—
Home equity		170		13		183		45,590		45,773		—
Consumer loans		28		—		28		8,451		8,479		—
Other loans		—		—		—		542		542		—


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

December 31, 2013


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

Commercial	$	143	$	204	$	347	$	47,089	$	47,436	$	—
Real estate - commercial		165		1,064		1,229		94,693		95,922		—
Other real estate construction		145		1,637		1,782		15,801		17,583		—
Real estate construction		—		—		—		3,418		3,418		—
Real estate - residential		1,426		1,564		2,990		84,533		87,523		—
Home equity		207		248		455		44,776		45,231		—
Consumer loan		55		—		55		9,568		9,623		—
Other loans		—		—		—		612		612		—


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

-15-

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

The composition of nonaccrual loans by class as of September 30, 2014 and December 31, 2013 is as follows:


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

Commercial	$	—	$	204
Real estate - commercial		531		1,064
Other real estate construction		1,030		1,637
Real estate 1 – 4 family construction		—		—
Real estate – residential		1,113		1,564
Home equity		13		248
Consumer loans		—		—
Other loans		—		—

	$	2,687	$	4,717

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

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

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

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

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

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

-16-

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

September 30, 2014


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

Commercial	$	46,922	$	652	$	58	$	—	$	47,632
Real estate - commercial		79,522		6,082		4,128		—		89,732
Other real estate construction		19,522		2,001		1,671		—		23,194
Real estate 1 - 4 family construction		3,895		—		—		—		3,895
Real estate - residential		74,890		11,447		4,394		—		90,731
Home equity		44,373		1,287		113		—		45,773
Consumer loans		8,167		279		33		—		8,479
Other loans		542		—		—		—		542


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

December 31, 2013


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

Commercial	$	46,520	$	635	$	281	$	—	$	47,436
Real estate - commercial		80,679		9,396		5,847		—		95,922
Other real estate construction		12,898		2,465		1,385		835		17,583
Real estate 1 - 4 family construction		3,418		—		—		—		3,418
Real estate - residential		70,407		12,911		4,205		—		87,523
Home equity		43,830		1,005		396		—		45,231
Consumer loans		9,216		361		46		—		9,623
Other loans		612		—		—		—		612


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

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

September 30, 2014


			Non-
	Performing		Performing		Total
	(dollars in thousands)

Commercial	$	47,632	$	—	$	47,632
Real estate - commercial		89,201		531		89,732
Other real estate construction		22,164		1,030		23,194
Real estate 1 – 4 family construction		3,895		—		3,895
Real estate – residential		89,618		1,113		90,731
Home equity		45,760		13		45,773
Consumer loans		8,479		—		8,479
Other loans		542		—		542


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

-17-

December 31, 2013


			Non-
	Performing		Performing		Total
	(dollars in thousands)

Commercial	$	47,232	$	204	$	47,436
Real estate - commercial		94,858		1,064		95,922
Other real estate construction		15,946		1,637		17,583
Real estate 1 – 4 family construction		3,418		—		3,418
Real estate – residential		85,959		1,564		87,523
Home equity		44,983		248		45,231
Consumer loans		9,623		—		9,623
Other loans		612		—		612


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

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

September 30, 2014


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

Commercial	$	73	$	73	$	—	$	—	$	—
Real estate - commercial		2,061		1,872		—		—		531
Other real estate construction		1,622		1,084		—		—		1,030
Real estate 1 - 4 family construction		21		21		—		—		—
Real estate - residential		5,182		4,698		235		59		1,113
Home equity		31		31		—		—		13
Consumer loans		74		74		—		—		—
Other loans		—		—		—		—		—


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

December 31, 2013


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

Commercial	$	377	$	291	$	86	$	67
Real estate - commercial		6,808		3,962		2,375		507
Other real estate construction		2,034		247		1,739		945
Real estate 1 - 4 family construction		374		25		349		16
Real estate - residential		8,197		4,619		3,329		530
Home equity		415		58		357		279
Consumer loans		116		61		55		43
Other loans		—		—		—		—


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

-18-


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

Commercial	$	102	$	1	$	926	$	3
Real estate - commercial		1,754		19		6,978		48
Other real estate construction		1,058		2		2,091		3
Real estate 1 - 4 family construction		21		—		376		7
Real estate - residential		5,379		43		8,727		52
Home equity		32		1		908		4
Consumer loans		77		3		148		2
Other loans		—		—		—		—


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


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

Commercial	$	123	$	4	$	1,001	$	11
Real estate - commercial		2,978		54		7,340		186
Other real estate construction		1,346		2		2,108		16
Real estate 1 - 4 family construction		138		1		383		18
Real estate - residential		6,054		156		8,693		273
Home equity		81		1		954		17
Consumer loans		87		5		169		6
Other loans		—		—		—		—


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

Note 8 – Troubled Debt Restructures

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

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

-19-

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


	For the three months ended September 30, 2014
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded
	of Contracts		Investment		Investment
	(dollars in thousands)
Extend payment terms:
Commercial		—	$	—	$	—
Real estate - commercial		—		—		—
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		—		—		—
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—


		—	$	—	$	—


Other:
Commercial		—	$	—	$	—
Real estate - commercial		1		187		187
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		1		18		18
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—


		2	$	205	$	205


Total		2	$	205	$	205


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

Other:
Commercial		—	$	—	$	—
Real estate - commercial		—		—		—
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		2		269		268
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—


Total		2	$	269	$	268

-20-


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

Extend payment terms:
Commercial		—	$	—	$	—
Real estate - commercial		—		—		—
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		—		—		—
Home equity		—		—		—
Consumer loans		1		32		30
Other loans		—		—		—


Total		1	$	32	$	30


Other:
Commercial		—	$	—	$	—
Real estate - commercial		2		299		298
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		5		636		632
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—


Total		7	$	935	$	930


Total		8	$	967	$	960


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

Other:
Commercial		—	$	—	$	—
Real estate - commercial		1		357		342
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		4		468		458
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—


Total		5	$	825	$	800

-21-

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

Twelve months ended

September 30, 2014

September , 2013

Number

Recorded

Number

Recorded

of Loans

Investment

of Loans

Investment

(dollars in thousands)

Other:

Commercial

—

Real estate - commercial

—

Other real estate construction

—

Real estate 1 - 4 family construction

—

Real estate - residential

—

Home equity

—

Consumer loans

—

Other loans

—

Total

—

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

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


	Paid In Full				Paying as restructured				Converted to nonaccrual				Foreclosure/ Default
	Number of		Recorded		Number of		Recorded		Number of		Recorded		Number of		Recorded
	Loans		Investments		Loans		Investments		Loans		Investments		Loans		Investments
	(dollars in thousands)
September 30, 2014

Below market Interest rate		—	$	—		—	$	—		—	$	—		—	$	—
Extended payment Terms		—		—		1		30		—		—		—		—
Forgiveness of Principal
Other		—		—		9		1,084		—		—		—		—


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


September 30, 2013
	Paid In Full				Paying as restructured				Converted to nonaccrual				Foreclosure/ Default
	Number of		Recorded		Number of		Recorded		Number of		Recorded		Number of		Recorded
	Loans		Investments		Loans		Investments		Loans		Investments		Loans		Investments
	(dollars in thousands)

Below market interest rate		—	$	—		—	$	—		—	$	—		—	$	—
Extended payment terms		—		—		—		—		—		—		—		—
Forgiveness of Principal		—		—		10		1,578		—		—		—		—
Other Loans		—		—		—		—		—		—		—		—


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

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

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Note 9 – Commitments and Contingencies

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

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


	(dollars in thousands)
Commitments to extend credit	$	74,137
Credit card commitments		8,081
Standby letters of credit		1,788

Total commitments	$	84,006

Note 10 – Fair Value Disclosures

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

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

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

Prices for US Treasury securities are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the ‘Level 1 input’ column. Prices for government agency securities, mortgage-backed securities and for state, county and

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

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment by using one of several methods including collateral value, fair value of similar debt and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected repayments or fair value of collateral exceed the recorded investments in such loans. At June 30, 2014, substantially all of the total impaired loans were evaluated based on the fair value of the underlying collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an internal assessment of fair value based upon market data issued or management determines the fair value of the underlying collateral is further impaired below the appraised value, the Company records the impaired loan as nonrecurring Level 3.

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

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

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

-24-

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


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

Securities available for sale:
US Treasury	$	21,134	$	21,134	$	—	$	—
US Government Agencies		40,325		—		40,325		—
GSE - Mortgage-backed securities and CMO’s		37,287		—		37,287		—
State and political subdivisions		12,165		—		12,165		—
Corporate bonds		3,013		—		3,013		—


Total assets at fair value	$	113,924	$	21,134	$	92,790	$	—


Total liabilities at fair value	$	—	$	—	$	—	$	—


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

Securities available for sale:
US Treasury	$	21,286	$	21,286	$	—	$	—
US Gov’t		34,300		—		34,300		—
Mortgage-backed securities and CMO’s		37,006		—		37,006		—
State and political subdivisions		7,688		—		7,688		—


Total assets at fair value	$	100,280	$	21,286	$	78,994	$	—


Total liabilities at fair value	$	—	$	—	$	—	$	—

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value less cost of sell at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of September 30, 2014 and December 31, 2013:


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

Impaired loans	$	1,631	$	—	$	—	$	1,631
Loans held for sale		1,402		—		1,402		—
Other real estate owned		3,753		—		—		3,753

Total assets at fair value	$	6,786	$	—	$	1,402	$	5,384


Total liabilities at fair value	$	—	$	—	$	—	$	—

-25-


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

Impaired loans	$	5,903	$	—	$	—	$	5,903
Loans held for sale		1,139		—		1,139		—
Other real estate owned		3,533		—		—		3,533


Total assets at fair value	$	10,575	$	—	$	1,139	$	9,436


Total liabilities at fair value	$	—	$	—	$	—	$	—

Quantitative Information about Level 3 Fair Value Measurements


September 30, 2014	Valuation Technique	Unobservable Input	Range
Nonrecurring measurements:

Impaired loans	Discounted expected cash flows	Expected loss rates	0 – 25%

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


December 31, 2013	Valuation Technique	Unobservable Input	Range
Nonrecurring measurements:

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

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

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

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

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

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The fair value estimates presented at September 30, 2014 and December 31, 2013, are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price at which a liability could be settled. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of September 30, 2014 and December 31, 2013:

September 30, 2014


	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	54,802	$	54,802	$	54,802	$	—	$	—
Securities available for sale		113,924		113,924		21,134		92,790		—
Loans held for investment, net		309,978		322,566		—		—		322,566
Loans held for sale		1,402		1,402		—		1,402		—
Restricted stock		1,038		1,038		1,038		—		—
Bank-owned life insurance		6,615		6,615		—		—		6,615
Mortgage servicing rights		2,262		3,261		—		—		3,261
Accrued interest receivable		1,498		1,498		—		—		1,498

FINANCIAL LIABILITIES
Deposits	$	454,262	$	446,687	$	—	$	—	$	446,687
Short-term borrowings		3,771		3,771		—		3,771		—
Long-term borrowings		27		27		—		27		—
Junior subordinated debt		9,534		9,705		—		—		9,705
Accrued interest payable		182		182		—		—		182

December 31, 2013


	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	72,394	$	72,394	$	72,394	$	—	$	—
Securities available for sale		100,280		100,280		21,286		78,994		—
Loans held for investment, net		302,253		308,112		—		—		308,112
Loans held for sale		1,139		1,139		—		1,139		—
Restricted stock		1,184		1,184		1,184		—		—
Bank-owned life insurance		6,516		6,516		—		—		6,516
Mortgage servicing rights		2,356		3,085		—		—		3,085
Accrued interest receivable		1,747		1,747		—		—		1,747

FINANCIAL LIABILITIES
Deposits	$	453,708	$	438,593	$	—	$	—	$	438,593
Short-term borrowings		5,509		5,509		—		5,509		—
Long-term borrowings		36		36		—		36		—
Junior subordinated debt		11,127		11,271		—		—		11,271
Accrued interest payable		224		224		—		—		224

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

•

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

•

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

•

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

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•

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

•

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

•

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

•

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

•

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

•

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

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

Note 12 – Recent Accounting Pronouncements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $399,000 for the three months ended September 30, 2014, as compared to $218,000 for the three months ended September 30, 2013, an increase of $181,000. Net income available to common shareholders was $250,000 or $0.03 per common share for the three months ended September 30, 2014, compared to $43,000 or $0.01 per common share for the three months ended September 30, 2013. Net income available to common shareholders is net income less any dividends on preferred stock related to the $10.0 million of capital received from the United States Department of the Treasury under the Capital Purchase Program in December 2008 and dividends on the aforementioned noncontrolling interest. The entire $10.0 million of Capital Purchase Program preferred stock was redeemed and retired during 2013.

Net Interest Income

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

Net interest income for both of the three months ended September 30, 2014 and September 30, 2013 was $4.2 million. During the current quarter, our decline in the volume of interest-earning assets outpaced the volume of interest-bearing liabilities by $56,000. The average yield on our interest–earning assets decreased 10 basis points to 4.02%, while the average rate we paid for our interest-bearing liabilities decreased 14 basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve Open Market Committee adjusts interest rates, while interest-bearing time deposits adjust at the time of maturity. The aforementioned decreases resulted in an increase of four basis points in our interest rate spread, from 3.49% in 2013 to 3.53% in 2014. Our net interest margin was 3.62% and 3.59% for the comparable periods in 2014 and 2013, respectively.

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

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended September 30,


(dollars in thousands)	Average Balance				Income/Expense				Rate/Yield
(dollars in thousands)	2014		2013		2014		2013		2014			2013
Interest-earning assets:
Taxable securities	$	101,692	$	116,491	$	412	$	425		1.61	%		1.45	%
Nontaxable securities (1)		11,541		7,659		86		61		4.77	%		4.49	%
Short-term investments		46,862		39,633		36		24		0.30	%		0.24	%
Taxable loans		294,976		300,609		4,017		4,257		5.40	%		5.62	%
Non-taxable loans (1)		15,928		15,959		103		111		4.14	%		4.49	%

Total interest-earning assets		470,999		480,351		4,654		4,878		4.02	%		4.12	%

Interest-bearing liabilities:
Interest-bearing deposits		370,770		384,966		329		454		0.35	%		0.47	%
Short-term borrowed funds		3,953		8,014		2		19		0.20	%		0.94	%
Long-term debt		9,562		11,167		139		164		5.77	%		5.83	%

Total interest bearing liabilities		384,285		404,147		470		637		0.49	%		0.63	%


Net interest spread	$	86,714	$	76,204	$	4,184	$	4,241		3.53	%		3.49	%


Net interest margin (1) (% of earning assets)										3.62	%		3.59	%

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

Provision and Allowance for Loan Losses

The Company recovered $(271,000) for the three months ending September 30, 2014 compared to an expense of $227,000 for the same period in 2013. There were net loan recoveries of $(37,000) for the three months ended September 30, 2014, as compared with net loan charge-offs of $444,000 during the same period of 2013. Refer to the Asset Quality discussion on page 36 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like all financial institutions, diversification of our revenue base is of major importance to our long term success. Total noninterest income increased $153,000 for the three month period ending September 30, 2014 as compared to the same period in 2013. Income from mortgage loan sales decreased $79,000 from $361,000 for the quarter ended September 30, 2013 to $282,000 for the same period in 2014. Service charges on deposit accounts produced revenue of $367,000, a decrease of $41,000 for the three months ended September 30, 2014. The primary factor leading to this decrease was a decrease in NSF fees for the comparable periods. Other service fees and commissions experienced a $116,000 or 13.3% increase for the comparable three month period, primarily due to an increase in brokerage commissions and asset management fees. The Company realized gains on the sale of other real estate owned of $231,000 for the three months ended September 30, 2014 compared to realized gains of $22,000 for the same period in 2013.

Noninterest Expense

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

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

Other noninterest expense


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

Postage	$	51	$	46
Telephone and data lines		39		51
Loan collection expense		21		102
Shareholder relations expense		62		44
Dues and subscriptions		32		31
Other		367		375

Total	$	572	$	649

Income Tax Expense

The Company had income tax expense of $191,000 for the three months ended September 30, 2014 resulting in an effective rate of 32.37% compared to income tax expense of $48,000 and an effective rate of 18.05% in the 2013 period. Income taxes computed at statutory rate are reduced primarily by eligible amount of interest earned on state and municipal securities, tax free municipal loans and income earned on bank owned life insurance. The level of income before taxes was significantly lower in for the three months ending September 30, 2013 than the current period.

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

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $1.5 million for the nine months ended September 30, 2014, as compared to $1.1 million for the nine months ended September 30, 2013, an increase of $394,000. Net income available to common shareholders was $1.1 million or $0.15 per common share for the nine months ended September 30, 2014, compared to $520,000 or $0.07 per common share for the nine months ended September 30, 2013. Net income available to common shareholders is net income less any dividends on preferred stock related to the capital received from the United States Department of the Treasury under the Capital Purchase Program in December 2008 and dividends on the aforementioned noncontrolling interest. The entire $10.0 million of Capital Purchase Program preferred stock was redeemed and retired during 2013.

Net Interest Income

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

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

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

Average Balance Sheet and Net Interest Income Analysis

For the Nine Months Ended September 30,

(dollars in thousands)


	Average Balance				Income/Expense				Rate/Yield
	2014		2013		2014		2013		2014			2013
Interest-earning assets:
Taxable securities	$	99,011	$	107,025	$	1,256	$	999		1.70	%		1.25	%
Nontaxable securities (1)		9,957		7,639		232		189		5.01	%		5.39	%
Short-term investments		51,228		50,719		120		133		0.31	%		0.35	%
Taxable loans		293,900		307,594		11,955		12,924		5.44	%		5.62	%
Non-taxable loans (1)		15,611		14,959		330		320		4.56	%		4.65	%

Total interest-earning assets		469,707		487,936		13,893		14,565		4.05	%		4.08	%

Interest-bearing liabilities:
Interest-bearing deposits		370,332		385,991		1,042		1,488		0.38	%		0.52	%
Short-term borrowed funds		4,923		12,103		29		142		0.79	%		1.57	%
Long-term debt		10,085		11,857		434		501		5.75	%		5.65	%

Total interest bearing liabilities		385,340		409,951		1,505		2,131		0.52	%		0.69	%


Net interest spread	$	84,367	$	77,985	$	12,388	$	12,434		3.53	%		3.39	%


Net interest margin (1) (% of earning assets)										3.63	%		3.49	%

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

Provision and Allowance for Loan Losses

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

Noninterest Income

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

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

Noninterest Expense

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

Other noninterest expense


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

Postage	$	149	$	150
Telephone and data lines		115		143
Loan collection expense		108		296
Shareholder relations expense		174		131
Dues and subscriptions		108		114
Other		1,072		1,141

Total	$	1,726	$	1,975

Income Tax Expense

The Company had income tax expense of $710,000 for the six months ended September 30, 2014 resulting in an effective tax rate of 31.67%, compared to income tax expense of $557,000 and an effective rate of 32.86% in the 2013 period. Income taxes computed at statutory rate are reduced primarily by eligible amount of interest earned on state and municipal securities, tax free municipal loans and income earned on bank owned life insurance. The increase in tax free income coupled with the reduction in the state tax rate attributed to this decrease in effective tax rate.

Asset Quality

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Nonperforming Assets

(dollars in thousands)


	September 30, 2014			December 31, 2013
Nonperforming assets:
Loans past due 90 days or more	$	—		$	—
Nonaccrual loans		2,688			4,717
Other real estate owned		5,858			7,170

Total nonperforming assets	$	8,546		$	11,887


Allowance for loans losses	$	3,466		$	5,095
Nonperforming loans to total loans		0.87	%		1.53	%
Allowance for loan losses to total loans		1.12	%		1.66	%
Nonperforming assets to total assets		1.65	%		2.30	%
Allowance for loan losses to nonperforming loans		128.97	%		108.02	%

Liquidity and Capital Resources

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

The Company’s primary sources of internally generated funds are principal and interest payments on loans, cash flows generated from operations and cash flow generated by investments. Growth in deposits is typically the primary source of funds for loan growth. The Company and its subsidiary bank have multiple funding sources, in addition to deposits that can

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

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

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

The Company and its subsidiary bank have each maintained capital levels exceeding minimum levels for “well capitalized” banks and bank holding companies. The Company expects to continue to exceed minimum capital requirements without altering current operations or strategy. As previously discussed, the Company’s subsidiary bank has a net total of $10.5 million in outstanding fixed Rate Noncumulative Perpetual Preferred Stock. The preferred stock qualifies as Tier 1 capital at the bank and will pay dividends at an annual rate of 5.30%. The net total of $10.5 million is presented as noncontrolling interest at the Company level and does qualify as Tier 1 capital at the Company. At September 30, 2014, the Company had $9.5 million in subordinated debt outstanding that qualifies as Tier 2 capital. The Company has made all interest and dividend payments in a timely manner.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

The Company’s primary market risk is interest rate risk. Interest rate risk is the result of differing maturities or repricing intervals of interest-earning assets and interest-bearing liabilities and the fact that rates on these financial instruments do not change uniformly. These conditions may impact the earnings generated by the Company’s interest earning assets or the cost of its interest-bearing liabilities, thus directly impacting the Company’s overall earnings. The Company’s management actively monitors and manages interest rate risk. One way this is accomplished is through the development of and adherence to the Company’s asset/liability policy. This policy sets forth management’s strategy for matching the risk characteristics of the Company’s interest-earning assets and liabilities so as to mitigate the effect of changes in the rate environment. In management’s opinion, the Company’s market risk profile has not changed significantly since December 31, 2013.

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Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

Management of the Company has evaluated, with the participation of the Company’s principal executive officer and principal financial officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a -15(f) and 15d – 15(f) of the Exchange Act) during the third quarter of 2014. In connection with such evaluation, the Company has determined that there were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensuring that the Company’s systems evolve with its business.

Part II. OTHER INFORMATION

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

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

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information with respect to shares of common stock repurchased by the Company during the three months ended September 30, 2014.


	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Program (1)		(d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans (2)(3)
July 1, 2014 Through July 31, 2014		1,544	$	2.95		—	$	—
August 1, 2014 Through August 31, 2014		2,341	$	3.34		—	$	—
September 1, 2014 Through September 30, 2014		6,061	$	3.28		—	$	—

Total		9,946	$	3.24		—	$	—

Trades of the Company’s stock occur in the Over-the-Counter Bulletin Board market from time to time. The Company also has in place a Stock Repurchase Plan that provides liquidity to its shareholders in the event a willing buyer is not available to purchase shares that are offered for sale. The Company is under no obligation to purchase shares offered; however, it will accommodate such offers as its Stock Repurchase Plan allows.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

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Item 6. Exhibits


Exhibit Number		Description of Exhibit

3.1		Registrant’s Articles of Incorporation ⁽¹⁾

3.2		Registrant’s By-laws ⁽⁶⁾

3.2		Articles of Amendment dated December 19, 2008 ⁽⁵⁾

4.1		Form of stock certificate ⁽¹⁾

4.2		Form of Security Holders Agreement⁽⁸⁾

10.1		Incentive Stock Option Plan, as amended ⁽¹⁾

10.2		Employee Stock Ownership Plan and Trust ⁽²⁾

10.3		2006 Incentive Stock Option Plan ⁽³⁾

10.4		2006 Employee Stock Purchase Plan ⁽³⁾

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

10.6		Relocation Assistance Agreement dated February 9, 2009, between the Registrant and Brendan P. Duffey⁽⁶⁾

10.7		Nonqualified Deferred Compensation Plan and Supplemental Retirement Plan Agreement dated December 31, 2008, between the Registrant and Roger L. Dick, Brendan P. Duffey, and Christy D. Stoner ⁽⁶⁾

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

101		Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014, in XBRL (eXtensible Business Reporting Language) ⁽⁷⁾

(1)	Incorporated by reference from exhibits to Registrant’s Registration Statement on Form S-4 (Reg. No. 33-58882).

(2)	Incorporated by reference to Registrant’s Annual Report on Form 10-KSB for the Fiscal year ended 1999.

(3)	Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2007.

(4)	Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2008.

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(5)	Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2009.

(6)	Incorporated by reference to Registrant’s Annual Report on Form 10-K for the Fiscal year ended 2009.

(7)

Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.

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

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Signatures

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


	UWHARRIE CAPITAL CORP
	(Registrant)

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

Date: November 4, 2014	By:	/s/ R. David Beaver, III
	R. David Beaver, III
	Principal Financial Officer

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EXHIBIT INDEX


Exhibit Number		Description of Exhibit

3.1		Registrant’s Articles of Incorporation ⁽¹⁾

3.2		Registrant’s By-laws ⁽⁶⁾

3.3		Articles of Amendment dated December 19, 2008 ⁽⁵⁾

4.1		Form of stock certificate ⁽¹⁾

4.2		Form of Security Holders Agreement⁽⁸⁾

10.1		Incentive Stock Option Plan, as amended ⁽¹⁾

10.2		Employee Stock Ownership Plan and Trust ⁽²⁾

10.3		2006 Incentive Stock Option Plan ⁽³⁾

10.4		2006 Employee Stock Purchase Plan ⁽³⁾

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

10.6		Relocation Assistance Agreement dated February 9, 2009, between the Registrant and Brendan P. Duffey ⁽⁶⁾

10.7		Nonqualified Deferred Compensation Plan and Supplemental Retirement Plan Agreement dated December 31, 2008, between the Registrant and Roger L. Dick, Brendan P. Duffey, and Christy D. Stoner ⁽⁶⁾

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

101		Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014, in XBRL (eXtensible Business Reporting Language) ⁽⁷⁾

(1)	Incorporated by reference from exhibits to Registrant’s Registration Statement on Form S-4 (Reg. No. 33-58882).

(2)	Incorporated by reference to Registrant’s Annual Report on Form 10-KSB for the Fiscal year ended 1999.

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(3)	Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2007.

(4)	Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2008.

(5)	Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2009.

(6)	Incorporated by reference to Registrant’s Annual Report on Form 10-K for the Fiscal year ended 2009.

(7)

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

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