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UWHARRIE CAPITAL CORP - Quarter Report: 2015 September (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2015

OR

 

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

For the transition period from                      to                     .

COMMISSION FILE NUMBER 000-22062

 

 

UWHARRIE CAPITAL CORP

(Exact name of registrant as specified in its charter)

 

 

 

NORTH CAROLINA   56-1814206

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

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

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

N/A

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

 

 

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

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

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:6,875,586 shares of common stock outstanding as of October 26, 2015.

 

 

 


Table of Contents

Table of Contents

 

         Page No.  
Part I.  

FINANCIAL INFORMATION

  
Item 1 -  

Financial Statements (Unaudited)

  
 

Consolidated Balance Sheets September 30, 2015 and December 31, 2014

     3   
 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and 2014

     4   
 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2015 and 2014

     5   
 

Consolidated Statements of Changes in Shareholders’ Equity Nine Months Ended September 30, 2015

     6   
 

Consolidated Statements of Cash Flows Nine Months Ended September 30, 2015 and 2014

     7   
 

Notes to Consolidated Financial Statements

     8   
Item 2 -  

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

     31   
Item 3 -  

Quantitative and Qualitative Disclosures about Market Risk

     41   
Item 4 -  

Controls and Procedures

     41   
Part II.  

OTHER INFORMATION

  
Item 1 -  

Legal Proceedings

     42   
Item 1A -  

Risk Factors

     42   
Item 2 -  

Unregistered Sales of Equity Securities and Use of Proceeds

     43   
Item 3 -  

Defaults Upon Senior Securities

     43   
Item 4 -  

Mine Safety Disclosures

     43   
Item 5 -  

Other Information

     43   
Item 6 -  

Exhibits

     43   
 

Exhibit Index

     46   

 

-2-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

 

Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements

 

     September 30,
2015
(Unaudited)
    December 31,
2014*
 
     (dollars in thousands)  

ASSETS

    

Cash and due from banks

   $ 6,685      $ 6,807   

Interest-earning deposits with banks

     51,585        43,984   

Securities available for sale, at fair value

     96,927        112,824   

Securities held to maturity, at amortized cost (fair value $11,276 and $5,450, respectively)

     11,274        5,496   

Loans held for sale

     418        2,147   

Loans:

    

Loans held for investment

     322,816        310,853   

Less allowance for loan losses

     (2,961     (3,738
  

 

 

   

 

 

 

Net loans held for investment

     319,855        307,115   
  

 

 

   

 

 

 

Premises and equipment, net

     14,752        14,858   

Interest receivable

     1,466        1,747   

Restricted stock

     1,040        1,038   

Bank owned life insurance

     6,733        6,645   

Other real estate owned

     5,942        5,865   

Prepaid assets

     958        969   

Other assets

     9,461        8,969   
  

 

 

   

 

 

 

Total assets

   $ 527,096      $ 518,464   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Demand noninterest-bearing

   $ 92,753      $ 80,069   

Interest checking and money market accounts

     243,638        243,116   

Savings deposits

     40,001        39,091   

Time deposits, $250,000 and over

     8,139        9,865   

Other time deposits

     77,818        84,294   
  

 

 

   

 

 

 

Total deposits

     462,349        456,435   
  

 

 

   

 

 

 

Short-term borrowed funds

     5,232        4,685   

Long-term debt

     9,550        9,558   

Interest payable

     176        180   

Other liabilities

     5,860        4,783   
  

 

 

   

 

 

 

Total liabilities

     483,167        475,641   
  

 

 

   

 

 

 

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

    

Redeemable common stock held by the Employee Stock Ownership Plan (ESOP) (Note 4)

     —          561   

SHAREHOLDERS’ EQUITY

    

Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and outstanding 6,875,586 and 6,961,484

     8,594        8,702   

Common stock dividend distributable

     172        —     

Additional paid-in capital

     12,401        11,712   

Undivided profits

     11,874        10,974   

Accumulated other comprehensive income

     299        305   
  

 

 

   

 

 

 

Total Uwharrie Capital shareholders’ equity

     33,340        31,693   

Noncontrolling interest

     10,589        10,569   
  

 

 

   

 

 

 

Total shareholders’ equity

     43,929        42,262   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 527,096      $ 518,464   
  

 

 

   

 

 

 

 

(*) Derived from audited consolidated financial statements

See accompanying notes

 

-3-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  
     (in thousands, except share and per share data)  

Interest Income

        

Loans, including fees

   $ 3,936      $ 4,120      $ 11,784      $ 12,285   

Investment securities

        

US Treasury

     33        94        184        281   

US Government agencies and corporations

     331        310        991        968   

State and political subdivisions

     121        87        290        232   

Corporate bonds

     —          7        —          7   

Interest-earning deposits with banks and federal funds sold

     47        36        126        120   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     4,468        4,654        13,375        13,893   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

        

Interest checking and money market accounts

     69        70        207        228   

Savings deposits

     12        11        33        47   

Time deposits, $250,000 and over

     25        117        49        82   

Other time deposits

     176        131        586        685   

Short-term borrowed funds

     17        2        44        29   

Long-term debt

     139        139        411        434   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     438        470        1,330        1,505   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     4,030        4,184        12,045        12,388   

Provision for (recovery of) loan losses

     (323     (271     (620     (756
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     4,353        4,455        12,665        13,144   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Income

        

Service charges on deposit accounts

     338        367        979        1,104   

Other service fees and commissions

     1,040        986        3,055        2,893   

Gain/(loss) on sale of securities (includes reclassification of $5,000, $502,000 and $26,000 from accumulated other comprehensive income)

     —          5        502        26   

Gain (loss) on fixed assets and other assets

     120        231        115        471   

Income from mortgage loan sales

     706        282        1,699        701   

Other income

     161        92        309        283   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     2,365        1,963        6,659        5,478   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Expense

        

Salaries and employee benefits

     3,460        3,093        9,778        9,079   

Net occupancy expense

     272        278        824        823   

Equipment expense

     184        164        524        511   

Data processing costs

     194        181        553        551   

Office supplies and printing

     58        74        160        202   

Foreclosed real estate expense

     259        610        533        1,037   

Professional fees and services

     173        210        457        560   

Marketing and donations

     221        183        592        476   

Electronic banking expense

     265        214        775        689   

Software amortization and maintenance

     142        140        426        396   

FDIC insurance

     85        109        284        330   

Other noninterest expense

     621        572        1,761        1,726   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     5,934        5,828        16,667        16,380   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     784        590        2,657        2,242   

Income taxes (includes reclassification of $2,000, $194,000 and $10,000 from accumulated other other comprehensive income)

     223        191        799        710   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 561      $ 399      $ 1,858      $ 1,532   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

   $ 561        399        1,858        1,532   

Less: net income attributable to noncontrolling Interest

     (149     (149     (442     (442
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Uwharrie Capital Corp

     412        250        1,416        1,090   

Dividends - preferred stock

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 412      $ 250      $ 1,416      $ 1,090   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share

        

Basic

   $ 0.06      $ 0.03      $ 0.20      $ 0.15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.06      $ 0.03      $ 0.20      $ 0.15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

        

Basic

     7,034,958        7,456,372        7,073,046        7,473,496   

Diluted

     7,034,958        7,456,372        7,073,046        7,473,496   

See accompanying notes

 

-4-


Table of Contents

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

 

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  
     (in thousands)  

Net Income

   $ 561      $ 399      $ 1,858      $ 1,532   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

        

Unrealized gain (loss) on available for sale securities

     555        (461     493        792   

Related tax effect

     (188     156        (191     (270

Reclassification of (gain) loss recognized in net income

     —          (5     (502     (26

Related tax effect

     —          2        194        10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     367        (308     (6     506   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     928        91        1,852        2,038   

Less: Comprehensive income (loss) attributable to noncontrolling interest

     (149     (149     (442     (442
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Uwharrie Capital

   $ 779      $ (58   $ 1,410      $ 1,596   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

-5-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

 

 

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

Balance, December 31, 2014

     6,961,484      $ 8,702      $ —         $ 11,712      $ 10,974      $ 305      $ 10,569      $ 42,262   

Net Income

     —          —          —           —          1,416        —          442        1,858   

2% stock dividend declaration

     —          —          172         344        (516     —          —          —     

Repurchase of common stock

     (85,898     (108     —           (216     —          —          —          (324

Other comprehensive Income

     —          —          —           —          —          (6     —          (6

Reclass from mezzanine capital

     —          —          —           561        —          —          —          561   

Record preferred stock dividend

                 

Series B (noncontrolling interest)

     —          —          —           —          —          —          (311     (311

Record preferred stock dividend

                 

Series C (noncontrolling interest)

     —          —          —           —          —          —          (111     (111
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2015

     6,875,586      $ 8,594      $ 172       $ 12,401      $ 11,874      $ 299      $ 10,589      $ 43,929   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

-6-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

     Nine Months Ended
September 30,
 
     2015     2014  
     (dollars in thousands)  

Cash flows from operating activities

    

Net income

   $ 1,858      $ 1,532   

Adjustments to reconcile net income to net cash

    

Provided by (used in) operating activities:

    

Depreciation

     690        687   

Net amortization of security premiums/discounts AFS

     767        746   

Net amortization of security premiums/discounts HTM

     102        —     

Net amortization of mortgage servicing rights

     513        532   

Impairment of foreclosed real estate

     217        574   

Recovery of loan losses

     (620     (756

Net realized gain on sales / calls available for sales securities

     (502     (26

Income from mortgage loan sales

     (1,699     (701

Proceeds from sales of loans held for sale

     48,436        27,278   

Origination of loans held for sale

     (45,008     (26,840

Gain on sale of premises, equipment and other assets

     —          (146

Increase in cash surrender value of life insurance

     (88     (99

Gain on sales of foreclosed real estate

     (114     (325

Release of ESOP shares

     —          30   

Net change in interest receivable

     281        249   

Net change in other assets

     (582     (60

Net change in interest payable

     (4     (42

Net change in other liabilities

     1,077        1,007   
  

 

 

   

 

 

 

Net cash provided by operating activities

     5,324        3,640   
  

 

 

   

 

 

 

Cash flows from investing activities

    

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

     40,533        10,113   

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

     154        —     

Purchase of securities available for sale

     (24,910     (23,711

Purchase of securities held to maturity

     (6,034     —     

Net (increase) in loans

     (13,923     (3,957

Proceeds from sales of premises, equipment and other assets

     —          273   

Purchase of premises and equipment

     (584     (2,041

Proceeds from sales of foreclosed real estate

     1,623        1,517   

Investment in other assets

     (409     (250

Net decrease in restricted stock

     (2     146   
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,552     (17,910
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net increase in deposit accounts

     5,914        554   

Net increase (decrease) in short-term borrowed funds

     547        (1,735

Net decrease in long-term debt

     (8     (1,602

Repurchase of common stock

     (324     (113

Dividend and cost accretion on noncontrolling interest

     (422     (422

Cash paid for fractional shares

     —          (4
  

 

 

   

 

 

 

Net cash provided (used in) in financing activities

     5,707        (3,322
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     7,479        (17,592

Cash and cash equivalents, beginning of period

     50,791        72,394   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 58,270      $ 54,802   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information

    

Interest paid

   $ 1,334      $ 1,547   

Income taxes paid

     451        21   

Supplemental Schedule of Non-Cash Activities

    

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

   $ (6   $ 506   

Loans transferred to foreclosed real estate

     1,803        454   

Mortgage servicing rights capitalized

     488        274   

Net change in ESOP liability

     (561     104   

Exchange of unearned ESOP shares for ESOP debt

     —          973   

See accompanying notes

 

-7-


Table of Contents

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 - Basis of Presentation

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

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

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to consolidated financial statements filed as part of the Company’s 2014 Annual Report on Form 10-K. This Quarterly Report should be read in conjunction with such Annual Report.

Use of Estimates

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

Note 2 – Comprehensive Income (Loss)

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.

 

-8-


Table of Contents

The following table presents the changes in accumulated other comprehensive income for the three and nine months ended September 30, 2015 and 2014:

 

     Unrealized holding gains on available-for-sale securities  (net)  
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
     (dollars in thousands)  

Beginning Balance

   $ (68    $ 252       $ 305       $ (562

Other Comprehensive income (loss) before reclassifications, net of $188,000 $28,000, ($191,000) and ($197,000) tax effect, respectively

     367         (305      302         522   

Amounts reclassified from accumulated Other comprehensive income, net of $2,000, $194,000 and $10,000 tax effect

     —           (3      (308      (16
  

 

 

    

 

 

    

 

 

    

 

 

 

Net current-period other comprehensive Income (loss)

     367         (308      (6      506   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 299       $ (56    $ 299       $ (56
  

 

 

    

 

 

    

 

 

    

 

 

 

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

Note 4 – Per Share Data

On October 20, 2015, the Company’s Board of Directors declared a 2% stock dividend payable on November 19, 2015 to shareholders of record on November 3, 2015. All information presented in the accompanying interim consolidated financial statements regarding earnings per share and weighted average number of shares outstanding has been computed giving effect to this stock dividend.

Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for stock dividends. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. The Company had stock options outstanding covering 12,859 shares of common stock at both September 30, 2015 and December 31, 2014. All of these options were anti-dilutive.

Basic and diluted net income per common share have been computed based upon net income available to common shareholders as presented in the accompanying consolidated statements of income divided by the weighted average number of common shares outstanding or assumed to be outstanding.

 

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Table of Contents

The computation of shares outstanding used in the calculation of basic and dilutive earnings per share are summarized below:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Weighted average number of common shares outstanding

     7,034,958         7,456,372         7,073,046         7,473,496   

Effect of ESOP shares

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     7,034,958         7,456,372         7,073,046         7,473,496   

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

     7,034,958         7,456,372         7,073,046         7,473,496   
  

 

 

    

 

 

    

 

 

    

 

 

 

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. All allocated shares were distributed to the ESOP participants prior to December 31, 2014.

The Company received the favorable determination letter dated September 5, 2014 from the Internal Revenue Service.

 

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Table of Contents

Note 5 – Investment Securities

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

 

September 30, 2015

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

Securities available for sale

           

U.S. Treasury

   $ 7,038       $ 79       $ —         $ 7,117   

U.S. Government agencies

     36,536         266         54         36,748   

GSE - Mortgage-backed securities and CMO’s

     31,715         141         213         31,643   

State and political subdivisions

     13,748         277         6         14,019   

Corporate bonds

     7,437         —           37         7,400   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 96,474       $ 763       $ 310       $ 96,927   
  

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2015

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

Securities held to maturity

           

U.S. Government agencies

   $ 1,915       $ —         $ 1       $ 1,914   

State and political subdivisions

     6,003         14         22         5,995   

Corporate bonds

     3,356         11         —           3,367   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $ 11,274       $ 25       $ 23       $ 11,276   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

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

Securities available for sale

           

U.S. Treasury

   $ 19,030       $ 362       $ 6       $ 19,386   

U.S. Government agencies

     50,969         96         290         50,775   

GSE - Mortgage-backed securities and CMO’s

     27,748         133         309         27,572   

State and political subdivisions

     11,575         505         —           12,080   

Corporate bonds

     3,040         —           29         3,011   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 112,362       $ 1,096       $ 634       $ 112,824   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

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

Securities held to maturity

           

U.S. Government agencies

   $ 2,085       $ —         $ 32       $ 2,053   

Corporate bonds

     3,411         —           14         3,397   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $ 5,496       $ —         $ 46       $ 5,450   
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2015 and December 31, 2014, the Company owned Federal Reserve Bank stock reported at cost of $507,000 and $506,000, respectively. Also at September 30, 2015 and December 31, 2014, the Company owned Federal Home Loan Bank Stock (FHLB) of $533,000 and $532,000, respectively. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership in, and borrowings with, these banks and classified as restricted stock on the consolidated balance sheet. These investments are carried at cost since there is no ready market and redemption has historically been made at par value. The Company estimated that the fair value approximated cost and that these investments were not impaired at September 30, 2015.

 

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Table of Contents

Results from sales and calls of securities available for sale for the three and nine month periods ended September 30, 2015 and September 30, 2014 are as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
     (dollars in thousands)  

Gross proceeds from sales and calls

   $ —         $ 4,405       $ 29,739       $ 4,733   
  

 

 

    

 

 

    

 

 

    

 

 

 

Realized gains from sales and calls

   $ —         $ 5       $ 502       $ 26   

Realized losses from sales and calls

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Realized gains

   $ —         $ 5       $ 502       $ 26   
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2015 and December 31, 2014, securities available for sale with a carrying amount of $71.6 million and $84.7 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2015 and December 31, 2014. We believe these unrealized losses on investment securities are a result of a volatile market and fluctuations in market prices due to a rise in interest rates, which will adjust if rates decline. Management does not believe these fluctuations are a reflection of the quality of the investments. At September 30, 2015, the unrealized losses on available for sale securities less than twelve months related to two government agency bonds, six government sponsored enterprise (GSE) mortgage backed securities and three corporate bonds. The Company had five government agency bonds, four GSE mortgage backed securities and one corporate bond that had been in a loss position for more than twelve months. At September 30, 2015, the unrealized losses on held to maturity securities related to one government agency security and five state and political subdivision bonds. At December 31, 2014, the unrealized losses on available for sale securities related to one United States Treasury note, thirteen government agency bonds, eight GSE mortgage backed securities and two corporate bonds. At December 31, 2014, the unrealized losses on held to maturity securities related to one government agency security and two corporate bonds.

 

     Less than 12 Months      12 Months or More      Total  

September 30, 2015

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

Securities available for sale temporary impairment

                 

U.S. Gov’t agencies

   $ 1,513       $ 4       $ 4,648       $ 50       $ 6,161       $ 54   

GSE-Mortgage-backed securities and CMO’s

     13,532         65         7,686         148         21,218         213   

State & political subdivisions

     466         6         —           —           466         6   

Corporate bonds

     6,601         21         799         16         7,400         37   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 22,112       $ 96       $ 13,133       $ 214       $ 35,245       $ 310   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Less than 12 Months      12 Months or More      Total  

September 30, 2015

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

Held to maturity temporary impairment

                 

U.S. Gov’t agencies

   $ 1,914       $ 1       $ —         $ —         $ 1,914       $ 1   

State & political subdivisions

     3,209         22         —           —           3,209         22   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $   5,123       $ 23       $      —         $   —         $   5,123       $   23   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Less than 12 Months      12 Months or More      Total  

December 31, 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

   $ 3,143       $ 6       $ —         $ —         $ 3,143       $ 6   

U.S. Gov’t agencies

     9,690         23         17,776         267         27,466         290   

GSE-Mortgage-backed securities and CMO’s

     1,990         4         14,168         305         16,158         309   

Corporate bonds

     3,011         29         —           —           3,011         29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 17,834       $ 62       $ 31,944       $ 572       $ 49,778       $ 634   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Less than 12 Months      12 Months or More      Total  

December 31, 2014

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

Held to maturity temporary impairment

                 

U.S. Gov’t agencies

   $ 2,053       $ 32       $ —         $ —         $ 2,053       $ 32   

Corporate bonds

     3,397         14         —           —           3,397         14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $   5,450       $ 46       $      —         $   —         $   5,450       $   46   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company had five government agency securities, four GSE mortgage backed securities and one corporate bond that had been in a loss position for more than twelve months as of September 30, 2015. Declines in the fair value of the investment portfolio are believed by management to be temporary in nature. When evaluating an investment for other-than-temporary impairment management considers among other things, the length of time and the extent to which the fair value has been in a loss position, the financial condition of the issuer and the intent and the ability of the Company to hold the investment until the loss position is recovered.

Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of quality but that the losses are temporary in nature. At September 30, 2015, the Company does not intend to sell and is not likely to be required to sell the available for sale securities that were in a loss position prior to full recovery.

 

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Table of Contents

The aggregate amortized cost and fair value of the available for sale securities portfolio at September 30, 2015 by remaining contractual maturity are as follows:

 

     September 30, 2015  
     Amortized
Cost
     Estimated
Fair Value
     Book
Yield
 
     (dollars in thousands)  

Securities available for sale

        

U. S. Treasury

        

Due within twelve months

     3,010         3,066         2.80

Due after one but within five years

     4,028         4,051         1.13
  

 

 

    

 

 

    

 

 

 
     7,038         7,117         1.84
  

 

 

    

 

 

    

 

 

 

U.S. Government agencies

        

Due after one but within five years

     27,704         27,963         1.43

Due after five but within ten years

     1,376         1,381         0.76

Due after ten years

     7,456         7,404         1.68
  

 

 

    

 

 

    

 

 

 
     36,536         36,748         1.45
  

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

        

Due after one but within five years

     3,467         3,445         1.69

Due after five but within ten years

     4,260         4,313         2.23

Due after ten years

     23,988         23,885         1.92
  

 

 

    

 

 

    

 

 

 
     31,715         31,643         1.94
  

 

 

    

 

 

    

 

 

 

State and political subdivisions

        

Due within twelve months

     472         479         5.77

Due after one but within five years

     1,896         2,022         4.77

Due after five but within ten years

     2,823         2,852         4.43

Due after ten years

     8,557         8,666         3.79
  

 

 

    

 

 

    

 

 

 
     13,748         14,019         4.12
  

 

 

    

 

 

    

 

 

 

Corporate Bonds

        

Due within twelve months

     2,401         2,400         1.16

Due after one but within five years

     2,815         2,798         1.79

Due after five but within ten years

     2,221         2,202         1.21
  

 

 

    

 

 

    

 

 

 
     7,437         7,400         1.41
  

 

 

    

 

 

    

 

 

 

Total Securities available for sale

        

Due within twelve months

     5,883         5,945         2.37

Due after one but within five years

     39,910         40,279         1.60

Due after five but within ten years

     10,680         10,748         2.41

Due after ten years

     40,001         39,955         2.28
  

 

 

    

 

 

    

 

 

 
   $ 96,474       $ 96,927         2.02
  

 

 

    

 

 

    

 

 

 

 

     September 30, 2015  
     Amortized
Cost
     Estimated
Fair Value
     Book
Yield
 
     (dollars in thousands)  

Held to maturity

        

U. S. Government agencies

        

Due after five but within ten years

     1,915         1,914         2.39
  

 

 

    

 

 

    

 

 

 
     1,915         1,914         2.39
  

 

 

    

 

 

    

 

 

 

State and political subdivisions

        

Due after one but within five years

     1,533         1,536         2.24

Due after five but within ten years

     4,470         4,459         2.89
  

 

 

    

 

 

    

 

 

 
     6,003         5,995         2.68
  

 

 

    

 

 

    

 

 

 

Corporate Bonds

        

Due after one but within five years

     3,356         3,367         2.76
  

 

 

    

 

 

    

 

 

 
     3,356         3,367         2.76
  

 

 

    

 

 

    

 

 

 

Total Securities held for maturity

        

Due after one but within five years

     1,533         1,536         2.60

Due after five but within ten years

     9,741         9,740         2.74
  

 

 

    

 

 

    

 

 

 
   $ 11,274       $ 11,276         2.68
  

 

 

    

 

 

    

 

 

 

 

-14-


Table of Contents

Note 6 – Loans Held for Investment

The composition of net loans held for investment by class as of September 30, 2015 and December 31, 2014 are as follows:

 

     September 30,
2015
     December 31,
2014
 
     (dollars in thousands)  

Commercial

     

Commercial

   $ 51,417       $ 47,418   

Real estate - commercial

     101,839         92,517   

Other real estate construction loans

     16,541         22,362   

Noncommercial

     

Real estate 1 - 4 family construction

     4,635         3,888   

Real estate - residential

     88,202         89,374   

Home equity

     49,553         46,360   

Consumer loans

     9,031         8,460   

Other loans

     1,557         481   
  

 

 

    

 

 

 
     322,775         310,860   

Less:

     

Allowance for loan losses

     (2,961      (3,738

Deferred loan (fees) costs, net

     41         (7
  

 

 

    

 

 

 

Loans held for investment, net

   $ 319,855       $ 307,115   
  

 

 

    

 

 

 

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, 2015 and 2014, respectively:

Commercial

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
     (dollars in thousands)  

Balance, beginning of period

   $ 1,553       $ 1,570       $ 1,716       $ 2,665   

Provision (recovery) charged to operations

     (212      33         (501      (378

Charge-offs

     (18      —           (79      (744

Recoveries

     10         35         197         95   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (charge-offs)

     (8      35         118         (649
  

 

 

    

 

 

    

 

 

    

 

 

 

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 1,333       $ 1,638       $ 1,333       $ 1,638   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-Commercial

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
     (dollars in thousands)  

Balance, beginning of period

   $ 1,774       $ 2,130       $ 2,022       $ 2,430   

Provision (recovery) charged to operations

     (111      (304      (119      (378

Charge-offs

     (84      (60      (385      (357

Recoveries

     49         62         110         133   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (charge-offs)

     (35      2         (275      (224
  

 

 

    

 

 

    

 

 

    

 

 

 

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 1,628       $ 1,828       $ 1,628       $ 1,828   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-15-


Table of Contents

Total

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
     (dollars in thousands)  

Balance, beginning of period

   $ 3,327       $ 3,700       $ 3,738       $ 5,095   

Provision (recovery) charged to operations

     (323      (271      (620      (756

Charge-offs

     (102      (60      (464      (1,101

Recoveries

     59         97         307         228   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (charge-offs)

     (43      37         (157      (873
  

 

 

    

 

 

    

 

 

    

 

 

 

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 2,961       $ 3,466       $ 2,961       $ 3.466   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the third quarter of 2015, the Company made a change to their Allowance for Loan Loss methodology model. One of the components utilized in the model is Beacon 5 scores. During the third quarter, this was changed to FICO 9 scores. Refer to the Asset Quality discussion on page 38 for further information.

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at September 30, 2015 and December 31, 2014:

September 30, 2015

 

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

Commercial

   $ 12       $ 1,195       $ 1,321       $ 168,602       $ 1,333       $ 169,797   

Non-Commercial

     179         4,519         1,449         148,500         1,628         153,019   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 191       $ 5,714       $ 2,770       $ 317,102       $ 2,961       $ 322,816   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

 

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

Commercial

   $ 179       $ 2,125       $ 1,537       $ 160,172       $ 1,716       $ 162,297   

Non-Commercial

     277         5,436         1,745         143,120         2,022         148,556   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 456       $ 7,561       $ 3,282       $ 303,292       $ 3,738       $ 310,853   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2015

 

     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

   $ 41       $ 34       $ 75       $ 51,342       $ 51,417       $ —     

Real estate - commercial

     536         —           536         101,303         101,839         —     

Other real estate construction

     —           216         216         16,325         16,541         —     

Real estate 1 - 4 family construction

     —           —           —           4,635         4,635         —     

Real estate - residential

     1,733         846         2,579         85,664         88,243         —     

Home equity

     85         34         119         49,434         49,553         —     

Consumer loans

     112         —           112         8,919         9,031         —     

Other loans

     —           —           —           1,557         1,557         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,507       $ 1,130       $ 3,637       $ 319,179       $ 322,816       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-16-


Table of Contents

December 31, 2014

 

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

Commercial

   $ 42       $ —         $ 42       $ 47,376       $ 47,418       $ —     

Real estate - commercial

     77         794         871         91,646         92,517         —     

Other real estate construction

     —           342         342         22,020         22,362         —     

Real estate construction

     —           —           —           3,888         3,888         —     

Real estate - residential

     1,673         1,097         2,770         86,597         89,367         —     

Home equity

     89         13         102         46,258         46,360         —     

Consumer loan

     123         —           123         8,337         8,460         —     

Other loans

     —           —           —           481         481         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,004       $ 2,246       $ 4,250       $ 306,603       $ 310,853       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2015 and December 31, 2014 is as follows:

 

     September 30,
2015
     December 31,
2014
 
     (dollars in thousands)  

Commercial

   $ 34       $ —     

Real estate - commercial

     —           794   

Other real estate construction

     216         342   

Real estate 1 - 4 family construction

     —           —     

Real estate - residential

     846         1,097   

Home equity

     34         13   

Consumer loans

     —           —     

Other loans

     —           —     
  

 

 

    

 

 

 
   $ 1,130       $ 2,246   
  

 

 

    

 

 

 

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.

 

-17-


Table of Contents

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

The tables below summarize risk grades of the loan portfolio by class at September 30, 2015 and December 31, 2014:

September 30, 2015

 

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

Commercial

   $ 51,239       $ 91       $ 87       $ —         $ 51,417   

Real estate - commercial

     95,240         3,555         3,044         —           101,839   

Other real estate construction

     14,014         1,971         556         —           16,541   

Real estate 1 - 4 family construction

     4,532         103         —           —           4,635   

Real estate - residential

     76,277         9,652         2,314         —           88,243   

Home equity

     48,294         1,135         124         —           49,553   

Consumer loans

     8,626         400         5         —           9,031   

Other loans

     1,557         —           —           —           1,557   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 299,779       $ 16,907       $ 6,130       $ —         $ 322,816   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

 

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

Commercial

   $ 46,734       $ 614       $ 70       $ —         $ 47,418   

Real estate - commercial

     82,846         5,513         4,158         —           92,517   

Other real estate construction

     19,724         1,925         713         —           22,362   

Real estate 1 - 4 family construction

     3,888         —           —           —           3,888   

Real estate - residential

     75,859         10,090         3,418         —           89,367   

Home equity

     44,799         1,458         103         —           46,360   

Consumer loans

     8,175         277         8         —           8,460   

Other loans

     481         —           —           —           481   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 282,506       $ 19,877       $ 8,470       $ —         $ 310,853   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-18-


Table of Contents

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. At both September 30, 2015 and December 31, 2014 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, 2015 and December 31, 2014:

September 30, 2015

 

     Performing      Non-
Performing
     Total  
     (dollars in thousands)  

Commercial

   $ 51,383       $ 34       $ 51,417   

Real estate - commercial

     101,839         —           101,839   

Other real estate construction

     16,325         216         16,541   

Real estate 1 - 4 family construction

     4,635         —           4,635   

Real estate - residential

     87,397         846         88,243   

Home equity

     49,519         34         49,553   

Consumer loans

     9,031         —           9,031   

Other loans

     1,557         —           1,557   
  

 

 

    

 

 

    

 

 

 

Total

   $ 321,686       $ 1,130       $ 322,816   
  

 

 

    

 

 

    

 

 

 

December 31, 2014

 

     Performing      Non-
Performing
     Total  
     (dollars in thousands)  

Commercial

   $ 47,418       $ —         $ 47,418   

Real estate - commercial

     91,723         794         92,517   

Other real estate construction

     22,020         342         22,362   

Real estate 1 - 4 family construction

     3,888         —           3,888   

Real estate - residential

     88,270         1,097         89,367   

Home equity

     46,347         13         46,360   

Consumer loans

     8,460         —           8,460   

Other loans

     481         —           481   
  

 

 

    

 

 

    

 

 

 

Total

   $ 308,607       $ 2,246       $ 310,853   
  

 

 

    

 

 

    

 

 

 

 

-19-


Table of Contents

Loans are considered impaired when, based on current information and events it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired, a specific calculation is performed and a specific reserve is allocated, if necessary. The tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class at September 30, 2015 and December 31, 2014.

September 30, 2015

 

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

Commercial

   $ 82       $ 82       $ —         $ —     

Real estate - commercial

     845         545         300         9   

Other real estate construction

     806         216         52         3   

Real estate 1 - 4 family construction

     15         —           15         1   

Real estate - residential

     4,431         1,651         2,780         171   

Home equity

     50         29         21         7   

Consumer loans

     23         23         —           —     

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,252       $ 2,546       $ 3,168       $ 191   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

 

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

Commercial

   $ 98       $ 68       $ 30       $ 30   

Real estate - commercial

     1,820         1,242         389         145   

Other real estate construction

     934         342         54         4   

Real estate 1 - 4 family construction

     20         —           20         1   

Real estate - residential

     5,298         1,865         3,433         257   

Home equity

     49         30         19         19   

Consumer loans

     69         29         40         —     

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,288       $ 3,576       $ 3,985       $ 456   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-20-


Table of Contents
     Three Months ended
September 30, 2015
     Three Months ended
September 30, 2014
 
     Average
Recorded
Investment
     Interest
Income
     Average
Recorded
Investment
     Interest
Income
 
     (dollars in thousands)  

Commercial

   $ 83       $ —         $ 102       $ 1   

Real estate - commercial

     968         14         1,754         19   

Other real estate construction

     270         1         1,058         2   

Real estate 1 - 4 family construction

     16         1         21         —     

Real estate - residential

     4,639         53         5,379         43   

Home equity

     51         —           32         1   

Consumer loans

     24         —           77         3   

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,051       $ 69       $   8,423       $ 69   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months ended
September 30, 2015
     Nine Months ended
September 30, 2014
 
     Average
Recorded
Investment
     Interest
Income
     Average
Recorded
Investment
     Interest
Income
 
     (dollars in thousands)  

Commercial

   $ 81       $ 3       $ 123       $ 4   

Real estate - commercial

     1,374         42         2,978         54   

Other real estate construction

     304         2         1,346         2   

Real estate 1 - 4 family construction

     18         1         138         1   

Real estate - residential

     5,037         154         6,054         156   

Home equity

     55         1         81         1   

Consumer loans

     36         1         87         5   

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,905       $ 204       $ 10,807       $ 223   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

At September 30, 2015, the Company had $4.8 million in TDR’s outstanding, of which all were on an accruing basis.

 

-21-


Table of Contents

For the three and nine months ended September 30, 2015 and 2014, the following table presents a breakdown of the types of concessions made by loan class:

 

     For the three months ended September 30, 2015  
     Number
of Contracts
     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 
     (dollars in thousands)  

Other:

        

Commercial

     —         $ —         $ —     

Real estate - commercial

     —           —           —     

Other real estate construction

     —           —           —     

Real estate 1 - 4 family construction

     —           —           —     

Real estate - residential

     1         76         76   

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     1       $ 76       $ 76   
  

 

 

    

 

 

    

 

 

 

Total

     1       $ 76       $ 76   
  

 

 

    

 

 

    

 

 

 

 

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

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

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     2       $ 205       $ 205   
  

 

 

    

 

 

    

 

 

 

 

-22-


Table of Contents
     For the nine months ended September 30, 2015  
     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

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     —         $ —         $ —     
  

 

 

    

 

 

    

 

 

 

Other:

        

Commercial

     1       $ 48       $ 29   

Real estate - commercial

     1         265         123   

Other real estate construction

     —           —           —     

Real estate 1 - 4 family construction

     —           —           —     

Real estate - residential

     5         482         471   

Home equity

     —           —           —     

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     7       $ 795       $ 623   
  

 

 

    

 

 

    

 

 

 

Total

     7       $ 795       $ 623   
  

 

 

    

 

 

    

 

 

 

 

-23-


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

Extend payment terms:

        

Commercial

     —         $ —         $ —     

Real estate - commercial

     —           —           —     

Other real estate construction

     —           —           —     

Real estate 1 - 4 family construction

     —           —           —     

Real estate - residential

     —           —           —     

Home equity

     —           —           —     

Consumer loans

     1         32         30   

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     1       $ 32       $ 30   
  

 

 

    

 

 

    

 

 

 

Other:

        

Commercial

     —         $ —         $ —     

Real estate - commercial

     2         299         298   

Other real estate construction

     —           —           —     

Real estate 1 - 4 family construction

     —           —           —     

Real estate - residential

     5         636         632   

Home equity

     —           —           —     

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     7         935         930   
  

 

 

    

 

 

    

 

 

 

Total

     8       $ 967       $ 960   
  

 

 

    

 

 

    

 

 

 

During the twelve months ended September 30, 2015 and September 30, 2014, there were no TDRs for which there was a payment default.

A default on a TDR is defined as being past due 90 days or being out of compliance with the modification agreement. As previously mentioned the Company considers TDRs to be impaired loans and has $188,000 in the allowance for loan loss as of September 30, 2015, as a direct result of these TDRs. At September 30, 2014, there was $59,000 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, 2015 and 2014:

 

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

September 30, 2015

                       

Below market Interest rate

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

Extended payment Terms

     —           —           —           —           —           —           —           —     

Forgiveness of Principal

                       

Other

     —           —           7         795         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           7       $ 795         —         $ —           —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-24-


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

September 30, 2014

                       

Below market Interest rate

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

Extended payment Terms

     —           —           1         30         —           —           —           —     

Forgiveness of Principal

                       

Other

     —           —           9         1,084         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

Note 9 - Commitments and Contingencies

The 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, 2015, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

     (dollars in thousands)  

Commitments to extend credit

   $ 74,972   

Credit card commitments

     8,951   

Standby letters of credit

     2,376   
  

 

 

 

Total commitments

   $ 86,299   
  

 

 

 

 

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Note 10 – Fair Value Disclosures

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

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

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

Prices for US Treasury securities are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the ‘Level 1 input’ column. Prices for government agency securities, mortgage-backed securities and for state, county and municipal securities are obtained for similar securities, and the resulting fair values are shown in the ‘Level 2 input’ column. Prices for all other non-marketable investments are determined based on various assumptions that are not observable. The fair values for these investment securities are shown in the ‘Level 3 input’ column. Non-marketable investment securities, which are carried at their purchase price, include those that may only be redeemed by the issuer. The changes in securities between Level 1 and Level 2 were related to the purchase and sale of several securities and not the 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 or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected repayments or fair value of collateral exceed the recorded investments in such loans. 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 the estimated fair

 

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

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

The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014:

 

     September 30, 2015  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Securities available for sale:

           

US Treasury

   $ 7,117       $ 7,117       $ —         $ —     

US Government Agencies

     36,748         —           36,748         —     

GSE - Mortgage-backed securities and CMO’s

     31,643         —           31,643         —     

State and political subdivisions

     14,019         —           14,019         —     

Corporate bonds

     7,400         —           7,400         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $   96,927       $   7,117       $ 89,810       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2014  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Securities available for sale:

           

US Treasury

   $ 19,386       $ 19,386       $ —         $ —     

US Gov’t

     50,775         —           50,775         —     

Mortgage-backed securities and CMO’s

     27,572         —           27,572         —     

State and political subdivisions

     12,080         —           12,080         —     

Corporate bonds

     3,011         —           3,011      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 112,824       $ 19,386       $ 93,438       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value less cost to sell at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of September 30, 2015 and December 31, 2014:

 

     September 30, 2015  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Impaired loans

   $ 3,371       $ —         $ —         $ 3,371   

Other real estate owned

     2,856         —           —           2,856   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 6,227       $ —         $ —         $ 6,227   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2014  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Impaired loans

   $ 1,854       $ —         $ —         $ 1,854   

Other real estate owned

     3,290         —           —           3,290   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 5,144       $ —         $ —         $ 5,144   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

September 30, 2015

 

    

Valuation Technique

  

Unobservable Input

  

General

Range

Nonrecurring measurements:

        

Impaired loans

   Discounted appraisals    Expected loss rates    0 – 25%
   Discounted cash flows    Discount rates    4% – 8.75%

OREO

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

December 31, 2014

 

    

Valuation Technique

  

Unobservable Input

  

General

Range

Nonrecurring measurements:

        

Impaired loans

   Discounted appraisals    Expected loss rates    0 – 25%
   Discounted cash flows    Discount rates    4% – 8.75%

OREO

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

At September 30, 2015, impaired loans were being evaluated with discounted expected cash flows and discounted appraisals were being used on collateral dependent loans.

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

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

 

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The fair value estimates presented at September 30, 2015 and December 31, 2014, are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price at which an asset could be sold 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, 2015 and December 31, 2014:

September 30, 2015

 

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

FINANCIAL ASSETS

              

Cash and cash equivalents

   $ 58,270       $ 58,341       $ 54,535       $ 3,806       $ —     

Securities available for sale

     96,927         96,927         7,117         89,810         —     

Securities held to maturity

     11,274         11,276         —           11,276         —     

Loans held for investment, net

     319,855         317,590         —           —           317,590   

Loans held for sale

     418         418         —           418         —     

Restricted stock

     1,040         1,040         1,040         —           —     

Accrued interest receivable

     1,466         1,466         —           —           1,466   

FINANCIAL LIABILITIES

              

Deposits

   $ 462,349       $ 435,613       $ —         $ 435,613       $ —     

Short-term borrowings

     5,232         5,232         —           5,232         —     

Long-term borrowings

     16         16         —           16         —     

Junior subordinated debt

     9,534         9,695         —           —           9,691   

Accrued interest payable

     176         176         —           —           176   

December 31, 2014

 

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

FINANCIAL ASSETS

              

Cash and cash equivalents

   $ 50,791       $ 50,826       $ 47,605       $ 3,221       $ —     

Securities available for sale

     112,824         112,824         19,386         93,438         —     

Securities held to maturity

     5,496         5,450         2,053         3,397         —     

Loans held for investment, net

     307,115         321,295         —           —           321,295   

Loans held for sale

     2,147         2,147         —           2,147         —     

Restricted stock

     1,038         1,038         1,038         —           —     

Accrued interest receivable

     1,747         1,747         —           —           1,747   

FINANCIAL LIABILITIES

              

Deposits

   $ 456,435       $ 442,655       $ —         $ 442,655       $ —     

Short-term borrowings

     4,685         4,685         —           4,685         —     

Long-term borrowings

     24         24         —           24         —     

Junior subordinated debt

     9,534         9,703         —           —           9,703   

Accrued interest payable

     180         180         —           —           180   

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. Time deposits are recorded in Level 2.

 

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

 

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

 

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

 

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

 

    Deposits – The fair value of deposits is estimated based on discounted cash flow analyses using offered market rates and is recorded in Level 2. The fair value of deposits does not consider any customer related intangibles.

 

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

At September 30, 2015, the Bank had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, they were deemed to have no current fair value. See Note 9.

Note 12 – Recent Accounting Pronouncements

In February 2015, the FASB issued ASU 2015-02, an update to Topic 810 “Consolidation”. This modifies the consolidation model for reporting organizations under both the variable interest model and the voting interest model. The ASU is generally expected to reduce the number of situations where consolidation is required; however, in certain circumstances, the ASU may result in companies consolidating entities previously unconsolidated. This ASU will require all legal entities to reevaluate previous consolidation conclusions under the revised model and will be effective for periods beginning after December 15, 2015. Early adoption is permitted. A reporting entity may apply the ASU by using a modified retrospective approach (by recording a cumulative-effect adjustment to equity as of the beginning of the year of adoption) or a full retrospective approach (by restating all periods presented). The adoption of this update will not have a significant impact on the Company’s consolidated financial statements.

In January 2015, the FASB issued ASU 2015-01, an update to subtopic 225-20 “Income Statement – Extraordinary and Unusual Items”. This update was issued as part of the FASB’s simplification initiative, which aims to reduce unnecessary cost and complexity within GAAP by issuing ASUs to simplify the guidance while retaining or improving the usefulness of information

 

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included in the financial statements. Subtopic 225-20 requires an entity to separately classify, present, and disclose extraordinary events and transactions. In response to feedback received from users and preparers the FASB issued this ASU to eliminate the concept of extraordinary items. The amendments in this ASU are effective for fiscal years (and interim periods within those fiscal years), beginning after December 15, 2015 and may be adopted early. Entities may apply this ASU either prospectively or retrospectively. As recognition and disclosure of extraordinary items have become rare, we do not anticipate a significant impact to financial reporting from implementation of ASU 2015-01. The adoption of this update will not have a significant impact on the Company’s consolidated financial statements.

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 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 Company evaluated this update and it does not have a material impact on the Company’s consolidated financial statements. The Company had $2.2 million in foreclosed residential real estate and $295,000 of residential real estate in process of foreclosure at September 30, 2015.

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.

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, 2015 and December 31, 2014.

During the nine months ended September 30, 2015, the Company’s total assets increased $8.6 million, from $518.5 million to $527.1 million.

Cash and cash equivalents increased $7.5 million during the nine months ended September 30, 2015. Cash and due from banks decreased $122,000, while interest-earning deposits with banks increased $7.6 million.

 

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Investment securities consist of securities available for sale and securities held to maturity. Investment securities decreased $10.1 million to $108.2 million for the period ended September 30, 2015. During the first nine months of 2015, the Company, in a continued effort to reduce our extension risk in a rising interest rate environment, made the decision to sell $29.7 million of investment securities. The Company realized a gain of $502,000 on these transactions. The Company also had maturities of $5.1 million and normal reductions stemming from principal payments on mortgage backed securities. Also during the first nine months of 2015, the Company purchased securities of $30.9 million. The Company is investing in lower duration securities as well as variable rate securities. These securities 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, 2015, the Company had net unrealized gains on securities available for sale of $453,000.

Loans held for investment increased from $310.9 million to $322.8 million, an increase of $11.9 million. The real estate one-to-four family and other real estate construction loan segments of the loan portfolio decreased during the first nine months of 2015 with the other real estate construction experiencing the largest decline of 26.0%, or $5.8 million. The Company experienced growth in the remaining segments of its loan portfolio during the first nine months of 2015 with the commercial segment having the largest increase of 19.2%, primarily consisting of owner occupied properties. Loans held for sale decreased 80.5%, or $1.7 million. The Company did sell $1.9 million of USDA government loans that were in the loan portfolio in the secondary market during the first nine months of 2015. The allowance for loan losses was $3.0 million at September 30, 2015, which represented 0.92% 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 $88,000, while premises and equipment decreased $106,000. Accrued interest receivable declined $281,000. Restricted stock, which is comprised of Federal Home Loan Bank stock and Federal Reserve Bank stock, increased $2,000. Federal Home Loan Bank member institutions are required to increase or decrease their ownership as their utilization of FHLB borrowings changes. The Company’s required ownership in FHLB stock increased $1,000 to $533,000, while the Company’s required ownership in Federal Reserve Bank stock increased $1,000 to $507,000 during the first nine months of 2015. Other real estate owned increased $77,000. During the nine months ended September 30, 2015, the Company sold fourteen pieces of property totaling $1.5 million. The Company recorded net valuation write-down adjustments of $217,000. These declines were offset by the addition of thirty pieces of real estate foreclosed on totaling $1.8 million. The Company foreclosed on one loan relationship resulting in the addition of twenty-four of the aforementioned thirty pieces of property. Other assets increased $777,000 during the first nine months ended September 30, 2015.

Customer deposits, our primary funding source, experienced a $5.9 million increase during the nine month period ended September 30, 2015, increasing from $456.4 million to $462.3 million. Demand noninterest bearing checking accounts increased $12.7 million, interest checking and money market accounts increased $910,000 and savings deposits increased $522,000. This increase was offset by declines in time deposits of $250,000 and over of $1.7 million and other time deposits of $6.5 million. Total borrowings increased $540,000 for the period consisting of both short-term and long-term borrowed funds.

Other liabilities increased from $4.8 million at December 31, 2014 to $5.9 million at September 30, 2015, an increase of $1.1 million. The increase in income taxes payable along with increases in several reserve accruals were the primary factors related to this increase.

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

 

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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.

As disclosed in Note 4 to the unaudited financial statements within 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.

During the fourth quarter of 2014, all allocated shares were distributed to the ESOP participants and at December 31, 2014, there was $561,000 set aside to cover the liability for shares that could be put back to the Company during the first six months of 2015. During the first six months of 2015, the participants put 29,735 shares back to the Company. The time for this option has now expired and the liability was reclassed back into additional paid-in capital at September 30, 2015.

At September 30, 2015, total shareholders’ equity was $43.9 million, an increase of $1.7 from December 31, 2014. Net income for the nine month period was $1.9 million. Unrealized gains and losses on investment securities, net of tax, decreased $6,000. The Company transferred $561,000 from mezzanine capital to additional paid in capital coming from the expiration of the aforementioned ESOP put liability. The Company also repurchased 85,898 shares of common stock totaling $324,000. Of the shares repurchased, 29,735 shares were related to the ESOP put option. The Company paid $442,000 in preferred stock dividends attributed to noncontrolling interest.

Comparison of Results of Operations for the Three Months Ended September 30, 2015 and 2014.

Net Income and Net Income Available to Common Shareholders

The Company reported net income of $561,000 for the three months ended September 30, 2015, as compared to $399,000 for the three months ended September 30, 2014, an increase of $162,000. Net income available to common shareholders was $412,000 or $0.06 per common share for the three months ended September 30, 2015, compared to $250,000 or $0.03 per common share for the three months ended September 30, 2014. Net income available to common shareholders is net income less any dividends on the aforementioned noncontrolling interest.

Net Interest Income

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

 

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Net interest income for of the three months ended September 30, 2015 was $4.0 million compared to $4.2 million for the three months ended September 30, 2014, a decrease of $154,000. During the current quarter, our decline in the volume of interest-earning assets outpaced the volume of interest-bearing liabilities by $78,000. The average yield on our interest-earning assets decreased twenty-one basis points to 3.81%, while the average rate we paid for our interest-bearing liabilities decreased three basis points. The aforementioned changes resulted in a decrease of eighteen basis points in our interest rate spread, from 3.53% in 2014 to 3.35% in 2015. Our net interest margin was 3.44% and 3.62% for the comparable periods in 2015 and 2014, respectively.

The following table presents average balance sheets and a net interest income analysis for the three months ended September 30, 2015 and 2014:

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended September 30,

 

(dollars in thousands)    Average Balance      Income/Expense      Rate/Yield  
     2015      2014      2015      2014      2015     2014  

Interest-earning assets:

                

Taxable securities

   $ 94,959       $ 101,692       $ 398       $ 412         1.66     1.61

Nontaxable securities (1)

     14,072         11,541         87         86         3.95     4.77

Short-term investments

     50,003         46,862         47         36         0.37     0.30

Taxable loans

     302,786         294,976         3,834         4,017         5.02     5.40

Non-taxable loans (1)

     15,989         15,928         102         103         4.08     4.14
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest-earning assets

     477,809         470,999         4,468         4,654         3.81     4.02

Interest-bearing liabilities:

                

Interest-bearing deposits

     365,743         370,770         282         329         0.31     0.35

Short-term borrowed funds

     2,968         3,953         17         2         2.27     0.20

Long-term debt

     11,382         9,562         139         139         4.85     5.77
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest bearing liabilities

     380,093         384,285         438         470         0.46     0.49
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net interest spread

   $ 97,716       $ 86,714       $ 4,030       $ 4,184         3.35     3.53
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net interest margin (1)

                

(% of earning assets)

                 3.44     3.62
              

 

 

   

 

 

 

 

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

Provision and Allowance for Loan Losses

The Company recovered $(323,000) for the three months ending September 30, 2015 compared to a recovery of $(271,000) for the same period in 2014. There were net loan charge-offs of $43,000 for the three months ended September 30, 2015, as compared with net loan recoveries of $(37,000) during the same period of 2014. Refer to the Asset Quality discussion on page 38 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 $401,000 for the three month period ending September 30, 2015 as compared to the same period in 2014. Income from mortgage loan sales increased $424,000 from $282,000 for the quarter ended September 30, 2014 to $706,000 for the same period in 2015. Service charges on deposit accounts produced revenue of $338,000, a decrease of $29,000 for the three months ended September 30, 2015. The primary factor leading to this decrease was a decrease in NSF fees for the comparable periods. Other service fees and commissions experienced a $54,000 or 5.5% increase for the comparable three month period, primarily due to an increase in brokerage commissions and asset management fees.

 

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The Company realized gains on the sale of other real estate owned of $121,000 for the three months ended September 30, 2015 compared to realized gains of $231,000 for the same period in 2014.

Noninterest Expense

Noninterest expense for the quarter ended September 30, 2015 was $5.9 million compared to $5.8 million for the same period of 2014, an increase of $107,000. Salaries and employee benefits, the largest component of noninterest expense, increased $367,000 for the quarter ending September 30, 2015. The majority of this increase is attributable to the increase in staffing related to the expansion of the mortgage department. Foreclosed real estate expense decreased $351,000 for the three months ending September 30, 2015. The major factor related to the decrease in foreclosed real estate expense was a decrease 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 $125,000 in write-downs and reserves for the three month period in 2015 compared to $572,000 for the same period in 2014. Professional fees and services were $173,000 during the three months ending September 30, 2015 as compared to $210,000 for the same period in 2014. The improvement the Company is experiencing in asset quality resulted in this decrease with lower legal fees associated with loan collection costs. Other noninterest expense increased $72,000 for the comparable three month period. The table below reflects the composition of other noninterest expense.

Other noninterest expense

 

     Three Months Ended
September 30,
 
     2015      2014  
     (dollars in thousands)  

Postage

   $ 59       $ 51   

Telephone and data lines

     40         39   

Loan collection expense

     23         21   

Shareholder relations expense

     18         62   

Dues and subscriptions

     42         32   

Other

     439         367   
  

 

 

    

 

 

 

Total

   $ 621       $ 572   
  

 

 

    

 

 

 

Income Tax Expense

The Company had income tax expense of $223,000 for the three months ended September 30, 2015 resulting in an effective rate of 28.52% compared to income tax expense of $191,000 and an effective rate of 32.37% in the 2014 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 corporate rate for the State of North Carolina was reduced from 6% in 2014 to 5% in 2015. This change coupled with an increase in the level of nontaxable income for the comparable three month periods resulted in the lower effective rate.

The State further lowered the corporate income tax rate from 5% to 4% effective for tax years beginning on or after January 1, 2016. As of September 30, the Company estimates the rate reduction trigger will result in a $41,000 reduction in deferred income taxes.

 

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Comparison of Results of Operations For the Nine Months Ended September 30, 2015 and 2014.

Net Income and Net Income Available to Common Shareholders

The Company reported net income of $1.9 million for the nine months ended September 30, 2015, as compared to $1.5 million for the nine months ended September 30, 2014, an increase of $326,000. Net income available to common shareholders was $1.4 million or $0.20 per common share for the nine months ended September 30, 2015, compared to $1.1 million or $0.15 per common share for the nine months ended September 30, 2014. Net income available to common shareholders is net income less any dividends on the aforementioned noncontrolling interest.

Net Interest Income

Net interest income for both of the nine months ended September 30, 2015 and 2014 was $12.0 million. During the nine months ending September 30, 2015, the decline in the volume of interest-earning assets outpaced the decline in growth of our interest-bearing liabilities by $310,000. The average yield on our interest-earning assets decreased nineteen basis points to 3.86%, while the average rate we paid for our interest-bearing liabilities decreased five basis points to 0.47%. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve adjusts interest rates, while interest-bearing time deposits adjust at the time of maturity. The aforementioned changes resulted in a decrease of fourteen basis points in our interest rate spread of 3.39% for the first nine months of 2015, compared to 3.53% for the first nine months of 2014. Our net interest margin was 3.48% and 3.63% for the comparable nine month periods in 2015 and 2014, respectively. A portion of the Company’s loan portfolio has interest rate floors and caps in place on the loans. This feature has allowed the Company to maintain a stronger interest margin, while there has been a decline in rates, however this feature could hurt the margin in a rising rate environment.

The following table presents average balance sheets and a net interest income analysis for the nine months ended September 30, 2015 and 2014:

Average Balance Sheet and Net Interest Income Analysis

For the Nine Months Ended September 30,

 

(dollars in thousands)    Average Balance      Income/Expense      Rate/Yield  
     2015      2014      2015      2014      2015     2014  

Interest-earning assets:

                

Taxable securities

   $ 99,979       $ 99,011       $ 1,175       $ 1,256         1.57     1.70

Nontaxable securities (1)

     14,569         9,957         290         232         4.98     5.01

Short-term investments

     48,109         51,228         126         120         0.35     0.31

Taxable loans

     300,062         293,900         11,453         11,955         5.10     5.44

Non-taxable loans (1)

     14,330         15,611         331         330         4.28     4.56
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest-earning assets

     477,049         469,707         13,375         13,893         3.86     4.05

Interest-bearing liabilities:

                

Interest-bearing deposits

     367,527         370,332         875         1,042         0.32     0.38

Short-term borrowed funds

     3,326         4,923         44         29         1.77     0.79

Long-term debt

     10,932         10,085         411         434         5.03     5.75
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest bearing liabilities

     381,785         385,340         1,330         1,505         0.47     0.52
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net interest spread

   $ 95,264       $ 84,367       $ 12,045       $ 12,388         3.39     3.53
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net interest margin (1)

                

(% of earning assets)

                 3.48     3.63
              

 

 

   

 

 

 

 

(1) Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 34% tax rate in 2015.

Provision and Allowance for Loan Losses

The Company had a recovery of allowance for loan losses of $(620,000) for the nine months ending September 30, 2015 compared to a recovery of $(756,000) for the same period in 2014. There were net loan charge-offs of $157,000 for the nine months ended September 30, 2015 compared to net loan charge-offs of $873,000 for the same period in 2014. Refer to the Asset Quality discussion on page 38 for further information.

 

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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 increased $1.2 million for the nine month period ending September 30, 2015 as compared to the same period in 2014. Income from mortgage loan sales was $1.7 million for the nine months ended September 30, 2015 as compared to $701,000 for the same period in 2014, an increase of $998,000. The Company has expanded its mortgage operations into a neighboring market. This expansion is the primary factor behind the growth in income from mortgage sales. Service charges on deposit accounts produced earnings of $979,000 million for the nine months ended September 30, 2015, a decrease of $125,000. The primary contributing factor was a decrease in NSF fees due in large part to changes in regulatory governance. Other service fees and commissions experienced a 5.6% increase for the comparable nine month period. This increase was directly related to brokerage commissions and asset management fees increasing. Gain on sale of other assets was $115,000 for the nine months ended September 30, 2015 compared to $471,000 for the same period in 2014. Gains realized on the sale of securities were $502,000 for the first nine months in 2015 compared to $26,000 for the same period in 2014.

Noninterest Expense

Noninterest expense for the nine months ended September 30, 2015 was $16.7 million compared to $16.4 million for the same period in 2014, an increase of $288,000. Salaries and employee benefits, the largest component of noninterest expense, increased $699,000 to $9.8 million for the nine month period ending September 30, 2015. The majority of this increase is attributable to the expansion in the mortgage operation department. Professional fees and services decreased $103,000. The improvement the Company is experiencing in asset quality resulted in this decrease with lower legal fees associated with loan collections fees. FDIC deposit insurance premiums also declined $46,000 for the comparable period. Foreclosed real estate expense decreased $504,000. 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 2015 totaling $217,000 compared to $574,000 in net write downs for the same period in 2014. The Company also had expenses related to a prior year sale totaling $92,000 that occurred during the first quarter of 2014 that played a part in the decrease in foreclosed real estate expense. Other noninterest expense increased $35,000 for the comparable nine month periods. The table below reflects the composition of other noninterest expense.

 

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Other noninterest expense

 

     Nine Months Ended
September 30,
 
     2015      2014  
     (in thousands)  

Postage

   $ 161       $ 149   

Telephone and data lines

     124         115   

Loan collection expense

     71         108   

Shareholder relations expense

     106         174   

Dues and subscriptions

     127         108   

Other

     1,172         1,072   
  

 

 

    

 

 

 

Total

   $ 1,761       $ 1,726   
  

 

 

    

 

 

 

Income Tax Expense

The Company had income tax expense of $799,000 for the nine months ended September 30, 2015 resulting in an effective tax rate of 30.07%, compared to income tax expense of $710,000 and an effective rate of 31.67% in the 2014 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 corporate rate for the State of North Carolina was reduced from 6% in 2014 to 5% in 2015.This change coupled with an increase in the level of nontaxable income for the comparable three month periods resulted in the lower effective rate.

The State further lowered the corporate income tax rate from 5% to 4% effective for tax years beginning on or after January 1, 2016. As of September 30, the Company estimates the rate reduction trigger will result in a $41,000 reduction in deferred income taxes.

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

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.

 

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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 GAAP, 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, 2015 the levels of our impaired loans, which includes all loans in nonaccrual status, TDRs and other loans deemed by management to be impaired, were $5.7 million compared to $7.6 million at December 31, 2014, a net decrease of $1.9 million. Total nonaccrual loans, which are a component of impaired loans, decreased from $2.2 million at December 31, 2014 to $1.1 million at September 30, 2015. During the first nine months of 2015, thirteen relationships totaling $1.2 million were added to impaired loans. These additions were offset by one relationship for $102,000 being deemed no longer impaired based on improved cash flow, five impaired relationships totaling $262,000 being charged off, six relationships in the amount of $1.7 million being foreclosed and transferred to other real estate owned, two impaired relationships in the amount of $297,000 being paid off completely and several relationships with pay downs totaling $624,000.

The allowance expressed as a percentage of gross loans held for investment decreased twenty-eight basis points from 1.20% at December 31, 2014 to 0.92% at September 30, 2015. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 1.08% at December 31, 2014 and 0.87% at September 30, 2015, while the individually evaluated allowance as a percentage of individually evaluated loans decreased from 6.04% to 3.34% for the same periods. The portion of the Company’s allowance for loan loss model related to general reserves is intended to capture the mean loss of individual loans and the rare event of severe loss that can occur within the loan portfolio. Specifically, the Company calculates probable losses on loans by computing a probability of loss and expected loss scenario by FDIC call report codes. Together, these expected components as well as a level of more extreme unexpected losses form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.

The Company assesses the probability of losses inherent in the loan portfolio using probability of default data, acquired from a third party vendor representing a one year loss horizon for each obligor. The Company updates the data inputs into the model; specifically the loss given default and the probability of defaults obtained from the vendor annually during the second quarter. The Company updates the credit scores that are one of the components used within the allowance model semi-annually, during the first and third quarters. Beginning with the third quarter update, the Company transitioned from Beacon 5 scores to FICO 9 scores. This change accounted for approximately a $20,000 decrease in the allowance. The continued improvement in credit quality coupled with the continued trend of overall improvement in credit scores resulted in the average credit score increasing thirty-three points from 724 to 757 during the first nine months of the 2015. The improvement in credit scores has been the major driver in the overall decrease in the allowance for loan losses. This improvement lowered the allowance approximately $409,000.

Nonperforming loans, which consist of nonaccrual loans and loans past due 90 days and still accruing, to total loans decreased from 0.72% at December 31, 2014, to 0.44% at September 30, 2015.

 

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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 increased $77,000 during the first nine months of 2015. The Company sold fourteen pieces of foreclosed property totaling $1.5 million realizing a gain of $115,000. The Company also had write downs and changes in reserves totaling $217,000 on the remaining existing property. The Company foreclosed on seven loan relationships totaling $1.8 million and added thirty pieces of property to other real estate owned. One of the relationships foreclosed on totaled $792,000 and added twenty-four pieces of property.

Restructured loans at September 30, 2015 totaled $4.8 million compared to $5.3 million at December 31, 2014 and are included in impaired loans. At September 30, 2015, all restructured loans were on an accruing basis.

The following table shows the comparison of nonperforming assets at September 30, 2015 to December 31, 2014:

Nonperforming Assets

(dollars in thousands)

 

     September 30,     December 31,  
     2015     2014  

Nonperforming assets:

    

Loans past due 90 days or more

   $ —        $ —     

Nonaccrual loans

     1,130        2,246   

Other real estate owned

     5,942        5,865   
  

 

 

   

 

 

 

Total nonperforming assets

   $ 7,072      $ 8,111   
  

 

 

   

 

 

 

Allowance for loans losses

   $ 2,961      $ 3,738   

Nonperforming loans to total loans

     0.44     0.72

Allowance for loan losses to total loans

     0.92     1.20

Nonperforming assets to total assets

     1.39     1.56

Allowance for loan losses to nonperforming loans

     210.41     166.48

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 Bank have multiple funding sources, in addition to deposits, that can be used to increase liquidity and provide additional financial flexibility. These sources are the Bank’s established federal funds lines with correspondent banks aggregating $15.8 million at September 30, 2015, with available credit of $15.8 million; established borrowing relationships with the Federal Home Loan Bank, with available credit of $47.5 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of $20.4 million and the issuance of commercial paper. The Company has also secured long-term debt from other sources. Total debt from these sources aggregated $14.8 million at September 30, 2015, compared to $14.2 million at December 31, 2014.

 

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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 Bank, has adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets.

On July 2, 2013, the Federal Reserve approved a final rule that establishes an integrated regulatory capital framework that addresses shortcomings in certain capital requirements. The rule implements in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. The major provisions of the new rule applicable to the Company are: The new rule implements higher minimum capital requirements, includes a new common equity tier 1 capital requirement, and establishes criteria that instruments must meet in order to be considered common equity tier 1 capital, additional tier 1 capital, or tier 2 capital. These enhancements both improve the quality and increase the quantity of capital required to be held by banking organizations, better equipping the U.S. banking system to deal with adverse economic conditions. The new minimum capital to risk-weighted assets (RWA) requirements are a common equity tier 1 capital ratio of 4.5 percent and a tier 1 capital ratio of 6.0 percent, which is an increase from 4.0 percent, and a total capital ratio that remains at 8.0 percent. The minimum leverage ratio (tier 1 capital to total assets) is 4.0 percent. The new rule maintains the general structure of the current prompt corrective action, or PCA, framework while incorporating these increased minimum requirements.

The Company and its 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 Bank has a net total of $10.6 million in outstanding Fixed Rate Noncumulative Perpetual Preferred Stock. The preferred stock qualifies as Tier 1 capital at the bank and will pay dividends at an annual rate of 5.30%. The net total of $10.6 million is presented as noncontrolling interest at the Company level and does qualify as Tier 1 capital at the Company. At September 30, 2015, 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, 2014.

 

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

 

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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 2015. 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 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 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, 2015.

 

     (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, 2015 Through July 31, 2015

     1,900       $ 3.72         —         $ —     

August 1, 2015 Through August 30, 2015

     2,801       $ 3.75         —         $ —     

September 1, 2015 Through September 30, 2015

     22,167       $ 3.70         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     26,868       $ 3.71         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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)

 

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  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, Christy D. Stoner and R. David Beaver, III (6)(9)
  10.8    Change in Control Agreement dated January 1, 2015, between the Registrant and R. David Beaver, III (9)
  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 June 30, 2015, in XBRL (eXtensible Business Reporting Language) (7)

 

(1) Incorporated by reference from exhibits to Registrant’s Registration Statement on Form S-4 (Reg. No. 33-58882).
(2) Incorporated by reference to Registrant’s Annual Report on Form 10-KSB for the Fiscal year ended 1999.
(3) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2007.
(4) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2008.
(5) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2009.
(6) Incorporated by reference to Registrant’s Annual Report on Form 10-K for the Fiscal year ended 2009.
(7) 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 Annual Report on Form 10-Q for the Quarter ended June 30, 2011.
(9) Incorporated by reference to Registrant’s Current Report on Form 8-K dated June 30, 2015.

 

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Signatures

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

 

    UWHARRIE CAPITAL CORP
    (Registrant)
Date: November 3, 2015     By:  

/s/ Roger L. Dick

    Roger L. Dick
    President and Chief Executive Officer
Date: November 3, 2015     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, Christy D. Stoner and R. David Beaver, III (6)(9)
  10.9    Change in Control Agreement dated January 1, 2015, between the Registrant and R. David Beaver, III (9)
  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 June 30, 2015, in XBRL (eXtensible Business Reporting Language) (7)

 

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

 

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(3) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2007.
(4) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2008.
(5) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2009.
(6) Incorporated by reference to Registrant’s Annual Report on Form 10-K for the Fiscal year ended 2009.
(7) Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.
(8) Incorporated by reference to Registrant’s Annual Report on Form 10-Q for the Quarter ended June 30, 2011.
(9) Incorporated by reference to Registrant’s Current Report on Form 8-K dated June 30, 2015.

 

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