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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 June 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: 6,902,454 shares of common stock outstanding as of July 20, 2015.

 

 

 


Table of Contents

Table of Contents

 

         Page No.  
Part I.  

FINANCIAL INFORMATION

  
Item 1 -  

Financial Statements (Unaudited)

  
 

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

     3   
 

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014

     4   
 

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

     5   
 

Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2015

     6   
 

Consolidated Statements of Cash Flows Six Months Ended June 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

     30   
Item 3 -  

Quantitative and Qualitative Disclosures about Market Risk

     40   
Item 4 -  

Controls and Procedures

     40   
Part II.  

OTHER INFORMATION

  
Item 1 -  

Legal Proceedings

     41   
Item 1A -  

Risk Factors

     41   
Item 2 -  

Unregistered Sales of Equity Securities and Use of Proceeds

     41   
Item 3 -  

Defaults Upon Senior Securities

     42   
Item 4 -  

Mine Safety Disclosures

     42   
Item 5 -  

Other Information

     42   
Item 6 -  

Exhibits

     42   
 

Exhibit Index

     45   

 

-2-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

 

Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements

 

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

ASSETS

    

Cash and due from banks

   $ 5,796      $ 6,807   

Interest-earning deposits with banks

     45,397        43,984   

Securities available for sale, at fair value

     98,483        112,824   

Securities held to maturity, at amortized cost (fair value $11,312 and $5,450, respectively)

     11,434        5,496   

Loans held for sale

     414        2,147   

Loans:

    

Loans held for investment

     317,070        310,853   

Less allowance for loan losses

     (3,327     (3,738
  

 

 

   

 

 

 

Net loans held for investment

     313,743        307,115   
  

 

 

   

 

 

 

Premises and equipment, net

     14,821        14,858   

Interest receivable

     1,456        1,747   

Restricted stock

     1,040        1,038   

Bank owned life insurance

     6,704        6,645   

Other real estate owned

     6,086        5,865   

Prepaid assets

     1,171        969   

Other assets

     9,292        8,969   
  

 

 

   

 

 

 

Total assets

   $ 515,837      $ 518,464   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Demand noninterest-bearing

   $ 91,040      $ 80,069   

Interest checking and money market accounts

     232,082        243,116   

Savings deposits

     39,416        39,091   

Time deposits, $250,000 and over

     9,046        9,865   

Other time deposits

     81,450        84,294   
  

 

 

   

 

 

 

Total deposits

     453,034        456,435   
  

 

 

   

 

 

 

Short-term borrowed funds

     4,232        4,685   

Long-term debt

     9,553        9,558   

Interest payable

     181        180   

Other liabilities

     5,593        4,783   
  

 

 

   

 

 

 

Total liabilities

     472,593        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 6,902,454 and 6,961,484

     8,628        8,702   

Additional paid-in capital

     12,124        11,712   

Undivided profits

     11,978        10,974   

Accumulated other comprehensive income

     (68     305   
  

 

 

   

 

 

 

Total Uwharrie Capital shareholders’ equity

     32,662        31,693   

Noncontrolling interest

     10,582        10,569   
  

 

 

   

 

 

 

Total shareholders’ equity

     43,244        42,262   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 515,837      $ 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
June 30,
    Six Months Ended
June 30,
 
     2015     2014     2015     2014  
     (in thousands, except share and per share data)  

Interest Income

        

Loans, including fees

   $ 3,938      $ 4,106      $ 7,848      $ 8,165   

Investment securities

        

US Treasury

     67        94        151        187   

US Government agencies and corporations

     327        341        660        658   

State and political subdivisions

     87        80        169        145   

Interest-earning deposits with banks and federal funds sold

     42        39        79        84   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     4,461        4,660        8,907        9,239   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

        

Interest checking and money market accounts

     68        73        138        158   

Savings deposits

     10        11        21        36   

Time deposits, $250,000 and over

     13        12        24        24   

Other time deposits

     203        244        410        495   

Short-term borrowed funds

     15        9        27        27   

Long-term debt

     137        138        272        295   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     446        487        892        1,035   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     4,015        4,173        8,015        8,204   

Provision for (recovery of) loan losses

     (235     (61     (297     (485
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     4,250        4,234        8,312        8,689   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Income

        

Service charges on deposit accounts

     311        359        641        737   

Other service fees and commissions

     1,033        970        2,015        1,907   

Gain/(loss) on sale of securities (includes reclassification of $277,000, $502,000 and $21,000 from accumulated other comprehensive income)

     277        —          502        21   

Gain (loss) on fixed assets and other assets

     17        239        (5     240   

Income from mortgage loan sales

     492        257        993        419   

Other income

     91        94        148        191   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     2,221        1,919        4,294        3,515   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Expense

        

Salaries and employee benefits

     3,226        2,980        6,318        5,986   

Net occupancy expense

     268        259        552        545   

Equipment expense

     173        177        340        347   

Data processing costs

     183        191        359        370   

Office supplies and printing

     53        63        102        128   

Foreclosed real estate expense

     155        199        274        427   

Professional fees and services

     133        193        284        350   

Marketing and donations

     178        147        371        293   

Electronic banking expense

     259        236        510        475   

Software amortization and maintenance

     134        138        284        256   

FDIC insurance

     97        109        199        221   

Other noninterest expense

     649        614        1,140        1,154   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     5,508        5,306        10,733        10,552   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     963        847        1,873        1,652   

Income taxes (includes reclassification $107,000, $194,000 and $8,000 from accumulated other comprehensive income)

     303        251        576        519   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 660      $ 596      $ 1,297      $ 1,133   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

   $ 660        596        1,297        1,133   

Less: net income attributable to noncontrolling Interest

     (147     (147     (293     (293
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Uwharrie Capital Corp

     513        449        1,004        840   

Dividends – preferred stock

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ 513      $ 449      $ 1,004      $ 840   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share

        

Basic

   $ 0.07      $ 0.06      $ 0.14      $ 0.11   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.07      $ 0.06      $ 0.14      $ 0.11   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

        

Basic

     6,945,102        7,483,762        6,953,176        7,483,887   

Diluted

     6,945,102        7,483,762        6,953,176        7,483,887   

See accompanying notes

 

-4-


Table of Contents

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

 

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2015     2014     2015     2014  
     (in thousands)  

Net Income

   $ 660      $ 596      $ 1,297      $ 1,133   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

        

Unrealized gain (loss) on available for sale securities

     (616     736        (62     1,254   

Related tax effect

     196        (250     (3     (427

Reclassification of (gain) loss recognized in net income

     (277     —          (502     (21

Related tax effect

     107        —          194        8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (590     486        (373     814   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     70        1,082        924        1,947   

Less: Comprehensive income attributable to noncontrolling interest

     (147     (147     (293     (293
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Uwharrie Capital

   $ (77   $ 935      $ 631      $ 1,654   
  

 

 

   

 

 

   

 

 

   

 

 

 

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
    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

     —          —          —          1,004         —          293        1,297   

Repurchase of common stock

     (59,030     (74     (149     —           —          —          (223

Other comprehensive Income

     —          —          —          —           (373     —          (373

Reclass from mezzanine capital

     —          —          561        —           —          —          561   

Record preferred stock dividend Series B (noncontrolling interest)

     —          —          —          —           —          (206     (206

Record preferred stock dividend Series C (noncontrolling interest)

     —          —          —          —           —          (74     (74
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

  6,902,454    $ 8,628    $ 12,124    $ 11,978    $ (68 $ 10,582    $ 43,244   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes

 

-6-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

     Six Months Ended
June 30,
 
     2015     2014  
     (dollars in thousands)  

Cash flows from operating activities

  

Net income

   $ 1,297      $ 1,133   

Adjustments to reconcile net income to net cash

    

Provided by (used in) operating activities:

    

Depreciation

     472        451   

Net amortization of security premiums/discounts AFS

     555        469   

Net amortization of security premiums/discounts HTM

     65        —     

Net amortization of mortgage servicing rights

     350        351   

Impairment of foreclosed real estate

     92        72   

Recovery of loan losses

     (297     (485

Net realized gain on sales / calls available for sales securities

     (502     (21

Income from mortgage loan sales

     (993     (419

Proceeds from sales of loans held for sale

     29,792        16,840   

Origination of loans held for sale

     (27,066     (15,819

Gain on sale of premises, equipment and other assets

     —          (146

Increase in cash surrender value of life insurance

     (59     (70

(Gain) loss on sales of foreclosed real estate

     6        (94

Release and write-off of ESOP shares

     —          30   

Net change in interest receivable

     291        129   

Net change in other assets

     (507     64   

Net change in interest payable

     1        (41

Net change in other liabilities

     810        534   
  

 

 

   

 

 

 

Net cash provided by operating activities

  4,307      2,978   
  

 

 

   

 

 

 

Cash flows from investing activities

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

  38,633      3,886   

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

  31      —     

Purchase of securities available for sale

  (24,910   (12,790

Purchase of securities held to maturity

  (6,034   —     

Net (increase) decrease in loans

  (7,282   (3,793

Proceeds from sales of premises, equipment and other assets

  —        273   

Purchase of premises and equipment

  (435   (1,957

Proceeds from sales of foreclosed real estate

  632      382   

Investment in other assets

  (163   (186

Net decrease in restricted stock

  (2   146   
  

 

 

   

 

 

 

Net cash provided (used) by investing activities

  470      (14,039
  

 

 

   

 

 

 

Cash flows from financing activities

Net decrease in deposit accounts

  (3,401   (4,806

Net decrease in short-term borrowed funds

  (453   (1,756

Net decrease in long-term debt

  (5   (1,599

Repurchase of common stock

  (223   (74

Dividend and cost accretion on noncontrolling interest

  (293   (293
  

 

 

   

 

 

 

Net used in financing activities

  (4,375   (8,528
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

  402      (19,589

Cash and cash equivalents, beginning of period

  50,791      72,394   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

$ 51,193    $ 52,805   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information

Interest paid

$ 891    $ 579   

Income taxes paid

  243      6   

Supplemental Schedule of Non-Cash Activities

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

$ (373 $ 814   

Loans transferred to foreclosed real estate

  951      295   

Company financed sales of other real estate owned

  —        —     

Mortgage servicing rights capitalized

  299      168   

Net change in ESOP liability

  (561   111   

Exchange of unearned ESOP shares for ESOP debt

  —        964   

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”), Strategic Investment Advisors, Inc. (“SIA”), and Uwharrie Mortgage Inc. The Bank consolidates its subsidiaries, the Strategic Alliance Corporation, BOS Agency, Inc. and Gateway Mortgage, Inc., each of which is wholly-owned by the Bank.

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

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to consolidated financial statements filed as part of the Company’s 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 with accounting principles generally accepted in the United States of America (“GAAP”), requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses.

Note 2 – Comprehensive Income (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 six months ended June 30, 2015 and 2014:

 

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

Beginning Balance

   $ 522       $ (234    $ 305       $ (562

Other Comprehensive income (loss) before reclassifications, net of ($196,000) ($30,000), ($3,000) and ($207,000) tax effect, respectively

     (420      486         (65      827   

Amounts reclassified from accumulated Other comprehensive income, net of $107,000, $194,000 and $8,000 tax effect

     (170      —           (308      (13
  

 

 

    

 

 

    

 

 

    

 

 

 

Net current-period other comprehensive income (loss)

  (590   486      (373   814   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

$ (68 $ 252    $ (68 $ 252   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 3 – Noncontrolling Interest

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

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

Note 4 – Per Share Data

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 12,607 shares of common stock at both June 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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The computation of shares outstanding used in the calculation of basic and dilutive earnings per share are summarized below:

 

     Three Months Ended
June 30,
    

Six Months Ended

June 30,

 
     2015      2014      2015      2014  

Weighted average number of common shares outstanding

     6,945,102         7,483,762         6,953,176         7,483,887   

Effect of ESOP shares

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     6,945,102         7,483,762         6,953,176         7,483,887   

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

     6,945,102         7,483,762         6,953,176         7,483,887   
  

 

 

    

 

 

    

 

 

    

 

 

 

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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Note 5 – Investment Securities

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

 

June 30, 2015

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

Securities available for sale

           

U.S. Treasury

   $ 7,044       $ 75       $ —         $ 7,119   

U.S. Government agencies

     36,813         172         124         36,861   

GSE - Mortgage-backed securities and CMO’s

     33,484         120         439         33,165   

State and political subdivisions

     13,804         195         76         13,923   

Corporate bonds

     7,441         —           26         7,415   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

$   98,586    $    562    $  665    $   98,483   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

June 30, 2015

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

Securities held to maturity

           

U.S. Government agencies

   $ 2,046       $ —         $ 12       $ 2,034   

State and political subdivisions

     6,014         —           94         5,920   

Corporate bonds

     3,374         —           16         3,358   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

$   11,434    $   —      $  122    $   11,312   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 both June 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 June 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 June 30, 2015.

 

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

 

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

Gross proceeds from sales

   $ 24,596       $ —         $ 29,739       $ 328   
  

 

 

    

 

 

    

 

 

    

 

 

 

Realized gains from sales

   $ 277       $ —         $ 502       $ 21   

Realized losses from sales

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Realized gains

   $ 277       $ —         $ 502       $ 21   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2015 and December 31, 2014, securities available for sale with a carrying amount of $72.8 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 June 30, 2015 and December 31, 2014. We believe these unrealized losses on investment securities are a result of a volatile marker 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 June 30, 2015, the unrealized losses on available for sale securities less than twelve months related to two government agency bonds, eight government sponsored enterprise (GSE) mortgage backed securities and two corporate bonds. The Company had six 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 June 30, 2015, the unrealized losses on held to maturity securities related to one government agency security, two corporate bonds and nine 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 government sponsored enterprise (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  

June 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

   $ 10,442       $ 75       $ 7,324       $ 49       $ 17,766       $ 124   

GSE-Mortgage-backed securities and CMO’s

     15,661         201         7,919         238         23,580         439   

State & political subdivisions

     7,289         76         —           —           7,289         76   

Corporate bonds

     4,612         12         801         14         5,413         26   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 38,004       $ 364       $ 16,044       $ 301       $ 54,048       $ 665   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Less than 12 Months      12 Months or More      Total  

June 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

   $ 2,033       $ 12       $ —         $ —         $ 2,033       $ 12   

State & political subdivisions

     5,920         94         —           —           5,920         94   

Corporate Bonds

     3,358         16         —           —           3,358         16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $ 11,311       $ 122       $     —         $ —         $ 11,311       $ 122   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 six 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 June 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 June 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 June 30, 2015 by remaining contractual maturity are as follows:

 

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

Securities available for sale

        

U. S. Treasury

        

Due within twelve months

     3,013         3,087         2.80

Due after one but within five years

     4,031         4,032         1.13
  

 

 

    

 

 

    

 

 

 
  7,044      7,119      1.84
  

 

 

    

 

 

    

 

 

 

U.S. Government agencies

Due after one but within five years

  27,737      27,817      1.42

Due after five but within ten years

  1,476      1,483      1.49

Due after ten years

  7,600      7,561      1.58
  

 

 

    

 

 

    

 

 

 
  36,813      36,861      1.46
  

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

Due after one but within five years

  3,671      3,635      1.61

Due after five but within ten years

  4,534      4,575      2.31

Due after ten years

  25,279      24,955      1.86
  

 

 

    

 

 

    

 

 

 
  33,484      33,165      1.89
  

 

 

    

 

 

    

 

 

 

State and political subdivisions

Due within twelve months

  474      484      5.77

Due after one but within five years

  1,901      2,021      4.43

Due after five but within ten years

  2,832      2,850      4.43

Due after ten years

  8,597      8,568      3.77
  

 

 

    

 

 

    

 

 

 
  13,804      13,923      4.11
  

 

 

    

 

 

    

 

 

 

Corporate Bonds

Due within twelve months

  2,402      2,400      1.14

Due after one but within five years

  2,002      2,002      1.13

Due after five but within ten years

  3,037      3,013      1.27
  

 

 

    

 

 

    

 

 

 
  7,441      7,415      1.20
  

 

 

    

 

 

    

 

 

 

Total Securities available for sale

Due within twelve months

  5,889      5,971      2.36

Due after one but within five years

  39,342      39,507      1.56

Due after five but within ten years

  11,879      11,921      2.45

Due after ten years

  41,476      41,084      2.20
  

 

 

    

 

 

    

 

 

 
$ 98,586    $ 98,483      1.99
  

 

 

    

 

 

    

 

 

 

 

     June 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

     2,046         2,034         2.40
  

 

 

    

 

 

    

 

 

 
  2,046      2,034      2.40
  

 

 

    

 

 

    

 

 

 

State and political subdivisions

Due after five but within ten years

  6,014      5,920      2.73
  

 

 

    

 

 

    

 

 

 
  6,014      5,920      2.73
  

 

 

    

 

 

    

 

 

 

Corporate Bonds

Due after one but within five years

  1,677      1,669      2.73

Due after five but within ten years

  1,697      1,689      2.79
  

 

 

    

 

 

    

 

 

 
  3,374      3,358      2.76
  

 

 

    

 

 

    

 

 

 

Total Securities held for maturity

Due after one but within five years

  1,677      1,669      2.73

Due after five but within ten years

  9,757      9,643      2.67
  

 

 

    

 

 

    

 

 

 
$ 11,434    $ 11,312      2.68
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Note 6 – Loans Held for Investment

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

 

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

Commercial

     

Commercial

   $ 49,316       $ 47,418   

Real estate - commercial

     99,464         92,517   

Other real estate construction loans

     17,484         22,362   

Noncommercial

     

Real estate 1-4 family construction

     4,470         3,888   

Real estate - residential

     88,330         89,374   

Home equity

     47,088         46,360   

Consumer loans

     9,309         8,460   

Other loans

     1,619         481   
  

 

 

    

 

 

 
  317,080      310,860   

Less:

Allowance for loan losses

  (3,327   (3,738

Deferred loan (fees) costs, net

  (10   (7
  

 

 

    

 

 

 

Loans held for investment, net

$ 313,743    $ 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 six month period ended June 30, 2015 and 2014, respectively:

 

Commercial

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

Balance, beginning of period

   $ 1,794       $ 2,192       $ 1,716       $ 2,665   

Provision (recovery) charged to operations

     (228      (166      (289      (411

Charge-offs

     (21      (507      (61      (744

Recoveries

     8         51         187         60   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (charge-offs)

  (13   (456   126      (684
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

$ 1,553    $ 1,570    $ 1,553    $ 1,570   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Non-Commercial

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

Balance, beginning of period

   $ 1,935       $ 2,006       $ 2,022       $ 2,430   

Provision (recovery) charged to operations

     (7      105         (8      (74

Charge-offs

     (184      (28      (301      (297

Recoveries

     30         47         61         71   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (charge-offs)

  (154   19      (240   (226
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

$ 1,774    $ 2,130    $ 1,774    $ 2,130   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-15-


Table of Contents

Total

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

Balance, beginning of period

   $ 3,729       $ 4,198       $ 3,738       $ 5,095   

Provision (recovery) charged to operations

     (235      (61      (297      (485

Charge-offs

     (205      (535      (362      (1,041

Recoveries

     38         98         248         131   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (charge-offs)

  (167   (437   (114   (910
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

$ 3,327    $ 3,700    $ 3,327    $ 3,700   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

June 30, 2015

 

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

Commercial

   $ 28       $ 1,448       $ 1,525       $ 164,816       $ 1,553       $ 166,264   

Non-Commercial

     180         4,940         1,594         145,866         1,774         150,806   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 208    $ 6,388    $ 3,119    $ 310,682    $ 3,327    $ 317,070   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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:

June 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

   $ 32       $ —         $ 32       $ 49,284       $ 49,316       $ —     

Real estate - commercial

     75         276         351         99,113         99,464         —     

Other real estate construction

     —           219         219         17,265         17,484         —     

Real estate 1 -4 family construction

     —           —           —           4,470         4,470         —     

Real estate - residential

     1,462         879         2,341         85,979         88,320         —     

Home equity

     66         34         100         46,988         47,088         —     

Consumer loans

     29         —           29         9,280         9,309         —     

Other loans

     —           —           —           1,619         1,619         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 1,664    $ 1,408    $ 3,072    $ 313,998    $ 317,070    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-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 June 30, 2015 and December 31, 2014 is as follows:

 

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

Commercial

   $ —         $ —     

Real estate - commercial

     276         794   

Other real estate construction

     219         342   

Real estate 1 – 4 family construction

     —           —     

Real estate – residential

     879         1,097   

Home equity

     34         13   

Consumer loans

     —           —     

Other loans

     —           —     
  

 

 

    

 

 

 
$ 1,408    $ 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 June 30, 2015 and December 31, 2014:

June 30, 2015

 

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

Commercial

   $ 48,881       $ 380       $ 55       $ —         $ 49,316   

Real estate - commercial

     92,486         3,618         3,360         —           99,464   

Other real estate construction

     14,930         1,996         558         —           17,484   

Real estate 1 - 4 family construction

     4,381         89         —           —           4,470   

Real estate - residential

     75,504         9,879         2,937         —           88,320   

Home equity

     45,560         1,404         124         —           47,088   

Consumer loans

     8,894         409         6         —           9,309   

Other loans

     1,619         —           —           —           1,619   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 292,255    $ 17,775    $ 7,040    $ —      $ 317,070   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 June 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 June 30, 2015 and December 31, 2014:

June 30, 2015

 

     Performing      Non-
Performing
     Total  
     (dollars in thousands)  

Commercial

   $ 49,316       $ —         $ 49,316   

Real estate - commercial

     99,188         276         99,464   

Other real estate construction

     17,265         219         17,484   

Real estate 1 – 4 family construction

     4,470         —           4,470   

Real estate – residential

     87,441         879         88,320   

Home equity

     47,054         34         47,088   

Consumer loans

     9,309         —           9,309   

Other loans

     1,619         —           1,619   
  

 

 

    

 

 

    

 

 

 

Total

$ 315,662    $ 1,408    $ 317,070   
  

 

 

    

 

 

    

 

 

 

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 June 30, 2015 and December 31, 2014.

June 30, 2015

 

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

Commercial

   $ 84       $ 84       $ —         $ —     

Real estate - commercial

     1,092         953         139         24   

Other real estate construction

     810         219         53         4   

Real estate 1 -4 family construction

     17         —           17         1   

Real estate - residential

     4,847         1,756         3,091         179   

Home equity

     51         51         —           —     

Consumer loans

     25         25         —           —     

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 6,926    $ 3,088    $ 3,300    $ 208   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

Commercial

   $ 72       $ 2       $ 148       $ 2   

Real estate - commercial

     1,511         12         3,531         17   

Other real estate construction

     276         —           1,476         —     

Real estate 1-4 family construction

     17         —           197         1   

Real estate - residential

     5,209         50         6,614         58   

Home equity

     61         1         107         —     

Consumer loans

     26         —           94         —     

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 7,172    $ 65    $ 12,167    $ 78   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Commercial

   $ 81       $ 3       $ 225       $ 3   

Real estate - commercial

     1,551         28         4,466         35   

Other real estate construction

     316         1         1,646         —     

Real estate 1-4 family construction

     18         —           256         1   

Real estate - residential

     5,239         101         7,058         113   

Home equity

     57         1         210         —     

Consumer loans

     40         1         101         2   

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 7,302    $ 135    $ 13,962    $ 154   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2015, the Company had $4.7 million in TDR’s outstanding, of which all were on an accruing basis.

 

-21-


Table of Contents

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

 

     For the three months ended June 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

     —           —           —     
  

 

 

    

 

 

    

 

 

 
  —      $ —      $ —     
  

 

 

    

 

 

    

 

 

 

Other payment terms:

Commercial

  1    $ 48    $ 29   

Real estate - commercial

  —        —        —     

Other real estate construction

  —        —        —     

Real estate 1 – 4 family construction

  —        —        —     

Real estate – residential

  2      217      216   

Home equity

  —        —        —     

Consumer loans

  —        —        —     

Other loans

  —        —        —     
  

 

 

    

 

 

    

 

 

 
  3    $ 265    $ 245   
  

 

 

    

 

 

    

 

 

 

Total

  3    $ 265    $ 245   
  

 

 

    

 

 

    

 

 

 

 

     For the three months ended June 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         32   

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 
  1    $ 32    $ 32   
  

 

 

    

 

 

    

 

 

 

Other payment terms:

Commercial

  —      $ —      $ —     

Real estate - commercial

  1      112      112   

Other real estate construction

  —        —        —     

Real estate 1 – 4 family construction

  —        —        —     

Real estate – residential

  2      386      386   

Home equity

  —        —        —     

Consumer loans

  —        —        —     

Other loans

  —        —        —     
  

 

 

    

 

 

    

 

 

 
  3    $ 498    $ 498   
  

 

 

    

 

 

    

 

 

 

Total

  4    $ 530    $ 530   
  

 

 

    

 

 

    

 

 

 

 

-22-


Table of Contents
     Six months ended June 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      124   

Other real estate construction

  —        —        —     

Real estate 1 – 4 family construction

  —        —        —     

Real estate – residential

  4      406      398   

Home equity

  —        —        —     

Consumer loans

  —        —        —     

Other loans

  —        —        —     
  

 

 

    

 

 

    

 

 

 

Total

  6    $ 719    $ 551   
  

 

 

    

 

 

    

 

 

 

Total

  6    $ 719    $ 551   
  

 

 

    

 

 

    

 

 

 

 

     Six months ended June 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         32   

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

  1    $ 32    $ 32   
  

 

 

    

 

 

    

 

 

 

Other:

Commercial

  —      $ —      $ —     

Real estate - commercial

  1      112      112   

Other real estate construction

  —        —        —     

Real estate 1 – 4 family construction

  —        —        —     

Real estate – residential

  4      619      619   

Home equity

  —        —        —     

Consumer loans

  —        —        —     

Other loans

  —        —        —     
  

 

 

    

 

 

    

 

 

 

Total

  5    $ 731    $ 731   
  

 

 

    

 

 

    

 

 

 

Total

  6    $ 763    $ 763   
  

 

 

    

 

 

    

 

 

 

 

-23-


Table of Contents

During the twelve months ended June 30, 2015 and June 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 $186,000 in the allowance for loan loss as of June 30, 2015, as a direct result of these TDRs. At June 30, 2014, there was $60,000 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 June 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)  
June 30, 2015                        

Below market Interest rate

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

Extended payment Terms

     —           —           —           —           —           —           —           —     

Forgiveness of Principal

                       

Other

     —           —           9         1,298         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  —      $ —        9    $ 1,298      —      $ —        —      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
June 30, 2014

Below market Interest rate

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

Extended payment Terms

  —        —        1      32      —        —        —        —     

Forgiveness of Principal

Other

  —        —        10      1,359      —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  —      $ —        11    $ 1,391      —      $ —        —      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

Note 9 - Commitments and Contingencies

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

The bank’s risk of loss with 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 June 30, 2015, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

     (dollars in thousands)  

Commitments to extend credit

   $ 77,407   

Credit card commitments

     8,840   

Standby letters of credit

     2,375   
  

 

 

 

Total commitments

$ 88,622   
  

 

 

 

 

-24-


Table of Contents

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.

 

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

Servicing assets are evaluated for impairment based upon the fair value. Fair value is determined based upon discounted cash flows using market-based assumptions. Servicing assets are recorded in Level 3.

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

 

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

Securities available for sale:

           

US Treasury

   $ 7,119       $ 7,119       $ —         $ —     

US Government Agencies

     36,861         —           36,861         —     

GSE - Mortgage-backed securities and CMO’s

     33,165         —           33,165         —     

State and political subdivisions

     13,923         —           13,923         —     

Corporate bonds

     7,415         —           7,415         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

$ 98,483    $ 7,119    $ 91,364    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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 U.S. GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value less cost of sell at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of June 30, 2015 and December 31, 2014:

 

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

Impaired loans

   $ 3,503       $ —         $ —         $ 3,503   

Other real estate owned

     3,518         —           —           3,518   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 7,021       $ —         $ —         $ 7,021   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

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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.

The fair value estimates presented at June 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 an asset could be sold at or the price at which a liability could be settled. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of June 30, 2015 and December 31, 2014:

June 30, 2015

 

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

FINANCIAL ASSETS

              

Cash and cash equivalents

   $ 51,193       $ 51,248       $ 47,209       $ 4,039       $ —     

Securities available for sale

     98,483         98,483         7,119         91,364         —     

Securities held to maturity

     11,434         11,312         —           11,312         —     

Loans held for investment, net

     313,743         316,732         —           —           316,732   

Loans held for sale

     414         414         —           414         —     

Restricted stock

     1,040         1,040         1,040         —           —     

Accrued interest receivable

     1,456         1,456         —           —           1,456   

FINANCIAL LIABILITIES

              

Deposits

   $ 453,034       $ 437,196       $ —         $ —         $ 437,196   

Short-term borrowings

     4,232         4,232         —           4,232         —     

Long-term borrowings

     19         19         —           19         —     

Junior subordinated debt

     9,534         9,695         —           —           9,695   

Accrued interest payable

     181         181         —           —           181   

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   

 

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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 and Level 2.

 

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

 

    Securities held to maturity – Securities held to maturity are carried at amortized cost and are recorded in Level 2. 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 3. The fair value of deposits does not consider any customer related intangibles.

 

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

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

Note 12 – Recent Accounting Pronouncements

In February 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.

 

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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 U.S. GAAP by issuing ASUs to simplify the guidance while retaining or improving the usefulness of information 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 $1.9 million in foreclosed residential real estate and $820,000 of residential real estate in process of foreclosure at June 30, 1015.

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

Reclassification

Certain amounts in the 2014 financial statements have been reclassified to conform to the 2015 presentation. These reclassifications do not have an impact on net income or shareholders’ equity.

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.

 

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Comparison of Financial Condition at June 30, 2015 and December 31, 2014.

During the three months ended June 30, 2015, the Company’s total assets decreased $2.7 million, from $518.5 million to $515.8 million.

Cash and cash equivalents increased $402,000 during the six months ended June 30, 2015. Cash and due from banks decreased $1.0 million, while interest-earning deposits with banks increased $1.4 million.

Investment securities consist of securities available for sale and securities held to maturity. Investment securities decreased $8.4 million to $109.9 million for the period ended June 30, 2015. During the first six 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 net 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 six 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 June 30, 2015, the Company had net unrealized losses on securities available for sale of $103,000.

Loans held for investment increased from $310.9 million to $317.1 million, an increase of $6.2 million. The real estate one-to-four family and other real estate construction loan segments of the loan portfolio decreased during the first six months of 2015 with the other real estate construction experiencing the largest decline of 21.8%, or $4.9 million. The Company experienced growth in the remaining segments of its loan portfolio during the first six months of 2015 with the real estate one-to-four family construction segment having the largest increase of 15.0%, primarily consisting of owner occupied properties. Loans held for sale decreased 80.7%, 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 six months of 2015. The allowance for loan losses was $3.3 million at June 30, 2015, which represented 1.05% of the loan portfolio.

Other changes in our consolidated assets are related to premises and equipment, interest receivable, restricted stock, bank owned life insurance, other real estate owned, prepaid assets and other assets. Bank owned life insurance increased $59,000, while premises and equipment decreased $37,000. Accrued interest receivable declined $291,000. 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 six months of 2015. Other real estate owned increased $221,000. During the six months ended June 30, 2015, the Company sold ten pieces of property totaling $638,000. The Company recorded net valuation write-down adjustments of $92,000. These declines were offset by the addition of twenty-five pieces of real estate foreclosed on totaling $951,000. The Company foreclosed on one loan relationship resulting in the addition of twenty-four of the aforementioned twenty-five pieces of property. Other assets increased $323,000 during the first six months ended June 30, 2015.

Customer deposits, our primary funding source, experienced a $3.4 million decrease during the six month period ended June 30, 2015, decreasing from $456.4 million to $453.0 million. Demand noninterest bearing checking accounts increased $11.0 million and savings deposits increased $325,000. This increase was offset by declines in interest checking and money market accounts of $11.0 million, time deposits $250,000 and over of $819,000 and other time deposits of $2.8 million.

 

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Total borrowings decreased $458,000 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 $5.6 million at June 30, 2015, an increase of $800,000. The increase in income taxes payable was the primary factor 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 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 with in 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 June 30, 2015.

At June 30, 2015, total shareholders’ equity was $43.2 million, an increase of $982,000 from December 31, 2014. Net income for the six month period was $1.3 million. Unrealized gains and losses on investment securities, net of tax, decreased $373,000. 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 59,030 shares of common stock totaling $223,000. Of the shares repurchased, 29,735 shares were related to the ESOP put option. The Company paid $293,000 in preferred stock dividends attributed to noncontrolling interest.

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

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $660,000 for the three months ended June 30, 2015, as compared to $596,000 for the three months ended June 30, 2014, an increase of $64,000. Net income available to common shareholders was $513,000 or $0.07 per common share for the three months ended June 30, 2015, compared to $449,000 or $0.06 per common share for the three months ended June 30, 2014. Net income available to common shareholders is net income less any dividends on the aforementioned noncontrolling interest.

 

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Net Interest Income

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

Net interest income for both the three months ended June 30, 2015 and June 30, 2014 was $4.0 million. During the current quarter, growth in the volume of interest-earning assets outpaced the volume of interest-bearing liabilities by $66,000. The average yield on our interest–earning assets decreased twenty-four basis points to 3.86%, while the average rate we paid for our interest-bearing liabilities decreased four basis points. The aforementioned changes resulted in a decrease of twenty basis points in our interest rate spread, from 3.59% in 2014 to 3.39% in 2015. Our net interest margin was 3.49% and 3.68% 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 June 30, 2015 and 2014:

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended June 30,

 

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

Interest-earning assets:

                

Taxable securities

   $ 100,597       $ 100,666       $ 394         434         1.57     1.73

Non-taxable securities

     12,291         10,169         87         81         4.58     5.12

Short-term investments

     46,917         43,745         42         39         0.36     0.36

Taxable loans

     301,344         296,111         3,836         3.998         5.11     5.42

Non-taxable loans (1)

     14,021         16,176         102         108         4.70     4.30
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest-earning assets

  475,170      466,867      4,461      4,660      3.86   4.10

Interest-bearing liabilities:

Interest-bearing deposits

  363,670      368,837      294      340      0.32   0.37

Short-term borrowed funds

  3,113      4,906      15      9      1.93   0.74

Long-term debt

  10,844      9,566      137      138      5.07   5.79
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest bearing liabilities

  377,627      383,309      446      487      0.47   0.51

Net interest spread

$ 97,543    $ 83,558    $ 4,015    $ 4,173      3.39   3.59
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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

  3.49   3.68
              

 

 

   

 

 

 

 

(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 provision for loan losses was a recovery of ($235,000) for the three months ending June 30, 2015 compared to a recovery of ($61,000) for the same period in 2014. There were net loan charge-offs of $167,000 for the three months ended June 30, 2015, as compared with net loan charge-offs of $437,000 during the same period of 2014. Refer to the Asset Quality discussion on page 37 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 revenue base is of major importance in our long term success. Total noninterest income increased $302,000 for the three month period ending June 30, 2015 as compared to the same period in 2014. Income from mortgage loan sales increased $235,000 from $257,000 for the quarter ended June 30, 2014 to $492,000 for the same period in 2015. Service charges on deposit accounts produced revenue of $311,000, a decrease of $48,000 for the three months ended June 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 an increase of $63,000 or 6.5% for the comparable three month period, primarily due to an increase in brokerage commissions and asset management fees. The Company realized gains on the sale of other real estate owned of $16,000 for the three months ended June 30, 2015 compared to realized gains of $93,000 for the same period in 2014. The Company also realized a gain of $277,000 on the sale of investment securities during the second quarter of 2015.

Noninterest Expense

Noninterest expense for the quarter ended June 30, 2015 was $5.5 million compared to $5.3 million for the same period of 2014, an increase of $202,000. Salaries and employee benefits, the largest component of noninterest expense, increased $246,000 for the quarter ending June 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 $44,000 for the three months ending June 30, 2015. The major factor related to the decrease in foreclosed real estate expense was a decrease in write-downs on properties held in other real estate owned. These write downs are attributed to updated appraisals and the lowering of list prices. Total write-downs for the three month period in 2015 were $48,000 compared to $63,000 for the same period in 2014. Professional fees and services decreased $60,000 during the three months ending June 30, 2015 to $133,000 as compared to $193,000 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 fees. Other noninterest expense increased $35,000 for the comparable three month period. The table below reflects the composition of other noninterest expense.

Other noninterest expense

 

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

Postage

   $ 56       $ 47   

Telephone and data lines

     39         42   

Loan collection expense

     48         87   

Shareholder relations expense

     33         50   

Dues and subscriptions

     47         43   

Other

     426         345   
  

 

 

    

 

 

 

Total

$ 649    $ 614   
  

 

 

    

 

 

 

Income Tax Expense

The Company had income tax expense of $303,000 for the three months ended June 30, 2015 resulting in an effective rate of 31.46% compared to income tax expense of $251,000 and an effective rate of 29.63% in the 2014 period.

 

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Comparison of Results of Operations For the Six Months Ended June 30, 2015 and 2014.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $1.3 million for the six months ended June 30, 2015, as compared to $1.1 million for the six months ended June 30, 2014, an increase of $164,000. Net income available to common shareholders was $1.0 million or $0.14 per common share for the six months ended June 30, 2015, compared to $840,000 or $0.11 per common share for the six months ended June 30, 2014. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.

Net Interest Income

Net interest income for both the six months ended June 30, 2015 and June 30, 2014 was $8.0 million. During the six months ending June 30, 2015, the volume of interest-earning assets outpaced the growth of our interest-bearing liabilities by $223,000. The average yield on our interest–earning assets declined twenty-one basis points to 3.86%, while the average rate we paid for our interest-bearing liabilities decreased seven basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve adjusts interest rates, while interest-bearing time deposits adjust at the time of maturity. The aforementioned changes resulted in a decrease of fourteen basis points in our interest rate spread to 3.39% for the first six months of 2015, compared to 3.53% for the first six months of 2014. Our net interest margin was 3.49% and 3.62% for the comparable six 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 six months ended June 30, 2015 and 2014:

Average Balance Sheet and Net Interest Income Analysis

For the Six Months Ended June 30,

 

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

Interest-earning assets:

                

Taxable securities

   $ 104,624       $ 97,649       $ 811       $ 845         1.56     1.75

Nontaxable securities (1)

     12,728         9,151         169         145         4.31     5.16

Short-term investments

     47,147         53,447         79         84         0.34     0.32

Taxable loans

     298,674         293,022         7,646         7,944         5.16     5.47

Non-taxable loans (1)

     13,491         15,780         202         221         4.87     4.55
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest-earning assets

  476,664      469,049      8,907      9,239      3.86   4.07

Interest-bearing liabilities:

Interest-bearing deposits

  368,433      371,617      593      713      0.32   0.39

Short-term borrowed funds

  3,508      5,416      27      27      1.55   1.01

Long-term debt

  10,703      10,350      272      295      5.12   5.75
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest bearing liabilities

  382,644      387,383      892      1,035      0.47   0.54
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net interest spread

$ 94,020    $ 81,666    $ 8,015    $ 8,204      3.39   3.53
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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

  3.49   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 in 2015.

 

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Provision and Allowance for Loan Losses

The Company recovered $(297,000) for the six months ending June 30, 2015 compared to $(485,000) recovered for the same period in 2014. There were net loan charge-offs of $114,000 for the six months ended June 30, 2015 as compared with net loan charge-offs of $910,000 during the same period of 2014. Refer to the Asset Quality discussion on page 37 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like all financial institutions, diversification of our earnings base is of major importance in our long term success. Total noninterest income increased $779,000 for the six month period ending June 30, 2015 as compared to the same period in 2014. Income from mortgage loan sales was $993,000 for the six months ended June 30, 2015 compared to $419,000 for the same period in 2014. Service charges on deposit accounts produced revenue of $641,000 for the six months ended June 30, 2014, a decrease of $96,000. The primary contributing factor is a decrease in NSF fees was changes in the regulatory governance. Other service fees and commissions experienced a 5.7% increase for the comparable six month period. This increase was directly related to brokerage commissions and asset management fees increasing. The Company realized losses on sale of other assets of $5,000 for the six months ended June 30, 2015 compared to $240,000 for the same period in 2014. The Company did realize a gain of $158,000 on the sale of a piece of property during the first six months of 2014. Gains realized on the sale of securities were $502,000 for the first six months in 2015 compared to $21,000 for the same period in 2014.

Noninterest Expense

Noninterest expense for the six months ended June 30, 2015 was $10.7 million compared to $10.6 million for the same period of 2014; an increase of $181,000. Salaries and employee benefits, the largest component of noninterest expense, increased $332,000 for the six months ending June 30, 2015. The majority of this increase is attributable to the increase in staffing related to the expansion of the mortgage department. Professional fees and services decreased $66,000 during the six months ending June 30, 2015 as compared to 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 collections fees. FDIC deposit insurance premiums also declined $22,000 for the comparable periods. Foreclosed real estate expense decreased $153,000 for the six months ending June 30, 2015 compared to same period in 2014. The major factor related to the decrease in foreclosed real estate expense was expenses related to a prior year sale of other real estate owned totaling $92,000 that occurred during first quarter 2014. Write-downs on properties held in other real estate owned are attributed to updated appraisals and the lowering of list prices, which increased from $72,000 for the six month period ending June 30, 2014 to $81,000 for the same period in 2015. Other noninterest expense decreased $14,000 for the comparable six month periods. The table below reflects the composition of other noninterest expense.

 

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Other noninterest expense

 

     Six Months Ended  
     June 30,  
     2015      2014  
     (dollars in thousands)  

Postage

   $ 102       $ 98   

Telephone and data lines

     84         76   

Loan collection expense

     48         87   

Shareholder relations expense

     88         112   

Dues and subscriptions

     85         76   

Other

     733         705   
  

 

 

    

 

 

 

Total

$ 1,140    $ 1,154   
  

 

 

    

 

 

 

Income Tax Expense

The Company had income tax expense of $576,000 for the six months ended June 30, 2015 resulting in an effective tax rate of 30.75%, compared to income tax expense of $519,000 and an effective rate of 31.42% in the 2014 period.

Asset Quality

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

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

The allowance for loan losses represents management’s best estimate of an appropriate amount to provide for probable credit risk inherent in the loan portfolio in the normal course of business. While management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and

 

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

At June 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 $6.4 million compared to $7.6 million at December 31, 2014, a net decrease of $1.2 million. Total nonaccrual loans, which are a component of impaired loans, decreased from $2.2 million at December 31, 2014 to $1.4 million at June 30, 2015. During the first six months of 2015, ten relationships totaling $983,000 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 $247,000 being charged off, two relationships in the amount of $952,000 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 $559,000.

The allowance expressed as a percentage of gross loans held for investment decreased fifteen basis points from 1.20% at December 31, 2014 to 1.05% at June 30, 2015. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 1.08% at December 31, 2014 and 1.00% at June 30, 2015, while the individually evaluated allowance as a percentage of individually evaluated loans decreased from 6.04% to 3.26% 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 beacon scores that are one of the components used within the allowance model semi-annually, during the first and third quarters. The trend of continued improvement in beacon scores continued with the update during the first quarter. The average beacon score increased eight points from 724 to 732 during the first half of the year.

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 June 30, 2015.

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 $221,000 during the first half of 2015. The Company sold ten pieces of foreclosed property totaling $638,000 realizing a loss of $6,000. The Company also had write downs and changes in reserves totaling $92,000 on the remaining existing property. The Company foreclosed on two loan relationships totaling $951,000 and added twenty-five pieces of property to other real estate owned.

 

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Restructured loans at June 30, 2015 totaled $4.7 million compared to $5.3 million at December 31, 2014 and are included in impaired loans. At June 30, 2015, all restructured loans were on an accruing basis.

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

Nonperforming Assets

(dollars in thousands)

 

     June 30,     December 31,  
     2015     2014  

Nonperforming assets:

    

Loans past due 90 days or more

   $ —        $ —     

Nonaccrual loans

     1,408        2,246   

Other real estate owned

     6,086        5,865   
  

 

 

   

 

 

 

Total nonperforming assets

$ 7,494    $ 8,111   
  

 

 

   

 

 

 

Allowance for loans losses

$ 3,327    $ 3,738   

Nonperforming loans to total loans

  0.44   0.72

Allowance for loan losses to total loans

  1.05   1.20

Nonperforming assets to total assets

  1.45   1.56

Allowance for loan losses to nonperforming loans

  236.40   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 subsidiary bank have multiple funding sources, in addition to deposits, that can be used to increase liquidity and provide additional financial flexibility. These sources are the subsidiary bank’s established federal funds lines with correspondent banks aggregating $15.8 million at June 30, 2015, with available credit of $15.8 million; established borrowing relationships with the Federal Home Loan Bank, with available credit of $54.9 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of $20.3 million and the issuance of commercial paper. The Company has also secured long-term debt from other sources. Total debt from these sources aggregated $13.8 million at June 30, 2015, compared to $14.2 million at December 31, 2014.

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

 

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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 subsidiary bank have each maintained capital levels exceeding minimum levels for “well capitalized” banks and bank holding companies. The Company expects to continue to exceed minimum capital requirements without altering current operations or strategy.

As previously discussed, the Company’s subsidiary bank has a net total of $10.6 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 $10.5 million is presented as noncontrolling interest at the Company level and does qualify as Tier 1 capital at the Company. At June 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 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

 

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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 second 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 to ensuring that the Company’s systems evolve with its business.

 

Part II. OTHER INFORMATION

 

Item 1. Legal Proceedings

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

 

Item 1A. Risk Factors

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

 

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 June 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)

 

April 1, 2015 Through

April 30, 2015

     —         $ 0.00         —         $ —     

May 1, 2015 Through

May 31, 2015

     —         $ 0.00         —         $ —     

June 1, 2015 Through

June 30, 2015

     45,925       $ 3.97         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  45,925    $ 3.97      —      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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)

  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)

 

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  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: July 28, 2015 By:

/s/ Roger L. Dick

Roger L. Dick
President and Chief Executive Officer
Date: July 28, 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.
(8) Incorporated by reference to Registrant’s Current Report on Form 8-K dated June 30, 2015.

 

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