Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2015

OR

 

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

For the transition period from                      to                     .

COMMISSION FILE NUMBER 000-22062

 

 

UWHARRIE CAPITAL CORP

(Exact name of registrant as specified in its charter)

 

 

 

NORTH CAROLINA		56-1814206
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

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

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

N/A

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

 

 

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

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

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

 

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

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

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

 

 

 

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Table of Contents

 

				Page No.
Part I.		FINANCIAL INFORMATION
Item 1 -		Financial Statements (Unaudited)
		Consolidated Balance Sheets September 30, 2015 and December 31, 2014			3
		Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and 2014			4
		Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2015 and 2014			5
		Consolidated Statements of Changes in Shareholders’ Equity Nine Months Ended September 30, 2015			6
		Consolidated Statements of Cash Flows Nine Months Ended September 30, 2015 and 2014			7
		Notes to Consolidated Financial Statements			8
Item 2 -		Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3 -		Quantitative and Qualitative Disclosures about Market Risk			41
Item 4 -		Controls and Procedures			41
Part II.		OTHER INFORMATION
Item 1 -		Legal Proceedings			42
Item 1A -		Risk Factors			42
Item 2 -		Unregistered Sales of Equity Securities and Use of Proceeds			43
Item 3 -		Defaults Upon Senior Securities			43
Item 4 -		Mine Safety Disclosures			43
Item 5 -		Other Information			43
Item 6 -		Exhibits			43
		Exhibit Index			46

 

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Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

 

Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements

 

		September 30, 2015 (Unaudited)				December 31, 2014*
		(dollars in thousands)
ASSETS
Cash and due from banks		$	6,685			$	6,807
Interest-earning deposits with banks			51,585				43,984
Securities available for sale, at fair value			96,927				112,824
Securities held to maturity, at amortized cost (fair value $11,276 and $5,450, respectively)			11,274				5,496
Loans held for sale			418				2,147
Loans:
Loans held for investment			322,816				310,853
Less allowance for loan losses			(2,961	)			(3,738	)
Net loans held for investment			319,855				307,115
Premises and equipment, net			14,752				14,858
Interest receivable			1,466				1,747
Restricted stock			1,040				1,038
Bank owned life insurance			6,733				6,645
Other real estate owned			5,942				5,865
Prepaid assets			958				969
Other assets			9,461				8,969
Total assets		$	527,096			$	518,464
LIABILITIES
Deposits:
Demand noninterest-bearing		$	92,753			$	80,069
Interest checking and money market accounts			243,638				243,116
Savings deposits			40,001				39,091
Time deposits, $250,000 and over			8,139				9,865
Other time deposits			77,818				84,294
Total deposits			462,349				456,435
Short-term borrowed funds			5,232				4,685
Long-term debt			9,550				9,558
Interest payable			176				180
Other liabilities			5,860				4,783
Total liabilities			483,167				475,641
Off balance sheet items, commitments and contingencies (Note 9)
Redeemable common stock held by the Employee Stock Ownership Plan (ESOP) (Note 4)			—				561
SHAREHOLDERS’ EQUITY
Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and outstanding 6,875,586 and 6,961,484			8,594				8,702
Common stock dividend distributable			172				—
Additional paid-in capital			12,401				11,712
Undivided profits			11,874				10,974
Accumulated other comprehensive income			299				305
Total Uwharrie Capital shareholders’ equity			33,340				31,693
Noncontrolling interest			10,589				10,569
Total shareholders’ equity			43,929				42,262
Total liabilities and shareholders’ equity		$	527,096			$	518,464

 

(*)	Derived from audited consolidated financial statements

See accompanying notes

 

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
		(in thousands, except share and per share data)
Interest Income
Loans, including fees		$	3,936			$	4,120			$	11,784			$	12,285
Investment securities
US Treasury			33				94				184				281
US Government agencies and corporations			331				310				991				968
State and political subdivisions			121				87				290				232
Corporate bonds			—				7				—				7
Interest-earning deposits with banks and federal funds sold			47				36				126				120
Total interest income			4,468				4,654				13,375				13,893
Interest Expense
Interest checking and money market accounts			69				70				207				228
Savings deposits			12				11				33				47
Time deposits, $250,000 and over			25				117				49				82
Other time deposits			176				131				586				685
Short-term borrowed funds			17				2				44				29
Long-term debt			139				139				411				434
Total interest expense			438				470				1,330				1,505
Net interest income			4,030				4,184				12,045				12,388
Provision for (recovery of) loan losses			(323	)			(271	)			(620	)			(756	)
Net interest income after provision (recovery of) for loan losses			4,353				4,455				12,665				13,144
Noninterest Income
Service charges on deposit accounts			338				367				979				1,104
Other service fees and commissions			1,040				986				3,055				2,893
Gain/(loss) on sale of securities (includes reclassification of $5,000, $502,000 and $26,000 from accumulated other comprehensive income)			—				5				502				26
Gain (loss) on fixed assets and other assets			120				231				115				471
Income from mortgage loan sales			706				282				1,699				701
Other income			161				92				309				283
Total noninterest income			2,365				1,963				6,659				5,478
Noninterest Expense
Salaries and employee benefits			3,460				3,093				9,778				9,079
Net occupancy expense			272				278				824				823
Equipment expense			184				164				524				511
Data processing costs			194				181				553				551
Office supplies and printing			58				74				160				202
Foreclosed real estate expense			259				610				533				1,037
Professional fees and services			173				210				457				560
Marketing and donations			221				183				592				476
Electronic banking expense			265				214				775				689
Software amortization and maintenance			142				140				426				396
FDIC insurance			85				109				284				330
Other noninterest expense			621				572				1,761				1,726
Total noninterest expense			5,934				5,828				16,667				16,380
Income before income taxes			784				590				2,657				2,242
Income taxes (includes reclassification of $2,000, $194,000 and $10,000 from accumulated other other comprehensive income)			223				191				799				710
Net income		$	561			$	399			$	1,858			$	1,532
Consolidated net income		$	561				399				1,858				1,532
Less: net income attributable to noncontrolling Interest			(149	)			(149	)			(442	)			(442	)
Net income attributable to Uwharrie Capital Corp			412				250				1,416				1,090
Dividends - preferred stock			—				—				—				—
Net income available to common shareholders		$	412			$	250			$	1,416			$	1,090
Net income per common share
Basic		$	0.06			$	0.03			$	0.20			$	0.15
Diluted		$	0.06			$	0.03			$	0.20			$	0.15
Weighted average shares outstanding
Basic			7,034,958				7,456,372				7,073,046				7,473,496
Diluted			7,034,958				7,456,372				7,073,046				7,473,496

See accompanying notes

 

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
		(in thousands)
Net Income		$	561			$	399			$	1,858			$	1,532
Other comprehensive income (loss)
Unrealized gain (loss) on available for sale securities			555				(461	)			493				792
Related tax effect			(188	)			156				(191	)			(270	)
Reclassification of (gain) loss recognized in net income			—				(5	)			(502	)			(26	)
Related tax effect			—				2				194				10
Total other comprehensive income (loss)			367				(308	)			(6	)			506
Comprehensive income (loss)			928				91				1,852				2,038
Less: Comprehensive income (loss) attributable to noncontrolling interest			(149	)			(149	)			(442	)			(442	)
Comprehensive income (loss) attributable to Uwharrie Capital		$	779			$	(58	)		$	1,410			$	1,596

See accompanying notes

 

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

 

 

		Number Common Shares Issued				Common Stock				Common Stock Dividend Distributable				Additional Paid-in Capital				Undivided Profits				Accumulated Other Comprehensive Income (Loss)				Non Controlling Interest				Total
		(dollars in thousands, except share data)
Balance, December 31, 2014			6,961,484			$	8,702			$	—			$	11,712			$	10,974			$	305			$	10,569			$	42,262
Net Income			—				—				—				—				1,416				—				442				1,858
2% stock dividend declaration			—				—				172				344				(516	)			—				—				—
Repurchase of common stock			(85,898	)			(108	)			—				(216	)			—				—				—				(324	)
Other comprehensive Income			—				—				—				—				—				(6	)			—				(6	)
Reclass from mezzanine capital			—				—				—				561				—				—				—				561
Record preferred stock dividend
Series B (noncontrolling interest)			—				—				—				—				—				—				(311	)			(311	)
Record preferred stock dividend
Series C (noncontrolling interest)			—				—				—				—				—				—				(111	)			(111	)
Balance, September 30, 2015			6,875,586			$	8,594			$	172			$	12,401			$	11,874			$	299			$	10,589			$	43,929

See accompanying notes

 

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

		Nine Months Ended September 30,
		2015				2014
		(dollars in thousands)
Cash flows from operating activities
Net income		$	1,858			$	1,532
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation			690				687
Net amortization of security premiums/discounts AFS			767				746
Net amortization of security premiums/discounts HTM			102				—
Net amortization of mortgage servicing rights			513				532
Impairment of foreclosed real estate			217				574
Recovery of loan losses			(620	)			(756	)
Net realized gain on sales / calls available for sales securities			(502	)			(26	)
Income from mortgage loan sales			(1,699	)			(701	)
Proceeds from sales of loans held for sale			48,436				27,278
Origination of loans held for sale			(45,008	)			(26,840	)
Gain on sale of premises, equipment and other assets			—				(146	)
Increase in cash surrender value of life insurance			(88	)			(99	)
Gain on sales of foreclosed real estate			(114	)			(325	)
Release of ESOP shares			—				30
Net change in interest receivable			281				249
Net change in other assets			(582	)			(60	)
Net change in interest payable			(4	)			(42	)
Net change in other liabilities			1,077				1,007
Net cash provided by operating activities			5,324				3,640
Cash flows from investing activities
Proceeds from sales, maturities and calls of securities available for sale			40,533				10,113
Proceeds from sales, maturities and calls of securities held to maturity			154				—
Purchase of securities available for sale			(24,910	)			(23,711	)
Purchase of securities held to maturity			(6,034	)			—
Net (increase) in loans			(13,923	)			(3,957	)
Proceeds from sales of premises, equipment and other assets			—				273
Purchase of premises and equipment			(584	)			(2,041	)
Proceeds from sales of foreclosed real estate			1,623				1,517
Investment in other assets			(409	)			(250	)
Net decrease in restricted stock			(2	)			146
Net cash used in investing activities			(3,552	)			(17,910	)
Cash flows from financing activities
Net increase in deposit accounts			5,914				554
Net increase (decrease) in short-term borrowed funds			547				(1,735	)
Net decrease in long-term debt			(8	)			(1,602	)
Repurchase of common stock			(324	)			(113	)
Dividend and cost accretion on noncontrolling interest			(422	)			(422	)
Cash paid for fractional shares			—				(4	)
Net cash provided (used in) in financing activities			5,707				(3,322	)
Increase (decrease) in cash and cash equivalents			7,479				(17,592	)
Cash and cash equivalents, beginning of period			50,791				72,394
Cash and cash equivalents, end of period		$	58,270			$	54,802
Supplemental Disclosures of Cash Flow Information
Interest paid		$	1,334			$	1,547
Income taxes paid			451				21
Supplemental Schedule of Non-Cash Activities
Net change in fair value securities available for sale, net of tax		$	(6	)		$	506
Loans transferred to foreclosed real estate			1,803				454
Mortgage servicing rights capitalized			488				274
Net change in ESOP liability			(561	)			104
Exchange of unearned ESOP shares for ESOP debt			—				973

See accompanying notes

 

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 - Basis of Presentation

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

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

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

Use of Estimates

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

Note 2 – Comprehensive Income (Loss)

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

 

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

 

		Unrealized holding gains on available-for-sale securities  (net)
		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
		(dollars in thousands)
Beginning Balance		$	(68	)		$	252			$	305			$	(562	)
Other Comprehensive income (loss) before reclassifications, net of $188,000 $28,000, ($191,000) and ($197,000) tax effect, respectively			367				(305	)			302				522
Amounts reclassified from accumulated Other comprehensive income, net of $2,000, $194,000 and $10,000 tax effect			—				(3	)			(308	)			(16	)
Net current-period other comprehensive Income (loss)			367				(308	)			(6	)			506
Ending Balance		$	299			$	(56	)		$	299			$	(56	)

Note 3 – Noncontrolling Interest

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

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

Note 4 – Per Share Data

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

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

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

 

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

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Weighted average number of common shares outstanding			7,034,958				7,456,372				7,073,046				7,473,496
Effect of ESOP shares			—				—				—				—
Adjusted weighted average number of common shares used in computing basic net income per common share			7,034,958				7,456,372				7,073,046				7,473,496
Effect of dilutive stock options			—				—				—				—
Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per common share			7,034,958				7,456,372				7,073,046				7,473,496

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

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

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

The Company filed a request for a favorable determination letter from the Internal Revenue Service as to the tax-qualified status of the ESOP on its termination. All allocated shares were distributed to the ESOP participants prior to December 31, 2014.

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

 

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Note 5 – Investment Securities

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

 

September 30, 2015		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(dollars in thousands)
Securities available for sale
U.S. Treasury		$	7,038			$	79			$	—			$	7,117
U.S. Government agencies			36,536				266				54				36,748
GSE - Mortgage-backed securities and CMO’s			31,715				141				213				31,643
State and political subdivisions			13,748				277				6				14,019
Corporate bonds			7,437				—				37				7,400
Total securities available for sale		$	96,474			$	763			$	310			$	96,927
September 30, 2015		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(dollars in thousands)
Securities held to maturity
U.S. Government agencies		$	1,915			$	—			$	1			$	1,914
State and political subdivisions			6,003				14				22				5,995
Corporate bonds			3,356				11				—				3,367
Total securities held to maturity		$	11,274			$	25			$	23			$	11,276
December 31, 2014		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(dollars in thousands)
Securities available for sale
U.S. Treasury		$	19,030			$	362			$	6			$	19,386
U.S. Government agencies			50,969				96				290				50,775
GSE - Mortgage-backed securities and CMO’s			27,748				133				309				27,572
State and political subdivisions			11,575				505				—				12,080
Corporate bonds			3,040				—				29				3,011
Total securities available for sale		$	112,362			$	1,096			$	634			$	112,824
December 31, 2014		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(dollars in thousands)
Securities held to maturity
U.S. Government agencies		$	2,085			$	—			$	32			$	2,053
Corporate bonds			3,411				—				14				3,397
Total securities held to maturity		$	5,496			$	—			$	46			$	5,450

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

 

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

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
		(dollars in thousands)
Gross proceeds from sales and calls		$	—			$	4,405			$	29,739			$	4,733
Realized gains from sales and calls		$	—			$	5			$	502			$	26
Realized losses from sales and calls			—				—				—				—
Net Realized gains		$	—			$	5			$	502			$	26

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

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

 

		Less than 12 Months								12 Months or More								Total
September 30, 2015		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(dollars in thousands)
Securities available for sale temporary impairment
U.S. Gov’t agencies		$	1,513			$	4			$	4,648			$	50			$	6,161			$	54
GSE-Mortgage-backed securities and CMO’s			13,532				65				7,686				148				21,218				213
State & political subdivisions			466				6				—				—				466				6
Corporate bonds			6,601				21				799				16				7,400				37
Total securities available for sale		$	22,112			$	96			$	13,133			$	214			$	35,245			$	310

 

		Less than 12 Months								12 Months or More								Total
September 30, 2015		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(dollars in thousands)
Held to maturity temporary impairment
U.S. Gov’t agencies		$	1,914			$	1			$	—			$	—			$	1,914			$	1
State & political subdivisions			3,209				22				—				—				3,209				22
Total securities held to maturity		$	5,123			$	23			$	—			$	—			$	5,123			$	23

 

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		Less than 12 Months								12 Months or More								Total
December 31, 2014		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(dollars in thousands)
Securities available for sale temporary impairment
U.S. Treasury		$	3,143			$	6			$	—			$	—			$	3,143			$	6
U.S. Gov’t agencies			9,690				23				17,776				267				27,466				290
GSE-Mortgage-backed securities and CMO’s			1,990				4				14,168				305				16,158				309
Corporate bonds			3,011				29				—				—				3,011				29
Total securities available for sale		$	17,834			$	62			$	31,944			$	572			$	49,778			$	634

 

		Less than 12 Months								12 Months or More								Total
December 31, 2014		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(dollars in thousands)
Held to maturity temporary impairment
U.S. Gov’t agencies		$	2,053			$	32			$	—			$	—			$	2,053			$	32
Corporate bonds			3,397				14				—				—				3,397				14
Total securities held to maturity		$	5,450			$	46			$	—			$	—			$	5,450			$	46

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

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

 

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

 

		September 30, 2015
		Amortized Cost				Estimated Fair Value				Book Yield
		(dollars in thousands)
Securities available for sale
U. S. Treasury
Due within twelve months			3,010				3,066				2.80	%
Due after one but within five years			4,028				4,051				1.13	%
			7,038				7,117				1.84	%
U.S. Government agencies
Due after one but within five years			27,704				27,963				1.43	%
Due after five but within ten years			1,376				1,381				0.76	%
Due after ten years			7,456				7,404				1.68	%
			36,536				36,748				1.45	%
Mortgage-backed securities
Due after one but within five years			3,467				3,445				1.69	%
Due after five but within ten years			4,260				4,313				2.23	%
Due after ten years			23,988				23,885				1.92	%
			31,715				31,643				1.94	%
State and political subdivisions
Due within twelve months			472				479				5.77	%
Due after one but within five years			1,896				2,022				4.77	%
Due after five but within ten years			2,823				2,852				4.43	%
Due after ten years			8,557				8,666				3.79	%
			13,748				14,019				4.12	%
Corporate Bonds
Due within twelve months			2,401				2,400				1.16	%
Due after one but within five years			2,815				2,798				1.79	%
Due after five but within ten years			2,221				2,202				1.21	%
			7,437				7,400				1.41	%
Total Securities available for sale
Due within twelve months			5,883				5,945				2.37	%
Due after one but within five years			39,910				40,279				1.60	%
Due after five but within ten years			10,680				10,748				2.41	%
Due after ten years			40,001				39,955				2.28	%
		$	96,474			$	96,927				2.02	%

 

		September 30, 2015
		Amortized Cost				Estimated Fair Value				Book Yield
		(dollars in thousands)
Held to maturity
U. S. Government agencies
Due after five but within ten years			1,915				1,914				2.39	%
			1,915				1,914				2.39	%
State and political subdivisions
Due after one but within five years			1,533				1,536				2.24	%
Due after five but within ten years			4,470				4,459				2.89	%
			6,003				5,995				2.68	%
Corporate Bonds
Due after one but within five years			3,356				3,367				2.76	%
			3,356				3,367				2.76	%
Total Securities held for maturity
Due after one but within five years			1,533				1,536				2.60	%
Due after five but within ten years			9,741				9,740				2.74	%
		$	11,274			$	11,276				2.68	%

 

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Note 6 – Loans Held for Investment

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

 

		September 30, 2015				December 31, 2014
		(dollars in thousands)
Commercial
Commercial		$	51,417			$	47,418
Real estate - commercial			101,839				92,517
Other real estate construction loans			16,541				22,362
Noncommercial
Real estate 1 - 4 family construction			4,635				3,888
Real estate - residential			88,202				89,374
Home equity			49,553				46,360
Consumer loans			9,031				8,460
Other loans			1,557				481
			322,775				310,860
Less:
Allowance for loan losses			(2,961	)			(3,738	)
Deferred loan (fees) costs, net			41				(7	)
Loans held for investment, net		$	319,855			$	307,115

Note 7 – Allowance for Loan Losses

The following table shows the change in the allowance for loss losses by loan segment for the three and nine month period ended September 30, 2015 and 2014, respectively:

Commercial

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
		(dollars in thousands)
Balance, beginning of period		$	1,553			$	1,570			$	1,716			$	2,665
Provision (recovery) charged to operations			(212	)			33				(501	)			(378	)
Charge-offs			(18	)			—				(79	)			(744	)
Recoveries			10				35				197				95
Net (charge-offs)			(8	)			35				118				(649	)
Other			—				—				—				—
Balance at end of period		$	1,333			$	1,638			$	1,333			$	1,638

Non-Commercial

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
		(dollars in thousands)
Balance, beginning of period		$	1,774			$	2,130			$	2,022			$	2,430
Provision (recovery) charged to operations			(111	)			(304	)			(119	)			(378	)
Charge-offs			(84	)			(60	)			(385	)			(357	)
Recoveries			49				62				110				133
Net (charge-offs)			(35	)			2				(275	)			(224	)
Other			—				—				—				—
Balance at end of period		$	1,628			$	1,828			$	1,628			$	1,828

 

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Total

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
		(dollars in thousands)
Balance, beginning of period		$	3,327			$	3,700			$	3,738			$	5,095
Provision (recovery) charged to operations			(323	)			(271	)			(620	)			(756	)
Charge-offs			(102	)			(60	)			(464	)			(1,101	)
Recoveries			59				97				307				228
Net (charge-offs)			(43	)			37				(157	)			(873	)
Other			—				—				—				—
Balance at end of period		$	2,961			$	3,466			$	2,961			$	3.466

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

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

September 30, 2015

 

		Individually Evaluated								Collectively Evaluated								Total
		Reserve				Loans				Reserve				Loans				Reserve				Loans
		(dollars in thousands)
Commercial		$	12			$	1,195			$	1,321			$	168,602			$	1,333			$	169,797
Non-Commercial			179				4,519				1,449				148,500				1,628				153,019
Total		$	191			$	5,714			$	2,770			$	317,102			$	2,961			$	322,816

December 31, 2014

 

		Individually Evaluated								Collectively Evaluated								Total
		Reserve				Loans				Reserve				Loans				Reserve				Loans
		(dollars in thousands)
Commercial		$	179			$	2,125			$	1,537			$	160,172			$	1,716			$	162,297
Non-Commercial			277				5,436				1,745				143,120				2,022				148,556
Total		$	456			$	7,561			$	3,282			$	303,292			$	3,738			$	310,853

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

September 30, 2015

 

		Loans 30-89 Days Past Due				Loans 90 Days or More Past due				Total Past Due Loans				Current Loans				Total Loans				Accruing Loans 90 or More Days Past Due
		(dollars in thousands)
Commercial		$	41			$	34			$	75			$	51,342			$	51,417			$	—
Real estate - commercial			536				—				536				101,303				101,839				—
Other real estate construction			—				216				216				16,325				16,541				—
Real estate 1 - 4 family construction			—				—				—				4,635				4,635				—
Real estate - residential			1,733				846				2,579				85,664				88,243				—
Home equity			85				34				119				49,434				49,553				—
Consumer loans			112				—				112				8,919				9,031				—
Other loans			—				—				—				1,557				1,557				—
Total		$	2,507			$	1,130			$	3,637			$	319,179			$	322,816			$	—

 

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December 31, 2014

 

		Loans 30-89 Days Past Due				Loans 90 Days or More Past due and Non - Accrual				Total Past Due Loans				Current Loans				Total Loans				Accruing Loans 90 or More Days Past Due
		(dollars in thousands)
Commercial		$	42			$	—			$	42			$	47,376			$	47,418			$	—
Real estate - commercial			77				794				871				91,646				92,517				—
Other real estate construction			—				342				342				22,020				22,362				—
Real estate construction			—				—				—				3,888				3,888				—
Real estate - residential			1,673				1,097				2,770				86,597				89,367				—
Home equity			89				13				102				46,258				46,360				—
Consumer loan			123				—				123				8,337				8,460				—
Other loans			—				—				—				481				481				—
Total		$	2,004			$	2,246			$	4,250			$	306,603			$	310,853			$	—

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

The composition of nonaccrual loans by class as of September 30, 2015 and December 31, 2014 is as follows:

 

		September 30, 2015				December 31, 2014
		(dollars in thousands)
Commercial		$	34			$	—
Real estate - commercial			—				794
Other real estate construction			216				342
Real estate 1 - 4 family construction			—				—
Real estate - residential			846				1,097
Home equity			34				13
Consumer loans			—				—
Other loans			—				—
		$	1,130			$	2,246

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

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

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

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

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

 

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

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

September 30, 2015

 

		Pass				Watch				Sub- standard				Doubtful				Total
		(dollars in thousands)
Commercial		$	51,239			$	91			$	87			$	—			$	51,417
Real estate - commercial			95,240				3,555				3,044				—				101,839
Other real estate construction			14,014				1,971				556				—				16,541
Real estate 1 - 4 family construction			4,532				103				—				—				4,635
Real estate - residential			76,277				9,652				2,314				—				88,243
Home equity			48,294				1,135				124				—				49,553
Consumer loans			8,626				400				5				—				9,031
Other loans			1,557				—				—				—				1,557
Total		$	299,779			$	16,907			$	6,130			$	—			$	322,816

December 31, 2014

 

		Pass				Watch				Sub- standard				Doubtful				Total
		(dollars in thousands)
Commercial		$	46,734			$	614			$	70			$	—			$	47,418
Real estate - commercial			82,846				5,513				4,158				—				92,517
Other real estate construction			19,724				1,925				713				—				22,362
Real estate 1 - 4 family construction			3,888				—				—				—				3,888
Real estate - residential			75,859				10,090				3,418				—				89,367
Home equity			44,799				1,458				103				—				46,360
Consumer loans			8,175				277				8				—				8,460
Other loans			481				—				—				—				481
Total		$	282,506			$	19,877			$	8,470			$	—			$	310,853

 

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Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. At both September 30, 2015 and December 31, 2014 there were no loans 90 days past due and still accruing. The following tables show the breakdown between performing and nonperforming loans by class at September 30, 2015 and December 31, 2014:

September 30, 2015

 

		Performing				Non- Performing				Total
		(dollars in thousands)
Commercial		$	51,383			$	34			$	51,417
Real estate - commercial			101,839				—				101,839
Other real estate construction			16,325				216				16,541
Real estate 1 - 4 family construction			4,635				—				4,635
Real estate - residential			87,397				846				88,243
Home equity			49,519				34				49,553
Consumer loans			9,031				—				9,031
Other loans			1,557				—				1,557
Total		$	321,686			$	1,130			$	322,816

December 31, 2014

 

		Performing				Non- Performing				Total
		(dollars in thousands)
Commercial		$	47,418			$	—			$	47,418
Real estate - commercial			91,723				794				92,517
Other real estate construction			22,020				342				22,362
Real estate 1 - 4 family construction			3,888				—				3,888
Real estate - residential			88,270				1,097				89,367
Home equity			46,347				13				46,360
Consumer loans			8,460				—				8,460
Other loans			481				—				481
Total		$	308,607			$	2,246			$	310,853

 

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

September 30, 2015

 

		Unpaid Principal Balance				Recorded Investment With No Allowance				Recorded Investment With Allowance				Related Allowance
		(dollars in thousands)
Commercial		$	82			$	82			$	—			$	—
Real estate - commercial			845				545				300				9
Other real estate construction			806				216				52				3
Real estate 1 - 4 family construction			15				—				15				1
Real estate - residential			4,431				1,651				2,780				171
Home equity			50				29				21				7
Consumer loans			23				23				—				—
Other loans			—				—				—				—
Total		$	6,252			$	2,546			$	3,168			$	191

December 31, 2014

 

		Unpaid Principal Balance				Recorded Investment With No Allowance				Recorded Investment With Allowance				Related Allowance
		(dollars in thousands)
Commercial		$	98			$	68			$	30			$	30
Real estate - commercial			1,820				1,242				389				145
Other real estate construction			934				342				54				4
Real estate 1 - 4 family construction			20				—				20				1
Real estate - residential			5,298				1,865				3,433				257
Home equity			49				30				19				19
Consumer loans			69				29				40				—
Other loans			—				—				—				—
Total		$	8,288			$	3,576			$	3,985			$	456

 

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		Three Months ended September 30, 2015								Three Months ended September 30, 2014
		Average Recorded Investment				Interest Income				Average Recorded Investment				Interest Income
		(dollars in thousands)
Commercial		$	83			$	—			$	102			$	1
Real estate - commercial			968				14				1,754				19
Other real estate construction			270				1				1,058				2
Real estate 1 - 4 family construction			16				1				21				—
Real estate - residential			4,639				53				5,379				43
Home equity			51				—				32				1
Consumer loans			24				—				77				3
Other loans			—				—				—				—
Total		$	6,051			$	69			$	8,423			$	69

 

		Nine Months ended September 30, 2015								Nine Months ended September 30, 2014
		Average Recorded Investment				Interest Income				Average Recorded Investment				Interest Income
		(dollars in thousands)
Commercial		$	81			$	3			$	123			$	4
Real estate - commercial			1,374				42				2,978				54
Other real estate construction			304				2				1,346				2
Real estate 1 - 4 family construction			18				1				138				1
Real estate - residential			5,037				154				6,054				156
Home equity			55				1				81				1
Consumer loans			36				1				87				5
Other loans			—				—				—				—
Total		$	6,905			$	204			$	10,807			$	223

Note 8 – Troubled Debt Restructures

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

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

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

 

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

 

		For the three months ended September 30, 2015
		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
		(dollars in thousands)
Other:
Commercial			—			$	—			$	—
Real estate - commercial			—				—				—
Other real estate construction			—				—				—
Real estate 1 - 4 family construction			—				—				—
Real estate - residential			1				76				76
Consumer loans			—				—				—
Other loans			—				—				—
			1			$	76			$	76
Total			1			$	76			$	76

 

		For the three months ended September 30, 2014
		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
		(dollars in thousands)
Other:
Commercial			—			$	—			$	—
Real estate - commercial			1				187				187
Other real estate construction			—				—				—
Real estate 1 - 4 family construction			—				—				—
Real estate - residential			1				18				18
Home equity			—				—				—
Consumer loans			—				—				—
Other loans			—				—				—
Total			2			$	205			$	205

 

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		For the nine months ended September 30, 2015
		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
		(dollars in thousands)
Extend payment terms:
Commercial			—			$	—			$	—
Real estate - commercial			—				—				—
Other real estate construction			—				—				—
Real estate 1 - 4 family construction			—				—				—
Real estate - residential			—				—				—
Home equity			—				—				—
Consumer loans			—				—				—
Other loans			—				—				—
Total			—			$	—			$	—
Other:
Commercial			1			$	48			$	29
Real estate - commercial			1				265				123
Other real estate construction			—				—				—
Real estate 1 - 4 family construction			—				—				—
Real estate - residential			5				482				471
Home equity			—				—				—
Consumer loans			—				—				—
Other loans			—				—				—
Total			7			$	795			$	623
Total			7			$	795			$	623

 

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		For the nine months ended September 30, 2014
		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
		(dollars in thousands)
Extend payment terms:
Commercial			—			$	—			$	—
Real estate - commercial			—				—				—
Other real estate construction			—				—				—
Real estate 1 - 4 family construction			—				—				—
Real estate - residential			—				—				—
Home equity			—				—				—
Consumer loans			1				32				30
Other loans			—				—				—
Total			1			$	32			$	30
Other:
Commercial			—			$	—			$	—
Real estate - commercial			2				299				298
Other real estate construction			—				—				—
Real estate 1 - 4 family construction			—				—				—
Real estate - residential			5				636				632
Home equity			—				—				—
Consumer loans			—				—				—
Other loans			—				—				—
Total			7				935				930
Total			8			$	967			$	960

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

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

The following table presents the successes and failures of the types of modifications within the previous twelve months as of September 30, 2015 and 2014:

 

		Paid In Full								Paying as restructured								Converted to nonaccrual								Foreclosure/ Default
		Number of Loans				Recorded Investments				Number of Loans				Recorded Investments				Number of Loans				Recorded Investments				Number of Loans				Recorded Investments
		(dollars in thousands)
September 30, 2015
Below market Interest rate			—			$	—				—			$	—				—			$	—				—			$	—
Extended payment Terms			—				—				—				—				—				—				—				—
Forgiveness of Principal
Other			—				—				7				795				—				—				—				—
Total			—			$	—				7			$	795				—			$	—				—			$	—

 

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		Paid In Full								Paying as restructured								Converted to nonaccrual								Foreclosure/ Default
		Number of Loans				Recorded Investments				Number of Loans				Recorded Investments				Number of Loans				Recorded Investments				Number of Loans				Recorded Investments
		(dollars in thousands)
September 30, 2014
Below market Interest rate			—			$	—				—			$	—				—			$	—				—			$	—
Extended payment Terms			—				—				1				30				—				—				—				—
Forgiveness of Principal
Other			—				—				9				1,084				—				—				—				—
Total			—			$	—				10			$	1,114				—			$	—				—			$	—

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

Note 9 - Commitments and Contingencies

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

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

At September 30, 2015, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

		(dollars in thousands)
Commitments to extend credit		$	74,972
Credit card commitments			8,951
Standby letters of credit			2,376
Total commitments		$	86,299

 

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Note 10 – Fair Value Disclosures

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

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

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

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

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

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at the estimated fair

 

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

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

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

 

		September 30, 2015
		(dollars in thousands)
		Total				Level 1				Level 2				Level 3
Securities available for sale:
US Treasury		$	7,117			$	7,117			$	—			$	—
US Government Agencies			36,748				—				36,748				—
GSE - Mortgage-backed securities and CMO’s			31,643				—				31,643				—
State and political subdivisions			14,019				—				14,019				—
Corporate bonds			7,400				—				7,400				—
Total assets at fair value		$	96,927			$	7,117			$	89,810			$	—
Total liabilities at fair value		$	—			$	—			$	—			$	—

 

		December 31, 2014
		(dollars in thousands)
		Total				Level 1				Level 2				Level 3
Securities available for sale:
US Treasury		$	19,386			$	19,386			$	—			$	—
US Gov’t			50,775				—				50,775				—
Mortgage-backed securities and CMO’s			27,572				—				27,572				—
State and political subdivisions			12,080				—				12,080				—
Corporate bonds			3,011				—				3,011
Total assets at fair value		$	112,824			$	19,386			$	93,438			$	—
Total liabilities at fair value		$	—			$	—			$	—			$	—

 

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

 

		September 30, 2015
		(dollars in thousands)
		Total				Level 1				Level 2				Level 3
Impaired loans		$	3,371			$	—			$	—			$	3,371
Other real estate owned			2,856				—				—				2,856
Total assets at fair value		$	6,227			$	—			$	—			$	6,227
Total liabilities at fair value		$	—			$	—			$	—			$	—

 

		December 31, 2014
		(dollars in thousands)
		Total				Level 1				Level 2				Level 3
Impaired loans		$	1,854			$	—			$	—			$	1,854
Other real estate owned			3,290				—				—				3,290
Total assets at fair value		$	5,144			$	—			$	—			$	5,144
Total liabilities at fair value		$	—			$	—			$	—			$	—

Quantitative Information about Level 3 Fair Value Measurements

September 30, 2015

 

		Valuation Technique		Unobservable Input		General Range
Nonrecurring measurements:
Impaired loans		Discounted appraisals		Expected loss rates		0 – 25%
		Discounted cash flows		Discount rates		4% – 8.75%
OREO		Discounted appraisals		Collateral discounts and Estimated costs to sell		0 – 10%

December 31, 2014

 

		Valuation Technique		Unobservable Input		General Range
Nonrecurring measurements:
Impaired loans		Discounted appraisals		Expected loss rates		0 – 25%
		Discounted cash flows		Discount rates		4% – 8.75%
OREO		Discounted appraisals		Collateral discounts and Estimated costs to sell		0 – 10%

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

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

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

 

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

September 30, 2015

 

		Carrying Value				Estimated Fair Value				Level 1				Level 2				Level 3
						(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents		$	58,270			$	58,341			$	54,535			$	3,806			$	—
Securities available for sale			96,927				96,927				7,117				89,810				—
Securities held to maturity			11,274				11,276				—				11,276				—
Loans held for investment, net			319,855				317,590				—				—				317,590
Loans held for sale			418				418				—				418				—
Restricted stock			1,040				1,040				1,040				—				—
Accrued interest receivable			1,466				1,466				—				—				1,466
FINANCIAL LIABILITIES
Deposits		$	462,349			$	435,613			$	—			$	435,613			$	—
Short-term borrowings			5,232				5,232				—				5,232				—
Long-term borrowings			16				16				—				16				—
Junior subordinated debt			9,534				9,695				—				—				9,691
Accrued interest payable			176				176				—				—				176

December 31, 2014

 

		Carrying Value				Estimated Fair Value				Level 1				Level 2				Level 3
						(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents		$	50,791			$	50,826			$	47,605			$	3,221			$	—
Securities available for sale			112,824				112,824				19,386				93,438				—
Securities held to maturity			5,496				5,450				2,053				3,397				—
Loans held for investment, net			307,115				321,295				—				—				321,295
Loans held for sale			2,147				2,147				—				2,147				—
Restricted stock			1,038				1,038				1,038				—				—
Accrued interest receivable			1,747				1,747				—				—				1,747
FINANCIAL LIABILITIES
Deposits		$	456,435			$	442,655			$	—			$	442,655			$	—
Short-term borrowings			4,685				4,685				—				4,685				—
Long-term borrowings			24				24				—				24				—
Junior subordinated debt			9,534				9,703				—				—				9,703
Accrued interest payable			180				180				—				—				180

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

 

•

Cash and cash equivalents – The carrying amount of cash and cash equivalents approximate their fair values due to the short period of time until their expected realization and are recorded in Level 1. Time deposits are recorded in Level 2.

 

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•

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

 

•

Securities held to maturity – Securities held to maturity are carried at amortized cost and are recorded in Level 2. Also see Note 5.

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

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

Note 12 – Recent Accounting Pronouncements

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

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

 

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

In January 2014, the FASB issued ASU 2014-04, an update to ASC 310 “Receivables – Troubled Debt Restructurings by Creditors”. The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The update is effective for reporting periods beginning after December 15, 2014. The Company evaluated this update and it does not have a material impact on the Company’s consolidated financial statements. The Company had $2.2 million in foreclosed residential real estate and $295,000 of residential real estate in process of foreclosure at September 30, 2015.

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

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

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

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

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

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

 

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

Loans held for investment increased from $310.9 million to $322.8 million, an increase of $11.9 million. The real estate one-to-four family and other real estate construction loan segments of the loan portfolio decreased during the first nine months of 2015 with the other real estate construction experiencing the largest decline of 26.0%, or $5.8 million. The Company experienced growth in the remaining segments of its loan portfolio during the first nine months of 2015 with the commercial segment having the largest increase of 19.2%, primarily consisting of owner occupied properties. Loans held for sale decreased 80.5%, or $1.7 million. The Company did sell $1.9 million of USDA government loans that were in the loan portfolio in the secondary market during the first nine months of 2015. The allowance for loan losses was $3.0 million at September 30, 2015, which represented 0.92% of the loan portfolio.

Other changes in our consolidated assets are related to premises and equipment, interest receivable, restricted stock, bank owned life insurance, other real estate owned and other assets. Bank owned life insurance increased $88,000, while premises and equipment decreased $106,000. Accrued interest receivable declined $281,000. Restricted stock, which is comprised of Federal Home Loan Bank stock and Federal Reserve Bank stock, increased $2,000. Federal Home Loan Bank member institutions are required to increase or decrease their ownership as their utilization of FHLB borrowings changes. The Company’s required ownership in FHLB stock increased $1,000 to $533,000, while the Company’s required ownership in Federal Reserve Bank stock increased $1,000 to $507,000 during the first nine months of 2015. Other real estate owned increased $77,000. During the nine months ended September 30, 2015, the Company sold fourteen pieces of property totaling $1.5 million. The Company recorded net valuation write-down adjustments of $217,000. These declines were offset by the addition of thirty pieces of real estate foreclosed on totaling $1.8 million. The Company foreclosed on one loan relationship resulting in the addition of twenty-four of the aforementioned thirty pieces of property. Other assets increased $777,000 during the first nine months ended September 30, 2015.

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

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

The Company has historically had an Employee Stock Ownership Plan (ESOP) in place. Late in 2011, the Internal Revenue Service issued IRS notice 2011-19 that drew a clear line between what stock exchanges are considered public and which are not. The Company’s stock trades on the OTC Bulletin Board, which is a publically traded exchange, however, the IRS no longer

 

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recognizes the Bulletin Board as a public exchange. The result of this ruling is that companies that have ESOP plans in place are required to set aside funds to handle allocated shares put back to the company. The plan that the Company has includes a put option that requires the Company to repurchase allocated shares of participants at the participants’ option. The Company reclassed capital from additional paid-in capital to set aside the liability to cover all allocated shares that the Company may be required to buy back.

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

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

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

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

Net Income and Net Income Available to Common Shareholders

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

Net Interest Income

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

 

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

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

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended September 30,

 

(dollars in thousands)		Average Balance								Income/Expense								Rate/Yield
		2015				2014				2015				2014				2015				2014
Interest-earning assets:
Taxable securities		$	94,959			$	101,692			$	398			$	412				1.66	%			1.61	%
Nontaxable securities (1)			14,072				11,541				87				86				3.95	%			4.77	%
Short-term investments			50,003				46,862				47				36				0.37	%			0.30	%
Taxable loans			302,786				294,976				3,834				4,017				5.02	%			5.40	%
Non-taxable loans (1)			15,989				15,928				102				103				4.08	%			4.14	%
Total interest-earning assets			477,809				470,999				4,468				4,654				3.81	%			4.02	%
Interest-bearing liabilities:
Interest-bearing deposits			365,743				370,770				282				329				0.31	%			0.35	%
Short-term borrowed funds			2,968				3,953				17				2				2.27	%			0.20	%
Long-term debt			11,382				9,562				139				139				4.85	%			5.77	%
Total interest bearing liabilities			380,093				384,285				438				470				0.46	%			0.49	%
Net interest spread		$	97,716			$	86,714			$	4,030			$	4,184				3.35	%			3.53	%
Net interest margin (1)
(% of earning assets)																			3.44	%			3.62	%

 

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

Provision and Allowance for Loan Losses

The Company recovered $(323,000) for the three months ending September 30, 2015 compared to a recovery of $(271,000) for the same period in 2014. There were net loan charge-offs of $43,000 for the three months ended September 30, 2015, as compared with net loan recoveries of $(37,000) during the same period of 2014. Refer to the Asset Quality discussion on page 38 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like all financial institutions, diversification of our revenue base is of major importance to our long term success. Total noninterest income increased $401,000 for the three month period ending September 30, 2015 as compared to the same period in 2014. Income from mortgage loan sales increased $424,000 from $282,000 for the quarter ended September 30, 2014 to $706,000 for the same period in 2015. Service charges on deposit accounts produced revenue of $338,000, a decrease of $29,000 for the three months ended September 30, 2015. The primary factor leading to this decrease was a decrease in NSF fees for the comparable periods. Other service fees and commissions experienced a $54,000 or 5.5% increase for the comparable three month period, primarily due to an increase in brokerage commissions and asset management fees.

 

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

Noninterest Expense

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

Other noninterest expense

 

		Three Months Ended September 30,
		2015				2014
		(dollars in thousands)
Postage		$	59			$	51
Telephone and data lines			40				39
Loan collection expense			23				21
Shareholder relations expense			18				62
Dues and subscriptions			42				32
Other			439				367
Total		$	621			$	572

Income Tax Expense

The Company had income tax expense of $223,000 for the three months ended September 30, 2015 resulting in an effective rate of 28.52% compared to income tax expense of $191,000 and an effective rate of 32.37% in the 2014 period. Income taxes computed at statutory rate are reduced primarily by eligible amount of interest earned on state and municipal securities, tax free municipal loans and income earned on bank owned life insurance. The corporate rate for the State of North Carolina was reduced from 6% in 2014 to 5% in 2015. This change coupled with an increase in the level of nontaxable income for the comparable three month periods resulted in the lower effective rate.

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

 

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

Net Income and Net Income Available to Common Shareholders

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

Net Interest Income

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

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

Average Balance Sheet and Net Interest Income Analysis

For the Nine Months Ended September 30,

 

(dollars in thousands)		Average Balance								Income/Expense								Rate/Yield
		2015				2014				2015				2014				2015				2014
Interest-earning assets:
Taxable securities		$	99,979			$	99,011			$	1,175			$	1,256				1.57	%			1.70	%
Nontaxable securities (1)			14,569				9,957				290				232				4.98	%			5.01	%
Short-term investments			48,109				51,228				126				120				0.35	%			0.31	%
Taxable loans			300,062				293,900				11,453				11,955				5.10	%			5.44	%
Non-taxable loans (1)			14,330				15,611				331				330				4.28	%			4.56	%
Total interest-earning assets			477,049				469,707				13,375				13,893				3.86	%			4.05	%
Interest-bearing liabilities:
Interest-bearing deposits			367,527				370,332				875				1,042				0.32	%			0.38	%
Short-term borrowed funds			3,326				4,923				44				29				1.77	%			0.79	%
Long-term debt			10,932				10,085				411				434				5.03	%			5.75	%
Total interest bearing liabilities			381,785				385,340				1,330				1,505				0.47	%			0.52	%
Net interest spread		$	95,264			$	84,367			$	12,045			$	12,388				3.39	%			3.53	%
Net interest margin (1)
(% of earning assets)																			3.48	%			3.63	%

 

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

Provision and Allowance for Loan Losses

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

 

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Noninterest Income

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

Noninterest Expense

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

 

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Other noninterest expense

 

		Nine Months Ended September 30,
		2015				2014
		(in thousands)
Postage		$	161			$	149
Telephone and data lines			124				115
Loan collection expense			71				108
Shareholder relations expense			106				174
Dues and subscriptions			127				108
Other			1,172				1,072
Total		$	1,761			$	1,726

Income Tax Expense

The Company had income tax expense of $799,000 for the nine months ended September 30, 2015 resulting in an effective tax rate of 30.07%, compared to income tax expense of $710,000 and an effective rate of 31.67% in the 2014 period. Income taxes computed at statutory rate are reduced primarily by eligible amount of interest earned on state and municipal securities, tax free municipal loans and income earned on bank owned life insurance. . The corporate rate for the State of North Carolina was reduced from 6% in 2014 to 5% in 2015.This change coupled with an increase in the level of nontaxable income for the comparable three month periods resulted in the lower effective rate.

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

Asset Quality

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

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

 

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

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

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

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

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

 

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

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

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

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

Nonperforming Assets

(dollars in thousands)

 

		September 30,				December 31,
		2015				2014
Nonperforming assets:
Loans past due 90 days or more		$	—			$	—
Nonaccrual loans			1,130				2,246
Other real estate owned			5,942				5,865
Total nonperforming assets		$	7,072			$	8,111
Allowance for loans losses		$	2,961			$	3,738
Nonperforming loans to total loans			0.44	%			0.72	%
Allowance for loan losses to total loans			0.92	%			1.20	%
Nonperforming assets to total assets			1.39	%			1.56	%
Allowance for loan losses to nonperforming loans			210.41	%			166.48	%

Liquidity and Capital Resources

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

The Company’s primary sources of internally generated funds are principal and interest payments on loans, cash flows generated from operations and cash flow generated by investments. Growth in deposits is typically the primary source of funds for loan growth. The Company and its Bank have multiple funding sources, in addition to deposits, that can be used to increase liquidity and provide additional financial flexibility. These sources are the Bank’s established federal funds lines with correspondent banks aggregating $15.8 million at September 30, 2015, with available credit of $15.8 million; established borrowing relationships with the Federal Home Loan Bank, with available credit of $47.5 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of $20.4 million and the issuance of commercial paper. The Company has also secured long-term debt from other sources. Total debt from these sources aggregated $14.8 million at September 30, 2015, compared to $14.2 million at December 31, 2014.

 

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

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

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

As previously discussed, the Bank has a net total of $10.6 million in outstanding Fixed Rate Noncumulative Perpetual Preferred Stock. The preferred stock qualifies as Tier 1 capital at the bank and will pay dividends at an annual rate of 5.30%. The net total of $10.6 million is presented as noncontrolling interest at the Company level and does qualify as Tier 1 capital at the Company. At September 30, 2015, the Company had $9.5 million in subordinated debt outstanding that qualifies as Tier 2 capital. The Company has made all interest and dividend payments in a timely manner.

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

The Company’s primary market risk is interest rate risk. Interest rate risk is the result of differing maturities or repricing intervals of interest-earning assets and interest-bearing liabilities and the fact that rates on these financial instruments do not change uniformly. These conditions may impact the earnings generated by the Company’s interest earning assets or the cost of its interest-bearing liabilities, thus directly impacting the Company’s overall earnings. The Company’s management actively monitors and manages interest rate risk. One way this is accomplished is through the development of and adherence to the Company’s asset/liability policy. This policy sets forth management’s strategy for matching the risk characteristics of the Company’s interest-earning assets and liabilities so as to mitigate the effect of changes in the rate environment. In management’s opinion, the Company’s market risk profile has not changed significantly since December 31, 2014.

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the

 

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Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act (“Exchange Act”) Rule 13a-15.

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

Changes in Internal Control over Financial Reporting

Management of the Company has evaluated, with the participation of the Company’s principal executive officer and principal financial officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a -15(f) and 15d – 15(f) of the Exchange Act) during the third quarter of 2015. In connection with such evaluation, the Company has determined that there were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and ensuring that the Company’s systems evolve with its business.

Part II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

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

 

Item 1A.

Risk Factors

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

 

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information with respect to shares of common stock repurchased by the Company during the three months ended September 30, 2015.

 

		(a) Total Number of Shares Purchased				(b) Average Price Paid per Share				(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Program (1)				(d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans (2)(3)
July 1, 2015 Through July 31, 2015			1,900			$	3.72				—			$	—
August 1, 2015 Through August 30, 2015			2,801			$	3.75				—			$	—
September 1, 2015 Through September 30, 2015			22,167			$	3.70				—			$	—
Total			26,868			$	3.71				—			$	—

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

 

Item 3.

Defaults upon Senior Securities

None

 

Item 4.

Mine Safety Disclosures

Not applicable

 

Item 5.

Other Information

None.

 

Item 6.

Exhibits

 

Exhibit Number		Description of Exhibit
3.1		Registrant’s Articles of Incorporation (1)
3.2		Registrant’s By-laws (6)
3.2		Articles of Amendment dated December 19, 2008 (5)
4.1		Form of stock certificate (1)
4.2		Form of Security Holders Agreement (8)
10.1		Incentive Stock Option Plan, as amended (1)
10.2		Employee Stock Ownership Plan and Trust (2)
10.3		2006 Incentive Stock Option Plan (3)
10.4		2006 Employee Stock Purchase Plan (3)

 

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10.5		Amendment to the Employee Stock Ownership Plan and Trust (4)
10.6		Relocation Assistance Agreement dated February 9, 2009, between the Registrant and Brendan P. Duffey (6)
10.7		Nonqualified Deferred Compensation Plan and Supplemental Retirement Plan Agreement dated December 31, 2008, between the Registrant and Roger L. Dick, Brendan P. Duffey, Christy D. Stoner and R. David Beaver, III (6)(9)
10.8		Change in Control Agreement dated January 1, 2015, between the Registrant and R. David Beaver, III (9)
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
101		Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015, in XBRL (eXtensible Business Reporting Language) (7)

 

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

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

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

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

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

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

(7)

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

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

(9)	Incorporated by reference to Registrant’s Current Report on Form 8-K dated June 30, 2015.

 

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Signatures

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

 

				UWHARRIE CAPITAL CORP
				(Registrant)
Date: November 3, 2015				By:		/s/ Roger L. Dick
				Roger L. Dick
				President and Chief Executive Officer
Date: November 3, 2015				By:		/s/ R. David Beaver, III
				R. David Beaver, III
				Principal Financial Officer

 

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EXHIBIT INDEX

 

Exhibit Number		Description of Exhibit
3.1		Registrant’s Articles of Incorporation (1)
3.2		Registrant’s By-laws (6)
3.3		Articles of Amendment dated December 19, 2008 (5)
4.1		Form of stock certificate (1)
4.2		Form of Security Holders Agreement (8)
10.1		Incentive Stock Option Plan, as amended (1)
10.2		Employee Stock Ownership Plan and Trust (2)
10.3		2006 Incentive Stock Option Plan (3)
10.4		2006 Employee Stock Purchase Plan (3)
10.5		Amendment to the Employee Stock Ownership Plan and Trust (4)
10.6		Relocation Assistance Agreement dated February 9, 2009, between the Registrant and Brendan P. Duffey (6)
10.7		Nonqualified Deferred Compensation Plan and Supplemental Retirement Plan Agreement dated December 31, 2008, between the Registrant and Roger L. Dick, Brendan P. Duffey, Christy D. Stoner and R. David Beaver, III (6)(9)
10.9		Change in Control Agreement dated January 1, 2015, between the Registrant and R. David Beaver, III (9)
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
101		Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015, in XBRL (eXtensible Business Reporting Language) (7)

 

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

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

 

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

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

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

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

(7)

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

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

(9)	Incorporated by reference to Registrant’s Current Report on Form 8-K dated June 30, 2015.

 

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