UWHARRIE CAPITAL CORP - FORM 10-Q

UWHARRIE CAPITAL CORP - FORM 10-Q - August 9, 2016

Attached files

Attached files

UWHARRIE CAPITAL CORP Reports

file	filename
EX-31.1 - EX-31.1 - UWHARRIE CAPITAL CORP	d216840dex311.htm
EX-32 - EX-32 - UWHARRIE CAPITAL CORP	d216840dex32.htm
EX-31.2 - EX-31.2 - UWHARRIE CAPITAL CORP	d216840dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2016

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

For the transition period from to .

COMMISSION FILE NUMBER 000-22062

UWHARRIE CAPITAL CORP

(Exact name of registrant as specified in its charter)

NORTH CAROLINA

56-1814206

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

132 NORTH FIRST STREET

ALBEMARLE, NORTH CAROLINA

28001

(Address of Principal Executive Offices)

(Zip Code)

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

N/A

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 6,972,154 shares of common stock outstanding as of July 25, 2016.

Table of Contents


		Page No.

Part I.	FINANCIAL INFORMATION

Item 1 -	Financial Statements (Unaudited)

	Consolidated Balance Sheets June 30, 2016 and December 31, 2015		3

	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2016 and 2015		4

	Consolidated Statements of Comprehensive Income for the Three And Six Months Ended June 30, 2016 and 2015		5

	Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2016		6

	Consolidated Statements of Cash Flows Six Months Ended June 30, 2016 and 2015		7

	Notes to Consolidated Financial Statements		8

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30

Item 3 -	Quantitative and Qualitative Disclosures about Market Risk		39

Item 4 -	Controls and Procedures		40

Part II.	OTHER INFORMATION

Item 1 -	Legal Proceedings		40

Item 1A -	Risk Factors		40

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

Item 3 -	Defaults Upon Senior Securities		41

Item 4 -	Mine Safety Disclosures		41

Item 5 -	Other Information		41

Item 6 -	Exhibits		42

	Exhibit Index		45

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Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements


	June 30, 2016 (Unaudited)			December 31, 2015*
	(dollars in thousands)
ASSETS
Cash and due from banks	$	6,207		$	7,038
Interest-earning deposits with banks		44,914			61,895
Securities available for sale, at fair value		93,023			89,258
Securities held to maturity, at amortized cost (fair value $12,444 and $11,242, respectively)		12,145			11,242
Loans held for sale		2,270			5,922
Loans:
Loans held for investment		330,295			320,132
Less allowance for loan losses		(2,706	)		(2,884	)

Net loans held for investment		327,589			317,248

Premises and equipment, net		14,477			14,666
Interest receivable		1,473			1,564
Restricted stock		1,052			1,040
Bank owned life insurance		6,820			6,762
Other real estate owned		4,356			4,994
Prepaid assets		1,254			764
Other assets		9,671			9,809

Total assets	$	525,251		$	532,202


LIABILITIES
Deposits:
Demand noninterest-bearing	$	106,071		$	92,524
Interest checking and money market accounts		243,999			252,345
Savings deposits		42,287			40,436
Time deposits, $250,000 and over		7,033			8,148
Other time deposits		62,679			74,280

Total deposits		462,069			467,733

Short-term borrowed funds		1,931			5,758
Long-term debt		9,540			9,547
Interest payable		153			168
Other liabilities		6,766			5,682

Total liabilities		480,459			488,888


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

SHAREHOLDERS’ EQUITY
Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and outstanding 6,972,154 and 6,983,017		8,715			8,729
Additional paid-in capital		12,273			12,308
Undivided profits		12,818			11,893
Accumulated other comprehensive income (loss)		376			(212	)

Total Uwharrie Capital shareholders’ equity		34,182			32,718
Noncontrolling interest		10,610			10,596

Total shareholders’ equity		44,792			43,314

Total liabilities and shareholders’ equity	$	525,251		$	532,202

(*)	Derived from audited consolidated financial statements

See accompanying notes

-3-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in thousands, except share and per share data)
Interest Income
Loans, including fees	$	3,897		$	3,938		$	7,795		$	7,848
Investment securities
US Treasury		12			67			23			151
US Government agencies and corporations		223			327			539			660
State and political subdivisions		214			87			337			169
Interest-earning deposits with banks and federal funds sold		70			42			158			79

Total interest income		4,416			4,461			8,852			8,907


Interest Expense
Interest checking and money market accounts		75			68			147			138
Savings deposits		12			10			23			21
Time deposits, $250,000 and over		12			13			30			24
Other time deposits		83			203			196			410
Short-term borrowed funds		8			15			29			27
Long-term debt		137			137			273			272

Total interest expense		327			446			698			892

Net interest income		4,089			4,015			8,154			8,015
Provision for (recovery of) loan losses		(112	)		(235	)		(170	)		(297	)

Net interest income after provision (recovery of) for loan losses		4,201			4,250			8,324			8,312


Noninterest Income
Service charges on deposit accounts		289			311			595			641
Other service fees and commissions		1,147			1,033			2,275			2,015
Gain/(loss) on sale of securities (includes reclassification of $337,000, $277,000, $542,000 and $502,000 from accumulated other comprehensive income)		337			277			542			502
Gain (loss) on fixed assets and other assets		32			17			32			(5	)
Income from mortgage loan sales		958			492			1,658			993
Other income		130			91			272			148

Total noninterest income		2,893			2,221			5,374			4,294


Noninterest Expense
Salaries and employee benefits		3,603			3,226			7,166			6,318
Net occupancy expense		266			268			523			552
Equipment expense		160			173			329			340
Data processing costs		188			183			368			359
Office supplies and printing		41			53			83			102
Foreclosed real estate expense		98			155			175			274
Professional fees and services		178			133			370			284
Marketing and donations		226			178			427			371
Electronic banking expense		270			259			581			510
Software amortization and maintenance		179			134			334			284
FDIC insurance		85			97			171			199
Other noninterest expense		746			649			1,434			1,140

Total noninterest expense		6,040			5,508			11,961			10,733

Income before income taxes		1,054			963			1,737			1,873
Income taxes (includes reclassification $130,000, $107,000, $209,000 and $194,000 from accumulated other comprehensive income)		344			303			517			576

Net income	$	710		$	660		$	1,220		$	1,297


Consolidated net income	$	710			660			1,220			1,297
Less: net income attributable to noncontrolling Interest		(148	)		(147	)		(295	)		(293	)

Net income attributable to Uwharrie Capital Corp		562			513			925			1,004
Dividends – preferred stock		—			—			—			—

Net income (loss) available to common shareholders	$	562		$	513		$	925		$	1,004

Net income (loss) per common share
Basic	$	0.08		$	0.07		$	0.13		$	0.14

Diluted	$	0.08		$	0.07		$	0.13		$	0.14

Weighted average shares outstanding
Basic		6,977,931			7,084,004			6,980,474			7,092,240
Diluted		6,977,931			7,084,004			6,980,474			7,092,240

See accompanying notes

-4-

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in thousands)

Net Income	$	710		$	660		$	1,220		$	1,297


Unrealized gain (loss) on available for sale securities		485			(616	)		1,433			(62	)
Related tax effect		(180	)		196			(512	)		(3	)
Reclassification of (gain) loss recognized in net income		(337	)		(277	)		(542	)		(502	)
Related tax effect		130			107			209			194


Total other comprehensive income (loss)		98			(590	)		588			(373	)


Comprehensive income		808			70			1,808			924

Less: Comprehensive income attributable to noncontrolling interest		(148	)		(147	)		(295	)		(293	)


Comprehensive income (loss) attributable to Uwharrie Capital	$	660		$	(77	)	$	1,513		$	631

See accompanying notes

-5-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)


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

Balance, December 31, 2015		6,983,017		$	8,729		$	12,308		$	11,893	$	(212	)	$	10,596		$	43,314
Net Income		—			—			—			925		—			295			1,220
Repurchase of common stock		(10,863	)		(14	)		(35	)		—		—			—			(49	)
Other comprehensive Income		—			—			—			—		588			—			588
Record preferred stock dividend Series B (noncontrolling interest)		—			—			—			—		—			(207	)		(207	)
Record preferred stock dividend Series C (noncontrolling interest)		—			—			—			—		—			(74	)		(74	)

Balance, June 30, 2016		6,972,154		$	8,715		$	12,273		$	12,818	$	376		$	10,610		$	44,792

See accompanying notes

-6-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)


	Six Months Ended June 30,
	2016			2015
	(dollars in thousands)
Cash flows from operating activities
Net income	$	1,220		$	1,297
Adjustments to reconcile net income to net cash
Provided (used) by operating activities:
Depreciation		443			472
Net amortization of security premiums/discounts AFS		493			555
Net amortization of security premiums/discounts HTM		68			65
Net amortization of mortgage servicing rights		366			350
Impairment of foreclosed real estate		34			92
Recovery of loan losses		(170	)		(297	)
Net realized gain on sales / calls available for sales securities		(542	)		(502	)
Income from mortgage loan sales		(1,658	)		(993	)
Proceeds from sales of loans held for sale		54,927			29,792
Origination of loans held for sale		(49,617	)		(27,066	)
Increase in cash surrender value of life insurance		(58	)		(59	)
Loss / (gain) on sales of foreclosed real estate		(34	)		6
Net change in interest receivable		91			291
Net change in other assets		(682	)		(507	)
Net change in interest payable		(15	)		1
Net change in other liabilities		1,084			810

Net cash provided by operating activities		5,950			4,307


Cash flows from investing activities
Proceeds from sales, maturities and calls of securities available for sale		26,766			38,633
Proceeds from sales, maturities and calls of securities held to maturity		56			31
Purchase of securities available for sale		(29,591	)		(24,910	)
Purchase of securities held to maturity		(1,027	)		(6,034	)
Net (increase) in loans		(10,171	)		(7,282	)
Purchase of premises and equipment		(254	)		(435	)
Proceeds from sales of foreclosed real estate		755			632
Investment in other assets		(442	)		(163	)
Net change in restricted stock		(12	)		(2	)

Net cash provided (used) by investing activities		(13,920	)		470


Cash flows from financing activities
Net decrease in deposit accounts		(5,664	)		(3,401	)
Net increase in short-term borrowed funds		(3,827	)		(453	)
Net decrease in long-term debt		(7	)		(5	)
Repurchase of common stock		(49	)		(223	)
Dividend and discount accretion on noncontrolling interest		(295	)		(293	)

Net cash used by financing activities		(9,842	)		(4,375	)

Increase (decrease) in cash and cash equivalents		(17,812	)		402
Cash and cash equivalents, beginning of period		68,933			50,791

Cash and cash equivalents, end of period	$	51,121		$	51,193


Supplemental Disclosures of Cash Flow Information
Interest paid	$	713		$	891
Income taxes paid		47			243
Supplemental Schedule of Non-Cash Activities
Net change in fair value securities available for sale, net of tax	$	(588	)	$	(373	)
Loans transferred to foreclosed real estate		116			951
Mortgage servicing rights capitalized		437			299
Net Change in ESOP liability		—			(561	)

See accompanying notes

-7-

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 2015 Annual Report on Form 10-K. This Quarterly Report should be read in conjunction with such Annual Report.

Use of Estimates

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

Note 2 – Comprehensive Income

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

-8-

The following table presents the changes in accumulated other comprehensive income for the three and six months ended June 30, 2016 and 2015:


	Unrealized holding gains on available-for-sale securities (net)
	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(dollars in thousands)

Beginning Balance	$	278		$	522		$	(212	)	$	305

Other Comprehensive income (loss) before reclassifications, net of $180,000 ($196,000), $512,000 and ($3,000) tax effect, respectively		305			(420	)		921			(65	)

Amounts reclassified from accumulated Other comprehensive income, net of $130,000, $107,000, $209,000 and $194,000 tax effect		(207	)		(170	)		(333	)		(308	)


Net current-period other comprehensive income (loss)		98			(590	)		588			(373	)


Ending Balance	$	376		$	(68	)	$	376		$	(68	)

Note 3 – Noncontrolling Interest

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

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

Note 4 – Per Share Data

Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for stock dividends. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. The Company had stock options outstanding covering 12,859 shares of common stock at both June 30, 2016 and December 31, 2015. 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.

-9-

The computation of basic and dilutive earnings per share is summarized below:


	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015

Weighted average number of common shares outstanding		6,977,931		7,084,004		6,980,474		7,092,240

Effect of dilutive stock options		—		—		—		—


Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per common share		6,977,931		7,084,004		6,980,474		7,092,240

Note 5 – Investment Securities

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


June 30, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
Securities available for sale
U.S. Treasury	$	4,022	$	45	$	—	$	4,067
U.S. Government agencies		39,692		296		67		39,921
GSE - Mortgage-backed securities and CMO’s		29,475		271		95		29,651
State and political subdivisions		14,205		145		—		14,350
Corporate bonds		5,060		30		56		5,034

Total securities available for sale	$	92,454	$	787	$	218	$	93,023


June 30, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
Securities held to maturity
U.S. Government agencies	$	1,848	$	18	$	—	$	1,866
State and political subdivisions		6,997		218		—		7,215
Corporate bonds		3,300		63		—		3,363

Total securities held to maturity	$	12,145	$	299	$	—	$	12,444


December 31, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
Securities available for sale
U.S. Treasury	$	4,026	$	—	$	14	$	4,012
U.S. Government agencies		36,159		99		188		36,070
GSE - Mortgage-backed securities and CMO’s		30,269		53		549		29,773
State and political subdivisions		13,691		351		3		14,039
Corporate bonds		5,435		—		71		5,364

Total securities available for sale	$	89,580	$	503	$	825	$	89,258

-10-


December 31, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
Securities held to maturity
U.S. Government agencies	$	1,911	$	—	$	5	$	1,906
State and political subdivisions		5,993		30		5		6,018
Corporate bonds		3,338		—		20		3,318

Total securities held to maturity	$	11,242	$	30	$	30	$	11,242

At both June 30, 2016 and December 31, 2015, the Company owned Federal Reserve Bank stock reported at cost of $507,000. Also at June 30, 2016 and December 31, 2015, the Company owned Federal Home Loan Bank Stock (FHLB) of $545,000 and $533,000, respectively. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership in, and borrowings with, these banks and classified as restricted stock on the consolidated balance sheet. These investments are carried at cost since there is no ready market and redemption has historically been made at par value. The Company estimated that the fair value approximated cost and that these investments were not impaired at June 30, 2016.

Results from sales and calls of securities available for sale for the three and six month periods ended June 30, 2016 and June 30, 2015 are as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
	(dollars in thousands)

Gross proceeds from sales	$	9,980	$	24,596	$	20,225	$	29,739


Realized gains from sales	$	337	$	277	$	542	$	502
Realized losses from sales		—		—		—		—

Net realized gains	$	337	$	277	$	542	$	502

At June 30, 2016 and December 31, 2015, securities available for sale with a carrying amount of $54.5 million and $68.8 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2016 and December 31, 2015. These unrealized losses on investment securities are a result of temporary fluctuations in market prices due to a rise in interest rates, which will adjust if rates decline, and in a volatile market and are in no way a reflection of the credit quality of the investments. Management does not believe these fluctuations are a reflection of the quality of the investments. At June 30, 2016, the unrealized losses on available for sale securities less than twelve months related to four government agency bonds and five government sponsored enterprise (GSE) mortgage backed securities. The Company had six government agency bonds, three GSE mortgage backed securities, and two corporate bonds that had been in a loss position for more than twelve months. At June 30, 2016, there were no unrealized losses on held to maturity securities. At December 31, 2015, the unrealized losses on available for sale securities less than twelve months related to one U.S. Treasury, five government agency bonds, eight government sponsored enterprise (GSE) mortgage backed securities, two corporate bonds and one state and political subdivision bond. At December 31, 2015, the unrealized losses on held to maturity securities related to one government agency security, two corporate bonds and two state and political subdivision bonds.


	Less than 12 Months				12 Months or More				Total
June 30, 2016	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	$	4,346	$	15	$	4,624	$	52	$	8,970	$	67
GSE-Mortgage-backed securities and CMO’s		7,256		35		4,615		60		11,871		95
Corporate bonds		—		—		2,976		56		2,976		56

Total securities available for sale	$	11,602	$	50	$	12,215	$	168	$	23,817	$	218

-11-


	Less than 12 Months				12 Months or More				Total
December 31, 2015	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(dollars in thousands)
Securities available for sale temporary impairment
U.S. Treasury	$	4,013	$	14	$	—	$	—	$	4,013	$	14
U.S. Gov’t agencies		16,692		128		5,048		60		21,740		188
GSE-Mortgage-backed securities and CMO’s		15,620		290		7,230		259		22,850		549
State and political		465		3		—		—		465		3
Corporate bonds		4,566		55		798		16		5,364		71

Total securities available for sale	$	41,356	$	490	$	13,076	$	335	$	54,432	$	825


	Less than 12 Months				12 Months or More				Total
December 31, 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	$	1,906	$	5	$	—	$	—	$	1,906	$	5
State and political		3,318		5		—		—		3,318		5
Corporate bonds		1,312		20		—		—		1,312		20

Total securities held to maturity	$	6,536	$	30	$	—	$	—	$	6,536	$	30

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

Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of quality but that the losses are temporary in nature. At June 30, 2016, 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.

-12-

The aggregate amortized cost and fair value of the available for sale securities portfolio at June 30, 2016 by remaining contractual maturity are as follows:


	June 30, 2016
	Amortized Cost		Estimated Fair Value		Book Yield
	(dollars in thousands)
Securities available for sale

U. S. Treasury
Due after one but within five years		4,022		4,067		1.13	%

		4,022		4,067		1.13	%

U.S. Government agencies
Due after one but within five years		22,885		23,127		1.20	%
Due after five but within ten years		7,439		7,491		1.95	%
Due after ten years		9,368		9,303		1.63	%

		39,692		39,921		1.44	%

Mortgage-backed securities
Due after one but within five years		3,810		3,855		1.97	%
Due after five but within ten years		4,426		4,434		2.21	%
Due after ten years		21,239		21,362		1.96	%

		29,475		29,651		2.00	%

State and political subdivisions
Due after one but within five years		1,879		1,988		4.78	%
Due after five but within ten years		1,603		1,624		6.31	%
Due after ten years		10,723		10,738		2.30	%

		14,205		14,350		3.08	%

Corporate Bonds
Due after one but within five years		2,841		2,841		2.15	%
Due after five but within ten years		2,219		2,193		1.50	%

		5,060		5,034		1.86	%

Total Securities available for sale
Due after one but within five years		35,437		35,878		1.54	%
Due after five but within ten years		15,687		15,742		2.40	%
Due after ten years		41,330		41,403		1.97	%

	$	92,454	$	93,023		1.88	%


	June 30, 2016
	Amortized Cost		Estimated Fair Value		Book Yield
	(dollars in thousands)
Held to maturity

U. S. Government agencies
Due after five but within ten years		1,848		1,866		2.49	%

		1,848		1,866		2.49	%

State and political subdivisions
Due after one but within five years		1,528		1,563		2.24	%
Due after five but within ten years		5,469		5,652		2.74	%

		6,997		7,215		2.63	%

Corporate Bonds
Due after one but within five years		3,300		3,363		2.76	%

		3,300		3,363		2.76	%

Total Securities held for maturity
Due after one but within five years		4,828		4,926		2.60	%
Due after five but within ten years		7,317		7,518		2.68	%

	$	12,145	$	12,444		2.65	%

-13-

Note 6 – Loans Held for Investment

The composition of net loans held for investment by class as of June 30, 2016 and December 31, 2015 are as follows:


	June 30, 2016			December 31, 2015
	(dollars in thousands)
Commercial
Commercial	$	55,112		$	52,311
Real estate - commercial		104,696			101,198
Other real estate construction loans		22,124			17,692
Noncommercial
Real estate 1-4 family construction		4,474			5,629
Real estate - residential		81,216			83,379
Home equity		50,873			49,420
Consumer loans		9,953			8,982
Other loans		1,777			1,481

		330,225			320,092
Less:
Allowance for loan losses		(2,706	)		(2,884	)
Deferred loan (fees) costs, net		70			40


Loans held for investment, net	$	327,589		$	317,248

Note 7 - Allowance for Loan Losses

The following table shows the change in the allowance for loss losses by loan segment for the three and six month period ended June 30, 2016 and 2015, respectively:


Commercial	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(dollars in thousands)

Balance, beginning of period	$	1,315		$	1,794		$	1,310		$	1,716
Provision (recovery) charged to operations		11			(228	)		71			(289	)
Charge-offs		—			(21	)		(62	)		(61	)
Recoveries		20			8			27			187

Net (charge-offs)		20			(13	)		(35	)		126

Balance at end of period	$	1,346		$	1,553		$	1,346		$	1,553


Non-Commercial	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(dollars in thousands)

Balance, beginning of period	$	1,495		$	1,935		$	1,574		$	2,022
Provision (recovery) charged to operations		(123	)		(7	)		(241	)		(8	)
Charge-offs		(64	)		(184	)		(80	)		(301	)
Recoveries		52			30			107			61

Net (charge-offs)		(12	)		(154	)		27			(240	)

Balance at end of period	$	1,360		$	1,774		$	1,360		$	1,774

-14-


Total	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(dollars in thousands)

Balance, beginning of period	$	2,810		$	3,729		$	2,884		$	3,738
Provision (recovery) charged to operations		(112	)		(235	)		(170	)		(297	)
Charge-offs		(64	)		(205	)		(142	)		(362	)
Recoveries		72			38			134			248

Net (charge-offs)		8			(167	)		(8	)		(114	)

Balance at end of period	$	2,706		$	3,327		$	2,706		$	3,327

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at June 30, 2016 and December 31, 2015:


June 30, 2016
	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
	(dollars in thousands)

Commercial	$	17	$	809	$	1,329	$	181,123	$	1,346	$	181,932
Non-Commercial		180		4,589		1,180		143,774		1,360		148,363


Total	$	197	$	5,398	$	2,509	$	324,897	$	2,706	$	330,295


December 31, 2015
	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
	(dollars in thousands)

Commercial	$	18	$	1,019	$	1,292	$	170,182	$	1,310	$	171,201
Non-Commercial		163		4,459		1,411		144,472		1,574		148,931


Total	$	181	$	5,478	$	2,703	$	314,654	$	2,884	$	320,132

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


June 30, 2016
	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	$	42	$	—	$	42	$	55,070	$	55,112	$	—
Real estate - commercial		13		20		33		104,663		104,696		—
Other real estate construction		—		193		193		21,931		22,124		—
Real estate 1-4 family construction		—		—		—		4,474		4,474		—
Real estate - residential		967		783		1,750		79,536		81,286		—
Home equity		125		42		167		50,706		50,873		—
Consumer loans		28		—		28		9,925		9,953		—
Other loans		—		—		—		1,777		1,777		—


Total	$	1,175	$	1,038	$	2,213	$	328,082	$	330,295	$	—

-15-


December 31, 2015
	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	$	46	$	34	$	80	$	52,231	$	52,311	$	—
Real estate - commercial		74		—		74		101,124		101,198		—
Other real estate construction		110		195		305		17,387		17,692		—
Real estate construction		—		—		—		5,629		5,629		—
Real estate - residential		1,580		541		2,121		81,298		83,419		—
Home equity		75		13		88		49,332		49,420		—
Consumer loan		39		—		39		8,943		8,982		—
Other loans		—		—		—		1,481		1,481		—


Total	$	1,924	$	783	$	2,707	$	317,425	$	320,132	$	—

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 Company had $1.3 million in foreclosed residential real estate and $433,000 of residential real estate in process of foreclosure at June 30, 2016.

The composition of nonaccrual loans by class as of June 30, 2016 and December 31, 2015 is as follows:


	June 30, 2016		December 31, 2015
	(dollars in thousands)

Commercial	$	—	$	34
Real estate - commercial		20		—
Other real estate construction		193		195
Real estate 1 – 4 family construction		—		—
Real estate – residential		783		541
Home equity		42		13
Consumer loans		—		—
Other loans		—		—

	$	1,038	$	783

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.

-16-

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

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

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

The tables below summarize risk grades of the loan portfolio by class at June 30, 2016 and December 31, 2015:


June 30, 2016
	Pass		Watch		Sub- standard		Doubtful		Total
	(dollars in thousands)

Commercial	$	53,522	$	1,569	$	21	$	—	$	55,112
Real estate - commercial		99,364		2,734		2,598		—		104,696
Other real estate construction		19,642		1,949		533		—		22,124
Real estate 1 - 4 family construction		4,474		—		—		—		4,474
Real estate - residential		69,565		9,231		2,490		—		81,286
Home equity		49,574		1,254		45		—		50,873
Consumer loans		9,795		154		4		—		9,953
Other loans		1,777		—		—		—		1,777


Total	$	307,713	$	16,891	$	5,691	$	—	$	330,295


December 31, 2015
	Pass		Watch		Sub- standard		Doubtful		Total
	(dollars in thousands)

Commercial	$	52,096	$	130	$	85	$	—	$	52,311
Real estate - commercial		97,506		1,161		2,531		—		101,198
Other real estate construction		15,163		1,994		535		—		17,692
Real estate 1 - 4 family construction		5,526		103		—		—		5,629
Real estate - residential		71,736		9,398		2,285		—		83,419
Home equity		48,195		1,209		16		—		49,420
Consumer loans		8,583		394		5		—		8,982
Other loans		1,481		—		—		—		1,481


Total	$	300,286	$	14,389	$	5,457	$	—	$	320,132

-17-

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. At both June 30, 2016 and December 31, 2015 there were no loans 90 days past due and still accruing. The following tables show the breakdown between performing and nonperforming loans by class at June 30, 2016 and December 31, 2015:


June 30, 2016
	Performing		Non- Performing		Total
	(dollars in thousands)

Commercial	$	55,112	$	—	$	55,112
Real estate - commercial		104,676		20		104,696
Other real estate construction		21,931		193		22,124
Real estate 1 – 4 family construction		4,474		—		4,474
Real estate – residential		80,503		783		81,286
Home equity		50,831		42		50,873
Consumer loans		9,953		—		9,953
Other loans		1,777		—		1,777


Total	$	329,257	$	1,038	$	330,295


December 31, 2015
	Performing		Non- Performing		Total
	(dollars in thousands)

Commercial	$	52,277	$	34	$	52,311
Real estate - commercial		101,198		—		101,198
Other real estate construction		17,497		195		17,692
Real estate 1 – 4 family construction		5,629		—		5,629
Real estate – residential		82,878		541		83,419
Home equity		49,407		13		49,420
Consumer loans		8,982		—		8,982
Other loans		1,481		—		1,481


Total	$	319,349	$	783	$	320,132

-18-

Loans are considered impaired when, based on current information and events it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired, a specific calculation is performed and a specific reserve is allocated, if necessary. The tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class at June 30, 2016 and December 31, 2015.


June 30, 2016
	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance
	(dollars in thousands)

Commercial	$	32	$	—	$	32	$	2
Real estate - commercial		479		187		292		9
Other real estate construction		836		193		105		6
Real estate 1 - 4 family construction		10		—		10		—
Real estate - residential		4,445		1,599		2,846		168
Home equity		57		37		20		12
Consumer loans		77		69		8		—
Other loans		—		—		—		—


Total	$	5,936	$	2,085	$	3,313	$	197


December 31, 2015
	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance
	(dollars in thousands)

Commercial	$	97	$	80	$	17	$	2
Real estate - commercial		620		498		122		9
Other real estate construction		840		195		107		7
Real estate 1 - 4 family construction		13		—		13		—
Real estate - residential		4,343		1,507		2,836		163
Home equity		28		28		—		—
Consumer loans		75		75		—		—
Other loans		—		—		—		—


Total	$	6,016	$	2,383	$	3,095	$	181

-19-


	Three Months ended June 30, 2016				Three Months ended June 30, 2015
	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
	(dollars in thousands)

Commercial	$	33	$	1	$	72	$	2
Real estate - commercial		557		9		1,511		12
Other real estate construction		299		2		276		—
Real estate 1- 4 family construction		10		—		17		—
Real estate - residential		4,552		53		5,209		50
Home equity		62		1		61		1
Consumer loans		79		1		26		—
Other loans		—		—		—		—


Total	$	5,592	$	67	$	7,172	$	65


	Six Months ended June 30, 2016				Six Months ended June 30, 2015
	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
	(dollars in thousands)

Commercial	$	54	$	1	$	81	$	3
Real estate - commercial		578		19		1,551		28
Other real estate construction		300		3		316		1
Real estate 1- 4 family construction		11		—		18		—
Real estate - residential		4,482		111		5,239		101
Home equity		51		1		57		1
Consumer loans		78		3		40		1
Other loans		—		—		—		—


Total	$	5,554	$	138	$	7,302	$	135

Note 8 – Troubled Debt Restructures

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

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

At June 30, 2016, the Company had $4.4 million in TDR’s outstanding, of which all were on an accruing basis with the exception of one loan for $230,000.

-20-

For the three and six months ended June 30, 2016 and 2015, the following table presents a breakdown of the types of concessions made by loan class:


	For the three months ended June 30, 2016
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)

Other:
Commercial		—	$	—	$	—
Real estate - commercial		1		289		238
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		1		40		30
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—


Total		2	$	329	$	268


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

Other:
Commercial		1	$	48	$	29
Real estate - commercial		—		—		—
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		2		217		216
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—


Total		3	$	265	$	245


	For the six months ended June 30, 2016
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)

Other:
Commercial		—	$	—	$	—
Real estate - commercial		1		289		238
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		1		40		30
Home equity		—		—		—
Consumer loans		1		9		9
Other loans		—		—		—


Total		3	$	338	$	277

-21-


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

Other:
Commercial		1	$	48	$	29
Real estate - commercial		1		265		124
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		4		406		398
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—


Total		6	$	719	$	551

During the twelve months ended June 30, 2016 and June 30, 2015, 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 $164,000 in the allowance for loan loss as of June 30, 2016, as a direct result of these TDRs. At June 30, 2015, there was $186,000 in the allowance for loan loss related to TDRs.

The following table presents the successes and failures of the types of modifications within the previous twelve months as of June 30, 2016 and 2015:


	Paid In Full				Paying as restructured				Converted to nonaccrual				Foreclosure/ Default
	Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments
	(dollars in thousands)
June 30, 2016

Below market
Interest rate		—	$	—		—	$	—		—	$	—		—	$	—
Extended payment Terms		—		—		—		—		—		—		—		—
Forgiveness of Principal Other		3		212		8		374		—		—		2		58


Total		3	$	212		8	$	374		—	$	—		2	$	58


June 30, 2015

Below market
Interest rate		—	$	—		—	$	—		—	$	—		—	$	—
Extended payment Terms		—		—		—		—		—		—		—		—
Forgiveness of Principal Other		—		—		9		1,298		—		—		—		—


Total		—	$	—		9	$	1,298		—	$	—		—	$	—

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

-22-

Note 9 - Commitments and Contingencies

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

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

At June 30, 2016, outstanding financial instruments whose contract amounts represent credit risk were approximately:


	(dollars in thousands)
Commitments to extend credit	$	93,077
Credit card commitments		9,738
Standby letters of credit		1,737

Total commitments	$	104,552

-23-

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 transfer of securities.

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment by using one of several methods including collateral value, fair value of similar debt 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. The Company typically bases the fair value of the collateral on appraised values which the Company considers Level 3 valuations.

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

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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. The Company typically bases the fair value of the collateral on appraised values which the Company considers Level 3 valuations.

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 June 30, 2016 and December 31, 2015:


	June 30, 2016
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Securities available for sale:
US Treasury	$	4,067	$	4,067	$	—	$	—
US Government Agencies		39,921		—		39,921		—
GSE - Mortgage-backed securities and CMO’s		29,651		—		29,651		—
State and political subdivisions		14,350		—		14,350		—
Corporate bonds		5,034		—		5,034		—


Total assets at fair value	$	93,023	$	4,067	$	88,956	$	—


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


	December 31, 2015
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Securities available for sale:
US Treasury	$	4,012	$	4,012	$	—	$	—
US Gov’t		36,070		—		36,070		—
Mortgage-backed securities and CMO’s		29,773		—		29,773		—
State and political subdivisions		14,039		—		14,039		—
Corporate bonds		5,364		—		5,364		—


Total assets at fair value	$	89,258	$	4,012	$	85,246	$	—


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

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The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value less cost of sell at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of June 30, 2016 and December 31, 2015:


	June 30, 2016
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Impaired loans	$	3,309	$	—	$	—	$	3,309
Other real estate owned		2,327		—		—		2,327

Total assets at fair value	$	5,636	$	—	$	—	$	5,636


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


	December 31, 2015
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Impaired loans	$	3,108	$	—	$	—	$	3,108
Other real estate owned		2,909		—		—		2,909


Total assets at fair value	$	6,017	$	—	$	—	$	6,017

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

Quantitative Information about Level 3 Fair Value Measurements


June 30, 2016
	Valuation Technique	Unobservable Input	General Range
Nonrecurring measurements:

Impaired loans	Discounted appraisals	Expected loss rates		0 – 25%
	Discounted cash flows	Discount Rate		4%-8.75%

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

December 31, 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%

At June 30, 2016, 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.

The fair value estimates presented at June 30, 2016 and December 31, 2015, are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price at which a

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liability could be settled. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of June 30, 2016 and December 31, 2015:


June 30, 2016
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	51,121	$	51,217	$	47,137	$	4,080	$	—
Securities available for sale		93,023		93,023		4,067		88,956		—
Securities held to maturity		12,145		12,444		—		12,444		—
Loans held for investment, net		327,589		325,420		—		—		325,420
Loans held for sale		2,270		2,270		—		2,270		—
Restricted stock		1,052		1,052		1,052		—		—
Accrued interest receivable		1,473		1,473		—		—		1,473

FINANCIAL LIABILITIES
Deposits	$	462,069	$	442,305	$	—	$	442,305	$	—
Short-term borrowings		1,931		1,931		—		1,931		—
Long-term borrowings		7		7		—		7		—
Junior subordinated debt		9,534		9,681		—		—		9,681
Accrued interest payable		154		154		—		—		154

December 31, 2015
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	68,933	$	68,973	$	65,198	$	3,775	$	—
Securities available for sale		89,258		89,258		4,012		85,246		—
Securities held to maturity		11,242		11,242		—		11,242		—
Loans held for investment, net		317,248		313,649		—		—		313,649
Loans held for sale		5,922		5,922		—		5,922		—
Restricted stock		1,040		1,040		1,040		—		—
Accrued interest receivable		1,564		1,564		—		—		1,564

FINANCIAL LIABILITIES
Deposits	$	467,733	$	442,619	$	—	$	442,619	$	—
Short-term borrowings		5,758		5,758		—		5,758		—
Long-term borrowings		13		13		—		13
Junior subordinated debt		9,534		9,688		—		—		9,688
Accrued interest payable		168		168		—		—		168

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

•

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

•

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

•

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

•

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 June 30, 2016, the subsidiary bank had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, they were deemed to have no current fair value. See Note 9.

Note 12 – Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers, Topic 606 (“ASU 2014-09”)”. The new standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under existing guidance. These may include identifying performance obligations in the

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contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August of 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, Topic 606: Deferral of the Effective Date, deferring the effective date of ASU 2014-09 until annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this new guidance recognized at the date of initial application. The Company is currently evaluating the provisions of ASU 2014-09 to determine the potential impact the new standard will have to the Company’s financial statements.

In February 2015, the FASB issued ASU 2015-02, “Consolidation, topic 810 (“ASU-2015-02”)”. The amendments to this standard improve targeted areas of consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard places more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE), and changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs. The amendments in this ASU are effective for fiscal years beginning after December 15, 2015 for public business entities, including interim periods within those fiscal years. We adopted the guidance effective in the first quarter of 2016. The initial adoption had no impact on our consolidated financial position and consolidated results of operations.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in this ASU address certain aspects of recognition, measurement, presentation and disclosure. The amendments in this ASU (i) require equity investments to be measured at fair value with changes in fair value recognized in net income; (ii) simplify the impairment assessment of equity investments without readily determinable fair value; (iii) require public business entities to use exit prices, rather than entry prices, when measuring fair value of financial instruments for disclosure purposes; (iv) require separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; (v) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet; (vi) require separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; and (vii) state that a valuation allowance on deferred tax assets related to available-for-sale securities should be evaluated in combination with other deferred tax assets. The amendments in this ASU are effective for public business entities for fiscal periods beginning after December 15, 2017, including interim periods within those fiscal years. The ASU only permits early adoption of the instrument-specific credit risk provision. We are currently evaluating the impact of the new standard.

In February 2016, the FASB issued ASU 2016-02, “Leases, topic 842 (“ASU 2016-02”)”.This ASU increases the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The key difference between existing standards and this ASU is the requirement for lessees to recognize on their balance sheet all lease contracts with lease terms greater than 12 months, including operating leases. Both a right-of-use asset, representing the right to use the leased asset, and a lease liability, representing the contractual obligation, are required to be recognized on the balance sheet of the lessee at lease commencement. Further, this ASU requires lessees to classify leases as either operating or finance leases, which are substantially similar to the current operating and capital leases classifications. The distinction between these two classifications under the new standard does not relate to balance sheet treatment, but

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relates to treatment in the statements of income and cash flows. Lessor guidance remains largely unchanged with the exception of how a lessor determines the appropriate lease classification for each lease to better align the lessor guidance with revised lessee classification guidance. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the new standard and we will adopt during the first quarter of 2019.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. Entities will apply the standard’s provisions as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently assessing the impact of the new guidance on the Company’s consolidated financial statements.

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

Reclassification

Certain amounts in the 2015 financial statements have been reclassified to conform to the 2016 presentation. These reclassifications do not have an impact on net income or shareholders’ equity.

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

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

Comparison of Financial Condition at June 30, 2016 and December 31, 2015.

During the six months ended June 30, 2016, the Company’s total assets decreased $7.0 million, from $532.2 million to $525.3 million.

Cash and cash equivalents decreased $17.8 million during the six months ended June 30, 2016. Cash and due from banks decreased $831,000, while interest-earning deposits with banks decreased $17.0 million. These decreases are directly related to the decreases in deposits, as well as an increase in loans held for investment of $10.2 million for the first six months of 2016.

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Investment securities consist of securities available for sale and securities held to maturity. Investment securities increased $4.7 million to $105.2 million for the six month period ended June 30, 2016. During the second quarter of 2016, the Company, in a continued effort to reduce our extension risk in a rising interest rate environment, made the decision to sell $10 million of investment securities. The Company realized a net gain of $337,000 on these transactions. At June 30, 2016, the Company had net unrealized gains on the securities available for sale of $569,000.

Loans held for investment increased from $320.1 million to $330.3 million, an increase of $10.2 million. The real estate one-to-four family construction and real estate residential segments of the loan portfolio decreased during the first six months of 2016 with the real estate residential experiencing the largest decline of 2.59%, or $2.2 million. The Company experienced growth in the remaining segments of its loan portfolio during the first six months of 2016, with other real estate construction having the largest increase of 25.05%. Loans held for sale decreased 61.67%, or $3.7 million. The allowance for loan losses was $2.7 million at June 30, 2016, which represented 0.81% of the loan portfolio.

Other changes in our consolidated assets are related to premises and equipment, interest receivable, restricted stock, bank owned life insurance, other real estate owned, prepaid assets and other assets. Bank owned life insurance increased $58,000, while premises and equipment decreased $189,000. Accrued interest receivable declined $91,000. Restricted stock, which is comprised of Federal Home Loan Bank stock and Federal Reserve Bank stock, increased $12,000. 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 $12,000, while the Company’s required ownership in Federal Reserve Bank stock remained at $507,000 during the first six months of 2016. Other real estate owned decreased $638,000. During the six months ended June 30, 2016, the Company sold thirteen pieces of property totaling $753,000. The Company recorded net valuation write-down adjustments of $34,000. Other assets increased $352,000.

Customer deposits, our primary funding source, experienced a $5.7 million decrease during the six month period ended June 30, 2016, decreasing from $467.7 million to $462.1 million. Demand noninterest bearing checking increased $13.5 million and savings deposits increased $1.9 million. This increase was offset by declines in interest checking and money market accounts of $8.3 million, time deposits of $250,000 and over of $1.1 million and other time deposits of $11.6 million.

Total borrowings decreased $3.8 million for the period and consist of both short-term and long-term borrowed funds.

Other liabilities increased from $5.8 million at December 31, 2015 to $6.9 million at June 30, 2016, an increase of $1.1 million.

At June 30, 2016, total shareholders’ equity was $44.8 million, an increase of $1.5 million from December 31, 2015. Net income for the six month period was $1.2 million. Unrealized gains and losses on investment securities, net of tax, increased $588,000. The Company also repurchased common stock totaling $49,000. The Company paid $281,000 in dividends attributed to noncontrolling interest.

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Comparison of Results of Operations for the Three Months Ended June 30, 2016 and 2015.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $710,000 for the three months ended June 30, 2016, as compared to $660,000 for the three months ended June 30, 2015, an increase of $50,000. Net income available to common shareholders was $562,000 or $0.08 per common share at June 30, 2016, compared to $513,000 or $0.07 per common share at June 30, 2015. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.

Net Interest Income

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

Net interest income for the three months ended June 30, 2016 was $4.1 million compared to $4.0 million for the three months ended June 30, 2015, an increase of $73,000. During the second quarter, the volume of interest-earning assets increased versus a decline in volume of interest-bearing liabilities by $184,000. The average yield on our interest–earning assets decreased seven basis points to 3.80%, while the average rate we paid for our interest-bearing liabilities decreased twelve basis points to 0.35%. A portion of the Company’s loan portfolio has interest rate floors and caps in place on the loans. The interest rate floor feature has allowed the Company to maintain a more favorable interest margin despite a decline in rates; however, the interest rate cap could hurt the margin in a rising rate environment. The aforementioned changes resulted in an increase of five basis points in our interest rate spread, from 3.39% in the second quarter of 2015 to 3.44% in the second quarter of 2016. Our net interest margin was 3.51% and 3.48% for the comparable periods in 2016 and 2015, respectively.

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The following table presents average balance sheets and a net interest income analysis for the three months ended June 30, 2016 and 2015:

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended June 30,


(dollars in thousands)
	Average Balance				Income/Expenses				Rate/Yield
	2016		2015		2016		2015		2016			2015
Interest-earning assets:
Taxable securities	$	86,756	$	100,597	$	322	$	394		1.49	%		1.57	%
Nontaxable securities (1)		19,536		12,291		126		87		4.20	%		4.58	%
Short-term investments		47,081		46,917		72		42		0.62	%		0.36	%
Taxable loans		313,290		301,344		3,787		3,836		4.86	%		5.11	%
Non-taxable loans (1)		16,919		14,021		109		102		4.18	%		4.70	%

Total interest-earning assets		483,582		475,170		4,416		4,461		3.80	%		3.87	%


Interest-bearing liabilities:
Interest-bearing deposits		359,939		363,670		182		294		0.20	%		0.32	%
Short-term borrowed funds		2,991		3,113		8		15		1.08	%		1.93	%
Long-term debt		9,541		10,844		137		137		5.78	%		5.07	%

Total interest bearing liabilities		372,471		377,627		327		446		0.35	%		0.47	%


Net interest spread	$	111,111	$	97,543	$	4,089	$	4,015		3.44	%		3.39	%


Net interest margin (1) (% of earning assets)										3.51	%		3.48	%

(1)	Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 34.00% tax rate.

Provision and Allowance for Loan Losses

The provision for loan losses was a recovery of ($112,000) for the three months ending June 30, 2016 compared to a recovery of ($235,000) for the same period in 2015. There were net loan recoveries of $8,000 for the three months ended June 30, 2016, as compared with net loan charge-offs of $167,000 during the same period of 2015. Refer to the Asset Quality discussion on page 36 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like all financial institutions, diversification of our revenue base is of major importance in our long term success. Total noninterest income increased $672,000 for the three month period ending June 30, 2016 as compared to the same period in 2015. The primary factor contributing to the overall increase was an increase in income from mortgage loan sales of $466,000, increasing from $492,000 for the quarter ended June 30, 2015 to $958,000 for the same period in 2016. During 2015, the Company expanded its mortgage operation into a neighboring market. This expansion and the resulting increase in mortgage loan origination volume was the driving force behind the growth in income from loan sales. Service charges on deposit accounts produced revenue of $289,000, a decrease of $22,000 for the three months ended June 30, 2016. The primary factor leading to this decrease was a decrease in NSF (non-sufficient funds) fees for the comparable periods. Other service fees and commissions experienced a $114,000 or 11.04% increase for the comparable three month period, primarily due to an increase in brokerage commissions and asset management fees. The Company realized gains on the sale of investment securities during the three months ended June 30, 2016 of $337,000 as compared to realized gains of $277,000 for the same period in 2015.

Noninterest Expense

Noninterest expense for the quarter ended June 30, 2016 was $6.0 million compared to $5.5 million for the same period of 2015, an increase of $532,000. Salaries and employee benefits, the largest component of noninterest expense, increased $377,000 for the quarter ending June 30, 2016. The majority of this increase is attributable to the increase in staffing related to the expansion of the mortgage department. Professional fees and services increased $45,000

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during the three months ending June 30, 2016 as compared to the same period in 2015. FDIC deposit insurance premiums declined $12,000 for the comparable periods. Foreclosed real estate expense decreased $57,000 for the three months ending June 30, 2016 compared to same period in 2015. Foreclosed real estate expenses have improved $57 thousand for the quarter when compared to the same period of 2015, and $99 thousand when comparing 2016 year-to-date to the same period of 2015. We continue to focus on reducing the number of properties through sales, which lowers the ongoing maintenance expense, as well as the annual taxes and insurance. Other noninterest expense increased $97,000 for the comparable three-month periods. The table below reflects the composition of other noninterest expense.

Other noninterest expense


	Three Months Ended June 30,
	2016		2015
	(in thousands)

Postage	$	48	$	56
Telephone and data lines		41		39
Insurance		119		140
Shareholder relations expense		34		33
Dues and subscriptions		55		47
Other		449		334

Total	$	746	$	649

Income Tax Expense

The Company had income tax expense of $344,000 for the three months ended June 30, 2016 at an effective tax rate of 32.57% compared to income tax expense of $303,000 with an effective tax rate of 31.46% in the 2015 period. Income taxes computed at the statutory rate are affected primarily by the 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 declined from 5% in 2015 to 4% in 2016. However, even with this reduction in the state tax rate, the effective tax rate increased as we had less interest income from tax free bonds. The overall nominal expense also increased in relation to the additional $90,000 of income before taxes for the second quarter of 2016 compared to 2015.

Comparison of Results of Operations For the Six Months Ended June 30, 2016 and 2015.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $1.2 million for the six months ended June 30, 2016, as compared to $1.3 million for the six months ended June 30, 2015, a decrease of $77,000. Net income available to common shareholders was $925,000 or $0.13 per common share for the six months ended June 30, 2016, compared to $1.0 million or $0.14 per common share for the six months ended June 30, 2015. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.

Net Interest Income

Net interest income for the six months ended June 30, 2016 was $8.2 million compared to $8.0 million for six months ending June 30, 2015. During the six months ending June 30, 2016, the volume of interest-earning assets increased, outpacing the decline in volume of interest-bearing liabilities by $309,000. The average yield on our interest–earning assets declined three basis points to 3.83%, while the average rate we paid for our interest-bearing liabilities decreased nine basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve adjusts interest rates, while interest-bearing time deposits adjust at the time of maturity. The aforementioned changes resulted in an increase of five basis points in our interest rate spread to 3.45% for the first six months of 2016, compared to 3.40% for the first six months

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of 2015. Our net interest margin was 3.53% and 3.49% for the comparable six month periods in 2016 and 2015, respectively. A portion of the Company’s loan portfolio has interest rate floors and caps in place on the loans. This feature has allowed the Company to maintain a stronger interest margin, while there has been a decline in rates; however, this feature could hurt the margin in a rising rate environment.

The following table presents average balance sheets and a net interest income analysis for the six months ended June 30, 2016 and 2015:

Average Balance Sheet and Net Interest Income Analysis

For the Six Months Ended June 30,


(dollars in thousands)
	Average Balance				Income/Expenses				Rate/Yield
	2016		2015		2016		2015		2016			2015
Interest-earning assets:
Taxable securities	$	84,104	$	104,624	$	650	$	811		1.55	%		1.56	%
Nontaxable securities (1)		19,216		12,728		249		169		4.20	%		4.31	%
Short-term investments		49,791		47,147		158		79		0.64	%		0.34	%
Taxable loans		310,374		298,674		7,575		7,646		4.91	%		5.16	%
Non-taxable loans (1)		16,953		13,491		220		202		4.21	%		4.87	%

Total interest-earning assets		480,438		476,664		8,852		8,907		3.83	%		3.86	%

Interest-bearing liabilities:
Interest-bearing deposits		360,411		368,433		396		593		0.22	%		0.32	%
Short-term borrowed funds		4,290		3,508		29		27		1.41	%		1.55	%
Long-term debt		9,545		10,703		273		272		5.75	%		5.12	%

Total interest bearing liabilities		374,246		382,644		698		892		0.38	%		0.47	%


Net interest spread	$	106,192	$	94,020	$	8,154	$	8,015		3.45	%		3.39	%


Net interest margin (1) (% of earning assets)										3.53	%		3.49	%

(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 2016.

Provision and Allowance for Loan Losses

The Company recovered $(170,000) for the six months ending June 30, 2016 compared to $(297,000) recovered for the same period in 2015. There were net loan charge-offs of $8,000 for the six months ended June 30, 2016 as compared with net loan charge-offs of $114,000 during the same period of 2015. Refer to the Asset Quality discussion on page 36 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like all financial institutions, diversification of our earnings base is of major importance in our long term success. Total noninterest income increased $1.1 million for the six month period ending June 30, 2016 as compared to the same period in 2015. Income from mortgage loan sales was $1.7 million for the six months ended June 30, 2016 compared to $993,000 for the same period in 2015. Service charges on deposit accounts produced revenue of $595,000 for the six months ended June 30, 2016, a decrease of $46,000 compared to the same period in 2015. Other service fees and commissions experienced a 5.7% increase for the comparable six month period. This increase was directly related to brokerage commissions and asset management fees increasing. The Company realized gains on sale of other assets of $32,000 for the six months ended June 30, 2016 compared to realized losses of $5,000 for the same period in 2015. Gains realized on the sale of securities were $542,000 for the first six months in 2016 compared to $502,000 for the same period in 2015.

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Noninterest Expense

Noninterest expense for the six months ended June 30, 2016 was $12.0 million compared to $10.7 million for the same period of 2015; an increase of $1.2 million. Salaries and employee benefits, the largest component of noninterest expense, increased $848,000 for the six months ending June 30, 2016. The majority of this increase is attributable to the increase in staffing and commissions paid related to the expansion of the mortgage department. Professional fees and services increased $86,000 during the six months ending June 30, 2016 as compared to the same period in 2015. FDIC deposit insurance premiums also declined $28,000 for the comparable periods. Foreclosed real estate expense decreased $99,000 for the six months ending June 30, 2016 compared to the same period in 2015. The driver of this decline is the overall decline in outstanding other real estate owned. Other noninterest expense increased $294,000 for the comparable six month periods. The table below reflects the composition of other noninterest expense.

Other noninterest expense


	Six Months Ended June 30,
	2016		2015
	(dollars in thousands)

Postage	$	100	$	102
Telephone and data lines		84		84
Insurance expense		230		269
Shareholder relations expense		67		88
Dues and subscriptions		97		85
Other		856		512

Total	$	1,434	$	1,140

Income Tax Expense

The Company had income tax expense of $517,000 for the six months ended June 30, 2016 resulting in an effective tax rate of 29.72%, compared to income tax expense of $576,000 and an effective rate of 30.75% in the 2015 period.

Asset Quality

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

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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 to be impaired and evaluated as an impaired loan.

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

At June 30, 2016 the levels of our impaired loans, which includes all loans in nonaccrual status, TDRs and other loans deemed by management to be impaired, were $5.4 million compared to $5.5 million at December 31, 2015, a net decrease of $80,000. Total nonaccrual loans, which are a component of impaired loans, increased from $783,000 at December 31, 2015 to $1.0 million at June 30, 2016. During the six months of 2016, six relationships totaling $440,000 were added to impaired loans. These additions were offset in part by two impaired relationships totaling $62,000 being charged off and net pay downs of $59,000.

The allowance expressed as a percentage of gross loans held for investment decreased seven basis points from 0.88% at December 31, 2015 to 0.81% at June 30, 2016. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 0.86% at December 31, 2015 and 0.77% at June 30, 2016, while the individually evaluated allowance as a percentage of individually evaluated loans increased from 3.30% to 3.65% for the same periods. The portion of the Company’s allowance for loan loss model related to general reserves captures the mean loss of individual loans and the rare event of severe loss that can occur within the loan portfolio. Specifically, the Company calculates probable losses on loans by computing a probability of loss and expected loss scenario by FDIC call report codes. Together, these expected components as well as a level of more extreme unexpected losses form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.

The Company assesses the probability of losses inherent in the loan portfolio using probability of default data, acquired from a third party vendor representing a one-year loss horizon for each obligor. The Company updates the data inputs into the model; specifically the loss given default and the probability of defaults obtained from the vendor annually during the second quarter. The Company updates the credit scores which is one of the components used within the allowance model semi-annually, during the first and third quarters. The probability of default associated with each credit score is the major driver in the overall decrease in the allowance for loan losses, thus reducing the balance of the allowance.

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Nonperforming loans, which consist of nonaccrual loans and loans past due 90 days and still accruing, to total loans increased from 0.24% at December 31, 2015, to 0.31% at June 30, 2016.

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

Other real estate owned decreased $588,000 during the second quarter of 2016. The Company sold nine pieces of foreclosed property totaling $711,000 realizing a gain of $7,000. The Company had no write-downs or changes in reserves on the remaining existing property. There were no loans foreclosed on during the second quarter.

Restructured loans at June 30, 2016 totaled $4.4 million compared to $4.5 million at December 31, 2015 and are included in impaired loans. At June 30, 2016, there was one restructured loan for $230,000 in nonaccrual status. The remainder were accruing.

The following table shows the comparison of nonperforming assets at June 30, 2016 to December 31, 2015:

Nonperforming Assets

(dollars in thousands)


	June 30, 2016			December 31, 2015
Nonperforming assets:
Loans past due 90 days or more	$	—		$	—
Nonaccrual loans		1,038			783
Other real estate owned		4,356			4,994

Total nonperforming assets	$	5,394		$	5,777


Allowance for loans losses	$	2,706		$	2,884
Nonperforming loans to total loans		0.31	%		0.24	%
Allowance for loan losses to total loans		0.81	%		0.90	%
Nonperforming assets to total assets		1.03	%		1.09	%
Allowance for loan losses to nonperforming loans		260.69	%		368.23	%

Liquidity and Capital Resources

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

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

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can be used to increase liquidity and provide additional financial flexibility. These sources are the subsidiary bank’s established federal funds lines with correspondent banks aggregating $28 million at June 30, 2016, with available credit of $28 million; established borrowing relationships with the Federal Home Loan Bank, with available credit of $58.5 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of $23.8 million and the issuance of commercial paper. The Company has also secured long-term debt from other sources. Total debt from these sources aggregated $11.5 million at June 30, 2016, compared to $15.3 million at December 31, 2015.

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

The Company continues to maintain capital ratios that support its asset growth. Bank regulatory agencies approved regulatory capital guidelines (“Basel III”) aimed at strengthening existing capital requirements for banking organizations. Under the final rules, minimum requirements increase for both the quantity and quality of capital held by the Company. The rules include a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.50%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.00% to 6.00%, require a minimum ratio of total capital to risk-weighted assets of 8.00%, and require a minimum Tier 1 leverage ratio of 4.00%. A new capital conservation buffer, comprised of common equity Tier 1 capital, was also established above the regulatory minimum capital requirements. This capital conservation buffer will be phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increase each subsequent year by an additional 0.625% until reaching its final level of 2.50% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. The final rules also revise the definition and calculation of Tier 1 capital, total capital, and risk-weighted assets.

The phase-in period for the final rules became effective for the Company and its subsidiary bank on January 1, 2015, with full compliance of all the final rules’ requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019. As of June 30, 2016, the Company and its subsidiary bank continue to exceed minimum capital standards and remain well-capitalized under the new rules.

As previously discussed, the Company’s subsidiary bank has a net total of $10.6 million in outstanding fixed Rate Noncumulative Perpetual Preferred Stock. The preferred stock qualifies as Tier 1 capital at the bank and will pay dividends at an annual rate of 5.30%. The net total of $10.5 million is presented as noncontrolling interest at the Company level and qualifies as Tier 1 capital at the Company. At June 30, 2016, 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, 2015.

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Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

Management of the Company has evaluated, with the participation of the Company’s principal executive officer and principal financial officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a -15(f) and 15d – 15(f) of the Exchange Act) during the second quarter of 2016. In connection with such evaluation, the Company has determined that there were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensuring that the Company’s systems evolve with its business.

Part II. OTHER INFORMATION

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

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

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information with respect to shares of common stock repurchased by the Company during the three months ended June 30, 2016.


	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Program (1)		(d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans (2)(3)
April 1, 2016 Through April 30, 2016		—	$	—		—	$	—
May 1, 2016 Through May 31, 2016		5,853	$	4.50		—	$	—
June 1, 2016 Through June 30, 2016		3,810	$	4.43		—	$	—

Total		9,663	$	4.47		—	$	—

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

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Mine Safety Disclosures

Not applicable

Item 5.

Other Information

None.

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Item 6. Exhibits


Exhibit Number		Description of Exhibit

3.1		Registrant’s Articles of Incorporation ⁽¹⁾

3.2		Registrant’s By-laws ⁽⁶⁾

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

4.1		Form of stock certificate ⁽¹⁾

4.2		Form of Security Holders Agreement ⁽⁸⁾

10.1		Incentive Stock Option Plan, as amended ⁽¹⁾

10.2		Employee Stock Ownership Plan and Trust ⁽²⁾

10.3		2006 Incentive Stock Option Plan ⁽³⁾

10.4		2006 Employee Stock Purchase Plan ⁽³⁾

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

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

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

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

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

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

101		Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016, 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.

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

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

(9)	Incorporated by reference to Registrant’s Registration Statement on Form S-8 dated October 27, 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:	August 9, 2016	By:	/s/ Roger L. Dick
		Roger L. Dick
		President and Chief Executive Officer

Date:	August 9, 2016	By:	/s/ R. David Beaver, III
		R. David Beaver, III
		Principal Financial Officer

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EXHIBIT INDEX


Exhibit Number		Description of Exhibit

3.1		Registrant’s Articles of Incorporation ⁽¹⁾

3.2		Registrant’s By-laws ⁽⁶⁾

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

4.1		Form of stock certificate ⁽¹⁾

4.2		Form of Security Holders Agreement ⁽⁸⁾

10.1		Incentive Stock Option Plan, as amended ⁽¹⁾

10.2		Employee Stock Ownership Plan and Trust ⁽²⁾

10.3		2006 Incentive Stock Option Plan ⁽³⁾

10.4		2006 Employee Stock Purchase Plan ⁽³⁾

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

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

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

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

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

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

101		Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016, 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)	Incorporated by reference to Registrant’s Annual Report on Form 10-Q for the Quarter ended June 30, 2011.

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

(9)	Incorporated by reference to Registrant’s Registration Statement on Form S-8 dated October 27, 2015.

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Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company