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 JuneSeptember 30, 2009
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
COMMISSION FILE NUMBER 000-22062
UWHARRIE CAPITAL CORP
(Exact name of registrant as specified in its charter)
NORTH CAROLINA | 56-1814206 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
132 NORTH FIRST STREET ALBEMARLE, NORTH CAROLINA | 28001 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrant’s Telephone number, including area code: (704) 983-6181
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨Yes ¨ No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the classes of common stock issuer’s as of the latest practicable date: 7,593,929November 10, 2009 shares of common stock outstanding as of August 1, 2009.7,593,929.
Page No. | ||||
Part I. | ||||
Item 1 - | ||||
Consolidated Balance Sheets | 3 | |||
4 | ||||
5 | ||||
Consolidated Statements of Cash Flows | 6 | |||
7 | ||||
Item 2 - | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||
Item 3 - | ||||
Item 4 - | ||||
Part II. | ||||
Item 1 - | ||||
Item 1A - | ||||
Item 2 - | ||||
Item 3 - | 31 | |||
Item 4 - | 31 | |||
Item 5 - | ||||
Item 6 - | ||||
-2-
Uwharrie Capital Corp and Subsidiaries
Consolidated Balance Sheets
June 30, 2009 (Unaudited) | December 31, 2008* | September 30, 2009 (Unaudited) | December 31, 2008* | |||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||
ASSETS | ||||||||||||||||
Cash and due from banks | $ | 7,750 | $ | 2,931 | $ | 7,837 | $ | 2,931 | ||||||||
Interest-earning deposits with banks | 2,807 | 10,353 | 3,110 | 10,353 | ||||||||||||
Securities available for sale, at fair value | 74,650 | 68,835 | 85,277 | 68,835 | ||||||||||||
Loans held for sale | 2,922 | 2,691 | 1,332 | 2,691 | ||||||||||||
Loans: | ||||||||||||||||
Loans held for investment | 344,721 | 340,830 | 351,794 | 340,830 | ||||||||||||
Less allowance for loan losses | (4,732 | ) | (4,361 | ) | (4,828 | ) | (4,361 | ) | ||||||||
Net loans held for investment | 339,989 | 336,469 | 346,966 | 336,469 | ||||||||||||
Premises and equipment, net | 12,863 | 11,128 | 13,480 | 11,128 | ||||||||||||
Interest receivable | 1,987 | 2,027 | 2,174 | 2,027 | ||||||||||||
Federal Home Loan Bank stock | 3,147 | 2,284 | 3,201 | 2,284 | ||||||||||||
Bank owned life insurance | 5,608 | 5,511 | 5,652 | 5,511 | ||||||||||||
Goodwill | 987 | 987 | 987 | 987 | ||||||||||||
Other real estate owned | 2,497 | 2,816 | 2,623 | 2,816 | ||||||||||||
Other assets | 8,629 | 6,436 | 8,065 | 6,436 | ||||||||||||
Total assets | $ | 463,836 | $ | 452,468 | $ | 480,704 | $ | 452,468 | ||||||||
LIABILITIES | ||||||||||||||||
Deposits: | ||||||||||||||||
Demand noninterest-bearing | $ | 47,206 | $ | 46,032 | $ | 43,825 | $ | 46,032 | ||||||||
Interest checking and money market accounts | 118,932 | 117,325 | 120,616 | 117,325 | ||||||||||||
Savings deposits | 32,128 | 26,360 | 32,796 | 26,360 | ||||||||||||
Time deposits, $100,000 and over | 70,837 | 63,321 | 71,220 | 63,321 | ||||||||||||
Other time deposits | 102,681 | 100,589 | 103,030 | 100,589 | ||||||||||||
Total deposits | 371,784 | 353,627 | 371,487 | 353,627 | ||||||||||||
Short-term borrowed funds | 14,642 | 22,249 | 29,816 | 22,249 | ||||||||||||
Long-term debt | 30,648 | 32,502 | 31,648 | 32,502 | ||||||||||||
Interest payable | 487 | 502 | 456 | 502 | ||||||||||||
Other liabilities | 3,051 | 2,355 | 2,807 | 2,355 | ||||||||||||
Total liabilities | 420,612 | 411,235 | 436,214 | 411,235 | ||||||||||||
Off balance sheet items, commitments and contingencies (Note 6) | ||||||||||||||||
SHAREHOLDERS’ EQUITY | ||||||||||||||||
Preferred stock, no par value: 10,000,000 shares authorized; 10,000 shares of series A issued and outstanding and | 10,000 | 10,000 | 10,000 | 10,000 | ||||||||||||
500 shares of series B issued and outstanding | 500 | 500 | 500 | 500 | ||||||||||||
Discount on preferred stock | (450 | ) | (500 | ) | (425 | ) | (500 | ) | ||||||||
Common stock, $1.25 par value: 20,000,000 shares authorized; 7,593,929 shares issued and outstanding | 9,492 | 9,492 | 9,492 | 9,492 | ||||||||||||
Additional paid-in capital | 14,028 | 14,019 | 14,029 | 14,019 | ||||||||||||
Unearned ESOP compensation | (701 | ) | (736 | ) | (683 | ) | (736 | ) | ||||||||
Undivided profits | 11,214 | 10,008 | 11,345 | 10,008 | ||||||||||||
Accumulated other comprehensive income (loss) | (859 | ) | (1,550 | ) | 232 | (1,550 | ) | |||||||||
Total shareholders’ equity | 43,224 | 41,233 | 44,490 | 41,233 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 463,836 | $ | 452,468 | $ | 480,704 | $ | 452,468 | ||||||||
(*) | Derived from audited consolidated financial statements |
See accompanying notes
-3-
Uwharrie Capital Corp and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||
(in thousands, except share and per share data) | (in thousands, except share and per share data) | |||||||||||||||||||||||||||
Interest Income | ||||||||||||||||||||||||||||
Loans, including fees | $ | 5,218 | $ | 5,669 | $ | 10,593 | $ | 11,638 | $ | 5,281 | $ | 5,652 | $ | 15,874 | $ | 17,290 | ||||||||||||
Investment securities | ||||||||||||||||||||||||||||
US Treasury | — | 25 | — | 49 | 1 | 24 | 1 | 73 | ||||||||||||||||||||
US Government agencies and corporations | 769 | 468 | 1,550 | 955 | 785 | 376 | 2,335 | 1,331 | ||||||||||||||||||||
State and political subdivisions | 176 | 170 | 365 | 328 | 145 | 182 | 510 | 510 | ||||||||||||||||||||
Interest-earning deposits with banks and federal funds sold | 19 | 18 | 43 | 43 | 14 | 16 | 57 | 59 | ||||||||||||||||||||
Total interest income | 6,182 | 6,350 | 12,551 | 13,013 | 6,226 | 6,250 | 18,777 | 19,263 | ||||||||||||||||||||
Interest Expense | ||||||||||||||||||||||||||||
Interest checking and money market accounts | 199 | 312 | 397 | 747 | 211 | 345 | 608 | 1,092 | ||||||||||||||||||||
Savings deposits | 69 | 74 | 123 | 169 | 67 | 68 | 190 | 237 | ||||||||||||||||||||
Time deposits, $100,000 and over | 534 | 604 | 1,092 | 1,286 | 505 | 578 | 1,597 | 1,864 | ||||||||||||||||||||
Other time deposits | 755 | 985 | 1,553 | 2,078 | 708 | 888 | 2,261 | 2,966 | ||||||||||||||||||||
Short-term borrowed funds | 71 | 146 | 186 | 334 | 64 | 73 | 250 | 407 | ||||||||||||||||||||
Long-term debt | 368 | 308 | 732 | 619 | 374 | 395 | 1,106 | 1,014 | ||||||||||||||||||||
Total interest expense | 1,996 | 2,429 | 4,083 | 5,233 | 1,929 | 2,347 | 6,012 | 7,580 | ||||||||||||||||||||
Net interest income | 4,186 | 3,921 | 8,468 | 7,780 | 4,297 | 3,903 | 12,765 | 11,683 | ||||||||||||||||||||
Provision for loan losses | 196 | 171 | 568 | 257 | 295 | 529 | 863 | 786 | ||||||||||||||||||||
Net interest income after provision for loan losses | 3,990 | 3,750 | 7,900 | 7,523 | 4,002 | 3,374 | 11,902 | 10,897 | ||||||||||||||||||||
Noninterest Income | ||||||||||||||||||||||||||||
Service charges on deposit accounts | 567 | 537 | 1,135 | 1,067 | 616 | 599 | 1,751 | 1,666 | ||||||||||||||||||||
Other service fees and commissions | 575 | 754 | 1,032 | 1,502 | 595 | 737 | 1,627 | 2,205 | ||||||||||||||||||||
Gain (loss) on sale of securities | 20 | — | (20 | ) | — | |||||||||||||||||||||||
Gain on sale of securities | 124 | — | 104 | — | ||||||||||||||||||||||||
Loss on nonmarketable securities | — | — | (172 | ) | — | — | — | (172 | ) | — | ||||||||||||||||||
Total other-than-temporary impairment loss | (1,855 | ) | — | (1,855 | ) | — | ||||||||||||||||||||||
Total other-than-temporary impairment (loss) | — | — | (1,782 | ) | — | |||||||||||||||||||||||
Portion of loss recognized in other comprehensive income | 1,651 | — | 1,651 | — | (183 | ) | — | 1,395 | — | |||||||||||||||||||
Net impairment recognized in earnings | (204 | ) | — | (204 | ) | — | (183 | ) | — | (387 | ) | — | ||||||||||||||||
Loss fixed assets/other assets | (20 | ) | — | (20 | ) | — | ||||||||||||||||||||||
Gain (loss) fixed assets/other assets | (18 | ) | 6 | (38 | ) | 6 | ||||||||||||||||||||||
Income from mortgage loan sales | 1,131 | 357 | 2,567 | 798 | 364 | 206 | 2,931 | 1,004 | ||||||||||||||||||||
Other income | 104 | 279 | 184 | 459 | 135 | 119 | 319 | 612 | ||||||||||||||||||||
Total noninterest income | 2,173 | 1,927 | 4,502 | 3,826 | 1,633 | 1,667 | 6,135 | 5,493 | ||||||||||||||||||||
Noninterest Expense | ||||||||||||||||||||||||||||
Salaries and employee benefits | 2,886 | 2,664 | 5,759 | 5,301 | 2,822 | 2,620 | 8,581 | 7,921 | ||||||||||||||||||||
Net occupancy expense | 242 | 236 | 487 | 459 | 302 | 250 | 789 | 709 | ||||||||||||||||||||
Equipment expense | 180 | 156 | 361 | 296 | 186 | 178 | 547 | 474 | ||||||||||||||||||||
Data processing costs | 198 | 204 | 389 | 392 | 203 | 194 | 592 | 586 | ||||||||||||||||||||
Other noninterest expense | 1,775 | 1,272 | 3,164 | 2,607 | 1,802 | 1,300 | 4,966 | 3,907 | ||||||||||||||||||||
Total noninterest expense | 5,281 | 4,532 | 10,160 | 9,055 | 5,315 | 4,542 | 15,475 | 13,597 | ||||||||||||||||||||
Income before income taxes | 882 | 1,145 | 2,242 | 2,294 | 320 | 499 | 2,562 | 2,793 | ||||||||||||||||||||
Income taxes | 259 | 373 | 714 | 747 | 30 | 156 | 744 | 903 | ||||||||||||||||||||
Net income | $ | 623 | $ | 772 | $ | 1,528 | $ | 1,547 | $ | 290 | $ | 343 | $ | 1,818 | $ | 1,890 | ||||||||||||
Net Income | $ | 623 | 772 | 1,528 | 1,547 | $ | 290 | 343 | 1,818 | 1,890 | ||||||||||||||||||
Dividends – preferred stock | (160 | ) | — | (322 | ) | — | (159 | ) | — | (481 | ) | — | ||||||||||||||||
Net income available to common shareholders | $ | 463 | $ | 772 | $ | 1,206 | $ | 1,547 | $ | 131 | $ | 343 | $ | 1,337 | $ | 1,890 | ||||||||||||
Net income per common share | ||||||||||||||||||||||||||||
Basic | $ | 0.06 | $ | 0.10 | $ | 0.16 | $ | 0.21 | $ | 0.02 | $ | 0.05 | $ | 0.18 | $ | 0.25 | ||||||||||||
Diluted | $ | 0.06 | $ | 0.10 | $ | 0.16 | $ | 0.21 | $ | 0.02 | $ | 0.05 | $ | 0.18 | $ | 0.25 | ||||||||||||
Weighted average shares outstanding | ||||||||||||||||||||||||||||
Basic | 7,472,003 | 7,448,825 | 7,469,905 | 7,469,496 | 7,476,197 | 7,495,903 | 7,472,033 | 7,481,606 | ||||||||||||||||||||
Diluted | 7,472,003 | 7,481,095 | 7,469,905 | 7,512,109 | 7,476,197 | 7,541,820 | 7,472,033 | 7,525,329 |
See accompanying notes
-4-
Uwharrie Capital Corp and Subsidiaries
Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)
Number Common Shares Issued | Preferred Stock Series A | Preferred Stock Series B | Discount on Preferred Stock | Common Stock | Additional Paid-in Capital | Unearned ESOP Compensation | Undivided Profits | Accumulated Other Comprehensive Income(Loss) | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Number Common Shares Issued | Preferred Stock Series A | Preferred Stock Series B | Discount on Preferred Stock | Common Stock | Additional Paid-in Capital | Unearned ESOP Compensation | Undivided Profits | Accumulated Other Comprehensive Income(Loss) | Total | (in thousands, except share data) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands, except share data) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2008 | 7,593,929 | $ | 10,000 | $ | 500 | $ | (500 | ) | $ | 9,492 | $ | 14,019 | $ | (736 | ) | $ | 10,008 | $ | (1,550 | ) | $ | 41,233 | 7,593,929 | $ | 10,000 | $ | 500 | $ | (500 | ) | $ | 9,492 | $ | 14,019 | $ | (736 | ) | $ | 10,008 | $ | (1,550 | ) | $ | 41,233 | ||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | 1,528 | — | 1,528 | — | — | — | — | — | — | — | 1,818 | — | 1,818 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | — | — | 691 | 691 | — | — | — | — | — | — | — | — | 1,782 | 1,782 | ||||||||||||||||||||||||||||||||||||||||||||||||
Release of ESOP shares | — | — | — | — | — | — | 35 | — | — | 35 | — | — | — | — | — | — | 53 | — | — | 53 | ||||||||||||||||||||||||||||||||||||||||||||||||
Stock compensation expense | — | — | — | — | — | 9 | — | — | — | 9 | — | — | — | — | — | 10 | — | — | — | 10 | ||||||||||||||||||||||||||||||||||||||||||||||||
Record preferred stock dividend and discount accretion | — | — | — | 50 | — | — | — | (322 | ) | — | (272 | ) | — | — | — | 75 | — | — | — | (481 | ) | — | (406 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2009 | 7,593,929 | $ | 10,000 | $ | 500 | $ | (450 | ) | $ | 9,492 | $ | 14,028 | $ | (701 | ) | $ | 11,214 | $ | (859 | ) | $ | 43,224 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2009 | 7,593,929 | $ | 10,000 | $ | 500 | $ | (425 | ) | $ | 9,492 | $ | 14,029 | $ | (683 | ) | $ | 11,345 | $ | 232 | $ | 44,490 | |||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes
-5-
Uwharrie Capital Corp and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, | ||||||||||||||||
2009 | 2008 | Nine Months Ended September 30, | ||||||||||||||
(dollars in thousands) | 2009 | 2008 | ||||||||||||||
Cash flows from operating activities | (dollars in thousands) | |||||||||||||||
Net income | $ | 1,528 | $ | 1,547 | $ | 1,818 | $ | 1,890 | ||||||||
Adjustments to reconcile net income to net cash | ||||||||||||||||
Provided by operating activities: | ||||||||||||||||
Depreciation | 387 | 319 | 583 | 486 | ||||||||||||
Net amortization of security premiums/discounts | 43 | (116 | ) | 84 | (158 | ) | ||||||||||
Impairment of securities available for sales | 204 | — | ||||||||||||||
Impairment of securities available for sale | 387 | — | ||||||||||||||
Net amortization of mortgage servicing rights | 656 | 237 | 864 | 352 | ||||||||||||
Impairment of foreclosed real estate | 34 | — | 34 | — | ||||||||||||
Provision for loan losses | 568 | 257 | 863 | 786 | ||||||||||||
Stock compensation | 9 | 13 | 10 | 20 | ||||||||||||
Net realized loss on available for sales securities | 20 | — | ||||||||||||||
Net realized gain on available for sales securities | (104 | ) | — | |||||||||||||
Income from mortgage loan sales | (2,567 | ) | (798 | ) | (2,931 | ) | (1,004 | ) | ||||||||
Proceeds from sales of loans held for sale | 106,574 | 36,614 | 123,462 | 46,180 | ||||||||||||
Origination of loans held for sale | (105,337 | ) | (35,187 | ) | (120,426 | ) | (43,804 | ) | ||||||||
(Gain) loss on sale of premises, equipment and other assets | (1 | ) | 5 | (1 | ) | 5 | ||||||||||
Loss on nonmarketable securities | 172 | — | 172 | — | ||||||||||||
Increase in cash surrender value of life insurance | (97 | ) | (93 | ) | (141 | ) | (141 | ) | ||||||||
Loss on sales of foreclosed real estate | 21 | — | ||||||||||||||
(Gain) loss on sales of foreclosed real estate | 39 | (11 | ) | |||||||||||||
Release of ESOP shares | 35 | 40 | 53 | 60 | ||||||||||||
Net change in interest receivable | 40 | 130 | (147 | ) | 14 | |||||||||||
Net change in other assets | (1,738 | ) | (324 | ) | (1,426 | ) | (1,583 | ) | ||||||||
Net change in interest payable | (15 | ) | (58 | ) | (46 | ) | (98 | ) | ||||||||
Net change in other liabilities | 696 | 233 | 452 | 451 | ||||||||||||
Net cash provided by (used in) operating activities | 1,232 | 2,819 | ||||||||||||||
Net cash provided by operating activities | 3,599 | 3,445 | ||||||||||||||
Cash flows from investing activities | ||||||||||||||||
Proceeds from sales, maturities and calls of securities available for sale | 13,202 | 4,361 | 22,272 | 9,792 | ||||||||||||
Purchase of securities available for sale | (18,175 | ) | (3,184 | ) | (36,208 | ) | (3,920 | ) | ||||||||
Net increase in loans | (4,532 | ) | (15,285 | ) | (12,378 | ) | (19,994 | ) | ||||||||
Proceeds from sale of premises, equipment and other assets | 1 | — | 1 | — | ||||||||||||
Purchase of premises and equipment | (2,122 | ) | (896 | ) | (2,935 | ) | (2,037 | ) | ||||||||
Proceeds from sales of foreclosed real estate | 708 | — | 1,138 | 135 | ||||||||||||
Investment in other assets | (602 | ) | — | (1,076 | ) | — | ||||||||||
Net increase in Federal Home Loan Bank stock | (863 | ) | (232 | ) | ||||||||||||
(Increase) decrease in Federal Home Loan Bank stock | (917 | ) | 45 | |||||||||||||
Net cash used by investing activities | (12,383 | ) | (15,236 | ) | (30,103 | ) | (15,979 | ) | ||||||||
Cash flows from financing activities | ||||||||||||||||
Net increase in deposit accounts | 18,157 | 10,445 | 17,860 | 19,954 | ||||||||||||
Net decrease in short-term borrowed funds | (7,607 | ) | (11,677 | ) | ||||||||||||
Net increase (decrease) in short-term borrowed funds | 7,567 | (22,467 | ) | |||||||||||||
Net increase (decrease) in long-term debt | (1,854 | ) | 12,504 | (854 | ) | 15,062 | ||||||||||
Repurchase of common stock | — | (412 | ) | — | (412 | ) | ||||||||||
Net proceeds from issuance of common stock | — | 300 | — | 300 | ||||||||||||
Tax benefit of stock options exercised | — | 26 | — | 26 | ||||||||||||
Dividend on preferred stock | (272 | ) | — | (406 | ) | — | ||||||||||
Net cash provided by financing activities | 8,424 | 11,186 | 24,167 | 12,463 | ||||||||||||
Decrease in cash and cash equivalents | (2,727 | ) | (1,231 | ) | (2,337 | ) | (71 | ) | ||||||||
Cash and cash equivalents, beginning of period | 13,284 | 16,197 | 13,284 | 16,197 | ||||||||||||
Cash and cash equivalents, end of period | $ | 10,557 | $ | 14,966 | $ | 10,947 | $ | 16,126 | ||||||||
See accompanying notes
-6-
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, Bank of Stanly (“Stanly”), Anson Bank & Trust Co. (“Anson”), Cabarrus Bank & Trust Company (“Cabarrus”), Strategic Investment Advisors, Inc., (“SIA”), and Uwharrie Mortgage Inc. Stanly consolidates its subsidiaries, the Strategic Alliance Corporation, BOS Agency, Inc. and Gateway Mortgage, Inc., each of which is wholly-owned by Stanly.
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 accounting principles generally accepted in the United States of America 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 2008 Annual Report on Form 10-K. This Quarterly report should be read in conjunction with such Annual Report.
Subsequent Events
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through August 11,November 10, 2009, the date the financial statements were issued.
-7-
Note 2 – Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Net Income | $ | 623 | $ | 772 | $ | 1,528 | $ | 1,547 | $ | 290 | $ | 343 | $ | 1,818 | $ | 1,890 | ||||||||||||||||
Other comprehensive loss | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||||||||||||||
Unrealized gain (losses) on available for sale securities | (360 | ) | (1,009 | ) | 886 | (1,196 | ) | 1,704 | (1,087 | ) | 2,590 | (2,283 | ) | |||||||||||||||||||
Related tax effect | 138 | 386 | (333 | ) | 459 | (648 | ) | 418 | (982 | ) | 877 | |||||||||||||||||||||
Reclassification of loss (gains) recognized in net income | (20 | ) | — | 20 | — | |||||||||||||||||||||||||||
Reclassification of gains recognized in net income | (124 | ) | — | (104 | ) | — | ||||||||||||||||||||||||||
Related tax effect | (8 | ) | — | (8 | ) | — | 48 | — | 40 | — | ||||||||||||||||||||||
Reclassification of losses for which credit-related portion was recognized in net income | 204 | — | 204 | — | 183 | — | 387 | — | ||||||||||||||||||||||||
Related tax effect | (71 | ) | — | (78 | ) | — | (71 | ) | — | (149 | ) | — | ||||||||||||||||||||
Total other comprehensive gain (loss) | (117 | ) | (623 | ) | 691 | (737 | ) | 1,092 | (669 | ) | 1,782 | (1,406 | ) | |||||||||||||||||||
Comprehensive income | $ | 506 | $ | 149 | $ | 2,219 | $ | 810 | ||||||||||||||||||||||||
Comprehensive income (loss) | $ | 1,382 | $ | (326 | ) | $ | 3,600 | $ | 484 | |||||||||||||||||||||||
As of JuneSeptember 30, 2009 and December 31, 2008, total accumulated other comprehensive income (loss) income was $(859)$232 thousand and $(1.55)$(1.6) million, respectively. The components of accumulated other comprehensive income at JuneSeptember 30, 2009 included $156$939 thousand of unrealized gains and temporary unrealized losses net of tax, and non credit losses on fourfive other than temporarily impaired investments of $(1.02) million$(707) thousand net of tax. Accumulated other comprehensive income at December 31, 2008 consisted of unrealized gains and temporary unrealized losses of $(1.55)$(1.6) million net of tax.
Note 3 – Per Share Data
On November 3, 2008, the Company’s Board of Directors declared a 3% stock dividend payable on December 4, 2008 to shareholders of record on November 17, 2008. All information presented in the accompanying interim consolidated financial statements regarding earnings per share and weighted average number of shares outstanding has been computed giving effect to this stock dividend.
Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for stock dividends. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. At JuneFor the three months and nine months ended September 30, 2009, the Company hadCompany’s 459,856 stock options and at this time they are all under market value andoutstanding did not have a dilutive effect on net income.per share results because the exercise prices exceeded the average share values for each period.
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 operations divided by the weighted average number of common shares outstanding or assumed to be outstanding. The computation of basic and dilutive earnings per share is summarized below:
-8-
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||
Weighted average number of common shares outstanding | 7,593,929 | 7,587,042 | 7,593,929 | 7,607,713 | 7,593,929 | 7,630,292 | 7,593,959 | 7,615,995 | ||||||||||||||||
Effect of ESOP shares | (121,926 | ) | (138,217 | ) | (124,024 | ) | (138,217 | ) | (117,732 | ) | (134,389 | ) | (121,926 | ) | (134,389 | ) | ||||||||
Adjusted weighted average number of common shares used in computing basic net income per common share | 7,472,003 | 7,448,825 | 7,469,905 | 7,469,496 | 7,476,197 | 7,495,903 | 7,472,033 | 7,481,606 | ||||||||||||||||
Effect of dilutive stock options | — | 32,270 | — | 42,613 | — | 45,917 | — | 43,723 | ||||||||||||||||
Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per common share | 7,472,003 | 7,481,095 | 7,469,905 | 7,512,109 | 7,476,197 | 7,541,820 | 7,472,033 | 7,525,329 | ||||||||||||||||
Note 4 – Investment Securities
Carrying amounts and fair values of securities available for sale are summarized below:
June 30, 2009 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
September 30, 2009 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||
U.S. Treasury | $ | 3,026 | $ | 5 | $ | — | $ | 3,031 | ||||||||||||||||
U.S. Government agencies | $ | 8,306 | $ | 263 | $ | — | $ | 8,569 | 20,988 | 393 | — | 21,381 | ||||||||||||
Mortgage-backed securities and CMO’s | 53,492 | 938 | 2,981 | 51,449 | 37,865 | 1,351 | — | 39,219 | ||||||||||||||||
Private label CMO’s | 10,991 | 119 | 2,028 | 9,082 | ||||||||||||||||||||
State and political subdivisions | 14,271 | 374 | 13 | 14,632 | 12,063 | 504 | — | 12,567 | ||||||||||||||||
Total securities available for sale | $ | 76,069 | $ | 1,575 | $ | 2,994 | $ | 74,650 | $ | 84,933 | $ | 2,372 | $ | 2,028 | $ | 85,277 | ||||||||
December 31, 2008 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||
U.S. Government agencies | $ | 10,469 | $ | 229 | $ | 55 | $ | 10,643 | $ | 10,469 | $ | 229 | $ | 55 | �� | $ | 10,643 | |||||||
Mortgage-backed securities and CMO’s | 44,500 | 691 | 3,795 | 41,396 | 33,149 | 691 | 225 | 33,615 | ||||||||||||||||
Private label CMO’s | 11,351 | — | 3,570 | 7,781 | ||||||||||||||||||||
State and political subdivisions | 16,396 | 417 | 17 | 16,796 | 16,396 | 417 | 17 | 16,796 | ||||||||||||||||
Total securities available for sale | $ | 71,365 | $ | 1,337 | $ | 3,867 | $ | 68,835 | $ | 71,365 | $ | 1,337 | $ | 3,867 | $ | 68,835 | ||||||||
At JuneSeptember 30, 2009, the Company owned Federal Reserve stock reported at cost of $778,850$779 thousand and included in other assets. Also at JuneSeptember 30, 2009 and December 31, 2008, the Company owned Federal Home Loan Bank Stock (FHLB) of $3.1$3.2 million and $2.3 million, respectively. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership and borrowings with these banks. These investments are carried at cost since there is no ready market and historically redemption has been made at par value. The Company estimated that the fair value was equal to the cost and that these investments were not impaired at September 30, 2009.
-9-
Results from sales of securities available for sale for the three and sixnine month periods ended JuneSeptember 30, 2009 and JuneSeptember 30, 2008 are as follows:
Three Months Ended June 30, | Three Months Ended September 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||
Gross proceeds from sales | $ | 1,020 | $ | — | $ | 3,628 | $ | |||||||
Realized gains from sales | $ | 20 | $ | — | $ | 124 | $ | — | ||||||
Realized losses from sales | — | — | — | — | ||||||||||
Net realized gains (losses) | $ | 20 | $ | — | $ | 124 | $ | — | ||||||
Six Months Ended June 30, | Nine Months Ended September 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||
Gross proceeds from sales | $ | 2,543 | $ | — | $ | 6,171 | $ | |||||||
Realized gains from sales | $ | 73 | $ | — | $ | 198 | $ | — | ||||||
Realized losses from sales | (93 | ) | — | (94 | ) | — | ||||||||
Net realized gains (losses) | $ | (20 | ) | $ | — | $ | 104 | $ | — | |||||
At JuneSeptember 30, 2009 and December 31, 2008 securities available for sale with a carrying amount of $16.4$15.5 million and $13.2 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 JuneSeptember 30, 2009 and December 31,2008.31, 2008. These unrealized losses on investment securities are a result of temporary fluctuations in the market prices due to a rise in interest rates, which will adjust if rates decline, and a volatile market and are in no way a reflection of the quality of the investments. At JuneSeptember 30, 2009 the unrealized losses related to fifteenseventeen mortgage backed securities and CMOs and seven state and political subdivisions securities.CMOs. At December 31, 2008 the unrealized losses related to three U.S. Government Agencies, fifteen mortgage backed securities and CMOs and twelve state and political subdivisions securities.
Less than 12 Months | 12 Months or More | Total | Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||
June 30, 2009 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||
September 30, 2009 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||
Securities available for sale temporary impairment: | ||||||||||||||||||||||||||||||||||||
U.S. Gov’t agencies | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Mortgage-backed securities and CMO’s | 8,112 | 166 | 9,214 | 1,164 | 17,326 | 1,330 | — | — | — | — | — | — | ||||||||||||||||||||||||
Private label CMOs | — | — | 2,923 | 634 | 2,923 | 634 | ||||||||||||||||||||||||||||||
State and political subdivisions | 1,148 | 11 | 97 | 2 | 1,245 | 13 | — | — | — | — | — | — | ||||||||||||||||||||||||
$ | 9,260 | $ | 177 | $ | 9,311 | $ | 1,166 | $ | 18,571 | $ | 1,343 | $ | — | $ | — | $ | 2,923 | $ | 634 | $ | 2,923 | $ | 634 | |||||||||||||
Other than temporary impairment: | ||||||||||||||||||||||||||||||||||||
Mortgage-backed & CMOs | $ | — | $ | — | $ | 2,757 | $ | 1,651 | $ | 2,757 | $ | 1,651 | ||||||||||||||||||||||||
Private label CMOs | $ | — | $ | — | $ | 4,097 | $ | 1,394 | $ | 4,097 | $ | 1,394 | ||||||||||||||||||||||||
$ | — | $ | — | $ | 2,757 | $ | 1,651 | $ | 2,757 | $ | 1,651 | $ | — | $ | — | $ | 4,097 | $ | 1,394 | $ | 4,097 | $ | 1,394 | |||||||||||||
-10-
Less than 12 Months | 12 Months or More | Total | Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||
December 31, 2008 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||
Securities available for sale temporary impairment: | ||||||||||||||||||||||||||||||||||||
U.S. Gov’t agencies | $ | 3,010 | $ | 55 | $ | — | $ | — | $ | 3,010 | $ | 55 | $ | 3,010 | $ | 55 | $ | — | $ | — | $ | 3,010 | $ | 55 | ||||||||||||
Mortgage-backed securities and CMO’s | 14,502 | 3,288 | 1,290 | 78 | 15,792 | 3,366 | 3,996 | 212 | 633 | 12 | 4,629 | 224 | ||||||||||||||||||||||||
Private label CMO’s | 10,506 | 3,076 | 657 | 66 | 11,163 | 3,142 | ||||||||||||||||||||||||||||||
State and political subdivisions | 2,648 | 17 | — | — | 2,648 | 17 | 2,648 | 17 | — | — | 2,648 | 17 | ||||||||||||||||||||||||
$ | 20,160 | $ | 3,360 | $ | 1,290 | $ | 78 | $ | 21,450 | $ | 3,438 | $ | 20,160 | $ | 3,360 | $ | 1,290 | $ | 78 | $ | 21,450 | $ | 3,438 | |||||||||||||
Other than temporary impairment: | ||||||||||||||||||||||||||||||||||||
Mortgage-backed & CMOs | $ | 188 | $ | 429 | $ | — | $ | — | $ | 188 | $ | 429 | ||||||||||||||||||||||||
Private label CMOs | $ | 188 | $ | 429 | $ | — | $ | — | $ | 188 | $ | 429 | ||||||||||||||||||||||||
$ | 188 | $ | 429 | $ | — | $ | — | $ | 188 | $ | 429 | $ | 188 | $ | 429 | $ | — | $ | — | $ | 188 | $ | 429 | |||||||||||||
WeThe Company routinely conduct periodic reviews to identify and evaluate each investment security to determine whether OTTI has occurred. Economic models are used to determine whether an OTTI has occurred on these securities.using several economic models. To determine if the unrealized loss is other-than-temporary, we projectthe Company projects total estimated defaults of the underlying troubled and non performing assets (mortgages) and multiply that calculated amount by an estimate of realizable value upon sale in the marketplace (severity) in order to determine the projected collateral loss. WeThe Company also evaluateevaluates the current credit enhancement underlying the bond to determine the impact on cash flows. If we determinethe Company determines that a given position will be subject to a write-down, loss or decline in yield, we recordthe Company records the expected credit loss as a charge to earnings. In addition, we havethe Company estimated the expected loss by taking into account observed performance of the underlying securities, industry studies, market forecasts, as well as our view of the economic outlook affecting bond collateral. The following assumptions were madeAssumptions used in evaluating estimated cash flows include a prepayment speed of six CPR, severity rates ranging from 55% to 60% and the original purchased yield.
Based on these evaluations, the Company did have an other-than-temporary impairment on four private label collateralized mortgage obligations (“CMOs”) at JuneSeptember 30, 2009. In accordance with FSP FAS 115-2,ASC 320, a $204$183 thousand other-than-temporary charge due to the credit-related factors was recognized in earnings during the quarter, $1.7quarter; $1.4 million was determined to relate to other non-credit-related factors in the market place. The difference between total unrealized losses and estimated credit losses on these securities was charged against equity, net of deferred taxes, as a component of Other Comprehensive Income.
The following table, as of Junetables for the three and nine months ended September 30, 2009, shows a roll forward of the amount related to credit losses recognized on debt securities held by the Company for a portion of an other-than-temporary impairment was recognized in other comprehensive income.
For three months ended September 30, 2009 | (in thousands) | ||||||
Balance of credit losses on debt securities at June 30, 2009 | $ | 204 | |||||
Increase related to the credit loss for which an other-than-temporary impairment was recognized | 183 | ||||||
Balance of credit losses on debt securities at September 30, 2009 | $ | 387 | |||||
June 30, 2009 | |||||||
(in thousands) | |||||||
Balance of credit losses on debt securities at the beginning of the period | $ | — | |||||
For nine months ended September 30, 2009 | (in thousands) | ||||||
Balance of credit losses on debt securities at December 31, 2008 | $ | 159 | |||||
Decrease related to sales of other-than-temporary securities | (159 | ) | |||||
Increase related to the credit loss for which an other-than-temporary impairment was recognized | 204 | 387 | |||||
Balance of credit losses on debt securities at the end of the current period | $ | 204 | $ | 387 | |||
-11-
The aggregate amortized cost and fair value of the available for sale securities portfolio at JuneSeptember 30, 2009 and December 31, 2008 by remaining contractual maturity are as follows.
September 30, 2009 | ||||||||||||
June 30, 2009 | Amortized Cost | Estimated Fair Value | ||||||||||
Amortized Cost | Estimated Fair Value | (dollars in thousands) | ||||||||||
(dollars in thousands) | ||||||||||||
Securities available for sale | ||||||||||||
U.S. Government agencies | ||||||||||||
Due within one year | 1,002 | 1,007 | ||||||||||
Due after one but within five years | 3,026 | 3,031 | ||||||||||
3,026 | 3,031 | |||||||||||
U.S. Government agencies | ||||||||||||
Due after one but within five years | 4,152 | 4,316 | 11,387 | 11,594 | ||||||||
Due after five but within ten years | 3,152 | 3,246 | 9,601 | 9,787 | ||||||||
20,988 | 21,381 | |||||||||||
8,306 | 8,569 | |||||||||||
Mortgage-backed securities | ||||||||||||
Due after one year but within five years | 423 | 432 | 288 | 295 | ||||||||
Due after five but within ten year | 8,618 | 8,927 | 8,046 | 8,454 | ||||||||
Due after ten years | 44,451 | 42,090 | 40,522 | 39,549 | ||||||||
53,492 | 51,449 | 48,856 | 48,298 | |||||||||
State and political | ||||||||||||
Due within one year | 487 | 493 | 863 | 867 | ||||||||
Due after one but within five years | 5,097 | 5,194 | 3,712 | 3,856 | ||||||||
Due after five but within ten year | 3,864 | 4,016 | 2,663 | 2,833 | ||||||||
Due after ten years | 4,823 | 4,929 | 4,825 | 5,011 | ||||||||
12,063 | 12,567 | |||||||||||
14,271 | 14,632 | |||||||||||
Total Securities available for sale | ||||||||||||
Due within one year | 1,489 | 1,500 | 863 | 867 | ||||||||
Due after one but within five years | 9,672 | 9,942 | 18,413 | 18,776 | ||||||||
Due after five but within ten year | 15,634 | 16,189 | 20,310 | 21,074 | ||||||||
Due after ten years | 49,274 | 47,019 | 45,347 | 44,560 | ||||||||
$ | 76,069 | $ | 74,650 | $ | 84,933 | $ | 85,277 | |||||
December 31, 2008 | December 31, 2008 | |||||||||||
Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | |||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||
Securities available for sale | ||||||||||||
U.S. Government agencies | ||||||||||||
Due within one year | 1,512 | 1,541 | 1,512 | 1,541 | ||||||||
Due after one but within five years | 5,532 | 5,664 | 5,532 | 5,664 | ||||||||
Due after five but within ten years | 3,425 | 3,438 | 3,425 | 3,438 | ||||||||
10,469 | 10,643 | 10,469 | 10,643 | |||||||||
Mortgage-backed securities | ||||||||||||
Due after one year but within five years | 721 | 729 | 721 | 729 | ||||||||
Due after five but within ten year | 4,569 | 4,733 | 4,569 | 4,733 | ||||||||
Due after ten years | 39,210 | 35,934 | 39,210 | 35,934 | ||||||||
44,500 | 41,396 | |||||||||||
44,500 | 41,396 | |||||||||||
State and political | ||||||||||||
Due within one year | 1,063 | 1,080 | 1,063 | 1,080 | ||||||||
Due after one but within five years | 5,313 | 5,397 | 5,313 | 5,397 | ||||||||
Due after five but within ten year | 4,800 | 4,959 | 4,800 | 4,959 | ||||||||
Due after ten years | 5,220 | 5,360 | 5,220 | 5,360 | ||||||||
16,396 | 16,796 | 16,396 | 16,796 | |||||||||
Total Securities available for sale | ||||||||||||
Due within one year | 2,575 | 2,621 | 2,575 | 2,621 | ||||||||
Due after one but within five years | 11,566 | 11,790 | 11,566 | 11,790 | ||||||||
Due after five but within ten year | 12,794 | 13,130 | 12,794 | 13,130 | ||||||||
Due after ten years | 44,430 | 41,294 | 44,430 | 41,294 | ||||||||
$ | 71,365 | $ | 68,835 | $ | 71,365 | $ | 68,835 | |||||
-12-
Note 5 – Loans
June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | |||||||||
(in thousands) | (in thousands) | |||||||||||
Loans outstanding at period end: | ||||||||||||
Commercial | $ | 49,231 | $ | 45,470 | $ | 51,983 | $ | 45,470 | ||||
Real estate-construction | 47,916 | 50,661 | 45,950 | 50,661 | ||||||||
Real estate-residential | 139,278 | 139,518 | 141,257 | 139,518 | ||||||||
Real estate-commercial | 92,113 | 89,561 | 95,947 | 89,561 | ||||||||
Consumer loans | 16,084 | 15,499 | 16,511 | 15,499 | ||||||||
All other loans | 99 | 121 | 146 | 121 | ||||||||
Total | $ | 344,721 | $ | 340,830 | $ | 351,794 | $ | 340,830 | ||||
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Analysis of the allowance for loan losses | ||||||||||||||||||||||||||||||||
Balance at beginning of period | $ | 4,573 | $ | 3,583 | $ | 4,361 | $ | 3,510 | $ | 4,732 | $ | 3,657 | $ | 4,361 | $ | 3,510 | ||||||||||||||||
Provision charged to operations | 196 | 171 | 568 | 257 | 295 | 529 | 863 | 786 | ||||||||||||||||||||||||
Charge-offs | (46 | ) | (137 | ) | (241 | ) | (167 | ) | (207 | ) | (63 | ) | (448 | ) | (230 | ) | ||||||||||||||||
Recoveries | 9 | 40 | 44 | 57 | 8 | 20 | 52 | 77 | ||||||||||||||||||||||||
Net (charge-offs) | (37 | ) | (97 | ) | (197 | ) | (110 | ) | (199 | ) | (43 | ) | (396 | ) | (153 | ) | ||||||||||||||||
Balance at end of period | $ | 4,732 | $ | 3,657 | $ | 4,732 | $ | 3,657 | $ | 4,828 | $ | 4,143 | $ | 4,828 | $ | 4,143 | ||||||||||||||||
Note 6 – Commitments and Contingencies
The subsidiary banks are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their 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 banks’ risk of loss with the unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The banks use the same credit policies in making commitments under such instruments as they do 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 JuneSeptember 30, 2009, outstanding financial instruments whose contract amounts represent credit risk were approximately:
(in thousands) | ||||||
Commitments to extend credit | $ | 92,233 | $ | 92,592 | ||
Credit card commitments | 8,702 | 8,802 | ||||
Standby letters of credit | 1,142 | 838 | ||||
Total commitments | $ | 102,077 | $ | 102,232 | ||
Note 7 – Fair Value Disclosures
The Company adopted the provisions of Statement of Financial Accounting Statements (SFAS) No. 157Standards Codification (ASC) 820Fair Value Measurements and Disclosures (SFAS 157) and SFAS No. 159,ASC 825,The Fair Value Option for Financial Assets and LiabilitiesInstruments on (SFAS 159) on January 1, 2008.
-13-
SFAS 157ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157ASC 820 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. SFAS 157ASC 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.
SFAS 157ASC 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 loans held for sale, which are carried at the lower of cost or market,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,assumptions; foreclosed real estate, which is carried at lower of cost or fair market value and goodwill, which is periodically tested for impairment. Deposits, short-term borrowings and long-term obligations are not reported at fair value.
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 in accordance with SFAS 114,ASC 310,Accounting by Creditors for Impairment of aReceivables, Loan and Debt Securities.(SFAS 114). The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At JuneSeptember 30, 2009, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
-14-
For assets and liabilities carried at fair value, the following table provides fair value information as of JuneSeptember 30, 2009 and December 31, 2008:
September 30, 2009 | ||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | (dollars in thousands) | ||||||||||||||||||||
(dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
Investment securities available for sale | $ | 74,650 | $ | 8,561 | $ | 63,128 | $ | 2,961 | $ | 85,277 | $ | 24,411 | $ | 56,769 | $ | 4,097 | ||||||||
Total assets at fair value | $ | 74,650 | $ | 8,561 | $ | 63,128 | $ | 2,961 | $ | 85,277 | $ | 24,411 | $ | 56,769 | $ | 4,097 | ||||||||
Total liabilities at fair value | $ | — | $ | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||
Total | Level 1 | Level 2 | Level 3 | December 31, 2008 | ||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||
Investment securities available for sale | $ | 68,835 | $ | 10,643 | $ | 58,004 | $ | 188 | $ | 68,835 | $ | 10,643 | $ | 58,004 | $ | 188 | ||||||||
Total assets at fair value | $ | 68,835 | $ | 10,643 | $ | 58,004 | $ | 188 | $ | 68,835 | $ | 10,643 | $ | 58,004 | $ | 188 | ||||||||
Total liabilities at fair value | $ | — | $ | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||
The following table provides reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unoberservableunobservable inputs (level 3) during 2009:
(dollars in thousands) | ||||||||
Balance December 31, 2008 | $ | 188 | $ | 188 | ||||
Total losses realized in earnings Included in earnings | — | |||||||
Total losses realized in earnings included in earnings | — | |||||||
Purchases | — | — | ||||||
Sales | (188 | ) | (188 | ) | ||||
Transfers into level 3 | 2,961 | 4,097 | ||||||
Balance June 30, 2009 | $ | 2,961 | ||||||
Balance September 30, 2009 | $ | 4,097 | ||||||
Investment securities available for sale having a Level 3 value of $188,000 at December 31, 2008 were disposed of during the first quarter of 2009 with an additional loss of $93,714.
Prices for US Treasury and government agency 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 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 Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of JuneSeptember 30, 2009 and December 31, 2008:
-15-
September 30, 2009 | ||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | (dollars in thousands) | ||||||||||||||||||||
(dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
Loans | $ | 7,836 | $ | — | $ | 7,836 | $ | — | $ | 8,809 | $ | — | $ | 8,809 | $ | — | ||||||||
Loans held for sale | 2,922 | — | 2,922 | — | 1,332 | — | 1,332 | — | ||||||||||||||||
Other real estate owned | 382 | — | 382 | — | 2,623 | — | 2,623 | — | ||||||||||||||||
Mortgage servicing rights | 1,906 | — | — | 1,906 | 1,853 | — | — | 1,853 | ||||||||||||||||
Total assets at fair value | $ | 13,046 | $ | — | $ | 11,140 | $ | 1,906 | $ | 14,617 | $ | — | $ | 12,764 | $ | 1,853 | ||||||||
Total liabilities at fair value | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||
Total | Level 1 | Level 2 | Level 3 | December 31, 2008 | ||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||
Loans | $ | 6,688 | $ | — | $ | 6,688 | $ | — | $ | 6,688 | $ | — | $ | 6,688 | $ | — | ||||||||
Loans held for sale | 2,691 | — | 2,691 | — | 2,691 | — | 2,691 | — | ||||||||||||||||
Mortgage servicing rights | 1,293 | — | — | 1,293 | 1,293 | — | — | 1,293 | ||||||||||||||||
Total assets at fair value | $ | 10,672 | $ | — | $ | 9,379 | $ | 1,293 | $ | 10,672 | $ | — | $ | 9,379 | $ | 1,293 | ||||||||
Total liabilities at fair value | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||
SFAS 159 allows an entity to elect to measure certain financial assets and liabilities at fair value with changes in fair value recognized in the income statement each period. The statement also requires additional disclosures to identify the effects of an entity’s fair value election on its earnings. Upon the adoption of SFAS 159, the Company did not elect to report any assets and liabilities at fair value.
Note 8 – Fair Values of Financial Instruments and Interest Rate Risk
SFAS 107, “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 below are made at JuneSeptember 30, 2009 and December 31, 2008, 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 a liability could be settled for. 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 JuneSeptember 30, 2009 and December 31, 2008.
-16-
June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | |||||||||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||
Financial Assets | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 10,557 | $ | 10,557 | $ | 13,284 | $ | 13,284 | $ | 10,947 | $ | 10,947 | $ | 13,284 | $ | 13,284 | ||||||||
Securities available for sale | 74,650 | 74,650 | 68,835 | 68,835 | 85,277 | 85,277 | 68,835 | 68,835 | ||||||||||||||||
Loans held for investment, net | 339,989 | 355,346 | 336,469 | 354,083 | 346,966 | 361,957 | 336,469 | 354,083 | ||||||||||||||||
Loans held for sale | 2,922 | 2,814 | 2,691 | 2,691 | 1,332 | 1,332 | 2,691 | 2,691 | ||||||||||||||||
FHLB Stock | 3,147 | 3,147 | 2,284 | 2,284 | 3,201 | 3,201 | 2,284 | 2,284 | ||||||||||||||||
FRB Stock | 779 | 779 | — | — | 779 | 779 | — | — | ||||||||||||||||
Bank-owned life insurance | 5,608 | 5,608 | 5,511 | 5,511 | 5,652 | 5,652 | 5,511 | 5,511 | ||||||||||||||||
Accrued interest receivables | 1,987 | 1,987 | 2,027 | 2,027 | 2,174 | 2,174 | 2,027 | 2,027 | ||||||||||||||||
Financial Liabilities | ||||||||||||||||||||||||
Deposits | $ | 371,784 | $ | 375,060 | $ | 353,627 | $ | 354,589 | $ | 371,487 | $ | 391,311 | $ | 353,627 | $ | 354,589 | ||||||||
Short-term borrowings | 14,641 | 14,641 | 22,249 | 22,249 | 29,816 | 29,816 | 22,249 | 22,249 | ||||||||||||||||
Long-term debt | 30,648 | 31,950 | 32,502 | 33,306 | 31,648 | 32,956 | 32,502 | 33,306 | ||||||||||||||||
Accrued interest payable | 487 | 487 | 502 | 502 | 456 | 456 | 502 | 502 |
The carrying amount of cash and cash equivalents and accrued interest approximate their fair values due to the short period of time until their expected realization. Securities available for sale are carried at fair value based on quoted market prices. The carrying amount of bank-owned life insurance is the current cash value. It is not practicable to determine fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability and it is presented at its carrying value.
The following methods and assumptions were used by the Company in estimating the fair value of the financial instruments:
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. Loans held for sale, which represent current mortgage production forward sales not yet delivered, are valued based on current market prices. The fair value of loans does not consider the lack of liquidity and uncertainty in the market that would effect the valuation under SFAS No. 157, but the result is not material.valuation.
Deposits – The fair value of checking, savings and money market deposit is deemed equal to the amount payable on demand. The fair value of certificates of deposit is estimated based on discounted cash flow analyses using offered market rates.
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. The estimated fair value for long-term borrowings are estimated based on discounted cash flow analyses using offered market rates.
At JuneSeptember 30, 2009, the subsidiary banks 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 6.
Note 9 – Recent Accounting Pronouncements
SFAS 159ASC 825
Statement of Financial Accounting Standards No. 159Codification 825 (“SFAS 159”ASC 825”),The Fair Value Option for Financial Assets and Financial LiabilitiesInstruments, permits entities to choose to measure many financial
-17-
instruments and certain other items at fair value. The
-17-
objective of this standard is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective for fiscal years beginning after November 15, 2007, with early adoption permitted under certain circumstances. The adoption of SFAS 159ASC 825 did not have any impact on the Company’s consolidated financial statements.
SFAS 161ASC 815
In March of 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 161Codification 815 (“SFAS 161”ASC 815”),Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (“SFAS 161”)Hedging.. SFAS 161 ASC 815 amends and expands the disclosure requirement of Statement No. 133 for derivative instruments and hedging activities to provide users of financial statements with an enhanced understanding of the derivative instrument’s purpose, how it is accounted for, and its impact on the financial statements. The adoption of SFAS 161ASC 815 on January 1, 2009 did not have a material effect on the Company’s consolidated financial statements.
SFAS 162
In May 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 162 (“SFAS 162”),The Hierarchy of Generally Accepted Accounting Principles. The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. Prior to the issuance of SFAS No. 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards (SAS) No. 69,The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SAS 69 has been criticized because it is directed to the auditor rather than the entity. SFAS No. 162 addresses these issues by establishing that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Accordingly, the initial application of SFAS No. 162 will not have an impact on our financial statements
SFAS 165ASC 855
In May 2009, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 162Codification (“SFAS 165”ASC 855”),Subsequent Events.The new standard is intended to provide guidance on when a subsequent event should be recognized in the financial statements. Subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet should be recognized at the balance sheet date. Subsequent events that provide evidence about conditions that arose after the balance sheet date but before financial statements are issued, or are available to be issued, are not required to be recognized. The date through which subsequent events have been evaluated must be disclosed as well as whether it is the date the financial statements were issued or the date the financial statements were available to be issued. For nonrecognized subsequent events which should be disclosed to keep the financial statements from being misleading, the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made, should be disclosed. The standard is effective for interim or annual periods ending after June 15, 2009.
FSP EITF 99-20-1
On January 12, 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position, Emerging Issues Task Force (EITF) 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20. FSP EITF 99-20-1 addresses certain practice issues in EITF No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial
-18-
Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” by making its other-than-temporary impairment assessment guidance consistent with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” FSP EITF 99-20-1 removes the reference to the consideration of a market participant’s estimates of cash flows in EITF 99-20, and instead requires an assessment of whether it is probable, based on current information and events, that the holder of the security will be unable to collect all amounts due according to the contractual terms. If it is probable that thereThis topic has been an adverse change in estimated cash flows, other-than-temporary impairment is deemed to exist,adopted and a corresponding loss shall be recognized in earnings equal to the entire difference between the investment’s carrying value and its fair value at the balance sheet date of the reporting period for which the assessment isdisclosures are made. This FSP is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. The impact of adoption did not have a material impact on the Company’s consolidated financial statements.
In April 2009, the Financial Accounting Standards Board issued the following three FASB Staff Positions intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities:
FSP No. FAS 157-4
FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provide additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have decreased significantly. FSP FAS 157-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly. The provisions of FSP FAS 157-4 are effective for the Company’s interim period ending on June 30, 2009. Management is currently evaluating the effect that the provisions of FSP FAS 157-4 may have on the Company’s consolidated financial statements.
FSP No. 107-1 and APB 28-1
FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The provisions of FSP FAS 107-1 and APB 28-1 are effective for the Company’s interim period ending on June 30, 2009. As FSP FAS 107-1 and APB 28-1 amends only the disclosure requirements about fair value of financial instruments in interim periods, the adoption of FSP FAS 107-1 and APB 28-1 did not have a material effect on the Company’s statement of operations and balance sheet.
FSP Nos. FAS 115-2 and FAS 124-2
FSP Nos., FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” amends current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The Company adopted these as of June 30, 2009 and they did not have a material effect on the Company’s statement of operations and balance sheet.
SAB 111
The Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 111 (FASB ASC 320-10-S99-1) on April 9, 2009 to amend Topic 5.M., “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities” and to supplement FSP SFAS 115-2 and SFAS 124-2. SAB 111 maintains the staff’sStaff’s previous views related to equity securities; however, debt securities are excluded from its scope. The SAB provides that “other-
-19-
than-temporary”“other-than-temporary” impairment is not necessarily the same as “permanent” impairment and unless evidence exists to support a value equal to or greater than the carrying value of the equity security investment, a write-down to fair value should be recorded and accounted for as a realized loss. The SAB was effective upon issuance and had no impact on the Company’s financial position.
In April 2009, the FASB issued guidance on the recognition and presentation of Other-Than-Temporary Impairments (“OTTI”). The recognition practice categorizes losses on debt securities available-for-sale or held-to-maturity determined by management to be other-than-temporarily impaired into losses due to credit issues and losses related to all other factors. Other-than-temporary impairment exists when it is more likely than not that the security will mature or be sold before its amortized cost basis can be recovered. An OTTI related to credit losses should be recognized through earnings. An OTTI related to other factors should be recognized in other comprehensive income. Required annual disclosures are now also required for interim periods (including the aging of securities with unrealized losses). The adoption of the new practices did have an effect and has been disclosed in the Company’s financial statements.
-18-
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.
-20--19-
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.
Comparison of Financial Condition at JuneSeptember 30, 2009 and December 31, 2008.
During the sixnine months ended JuneSeptember 30, 2009, the Company’s total assets increased $11.3$28.2 million, from $452.5 million to $463.8$480.7 million. During the six months,same period, securities available for sale increased $5.8$16.5 million or 8.4%23.9%, from $68.8 million at December 31, 2008 to $74.6$85.3 million at JuneSeptember 30, 2009. Loans held for investment also increased $3.9$11.0 million to $344.7 million during the period.$351.8 million.
Cash and cash equivalents decreased $2.7$2.3 million during the sixnine months ended JuneSeptember 30, 2009. Cash and due from banks increased $4.8$4.9 million, while interest-earning deposits with banks declined $7.5$7.2 million.
Investment securities increased $5.8$16.5 million or 8.4%23.9% for the six months. Market values thatnine months ended September 30, 2009. As a result of the financial markets dislocations which occurred in the second half of 2008, the Company had declined at December 31, 2008 to $2.5 million in net unrealized losses due toat December 31, 2008. Actions taken by the recent downturnFederal Reserve have mostly stabilized the markets and brought about the resumption of more rational pricing. As a result on September 30, 2009, the Company had net unrealized gains of $344 thousand. The Company owns $11.0 million in whole loan private label CMOs. This portion of the investment markets experienced an improvementportfolio had net unrealized losses of $1.1 million during the second quarter. The total unrealized loss at June 30, 2009 was $1.4$1.9 million. The majority of the unrealized loss is related to the whole loan CMO portfolio. The Company evaluated its entire investment portfolio for other than temporary impairments. Management believes that all of the unrealized losses are only temporary with the exception of fourfive private label CMO investments. Management has deemed that an impairment is necessary basedBased on the erosion of the underlying collateral.collateral, management determined that an impairment charge was warranted. Thus, the Company recorded a $204$387 thousand impairmentin impairments on these fourfive bonds. During the period, the Company purchased $18.6$35.9 million in new securities, during the periodhad $3.0 million in municipal bonds called and sold $1.7$3.2 million in securities at asecurities. At September 30, 2009 the Company had net realized lossgains of $20$104 thousand.
As previously stated, loans held for investment increased $3.9$11.0 million to $344.7 million during the period ended June 30, 2009.$351.8 million. The Company has experienced positive growth trends in the commercial, consumer and commercial real estate commercial areasloans at a growth rate of its loan portfolio. These areas experienced growth of 8.3%14.3%, 6.5% and 2.8%7.1%, respectively. The consumer loan portfolio experienced growth of 3.8% as well. The remaining areas of the loan portfolio declined during the first sixnine months of 2009. Loans held for sale increased 8.6%decreased 50.5% or $231 thousand$1.4 million during the period. The allowance for loan losses was $4.7$4.8 million at JuneSeptember 30, 2009, which represents 1.37% of the loan portfolio.portfolio, an increase from $4.4 million or 1.28% at December 31, 2008.
Other changes in our consolidated assets are related to premises and equipment, interest receivable, Federal Home Loan Bank stock, bank owned life insurance, other real estate owned and other assets. The Company completed the purchase of a tract of land for a future branch, expansion, purchased a branch building that the Company had been leasing for a long period of time and also purchased another buildingtwo other buildings to be used for future office space. Construction has begun on a new branch office in Locust, NC, which will be completed in 2010. These purchases were the
-20-
leading factors in the increase of $1.7$2.4 million in fixed assets. Bank owned life insurance increased $97 thousand, whileand interest receivable increased $141 thousand and $147 thousand, respectively, while other real estate owned decreased $40 thousand and $319 thousand, respectively.$193 thousand. The Company did have an investment of $172 thousand in common stock of the parent company of Silverton Bank. On May 1, 2009, the Office of the Comptroller of the Currency closed Silverton Bank, and the
-21-
Federal Deposit Insurance Corporation (“FDIC”) was appointed receiver. The Company has written off this investment as of March 31, 2009. Federal Home Loan Bank stock increased $863 thousand.$917 thousand because member institutions are required to increase their ownership as they increase their utilization of FHLB borrowings. The Company was also required to increase their ownership in Federal Home LoanReserve Bank stock ownership is a requirement for member banks that utilizeby $210 thousand during the Federal Home Loan Bank for borrowing funds. The amount of stock owned by each member bank is based primarily on the amount of borrowings outstanding.period.
Customer deposits, our primary funding source, experienced an $18.2a $17.9 million increase during the sixnine months ended JuneSeptember 30, 2009, increasing from $353.6 million to $371.8$371.5 million. Demand, noninterest-bearingInterest checking and money market accounts increased $1.2$3.3 million, while savings deposits grew $5.8$6.4 million. Time deposits over $100,000 and other time deposits experienced positive growth of $7.5$7.9 million and $2.1$2.4 million, respectively. The Company also experienced aThese positive growth trendtrends were partially offset by a decline in interest checking and money marketdemand, noninterest-bearing accounts of $1.6$2.2 million.
Total borrowings increased $6.7 million for the period ending June 30, 2009.
Total borrowings decreased $9.5 million for the period. Borrowingswhich consist of both short-term and long-term borrowed funds. The Company utilizes both short-term and long-term advancesfunds primarily from the Federal Home Loan Bank. At JuneSeptember 30, 2009, $27.0$42.9 million of the total borrowings of $45.3$61.5 million were comprised of Federal Home Loan Bank advances. In addition the Company executed a $200 thousand note payable for a building that was purchased during the period. The noteperiod and is payable in four annual payments of $50 thousand each. The Company retired a $2.6 million short-term note to a correspondent bank in the first quarter of 2009.
Other liabilities increased from $2.4 million at December 31, 2008 to $3.1$2.8 million at JuneSeptember 30, 2009, an increase of $696$452 thousand.
At JuneSeptember 30, 2009, total shareholders’ equity was $43.2$44.5 million, an increase of $2.0$3.3 million from December 31, 2008. Net income for the period was $1.5$1.8 million. Unrealized lossesgains on investment securities, net of tax improved $691 thousand. The$1.8 million. These increases were offset as the Company also recorded $322$406 thousand in preferred stock dividends and discount accretions on the series A and B preferred stock for the sixnine months period. At JuneSeptember 30, 2009, the Company and its subsidiary banks exceeded all applicable regulatory capital requirements.
Comparison of Results of Operations For the Three Months Ended JuneSeptember 30, 2009 and 2008.
Net Income and Net Income Available to Common Shareholders
Uwharrie Capital Corp reported net income of $623$290 thousand for the three months ended JuneSeptember 30, 2009, as compared to $772$343 thousand for the three months ended JuneSeptember 30, 2008, a decrease of $149$53 thousand. Net income available to common shareholders was $463$131 thousand or $0.06$0.02 per common share at JuneSeptember 30, 2009, compared to $772$343 thousand or $0.10$0.05 per common share at JuneSeptember 30, 2008. Net income available to common shareholders is net income less any dividends and discount accretions on preferred stock pertainingrelated to the $10 million of capital received from the United States Department of the Treasury under the capital purchase program in December 2008.
Net Interest Income
The Company’s primary source of income, net interest income, increased $265$394 thousand or 6.7%10.1% for the three months ended JuneSeptember 30, 2009, as compared to the same period for 2008. Refer to the sixnine month discussion on page 1924 for further information.
-22--21-
Provision and Allowance for Loan Losses
The provision for loan losses was $196$295 thousand for the three months ending JuneSeptember 30, 2009 compared to $171$529 thousand for the same period in 2008. There were net loan charge-offs of $37$199 thousand for the three months ended JuneSeptember 30, 2009 as compared with net loan charge-offs of $97$43 thousand during the same period of 2008. Refer to the Asset Quality discussion belowon page 27 for further information.
Noninterest Income
The Company generates most of its revenue from net interest income; however, like nearly all financial institutions, diversification of our earnings base is of major importance into our long term success. Total noninterest income increased $246decreased $34 thousand for the three month period ending JuneSeptember 30, 2009 as compared to the same period in 2008. IncomeAlthough the volume of mortgage activity has slowed considerably during the third quarter, income from mortgage loan sales reached $1.1 millionincreased $158 thousand for the quarter ended JuneSeptember 30, 2009, a $774 thousand increase from the $357 thousand recorded foras compared to the same period in 2008. The recent decline in interest rates was the leading factor in this increase, as customers were able to refinance at a lower rate. Service charges on deposit accounts produced earnings of $567$616 thousand for the three months ended JuneSeptember 30, 2009, an increase of 5.6%2.8% due to growth in deposit balances. Other service fees and commissions experienced a 23.7%19.3% decrease for the comparable three month period. In this category $98$66 thousand of the decrease is attributable to reductions in brokerage commissions and assets under management. Other income was down $175 thousand compared to the prior year and is attributable to the non-recurring gain recognized in 2008 fromNet realized gains on the sale and call of MasterCard stock. Thesecurities available for sale was $124 thousand for the period. As previously discussed the Company recorded an additional other-than-temporary impairment of $204$183 thousand during the quarter as previously discussed.quarter. No impairment charges were recognized during the same period in 2008.
Noninterest Expense
Noninterest expense for the quarter ended JuneSeptember 30, 2009 was approximately $5.3 million compared to $4.5 million for the same period of 2008, an increase of $749$773 thousand. Salaries and employee benefits, the largest component of noninterest expense, increased $222$202 thousand, from $2.7$2.6 million for the quarter ending JuneSeptember 30, 2008 to $2.9$2.8 million for the same period in 2009. This increase is attributable to normal salary increases, additional executive management and supportadditions to staff and higher benefit expenses. Net occupancy expense and equipment expense had a combined increase of $30$60 thousand. Other noninterest expense increased $503$502 thousand for the comparable three month periods.period. The majority of the increase in other noninterest expense is attributed to an increase in FDIC assessment costs of $262$353 thousand. TheNot only has the assessment rate charged by the FDIC levied a special assessment onto all FDIC-insured financial institutions. The Company’s portion of this special assessment was $214 thousand. During 2008,institutions increased but also the Company received and utilized FDIC credits that reduced its assessment charges.charges during 2008. The table below reflects the further compositionadditional breakdown of other noninterest expense.
-23--22-
Other noninterest expense
Three Months Ended September 30, | |||||||||||||
Three Months Ended June 30, | 2009 | 2008 | |||||||||||
2009 | 2008 | (in thousands) | |||||||||||
(in thousands) | |||||||||||||
Professional fees and services | $ | 234 | $ | 173 | $ | 301 | $ | 184 | |||||
Marketing and donations | 169 | 145 | 176 | 146 | |||||||||
Office supplies and printing | 83 | 65 | 66 | 62 | |||||||||
Telephone and data lines | 56 | 62 | 55 | 57 | |||||||||
Electronic banking expense | 178 | 200 | 184 | 221 | |||||||||
Software amortization and maintenance | 107 | 114 | 118 | 114 | |||||||||
Loan collection expense | 105 | 56 | (19 | ) | 46 | ||||||||
Foreclosed real estate expense | 68 | 17 | |||||||||||
Shareholder relations expense | 56 | 43 | 51 | 43 | |||||||||
Dues and subscriptions | 42 | 40 | 37 | 32 | |||||||||
Postage | 53 | 49 | 51 | 45 | |||||||||
FDIC assessment | 281 | 19 | 384 | 31 | |||||||||
Other | 411 | 306 | 330 | 302 | |||||||||
Total | $ | 1,775 | $ | 1,272 | $ | 1,802 | $ | 1,300 | |||||
Income Tax Expense
The Company had income tax expense of $259$30 thousand for the three months ended JuneSeptember 30, 2009 resulting in an effective tax rate of 29.37%9.4% compared to income tax expense of $373$156 thousand andor an effective rate of 32.58%31.3% in the 2008 period. Income taxes computed at the statutory rate are reduced 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 decrease in the effective tax rate resulted primarily from the increase in the level of such tax free income as a percentage of income before income taxes in the current year quarter compared to the 2008 quarter.
Comparison of Results of Operations For the SixNine Months Ended JuneSeptember 30, 2009 and 2008.
Net Income and Net Income Available to Common Shareholders
The Company reported net income of approximately $1.5$1.8 million for the sixnine months ended JuneSeptember 30, 2009, as compared to $1.5approximately $1.9 million for the six months ended June 30, 2008, a decrease of $19 thousand.2008. Net income available to common shareholders was $1.2$1.3 million or $0.16$0.18 per common share at JuneSeptember 30, 2009, compared at $1.5to $1.9 million or $0.21$0.25 per common share at JuneSeptember 30, 2008. Net income available to common shareholders is net income less any dividends and discount accretions on preferred stock pertaining to the $10 million of capital received from the United States Department of the Treasury in December 2008.
Net Interest Income
As with most financial institutions, the primary component of earnings for our banks 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 borrowings. Changes in net interest income generally 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
-23-
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.
-24-
Net interest income for the sixnine months ended JuneSeptember 30, 2009 was $8.5$12.8 million as compared with $7.8$11.7 million during the sixnine months ending JuneSeptember 30, 2008, resulting in an increase of $688 thousand,$1.1 million, or 8.8%9.3%. During the sixnine months ending JuneSeptember 30, 2009 our growth in the volume of interest-earning assets outpaced the growth in interest-bearing liabilities by $806 thousand.$1.0 million. The average yield on our interest–earning assets decreased 9683 basis points to 5.99%5.94%, while the average rate we paid for our interest-bearing liabilities also decreased 9687 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 decreases resulted in an increase of onethree basis pointpoints in our interest rate spread, from 3.79%3.77% in 2008 to 3.80% in 2009. Our net interest margin was 4.09%4.08% and 4.21%4.17% for the comparable periods in 2009 and 2008, respectively.
The following table presents average balance sheets and a net interest income analysis for the sixnine months ended JuneSeptember 30, 2009 and 2008:
Average Balance Sheet and Net Interest Income Analysis
For the SixNine Months Ended JuneSeptember 30,
(in thousands)
Average Balance | Income/Expenses | Rate/Yield | Average Balance | Income/Expenses | Rate/Yield | |||||||||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||
Taxable securities | $ | 60,475 | $ | 36,383 | $ | 1,556 | $ | 1,009 | 5.19 | % | 5.59 | % | $ | 61,616 | $ | 36,763 | $ | 2,344 | $ | 1,493 | 5.09 | % | 5.42 | % | ||||||||||||
Nontaxable securities (1) | 16,103 | 13,726 | 359 | 323 | 7.32 | % | 7.70 | % | 14,992 | 14,298 | 502 | 504 | 7.28 | % | 7.66 | % | ||||||||||||||||||||
Short-term investments | 7,224 | 3,487 | 43 | 43 | 1.20 | % | 2.49 | % | 7,222 | 3,801 | 57 | 59 | 1.06 | % | 2.07 | % | ||||||||||||||||||||
Taxable loans | 343,380 | 326,770 | 10,499 | 11,550 | 6.17 | % | 7.13 | % | 343,121 | 330,286 | 15,712 | 17,201 | 6.12 | % | 6.96 | % | ||||||||||||||||||||
Non-taxable loans (1) | 4,793 | 3,895 | 94 | 88 | 6.40 | % | 7.44 | % | 5,302 | 3,909 | 162 | 89 | 6.63 | % | 7.45 | % | ||||||||||||||||||||
Total interest-earning assets | 431,975 | 384,261 | 12,551 | 13,013 | 5.99 | % | 6.95 | % | 432,253 | 389,057 | 18,777 | 19,346 | 5.94 | % | 6.77 | % | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
Interest-bearing deposits | 315,987 | 283,537 | 3,165 | 4,280 | 2.02 | % | 3.04 | % | $ | 320,805 | 286,882 | 4,656 | 6,159 | 1.94 | % | 2.87 | % | |||||||||||||||||||
Short-term borrowed funds | 29,015 | 18,493 | 186 | 334 | 1.29 | % | 3.64 | % | 25,019 | 17,589 | 250 | 407 | 1.34 | % | 3.09 | % | ||||||||||||||||||||
Long-term debt | 30,707 | 32,755 | 732 | 619 | 4.81 | % | 3.81 | % | 30,952 | 33,117 | 1,106 | 1,014 | 4.78 | % | 4.09 | % | ||||||||||||||||||||
Total interest bearing liabilities | 375,709 | 334,785 | 4,083 | 5,233 | 2.19 | % | 3.15 | % | 376,776 | 337,588 | 6,012 | 7,580 | 2.13 | % | 3.00 | % | ||||||||||||||||||||
Net interest spread | $ | 56,266 | $ | 49,476 | $ | 8,468 | $ | 7,780 | 3.80 | % | 3.79 | % | $ | 55,477 | $ | 51,469 | $ | 12,765 | $ | 11,766 | 3.80 | % | 3.77 | % | ||||||||||||
Net interest margin (1) | ||||||||||||||||||||||||||||||||||||
(% of earning assets) | 4.09 | % | 4.21 | % | ||||||||||||||||||||||||||||||||
Net interest margin (1) | 4.08 | % | 4.17 | % | ||||||||||||||||||||||||||||||||
(1) | Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 38.55% tax rate. |
Provision and Allowance for Loan Losses
The provision for loan losses was $568$863 thousand for the sixnine months ending JuneSeptember 30, 2009 compared to $257$786 thousand for the same period in 2008. There were net loan charge-offs of $197$396 thousand for the sixnine months ended JuneSeptember 30, 2009 as compared with net loan charge-offs of $110$153 thousand during the same period of 2008. Refer to the Asset Quality discussion on page 2127 for further information.
Noninterest Income
The Company generates most of its revenue from net interest income; however, like nearly all financial institutions, diversification of our earnings base is of major importance to our long term success. Total noninterest income increased $676$642 thousand for the sixnine month period ending June
-24-
September 30, 2009 as compared to the same period in 2008. IncomeThe leading factor for this increase was the growth in income from mortgage loan sales. With the drastic drop in interest rates during the fourth quarter of 2008, many customers have been able to take advantage by refinancing their mortgage loans to much lower rates. As a result of all this refinancing activity, income from mortgage loan sales increased $1.8 million from $798 thousand for the sixnine months ended JuneSeptember 30, 2008 to $2.6
-25-
2009 was $2.9 million foror an increase of $1.9 million over the same period in 2009. The recent decline in interest rates was the leading factor in this increase, as customers were able to refinance at a lower rate.2008. Service charges on deposit accounts produced earnings of $1.1$1.8 million for the sixnine months ended JuneSeptember 30, 2009 and reflected an increase of 6.4%5.1% compared to the prior year which was attributable to growth in deposit balances. Other service fees and commissions experienced a 31.3%26.2% decrease versus the comparable sixnine month period. In this category, $194$256 thousand of the decrease iswas attributable to reductions in brokerage commissions and asset under management, while income from mortgagemanagement. The current downturn in the financial markets and the over all economy has made many investors more nervous about investing in the financial markets thus resulting in the decrease in commission income. Mortgage servicing rights, another component of this category decreased $22$275 thousand as a result of heavy mortgage refinancing volume during the second quarter of 2009.nine month period. The $172 thousand investment the Company had in the stock of Silverton Bank’s holding company was a nonmarketable security that was written off during the first quarter of 2009 due to the take over of Silverton by the regulators. The Company realized gains on the sale and the call of securities available for of sale of $104 thousand. The Company recorded an other-than-temporary impairment of $387 thousand during the nine month period ended September 30, 2009. Other income was down $275$293 thousand compared to the sixnine month period of 2008. Of that amount, $220$221 thousand relates to the 2008 non-recurring gain recognized from the sale of MasterCard and Visa stock. The Company recorded an other-than-temporary impairment of $204 thousand during the six month period ended June 30, 2009 as previously discussed
Noninterest Expense
Noninterest expense for the quarternine months ended JuneSeptember 30, 2009 was $10.2$15.5 million compared to $9.1$13.6 million for the same period of 2008, an increase of $1.1$1.9 million. Salaries and employee benefits, the largest component of noninterest expense, increased $458$660 thousand, from $5.3$7.9 million for the sixnine months ending JuneSeptember 30, 2008 to $5.8$8.6 million for the same period in 2009. This increase is attributable to normal salary increases, additional executive management and supportadditions to staff and higher benefit expenses. Net occupancy expense and equipment expense had a combined increase of $93$153 thousand due to the additional depreciation and utilities on a renovated building and associated new furniture and equipment put into servicesservice in late 2008. Other noninterest expense increased $557 thousand$1.0 million for the comparable sixnine month period. The major contributing factor to this increase was an increase of $309$662 thousand in FDIC assessment charges. DuringThe aforementioned rate increases coupled with a special assessment levied on all FDIC-insured financial institutions during the second quarter account for this increase. Another attributing factor to the increase was the fact that during 2008, the Company received and utilized FDIC credits that reduced its assessment charges. ThisOther factors influencing the increase in other noninterest expense include an increase of $191 thousand in professional fees and services, which includes the previously discussed special assessment.
legal fees related to loan collections and foreclosure expense and an increase in foreclosed real estate expense totaling $99 thousand. The table below reflects the composition of other noninterest expense.
-25-
Other noninterest expense
Six Months Ended June 30, | ||||||
2009 | 2008 | |||||
(in thousands) | ||||||
Professional fees and services | $ | 412 | $ | 338 | ||
Marketing and donations | 333 | 317 | ||||
Office supplies and printing | 160 | 135 | ||||
Telephone and data lines | 111 | 122 | ||||
Electronic banking expense | 355 | 386 | ||||
Software amortization and maintenance | 223 | 213 | ||||
Loan collection expense | 190 | 127 | ||||
Shareholder relations expense | 100 | 101 | ||||
Dues and subscriptions | 85 | 77 | ||||
Postage | 102 | 96 | ||||
FDIC assessment | 348 | 39 | ||||
Other | 745 | 656 | ||||
Total | $ | 3,164 | $ | 2,607 | ||
-26-
Nine Months Ended September 30, | ||||||
2009 | 2008 | |||||
(in thousands) | ||||||
Professional fees and services | $ | 713 | $ | 522 | ||
Marketing and donations | 509 | 463 | ||||
Office supplies and printing | 226 | 197 | ||||
Telephone and data lines | 166 | 179 | ||||
Electronic banking expense | 539 | 607 | ||||
Software amortization and maintenance | 341 | 327 | ||||
Loan collection expense | 171 | 173 | ||||
Foreclosed real estate expense | 136 | 37 | ||||
Shareholder relations expense | 151 | 144 | ||||
Dues and subscriptions | 122 | 109 | ||||
Postage | 153 | 141 | ||||
FDIC assessment | 732 | 70 | ||||
Other | 1,007 | 938 | ||||
Total | $ | 4,966 | $ | 3,907 | ||
Income Tax Expense
The Company had income tax expense of $714$744 thousand for the sixnine months ended JuneSeptember 30, 2009 resulting in an effective tax rate of 31.85%29.0% compared to income tax expense of $747$903 thousand and an effective rate of 32.56%32.3% in the 2008 period. Income taxes computed at the statutory rate are reduced 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 decrease in the effective tax rate resulted primarily from the increase in the level of such tax free income as a percentage of income before income taxes in the current year compared to the 2008 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 by recoveries of amounts previously charged off, and reduced by loans charged off. Management evaluates the adequacy of the allowance at least quarterly. In evaluating the adequacy of the allowance, management considers the followingfollowing: 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, 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 either on discounted cash flows using the loan’s initial effective interest rate or on the fair value of the collateral for certain collateral dependent loans. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans, which may be susceptible to significant change. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require additions for estimated losses based upon judgments different from those of management.
-26-
Management uses a risk-grading program to facilitate the evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by loan officers and reviewed and monitored by credit administration. The Company strives to maintain its loan portfolio in accordance with conservative loan underwriting policies that result in loans specifically tailored to the needs of its market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies. The Company has no foreign loans and does not engage in significant lease financing or highly leveraged transactions. The Company follows a loan review program designed to evaluate the credit risk in the loan portfolio. This process includes the maintenance of an internally classified watch 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. As a result of this process, certain loans are categorized as substandard, doubtful or loss and reserves are allocated based on management’s judgment and historical experience.
The allowance for loan losses represents management’s best estimate of an appropriate amount to provide for known and inherent losses 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
-27-
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 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 as a result 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.
The provision for loan losses was $568$863 thousand for the sixnine months ended JuneSeptember 30, 2009 as compared to $257$786 thousand for the same period in 2008. Additionally, the allowance expressed as a percentage of loans held for investment was 1.37% at JuneSeptember 30, 2009 compared to 1.28% December 31, 2008. During the first six months ofAt September 30, 2009 the levels of our impaired loans, which includes all loans in nonaccrual status and other loans deemed by management to be impaired, were $22.4$18.7 million compared to $12.5 million at December 31, 2008, an increase of $9.9$6.2 million. The increase in the level of impaired loans primarily resulted from three customer relationships that are included in impaired loans totaling $8.2$5.7 million. One of these relationships totaling $1.3 million was for $3.9 million and has been brought current since Junein nonaccrual at September 30, 2009 and is no longer considered by management to be impaired. This relationship was also included in the total nonaccrual loans as of June 30, 2009 and will reduce that number as well.2009. Total nonaccrual loans, which are a component of impaired loans, increased from $3.9 million at December 31, 2008 to $10.4$6.6 million at JuneSeptember 30, 2009. The Company had one relationship of $789 thousand that was in nonaccrual at the end of the period that has now been foreclosed and is currently included in other real estate owned. The Company had net loan charge-offs for the first sixnine months of 2009 of $197$396 thousand compared to net loan charge-offs of $110$153 thousand for the same period in 2008.
The allowance expressed as a percentage of gross loans held for investment increased nine basis points from 1.28% at December 31, 2008 to 1.37% at JuneSeptember 30, 2009. The allowance, as a percentage of total impaired loans, decreased from 53.3% at December 31, 2008 to 53.0%52.7% at JuneSeptember 30, 2009. Likewise, the portion of the allowance specifically allocable to impaired loans decreased from 18.5% at December 31, 2008 to 11.2%13.6% at JuneSeptember 30, 2009. Nonperforming loans, which consist solely of nonaccrual loans, were $10.4$6.6 million at JuneSeptember 30, 2009 as compared to $3.9 million at December 31, 2008.
-27-
Nonperforming loans to total loans increased from 1.14% at December 31, 2008, to 3.02%1.88% at JuneSeptember 30, 2009. The total allowance relative to non-performing loans decreased from 111.87% at the end of 2008 to 45.53%73.16% at JuneSeptember 30, 2009. During the period the Company had a decrease in other real estate owned of $319$193 thousand. With the exception of the three aforementioned relationships, of which $4.5 million is in land development, delinquencies have remained relatively constant during the period, even in these difficult economic times Management believes the current level of allowance for loan losses is appropriate given the risk inherent in the Company’s loan portfolio at this time.
-28-
The following nonperforming loan table shows the comparison for the sixnine months ended JuneSeptember 30, 2009 to December 31, 2008:
Nonperforming Assets
(dollars in thousands)
September 30, 2009 | December 31, 2008 | |||||||||||||||
June 30, 2009 | December 31, 2008 | |||||||||||||||
Nonperforming assets: | ||||||||||||||||
Nonaccrual loans | $ | 10,393 | $ | 3,898 | $ | 6,600 | $ | 3,898 | ||||||||
Other real estate owned | 2,497 | 2,816 | 2,623 | 2,816 | ||||||||||||
Total nonperforming assets | $ | 12,890 | $ | 6,714 | $ | 9,223 | $ | 6,714 | ||||||||
Accruing loans past due 90 days or more | $ | 8 | $ | 3 | $ | 8 | $ | 3 | ||||||||
Allowance for loans losses | 4,732 | 4,361 | 4,828 | 4,361 | ||||||||||||
Nonperforming loans to total loans | 3.02 | % | 1.14 | % | 1.88 | % | 1.14 | % | ||||||||
Allowance for loan losses to total loans | 1.37 | % | 1.28 | % | 1.37 | % | 1.28 | % | ||||||||
Nonperforming assets to total loans and other real estate | 3.74 | % | 1.97 | % | 2.62 | % | 1.97 | % | ||||||||
Nonperforming assets to total assets | 2.78 | % | 1.48 | % | 1.92 | % | 1.48 | % | ||||||||
Allowance for loan losses to nonperforming loans | 45.53 | % | 111.87 | % | 73.16 | % | 111.87 | % |
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 banks have multiple funding sources in addition to deposits that can be used to increase liquidity and provide additional financial flexibility. These sources are the subsidiary banks’ established federal funds lines with correspondent banks aggregating $10.5$18.8 million at JuneSeptember 30, 2009, with available credit of $10.5$18.8 million, established borrowing relationships with the Federal Home Loan Bank, with available credit of $43.4$21.9 million, access to borrowings from the Federal Reserve Bank discount window, and the saleissuance of securities under agreements to repurchase. In addition, thecommercial paper. The Company issues commercial paper and has also secured long-term debt from other sources. Total
-28-
debt from these sources aggregated $45.3$61.5 million at JuneSeptember 30, 2009, compared to $54.8 million at December 31, 2008.
The Company’s subsidiary banks had federal funds purchased lines of credit with Silverton Bank for $10.4 million. The Office of the Comptroller of the Currency took control of Silverton Bank on May 1, 2009 and appointed the FDIC receiver. Silverton was later closed. Management has entered into a new correspondent bank relationship with $9.8 million in federal funds lines available. These new lines went into effect on July 16, 2009 and are not included in the total available federal funds lines previously discussed.
-29-
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 banks, has adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets.
Regulatory guidelines require a minimum of total capital to risk-adjusted assets ratio of 8 percent and a Tier leverage ratio of 4 percent. Banks, which meet or exceed a Tier 1 risk-based capital ratio of 6 percent, a total risked-based capital ratio of 10 percent and a Tier leverage ratio of 5 percent are considered “well capitalized” by regulatory standards. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with those guidelines.
The Company and its subsidiary banks have each maintained capital levels exceeding minimum levels for “well capitalized” banks and bank holding companies. The Company expects to continue to exceed minimum capital requirements without altering current operations or strategy. The Company completed a private placement of subordinated debt during 2008 that qualifies as regulatory capital. At JuneSeptember 30, 2009, the Company had $7.4 million in subordinated debt and $10 million in preferred stock issued to the United States Department of the Treasury.
Accounting and Regulatory Matters
Management is not aware of any known trends, events, uncertainties or current recommendations by regulatory authorities that will have or that are reasonably likely to have a material effect on the Company’s liquidity, capital resources, or other operations.
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, 2008.
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
-29-
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,
-30-
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 firstthird quarter of 2009. 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.
Neither the Company nor its subsidiaries, nor any of their properties are subject to any material legal proceedings. From time to time the Banks are engaged in ordinary routine litigation incidental to their business.
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Trades of the Company’s stock occur in the Over-the-Counter marketplace 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. This plan was initially adopted in 1995 and is approved annually by resolution of the Board of Directors or the Executive Committee of the Board.
Pursuant to the terms of the United States Department of the Treasury’s investment in the Company’s preferred stock under the Capital Purchase Program (“CPP”), the Company must obtain the prior consent of the United States Department of the Treasury to repurchase its common stock under the Stock Purchase Plan or otherwise or to pay a cash dividend.
-30-
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company’s annual meeting of shareholders was held on Tuesday, May 12, 2009 in Albemarle, North Carolina. Proposals listed in the Proxy Statement dated March 31, 2009, (1) to elect six (6) directors of the Company to three (3) year terms and one (1) director to a two (2) yearNone
-31-
term, (2) to ratify a non-binding Resolution for Executive Compensation and (3) to ratify the appointment of the Company’s independent public accountants for 2009, were approved by the shareholders as listed below. There were no other matters submitted for vote of the shareholders at this meeting.
Proposal (1) To elect six (6) directors to three (3) year terms. Votes for each nominee were as follows:
Nominee | For | Withheld | ||
W. Stephen Aldridge, III | 4,617,622 | 98,014 | ||
Bill C. Burnside | 4,624,820 | 90,816 | ||
W. Kenneth Huntley | 4,625,709 | 89,927 | ||
Joseph R. Kluttz, Jr. | 4,623,088 | 92,548 | ||
Lee Roy Lookabill, Jr | 4,625,176 | 90,460 | ||
Edward B.Tyson | 4,619,474 | 96,162 |
To elect one (1) director to a two (2) year term. Votes for each nominee were as follows:
Nominee | For | Withheld | ||
Barry S. Moose | 4,615,114 | 100,522 |
The following eleven directors continued in office: Joe S. Brooks, Ronald T. Burleson, Henry E. Farmer, Sr., Charles F. Geschickter,III, Thomas M. Hearne, Jr., Charles D. Horne, W. Chester Lowder, Timothy J. Propst, Susan J. Rourke, Donald P. Scarborough and John W. Shealy, Jr.
Proposal (2) To ratify the Resolution Regarding Executive Compensation.
| ||
| ||
|
Proposal (3) To ratify the appointment of Dixon Hughes PLLC as the Company’s independent registered public accounting firm for 2009.
| ||
| ||
|
None
-32--31-
Exhibit | Description of Exhibit | |
3.1 | Registrant’s Articles of Incorporation * | |
3.2 | Registrant’s By-laws ***** | |
4 | Form of stock certificate * | |
10.1 | Incentive Stock Option Plan, as amended * | |
10.2 | Employee Stock Ownership Plan and Trust ** | |
10.3 | 2006 Incentive Stock Option Plan *** | |
10.4 | 2006 Employee Stock Purchase Plan *** | |
10.5 | Amendment to the Employee Stock Ownership Plan and Trust **** | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the | |
31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the | |
32 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
* | Incorporated by reference from exhibits to Registrant’s Registration Statement on Form S-4 (Reg. No. 33-58882). |
** | Incorporated by reference to Registrant’s Annual Report on Form 10-KSB for the Fiscal year ended 1999. |
*** | Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2006. |
**** | Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2008. | |
***** | Filed here within this report. |
-33--32-
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 who is thereunto duly authorized.
UWHARRIE CAPITAL CORP | ||||||
(Registrant) | ||||||
Date: | By: | / | ||||
Roger L. Dick | ||||||
President and Chief Executive Officer | ||||||
Date: | By: | / | ||||
Robert O. Bratton | ||||||
Principal Financial Officer |
-34--33-
Exhibit | Description of Exhibit | |
3.1 | Registrant’s Articles of Incorporation * | |
3.2 | Registrant’s By-laws | |
4 | Form of stock certificate * | |
10.1 | Incentive Stock Option Plan, as amended * | |
10.2 | Employee Stock Ownership Plan and Trust * | |
10.3 | 2006 Incentive Stock Option Plan * | |
10.4 | 2006 Employee Stock Purchase Plan * | |
10.5 | Amendment to the Employee Stock Ownership Plan and Trust * | |
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) |
* | Incorporated by reference | |
** | Filed here within this report |
-35--34-