Exhibit 13
Uwharrie Capital Corp
2013
ANNUAL REPORT TO SHAREHOLDERS
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UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Description of Business
Uwharrie Capital Corp (the “Company”) is a North Carolina bank holding company. The Company was incorporated on February 24, 1993 to become the bank holding company for Uwharrie Bank (the “Bank”), formerly, known as Bank of Stanly a North Carolina commercial bank chartered on September 28, 1983, and its three wholly-owned subsidiaries, The Strategic Alliance Corporation, BOS Agency, Inc., and Gateway Mortgage, Inc., a mortgage origination company. The Company also owns two non-bank subsidiaries, Strategic Investment Advisors, Inc., and Uwharrie Mortgage, Inc.
The Bank engages in retail and commercial banking, with six banking offices in Stanly County, North Carolina. The Bank provides a wide range of banking services including deposit accounts, commercial, consumer, home equity and residential mortgage loans, safe deposit boxes, and electronic banking services.
On January 19, 2000, the Company completed its acquisition of Anson Bancorp, Inc. and its subsidiary, Anson Savings Bank. The savings bank retained its North Carolina savings bank charter and became a wholly-owned subsidiary of Uwharrie Capital Corp as Anson Bank & Trust Co. (“Anson”) and provided financial services to customers through one banking office in Anson County until September 1, 2013 when it was consolidated with and into the Bank. The former Anson office is now operated by the Bank.
On April 10, 2003, the Company capitalized a new wholly-owned subsidiary bank, Cabarrus Bank & Trust Company (“Cabarrus”), located in Concord, North Carolina. As of that date, Cabarrus purchased two branch offices located in Cabarrus County from the Bank to begin its operation. Cabarrus operated as a commercial bank and provided a full range of banking services. Cabarrus was consolidated into the Bank effective September 1, 2013. The former Cabarrus offices are now operated as branches of the Bank.
The Company and its subsidiaries are located in Stanly County, Anson County and Cabarrus County. However, the Company intends to prudently expand its service area to include the entire Uwharrie Lakes Region of North Carolina.
Depository services offered by the Bank include personal and commercial checking, savings, money market, certificates of deposit accounts and individual retirement accounts, all tailored to meet customers’ needs. The bank provides fixed and variable rate loans, which include mortgage, home equity, lines of credit, consumer and commercial loans. The bank also offers internet banking, mobile banking, and 24-hour telephone banking, providing customers the convenience of access to account information, rate information and accessibility of funds transfers between accounts. Other services include MasterCard® credit cards and a Visa® check card which functions as a point-of-sale (POS) and automated teller machine (ATM) card. Customers can use the check card for purchases at virtually any merchant accepting Visa® and ATMs displaying the STAR® or CIRRUS® networks regionally and worldwide, respectively.
Strategic Investment Advisors Inc. provides portfolio management services to its customers. The Strategic Alliance Corporation (Strategic Alliance®) is a registered broker-dealer with the Financial Industry Regulatory Authority (FINRA). BOS Agency provides insurance products and is licensed in the state of North Carolina. Through Strategic Investment Group, a DBA for financial consultants registered with Private Client Services LLC. securities and insurance products are offered including fixed annuities, long-term care, Medicare supplement products and life insurance products. Group insurance products are offered through an arrangement with Burchfield Insurance Group, Inc.
Strategic Investment Group: Securities and insurance products are offered through Private Client Services, LLC, 2225 Lexington Rd , Louisville, KY 40206, ph: 502-451-0600, Member FINRA and SIPC. Private Client Services, LLC and Uwharrie Capital Corp along with its affiliates and/or subsidiaries are separate, distinct, and unaffiliated entities. It is important to note that securities and insurance products are; NOT BANK DEPOSITS – NOT INSURED BY THE FDIC OR ANY FEDERAL GOVERNMENT AGENCY – NOT OBLICATIONS OF OR GUARANTEED BY ANY FINANCIAL INSTITUTION – SUBJECT TO RISK AND MAY LOSE VALUE.
Uwharrie Bank, Member FDIC, Equal Housing Lender.
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UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Financial Highlights
(Dollars in thousands, except per share amounts) | 2013 | 2012 | Percent Increase (Decrease) | |||||||||
For the year: | ||||||||||||
Net income | $ | 954 | $ | 404 | 136.14 | % | ||||||
Net income (loss) available to common shareholders | $ | 151 | $ | (241 | ) | 162.66 | % | |||||
Basic net income (loss) per common share | $ | 0.02 | $ | (0.03 | ) | 166.67 | % | |||||
Diluted net income (loss) per common share | $ | 0.02 | $ | (0.03 | ) | 166.67 | % | |||||
Weighted average common shares outstanding (diluted) | 7,276,751 | 7,371,667 | -1.29 | % | ||||||||
At year-end: | ||||||||||||
Total assets | $ | 517,320 | $ | 545,007 | -5.08 | % | ||||||
Total earning assets | 473,214 | 499,045 | -5.18 | % | ||||||||
Loans held for investment | 307,348 | 329,183 | -6.63 | % | ||||||||
Total interest-bearing liabilities | 395,887 | 418,628 | -5.43 | % | ||||||||
Shareholders’ equity | 40,509 | 42,729 | -5.20 | % | ||||||||
Book value per common share | $ | 4.02 | $ | 4.31 | -6.73 | % | ||||||
Averages for the year: | ||||||||||||
Total assets | $ | 527,693 | $ | 526,361 | 0.25 | % | ||||||
Total earning assets | 457,095 | 478,630 | -4.50 | % | ||||||||
Loans held for investment | 317,274 | 347,762 | -8.77 | % | ||||||||
Total interest-bearing liabilities | 407,857 | 408,358 | -0.12 | % | ||||||||
Shareholders’ equity | 43,994 | 44,868 | -1.95 | % | ||||||||
Financial ratios (in percentage): | ||||||||||||
Return on average assets | 0.18 | % | 0.08 | % | ||||||||
Return on average shareholders’ equity | 2.17 | % | 0.90 | % | ||||||||
Average equity to average assets | 8.34 | % | 8.52 | % | ||||||||
Net interest margin (fully tax equivalent basis) | 3.52 | % | 3.90 | % | ||||||||
Allowance as % of loans at year-end | 1.66 | % | 2.07 | % | ||||||||
Allowance as % of nonperforming loans | 108.02 | % | 71.74 | % | ||||||||
Nonperforming loans to total loans | 1.53 | % | 2.88 | % | ||||||||
Nonperforming assets to total assets | 2.30 | % | 3.34 | % | ||||||||
Net loan charge-offs to average loans | 0.55 | % | 0.53 | % |
Market for the Company’s Common Stock and Related Security Holder Matters
It is the philosophy of Uwharrie Capital Corp to promote a strong base of local shareholders. While bid and asked prices for the Company’s common stock are quoted on the OTCQB marketplace operated by OTC Markets Group Inc. under the symbol UWHR, trading is sporadic with trades also taking place in privately negotiated transactions. Management makes every reasonable effort to match willing buyers with willing sellers as they become known for the purpose of private negotiations for the purchase and sale of the Company’s common stock.
Shareholders needing information about purchasing or selling shares of Uwharrie Capital Corp should contact Tamara M. Singletary or Lisa E. Hartsell, Investor Relations at Uwharrie Capital Corp, 132 N. First Street, Post Office Box 338, Albemarle, NC 28002.
The Board of Directors adopts a dividend policy on an annual basis. For 2013 and 2012, Uwharrie Capital Corp did not declare a dividend on its outstanding common stock. The Board of Directors will determine an appropriate dividend, if any, on an annual basis, consistent with the capital needs of the Company.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
Uwharrie Capital Corp
Albemarle, North Carolina
We have audited the accompanying consolidated balance sheets of Uwharrie Capital Corp and Subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Uwharrie Capital Corp and Subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
/s/ Dixon Hughes Goodman LLP
Asheville, North Carolina
February 28, 2014
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UWHARRIE CAPITAL CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2013 and 2012
2013 | 2012 | |||||||
(dollars in thousands) | ||||||||
ASSETS | ||||||||
Cash and due from banks | $ | 7,947 | $ | 8,877 | ||||
Interest-earning deposits with banks | 64,447 | 72,851 | ||||||
Securities available for sale, at fair value | 100,280 | 91,638 | ||||||
Loans held for sale | 1,139 | 5,373 | ||||||
Loans: | ||||||||
Loans held for investment | 307,348 | 329,183 | ||||||
Less allowance for loan losses | (5,095 | ) | (6,801 | ) | ||||
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Net loans held for investment | 302,253 | 322,382 | ||||||
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Premises and equipment, net | 13,781 | 14,952 | ||||||
Interest receivable | 1,747 | 1,753 | ||||||
Restricted stock | 1,184 | 2,265 | ||||||
Bank owned life insurance | 6,516 | 6,394 | ||||||
Other real estate owned | 7,170 | 8,713 | ||||||
Other assets | 10,856 | 9,809 | ||||||
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Total assets | $ | 517,320 | $ | 545,007 | ||||
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LIABILITIES | ||||||||
Deposits: | ||||||||
Demand noninterest-bearing | $ | 74,493 | $ | 70,347 | ||||
Interest checking and money market accounts | 228,933 | 211,066 | ||||||
Savings deposits | 41,512 | 43,336 | ||||||
Time deposits, $100,000 and over | 44,690 | 53,449 | ||||||
Other time deposits | 64,080 | 79,414 | ||||||
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Total deposits | 453,708 | 457,612 | ||||||
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Short-term borrowed funds | 5,509 | 18,690 | ||||||
Long-term debt | 11,163 | 12,673 | ||||||
Interest payable | 224 | 270 | ||||||
Other liabilities | 4,491 | 11,449 | ||||||
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Total liabilities | 475,095 | 500,694 | ||||||
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Off balance sheet items, commitments and contingencies (Note 13) | ||||||||
Redeemable common stock held by the Employee Stock Ownership Plan (ESOP) (Note 17) | 1,716 | 1,584 | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Preferred stock, no par value: 10,000,000 shares authorized; | ||||||||
10,000 shares of series A issued and outstanding, 2012 | — | 10,000 | ||||||
500 shares of series B issued and outstanding, 2012 | — | 500 | ||||||
Discount on preferred stock | — | (100 | ) | |||||
Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and outstanding 7,445,931 and 7,502,496 | 9,307 | 9,378 | ||||||
Additional paid-in capital | 11,922 | 12,201 | ||||||
Unearned ESOP compensation | (989 | ) | (875 | ) | ||||
Undivided profits | 10,289 | 10,138 | ||||||
Accumulated other comprehensive income (loss) | (562 | ) | 1,487 | |||||
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Total Uwharrie Capital shareholders’ equity | 29,967 | 42,729 | ||||||
Noncontrolling interest | 10,542 | — | ||||||
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Total shareholders’ equity | 40,509 | 42,729 | ||||||
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Total liabilities and shareholders’ equity | $ | 517,320 | $ | 545,007 | ||||
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The accompanying notes are an integral part of the consolidated financial statements.
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UWHARRIE CAPITAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2013, 2012 and 2011
2013 | 2012 | 2011 | ||||||||||
(dollars in thousands, except share and per share data) | ||||||||||||
Interest Income | ||||||||||||
Loans, including fees | $ | 17,573 | $ | 19,724 | $ | 21,609 | ||||||
Investment securities: | ||||||||||||
US Treasury | 397 | 581 | 742 | |||||||||
US Government agencies and corporations | 1,066 | 1,105 | 1,035 | |||||||||
State and political subdivisions | 252 | 324 | 371 | |||||||||
Interest-earning deposits with banks and federal funds sold | 177 | 137 | 65 | |||||||||
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Total interest income | 19,465 | 21,871 | 23,822 | |||||||||
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Interest Expense | ||||||||||||
Interest checking and money market accounts | 439 | 542 | 785 | |||||||||
Savings deposits | 171 | 197 | 286 | |||||||||
Time deposits $100,000 and over | 592 | 802 | 1,106 | |||||||||
Other time deposits | 708 | 1,008 | 1,138 | |||||||||
Short-term borrowed funds | 160 | 353 | 354 | |||||||||
Long-term debt | 664 | 796 | 1,068 | |||||||||
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Total interest expense | 2,734 | 3,698 | 4,737 | |||||||||
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Net interest income | 16,731 | 18,173 | 19,085 | |||||||||
Provision for loan losses | 28 | 1,832 | 3,456 | |||||||||
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Net interest income after provision for loan losses | 16,703 | 16,341 | 15,629 | |||||||||
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Noninterest Income | ||||||||||||
Service charges on deposit accounts | 1,627 | 1,723 | 1,837 | |||||||||
Other service fees and commissions | 3,399 | 3,178 | 3,409 | |||||||||
Gain (loss) on sale of securities (includes reclassification of $523 from accumulated comprehensive income) | (523 | ) | 1,286 | 933 | ||||||||
Income from mortgage loan sales | 2,113 | 3,740 | 1,806 | |||||||||
Other income | 971 | 748 | 271 | |||||||||
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Total noninterest income | 7,587 | 10,675 | 8,256 | |||||||||
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Noninterest Expense | ||||||||||||
Salaries and employee benefits | 12,423 | 12,891 | 12,121 | |||||||||
Net occupancy expense | 1,098 | 1,155 | 1,165 | |||||||||
Equipment expense | 734 | 733 | 758 | |||||||||
Data processing costs | 784 | 889 | 858 | |||||||||
Office supplies and printing | 358 | 334 | 337 | |||||||||
Foreclosed real estate expense | 1,647 | 2,994 | 489 | |||||||||
Professional fees and services | 680 | 588 | 1,488 | |||||||||
Marketing and donations | 728 | 691 | 769 | |||||||||
Electronic banking expense | 999 | 951 | 875 | |||||||||
Software amortization and maintenance | 541 | 576 | 573 | |||||||||
FDIC insurance | 518 | 693 | 750 | |||||||||
Goodwill Impairment | — | 987 | — | |||||||||
Other noninterest expense | 2,484 | 2,765 | 2,606 | |||||||||
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Total noninterest expense | 22,994 | 26,247 | 22,789 | |||||||||
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Income before income taxes | 1,296 | 769 | 1,096 | |||||||||
Income taxes (includes reclassification of $202 from accumulated other comprehensive income) | 342 | 365 | 196 | |||||||||
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Net income | $ | 954 | $ | 404 | $ | 900 | ||||||
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Consolidated net income | $ | 954 | $ | 404 | $ | 900 | ||||||
Less: Net income attributable to noncontrolling interest | (478 | ) | — | — | ||||||||
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Net income attributable to Uwharrie Capital Corp | 476 | 404 | 900 | |||||||||
Dividends on preferred stock | (325 | ) | (645 | ) | (645 | ) | ||||||
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Net Income (loss) available to common shareholders | $ | 151 | $ | (241 | ) | $ | 255 | |||||
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Net income (loss) per common share | ||||||||||||
Basic | $ | 0.02 | $ | (0.03 | ) | $ | 0.03 | |||||
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Diluted | $ | 0.02 | $ | (0.03 | ) | $ | 0.03 | |||||
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Weighted average common shares outstanding | ||||||||||||
Basic | 7,276,751 | 7,371,667 | 7,467,396 | |||||||||
Diluted | 7,276,751 | 7,371,667 | 7,467,396 |
The accompanying notes are an integral part of the consolidated financial statements.
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UWHARRIE CAPITAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2013, 2012 and 2011
2013 | 2012 | 2011 | ||||||||||
(dollars in thousands) | ||||||||||||
Net Income | $ | 954 | $ | 404 | $ | 900 | ||||||
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Other comprehensive income (loss): | ||||||||||||
Unrealized gains (losses) on available for sale securities | (3,662 | ) | 2,356 | 3,759 | ||||||||
Related tax effect | 1,292 | (859 | ) | (1,327 | ) | |||||||
Reclassification of losses (gains) recognized in net income | 523 | (1,286 | ) | (933 | ) | |||||||
Related tax effect | (202 | ) | 496 | 360 | ||||||||
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Total other comprehensive income (loss) | (2,049 | ) | 707 | 1,859 | ||||||||
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Comprehensive income (loss) | (1,095 | ) | 1,111 | 2,759 | ||||||||
Less: Comprehensive income attributable to noncontrolling interest | (478 | ) | — | — | ||||||||
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Comprehensive income (loss) attributable to Uwharrie Capital | $ | (1,573 | ) | $ | 1,111 | $ | 2,759 | |||||
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The accompanying notes are an integral part of the consolidated financial statements.
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UWHARRIE CAPITAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2013, 2012 and 2011
Number of 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) | Noncontrolling Interest | Total | ||||||||||||||||||||||||||||||||||
(dollars in thousands, except share data) | ||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2010 | 7,593,929 | $ | 10,000 | $ | 500 | $ | (300 | ) | $ | 9,492 | $ | 14,034 | $ | (692 | ) | $ | 10,124 | $ | 335 | $ | — | $ | 43,493 | |||||||||||||||||||||
Net Income | — | — | — | — | — | — | — | 900 | — | — | 900 | |||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | — | — | 1,859 | — | 1,859 | |||||||||||||||||||||||||||||||||
Release of ESOP shares | — | — | — | — | — | (28 | ) | 81 | — | — | — | 53 | ||||||||||||||||||||||||||||||||
Increase in ESOP notes receivable | — | — | — | — | — | — | (161 | ) | — | — | — | (161 | ) | |||||||||||||||||||||||||||||||
Reclass of redeemable ESOP stock | — | — | — | — | — | (1,349 | ) | — | — | — | — | (1,349 | ) | |||||||||||||||||||||||||||||||
Stock compensation expense | — | — | — | — | — | 4 | — | — | — | — | 4 | |||||||||||||||||||||||||||||||||
Record preferred stock dividend and discount accretion | — | — | — | 100 | — | — | — | (645) | — | — | (545) | |||||||||||||||||||||||||||||||||
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Balance, December 31, 2011 | 7,593,929 | $ | 10,000 | $ | 500 | $ | (200 | ) | $ | 9,492 | $ | 12,661 | $ | (772 | ) | $ | 10,379 | $ | 2,194 | $ | — | $ | 44,254 | |||||||||||||||||||||
Net Income | — | — | — | — | — | — | — | 404 | — | — | 404 | |||||||||||||||||||||||||||||||||
Repurchase of common stock | (90,260 | ) | — | — | — | (113 | ) | (191 | ) | — | — | — | — | (304 | ) | |||||||||||||||||||||||||||||
Retirement of common stock | (1,173 | ) | — | — | — | (1 | ) | 1 | — | — | — | — | — | |||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | — | — | (707 | ) | — | (707 | ) | |||||||||||||||||||||||||||||||
Release of ESOP shares | — | — | — | — | — | (39 | ) | 87 | — | — | — | 48 | ||||||||||||||||||||||||||||||||
Increase in ESOP notes receivable | — | — | — | — | — | — | (190 | ) | — | — | — | (190 | ) | |||||||||||||||||||||||||||||||
Reclass of redeemable ESOP stock | — | — | — | — | — | (235 | ) | — | — | — | — | (235 | ) | |||||||||||||||||||||||||||||||
Stock compensation expense | — | — | — | — | — | 4 | — | — | — | — | 4 | |||||||||||||||||||||||||||||||||
Record preferred stock dividend and discount accretion | — | — | — | 100 | — | — | — | (645 | ) | — | — | (545 | ) | |||||||||||||||||||||||||||||||
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Balance, December 31, 2012 | 7,502,496 | $ | 10,000 | $ | 500 | $ | (100 | ) | $ | 9,378 | $ | 12,201 | $ | (875 | ) | $ | 10,138 | $ | 1,487 | $ | — | $ | 42,729 | |||||||||||||||||||||
Net Income | — | — | — | — | — | — | — | 476 | — | 478 | 954 | |||||||||||||||||||||||||||||||||
Repurchase of common stock | (56,565 | ) | — | — | — | (71 | ) | (98 | ) | — | — | — | — | (169 | ) | |||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | — | — | (2,049 | ) | — | (2,049 | ) | |||||||||||||||||||||||||||||||
Release of ESOP shares | — | — | — | — | — | (49 | ) | 94 | — | — | — | 45 | ||||||||||||||||||||||||||||||||
Increase in ESOP notes receivable | — | — | — | — | — | — | (208 | ) | — | — | — | (208 | ) | |||||||||||||||||||||||||||||||
Reclass to mezzanine capital | — | — | — | — | — | (132 | ) | — | — | — | — | (132 | ) | |||||||||||||||||||||||||||||||
Repayment of preferred stock series A | — | (10,000 | ) | (500 | ) | — | — | — | — | — | — | — | (10,500 | ) | ||||||||||||||||||||||||||||||
Issuance of preferred stock (noncontrolling interest) | — | — | — | — | — | — | — | — | — | 10,655 | 10,655 | |||||||||||||||||||||||||||||||||
Record costs of preferred stock (noncontrolling interest) | — | — | — | — | — | — | — | — | — | (137 | ) | (137 | ) | |||||||||||||||||||||||||||||||
Record preferred stock dividend (noncontrolling interest) | — | — | — | — | — | — | — | — | — | (454) | (454) | |||||||||||||||||||||||||||||||||
Record preferred stock dividend and discount accretion | — | — | — | 100 | — | — | — | (325 | ) | — | — | (225 | ) | |||||||||||||||||||||||||||||||
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Balance, December 31, 2013 | 7,445,931 | $ | — | $ | — | $ | — | $ | 9,307 | $ | 11,922 | $ | (989 | ) | $ | 10,289 | $ | (562 | ) | $ | 10,542 | $ | 40,509 | |||||||||||||||||||||
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The accompanying notes are an integral part of the consolidated financial statements.
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UWHARRIE CAPITAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2013, 2012 and 2011
2013 | 2012 | 2011 | ||||||||||
(dollars in thousands) | ||||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 954 | $ | 404 | $ | 900 | ||||||
Adjustments to reconcile net income to net cash Provided (used) by operating activities: | ||||||||||||
Depreciation | 914 | 954 | 838 | |||||||||
Net amortization of security premiums/discounts | 1,420 | 1,334 | 865 | |||||||||
Impairment of goodwill | — | 987 | — | |||||||||
Net amortization of mortgage servicing rights | 801 | 908 | 670 | |||||||||
Impairment of foreclosed real estate | 921 | 2,365 | 212 | |||||||||
Provision for loan losses | 28 | 1,832 | 3,456 | |||||||||
Deferred income taxes | 438 | (1,134 | ) | 1,000 | ||||||||
Stock compensation | — | 4 | 4 | |||||||||
Net realized (gains) loss on sales / calls available for sale securities | 523 | (1,286 | ) | (933 | ) | |||||||
Income from mortgage loan sales | (2,113 | ) | (3,740 | ) | (1,806 | ) | ||||||
Proceeds from sales of loans held for sale | 77,544 | 126,189 | 70,251 | |||||||||
Origination of loans held for sale | (71,197 | ) | (125,864 | ) | (64,116 | ) | ||||||
(Gain) loss on sale of premises, equipment and other assets | (233 | ) | (252 | ) | 13 | |||||||
Increase in cash surrender value of life insurance | (122 | ) | (223 | ) | (196 | ) | ||||||
(Gain) loss on sales of foreclosed real estate | (290 | ) | 55 | 68 | ||||||||
Release of ESOP Shares | 45 | 48 | 53 | |||||||||
Net change in interest receivable | 6 | 331 | 324 | |||||||||
Net change in other assets | (810 | ) | (3,732 | ) | (1,910 | ) | ||||||
Net change in interest payable | (46 | ) | (31 | ) | (41 | ) | ||||||
Net change in other liabilities | 424 | 431 | 621 | |||||||||
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Net cash provided (used) by operating activities | 9,207 | (420 | ) | 10,273 | ||||||||
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Cash flows from investing activities | ||||||||||||
Proceeds from sales, maturities and calls of securities available for sale | 32,969 | 57,274 | 38,648 | |||||||||
Purchase of securities available for sale | (46,693 | ) | (61,369 | ) | (28,020 | ) | ||||||
Net (increase) decrease in loans | 16,282 | 32,739 | 6,259 | |||||||||
Proceeds from sale of premises, equipment and other assets | 949 | 5,169 | — | |||||||||
Purchase of premises and equipment | (488 | ) | (830 | ) | (1,373 | ) | ||||||
Proceeds from sales of foreclosed real estate | 4,731 | 1,844 | 611 | |||||||||
Investment in other assets | (357 | ) | (346 | ) | (181 | ) | ||||||
Net decrease in Federal Home Loan Bank stock | 1,081 | 1,024 | 766 | |||||||||
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Net cash provided by investing activities | 8,474 | 35,505 | 16,710 | |||||||||
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Cash flows from financing activities | ||||||||||||
Net increase (decrease) in deposit accounts | (3,904 | ) | 26,274 | (2,695 | ) | |||||||
Net increase (decrease) in short-term borrowed funds | (13,181 | ) | (2,101 | ) | 309 | |||||||
Net increase (decrease) in long-term debt | (1,510 | ) | (12,560 | ) | (10,060 | ) | ||||||
Net proceeds from issuance of junior subordinated debt | — | — | 1,962 | |||||||||
Proceeds from preferred stock offering, net of costs | 3,136 | 7,382 | — | |||||||||
Repayment preferred stock, series A | (10,500 | ) | — | (730 | ) | |||||||
Increase in unearned ESOP compensation | (208 | ) | (190 | ) | (161 | ) | ||||||
Repurchase of common stock | (169 | ) | (304 | ) | — | |||||||
Dividend and discount accretion on preferred stock | (679 | ) | (545 | ) | (545 | ) | ||||||
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Net cash provided (used) by financing activities | (27,015 | ) | 17,956 | (11,920 | ) | |||||||
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Increase (decrease) in cash and cash equivalents | (9,334 | ) | 53,041 | 15,063 | ||||||||
Cash and cash equivalents, beginning of year | 81,728 | 28,687 | 13,624 | |||||||||
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Cash and cash equivalents, end of year | $ | 72,394 | $ | 81,728 | $ | 28,687 | ||||||
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Supplemental disclosures of cash flow information | ||||||||||||
Interest paid | $ | 2,780 | $ | 3,729 | $ | 4,778 | ||||||
Income taxes paid | 648 | 270 | 220 | |||||||||
Supplemental schedule of non-cash activities | ||||||||||||
Net change in fair value of securities available for sale, net of tax | (2,049 | ) | (707 | ) | 1,859 | |||||||
Loans transferred to foreclosed real estate | 4,032 | 2,907 | 9,127 | |||||||||
Company financed sales of other real estate owned | (213 | ) | (188 | ) | — | |||||||
Mortgage servicing rights capitalized | 763 | 1,237 | 679 | |||||||||
Preferred stock dividend accrued | (142 | ) | (68 | ) | (68 | ) | ||||||
Net change in ESOP liability | 132 | 235 | 1,349 |
The accompanying notes are an integral part of the consolidated financial statements.
40
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies
Nature of Business
Uwharrie Capital Corp (the “Company”) was incorporated under North Carolina law for the purpose of becoming the holding company for Bank of Stanly (“Stanly”). On July 1, 1993, Stanly became a wholly-owned subsidiary of the Company through a one-for-one exchange of the common stock of Stanly for common stock of the Company. On September 1, 2013, Bank of Stanly changed its name to Uwharrie Bank (“Uwharrie”).
Uwharrie was incorporated on September 28, 1983, under the laws of the State of North Carolina and began operations on January 26, 1984 in Albemarle, North Carolina. Deposits with Uwharrie are insured by the Federal Deposit Insurance Corporation (“FDIC”). Uwharrie is under regulation of the Federal Reserve, the FDIC and the North Carolina State Banking Commission. Through its six branch locations in Stanly County, Uwharrie provides a wide range of deposit accounts, commercial, consumer, home equity and residential mortgage loans, safe deposit boxes and automated banking.
In 1987, Uwharrie established a wholly-owned subsidiary, BOS Agency, Inc. (“BOS Agency”), which engages in insurance product sales. In 1989, Uwharrie established a second wholly-owned subsidiary, BOS Financial Corporation, for the purpose of conducting business as a “broker dealer” in securities. During 1993, BOS Financial Corporation changed its name to The Strategic Alliance Corporation (“Strategic Alliance”) and was registered as a “broker dealer” and is regulated by the Financial Industry Regulatory Authority (“FINRA”).
The Company formed a new subsidiary, Strategic Investment Advisors, Inc. (“SIA”), during 1998 to provide investment advisory and asset management services. This subsidiary is registered as an investment advisor with the Securities and Exchange Commission.
On January 19, 2000, the Company completed its acquisition of Anson BanCorp, Inc. and its subsidiary, Anson Savings Bank. The savings bank retained its North Carolina savings bank charter and became a wholly-owned subsidiary of Uwharrie Capital Corp as Anson Bank & Trust Company (“Anson”), operating out of its main office branch in Wadesboro. Anson was consolidated into Uwharrie Bank effective September 1, 2013.
On August 4, 2000, Uwharrie acquired another subsidiary, Gateway Mortgage, Inc. (“Gateway”), a mortgage origination company. This company is currently inactive and does not affect the consolidated financials.
On April 10, 2003, the Company capitalized a new wholly-owned subsidiary bank, Cabarrus Bank & Trust Company (“Cabarrus”), located in Concord, North Carolina. As of that date, Cabarrus purchased two branch offices located in Cabarrus County from Uwharrie to begin its operation. Cabarrus operated as a commercial bank and provided a full range of banking services. Cabarrus was consolidated into Uwharrie Bank effective September 1, 2013.
On April 7, 2004 Uwharrie Mortgage, Inc. was established as a subsidiary of the Company to serve in the capacity of trustee and substitute trustee under deeds of trust.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, Uwharrie, SIA and Uwharrie’s subsidiaries, BOS Agency and Strategic Alliance. All significant intercompany transactions and balances have been eliminated in consolidation.
41
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies (Continued)
Use of Estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America (“GAAP”), requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses.
Cash and Cash Equivalents
For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions “Cash and due from banks” and “Interest-earning deposits with banks.”
Investment Securities Available for Sale
Investment securities available for sale consist of United States Treasuries, United States Government agencies, Government Sponsored Enterprise (GSE) mortgage backed securities and collateralized mortgage obligations (CMOs) and state and political subdivision bonds. We do not hold any trading securities or held to maturity securities. Unrealized holding gains and losses on available for sale securities are reported as a net amount in other comprehensive income, net of income taxes. Gains and losses on the sale of available for sale securities are determined using the specific identification method. Declines in the fair value of individual available for sale securities below their cost that are other than temporary would result in write-downs of the individual securities, to their fair value. Such write-downs would be included in earnings as realized losses. Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the period to maturity.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. The allowance, if any, would not have a material impact on the financial statements.
Loans
The Company divides the loans it grants into two segments, commercial and noncommercial loans. Commercial loans are broken down into the following classes: commercial loans, real estate commercial loans and other real estate construction loans. Noncommercial loans are divided into the following classes: real estate 1-4 family construction, real estate 1-4 family residential loans, home equity loans, consumer loans and other loans. The ability of the Company’s borrowers to honor their contracts is largely dependent upon the real estate and general economic conditions in the Company’s market area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the effective interest method.
42
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies (Continued)
The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Credit card loans and other personal loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. The exception to this policy is credit card loans that remain in accrual status 90 days or more until they are paid current or charged off.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these impaired loans is accounted for on the cash-basis until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Generally a minimum of six months of sustained performance is required.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses. The provision for loan losses is expensed to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The Company has different specific risks identified within the loan segments. Specific risks within the commercial loan segment arise with borrowers that are experiencing diminished operating cash flows, depreciated collateral values or prolonged sales and rental absorption periods. Concentrations within the portfolio if unmanaged, pose additional risk. Occasionally, the Company will purchase participation loans from other institutions and if not independently underwritten by the Bank, could carry additional risk. Generally, owner-occupied commercial real estate loans carry less risk than non-owner occupied. Specific risks within the non-commercial portfolio tend to be tied to economic factors including high unemployment and decreased real estate values. Risk to the Company is greater as home values deteriorate more rapidly than amortization in a loan, leaving little to no equity in properties, especially in junior lien positions. Concentration in the portfolio, such as home equity lines of credit, could pose additional risk if not appropriately managed.
The allowance for loan losses is evaluated both individually and collectively by loan class on a regular basis by management. Loans are collectively evaluated based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. Individually evaluated loans are based upon discounted cash flows or the underlying value of the collateral. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. In addition, regulatory examiners may require the Company to recognize adjustments to the allowance for loan losses based on their judgment about information available to them at the time of their assessment.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls
43
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies (Continued)
on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Homogeneous loans are collectively evaluated by loan class for impairment. However, homogeneous loans will be evaluated individually for impairment if such a loan is deemed impaired.
Troubled debt restructure loans (TDR) are modifications of a loan when a borrower is experiencing financial difficulty and the modification involves providing a concession to the existing loan contract. TDRs are considered to be impaired loans and are individually evaluated for impairment.
The portion of the Company’s allowance for loan loss model related to general reserves captures the mean loss of individual loans and the rare event of severe loss that can occur within the loan portfolio. Specifically, the Company calculates probable losses on loans by computing a probability of loss and expected loss scenario by FDIC call report codes. Together, these expected components, as well as a level of more extreme unexpected losses form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.
In the second and third quarters of 2013, the Company updated its allowance for loan loss model to more accurately assess the probability of losses inherent in the loan portfolio. A frequently used risk statistic is the Value at Risk (“VaR”). The VaR statistic represents the amount of loss that can occur in a specified time period at a certain confidence level. In the second quarter two alterations were made to the methodology: the previous “VaR” calculation was replaced by an improved “VaR” that more adequately reflected the risk in the loan portfolio, and the least squares regression was replaced by a simple average. The first alteration caused an increase of $849,538 in the allowance, while the second caused a decrease of $159,869.
Mortgage Servicing Rights
The Company capitalizes mortgage servicing rights when loans are sold and the loan servicing is retained. The cost of servicing rights is amortized in proportion to and over the estimated period of net servicing revenues is expected to be received based on projections of the amount and timing of estimated future cash flows. The amortization of servicing rights is recognized in the statement of income as an offset to other noninterest income. Servicing assets are periodically evaluated for impairment based upon their fair value. Fair value is based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance and charged to other expense.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
44
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies (Continued)
Foreclosed Real Estate
Real estate properties acquired through foreclosure or other proceedings are initially recorded at fair value upon foreclosure, establishing a new cost basis less costs to sell. Annually, valuations are performed and the foreclosed property is adjusted to the lower of cost or fair value of the properties, less costs to sell. Any write-down at the time of transfer to foreclosed properties is charged to the allowance for loan losses. Subsequent write-downs are charged to other expenses, and costs related to the improvement of the property are capitalized if the current fair value will allow it. If not these costs are expensed also.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Land is carried at cost. Additions and major replacements or betterments which extend the useful lives of premises and equipment are capitalized. Maintenance, repairs and minor improvements are expensed as incurred. Depreciation is computed principally by the straight-line method over estimated useful lives, except in the case of leasehold improvements, which are amortized over the term of the leases, if shorter. Useful lives range from five to seven years for furniture, fixtures and equipment, to ten to thirty-nine years for leasehold improvements and buildings, respectively. Upon retirement or other disposition of the assets, the cost and the related accumulated depreciation are removed from the accounts and any gains or losses are reflected in income.
Restricted Stock
As a requirement for membership, the bank invests in the stock of the Federal Home Loan Bank of Atlanta (“FHLB”) and Federal Reserve Bank (“FRB”). These investments are carried at cost. Due to the redemption provisions of these investments, the Company estimated that fair value approximates cost and that this investment was not impaired.
Stock-Based Compensation
The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). ASC 718 also requires measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award. Excess tax benefits are reported as financing cash inflows in the consolidated statement of cash flows.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return and separate North Carolina income tax returns. The provision for income taxes in the accompanying consolidated financial statements is provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
45
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies (Continued)
The tax returns for the Company are subject to audit for the 2010 fiscal year and thereafter. The Company records penalties and interest related to income taxes as a component of income tax expense.
Fair Value of Financial Instruments
Accounting Standards Codification (ASC) 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. ASC 820 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation.
ASC 820 defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which those assets or liabilities are sold and considers assumptions that market participants would use when pricing those assets or liabilities. Fair values determined using Level 1 inputs rely on active and observable markets to price identical assets or liabilities. In situations where identical assets and liabilities are not traded in active markets, fair values may be determined based on Level 2 inputs, which exist when observable data exists for similar assets and liabilities. Fair values for assets and liabilities for which identical or similar assets and liabilities are not actively traded in observable markets are based on Level 3 inputs, which are considered to be unobservable.
Among the Company’s assets and liabilities, investment securities available for sale are reported at their fair values on a recurring basis. Certain other assets are adjusted to their fair value on a nonrecurring basis, including other real estate owned, impaired loans, loans held for sale, which are carried at the lower of cost or market; loan servicing rights, where fair value is determined using similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions; and goodwill, which is periodically tested for impairment. Deposits, short-term borrowings and long-term obligations are not reported at fair value.
Prices for US Treasury securities are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the ‘Level 1 input’ column. Prices for government agency securities, mortgage-backed securities and for state, county and municipal securities are obtained for similar securities, and the resulting fair values are shown in the ‘Level 2 input’ column. Prices for all other non-marketable investments are determined based on various assumptions that are not observable. The fair values for these investment securities are shown in the ‘Level 3 input’ column. Non-marketable investment securities, which are carried at their purchase price, include those that may only be redeemed by the issuer. The changes in securities between Level 1 and Level 2 were related to the purchase and sale of several securities and not the transfer of securities.
46
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies (Continued)
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment by using one of several methods including collateral value, fair value of similar debt or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected repayments or fair value of collateral exceed the recorded investments in such loans. At December 31, 2013, substantially all of the total impaired loans were evaluated based on the fair value of the underlying collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an internal assessment of fair value based upon market data issued or management determines the fair value of the underlying collateral is further impaired below the appraised value, the Company records the impaired loan as nonrecurring Level 3.
Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at the estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an internal assessment of fair value based upon market data issued or management determines the fair value of the underlying collateral is further impaired below the appraised value, the Company records the impaired loan as nonrecurring Level 3.
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate, based on secondary market prices. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. These loans are recorded in Level 2
Servicing assets are evaluated for impairment based upon the fair value. Fair value is determined based upon discounted cash flows using market-based assumptions. Servicing assets are recorded in Level 3.
Comprehensive Income
The Company reports as comprehensive income all changes in shareholders’ equity during the year from sources other than shareholders. Other comprehensive income refers to all components (revenues, expenses, gains, and losses) of comprehensive income that are excluded from net income. The Company’s only component of other comprehensive income is unrealized gains and losses,
47
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies (Continued)
net of income tax, on investment securities available for sale. The following table presents the changes in accumulated other comprehensive income for the year ended December 31, 2013:
Year ended December 31, 2013 | ||||
(dollars in thousands) | ||||
Beginning Balance | $ | 1,487 | ||
Other comprehensive income (loss) before reclassifications, net of $1,292 tax effect | (2,370 | ) | ||
Amounts reclassified from accumulated other comprehensive income, net of $202 tax effect | 321 | |||
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Net current-period other comprehensive loss | 2,049 | |||
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Ending Balance | $ | (562 | ) | |
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As of December 31, 2013 and December 31, 2012, total accumulated other comprehensive income (loss) was ($562,000) and $1.4 million, respectively.
Earnings per Common Share
The Company had stock options outstanding covering 92,491 shares of common stock at both December 31, 2013 and 2012 and 123,570 shares of common stock at December 31, 2011. All of these options were anti-dilutive.
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS 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 earnings of the entity. The ESOP effect is the average of the unallocated ESOP shares.
The computation of weighted average shares used in the calculation of basic and dilutive earnings per share is summarized below:
2013 | 2012 | 2011 | ||||||||||
Weighted average number of common shares used in computing basic net income per common share | 7,483,691 | 7,502,496 | 7,593,969 | |||||||||
Effect of ESOP shares | (206,940 | ) | (130,829 | ) | (126,573 | ) | ||||||
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Adjusted weighted average number of common shares used in computing basic net income per common share | 7,276,751 | 7,371,667 | 7,467,396 | |||||||||
Effect of dilutive stock options | — | — | — | |||||||||
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Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per common share | 7,276,751 | 7,371,667 | 7,467,396 | |||||||||
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48
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies (Continued)
Noncontrolling Interest
During 2012, each of the Company’s subsidiary banks began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series B. The preferred stock qualifies as Tier 1 capital at each bank and pays dividends at an annual rate of 5.30%. The preferred stock has no voting rights. The campaign raised $7.9 million less issuance costs of $113,000 of Fixed Rate Noncumulative Perpetual Preferred Stock. These funds were held in an escrow account at December 31, 2012 and the new preferred stock was issued in January 2013. The total net amount of capital raised was $7.7 million at the subsidiary bank level. This capital is presented as noncontrolling interest in the consolidated balance sheets. Dividends declared on this preferred stock are presented as earnings allocated to the noncontrolling interest in the consolidated statements of income. Effective September 1, 2013, the Fixed Rate Noncumulative Perpetual Preferred Stock, Series B was rolled into one issue under Uwharrie Bank in connection with the consolidation and name change.
During 2013, the Company’s subsidiary bank, Uwharrie Bank, began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series C to be issued by the subsidiary bank. The preferred stock qualifies as Tier 1 capital at the bank and pays dividends at an annual rate of 5.30%. The preferred stock has no voting rights. The campaign raised $2.8 million less issuance costs of $24,000.
Recent Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-02, an update to ASC 220 “Comprehensive Income”. The amendments in this update do not change the current reporting requirements for net income or other comprehensive income (OCI), but finalize reporting requirements related to reclassifications out of accumulated other comprehensive income (AOCI). Presentation requirements were originally addressed in ASU 2011-05, but delayed by ASU 2011-12 as a result of feedback received and have been modified in this Update to address those concerns. This Update requires entities to provide information about significant amounts reclassified out of AOCI. If the reclassified amount is required to be reclassified in its entirety to net income in the same reporting period, the entity is required to present, either on the face of the income statement or in the notes, the impact of the reclassification on the respective line items of net income. For other amounts that are reclassified partially to the balance sheet and partially to the income statement (i.e. those amounts that are not reclassified in their entirety to net income in the same reporting period), the entity must cross-reference to other disclosures that provide additional detail about those amounts. The update is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this update did not have a significant impact on the Company’s financial statements except for the added disclosures.
In January 2014, the FASB issued ASU 2014-04, an update to ASC 310 “Receivables – Trouble Debt Restructurings by Creditors”. The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of
49
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies (Continued)
foreclosure according to local requirements of the applicable jurisdiction. The update is effective for reporting periods beginning after December 15, 2014. The adoption of this update will not have a significant impact on the Company’s financial statements except for added disclosures.
From time to time the FASB issues exposure drafts of proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.
Reclassification
Certain amounts in the 2012 financial statements have been reclassified to conform to the 2013 presentation. These reclassifications do not have a material impact on consolidated financial statements or related footnotes.
Note 2 - Investment Securities
Carrying amounts and fair values of securities available for sale are summarized below:
December 31, 2013 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
(dollars in thousands) | ||||||||||||||||
U.S. Treasury | $ | 20,992 | $ | 502 | $ | 208 | $ | 21,286 | ||||||||
U.S. Government agencies | 34,931 | 145 | 776 | 34,300 | ||||||||||||
GSE – Mortgage-backed securities and CMO’s | 37,871 | 121 | 986 | 37,006 | ||||||||||||
State and political subdivisions | 7,337 | 351 | — | 7,688 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total securities available for sale | $ | 101,131 | $ | 1,119 | $ | 1,970 | $ | 100,280 | ||||||||
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|
|
|
|
|
|
December 31, 2012 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
(dollars in thousands) | ||||||||||||||||
U.S. Treasury | $ | 18,731 | $ | 846 | $ | 1 | $ | 19,576 | ||||||||
U.S. Government agencies | 21,689 | 485 | — | 22,174 | ||||||||||||
GSE – Mortgage-backed securities and CMO’s | 40,766 | 379 | 123 | 41,022 | ||||||||||||
State and political subdivisions | 8,165 | 701 | — | 8,866 | ||||||||||||
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| |||||||||
Total securities available for sale | $ | 89,351 | $ | 2,411 | $ | 124 | $ | 91,638 | ||||||||
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At both December 31, 2013 and 2012, the Company owned Federal Reserve Bank stock reported at cost of $467,000 and $803,000, respectively. Also at December 31, 2013 and 2012, the Company owned Federal Home Loan Bank Stock (FHLB) of $717,000 and $1.5 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.
50
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 2 - Investment Securities (Continued)
Results from sales and calls of securities available for sale for the years ended December 31, 2013, 2012 and 2011 are as follows:
2013 | 2012 | 2011 | ||||||||||
(dollars in thousands) | ||||||||||||
Gross proceeds from sales and calls | $ | 20,182 | $ | 42,889 | $ | 25,568 | ||||||
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| |||||||
Realized gains from sales | $ | 41 | $ | 1,398 | $ | 933 | ||||||
Realized losses from sales | (564 | ) | (112 | ) | — | |||||||
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| |||||||
Net realized gains (losses) | $ | (523 | ) | $ | 1,286 | $ | 933 | |||||
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At December 31, 2013, 2012 and 2011 securities available for sale with a carrying amount of $63.1 million, $48.8 million and $37.7 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.
The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2013 and 2012. The 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 in a volatile market and are in no way a reflection of the credit quality of the investments. At December 31, 2013, the unrealized losses related to one United States Treasury note, ten government agency bonds and thirteen government sponsored enterprise (GSE) mortgage backed securities. At December 31, 2012 the unrealized losses related to two United States Treasury notes and seven mortgage backed securities.
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
December 31, 2013 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Securities available for sale temporary impairment | ||||||||||||||||||||||||
U.S. Treasury | $ | 4,722 | $ | 208 | $ | — | $ | — | $ | 4,722 | $ | 208 | ||||||||||||
U.S. Gov’t agencies | 29,147 | 776 | — | — | 29,147 | 776 | ||||||||||||||||||
GSE-Mortgage-backed securities and CMO’s | 22,206 | 842 | 3,849 | 144 | 26,055 | 986 | ||||||||||||||||||
State and political subdivisions | — | — | — | — | — | — | ||||||||||||||||||
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| |||||||||||||
$ | 56,075 | $ | 1,826 | $ | 3,849 | $ | 144 | $ | 59,924 | $ | 1,970 | |||||||||||||
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| |||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
December 31, 2012 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Securities available for sale temporary impairment | ||||||||||||||||||||||||
U.S. Treasury | $ | 2,485 | $ | 1 | $ | — | $ | — | $ | 2,485 | $ | 1 | ||||||||||||
U.S. Gov’t agencies | — | — | — | — | — | — | ||||||||||||||||||
GSE-Mortgage-backed securities and CMO’s | 21,355 | 123 | — | — | 21,355 | 123 | ||||||||||||||||||
State and political subdivisions | — | — | — | — | — | — | ||||||||||||||||||
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$ | 23,840 | $ | 124 | $ | — | $ | — | $ | 23,840 | $ | 124 | |||||||||||||
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51
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 2 - Investment Securities (Continued)
The Company did have two GSE mortgage backed securities that had been in a loss position for more than twelve months. Declines in the fair value of the investment portfolio are believed by management to be temporary in nature. When evaluating an investment for other-than-temporary impairment management considers among other things, the length of time and the extent to which the fair value has been in a loss position, the financial condition of the issuer and the intent and the ability of the Company to hold the investment until the loss position is recovered.
Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of quality but that the losses are temporary in nature. At December 31, 2013, the Company does not intend to sell and is not likely to be required to sell the available for sale securities that were in a loss position prior to full recovery.
The following table shows contractual maturities of the investment portfolio as of December 31, 2013:
Amortized Cost | Estimated Fair Value | |||||||
(dollars in thousands) | ||||||||
Due within one year | $ | 481 | $ | 485 | ||||
Due after one but within five years | 38,590 | 39,124 | ||||||
Due after five but within ten years | 23,171 | 22,623 | ||||||
Due after ten years | 1,018 | 1,042 | ||||||
Mortgage backed securities | 37,871 | 37,006 | ||||||
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| |||||
$ | 101,131 | $ | 100,280 | |||||
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|
|
The mortgage-backed securities are shown separately as they are not due at a single maturity date.
Note 3 - Loans Held for Investment
The composition of net loans held for investment by class as of December 31, 2013 and 2012 is as follows:
2013 | 2012 | |||||||
(dollars in thousands) | ||||||||
Commercial | ||||||||
Commercial | $ | 47,436 | $ | 41,390 | ||||
Real estate – commercial | 95,922 | 103,304 | ||||||
Other real estate construction loans | 17,583 | 25,052 | ||||||
Noncommercial | ||||||||
Real estate 1-4 family construction | 3,418 | 3,080 | ||||||
Real estate – residential | 87,463 | 93,927 | ||||||
Home equity | 45,231 | 48,517 | ||||||
Consumer loans | 9,623 | 12,986 | ||||||
Other loans | 612 | 822 | ||||||
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|
| |||||
307,288 | 329,078 | |||||||
Less: | ||||||||
Allowance for loan losses | (5,095 | ) | (6,801 | ) | ||||
Deferred loan (fees) costs, net | 60 | 105 | ||||||
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| |||||
Loans held for investment, net | $ | 302,253 | $ | 322,382 | ||||
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52
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 3 - Loans Held for Investment (Continued)
Although the subsidiary bank loan portfolio is diversified, there is a concentration of mortgage real estate loans, primarily 1 to 4 family residential mortgage loans, which represent 44.29% of total loans. Additionally, there is concentration in commercial loans secured primarily by real estate, shopping center locations, commercial land development, commercial buildings and equipment that represent 52.37% of total loans. There is not a concentration of a particular type of credit in this group of commercial loans.
Total recorded investment in impaired loans, which consisted of nonaccrual loans and other loans identified by management as impaired, totaled $17.6 million and $26.1 million at December 31, 2013 and 2012, respectively. There were no loans 90 past due and still accruing at December 31, 2013 or at December 31, 2012.
Restructured loans at December 31, 2013 totaled $6.4 million of which all $6.4 million are included in the impaired loan total, compared to $6.8 million of which all $6.8 million were included in impaired loans at December 31, 2012. The carrying value of foreclosed properties held as other real estate was $7.2 million and $8.7 million at December 31, 2013 and 2012, respectively.
The Company had loans of $150.4 million and $137.2 million pledged to borrowings at Federal Home Loan Bank and the Federal Reserve Bank at December 31, 2013 and 2012, respectively.
The Company’s loan policies are written to address loan-to-value ratios and collateralization methods with respect to each lending category. Consideration is given to the economic and credit risk of lending areas and customers associated with each category.
Note 4 - Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December 31, 2013, 2012 and 2011 are presented below:
Commercial | 2013 | 2012 | 2011 | |||||||||
(dollars in thousands) | ||||||||||||
Balance, beginning of year | $ | 2,791 | $ | 2,904 | $ | 5,363 | ||||||
Provision (recovery) charged to operations | 784 | 985 | 1,947 | |||||||||
Charge-offs | (1,005 | ) | (1,167 | ) | (4,417 | ) | ||||||
Recoveries | 96 | 69 | 11 | |||||||||
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| |||||||
Net (charge-offs) | (909 | ) | (1,098 | ) | (4,406 | ) | ||||||
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| |||||||
Other | (1 | ) | — | 14 | ||||||||
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| |||||||
Balance, end of year | $ | 2,665 | $ | 2,791 | $ | 2,904 | ||||||
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53
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 4 - Allowance for Loan Losses (Continued)
Non-Commercial | 2013 | 2012 | 2011 | |||||||||
(dollars in thousands) | ||||||||||||
Balance, beginning of year | $ | 4,010 | $ | 3,911 | $ | 3,704 | ||||||
Provision (recovery) charged to operations | (756 | ) | 847 | 1,509 | ||||||||
Charge-offs | (966 | ) | (824 | ) | (1,419 | ) | ||||||
Recoveries | 146 | 76 | 122 | |||||||||
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| |||||||
Net (charge-offs) | (820 | ) | (748 | ) | (1,297 | ) | ||||||
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| |||||||
Other | (4 | ) | — | (5 | ) | |||||||
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| |||||||
Balance, end of year | $ | 2,430 | $ | 4,010 | $ | 3,911 | ||||||
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| |||||||
Total | 2013 | 2012 | 2011 | |||||||||
(dollars in thousands) | ||||||||||||
Balance, beginning of year | $ | 6,801 | $ | 6,815 | $ | 9,067 | ||||||
Provision (recovery) charged to operations | 28 | 1,832 | 3,456 | |||||||||
Charge-offs | (1,971 | ) | (1,991 | ) | (5,836 | ) | ||||||
Recoveries | 242 | 145 | 133 | |||||||||
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| |||||||
Net (charge-offs) | (1,729 | ) | (1,846 | ) | (5,703 | ) | ||||||
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| |||||||
Other | (5 | ) | — | (5 | ) | |||||||
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| |||||||
Balance, end of year | $ | 5,095 | $ | 6,801 | $ | 6,815 | ||||||
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The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at December 31, 2013 and 2012:
December 31, 2013
Individually Evaluated | Collectively Evaluated | Total | ||||||||||||||||||||||
Reserve | Loans | Reserve | Loans | Reserve | Loans | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Commercial | $ | 1,519 | $ | 8,700 | $ | 1,146 | $ | 152,241 | $ | 2,665 | $ | 160,941 | ||||||||||||
Non-Commercial | 868 | 8,853 | 1,562 | 137,554 | 2,430 | 146,407 | ||||||||||||||||||
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|
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| |||||||||||||
Total | $ | 2,387 | $ | 17,553 | $ | 2,708 | $ | 289,795 | $ | 5,095 | $ | 307,348 | ||||||||||||
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|
December 31, 2012
Individually Evaluated | Collectively Evaluated | Total | ||||||||||||||||||||||
Reserve | Loans | Reserve | Loans | Reserve | Loans | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Commercial | $ | 1,428 | $ | 14,979 | $ | 1,363 | $ | 154,767 | $ | 2,791 | $ | 169,746 | ||||||||||||
Non-Commercial | 1,606 | 11,128 | 2,404 | 148,309 | 4,010 | 159,437 | ||||||||||||||||||
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| |||||||||||||
Total | $ | 3,034 | $ | 26,107 | $ | 3,767 | $ | 303,076 | $ | 6,801 | $ | 329,183 | ||||||||||||
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54
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 4 - Allowance for Loan Losses (Continued)
Past due loan information is used by management when assessing the adequacy of the allowance for loan loss. The following tables summarize the past due information of the loan portfolio by class:
December 31, 2013
Loans 30-89 Days Past Due | Loans 90 Days or More Past due and Non - Accrual | Total Past Due Loans | Current Loans | Total Loans | Accruing Loans 90 or More Days Past Due | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Commercial | $ | 143 | $ | 204 | $ | 347 | $ | 47,089 | $ | 47,436 | $ | — | ||||||||||||
Real estate – commercial | 165 | 1,064 | 1,229 | 94,693 | 95,922 | — | ||||||||||||||||||
Other real estate construction | 145 | 1,637 | 1,782 | 15,801 | 17,583 | — | ||||||||||||||||||
Real estate construction | — | — | — | 3,418 | 3,418 | — | ||||||||||||||||||
Real estate – residential | 1,426 | 1,564 | 2,990 | 84,533 | 87,523 | — | ||||||||||||||||||
Home equity | 207 | 248 | 455 | 44,776 | 45,231 | — | ||||||||||||||||||
Consumer loan | 55 | — | 55 | 9,568 | 9,623 | — | ||||||||||||||||||
Other loans | — | — | — | 612 | 612 | — | ||||||||||||||||||
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|
|
|
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|
|
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| |||||||||||||
Total | $ | 2,141 | $ | 4,717 | $ | 6,858 | $ | 300,490 | $ | 307,348 | $ | — | ||||||||||||
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|
December 31, 2012
Loans 30-89 Days Past Due | Loans 90 Days or More Past due and Non - Accrual | Total Past Due Loans | Current Loans | Total Loans | Accruing Loans 90 or More Days Past Due | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Commercial | $ | 98 | $ | 437 | $ | 535 | $ | 40,855 | $ | 41,390 | $ | — | ||||||||||||
Real estate – commercial | 708 | 3,032 | 3,740 | 99,564 | 103,304 | — | ||||||||||||||||||
Other real estate construction | 12 | 2,945 | 2,957 | 22,095 | 25,052 | — | ||||||||||||||||||
Real estate construction | — | — | — | 3,080 | 3,080 | — | ||||||||||||||||||
Real estate – residential | 1,309 | 2,507 | 3,816 | 90,216 | 94,032 | — | ||||||||||||||||||
Home equity | 162 | 558 | 720 | 47,797 | 48,517 | — | ||||||||||||||||||
Consumer loan | 218 | 1 | 219 | 12,767 | 12,986 | — | ||||||||||||||||||
Other loans | — | — | — | 822 | 822 | — | ||||||||||||||||||
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|
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|
|
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|
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|
| |||||||||||||
Total | $ | 2,507 | $ | 9,480 | $ | 11,987 | $ | 317,196 | $ | 329,183 | $ | — | ||||||||||||
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|
Once a loan becomes 90 days past due, the loan is automatically transferred to a nonaccrual status. The exception to this policy is credit card loans that remain in accrual status 90 days or more until they are paid current or charged off.
55
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 4 - Allowance for Loan Losses (Continued)
The composition of nonaccrual loans by class as of December 31, 2013 and 2012 is as follows:
2013 | 2012 | |||||||
(dollars in thousands) | ||||||||
Commercial | $ | 204 | $ | 437 | ||||
Real estate – commercial | 1,064 | 3,032 | ||||||
Other real estate construction | 1,637 | 2,945 | ||||||
Real estate 1-4 family construction | — | — | ||||||
Real estate – residential | 1,564 | 2,507 | ||||||
Home equity | 248 | 558 | ||||||
Consumer loans | — | 1 | ||||||
Other loans | — | — | ||||||
|
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| |||||
$ | 4,717 | $ | 9,480 | |||||
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|
Management uses a risk-grading program to facilitate the evaluation of probable inherent loan losses and to measure the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by the loan officers and reviewed and monitored by the lenders and credit administration on an ongoing basis. The program has eight risk grades summarized in five categories as follows:
Pass: Loans that are pass grade credits include loans that are fundamentally sound and risk factors are reasonable and acceptable. They generally conform to policy with only minor exceptions and any major exceptions are clearly mitigated by other economic factors.
Watch: Loans that are watch credits include loans on management’s watch list where a risk concern may be anticipated in the near future.
Substandard: Loans that are considered substandard are loans that are inadequately protected by current sound net worth, paying capacity of the obligor or the value of the collateral pledged. All nonaccrual loans are graded as substandard.
Doubtful: Loans that are considered to be doubtful have all weaknesses inherent in loans classified substandard, plus the added characteristic that the weaknesses make the collection or liquidation in full on the basis of current existing facts, conditions and values highly questionable and improbable.
Loss: Loans that are considered to be a loss are considered to be uncollectible and of such little value that their continuance as bankable assets is not warranted.
56
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 4 - Allowance for Loan Losses (Continued)
The tables below summarize risk grades of the loan portfolio by class as of December 31, 2013 and 2012:
December 31, 2013
Pass | Watch | Sub- standard | Doubtful | Total | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Commercial | $ | 46,520 | $ | 635 | $ | 281 | $ | — | $ | 47,436 | ||||||||||
Real estate – commercial | 80,679 | 9,396 | 5,847 | — | 95,922 | |||||||||||||||
Other real estate construction | 12,898 | 2,465 | 1,385 | 835 | 17,583 | |||||||||||||||
Real estate 1-4 family construction | 3,418 | — | — | — | 3,418 | |||||||||||||||
Real estate – residential | 70,407 | 12,911 | 4,205 | — | 87,523 | |||||||||||||||
Home equity | 43,830 | 1,005 | 396 | — | 45,231 | |||||||||||||||
Consumer loans | 9,216 | 361 | 46 | — | 9,623 | |||||||||||||||
Other loans | 612 | — | — | — | 612 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 267,580 | $ | 26,773 | $ | 12,160 | $ | 835 | $ | 307,348 | ||||||||||
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|
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|
|
December 31, 2012
Pass | Watch | Sub- standard | Doubtful | Total | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Commercial | $ | 39,800 | $ | 836 | $ | 754 | $ | — | $ | 41,390 | ||||||||||
Real estate – commercial | 84,748 | 9,337 | 9,219 | — | 103,304 | |||||||||||||||
Other real estate construction | 20,684 | 577 | 3,477 | 314 | 25,052 | |||||||||||||||
Real estate 1-4 family construction | 3,080 | — | — | — | 3,080 | |||||||||||||||
Real estate – residential | 78,115 | 9,728 | 6,189 | — | 94,032 | |||||||||||||||
Home equity | 46,590 | 914 | 1,013 | — | 48,517 | |||||||||||||||
Consumer loans | 12,360 | 512 | 114 | — | 12,986 | |||||||||||||||
Other loans | 822 | — | — | — | 822 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 286,199 | $ | 21,904 | $ | 20,766 | $ | 314 | $ | 329,183 | ||||||||||
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|
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|
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|
|
Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. During 2013, nonperforming loans decreased from $9.5 million at December 31, 2012 to $4.7 million at December 31, 2013, a decrease of $4.8 million. The major contributor to this decrease was one loan relationship totaling $1.3 million that was paid off. There were several loans that were foreclosed on during 2013 with the related property being moved into other real estate owned.
57
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
��
Note 4 - Allowance for Loan Losses (Continued)
The following tables show the breakdown between performing and nonperforming loans by class as of December 31, 2013 and 2012:
December 31, 2013
Performing | Non- Performing | Total | ||||||||||
(dollars in thousands) | ||||||||||||
Commercial | $ | 47,232 | $ | 204 | $ | 47,436 | ||||||
Real estate – commercial | 94,858 | 1,064 | 95,922 | |||||||||
Other real estate construction | 15,946 | 1,637 | 17,583 | |||||||||
Real estate 1-4 family construction | 3,418 | — | 3,418 | |||||||||
Real estate – residential | 85,959 | 1,564 | 87,523 | |||||||||
Home equity | 44,983 | 248 | 45,231 | |||||||||
Consumer loans | 9,623 | — | 9,623 | |||||||||
Other loans | 612 | — | 612 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 302,631 | $ | 4,717 | $ | 307,348 | ||||||
|
|
|
|
|
|
December 31, 2012
Performing | Non- Performing | Total | ||||||||||
(dollars in thousands) | ||||||||||||
Commercial | $ | 40,953 | $ | 437 | $ | 41,390 | ||||||
Real estate – commercial | 100,272 | 3,032 | 103,304 | |||||||||
Other real estate construction | 22,107 | 2,945 | 25,052 | |||||||||
Real estate 1-4 family construction | 3,080 | — | 3,080 | |||||||||
Real estate – residential | 91,525 | 2,507 | 94,032 | |||||||||
Home equity | 47,959 | 558 | 48,517 | |||||||||
Consumer loans | 12,985 | 1 | 12,986 | |||||||||
Other loans | 822 | — | 822 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 319,703 | $ | 9,480 | $ | 329,183 | ||||||
|
|
|
|
|
|
58
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 4 - Allowance for Loan Losses (Continued)
Loans are considered impaired when, based on current information and events it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired, a valuation analysis is performed and a specific reserve is allocated if necessary. The tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class as of December 31, 2013 and 2012 (unpaid principal balance was grossed up for chargeoffs):
As of December 31, 2013 | Year ended December 31, 2013 | |||||||||||||||||||||||
Unpaid Principal Balance | Recorded Investment With No Allowance | Recorded Investment With Allowance | Related Allowance | Average Recorded Investment | Interest Income | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Commercial | $ | 377 | $ | 291 | $ | 86 | $ | 67 | $ | 845 | $ | 21 | ||||||||||||
Real estate – commercial | 6,808 | 3,962 | 2,375 | 507 | 7,089 | 328 | ||||||||||||||||||
Other real estate construction | 2,034 | 247 | 1,739 | 945 | 2,078 | 17 | ||||||||||||||||||
Real estate 1-4 family construction | 374 | 25 | 349 | 16 | 380 | 23 | ||||||||||||||||||
Real estate – residential | 8,197 | 4,619 | 3,329 | 530 | 8,507 | 300 | ||||||||||||||||||
Home equity | 415 | 58 | 357 | 279 | 819 | 8 | ||||||||||||||||||
Consumer loans | 116 | 61 | 55 | 43 | 156 | 14 | ||||||||||||||||||
Other loans | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 18,321 | $ | 9,263 | $ | 8,290 | $ | 2,387 | $ | 19,874 | $ | 711 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
As of December 31, 2012 | Year ended December 31, 2012 | |||||||||||||||||||||||
Unpaid Principal Balance | Recorded Investment With No Allowance | Recorded Investment With Allowance | Related Allowance | Average Recorded Investment | Interest Income | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Commercial | $ | 1,977 | $ | 388 | $ | 1,470 | $ | 616 | $ | 1,440 | $ | 66 | ||||||||||||
Real estate – commercial | 11,299 | 6,341 | 2,895 | 411 | 11,607 | 473 | ||||||||||||||||||
Other real estate construction | 3,935 | 2,437 | 1,448 | 401 | 4,055 | 202 | ||||||||||||||||||
Real estate 1-4 family construction | 840 | 713 | 127 | 127 | 1,053 | 43 | ||||||||||||||||||
Real estate – residential | 8,985 | 3,994 | 4,991 | 1,215 | 11,442 | 427 | ||||||||||||||||||
Home equity | 1,068 | 521 | 547 | 159 | 1,200 | 32 | ||||||||||||||||||
Consumer loans | 235 | 39 | 196 | 105 | 308 | 14 | ||||||||||||||||||
Other loans | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 28,339 | $ | 14,433 | $ | 11,674 | $ | 3,034 | $ | 31,105 | $ | 1,257 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
As of December 31, 2011 | Year ended December 31, 2011 | |||||||||||||||||||||||
Unpaid Principal Balance | Recorded Investment With No Allowance | Recorded Investment With Allowance | Related Allowance | Average Recorded Investment | Interest Income | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Commercial | $ | 2,099 | $ | 889 | $ | 1,091 | $ | 578 | $ | 1,525 | $ | 93 | ||||||||||||
Real estate – commercial | 14,951 | 11,365 | 1,523 | 452 | 16,520 | 716 | ||||||||||||||||||
Other real estate construction | 4,016 | 2,644 | 1,370 | 107 | 7,746 | 236 | ||||||||||||||||||
Real estate 1-4 family construction | 1,095 | 501 | 594 | 202 | 1,249 | 53 | ||||||||||||||||||
Real estate – residential | 11,877 | 7,231 | 4,646 | 1,001 | 10,137 | 616 | ||||||||||||||||||
Home equity | 993 | 753 | 240 | 124 | 1,194 | 37 | ||||||||||||||||||
Consumer loans | 242 | 49 | 193 | 119 | 280 | 16 | ||||||||||||||||||
Other loans | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 35,273 | $ | 23,432 | $ | 9,657 | $ | 2,583 | $ | 38,651 | $ | 1,767 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
59
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 5 - Troubled Debt Restructures
A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification involves providing a concession to the existing loan contract. The Company offers various types of concessions when modifying loans to troubled borrowers, however, forgiveness of principal is rarely granted. Concessions offered are term extensions, capitalizing accrued interest, reducing interest rates to below current market rates or a combination of any of these. Combinations from time to time may include allowing a customer to be placed on interest-only payments. The presentations below in the “other” category are TDR’s with a combination of concessions. At the time of a TDR, additional collateral or a guarantor may be requested.
Loans modified as TDRs are typically already on nonaccrual status and in some cases, partial chargeoffs may have already been taken against the outstanding loan balance. The Company classifies TDR loans as impaired loans and evaluates the need for an allowance for loan loss on a loan-by-loan basis. An allowance is based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the estimated fair value of the underlying collateral less any selling costs, if the loan is deemed to be collateral dependent.
For the twelve months ended December 31, 2013 and 2012, the following table presents a breakdown of the types of concessions made by loan class:
Year ended December 31, 2013 | ||||||||||||
Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | ||||||||||
(dollars in thousands) | ||||||||||||
Extend payment terms: | ||||||||||||
Commercial | — | $ | — | $ | — | |||||||
Real estate – commercial | — | — | — | |||||||||
Other real estate construction | — | — | — | |||||||||
Real estate 1-4 family construction | — | — | — | |||||||||
Real estate – residential | — | — | — | |||||||||
Home equity | — | — | — | |||||||||
Consumer loans | — | — | — | |||||||||
Other loans | — | — | — | |||||||||
|
|
|
|
|
| |||||||
— | $ | — | $ | — | ||||||||
|
|
|
|
|
| |||||||
Other: | ||||||||||||
Commercial | — | $ | — | $ | — | |||||||
Real estate – commercial | 1 | 356 | 341 | |||||||||
Other real estate construction | — | — | — | |||||||||
Real estate 1-4 family construction | — | — | — | |||||||||
Real estate – residential | 8 | 895 | 875 | |||||||||
Home equity | 1 | 18 | 18 | |||||||||
Consumer loans | — | — | — | |||||||||
Other loans | — | — | — | |||||||||
|
|
|
|
|
| |||||||
10 | $ | 1,269 | $ | 1,234 | ||||||||
|
|
|
|
|
| |||||||
Total | 10 | $ | 1,269 | $ | 1,234 | |||||||
|
|
|
|
|
|
60
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 5 - Troubled Debt Restructures (Continued)
Year ended December 31, 2012 | ||||||||||||
Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | ||||||||||
(dollars in thousands) | ||||||||||||
Extend payment terms: | ||||||||||||
Commercial | 1 | $ | 33 | $ | 32 | |||||||
Real estate – commercial | — | — | — | |||||||||
Other real estate construction | 1 | 49 | 49 | |||||||||
Real estate 1-4 family construction | — | — | — | |||||||||
Real estate – residential | 2 | 30 | 30 | |||||||||
Home equity | — | — | — | |||||||||
Consumer loans | 1 | 45 | 42 | |||||||||
Other loans | — | — | — | |||||||||
|
|
|
|
|
| |||||||
5 | $ | 157 | $ | 153 | ||||||||
|
|
|
|
|
| |||||||
Other: | ||||||||||||
Commercial | 1 | $ | 68 | $ | 68 | |||||||
Real estate – commercial | 1 | 116 | 112 | |||||||||
Other real estate construction | — | — | — | |||||||||
Real estate 1-4 family construction | 1 | 32 | 31 | |||||||||
Real estate – residential | 6 | 939 | 933 | |||||||||
Home equity | — | — | — | |||||||||
Consumer loans | 1 | 17 | 17 | |||||||||
Other loans | — | — | — | |||||||||
|
|
|
|
|
| |||||||
10 | $ | 1,172 | $ | 1,161 | ||||||||
|
|
|
|
|
| |||||||
Total | 15 | $ | 1,329 | $ | 1,314 | |||||||
|
|
|
|
|
|
61
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 5 - Troubled Debt Restructures (Continued)
The following table presents loans that were modified as troubled debt restructurings within the previous twelve months and for which there was a payment default during the twelve months ended December 31, 2013 and December 31, 2012:
Year ended December 31, 2013 | Year ended December 31, 2012 | |||||||||||||||
Number of Loans | Recorded Investment | Number of Loans | Recorded Income | |||||||||||||
Extend payment terms: | ||||||||||||||||
Commercial | — | $ | — | 1 | $ | 31 | ||||||||||
Real estate – commercial | — | — | — | — | ||||||||||||
Other real estate construction | — | — | 1 | 49 | ||||||||||||
Real estate 1-4 family construction | — | — | — | — | ||||||||||||
Real estate – residential | — | — | — | — | ||||||||||||
Home equity | — | — | 2 | 30 | ||||||||||||
Consumer loans | — | — | — | — | ||||||||||||
Other loans | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | — | $ | — | $ | 4 | $ | 110 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Other: | ||||||||||||||||
Commercial | — | $ | — | — | $ | — | ||||||||||
Real estate – commercial | — | — | — | — | ||||||||||||
Other real estate construction | — | — | — | — | ||||||||||||
Real estate 1-4 family construction | — | — | — | — | ||||||||||||
Real estate – residential | — | — | 1 | 238 | ||||||||||||
Home equity | — | — | — | — | ||||||||||||
Consumer loans | — | — | 1 | 17 | ||||||||||||
Other loans | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | — | $ | — | $ | 2 | $ | 255 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | — | $ | — | $ | 6 | $ | 365 | ||||||||
|
|
|
|
|
|
|
|
A default on a troubled debt restructure is defined as being past due 90 days or being out of compliance with the modification agreement. As previously mentioned the Company considers TDRs to be impaired loans and has $420,000 in the allowance for loan loss as of December 31, 2013, as a direct result of these TDRs. At December 31, 2012 there was $1.1 million in the allowance for loan loss related to TDRs.
62
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 5 - Troubled Debt Restructures (Continued)
The following table presents the successes and failures of the types of modifications within the previous twelve months as of December 31, 2013 and 2012:
Paid In Full | Paying as restructured | Converted to nonaccrual | Foreclosure/ Default | |||||||||||||||||||||||||||||
Number of Loans | Recorded Investments | Number of Loans | Recorded Investments | Number of Loans | Recorded Investments | Number of Loans | Recorded Investments | |||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
December 31, 2013 | ||||||||||||||||||||||||||||||||
Extended payment terms | — | $ | — | — | $ | — | — | $ | — | — | $ | — | ||||||||||||||||||||
Other | — | — | 10 | 1,234 | — | — | — | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total | — | $ | — | 10 | $ | 1,234 | — | $ | — | — | $ | — | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
December 31, 2012 | ||||||||||||||||||||||||||||||||
Extended payment terms | — | $ | — | — | $ | — | — | $ | — | 4 | $ | 110 | ||||||||||||||||||||
Other | — | — | 9 | 949 | — | — | 2 | 255 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total | — | $ | — | 9 | $ | 949 | — | $ | — | 6 | $ | 365 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6 - Mortgage Servicing Assets
The principal balance of loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were approximately $406 million and $386 million at December 31, 2013 and 2012, respectively. The carrying value of capitalized servicing rights, net of valuation allowances, is included in other assets. A summary of mortgage servicing rights follows:
2013 | 2012 | 2011 | ||||||||||
(dollars in thousands) | ||||||||||||
Beginning of year mortgage servicing rights: | $ | 2,394 | $ | 2,142 | $ | 2,134 | ||||||
Amounts capitalized | 763 | 1,237 | 679 | |||||||||
Amortization | (801 | ) | (908 | ) | (671 | ) | ||||||
Impairment | — | (77 | ) | — | ||||||||
|
|
|
|
|
| |||||||
End of year | $ | 2,356 | $ | 2,394 | $ | 2,142 | ||||||
|
|
|
|
|
|
63
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 6 - Mortgage Servicing Assets (Continued)
Amortization expense is estimated as follows:
Year ending December 31, | ||||
(dollars in thousands) | ||||
2014 | $ | 557 | ||
2015 | 482 | |||
2016 | 407 | |||
2017 | 332 | |||
2018 | 257 | |||
Thereafter | 321 | |||
|
| |||
Total | $ | 2,356 | ||
|
|
The amortization does not anticipate or pro-forma loan prepayments.
The fair value of mortgage servicing rights was $3.1 million at December 31, 2013 and $2.4 million at December 31, 2012. The key assumptions used to value mortgage servicing rights as of December 31, 2013 were as follows:
2013 | 2012 | |||||||
Weighted average remaining life | 260 months | 264 months | ||||||
Weighted average discount rate | 12 | % | 12 | % | ||||
Weighted average coupon | 4.01 | % | 4.22 | % | ||||
Weighted average prepayment speed | 187 | % | 325 | % |
Note 7 - Premises and Equipment
The major classes of premises and equipment and the total accumulated depreciation at December 31, 2013 and 2012 are listed below:
2013 | 2012 | |||||||
(dollars in thousands) | ||||||||
Land | $ | 3,454 | $ | 4,101 | ||||
Building and improvements | 11,096 | 11,129 | ||||||
Furniture and equipment | 7,937 | 7,583 | ||||||
|
|
|
| |||||
Total fixed assets | 22,487 | 22,813 | ||||||
Less accumulated depreciation | 8,706 | 7,861 | ||||||
|
|
|
| |||||
Net fixed assets | $ | 13,781 | $ | 14,952 | ||||
|
|
|
|
64
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 8 - Leases
The Company’s subsidiary, Uwharrie Bank has entered into a noncancelable operating lease for an administrative office location in Concord that expires in 2017. The lease requires annual rental payments of $62,120 and contains two five-year renewal options at the expiration of the initial term.
Future minimum lease payments under these leases for years subsequent to December 31, 2013 are as follows:
Year ending December 31, | ||||
(dollars in thousands) | ||||
2014 | $ | 62 | ||
2015 | 62 | |||
2016 | 62 | |||
2017 | 42 | |||
2018 | — | |||
Thereafter | — | |||
|
| |||
Total | $ | 228 | ||
|
|
Total rental expense related to the operating leases was $61,914, $60,929, and $60,450 for the years ended December 31, 2013, 2012 and 2011, respectively, and is included in occupancy expense.
Note 9 - Deposits
The composition of deposits at December 31, 2013 and 2012 is as follows:
2013 | 2012 | |||||||||||||||
Amount | Percentage of Total | Amount | Percentage of Total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Demand noninterest-bearing | $ | 74,493 | 16 | % | $ | 70,347 | 15 | % | ||||||||
Interest checking and money market | 228,933 | 51 | % | 211,066 | 46 | % | ||||||||||
Savings | 41,512 | 9 | % | 43,336 | 10 | % | ||||||||||
Time deposits $100,000 and over | 44,690 | 10 | % | 53,449 | 12 | % | ||||||||||
Other time deposits | 64,080 | 14 | % | 79,414 | 17 | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 453,708 | 100 | % | $ | 457,612 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
The maturities of fixed-rate time deposits at December 31, 2013 are reflected in the table below:
Year ending December 31, | Time Deposits $100,000 and Over | Other Time Deposits | ||||||
(dollars in thousands) | ||||||||
2014 | $ | 21,528 | $ | 38,614 | ||||
2015 | 7,060 | 9,819 | ||||||
2016 | 12,289 | 12,845 | ||||||
2017 | 3,163 | 2,554 | ||||||
2018 | 650 | 248 | ||||||
Thereafter | — | — | ||||||
|
|
|
| |||||
Total | $ | 44,690 | $ | 64,080 | ||||
|
|
|
|
65
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 10 - Short-Term Borrowed Funds
The following tables set forth certain information regarding the amounts, year-end weighted average rates, average balances, weighted average rate, and maximum month-end balances for short-term borrowed funds, at and during 2013 and 2012:
2013 | 2012 | |||||||||||||||
Amount | Rate | Amount | Rate | |||||||||||||
(dollars in thousands) | ||||||||||||||||
At year-end | ||||||||||||||||
Master notes and other short term borrowing | $ | 3,998 | 0.25 | % | $ | 6,180 | | 0.92 | % | |||||||
Notes payable | 11 | 6.00 | % | 10 | 6.00 | % | ||||||||||
Short-term advances from FHLB | 1,500 | 4.08 | % | 12,500 | 2.30 | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 5,509 | 1.30 | % | $ | 18,690 | 1.84 | % | |||||||||
|
|
|
|
|
|
|
| |||||||||
2013 | 2012 | |||||||||||||||
Amount | Rate | Amount | Rate | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Average for the year | ||||||||||||||||
Federal funds purchased | $ | 4 | 0.79 | % | $ | 5 | 0.80 | % | ||||||||
Master notes and other short term borrowing | 5,617 | 0.41 | % | 7,464 | 0.90 | % | ||||||||||
Notes payable | 10 | 6.00 | % | 29 | 4.37 | % | ||||||||||
Short-term advances from FHLB | 5,026 | 2.61 | % | 11,503 | 2.46 | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 10,657 | 1.34 | % | $ | 19,001 | 1.85 | % | |||||||||
|
|
|
|
|
|
|
|
2013 | 2012 | |||||||
(dollars in thousands) | ||||||||
Maximum month-end balance | ||||||||
Federal funds purchased | $ | — | $ | — | ||||
Master notes and other short term borrowing | 6,736 | 7,491 | ||||||
Notes payable | 11 | 59 | ||||||
Short-term advances from FHLB | 9,500 | 13,500 |
Federal funds purchased represent unsecured overnight borrowings from other financial institutions. Master notes and other secured borrowings represent an overnight investment in commercial paper issued by the Company to customers of its subsidiary bank, where an agreement is in place.
The subsidiary bank has combined available lines of credit for federal funds and Federal Reserve discount window availability in the amount of $52.6 million at December 31, 2013.
Note 11 - Long-Term Debt
The Company has a line of credit with the Federal Home Loan Bank secured by qualifying first lien and second mortgage loans, commercial real estate loans and investment securities with eligible collateral value of $62.4 million with remaining availability of $49.4 million at December 31, 2013. There were no long-term advances under this line at December 31, 2013 and $1.5 million at December 31, 2012. The interest rate was 4.08% in 2012. The subsidiary bank also has standby letters of credit issued by the Federal Home Loan Bank to be used as collateral for public funds deposits. The amount of the letters of credit was $11.5 million at December 31, 2013.
66
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 11 - Long-Term Debt (Continued)
During the second and third quarters of 2010, the Company conducted a private placement offering of fixed rate junior subordinated debt securities at $1,000 per security with a required minimum investment of $50,000. The offering raised $11.1 million, of which the entire $11.1 million was outstanding at December 31, 2013. These securities have a final maturity date of December 31, 2018 and may be redeemed by the Company after December 31, 2013. The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.75%. All proceeds of this private placement qualify and are included in the calculation of Tier 2 capital. Once the final maturity drops under five years, the Company must impose a twenty percent annual reduction per year of the amount of the proceeds from the sale of these securities that are eligible to be counted as Tier 2 capital. The Company would have a twenty percent reduction beginning at March 31, 2014. The Company is in the process of refinancing the current fixed rate junior subordinated debt securities with a new offering currently in process with an annual fixed rate of 5.75% and a ten year maturity.
On November 19, 2002, the Company executed a mortgage in the amount of $129,000 for the purchase of property for branch expansion. This loan bears interest at 6.00% and is to be paid in 60 quarterly installments of $3,277. The outstanding principal balance on this note was $46,301 at December 31, 2013 down from $56,254 at December 31, 2012.
As of December 31, 2013, the scheduled maturities of these long term borrowings are as follows:
Year ending December 31, | ||||
(dollars in thousands) | ||||
2015 | $ | 12 | ||
2016 | 12 | |||
2017 | 12 | |||
2018 | 11,127 | |||
2019 | — | |||
Thereafter | — | |||
|
| |||
Total | $ | 11,163 | ||
|
|
Note 12 - Income Tax Matters
The significant components of income tax expense (benefit) for the years ended December 31, 2013, 2012 and 2011 are summarized as follows:
2013 | 2012 | 2011 | ||||||||||
(dollars in thousands) | ||||||||||||
Current tax expense (benefit): | ||||||||||||
Federal | $ | (98 | ) | $ | 1,243 | $ | (838 | ) | ||||
State | 2 | 256 | 34 | |||||||||
|
|
|
|
|
| |||||||
Total | (96 | ) | 1,499 | (804 | ) | |||||||
|
|
|
|
|
| |||||||
Deferred tax expense (benefit): | ||||||||||||
Federal | 285 | (946 | ) | 890 | ||||||||
State | 153 | (188 | ) | 110 | ||||||||
|
|
|
|
|
| |||||||
Total | 438 | (1,134 | ) | 1,000 | ||||||||
|
|
|
|
|
| |||||||
Net provision for income taxes | $ | 342 | $ | 365 | $ | 196 | ||||||
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|
|
|
|
67
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 12 - Income Tax Matters (Continued)
The difference between the provision for income taxes and the amounts computed by applying the statutory federal income tax rate of 34% to income before income taxes is summarized below:
2013 | 2012 | 2011 | ||||||||||
(dollars in thousands) | ||||||||||||
Tax computed at the statutory federal rate | $ | 441 | $ | 262 | $ | 373 | ||||||
Increases (decrease) resulting from: | ||||||||||||
Tax exempt interest, net | (229 | ) | (250 | ) | (247 | ) | ||||||
State income taxes, net of federal benefit | 102 | 45 | 94 | |||||||||
Impairment of goodwill | — | 336 | — | |||||||||
Other | 28 | (28 | ) | (24 | ) | |||||||
|
|
|
|
|
| |||||||
Provision for income taxes | $ | 342 | $ | 365 | $ | 196 | ||||||
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred taxes at December 31, 2013, 2012 and 2011 are as follows:
2013 | 2012 | 2011 | ||||||||||
(dollars in thousands) | ||||||||||||
Deferred tax assets relating to: | ||||||||||||
Allowance for loan losses | $ | 1,934 | $ | 2,514 | $ | 2,439 | ||||||
Deferred compensation | 853 | 696 | 595 | |||||||||
Other | 856 | 1,030 | 264 | |||||||||
Net unrealized loss on securities available for sale | 289 | — | — | |||||||||
|
|
|
|
|
| |||||||
Total deferred tax assets | 3,932 | 4,240 | 3,298 | |||||||||
Deferred tax liabilities relating to: | ||||||||||||
Net unrealized gain on securities available for sale | — | (801 | ) | (1,164 | ) | |||||||
Premises and equipment | (487 | ) | (651 | ) | (678 | ) | ||||||
Deferred loans fees and costs | (199 | ) | (187 | ) | (205 | ) | ||||||
Loan servicing | (201 | ) | (208 | ) | (206 | ) | ||||||
Prepaid expenses | — | — | (149 | ) | ||||||||
|
|
|
|
|
| |||||||
Total deferred tax liabilities | (887 | ) | (1,847 | ) | (2,402 | ) | ||||||
|
|
|
|
|
| |||||||
Net recorded deferred tax asset | $ | 3,045 | $ | 2,393 | $ | 896 | ||||||
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|
|
|
|
The net deferred tax asset is included in other assets on the accompanying consolidated balance sheets.
Note 13 - Commitments and Contingencies
Financial Instruments with Off-Balance Sheet Risk
The subsidiary bank is party to financial instruments with off-balance sheet risks in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, lines of credit and standby letters of credit. These instruments involve elements of credit risk in excess of amounts recognized in the accompanying financial statements.
The subsidiary bank’s risk of loss with the unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments under such instruments as it does for on-balance
68
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 13 - Commitments and Contingencies (Continued)
sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, real estate and time deposits with financial institutions. 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.
As of December 31, 2013 and 2012, outstanding financial instruments whose contract amounts represent credit risk were as follows:
2013 | 2012 | |||||||
(dollars in thousands) | ||||||||
Commitments to extend credit | $ | 67,865 | $ | 71,997 | ||||
Credit card commitments | 8,016 | 7,957 | ||||||
Standby letters of credit | 1,100 | 1,100 | ||||||
|
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| |||||
$ | 76,981 | $ | 81,054 | |||||
|
|
|
|
Contingencies
In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements.
Financial Instruments with Concentration of Credit Risk
The subsidiary bank makes commercial, agricultural, real estate mortgage, home equity and consumer loans primarily in Stanly, Anson and Cabarrus counties. A substantial portion of the Company’s customers’ ability to honor their contracts is dependent on the economy in these counties.
Although the Company’s composition of loans is diversified, there is some concentration of mortgage loans in the total portfolio. The Banks’ policy is to abide by real estate loan-to-value margin limits corresponding to guidelines issued by the federal supervisory agencies on March 19, 1993. Lending policy for all loans requires that they be supported by sufficient cash flows at the time of origination.
Note 14 - Related Party Transactions
The Company has granted loans to certain directors and executive officers and their related interests. Such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers and, in management’s opinion, do not involve more than the normal risk of collectability. All loans to directors and executive officers or their interests are submitted to the Board of Directors for approval. A summary of loans to directors, executive officers and their related interests follows:
(dollars in thousands) | ||||
Balance at December 31, 2012 | $ | 15,169 | ||
Disbursements during the year | 7,345 | |||
Collections during the year | (9,847 | ) | ||
|
| |||
Balance at December 31, 2013 | $ | 12,667 | ||
|
|
69
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 14 - Related Party Transactions (Continued)
At December 31, 2013, the Company had approved, but unused lines of credit, totaling $2.2 million to executive officers and directors, and their related interests.
Note 15 - Shareholders’ Equity and Regulatory Matters
The Company and its banking subsidiary are subject to certain requirements imposed by state and federal banking statutes and regulations. These requirements, among other things, establish minimum levels of capital, restrict the amount of dividends that may be distributed, and require that reserves on deposit liabilities be maintained in the form of vault cash or deposits with the Federal Reserve Bank.
The Company and its subsidiary bank are subject to federal regulatory risk-based capital guidelines for banks and bank holding companies. Each must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices which measure Total and Tier 1 Capital to risk-weighted assets and Tier 1 Capital to average assets. Quantitative measures established by regulation to ensure capital adequacy and the Company’s consolidated capital ratios are set forth in the table below. The Company expects to meet or exceed these minimums without altering current operations or strategy.
Actual | Minimum For Capital Requirement | Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
December 31, 2013 | ||||||||||||||||||||||||
Total Capital to Risk | ||||||||||||||||||||||||
Weighted Assets: | ||||||||||||||||||||||||
Consolidated | $ | 56,439 | 16.7 | % | $ | 27,071 | 8.0 | % | $ | N/A | — | % | ||||||||||||
Uwharrie Bank | 54,503 | 16.2 | % | 26,955 | 8.0 | % | 33,694 | 10.0 | % | |||||||||||||||
Tier 1 Capital to Risk | ||||||||||||||||||||||||
Weighted Assets: | ||||||||||||||||||||||||
Consolidated | 41,071 | 12.1 | % | 13,536 | 4.0 | % | N/A | — | % | |||||||||||||||
Uwharrie Bank | 50,280 | 15.0 | % | 13,478 | 4.0 | % | 20,216 | 6.0 | % | |||||||||||||||
Tier 1 Capital to | ||||||||||||||||||||||||
Average Assets: | ||||||||||||||||||||||||
Consolidated | 41,071 | 7.8 | % | 21,126 | 4.0 | % | N/A | — | % | |||||||||||||||
Uwharrie Bank | 50,280 | 9.6 | % | 21,067 | 4.0 | % | 26,334 | 5.0 | % |
70
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 15 - Shareholders’ Equity and Regulatory Matters (Continued)
Actual | Minimum For Capital Requirement | Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
December 31, 2012 | ||||||||||||||||||||||||
Total Capital to Risk | ||||||||||||||||||||||||
Weighted Assets: | ||||||||||||||||||||||||
Consolidated | $ | 56,728 | 16.3 | % | $ | 27,899 | 8.0 | % | $ | N/A | — | % | ||||||||||||
Bank of Stanly | 34,208 | 15.1 | % | 18,159 | 8.0 | % | 22,699 | 10.0 | % | |||||||||||||||
Anson Bank and Trust | 6,402 | 19.1 | % | 2,688 | 8.0 | % | 3,360 | 10.0 | % | |||||||||||||||
Cabarrus Bank and Trust | 12,879 | 15.5 | % | 6,668 | 8.0 | % | 8,335 | 10.0 | % | |||||||||||||||
Tier 1 Capital to Risk | ||||||||||||||||||||||||
Weighted Assets: | ||||||||||||||||||||||||
Consolidated | 41,212 | 11.8 | % | 13,949 | 4.0 | % | N/A | — | % | |||||||||||||||
Bank of Stanly | 31,349 | 13.8 | % | 9,080 | 4.0 | % | 13,619 | 6.0 | % | |||||||||||||||
Anson Bank and Trust | 5,976 | 17.8 | % | 1,344 | 4.0 | % | 2,016 | 6.0 | % | |||||||||||||||
Cabarrus Bank and Trust | 11,834 | 14.2 | % | 3,334 | 4.0 | % | 5,001 | 6.0 | % | |||||||||||||||
Tier 1 Capital to | ||||||||||||||||||||||||
Average Assets: | ||||||||||||||||||||||||
Consolidated | 41,212 | 7.6 | % | 21,643 | 4.0 | % | N/A | — | % | |||||||||||||||
Bank of Stanly | 31,349 | 9.3 | % | 13,619 | 4.0 | % | 13,514 | 5.0 | % | |||||||||||||||
Anson Bank and Trust | 5,976 | 9.9 | % | 2,016 | 4.0 | % | 2,410 | 5.0 | % | |||||||||||||||
Cabarrus Bank and Trust | 11,834 | 9.0 | % | 5,001 | 4.0 | % | 5,225 | 5.0 | % |
As of December 31, 2013, the most recent notification from the Federal Deposit Insurance Corporation categorized the Company’s subsidiary bank as being well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since such notification that management believes would have changed the categorization.
On December 23, 2008, the Company entered into a letter agreement with the United States Department of Treasury to sell 10,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Senior Preferred”) with a redemption value of $10.0 million under the capital purchase program (“CPP”). The Company also issued a warrant to the Treasury that was immediately exercised for 500 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the “Warrant Preferred”) with redemption value of $500,000. Combined proceeds received for the issuance of both the Senior Preferred and the Warrant Preferred was $10.0 million, resulting in a net discount that has been allocated between the two issues based upon their relative fair values. As a condition of the Cumulative Perpetual Preferred Stock, the Company must obtain consent from the holder to repurchase its common stock or to pay a cash dividend.
The Senior Preferred qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per year, for the first five years, and 9% per year thereafter. Under the terms of the agreement, the Senior Preferred may be redeemed with prior approval from the Federal Reserve in the first three years with the proceeds from the issuance of certain qualifying Tier 1 capital or after three years at par value plus accrued and unpaid dividends.
The Warrant Preferred also qualifies as Tier 1 capital and pays cumulative dividends at a rate of 9% per year. Under the terms of the agreement, the Warrant Preferred may be redeemed after the Senior Preferred has been completely redeemed, at par value plus accrued and unpaid dividends. It was the Company’s intention to redeem both issues of preferred stock no later than the fifth anniversary of their issuance. Accordingly, the net discount of $500,000 is going to be amortized over five years.
71
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 15 - Shareholders’ Equity and Regulatory Matters (Continued)
On December 31, 2008, the Company entered into agreements with its subsidiary banks to sell Fixed Rate Noncumulative Perpetual Preferred Stock to the Company to provide an avenue for investing portions of the funds received from Company’s issuance of senior preferred stock at the subsidiary bank level. At December 31, 2012, Uwharrie Capital Corp had invested $3.0 million in Stanly, $1.8 million in Anson and $3.0 million in Cabarrus.
During 2012, each of the Company’s subsidiary banks began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series B. The preferred stock qualifies as Tier 1 capital at the subsidiary bank and pays dividends at a rate of 5.30%. The sale ended on December 31, 2012 raising $7.9 million less issuance costs of $113,000. These funds were held in an escrow account at December 31, 2012 and the new preferred stock was issued in January 2013. The total net amount of capital raised was $7.7 million at the subsidiary bank level. This capital is presented as noncontrolling interest in the consolidated balance sheets.
During the third quarter of 2013, the Company’s subsidiary bank, Uwharrie Bank, began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series C to be issued by the subsidiary bank. The preferred stock qualifies as Tier 1 capital at the bank and pays dividends at an annual rate of 5.30%. The preferred stock has no voting rights. The offering ended September 15, 2013 with Uwharrie raising $2.8 million in new capital less total issuance costs of $23,000. At September 30, 2013, these funds were held in an escrow account and the new preferred stock was issued on October 1, 2013.
During the fourth quarter of 2013, the Company repaid the entire $10.5 million of Series A and Series B Fixed Rate Cumulative Perpetual Preferred Stock, at par, to the United States Department of Treasury.
All of the Company’s aforementioned investment in its subsidiary bank qualifies for Tier 1 capital treatment for the bank and is included as such in its year end capital ratios.
For the reserve maintenance period in effect at December 31, 2013, the subsidiary bank was required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank in the aggregate amount of $3.7 million as reserves on deposit liabilities.
Stock Repurchase Program
On February 21, 1995, the Company’s Board of Directors authorized and approved a Stock Repurchase Program, to be reaffirmed annually, pursuant to which the Company may repurchase shares of the Company’s common stock for the primary purpose of providing liquidity to its shareholders. After receiving approval the Company repurchased 56,565 shares of outstanding common stock in 2013 and 90,260 shares of outstanding common stock in 2012.
72
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 15 - Shareholders’ Equity and Regulatory Matters (Continued)
Pursuant to the terms of the United States Department of the Treasury’s investment in the Company’s preferred stock under the 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. With the repayment in full to United States Department of the Treasury in fourth quarter of 2013 this consent is no longer needed.
Note 16 - Stock Based Compensation
During 1996, the Company adopted the 1996 Incentive Stock Option Plan (“SOP”) and the Employee Stock Purchase Plan (“SPP”), under which options to purchase shares of the Company’s common stock may be granted to officers and eligible employees. Options granted under the SOP are exercisable in established increments according to vesting schedules, generally three to five years, and will expire if not exercised within ten years of the date of grant. Options granted under the SPP are fully vested at the date of grant and expire if not exercised within two years of the grant date. Both of these plans expired in 2006. At December 31, 2013, the SOP had 80,131 options still outstanding and the SPP had no options outstanding.
During 2006, the Company adopted the 2006 Incentive Stock Option Plan (“SOP II”) and the Employee Stock Purchase Plan (“SPP II”), under which options to purchase shares of the Company’s common stock may be granted to officers and eligible employees. Options granted under the SOP II are exercisable in established increments according to vesting schedules, generally three to five years, and will expire if not exercised within ten years of the date of grant. Options granted under the SPP II are fully vested at the date of grant and expire if not exercised within two years of the grant date. At December 31, 2013, the SOP II had 12,360 options outstanding and the SPP II had no options outstanding.
Employee Stock Plans
The following is a summary of stock option activity for the year ended December 31, 2013:
Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value (in thousands) | ||||||||||
Options outstanding at the beginning of the year | 92,491 | $ | 5.35 | $ | — | |||||||
|
| |||||||||||
Options granted | — | — | ||||||||||
Options exercised | — | — | ||||||||||
Forfeitures | — | — | ||||||||||
|
|
|
| |||||||||
Options outstanding at the end of the year | 92,491 | $ | 5.35 | $ | — | |||||||
|
|
|
|
|
| |||||||
Options exercisable at the end of the year | 92,491 | $ | 5.35 | $ | — | |||||||
|
|
|
|
|
|
Total options outstanding at December 31, 2013 were 92,491 at an exercise price range of $5.34 to $5.35 per share with a weighted average expected term of 0.88 years. Exercisable options at December 31, 2013 were 92,491 options at an exercise price range of $5.34 to $5.35 per share. At December 31, 2013, authorized shares of common stock reserved for future grants of options totaled 154,971 under the SOP II and 103,234 under the SPP II.
73
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 16 - Stock Based Compensation (Continued)
The fair market value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. There were no shares granted during the years ended December 31, 2013 and 2012 under the SOP II.
A summary of the status of the Company’s non-vested stock option grants as of December 31, 2013, and changes during the year then ended is presented below:
Shares | Weighted Average Grant Date Fair Value | |||||||
Non-vested December 31, 2012 | 2,472 | $ | 1.43 | |||||
Granted | — | — | ||||||
Vested | (2,472 | ) | 1.43 | |||||
Forfeited | — | — | ||||||
|
| |||||||
Non-vested December 31, 2013 | — | — | ||||||
|
|
The grant date fair value of stock options vested over the years ended December 31, 2013, 2012 and 2011 was $1.43 for all three years.
As of December 31, 2013, there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all of the Company’s stock benefit plans.
The Company funds the option shares from authorized but unissued shares. The Company does not typically purchase shares to fulfill the obligations of the stock benefit plans. Company policy does allow option holders to exercise options with seasoned shares.
There were no options exercised in 2011, 2012 or 2013.
Note 17 - Employee and Director Benefit Plans
Employees’ 401(k) Retirement Plan
The Company has established an associate tax deferred savings plan under Section 401(k) of the Internal Revenue Code of 1986. All associates are eligible to make elective deferrals on the first day of the calendar month coincident or next following the date the associate attains the age of 18, completes one year of eligibility service and completes at least 1,000 hours of service and is 100% vested in the plan once they enroll.
The Company’s annual contribution to the plan was $317,281 in 2013, $323,545 in 2012 and $306,673 in 2011, determined as follows:
• | The Company will contribute a safe harbor matching contribution in an amount equal to :(i) 100% of the matched employee contributions that are not in excess of 3% of compensation, plus (ii) 50% of the amount of the matched employee contributions that exceed 3% of compensation, but do not exceed 5% of compensation. |
• | A discretionary contribution, subject to approval by the Board of Directors, limited to an amount not to exceed the maximum amount deductible for income tax purposes. |
74
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 17 - Employee and Director Benefit Plans (Continued)
Employee Stock Ownership Plan
The Company established an Employee Stock Ownership Plan (“ESOP”) to benefit all qualified employees. The ESOP purchased 293,216 dividend adjusted shares of common stock in 1999 with proceeds received from a loan of $1.2 million from the Company. The loan is to be repaid over eighteen years with interest at 8%. The loan may be prepaid without penalty. The unallocated shares of stock held by the ESOP are pledged as collateral for the loan. The ESOP is funded by contributions made by the Company and its subsidiaries in amounts sufficient to retire the debt. At December 31, 2013, the outstanding balance of the loan is $329,980 and is presented as a reduction of shareholders’ equity.
As the debt payments are made on the loans, shares associated with those debt payments are released to the ESOP and allocated among active participants on the basis of compensation in the year of allocation. There is a three year cliff vesting schedule for participants entering the plan on or after January 1, 2007. Dividends on unallocated shares may be used by the ESOP to repay the loan to the Company and are not reported as dividends in the financial statements. Dividends on allocated or committed to be allocated shares are credited to the accounts of the participants and reported as dividends in the consolidated financial statements.
The Company established a $500,000 line of credit to the ESOP in the third quarter of 2010 for the purpose of purchasing shares for the ESOP. Advances of $499,999 have been made under this line of credit, and a total of 151,563 unallocated shares have been purchased from the open market from the advance proceeds and pledged as collateral. At December 31, 2013, the outstanding balance of the loan is $499,999 and is presented as a reduction of shareholders’ equity.
The Company established a second $500,000 line of credit to the ESOP in the second quarter of 2013 for the purpose of purchasing shares for the ESOP. Advances of $159,750 have been made under this line of credit, and a total of 59,457 unallocated shares have been purchased from the open market from the advance proceeds and pledged as collateral. The unused balance of the line of credit at December 31, 2013 was $340,250. This amount is available for future advances to purchase stock for the ESOP plan. At December 31, 2013, the outstanding balance of the loan is $159,750 and is presented as a reduction of shareholders’ equity.
During 2013 the Company continued to expense approximately 2% of eligible compensation as a contribution to the ESOP Plan, the same as 2012 and 2011. Expenses of $223,283, $209,434 and $219,657 during the years ended December 31, 2013, 2012 and 2011, respectively, were incurred in connection with the ESOP.
At December 31, 2013, 480,639 shares held by the ESOP, including additional shares purchased, have been released or committed to be released to the ESOP’s participants for purposes of computing earnings per share. The ESOP has a put option that allows the employee to put their shares back to the Company. The Company has a liability set aside for the total allocated shares at fair value in the amount of approximately $1.7 million. This liability was reclassified from additional paid in capital and is presented separately on the face of the balance sheet. There were 259,891 shares unallocated with a fair value of approximately $927,811 at December 31, 2013.
75
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 17 - Employee and Director Benefit Plans (Continued)
Supplemental Executive Retirement Plan
The Company has implemented a non-qualifying deferred compensation plan for certain executive officers. Certain of the plan benefits will accrue and vest during the period of employment and will be paid in fixed monthly benefit payments for up to ten years upon separation from service. The plan also provides for payment of death benefits and for payment of disability benefits in the event the officer becomes permanently disabled prior to separation from service.
Effective December 31, 2008, this plan was amended and restated to comply with Section 409A of the Internal Revenue Code. The participants’ account liability balances as of December 31, 2008 could be transferred into a trust fund, where investments will be participant-directed.
The plan is structured as a defined contribution plan and the Company’s expected annual funding contribution for the participants has been calculated through the participant’s expected retirement date. Under terms of the agreement, the Company has reserved the absolute right, at its sole discretion, to either fund or refrain from funding the plan. The plan also provides for payment of death benefits and for payment of disability benefits in the event the officer becomes permanently disabled prior to separation from service.
During 2013, 2012 and 2011, $336,800, $266,800 and $266,800, respectively was expensed each year for benefits provided under the plans. During 2013, the Company added two new participants to the plan, resulting in the $70,000 increase in 2013. The liability accrued for deferred compensation under the plan amount to $2.8 million and $2.4 million at December 31, 2013 and 2012, respectively.
Split-Dollar Life Insurance
The Company has entered into Life Insurance Endorsement Method Split-Dollar Agreements with certain officers. Under these agreements, upon death of the officer, the Company first recovers the cash surrender value of the contract and then shares the remaining death benefits from insurance contracts, which are written with different carriers, with the designated beneficiaries of the officers. The death benefit to the officers’ beneficiaries is a multiple of base salary at the time of the agreements. The Company, as owner of the policies, retains an interest in the life insurance proceeds and a 100% interest in the cash surrender value of the policies. During 2013 and 2012, the expense associated with these policies was $63,732 and $56,458 respectively.
76
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 18 - Fair Values of Financial Instruments and Interest Rate Risk
ASC 825, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or non-recurring basis.
The fair value estimates presented at December 31, 2013 and December 31, 2012, are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price 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 December 31, 2013 and December 31, 2012:
December 31, 2013
Carrying Value | Estimated Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
FINANCIAL ASSETS | ||||||||||||||||||||
Cash and cash equivalents | $ | 72,394 | $ | 72,394 | $ | 72,394 | $ | — | $ | — | ||||||||||
Securities available for sale | 100,280 | 100,280 | 21,286 | 78,994 | — | |||||||||||||||
Loans held for investment, net | 302,253 | 308,112 | — | — | 308,112 | |||||||||||||||
Loans held for sale | 1,139 | 1,139 | — | 1,139 | — | |||||||||||||||
Restricted stock | 1,184 | 1,184 | 1,184 | — | — | |||||||||||||||
Bank-owned life insurance | 6,516 | 6,516 | — | — | 6,516 | |||||||||||||||
Mortgage servicing rights | 2,356 | 3,085 | — | — | 3,085 | |||||||||||||||
Accrued interest receivable | 1,747 | 1,747 | — | — | 1,747 | |||||||||||||||
FINANCIAL LIABILITIES | ||||||||||||||||||||
Deposits | $ | 453,708 | $ | 438,593 | $ | — | $ | — | $ | 438,593 | ||||||||||
Short-term borrowings | 5,509 | 5,509 | — | 5,509 | — | |||||||||||||||
Long-term borrowings | 36 | 36 | — | 36 | — | |||||||||||||||
Junior subordinated debt | 11,127 | 11,271 | — | — | 11,271 | |||||||||||||||
Accrued interest payable | 224 | 224 | — | — | 224 |
77
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 18 - Fair Values of Financial Instruments and Interest Rate Risk (Continued)
December 31, 2012
Carrying Value | Estimated Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
FINANCIAL ASSETS | ||||||||||||||||||||
Cash and cash equivalents | $ | 81,728 | $ | 81,728 | $ | 81,728 | $ | — | $ | — | ||||||||||
Securities available for sale | 91,638 | 91,638 | 19,576 | 72,062 | — | |||||||||||||||
Loans held for investment, net | 322,382 | 331,386 | — | — | 331,386 | |||||||||||||||
Loans held for sale | 5,373 | 5,373 | — | 5,373 | — | |||||||||||||||
Restricted stock | 2,265 | 2,265 | 2,265 | — | — | |||||||||||||||
Bank-owned life insurance | 6,394 | 6,394 | — | — | 6,394 | |||||||||||||||
Mortgage servicing rights | 2,394 | 2,394 | — | — | 2,394 | |||||||||||||||
Accrued interest receivable | 1,753 | 1,753 | — | — | 1,753 | |||||||||||||||
FINANCIAL LIABILITIES | ||||||||||||||||||||
Deposits | $ | 457,612 | $ | 446,669 | $ | — | $ | — | $ | 446,669 | ||||||||||
Short-term borrowings | 18,690 | 18,690 | — | 18,690 | — | |||||||||||||||
Long-term borrowings | 1,546 | 1,702 | — | 1,702 | — | |||||||||||||||
Junior subordinated debt | 11,127 | 11,268 | — | — | 11,268 | |||||||||||||||
Accrued interest payable | 270 | 270 | — | — | 270 |
The following methods and assumptions were used by the Company in estimating the fair value of financial instruments:
• | Cash and cash equivalents - The carrying amount of cash and cash equivalents approximate their fair values due to the short period of time until their expected realization and are recorded in Level 1. |
• | Securities available for sale - Securities available for sale are carried at fair value based on quoted and observable market prices and are recorded in Levels 1 and 2. Also see discussion in note 9. |
• | Loans - The fair value of loans is estimated based on discounted expected cash flows using the current interest rates at which similar loans would be made and carried in level 3. Loans held for sale, which represent current mortgage production forward sales not yet delivered, are valued based on secondary market prices. The fair value of loans does not consider the lack of liquidity and uncertainty in the market that would affect the valuation. Loans held for sale are recorded in Level 2. |
• | Restricted stock - It is not practicable to determine fair value of restricted stock which is comprised of Federal Home Loan Bank and Federal Reserve Bank stock due to restrictions placed on its transferability and it is presented at its carrying value and is recorded in Level 1 due to the redemption provisions of the Federal Home Loan Bank and the Federal Reserve Bank. |
• | Bank-owned life insurance - The carrying amount of bank-owned life insurance is the current cash surrender value and is recorded in level 3. |
• | Mortgage servicing rights - Fair value is determined based upon discounted cash flows using market-based assumptions and is recorded in Level 3. |
• | Accrued interest receivable and payable - Both accrued interest receivable and payable are recorded in Level 3, as there are not active markets for these. |
78
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 18 - Fair Values of Financial Instruments and Interest Rate Risk (Continued)
• | Deposits - The fair value of deposits is estimated based on discounted cash flow analyses using offered market rates and is recorded in Level 3. The fair value of deposits does not consider any customer related intangibles. |
• | Borrowings - The fair value disclosed for short-term borrowings, which are composed of overnight borrowings and debt due within one year approximate the carrying value for such debt and is recorded in Level 2. The estimated fair value for long-term borrowings are estimated based on discounted cash flow analyses using offered market rates. Total borrowings are carried in Level 2. Junior subordinated debt is fair valued based on discounted cash flow analyses and is recorded in Level 3. |
At December 31, 2013, the subsidiary bank had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, they were deemed to have no current fair value. See Note 13.
The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and 2012:
December 31, 2013 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Securities available for sale: | ||||||||||||||||
US Treasury | $ | 21,286 | $ | 21,286 | $ | — | $ | — | ||||||||
US Gov’t | 34,300 | — | 34,300 | — | ||||||||||||
Mortgage-backed securities and CMO’s | 37,006 | — | 37,006 | — | ||||||||||||
State and political subdivisions | 7,688 | — | 7,688 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets at fair value | $ | 100,280 | $ | 21,286 | $ | 78,994 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities at fair value | $ | — | $ | — | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
December 31, 2012 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Securities available for sale: | ||||||||||||||||
US Treasury | $ | 19,576 | $ | 19,576 | $ | — | $ | — | ||||||||
US Gov’t | 22,174 | — | 22,174 | — | ||||||||||||
Mortgage-backed securities and CMO’s | 41,022 | — | 41,022 | — | ||||||||||||
State and political subdivisions | 8,866 | — | 8,866 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets at fair value | $ | 91,638 | $ | 19,576 | $ | 72,062 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities at fair value | $ | — | $ | — | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
Prices for US Treasury 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, government agency securities and for state, county and municipal securities are obtained for similar securities, and the resulting fair values are shown in the ‘Level
79
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 18 - Fair Values of Financial Instruments and Interest Rate Risk (Continued)
2 input’ column. Prices for 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 December 31, 2013 and December 31, 2012:
December 31, 2013 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Impaired loans | $ | 5,903 | $ | — | $ | — | $ | 5,903 | ||||||||
Loans held for sale | 1,139 | — | 1,139 | — | ||||||||||||
Other real estate owned | 3,533 | — | — | 3,533 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets at fair value | $ | 10,575 | $ | — | $ | 1,139 | $ | 9,436 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities at fair value | $ | — | $ | — | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
December 31, 2012 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Impaired loans | $ | 8,640 | $ | — | $ | — | $ | 8,640 | ||||||||
Loans held for sale | 5,373 | — | 5,373 | — | ||||||||||||
Other real estate owned | 5,596 | — | — | 5,596 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets at fair value | $ | 19,609 | $ | — | $ | 5,373 | $ | 14,236 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities at fair value | $ | — | $ | — | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
Valuation Technique | Unobservable Input | General Range | ||||
Nonrecurring measurements: | ||||||
OREO | Discounted appraisals | Collateral discounts and Estimated costs to sell | 0 – 10% | |||
Impaired loans | Discounted appraisals | Collateral discounts | 0 – 30% |
ASC 825 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 ASC 825, the Company did not elect to report any assets and liabilities at fair value.
80
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 18 - Fair Values of Financial Instruments and Interest Rate Risk (Continued)
Interest Rate Risk
The Company assumes interest rate risk (the risk that general interest rate levels will change) in the course of its normal operations. As a result, fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are more likely to prepay in a falling rate environment and less likely to prepay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.
Note 19 - Parent Company Financial Data
The following is a summary of the condensed financial statements of Uwharrie Capital Corp:
Condensed Balance Sheets
December 31, | ||||||||
2013 | 2012 | |||||||
(dollars in thousands) | ||||||||
Assets | ||||||||
Cash and demand deposits | $ | 1,858 | $ | 300 | ||||
Interest-earning deposits | 3,998 | 6,217 | ||||||
Investments in: | ||||||||
Bank subsidiaries | 39,176 | 50,677 | ||||||
Nonbank subsidiaries | 618 | 836 | ||||||
Other assets | 1,229 | 3,237 | ||||||
|
|
|
| |||||
Total assets | $ | 46,879 | $ | 61,627 | ||||
|
|
|
| |||||
Liabilities and shareholders’ equity | ||||||||
Master notes | $ | 3,998 | $ | 5,451 | ||||
Junior subordinated debentures | 11,127 | 11,127 | ||||||
Other liabilities | 71 | 376 | ||||||
|
|
|
| |||||
Total liabilities | 15,196 | 16,954 | ||||||
|
|
|
| |||||
Redeemable common stock held by the Employee Stock Ownership Plan (ESOP) | 1,716 | 1,584 | ||||||
Shareholders’ equity | 29,967 | 42,729 | ||||||
|
|
|
| |||||
Total liabilities and shareholders’ equity | $ | 46,879 | $ | 61,267 | ||||
|
|
|
|
81
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 19 - Parent Company Financial Data (Continued)
Condensed Statements of Income
2013 | 2012 | 2011 | ||||||||||
(dollars in thousands) | ||||||||||||
Equity in earnings of subsidiaries | $ | 1,666 | $ | 1,100 | $ | 1,649 | ||||||
Interest income | 21 | 41 | 64 | |||||||||
Management and service fees | 4,347 | 6,937 | 6,689 | |||||||||
Other income | 166 | 102 | 104 | |||||||||
Interest expense | (659 | ) | (670 | ) | (674 | ) | ||||||
Other operating expense | (4,881 | ) | (7,428 | ) | (7,304 | ) | ||||||
Income tax benefit | 294 | 322 | 372 | |||||||||
|
|
|
|
|
| |||||||
Net income | $ | 954 | $ | 404 | $ | 900 | ||||||
|
|
|
|
|
| |||||||
Consolidated net income | $ | 954 | $ | 404 | $ | 900 | ||||||
Less: Net income attributable to noncontrolling interest | (478 | ) | — | — | ||||||||
|
|
|
|
|
| |||||||
Net income attributable to Uwharrie Capital Corp | 476 | 404 | 900 | |||||||||
Dividends – preferred stock | (325 | ) | (645 | ) | (645 | ) | ||||||
|
|
|
|
|
| |||||||
Net Income (loss) available to common shareholders | $ | 151 | $ | (241 | ) | $ | 255 | |||||
|
|
|
|
|
| |||||||
Net income (loss) per common share | ||||||||||||
Basic | $ | 0.02 | $ | (0.03 | ) | $ | 0.03 | |||||
|
|
|
|
|
| |||||||
Diluted | $ | 0.02 | $ | (0.03 | ) | $ | 0.03 | |||||
|
|
|
|
|
| |||||||
Weighted average shares outstanding | ||||||||||||
Basic | 7,276,751 | 7,371,667 | 7,467,396 | |||||||||
Diluted | 7,276,751 | 7,371,667 | 7,467,396 |
82
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 19 - Parent Company Financial Data (Continued)
Condensed Statements of Cash Flows
2013 | 2012 | 2011 | ||||||||||
(dollars in thousands) | ||||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 954 | $ | 404 | $ | 900 | ||||||
adjustments to reconcile net income to net cash used by operating activities: | ||||||||||||
Equity in earnings of subsidiaries | (1,666 | ) | (1,100 | ) | (1,649 | ) | ||||||
(Increase) decrease in other assets | 2,298 | (734 | ) | (203 | ) | |||||||
Increase (decrease) in other liabilities | (305 | ) | (97 | ) | 131 | |||||||
|
|
|
|
|
| |||||||
Net cash provided (used) by operating activities | 1,281 | (1,527 | ) | (821 | ) | |||||||
|
|
|
|
|
| |||||||
Cash flows from investing activities | ||||||||||||
Dividends received from subsidiaries | 2,719 | — | — | |||||||||
|
|
|
|
|
| |||||||
Net cash provided by investing activities | 2,719 | — | — | |||||||||
|
|
|
|
|
| |||||||
Cash flows from financing activities | ||||||||||||
Net increase (decrease) in master notes | (1,453 | ) | (757 | ) | (2,386 | ) | ||||||
Net proceeds from issuance of junior subordinated debentures | — | — | 1,232 | |||||||||
Repurchase of common stock | (169 | ) | — | — | ||||||||
Repayment of series A preferred stock | (10,500 | ) | — | — | ||||||||
Preferred stock redeemed by from bank subsidiary | 7,800 | — | — | |||||||||
Increase in unearned ESOP compensation | (114 | ) | (103 | ) | (161 | ) | ||||||
Dividends on preferred stock | (225 | ) | (545 | ) | (545 | ) | ||||||
|
|
|
|
|
| |||||||
Net cash used by financing activities | (4,661 | ) | (1,405 | ) | (1,860 | ) | ||||||
|
|
|
|
|
| |||||||
Net decrease in cash and cash equivalents | (661 | ) | (2,932 | ) | (2,681 | ) | ||||||
Cash and cash equivalents at beginning of year | 6,517 | 9,449 | 12,130 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents at end of year | $ | 5,856 | $ | 6,517 | $ | 9,449 | ||||||
|
|
|
|
|
|
83
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Selected Financial Data
Selected Financial Data
(in thousands except per share and shares outstanding information)
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Summary of Operations | ||||||||||||||||||||
Interest income | $ | 19,465 | $ | 21,871 | $ | 23,822 | $ | 24,487 | $ | 25,062 | ||||||||||
Interest expense | 2,734 | 3,698 | 4,737 | 5,951 | 7,697 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net interest income | 16,731 | 18,173 | 19,085 | 18,536 | 17,365 | |||||||||||||||
Provision for loan losses | 28 | 1,832 | 3,456 | 4,919 | 1,732 | |||||||||||||||
Noninterest income | 7,587 | 10,675 | 8,256 | 9,898 | 5,824 | |||||||||||||||
Noninterest expense | 22,994 | 26,247 | 22,789 | 22,651 | 20,930 | |||||||||||||||
Income tax expense(benefit) | 342 | 365 | 196 | 151 | (163 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income | $ | 954 | $ | 404 | $ | 900 | $ | 713 | $ | 690 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Per Common Share | ||||||||||||||||||||
Net income – basic | $ | 0.02 | $ | (0.03 | ) | $ | 0.03 | $ | 0.01 | $ | 0.01 | |||||||||
Net income – diluted | 0.02 | (0.03 | ) | 0.03 | 0.01 | 0.01 | ||||||||||||||
Book value | 4.02 | 4.31 | 4.47 | 4.38 | 4.47 | |||||||||||||||
Weighted Average Shares | ||||||||||||||||||||
Outstanding: | ||||||||||||||||||||
Basic | 7,276,751 | 7,371,667 | 7,467,396 | 7,485,373 | 7,474,140 | |||||||||||||||
Diluted | 7,276,751 | 7,371,667 | 7,467,396 | 7,485,373 | 7,474,140 | |||||||||||||||
Ratios | ||||||||||||||||||||
Return on average assets | 0.18 | % | 0.08 | % | 0.17 | % | 0.14 | % | 0.15 | % | ||||||||||
Return on average equity | 2.17 | % | 0.90 | % | 2.02 | % | 1.57 | % | 1.60 | % | ||||||||||
Average equity to average assets | 8.34 | % | 8.52 | % | 8.39 | % | 8.83 | % | 9.15 | % | ||||||||||
Selected Year-end Balances | ||||||||||||||||||||
Assets | $ | 517,320 | $ | 545,007 | $ | 526,902 | $ | 535,426 | $ | 477,846 | ||||||||||
Loans held for investment | 307,348 | 329,183 | 366,675 | 387,769 | 353,729 | |||||||||||||||
Securities | 100,280 | 91,638 | 88,661 | 96,395 | 76,317 | |||||||||||||||
Deposits | 453,708 | 457,612 | 431,338 | 434,033 | 376,774 | |||||||||||||||
Borrowed funds | 16,672 | 31,363 | 46,024 | 54,543 | 53,583 | |||||||||||||||
Shareholders’ equity | 40,509 | 42,729 | 44,254 | 43,493 | 44,024 | |||||||||||||||
Selected Average Balances | ||||||||||||||||||||
Assets | $ | 527,693 | $ | 526,361 | $ | 529,970 | $ | 514,425 | $ | 471,729 | ||||||||||
Loans held for investment | 317,274 | 347,762 | 381,419 | 375,381 | 346,976 | |||||||||||||||
Securities | 116,333 | 102,686 | 90,701 | 86,780 | 78,049 | |||||||||||||||
Deposits | 455,146 | 440,274 | 430,998 | 406,304 | 369,957 | |||||||||||||||
Borrowed funds | 22,340 | 35,543 | 50,529 | 58,291 | 55,084 | |||||||||||||||
Shareholders’ equity | 43,994 | 44,868 | 44,462 | 45,425 | 43,182 |
84
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
A discussion and analysis of the Company’s operating results and financial condition are presented in the following narrative and financial tables. The comments are intended to supplement and should be reviewed in conjunction with the consolidated financial statements and notes thereto appearing on pages 36-84 of this Annual Report. References to changes in assets and liabilities represent end of period balances unless otherwise noted. Statements contained in this Annual Report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Amounts herein could vary because of market and other factors. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the Securities and Exchange Commission periodically. Such forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “might,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, 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.
Financial Condition at December 31, 2013 and December 31, 2012
The Company’s total assets decreased $27.7 million or 5.1% from $545.0 million at December 31, 2012 to $517.3 million at December 31, 2013. This decrease resulted primarily from a $21.9 million decrease in loans held for investment and a decrease in cash and cash equivalents of $9.3 million. These decreases were offset by an increase in investment securities available for sale of $9.3 million.
Cash and cash equivalents decreased $9.3 million during the year ended December 31, 2013. Cash and due from banks declined $930,000, while interest-earning deposits with banks decreased $8.4 million. Throughout 2013, the Company purchased $46.7 million in new available for sale securities, repaid $12.5 million in borrowings and experienced a $3.9 million decline in total deposits. All of these factors related to the decline in interest-earning deposits.
Investment securities increased $8.7 million or 9.5%, from $91.6 million at December 31, 2012 to $100.3 million at December 31, 2013. During the year, in an effort to improve our concentration risk in various sectors as well as to reduce our extension risk in a rising interest rate environment, management made the decision to sell $20.2 million of investment securities, including $19.3 million of US Treasuries and government agency bonds, $447,000 of mortgage-backed securities and $426,000 in state and political municipal bonds. The Company realized a net loss of $523,000 on these transactions. The Company is reinvesting the proceeds from these sales in lower duration securities as well as variable rate securities. These investments will provide protection in a rising rate environment and mitigate the downside risk embedded in the current portfolio. At December 31, 2013, the Company had net unrealized losses of $851,000.
85
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Loans held for investment decreased $21.9 million from $329.2 million at December 31, 2012 to $307.3 million at December 31, 2013. Throughout 2013, the Company experienced a downward trend in loans resulting from pay downs and the lack of new loan demand. These declines in affected all areas of the loan portfolio except the commercial real estate loan portfolio and real estate one to four family construction portfolio that experienced growth of $6.0 million and $338,000, respectively. Other real estate construction and consumer loans experienced the largest declines at 29.8% and 25.9%, respectively. Loans held for sale decreased 78.8% or $4.2 million compared to the prior year. The allowance for loan losses was $5.1 million at December 31, 2013, which represents 1.66% of the loan portfolio, a decrease from 2.07% at December 31, 2012. Net chargeoffs decreased from $1.8 million at December 31, 2012 to $1.7 million at December 31, 2013.
Other changes in our consolidated assets are related to premises and equipment, interest receivable, restricted stock, bank owned life insurance, other real estate owned, and other assets. Bank owned life insurance increased $122,000 while accrued interest declined $6,000. Premises and equipment declined $1.2 million. The decrease in premises and equipment was related to the sale of a piece of property that had been purchased for further use. The property was sold for $949,000, with the Company realizing a gain on the sale of $229,000. During 2013, other real estate owned declined $1.5 million, from $8.7 million at December 31, 2012 to $7.2 million at December 31, 2013. Throughout 2013, the Company sold twenty-nine pieces of property totaling $4.7 million and resulting in a gain on the sale of other real estate owned of $290,000. Also during 2013, the Company had additional write downs and changes in reserves of $904,000 resulting from new appraisals and evaluations. The majority, or $678,000, of the write-downs was attributed to one piece of property. These declines were offset by the addition of thirty-five pieces of property foreclosed on totaling $4.0 million. Restricted stock which is comprised of Federal Home Loan Bank stock and Federal Reserve Bank stock decreased $1.1 million because member institutions are required to increase or decrease their ownership as their utilization of FHLB borrowings change. The Company’s required ownership in Federal Reserve Bank stock decreased $336,000 in 2013, while the required ownership in Federal Home Loan Bank stock declined $716,000. Other assets increased $1.0 million primarily from changes in deferred taxes.
Customer deposits continued to be our principal funding source in 2013. At December 31, 2013, deposits from our customers totaled $453.7 million, a decrease of $3.9 million from $457.6 million at December 31, 2012. Demand noninterest bearing checking increased $4.1 million, while interest checking and money market accounts increased $17.9 million during 2013. These increases were offset by declines in savings deposits of $1.8 million, time deposits over $100,000 of $8.7 million and other time deposits of $15.3 million respectively during 2013. In the current low rate environment, customers are continuing to stay in short term deposit products and are continuing to shift away from time deposits.
During 2013 the Company’s net borrowings decreased by $14.7 million. Borrowings consist of both short-term and long-term borrowed funds. The Company utilizes both short-term and long-term advances from the Federal Home Loan Bank. The Company repaid $12.5 million of Federal Home Loan Bank advances that matured during 2013. At December 31, 2013, $1.5 million of the total borrowings of $16.7 million were attributed to Federal Home Loan Bank advances. Other components of total borrowings include $11.1 million in junior subordinated debt and $4.0 million in master notes and other secured borrowings.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Other liabilities decreased from $11.4 million at December 31, 2012 to $4.4 million at December 31, 2013, a decrease of $7.0 million. At December 31, 2012, the Company had a combined total of $7.9 million being held in escrow related to the Company’s subsidiary banks’ preferred stock offering in the last half of 2012. This preferred stock was issued in the first quarter of 2013 and the proceeds transferred to shareholders equity.
The Company has an Employee Stock Ownership Plan (ESOP) in place. Late in 2011, the Internal Revenue Service issued IRS notice 2011-19 that drew a clear line between what stock exchanges are considered public and which are not. The Company historically trades its stock on the Bulletin Board, which is a publically traded exchange, however, the IRS no longer recognizes the Bulletin Board as a public exchange. The result of this ruling is that companies that have ESOP plans in place are required to set aside funds to handle allocated shares put back to the company. The plan that the Company has, does include a put option that requires the Company to repurchase allocated shares of participants at the participants’ option. The Company reclassified capital from additional paid-in capital to set aside the liability to cover all allocated shares that the Company may be requested to buy back. During 2013, the Company reclassified an additional $132,000 to this liability from additional paid-in capital. See note 17 to the Company’s audited financial statements for additional information on this liability.
At December 31, 2013, total shareholders’ equity was $40.5 million, a decrease of $2.2 million from December 31, 2012. Net income for the period was $954,000. Unrealized gains and losses on investment securities net of tax decreased $2.0 million. Net income was offset by a net increase in unearned ESOP compensation of $114,000 and the aforementioned reallocation of $132,000 to cover the ESOP repurchase obligation. The Company also recorded $325,000 in dividends on its series A and B preferred stock for the year ended December 31, 2013. The Company also has $478,000 in dividends attributed to noncontrolling interest. The Company repurchased at par, $10.5 million of its series A and B preferred stock that was issued to the United States Treasury. The Company’s subsidiary bank issued $10.7 million of series B preferred stock that is presented less issuance costs, as noncontrolling interest. The Company, after receiving approval from the United States Department of the Treasury and the Federal Reserve, repurchased common stock totaling $169,000. At December 31, 2013, the Company and its subsidiary bank exceeded all applicable regulatory capital requirements.
Results of Operations for the Years Ended December 31, 2013 and 2012
Earnings
Uwharrie Capital Corp reported net income of $954,000 for the twelve months ended December 31, 2013, as compared to $404,000 for the twelve months ended December 31, 2012, an increase of $550,000. Net income available to common shareholders was $151,000 or $0.02 per common share at December 31, 2013, compared to net loss available to common shareholders of $(241,000) or $(0.03) per common share at December 31, 2012. Net income available to common shareholders is net income less any dividends and discount accretions on preferred stock related to the $10 million of capital received from the United States Department of the Treasury under the Capital Purchase Program in December 2008 and dividends on the aforementioned noncontrolling interest.
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UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Net Interest Income
As with most financial institutions, the primary component of earnings for our subsidiary bank is net interest income. Net interest income is the difference between interest income, principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and wholesale borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as levels of noninterest bearing liabilities and capital.
Net interest income decreased $1.5 million to $16.7 million for 2013 compared to the $18.2 million earned in 2012. During the year ended December 31, 2013, our decline in the volume of interest-earning assets outpaced the decline in interest-bearing liabilities by $928,000. The average yield on our interest-earning assets decreased 58 basis points to 4.09%, while the average rate we paid for our interest-bearing liabilities decreased 24 basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve Open Market Committee adjusts interest rates while interest-bearing time deposits adjust at the time of maturity. These decreases resulted in a decrease of 35 basis points in our interest rate spread, from 3.76% in 2012 to 3.41% in 2013. Our net interest margin for 2013 was 3.52%, compared to 3.90% in 2012. A portion of the Company’s loan portfolio has interest rate floors and caps in place on the loans. The interest rate floor feature has allowed the Company to maintain a good interest margin despite a decline in rates; however, the interest rate cap could hurt the margin in a rising rate environment. Financial Table 1 on page 99 presents a detailed analysis of the components of the Company’s net interest income, while Financial Table 2 on page 100 summarizes the effects on net interest income from changes in interest rates and in the dollar volume of the components of interest-earning assets and interest bearing liabilities.
Provision for Loan Losses
The provision for loan losses was $28,000 and $1.8 million for the twelve months ended December 31, 2013 and 2012, respectively. There were net loan charge-offs of $1.7 million for the twelve months ended December 31, 2013 as compared with net loan charge-offs of $1.8 million during the same period of 2012. Refer to the Asset Quality discussion beginning on page 91 for further information.
Noninterest Income
The Company generates most of its revenue from net interest income; however, diversification of our earnings base is of major importance to our long term success. Noninterest income decreased 28.9%, from $10.7 million in 2012, to $7.6 million in 2013, a decrease of $3.1 million. While the Company did benefit from another strong year of income from mortgage loan sales, income from mortgage loan sales decreased $1.6 million to $2.1 million for 2013 compared to $3.7 million during 2012. Service charges on deposit accounts produced earnings of $1.6 million, a decrease of 5.9%. The primary contributing factor is a decrease in NSF (non-sufficient funds) fees due in large part to changes in regulatory governance. Other service fees and commissions experienced a 6.9% increase during 2013. This is related to an increase of
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UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
$90,000 in fees from assets under management. The Company also realized losses on the sale of investments in the amount of $523,000 for the twelve months ending December 31, 2013, as compared to realized gains of $1.3 million for the same period in 2012, a $1.8 million reduction in net income.
Noninterest Expense
Noninterest expense for the year ended December 31, 2013 was $23.0 million compared to $26.2 million for the same period of 2012, a decrease of $3.2 million. Salaries and employee benefits, the largest component of noninterest expense, decreased $468,000, from $12.9 million for the period ending December 31, 2012 to $12.4 million for the same period in 2013. This decrease is attributable to a reduction in staff related to aforementioned consolidation of the Company’s subsidiary banks during 2013. Net occupancy and equipment expense had a combined decrease of $56,000. Professional fees and services increased $92,000 for the twelve month period. This increase in other professional fees and services was directly related to reimbursement of prior period legal fees totaling $360,000 that reduced professional fees and services during 2012. Of that amount, $270,000 was related to a reimbursement for legal services under the Company’s employment practices liability insurance policy and $90,000 associated with a previously closed government guaranteed loan. Marketing and donations that included expenditures associated with advertising, business development and public relations, donations to local charities, sponsorships of local community events and economic development increased $37,000 from the prior year, while premiums paid for FDIC insurance also decreased $175,000 for the same period. Data processing costs declined $105,000, a decrease related to the aforementioned bank consolidation. Foreclosed real estate expense, another major component of noninterest expense, decreased $1.4 million, from $3.0 million in 2012 to $1.6 million during 2013. The primary factor relating to this decrease was a reduction in write downs on properties held in other real estate owned. These write downs were attributed to updated appraisals and the lowering of list prices during the year totaling $1.0 million compared to $2.4 million for the same period in 2012. During 2012, the Company had a goodwill impairment charge that resulted in an expense of $989,000. Other noninterest expense experienced a decrease totaling $281,000 for the comparable twelve month period. The table on page 103 reflects the additional breakdown of other noninterest expense.
Income Tax Expense
The Company had an income tax expense of $342,000 for 2013 at an effective tax rate of 26.39% compared to income tax expense of $365,000 in 2012 with an effective tax rate of 47.46%. The higher effective rate for 2012 is related to the tax effect of the goodwill impairment.
Results of Operations for the Years Ended December 31, 2012 and 2011
Earnings
Uwharrie Capital Corp reported net income of $404,000 for the twelve months ended December 31, 2012, as compared to $900,000 for the twelve months ended December 31, 2011, a decrease of $496,000. Net loss available to common shareholders was $(241,000) or $(0.03) per common share at December 31, 2012, compared to net income available to common shareholders of $255,000 or $0.03 per common share at December 31, 2011. Net income available to common shareholders is net income less any dividends and discount accretions on preferred stock related to the $10 million of capital received from the United States Department of the Treasury under the Capital Purchase Program in December 2008.
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UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Net Interest Income
As with most financial institutions, the primary component of earnings for our banks in 2012 and 2011 was net interest income. Net interest income is the difference between interest income, principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and wholesale borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as levels of noninterest bearing liabilities and capital.
Net interest income decreased $912,000 to $18.2 million for 2012 compared to the $19.1 million earned in 2011. During the year ended December 31, 2012, our decline in the volume of interest-earning assets outpaced the decline in interest-bearing liabilities by $1.0 million. The average yield on our interest-earning assets decreased 32 basis points to 4.67%, while the average rate we paid for our interest-bearing liabilities decreased 21 basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve Open Market Committee adjusts interest rates while interest-bearing time deposits adjust at the time of maturity. These decreases resulted in a decrease of 11 basis points in our interest rate spread, from 3.87% in 2011 to 3.76% in 2012. Our net interest margin for 2012 was 3.90%, compared to 4.01% in 2011. A portion of the Company’s loan portfolio has interest rate floors and caps in place on the loans. The interest rate floor feature has allowed the Company to maintain a good interest margin despite a decline in rates; however, the interest rate cap could hurt the margin in a rising rate environment. Financial Table 1 on page 99 presents a detailed analysis of the components of the Company’s net interest income, while Financial Table 2 on page 100 summarizes the effects on net interest income from changes in interest rates and in the dollar volume of the components of interest-earning assets and interest bearing liabilities.
Provision for Loan Losses
The provision for loan losses was $1.8 million and $3.5 million for the twelve months ended December 31, 2012 and 2011, respectively. There were net loan charge-offs of $1.8 million for the twelve months ended December 31, 2012 as compared with net loan charge-offs of $5.7 million during the same period of 2011. Refer to the Asset Quality discussion beginning on page 91 for further information.
Noninterest Income
The Company generates most of its revenue from net interest income; however, diversification of our earnings base is of major importance to our long term success. Noninterest income increased 29.0%, from $8.3 million in 2011, to $10.7 million in 2012, an increase of $2.4 million. The Company benefited from another strong year of income from mortgage loan sales, as income from mortgage loan sales increased $1.9 million to $3.7 million for 2012 compared to $1.8 million during 2011. Mortgage loan interest rates continued to be attractive for buyers and
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UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
rates declined at several times during 2012, allowing customers to be able to refinance again at even lower rates. Service charges on deposit accounts produced earnings of $1.7 million, a decrease of 6.2%. The primary contributing factor is a decrease in NSF fees due in large part to changes in regulatory governance. Other service fees and commissions experienced a 6.8% decrease during 2012. This is related to acceleration in the write-down of servicing assets due to the refinancing of mortgage loans and a net impairment charge on the mortgage servicing asset of $77,000. The Company sold the government guaranteed portion of a loan totaling $4.9 million during the year and realized a gain on the sale of $276,000. The Company also realized gains on the sale of investments in the amount of $1.3 million for the twelve months ending December 31, 2012, as compared to realized gains of $933,000 for the same period in 2011.
Noninterest Expense
Noninterest expense for the year ended December 31, 2012 was $26.2 million compared to $22.8 million for the same period of 2011, an increase of $3.4 million. Salaries and employee benefits, the largest component of noninterest expense, increased $770,000, from $12.1 million for the period ending December 31, 2011 to $12.9 million for the same period in 2012. This increase is attributable to normal salary increases, additions to staff and higher benefit expenses. Net occupancy and equipment expense had a combined decrease of $35,000. Professional fees and services decreased $900,000 for the twelve month period. This decrease in other professional fees and services was directly related to reimbursement of prior period legal fees totaling $360,000. Of this amount, $270,000 was related to a reimbursement for legal services under the Company’s employment practices liability insurance policy and $90,000 associated with a previously closed government guaranteed loan. Marketing and donations that included expenditures associated with advertising, business development and public relations, donations to local charities, sponsorships of local community events and economic development decreased $78,000 from the prior year, while premiums paid for FDIC insurance also decreased $57,000 for the same period. These decreases were offset by increases in data processing costs, electronic banking expense and foreclosed real estate expense. Foreclosed real estate expense increased $2.5 million during 2012. The major factor related to the increase in foreclosed real estate expense was write downs on properties held in other real estate owned. These write downs were attributed to updated appraisals and the lowering of list prices during the year totaling $2.4 million compared to $215,000 for the same period in 2011. Growth in electronic banking operations, including preparation for new services, created increased expense of $76,000. The previously discussed goodwill impairment charge resulted in an expense charge of $987,000. Other noninterest expense experienced an increase totaling $159,000 for the comparable twelve month period. The table on page103 reflects the additional breakdown of other noninterest expense.
Income Tax Expense
The Company had an income tax expense of $365,000 for 2012 at an effective tax rate of 47.46% compared to income tax expense of $196,000 in 2011 with an effective tax rate of 17.88%. The increase in the effective rate is related to the tax effect of the goodwill impairment.
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 is reduced by recovery of provisions
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UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
and loans charged off. Management continuously evaluates the adequacy of the allowance for loan losses. In evaluating the adequacy of the allowance, management considers the following: the growth, composition and industry diversification of the portfolio; historical loan loss experience; current delinquency levels; adverse situations that may affect a borrower’s ability to repay; estimated value of any underlying collateral; prevailing economic conditions and other relevant factors. The Company’s credit administration function, through a review process, periodically validates the accuracy of the initial risk grade assessment. In addition, as a given loan’s credit quality improves or deteriorates, the credit administration department has the responsibility to change the borrower’s risk grade accordingly. For loans determined to be impaired, the allowance is based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the estimated fair value of the underlying collateral less the selling costs. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans, which may be susceptible to significant change. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require additions for estimated losses based upon judgments different from those of management.
Management uses a risk-grading program 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 loan list that is designed to help management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history and the current delinquent status. Because of this process, certain loans are deemed as impaired and evaluated as an impaired loan.
The allowance for loan losses represents management’s best estimate of an appropriate amount to provide for inherent risk in the loan portfolio in the normal course of business. While management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ from the assumptions used in making the determinations. Furthermore, while management believes it has established the allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that banking regulators, in reviewing the Company’s portfolio, will not require an adjustment to the allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary, should the quality of any loans deteriorate because of the factors discussed herein. Any material increase in the allowance for loan losses may adversely affect the Company’s financial condition and results of operations.
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UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
The provision for loan losses was $28,000 for the year ended December 31, 2013 as compared to $1.8 million for the same period in 2012. At the end of 2013 the levels of our impaired loans, which includes all loans in nonaccrual status and other loans deemed by management to be impaired, were $17.6 million compared to $26.1 million at December 31, 2012, a decrease of $8.5 million. Total nonaccrual loans, which are a component of impaired loans, decreased from $9.5 million at December 31, 2012 to $4.7 million at December 31, 2013. During 2013, the Company transferred $4.0 million in impaired loans to other real estate owned. This coupled with relationship upgrades and these relationships no longer being deemed impaired by management were the primary factors contributing to the decrease in impaired loans. The Company had net loan charge-offs for 2013 of $1.7 million compared to net loan charge-offs of $1.8 million for the same period in 2012.
The allowance expressed as a percentage of gross loans held for investment decreased 54 basis points from 2.07% at December 31, 2012 to 1.66% at December 31, 2013. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 1.24% at December 31, 2012 and 0.93% at December 31, 2013, while the individually evaluated allowance as a percentage of individually evaluated loans increased from 11.62% to 13.60%. The portion of the Company’s allowance for loan loss model related to general reserves captures the mean loss of individual loans and the rare event of severe loss that can occur within the loan portfolio. Specifically, the Company calculates probable losses on loans by computing a probability of loss and expected loss scenario by FDIC call report codes. Together, these expected components as well as a level of more extreme unexpected losses form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.
During the fourth quarter of 2012, the Company updated its allowance for loan loss model to more accurately assess the probability of losses inherent in the loan portfolio. The probabilities of default that the Company acquires from a third party vendor are associated with a two year horizon, while the allowance for loan loss is deemed to have a one year horizon. Therefore, the Company altered the model to account for this horizon; converting the two year probability of default into a one year probability of default for each obligor. At this time, the Company also updated the data inputs into the model; specifically the loss given default and the probability of defaults obtained from the vendor. The net result of these alterations had minimal effect on the loan loss provision. The Company updates the beacon scores that are one of the components used within the allowance model semi-annually, during the first and third quarters. For the first time in several updates, beacon scores experienced significant improvement during 2013.
During second and third quarters of 2013, the Company updated its allowance for loan loss model to more accurately assess the probability of losses inherent in the loan portfolio. Two alterations were made: the previous “VaR” calculation was replaced by an improved “VaR” that more adequately reflected the risk in the loan portfolio, and the least squares regression was replaced by a simple average.
Nonperforming loans, which consist of nonaccrual loans and loans past due 90 days and still accruing, to total loans decreased from 2.88% at December 31, 2012, to 1.66% at December 31, 2013.
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UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Other real estate owned decreased $1.5 million during 2013. The Company sold twenty-nine pieces of foreclosed property totaling $4.7 million realizing a gain of $290,000. The Company also had write downs and changes in reserves totaling $904,000 on the remaining existing property. The Company did have one write down totaling $678,000. These decreases in other real estate owned were offset by thirty-five new pieces of property being foreclosed on totaling $4.0 million. Management believes the current level of the allowance for loan losses is appropriate in light of the risk inherent in the loan portfolio.
Restructured loans at December 31, 2013 totaled $6.4 million compared to $6.8 million at December 31, 2012.
The following nonperforming loan table shows the comparison for the past five years:
Nonperforming Assets
(dollars in thousands)
At December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Nonperforming Assets: | ||||||||||||||||||||
Nonaccrual loans past due 90 days or more | $ | — | $ | — | $ | — | $ | 407 | $ | 282 | ||||||||||
Nonaccrual loans | 4,717 | 9,480 | 7,862 | 19,730 | 5,630 | |||||||||||||||
Other real estate owned | 7,170 | 8,713 | 10,258 | 2,022 | 3,419 | |||||||||||||||
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Total nonperforming assets | $ | 11,887 | $ | 18,193 | $ | 18,120 | $ | 22,159 | $ | 9,331 | ||||||||||
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Allowance for loan losses | $ | 5,095 | $ | 6,801 | $ | 6,815 | $ | 9,067 | $ | 5,276 | ||||||||||
Nonperforming loans to total loans | 1.53 | % | 2.88 | % | 2.14 | % | 5.19 | % | 1.67 | % | ||||||||||
Allowance for loan losses to total loans | 1.66 | % | 2.07 | % | 1.86 | % | 2.34 | % | 1.49 | % | ||||||||||
Nonperforming assets to total assets | 2.30 | % | 3.34 | % | 3.44 | % | 4.14 | % | 1.95 | % | ||||||||||
Allowance for loan losses to nonperforming loans | 108.02 | % | 71.74 | % | 86.88 | % | 45.03 | % | 89.24 | % |
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UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Capital Resources
The Company continues to maintain capital ratios that support its asset growth. The capital position is maintained through the retention of earnings and controlled growth. Regulatory agencies divide capital into Tier 1 (consisting of shareholders’ equity less ineligible intangible assets and accumulated other comprehensive income and allowable portions of trust preferred securities) and Tier 2 (consisting of the allowable portion of the reserve for loan losses and certain long-term debt) and measure capital adequacy by applying both capital levels to a banking company’s risk-adjusted assets and off-balance sheet items. In addition to these capital ratios, regulatory agencies have established a Tier 1 leverage ratio that measures Tier 1 capital to average assets less ineligible intangible assets.
Regulatory guidelines require a minimum of total capital to risk-adjusted assets ratio of 8% with one-half consisting of tangible common shareholders’ equity and a minimum Tier 1 leverage ratio of 4%. Banks, which meet or exceed a Tier 1 ratio of 6%, a total capital ratio of 10% and a Tier 1 leverage ratio of 5% are considered well capitalized by regulatory standards. At December 31, 2013, the Company’s subsidiary bank was well capitalized.
During 2012, each of the Company’s subsidiary banks began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series B to be issued by each subsidiary bank. The preferred stock qualifies as Tier 1 capital at each bank and pays dividends at a rate of 5.30%. The offering raised $7.9 million less issuance costs of $113,000. These funds were held in an escrow account at December 31, 2012 and the new preferred stock was issued in January 2013. Effective September 1, 2013, the Fixed Rate Noncumulative Perpetual Preferred Stock, Series B was rolled into one issue under Uwharrie Bank in connection with the consolidation and name change.
During 2013, the Company’s subsidiary bank, Uwharrie Bank, began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series C to be issued by the subsidiary bank. The preferred stock qualifies as Tier 1 capital at the bank and pays dividends at an annual rate of 5.30%. The preferred stock has no voting rights. The campaign raised $2.8 million less issuance costs of $24,000. Also during 2013, the Company redeemed at par $10.0 million of Fixed Rate Cumulative Perpetual Preferred Stock, Series A and $500,000 of Fixed Rate Cumulative Perpetual Preferred Stock, Series B.
The Company expects to continue to exceed required minimum capital ratios without altering current operations or strategy. Note 15 to the Consolidated Financial Statements presents additional information regarding the Company’s and its subsidiary banks’ capital ratios.
Dividends
There was not a dividend declared in 2013, 2012 or 2011.
Liquidity
Liquidity, the ability to raise cash when needed without adversely affecting profits, is managed primarily by the selection of asset mix and the maturity mix of liabilities. Maturities and the marketability of securities and other funding sources provide a source of liquidity to meet deposit fluctuations. Maturities in the securities portfolio, presented in Financial Table 4 on page 102, are supported by cash flows from mortgage-backed securities that have longer-term contractual maturities.
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UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Other funding sources at year-end 2013 included $15.8 million in federal funds lines of credit from correspondent banks and approximately $49.4 million of remaining credit availability from the Federal Home Loan Bank. The Company may also borrow from the Federal Reserve Bank discount window with credit availability of $36.8 million. Growth in deposits is typically the primary source of funding for loans, supported by long-term credit available from the Federal Home Loan Bank.
At December 31, 2013, borrowings from federal funds lines and the issuance of commercial paper amounted to $4.0 million, while other short-term borrowings totaled $1.5 million including one Federal Home Loan Bank advance maturing in 2014. Long-term debt at that date consisted of junior subordinated debt of $11.1 million and a mortgage payable of $36,000.
Management believes that the Company’s current sources of funds provide adequate liquidity for its current cash flow needs.
Contractual Obligations
The following table reflects the contractual obligations of the Company outstanding as of December 31, 2013.
Payments Due by Period (in thousands) | ||||||||||||||||||||
Total | On Demand or less than 1 year | 1-3 Years | 4-5 Years | After 5 Years | ||||||||||||||||
Contractual Obligations | ||||||||||||||||||||
Short-term debt | $ | 5,509 | $ | 5,509 | $ | — | $ | — | $ | — | ||||||||||
Long-term debt | 11,163 | — | 24 | 11,139 | — | |||||||||||||||
Operating leases | 228 | 62 | 124 | 42 | — | |||||||||||||||
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Total contractual cash obligations, excluding deposits | 16,900 | 5,571 | 148 | 11,181 | — | |||||||||||||||
Deposits | 453,708 | 405,080 | 42,013 | 6,615 | — | |||||||||||||||
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Total contractual cash obligations, including deposits | $ | 470,608 | $ | 410,651 | $ | 42,161 | $ | 17,796 | $ | — | ||||||||||
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|
|
|
Critical Accounting Policy
A critical accounting policy is one that is both very important to the portrayal of the Company’s financial condition and results, and requires management’s most difficult, subjective and/or complex judgments. What makes these judgments difficult, subjective and/or complex is the need to make estimates about the effects of matters that are inherently uncertain. Refer to Note 1 in the consolidated financial statements for more information about these and other accounting policies utilized by the Company.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
96
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
The allowance for loan losses is evaluated both individually and collectively by loan class on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experiences. The nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay; estimated value of any underlying collateral and prevailing economic conditions are the key factors. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. In addition, regulatory examiners may require the Company to recognize adjustments to the allowance for loan losses based on their judgment about information available to them at the time of their assessment.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Income Taxes
The calculation of the Company’s income tax expense is complex and requires the use of many estimates and judgments in its determination. Management’s determination of the realization of the net deferred tax asset is based upon management’s evaluation of positive and negative evidence related to cumulative pretax earnings over a three year period and projected earnings trends. This evidence is reviewed to determine if it is more likely than not that the net deferred tax asset will be realized.
Valuation of Foreclosed Assets
Assets acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at fair value less estimated cost to sell at the date of foreclosure, establishing a new cost basis. Principal and interest losses existing at the time of acquisition of such assets are charged against the allowance for loan losses and interest income, respectively. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell.
Off-Balance Sheet Arrangements
The Company has various financial instruments (outstanding commitments) with off-balance sheet risk that are issued in the normal course of business to meet the financing needs of its customers. See Note 13 to the consolidated financial statements for more information regarding these commitments and contingent liabilities.
97
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Interest Rate Sensitivity
Net Interest Income (Margin) is the single largest component of revenue for the Company. Net Interest Margin is the difference between the yield on earning assets and interest paid on costing liabilities. The margin can vary over time as interest rates change. The variance fluctuates based on both the timing (repricing) and magnitude of maturing assets and liabilities.
To identify interest rate sensitivity, a common measure is a gap analysis, which reflects the difference or gap between rate sensitive assets and liabilities over various periods. Gap analysis at December 31, 2013 is reflected in Financial Table 3 on page 101. While management reviews this information, it has implemented the use of an income simulation model, which calculates expected future Net Interest Income (Margin) based on projected interest-earning assets, interest-bearing liabilities and forecasted interest rates along with multiple other forecasted assumptions. Management believes this provides a more relevant view of interest rate risk sensitivity than the traditional gap analysis because the gap analysis ignores optionality embedded in the balance sheet. The income simulation model allows a comparison of flat, rising and falling rate scenarios to determine the interest rate sensitivity of earnings in varying interest rate environments.
The Company models immediate rising and declining rate shocks of up to 4% (in 1% intervals) on its subsidiary bank, using a no growth and most likely balance sheet growth, for a two year horizon, as preferred by regulators. The most recent consolidated 2% rate shock projections using the most likely balance sheet growth for a one-year horizon, indicates a negative impact of (7.49%) on Net Interest Income (Margin) in a rates down scenario and a positive impact of 15.79% on Net Interest Income (Margin) in a rates up scenario. Based on the most recent twelve month forecast, the subsidiary bank is asset sensitive and may experience some negative impact to earnings should interest rates decline. While many interest bearing assets would reprice in a declining interest rate environment; many liabilities are already approaching 0% interest rates. The subsidiary bank has the potential to benefit from a rising interest rate environment, but current market deposit pricing and embedded options in the balance sheet may limit the upside potential.
The principal goals for asset liability management for the Company are to maintain adequate levels and sources of liquidity and to manage interest rate risk. Interest rate risk management attempts to balance the effects of interest rate changes on both interest-sensitive assets and interest-sensitive liabilities to protect Net Interest Income (Margin) from wide fluctuations as a result from changes in market interest rates. To that end, management has recommended and the board has approved policy limits that minimize the downside risk from interest rate shifts. The aforementioned ratios are within those stated limits of -18% for the respective modeled scenarios at the subsidiary bank and combined. Managing interest rate risk is an important factor to the long-term viability of the Company since Net Interest Income (Margin) is such a large component of earnings. The Company’s Asset Liability Management Committee (ALCO) monitors market changes in interest rates and assists with the pricing of loans and deposit products while considering the funding source needs, asset growth projections, and necessary operating liquidity.
98
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Financial Table 1
Average Balances and Net Interest Income Analysis
(dollars in thousands)
2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||
Average Balance | Interest Income/ Expense | Average Yield/ Rate (1) | Average Balance | Interest Income/ Expense | Average Yield/ Rate (1) | Average Balance | Interest Income Expense | Average Yield Rate (1) | ||||||||||||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||||||||||||||
Taxable securities | $ | 108,767 | 1,464 | 1.35 | % | $ | 93,170 | 1,686 | 1.81 | % | $ | 80,089 | 1,777 | 2.22 | % | |||||||||||||||||||||
Non-taxable securities (1) | 7,566 | 251 | 5.40 | % | 9,516 | 324 | 5.54 | % | 10,612 | 371 | 5.70 | % | ||||||||||||||||||||||||
Short-term investments | 51,612 | 177 | 0.34 | % | 26,735 | 137 | 0.51 | % | 13,282 | 65 | 0.49 | % | ||||||||||||||||||||||||
Taxable loans (2) | 303,698 | 17,134 | 5.64 | % | 336,189 | 19,286 | 5.74 | % | 372,415 | 21,222 | 5.70 | % | ||||||||||||||||||||||||
Non-taxable loans (1) | 15,451 | 439 | 4.62 | % | 13,021 | 438 | 5.47 | % | 10,152 | 387 | 6.20 | % | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total interest-earning assets | 487,094 | 19,465 | 4.09 | % | 478,631 | 21,871 | 4.67 | % | 486,550 | 23,822 | 4.99 | % | ||||||||||||||||||||||||
|
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|
|
|
|
|
|
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|
|
|
|
|
|
| |||||||||||||||||||
Non-earning assets | ||||||||||||||||||||||||||||||||||||
Cash and due from banks | 2,172 | 6,704 | 6,470 | |||||||||||||||||||||||||||||||||
Premises and equipment, net | 14,127 | 15,024 | 14,814 | |||||||||||||||||||||||||||||||||
Interest receivable and other | 24,300 | 26,002 | 22,136 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total non-earning assets | 40,599 | 47,730 | 43,420 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total assets | $ | 527,693 | $ | 526,361 | $ | 529,970 | ||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||
Savings deposits | $ | 45,706 | $ | 171 | 0.37 | % | $ | 41,822 | $ | 197 | 0.47 | % | $ | 39,432 | $ | 286 | 0.73 | % | ||||||||||||||||||
Interest checking & MMDA | 220,663 | 439 | 0.20 | % | 192,123 | 542 | 0.28 | % | 178,947 | 785 | 0.44 | % | ||||||||||||||||||||||||
Time deposits | 119,149 | 1,300 | 1.09 | % | 138,871 | 1,810 | 1.30 | % | 154,887 | 2,244 | 1.45 | % | ||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total deposits | 385,518 | 1,910 | 0.50 | % | 372,816 | 2,549 | 0.68 | % | 373,266 | 3,315 | 0.89 | % | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Short-term borrowed funds | 10,657 | 160 | 1.50 | % | 18,591 | 353 | 1.90 | % | 24,133 | 354 | 1.47 | % | ||||||||||||||||||||||||
Long-term debt | 11,683 | 664 | 5.68 | % | 16,952 | 796 | 4.70 | % | 26,396 | 1,068 | 4.05 | % | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total interest-bearing liabilities | 407,858 | 2,734 | 0.67 | % | 408,359 | 3,698 | 0.91 | % | 423,795 | 4,737 | 1.12 | % | ||||||||||||||||||||||||
|
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|
|
|
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| |||||||||||||||||||
Noninterest liabilities | ||||||||||||||||||||||||||||||||||||
Transaction deposits | 69,628 | 67,458 | 57,732 | |||||||||||||||||||||||||||||||||
Interest payable and other | 6,213 | 4,331 | 3,981 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total liabilities | 483,699 | 480,148 | 485,508 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Shareholders’ equity | 43,994 | 46,213 | 44,462 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total liabilities and shareholders equity | $ | 527,693 | $ | 526,361 | $ | 529,970 | ||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Interest rate spread | 3.41 | % | 3.76 | % | 3.87 | % | ||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Net interest income and net interest margin | $ | 16,731 | 3.52 | % | $ | 18,173 | 3.90 | % | $ | 19,085 | 4.01 | % | ||||||||||||||||||||||||
|
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|
|
1) | Yields related to securities and loans exempt from federal and/or state income taxes are stated on a fully tax-equivalent basis, assuming a 34.00% tax rate. |
2) | Nonaccrual loans are included in loans, net of unearned income. |
99
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Financial Table 2
Volume and Rate Variance Analysis
(dollars in thousands)
2013 Versus 2012 | 2012 Versus 2011 | |||||||||||||||||||||||
Volume | Rate | Net Change | Volume | Rate | Net Change | |||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||
Taxable securities | $ | 246 | $ | (468 | ) | $ | (222 | ) | $ | 263 | $ | (354 | ) | $ | (91 | ) | ||||||||
Non-taxable securities | (66 | ) | (7 | ) | (73 | ) | (38 | ) | (9 | ) | (47 | ) | ||||||||||||
Short-term investments | 106 | (66 | ) | 40 | 67 | 5 | 72 | |||||||||||||||||
Taxable loans | (1,848 | ) | (304 | ) | (2,152 | ) | (2,071 | ) | 135 | (1,936 | ) | |||||||||||||
Non-taxable loans | 75 | (74 | ) | 1 | 103 | (52 | ) | 51 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total interest-earning assets | (1,487 | ) | (919 | ) | (2,406 | ) | (1,676 | ) | (275 | ) | (1,951 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Savings deposits | 16 | (42 | ) | (26 | ) | 14 | (103 | ) | (89 | ) | ||||||||||||||
Transaction and MMDA deposits | 69 | (172 | ) | (103 | ) | 47 | (290 | ) | (243 | ) | ||||||||||||||
Other time deposits | (236 | ) | (274 | ) | (510 | ) | (220 | ) | (214 | ) | (434 | ) | ||||||||||||
Short-term borrowed funds | (135 | ) | (58 | ) | (193 | ) | (93 | ) | 92 | (1 | ) | |||||||||||||
Long-term debt | (273 | ) | 141 | (132 | ) | (413 | ) | 141 | (272 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total interest-bearing liabilities | (559 | ) | (405 | ) | (964 | ) | (187 | ) | (1,027 | ) | (1,214 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net interest income | $ | (928 | ) | $ | (514 | ) | $ | (1,442 | ) | $ | (1,011 | ) | $ | 99 | $ | (912 | ) | |||||||
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|
|
|
|
|
|
|
|
|
|
|
The above table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in volume multiplied by the prior period’s rate), (ii) changes attributable to rate (changes in rate multiplied by the prior period’s volume), and (iii) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) has been allocated equally to the change attributable to volume and the change attributable to rate.
100
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Financial Table 3
Interest Rate Sensitivity Analysis
(dollars in thousands)
1-90 Day Position | 3-6 Month Position | 6-12 Month Position | 1-5 Year Position | > 5 Year Position | Total Position | |||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||
Interest-earning deposits with banks | $ | 63,004 | $ | — | $ | — | $ | 1,443 | $ | — | $ | 64,447 | ||||||||||||
Investment securities | 1,230 | 2,161 | 6,470 | 54,074 | 36,345 | 100,280 | ||||||||||||||||||
FHLB and other stock | — | — | — | — | 1,184 | 1,184 | ||||||||||||||||||
Loans held for sale | 1,139 | — | — | — | — | 1,139 | ||||||||||||||||||
Loans held for investment | 95,379 | 21,661 | 40,421 | 113,176 | 36,711 | 307,348 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total interest-earning assets | 160,752 | 23,822 | 46,891 | 168,693 | 74,240 | 474,398 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Deposits | 18,942 | 46,587 | 36,284 | 135,250 | 145,152 | 379,215 | ||||||||||||||||||
Short-term borrowed funds | 4,009 | 1,500 | — | — | — | 5,509 | ||||||||||||||||||
Long-term debt | — | — | — | 11,163 | — | 11,163 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total interest-bearing liabilities | 22,951 | 45,087 | 36,284 | 146,413 | 145,152 | 395,887 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Interest sensitivity GAP per period | $ | 137,801 | $ | (21,265 | ) | $ | 10,607 | $ | 22,280 | $ | (70,912 | ) | $ | 78,511 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Cumulative interest sensitivity GAP | $ | 137,801 | $ | 116,536 | $ | 127,143 | $ | 149,423 | $ | 78,511 | $ | 78,511 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ratios | ||||||||||||||||||||||||
Cumulative gap as a percentage of total interest-earning assets | 29.05 | % | 24.57 | % | 26.80 | % | 31.50 | % | 16.55 | % | 16.55 | % | ||||||||||||
Cumulative interest-earning assets as a percentage of interest-bearing liabilities | 700.41 | % | 271.28 | % | 221.88 | % | 159.59 | % | 119.83 | % | 119.83 | % |
101
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Financial Table 4
Investment Securities Portfolio Analysis
(dollars in thousands)
December 31, 2013 | ||||||||||||
Amortized Cost | Estimated Fair Value | Book Yield(1) | ||||||||||
Securities available for sale | ||||||||||||
U. S. Treasury | ||||||||||||
Due after one but within five years | 16,062 | 16,564 | 1.91 | % | ||||||||
Due after five but within ten years | 4,930 | 4,722 | 1.37 | % | ||||||||
|
|
|
|
|
| |||||||
20,992 | 21,286 | 1.79 | % | |||||||||
|
|
|
|
|
| |||||||
U.S. Government agencies | ||||||||||||
Due after one but within five years | 21,059 | 20,965 | 1.46 | % | ||||||||
34,931 | 34,300 | 1.45 | % | |||||||||
|
|
|
|
|
| |||||||
Mortgage-backed securities | ||||||||||||
Due after one but within five years | 2,557 | 2,436 | 1.77 | % | ||||||||
Due after five but within ten year | 4,706 | 4,777 | 2.08 | % | ||||||||
Due after ten years | 30,608 | 29,793 | 2.01 | % | ||||||||
|
|
|
|
|
| |||||||
37,871 | 37,006 | 2.00 | % | |||||||||
|
|
|
|
|
| |||||||
State and political | ||||||||||||
Due within one year | 481 | 485 | 4.97 | % | ||||||||
Due after one but within five years | 1,469 | 1,595 | 5.75 | % | ||||||||
Due after five but within ten year | 4,369 | 4,566 | 4.64 | % | ||||||||
Due after ten years | 1,018 | 1,042 | 6.33 | % | ||||||||
|
|
|
|
|
| |||||||
7,337 | 7,688 | 5.12 | % | |||||||||
|
|
|
|
|
| |||||||
Total Securities available for sale | ||||||||||||
Due within one year | 481 | 485 | 2.36 | % | ||||||||
Due after one but within five years | 41,147 | 41,560 | 1.59 | % | ||||||||
Due after five but within ten year | 27,877 | 27,400 | 1.64 | % | ||||||||
Due after ten years | 31,626 | 30,835 | 1.67 | % | ||||||||
|
|
|
|
|
| |||||||
$ | 101,131 | $ | 100,280 | 1.66 | % | |||||||
|
|
|
|
|
|
1) | Yields on securities and investments exempt from federal and/or state income taxes are stated on a fully tax- equivalent basis, assuming a 34.00% tax rate. |
102
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Financial Table 5
Noninterest Income
(dollars in thousands)
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Service charges on deposit accounts | $ | 1,627 | $ | 1,723 | $ | 1,837 | ||||||
Other banking fees | 1,589 | 1,455 | 1,576 | |||||||||
Asset management fees | 1,624 | 1,533 | 1,670 | |||||||||
Brokerage commissions | 186 | 190 | 163 | |||||||||
Other noninterest income | 448 | 552 | 353 | |||||||||
Income from mortgage loan sales | 2,113 | 3,740 | 1,806 | |||||||||
Security gains (losses) | (523 | ) | 1,286 | 933 | ||||||||
Gains (losses) from sale of OREO | 290 | (55 | ) | (68 | ) | |||||||
Other gains (losses) from sale of assets | 233 | 251 | (14 | ) | ||||||||
|
|
|
|
|
| |||||||
Total noninterest income | $ | 7,587 | $ | 10,675 | $ | 8,256 | ||||||
|
|
|
|
|
|
Financial Table 6
Other Noninterest Expense
(dollars in thousands)
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Postage | $ | 171 | $ | 211 | $ | 192 | ||||||
Telephone and data lines | 162 | 180 | 167 | |||||||||
Loan collection cost | 352 | 250 | 330 | |||||||||
Shareholder relations expense | 164 | 175 | 93 | |||||||||
Dues and subscriptions | 139 | 166 | 157 | |||||||||
Other | 1,496 | 1,801 | 1,747 | |||||||||
|
|
|
|
|
| |||||||
Total other noninterest expense | $ | 2,484 | $ | 2,765 | $ | 2,606 | ||||||
|
|
|
|
|
|
103
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Financial Table 7
Loan Portfolio Composition
(dollars in thousands)
At December 31, | ||||||||||||||||||||||||
2013 | 2012 | 2011 | ||||||||||||||||||||||
Amount | % of Total Loans | Amount | % of Total Loans | Amount | % of Total Loans | |||||||||||||||||||
Loan type: | ||||||||||||||||||||||||
Commercial | $ | 47,436 | 15.44 | % | $ | 41,390 | 12.58 | % | $ | 45,907 | 12.52 | % | ||||||||||||
Real estate – construction | 21,001 | 6.83 | % | 28,132 | 8.55 | % | 37,144 | 10.13 | % | |||||||||||||||
Real estate – residential | 132,694 | 43.18 | % | 142,444 | 43.28 | % | 153,260 | 41.81 | % | |||||||||||||||
Real estate – commercial | 95,922 | 31.22 | % | 103,304 | 31.39 | % | 114,944 | 31.36 | % | |||||||||||||||
Consumer | 9,623 | 3.13 | % | 12,986 | 3.95 | % | 14,710 | 4.01 | % | |||||||||||||||
Other | 612 | 0.20 | % | 822 | 0.25 | % | 602 | 0.16 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total loans | 307,288 | 100.00 | % | 329,078 | 100.00 | % | 366,567 | 100.00 | % | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Less: | ||||||||||||||||||||||||
Allowance for loan losses | (5,095 | ) | (6,801 | ) | (6,815 | ) | ||||||||||||||||||
Unearned net loan fees | 60 | 105 | 108 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net loans | $ | 302,253 | $ | 322,382 | $ | 359,860 | ||||||||||||||||||
|
|
|
|
|
|
At December 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Amount | % of Total Loans | Amount | % of Total Loans | |||||||||||||
Loan type: | ||||||||||||||||
Commercial | $ | 51,679 | 14.63 | % | $ | 51,723 | 14.63 | % | ||||||||
Real estate – construction | 56,602 | 12.72 | % | 44,976 | 12.72 | % | ||||||||||
Real estate – residential | 155,814 | 40.77 | % | 144,154 | 40.77 | % | ||||||||||
Real estate – commercial | 105,123 | 27.13 | % | 95,938 | 27.13 | % | ||||||||||
Consumer | 17,721 | 4.70 | % | 16,628 | 4.70 | % | ||||||||||
Other | 739 | 0.05 | % | 172 | 0.05 | % | ||||||||||
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Total loans | 387,678 | 100.00 | % | 353,591 | 100.00 | % | ||||||||||
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| |||||||||||||
Less: | ||||||||||||||||
Allowance for loan losses | (9,067 | ) | (5,276 | ) | ||||||||||||
Unearned net loan fees | 91 | 138 | ||||||||||||||
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Net loans | $ | 378,702 | $ | 348,453 | ||||||||||||
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104
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Financial Table 8
Selected Loan Maturities
(dollars in thousands)
December 31, 2013 | ||||||||||||||||
One Year or Less | One to Five Years | Over Five Years | Total | |||||||||||||
Commercial and agricultural | $ | 15,806 | $ | 17,095 | $ | 14,535 | $ | 47,436 | ||||||||
Real estate – construction | 11,387 | 9,614 | — | 21,001 | ||||||||||||
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Total selected loans | $ | 27,193 | $ | 26,709 | $ | 14,535 | $ | 68,437 | ||||||||
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Fixed rate loans | $ | 26,423 | $ | 80,652 | $ | 63,234 | $ | 170,309 | ||||||||
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Sensitivity to rate changes: | ||||||||||||||||
Variable interest rates | $ | 38,458 | $ | 42,683 | $ | 55,898 | $ | 137,039 | ||||||||
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105
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Financial Table 9
Activity in the Allowance for Loan Loss
(dollars in thousands)
At or for the Year Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Allowance for loan losses at beginning of year | $ | 6,801 | $ | 6,815 | $ | 9,067 | $ | 5,276 | $ | 4,361 | ||||||||||
Provision for loan losses | 28 | 1,832 | 3,456 | 4,919 | 1,732 | |||||||||||||||
Other | (5 | ) | — | (5 | ) | 17 | — | |||||||||||||
Loan charge-offs: | ||||||||||||||||||||
Commercial | 571 | 322 | 336 | 59 | 39 | |||||||||||||||
Real estate | 1,225 | 1,427 | 5,110 | 924 | 692 | |||||||||||||||
Consumer | 175 | 242 | 390 | 206 | 140 | |||||||||||||||
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Total charge-offs | 1,971 | 1,991 | 5,836 | 1,189 | 871 | |||||||||||||||
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Recoveries of loans previously charged off: | ||||||||||||||||||||
Commercial | 14 | 43 | 4 | 3 | 19 | |||||||||||||||
Real estate | 180 | 66 | 28 | 4 | 14 | |||||||||||||||
Consumer | 48 | 36 | 101 | 37 | 21 | |||||||||||||||
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| |||||||||||
Total recoveries | 242 | 145 | 133 | 44 | 54 | |||||||||||||||
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Net charge-offs | 1,729 | 1,846 | 5,703 | 1,145 | 817 | |||||||||||||||
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| |||||||||||
Allowance for loan losses at end of year | $ | 5,095 | $ | 6,801 | $ | 6,815 | $ | 9,067 | $ | 5,276 | ||||||||||
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Net (charge-offs) recoveries as a percent of average loans | 0.55 | % | 0.53 | % | 1.50 | % | 0.31 | % | 0.24 | % |
106
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Financial Table 10
Allocation of the Allowance for Loan Losses
(dollars in thousands)
At December 31, | ||||||||||||||||||||||||
2013 | 2012 | 2011 | ||||||||||||||||||||||
Amount | % of Total Loans (1) | Amount | % of Total Loans (1) | Amount | % of Total Loans (1) | |||||||||||||||||||
Commercial | $ | 722 | 14.17 | % | $ | 1,180 | 17.35 | % | $ | 1,127 | 12.52 | % | ||||||||||||
Real estate – construction | 1,203 | 23.61 | % | 719 | 10.57 | % | 557 | 10.13 | % | |||||||||||||||
Real estate – residential | 2,025 | 39.75 | % | 3,020 | 44.41 | % | 2,924 | 41.81 | % | |||||||||||||||
Real estate – commercial | 890 | 17.47 | % | 1,040 | 15.29 | % | 1,459 | 31.36 | % | |||||||||||||||
Consumer loans | 255 | 5.00 | % | 842 | 12.38 | % | 667 | 4.01 | % | |||||||||||||||
Other | — | — | % | — | — | % | 81 | 0.16 | % | |||||||||||||||
Unallocated | — | — | % | — | — | % | — | — | % | |||||||||||||||
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|
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|
|
| |||||||||||||
Total loans | $ | 5,095 | 100.00 | % | $ | 6,801 | 100.00 | % | $ | 6,815 | 100.00 | % | ||||||||||||
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At December 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Amount | % of Total Loans (1) | Amount | % of Total Loans (1) | |||||||||||||
Commercial | $ | 966 | 13.33 | % | $ | 449 | 14.63 | % | ||||||||
Real estate – construction | 2,190 | 14.60 | % | 1,373 | 12.72 | % | ||||||||||
Real estate – residential | 2,629 | 40.19 | % | 1,477 | 40.77 | % | ||||||||||
Real estate – commercial | 2,240 | 27.12 | % | 1,541 | 27.13 | % | ||||||||||
Consumer | 984 | 4.57 | % | 436 | 4.70 | % | ||||||||||
Other | 58 | 0.19 | % | — | 0.05 | % | ||||||||||
Unallocated | — | — | % | — | — | % | ||||||||||
|
|
|
|
|
|
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| |||||||||
Total loans | $ | 9,067 | 100.00 | % | $ | 5,276 | 100.00 | % | ||||||||
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|
|
|
|
|
|
(1) | Represents total of all outstanding loans in each category as a percent of total loans outstanding. |
107
UWHARRIE CAPITAL CORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Financial Table 11
Maturities of Time Deposits
(dollars in thousands)
3 Months or Less | Over 3 Months to 6 Months | Over 6 Months to 12 Months | Over 12 Months | Total | ||||||||||||||||
Time Deposits of $ 100,000 or more | $ | 4,936 | $ | 8,847 | $ | 7,745 | $ | 23,162 | $ | 44,690 | ||||||||||
Other Time Deposits | 10,641 | 10,080 | 17,893 | 25,466 | 64,080 | |||||||||||||||
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|
|
|
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|
| |||||||||||
$ | 15,577 | $ | 18,927 | $ | 25,638 | $ | 48,628 | $ | 108,770 | |||||||||||
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Financial Table 12
Performance Ratios
At December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Return on average assets | 0.18 | % | 0.08 | % | 0.17 | % | 0.14 | % | 0.15 | % | ||||||||||
Return on average equity | 2.17 | % | 0.90 | % | 2.02 | % | 1.57 | % | 1.60 | % | ||||||||||
Equity to average assets ratio | 8.34 | % | 8.52 | % | 8.39 | % | 8.83 | % | 9.15 | % |
108
UWHARRIE CAPITAL CORP
Board of Directors
W. Stephen Aldridge, III | Charles D. Horne | Barry S. Moose | ||
President/Funeral Director | President | Operations and Maintenance Director | ||
Stanly Funeral Home, Inc. | Hornwood, Inc. | SEPI Engineering & Construction, Co. | ||
Joe S. Brooks | W. Kenneth Huntley | Cynthia L. Mynatt | ||
Board Vice Chairman | President and Owner | President | ||
Owner and Manager | Huntley Oil & Gas Co., Inc. | Ben Mynatt Buick - GMC | ||
Brothers Precision Tool Co. | ||||
Ronald T. Burleson | Joseph R. Kluttz, Jr. | Susan J. Rourke | ||
Partner | Retired - Secretary and | President and Owner | ||
Thurman Burleson and Sons Farm | Treasurer, Albemarle Insurance | U. S. Land Management Co. | ||
Bill C. Burnside, DDS | Lee Roy Lookabill, Jr. | S. Todd Swaringen | ||
Retired – General Dentist | President | Partner | ||
Anson Real Estate and | Beane Swaringen & Company, PLLC | |||
Charles F. Geschickter, III | W. Chester Lowder | Edward B. Tyson | ||
President and | Board Chairman | Retired - Superintendent of | ||
Chief Executive Officer | Director of Livestock Program | Kannapolis City Schools | ||
JTG Racing, Inc.; | Public Policy Division | |||
ST Motorsports, Inc. | NC Farm Bureau | |||
Executive Officers | ||||
Roger L. Dick | R. David Beaver, III | Jeffrey M. Talley | ||
President and | Chief Financial Officer | President | ||
Chief Executive Officer | Uwharrie Capital Corp; | Strategic Investment | ||
Uwharrie Capital Corp; | Chief Financial Officer | Advisors, Inc.; | ||
Chief Executive Officer | Uwharrie Bank | Executive Vice President | ||
Uwharrie Bank | Uwharrie Bank | |||
Brendan P. Duffey | Christy D. Stoner | |||
Chief Operating Officer and | Chief Executive Officer | |||
Chief Risk Officer | Strategic Investment | |||
Uwharrie Capital Corp; | Advisors, Inc.; | |||
President Uwharrie Bank | Executive Vice President | |||
Uwharrie Bank |
109