UWHR 10-Q Quarterly Report June 30, 2014

UWHR 10-Q Quarter ended June 30, 2014

UWHARRIE CAPITAL CORP

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10-Q 1 d753538d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2014

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

For the transition period from to .

COMMISSION FILE NUMBER 000-22062

UWHARRIE CAPITAL CORP

(Exact name of registrant as specified in its charter)

NORTH CAROLINA

56-1814206

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

132 NORTH FIRST STREET

ALBEMARLE, NORTH CAROLINA

28001

(Address of Principal Executive Offices)

(Zip Code)

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

N/A

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 7,169,575 shares of common stock outstanding as of July 28, 2014.

Table of Contents


		Page No.

Part I.	FINANCIAL INFORMATION

Item 1 -	Financial Statements (Unaudited)

	Consolidated Balance Sheets June 30, 2014 and December 31, 2013	3

	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2014 and 2013	4

	Consolidated Statements of Comprehensive Income for the Three And Six Months Ended June 30, 2014 and 2013	5

	Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2014	6

	Consolidated Statements of Cash Flows Six Months Ended June 30, 2014 and 2013	7

	Notes to Consolidated Financial Statements	8

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3 -	Quantitative and Qualitative Disclosures about Market Risk	38

Item 4 -	Controls and Procedures	38

Part II.	OTHER INFORMATION

Item 1 -	Legal Proceedings	38

Item 1A -	Risk Factors	39

Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3 -	Defaults Upon Senior Securities	40

Item 4 -	Mine Safety Disclosures	40

Item 5 -	Other Information	40

Item 6 -	Exhibits	41

	Exhibit Index	44

-2-

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements


	June 30, 2014 (Unaudited)			December 31, 2013*
	(dollars in thousands)
ASSETS
Cash and due from banks	$	6,709		$	7,947
Interest-earning deposits with banks		46,096			64,447
Securities available for sale, at fair value		109,969			100,280
Loans held for sale		537			1,139
Loans:		309,936			307,348
Less allowance for loan losses		(3,700	)		(5,095	)

Net loans held for investment		306,236			302,253

Premises and equipment, net		15,160			13,781
Interest receivable		1,618			1,747
Restricted stock		1,038			1,184
Bank owned life insurance		6,586			6,516
Other real estate owned		7,105			7,170
Other assets		10,222			10,856

Total assets	$	511,276		$	517,320

LIABILITIES
Deposits:
Demand noninterest-bearing	$	79,839		$	74,493
Interest checking and money market accounts		228,358			228,933
Savings deposits		38,401			41,512
Time deposits, $100,000 and over		41,788			44,690
Other time deposits		60,516			64,080

Total deposits		448,902			453,708

Short-term borrowed funds		3,753			5,509
Long-term debt		9,564			11,163
Interest payable		183			224
Other liabilities		5,025			4,491

Total liabilities		467,427			475,095

Off balance sheet items, commitments and contingencies (Note 9)
Redeemable common stock held by the Employee Stock Ownership Plan (ESOP)		1,827			1,716
SHAREHOLDERS’ EQUITY
Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and outstanding 7,171,119 and 7,445,931 shares, respectively		8,964			9,307
Additional paid-in capital		11,121			11,922
Unearned ESOP compensation		—			(989	)
Undivided profits		11,129			10,289
Accumulated other comprehensive gain ( loss)		252			(562	)

Total Uwharrie Capital shareholders’ equity		31,466			29,967
Noncontrolling interest		10,556			10,542

Total shareholders’ equity		42,022			40,509

Total liabilities and shareholders’ equity	$	511,276		$	517,320

(*) Derived from audited consolidated financial statements

See accompanying notes

-3-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(in thousands, except share and per share data)
Interest Income
Loans, including fees	$	4,106		$	4,449		$	8,165		$	8,876
Investment securities
US Treasury		94			100			187			193
US Government agencies and corporations		341			202			658			381
State and political subdivisions		80			62			145			128
Interest-earning deposits with banks and federal funds sold		39			54			84			109

Total interest income		4,660			4,867			9,239			9,687

Interest Expense
Interest checking and money market accounts		73			112			158			228
Savings deposits		11			42			36			84
Time deposits, $100,000 and over		120			153			241			327
Other time deposits		136			182			278			395
Short-term borrowed funds		9			43			27			123
Long-term debt		138			166			295			337

Total interest expense		487			698			1,035			1,494

Net interest income		4,173			4,169			8,204			8,193
Provision for (recovery of) loan losses		(61	)		(405	)		(485	)		(774	)

Net interest income after provision (recovery of)for loan losses		4,234			4,574			8,689			8,967

Noninterest Income
Service charges on deposit accounts		359			392			737			797
Other service fees and commissions		970			841			1,907			1,634
Gain/(loss) on sale of securities (includes reclassification of $21,000 and $14,000 from accumulated other comprehensive income)		—			—			21			14
Gain (loss) on fixed assets and other assets		239			(22	)		240			225
Income from mortgage loan sales		257			642			419			1,482
Other income		94			109			191			224

Total noninterest income		1,919			1,962			3,515			4,376

Noninterest Expense
Salaries and employee benefits		2,980			3,060			5,986			6,152
Net occupancy expense		259			276			545			550
Equipment expense		177			186			347			354
Data processing costs		191			192			370			392
Office supplies and printing		63			48			128			111
Foreclosed real estate expense		199			948			427			1,123
Professional fees and services		193			243			350			481
Marketing and donations		147			203			293			376
Electronic banking expense		236			249			475			471
Software amortization and maintenance		138			137			256			281
FDIC insurance		109			126			221			297
Other noninterest expense		614			618			1,154			1,327

Total noninterest expense		5,306			6,286			10,552			11,915

Income before income taxes		847			250			1,652			1,428
Income taxes (includes reclassification of $8,000 and $5,000 from accumulated other comprehensive income)		251			94			519			509

Net income	$	596		$	156		$	1,133		$	919

Consolidated net income	$	596			156			1,133			919
Less: net income attributable to noncontrolling Interest		(147	)		(114	)		(293	)		(217	)

Net income attributable to Uwharrie Capital Corp		449			42			840			702
Dividends – preferred stock		—			(65	)		—			(226	)

Net income (loss) available to common shareholders	$	449		$	(23	)	$	840		$	476

Net income (loss) per common share
Basic	$	0.06		$	0.00		$	0.11		$	0.06

Diluted	$	0.06		$	0.00		$	0.11		$	0.06

Weighted average shares outstanding
Basic		7,337,022			7,433,415			7,337,144			7,442,989
Diluted		7,337,022			7,433,415			7,337,144			7,442,989

See accompanying notes

-4-

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(in thousands)
Net Income	$	596		$	156		$	1,133		$	919

Other comprehensive income (loss)
Unrealized gain (loss) on available for sale securities		736			(2,413	)		1,254			(2,537	)
Related tax effect		(250	)		844			(427	)		886
Reclassification of (gain) loss recognized in net income		—			—			(21	)		(14	)
Related tax effect		—			—			8			5

Total other comprehensive income (loss)		486			(1,569	)		814			(1,660	)

Comprehensive income (loss)		1,082			(1,413	)		1,947			(741	)
Less: Comprehensive income (loss) attributable to noncontrolling interest		(147	)		(113	)		(293	)		(217	)

Comprehensive income (loss) attributable to Uwharrie Capital	$	935		$	(1,527	)	$	1,654		$	(958	)

See accompanying notes

-5-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)


	Number Common Shares Issued			Common Stock			Additional Paid-in Capital			Unearned ESOP Compensation			Undivided Profits		Accumulated Other Comprehensive Income (Loss)			Non Controlling Interest			Total
							(dollars in thousands, except share data)
Balance, December 31, 2013		7,445,931		$	9,307		$	11,922		$	(989	)	$	10,289	$	(562	)	$	10,542		$	40,509
Net Income		—			—			—			—			840		—			293			1,133
Repurchase of common stock		(22,366	)		(28	)		(46	)		—			—		—			—			(74	)
Other comprehensive Income		—			—			—			—			—		814			—			814
Release of ESOP shares		—			—			5			16			—		—			—			21
Repayment of ESOP notes receivable		(252,446	)		(315	)		(649	)		973			—		—			—			9
Reclass to mezzanine capital		—			—			(111	)		—			—		—			—			(111	)
Record preferred stock dividend
Series B (noncontrolling interest)		—			—			—			—			—		—			(206	)		(206	)
Record preferred stock dividend Series C (noncontrolling interest)		—			—			—			—			—		—			(73	)		(73	)

Balance, June 30, 2014		7,171,119		$	8,964		$	11,121		$	—		$	11,129	$	252		$	10,556		$	42,022

See accompanying notes

-6-

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)


	Six Months Ended June 30,
	2014			2013
	(dollars in thousands)
Cash flows from operating activities
Net income	$	1,133		$	919
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation		451			464
Net amortization of security premiums/discounts		469			850
Net amortization of mortgage servicing rights		351			430
Impairment of foreclosed real estate		72			758
Recovery of loan losses		(485	)		(774	)
Net realized gain on sales / calls available for sales securities		(21	)		(14	)
Income from mortgage loan sales		(419	)		(1,482	)
Proceeds from sales of loans held for sale		16,840			51,667
Origination of loans held for sale		(15,819	)		(45,488	)
Gain on sale of premises, equipment and other assets		(146	)		(229	)
Increase in cash surrender value of life insurance		(70	)		(62	)
(Gain) loss on sales of foreclosed real estate		(94	)		4
Release and write-off of ESOP shares		30			23
Net change in interest receivable		129			(87	)
Net change in other assets		50			(738	)
Net change in interest payable		(41	)		(38	)
Net change in other liabilities		534			742

Net cash provided by operating activities		2,964			6,945

Cash flows from investing activities
Proceeds from sales, maturities and calls of securities available for sale		3,886			8,438
Purchase of securities available for sale		(12,790	)		(40,758	)
Net (increase) decrease in loans		(3,793	)		4,537
Proceeds from sales of premises, equipment and other assets		273			949
Purchase of premises and equipment		(1,957	)		(273	)
Proceeds from sales of foreclosed real estate		382			804
Investment in other assets		(186	)		(390	)
Net decrease in restricted stock		146			475

Net cash used in investing activities		(14,039	)		(26,218	)

Cash flows from financing activities
Net increase (decrease) in deposit accounts		(4,806	)		3,355
Net decrease in short-term borrowed funds		(1,756	)		(9,318	)
Net decrease in long-term debt		(1,599	)		(1,505	)
Proceeds from preferred stock series B issued by subsidiaries		—			360
Repayment of preferred stock series A		—			(7,742	)
Increase in unearned ESOP compensation		—			(32	)
Repurchase of common stock		(74	)		(72	)
Dividend and discount accretion on preferred stock		—			(176	)
Dividend and cost accretion on noncontrolling interest		(279	)		(195	)

Net used in financing activities		(8,514	)		(15,325	)

Decrease in cash and cash equivalents		(19,589	)		(34,598	)
Cash and cash equivalents, beginning of period		72,394			81,728

Cash and cash equivalents, end of period	$	52,805		$	47,130

Supplemental Disclosures of Cash Flow Information
Interest paid	$	579		$	1,532
Income taxes paid		6			617
Supplemental Schedule of Non-Cash Activities
Net change in fair value securities available for sale, net of tax	$	814		$	(1,660	)
Loans transferred to foreclosed real estate		295			2,307
Company financed sales of other real estate owned		—			—
Net change in ESOP liability		111			102
Exchange of unearned ESOP shares for ESOP debt		964			—

See accompanying notes

-7-

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Basis of Presentation

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

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

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to consolidated financial statements filed as part of the Company’s 2013 Annual Report on Form 10-K. This Quarterly Report should be read in conjunction with such Annual Report.

Note 2 – Comprehensive Income

The Company reports as comprehensive income all changes in shareholders’ equity during the year from sources other than shareholders. Other accumulated 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 accumulated other comprehensive income is unrealized gains and losses, net of income tax, on investment securities available for sale. The following table presents the changes in accumulated other comprehensive income for the three and six months ended June 30, 2014 and 2013:


	Unrealized holding gains on available-for-sale securities (net)
	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
				(dollars in thousands)
Beginning Balance	$	(234	)	$	1,396		$	(562	)	$	1,487
Other Comprehensive income (loss) before reclassifications, net of ($250,000) $844,000, ($427,000) and $885,000 tax effect, respectively		486			(1,569	)		827			(1,651	)
Amounts reclassified from accumulated Other comprehensive income, net of $8,000 and $5,000 tax effect		—			—			(13	)		(9	)

Net current-period other comprehensive income (loss)		486			(1,569	)		814			(1,660	)

Ending Balance	$	252		$	(173	)	$	252		$	(173	)

-8-

Note 3 – Noncontrolling Interest

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

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

Note 4 – Per Share Data

On July 15, 2014, the Company’s Board of Directors declared a 2% stock dividend payable on August 15, 2014 to shareholders of record on July 30, 2014. All information presented in the accompanying interim consolidated financial statements regarding earnings per share and weighted average number of shares outstanding has been computed giving effect to this stock dividend.

Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for stock dividends. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. For both the three and six months ended June 30, 2013, the Company’s 92,491 stock options outstanding did not have a dilutive effect on per share results because the exercise prices exceeded the share values for each period. For the three and six months ended June 30, 2014, the Company had 12,360 stock options outstanding and they did not have a dilutive effect. The Employee Stock Ownership Plan, (“ESOP”) effect is the average of the unallocated ESOP shares.

-9-

Basic and diluted net income per common share have been computed based upon net income available to common shareholders as presented in the accompanying consolidated statements of income divided by the weighted average number of common shares outstanding or assumed to be outstanding. The computation of basic and dilutive earnings per share is summarized below:


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2014		2013			2014		2013
Weighted average number of common shares outstanding		7,337,022		7,627,666			7,337,144		7,627,666
Effect of ESOP shares		—		(194,251	)		—		(184,677	)

Adjusted weighted average number of common shares used in computing basic net income per common share		7,337,022		7,433,415			7,337,144		7,442,989
Effect of dilutive stock options		—		—			—		—

Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per common share		7,337,022		7,433,415			7,337,144		7,442,989

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

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

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

The Company has filed a request for a favorable determination letter from the Internal Revenue Service as to the tax-qualified status of the ESOP on its termination. Upon receipt of a favorable determination letter, all shares allocated to participant accounts will be distributed to the participants.

-10-

Note 5 – Investment Securities

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


June 30, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
			(dollars in thousands)
U.S. Treasury	$	20,908	$	472	$	105	$	21,275
U.S. Government agencies		44,822		160		299		44,683
GSE - Mortgage-backed securities and CMO’s		34,318		135		462		33,991
State and political subdivisions		9,539		481		—		10,020

Total securities available for sale	$	109,587	$	1,248	$	866	$	109,969


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

Total securities available for sale	$	101,131	$	1,119	$	1,970	$	100,280

At both June 30, 2014 and December 31, 2013 the Company owned Federal Reserve Bank stock reported at cost of $506,000 and $467,000, respectively. Also at June 30, 2014 and December 31, 2013, the Company owned Federal Home Loan Bank Stock (FHLB) of $531,600 and $717,000, respectively. Both of these stocks are combined and reported as restricted stock. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership in, and borrowings with, these banks. These investments are carried at cost since there is no ready market and redemption has historically been made at par value. The Company estimated that the fair value approximated cost and that these investments were not impaired at June 30, 2014.

Results from sales of securities available for sale for the three and six month periods ended June 30, 2014 and June 30, 2013 are as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
			(dollars in thousands)
Gross proceeds from sales	$	—	$	—	$	328	$	426

Realized gains from sales	$	—	$	—	$	21	$	14
Realized losses from sales		—		—		—		—

Net Realized gains	$	—	$	—	$	21	$	14

At June 30, 2014 and December 31, 2013, securities available for sale with a carrying amount of $74.9 million and $63.1 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2014 and December 31, 2013. These unrealized losses on investment securities are a result of temporary fluctuations in market prices due to a rise in interest rates, which will adjust if rates decline, and in a volatile market. Management does not believe these fluctuations are a reflection of the quality of the investments. At June 30, 2014, the unrealized losses for securities less than twelve months related to two government agency

-11-

bonds and five government sponsored enterprise (GSE) mortgage backed securities. The Company had one United States Treasury note, four government agency bonds and six GSE mortgage backed securities that had been in a loss position for more than twelve months. At December 31, 2013, the unrealized losses less than twelve months related to one United States Treasury note, ten government agency bonds and eleven government sponsored enterprise (GSE) mortgage backed securities. The Company had two GSE mortgage backed securities that had been in a loss position for more than twelve months at December 31, 2013.


	Less than 12 Months				12 Months or More				Total
June 30, 2014	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
					(dollars in thousands)
Securities available for sale temporary impairment
U.S. Treasury	$	—	$	—	$	4,830	$	105	$	4,830	$	105
U.S. Gov’t agencies		6,586		7		16,887		292		23,473		299
GSE-Mortgage-backed securities and CMO’s		8,731		139		12,059		323		20,790		462
State and political subdivisions		—		—		—		—		—		—

	$	15,317	$	146	$	33,776	$	720	$	49,093	$	866


	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		—		—		—		—		—		—

	$	56,075	$	1,826	$	3,849	$	144	$	59,924	$	1,970

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 losses, 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 the Company has to hold the investment until the loss position is recovered.

At June 30, 2014, the Company had one United States Treasury note, four government agency bonds and six GSE mortgage backed securities that had been in a loss position for twelve months or more. The unrealized losses are not likely to reverse unless market interest rates decline to the levels that existed when the securities were purchased. None of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. At June 30, 2014, the Company had no intent to sell and was not more likely than not to be required to sell the available for sale securities that were in a loss position prior to full recovery. For the three and six months ended June 30, 2014, there were no available for sale securities deemed to be other than temporarily impaired.

-12-

The aggregate amortized cost and fair value of the available for sale securities portfolio at June 30, 2014 by remaining contractual maturity are as follows:


	June 30, 2014
	Amortized Cost		Estimated Fair Value		Book Yield
	(dollars in thousands)
Securities available for sale
U. S. Treasury
Due after one but within five years		15,972		16,444		1.91	%
Due after five but within ten years		4,936		4,831		1.37	%

		20,908		21,275		1.79	%

U.S. Government agencies
Due within twelve months		4,990		5,082		2.77	%
Due after one but within five years		35,887		35,668		1.29	%
Due after five but within ten years		3,945		3,933		2.03	%

		44,822		44,683		1.52	%

Mortgage-backed securities
Due after one but within five years		4,799		4,743		1.51	%
Due after five but within ten years		1,409		1,448		3.08	%
Due after ten years		28,110		27,800		3.42	%

		34,318		33,991		3.14	%

State and political subdivisions
Due within twelve months		176		179		4.62	%
Due after one but within five years		2,402		2,586		4.96	%
Due after five but within ten years		3,713		3,911		5.07	%
Due after ten years		3,248		3,344		4.98	%

		9,539		10,020		5.00	%

Total Securities available for sale
Due within twelve months		5,166		5,261		2.83	%
Due after one but within five years		59,060		59,441		1.62	%
Due after five but within ten years		14,003		14,123		2.71	%
Due after ten years		31,358		31,144		3.58	%

	$	109,587	$	109,969		2.38	%

Note 6 – Loans Held for Investment

The composition of net loans held for investment by class as of June 30, 2014 and December 31, 2013 are as follows:


	June 30,			December 31,
	2014			2013
	(dollars in thousands)
Commercial
Commercial	$	45,811		$	47,436
Real estate - commercial		93,009			95,922
Other real estate construction loans		20,918			17,583
Noncommercial
Real estate 1 - 4 family construction		3,925			3,418
Real estate - residential		92,408			87,463
Home equity		45,027			45,231
Consumer loans		8,316			9,623
Other loans		550			612

		309,964			307,288
Less:
Allowance for loan losses		(3,700	)		(5,095	)
Deferred loan (fees) costs, net		(28	)		60

Loans held for investment, net	$	306,236		$	302,253

-13-

Note 7 – Allowance for Loan Losses

The following table shows the change in the allowance for loss losses by loan segment for the three and six month period ended June 30, 2014 and 2013, respectively:


Commercial	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
				(dollars in thousands)
Balance, beginning of period	$	2,192		$	2,257		$	2,665		$	2,791
Provision (recovery) charged to operations		(166	)		375			(411	)		254
Charge-offs		(507	)		(124	)		(744	)		(395	)
Recoveries		51			34			60			39

Net (charge-offs)		(456	)		(90	)		(684	)		(356	)

Balance at end of period	$	1,570		$	2,542		$	1,570		$	2,689


Non-Commercial	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
				(dollars in thousands)
Balance, beginning of period	$	2,006		$	3,716		$	2,430		$	4,010
Provision (recovery) charged to operations		105			(780	)		(74	)		(1,028	)
Charge-offs		(28	)		(41	)		(297	)		(265	)
Recoveries		47			44			71			75

Net (charge-offs)		19			3			(226	)		(190	)

Balance at end of period	$	2,130		$	2,939		$	2,130		$	2,792


Total	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
				(dollars in thousands)
Balance, beginning of period	$	4,198		$	5,973		$	5,095		$	6,801
Provision (recovery) charged to operations		(61	)		(405	)		(485	)		(774	)
Charge-offs		(535	)		(165	)		(1,041	)		(660	)
Recoveries		98			78			131			114

Net (charge-offs)		(437	)		(87	)		(910	)		(546	)

Balance at end of period	$	3,700		$	5,481		$	3,700		$	5,481

-14-

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at June 30, 2014 and December 31, 2013:


June 30, 2014
	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
					(dollars in thousands)
Commercial	$	—	$	2,799	$	1,570	$	156,939	$	1,570	$	159,738
Non-Commercial		96		5,959		2,034		144,239		2,130		150,198

Total	$	96	$	8,758	$	3,604	$	301,178	$	3,700	$	309,936


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

Total	$	2,387	$	17,553	$	2,708	$	289,795	$	5,095	$	307,348

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


June 30, 2014
	Loans 30-89 Days Past Due		Loans 90 Days or More Past due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
					(dollars in thousands)
Commercial	$	11	$	50	$	61	$	45,750	$	45,811	$	—
Real estate - commercial		38		531		569		92,440		93,009		—
Other real estate construction		17		1,032		1,049		19,869		20,918		—
Real estate 1 -4 family construction		—		—		—		3,925		3,925		—
Real estate - residential		970		1,020		1,990		90,390		92,380		—
Home equity		74		15		89		44,938		45,027		—
Consumer loans		45		—		45		8,271		8,316		—
Other loans		—		—		—		550		550		—

Total	$	1,155	$	2,648	$	3,803	$	306,133	$	309,936	$	—


December 31, 2013
	Loans 30-89 Days Past Due		Loans 90 Days or More Past due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
	(dollars in thousands)
Commercial	$	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		—

Total	$	2,141	$	4,717	$	6,858	$	300,490	$	307,348	$	—

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

-15-

The composition of nonaccrual loans by class as of June 30, 2014 and December 31, 2013 is as follows:


	June 30, 2014		December 31, 2013
	(dollars in thousands)
Commercial	$	50	$	204
Real estate - commercial		531		1,064
Other real estate construction		1,032		1,637
Real estate 1 – 4 family construction		—		—
Real estate – residential		1,020		1,564
Home equity		15		248
Consumer loans		—		—
Other loans		—		—

	$	2,648	$	4,717

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

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

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

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

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

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.

-16-

The tables below summarize risk grades of the loan portfolio by class at June 30, 2014 and December 31, 2013:


June 30, 2014
	Pass		Watch		Sub- standard		Doubtful		Total
	(dollars in thousands)
Commercial	$	45,050	$	578	$	183	$	—	$	45,811
Real estate - commercial		81,227		7,591		4,191		—		93,009
Other real estate construction		17,274		1,969		1,675		—		20,918
Real estate 1 - 4 family construction		3,925		—		—		—		3,925
Real estate - residential		75,459		11,750		5,171		—		92,380
Home equity		43,603		1,054		370		—		45,027
Consumer loans		7,972		300		44		—		8,316
Other loans		550		—		—		—		550

Total	$	275,060	$	23,242	$	11,634	$	—	$	309,936


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

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. At both June 30, 2014 and December 31, 2013 there were no loans 90 days past due and still accruing. The following tables show the breakdown between performing and nonperforming loans by class at June 30, 2014 and December 31, 2013:


June 30, 2014
	Performing		Non- Performing		Total
	(dollars in thousands)
Commercial	$	45,761	$	50	$	45,811
Real estate - commercial		92,478		531		93,009
Other real estate construction		19,886		1,032		20,918
Real estate 1 – 4 family construction		3,925		—		3,925
Real estate – residential		91,360		1,020		92,380
Home equity		45,012		15		45,027
Consumer loans		8,316		—		8,316
Other loans		550		—		550

Total	$	307,288	$	2,648	$	309,936

-17-


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

Loans are considered impaired when, based on current information and events it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired, a specific calculation is performed and a specific reserve is allocated, if necessary. The tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class at June 30, 2014 and December 31, 2013.


June 30, 2014
	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance
			(dollars in thousands)
Commercial	$	130	$	130	$	—	$	—
Real estate - commercial		1,825		1,636		—		—
Other real estate construction		1,571		1,033		—		—
Real estate 1 - 4 family construction		22		22		—		—
Real estate - residential		6,074		5,464		361		96
Home equity		33		33		—		—
Consumer loans		79		79		—		—
Other loans		—		—		—		—

Total	$	9,734	$	8,397	$	361	$	96


December 31, 2013
	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance
			(dollars in thousands)
Commercial	$	377	$	291	$	86	$	67
Real estate - commercial		6,808		3,962		2,375		507
Other real estate construction		2,034		247		1,739		945
Real estate 1 - 4 family construction		374		25		349		16
Real estate - residential		8,197		4,619		3,329		530
Home equity		415		58		357		279
Consumer loans		116		61		55		43
Other loans		—		—		—		—

Total	$	18,321	$	9,263	$	8,290	$	2,387

-18-


	Three Months ended June 30, 2014				Three Months ended June, 2013
	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
			(dollars in thousands)
Commercial	$	148	$	2	$	1,237	$	4
Real estate - commercial		3,531		17		8,516		63
Other real estate construction		1,476		—		3,011		7
Real estate 1 - 4 family construction		197		1		609		6
Real estate - residential		6,614		58		8,680		132
Home equity		107		—		1,065		8
Consumer loans		94		—		192		1
Other loans		—		—		—		—

Total	$	12,167	$	78	$	23,310	$	221


	Six Months ended June 30, 2014				Six Months ended June, 2013
	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
			(dollars in thousands)
Commercial	$	225	$	3	$	1,444	$	15
Real estate - commercial		4,466		35		8,366		138
Other real estate construction		1,646		—		2,722		13
Real estate 1 - 4 family construction		256		1		537		11
Real estate - residential		7,058		113		8,662		221
Home equity		210		—		1,058		13
Consumer loans		101		2		308		4
Other loans		—		—		—		—

Total	$	13,962	$	154	$	23,097	$	415

Note 8 – Troubled Debt Restructures

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

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

-19-

For the three and six months ended June 30, 2014 and 2013, the following table presents a breakdown of the types of concessions made by loan class:


	For the three months ended June 30, 2014
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			(dollars in thousands)
Extend payment terms:
Commercial		—	$	—	$	—
Real estate - commercial		—		—		—
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		—		—		—
Home equity		—		—		—
Consumer loans		1		32		32
Other loans		—		—		—

		1	$	32	$	32

Other payment terms:
Commercial		—	$	—	$	—
Real estate - commercial		1		112		112
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		2		386		386
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—

		3	$	498	$	498

Total		4	$	530	$	530


	Three months ended June 30, 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		2		403		403
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—

Total		2	$	403	$	403

-20-


	Six months ended June 30, 2014
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			(dollars in thousands)
Extend payment terms:
Commercial		—	$	—	$	—
Real estate - commercial		—		—		—
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		—		—		—
Home equity		—		—		—
Consumer loans		1		32		32
Other loans		—		—		—

Total		1	$	32	$	32

Other:
Commercial		—	$	—	$	—
Real estate - commercial		1		112		112
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		4		619		619
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—

Total		5	$	731	$	731

Total		6	$	763	$	763


	Six months ended June 30, 2013
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			(dollars in thousands)
Other:
Commercial		—	$	—	$	—
Real estate - commercial		—		—		—
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		4		468		466
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—

Total		4	$	468	$	466

-21-

The following table presents loans that were modified as TDRs within the previous twelve months and for which there was a payment default during the twelve months ended June 30, 2014 and June 30, 2013:


	Twelve months ended June 30, 2014				Twelve months ended June 30, 2013
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
			(dollars in thousands)
Other:
Commercial		—	$	—		—	$	—
Real estate - commercial		—		—		—		—
Other real estate construction		—		—		—		—
Real estate 1 -4 family construction		—		—		—		—
Real estate - residential		—		—		2		28
Home equity		—		—		—		—
Consumer loans		—		—		—		—
Other loans		—		—		—		—

		—	$	—		2	$	28

Total		—	$	—		2	$	28

A default on a TDR is defined as being past due 90 days or being out of compliance with the modification agreement. As previously mentioned the Company considers TDRs to be impaired loans and has $60,000 in the allowance for loan loss as of June 30, 2014, as a direct result of these TDRs. At June 30, 2013, there was $614,000 in the allowance for loan loss related to TDRs.

The following table presents the successes and failures of the types of modifications within the previous twelve months as of June 30, 2014 and 2013:


	Paid In Full				Paying as restructured				Converted to nonaccrual				Foreclosure/ Default
	Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments		Number of Loans		Recorded Investments
							(dollars in thousands)
June 30, 2014
Below market Interest rate		—	$	—		—	$	—		—	$	—		—	$	—
Extended payment Terms		—		—		1		32		—		—		—		—
Forgiveness of Principal
Other		—		—		10		1,359		—		—		—		—

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

June 30, 2013
Forgiveness of Principal		—	$	—		—	$	—		—	$	—		—	$	—
Other		—		—		15		1,246		—		—		—		—

Total		—	$	—		15	$	1,246		—	$	—		—	$	—

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

Note 9 – Commitments and Contingencies

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

The bank’s risk of loss with the unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The bank uses the same credit

-22-

policies in making commitments under such instruments as it does for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are unsecured. At June 30, 2014, outstanding financial instruments whose contract amounts represent credit risk were approximately:


	(dollars in thousands)
Commitments to extend credit	$	73,676
Credit card commitments		8,609
Standby letters of credit		1,508

Total commitments	$	83,793

Note 10 – Fair Value Disclosures

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

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

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

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

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with

-23-

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 and 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 June 30, 2014, 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 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 is used 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.

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

The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013:


	June 30, 2014
			(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Securities available for sale:
US Treasury	$	21,275	$	21,275	$	—	$	—
US Government Agencies		44,683		—		44,683		—
GSE - Mortgage-backed securities and CMO’s		33,991		—		33,991		—
State and political subdivisions		10,020		—		10,020		—

Total assets at fair value	$	109,969	$	21,275	$	88,694	$	—

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

-24-


	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	$	—	$	—	$	—	$	—

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value 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 June 30, 2014 and December 31, 2013:


	June 30, 2014
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Impaired loans	$	265	$	—	$	—	$	265
Loans held for sale		537		—		537		—
Other real estate owned		3,475		—		—		3,475

Total assets at fair value	$	4,277	$	—	$	537	$	3,740

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


	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	$	—	$	—	$	—	$	—

Quantitative Information about Level 3 Fair Value Measurements


	Valuation Technique		Unobservable Input		General Range
Nonrecurring measurements:
Impaired loans		Discounted appraisals		Collateral discounts and Estimated costs to sell	0 – 10%

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

-25-

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

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

The fair value estimates presented at June 30, 2014 and December 31, 2013, are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price at which a liability could be settled. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of June 30, 2014 and December 31, 2013:


June 30, 2014
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	52,805	$	52,805	$	52,805	$	—	$	—
Securities available for sale		109,969		109,969		21,275		88,694		—
Loans held for investment, net		306,236		313,121		—		—		313,121
Loans held for sale		537		537		—		537		—
Restricted stock		1,038		1,038		1,038		—		—
Bank-owned life insurance		6,586		6,586		—		—		6,586
Mortgage servicing rights		2,173		3,046		—		—		3,046
Accrued interest receivable		1,618		1,618		—		—		1,618
FINANCIAL LIABILITIES
Deposits	$	448,902	$	436,059	$	—	$	—	$	436,059
Short-term borrowings		3,753		3,753		—		3,753		—
Long-term borrowings		30		30		—		30		—
Junior subordinated debt		9,534		9,709		—		—		9,709
Accrued interest payable		183		183		—		—		183

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

-26-

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 5.

•

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

•

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

•

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 serving 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.

•

Deposits – The fair value of deposits is estimated based on discounted cash flow analyses using offered market rates and is recorded in Level 3. The fair value of deposits does not consider any customer related intangibles.

•

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

At June 30, 2014, the subsidiary bank had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, they were deemed to have no current fair value. See Note 9.

Note 12 – Recent Accounting Pronouncements

In January 2014, the FASB issued ASU 2014-04, an update to ASC 310 “Receivables – Troubled Debt Restructurings by Creditors”. The amendments in this update clarify that if 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

-27-

require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The update is effective for reporting periods beginning after December 15, 2014. The 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.

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

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

Comparison of Financial Condition at June 30, 2014 and December 31, 2013.

During the six months ended June 30, 2014, the Company’s total assets decreased $6.0 million, from $517.3 million to $511.3 million. During the same period, cash and cash equivalents decreased $19.6 million, while loans held for investment and securities available for sale increased $2.6 million and $9.7 million, respectively.

Cash and cash equivalents decreased $19.6 million, during the six months ended June 30, 2014. Cash and due from banks decreased $1.2 million, while interest-earning deposits with banks decreased $19.4 million. These decreases are directly related to the growth in both investment securities and loans held for investment.

Investment securities increased $9.7 million to $110.0 million for the period ended June 30, 2014. During the first six months of 2014, the Company purchased securities of $12.8 million. The increase from new purchases was reduced by sales of $328,000, maturities of $480,000 and normal reductions stemming from principal payments on mortgage backed securities. The Company is investing in lower duration securities as well as variable rate securities. These sectors should provide better protection in a rising rate environment, and mitigate the downside risk embedded in the current portfolio and improve the yield on earning assets. At June 30, 2014, the Company had net unrealized gains of $382,000.

Loans held for investment increased from $307.3 million to $309.9 million, an increase of $2.6 million. The commercial, commercial real estate, home equity and consumer loan segments of the loan portfolio decreased during the first six months of 2014 with the consumer loan segment experiencing the largest decline of 13.6%. The Company experienced growth in the remaining segments of its loan portfolio during the first half of 2014 with the other real estate construction segment having the largest increase of 19.0%, primarily owner occupied. The Company had five relationships that were foreclosed on for a total of $641,000. Loans held for sale decreased 52.9% or $602,000. The allowance for loan losses was $3.7 million at June 30, 2014, which represented 1.19% of the loan portfolio.

-28-

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 $70,000, while premises and equipment increased $1.4 million. The increase in premises and equipment was related to the purchase of a piece of property that was currently being leased. Accrued interest receivable declined $129,000. Restricted stock which is comprised of Federal Home Loan Bank stock and Federal Reserve Bank stock decreased $146,000. Federal Home Loan Bank member institutions are required to increase or decrease their ownership as their utilization of FHLB borrowings change. The Company’s required ownership in FHLB stock decreased $185,000, while the Company’s required ownership in Federal Reserve Bank stock increased $39,000 to $506,000 during the first six months of 2014. Other real estate owned decreased $65,000. During the six months ended June 30, 2014, the Company foreclosed on five loan relationships during the first six months of 2014 totaling $641,000 and sold nine pieces of property totaling $744,000. The Company recorded net valuation write-down adjustments of $73,000. Other assets decreased $634,000.

Customer deposits, our primary funding source, experienced a $4.8 million decrease during the six month period ended June 30, 2014, decreasing from $453.7 million to $448.9 million. Demand noninterest bearing checking increased $5.3 million. This increase was offset by declines in interest checking and money market accounts of $575,000, savings deposits of $3.1 million, time deposits over $100,000 of $2.9 million and other time deposits of $3.6 million.

Total borrowings decreased $3.4 million for the period and consist of both short-term and long-term borrowed funds. During the first quarter of 2014, 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 $9.5 million. These securities have a final maturity date of March 31, 2024 and may be redeemed by the Company after March 31, 2019. The subordinated debt pays interest quarterly at an annual fixed rate of 5.75%. All proceeds of this private placement were issued and outstanding at June 30, 2014. All proceeds also qualify for and are included in the calculation of Tier 2 capital. On March 31, 2014, the Company called its entire $11.1 million private outstanding issue of fixed rate subordinated debt that had a final maturity of December 31, 2018. These two events had a net reduction in total borrowings of $1.6 million at June 30, 2014. Other components of total borrowings include $3.8 million in master notes and other secured borrowings.

Other liabilities increased from $4.5 million at December 31, 2013 to $5.0 million at June 30, 2014, an increase of $534,000.

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 OTC Bulletin Board, which is a publically traded exchange, however, the IRS no longer recognizes the Bulletin Board as a public exchange. The result of this ruling is that companies that have ESOP plans in place are required to set aside funds to handle allocated shares put back to the company. The plan that the Company has includes a put option that requires the Company to repurchase allocated shares of participants at the participants’ option. The Company reclassed capital from additional paid-in capital to set aside the liability to cover all allocated shares that the Company may be requested to buy back. During the first six months of 2014, the Company reclassed an additional $111,000 to this liability from additional paid-in capital.

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

-29-

of $8,600 on the loans was expensed by the Company to completely satisfy the loans. At June 30, 2014, the Company and its subsidiary bank exceeded all applicable regulatory capital requirements.

At June 30, 2014, total shareholders’ equity was $42.0 million, an increase of $1.5 million from December 31, 2013. Net income for the period was $1.1 million. Unrealized gains and losses on investment securities, net of tax, increased $814,000. The Company repurchased common stock totaling $74,000. The Company paid $293,000 in dividends attributed to noncontrolling interest.

Comparison of Results of Operations for the Three Months Ended June 30, 2014 and 2013.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $596,000 for the three months ended June 30, 2014, as compared to $156,000 for the three months ended June 30, 2013, an increase of $440,000. Net income available to common shareholders was $449,000 or $0.06 per common share for the three months ended June 30, 2014, compared to $(23,000) or $0.00 per common share for the three months ended June 30, 2013. Net income available to common shareholders is net income less any dividends on preferred stock related to the $10.0 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. The entire $10.0 million of preferred stock capital was redeemed and retired during 2013.

Net Interest Income

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

Net interest income for both the three months ended June 30, 2014 and June 30, 2013 was $4.2 million. During the current quarter, our decline in the volume of interest-earning assets outpaced the volume of interest-bearing liabilities by $82,000. The average yield on our interest–earning assets decreased four basis points to 4.10%, while the average rate we paid for our interest-bearing liabilities decreased 18 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. The aforementioned decreases resulted in an increase of 14 basis points in our interest rate spread, from 3.45% in 2013 to 3.59% in 2014. Our net interest margin was 3.68% and 3.56% for the comparable periods in 2014 and 2013, respectively.

-30-

The following table presents average balance sheets and a net interest income analysis for the three months ended June 30, 2014 and 2013:

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended June 30,


(dollars in thousands)
	Average Balance				Income/Expenses				Rate/Yield
	2014		2013		2014		2013		2014			2013
Interest-earning assets:
Taxable securities	$	100,666	$	106,051	$	434		302		1.73	%		1.14	%
Non-taxable securities		10,169		7,407		81		62		5.12	%		5.46	%
Short-term investments		43,745		45,596		39		54		0.36	%		0.48	%
Taxable loans		296,111		308,081		3,998		4,343		5.42	%		5.65	%
Non-taxable loans (1)		16,176		14,243		108		106		4.30	%		4.84	%

Total interest-earning assets		466,867		481,378		4,660		4,867		4.10	%		4.14	%
Interest-bearing liabilities:
Interest-bearing deposits		368,837		384,847		340		489		0.37	%		0.51	%
Short-term borrowed funds		4,906		11,351		9		43		0.74	%		1.52	%
Long-term debt		9,566		11,750		138		166		5.79	%		5.67	%

Total interest bearing liabilities		383,309		407,948		487		698		0.51	%		0.69	%
Net interest spread	$	83,558	$	73,430	$	4,173	$	4,169		3.59	%		3.45	%

Net interest margin (1) (% of earning assets)										3.68	%		3.56	%

(1)	Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 37.96 tax in 2014 and a 38.55% tax rate in 2013.

Provision and Allowance for Loan Losses

The Company recovered $(61,000) for the three months ending June 30, 2014 compared to recovering $(405,000) for the same period in 2013. There were net loan charge-offs of $437,000 for the three months ended June 30, 2014, as compared with net loan charge-offs of $87,000 during the same period of 2013. Refer to the Asset Quality discussion on page 34 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like all financial institutions, diversification of our revenue base is of major importance in our long term success. Total noninterest income decreased $43,000 for the three month period ending June 30, 2014 as compared to the same period in 2013. Income from mortgage loan sales decreased $385,000 from $642,000 for the quarter ended June 30, 2013 to $257,000 for the same period in 2014. Service charges on deposit accounts produced revenue of $359,000, a decrease of $33,000 for the three months ended June 30, 2014. The primary factor leading to this decrease was a decrease in NSF fees for the comparable periods. Other service fees and commissions experienced a $129,000 or 15.3% increase for the comparable three month period, primarily due to an increase in brokerage commissions and asset management fees. The Company realized gains on the sale of other real estate owned of $93,000 for the three months ended June 30, 2014 compared to realized losses of $22,000 for the same period in 2013. The Company also realized a gain of $146,000 on the sale of a piece of property.

Noninterest Expense

Noninterest expense for the quarter ended June 30, 2014 was $5.3 million compared to $6.3 million for the same period of 2013, a decrease of $980,000. Salaries and employee benefits, the largest component of noninterest expense, decreased $80,000 for the quarter ending June 30, 2014. Foreclosed real estate expense decreased $749,000 for the three months ending June 30, 2014. The major factor related to the decrease in foreclosed real estate expense was a decrease in write-downs on properties held in other real estate owned. These write downs are attributed to updated appraisals and the lowering of list prices. Total write-downs for the three month period in 2014 were $63,000 compared to $728,000 for the same period in 2013 that did include one write-down totaling $687,000. Professional fees and services decreased $50,000 during the three months ending June 30, 2014 to $193,000 as compared to $243,000 for the same period in 2013. Other noninterest expense increased $4,000 for the comparable three month period. The table below reflects the composition of other noninterest expense.

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Other noninterest expense


	Three Months Ended June 30,
	2014		2013
	(dollars in thousands)
Postage	$	47	$	57
Telephone and data lines		42		38
Loan collection expense		87		109
Shareholder relations expense		50		45
Dues and subscriptions		43		43
Other		345		326

Total	$	614	$	618

Income Tax Expense

The Company had income tax expense of $251,000 for the three months ended June 30, 2014 resulting in an effective rate of 29.63% compared to income tax expense of $156,000 and an effective rate of 37.60% in the 2013 period Income taxes computed at statutory rate are reduced primarily by eligible amount of interest earned on state and municipal securities, tax free municipal loans and income earned on bank owned life insurance. The increase in earnings generated in these areas coupled with the reduction of the state tax rate was the primary drivers behind the decline in the effective tax rate.

Comparison of Results of Operations For the Six Months Ended June 30, 2014 and 2013.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $1.1 million for the six months ended June 30, 2014, as compared to $919,000 for the six months ended June 30, 2013, an increase of $219,000. Net income available to common shareholders was $840,000 or $0.11 per common share for the six months ended June 30, 2014, compared to $476,000 or $0.06 per common share for the six months ended June 30, 2013. Net income available to common shareholders is net income less any dividends on preferred stock related to the $10.0 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. The entire $10.0 million of preferred stock capital was redeemed and retired during 2013.

Net Interest Income

Net interest income for both the six months ended June 30, 2014 and June 30, 2013 was $8.2 million. During the six months ending June 30, 2014, the decline in the volume of interest-earning assets outpaced the decline in growth of our interest-bearing liabilities by $343,000. The average yield on our interest–earning assets remained steady at 4.07%, while the average rate we paid for our interest-bearing liabilities decreased 19 basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve adjusts interest rates, while interest-bearing time deposits adjust at the time of maturity. The aforementioned changes resulted in an increase of 19 basis points in our interest rate spread to 3.52% for the first six months of 2014, compared to 3.34% for the first six months of 2013. Our net interest margin was 3.62% and 3.46% for the comparable six month periods in 2014 and 2013, respectively. A portion of the Company’s loan portfolio has interest rate floors and caps in place on the loans. This feature has allowed the Company to maintain a strong interest margin, while there has been a decline in rates; however, this feature could hurt the margin in a rising rate environment.

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The following table presents average balance sheets and a net interest income analysis for the six months ended June 30, 2014 and 2013:

Average Balance Sheet and Net Interest Income Analysis

For the Six Months Ended June 30,


(dollars in thousands)
	Average Balance				Income/Expenses				Rate/Yield
	2014		2013		2014		2013		2014			2013
Interest-earning assets:
Taxable securities	$	97,649	$	102,213	$	845	$	574		1.75	%		1.13	%
Nontaxable securities (1)		9,151		7,629		145		128		5.16	%		5.51	%
Short-term investments		53,447		54,418		84		109		0.32	%		0.40	%
Taxable loans		293,022		311,158		7,944		8,667		5.47	%		5.62	%
Non-taxable loans (1)		15,780		14,437		221		209		4.55	%		4.75	%

Total interest-earning assets		469,049		489,855		9,239		9,687		4.07	%		4.07	%
Interest-bearing liabilities:
Interest-bearing deposits		371,617		386,513		713		1,034		0.39	%		0.54	%
Short-term borrowed funds		5,416		14,166		27		123		1.01	%		1.75	%
Long-term debt		10,350		12,209		295		337		5.75	%		5.57	%

Total interest bearing liabilities		387,383		412,888		1,035		1,494		0.54	%		0.73	%

Net interest spread	$	81,666	$	76,967	$	8,204	$	8,193		3.53	%		3.34	%

Net interest margin (1) (% of earning assets)										3.62	%		3.46	%

(1)	Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 37.96 tax rate in 2014 and a 38.55% tax rate in 2013.

Provision and Allowance for Loan Losses

The Company recovered $(485,000) for the six months ending June 30, 2014 compared to $(774,000) recovered for the same period in 2013. There were net loan charge-offs of $910,000 for the six months ended June 30, 2014 as compared with net loan charge-offs of $546,000 during the same period of 2013. Refer to the Asset Quality discussion on page 34 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like all financial institutions, diversification of our earnings base is of major importance in our long term success. Total noninterest income decreased $861,000 for the six month period ending June 30, 2014 as compared to the same period in 2013. Income from mortgage loan sales was $419,000 for the six months ended June 30, 2014 compared to $1.5 million for the same period in 2013. Service charges on deposit accounts produced revenue of $737,000 for the six months ended June 30, 2014, a decrease of $60,000. The primary contributing factor is a decrease in NSF fees due in large part to changes in the regulatory governance. Other service fees and commissions experienced a 16.7% increase for the comparable six month period. This increase was directly related to brokerage commissions and asset management fees increasing. Gain on sale of other assets was $240,000 for the six months ended June 30, 2014 compared to $225,000 for the same period in 2013. Gains realized on the sale of securities were $21,000 for the first six months in 2014 compared to $14,000 for the same period in 2013.

Noninterest Expense

Noninterest expense for the six months ended June 30, 2014 was $10.6 million compared to $11.9 million for the same period of 2013; a decrease of $1.3 million. Salaries and employee benefits, the largest component of noninterest expense, decreased $166,000 to $6.0 million for

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the period ending June 30, 2014. Net occupancy and equipment expense had a combined decrease of $12,000. Professional fees and services decreased $131,000. Foreclosed real estate expense decreased $696,000. The major factor related to the decrease in foreclosed real estate expense was a decrease in write downs on properties held in other real estate owned to a total for the first six months of 2014 of $72,000 compared to $758,000 in write downs for the same period in 2013 that does include one write down totaling $687,000 during the second quarter of 2013. Other noninterest expense decreased $173,000 for the comparable six month periods. The table below reflects the composition of other noninterest expense.

Other noninterest expense


	Six Months Ended June 30,
	2014		2013
	(dollars in thousands)
Postage	$	98	$	104
Telephone and data lines		76		92
Loan collection expense		87		194
Shareholder relations expense		112		87
Dues and subscriptions		76		83
Other		705		767

Total	$	1,154	$	1,327

Income Tax Expense

The Company had income tax expense of $519,000 for the six months ended June 30, 2014 resulting in an effective tax rate of 31.42%, compared to income tax expense of $509,000 and an effective rate of 35.64% in the 2013 period. Income taxes computed at statutory rate are reduced primarily by eligible amount of interest earned on state and municipal securities, tax free municipal loans and income earned on bank owned life insurance. The increase in tax free income coupled with the reduction in the state tax rate attributed to this decrease in effective tax rate.

Asset Quality

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

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

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

At June 30, 2014 the levels of our impaired loans, which includes all loans in nonaccrual status, TDRs and other loans deemed by management to be impaired, were $8.8 million compared to $17.6 million at December 31, 2013, a net decrease of $8.8 million. Total nonaccrual loans, which are a component of impaired loans, decreased from $4.7 million at December 31, 2013 to $2.6 million at June 30, 2014. During the second quarter of 2014, the Company performed a comprehensive review of all impaired loans. This review resulted in $6.7 million in loans with previously identified specific reserves of $419,000 being removed from impaired status. These loans were initially considered impaired during a period of heightened uncertainty in which each loan was experiencing significant delinquency stemming from reductions in cash flow attributed to the slow economy. Management reevaluated each of these loans and determined they have now performed under the original terms of the loan and remained in current or non-delinquent status for a sufficient amount of time to remove the loans from the impaired loan category. Therefore, management determined the previously identified credit weaknesses have been remediated and, while most of these loans currently retain their substandard risk grade status, they should all be removed from the impaired loan status as management expects to collect the current balance due in accordance with the original terms of the loan. Also, loans totaling $295,000 were transferred from impaired loans to other real estate owned, the Bank received $1.5 million in loan principal payments, and charge-offs of principal that had previously established specific reserves of $852,000, were additional factors contributing to the decrease in impaired loans. These decreases were offset by the addition of five relationships, in the amount of $533,000, that were added to impaired loans during the six month period.

Along with changes to the balance of impaired loans, the Company reevaluated its impairment measurement techniques to determine whether the most relevant method was being utilized for each impaired loan. The remaining impaired loans primarily consist of performing TDRs. This resulted in all the remaining impaired loans moving from the collateral method to the cash flow method with the exception of three relationships deemed to be collateral dependent. The switch from evaluating impaired loans under the collateral method to the cash flow method resulted in the reversal of $489,000 in previously established specific reserves. Due to the nature of the modifications the Company enters into with Borrowers, while payments may be reduced, significant concessions are not entered into and loan to life cash flows are not significantly altered. Given this and the uncertainty at the time these modifications occurred and the reserves were established, management didn’t believe the cash flow method provided adequate levels of reserves. This reversal, along with the removal of specific reserves associated with loan upgrades discussed above in the amount of $419,000, payoffs on loans with specific reserves of $238,000 and updated appraisals on one of the collateral dependent relationships, lowering the impairment by $349,000, resulted in $2.3 million being removed from specific reserves during the first six months of 2014.

The allowance expressed as a percentage of gross loans held for investment decreased 47 basis points from 1.66% at December 31, 2013 to 1.19% at June 30, 2014. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 0.93% at December 31, 2013 and 1.20% at June 30, 2014, while the individually evaluated allowance as a percentage of individually evaluated loans decreased from 13.60% to 1.10% for the same periods. The portion of the Company’s allowance for loan loss model related to general reserves captures the mean loss of individual loans and the rare event of severe loss that can occur within the loan portfolio. Specifically, the Company calculates probable losses on loans by computing a probability of loss and expected loss scenario by FDIC call report codes. Together, these expected components as well as a level of more extreme unexpected losses form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.

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The Company assesses the probability of losses inherent in the loan portfolio using probability of default data, acquired from a third party vendor representing a one year loss horizon for each obligor. The Company updates the data inputs into the model; specifically the loss given default and the probability of defaults obtained from the vendor annually during the second quarter. The Company updates the beacon scores that are one of the components used within the allowance model semi-annually, during the first and third quarters. For the first time in several updates, beacon scores experienced significant improvement during 2013. This trend continued during the first quarter of 2014 with beacon scores continuing to show improvement. The average beacon score increased nine points from 702 to 712 during the first quarter.

During the second quarter of 2014, the allocation for general reserves increased $1.1 million from the previous quarter. Two changes were made to the model’s inputs that resulted in this increase. First, the process of assigning the probability of default to commercial loans was changed to be based on internally determined loan grades instead of the credit scores of the underlying individual borrower This change added approximately $260,000 to general reserves. Second, it was decided that a more accurate and stable measure of the risk in the portfolio would be achieved by a “through the cycle” probability of default. The probabilities of default are sampled from the prior two years making the previous method of estimating default a severely lagging statistic. Credit quality is currently improving and has been for the last several years; but there is no guarantee that a large negative economic shock won’t occur, increasing the credit risk in the portfolio. Using an average probability of default that is derived from both adverse and favorable economic conditions more accurately represents the range of possible risks to the loan portfolio. We used all available historical defaults to compute this average, dating back to the 2009-2011 default windows. This change added nearly $1.0 million to general reserves.

Nonperforming loans, which consist of nonaccrual loans and loans past due 90 days and still accruing, to total loans decreased from 1.55% at December 31, 2013, to 0.85% at June 30, 2014.

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

Other real estate owned decreased $65,000 during the first half of 2014. The Company sold nine pieces of foreclosed property totaling $744,000 realizing a gain of $94,000 The Company also had write downs and changes in reserves totaling $73,000 on the remaining existing property. During the first six months of 2014, the Company did foreclose on five new pieces of property totaling $641,000, which included paying through a first lien of $346,000 upon foreclosed on a second lien that the Company held.

Restructured loans at June 30, 2014 totaled $6.1 million compared to $6.4 million at December 31, 2013 and are included in impaired loans.

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The following table shows the comparison nonperforming assets at June 30, 2014 to December 31, 2013:

Nonperforming Assets


(dollars in thousands)
	June 30, 2014			December 31, 2013
Nonperforming assets:
Loans past due 90 days or more	$	—		$	—
Nonaccrual loans		2,648			4,717
Other real estate owned		7,105			7,170

Total nonperforming assets	$	9,753		$	11,887

Allowance for loans losses	$	3,700		$	5,095
Nonperforming loans to total loans		0.85	%		1.53	%
Allowance for loan losses to total loans		1.19	%		1.66	%
Nonperforming assets to total assets		1.91	%		2.30	%
Allowance for loan losses to nonperforming loans		139.72	%		108.02	%

Liquidity and Capital Resources

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

The Company’s primary sources of internally generated funds are principal and interest payments on loans, cash flows generated from operations and cash flow generated by investments. Growth in deposits is typically the primary source of funds for loan growth. The Company and its subsidiary bank have multiple funding sources, in addition to deposits that can be used to increase liquidity and provide additional financial flexibility. These sources are the subsidiary bank’s established federal funds lines with correspondent banks aggregating $15.8 million at June 30, 2014, with available credit of $15.8 million; established borrowing relationships with the Federal Home Loan Bank, with available credit of $57.5 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of $34.3 million and the issuance of commercial paper. The Company has also secured long-term debt from other sources. Total debt from these sources aggregated $13.3 million at June 30, 2014, compared to $16.7 million at December 31, 2013.

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

Regulatory guidelines require a minimum of total capital to risk-adjusted assets ratio of 8 percent and a Tier 1 leverage ratio of 4 percent. Banks are considered “well capitalized” by regulatory standards when they meet or exceed a Tier 1 risk-based capital ratio of 6 percent, a total risk-based capital ratio of 10 percent and a leverage ratio of 5 percent. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with those guidelines.

The Company and its subsidiary bank have each maintained capital levels exceeding minimum levels for “well capitalized” banks and bank holding companies. The Company expects to continue to exceed minimum capital requirements without altering current operations or strategy. As previously discussed, the Company’s subsidiary bank has a net total of $10.5 million in outstanding fixed Rate Noncumulative Perpetual Preferred Stock. The preferred stock qualifies as Tier 1 capital at the bank and will pay dividends at an annual rate of 5.30%. The net total of $10.5 million is presented as noncontrolling interest at the Company level and does qualify as Tier 1 capital at the Company. At June 30, 2014, the Company had $9.5 million in subordinated debt outstanding that qualifies as Tier 2 capital. The Company has made all interest and dividend payments in a timely manner.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s primary market risk is interest rate risk. Interest rate risk is the result of differing maturities or repricing intervals of interest-earning assets and interest-bearing liabilities and the fact that rates on these financial instruments do not change uniformly. These conditions may impact the earnings generated by the Company’s interest earning assets or the cost of its interest-bearing liabilities, thus directly impacting the Company’s overall earnings. The Company’s management actively monitors and manages interest rate risk. One way this is accomplished is through the development of and adherence to the Company’s asset/liability policy. This policy sets forth management’s strategy for matching the risk characteristics of the Company’s interest-earning assets and liabilities so as to mitigate the effect of changes in the rate environment. In management’s opinion, the Company’s market risk profile has not changed significantly since December 31, 2013.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

Management of the Company has evaluated, with the participation of the Company’s principal executive officer and principal financial officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a -15(f) and 15d – 15(f) of the Exchange Act) during the second quarter of 2014. In connection with such evaluation, the Company has determined that there were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensuring that the Company’s systems evolve with its business.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

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

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Item 1A. Risk Factors

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information with respect to shares of common stock repurchased by the Company during the three months ended June 30, 2014.


	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Program (1)		(d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans (2)(3)
April 1, 2014 Through April 30, 2014		—	$	—		—	$	—
May 1, 2014 Through May 31, 2014		—	$	—		—	$	—
June 1, 2014 Through June 30, 2014		12,687	$	2.87		—	$	—
Total		12,687	$	2.87		—	$	—

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

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Raymond R. Cranford, Jr., Thomas M. Hearne and James E. Nance were technically appointed to the Registrant’s Board of Directors effective February 27, 2014, prior to their election by the shareholders at the Registrant’s 2014 Annual Meeting of Shareholders.

Mr. Cranford is an owner and Vice President of Sales for Crook Motor Co., Inc., a new and used truck sales company in Albemarle, NC, and a graduate of North Carolina State University.

Mr. Hearne is a retired geopavement engineer from the North Carolina Department of Transportation with 30 years of service. He earned a Bachelor of Science degree in Civil Engineering from The Citadel, Charleston, SC, and a Master of Engineering degree from the University of Florida, Gainesville, FL. He is a registered Professional Engineer in the State of North Carolina

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Mr. Nance served as Dealer Operator and President for Confederate Motors, Inc. which was a Chevrolet franchised dealership during his tenure with the family operated business from 1973 until the sale of the business in 2007. In 2008 he started North State Acquisitions, LLC and North State Negotiations, LLC which are real estate firms specializing in right of way negotiations and claim settlements. Mr. Nance is a graduate of the University of North Carolina at Chapel Hill with a B.S. in Business Administration. He also is a licensed Real Estate Broker and Broker in Charge in the State of North Carolina.

As of the date of this Quarterly Report, none of the director appointees had been selected to any committees.

Each of the above-named directors is entitled to receive a cash fee for each board and committee meeting attended as specified under the Registrant’s current board policy, as the same may be modified from time to time.

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Item 6. Exhibits


Exhibit Number		Description of Exhibit

3.1		Registrant’s Articles of Incorporation ⁽¹⁾

3.2		Registrant’s By-laws ⁽⁶⁾

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

4.1		Form of stock certificate ⁽¹⁾

4.2		Form of Security Holders Agreement

10.1		Incentive Stock Option Plan, as amended ⁽¹⁾

10.2		Employee Stock Ownership Plan and Trust ⁽²⁾

10.3		2006 Incentive Stock Option Plan ⁽³⁾

10.4		2006 Employee Stock Purchase Plan ⁽³⁾

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

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

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

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

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

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

101		Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, in XBRL (eXtensible Business Reporting Language) ⁽⁷⁾

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

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

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

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

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

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

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

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Signatures

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


	UWHARRIE CAPITAL CORP (Registrant)

Date: August 4, 2014	By:	/s/ Roger L. Dick
	Roger L. Dick
	President and Chief Executive Officer

Date: August 4, 2014	By:	/s/ R. David Beaver, III
	R. David Beaver, III
	Principal Financial Officer

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EXHIBIT INDEX


Exhibit Number		Description of Exhibit

3.1		Registrant’s Articles of Incorporation ⁽¹⁾

3.2		Registrant’s By-laws ⁽⁶⁾

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

4.1		Form of stock certificate ⁽¹⁾

4.2		Form of Security Holders Agreement

10.1		Incentive Stock Option Plan, as amended ⁽¹⁾

10.2		Employee Stock Ownership Plan and Trust ⁽²⁾

10.3		2006 Incentive Stock Option Plan ⁽³⁾

10.4		2006 Employee Stock Purchase Plan ⁽³⁾

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

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

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

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

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

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

101		Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, in XBRL (eXtensible Business Reporting Language) ⁽⁷⁾

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

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

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

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

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

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

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

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TABLE OF CONTENTS

Part I. Financial Information Item 1 - Financial Statements Note 1 Basis Of Presentation Note 2 Comprehensive Income Note 3 Noncontrolling Interest Note 4 Per Share Data Note 5 Investment Securities Note 6 Loans Held For Investment Note 7 Allowance For Loan Losses Note 8 Troubled Debt Restructures Note 9 Commitments and Contingencies Note 10 Fair Value Disclosures Note 11 Fair Values Of Financial Instruments and Interest Rate Risk Note 12 Recent Accounting Pronouncements Item 2 Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company