UWHARRIE CAPITAL CORP - FORM 10-K - EX-13

Attached files

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EX-31.1 - EX-31.1 - UWHARRIE CAPITAL CORP	d114973dex311.htm
EX-21 - EX-21 - UWHARRIE CAPITAL CORP	d114973dex21.htm
EX-32 - EX-32 - UWHARRIE CAPITAL CORP	d114973dex32.htm
EX-31.2 - EX-31.2 - UWHARRIE CAPITAL CORP	d114973dex312.htm
10-K - FORM 10-K - UWHARRIE CAPITAL CORP	d114973d10k.htm
EX-23 - EX-23 - UWHARRIE CAPITAL CORP	d114973dex23.htm

Exhibit 13

Uwharrie Capital Corp

2015

ANNUAL REPORT TO SHAREHOLDERS

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Description of Business

Uwharrie Capital Corp (the “Company”) is a North Carolina bank holding company. The Company was incorporated on February 24, 1993 to become the bank holding company for Uwharrie Bank (the “Bank”), formerly, known as Bank of Stanly a North Carolina commercial bank chartered on September 28, 1983, and its three wholly-owned subsidiaries, The Strategic Alliance Corporation, BOS Agency, Inc., and Gateway Mortgage, Inc., a mortgage origination company. The Company also owns two non-bank subsidiaries, Uwharrie Investment Advisors, Inc., formally known as Strategic Investment Advisors, Inc., and Uwharrie Mortgage, Inc.

The Bank engages in retail and commercial banking, with six banking offices in Stanly County, North Carolina. The Bank provides a wide range of banking services including deposit accounts, commercial, consumer, home equity and residential mortgage loans, safe deposit boxes, and electronic banking services.

On January 19, 2000, the Company completed its acquisition of Anson Bancorp, Inc. and its subsidiary, Anson Savings Bank. The savings bank retained its North Carolina savings bank charter and became a wholly-owned subsidiary of Uwharrie Capital Corp as Anson Bank & Trust Co. (“Anson”) and provided financial services to customers through one banking office in Anson County until September 1, 2013 when it was consolidated with and into the Bank. The former Anson office is now operated by the Bank.

On April 10, 2003, the Company capitalized a new wholly-owned subsidiary bank, Cabarrus Bank & Trust Company (“Cabarrus”), located in Concord, North Carolina. As of that date, Cabarrus purchased two branch offices located in Cabarrus County from the Bank to begin its operation. Cabarrus operated as a commercial bank and provided a full range of banking services. Cabarrus was consolidated into the Bank effective September 1, 2013. The former Cabarrus offices are now operated as branches of the Bank.

The Company and its subsidiaries are located in Stanly County, Anson County, Cabarrus County and Mecklenburg County. However, the Company intends to prudently expand its service area to include the entire Uwharrie Lakes Region of North Carolina.

Depository services offered by the Bank include personal and commercial checking, savings, money market, certificates of deposit accounts and individual retirement accounts, all tailored to meet customers’ needs. The bank provides fixed and variable rate loans, which include mortgage, home equity, lines of credit, consumer and commercial loans. The bank also offers internet banking, mobile banking, and 24-hour telephone banking, providing customers the convenience of access to account information, rate information and accessibility of funds transfers between accounts. Other services include MasterCard^® credit cards and a Visa^® check card which functions as a point-of-sale (POS) and automated teller machine (ATM) card. Customers can use the check card for purchases at virtually any merchant accepting Visa^® and ATMs displaying the STAR^® or CIRRUS^® networks regionally and worldwide, respectively.

Uwharrie Investment Advisors, Inc., an SEC registered investment advisory firm, provides portfolio management services to its customers. The Strategic Alliance Corporation (Strategic Alliance^®) is a broker-dealer registered with the Financial Industry Regulatory Authority (FINRA) and SPIC. BOS Agency provides insurance products and is licensed in the state of North Carolina. Through Strategic Investment Group, a DBA for financial consultants registered with Private Client Services LLC., securities and insurance products are offered, including fixed annuities, long-term care products, Medicare supplement products, and life insurance products. Group insurance products are offered through an arrangement with Burchfield Insurance Group, Inc.

Uwharrie Investment Group: Securities and insurance products are offered through Private Client Services, LLC, 2225 Lexington Rd , Louisville, KY 40206, ph: 502-451-0600, Member FINRA and SIPC. Private Client Services, LLC and Uwharrie Capital Corp along with its affiliates and/or subsidiaries are separate, distinct, and unaffiliated entities. It is important to note that securities and insurance products are: NOT BANK DEPOSITS – NOT INSURED BY THE FDIC OR ANY FEDERAL GOVERNMENT AGENCY – NOT OBLICATIONS OF OR GUARANTEED BY ANY FINANCIAL INSTITUTION – SUBJECT TO RISK AND MAY LOSE VALUE.

Uwharrie Bank, Member FDIC, Equal Housing Lender.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Financial Highlights


(Dollars in thousands, except per share amounts)	2015			2014			Percent Increase (Decrease)
For the year:
Net income	$	2,007		$	1,679			19.54	%
Net income (loss) available to common shareholders	$	1,415		$	1,088			30.06	%
Basic net income (loss) per common share (1)	$	0.20		$	0.15			33.33	%
Diluted net income (loss) per common share (1)	$	0.20		$	0.15			33.33	%

Weighted average common shares outstanding (diluted)		7,051,751			7,447,008			-5.31	%

At year-end:
Total assets	$	532,202		$	518,464			2.65	%
Total earning assets		482,527			473,157			1.98	%
Loans held for investment		320,132			310,853			2.99	%
Total interest-bearing liabilities		390,514			390,609			-0.02	%
Shareholders’ equity		43,314			42,262			2.49	%
Book value per common share (1)	$	4.69		$	4.46			5.14	%

Averages for the year:
Total assets	$	521,699		$	513,676			1.56	%
Total earning assets		479,331			470,948			1.78	%
Loans held for investment		316,020			309,338			2.16	%
Total interest-bearing liabilities		382,461			386,237			-0.98	%
Shareholders’ equity		43,123			41,681			3.46	%

Financial ratios (in percentage):
Return on average assets		0.38	%		0.33	%
Return on average shareholders’ equity		4.65	%		4.03	%
Average equity to average assets		8.27	%		8.11	%
Net interest margin (fully tax equivalent basis)		3.47	%		3.60	%
Allowance as % of loans at year-end		0.90	%		1.20	%
Allowance as % of nonperforming loans		368.23	%		166.43	%
Nonperforming loans to total loans		0.24	%		0.72	%
Nonperforming assets to total assets		1.09	%		1.56	%
Net loan charge-offs (recoveries) to average loans		0.07	%		0.31	%

(1)	Net income per share, book value per share and shares outstanding at year-end for 2014 have been adjusted to reflect the 2% stock dividend in 2015.

Market for the Company’s Common Stock and Related Security Holder Matters

It is the philosophy of Uwharrie Capital Corp to promote a strong base of local shareholders. While bid and ask prices for the Company’s common stock are quoted on the OTCQB marketplace operated by OTC Markets Group, Inc. under the symbol UWHR, trading is sporadic with trades also taking place in privately negotiated transactions. Management makes every reasonable effort to match willing buyers with willing sellers as they become known for the purpose of private negotiations for the purchase and sale of the Company’s common stock.

Shareholders needing information about purchasing or selling shares of Uwharrie Capital Corp should contact Tamara M. Singletary or Lisa E. Hartsell, Investor Relations at Uwharrie Capital Corp, 132 N. First Street, Post Office Box 338, Albemarle, NC 28002.

The Board of Directors adopts a dividend policy on an annual basis. For 2015, Uwharrie Capital Corp declared a 2% stock dividend on its outstanding common stock. The Board of Directors will determine an appropriate dividend, if any, on an annual basis, consistent with the capital needs of the Company.

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LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

Uwharrie Capital Corp

Albemarle, North Carolina

We have audited the accompanying consolidated balance sheets of Uwharrie Capital Corp and Subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Uwharrie Capital Corp and Subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

/s/ Dixon Hughes Goodman LLP

Charlotte, North Carolina

March 1, 2016

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2015 and 2014


	2015			2014
	(dollars in thousands)
ASSETS
Cash and due from banks	$	7,038		$	6,807
Interest-earning deposits with banks		61,895			43,984
Securities available for sale, at fair value		89,258			112,824
Securities held to maturity (fair value $11,242 and $5,450, respectively)		11,242			5,496
Loans held for sale		5,922			2,147
Loans:
Loans held for investment		320,132			310,853
Less allowance for loan losses		(2,884	)		(3,738	)

Net loans held for investment		317,248			307,115

Premises and equipment, net		14,666			14,858
Interest receivable		1,564			1,747
Restricted stock		1,040			1,038
Bank owned life insurance		6,762			6,645
Other real estate owned		4,994			5,865
Prepaid assets		764			969
Other assets		9,809			8,969

Total assets	$	532,202		$	518,464

LIABILITIES
Deposits:
Demand noninterest-bearing	$	92,524		$	80,069
Interest checking and money market accounts		252,345			243,116
Savings deposits		40,436			39,091
Time deposits, $250,000 and over		8,148			9,865
Other time deposits		74,280			84,294

Total deposits		467,733			456,435

Short-term borrowed funds		5,758			4,685
Long-term debt		9,547			9,558
Interest payable		168			180
Other liabilities		5,682			4,783

Total liabilities		488,888			475,641

Off balance sheet items, commitments and contingencies (Note 13)

Redeemable common stock held by the Employee Stock Ownership Plan (ESOP) (Note 17)		—			561

SHAREHOLDERS’ EQUITY
Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and outstanding 6,983,017 and 6,961,484		8,729			8,702
Additional paid-in capital		12,308			11,712
Undivided profits		11,893			10,974
Accumulated other comprehensive income (loss)		(212	)		305

Total Uwharrie Capital shareholders’ equity		32,718			31,693
Noncontrolling interest		10,596			10,569

Total shareholders’ equity		43,314			42,262

Total liabilities and shareholders’ equity	$	532,202		$	518,464

The accompanying notes are an integral part of the consolidated financial statements.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2015, 2014 and 2013


	2015			2014			2013
	(dollars in thousands, except share
	and per share data)
Interest Income
Loans, including fees	$	15,725		$	16,336		$	17,573
Investment securities:
US Treasury		212			361			397
US Government agencies and corporations		1,315			1,271			1,066
State and political subdivisions		410			321			252
Interest-earning deposits with banks and federal funds sold		185			168			177

Total interest income		17,847			18,457			19,465

Interest Expense
Interest checking and money market accounts		278			299			439
Savings deposits		44			57			171
Time deposits $250,000 and over		69			49			60
Other time deposits		728			948			1,240
Short-term borrowed funds		64			34			160
Long-term debt		550			573			664

Total interest expense		1,733			1,960			2,734

Net interest income		16,114			16,497			16,731
Provision for (recovery of) loan losses		(620	)		(389	)		28

Net interest income after provision for loan losses		16,734			16,886			16,703

Noninterest Income
Service charges on deposit accounts		1,293			1,467			1,627
Other service fees and commissions		4,117			3,928			3,399
Gain (loss) on sale of securities (includes reclassification of $536, ($2) and ($523) from accumulated comprehensive income in 2015, 2014 and 2013, respectively)		536			(2	)		(523	)
Income from mortgage loan sales		2,306			1,001			2,113
Other income		458			927			971

Total noninterest income		8,710			7,321			7,587

Noninterest Expense
Salaries and employee benefits		13,186			12,051			12,423
Net occupancy expense		1,139			1,107			1,098
Equipment expense		678			680			734
Data processing costs		734			729			784
Office supplies and printing		217			273			358
Foreclosed real estate expense		853			1,246			1,647
Professional fees and services		594			847			680
Marketing and donations		852			762			728
Electronic banking expense		1,083			939			999
Software amortization and maintenance		578			535			541
FDIC insurance		375			425			518
Other noninterest expense		2,342			2,286			2,484

Total noninterest expense		22,631			21,880			22,994

Income before income taxes		2,813			2,327			1,296
Income taxes (includes reclassification of (($207), $1 and and $222) from accumulated other comprehensive income, respectively)		806			648			342

Net income	$	2,007		$	1,679		$	954

Consolidated net income	$	2,007		$	1,679		$	954
Less: Net income attributable to noncontrolling interest		(592	)		(591	)		(478	)

Net income attributable to Uwharrie Capital Corp		1,415			1,088			476
Dividends on preferred stock		—			—			(325	)

Net Income available to common shareholders	$	1,415		$	1,088		$	151

Net income per common share
Basic	$	0.20		$	0.15		$	0.02

Diluted	$	0.20		$	0.15		$	0.02

Weighted average common shares outstanding
Basic		7,051,751			7,447,008			7,570,732
Diluted		7,051,751			7,447,008			7,570,732

The accompanying notes are an integral part of the consolidated financial statements.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2015, 2014 and 2013


	2015			2014			2013
	(dollars in thousands)
Net Income	$	2,007		$	1,679		$	954

Other comprehensive income (loss):
Unrealized gains (losses) on available for sale securities		(248	)		1,311			(3,662	)
Related tax effect		60			(445	)		1,292

Reclassification of losses (gains) recognized in net income		(536	)		2			523
Related tax effect		207			(1	)		(202	)

Total other comprehensive income (loss)		(517	)		867			(2,049	)

Comprehensive income (loss)		1,490			2,546			(1,095	)

Less: Comprehensive income attributable to noncontrolling interest		(592	)		(591	)		(478	)

Comprehensive income (loss) attributable to Uwharrie Capital	$	898		$	1,955		$	(1,573	)

The accompanying notes are an integral part of the consolidated financial statements.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended December 31, 2015, 2014 and 2013


	Number of Common Shares Issued			Preferred Stock Series A			Preferred Stock Series B			Discount on Preferred Stock			Common Stock			Additional Paid-in Capital			Unearned ESOP Compensation			Undivided Profits			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest			Total
	(dollars in thousands, except share data)
Balance, December 31, 2012		7,502,496		$	10,000		$	500		$	(100	)	$	9,378		$	12,201		$	(875	)	$	10,138		$	1,487		$	—		$	42,729
Net Income		—			—			—			—			—			—			—			476			—			478			954
Repurchase of common stock		(56,565	)		—			—			—			(71	)		(98	)		—			—			—			—			(169	)
Other comprehensive loss		—			—			—			—			—			—			—			—			(2,049	)		—			(2,049	)
Release of ESOP shares		—			—			—			—			—			(49	)		94			—			—			—			45
Increase in ESOP notes receivable		—			—			—			—			—			—			(208	)		—			—			—			(208	)
Reclass to mezzanine capital		—			—			—			—			—			(132	)		—			—			—			—			(132	)
Repayment of preferred stock series A		—			(10,000	)		(500	)		—			—			—			—			—			—			—			(10,500	)
Issuance of preferred stock (noncontrolling interest)		—			—			—			—			—			—			—			—			—			10,655			10,655
Record costs of preferred stock (noncontrolling interest)		—			—			—			—			—			—			—			—			—			(137	)		(137	)
Record preferred stock dividend (noncontrolling interest)		—			—			—			—			—			—			—			—			—			(454	)		(454	)
Record preferred stock dividend and discount accretion		—			—			—			100			—			—			—			(325	)		—			—			(225	)

Balance, December 31, 2013		7,445,931		$	—		$	—		$	—		$	9,307		$	11,922		$	(989	)	$	10,289		$	(562	)	$	10,542		$	40,509

Net Income		—			—			—			—			—			—			—			1,088			—			591			1,679
Repurchase of common stock		(374,130	)		—			—			—			(468	)		(942	)		—			—			—			—			(1,410	)
2% stock dividend		142,129			—			—			—			178			221			—			(399	)		—			—			—
Cash paid – fractional shares		—			—			—			—			—			—			—			(4	)		—			—			(4	)
Other comprehensive income		—			—			—			—			—			—			—			—			867			—			867
Release of ESOP shares		—			—			—			—			—			5			16			—			—			—			21
Repayment of ESOP notes receivable		(252,446	)		—			—			—			(315	)		(649	)		973			—			—			—			9
Reclass from mezzanine capital		—			—			—			—			—			1,155			—			—			—			—			1,155
Record preferred stock dividend series B (noncontrolling interest)		—			—			—			—			—			—			—			—			—			(416	)		(416	)
Record preferred stock dividend series C (noncontrolling interest)		—			—			—			—			—			—			—			—			—			(148	)		(148	)

Balance, December 31, 2014		6,961,484		$	—		$	—		$	—		$	8,702		$	11,712		$	—		$	10,974		$	305		$	10,569		$	42,262

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY Continued

Years Ended December 31, 2015, 2014 and 2013


	Number of Common Shares Issued			Preferred Stock Series A		Preferred Stock Series B		Discount on Preferred Stock		Common Stock			Additional Paid-in Capital			Unearned ESOP Compensation		Undivided Profits			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest			Total
	(dollars in thousands, except share data)
Balance, December 31, 2014		6,961,484		$	—	$	—	$	—	$	8,702		$	11,712		$	—	$	10,974		$	305		$	10,569		$	42,262
Net Income		—			—		—		—		—			—			—		1,415			—			592			2,007
Repurchase of common stock		(114,377	)		—		—		—		(143	)		(286	)		—		—			—			—			(429	)
2% stock dividend		135,910			—		—		—		170			321			—		(491	)		—			—			—
Cash paid – fractional shares		—			—		—		—		—			—			—		(5	)		—			—			(5	)
Other comprehensive income		—			—		—		—		—			—			—		—			(517	)		—			(517	)
Reclass from mezzanine capital		—			—		—		—		—			561			—		—			—			—			561
Record preferred stock dividend series B (noncontrolling interest)		—			—		—		—		—			—			—		—			—			(416	)		(416	)
Record preferred stock dividend series C (noncontrolling interest)		—			—		—		—		—			—			—		—			—			(149	)		(149	)

Balance, December 31, 2015		6,983,017		$	—	$	—	$	—	$	8,729		$	12,308		$	—	$	11,893		$	(212	)	$	10,596		$	43,314

The accompanying notes are an integral part of the consolidated financial statements.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2015, 2014 and 2013


	2015			2014			2013
	(dollars in thousands)
Cash flows from operating activities
Net income	$	2,007		$	1,679		$	954
Adjustments to reconcile net income to net cash Provided (used) by operating activities:
Depreciation		908			922			914
Net amortization of security premiums/discounts AFS		975			1,050			1,420
Net amortization of security premiums/discounts HTM		134			2			—
Net amortization of mortgage servicing rights		689			709			801
Impairment of foreclosed real estate		425			647			921
Provision for (recovery of) loan losses		(620	)		(389	)		28
Deferred income taxes		336			593			438
Net realized (gains) loss on sales / calls available for sale securities		(536	)		2			523
Income from mortgage loan sales		(2,306	)		(1,001	)		(2,113	)
Proceeds from sales of loans held for sale		65,101			39,012			77,544
Origination of loans held for sale		(66,570	)		(39,019	)		(71,197	)
Gain on sale of premises, equipment and other assets		(1	)		(142	)		(233	)
Increase in cash surrender value of life insurance		(117	)		(129	)		(122	)
Gain on sales of foreclosed real estate		(140	)		(398	)		(290	)
Release of ESOP Shares		—			21			45
Net change in interest receivable		183			—			6
Net change in other assets		(1,201	)		(663	)		(810	)
Net change in interest payable		(12	)		(44	)		(46	)
Net change in other liabilities		899			349			424

Net cash provided by operating activities		154			3,201			9,207

Cash flows from investing activities
Proceeds from sales, maturities, calls and paydowns of securities available for sale		47,253			18,839			32,969
Proceeds from sales, maturities, calls and paydowns of securities held to maturity		154			—			—
Purchase of securities available for sale		(24,910	)		(31,122	)		(46,693	)
Purchase of securities held to maturity		(6,034	)		(5,498	)		—
Net (increase) decrease in loans		(11,331	)		(5,445	)		16,282
Proceeds from sale of premises, equipment and other assets		1			368			949
Purchase of premises and equipment		(716	)		(2,225	)		(488	)
Proceeds from sales of foreclosed real estate		2,404			2,028			4,731
Investment in other assets		(334	)		(366	)		(357	)
Net change in restricted stock		(2	)		146			1,081

Net cash provided (used) by investing activities		6,485			(23,275	)		8,474

Cash flows from financing activities
Net increase (decrease) in deposit accounts		11,298			2,727			(3,904	)
Net decrease in short-term borrowed funds		1,073			(824	)		(13,181	)
Net decrease in long-term debt		(11	)		(1,605	)		(1,510	)
Proceeds from preferred stock offering, net of costs		—			—			3,136
Repayment preferred stock, series A		—			—			(10,500	)
Increase in unearned ESOP compensation		—			—			(208	)
Repurchase of common stock, net		(429	)		(1,401	)		(169	)
Dividends on preferred stock		(423	)		(422	)		(679	)
Cash paid for fractional shares		(5	)		(4	)		—

Net cash provided (used) by financing activities		11,503			(1,529	)		(27,015	)

Increase (decrease) in cash and cash equivalents		18,142			(21,603	)		(9,334	)
Cash and cash equivalents, beginning of year		50,791			72,394			81,728

Cash and cash equivalents, end of year	$	68,933		$	50,791		$	72,394

Supplemental disclosures of cash flow information
Interest paid	$	1,745		$	2,004		$	2,780
Income taxes paid		459			41			648
Supplemental schedule of non-cash activities
Net change in fair value of securities available for sale, net of tax		(517	)		867			(2,049	)
Loans transferred to foreclosed real estate		1,818			972			4,032
Company financed sales of other real estate owned		(26	)		(65	)		(213	)
Mortgage servicing rights capitalized		657			386			763
Preferred stock dividend accrued		(142	)		(142	)		(142	)
Net change in ESOP liability		(561	)		1,155			132

The accompanying notes are an integral part of the consolidated financial statements.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies

Nature of Business

Uwharrie Capital Corp (the “Company”) was incorporated under North Carolina law for the purpose of becoming the holding company for Bank of Stanly (“Stanly”). On July 1, 1993, Stanly became a wholly-owned subsidiary of the Company through a one-for-one exchange of the common stock of Stanly for common stock of the Company. On September 1, 2013, Bank of Stanly changed its name to Uwharrie Bank (“Uwharrie”).

Uwharrie was incorporated on September 28, 1983, under the laws of the State of North Carolina and began operations on January 26, 1984 in Albemarle, North Carolina. Deposits with Uwharrie are insured by the Federal Deposit Insurance Corporation (“FDIC”). Uwharrie is under regulation of the Federal Reserve, the FDIC and the North Carolina Commissioner of Banks. Through its six branch locations in Stanly County, Uwharrie provides a wide range of deposit accounts, commercial, consumer, home equity and residential mortgage loans, safe deposit boxes and automated banking.

In 1987, Uwharrie established a wholly-owned subsidiary, BOS Agency, Inc. (“BOS Agency”), which engages in insurance product sales. In 1989, Uwharrie established a second wholly-owned subsidiary, BOS Financial Corporation, for the purpose of conducting business as a “broker dealer” in securities. During 1993, BOS Financial Corporation changed its name to The Strategic Alliance Corporation (“Strategic Alliance”) and was registered as a “broker dealer” and is regulated by the Financial Industry Regulatory Authority (“FINRA”).

The Company formed a new subsidiary, Strategic Investment Advisors, Inc. (“SIA”), during 1998 to provide investment advisory and asset management services. This subsidiary is registered as an investment advisor with the Securities and Exchange Commission. During 2015, SIA changed its name to Uwharrie Investment Advisors, Inc. (“UIA”).

On January 19, 2000, the Company completed its acquisition of Anson BanCorp, Inc. and its subsidiary, Anson Savings Bank. The savings bank retained its North Carolina savings bank charter and became a wholly-owned subsidiary of Uwharrie Capital Corp as Anson Bank & Trust Company (“Anson”), operating out of its main office branch in Wadesboro. Anson was consolidated into Uwharrie Bank effective September 1, 2013.

On August 4, 2000, Uwharrie acquired another subsidiary, Gateway Mortgage, Inc. (“Gateway”), a mortgage origination company. This company is currently inactive and does not affect the Company’s consolidated financials statements.

On April 10, 2003, the Company capitalized a new wholly-owned subsidiary bank, Cabarrus Bank & Trust Company (“Cabarrus”), located in Concord, North Carolina. As of that date, Cabarrus purchased two branch offices located in Cabarrus County from Uwharrie to begin its operation. Cabarrus operated as a commercial bank and provided a full range of banking services. Cabarrus was consolidated into Uwharrie Bank effective September 1, 2013.

On April 7, 2004 Uwharrie Mortgage, Inc. was established as a subsidiary of the Company to serve in the capacity of trustee and substitute trustee under deeds of trust.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, Uwharrie, UIA and Uwharrie’s subsidiaries, BOS Agency and Strategic Alliance. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

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

Cash and Cash Equivalents

For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions “Cash and due from banks” and “Interest-earning deposits with banks.”

Investment Securities Available for Sale

Investment securities available for sale consist of United States Treasuries, United States Government agencies, Government Sponsored Enterprise (GSE) mortgage backed securities and collateralized mortgage obligations (CMOs), corporate bonds and state and political subdivision bonds. Unrealized holding gains and losses on available for sale securities are reported as a net amount in other comprehensive income, net of income taxes. Gains and losses on the sale of available for sale securities are determined using the specific identification method and recorded on a trade basis. Declines in the fair value of individual available for sale securities below their cost that are other than temporary would result in write-downs of the individual securities, to their fair value. Such write-downs would be included in earnings as realized losses to the extent the losses are associated with the credit quality of the issuer. Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the period to maturity.

Investment Securities Held to Maturity

Investment securities held to maturity consist of United States Government agencies, and corporate bonds and state and political subdivision bonds. The Company has both the intent and ability to hold the securities to maturity. These securities are reported at amortized cost.

Loans Held for Sale

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

Loans

The Company divides the loans it grants into two segments, commercial and noncommercial loans. Commercial loans are broken down into the following classes: commercial loans, real estate commercial loans and other real estate construction loans. Noncommercial loans are divided into the following classes: real estate 1-4 family construction, real estate 1-4 family residential loans, home equity loans, consumer loans and other loans. The ability of the Company’s borrowers to honor their contracts is largely dependent upon the real estate and general economic conditions in the Company’s market area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the effective interest method. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Credit card loans and other personal loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. The exception to this policy is credit card loans that remain in accrual status 90 days or more until they are paid current or charged off.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these impaired loans is accounted for on the cash-basis until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Generally a minimum of six months of sustained performance is required.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses. The provision for loan losses is expensed to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Company has different specific risks identified within the loan segments. Specific risks within the commercial loan segment arise with borrowers that are experiencing diminished operating cash flows, depreciated collateral values or prolonged sales and rental absorption periods. Concentrations within the portfolio if unmanaged, pose additional risk. Occasionally, the Company will purchase participation loans from other institutions and if not independently underwritten by the Bank, could carry additional risk. Generally, owner-occupied commercial real estate loans carry less risk than non-owner occupied. Specific risks within the non-commercial portfolio tend to be tied to economic factors including high unemployment and decreased real estate values. Risk to the Company is greater as home values deteriorate more rapidly than amortization in a loan, leaving little to no equity in properties, especially in junior lien positions. Concentration in the portfolio, such as home equity lines of credit, could pose additional risk if not appropriately managed.

The allowance for loan losses is evaluated both individually and collectively by loan class on a regular basis by management. Loans are collectively evaluated based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. Individually evaluated loans are based upon discounted cash flows or the underlying value of the collateral. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. In addition, regulatory examiners may require the Company to recognize adjustments to the allowance for loan losses based on their judgment about information available to them at the time of their assessment.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Homogeneous loans are collectively evaluated by loan class for impairment. However, homogeneous loans will be evaluated individually for impairment if such a loan is deemed impaired.

Troubled debt restructure loans (TDR) are modifications of a loan when a borrower is experiencing financial difficulty and the modification involves providing a concession to the existing loan contract. TDRs are considered to be impaired loans and are individually evaluated for impairment.

The portion of the Company’s allowance for loan loss model related to general reserves captures the mean loss of individual loans and the rare event of severe loss that can occur within the loan portfolio. Specifically, the Company calculates probable losses on loans by computing a probability of loss and expected loss scenario by FDIC call report codes. Together, these expected components, as well as a level of more extreme unexpected losses form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.

Mortgage Servicing Rights

The Company capitalizes mortgage servicing rights when loans are sold and the loan servicing is retained. The cost of servicing rights is amortized in proportion to and over the estimated period of net servicing revenues is expected to be received based on projections of the amount and timing of estimated future cash flows. The amortization of servicing rights is recognized in the statement of income as an offset to other noninterest income. Servicing assets are periodically evaluated for impairment based upon their fair value. Fair value is based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance and charged to other expense.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Foreclosed Real Estate

Real estate properties acquired through foreclosure or other proceedings are initially recorded at fair value less costs to sell upon foreclosure, establishing a new cost basis. Annually, valuations are performed and the foreclosed property is adjusted to the lower of cost or fair value of the properties, less costs to sell. Any write-down at the time of transfer to foreclosed properties is charged to the allowance for loan losses. Subsequent write-downs are charged to noninterest expense, and costs related to the improvement of the property are capitalized if the fair value less cost to sell will allow it. If not, these costs are expensed also.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Land is carried at cost. Additions and major replacements or betterments which extend the useful lives of premises and equipment are capitalized. Maintenance, repairs and minor improvements are expensed as incurred. Depreciation is computed principally by the straight-line method over estimated useful lives, except in the case of leasehold improvements, which are amortized over the term of the leases, if shorter. Useful lives range from five to seven years for furniture, fixtures and equipment, to ten to thirty-nine years for leasehold improvements and buildings, respectively. Upon retirement or other disposition of the assets, the cost and the related accumulated depreciation are removed from the accounts and any gains or losses are reflected in income.

Restricted Stock

As a requirement for membership, the bank invests in the stock of the Federal Home Loan Bank of Atlanta (“FHLB”) and Federal Reserve Bank (“FRB”). These investments are carried at cost. Due to the redemption provisions of these investments, the Company estimated that fair value approximates cost and that this investment was not impaired.

Stock-Based Compensation

The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). Accounting Standards Codification (ASC) 718 also requires measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award. Excess tax benefits are reported as financing cash inflows in the consolidated statement of cash flows.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return and separate North Carolina income tax returns. The provision for income taxes in the accompanying consolidated financial statements is provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold. The tax returns for the Company are subject to audit for the 2011 fiscal year and thereafter. It is the Company’s policy to recognize interest and penalties associated with uncertain tax positions as components of other expenses in the income statement; however, if interest becomes a material amount, it would be reclassified as interest expense. There were no interest or penalties accrued during the years ended December 31, 2015, 2014 and 2013.

Fair Value of Financial Instruments

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; mortgage 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.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

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

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

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at the estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. The Company typically bases the fair value of the collateral on appraised values which the Company considers Level 3 valuations.

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

Comprehensive Income

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

following table presents the changes in accumulated other comprehensive income for the years ended December 31, 2015, 2014 and 2013:


	Year ended December 31,
	2015			2014			2013
	(dollars in thousands)
Beginning Balance	$	305		$	(562	)	$	1,487

Other comprehensive income (loss) before reclassifications, net of $474, ($445) and $1,292 tax effect, respectively		(188	)		866			(2,370	)

Amounts reclassified from accumulated other comprehensive income, net of ($207), $1 and $222 tax effect, respectively		(329	)		1			321

Net current-period other comprehensive loss		(517	)		867			(2,049	)

Ending Balance	$	(212	)	$	305		$	(562	)

As of December 31, 2015 and December 31, 2014, total accumulated other comprehensive income (loss) was ($212,000) and $305,000 respectively.

Earnings per Common Share

The Company had stock options outstanding covering 12,859 shares of common stock at both December 31, 2015 and 2014 and 96,228 shares of common stock at December 31, 2015. All of these options were anti-dilutive because the strike price was higher than the current market price.

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The ESOP effect is the average of the unallocated ESOP shares.

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

The computation of weighted average shares used in the calculation of basic and dilutive earnings per share is summarized below:


	2015		2014			2013
Weighted average number of common shares used in computing basic net income per common share		7,051,751		7,490,799			7,786,032

Effect of ESOP shares		—		(43,791	)		(215,300	)

Adjusted weighted average number of common shares used in computing basic net income per common share		7,051,751		7,447,008			7,570,732

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		7,051,751		7,447,008			7,570,732

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

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

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

The Company filed a request for a favorable determination letter from the Internal Revenue Service as to the tax-qualified status of the ESOP on its termination.

The Company received the favorable determination letter dated September 5, 2014 from the Internal Revenue Service and during the fourth quarter of 2014 distributed the allocated shares to the participants.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

Noncontrolling Interest

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

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

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 an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The update is effective for reporting periods beginning after December 15, 2014. The Company evaluated this update and it does not have a material impact on the Company’s consolidated financial statements. The Company had $1.6 million in foreclosed residential real estate and $219,000 of residential real estate in process of foreclosure at December 31, 2015.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, Topic 606 (“ASU 2014-09”). The new standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under existing guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August of 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, Topic 606: Deferral of the Effective Date, deferring the effective date of ASU 2014-09 until annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this new guidance recognized at the date of initial application. The Company is currently evaluating the provisions of ASU 2014-09 to determine the potential impact the new standard will have to the Company’s financial statements.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 - Significant Accounting Policies (Continued)

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

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

Reclassification

Certain amounts in the 2014 and 2013 financial statements have been reclassified to conform to the 2015 presentation. These reclassifications do not have a material impact on net income or shareholders’ equity.

Note 2 - Investment Securities

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


December 31, 2015

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

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 - Investment Securities (Continued)


December 31, 2015

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

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


December 31, 2014

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(dollars in thousands)
Securities available for sale
U.S. Treasury	$	19,030	$	362	$	6	$	19,386
U.S. Government agencies		50,969		96		290		50,775
GSE - Mortgage-backed securities and CMO’s		27,748		133		309		27,572
State and political subdivisions		11,575		505		—		12,080
Corporate bonds		3,040		—		29		3,011

Total securities available for sale	$	112,362	$	1,096	$	634	$	112,824


December 31, 2014

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(dollars in thousands)
Securities held to maturity
U.S. Government agencies	$	2,085	$	—	$	32	$	2,053
Corporate bonds		3,411		—		14		3,397

Total securities held to maturity	$	5,496	$	—	$	46	$	5,450

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

Results from sales and calls of securities available for sale for the years ended December 31, 2015, 2014 and 2013 are as follows:


	2015		2014			2013
	(dollars in thousands)
Gross proceeds from sales and calls	$	32,780	$	11,592		$	20,182

Realized gains from sales	$	536	$	28		$	41
Realized losses from sales		—		(30	)		(564	)

Net realized gains (losses)	$	536	$	(2	)	$	(523	)

At December 31, 2015, 2014 and 2013 securities available for sale with a carrying amount of $68.8 million, $84.7 million and $63.1 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 - Investment Securities (Continued)

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

December 31, 2015


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

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

December 31, 2015


	Less than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(dollars in thousands)
Held to maturity temporary impairment
U.S. Gov’t agencies	$	1,906	$	5	$	—	$	—	$	1,906	$	5
State and political		3,318		5		—		—		3,318		5
Corporate bonds		1,312		20		—		—		1,312		20

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

December 31, 2014


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

Total securities available for sale	$	17,834	$	62	$	31,944	$	572	$	49,778	$	634

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 - Investment Securities (Continued)

December 31, 2014


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

Total securities held to maturity	$	5,450	$	46	$	—	$	—	$	5,450	$	46

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

Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality but that the losses are temporary in nature. At December 31, 2015, the Company does not intend to sell and is not likely to be required to sell the available for sale securities that were in a loss position prior to full recovery.

The following table shows contractual maturities of the entire investment portfolio as of December 31, 2015:


	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Due within one year	$	2,871	$	2,872
Due after one but within five years		37,759		37,821
Due after five but within ten years		15,111		15,076
Due after ten years		14,812		14,958
Mortgage backed securities		30,269		29,773

	$	100,822	$	100,500

The mortgage-backed securities are shown separately as they are not due at a single maturity date.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 3 – Loans Held for Investment

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


	2015			2014
	(dollars in thousands)
Commercial
Commercial	$	52,311		$	47,418
Real estate - commercial		101,198			92,517
Other real estate construction loans		17,692			22,362
Noncommercial
Real estate 1-4 family construction		5,629			3,888
Real estate - residential		83,379			89,374
Home equity		49,420			46,360
Consumer loans		8,982			8,460
Other loans		1,481			481

		320,092			310,860
Less:
Allowance for loan losses		(2,884	)		(3,738	)
Deferred loan (fees) costs, net		40			(7	)

Loans held for investment, net	$	317,248		$	307,115

Although the subsidiary bank loan portfolio is diversified, there is a concentration of mortgage real estate loans, primarily 1 to 4 family residential mortgage loans, which represent 43.25% of total loans. Additionally, there is concentration in commercial loans secured primarily by real estate, shopping center locations, commercial land development, commercial buildings and equipment that represent 53.48% of total loans. There is not a concentration of a particular type of credit in this group of commercial loans.

Total recorded investment in impaired loans, which consisted of nonaccrual loans and other loans identified by management as impaired, totaled $5.5 million and $7.6 million at December 31, 2015 and 2014, respectively. There were no loans 90 days past due and still accruing at December 31, 2015 or at December 31, 2014.

Restructured loans at December 31, 2015 totaled $4.7 million and are included in the impaired loan total, compared to $6.0 million which were included in impaired loans at December 31, 2014. The carrying value of foreclosed properties held as other real estate was $5.0 million and $5.9 million at December 31, 2015 and 2014, respectively.

The Company had loans of $135.9 million and $128.9 million pledged to borrowings at Federal Home Loan Bank and the Federal Reserve Bank at December 31, 2015 and 2014, respectively.

The Company’s loan policies are written to address loan-to-value ratios and collateralization methods with respect to each lending category. Consideration is given to the economic and credit risk of lending areas and customers associated with each category.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31, 2015, 2014 and 2013 are presented below:


Commercial	2015			2014			2013
	(dollars in thousands)
Balance, beginning of year	$	1,716		$	2,665		$	2,791
Provision (recovery) charged to operations		(527	)		(302	)		784
Charge-offs		(89	)		(749	)		(1,005	)
Recoveries		210			102			96

Net (charge-offs)		121			(647	)		(909	)

Other		—			—			(1	)

Balance, end of year	$	1,310		$	1,716		$	2,665


Non-Commercial	2015			2014			2013
	(dollars in thousands)
Balance, beginning of year	$	2,022		$	2,430		$	4,010
Provision (recovery) charged to operations		(93	)		(87	)		(756	)
Charge-offs		(500	)		(482	)		(966	)
Recoveries		145			161			146

Net (charge-offs)		(355	)		(321	)		(820	)

Other		—			—			(4	)

Balance, end of year	$	1,574		$	2,022		$	2,430


Total	2015			2014			2013
	(dollars in thousands)
Balance, beginning of year	$	3,738		$	5,095		$	6,801
Provision (recovery) charged to operations		(620	)		(389	)		28
Charge-offs		(589	)		(1,231	)		(1,971	)
Recoveries		355			263			242

Net (charge-offs)		(234	)		(968	)		(1,729	)

Other		—			—			(5	)

Balance, end of year	$	2,884		$	3,738		$	5,095

During the third quarter of 2015, the Company made a change to their Allowance for Loan Loss methodology model. One of the components utilized in the model is Beacon 5 scores. During the third quarter, this was changed to FICO 9 scores. The impact of this change accounted for approximately a $20,000 decrease in the allowance Refer to the Asset Quality discussion on page 91 for further information.

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

December 31, 2015


	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
	(dollars in thousands)
Commercial	$	18	$	1,019	$	1,292	$	170,182	$	1,310	$	171,201
Non-Commercial		163		4,459		1,411		144,472		1,574		148,931

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses (Continued)

December 31, 2014


	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
	(dollars in thousands)
Commercial	$	179	$	2,125	$	1,537	$	160,172	$	1,716	$	162,297
Non-Commercial		277		5,436		1,745		143,120		2,022		148,556

Total	$	456	$	7,561	$	3,282	$	303,292	$	3,738	$	310,853

Past due loan information is used by management when assessing the adequacy of the allowance for loan loss. The following tables summarize the past due information of the loan portfolio by class:

December 31, 2015


	Loans 30-89 Days Past Due		Loans 90 Days or More Past due and Non - Accrual		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
	(dollars in thousands)
Commercial	$	46	$	34	$	80	$	52,231	$	52,311	$	—
Real estate - commercial		74		—		74		101,124		101,198		—
Other real estate construction		110		195		305		17,387		17,692		—
Real estate construction		—		—		—		5,629		5,629		—
Real estate - residential		1,580		541		2,121		81,298		83,419		—
Home equity		75		13		88		49,332		49,420		—
Consumer loan		39		—		39		8,943		8,982		—
Other loans		—		—		—		1,481		1,481		—

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


December 31, 2014

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

Total	$	2,004	$	2,246	$	4,250	$	306,603	$	310,853	$	—

Once a loan becomes 90 days past due, the loan is automatically transferred to a nonaccrual status. The exception to this policy is credit card loans that remain in accrual status 90 days or more until they are paid current or charged off.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses (Continued)

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


	2015		2014
	(dollars in thousands)
Commercial	$	34	$	—
Real estate - commercial		—		794
Other real estate construction		195		342
Real estate 1 – 4 family construction		—		—
Real estate – residential		541		1,097
Home equity		13		13
Consumer loans		—		—
Other loans		—		—

	$	783	$	2,246

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

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

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

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

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

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses (Continued)

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


December 31, 2015

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

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


December 31, 2014

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

Total	$	282,506	$	19,877	$	8,470	$	—	$	310,853

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. During 2015, nonperforming loans decreased from $2.2 million at December 31, 2014 to $783,000 at December 31, 2015, a decrease of $1.5 million. There were several loans that were foreclosed on during 2015 with the related property being moved into other real estate owned.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses (Continued)

The following tables show the breakdown between performing and nonperforming loans by class as of December 31, 2015 and 2014:

December 31, 2015


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

Total	$	319,349	$	783	$	320,132

December 31, 2014


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

Total	$	308,607	$	2,246	$	310,853

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 - Allowance for Loan Losses (Continued)


	As of December 31, 2015								Year ended December 31, 2015
			Recorded		Recorded
	Unpaid		Investment		Investment				Average
	Principal		With No		With		Related		Recorded		Interest
	Balance		Allowance		Allowance		Allowance		Investment		Income
	(dollars in thousands)
Commercial	$	97	$	80	$	17	$	2	$	81	$	4
Real estate - commercial		620		498		122		9		1,121		42
Other real estate construction		840		195		107		7		281		3
Real estate 1 -4 family construction		13		—		13		—		16		1
Real estate - residential		4,343		1,507		2,836		163		4,798		200
Home equity		28		28		—		—		50		1
Consumer loans		75		75		—		—		37		2
Other loans		—		—		—		—		—		—

Total	$	6,016	$	2,383	$	3,095	$	181	$	6,384	$	253


									Year ended
	As of December 31, 2014								December 31, 2014
			Recorded		Recorded
	Unpaid		Investment		Investment				Average
	Principal		With No		With		Related		Recorded		Interest
	Balance		Allowance		Allowance		Allowance		Investment		Income
	(dollars in thousands)
Commercial	$	98	$	68	$	30	$	30	$	117	$	7
Real estate - commercial		1,820		1,242		389		145		2,641		73
Other real estate construction		934		342		54		4		1,108		6
Real estate 1 -4 family construction		20		—		20		1		109		1
Real estate - residential		5,298		1,865		3,433		257		5,865		268
Home equity		49		30		19		19		73		2
Consumer loans		69		29		40		—		83		4
Other loans		—		—		—		—		—		—

Total	$	8,288	$	3,576	$	3,985	$	456	$	9,996	$	361


									Year ended
	As of December 31, 2013								December 31, 2013
			Recorded		Recorded
	Unpaid		Investment		Investment				Average
	Principal		With No		With		Related		Recorded		Interest
	Balance		Allowance		Allowance		Allowance		Investment		Income
	(dollars in thousands)
Commercial	$	377	$	291	$	86	$	67	$	845	$	21
Real estate - commercial		6,808		3,962		2,375		507		7,089		328
Other real estate construction		2,034		247		1,739		945		2,078		17
Real estate 1 -4 family construction		374		25		349		16		380		23
Real estate - residential		8,197		4,619		3,329		530		8,507		300
Home equity		415		58		357		279		819		8
Consumer loans		116		61		55		43		156		14
Other loans		—		—		—		—		—		—

Total	$	18,321	$	9,263	$	8,290	$	2,387	$	19,874	$	711

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 5 – Troubled Debt Restructures

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

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

For the twelve months ended December 31, 2015, 2014 and 2013, the following table presents a breakdown of the types of concessions made by loan class:


	Year ended December 31, 2015
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded
	of Contracts		Investment		Investment
			(dollars in thousands)
Extend payment terms:
Commercial		—	$	—	$	—
Real estate - commercial		—		—		—
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		—		—		—
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—

		—	$	—	$	—

Other:
Commercial		2	$	65	$	44
Real estate - commercial		—		—		—
Other real estate construction		1		55		55
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		6		535		521
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		1		73		53

		10	$	728	$	673

Total		10	$	728	$	673

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 5 – Troubled Debt Restructures (Continued)


	Year ended December 31, 2014
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded
	of Contracts		Investment		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:
Commercial		—	$	—	$	—
Real estate - commercial		3		424		424
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		6		870		870
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—

		9	$	1,294	$	1,294

Total		10	$	1,326	$	1,326

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 5 – Troubled Debt Restructures (Continued)


	Year ended December 31, 2013
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded
	of Contracts		Investment		Investment
			(dollars in thousands)
Extend payment terms:
Commercial		—	$	—	$	—
Real estate - commercial		—		—		—
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		—		—		—
Home equity		—		—		—
Consumer loans		—		—		—
Other loans		—		—		—

		—	$	—	$	—

Other:
Commercial		—	$	—	$	—
Real estate - commercial		1		356		341
Other real estate construction		—		—		—
Real estate 1 – 4 family construction		—		—		—
Real estate – residential		8		895		875
Home equity		1		18		18
Consumer loans		—		—		—
Other loans		—		—		—

		10	$	1,269	$	1,234

Total		10	$	1,269	$	1,234

During the twelve months ended December 31, 2015, 2014 and 2013, there were no TDRs for which there was a payment default.

A default on a troubled debt restructure is defined as being past due 90 days or being out of compliance with the modification agreement. As previously mentioned, the Company considers TDRs to be impaired loans and has $177,000 in the allowance for loan loss as of December 31, 2015, as a direct result of these TDRs. At December 31, 2014 and 2013 there was $373,000 and $420,000 in the allowance for loan loss related to TDRs, respectively.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 5 – Troubled Debt Restructures (Continued)

The following table presents the successes and failures of the types of modifications within the previous twelve months as of December 31, 2015, 2014 and 2013:


	Paid In Full				Paying as restructured				Converted to nonaccrual				Foreclosure/ Default
	Number of		Recorded		Number of		Recorded		Number of		Recorded		Number of		Recorded
	Loans		Investments		Loans		Investments		Loans		Investments		Loans		Investments
	(dollars in thousands)
December 31, 2015
Extended payment terms		—	$	—		—	$	—		—	$	—		—	$	—
Other		—		—		10		728		—		—		—		—

Total		—	$	—		10	$	728		—	$	—		—	$	—


	Paid In Full				Paying as restructured				Converted to nonaccrual				Foreclosure/ Default
	Number of		Recorded		Number of		Recorded		Number of		Recorded		Number of		Recorded
	Loans		Investments		Loans		Investments		Loans		Investments		Loans		Investments
	(dollars in thousands)
December 31, 2014
Extended payment terms		—	$	—		1	$	32		—	$	—		—	$	—
Other		1		112		8		1,182		—		—		—		—

Total		1	$	112		9	$	1,214		—	$	—		—	$	—


	Paid In Full				Paying as restructured				Converted to nonaccrual				Foreclosure/ Default
	Number of		Recorded		Number of		Recorded		Number of		Recorded		Number of		Recorded
	Loans		Investments		Loans		Investments		Loans		Investments		Loans		Investments
	(dollars in thousands)
December 31, 2013
Extended payment terms		—	$	—		—	$	—		—	$	—		—	$	—
Other		—		—		10		1,234		—		—		—		—

Total		—	$	—		10	$	1,234		—	$	—		—	$	—

Note 6 – Mortgage Servicing Assets

The principal balance of loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were approximately $406 million and $396 million at December 31, 2015 and 2014, respectively. The carrying value of capitalized servicing rights, net of valuation allowances, is included in other assets. A summary of mortgage servicing rights follows:


	2015			2014			2013
	(dollars in thousands)
Beginning of year mortgage servicing rights:	$	2,072		$	2,356		$	2,394
Amounts capitalized		657			386			763
Amortization		(689	)		(709	)		(801	)
Impairment		—			39			—

End of year	$	2,040		$	2,072		$	2,356

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 6 – Mortgage Servicing Assets (Continued)

Amortization expense is estimated as follows:


Year ending December 31,
(dollars in thousands)
2016	$	482
2017		417
2018		352
2019		287
2020		223
Thereafter		279

Total	$	2,040

The amortization does not anticipate or pro-forma loan prepayments.

The fair value of mortgage servicing rights was $3.3 million at December 31, 2015 and $3.2 million at December 31, 2014. The key assumptions used to value mortgage servicing rights were as follows:


	2015			2014
Weighted average remaining life		257 months			256 months
Weighted average discount rate		10	%		10	%
Weighted average coupon		3.95	%		3.98	%
Weighted average prepayment speed		171	%		187	%

Note 7 - Premises and Equipment

The major classes of premises and equipment and the total accumulated depreciation at December 31, 2015 and 2014 are listed below:


	2015		2014
	(dollars in thousands)
Land	$	3,302	$	3,302
Building and improvements		12,808		12,701
Furniture and equipment		8,901		8,439

Total fixed assets		25,011		24,442
Less accumulated depreciation		10,345		9,584

Net fixed assets	$	14,666	$	14,858

Note 8 – Leases

The Company’s subsidiary, Uwharrie Bank had entered into a noncancelable operating lease for an administrative office location in Concord that would have expired in 2017. The lease required annual rental payments of $62,120 and contained two five-year renewal options at the expiration of the initial term. During 2014, the Company purchased this location.

During 2015, Uwharrie Bank entered into a lease for a loan production office in Charlotte. This lease is a month to month lease with monthly rental payments of $2,888.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 8 – Leases (Continued)

Total rental expense related to the operating leases was $25,529, $16,230, and $61,914 for the years ended December 31, 2015, 2014 and 2013, respectively, and is included in net occupancy expense.

Note 9 - Deposits

The composition of deposits at December 31, 2015 and 2014 is as follows:


	2015					2014
			Percentage					Percentage
	Amount		of Total			Amount		of Total
	(dollars in thousands)
Demand noninterest-bearing	$	92,524		20	%	$	80,069		18	%
Interest checking and money market		252,345		54	%		243,116		53	%
Savings		40,436		8	%		39,091		9	%
Time deposits $250,000 and over		8,148		2	%		9,865		2	%
Other time deposits		74,280		16	%		84,294		18	%

Total	$	467,733		100	%	$	456,435		100	%

The maturities of fixed-rate time deposits at December 31, 2015 are reflected in the table below:


	Time Deposits		Other
Year ending December 31,	$250,000 and Over		Time Deposits
	(dollars in thousands)
2016	$	4,841	$	56,238
2017		3,307		9,237
2018		—		2,538
2019		—		1,578
2020		—		4,591
Thereafter		—		98

Total	$	8,148	$	74,280

Note 10 - Short-Term Borrowed Funds

The following tables set forth certain information regarding the amounts, year-end weighted average rates, average balances, weighted average rate, and maximum month-end balances for short-term borrowed funds, at and during 2015 and 2014:


	2015					2014
	Amount		Rate			Amount		Rate
	(dollars in thousands)
At year-end
Master notes and other short term borrowing	$	3,396		0.25	%	$	3,674		0.25	%
Notes payable		12		6.00	%		11		6.00	%
Short-term line of credit		2,350		3.50	%		1,000		3.75	%
Short-term advances from FHLB		—		0.00	%		—		0.00	%

	$	5,758		1.59	%	$	4,685		1.01	%

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 10 - Short-Term Borrowed Funds (Continued)


	2015					2014
	Amount		Rate			Amount		Rate
	(dollars in thousands)
Average for the year
Federal funds purchased	$	2		0.79	%	$	2		0.79	%
Master notes and other short term borrowing		3,280		0.25	%		4,250		0.44	%
Notes payable		18		6.00	%		11		6.00	%
Short-term line of credit		1,598		3.51	%		57		3.75	%
Short-term advances from FHLB		—		0.00	%		510		4.08	%

	$	4,898		1.32	%	$	4,830		0.88	%


	2015		2014
	(dollars in thousands)
Maximum month-end balance
Federal funds purchased	$	—	$	—
Master notes and other short term borrowing		7,736		4,640
Notes payable		12		11
Short-term line of credit		2,350		1,000
Short-term advances from FHLB		—		1,500

Federal funds purchased represent unsecured overnight borrowings from other financial institutions. Master notes and other secured borrowings represent an overnight investment in commercial paper issued by the Company to customers of its subsidiary bank, where an agreement is in place.

The Company has a short term line of credit with $2.4 million outstanding at December 31, 2015. The line of credit has an interest rate of 3.50% and matures July 5, 2016. The line is collateralized by Uwharrie Bank Stock.

The subsidiary bank has combined available lines of credit for federal funds and Federal Reserve discount window availability in the amount of $48.7 million at December 31, 2015.

Note 11 - Long-Term Debt

The Company has a line of credit with the Federal Home Loan Bank secured by qualifying first lien and second mortgage loans and commercial real estate loans with eligible collateral value of $52.1 million with remaining availability of $52.1 million at December 31, 2015. There were no long-term advances under this line at December 31, 2015 and at December 31, 2014. The subsidiary bank also has standby letters of credit issued by the Federal Home Loan Bank to be used as collateral for public funds deposits. The aggregate amount of the letters of credit was $20.5 million at December 31, 2015.

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, of which the entire $9.5 million was outstanding at December 31, 2014. These securities have a final maturity date of March 31, 2024 and may be redeemed by the Company after March 31, 2019. The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.75%. All proceeds of this private placement qualify and are included in the calculation of Tier 2 capital. Once the final maturity drops under five years, the Company must impose a twenty percent annual reduction per year of the amount of the proceeds from the sale of these securities that are eligible to be counted as Tier 2 capital. The Company would have a twenty percent reduction beginning at March 31, 2019.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 11 - Long-Term Debt (Continued)

On November 19, 2002, the Company executed a mortgage in the amount of $129,000 for the purchase of property for branch expansion. This loan bears interest at 6.00% and is to be paid in 60 quarterly installments of $3,277. The outstanding principal balance on this note was $24,526 at December 31, 2015 down from $35,738 at December 31, 2014.

As of December 31, 2015, the scheduled maturities of these long term borrowings are as follows:


Year ending December 31,
(dollars in thousands)
2017	$	13
2018		—
2019		9,534
2020		—
2021		—
Thereafter		—

Total	$	9,547

Note 12 - Income Tax Matters

The significant components of income tax expense (benefit) for the years ended December 31, 2015, 2014 and 2013 are summarized as follows:


	2015		2014		2013
	(dollars in thousands)
Current tax expense (benefit):
Federal	$	389	$	11	$	(98	)
State		81		44		2

Total		470		55		(96	)

Deferred tax expense (benefit):
Federal		228		458		285
State		108		135		153

Total		336		593		438

Net provision for income taxes	$	806	$	648	$	342

The difference between the provision for income taxes and the amounts computed by applying the statutory federal income tax rate of 34% to income before income taxes is summarized below:


	2015			2014			2013
	(dollars in thousands)
Tax computed at the statutory federal rate	$	956		$	791		$	441
Increases (decrease) resulting from:
Tax exempt interest, net		(280	)		(252	)		(229	)
State income taxes, net of federal benefit		125			118			102
Other		5			(9	)		28

Provision for income taxes	$	806		$	648		$	342

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 12 - Income Tax Matters (Continued)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred taxes at December 31, 2015, 2014 and 2013 are as follows:


	2015			2014			2013
	(dollars in thousands)
Deferred tax assets relating to:
Allowance for loan losses	$	1,057		$	1,395		$	1,934
Deferred compensation		1,080			975			853
Other		555			701			856
Net unrealized loss on securities available for sale		109			—			289

Total deferred tax assets		2,801			3,071			3,932
Deferred tax liabilities relating to:
Net unrealized gain on securities available for sale		—			(157	)		—
Premises and equipment		(319	)		(371	)		(487	)
Deferred loans fees and costs		(213	)		(198	)		(199	)
Loan servicing		(176	)		(182	)		(201	)

Total deferred tax liabilities		(708	)		(908	)		(887	)

Net recorded deferred tax asset	$	2,093		$	2,163		$	3,045

The net deferred tax asset is included in other assets on the accompanying consolidated balance sheets.

Note 13 - Commitments and Contingencies

Financial Instruments with Off-Balance Sheet Risk

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

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

As of December 31, 2015 and 2014, outstanding financial instruments whose contract amounts represent credit risk were as follows:


	2015		2014
	(dollars in thousands)
Commitments to extend credit	$	82,417	$	75,573
Credit card commitments		9,269		8,754
Standby letters of credit		2,255		2,224

	$	93,941	$	86,551

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 13 - Commitments and Contingencies (Continued)

Contingencies

In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements.

Financial Instruments with Concentration of Credit Risk

The subsidiary bank makes commercial, agricultural, real estate mortgage, home equity and consumer loans primarily in Stanly, Anson, Cabarrus and Mecklenburg counties. A substantial portion of the Company’s customers’ ability to honor their contracts is dependent on the economy in these counties.

Although the Company’s composition of loans is diversified, there is some concentration of mortgage real estate loans, primarily 1-to-4 family residential mortgage loans and in commercial loans secured primarily by real estate, shopping center locations, commercial land development, commercial buildings and equipment in the total portfolio. The Bank’s policy is to abide by real estate loan-to-value margin limits corresponding to guidelines issued by the federal supervisory agencies on March 19, 1993. Lending policy for all loans requires that they be supported by sufficient cash flows at the time of origination.

Note 14 - Related Party Transactions

The Company has granted loans to certain directors and executive officers and their related interests. Such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers and, in management’s opinion, do not involve more than the normal risk of collectability. All loans to directors and executive officers or their interests are submitted to the Board of Directors for approval. A summary of loans to directors, executive officers and their related interests follows:


	2015			2014
	(dollars in thousands)
Balance, at beginning of the year	$	21,720		$	12,667
Disbursements during the year		4,722			12,901
Collections during the year		(7,234	)		(3,848	)

Balance, at end of the year	$	19,208		$	21,720

At December 31, 2015, the Company had approved, but unused lines of credit, totaling $3.9 million to executive officers and directors, and their related interests.

Note 15 – Shareholders’ Equity and Regulatory Matters

The Company and its banking subsidiary are subject to certain requirements imposed by state and federal banking statutes and regulations. These requirements, among other things, establish minimum levels of capital, restrict the amount of dividends that may be distributed, and require that reserves on deposit liabilities be maintained in the form of vault cash or deposits with the Federal Reserve Bank.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 15 – Shareholders’ Equity and Regulatory Matters (Continued)

For the reserve maintenance period in effect at December 31, 2015, the subsidiary bank was required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank in the aggregate amount of $1.4 million as reserves on deposit liabilities.

The Company and its subsidiary bank are subject to federal regulatory risk-based capital guidelines for banks and bank holding companies. Each must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices which measure Total Capital, Tier 1 Capital and Common Equity Tier 1 Capital to risk-weighted assets and Tier 1 Capital to average assets.

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

The phase-in period for the final rules became effective for the Company and its subsidiary bank on January 1, 2015, with full compliance of all the final rules’ requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019. As of December 31, 2015, the Company and its subsidiary bank continue to exceed minimum capital standards and remain well-capitalized under the new rules.

Quantitative measures established by regulation to ensure capital adequacy and the Company’s consolidated capital ratios are set forth in the table below. The Company expects to meet or exceed these minimums without altering current operations or strategy.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 15 – Shareholders’ Equity and Regulatory Matters (Continued)


											Minimum to Be Well
						Minimum					Capitalized Under
						For Capital					Prompt Corrective
	Actual					Requirement					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
December 31, 2015

Total Capital to Risk
Weighted Assets:
Consolidated	$	55,945		15.6	%	$	28,708		8.0	%	$	35,885		10.0	%
Uwharrie Bank		56,221		15.8	%		28,549		8.0	%		35,686		10.0	%

Tier 1 Capital to Risk
Weighted Assets:
Consolidated		43,527		12.1	%		21,531		6.0	%		28,708		8.0	%
Uwharrie Bank		53,337		15.0	%		21,412		6.0	%		28,549		8.0	%

Common Equity Tier 1 Capital to Risk Weighted Assets:
Consolidated		32,931		9.2	%		16,148		5.0	%		23,325		6.5	%
Uwharrie Bank		42,741		12.0	%		17,843		5.0	%		23,196		6.5	%

Tier 1 Capital to
Average Assets:
Consolidated		43,527		8.2	%		21,225		4.0	%		26,531		5.0	%
Uwharrie Bank		53,337		10.1	%		21,156		4.0	%		26,445		5.0	%

											Minimum to Be Well
						Minimum					Capitalized Under
						For Capital					Prompt Corrective
	Actual					Requirement					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
December 31, 2014

Total Capital to Risk
Weighted Assets:
Consolidated	$	55,229		16.1	%	$	27,469		8.0	%	$	N/A		—	%
Uwharrie Bank		54,933		16.1	%		27,362		8.0	%		34,202		10.0	%

Tier 1 Capital to Risk
Weighted Assets:
Consolidated		41,957		12.2	%		13,735		4.0	%		N/A		—	%
Uwharrie Bank		51,195		15.0	%		13,681		4.0	%		20,521		6.0	%

Tier 1 Capital to
Average Assets:
Consolidated		41,957		8.1	%		20,765		4.0	%		N/A		—	%
Uwharrie Bank		51,195		9.9	%		20,716		4.0	%		25,895		5.0	%

As of December 31, 2015, the most recent notification from the Federal Deposit Insurance Corporation categorized the Company’s subsidiary bank as being well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since such notification that management believes would have changed the categorization.

During 2012, each of the Company’s subsidiary banks began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series B. The preferred stock qualifies as Tier 1 capital at the subsidiary bank and pays dividends at a rate of 5.30%. The sale ended on

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 15 – Shareholders’ Equity and Regulatory Matters (Continued)

December 31, 2012 raising $7.9 million less issuance costs of $113,000. These funds were held in an escrow account at December 31, 2012 and the new preferred stock was issued in January 2013. 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.

The total net amount of capital raised from Fixed Rate Noncumulative Perpetual Preferred Stock, Series B and Series C issued at the subsidiary bank level is presented as noncontrolling interest in the consolidated balance sheets.

All of the Company’s aforementioned investment in its subsidiary bank qualifies for Tier 1 capital treatment for the bank and is included as such in its year end capital ratios.

Stock Repurchase Program

On February 21, 1995, the Company’s Board of Directors authorized and approved a Stock Repurchase Program, to be reaffirmed annually, pursuant to which the Company may repurchase shares of the Company’s common stock for the primary purpose of providing liquidity to its shareholders. During 2015 the Company repurchased 114,377 shares of outstanding common stock and repurchased 374,130 during 2014.

Note 16 - Stock Based Compensation

During 2006, the Company adopted the 2006 Incentive Stock Option Plan (“SOP II”) and the Employee Stock Purchase Plan (“SPP II”), under which options to purchase shares of the Company’s common stock may be granted to officers and eligible employees. Options granted under the SOP II are exercisable in established increments according to vesting schedules, generally three to five years, and will expire if not exercised within ten years of the date of grant. Options granted under the SPP II are fully vested at the date of grant and expire if not exercised within two years of the grant date. At December 31, 2015, the SOP II had 12,859 options outstanding and the SPP II had no options outstanding.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 16 - Stock Based Compensation (Continued)

Employee Stock Plans

The following is a summary of stock option activity for the year ended December 31, 2015:


			Weighted
			Average		Aggregate
			Exercise		Intrinsic Value
	Shares		Price		(in thousands)
Options outstanding at the beginning of the year		12,859	$	5.13	$	—

Options granted		—		—
Options exercised		—		—
Forfeitures		—		—

Options outstanding at the end of the year		12,859	$	5.13	$	—

Options exercisable at the end of the year		12,859	$	5.13	$	—

Total options outstanding and exercisable at December 31, 2015 were 12,859 at an exercise price of $5.13 per share with a weighted average expected term of 2.12 years. At December 31, 2015, authorized shares of common stock reserved for future grants of options totaled 161,071 under the SOP II and 107,405 under the SPP II.

The fair market value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. There were no shares granted during the years ended December 31, 2014 and 2013 under the SOP II.

As of December 31, 2014, there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all of the Company’s stock benefit plans.

The Company funds the option shares from authorized but unissued shares. The Company does not typically purchase shares to fulfill the obligations of the stock benefit plans. Company policy does allow option holders to exercise options with seasoned shares.

There were no options exercised in 2013, 2014 or 2015.

Note 17 - Employee and Director Benefit Plans

Employees’ 401(k) Retirement Plan

The Company has established an associate tax deferred savings plan under Section 401(k) of the Internal Revenue Code of 1986. All associates are eligible to make elective deferrals on the first day of the calendar month coincident or next following the date the associate attains the age of 18, completes one year of eligibility service and completes at least 1,000 hours of service and is 100% vested in the plan once they enroll.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 17 - Employee and Director Benefit Plans (Continued)

The Company’s annual contribution to the plan was $319,340 in 2015, $330,448 in 2014 and $317,281 in 2013, determined as follows:

•

The Company will contribute a safe harbor matching contribution in an amount equal to: (i) 100% of the matched employee contributions that are not in excess of 3% of compensation, plus (ii) 50% of the amount of the matched employee contributions that exceed 3% of compensation, but do not exceed 5% of compensation.

•

A discretionary contribution, subject to approval by the Board of Directors, limited to an amount not to exceed the maximum amount deductible for income tax purposes.

Employee Stock Ownership Plan

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 expensed the remaining balance of $8,600. Upon the transfer of the unallocated shares to the Company, these shares were cancelled and returned to the Company’s pool of authorized but unissued shares of common stock.

The Company filed a request for a favorable determination letter from the Internal Revenue Service as to the tax-qualified status of the ESOP on its termination.

The Company received the favorable determination letter dated September 5, 2014 from the Internal Revenue Service and during the fourth quarter all shares under the ESOP were distributed to the participants.

The Company did have expense of approximately 2% of eligible compensation as a contribution to the ESOP Plan during the first part of 2014, the same as 2013. Expenses of $45,693 and $223,283 during the years ended December 31, 2014 and 2013, respectively, were incurred in connection with the ESOP.

The ESOP had a put option that allowed the employee to put their shares back to the Company. At December 31, 2014, the Company had a liability set aside at fair value in the amount of approximately $561,000 for shares that can be put back to the Company during the first half of 2015. The put option has expired and there will no longer be a liability for the Company. This liability that had been reclassified from additional paid in capital and was presented separately on the Company’s balance sheet, has now been returned to additional paid in capital.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 17 - Employee and Director Benefit Plans (Continued)

Supplemental Executive Retirement Plan

The Company has implemented a non-qualifying deferred compensation plan for certain executive officers. Certain of the plan benefits will accrue and vest during the period of employment and will be paid in fixed monthly benefit payments for up to ten years upon separation from service. The plan also provides for payment of death benefits and for payment of disability benefits in the event the officer becomes permanently disabled prior to separation from service.

Effective December 31, 2008, this plan was amended and restated to comply with Section 409A of the Internal Revenue Code. The participants’ account liability balances as of December 31, 2008 could be transferred into a trust fund, where investments will be participant-directed.

The plan is structured as a defined contribution plan and the Company’s expected annual funding contribution for the participants has been calculated through the participant’s expected retirement date. Under terms of the agreement, the Company has reserved the absolute right, at its sole discretion, to either fund or refrain from funding the plan. The plan also provides for payment of death benefits and for payment of disability benefits in the event the officer becomes permanently disabled prior to separation from service.

During 2015, 2014 and 2013, $331,800, $316,800 and $336,800, respectively was expensed each year for benefits provided under the plans. The liability accrued for deferred compensation under the plan amounted to $3.7 million and $3.3 million at December 31, 2015 and 2014, respectively.

Split-Dollar Life Insurance

The Company has entered into Life Insurance Endorsement Method Split-Dollar Agreements with certain officers. Under these agreements, upon death of the officer, the Company first recovers the cash surrender value of the contract and then shares the remaining death benefits from insurance contracts, which are written with different carriers, with the designated beneficiaries of the officers. The death benefit to the officers’ beneficiaries is a multiple of base salary at the time of the agreements. The Company, as owner of the policies, retains an interest in the life insurance proceeds and a 100% interest in the cash surrender value of the policies. During 2015 and 2014, the expense associated with these policies was $86,346 and $112,176 respectively.

Stock Grant Plan

During 2015, the Company adopted the 2015 Stock Grant Plan (“SGP”), under which the Company, at their own discretion, may choose to make grants or awards of Uwharrie Capital Corp common stock (the “Common Stock”) to employees, directors or independent contractors of the Company or its subsidiaries as an alternate form of compensation or as a performance bonus. Shares of Common Stock to be used for Stock Grants under this Plan will be outstanding shares purchased by a revocable trust formed by the Company (the “Trust”). The Participant will be 100% vested in the shares purchased on their behalf as soon as the Trust’s purchase is completed. The Company recognizes expense for the value of the shares at the time they are purchased by the Trust. The SGP allows for 510,000 shares to be granted and at December 31, 2015, the availability under the SGP was 491,994 shares. During 2015 there were 16,840 shares granted at an expense of $54,000.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 18 - Fair Values of Financial Instruments and Interest Rate Risk

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

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

December 31, 2015


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

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

December 31, 2014


	Carrying		Estimated
	Value		Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	50,791	$	50,826	$	47,605	$	3,221	$	—
Securities available for sale		112,824		112,824		19,386		93,438		—
Securities held to maturity		5,496		5,450		2,053		3,397		—
Loans held for investment, net		307,115		321,295		—		—		321,295
Loans held for sale		2,147		2,147		—		2,147
Restricted stock		1,038		1,038		1,038		—		—
Accrued interest receivable		1,747		1,747		—		—		1,747

FINANCIAL LIABILITIES
Deposits	$	456,435	$	442,655	$	—	$	442,655	$	—
Short-term borrowings		4,685		4,685		—		4,685		—
Long-term borrowings		24		24		—		24		—
Junior subordinated debt		9,534		9,703		—		—		9,703
Accrued interest payable		180		180		—		—		180

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 18 - Fair Values of Financial Instruments and Interest Rate Risk (Continued)

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 1

•

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

•

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

•

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

•

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

•

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

At December 31, 2015, the subsidiary bank had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, they were deemed to have no current fair value. See Note 13.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 18 - Fair Values of Financial Instruments and Interest Rate Risk (Continued)

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


	December 31, 2015
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Securities available for sale:
US Treasury	$	4,012	$	4,012	$	—	$	—
US Gov’t		36,070		—		36,070		—
Mortgage-backed securities and CMO’s		29,773		—		29,773		—
State and political subdivisions		14,039		—		14,039		—
Corporate bonds		5,364		—		5,364		—

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

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


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

Total assets at fair value	$	112,824	$	19,386	$	93,438	$	—

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

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


	December 31, 2015
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Impaired loans	$	3,108	$	—	$	—	$	3,108
Other real estate owned		2,909		—		—		2,909

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

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

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 18 - Fair Values of Financial Instruments and Interest Rate Risk (Continued)


	December 31, 2014
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3
Impaired loans	$	1,854	$	—	$	—	$	1,854
Other real estate owned		3,290		—		—		3,290

Total assets at fair value	$	5,144	$	—	$	—	$	5,144

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

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2015


			General
	Valuation Technique	Unobservable Input	Range
Nonrecurring measurements:

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

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

December 31, 2014


			General
	Valuation Technique	Unobservable Input	Range
Nonrecurring measurements:

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

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

At December 31, 2015 and 2014, impaired loans were being evaluated with discounted expected cash flows and discounted appraisals were being used on collateral dependent loans.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 19 - Parent Company Financial Data

The following is a summary of the condensed financial statements of Uwharrie Capital Corp:

Condensed Balance Sheets


	December 31,
	2015		2014
	(dollars in thousands)
Assets
Cash and demand deposits	$	246	$	297
Interest-earning deposits		3,396		3,674
Investments in:
Bank subsidiaries		42,528		40,931
Nonbank subsidiaries		648		594
Other assets		1,342		1,115

Total assets	$	48,160	$	46,611

Liabilities and shareholders’ equity
Master notes	$	3,396	$	3,674
Short term debt		2,350		1,000
Junior subordinated debentures		9,534		9,534
Other liabilities		163		149

Total liabilities		15,443		14,357

Redeemable common stock held by the Employee Stock Ownership Plan (ESOP)		—		561

Shareholders’ equity		32,717		31,693

Total liabilities and shareholders’ equity	$	48,160	$	46,611

Condensed Statements of Income


	2015			2014			2013
	(dollars in thousands)
Equity in undistributed earnings (loss) of subsidiaries	$	2,760		$	1,456		$	(1,053	)
Dividends received from subsidiaries		—			1,000			2,719
Interest income		8			11			21
Management and service fees		—			—			4,347
Other income		81			87			166
Interest expense		(612	)		(583	)		(659	)
Other operating expense		(555	)		(624	)		(4,881	)
Income tax benefit		325			332			294

Net income	$	2,007		$	1,679		$	954

Consolidated net income	$	2,007		$	1,679		$	954
Less: Net income attributable to noncontrolling interest		(592	)		(591	)		(478	)

Net income attributable to Uwharrie Capital Corp		1,415			1,088			476
Dividends – preferred stock		—			—			(325	)

Net Income (loss) available to common shareholders	$	1,415		$	1,088		$	151

Net income (loss) per common share
Basic	$	0.20		$	0.15		$	0.02

Diluted	$	0.20		$	0.15		$	0.02

Weighted average shares outstanding
Basic		7,051,751			7,447,008			7,570,732
Diluted		7,051,751			7,447,008			7,570,732

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 19 - Parent Company Financial Data (Continued)

Condensed Statements of Cash Flows


	2015			2014			2013
	(dollars in thousands)
Cash flows from operating activities
Net income	$	2,007		$	1,679		$	954
Adjustments to reconcile net income to net cash used by operating activities:
Equity in undistributed (earnings) loss of subsidiaries		(2,760	)		(1,456	)		1,053
(Increase) decrease in other assets		(228	)		136			2,298
Increase (decrease) in other liabilities		14			78			(305	)

Net cash provided (used) by operating activities		(967	)		437			4,000

Cash flows from financing activities
Net decrease in master notes		(278	)		(324	)		(1,453	)
Net increase in short-term debt		1,350			1,000			—
Net repayments of issuance of junior subordinated debentures		—			(1,593	)		—
Repurchase of common stock, net		(429	)		(1,401	)		(169	)
Repayment of series A preferred stock		—			—			(10,500	)
Preferred stock redeemed by from bank subsidiary		—			—			7,800
Increase in unearned ESOP compensation		—			—			(114	)
Dividends on preferred stock		—			—			(225	)
Cash paid for fractional shares		(5	)		(4	)		—

Net cash used by financing activities		638			(2,322	)		(4,661	)

Net decrease in cash and cash equivalents		(329	)		(1,885	)		(661	)
Cash and cash equivalents at beginning of year		3,971			5,856			6,517

Cash and cash equivalents at end of year	$	3,642		$	3,971		$	5,856

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Selected Financial Data

Selected Financial Data

(dollars in thousands except ratios, per share and shares outstanding information)


	2015			2014			2013			2012			2011
Summary of Operations
Interest income	$	17,847		$	18,457		$	19,465		$	21,871		$	23,822
Interest expense		1,733			1,960			2,734			3,698			4,737

Net interest income		16,114			16,497			16,731			18,173			19,085
Provision for (recovery of) loan losses		(620	)		(389	)		28			1,832			3,456
Noninterest income		8,710			7,321			7,587			10,675			8,256
Noninterest expense		22,631			21,880			22,994			26,247			22,789
Income taxes		806			648			342			365			196

Net income	$	2,007		$	1,679		$	954		$	404		$	900

Per Common Share
Net income – basic (1)	$	0.20		$	0.15		$	0.02		$	(0.03	)	$	0.03
Net income (loss) – diluted (1)		0.20			0.15			0.02			(0.03	)		0.03
Book value (1)		4.69			4.46			3.86			4.15			4.29

Weighted Average Shares
Outstanding:
Basic (1)		7,051,751			7,447,008			7,570,732			7,669,482			7,769,079
Diluted (1)		7,051,751			7,447,008			7,570,732			7,669,482			7,769,079

Ratios
Return on average assets		0.38	%		0.33	%		0.18	%		0.08	%		0.17	%
Return on average equity		4.65	%		4.03	%		2.17	%		0.90	%		2.02	%
Average equity to average assets		8.27	%		8.11	%		8.34	%		8.52	%		8.39	%

Selected Year-end Balances
Assets	$	532,202		$	518,464		$	517,320		$	545,007		$	526,902
Loans held for investment		320,132			310,853			307,348			329,183			366,675
Securities		100,500			118,320			100,280			91,638			88,661
Deposits		467,733			456,435			453,708			457,612			431,338
Borrowed funds		15,305			14,243			16,672			31,363			46,024
Shareholders’ equity		43,314			42,262			40,509			42,729			44,254

Selected Average Balances
Assets	$	521,699		$	513,676		$	527,693		$	526,361		$	529,970
Loans held for investment		316,485			309,338			317,274			347,762			381,419
Securities		112,348			109,056			116,333			102,686			90,701
Deposits		458,655			451,160			455,146			440,274			430,998
Borrowed funds		14,432			14,782			22,340			35,543			50,529
Shareholders’ equity		43,123			41,681			43,994			44,868			44,462

(1)	Net income per share, book value per share, weighted average shares outstanding and shares outstanding at year-end for years 2014 through 2011 have been adjusted to reflect the 2% stock dividend in 2014 and 2015.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

A discussion and analysis of the Company’s operating results and financial condition are presented in the following narrative and financial tables. The comments are intended to supplement and should be reviewed in conjunction with the consolidated financial statements and notes thereto appearing on pages 36-86 of this Annual Report. References to changes in assets and liabilities represent end of period balances unless otherwise noted. Statements contained in this Annual Report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Amounts herein could vary because of market and other factors. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the Securities and Exchange Commission periodically. Such forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “might,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Company that are subject to various factors, which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services.

Financial Condition at December 31, 2015 and December 31, 2014

The Company’s total assets increased $13.7 million from $518.5 million at December 31, 2014 to $532.2 million at December 31, 2015. This increase resulted primarily from a $9.3 million increase in loans held for investment and an increase in cash and cash equivalents of $18.1 million. These increases were offset by a decrease in investment securities available for sale of $23.6 million.

Cash and cash equivalents increased $18.1 million during the year ended December 31, 2015. Cash and due from banks increased $231,000, while interest-earning deposits with banks increased $17.9 million. This increase is attributable to the growth in deposits.

Investment securities consist of securities available for sale and securities held to maturity. Investment securities decreased $17.8 million or 15.1%, from $118.3 million at December 31, 2014 to $100.5 million combined at December 31, 2015. During the year, in an effort to improve our concentration risk in various sectors as well as to reduce our extension risk in a rising interest rate environment, management made the decision to sell $32.2 million of investment securities, including $27.3 million of US Treasuries and government agency bonds and $4.9 million of state and political subdivision bonds. There were also $2.0 million in securities called during 2015. The Company realized a net gain of $536,000 on these transactions. The Company is reinvesting the proceeds from these sales and calls and purchasing new securities that are lower duration securities as well as variable rate securities. These investments should provide better protection in a rising rate environment and were intended to help mitigate the downside risk embedded in the current portfolio. At December 31, 2015, the Company had net unrealized losses on the securities available for sale of $322,000.

Loans held for investment increased $9.3 million from $310.8 million at December 31, 2014 to $320.1 million at December 31, 2015. The growth in the portfolio was spread across several loan portfolio classes with commercial real estate experiencing the largest growth of $8.7 million or 9.4%. The commercial class, consumer class, home equity class and the real estate one-to-four

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

family construction all experienced appreciable growth. This growth was offset by declines in the real estate one-to-four family loan class and the other real estate commercial class, with real estate one-to-four family seeing the greatest decline of $6.0 million or 6.7%. Loans held for sale increased 104.6% or $3.8 million compared to the prior year. The allowance for loan losses was $2.9 million at December 31, 2015, which represents 0.90% of the loan portfolio, a decrease from 1.20% at December 31, 2014. Net chargeoffs decreased from $968,000 at December 31, 2014 to $234,000 at December 31, 2015.

Other changes in our consolidated assets are related to premises and equipment, restricted stock, bank owned life insurance, other real estate owned, and other assets. Bank owned life insurance increased $117,000 while premises and equipment decreased $192,000. During 2015, other real estate owned declined $871,000, from $5.9 million at December 31, 2014 to $5.0 million at December 31, 2015. Throughout 2015, the Company sold twenty-seven pieces of property totaling $2.4 million resulting in a net gain on the sale of other real estate owned of $140,000. Also during 2015, the Company had additional write downs and changes in reserves of $333,000 resulting from new appraisals and evaluations. These declines were offset by the addition of thirty-one pieces of property foreclosed on totaling $1.8 million. Restricted stock which is comprised of Federal Home Loan Bank stock and Federal Reserve Bank stock increased $2,000 because member institutions are required to increase or decrease their ownership as their utilization of FHLB borrowings change. The Company’s required ownership in Federal Reserve Bank stock increased $1,000 in 2015, while the required ownership in Federal Home Loan Bank stock also increased $1,000. Other assets increased $840,000.

Customer deposits continued to be our principal funding source in 2015. At December 31, 2015, deposits from our customers totaled $467.7 million, an increase of $11.3 million from $456.4 million at December 31, 2014. Demand noninterest bearing checking increased $12.5 million, while interest checking and money market accounts and savings deposits increased $9.2 million and $1.3 million, respectively during 2015. These increases were offset by decreases in time deposits over $250,000 of $1.7 million and other time deposits of $10.0 million during 2015. In the current low rate environment, customers are continuing to stay in short term deposit products and are continuing to shift away from time deposits.

During 2015 the Company’s net borrowings increased by $1.1 million. Borrowings consist of both short-term and long-term borrowed funds. The Company utilizes both short-term and long-term advances from the Federal Home Loan Bank. At December 31, 2015, there were no advances outstanding in the total borrowings of $15.3 million. During 2015, the Company put a line of credit in place. At December 31, 2015, there was $2.4 million outstanding on this line. Other components of total borrowings include $9.5 million in junior subordinated debt and $3.4 million in master notes and other secured borrowings.

Other liabilities increased from $4.8 million at December 31, 2014 to $5.7 million at December 31, 2015, an increase of $900,000.

As disclosed in Note 17 to the financial statements filed within this report, the Company voted to terminate its ESOP effective March 1, 2014. During the fourth quarter of 2014, all allocated shares were distributed to the ESOP participants. At December 31, 2014, there was $561,000 set aside to cover the liability for shares that could be put back to the Company during the first six months of 2015. After that time, the put option expired and this liability ceased to exist.

At December 31, 2015, total shareholders’ equity was $43.3 million, an increase of $1.0 million from December 31, 2014. Net income for the period was $2.0 million. Unrealized gains and losses on investment securities net of tax decreased $517,000. With the aforementioned

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

termination of the ESOP, the $561,000 of the liability set aside to cover the ESOP repurchase obligation was reallocated back to shareholders’ equity. The Company did repurchase 114,377 outstanding shares of common stock for an aggregate repurchase price of $429,000. Of the shares repurchased, 29,735 shares were related to the ESOP termination. The Company also has $592,000 in dividends attributed to noncontrolling interest. At December 31, 2015, the Company and its subsidiary bank exceeded all applicable regulatory capital requirements.

Results of Operations for the Years Ended December 31, 2015 and 2014

Earnings

Uwharrie Capital Corp reported net income of $2.0 million for the twelve months ended December 31, 2015, as compared to $1.7 million for the twelve months ended December 31, 2014, an increase of $328,000. Net income available to common shareholders was $1.4 million or $0.20 per common share for the year ended December 31, 2015, compared to net income available to common shareholders of $1.1 million or $0.15 per common share for the year ended December 31, 2014. Net income available to common shareholders is net income less any dividends paid on the aforementioned noncontrolling interest.

Net Interest Income

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

Net interest income decreased $383,000 to $16.1 million for 2015 compared to the $16.5 million earned in 2014. During the year ended December 31, 2015, our growth in the volume of interest-earning assets outpaced the decline in interest-bearing liabilities by $588,000. The average yield on our interest-earning assets decreased 19 basis points to 3.83%, while the average rate we paid for our interest-bearing liabilities decreased 5 basis points. These decreases resulted in a decrease of 12 basis points in our interest rate spread, from 3.50% in 2014 to 3.38% in 2015. Our net interest margin for 2015 was 3.47%, compared to 3.60% in 2014. A portion of the Company’s loan portfolio has interest rate floors and caps in place as part of the loan agreements. The interest rate floor feature has allowed the Company to maintain a more a favorable interest margin despite a decline in rates; however, the interest rate cap could hurt the margin in a rising rate environment. Financial Table 1 on page 99 presents a detailed analysis of the components of the Company’s net interest income, while Financial Table 2 on page 100 summarizes the effects on net interest income from changes in interest rates and in the dollar volume of the components of interest-earning assets and interest bearing liabilities.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

Provision for Loan Losses

The provision for loan losses was a recovery of ($620,000) and ($389,000) for the twelve months ended December 31, 2015 and 2014, respectively. There were net loan charge-offs of $234,000 for the twelve months ended December 31, 2015 as compared with net loan charge-offs of $968,000 during the same period of 2014. The continued decline in charge-offs and improvement in other credit quality metrics resulted in these recoveries of loan losses and Refer to the Asset Quality discussion beginning on page 91 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, diversification of our earnings base is of major importance to our long term success. Noninterest income increased 19.0%, from $7.3 million in 2014, to $8.7 million in 2015, an increase of $1.4 million. The primary factor contributing to this growth was the increase in income from mortgage loan sales that increased $1.3 million to $2.3 million for 2015 compared to $1.0 million during 2014. During 2015, the Company expanded its mortgage operation into a neighboring market. This expansion was the driving force behind the growth in income from loan sales. Service charges on deposit accounts produced earnings of $1.3 million, a decrease of 11.9%. The primary contributing factor was a decrease in NSF (non-sufficient funds) fees due in large part to changes in regulations. Other service fees and commissions experienced a 4.8% increase during 2015. This is related to an increase of $193,000 in other banking fees related to the growth in the customer base’s usage of the Company’s electronic banking products. The Company had realized gains on the sale of investments in the amount of $536,000 for the twelve months ending December 31, 2015, as compared to realized losses of $2,000 for the same period in 2014. The Company also had realized gains on the sale of other real estate owned of $140,000 during 2015 compared to realized gains of $398,000 for the twelve months ended December 31, 2014.

Noninterest Expense

Noninterest expense for the year ended December 31, 2015 was $22.6 million compared to $21.9 million for the same period of 2014, an increase of $751,000. Salaries and employee benefits, the largest component of noninterest expense, increased $1.1 million, from $12.1 million for the period ending December 31, 2014 to $13.2 million for the same period in 2015. The majority of this increase was attributable to the expansion in the mortgage operations department. Net occupancy and equipment expense had a combined increase of $30,000. Professional fees and services decreased $253,000 for the twelve month period. The improvement the Company is experiencing in asset quality resulted in this decrease with lower legal fees associated with loan collection costs. Marketing and donations that included expenditures associated with advertising, business development and public relations, donations to local charities, sponsorships of local community events and economic development increased $90,000 from the prior year, while premiums paid for FDIC insurance decreased $50,000 for the same period. Foreclosed real estate expense, another major component of noninterest expense, decreased $393,000, from $1.2 million in 2014 to $853,000 during 2015. The primary factor relating to this decrease was a reduction in write downs on properties held in other real estate owned. These write downs were attributed to updated appraisals and the lowering of list prices during the year totaling $333,000 compared to $647,000 for the same period in 2014. Other noninterest expense experienced an increase totaling $56,000 for the comparable twelve month period. The table on page 103 reflects the additional breakdown of other noninterest expense.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

Income Tax Expense

The Company had income tax expense of $806,000 for 2015 at an effective tax rate of 28.65% compared to income tax expense of $648,000 in 2014 with an effective tax rate of 27.85%. Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities, tax free municipal loans and income earned on bank owned life insurance. The corporate rate for the State of North Carolina was reduced from 6% in 2014 to 5% in 2015. The State further lowered the corporate income tax rate from 5% to 4% effective for tax years beginning on or after January 1, 2016. The State rate reduction caused the Company to write down the state deferred tax assets to their realizable value. This change coupled with an increase in the level of taxable income for the comparable periods resulted in the higher effective rate.

Results of Operations for the Years Ended December 31, 2014 and 2013

Earnings

Uwharrie Capital Corp reported net income of $1.7 million for the twelve months ended December 31, 2014, as compared to $954,000 for the twelve months ended December 31, 2013, an increase of $725,000. Net income available to common shareholders was $1.1 million or $0.15 per common share at December 31, 2014, compared to net income available to common shareholders of $151,000 or $0.02 per common share at December 31, 2013. Net income available to common shareholders is net income less any dividends and discount accretions on preferred stock related to the $10 million of capital received from the United States Department of the Treasury under the Capital Purchase Program in December 2008 that was repaid in 2013 and dividends on the aforementioned noncontrolling interest.

Net Interest Income

Net interest income decreased $234,000 to $16.5 million for 2014 compared to the $16.7 million earned in 2013. During the year ended December 31, 2014, our decline in the volume of interest-earning assets outpaced the decline in interest-bearing liabilities by $208,000. The average yield on our interest-earning assets decreased 8 basis points to 4.01%, while the average rate we paid for our interest-bearing liabilities decreased 16 basis points. These decreases resulted in an increase of 12 basis points in our interest rate spread, from 3.42% in 2013 to 3.50% in 2014. Our net interest margin for 2014 was 3.60%, compared to 3.52% in 2013. A portion of the Company’s loan portfolio has interest rate floors and caps in place on the loans. The interest rate floor feature has allowed the Company to maintain a more favorable interest margin despite a decline in rates; however, the interest rate cap could hurt the margin in a rising rate environment. Financial Table 1 on page 70 presents a detailed analysis of the components of the Company’s net interest income, while Financial Table 2 on page 71 summarizes the effects on net interest income from changes in interest rates and in the dollar volume of the components of interest-earning assets and interest bearing liabilities.

Provision for Loan Losses

The provision for loan losses was a recovery of ($389,000) and provisions of $28,000 for the twelve months ended December 31, 2014 and 2013, respectively. There were net loan charge-offs of $968,000 for the twelve months ended December 31, 2014 as compared with net loan charge-offs of $1.7 million during the same period of 2013. Refer to the Asset Quality discussion beginning on page 91 for further information.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

Noninterest Income

The Company generates most of its revenue from net interest income; however, diversification of our earnings base is of major importance to our long term success. Noninterest income decreased 3.5%, from $7.6 million in 2013, to $7.3 million in 2014, a decrease of $266,000. While the Company did benefit from another good year of income from mortgage loan sales, income from mortgage loan sales decreased $1.1 million to $1.0 million for 2014 compared to $2.1 million during 2013. Service charges on deposit accounts produced earnings of $1.5 million, a decrease of 9.8%. The primary contributing factor is a decrease in NSF (non-sufficient funds) fees due in large part to changes in regulatory governance. Other service fees and commissions experienced a 15.7% increase during 2014. This is related to an increase of $290,000 in fees from assets under management. The Company had realized losses on the sale of investments in the amount of $2,000 for the twelve months ending December 31, 2014, as compared to realized losses of $523,000 for the same period in 2013. The Company also had realized gains on the sale of other real estate owned of $398,000 compared to realized gains of $290,000 for the twelve months ended December 31, 2013.

Noninterest Expense

Noninterest expense for the year ended December 31, 2014 was $21.9 million compared to $23.0 million for the same period of 2013, a decrease of $1.1 million. Salaries and employee benefits, the largest component of noninterest expense, decreased $372,000, from $12.4 million for the period ending December 31, 2013 to $12.1 million for the same period in 2014. This decrease is attributable to a reduction in staff related to the consolidation of the Company’s subsidiary banks during 2013. Net occupancy and equipment expense had a combined decrease of $45,000. Professional fees and services increased $167,000 for the twelve month period. Marketing and donations that included expenditures associated with advertising, business development and public relations, donations to local charities, sponsorships of local community events and economic development increased $34,000 from the prior year, while premiums paid for FDIC insurance decreased $93,000 for the same period. Data processing costs declined $55,000, a decrease related to the aforementioned bank consolidation. Foreclosed real estate expense, another major component of noninterest expense, decreased $401,000, from $1.6 million in 2013 to $1.2 million during 2014. The primary factor relating to this decrease was a reduction in write downs on properties held in other real estate owned. These write downs were attributed to updated appraisals and the lowering of list prices during the year totaling $647,000 compared to $921,000 for the same period in 2013. Other noninterest expense experienced a decrease totaling $198,000 for the comparable twelve month period. The table on page 103 reflects the additional breakdown of other noninterest expense.

Income Tax Expense

The Company had income tax expense of $648,000 for 2014 at an effective tax rate of 27.85% compared to income tax expense of $342,000 in 2013 with an effective tax rate of 26.39%.

Asset Quality

The Company’s allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. The allowance is increased by provisions charged to operations, decreased by recoveries of amounts previously charged off and is reduced by recovery of provisions and loans charged off. Management continuously evaluates the adequacy of the

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

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.

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

At December 31, 2015 the levels of our impaired loans, which includes all loans in nonaccrual status, TDRs and other loans deemed by management to be impaired, were $5.5 million compared to $7.6 million at December 31, 2014, a net decrease of $2.1 million. Total nonaccrual loans, which are a component of impaired loans, decreased from $2.2 million at December 31, 2014 to $783,000 at December 31, 2015. During 2015, seventeen relationships totaling $1.4 million were added to impaired loans. These additions were offset by one relationship for $102,000 being deemed no longer impaired based on improved cash flow, seven impaired relationships totaling $271,000 being charged off, eight relationships in the amount of $1.8 million being foreclosed and transferred to other real estate owned, five impaired relationships in the amount of $441,000 being paid off completely and several relationships with pay downs totaling $861,000.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

The allowance expressed as a percentage of gross loans held for investment decreased thirty basis points from 1.20% at December 31, 2014 to 0.90% at December 31, 2015. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 1.08% at December 31, 2014 and 0.86% at December 31, 2015, while the individually evaluated allowance as a percentage of individually evaluated loans decreased from 6.04% to 3.31% for the same periods. The decrease in the ratio of general reserves to collectively evaluated loans is due to the decrease in charge-offs and improvement in credit scores of our borrowers as discussed below. The portion of the Company’s allowance for loan loss model related to general reserves is intended to capture the mean loss of individual loans and the rare event of severe loss that can occur within the loan portfolio. Specifically, the Company calculates probable losses on loans by computing a probability of loss and expected loss scenario by FDIC call report codes. Together, these expected components as well as a level of more extreme unexpected losses form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.

The Company assesses the probability of losses inherent in the loan portfolio using probability of default data, acquired from a third party vendor representing a one year loss horizon for each obligor. The Company updates the data inputs into the model; specifically the loss given default and the probability of defaults obtained from the vendor annually during the second quarter. The Company updates the credit scores that are one of the components used within the allowance model semi-annually, during the first and third quarters. Beginning with the third quarter update, the Company transitioned from Beacon 5 scores to FICO 9 scores. This change accounted for approximately a $20,000 decrease in the allowance. The continued improvement in credit quality coupled with the continued trend of overall improvement in credit scores resulted in our average customer credit score increasing thirty-one points from 724 to 755 during 2015. The improvement in credit scores has been the major driver in the overall decrease in the allowance for loan losses. This improvement reduced the balance of the allowance by approximately $409,000.

Nonperforming loans, which consist of nonaccrual loans and loans past due 90 days and still accruing, to total loans decreased from 0.72% at December 31, 2014, to 0.24% at December 31, 2015.

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 $871,000 during 2015. The Company sold twenty-seven pieces of foreclosed property totaling $2.4 million realizing a gain of $140,000. The Company also had write downs and changes in reserves totaling $333,000 on the remaining existing property. The Company foreclosed on eight loan relationships totaling $1.8 million and added thirty-one pieces of property to other real estate owned. One of the relationships foreclosed on totaled $792,000 and added twenty-four pieces of property.

Restructured loans at December 31, 2015 totaled $4.5 million compared to $5.3 million at December 31, 2014 and are included in impaired loans. At December 31, 2015, all restructured loans were on an accruing basis with the exception of two relationships totaling $264,000 that were in nonaccrual.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

The following nonperforming loan table shows the comparison for the past five years:

Nonperforming Assets

(dollars in thousands)


	At December 31,
	2015			2014			2013			2012			2011
Nonperforming Assets:
Accruing loans past due 90 days or more	$	—		$	—		$	—		$	—		$	—
Nonaccrual loans		783			2,246			4,717			9,480			7,862
Other real estate owned		4,994			5,865			7,170			8,713			10,258

Total nonperforming assets	$	5,777		$	8,111		$	11,887		$	18,193		$	18,120

Allowance for loan losses	$	2,884		$	3,738		$	5,095		$	6,801		$	6,815
Nonperforming loans to total loans		0.24	%		0.72	%		1.53	%		2.88	%		2.14	%
Allowance for loan losses to total loans		0.90	%		1.20	%		1.66	%		2.07	%		1.86	%
Nonperforming assets to total assets		1.09	%		1.56	%		2.30	%		3.34	%		3.44	%
Allowance for loan losses to nonperforming loans		368.23	%		166.48	%		108.02	%		71.74	%		86.88	%

Capital Resources

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

During 2012, each of the Company’s subsidiary banks began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series B to be issued by each subsidiary bank. The preferred stock qualifies as Tier 1 capital at each bank and pays dividends at a rate of 5.30%. The offering raised $7.9 million less issuance costs of $113,000. 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.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

During 2013, the Company’s subsidiary bank, Uwharrie Bank, began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series C to be issued by the subsidiary bank. The preferred stock qualifies as Tier 1 capital at the bank and pays dividends at an annual rate of 5.30%. The preferred stock has no voting rights. The campaign raised $2.8 million less issuance costs of $23,000.

The Company expects to continue to exceed required minimum capital ratios without altering current operations or strategy. Note 15 to the Consolidated Financial Statements presents additional information regarding the Company’s and its subsidiary banks’ capital ratios.

Dividends

The Board of Directors of Uwharrie Capital Corp declared a 2% stock dividend in 2015. All references in this Annual Report to net income per share and weighted average common and common equivalent shares outstanding reflect the effects of these stock dividends. There was a 2% stock dividend declared in 2014 and no dividends declared or paid in 2013.

Liquidity

Liquidity, the ability to raise cash when needed without adversely affecting profits, is managed primarily by the selection of asset mix and the maturity mix of liabilities. Maturities and the marketability of securities and other funding sources provide a source of liquidity to meet deposit fluctuations. Maturities in the securities portfolio, presented in Financial Table 3 on page 101, are supported by cash flows from mortgage-backed securities that have longer-term contractual maturities. Other funding sources at year-end 2015 included $28.0 million in federal funds lines of credit from correspondent banks and approximately $52.1 million of remaining credit availability from the Federal Home Loan Bank. The Company may also borrow from the Federal Reserve Bank discount window with credit availability of $20.7 million. Growth in deposits is typically the primary source of funding for loans, supported by long-term credit available from the Federal Home Loan Bank.

At December 31, 2015, borrowings from federal funds lines and the issuance of commercial paper amounted to $3.4 million. The Company also had a short-term line of credit totaling $2.4 million. Long-term debt at that date consisted of junior subordinated debt of $9.5 million and a mortgage payable of $25,000.

Management believes that the Company’s current sources of funds provide adequate liquidity for its current cash flow needs.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

Contractual Obligations

The following table reflects the contractual obligations of the Company outstanding as of December 31, 2015.


	Payments Due by Period (in thousands)
			On Demand
			or less						After
	Total		than 1 year		1-3 Years		4-5 Years		5 Years
Contractual Obligations
Short-term debt	$	5,758	$	5,758	$	—	$	—	$	—
Long-term debt		9,547		—		13		9,534		—

Total contractual cash obligations, excluding deposits		15,305		5,758		13		9,534		—

Deposits		467,733		446,383		15,082		6,169		99

Total contractual cash obligations, including deposits	$	483,038	$	452,141	$	15,095	$	15,703	$	99

Critical Accounting Policy

A critical accounting policy is one that is both very important to the portrayal of the Company’s financial condition and results, and requires management’s most difficult, subjective and/or complex judgments. What makes these judgments difficult, subjective and/or complex is the need to make estimates about the effects of matters that are inherently uncertain. Refer to Note 1 in the consolidated financial statements for more information about these and other accounting policies utilized by the Company.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated both individually and collectively by loan class on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experiences. The nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay; estimated value of any underlying collateral and prevailing economic conditions are the key factors. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. In addition, regulatory examiners may require the Company to recognize adjustments to the allowance for loan losses based on their judgment about information available to them at the time of their assessment.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Income Taxes

The calculation of the Company’s income tax expense is complex and requires the use of many estimates and judgments in its determination. Management’s determination of the realization of the net deferred tax asset is based upon management’s evaluation of positive and negative evidence related to cumulative pretax earnings over a three year period and projected earnings trends. This evidence is reviewed to determine if it is more likely than not that the net deferred tax asset will be realized.

Valuation of Foreclosed Assets

Assets acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at fair value less estimated cost to sell at the date of foreclosure, establishing a new cost basis. Principal and interest losses existing at the time of acquisition of such assets are charged against the allowance for loan losses and interest income, respectively. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell.

Off-Balance Sheet Arrangements

The Company has various financial instruments (outstanding commitments) with off-balance sheet risk that are issued in the normal course of business to meet the financing needs of its customers. See Note 13 to the consolidated financial statements for more information regarding these commitments and contingent liabilities.

Interest Rate Sensitivity

Net Interest Income (Margin) is the single largest component of revenue for the Company. Net Interest Margin is the difference between the yield on earning assets and interest paid on costing liabilities. The margin can vary over time as interest rates change. The variance fluctuates based on both the timing (repricing) and magnitude of maturing assets and liabilities.

To identify interest rate sensitivity, a common measure is a gap analysis, which reflects the difference or gap between rate sensitive assets and liabilities over various periods. While management reviews this information, it has implemented the use of an income simulation model, which calculates expected future Net Interest Income (Margin) based on projected interest-earning assets, interest-bearing liabilities and forecasted interest rates along with multiple other forecasted assumptions. Management believes this provides a more relevant view of interest rate risk sensitivity than the traditional gap analysis because the gap analysis ignores optionality embedded in the balance sheet. The income simulation model allows a comparison of flat, rising and falling rate scenarios to determine the interest rate sensitivity of earnings in varying interest rate environments.

The Company models immediate rising and declining rate shocks of up to 4% (in 1% intervals) on its subsidiary bank, using a no growth and most likely balance sheet growth, for a two year

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition

And Results of Operations

horizon, as preferred by regulators. The most recent consolidated 2% rate shock projections using the most likely balance sheet growth for a one-year horizon, indicates a negative impact of (9.93%) on Net Interest Income (Margin) in a rates down scenario and a positive impact of 19.70% on Net Interest Income (Margin) in a rates up scenario. Based on the most recent twelve month forecast, the subsidiary bank is asset sensitive and may experience some negative impact to earnings should interest rates decline. While many interest bearing assets would reprice in a declining interest rate environment; many liabilities are already approaching 0% interest rates. The subsidiary bank has the potential to benefit from a rising interest rate environment, but current market deposit pricing and embedded options in the balance sheet may limit the upside potential.

The principal goals for asset liability management for the Company are to maintain adequate levels and sources of liquidity and to manage interest rate risk. Interest rate risk management attempts to balance the effects of interest rate changes on both interest-sensitive assets and interest-sensitive liabilities to protect Net Interest Income (Margin) from wide fluctuations as a result from changes in market interest rates. To that end, management has recommended and the board has approved policy limits that minimize the downside risk from interest rate shifts. The aforementioned ratios are within those stated limits of -18% for the respective modeled scenarios at the subsidiary bank and combined. Managing interest rate risk is an important factor to the long-term viability of the Company since Net Interest Income (Margin) is such a large component of earnings. The Company’s Asset Liability Management Committee (ALCO) monitors market changes in interest rates and assists with the pricing of loans and deposit products while considering the funding source needs, asset growth projections, and necessary operating liquidity.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Financial Table 1

Average Balances and Net Interest Income Analysis

(dollars in thousands)


	2015							2014							2013
			Interest		Average					Interest		Average					Interest		Average
	Average		Income/		Yield/			Average		Income/		Yield/			Average		Income		Yield
	Balance		Expense		Rate (1)			Balance		Expense		Rate (1)			Balance		Expense		Rate (1)
Interest-earning assets
Taxable securities	$	96,867		1,527		1.58	%	$	98,549		1,632		1.66	%	$	108,767		1,464		1.35	%
Non-taxable securities (1)		15,481		410		4.27	%		10,507		321		4.92	%		7,566		251		5.40	%
Short-term investments		50,963		185		0.36	%		52,554		168		0.32	%		51,612		177		0.34	%
Taxable loans (2)		301,837		15,299		5.07	%		295,004		15,903		5.39	%		303,698		17,134		5.64	%
Non-taxable loans (1)		14,649		426		4.69	%		14,974		433		4.66	%		15,451		439		4.62	%

Total interest-earning assets		479,797		17,847		3.83	%		471,588		18,457		4.01	%		487,094		19,465		4.09	%

Non-earning assets
Cash and due from banks		5,966							5,898							2,172
Premises and equipment, net		14,779							14,806							14,127
Interest receivable and other		21,157							21,384							24,300

Total non-earning assets		41,902							42,088							40,599

Total assets	$	521,699						$	513,676						$	527,693

Interest-bearing liabilities
Savings deposits	$	39,393	$	44		0.11	%	$	38,751	$	57		0.15	%	$	45,706	$	171		0.37	%
Interest checking & MMDA		239,546		278		0.12	%		230,779		299		0.13	%		220,663		439		0.20	%
Time deposits		89,091		797		0.89	%		101,925		997		0.98	%		119,149		1,300		1.09	%

Total deposits		368,030		1,119		0.30	%		371,455		1,353		0.36	%		385,518		1,910		0.50	%

Short-term borrowed funds		4,880		64		1.31	%		4,830		34		0.70	%		10,657		160		1.50	%
Long-term debt		9,552		550		5.76	%		9,952		573		5.76	%		11,683		664		5.68	%

Total interest-bearing liabilities		382,462		1,733		0.45	%		386,237		1,960		0.51	%		407,858		2,734		0.67	%

Noninterest liabilities
Transaction deposits		90,625							79,705							69,628
Interest payable and other		5,489							6,053							6,213

Total liabilities		478,576							471,995							483,699

Shareholders’ equity		43,123							41,681							43,994

Total liabilities and shareholders equity	$	521,699						$	513,676						$	527,693

Interest rate spread						3.38	%						3.50	%						3.42	%

Net interest income and net interest margin			$	16,114		3.47	%			$	16,497		3.60	%			$	16,731		3.52	%

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

2)	Nonaccrual loans are included in loans, net of unearned income.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Financial Table 2

Volume and Rate Variance Analysis

(dollars in thousands)


	2015 Versus 2014									2014 Versus 2013
							Net									Net
	Volume			Rate			Change			Volume			Rate			Change
Interest-earning assets

Taxable securities	$	(27	)	$	(78	)	$	(105	)	$	(153	)	$	321		$	168
Non-taxable securities		142			(53	)		89			94			(24	)		70
Short-term investments		(5	)		22			17			3			(12	)		(9	)
Taxable loans		357			(961	)		(604	)		(480	)		(751	)		(1,231	)
Non-taxable loans		(9	)		2			(7	)		(14	)		8			(6	)

Total interest-earning assets		458			(1,068	)		(610	)		(550	)		(458	)		(1,008	)

Interest-bearing liabilities

Savings deposits		1			(14	)		(13	)		(18	)		(96	)		(114	)
Transaction and MMDA deposits		11			(32	)		(21	)		17			(157	)		(140	)
Other time deposits		(120	)		(80	)		(200	)		(178	)		(125	)		(303	)
Short-term borrowed funds		1			29			30			(64	)		(62	)		(126	)
Long-term debt		(23	)		—			(23	)		(99	)		8			(91	)

Total interest-bearing liabilities		(130	)		(97	)		(227	)		(342	)		(432	)		(774	)

Net interest income	$	588		$	(971	)	$	(383	)	$	(208	)	$	(26	)	$	(234	)

The above table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in volume multiplied by the prior period’s rate), (ii) changes attributable to rate (changes in rate multiplied by the prior period’s volume), and (iii) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) has been allocated equally to the change attributable to volume and the change attributable to rate.

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Financial Table 3

Investment Securities Portfolio Analysis

(dollars in thousands)


	December 31, 2015							December 31, 2014							December 31, 2013
			Estimated							Estimated							Estimated
	Amortized		Fair		Book			Amortized		Fair		Book			Amortized		Fair		Book
	Cost		Value		Yield(1)			Cost		Value		Yield(1)			Cost		Value		Yield(1)
Securities available for sale
U.S. Treasury
Due after one but within five years	$	4,026	$	4,012		1.13	%	$	19.030	$	19,386		1.86	%	$	16,062	$	16,564		1.91	%
Due after five but within ten years		—		—		0.00	%		—		—		0.00	%		4,930		4,722		1.37	%

		4,026		4,012		1.13	%		19,030		19,386		1.86	%		20,992		21,286		1.79	%

U.S. Government agencies
Due within twelve months		—		—		0.00	%		4,972		4,998		2.77	%		—		—		0.00	%
Due after one but within five years		27,671		27,635		1.43	%		36,292		36,116		1.30	%		21,059		20,965		1.46	%
Due after five but within ten years		2,193		2,199		1.05	%		—		—		0.00	%		13,872		13,335		1.45	%
Due after ten years		6,295		6,236		1.23	%		9,705		9,661		0.96	%		—		—		0.00	%

		36,159		36,070		1.37	%		50,969		50,775		1.38	%		34,931		34,300		1.45	%

Mortgage-backed securities
Due after one but within five years		4,351		4,317		1.90	%		4,192		4,151		1.52	%		2,557		2,436		1.77	%
Due after five but within ten years		8,545		8,489		2.32	%		3,003		3,046		2.43	%		4,706		4,777		2.08	%
Due after ten years		17,373		16,967		1.89	%		20,553		20,375		2.00	%		30,608		29,793		2.01	%

		30,269		29,773		2.01	%		27,748		27,572		1.98	%		37,871		37,006		2.00	%

State and political
Due within twelve months		471		473		5.77	%		175		177		4.62	%		481		485		4.97	%
Due after one but within five years		3,304		3,423		3.86	%		2,389		2,541		4.96	%		1,469		1,595		5.75	%
Due after five but within ten years		1,399		1,421		6.28	%		3,296		3,481		4.89	%		4,369		4,566		4.64	%
Due after ten years		8,517		8,722		3.77	%		5,715		5,881		4.36	%		1,018		1,042		6.33	%

		13,691		14,039		4.12	%		11,575		12,080		4.64	%		7,337		7,688		5.12	%

Corporate Bonds
Due within twelve months		2,400		2,399		1.19	%		—		—		0.00	%		—		—		0.00	%
Due after one but within five years		814		798		1.79	%		—		—		0.00	%		—		—		0.00	%
Due after five but within ten years		2,221		2,167		1.38	%		3,040		3,011		1.24	%		—		—		0.00	%

		5,435		5,364		1.36	%		3,040		3,011		1.24	%		—		—		0.00	%

Total Securities available for sale
Due within twelve months		2,871		2,872		1.94	%		5,147		5,175		2.83	%		481		485		2.36	%
Due after one but within five years		40,166		40,185		1.66	%		61,903		62,194		1.63	%		41,147		41,560		1.59	%
Due after five but within ten years		14,358		14,276		2.37	%		9,339		9,538		3.72	%		27,877		27,400		1.64	%
Due after ten years		32,185		31,925		2.26	%		35,973		35,917		2.03	%		31,626		30,835		1.67	%

	$	89,580	$	89,258		2.00	%	$	112,362	$	112,824		1.94	%	$	101,131	$	100,280		1.66	%

1)	Yields on securities and investments exempt from federal and/or state income taxes are stated on a fully tax- equivalent basis, assuming a 34.00% tax rate.

100

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And Results of Operations

Financial Table 3

Investment Securities Portfolio Analysis (Continued)

(dollars in thousands)


	December 31, 2015							December 31, 2014							December 31, 2013
			Estimated							Estimated							Estimated
	Amortized		Fair		Book			Amortized		Fair		Book			Amortized		Fair		Book
	Cost		Value		Yield(1)			Cost		Value		Yield(1)			Cost		Value		Yield(1)
Securities held to maturity
U.S. Government agencies
Due after five but within ten years	$	1,911	$	1,906		2.39	%	$	2,085	$	2,053		2.29	%	$	—	$	—		0.00	%

		1,911		1,906		2.39	%		2,085		2,053		2.29	%		—		—		0.00	%

State and political
Due after one but within five years		1,944		1,953		2.27	%		—		—		0.00	%		—		—		0.00	%
Due after five but within ten years		4,049		4,065		2.95	%		—		—		0.00	%		—		—		0.00	%

		5,993		6,018		2.73	%		—		—		0.00	%		—		—		0.00	%

Corporate Bonds
Due after five but within five years		3,338		3,318		2.76	%		3,411		3,397		2.76	%		—		—		0.00	%

		3,338		3,318		2.76	%		3,411		3,397		2.76	%		—		—		0.00	%

Total Securities held to maturity
Due after one but within five years		1,944		1,953		2.58	%		—		—		0.00	%		—		—		0.00	%
Due after five but within ten years		9,298		9,289		2.77	%		5,496		5,450		2.58	%		—		—		0.00	%

	$	11,242	$	11,242		2.68	%	$	5,496	$	5,450		2.58	%	$	—	$	—		0.00	%

1)	Yields on securities and investments exempt from federal and/or state income taxes are stated on a fully tax- equivalent basis, assuming a 34.00% tax rate.

101

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Financial Table 4

Noninterest Income

(dollars in thousands)


	Year Ended December 31,
	2015		2014			2013
Service charges on deposit accounts	$	1,293	$	1,467		$	1,627
Other banking fees		2,110		1,917			1,589
Asset management fees		1,737		1,732			1,624
Brokerage commissions		270		279			186
Other noninterest income		317		388			448
Income from mortgage loan sales		2,306		1,001			2,113
Security gains (losses)		536		(2	)		(523	)
Gains (losses) from sale of OREO		140		398			290
Other gains (losses) from sale of assets		1		141			233

Total noninterest income	$	8,710	$	7,321		$	7,587

Financial Table 5

Other Noninterest Expense

(dollars in thousands)


	Year Ended December 31,
	2015		2014		2013
Postage	$	184	$	184	$	171
Telephone and data lines		156		145		162
Loan collection cost		121		139		352
Shareholder relations expense		140		234		164
Dues and subscriptions		167		127		139
Other		1,574		1,457		1,496

Total other noninterest expense	$	2,342	$	2,286	$	2,484

102

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Financial Table 6

Loan Portfolio Composition

(dollars in thousands)


	At December 31,
	2015						2014						2013
				% of Total						% of Total						% of Total
	Amount			Loans			Amount			Loans			Amount			Loans
Loan type:
Commercial	$	52,311			16.34	%	$	47,418			15.25	%	$	47,436			15.44	%
Real estate - construction		23,321			7.29	%		26,250			8.44	%		21,001			6.83	%
Real estate - residential		132,799			41.49	%		135,734			43.67	%		132,694			43.18	%
Real estate - commercial		101,198			31.62	%		92,517			29.76	%		95,922			31.22	%
Consumer		8,982			2.81	%		8,460			2.72	%		9,623			3.13	%
Other		1,481			0.45	%		481			0.16	%		612			0.20	%

Total loans		320,092			100.00	%		310,860			100.00	%		307,288			100.00	%

Less:
Allowance for loan losses		(2,884	)					(3,738	)					(5,095	)
Unearned net loan fees		40						(7	)					60

Net loans	$	317,248					$	307,115					$	302,253


	At December 31,
	2012						2011
				% of Total						% of Total
	Amount			Loans			Amount			Loans
Loan type:
Commercial	$	41,390			12.58	%	$	45,907			12.52	%
Real estate - construction		28,132			8.55	%		37,144			10.13	%
Real estate - residential		142,444			43.28	%		153,260			41.82	%
Real estate - commercial		103,304			31.39	%		114,944			31.36	%
Consumer		12,986			3.95	%		14,710			4.01	%
Other		822			0.25	%		602			0.16	%

Total loans		329,078			100.00	%		366,567			100.00	%

Less:
Allowance for loan losses		(6,801	)					(6,815	)
Unearned net loan fees		105						108

Net loans	$	322,382					$	359,860

103

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Financial Table 7

Selected Loan Maturities

(dollars in thousands)


	December 31, 2015
	One Year		One to		Over Five
	or Less		Five Years		Years		Total
Commercial and agricultural	$	15,914	$	12,766	$	23,631	$	52,311
Real estate – construction		9,819		6,565		6,937		23,321

Total selected loans	$	25,733	$	19,331	$	30,568	$	75,632

Fixed rate loans	$	15,066	$	67,650	$	63,094	$	145,810

Sensitivity to rate changes:
Variable interest rates	$	33,631	$	25,934	$	114,757	$	174,322

104

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Financial Table 8

Activity in the Allowance for Loan Loss

(dollars in thousands)


	At or for the Year Ended December 31,
	2015			2014			2013			2012			2011
Allowance for loan losses at beginning of year	$	3,738		$	5,095		$	6,801		$	6,815		$	9,067
Provision for (recovery of) loan losses		(620	)		(389	)		28			1,832			3,456
Other		—			—			(5	)		—			(5	)
Loan charge-offs:
Commercial		34			8			571			322			336
Real estate		427			1,140			1,225			1,427			5,110
Consumer		128			83			175			242			390

Total charge-offs		589			1,231			1,971			1,991			5,836

Recoveries of loans previously charged off:
Commercial		16			81			14			43			4
Real estate		278			138			180			66			28
Consumer		61			44			48			36			101

Total recoveries		355			263			242			145			133

Net charge-offs		234			968			1,729			1,846			5,703

Allowance for loan losses at end of year	$	2,884		$	3,738		$	5,095		$	6,801		$	6,815

Net (charge-offs) recoveries as a percent of average loans		0.07	%		0.31	%		0.55	%		0.53	%		1.50	%

105

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Financial Table 9

Allocation of the Allowance for Loan Losses

(dollars in thousands)


	At December 31,
	2015					2014					2013
			% of Total					% of Total					% of Total
	Amount		Loans (1)			Amount		Loans (1)			Amount		Loans (1)
Commercial	$	478		16.57	%	$	790		21.13	%	$	722		14.17	%
Real estate - construction		227		7.87	%		223		5.97	%		1,203		23.61	%
Real estate - residential		1,338		46.40	%		1,775		47.50	%		2,025		39.75	%
Real estate - commercial		653		22.64	%		738		19.74	%		890		17.47	%
Other		188		6.52	%		212		5.66	%		255		5.00	%
Unallocated		—		—	%		—		—	%		—		—	%

Total loans	$	2,884		100.00	%	$	3,738		100.00	%	$	5,095		100.00	%


	At December 31,
	2012					2011
			% of Total					% of Total
	Amount		Loans (1)			Amount		Loans (1)
Commercial	$	1,180		17.35	%	$	1,127		12.52	%
Real estate – construction		719		10.57	%		557		10.13	%
Real estate – residential		3,020		44.41	%		2,924		41.81	%
Real estate – commercial		1,040		15.29	%		1,459		31.37	%
Consumer		842		12.38	%		667		4.01	%
Other		—		—	%		81		0.16	%
Unallocated		—		—	%		—		—	%

Total loans	$	6,801		100.00	%	$	6,815		100.00	%

(1)	Represents total of all outstanding loans in each category as a percent of total loans outstanding.

106

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Financial Table 10

Short Term Borrowings

(dollars in thousands)


	2015					2014					2013
	Amount		Rate			Amount		Rate			Amount		Rate
At year-end
Federal funds purchase	$	—		0.00	%	$	—		0.00	%	$	—		0.00	%
Master notes and other secured borrowings		3,396		0.25	%		3,674		0.25	%		3,998		0.25	%
Notes payable		12		6.00	%		11		6.00	%		11		6.00	%
Short-term line of credit		2,350		3.50	%		1,000		3.75	%		—		0.00	%
Short-term advances from FHLB		—		0.00	%		—		0.00	%		1,500		4.80	%

	$	5,758		1.59	%	$	4,685		1.70	%	$	5,509		1.30	%

Average for the year
Federal funds purchase	$	2		0.79	%	$	2		0.79	%	$	4		0.79	%
Master notes and other secured borrowings		3,280		0.25	%		4,250		0.44	%		5,617		0.41	%
Notes payable		18		6.00	%		11		6.00	%		10		6.00	%
Short-term line of credit		1,598		3.51	%		57		3.75	%		—		0.00	%
Short-term advances from FHLB		—		0.00	%		510		4.08	%		5,026		2.61	%

	$	4,898		1.32	%	$	4,830		1.86	%	$	10,657		1.34	%

Maximum month-end balance
Federal funds purchase	$	—				$	—				$	—
Master notes and other secured borrowings		4,736					4,640					6,736
Notes payable		12					11					11
Short-term line of credit		2,350					1,000					—
Short-term advances from FHLB		—					1,500					9,500

107

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Financial Table 11

Maturities of Time Deposits

(dollars in thousands)


			Over 3		Over 6
	3 Months		Months to		Months to		Over
	or Less		6 Months		12 Months		12 Months		Total
Time Deposits of $250,000 or more	$	1,850	$	2,121	$	870	$	3,307	$	8,148

Other Time Deposits		18,839		18,007		19,392		18,042		74,280

	$	20,689	$	20,128	$	20,262	$	21,349	$	82,428

Financial Table 12

Performance Ratios


	At December 31,
	2015			2014			2013			2012			2011
Return on average assets		0.38	%		0.33	%		0.18	%		0.08	%		0.17	%

Return on average equity		4.65	%		4.03	%		2.17	%		0.90	%		2.02	%

Equity to average assets ratio		8.27	%		8.11	%		8.34	%		8.52	%		8.39	%

108

UWHARRIE CAPITAL CORP

Board of Directors


W. Stephen Aldridge, III	Tara G. Eudy	Cynthia L. Mynatt
President/Funeral Director	President and Treasurer	President
Stanly Funeral Home, Inc.	Carolina Title Company, Inc.	Ben Mynatt Buick - GMC

Nadine B. Bowers	Charles F. Geschickter, III	James E. Nance
Retired – Senior Vice President	President and	Founder and Managing Member
Strategic Investment Advisors, Inc.	Chief Executive Officer	North State Negotiations, LLC &
and Bank of Stanly	JTG Racing, Inc.;	North State Acquisitions, LLC
	ST Motorsports, Inc.

Joe S. Brooks	Thomas M. Hearne, Jr.	Frank A. Rankin, III
Board Vice Chairman	Retired	President and Owner
Owner and Manager	Geopavement Engineer	Concord Engineering &
Brothers Precision Tool Co.	North Carolina Department	Surveying, Inc.
	of Transportation

Ronald T. Burleson	Charles D. Horne	S. Todd Swaringen
Partner	President	Certified Public Accountant/
Thurman Burleson & Sons Farm	Hornwood, Inc.	Partner
		Beane Swaringen &
		Company, PLLC

Bill C. Burnside, DDS	Harvey H. Leavitt, III	Dusty W. West
Retired – General Dentist	Owner and Operator	President and Owner
	Leavitt Funeral Home	Dean’s Ready Mixed, Inc.

James O. Campbell	Samuel M. Leder
Channel Sales Manager	Certified Public Accountant/
Viewpoint Construction Software	Partner
	Potter & Company, P.A.

Raymond R. Cranford, Jr.	W. Chester Lowder
Owner and Vice President of Sales	Board Chairman
Crook Motor Co., Inc.	Director of Livestock Program
	Public Policy Division
	NC Farm Bureau
	Federation, Inc.

Executive Officers

Roger L. Dick	Brendan P. Duffey	R. David Beaver, III
President and	Chief Operating Officer and	Chief Financial Officer
Chief Executive Officer	Chief Risk Officer	Uwharrie Capital Corp
Uwharrie Capital Corp;	Uwharrie Capital Corp;	and Uwharrie Bank
Chief Executive Officer	President
Uwharrie Bank	Uwharrie Bank

109

UWHARRIE CAPITAL CORP - FORM 10-K - EX-13 - March 2, 2016

Attached files

UWHARRIE CAPITAL CORP Reports