EX-13 2 dex13.htm 2008 ANNUAL REPORT TO SHAREHOLDERS 2008 Annual Report to Shareholders

Exhibit 13

Uwharrie Capital Corp

2008

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 organized on July 1, 1993 to become the bank holding company for the Bank of Stanly (“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 three non-bank subsidiaries, Strategic Investment Advisors, Inc., and Uwharrie Mortgage, Inc.

Stanly engages in retail and commercial banking, with five banking offices in Stanly County. Stanly 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 provides financial services to customers through one banking office in Anson County.

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 Stanly to begin its operation. Cabarrus operates as a commercial bank and provides a full range of banking services.

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

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

Strategic Investment Advisors Inc. provides portfolio management services to its customers. The Strategic Alliance Corporation (Strategic Alliance®) is a registered broker-dealer with the Financial Industry Regulatory Authority (FINRA). BOS Agency provides insurance products and is licensed in the state of North Carolina. Through Strategic Investment Group, a DBA for a partnership with UVEST Financial Services, Inc., securities and insurance products are offered including fixed annuities, long-term care, and life insurance products. Group insurance products are offered through an arrangement with Burchfield Insurance Group, Inc. and the Novus Group, Inc. as well as Medicare supplement products.

The Strategic Alliance Corporation. Member FINRA/SIPC.

Securities and insurance products are offered by, and Financial Consultants are registered with UVEST Financial Services, member FINRA/SIPC. UVEST, Strategic Investment Group and Uwharrie Capital Corp affiliates are independent entities. Securities and/or insurance products are not FDIC insured, are not deposits or other obligations of any depository institution, are not guaranteed by any depository institution and are subject to investment risks, including possible loss of the principal amount invested.

Bank of Stanly, Member FDIC, Equal Housing Lender.

Anson Bank & Trust Co., Member FDIC, Equal Housing Lender.

Cabarrus Bank & Trust Company, Member FDIC, Equal Housing Lender.

 

3


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Financial Highlights

 

(Dollars in thousands except per share amounts)    2008     2007     Percent
Increase
(Decrease)
 

For the year:

      

Net income

   $ 2,029     $ 2,959     (31.43 )%

Net income available to common shareholders

   $ 2,016     $ 2,959     (31.87 )%

Basic net income per common share (1)

   $ 0.27     $ 0.39     (30.48 )%

Diluted net income per common share (1)

   $ 0.27     $ 0.39     (30.48 )%

Weighted average common shares outstanding (diluted)

     7,469,057       7,706,832     (3.09 )%

At year-end:

      

Total assets

   $ 452,468     $ 411,944     9.84 %

Total earning assets

     425,165       380,549     11.72 %

Loans held for investment

     340,830       321,987     5.85 %

Total interest-bearing liabilities

     362,346       331,679     9.25 %

Shareholders’ equity

     41,233       31,574     30.59 %

Book value per common share (1)

   $ 4.11     $ 4.14     (0.63 )%

Averages for the year:

      

Total assets

   $ 422,857     $ 393,188     7.55 %

Total earning assets

     389,683       365,579     6.59 %

Loans held for investment

     331,705       308,149     7.64 %

Total interest-bearing liabilities

     342,342       313,570     9.18 %

Shareholders’ equity

     32,245       30,402     6.06 %

Financial Ratios (in percentage):

      

Return on average assets

     0.48 %     0.75 %  

Return on average shareholders’ equity

     6.29 %     9.73 %  

Average equity to average assets

     7.63 %     7.73 %  

Net interest margin (fully tax equivalent basis)

     4.13 %     4.24 %  

Allowance as % of loans at year-end

     1.28 %     1.09 %  

Allowance as % of nonperforming loans

     111.87 %     195.57 %  

Nonperforming loans to total loans

     1.14 %     0.56 %  

Nonperforming assets to total assets

     1.48 %     0.48 %  

Net loan charge-offs (recoveries) to average loans

     0.04 %     (0.11 )%  

 

(1) Net income per share, book value per share, and shares outstanding at year-end have been adjusted to reflect the 3% stock dividends in 2008 and in 2007.

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

It is the philosophy of Uwharrie Capital Corp to promote a strong, base of local shareholders. While bid and asked prices for the Company’s common stock are quoted on the Over the Counter Bulletin Board under the symbol UWHR, trading is sporadic with the most trades 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. The Company has an independent valuation of its common stock performed on a quarterly basis and makes this valuation available to interested shareholders in order to promote fairness and market efficiency in privately negotiated transactions.

The Board of Directors has adopted a dividend policy on an annual basis. For 2008, Uwharrie Capital Corp declared a 3% stock dividend. The Board of Directors will determine an appropriate dividend, if any, on an annual basis, consistent with the capital needs of the Company.

 

4


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

The following graph compares (i) the yearly change in the cumulative total shareholder return on the Company’s common stock with (ii) the cumulative return of The Carson Medlin Company Independent Bank Index, and (iii) the Nasdaq Composite. The graph assumes that the value of an investment in the Company’s common stock and in each index was $100 on December 31, 2003, and that all dividends were reinvested. The performance shown in the graph represents past performance and should not be considered the indication of future performance.

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.

LOGO

 

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6


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, 2008 and 2007, 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, 2008. 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, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2008 the Company adopted the provisions of Emerging Issues Task Force Issue No. 06-4, “Accounting for the Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” and Statement of Financial Accounting Standards No. 157, “Fair Value Measurement.”

 

LOGO
Southern Pines, North Carolina
March 25, 2009

 

7


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2008 and 2007

 

 

 

     2008     2007  
     (dollars in thousands)  

ASSETS

    

Cash and due from banks

   $ 2,931     $ 13,765  

Interest-earning deposits with banks

     10,353       2,432  

Securities available for sale, at fair value

     68,835       51,005  

Loans held for sale

     2,691       2,916  

Loans:

    

Loans held for investment

     340,830       321,987  

Less allowance for loan losses

     (4,361 )     (3,510 )
                

Net loans held for investment

     336,469       318,477  
                

Premises and equipment, net

     11,128       8,751  

Interest receivable

     2,027       2,055  

Federal Home Loan Bank stock

     2,284       2,137  

Bank owned life insurance

     5,511       5,318  

Goodwill

     987       987  

Other real estate owned

     2,816       163  

Other assets

     6,436       3,938  
                

Total assets

   $ 452,468     $ 411,944  
                

LIABILITIES

    

Deposits:

    

Demand noninterest-bearing

   $ 46,032     $ 46,597  

Interest checking and money market accounts

     117,325       102,411  

Savings deposits

     26,360       26,200  

Time deposits, $100,000 and over

     63,321       54,729  

Other time deposits

     100,589       94,720  
                

Total deposits

     353,627       324,657  
                

Short-term borrowed funds

     22,249       31,928  

Long-term debt

     32,502       21,691  

Interest payable

     502       596  

Other liabilities

     2,355       1,498  
                

Total liabilities

     411,235       380,370  
                

Off balance sheet items, commitments and contingencies (Note 12)

    

SHAREHOLDERS’ EQUITY

    

Preferred stock, no par value: 10,000,000 shares

authorized; 10,000 shares of series A issued and

outstanding at December 31, 2008 and

     10,000       —    

500 shares of series B issued and outstanding at December 31, 2008

     500       —    

Discount on preferred stock

     (500 )     —    

Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and outstanding 7,593,929 and 7,414,707 shares, respectively

     9,492       9,268  

Additional paid-in capital plus stock option surplus

     14,019       13,453  

Unearned ESOP compensation

     (736 )     (800 )

Undivided profits

     10,008       9,266  

Accumulated other comprehensive income (loss)

     (1,550 )     387  
                

Total shareholders’ equity

     41,233       31,574  
                

Total liabilities and shareholders’ equity

   $ 452,468     $ 411,944  
                

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

 

8


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2008, 2007 and 2006

 

 

 

     2008     2007     2006
     (in thousands, except share and per share data)

Interest Income

      

Loans, including fees

   $ 22,780     $ 23,916     $ 21,959

Investment securities:

      

US Treasury

     73       98       98

US Government agencies and corporations

     1,853       1,401       832

State and political subdivisions

     689       633       679

Other

     84       128       174

Interest-earning deposits with banks and federal funds sold

     85       733       611
                      

Total interest income

     25,564       26,909       24,353
                      

Interest Expense

      

Interest checking and money market accounts

     1,357       2,550       2,342

Savings deposits

     301       526       734

Time deposits $100,000 and over

     2,453       2,316       2,100

Other time deposits

     3,828       4,138       3,091

Short-term borrowed funds

     529       1,128       758

Long-term debt

     1,360       1,218       1,677
                      

Total interest expense

     9,828       11,876       10,702
                      

Net interest income

     15,736       15,033       13,651

Provision for loan losses

     969       15       298
                      

Net interest income after provision for loan losses

     14,767       15,018       13,353
                      

Noninterest Income

      

Service charges on deposit accounts

     2,238       2,188       2,000

Other service fees and commissions

     2,777       3,097       2,329

Gain(loss) on sale of securities

     —         (76 )     60

Income from mortgage loan sales

     1,208       957       764

Other income

     532       424       316
                      

Total noninterest income

     6,755       6,590       5,469
                      

Noninterest Expense

      

Salaries and employee benefits

     10,637       10,156       9,130

Net occupancy expense

     987       871       711

Equipment expense

     645       598       618

Data processing costs

     789       742       939

Securities impairment

     158       —         —  

Other noninterest expense

     5,473       4,995       4,520
                      

Total noninterest expense

     18,689       17,362       15,918
                      

Income before income taxes

     2,833       4,246       2,904

Income taxes

     804       1,287       833
                      

Net income

   $ 2,029     $ 2,959     $ 2,071
                      

Net income

   $ 2,029     $ 2,959     $ 2,071

Dividends on preferred stock

     (13 )     —         —  
                      

Net Income available to common shareholder

   $ 2,016     $ 2,959     $ 2,071
                      

Net income per common share

      

Basic

   $ 0.27     $ 0.39     $ 0.27
                      

Diluted

   $ 0.27     $ 0.39     $ 0.26
                      

Weighted average common shares outstanding

      

Basic

     7,482,488       7,603,494       7,685,978

Diluted

     7,520,484       7,706,832       7,802,101

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

 

9


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2008, 2007 and 2006

 

 

 

     2008     2007     2006  
     (in thousands)  

Net Income

   $ 2,029     $ 2,959     $ 2,071  
                        

Other comprehensive income (loss):

      

Unrealized gains (losses) on available for sale securities

     (3,157 )     275       (197 )

Related tax effect

     1,220       (105 )     76  

Reclassification of losses (gains) recognized in net income

     —         76       (60 )

Related tax effect

     —         (29 )     23  
                        

Total other comprehensive income (loss)

     (1,937 )     217       (158 )
                        

Comprehensive income

   $ 92     $ 3,176     $ 1,913  
                        

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

 

10


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended December 31, 2008, 2007 and 2006

 

 

 

     Number
Common
Shares
Issued
    Preferred
Stock
Series A
   Preferred
Stock
Series B
   Discount
on
Preferred
Stock
   Common
Stock
    Additional
Paid-in
Capital
    ESOP
Compensation
    Undivided
Profits
    Accumulated
Other
Comprehensive
Income(Loss)
    Total  
     (in thousands, except share data)  

Balance, December 31, 2005

   7,138,686     $ —      $ —      $ —      $ 8,923     $ 12,410     $ (914 )   $ 6,706     $ 328     $ 27,453  
                                                                           

Net income

   —         —        —        —        —         —         —         2,071       —         2,071  

Other comprehensive income

   —         —        —        —        —         —         —         —         (158 )     (158 )

Release of ESOP shares

   —         —        —        —        —         37       55       —         —         92  

Common stock issued pursuant to:

                       

3% stock dividend

   214,634       —        —        —        269       997       —         (1,266 )     —         —    

Stock options exercised

   94,094       —        —        —        117       107       —         —         —         224  

Tax benefit of stock options exercised

   —         —        —        —        —         48       —         —         —         48  

Repurchase of common stock

   (23,864 )     —        —        —        (30 )     (115 )     —         —         —         (145 )

Cash paid fraction shares

   —         —        —        —        —         —         —         (9 )     —         (9 )

Stock compensation expense

   —         —        —        —        —         57       —         —         —         57  
                                                                           

Balance, December 31, 2006

   7,423,550       —        —        —        9,279       13,541       (859 )     7,502       170       29,633  
                                                                           

Net income

   —         —        —        —        —         —         —         2,959       —         2,959  

Other comprehensive income

   —         —        —        —        —         —         —         —         217       217  

Release of ESOP shares

   —         —        —        —        —         31       59       —         —         90  

Common stock issued pursuant to:

                       

3% stock dividend

   216,062       —        —        —        270       916       —         (1,186 )     —         —    

Stock options exercised

   12,764       —        —        —        16       20       —         —         —         36  

Tax benefit of stock options exercised

   —         —        —        —        —         3       —         —         —         3  

Repurchase of common stock

   (237,669 )     —        —        —        (297 )     (1,107 )     —         —         —         (1,404 )

Cash paid fraction shares

   —         —        —        —        —         —         —         (9 )     —         (9 )

Stock compensation expense

   —         —        —        —        —         49       —         —         —         49  
                                                                           

Balance, December 31, 2007

   7,414,707       —        —        —        9,268       13,453       (800 )     9,266       387       31,574  
                                                                           

 

11


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)

Years Ended December 31, 2008, 2007 and 2006

 

 

 

     Number
Common
Shares
Issued
    Preferred
Stock
Series A
   Preferred
Stock
Series B
   Discount
on
Preferred
Stock
    Common
Stock
    Additional
Paid-in
Capital
    ESOP
Compensation
    Undivided
Profits
    Accumulated
Other
Comprehensive
Income(Loss)
    Total  
     (in thousands, except share data)  

Balance, December 31, 2007

   7,414,707       —        —        —         9,268       13,453       (800 )     9,266       387       31,574  
                                                                            

Net income

   —         —        —        —         —         —         —         2,029       —         2,029  

Other comprehensive income

   —         —        —        —         —         —         —         —         (1,937 )     (1,937 )

Release of ESOP shares

   —         —        —        —         —         14       64       —         —         78  

Common stock issued pursuant to:

                      

3% stock dividend

   220,738       —        —        —         276       718       —         (994 )     —         —    

Stock options exercised

   69,742       —        —        —         87       214       —         —         —         301  

Tax benefit of stock options exercised

   —         —        —        —         —         26       —         —         —         26  

Repurchase of common stock

   (111,258 )     —        —        —         (139 )     (432 )     —         —         —         (571 )

Cash paid fractional shares

   —         —        —        —         —         —         —         (7 )     —         (7 )

Stock compensation expense

   —         —        —        —         —         26       —         —         —         26  

Adjustment to initially apply EITF 06-4

   —         —        —        —         —         —         —         (273 )     —         (273 )

Issue series A preferred stock to the Treasury

   —         10,000      —        —         —         —         —         —         —         10,000  

Issue series B preferred stock to the Treasury

   —         —        500      —         —         —         —         —         —         500  

Record Series B warrant expense

   —         —        —        (500 )     —         —         —         —         —         (500 )

Record preferred stock dividend

   —         —        —        —         —         —         —         (13 )     —         (13 )
                                                                            

Balance, December 31, 2008

   7,593,929     $ 10,000    $ 500    $ (500 )   $ 9,492     $ 14,019     $ (736 )   $ 10,008     $ (1,550 )   $ 41,233  
                                                                            

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

 

12


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2008, 2007 and 2006

 

 

 

     2008     2007     2006  

Cash flows from operating activities

      

Net income

   $ 2,029     $ 2,959     $ 2,071  

Adjustments to reconcile net income to net cash
Provided by operating activities:

      

Depreciation

     676       625       625  

Net amortization of security premiums/discounts

     (202 )     (220 )     (41 )

Impairment of securities available for sale

     158       —         —    

Net amortization of mortgage servicing rights

     471       407       382  

Provision for loan losses

     969       15       298  

Deferred income taxes

     (728 )     205       439  

Stock compensation

     26       49       57  

Net realized (gain) loss on available for sale securities

     —         76       (60 )

Income from mortgage loan sales

     (1,208 )     (957 )     (764 )

Proceeds from sales of loans held for sale

     55,198       45,603       39,038  

Origination of loans held for sale

     (54,328 )     (43,748 )     (38,734 )

(Gain) loss on sale of premises, equipment and other assets

     5       (26 )     9  

Increase in cash surrender value of life insurance

     (193 )     (185 )     (184 )

Loss on sales of foreclosed real estate

     41       2       24  

Release of ESOP Shares

     78       90       92  

Net change in interest receivable

     28       (280 )     (250 )

Net change in other assets

     (471 )     (866 )     (243 )

Net change in interest payable

     (94 )     93       134  

Net change in other liabilities

     584       302       (190 )
                        

Net cash provided by operating activities

     3,039       4,144       2,703  
                        

Cash flows from investing activities

      

Proceeds from sales, maturities and calls of securities available for sale

     14,386       10,382       9,190  

Purchase of securities available for sale

     (35,329 )     (23,744 )     (11,480 )

Net increase in loans

     (21,837 )     (33,588 )     (17,165 )

Proceeds from sale of premises, equipment and other assets

     —         87       —    

Purchase of premises and equipment

     (3,058 )     (758 )     (813 )

Proceeds from sales of foreclosed real estate

     182       98       205  

Net increase in Federal Home Loan Bank stock

     (147 )     (157 )     (313 )
                        

Net cash used by investing activities

     (45,803 )     (47,680 )     (20,376 )
                        

Cash flows from financing activities

      

Net increase in deposit accounts

     28,970       15,057       35,624  

Net increase (decrease) in short-term borrowed funds

     (9,679 )     18,888       5,136  

Net increase (decrease) in long-term debt

     3,392       (7,598 )     (9,814 )

Net proceeds from issuance of junior subordinated debt

     7,419       —         —    

Repurchases of common stock

     (571 )     (1,404 )     (145 )

Net proceeds from issuance of preferred stock

     10,000       —         —    

Net proceeds from issuance of common stock

     301       36       224  

Tax benefit of stock options exercised

     26       3       48  

Cash paid for fractional shares

     (7 )     (9 )     (9 )
                        

Net cash provided by financing activities

     39,851       24,973       31,064  
                        

Increase (decrease) in cash and cash equivalents

     (2,913 )     (18,563 )     13,391  

Cash and cash equivalents, beginning of period

     16,197       34,760       21,369  
                        

Cash and cash equivalents, end of period

   $ 13,284     $ 16,197     $ 34,760  
                        

Supplemental disclosures of cash flow information

      

Interest paid

   $ 9,922     $ 11,783     $ 10,568  

Income taxes paid

     1,596       1,311       687  

Supplemental schedule of non-cash investing and financing activities

      

Increase (decrease) in fair value of securities available for sale, net of tax

     (1,937 )     217       (158 )

Loans transferred to foreclosed real estate

     2,876       60       262  

Mortgage servicing rights capitalized

     563       331       276  

Preferred stock dividend accrued

     (13 )     —         —    

EITF 06-4 charged to retained earnings

     (273 )     —         —    

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

 

13


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.

Stanly 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 Stanly are insured by the Federal Deposit Insurance Corporation (“FDIC”). Stanly is under regulation of the Federal Reserve, FDIC and the North Carolina State Banking Commission. Through its five branch locations in Stanly County, Stanly provides a wide range of deposit accounts, commercial, consumer, home equity and residential mortgage loans, safe deposit boxes and automated banking.

In 1987, Stanly established a wholly-owned subsidiary, BOS Agency, Inc. (“BOS Agency”), which engages in insurance product sales. In 1989, Stanly 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 1999 to provide investment advisory and asset management services. This subsidiary is registered as an investment advisor with the Securities and Exchange Commission.

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

On August 4, 2000, Stanly acquired another subsidiary, Gateway Mortgage, Inc. (“Gateway”), a mortgage origination company.

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 Stanly to begin its operation. Cabarrus operates as a commercial bank and provides a full range of banking services.

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

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, Stanly, Anson, Cabarrus, SIA and their subsidiaries, BOS Agency, Strategic Alliance and Gateway. All significant intercompany transactions and balances have been eliminated in consolidation.

 

14


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

Use of Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, 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,” “Interest-earning deposits with banks,” and “Federal funds sold”.

Investment Securities Held To Maturity

Investment securities classified as held to maturity are debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the interest method over their contractual lives. Declines in the fair value of individual held to maturity 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. The Company had no securities held to maturity at December 31, 2008 and 2007.

Investment Securities Available for Sale

Investment securities available for sale consist of bonds and notes not classified as trading securities nor as held to maturity securities. Unrealized holding gains and losses on available for sale securities are reported as a net amount in other comprehensive income, net of income taxes. Gains and losses on the sale of available for sale securities are determined using the specific identification method. Declines in the fair value of individual available for sale securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. Such write-downs would be included in earnings as realized losses. Premiums and discounts are recognized in interest income using the interest method over the period to maturity.

Loans Held for Sale

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

Loans

The Company grants mortgage, commercial and consumer loans to customers. 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

 

15


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

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 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.

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 loans is accounted for on the cash-basis or cost-recovery method, 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.

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 uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. 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.

 

16


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer, residential and other loans for impairment disclosures.

Servicing Rights

The Company capitalizes servicing rights when loans are either securitized or 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. The amortization of servicing rights is recognized in the statement of income as an offset to other noninterest income. Servicing assets are evaluated for impairment based upon the fair value. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance.

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 upon foreclosure, establishing a new cost basis. After foreclosure, valuations are performed and the foreclosed property is adjusted to the lower of cost or fair value of the properties, less costs to sell. Any write-down at the time of transfer to foreclosed properties is charged to the allowance for loan losses. Subsequent write-downs are charged to other expenses. Property is evaluated regularly to ensure that the recorded amount is supported by its current fair value.

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.

Federal Home Loan Bank Stock

As a requirement for membership, the banks invest in the stock of the Federal Home Loan Bank of Atlanta (“FHLB”). This investment is carried at cost. Due to the redemption provisions of the FHLB, the Company estimated that fair value approximates cost and that this investment was not impaired.

 

17


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

Goodwill

Goodwill resulted from the 2000 acquisition of Anson BanCorp, Inc. and its subsidiary, Anson Savings Bank. Goodwill is evaluated for impairment annually, or more frequently if circumstances indicate potential impairment.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R (revised 2004, “Share-Based Payment”, (“SFAS No. 123R”)) which was issued by the Financial Accounting Standards Board (“FASB”) in December 2004. SFAS No. 123R revises SFAS No. 123 “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees” (APB No. 25) and its related interpretations. SFAS No. 123R requires recognition of 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). SFAS No. 123R 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. SFAS No. 123R also amends SFAS No. 95 “Statement of Cash Flows”, to require that excess tax benefits be reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows.

The Company adopted SFAS No. 123R using the modified prospective application as permitted under SFAS No. 123R. Accordingly, prior period amounts have not been restated. Under this application, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Prior to the adoption of SFAS No. 123R, the Company used the intrinsic value method as prescribed by APB No. 25 and thus recognized no compensation expense for options granted with exercise prices equal to the fair market value of the common stock on the date of grant.

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 operating loss and tax credit carryforwards 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.

 

18


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

Fair Value of Financial Instruments

The Company adopted the provisions of Statement of Financial Accounting Statements (SFAS) No. 157 Fair Value Measurements (SFAS 157) and SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities (SFAS 159) on January 1, 2008.

SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. SFAS 157 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation.

SFAS 157 defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which those assets or liabilities are sold and considers assumptions that market participants would use when pricing those assets or liabilities. Fair values determined using Level 1 inputs rely on active and observable markets to price identical assets or liabilities. In situations where identical assets and liabilities are not traded in active markets, fair values may be determined based on Level 2 inputs, which exist when observable data exists for similar assets and liabilities. Fair values for assets and liabilities for which identical or similar assets and liabilities are not actively traded in observable markets are based on Level 3 inputs, which are considered to be unobservable.

Among the Company’s assets and liabilities, investment securities available for sale are reported at their fair values on a recurring basis. Certain other assets are adjusted to their fair value on a nonrecurring basis, including loans held for sale, which are carried at the lower of cost or market, 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, foreclosed real estate, which is carried at lower of cost or fair market value and goodwill, which is periodically tested for impairment. Deposits, short-term borrowings and long-term obligations are not reported at fair value.

 

19


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114, Accounting by Creditors for Impairment of a Loan, (SFAS 114). The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2008, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

For assets and liabilities carried at fair value, the following table provides fair value information as of December 31, 2008:

 

     Total    Level 1    Level 2    Level 3
     (dollars in thousands)

Investment securities available for sale

   $ 68,835    $ 10,643    $ 58,004    $ 188
                           

Total assets at fair value

   $ 68,835    $ 10,643    $ 58,004    $ 188
                           

Total liabilities at fair value

   $ —      $ —      $ —      $ —  
                           

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

 

20


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

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, 2008:

 

     Total    Level 1    Level 2    Level 3
     (dollars in thousands)

Loans

   $ 6,688    $ —      $ 6,688    $ —  

Loans held for sale

     2,691      —        2,691      —  

Mortgage servicing rights

     1,293      —        —        1,293
                           

Total assets at fair value

   $ 10,672    $ —      $ 9,379    $ 1,293
                           

Total liabilities at fair value

   $ —      $ —      $ —      $ —  
                           

SFAS 159 allows an entity to elect to measure certain financial assets and liabilities at fair value with changes in fair value recognized in the income statement each period. The statement also requires additional disclosures to identify the effects of an entity’s fair value election on its earnings. Upon the adoption of SFAS 159, the Company did not elect to report any assets and liabilities at fair value.

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.

Earnings per Common Share

The Company issued 3% stock dividends in 2008, 2007 and 2006. All references in these consolidated financial statements to earnings per common share and weighted average common and common equivalent shares outstanding have been adjusted for the effect of these stock dividends. In 2008 and 2006 there were 189,866 and 15,450 options outstanding, respectfully, that were anti-dilutive. Since the exercise price exceeded the average market price there were no anti-dilutive stock options outstanding during 2007. The anti-dilutive options from 2006 were forfeited during 2007.

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.

 

21


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:

 

     2008     2007     2006  

Weighted average number of common shares used in computing basic net income per common share

   7,618,913     7,753,837     7,852,238  

Effect of ESOP shares

   (136,425 )   (150,343 )   (166,260 )
                  

Adjusted weighted average number of common shares used in computing basic net income per common share

   7,482,488     7,603,494     7,685,978  

Effect of dilutive stock options

   37,996     103,338     116,123  
                  

Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per common share

   7,520,484     7,706,832     7,802,101  
                  

Recent Accounting Pronouncements

FIN 48

The Company adopted the Financial Accounting Standards Board’s Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. The adoption of FIN 48 did not have a material effect on our consolidated financial position or results of operations and unrecognized tax benefits as of December 31, 2008 and 2007 were immaterial. The Company classifies interest and penalties related to income tax assessments, if any, in income tax expense in the consolidated statement of operations and interest and penalties recognized in 2008, 2007, and 2006 were immaterial. Fiscal years ending on or after December 31, 2003 are subject to examination by federal and state tax authorities.

SAB 109

In November 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 109, “Application of Accounting Principles to Loan Commitments” (“SAB 109”), to inform registrants of the Staff’s view that the fair value of written loan commitments that are accounted for at fair value should include expected net future cash flows related to the associated servicing of the loan. Additionally, the Staff reaffirmed its previous views that internally-developed intangible assets (such as customer relationship intangible assets) should not be recorded as part of the fair value of such commitments. The Staff expects registrants to apply the views stated in SAB 109 on a prospective basis to written loan commitments recorded at fair value which were issued or modified in fiscal quarters beginning after December 15, 2007. The Company adopted SAB 109 on January 1, 2008. The adoption of SAB 109 did not have a material impact on the Company’s consolidated financial statements.

 

22


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

EITF 06-4

In September 2006, the FASB ratified the consensuses reached by the FASB’s Emerging Issues Task Force (“EITF”) relating to EITF 06-4, “Accounting for the Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” EITF 06-4 states that an employer accounting for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods should recognize a liability for future benefits in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” or Accounting Principles Board (“APB”) Opinion No. 12, “Omnibus Opinion—1967.” The Company adopted EITF 06-4 on January 1, 2008, and in connection therewith recorded a liability of $273,000 as a reduction of retained earnings. Subsequent increases in this liability will be reflected as an expense in determining operating results.

SFAS No. 157

SFAS No. 157, “Fair Value Measurements,” was issued in September 2006. In defining fair value, SFAS No. 157 retains the exchange price notion in earlier definitions of fair value. However, the definition of fair value under SFAS No. 157 focuses on the price that would be received to sell an asset or paid to transfer a liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). SFAS No. 157 applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. Accordingly, SFAS No. 157 does not expand the use of fair value in any new circumstances. SFAS No. 157 also establishes a fair value hierarchy that prioritizes the information used to develop assumptions used to determine the exit price. Under this standard, fair value measurements would be disclosed separately by level within the fair value hierarchy. The Company adopted SFAS No. 157 effective January 1, 2008. The adoption of SFAS No. 157 had no effect on the Company’s financial condition or results of operations. For additional information on the fair value of certain financial assets and liabilities, see Note 17 to the consolidated financial statements.

SFAS No. 159

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 creates a fair value option allowing an entity irrevocably to elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities, with changes in fair value recognized in earnings as they occur. SFAS No. 159 requires an entity to report those financial assets and financial liabilities measured at fair value in a manner that separates those reported fair values from the carrying amounts of assets and liabilities measured using another measurement attribute on the face of the statement of financial position. SFAS No. 159 also requires an entity to provide information that would allow users to understand the effect on earnings of changes in the fair value on those instruments selected for the fair value election. The Company adopted SFAS No. 159 effective January 1, 2008. There was no initial effect of adoption since the Company did not elect the fair value option for any existing asset or liability. In addition, the Company did not elect the fair value option for any financial assets originated or purchased, or for liabilities issued, through December 31, 2008.

FSP No. FAS 157-3

FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS 157-3”), issued in October 2008, clarifies the application of SFAS No. 157, “Fair Value Measurements”, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when

 

23


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

the market for that financial asset is not active. FSP FAS 157-3 was effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application should be accounted for as a change in accounting estimate following the guidance in SFAS No. 154, “Accounting Changes and Error Corrections.” However, the disclosure provisions in SFAS No. 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. As FSP FAS 157-3 clarified but did not change the application of SFAS No. 157, the adoption of FSP FAS 157-3 had no effect on the Company’s financial condition or results of operations.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

From time to time the FASB issues exposure drafts for 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 2007 and 2006 financial statements have been reclassified to conform to the 2008 presentation. The reclassifications had no effect on net income or shareholders’ equity as previously reported.

 

24


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 2 - Investment Securities

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

 

December 31, 2008

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
     (dollars in thousands)

U.S. Government agencies

   $ 10,469    $ 229    $ 55    $ 10,643

Mortgage-backed securities and CMO’s

     44,500      691      3,795      41,396

State and political subdivisions

     16,396      417      17      16,796
                           

Total securities available for sale

   $ 71,365    $ 1,337    $ 3,867    $ 68,835
                           

December 31, 2007

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
     (dollars in thousands)

U.S. Treasury

   $ 2,997    $ —      $ 2    $ 2,995

U.S. Government agencies

     6,506      62      —        6,568

Mortgage-backed securities and CMO’s

     28,179      197      84      28,292

State and political subdivisions

     12,187      452      5      12,634

Corporate bonds

     501      —        1      500
                           

Total debt securities

     50,370      711      92      50,989

Equity securities

     8      8      —        16
                           

Total securities available for sale

   $ 50,378    $ 719    $ 92    $ 51,005
                           

At December 31, 2008, the Company owned Federal Reserve stock reported at cost of $569,000 and included in other assets. Also at December 31, 2008 and 2007, the Company owned Federal Home Loan Bank Stock (FHLB) of $2.3 million and $2.1 million, respectively. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership and borrowings with these banks.

Results from sales of securities available for sale for the years ended December 31, 2008, 2007 and 2006 are as follows:

 

     2008    2007     2006
     (dollars in thousands)

Gross proceeds from sales

   $ —      $ 4,643     $ 2,885
                     

Realized gains from sales

   $ —      $ —       $ 60

Realized losses from sales

     —        (76 )     —  
                     

Net realized gains (losses)

   $ —      $ (76 )   $ 60
                     

At December 31, 2008, 2007 and 2006 securities available for sale with a carrying amount of $13.2 million, $15.2 million and $16.6 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2008 and 2007. These unrealized losses on investment securities are a result of temporary fluctuations in the market prices due to a rise in interest rates, which will adjust if rates decline and a volatile market and are in no way a reflection of the quality of the investments. At December 31, 2008 the unrealized losses related to three U.S. Government Agencies, fifteen mortgage backed securities and collateralized mortgage obligations “CMOs”, and twelve state and political subdivisions securities. Although

 

25


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 2 - Investment Securities (Continued)

 

there were several downgrades in the CMO security portfolio, all of the unrealized losses on investment securities are considered by management to be temporary given the credit ratings on these investment securities and management’s intent and ability to hold these investments until maturity with the exception of one CMO security that management has deemed to be impaired and recorded an impairment charge of $158,164.

The Company has developed a process for evaluating the mortgage-backed and CMO securities portfolio for impairment. These bonds are evaluated using numerous factors that included but are not limited to market loss, investment rating, investment tranche and the evaluation of the underlying collateral. The collateral is analyzed based on nonperforming loans, mortgage properties, occupancy rates and any accumulated loss up to the impairment valuation date. Cashflows, yields and constant prepayment rates (“CPR”) are also considered. At December 31, 2008, the Company had one whole loan CMO investment, First Horizon Alterative Mortgage Trust 2006-AA7 (FHAMS 2006-AA7), which it deemed to be impaired.

 

     Less than 12 Months    12 Months or More    Total

December 31, 2008

   Fair Value    Unrealized
Losses
   Fair Value    Unrealized
Losses
   Fair Value    Unrealized
Losses
      

Securities available for sale:

                 

U.S. Gov’t agencies

   $ 3,010    $ 55    $ —      $ —      $ 3,010    $ 55

Mortgage-backed securities and CMO’s

     14,690      3,717      1,290      78      15,980      3,795

State and political subdivisions

     2,648      17      —        —        2,648      17
                                         
   $ 20,348    $ 3,789    $ 1,290    $ 78    $ 21,638    $ 3,867
                                         
     Less than 12 Months    12 Months or More    Total

December 31, 2008

   Fair Value    Unrealized
Losses
   Fair Value    Unrealized
Losses
   Fair Value    Unrealized
Losses
     (dollars in thousands)

Securities available for sale:

                 

U.S. Treasury

   $ —      $ —      $ 2,995    $ 2    $ 2,995    $ 2

Mortgage-backed securities and CMO’s

     8,776      40      2,347      44      11,123      84

State and political subdivisions

     751      5      —        —        751      5

Corporate Bonds

     500      1      —        —        500      1
                                         
   $ 10,027    $ 46    $ 5,342    $ 46    $ 15,369    $ 92
                                         

Note 3 - Loans Held for Investment

The composition of net loans held for investment as of December 31, 2008 and 2007 is as follows:

 

     2008     2007  
     (dollars in thousands)  

Commercial

   $ 45,470     $ 37,724  

Real estate - construction

     50,661       46,546  

Real estate - residential

     139,346       135,842  

Real estate - commercial

     89,561       86,593  

Consumer

     15,499       15,022  

Other

     121       143  
                
     340,658       321,870  

Less:

    

Allowance for loan losses

     (4,361 )     (3,510 )

Deferred loan (fees) costs, net

     172       117  
                

Loans held for investment, net

   $ 336,469     $ 318,477  
                

 

26


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 3 - Loans Held for Investment (Continued)

 

Although the subsidiary banks’ loan portfolios are diversified, there is a concentration of mortgage real estate loans, primarily one to four family residential mortgage loans, which represent 40.90% of total loans. Additionally, there is concentration in commercial loans secured primarily by real estate, to finance manufacturing buildings, shopping center locations, commercial land development, commercial buildings and equipment that comprise 26.29% of total loans. There is not a concentration of a particular type of credit in this group of commercial loans.

Impaired loans, which consisted of nonaccrual loans and other loans identified by management as impaired, totaled $12.5 million and $7.5 million at December 31, 2008 and 2007, respectively. The nonaccrual status of these loans had the effect of reducing net income by $93,750 in 2008 and $6,077 in 2007. Of the $12.5 million in impaired loans at December 31, 2008, $9.0 million carried allowances totaling $2.3 million while $3.5 million were evaluated and required no specific allowance. Of the $7.5 million in impaired loans at December 31, 2007, $5.3 million carried allowances totaling $1.3 million while $2.2 million required no specific allowance. The allowance for impaired loans amounted to $2.3 million at December 31, 2008 and $1.3 million at December 31, 2007. There were no loans past due 90 days and still accruing interest at December 31, 2008 or 2007. Restructured loans, excluding those included in impaired loans, amounted to $166,426 at December 31, 2008.

The carrying value of foreclosed properties held as other real estate was $2.8 million and $163,452 at December 31, 2008 and 2007, respectively.

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

Note 4 - Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31, 2008, 2007 and 2006 are presented below:

 

     2008     2007     2006  
     (dollars in thousands)  

Balance, beginning of year

   $ 3,510     $ 3,171     $ 4,482  

Charge-offs

     (288 )     (224 )     (1,687 )

Recoveries

     170       548       78  

Provision charged against income

     969       15       298  
                        

Balance, end of year

   $ 4,361     $ 3,510     $ 3,171  
                        

 

27


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 5 - Servicing Assets

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 $228 million and $205 million at December 31, 2008 and 2007, respectively. The carrying value of capitalized servicing rights, net of valuation allowances, is included in other assets. A summary of mortgage servicing rights follows:

 

     2008     2007     2006  
     (dollars in thousands)  

Beginning of year mortgage servicing rights:

   $ 1,321     $ 1,244     $ 1,138  

Amounts capitalized

     563       484       488  

Amortization

     (471 )     (407 )     (382 )

Impairment

     (120 )     —         —    
                        

End of year

   $ 1,293     $ 1,321     $ 1,244  
                        

Amortization expense is estimated as follows:

 

Year ending December 31,

(dollars in thousands)

2009

       $ 304

2010

         264

2011

         224

2012

         183

2013

         142

Thereafter

         176
          

Total

       $ 1,293
          

Note 6 - Premises and Equipment

The major classes of premises and equipment and the total accumulated depreciation at December 31, 2008 and 2007 are listed below:

 

     2008    2007
     (dollars in thousands)

Land

   $ 3,207    $ 2,915

Building and improvements

     8,402      6,579

Furniture and equipment

     5,391      4,946
             
     17,000      14,440

Less accumulated depreciation

     5,872      5,689
             

Total

   $ 11,128    $ 8,751
             

The Company has also entered into an agreement to purchase a parcel of land for future branch expansion for $950 thousand.

Note 7 - Leases

The Company’s subsidiary, Bank of Stanly had a noncancelable operating lease for a branch location in Albemarle that expired in 2008, with annual rental payments of $19 thousand. The lease has one five year renewal option at the expiration of the initial term. Bank of Stanly elected to go into a month to month lease and entered into an agreement to purchase the

 

28


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 7 - Leases (Continued)

 

building for $300 thousand in 2009. The lease payment is remaining the same during the finalization of the purchase. Bank of Stanly has also entered into a noncancelable operating lease for a branch location in Locust that expires in 2009 with annual rental payments of $42 thousand. The lease has a one year renewal option at the expiration of the current term.

The Company’s subsidiary, Cabarrus Bank and Trust has entered into a noncancelable operating lease for an administrative office location in Concord that expires in 2017 with annual rental payments of $60 thousand. The lease has two five year renewal options at the expiration of the initial term.

Future minimum lease payments under these leases for years subsequent to December 31, 2008 are as follows:

 

Year ending December 31,

(dollars in thousands)

2009

       $ 102

2010

         95

2011

         60

2012

         60

2013

         60

Thereafter

         219
          

Total

       $ 596
          

Total rental expense related to the operating leases was $76,449, $76,449, and $23,807 for the years ended December 31, 2008, 2007 and 2006 respectively, and is included in occupancy expense.

Note 8 - Deposits

The composition of deposits at December 31, 2008 and 2007 is as follows:

 

     2008     2007  
     Amount    Percentage
of Total
    Amount    Percentage
of Total
 
     (dollars in thousands)  

Demand deposits

   $ 46,032    13 %   $ 46,597    14 %

Interest checking and money market

     117,325    33 %     102,411    32 %

Savings

     26,360    8 %     26,200    8 %

Time deposits $100,000 and over

     63,321    18 %     54,729    17 %

Other time deposits

     100,589    28 %     94,720    29 %
                          

Total

   $ 353,627    100 %   $ 324,657    100 %
                          

 

29


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 8 - Deposits (Continued)

 

The maturities of fixed-rate time deposits at December 31, 2008 are reflected in the table below:

 

Year ending

December 31,

   Time
Deposits
$100,000
and Over
   Other
Time
Deposits
     (dollars in thousands)

2009

   $ 50,686    $ 76,083

2010

     8,817      16,565

2011

     2,851      6,891

2012

     559      879

2013

     408      171

Thereafter

     —        —  
             

Total

   $ 63,321    $ 100,589
             

Note 9 - 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 2008 and 2007.

 

     2008     2007  
     Amount    Rate     Amount    Rate  
     (dollars in thousands)  

At year-end

          

Federal funds purchased

   $ —      0.00 %   $ 5,900    4.60 %

Securities sold under repurchase agreements

     1,463    0.92 %     1,604    2.82 %

Master notes

     8,903    1.00 %     9,630    2.67 %

Notes payable

     8    6.00 %     7    6.00 %

Short-term line of credit

     2,600    2.25 %     —      0.00 %

Short-term advances from FHLB

     9,275    0.46 %     14,787    3.85 %
                          
   $ 22,249    0.92 %   $ 31,928    3.58 %
                          
     2008     2007  
     Amount    Rate     Amount    Rate  
     (dollars in thousands)  

Average for the year

          

Federal funds purchased

   $ 1,245    2.93 %   $ 1,331    5.22 %

Securities sold under repurchase agreements

     1,354    1.37 %     1,798    3.81 %

Master notes

     8,882    1.36 %     12,058    3.95 %

Notes payable

     8    6.00 %     302    6.22 %

Short-term line of credit

     703    3.18 %     —      0.00 %

Short-term advances from FHLB

     7,278    4.46 %     13,882    3.54 %
                          
   $ 19,470    2.72 %   $ 29,371    3.84 %
                          

 

30


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 9 - Short-Term Borrowed Funds (Continued)

 

     2008    2007
     (dollars in thousands)

Maximum month-end balance

     

Federal funds purchased

   $ 6,050    $ 6,150

Securities sold under repurchase agreements

     1,752      2,194

Master notes

     11,657      15,830

Notes payable

     8      407

Short-term line of credit

     6,600      —  

Short-term advances from FHLB

     14,000      16,587

Federal funds purchased represent unsecured overnight borrowings from other financial institutions. Securities sold under repurchase agreements represent short-term borrowings collateralized by securities of the United States government or its agencies. Master notes represent an overnight investment in commercial paper issued by the Company to customers of its subsidiary banks, where an agreement is in place.

On September 25, 2007, the Company borrowed $6.6 million from a bank at an interest rate of prime less one percent. This is a two year note that is payable at maturity, with interest payable quarterly. The final maturity on this note is September 24, 2009 and is now reclassified to short-term borrowings. During 2008 payments were made on this borrowing facility in the amount of $4.0 million. The remaining balance at December 31, 2008 was $2.6 million.

The subsidiary banks have combined available lines of credit for federal funds in the amount of $20.9 million at December 31, 2008.

Note 10 - 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 $85.4 million at December 31, 2008. The long-term advances under this line amounted to $25.0 million and $15.0 million at December 31, 2008 and 2007, respectively. Interest rates ranged from 2.96% to 7.52% in both 2008 and 2007. Two subsidiary banks also have standby letters of credit issued by the Federal Home Loan Bank to be used as collateral for public funds deposits. The amount of the letters of credit was $15.0 million at December 31, 2008.

During the second and third quarters of 2008, the Company began a private placement of up to 7,500 fixed rate junior subordinated debt securities at $1,000 per security with a minimum investment of $50 thousand dollars. These securities may be redeemed by the Company after June 30, 2010 and the final maturity date is June 30, 2015. The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.75%. The proceeds of this private placement qualify and are included in the calculation of Tier 2 capital. At the end of the offering period the Company had raised $7.4 million that was outstanding at December 31, 2008.

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 $91,000 at December 31, 2008.

 

31


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 10 - Long-Term Debt (Continued)

 

As of December 31, 2008, the scheduled maturities of these advances and notes payable are as follows:

 

Year ending December 31,

(dollars in thousands)

2010

       $ 7,008

2011

         9,009

2012

         3,009

2013

         4,510

2014

         1,511

Thereafter

         7,455
          

Total

       $ 32,502
          

Note 11 - Income Tax Matters

The significant components of income tax expense for the years ended December 31 are summarized as follows:

 

     2008     2007    2006
     (dollars in thousands)

Current tax expense:

       

Federal

   $ 1,225     $ 844    $ 217

State

     307       238      177
                     

Total

     1,532       1,082      394
                     

Deferred tax expense:

       

Federal

     (607 )     198      343

State

     (121 )     7      96
                     

Total

     (728 )     205      439
                     

Net provision for income taxes

   $ 804     $ 1,287    $ 833
                     

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:

 

     2008     2007     2006  
     (dollars in thousands)  

Tax computed at the statutory federal rate

   $ 963     $ 1,443     $ 987  

Increases (decrease) resulting from:

      

Tax exempt interest, net

     (267 )     (245 )     (245 )

State income taxes, net of federal benefit

     123       162       143  
      

Other

     (15 )     (73 )     (52 )
                        

Provision for income taxes

   $ 804     $ 1,287     $ 833  
                        

 

32


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 11 - 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 are as follows:

 

     2008     2007     2006  
     (dollars in thousands)  

Deferred tax assets relating to:

      

Net unrealized loss on securities available for sale

   $ 979     $ —       $ —    

Allowance for loan losses

     1,305       935       912  

Deferred compensation

     494       357       316  

Other

     136       —         236  

Valuation allowance

     (10 )     (10 )     (12 )
                        

Total deferred tax assets

     2,904       1,282       1,452  
                        

Deferred tax liabilities relating to:

      

Net unrealized gain on securities available for sale

     —         (241 )     (107 )

Premises and equipment

     (301 )     (369 )     (364 )

Deferred loans fees and costs

     (213 )     (213 )     (212 )

Loan servicing

     (41 )     (78 )     (71 )

Prepaid expenses

     (138 )     (110 )     (96 )

Other

     —         (8 )     —    
                        

Total deferred tax liabilities

     (693 )     (1,019 )     (850 )
                        

Net recorded deferred tax asset

   $ 2,211     $ 263     $ 602  
                        

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

Note 12 - Commitments and Contingencies

Financial Instruments with Off-Balance Sheet Risk

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

The subsidiary banks’ risks of loss with the unfunded loans and lines of credit or standby letters of credit are represented by the contractual amount of these instruments. The Banks use the same credit policies in making commitments under such instruments as they do for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. 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.

 

33


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 12 - Commitments and Contingencies (Continued)

 

As of December 31, 2008 and 2007, outstanding financial instruments whose contract amounts represent credit risk were as follows:

 

     2008    2007
     (dollars in thousands)

Commitments to extend credit

   $ 79,649    $ 79,162

Credit card commitments

     10,923      9,017

Standby letters of credit

     981      1,641
             
   $ 91,553    $ 89,820
             

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

Although the Company’s composition of loans is diversified, there is some concentration of mortgage loans in the total portfolio. The Banks’ Policy is to abide by real estate loan-to-value margin limits corresponding to guidelines issued by the federal supervisory agencies on March 19, 1993. Lending policy for all loans requires that they be supported by sufficient cash flows. Credit losses related to this real estate concentration are consistent with credit losses experienced in the portfolio as a whole.

Note 13 - 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 collectibility. All loans to directors and executive officers or their interests are submitted to the Board of Directors for approval. A summary of loans to directors, executive officers and their related interests follows:

(dollars in thousands)

 

Balance at December 31, 2007

   $ 15,812  

Disbursements during the year

     2,874  

Collections during the year

     (3,237 )
        

Balance at December 31, 2008

   $ 15,449  
        

At December 31, 2008, the Company had approved, but unused lines of credit, totaling $6.4 million to executive officers, directors, officers and their related interests.

 

34


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 14 - Shareholders’ Equity and Regulatory Matters

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

The Company and its subsidiary banks are subject to federal regulatory risk-based capital guidelines for banks and bank holding companies. Each must meet specific capital guidelines that involve quantitative measure of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices which measure Total and Tier 1 Capital to risk-weighted assets and Tier 1 Capital to average assets. Quantitative measures established by regulation to ensure capital adequacy and the Company’s consolidated capital ratios are set forth in the table below. The Company expects to meet or exceed these minimums without altering current operations or strategy.

 

     Actual     Minimum
For Capital
Requirement
    Minimum to Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 

December 31, 2008

   Amount    Ratio     Amount    Ratio     Amount    Ratio  
     (Dollars in thousands)             
               

Total Capital to Risk

               

Weighted Assets:

               

Consolidated

   $ 53,368    14.4 %   $ 29,626    8.0 %   $ 37,033    10.0 %

Bank of Stanly

     33,357    13.1 %     20,349    8.0 %     25,436    10.0 %

Anson Bank and Trust

     4,477    12.5 %     2,864    8.0 %     3,580    10.0 %

Cabarrus Bank and Trust

     12,170    15.4 %     6,327    8.0 %     7,908    10.0 %

Tier I Capital to Risk

               

Weighted Assets:

               

Consolidated

     41,736    11.3 %     14,813    4.0 %     22,220    6.0 %

Bank of Stanly

     30,176    11.9 %     10,174    4.0 %     15,261    6.0 %

Anson Bank and Trust

     4,061    11.3 %     1,432    4.0 %     2,148    6.0 %

Cabarrus Bank and Trust

     11,554    14.6 %     3,163    4.0 %     4,745    6.0 %

Tier I Capital to

               

Average Assets:

               

Consolidated

     41,736    9.5 %     17,519    4.0 %     21,899    5.0 %

Bank of Stanly

     30,176    10.1 %     11,901    4.0 %     14,876    5.0 %

Anson Bank and Trust

     4,061    8.6 %     1,892    4.0 %     2,365    5.0 %

Cabarrus Bank and Trust

     11,554    13.3 %     3,471    4.0 %     4,339    5.0 %

 

35


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 14 - Shareholders’ Equity and Regulatory Matters (Continued)

 

December 31, 2007

                                 

Total Capital to Risk

               

Weighted Assets:

               

Consolidated

   $ 33,713    10.2 %   $ 26,346    8.00 %   $ 32,933    10.00 %

Bank of Stanly

     27,035    12.2 %     17,771    8.00 %     22,214    10.00 %

Anson Bank and Trust

     4,511    12.5 %     2,880    8.00 %     3,600    10.00 %

Cabarrus Bank and Trust

     7,693    10.9 %     5,653    8.00 %     7,067    10.00 %

Tier I Capital to Risk

               

Weighted Assets:

               

Consolidated

     30,200    9.2 %     13,173    4.00 %     19,760    6.00 %

Bank of Stanly

     24,550    11.1 %     8,885    4.00 %     13,328    6.00 %

Anson Bank and Trust

     4,123    11.5 %     1,440    4.00 %     2,160    6.00 %

Cabarrus Bank and Trust

     7,053    10.0 %     2,827    4.00 %     4,240    6.00 %

Tier I Capital to

               

Average Assets:

               

Consolidated

     30,200    7.6 %     15,833    4.00 %     19,791    5.00 %

Bank of Stanly

     24,550    9.1 %     10,775    4.00 %     13,468    5.00 %

Anson Bank and Trust

     4,123    8.8 %     1,884    4.00 %     2,355    5.00 %

Cabarrus Bank and Trust

     7,053    8.8 %     3,212    4.00 %     4,015    5.00 %

As of December 31, 2008, the most recent notification from the Federal Deposit Insurance Corporation categorized all subsidiary banks 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 categorizations.

On December 23, 2008, the Company entered into a letter agreement with the United States Department of Treasury to sell 10,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Senior Preferred”) with a redemption value of $10.0 million. The Company also issued a warrant to the Treasury that was immediately exercised for 500 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the “Warrant Preferred”) with redemption value of $500,000. Combined proceeds received for the issuance of both the Senior Preferred and the Warrant Preferred was $10.0 million, resulting in a net discount that has been allocated between the two issues based upon their relative fair values. As a condition of the Cumulative Perpetual Preferred Stock, the Company must obtain consent from the United States Department of the Treasury to repurchase its common stock or to pay a cash dividend. Furthermore, the Company has agreed to certain restrictions on executive compensation.

The Senior Preferred qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per year, for the first five years, and 9% per year thereafter. Under the terms of the agreement, the Senior Preferred may be redeemed with prior approval from the Federal Reserve in the first three years with the proceeds from the issuance of certain qualifying Tier 1 capital or after three years at par value plus accrued and unpaid dividends.

The Warrant Preferred also qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 9% per year. Under the terms of the agreement, the Warrant Preferred may be redeemed after the Senior Preferred has been completely redeemed, at par value plus accrued and unpaid dividends. It is the Company’s intention to redeem both issues of preferred stock no later than the fifth anniversary of its issuance. Accordingly, the net discount of $500,000 is going to be amortized over five years.

 

36


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 14 - Shareholders’ Equity and Regulatory Matters (Continued)

 

On December 31, 2008, the Company entered into agreements with its subsidiary banks to sell Fixed Rate Noncumulative Perpetual Preferred Stock to the Company to provide an avenue for pushing portion of the funds received from Company’s issuance of preferred stock down to the subsidiary bank level. At December 31, 2008, Uwharrie Capital Corp had invested $4.0 million in Bank of Stanly and $3.0 million in Cabarrus Bank and Trust.

All of the Company’s aforementioned investments in its subsidiary banks qualify for Tier 1 capital treatment and are included as such in their respective year end capital ratios.

For the reserve maintenance period in effect at December 31, 2008, the subsidiary banks were required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank in the aggregate amount of $2.1 million as reserves on deposit liabilities.

Note 15 - Stock Matters

During 1996, the Company adopted the 1996 Incentive Stock Option Plan (“SOP”) and the Employee Stock Purchase Plan (“SPP”), under which options to purchase shares of the Company’s common stock may be granted to officers and eligible employees. Options granted under the SOP are exercisable in established increments according to vesting schedules, generally three to five years, and will expire if not exercised within ten years of the date of grant. Options granted under the SPP are fully vested at the date of grant and expire if not exercised within two years of the grant date. Both of these plans expired in 2006. At December 31, 2008, the SOP had 447,496 shares still outstanding and the SPP had no options outstanding.

During 2006, the Company adopted the 2006 Incentive Stock Option Plan (“SOP II”) and the Employee Stock Purchase Plan (“SPP II”), under which options to purchase shares of the Company’s common stock may be granted to officers and eligible employees. Options granted under the SOP II are exercisable in established increments according to vesting schedules, generally three to five years, and will expire if not exercised within ten years of the date of grant. Options granted under the SPP II are fully vested at the date of grant and expire if not exercised within two years of the grant date. At December 31, 2008, the SOP II had 12,360 shares outstanding and the SPP II had no options outstanding.

Employee Stock Plans

Activity under all option plans, reflecting the effects of the 3% stock dividends issued in 2008, 2007 and 2006, are as follows:

 

     2008    2007    2006
     Number of
Shares
    Weighted
Average
Exercise
Price
   Number of
Shares
    Weighted
Average
Exercise
Price
   Number of
Shares
    Weighted
Average
Exercise
Price

Options outstanding at the beginning of the year

   519,328     $ 4.47    551,613     $ 4.46    724,760     $ 4.19

Options granted

   12,360       5.34    —         —      15,914       5.80

Options exercised

   (71,824 )     4.19    (13,538 )     2.66    (102,677 )     2.18

Forfeitures

   (8 )     4.28    (18,747 )     5.30    (86,384 )     5.17
                                      

Options outstanding at the end of the year

   459,856     $ 4.54    519,328     $ 4.48    551,613     $ 4.46
                                      

Options exercisable at the end of the year

   431,470     $ 4.49    487,281     $ 4.42    467,900     $ 4.32
                                      

 

37


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 15 - Stock Matters (Continued)

 

At December 31, 2008, options outstanding had a weighted-average remaining term of 2.75 years. Total options outstanding at December 31, 2008 included 459,856 options exercisable at a range of $2.00 to $5.50 per share with a weighted average expected term of 2.75 years. Exercisable options at December 31, 2008 included 431,470 options exercisable at a range of $2.00 to $5.50 per share. At December 31, 2008, authorized shares of common stock reserved for future grants of options totaled 154,971 under the SOP II, and 103,234 under the SPP II.

The fair market value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. There were 12,360 shares granted during the twelve months ended December 31, 2008 under the SOP II. The fair value at the grant date was $1.65 using the following assumptions; a risk-free interest rate of 4.5%, a dividend yield of 0%, an expected life equal to 70% of the term of the option, and volatility of 14%. There were no shares granted in 2007. All options granted in 2006 were forfeited in 2007.

The following is a summary of stock option activity for the years ended December 31, 2008:

 

     Shares     Weighted
Average
Exercise
Price
   Aggregate
Intrinsic Value
(in thousands)

Outstanding at December 31, 2007

   519,328     $ 4.47   

Granted

   12,360       5.34   

Exercised

   (71,824 )     4.19   

Forfeited

   (8 )     4.28   
           

Outstanding at December 31, 2008

   459,856       4.54    $ 96
           

Options exercisable at December 31, 2008

   431,470          96
           

A summary of the status of the Company’s non-vested stock options as of December 31, 2008, and changes during the year then ended is presented below:

 

     Shares     Weighted
Average
Grant Date
Fair Value

Non-vested December 31, 2007

   32,052     $ 1.40

Granted

   12,360       1.60

Vested

   (16,026 )     1.40

Forfeited

   —         1.49
        

Non-vested December 31, 2008

   28,386    
        

The grant date fair value of stock options vested over the twelve months ended December 31, 2008, 2007 and 2006 was $22 thousand, $42 thousand and $64 thousand, respectively.

As of December 31, 2008, there was $24 thousand of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all of the Company’s stock benefit plans. That cost is expected to be recognized over a weighted-average period of 4.3 years.

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.

 

38


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 15 - Stock Matters (Continued)

 

For the twelve months ended December 31, 2008, 2007 and 2006 the intrinsic value of options exercised was $74 thousand, $38 thousand, and $332 thousand, respectively.

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. Pursuant to stock repurchase authorizations and limitations, the Company purchased 111,258 shares during 2008 and 237,669 shares during 2007 at an aggregate purchase price of $570,839 and $1,403,749, respectively.

Note 16 - Employee and Director Benefit Plans

Employees’ Savings Plus and Profit Sharing Plan

The Company has established an associate tax deferred savings plan under Section 401(k) of the Internal Revenue Code of 1986. All associates who are scheduled to work 500 hours or more are eligible to participate upon completion of six months of employment.

The Company’s annual contribution to the plan was $206,478 in 2008, $192,776 in 2007 and $169,982 in 2006, determined as follows:

 

   

A matching contribution equivalent to 50% of the first 6% of each associate’s compensation contributed to the plan.

 

   

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.

Directors’ Deferred Compensation Plan

On March 1, 1994, the Company established a Directors’ Deferred Compensation Plan in accordance with the laws of the State of North Carolina under which each Director could elect to defer receipt for services rendered to the Company as a Director during the term of his or her service by entering into a written deferred compensation election. This plan was closed to new participants in 2001; subsequently, only two directors continued to defer receipt of fees in 2007 and one director continued in 2008. The balance in deferred directors’ compensation, not yet disbursed, was $165,487 and $195,938 at December 31, 2008 and 2007, respectively. Expense for the years ended December 31, 2008, 2007 and 2006 was $12,298, $12,956 and $12,283, respectively.

Employee Stock Ownership Plan

The Company established an Employee Stock Ownership Plan (“ESOP”) to benefit all qualified employees. The ESOP purchased 293,216 dividend adjusted shares of common stock in 1999 with proceeds received from a loan of $1.2 million from the Company. The loan is to be repaid over eighteen years with interest at 8%. The loan may be prepaid without penalty. The unallocated shares of stock held by the ESOP are pledged as collateral for the loan. The ESOP is funded by contributions made by the Company and its subsidiaries in amounts sufficient to retire the debt. At December 31, 2008, the outstanding balance of the loan is $735,813 and is presented as a reduction of shareholders’ equity.

 

39


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 16 - Employee and Director Benefit Plans (Continued)

 

Shares released as the debt is repaid and earnings from the common stock held by the ESOP are allocated among active participants on the basis of compensation in the year of allocation. Benefits vest 100% as they are allocated to participants. Dividends on unallocated shares may be used by the ESOP to repay the loan to the Company and are not reported as dividends in the financial statements. Dividends on allocated or committed to be allocated shares are credited to the accounts of the participants and reported as dividends in the consolidated financial statements.

Expenses of $326,633, $317,256 and $237,022 during the years ended December 31, 2008, 2007 and 2006, respectively, have been incurred in connection with the ESOP. At December 31, 2008, 229,196 shares held by the ESOP, including additional shares purchased, have been released or committed to be released to the ESOP’s participants for purposes of computing earnings per share. The fair value of the unallocated shares amounted to approximately $573 thousand at December 31, 2008.

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 commencing with the officer’s retirement at any time after attainment of the age specified in the officer’s plan agreement. 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 attainment of retirement age.

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 will 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 participant 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 attainment of retirement age.

During 2008, 2007 and 2006 a provision of $447,930, $199,328 and $23,446, respectively, was expensed for future benefits to be provided under the plan. The liability accrued for compensation deferred under the plan amounts to $1.5 million and $734,010 at December 31, 2008 and 2007, 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.

 

40


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 17 - Fair Values of Financial Instruments and Interest Rate Risk

SFAS 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or non-recurring basis.

The fair value estimates presented below are made at December 31, 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, 2008 and 2007.

 

     2008    2007
     Carrying
Amount
   Estimated
Fair Value
   Carrying
Amount
   Estimated
Fair Value
     (dollars in thousands)

Financial Assets

           

Cash and cash equivalents

   $ 13,284    $ 13,284    $ 16,197    $ 16,197

Securities available for sale

     68,835      68,835      51,005      51,005

Loans held for investment, net

     336,469      354,083      318,477      322,115

Loans held for sale

     2,691      2,691      2,916      2,917

FHLB Stock

     2,284      2,284      2,137      2,137

Bank-owned life insurance

     5,511      5,511      5,318      5,318

Accrued interest receivables

     2,027      2,027      2,055      2,055

Financial Liabilities

           

Deposits

   $ 353,627    $ 354,589    $ 324,657    $ 322,287

Short-term borrowings

     22,249      22,249      31,928      31,928

Long-term debt

     32,502      33,306      21,691      21,832

Accrued interest payable

     502      502      596      596

The carrying amount of cash and cash equivalents and accrued interest approximate their fair values due to the short period of time until their expected realization. Securities available for sale are carried at fair value based on quoted market prices. See Note 2. The carrying amount of bank-owned life insurance is the current cash value. It is not practicable to determine fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability and it is presented at its carrying value.

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

 

   

Loans – The fair value of loans is estimated based on discounted expected cash flows using the current interest rates at which similar loans would be made. Loans held for sale, which represent current mortgage production forward sales not yet delivered, are valued based on current market prices. The fair value of loans does not consider the lack of liquidity and uncertainty in the market that would effect the valuation under SFAS No. 157, but the result is not material.

 

41


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 17 - Fair Values of Financial Instruments and Interest Rate Risk (Continued)

 

   

Deposits – The fair value of checking, savings and money market deposit is deemed equal to the amount payable on demand. The fair value of certificates of deposit is estimated based on discounted cash flow analyses using offered market rates.

 

   

Borrowings – The fair value disclosed for short-term borrowings, which are composed of overnight borrowings and debt due within one year approximate the carrying value for such debt. The estimated fair value for long-term borrowings are estimated based on discounted cash flow analyses using offered market rates.

At December 31, 2008, the subsidiary banks had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, they were deemed to have no current fair value. See Note 12.

Interest Rate Risk

The Company assumes interest rate risk (the risk that general interest rate levels will change) in the course of its normal operations. As a result, fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are more likely to prepay in a falling rate environment and less likely to prepay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

 

42


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 18 - Parent Company Financial Data

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

Condensed Balance Sheets

 

     December 31,
     2008    2007
     (dollars in thousands)

Assets

     

Cash and demand deposits with bank subsidiaries

   $ 3,297    $ 289

Interest-earning deposits with bank subsidiaries

     10,157      9,830

Investments in:

     

Bank subsidiaries

     45,348      37,100

Nonbank subsidiaries

     331      252

Other assets

     1,387      770
             

Total assets

   $ 60,520    $ 48,241
             

Liabilities and shareholders’ equity

     

Master notes

   $ 8,903    $ 9,630

Long-term debt

     2,600      6,600

Junior subordinated debentures

     7,419      —  

Other liabilities

     365      437

Shareholders’ equity

     41,233      31,574
             

Total liabilities and shareholders’ equity

   $ 60,520    $ 48,241
             

Condensed Statement of Operations

 

     2008     2007     2006  
     (dollars in thousands)  

Equity in earnings of subsidiaries

   $ 2,738     $ 3,734     $ 2,915  

Interest income

     133       493       354  

Management and service fees

     4,464       4,227       3,854  

Other income

     94       119       190  

Interest expense

     535       1,029       921  

Other operating expense

     5,230       4,978       4,537  

Income tax benefit

     (365 )     (393 )     (216 )
                        

Net income

   $ 2,029     $ 2,959     $ 2,071  
                        

 

43


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 18 - Parent Company Financial Data (Continued)

 

Condensed Statements of Cash Flows

 

     2008     2007     2006  
     (dollars in thousands)  

Cash flows from operating activities

      

Net income

   $ 2,029     $ 2,959     $ 2,071  

Adjustments to reconcile net income to net cash
Provided (used) by operating activities:

      

Equity in earnings of subsidiaries

     (2,738 )     (3,734 )     (2,915 )

(Increase) decrease in other assets

     (2,025 )     618       1,020  

Increase (decrease) in other liabilities

     (72 )     304       (61 )
                        

Net cash provided (used) by operating activities

     (2,806 )     147       115  
                        

Cash flows from investing activities

      

Dividends received from subsidiaries

     200       1,800       —    
                        

Net cash provided by investing activities

     200       1,800       —    
                        

Cash flows from financing activities

      

Net increase(decrease) in master notes

     (727 )     3,022       2,153  

Net increase(decrease) in long-term debt

     (4,000 )     4,600       (400 )

Net decrease in subordinated debentures

     —         (5,155 )     —    

Net proceeds from issuance of junior subordinated debentures

     7,419       —         —    

Repurchase of common stock

     (571 )     (1,404 )     (145 )

Net proceeds from issuance of preferred stock

     10,500       —         —    

Proceeds from issuance of common stock

     301       36       224  

Preferred stock purchased from bank subsidiaries

     (7,000 )     —         —    

Tax benefit of stock options exercised

     26       3       48  

Cash paid for fractional shares

     (7 )     (9 )     (9 )
                        

Net cash provided (used) by financing activities

     5,941       1,093       1,871  
                        

Net increase in cash and cash equivalents

     3,335       3,040       1,986  

Cash and cash equivalents at beginning of period

     10,119       7,079       5,093  
                        

Cash and cash equivalents at end of period

   $ 13,454     $ 10,119     $ 7,079  
                        

 

44


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 19 - Quarterly Financial Data

 

     First     Second     Third     Fourth  
     (in thousands, except per share data)  

2008

        

Interest income

   $ 6,697     $ 6,382     $ 6,267     $ 6,218  

Interest expense

     (2,804 )     (2,429 )     (2,347 )     (2,248 )
                                

Net interest income

     3,893       3,953       3,920       3,970  

Provision for loan losses

     (86 )     (171 )     (529 )     (183 )
                                

Net interest income after provision for loan losses

     3,807       3,782       3,391       3,787  

Noninterest income

     1,865       1,895       1,650       1,345  

Noninterest expense

     (4,523 )     (4,532 )     (4,542 )     (5,092 )
                                

Income before taxes

     1,149       1,145       499       40  

Income taxes

     374       373       156       (99 )
                                

Net income

   $ 775     $ 772     $ 343     $ 139  
                                

Net income per common share

        

Basic

   $ 0.10     $ 0.10     $ 0.05     $ 0.02  
                                

Diluted

   $ 0.10     $ 0.10     $ 0.05     $ 0.02  
                                
     First     Second     Third     Fourth  
     (in thousands, except per share data)  

2007

        

Interest income

   $ 6,542     $ 6,650     $ 6,846     $ 6,871  

Interest expense

     (3,058 )     (2,972 )     (2,964 )     (2,882 )
                                

Net interest income

     3,484       3,678       3,882       3,989  

Provision for loan losses

     —         138       (18 )     (135 )
                                

Net interest income after provision for loan losses

     3,484       3,816       3,864       3,854  

Noninterest income

     1,542       1,492       1,660       1,896  

Noninterest expense

     (4,083 )     (4,273 )     (4,414 )     (4,592 )
                                

Income before taxes

     943       1,035       1,110       1,158  

Income taxes

     285       318       336       348  
                                

Net income

   $ 658     $ 717     $ 774     $ 810  
                                

Net income per common share

        

Basic

   $ 0.09     $ 0.10     $ 0.10     $ 0.11  
                                

Diluted

   $ 0.09     $ 0.10     $ 0.10     $ 0.11  
                                

 

45


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Selected Financial Data

 

 

Selected Financial Data

(in thousands except per share and shares outstanding information)

 

     2008     2007     2006     2005     2004  
Summary of Operations           

Interest income

   $ 25,564     $ 26,909     $ 24,353     $ 19,161     $ 15,906  

Interest expense

     9,828       11,876       10,702       6,630       4,734  
                                        

Net interest income

     15,736       15,033       13,651       12,531       11,172  

Provision for loan losses

     969       15       298       755       2,092  

Noninterest income

     6,755       6,590       5,469       4,351       4,271  

Noninterest expense

     18,689       17,362       15,918       14,087       13,297  

Income taxes

     804       1,287       833       523       (199 )
                                        

Net income

   $ 2,029     $ 2,959     $ 2,071     $ 1,517     $ 253  
                                        
Per Common Share           

Net income – basic (1)

   $ 0.27     $ 0.39     $ 0.27     $ 0.19     $ 0.03  

Net income – diluted (1)

     0.27       0.39       0.26       0.19       0.03  

Book value (1)

     4.11       4.14       3.76       3.51       3.42  
Weighted Average Shares           

Outstanding:

          

Basic (1)

     7,482,488       7,603,494       7,685,978       7,683,316       7,809,801  

Diluted (1)

     7,469,057       7,706,832       7,802,102       7,870,576       7,992,650  
Ratios           

Return on average assets

     0.48 %     0.75 %     0.56 %     0.45 %     0.08 %

Return on average equity

     6.29 %     9.73 %     7.32 %     5.58 %     0.91 %

Average equity to average assets

     7.63 %     7.73 %     7.67 %     8.14 %     8.64 %
Selected Year-end Balances           

Assets

   $ 452,468     $ 411,944     $ 383,261     $ 350,190     $ 329,262  

Loans held for investment

     340,830       321,987       288,135       272,842       260,835  

Securities

     68,835       51,005       37,150       35,016       28,524  

Deposits

     353,627       324,657       309,600       273,976       246,939  

Borrowed funds

     54,751       53,619       42,329       47,007       53,796  

Shareholders’ equity

     41,233       31,574       29,633       27,453       27,156  
Selected Average Balances           

Assets

   $ 422,857     $ 393,188     $ 368,781     $ 334,193     $ 321,093  

Loans held for investment

     331,705       308,149       293,394       267,164       256,525  

Securities

     48,926       41,188       35,227       29,038       28,846  

Deposits

     337,384       312,261       289,742       254,591       234,424  

Borrowed funds

     50,643       48,075       48,510       50,265       57,296  

Shareholders’ equity

     32,245       30,402       28,299       27,187       27,741  

 

(1) Net income per share, book value per share, weighted average shares outstanding and shares outstanding at year-end for 2004 through 2008 have been adjusted to reflect 3% stock dividends issued in 2008, 2007, 2006, 2005, and 2004.

 

46


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 8 - 46. References to changes in assets and liabilities represent end of period balances unless otherwise noted. All references in this Annual Report to net income per share and weighted average common and common equivalent shares outstanding have been adjusted to reflect 3% stock dividends in 2008, 2007, and 2006. 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 as a result of market and other factors. Such forward-looking statements are subject to risks and uncertainties which 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 from time to time. 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, 2008 and December 31, 2007

The Company’s total assets increased $40.6 million or 9.8% from $411.9 million at December 31, 2007 to $452.5 million at December 31, 2008. This increase resulted primarily from an $18.8 million increase in loans held for investment and a $17.8 million increase in securities available for sale. These increases were offset by a decrease of $2.9 million in cash and cash equivalents.

Loans held for investment increased $18.8 million, from $322.0 million at December 31, 2007 to $340.8 million at December 31, 2008, an increase of 5.9%. The growth was largely due to the 20.5%, or $7.7 million, increase in our commercial loan portfolio. Loans secured by real estate and our consumer portfolios experienced growth at a rate of 3.9% and 3.2%, respectively as well. Loans held for sale decreased $225 thousand, or 7.7%, for the period. At December 31, 2008 the allowance for loan losses was $4.4 million which represents1.28% of the loans held for investment portfolio.

Investment securities increased 35.0% during 2008, from $51.0 million at December 31, 2007 to $68.8 million at December 31, 2008. Throughout the year we invested in US Government agency securities, mortgage backed securities and municipal bonds. The downturn in the overall economy and the decrease in property values have greatly affected the mortgage backed security market. The Company had a decline of $3.2 million in the market value of its investment portfolio during 2008. The majority of this decline related to the whole loan CMO portfolio. The Company evaluated its mortgage backed portfolio for other than temporary impairments. Management believes that all of the losses are only temporary with the exception of one whole loan CMO. We recorded a $158 thousand impairment on that one security investment. The Company did not have any sales of securities during the year.

 

47


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

 

 

Cash and cash equivalents decreased by $2.9 million during 2008. Cash and due from banks declined $10.8 million while interest earning deposits with banks grew $7.9 million. During the fourth quarter of 2008 the Federal Reserve began paying interest on the clearing balances on deposit. This change attributed to the shift between cash and due from banks and interest-earning deposits with banks.

Premises and equipment increased $2.4 million or 27.2% during 2008. During 2008, the Company renovated an office building to gain some much needed office space. The final cost of these renovations was $1.5 million, largely attributed to the overall increase in premises and equipment. The Company also purchased another downtown property in Albemarle to be used in the future at a cost of $283 thousand.

Other changes in our consolidated assets related to interest receivable, Federal Home Loan Bank stock and bank owned life insurance. Federal Home Loan Bank stock increased $147 thousand. Federal Home Loan Bank stock ownership is a requirement for member banks that utilize the Federal Home Loan Bank for borrowing funds. The amount of stock owned by each member bank is based primarily on the amount of borrowings outstanding. Bank owned life insurance also experienced growth of $193 thousand. These increases were offset by a decrease in interest receivable of $28 thousand.

Other real estate owned experienced an increase of $2.7 million during 2008. While the Company foreclosed on several loan relationships during the year, the majority of this increase is attributed to one loan relationship of $2.2 million.

Customer deposits continued to be our principal funding source in 2008, allowing us to fund the growth in assets discussed above. At December 31, 2008, deposits from our customers totaled $353.6 million, an increase of $28.9 million, or 8.9%, from $324.7 million at December 31, 2007. Time deposits grew $14.5 million, or 9.7%, during the period, while interest checking and money market accounts increased $14.9 million, or 14.6% and savings accounts increased $160 thousand. Offsetting the growth in the aforementioned areas was a decline in noninterest bearing demand accounts of $565 thousand.

The aforementioned growth in the loan and investment portfolios required the Company to increase net borrowings by $1.1 million during 2008. 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, 2008, $34.3 million of the total borrowings of $54.8 million were attributed to Federal Home Loan Bank advances.

During 2008, the Company conducted a private placement of up to 7,500 fixed rate junior subordinated debt securities at $1,000 per security with a minimum investment of $50 thousand dollars. These securities may be redeemed by the Company after June 30, 2010 and have a final maturity date of June 30, 2015. The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.75%. At the end of the offering period the Company had raised $7.4 million in tier 2 capital that was outstanding at December 31, 2008 and included in long-term debt.

At December 31, 2008, total shareholders’ equity was $41.2 million, an increase of $9.7 million from December 31, 2007. Net income for the period was $2.0 million and the Company received $301 thousand from the exercise of stock options. These increases were offset by the repurchase of 111,258 shares of the Company’s common stock at a cost of $571 thousand and unrealized losses on investment securities, net of tax, of $1.9 million. On December 23, 2008, the Company entered into a letter agreement with the United States Department of Treasury to

 

48


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

 

 

 

sell 10,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, for a purchase price of $10.0 million. The Company also issued a warrant to the Treasury that was immediately exercised for 500 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B that totaled $500,000.

Results of Operations for the Years Ended December 31, 2008 and 2007

Earnings

The Company earned net income of $2.0 million, or $0.27, per basic common share for 2008 as compared with net income of $2.9 million, or $0.39 per basic common share, in 2007.

Net Interest Income

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

Net interest income increased $703 thousand to $15.7 million for 2008 compared to the $15.0 million earned in 2007. During the year ended December 31, 2008 our growth in the volume of interest-earning assets outpaced the growth in interest-bearing liabilities by $970 thousand. The average yield on our interest-earning assets decreased 86 basis points to 6.63%, while the average rate we paid for our interest-bearing liabilities decreased 92 basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve Open Market Committee adjusts interest rates while interest-bearing time deposits adjust at the time of maturity. These decreases resulted in an increase of 6 basis points in our interest rate spread, from 3.70% in 2007 to 3.76% in 2008. Our net interest margin for 2008 was 4.13%, compared to 4.24% in 2007. Financial Table 1 on page 56 presents a detailed analysis of the components of the Company’s net interest income while Financial Table 2 on page 57 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 $969 thousand and $15 thousand for the twelve months ended December 31, 2008 and 2007 respectively. There were net loan charge-offs of $118 thousand for the twelve months ended December 31, 2008 as compared with net loan recoveries of $324 thousand during the same period of 2007. Refer to the Asset Quality discussion beginning on page 51 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 2.5%, from $6.6 million in 2007 to $6.8 million in 2008, an increase of $165 thousand.

 

49


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

 

 

Service charges on deposit accounts grew $50 thousand to $2.2 million. Other income increased $108 thousand for the year ended December 31, 2008. The Company owns shares of VISA® stock and also owned MasterCard® stock. VISA® redeemed a portion of this stock during the first quarter of 2008 resulting in other income of $59 thousand. We sold all of the shares of MasterCard® during the second quarter of 2008 producing other income of $162 thousand. This income was the primary factor behind the growth in other income. The Company also benefited from an increase in income from mortgage loan sales of $251 thousand resulting from an increase in mortgage loan originations. The rate reductions during the year by the Federal Reserve attributed to this increase. These increases were offset by a decrease in other service fees and commissions of $320 thousand. Income generated from brokerage commissions and asset management fees decreased $260 thousand to $2.8 million, while other banking fees decreased $60 thousand or 5.0% during 2008. The recent downturn in the economy and the impact it has had on the overall stock market was the primary factor contributing to the decline in brokerage commissions and asset management fees.

Noninterest Expense

Noninterest expense increased $1.3 million to $18.7 million in 2008 compared to $17.4 million in 2007. Salaries and employee benefits, the largest component of noninterest expense, increased $481 thousand, from $10.1 million in 2007 to $10.6 million in 2008. Additions at the executive and bank support staff levels, together with normal salary increases, primarily account for this increase. Net occupancy expense increased $116 thousand during the year due to the afore mentioned renovations on an office building. Other noninterest expense increased $478 thousand for the year, including electronic banking expense, a major component of this category, which increased by $86 thousand. Increased usage of electronic banking products is the reason for the increase. Loan collection expense increased $132 thousand during the period. A large majority of this increase was related to one loan relationship.

Income Tax Expense

The Company had income tax expense of $804 thousand for 2008 at an effective tax rate of 28.38% compared to income tax expense of $1.3 million in 2007 at an effective tax rate of 30.31%. Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities and income earned on bank owned life insurance. The growth in nontaxable income out paced the growth in taxable income resulting in the decrease in the effective tax rate.

Results of Operations for the Years Ended December 31, 2007 and 2006

Earnings

The Company earned net income of $2.9 million, or $0.39, per basic share for 2007 as compared with net income of $2.1 million, or $0.28 per basic share, in 2006.

Net Interest Income

As with most financial institutions, the primary component of earnings for our banks, is net interest income. Net interest income is the difference between interest income, principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income 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

 

50


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

 

 

 

interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by levels of noninterest bearing liabilities and capital.

Net interest income increased $1.4 million to $15.0 million for 2007 compared to the $13.6 million earned in 2006. During 2007, with the interest rates stabilizing, the increase in net interest income resulted from growth in the loan and investment portfolio. The average yield on our interest-earning assets increased 24 basis points to 7.49%, while the average rate we paid for our interest-bearing liabilities increased 11 basis points. These increases resulted in an increase of 13 basis points in our interest rate spread, from 3.57% in 2006 to 3.70% in 2007. Our net interest margin for 2007 was 4.22%, compared to 4.10% in 2006. Financial Table 1 on page 56 presents a detailed analysis of the components of the Company’s net interest income while Financial Table 2 on page 57 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.

Asset Quality

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

Management uses the risk-grading program to facilitate the evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by loan officers and reviewed and monitored by credit administration. The Company strives to maintain its loan portfolio in accordance with conservative loan underwriting policies that result in loans specifically tailored to the needs of its market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies. The Company has no foreign loans and does not engage in significant lease financing or highly leveraged transactions. The Company follows a loan review program designed to evaluate the credit risk in the loan portfolio. This process includes the maintenance of an internally classified watch list that helps 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

 

51


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

 

 

 

current delinquent status. As a result of this process, certain loans are categorized as substandard, doubtful or loss and reserves are allocated based on management’s judgment and historical experience.

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

The provision for loan losses increased from $15 thousand in 2007 to $969 thousand in 2008, an increase of $954 thousand. This increase is a result of managements’ impairment evaluations and the increase in impaired reserves deemed necessary. Impaired loans, which include all loans in nonaccrual status and other loans deemed by management to be impaired, were $12.5 million at December 31, 2008 compared to $7.2 million at December 31, 2007 resulting in an increase of $5.3 million. Total nonaccrual loans, which are a component of impaired loans, increased from $1.8 million at December 31, 2007 to $3.9 million at December 31, 2008. The level of specific reserves identified for impaired loans increased by $1.1 million. The increase in the level of specific reserves for impaired loans resulted from two customer relationships that are included in impaired loans. The specific reserves relating to these two relationships were $824 thousand. The Company had net loan charge-offs in 2008 of $118 thousand compared to net loan recoveries of $324 thousand in 2007.

The allowance expressed as a percentage of gross loans held for investment increased 19 basis points from 1.09% at December 31, 2007 to 1.28% at December 31, 2008. The allowance, as a percentage of total impaired loans, increased from 35.7% at December 31, 2007 to 53.3% at December 31, 2008. Likewise, the portion of the allowance specifically allocable to impaired loans increased from 16.8% at December 31, 2007 to 18.5% at December 31, 2008. Nonperforming loans, which consist solely of nonaccrual loans, were $3.9 million at December 31, 2008 as compared to $1.8 million at December 31, 2007. Nonperforming loans to total loans increased from 0.56% at December 31, 2007, to 1.14% at the end of 2008. The total allowance relative to non-performing loans decreased from 195.57% at the end of 2007 to 111.87% at this year end. During the year the Company had an increase in other real estate owned of $2.7 million. The major contributing factor is attributable to one loan totaling $2.2 million. Management believes the current level of allowance for loan losses to be adequate at this time.

 

52


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,  
     2008     2007     2006     2005     2004  

Nonperforming Assets:

          

Nonaccrual loans

   $ 3,898     $ 1,795     $ 1,211     $ 1,875     $ 3,376  

Other real estate owned

     2,816       163       203       169       481  
                                        

Total nonperforming assets

   $ 6,714     $ 1,958     $ 1,414     $ 2,044     $ 3,857  
                                        

Accruing loans past due 90 days or more

   $ 3     $ —       $ 500     $ 339     $ 1,150  

Allowance for loan losses

     4,361       3,510       3,171       4,482       4,983  

Nonperforming loans to total loans

     1.14 %     0.56 %     0.42 %     0.69 %     1.30 %

Allowance for loan losses to total loans

     1.28 %     1.09 %     1.10 %     1.64 %     1.92 %

Nonperforming assets to total loans and other real estate

     1.97 %     0.61 %     0.49 %     0.75 %     1.47 %

Nonperforming assets to total assets

     1.48 %     0.48 %     0.37 %     0.58 %     1.17 %

Allowance for loan losses to nonperforming loans

     111.87 %     195.57 %     261.78 %     239.09 %     147.59 %

Capital Resources

The Company continues to maintain good capital ratios that support its asset growth. The capital position is maintained through the retention of earnings and controlled growth. Regulatory agencies divide capital into Tier 1 (consisting of shareholders’ equity less ineligible intangible assets and accumulated other comprehensive income and allowable portions of trust preferred securities) and Tier 2 (consisting of the allowable portion of the reserve for loan losses and certain long-term debt) and measure capital adequacy by applying both capital levels to a banking company’s risk-adjusted assets and off-balance sheet items. In addition to these capital ratios, regulatory agencies have established a Tier 1 leverage ratio that measures Tier 1 capital to average assets less ineligible intangible assets.

Regulatory guidelines require a minimum of total capital to risk-adjusted assets ratio of 8% with one-half consisting of tangible common shareholders’ equity and a minimum Tier 1 leverage ratio of 4%. Banks which meet or exceed a Tier 1 ratio of 6%, a total capital ratio of 10% and a Tier 1 leverage ratio of 5% are considered well capitalized by regulatory standards. At December 31, 2008, the Company and its subsidiary banks were all well capitalized under applicable regulatory standards.

The Company expects to continue to exceed these minimums without altering current operations or strategy. Note 14 to the Consolidated Financial Statements presents additional information regarding the Company’s and its subsidiary banks’ capital ratios.

 

53


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

 

 

Dividends

The Board of Directors of Uwharrie Capital Corp declared a 3% stock dividend in 2008, 2007, and in 2006. 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.

Liquidity

Liquidity, the ability to raise cash when needed without adversely impacting profits, is managed primarily by the selection of asset mix and the maturity mix of liabilities. Maturities and the marketability of securities and other funding sources provide a source of liquidity to meet deposit fluctuations. Maturities in the securities portfolio, presented in Financial Table 4 on page 59, are supported by cash flows from mortgage-backed securities that have longer-term contractual maturities.

Other funding sources at year-end 2008 included $20.9 million in federal funds lines of credit from correspondent banks and approximately $36.1 million of remaining credit availability from the Federal Home Loan Bank. The Company may also borrow from the Federal Reserve Bank discount window. 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, 2008, borrowings from federal funds lines and securities sold under repurchase agreements amounted to $1.5 million and a note payable to another bank of $2.6 million, while other short-term borrowings totaled $18.1 million. Long-term debt at that date consisted of advances of $25.0 million from the Federal Home Loan Bank, junior subordinated debt of $7.4 million and a mortgage payable of $83 thousand.

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

Contractual Obligations

The following table reflects the contractual obligations of the Company outstanding as of December 31, 2008.

 

     Payments Due by Period (in thousands)
     Total    On Demand
or less

than 1 year
   1-3 Years    4-5 Years    After
5 Years
Contractual Obligations               

Short-term debt

   $ 22,249    $ 22,249    $ —      $ —      $ —  

Long-term debt

     32,502      —        16,017      9,030      7,455

Operating leases

     596      102      155      120      219

Property purchase

     1,250      1,050      100      100      —  
                                  

Total contractual cash obligations, excluding deposits

     56,597      23,401      16,272      9,250      7,674

Deposits

     353,627      316,486      35,124      2,017      —  
                                  

Total contractual cash obligations, including deposits

   $ 410,224    $ 339,887    $ 51,396    $ 11,267    $ 7,674
                                  

 

54


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Management’s Discussion And Analysis of Financial Condition And Results of Operations

 

 

Critical Accounting Policy

The Company’s most significant critical accounting policy is the determination of its allowance for loan losses. 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 the discussion within Allowance for Loan Losses and in Note 1 to the consolidated financial statements for a comprehensive discussion regarding this accounting policy.

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 12 to the consolidated financial statements for more information regarding these commitments and contingent liabilities.

Interest Rate Sensitivity

The major component of income for the Company is net interest income, the difference between yield earned on assets and interest paid on liabilities. This differential or margin can vary over time as changes in interest rates occur. The volatility of changes in this differential can be measured by the timing (or repricing) difference between 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 time periods. Gap analysis at December 31, 2008 is reflected in Financial Table 3 on page 58. While management reviews this information, it has implemented the use of a simulation model which calculates expected net interest income based on projected interest-earning assets, interest-bearing liabilities and interest rates and provides a more relevant view of interest rate risk than traditional gap tables. The simulation allows comparison of flat, rising and falling rate scenarios to determine sensitivity of earnings to changes in interest rates.

The Company models immediate rising and declining rate shocks of 2% on its subsidiary banks as preferred by regulators. The most recent consolidated 2% rate shock projections from the asset liability model, measured over a twelve-month period, indicate a negative impact of 8.08% on net interest income in a rates down scenario and a negative impact of 1.71% on net interest income in a rates up environment. Two of the subsidiary banks are asset sensitive and typically have some negative impact when rates decline, since the majority of interest bearing assets will reprice more quickly than the interest bearing liabilities. The other bank is liability sensitive, with the opposite effect, and the blend provides some balance in the consolidated results.

The principal goals of the Company’s asset liability management are the maintenance of adequate liquidity and the management of interest rate risk. Interest rate risk management attempts to balance the effects of interest rate changes on interest-sensitive assets and liabilities to protect net interest income from wide fluctuations that could result from changes in interest rates. The Company’s Asset Liability Management Committee monitors market changes in interest rates and assists with pricing loan and deposit products consistent with funding source needs and asset growth projections.

 

55


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)

 

     2008     2007     2006  
     Average
Balance
   Interest
Income/
Expense
   Average
Yield/
Rate (1)
    Average
Balance
   Interest
Income/
Expense
   Average
Yield/
Rate (1)
    Average
Balance
   Interest
Income
Expense
   Average
Yield
Rate (1)
 

Interest-earning assets

                        

Taxable securities

   $ 36,573    $ 2,021    5.53 %   $ 30,364    $ 1,711    5.63