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

Exhibit 13

Uwharrie Capital Corp

2010

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 two non-bank subsidiaries, Strategic Investment Advisors, Inc., and Uwharrie Mortgage, Inc.

Stanly engages in retail and commercial banking, with six 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, mobile banking, and 24-hour telephone banking, providing customers the convenience of access to account information, rate information and accessibility of funds transfers between accounts. Other services include MasterCard® credit cards and a Visa® check card which functions as a point-of-sale (POS) and automated teller machine (ATM) card. Customers can use the check card for purchases at virtually any merchant accepting Visa® and ATMs displaying the STAR® or CIRRUS® networks regionally and worldwide, respectively.

Strategic Investment Advisors Inc. provides portfolio management services to its customers. The Strategic Alliance Corporation (Strategic Alliance®) is a registered broker-dealer with the Financial Industry Regulatory Authority (FINRA). BOS Agency provides insurance products and is licensed in the state of North Carolina. Through Strategic Investment Group, a DBA for financial advisors registered with UVEST Financial Services Group, 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, is independent of Strategic Investment Group and Uwharrie Capital Corp. 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.

 

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Financial Highlights

 

(Dollars in thousands except per share amounts)    2010     2009     Percent
Increase
(Decrease)
 

For the year:

      

Net income

   $ 713      $ 690        3.33

Net income available to common shareholders

   $ 68      $ 48        41.67

Basic net income per common share

   $ 0.01      $ 0.01        0.00

Diluted net income per common share

   $ 0.01      $ 0.01        0.00

Weighted average common shares outstanding (diluted)

     7,485,373        7,474,140        0.15

At year-end:

      

Total assets

   $ 535,426      $ 477,846        12.05

Total earning assets

     499,126        436,012        14.48

Loans held for investment

     387,769        353,729        9.62

Total interest-bearing liabilities

     433,739        385,433        12.53

Shareholders’ equity

     43,493        44,024        (1.21 )% 

Book value per common share

   $ 4.38      $ 4.47        (2.01 )% 

Averages for the year:

      

Total assets

   $ 514,425      $ 471,729        9.05

Total earning assets

     473,306        434,218        9.00

Loans held for investment

     375,381        346,976        8.19

Total interest-bearing liabilities

     414,373        378,411        9.50

Shareholders’ equity

     45,425        43,182        5.19

Financial ratios (in percentage):

      

Return on average assets

     0.14     0.15  

Return on average shareholders’ equity

     1.57     1.60  

Average equity to average assets

     8.83     9.15  

Net interest margin (fully tax equivalent basis)

     3.99     4.12  

Allowance as % of loans at year-end

     2.34     1.49  

Allowance as % of nonperforming loans

     45.03     93.71  

Nonperforming loans to total loans

     5.19     1.59  

Nonperforming assets to total assets

     4.14     1.89  

Net loan charge-offs (recoveries) to average loans

     0.31     0.24  

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 trades also taking place in privately negotiated transactions. Management makes every reasonable effort to match willing buyers with willing sellers as they become known for the purpose of private negotiations for the purchase and sale of the Company’s common stock.

The Board of Directors adopts a dividend policy on an annual basis. For 2010 and 2009, Uwharrie Capital Corp did not declare a dividend. The Board of Directors will determine an appropriate dividend, if any, on an annual basis, consistent with the capital needs of the Company.

 

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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, 2005, 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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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, 2010 and 2009, 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, 2010. 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, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

/s/ Dixon Hughes PLLC

Asheville, North Carolina

March 31, 2011

 

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2010 and 2009

 

 

 

     2010     2009  
     (dollars in thousands)  

ASSETS

    

Cash and due from banks

   $ 4,948      $ 7,521   

Interest-earning deposits with banks

     8,676        3,338   

Securities available for sale, at fair value

     96,395        76,317   

Loans held for sale

     6,286        2,628   

Loans:

    

Loans held for investment

     387,769        353,729   

Less allowance for loan losses

     (9,067     (5,276
                

Net loans held for investment

     378,702        348,453   
                

Premises and equipment, net

     14,554        13,646   

Interest receivable

     2,408        2,077   

Federal Home Loan Bank stock

     3,252        3,201   

Bank owned life insurance

     5,975        5,714   

Goodwill

     987        987   

Other real estate owned

     2,022        3,419   

Prepaid assets

     2,088        2,617   

Other assets

     9,133        7,928   
                

Total assets

   $ 535,426      $ 477,846   
                

LIABILITIES

    

Deposits:

    

Demand noninterest-bearing

   $ 54,837      $ 44,924   

Interest checking and money market accounts

     187,493        137,708   

Savings deposits

     37,624        32,120   

Time deposits, $100,000 and over

     59,431        64,736   

Other time deposits

     94,648        97,286   
                

Total deposits

     434,033        376,774   
                

Short-term borrowed funds

     20,482        26,940   

Long-term debt

     34,061        26,643   

Interest payable

     342        396   

Other liabilities

     3,015        3,069   
                

Total liabilities

     491,933        433,822   
                

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

     10,000        10,000   

500 shares of series B issued and outstanding

     500        500   

Discount on preferred stock

     (300     (400

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

     9,492        9,492   

Additional paid-in capital plus stock option surplus

     14,034        14,030   

Unearned ESOP compensation

     (692     (667

Undivided profits

     10,124        10,056   

Accumulated other comprehensive income

     335        1,013   
                

Total shareholders’ equity

     43,493        44,024   
                

Total liabilities and shareholders’ equity

   $ 535,426      $ 477,846   
                

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

 

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2010, 2009 and 2008

 

 

 

     2010     2009     2008  
     (in thousands, except share and per share data)  

Interest Income

      

Loans, including fees

   $ 21,616      $ 21,246      $ 22,780   

Investment securities:

      

US Treasury

     612        12        73   

US Government agencies and corporations

     1,896        3,106        1,853   

State and political subdivisions

     319        632        689   

Other

     —          —          84   

Interest-earning deposits with banks and federal funds sold

     44        66        85   
                        

Total interest income

     24,487        25,062        25,564   
                        

Interest Expense

      

Interest checking and money market accounts

     971        838        1,357   

Savings deposits

     327        255        301   

Time deposits $100,000 and over

     1,192        1,980        2,453   

Other time deposits

     1,684        2,836        3,828   

Short-term borrowed funds

     693        316        529   

Long-term debt

     1,084        1,472        1,360   
                        

Total interest expense

     5,951        7,697        9,828   
                        

Net interest income

     18,536        17,365        15,736   

Provision for loan losses

     4,919        1,732        969   
                        

Net interest income after provision for loan losses

     13,617        15,633        14,767   
                        

Noninterest Income

      

Service charges on deposit accounts

     2,219        2,360        2,238   

Other service fees and commissions

     2,883        2,273        2,777   

Gain (loss) on sale of securities

     1,484        (711     —     

Loss on nonmarketable securities

     —          (172     —     

Loss on securities with other-than-temporary impairment

     —          (1,807     (158

Portion of loss recognized in other comprehensive income

     —          —          —     
                        

Net impairment recognized in income

     —          (1,807     (158

Income from mortgage loan sales

     3,172        3,436        1,208   

Other income

     140        445        532   
                        

Total noninterest income

     9,898        5,824        6,597   
                        

Noninterest Expense

      

Salaries and employee benefits

     11,648        11,527        10,637   

Net occupancy expense

     1,193        1,071        987   

Equipment expense

     769        702        645   

Data processing costs

     853        792        789   

Office supplies and printing

     384        335        286   

Foreclosed real estate expense

     387        219        55   

Professional fees and services

     1,230        968        687   

Marketing and donations

     1,291        746        682   

Electronic banking expense

     811        728        792   

Software amortization and maintenance

     542        470        455   

FDIC insurance

     795        958        128   

Other noninterest expense

     2,748        2,414        2,388   
                        

Total noninterest expense

     22,651        20,930        18,531   
                        

Income before income taxes

     864        527        2,833   

Income taxes

     151        (163     804   
                        

Net income

   $ 713      $ 690      $ 2,029   
                        

Net income

   $ 713      $ 690      $ 2,029   

Dividends on preferred stock

     (645     (642     (13
                        

Net Income available to common shareholders

   $ 68      $ 48      $ 2,016   
                        

Net income per common share

      

Basic

   $ 0.01      $ 0.01      $ 0.27   
                        

Diluted

   $ 0.01      $ 0.01      $ 0.27   
                        

Weighted average common shares outstanding

      

Basic

     7,485,373        7,474,140        7,482,488   

Diluted

     7,485,373        7,474,140        7,520,484   

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

 

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2010, 2009 and 2008

 

 

 

     2010     2009     2008  
     (in thousands)  

Net Income

   $ 713      $ 690      $ 2,029   
                        

Other comprehensive income (loss):

      

Unrealized gains (losses) on available for sale securities

     390        1,637        (3,315

Related tax effect

     (156     (621     1,281   

Reclassification of losses (gains) recognized in net income

     (1,484     711        —     

Related tax effect

     572        (274     —     

Reclassification of losses for which credit-related portion other-than-temporary impairment was recognized in net income

     —          1,807        158   

Related tax effect

     —          (697     (61
                        

Total other comprehensive income (loss)

     (678     2,563        (1,937
                        

Comprehensive income

   $ 35      $ 3,253      $ 92   
                        

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

 

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended December 31, 2010, 2009 and 2008

 

 

 

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

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 ASC 715-60

     —          —           —           —          —          —          —          (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   
                                                                                  

Net income

     —          —           —           —          —          —          —          690        —          690   

Other comprehensive income

     —          —           —           —          —          —          —          —          2,563        2,563   

Release of ESOP shares

     —          —           —           —          —          —          69        —          —          69   

Stock compensation expense

     —          —           —           —          —          11        —          —          —          11   

Record preferred stock dividend and discount accretion

     —          —           —           100        —          —          —          (642     —          (542
                                                                                  

Balance, December 31, 2009

     7,593,929      $ 10,000       $ 500       $ (400   $ 9,492      $ 14,030      $ (667   $ 10,056      $ 1,013      $ 44,024   
                                                                                  

 

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)

Years Ended December 31, 2010, 2009 and 2008

 

 

 

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

Balance, December 31, 2009

     7,593,929       $ 10,000       $ 500       $ (400   $ 9,492       $ 14,030       $ (667   $ 10,056      $ 1,013      $ 44,024   

Net income

     —           —           —           —          —           —           —          713        —          713   

Other comprehensive income

     —           —           —           —          —           —           —          —          (678     (678

Release of ESOP shares

     —           —           —           —          —           —           75        —          —          75   

Increase in ESOP notes receivable

     —           —           —           —          —           —           (100     —          —          (100

Stock compensation expense

     —           —           —           —          —           4         —          —          —          4   

Record preferred stock dividend and discount accretion

     —           —           —           100        —           —           —          (645     —          (545
                                                                                     

Balance, December 31, 2010

     7,593,929       $ 10,000       $ 500       $ (300   $ 9,492       $ 14,034       $ (692   $ 10,124      $ 335      $ 43,493   
                                                                                     

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, 2010, 2009 and 2008

 

 

 

     2010     2009     2008  

Cash flows from operating activities

      

Net income

   $ 713      $ 690      $ 2,029   

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

      

Depreciation

     815        780        676   

Net amortization of security premiums/discounts

     412        134        (202

Impairment of securities available for sale

     —          1,807        158   

Net amortization of mortgage servicing rights

     869        868        471   

Impairment of foreclosed real estate

     125        78        28   

Provision for loan losses

     4,919        1,732        969   

Deferred income taxes

     (1,091     (737     (728

Stock compensation

     4        11        26   

Net realized loss on sales / calls available for sale securities

     (1,484     711        —     

Income from mortgage loan sales

     (3,172     (3,436     (1,208

Proceeds from sales of loans held for sale

     110,374        144,761        55,198   

Origination of loans held for sale

     (111,973     (142,727     (54,328

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

     71        (1     5   

Loss on nonmarketable securities

     —          172        —     

Increase in cash surrender value of life insurance

     (261     (203     (193

Loss on sales of foreclosed real estate

     332        36        41   

Release of ESOP Shares

     75        69        78   

Net change in interest receivable

     (331     (50     28   

Net change in other assets

     (532     (3,652     83   

Net change in interest payable

     (54     (106     (94

Net change in other liabilities

     (54     714        584   
                        

Net cash provided (used) by operating activities

     (243     1,651        3,621   
                        

Cash flows from investing activities

      

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

     53,013        30,353        14,386   

Purchase of securities available for sale

     (71,430     (36,208     (35,329

Net increase in loans

     (34,866     (15,598     (21,837

Proceeds from sale of premises, equipment and other assets

     —          1        —     

Purchase of premises and equipment

     (1,725     (3,298     (3,058

Proceeds from sales of foreclosed real estate

     733        1,243        182   

Investment in other assets

     (240     (1,089     (569

Net increase in Federal Home Loan Bank stock

     (51     (917     (147
                        

Net cash used by investing activities

     (54,566     (25,513     (46,372
                        

Cash flows from financing activities

      

Net increase in deposit accounts

     57,259        23,147        28,970   

Net increase (decrease) in short-term borrowed funds

     (6,458     4,691        (9,679

Net increase (decrease) in long-term debt

     4,942        (5,859     3,392   

Net proceeds from issuance of junior subordinated debt

     2,476        —          7,419   

Repurchases of common stock

     —          —          (571

Net proceeds from issuance of preferred stock

     —          —          10,000   

Net proceeds from issuance of common stock

     —          —          301   

Tax benefit of stock options exercised

     —          —          26   

Increase in unearned ESOP compensation

     (100     —          —     

Dividend on preferred stock

     (545     (542     (13

Cash paid for fractional shares

     —          —          (7
                        

Net cash provided by financing activities

     57,574        21,437        39,838   
                        

Increase (decrease) in cash and cash equivalents

     2,765        (2,425     (2,913

Cash and cash equivalents, beginning of period

     10,859        13,284        16,197   
                        

Cash and cash equivalents, end of period

   $ 13,624      $ 10,859      $ 13,284   
                        

Supplemental disclosures of cash flow information

      

Interest paid

   $ 6,005      $ 7,802      $ 9,922   

Income taxes paid

     1,274        1,558        1,596   

Supplemental schedule of non-cash activities

      

Net change in fair value of securities available for sale, net of tax

     (1,094     2,563        (1,937

Loans transferred to foreclosed real estate

     2,148        1,882        2,876   

Company financed sales of other real estate owned

     2,450        —          —     

Mortgage servicing rights capitalized

     1,113        1,465        563   

Preferred stock dividend accrued

     (68     (68     (13

ASC 715-60 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 six 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. This company is currently inactive and does not affect the consolidated financials.

On April 10, 2003, the Company capitalized a new wholly-owned subsidiary bank, Cabarrus Bank & Trust Company (“Cabarrus”), located in Concord, North Carolina. As of that date, Cabarrus purchased two branch offices located in Cabarrus County from 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 Stanly’s subsidiaries, BOS Agency and Strategic Alliance. 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” and “Interest-earning deposits with banks.”

Investment Securities Available for Sale

Investment securities available for sale consist of bonds, mortgage backed securities and collateralized mortgage obligations (CMOs) 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 divides the loans it grants into two segments, commercial and noncommercial loans. Commercial loans are broken down into the following classes, commercial loans, real estate commercial loans and other real estate construction loans. Noncommercial loans are divided into the following classes, real estate 1-4 family construction, real estate 1-4 family residential loans, home equity loans, consumer loans and other loans. The ability of the Company’s borrowers to honor their contracts is largely dependent upon the real estate and general economic conditions in the Company’s market area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

 

15


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 1 - Significant Accounting Policies (Continued)

 

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Credit card loans and other personal loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these impaired loans is accounted for on the cash-basis 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 both individually and collectively by loan class 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.

Smaller balances of homogeneous loans are collectively evaluated by loan class for impairment. Accordingly, the Company does not separately identify individual consumer, residential and other loans for impairment disclosures.

 

16


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 1 - Significant Accounting Policies (Continued)

 

In the third quarter, the Company upgraded our allowance for loan loss model to capture not only the mean loss of individual loans but also the rare event of severe loss that can occur within the loan portfolio. The changes were made in the part of the model used to compute the general reserves. Specifically, the Company began calculating probable losses on loans by computing a probability of loss and expected loss scenario by call codes. Together, these components created from Ordinary Least Squares (OLS) Regression of historical losses against multiple Macro-Economic factors make up the basis of the new allowance model. The loans that are impaired and included in the specific reserve are excluded from these new calculations.

In the third quarter, our allowance for loan losses increased approximately $2.1 million, of which approximately $300,000 was related to a net increase in allowance on impaired loans.

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

 

17


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 1 - Significant Accounting Policies (Continued)

 

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.

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

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

Income Taxes

The Company and its subsidiaries file a consolidated Federal income tax return and separate North Carolina income tax returns. The provision for income taxes in the accompanying consolidated financial statements is provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and 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. The tax returns for the Company are subject to audit for the 2007 fiscal year and thereafter. The Company records penalties and interest related to income taxes as a component of income tax expense.

Fair Value of Financial Instruments

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

ASC 820 defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. When

 

18


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 1 - Significant Accounting Policies (Continued)

 

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 fairvalue on a nonrecurring basis, including impaired loans, loans held for sale, which are carried at the lower of cost or market, other real estate owned and 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.

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

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment by using one of several methods including collateral value, fair value of similar debt and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected repayments or fair value of collateral exceed the recorded investments in such loans. At December 31, 2010, substantially all of the total impaired loans were evaluated based on the fair value of the underlying collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the underlying collateral is further impaired below the appraised value the Company records the impaired loan as nonrecurring Level 3.

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial

 

19


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 1 - Significant Accounting Policies (Continued)

 

recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an 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 foreclosed asset as nonrecurring Level 3.

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

Servicing assets are evaluated for impairment based upon the fair value. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.

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.

As of December 31, 2010 and December 31, 2009, total accumulated other comprehensive income was $335,000 and $1.0 million, respectively, consisting of $334,512 and $1,012,648 of unrealized gains and temporary unrealized losses net of tax.

Earnings per Common Share

The Company issued 3% stock dividends in 2008. There was not a stock dividend in 2010 or 2009. 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 2010, 2009 and 2008 there were 180,571, 280,715 and 189,866 options outstanding that were anti-dilutive, respectively.

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

 

20


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:

 

     2010     2009     2008  

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

     7,593,969        7,593,969        7,618,913   

Effect of ESOP shares

     (108,596     (119,829     (136,425
                        

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

     7,485,373        7,474,140        7,482,488   

Effect of dilutive stock options

     —          —          37,996   
                        

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

     7,485,373        7,474,140        7,520,484   
                        

Recent Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06, an update to ASC 820-10, “Fair Value Measurements.” This update adds a new requirement to disclose transfers in and out of Level 1 and Level 2, along with the reasons for the transfers, and requires a gross presentation of purchases and sales of Level 3 activities. Additionally, the update clarifies that entities provide fair value measurement disclosures for each class of assets and liabilities and that entities provide enhanced disclosures around Level 2 valuation techniques and inputs. The Company adopted the disclosure requirements for Level 1 and Level 2 transfers and the expanded fair value measurement and valuation disclosures effective January 1, 2010. The disclosure requirements for Level 3 activities are effective for the Company on January 1, 2011. The adoption of the disclosure requirements for Level 1 and Level 2 transfers and the expanded qualitative disclosures had no impact on the Company’s financial position, results of operations, and EPS. The Company does not expect the adoption of the Level 3 disclosure requirements to have an impact on its financial position, results of operations, and EPS.

In July 2010, the FASB issued an Accounting Standards update (ASU No. 2010-20) entitled “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which amends ASC 820-10. The update requires companies to provide more information in their disclosures about the credit quality of their financing receivables and the credit reserves held against them. The amendments that require disclosures as of the end of a reporting period are effective for the periods ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for the periods beginning on or after December 15, 2010.

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

 

21


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 1 - Significant Accounting Policies (Continued)

 

Reclassification

Certain amounts in the 2009 and 2008 financial statements have been reclassified to conform to the 2010 presentation. The reclassifications had no effect on net income or shareholders’ equity as previously reported.

Note 2 - Investment Securities

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

 

December 31, 2010

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

U.S. Treasury

   $ 51,622       $ 746       $ 1,220       $ 51,148   

U.S. Government agencies

     24,862         766         165         25,463   

Mortgage-backed securities and CMO’s

     8,655         294         49         8,900   

State and political subdivisions

     10,725         267         108         10,884   
                                   

Total securities available for sale

   $ 95,864       $ 2,073       $ 1,542       $ 96,395   
                                   

December 31, 2009

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

U.S. Treasury

   $ 3,024       $ —         $ 5       $ 3,019   

U.S. Government agencies

     20,736         246         11         20,971   

Mortgage-backed securities and CMO’s

     34,186         1,056         —           35,242   

Private label CMO’s

     7,468         117         85         7,500   

State and political subdivisions

     9,276         309         —           9,585   
                                   

Total securities available for sale

   $ 74,690       $ 1,728       $ 101       $ 76,317   
                                   

At both December 31, 2010 and 2009, the Company owned Federal Reserve stock reported at cost of $778,850 and is included in other assets. Also at December 31, 2010 and 2009, the Company owned Federal Home Loan Bank Stock (FHLB) of $3.3 million and $3.2 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 and calls of securities available for sale for the years ended December 31, 2010, 2009 and 2008 are as follows:

 

     2010     2009     2008  
     (dollars in thousands)  

Gross proceeds from sales and calls

   $ 40,623      $ 9,535      $ —     
                        

Realized gains from sales

   $ 1,960      $ 219      $ —     

Realized losses from sales

     (476     (930     —     
                        

Net realized gains (losses)

   $ 1,484      $ (711   $ —     
                        

 

22


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 2 - Investment Securities (Continued)

 

At December 31, 2010, 2009 and 2008 securities available for sale with a carrying amount of $40.7 million, $11.4 million and $13.2 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2010 and 2009. 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 in a volatile market and are in no way a reflection of the credit quality of the investments. At December 31, 2010, the unrealized losses related to six U.S. Treasury Notes, two U.S. Government Agencies, three mortgage backed securities and eight North Carolina municipal bonds.

 

     Less than 12 Months      12 Months or More      Total  

December 31, 2010

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

Securities available for sale temporary impairment

                 

U.S. Treasury

   $ 26,138       $ 1,220       $ —         $ —         $ 26,138       $ 1,220   

U.S. Gov’t agencies

     5,736         165         —           —           5,736         165   

Mortgage-backed securities and CMO’s

     2,900         49         —           —           2,900         49   

State and political subdivisions

     4,522         108         —           —           4,522         108   
                                                     
   $ 39,296       $ 1,542       $ —         $ —         $ 39,296       $ 1,542   
                                                     
     Less than 12 Months      12 Months or More      Total  

December 31, 2009

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

Securities available for sale temporary impairment

                 

U.S. Treasury

   $ 3,019       $ 5       $ —         $ —         $ 3,019       $ 5   

U.S. Gov’t agencies

     10,327         11         —           —           10,327         11   

Mortgage-backed securities and CMO’s

     —           —           134         —           134         —     

Private label CMO’s

     —           —           1,625         85         1,625         85   

State and political subdivisions

     —           —           —           —           —           —     
                                                     
   $ 13,346       $ 16       $ 1,759       $ 85       $ 15,105       $ 101   
                                                     

Other than Temporary Impairment

                 

Private label CMO’s

   $ —         $ —         $ 3,667       $ —         $ 3,667       $ —     
                                                     
   $ —         $ —         $ 3,667       $ —         $ 3,667       $ —     
                                                     

The Company routinely conducts reviews to identify and evaluate each investment security to determine whether OTTI has occurred using several economic models. To determine if the unrealized loss is other-than-temporary, the Company projects total estimated defaults of the underlying troubled and non performing assets (mortgages) and multiply that calculated amount by an estimate of realizable value upon sale in the marketplace (severity) in order to determine the projected collateral loss. The Company also evaluates the current credit enhancement underlying the bond to determine the impact on cash flows. If the Company determines that a given position will be subject to a write-down, loss or decline in yield, the Company records the expected credit loss as a charge to earnings. In addition, the Company estimates the expected loss by taking into account observed performance of the underlying securities, industry studies, market forecasts, as well as our view of the economic outlook affecting bond collateral.

 

23


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 2 - Investment Securities (Continued)

 

The following table shows contractual maturities of the investment portfolio as of December 31, 2010:

 

     Amortized
Cost
     Estimated
Fair Value
 
     (dollars in thousands)  

Due within one year

   $ 2,080       $ 2,102   

Due after one but within five years

     23,761         24,711   

Due after five but within ten years

     59,365         58,671   

Due after ten years

     2,003         2,011   

Mortgage backed securities

     8,655         8,900   
                 
   $ 95,864       $ 96,395   
                 

The following table summarizes cumulative credit other-than-temporary impairment losses recognized on debt securities held by the Company:

 

     2010     2009  
     (dollars in thousands)  

Balance, beginning of the period

   $ 1,807      $ —     

Impairment losses recognized during the year

     —          1,807   

Realized losses from sales

     (1,807     —     
                

Balance, end of year

   $ —        $ 1,807   
                

Note 3 - Loans Held for Investment

The composition of net loans held for investment by class as of December 31, 2010 and 2009 is as follows:

 

     2010     2009  
     (dollars in thousands)  

Commercial

    

Commercial

   $ 51,679      $ 51,723   

Real estate - commercial

     105,123        95,938   

Other real estate construction loans

     52,270        40,327   

Noncommercial

    

Real estate 1-4 family construction

     4,332        4,649   

Real estate - residential

     103,781        97,852   

Home equity

     52,034        46,303   

Consumer loans

     17,721        16,627   

Other loans

     739        172   
                
     387,679        353,591   

Less:

    

Allowance for loan losses

     (9,067     (5,276

Deferred loan (fees) costs, net

     90        138   
                

Loans held for investment, net

   $ 378,702      $ 348,453   
                

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 40.19% of total loans. Additionally, there is concentration in commercial loans secured primarily by real estate, shopping center locations, commercial land development,

 

24


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 3 - Loans Held for Investment (Continued)

 

commercial buildings and equipment that comprise 27.12% of total loans. There is not a concentration of a particular type of credit in this group of commercial loans.

Total impaired loans, which consisted of nonaccrual loans and other loans identified by management as impaired, totaled $43.3 million and $24.1 million at December 31, 2010 and 2009, respectively. The nonaccrual status of these loans had the effect of reducing net income by $646,078 in 2010 and $246,395 in 2009. Of the $43.3 million in impaired loans at December 31, 2010, $12.5 million were in the commercial segment and carried allowances totaling $3.6 million while $4.4 million were in the noncommercial segment and carried allowances totaling $1.0 million. The commercial segment had $19.5 million evaluated and required no specific allowance while the noncommercial segment had $6.8 million evaluated and required no specific allowance. Of the $24.1 million in impaired loans at December 31, 2009, $16.5 million carried allowances totaling $3.0 million while $7.6 million required no specific allowance. There were loans 90 days past due and still accruing of $407,223 and $298,635 at December 31, 2010 and 2009, respectively.

Restructured loans at December 31, 2010 totaled $5.1 million of which $4.6 million are included in impaired loans above. The carrying value of foreclosed properties held as other real estate was $2.0 million and $3.4 million at December 31, 2010 and 2009, 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, 2010, 2009 and 2008 are presented below:

 

     2010     2009     2008  
     (dollars in thousands)  

Balance, beginning of year

   $ 5,276      $ 4,361      $ 3,510   

Charge-offs

     (1,189     (871     (288

Recoveries

     44        54        170   

Other

     17        —          —     

Provision charged against income

     4,919        1,732        969   
                        

Balance, end of year

   $ 9,067      $ 5,276      $ 4,361   
                        

The following table is the breakout of allowance for loss by loan class at December 31, 2010:

 

     Beginning
Balance
     Provisions     Other      Chargeoffs     Recoveries      Ending
Balance
 
     (dollars in thousands)         

Commercial

   $ 449       $ 569      $ 4       $ (59   $ 3       $ 966   

Real estate - commercial

     1,541         1,216        10         (527     —           2,240   

Other real estate construction

     1,205         952        —           —          —           2,157   

Real estate construction

     168         (58     —           (78     1         33   

Real estate - residential

     1,264         614        —           (222     2         1,658   

Home equity

     213         854        —           (97     1         971   

Consumer loan

     436         714        3         (206     37         984   

Other loans

     —           58        —           —          —           58   
                                                   

Total

   $ 5,276       $ 4,919      $ 17       $ (1,189   $ 44       $ 9,067   
                                                   

 

25


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 4 - Allowance for Loan Losses (Continued)

 

The following table shows period-end loans and reserve balances by loan class both individually and collectively evaluated for impairment at December 31, 2010:

 

    

Individually Evaluated

    

Collectively Evaluated

    

Total

 
     Reserve      Ending
Loans
     Reserve      Loans      Reserve      Loans  
     (dollars in thousands)                

Commercial

   $ 399       $ 1,439       $ 567       $ 50,240       $ 966       $ 51,679   

Real estate - commercial

     1,384         20,321         856         84,802         2,240         105,123   

Other real estate construction

     1,818         10,355         339         41,915         2,157         52,270   

Real estate construction

     —           950         33         3,382         33         4,332   

Real estate - residential

     762         8,884         896         94,897         1,658         103,781   

Home equity

     136         1,065         835         50,969         971         52,034   

Consumer loan

     132         241         852         17,480         984         17,721   

Other loans

     —           —           58         739         58         739   
                                                     

Total

   $ 4,631       $ 43,255       $ 4,436       $ 344,424       $ 9,067       $ 387,679   
                                                     

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

 

     Loans
30-89 Days
Past Due
     Loans
90 Days
or More
Past due
     Total Past
Due Loans
     Current
Loans
     Total
Loans
     Accruing
Loans 90 or
More Days
Past Due
 
     (dollars in thousands)                

Commercial

   $ 666       $ 501       $ 1,167       $ 50,512       $ 51,679       $ —     

Real estate - commercial

     1,728         8,702         10,430         94,693         105,123         —     

Other real estate construction

     206         7,975         8,181         44,089         52,270         —     

Real estate 1 - 4 family construction

     —           500         500         3,832         4,332         —     

Real estate - residential

     1,648         2,337         3,985         99,796         103,781         397   

Home equity

     110         75         185         51,849         52,034         —     

Consumer loans

     267         46         313         17,408         17,721         10   

Other loans

     —           —           —           739         739         —     

Deferred cost / fees

     —           —           —           90         90         —     
                                                     

Total

   $ 4,625       $ 20,136       $ 24,761       $ 363,008       $ 387,769       $ 407   
                                                     

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

 

26


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 4 - Allowance for Loan Losses (Continued)

 

The composition of nonaccrual loans by class as of December 31, 2010 and 2009 is as follows:

 

     2010      2009  
     (dollars in thousands)  

Commercial

   $ 501       $ 25   

Real estate - commercial

     8,702         58   

Other real estate construction

     7,975         4,461   

Real estate 1 - 4 family construction

     500         85   

Real estate - residential

     1,940         760   

Home equity

     75         115   

Consumer loans

     36         125   

Other loans

     —           —     
                 
   $ 19,729       $ 5,629   
                 

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

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

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

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

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

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

 

27


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 4 - Allowance for Loan Losses (Continued)

 

The table below summarizes risk grades of the loan portfolio by class:

 

     Pass      Watch      Sub-
standard
     Doubtful      Total  
     (dollars in thousands)         

Commercial

   $ 50,108       $ 185       $ 1,386       $ —         $ 51,679   

Real estate - commercial

     81,410         4,520         18,455         738         105,123   

Other real estate construction

     41,709         301         10,260         —           52,270   

Real estate 1 - 4 family construction

     3,381         —           951         —           4,332   

Real estate - residential

     94,077         1,787         7,917         —           103,781   

Home equity

     50,902         158         974         —           52,034   

Consumer loans

     17,458         102         129         32         17,721   

Other loans

     739         —           —           —           739   
                                            

Total

   $ 339,784       $ 7,053       $ 40,072       $ 770       $ 387,679   
                                            

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. The following table shows the breakdown between performing and nonperforming loans by class:

 

     Performing      Non-
Performing
     Total  
     (dollars in thousands)  

Commercial

   $ 51,178       $ 501       $ 51,679   

Real estate - commercial

     96,421         8,702         105,123   

Other real estate construction

     44,295         7,975         52,270   

Real estate 1 - 4 family construction

     3,832         500         4,332   

Real estate - residential

     101,444         2,337         103,781   

Home equity

     51,959         75         52,034   

Consumer loans

     17,675         46         17,721   

Other loans

     739         —           739   
                          

Total

   $ 367,543       $ 20,136       $ 387,679   
                          

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

 

     Unpaid
Principal
Balance
     Recorded
Investment
With No
Allowance
     Recorded
Investment
With
Allowance
     Related
Allowance
     Average
Recorded
Investment
 
     (dollars in thousands)         

Commercial

   $ 1,439       $ 918       $ 521       $ 399       $ 1,485   

Real estate - commercial

     21,985         16,088         4,233         1,384         13,279   

Other real estate construction

     10,357         2,585         7,770         1,818         9,380   

Real estate 1 - 4 family construction

     950         950         —           —           1,100   

Real estate - residential

     8,884         5,118         3,766         762         7,257   

Home Equity loans

     1,066         677         388         136         821   

Consumer loans

     241         23         218         132         367   

Other loans

     —           —           —           —           —     
                                            

Total

   $ 44,922       $ 26,359       $ 16,896       $ 4,631       $ 33,689   
                                            

 

28


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 $327 million and $289 million at December 31, 2010 and 2009, respectively. The carrying value of capitalized servicing rights, net of valuation allowances, is included in other assets. A summary of mortgage servicing rights follows:

 

     2010     2009     2008  
     (dollars in thousands)  

Beginning of year mortgage servicing rights:

   $ 1,890      $ 1,293      $ 1,321   

Amounts capitalized

     1,113        1,465        563   

Amortization

     (869     (868     (471

Impairment

     —          —          (120
                        

End of year

   $ 2,134      $ 1,890      $ 1,293   
                        

Amortization expense is estimated as follows:

 

Year ending December 31,

 
(dollars in thousands)  

2011

   $ 504   

2012

     436   

2013

     369   

2014

     301   

2015

     233   

Thereafter

     291   
        

Total

   $ 2,134   
        

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

Note 6 - Premises and Equipment

The major classes of premises and equipment and the total accumulated depreciation at December 31, 2010 and 2009 are listed below:

 

     2010      2009  
     (dollars in thousands)  

Land

   $ 4,081       $ 4,081   

Building and improvements

     11,205         10,012   

Furniture and equipment

     6,128         5,598   
                 
     21,414         19,691   

Less accumulated depreciation

     6,860         6,045   
                 

Total

   $ 14,554       $ 13,646   
                 

 

29


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

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 $18,575. The lease had 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 building for $300,000 in 2009. The lease payment remained the same during the finalization of the purchase. Bank of Stanly entered into a month to month lease in 2009 with annual lease payments of $600. Bank of Stanly had also entered into a noncancelable operating lease for a branch location in Locust that expired in 2010 with annual rental payments of $41,856. Bank of Stanly terminated the Locust lease in the third quarter of 2010 when the branch moved into a new building Stanly had constructed. 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 $59,850. 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, 2010 are as follows:

 

Year ending December 31,

 
(dollars in thousands)  

2011

   $ 60   

2012

     60   

2013

     60   

2014

     60   

2015

     60   

Thereafter

     100   
        

Total

   $ 400   
        

Total rental expense related to the operating leases was $85,538, $106,350, and $120,281 for the years ended December 31, 2010, 2009 and 2008, respectively, and is included in occupancy expense.

Note 8 - Deposits

The composition of deposits at December 31, 2010 and 2009 is as follows:

 

     2010     2009  
     Amount      Percentage
of Total
    Amount      Percentage
of Total
 
     (dollars in thousands)  

Demand deposits

   $ 54,837         13   $ 44,924         12

Interest checking and money market

     187,493         43     137,708         37

Savings

     37,624         8     32,120         8

Time deposits $100,000 and over

     59,431         14     64,736         17

Other time deposits

     94,648         22     97,286         26
                                  

Total

   $ 434,033         100   $ 376,774         100
                                  

 

30


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 8 - Deposits (Continued)

 

The maturities of fixed-rate time deposits at December 31, 2010 are reflected in the table below:

 

Year ending December 31,

   Time
Deposits
$100,000

and Over
     Other
Time
Deposits
 
     (dollars in thousands)  

2011

   $ 39,225       $ 62,597   

2012

     6,788         9,698   

2013

     7,755         12,595   

2014

     748         3,363   

2015

     4,915         6,395   

Thereafter

     —           —     
                 

Total

   $ 59,431       $ 94,648   
                 

 

31


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

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 2010 and 2009:

 

     2010     2009  
     Amount      Rate     Amount      Rate  
     (dollars in thousands)  

At year-end

          

Federal funds purchased

   $ —           0.00   $ —           0.00

Securities sold under repurchase agreements

     —           0.00     —           0.00

Master notes and other short term borrowing

     10,423         0.94     11,482         0.50

Notes payable

     59         3.82     58         3.80

Short-term line of credit

     —           0.00     —           0.00

Short-term advances from FHLB

     10,000         4.42     15,400         0.36
                                  
   $ 20,482         2.64   $ 26,940         0.42
                                  
     2010     2009  
     Amount      Rate     Amount      Rate  
     (dollars in thousands)  

Average for the year

          

Federal funds purchased

   $ 7         1.17   $ 273         1.05

Securities sold under repurchase agreements

     —           0.00     669         0.89

Master notes and other short term borrowing

     11,174         0.95     11,298         0.83

Notes payable

     58         3.76     56         3.25

Short-term line of credit

     —           0.00     724         1.68

Short-term advances from FHLB

     15,272         3.83     11,401         1.70
                                  
   $ 26,511         2.62   $ 24,421         1.29
                                  

 

     2010      2009  
     (dollars in thousands)  

Maximum month-end balance

     

Federal funds purchased

   $ 300       $ 1,250   

Securities sold under repurchase agreements

     —           1,740   

Master notes and other short term borrowing

     13,454         12,559   

Notes payable

     58         58   

Short-term line of credit

     —           2,600   

Short-term advances from FHLB

     23,920         24,275   

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 and other secured borrowings represent an overnight investment in commercial paper issued by the Company to customers of its subsidiary banks, where an agreement is in place and borrowings secured by the Uwharrie Loan Pool.

On September 25, 2007, the Company borrowed $6.6 million from a bank at an interest rate of prime less one percent. During 2008 principal payments were made on this note in the amount of $4.0 million. The remaining balance of $2.6 million was paid off during 2009.

 

32


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 9 - Short-Term Borrowed Funds (Continued)

 

The subsidiary banks have combined available lines of credit for federal funds in the amount of $27.5 million at December 31, 2010.

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, commercial real estate loans and investment securities with eligible collateral value of $72.9 million at December 31, 2010. The long-term advances under this line amounted to $24.0 million and $19.0 million at December 31, 2010 and 2009, respectively. Interest rates ranged from 1.15% to 4.46% in 2010 and from 1.57% to 5.50% in 2009. The 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 $7.2 million at December 31, 2010.

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 required minimum investment of $50,000. These securities have a final maturity date of June 30, 2015 and may be redeemed by the Company after June 30, 2010. 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, 2010. Once the final maturity drops under five years, the Company must impose a twenty percent reduction per year of the amount of the proceeds from the sale of these securities that is eligible to be counted as Tier 2 capital. At December 31, 2010 $1.5 million of the $7.4 million was excluded as Tier 2 capital. These securities will be redeemed on March 31, 2011 and replaced with a new issue for subordinated debt securities discussed below.

During the third quarter of 2010, the Company began a private placement of up to 10,000 fixed rate junior subordinated debt securities at $1,000 per security with a required minimum investment of $50,000. These securities may be redeemed by the Company after December 31, 2013 and have a final maturity date is December 31, 2018. The junior subordinated debt securities pay 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 December 31, 2010 the Company had raised and had outstanding $2.5 million of this private placement.

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 $74,456 at December 31, 2010.

On May 13, 2009, the Company executed a note payable in the amount of $200,000 for the purchase of existing leased office space. The note bears interest at 3.43% and is to be paid in four equal annual payments of $50,000. The outstanding balance of this note was $150,000 at December 31, 2010.

 

33


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 10 - Long-Term Debt (Continued)

 

As of December 31, 2010, the scheduled maturities of these advances and notes payable are as follows:

 

Year ending December 31,

 
(dollars in thousands)  

2012

   $ 13,059   

2013

     9,560   

2014

     1,511   

2015

     7,430   

2016

     2,501   

Thereafter

     —     
        

Total

   $ 34,061   
        

Note 11 - Income Tax Matters

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

 

     2010     2009     2008  
     (dollars in thousands)  

Current tax expense:

      

Federal

   $ 1,021      $ 428      $ 1,225   

State

     221        146        307   
                        

Total

     1,242        574        1,532   
                        

Deferred tax expense (benefit):

      

Federal

     (891     (620     (607

State

     (200     (117     (121
                        

Total

     (1,091     (737     (728
                        

Net provision for income taxes

   $ 151      $ (163   $ 804   
                        

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:

 

     2010     2009     2008  
     (dollars in thousands)  

Tax computed at the statutory federal rate

   $ 294      $ 179      $ 963   

Increases (decrease) resulting from:

      

Tax exempt interest, net

     (179     (269     (267

State income taxes, net of federal benefit

     14        19        123   

Other

     22        (92     (15
                        

Provision for income taxes

   $ 151      $ (163   $ 804   
                        

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:

 

34


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 11 - Income Tax Matters (Continued)

 

     2010     2009     2008  
     (dollars in thousands)  

Deferred tax assets relating to:

      

Net unrealized loss on securities available for sale

   $ —        $ —        $ 979   

Allowance for loan losses

     3,253        1,772        1,305   

Deferred compensation

     518        635        494   

Other

     198        462        126   
                        

Total deferred tax assets

     3,969        2,869        2,904   

Deferred tax liabilities relating to:

      

Net unrealized gain on securities available for sale

     (197     (613     —     

Premises and equipment

     (381     (371     (301

Deferred loans fees and costs

     (212     (214     (213

Loan servicing

     (186     (158     (41

Prepaid expenses

     (130     (157     (138

Other

     —          —          —     
                        

Total deferred tax liabilities

     (1,106     (1,513     (693
                        

Net recorded deferred tax asset

   $ 2,863      $ 1,356      $ 2,211   
                        

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.

As of December 31, 2010 and 2009, outstanding financial instruments whose contract amounts represent credit risk were as follows:

 

     2010      2009  
     (dollars in thousands)  

Commitments to extend credit

   $ 82,455       $ 91,648   

Credit card commitments

     8,790         8,697   

Standby letters of credit

     1,626         881   
                 
   $ 92,871       $ 101,226   
                 

 

35


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 12 - Commitments and Contingencies (Continued)

 

Contingencies

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

Financial Instruments with Concentration of Credit Risk

The 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, 2009

   $ 14,789   

Disbursements during the year

     11,091   

Collections during the year

     (7,648
        

Balance at December 31, 2010

   $ 18,232   
        

At December 31, 2010, the Company had approved, but unused lines of credit, totaling $5.0 million to executive officers and directors, and their related interests.

 

36


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
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (Dollars in thousands)               

December 31, 2010

               

Total Capital to Risk

               

Weighted Assets:

               

Consolidated

   $ 55,534         14.4   $ 30,793         8.0   $ N/A         —  

Bank of Stanly

     32,520         12.6     20,590         8.0     25,738         10.0

Anson Bank and Trust

     5,276         13.8     3,050         8.0     3,812         10.0

Cabarrus Bank and Trust

     12,697         13.3     7,623         8.0     9,529         10.0

Tier I Capital to Risk

               

Weighted Assets:

               

Consolidated

     42,171         11.0     15,396         4.0     N/A         —  

Bank of Stanly

     29,263         11.4     10,295         4.0     15,443         6.0

Anson Bank and Trust

     4,793         12.6     1,525         4.0     2,287         6.0

Cabarrus Bank and Trust

     11,500         12.1     3,811         4.0     5,717         6.0

Tier I Capital to

               

Average Assets:

               

Consolidated

     42,171         7.8     21,615         4.0     N/A         —  

Bank of Stanly

     29,263         8.4     13,956         4.0     17,445         5.0

Anson Bank and Trust

     4,793         8.4     2,274         4.0     2,842         5.0

Cabarrus Bank and Trust

     11,500         8.9     5,184         4.0     6,480         5.0

 

37


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

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

 

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

December 31, 2009

               

Total Capital to Risk

               

Weighted Assets:

               

Consolidated

   $ 54,052         14.0   $ 30,908         8.0   $ N/A         —  

Bank of Stanly

     32,980         12.9     20,413         8.0     25,516         10.0

Anson Bank and Trust

     5,278         13.3     3,165         8.0     3,956         10.0

Cabarrus Bank and Trust

     12,260         13.8     7,120         8.0     8,901         10.0

Tier I Capital to Risk

               

Weighted Assets:

               

Consolidated

     42,024         10.9     15,454         4.0     N/A         —  

Bank of Stanly

     29,782         11.7     10,206         4.0     15,310         6.0

Anson Bank and Trust

     4,795         12.1     1,582         4.0     2,374         6.0

Cabarrus Bank and Trust

     11,332         12.7     3,560         4.0     5,340         6.0

Tier I Capital to

               

Average Assets:

               

Consolidated

     42,204         8.8     19,086         4.0     N/A         —  

Bank of Stanly

     29,782         9.4     12,709         4.0     15,887         5.0

Anson Bank and Trust

     4,795         8.8     2,171         4.0     2,714         5.0

Cabarrus Bank and Trust

     11,322         10.9     4,161         4.0     5,201         5.0

As of December 31, 2010, the most recent notification from the Federal Deposit Insurance Corporation categorized all of the Company’s 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

 

38


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

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

 

dividends. It is the Company’s intention to redeem both issues of preferred stock no later than the fifth anniversary of their issuance. Accordingly, the net discount of $500,000 is going to be amortized over five years. At December 31, 2010 the remaining discount was $300,000.

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 portions of the funds received from Company’s issuance of preferred stock down to the subsidiary bank level. At December 31, 2010, Uwharrie Capital Corp had invested $3.0 million in Stanly, $1.0 million in Anson and $3.0 million in Cabarrus.

The Company and its subsidiaries must receive Federal Reserve approval before paying common and preferred stock dividends.

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, 2010, the subsidiary banks were required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank in the aggregate amount of $2.9 million as reserves on deposit liabilities.

Stock Repurchase Program

On February 21, 1995, the Company’s Board of Directors authorized and approved a Stock Repurchase Program, to be reaffirmed annually, pursuant to which the Company may repurchase shares of the Company’s common stock for the primary purpose of providing liquidity to its shareholders. Pursuant to stock repurchase authorizations and limitations, the Company purchased 111,258 shares during 2008 at an aggregate purchase price of $570,839. There were no shares repurchased during 2009 or 2010.

Pursuant to the terms of the United States Department of the Treasury’s investment in the Company’s preferred stock under the Capital Purchase Program (“CPP”), the Company must obtain the prior consent of the United States Department of the Treasury to repurchase its common stock under the Stock Purchase Plan or otherwise or to pay a cash dividend.

Note 15 - Stock Based Compensation

During 1996, the Company adopted the 1996 Incentive Stock Option Plan (“SOP”) and the Employee Stock Purchase Plan (“SPP”), under which options to purchase shares of the Company’s common stock may be granted to officers and eligible employees. Options granted under the SOP are exercisable in established increments according to vesting schedules, generally three to five years, and will expire if not exercised within ten years of the date of grant. Options granted under the SPP are fully vested at the date of grant and expire if not exercised within two years of the grant date. Both of these plans expired in 2006. At December 31, 2010, the SOP had 168,211 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

 

39


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 15 - Stock Based Compensation (Continued)

 

within two years of the grant date. At December 31, 2010, the SOP II had 12,360 shares outstanding and the SPP II had no options outstanding.

Employee Stock Plans

The following is a summary of stock option activity for the year ended December 31, 2010:

 

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

Options outstanding at the beginning of the year

     280,715      $ 4.75       $ —     
             

Options granted

     —          —        

Options exercised

     —          —        

Forfeitures

     (100,144     4.48      
                   

Options outstanding at the end of the year

     180,571      $ 4.90       $ —     
                         

Options exercisable at the end of the year

     173,155      $ 4.88       $ —     
                         

Total options outstanding at December 31, 2010 were 180,571 at an exercise price range of $4.00 to $5.60 per share with a weighted average expected term of 2.35 years. Exercisable options at December 31, 2010 were 173,155 options at an exercise price range of $4.00 to $5.60 per share. At December 31, 2010, 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 no shares granted during the years ended December 31, 2010 and 2009 under the SOP II. There were 12,360 shares granted in 2008.

A summary of the status of the Company’s non-vested stock options as of December 31, 2010, and changes during the year then ended is presented below:

 

     Shares     Weighted
Average
Grant Date
Fair Value
 

Non-vested December 31, 2009

     9,888      $ 1.60   

Granted

     —          —     

Vested

     (2,472     1.60   

Forfeited

     —          —     
          

Non-vested December 31, 2010

     7,416        1.60   
          

The grant date fair value of stock options vested over the years ended December 31, 2010, 2009 and 2008 was $3,960, $26,438 and $22,478 respectively.

As of December 31, 2010, there was $8,328 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 2.3 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.

 

40


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 15 - Stock Based Compensation (Continued)

 

For the twelve months ended December 31, 2008 the intrinsic value of options exercised was $74,409. There were no options exercised in 2009 or 2010.

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 are eligible to make elective deferrals on the first day if calendar month coincident or next following the date the associate attains the age of 18, completes one year of eligibility service and completes at least 1,000 hours of service and is 100% vested in the plan once they enroll.

The Company’s annual contribution to the plan was $296,466 in 2010, $210,884 in 2009 and $206,478 in 2008, determined as follows:

 

   

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

 

   

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

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 at December 31, 2008. The plan was terminated in 2009 and all funds have been disbursed. Expense for the years ended December 31, 2009 and 2008 was $12,078 and $12,298, 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, 2010, the outstanding balance of the loan is $591,925 and is presented as a reduction of shareholders’ equity.

At the debt payments are made on the loans, shares associated with those debt payments are released to the ESOP and allocated among active participants on the basis of compensation in the year of allocation. Benefits vest 100% as they are allocated to participants. Dividends on

 

41


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 16 - Employee and Director Benefit Plans (Continued)

 

unallocated shares may be used by the ESOP to repay the loan to the Company and are not reported as dividends in the financial statements. Dividends on allocated or committed to be allocated shares are credited to the accounts of the participants and reported as dividends in the consolidated financial statements.

The Company established a $500,000 line of credit