EX-13 2 d306123dex13.htm ANNUAL REPORT Annual Report

Exhibit 13

Uwharrie Capital Corp

2011

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 consultants registered with Private Client Services LLC., securities and insurance products are offered including fixed annuities, long-term care, Medicare supplement products and life insurance products. Group insurance products are offered through an arrangement with Burchfield Insurance Group, Inc.

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

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)    2011     2010     Percent
Increase
(Decrease)
 

For the year:

      

Net income

   $ 900      $ 713        26.23

Net income available to common shareholders

   $ 255      $ 68        275.00

Basic net income per common share

   $ 0.03      $ 0.01        200.00

Diluted net income per common share

   $ 0.03      $ 0.01        200.00

Weighted average common shares outstanding (diluted)

     7,467,396        7,485,373        (0.24 )% 

At year-end:

      

Total assets

   $ 526,902      $ 535,426        (1.59 )% 

Total earning assets

     478,494        499,126        (4.13 )% 

Loans held for investment

     366,675        387,769        (5.44 )% 

Total interest-bearing liabilities

     415,023        433,739        (4.32 )% 

Shareholders’ equity

     45,603        43,493        4.85

Book value per common share

   $ 4.65      $ 4.38        6.16

Averages for the year:

      

Total assets

   $ 529,970      $ 514,425        3.02

Total earning assets

     486,550        473,306        2.80

Loans held for investment

     381,419        375,381        1.61

Total interest-bearing liabilities

     423,794        414,373        2.27

Shareholders’ equity

     44,462        45,425        (2.12 )% 

Financial ratios (in percentage):

      

Return on average assets

     0.17     0.14  

Return on average shareholders’ equity

     2.02     1.57  

Average equity to average assets

     8.39     8.83  

Net interest margin (fully tax equivalent basis)

     4.01     3.99  

Allowance as % of loans at year-end

     1.86     2.34  

Allowance as % of nonperforming loans

     86.68     45.03  

Nonperforming loans to total loans

     2.14     5.19  

Nonperforming assets to total assets

     3.44     4.14  

Net loan charge-offs (recoveries) to average loans

     1.50     0.31  

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.

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

The Board of Directors adopts a dividend policy on an annual basis. For 2011 and 2010, 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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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, 2011 and 2010, 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, 2011. 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, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

/s/ Dixon Hughes Goodman LLP

Asheville, North Carolina

March 23, 2012

 

36


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2011 and 2010

 

 

 

     2011     2010  
     (dollars in thousands)  

ASSETS

    

Cash and due from banks

   $ 7,487      $ 4,948   

Interest-earning deposits with banks

     21,200        8,676   

Securities available for sale, at fair value

     88,661        96,395   

Loans held for sale

     1,958        6,286   

Loans:

    

Loans held for investment

     366,675        387,769   

Less allowance for loan losses

     (6,815     (9,067
  

 

 

   

 

 

 

Net loans held for investment

     359,860        378,702   
  

 

 

   

 

 

 

Premises and equipment, net

     15,076        14,554   

Interest receivable

     2,084        2,408   

Federal Home Loan Bank stock

     2,486        3,252   

Bank owned life insurance

     6,171        5,975   

Goodwill

     987        987   

Other real estate owned

     10,258        2,022   

Prepaid assets

     1,347        2,088   

Other assets

     9,327        9,133   
  

 

 

   

 

 

 

Total assets

   $ 526,902      $ 535,426   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Demand noninterest-bearing

   $ 62,339      $ 54,837   

Interest checking and money market accounts

     185,539        187,493   

Savings deposits

     39,273        37,624   

Time deposits, $100,000 and over

     58,274        59,431   

Other time deposits

     85,913        94,648   
  

 

 

   

 

 

 

Total deposits

     431,338        434,033   
  

 

 

   

 

 

 

Short-term borrowed funds

     20,791        20,482   

Long-term debt

     25,233        34,061   

Interest payable

     301        342   

Other liabilities

     3,636        3,015   
  

 

 

   

 

 

 

Total liabilities

     481,299        491,933   
  

 

 

   

 

 

 

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

    

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

     (200     (300

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

     14,010        14,034   

Unearned ESOP compensation

     (772     (692

Undivided profits

     10,379        10,124   

Accumulated other comprehensive income

     2,194        335   
  

 

 

   

 

 

 

Total shareholders’ equity

     45,603        43,493   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 526,902      $ 535,426   
  

 

 

   

 

 

 

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

 

37


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2011, 2010 and 2009

 

 

 

     2011     2010     2009  
     (in thousands, except share and per share data)  

Interest Income

      

Loans, including fees

   $ 21,609      $ 21,616      $ 21,246   

Investment securities:

      

US Treasury

     742        612        12   

US Government agencies and corporations

     1,035        1,896        3,106   

State and political subdivisions

     371        319        632   

Interest-earning deposits with banks and federal funds sold

     65        44        66   
  

 

 

   

 

 

   

 

 

 

Total interest income

     23,822        24,487        25,062   
  

 

 

   

 

 

   

 

 

 

Interest Expense

      

Interest checking and money market accounts

     785        971        838   

Savings deposits

     286        327        255   

Time deposits $100,000 and over

     1,106        1,192        1,980   

Other time deposits

     1,138        1,684        2,836   

Short-term borrowed funds

     354        693        316   

Long-term debt

     1,068        1,084        1,472   
  

 

 

   

 

 

   

 

 

 

Total interest expense

     4,737        5,951        7,697   
  

 

 

   

 

 

   

 

 

 

Net interest income

     19,085        18,536        17,365   

Provision for loan losses

     3,456        4,919        1,732   
  

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     15,629        13,617        15,633   
  

 

 

   

 

 

   

 

 

 

Noninterest Income

      

Service charges on deposit accounts

     1,837        2,219        2,360   

Other service fees and commissions

     3,409        2,883        2,273   

Gain (loss) on sale of securities

     933        1,484        (711

Loss on nonmarketable securities

     —          —          (172

Loss on securities with other-than-temporary impairment

     —          —          (1,807

Portion of loss recognized in other comprehensive income

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Net impairment recognized in income

     —          —          (1,807

Income from mortgage loan sales

     1,806        3,172        3,436   

Other income

     271        140        445   
  

 

 

   

 

 

   

 

 

 

Total noninterest income

     8,256        9,898        5,824   
  

 

 

   

 

 

   

 

 

 

Noninterest Expense

      

Salaries and employee benefits

     12,121        11,648        11,527   

Net occupancy expense

     1,165        1,193        1,071   

Equipment expense

     758        769        702   

Data processing costs

     858        853        792   

Office supplies and printing

     337        384        335   

Foreclosed real estate expense

     489        387        219   

Professional fees and services

     1,488        1,230        968   

Marketing and donations

     769        1,291        746   

Electronic banking expense

     875        811        728   

Software amortization and maintenance

     573        542        470   

FDIC insurance

     750        795        958   

Other noninterest expense

     2,606        2,748        2,414   
  

 

 

   

 

 

   

 

 

 

Total noninterest expense

     22,789        22,651        20,930   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,096        864        527   

Income taxes

     196        151        (163
  

 

 

   

 

 

   

 

 

 

Net income

   $ 900      $ 713      $ 690   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 900      $ 713      $ 690   

Dividends on preferred stock

     (645     (645     (642
  

 

 

   

 

 

   

 

 

 

Net Income available to common shareholders

   $ 255      $ 68      $ 48   
  

 

 

   

 

 

   

 

 

 

Net income per common share

      

Basic

   $ 0.03      $ 0.01      $ 0.01   
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.03      $ 0.01      $ 0.01   
  

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

      

Basic

     7,467,396        7,485,373        7,474,140   

Diluted

     7,467,396        7,485,373        7,474,140   

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

 

38


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2011, 2010 and 2009

 

 

 

     2011     2010     2009  
     (in thousands)  

Net Income

   $ 900      $ 713      $ 690   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

      

Unrealized gains (losses) on available for sale securities

     3,759        390        1,637   

Related tax effect

     (1,327     (156     (621

Reclassification of losses (gains) recognized in net income

     (933     (1,484     711   

Related tax effect

     360        572        (274

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

     —          —          1,807   

Related tax effect

     —          —          (697
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     1,859        (678     2,563   
  

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 2,759      $ 35      $ 3,253   
  

 

 

   

 

 

   

 

 

 

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

 

39


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended December 31, 2011, 2010 and 2009

 

 

 

     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, 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   

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   

Net income

     —           —           —           —          —           —          —          900        —          900   

Other comprehensive income

     —           —           —           —          —           —          —          —          1,859        1,859   

Release of ESOP shares

     —           —           —           —          —           (28     81        —          —          53   

Increase in ESOP notes receivable

     —           —           —           —          —           —          (161     —          —          (161

Stock compensation expense

     —           —           —           —          —           4        —          —          —          4   

Record preferred stock dividend and discount accretion

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

     7,593,929       $ 10,000       $ 500       $ (200   $ 9,492       $ 14,010      $ (772   $ 10,379      $ 2,194      $ 45,603   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

40


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2011, 2010 and 2009

 

 

 

     2011     2010     2009  

Cash flows from operating activities

      

Net income

   $ 900      $ 713      $ 690   

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

      

Depreciation

     838        815        780   

Net amortization of security premiums/discounts

     865        412        134   

Impairment of securities available for sale

     —          —          1,807   

Net amortization of mortgage servicing rights

     670        869        868   

Impairment of foreclosed real estate

     212        125        78   

Provision for loan losses

     3,456        4,919        1,732   

Deferred income taxes

     1,000        (1,091     (737

Stock compensation

     4        4        11   

Net realized (gains)loss on sales / calls available for sale securities

     (933     (1,484     711   

Income from mortgage loan sales

     (1,806     (3,172     (3,436

Proceeds from sales of loans held for sale

     70,251        110,374        144,761   

Origination of loans held for sale

     (64,116     (111,973     (142,727

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

     13        71        (1

Loss on nonmarketable securities

     —          —          172   

Increase in cash surrender value of life insurance

     (196     (261     (203

Loss on sales of foreclosed real estate

     68        332        36   

Release of ESOP Shares

     53        75        69   

Net change in interest receivable

     324        (331     (50

Net change in other assets

     (1,910     (532     (3,652

Net change in interest payable

     (41     (54     (106

Net change in other liabilities

     621        (54     714   
  

 

 

   

 

 

   

 

 

 

Net cash provided (used) by operating activities

     10,273        (243     1,651   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

      

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

     38,648        53,013        30,353   

Purchase of securities available for sale

     (28,020     (71,430     (36,208

Net (increase) decrease in loans

     6,259        (34,866     (15,598

Proceeds from sale of premises, equipment and other assets

     —          —          1   

Purchase of premises and equipment

     (1,373     (1,725     (3,298

Proceeds from sales of foreclosed real estate

     611        733        1,243   

Investment in other assets

     (181     (240     (1,089

Net (increase) decrease in Federal Home Loan Bank stock

     766        (51     (917
  

 

 

   

 

 

   

 

 

 

Net cash provided (used) by investing activities

     16,710        (54,566     (25,513
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

      

Net increase (decrease) in deposit accounts

     (2,695     57,259        23,147   

Net increase (decrease) in short-term borrowed funds

     309        (6,458     4,691   

Net increase (decrease) in long-term debt

     (10,060     4,942        (5,859

Net proceeds from issuance of junior subordinated debt

     1,962        2,476        —     

Repayment of junior subordinated debt

     (730     —          —     

Increase in unearned ESOP compensation

     (161     (100     —     

Dividend on preferred stock

     (545     (545     (542
  

 

 

   

 

 

   

 

 

 

Net cash provided (used) by financing activities

     (11,920     57,574        21,437   
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     15,063        2,765        (2,425

Cash and cash equivalents, beginning of year

     13,624        10,859        13,284   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of year

   $ 28,687      $ 13,624      $ 10,859   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information

      

Interest paid

   $ 4,778      $ 6,005      $ 7,802   

Income taxes paid

     220        1,274        1,558   

Supplemental schedule of non-cash activities

      

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

     1,859        (678     2,563   

Loans transferred to foreclosed real estate

     9,127        2,148        1,882   

Company financed sales of other real estate owned

     —          2,450        —     

Mortgage servicing rights capitalized

     679        1,113        1,465   

Preferred stock dividend accrued

     (68     (68     (68

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

 

41


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.

 

42


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. The allowance if any would not have a material impact on the financial statements.

Loans

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

 

43


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 until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, generally a minimum of six months of sustained performance is required.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses 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.

Troubled debt restructure loans (TDR) are considered to be impaired loans and are individually evaluated for impairment.

Homogeneous loans are collectively evaluated by loan class for impairment. However, homogeneous loans will be evaluated individually for impairment is such a loan is deemed impaired.

 

44


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

In the third quarter of 2010, 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 FDIC call report 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.

Mortgage Servicing Rights

The Company capitalizes mortgage 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, and costs related to the improvement of the property are capitalized if the current fair value will allow it, if not these costs are expensed also. 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

 

45


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.

Restricted Stock

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

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). The cost of employee services received in exchange for an award based on the grant-date fair value of the award. Excess tax benefits are reported as financing cash inflows in the consolidated statement of cash flows.

Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return and separate North Carolina income tax returns. The provision for income taxes in the accompanying consolidated financial statements is provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The tax returns for the Company are subject to audit for the 2008 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

 

46


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 fair value 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 are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the ‘Level 1 input’ column. Prices for mortgage-backed securities, government agency securities and for state, county and municipal securities are obtained for similar securities, and the resulting fair values are shown in the ‘Level 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 or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected repayments or fair value of collateral exceed the recorded investments in such loans. At December 31, 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 write downs, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial

 

47


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.

Mortgage 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, 2011 and December 31, 2010, total accumulated other comprehensive income was $2.2 million and $335,000, respectively.

Earnings per Common Share

The Company had stock options outstanding of 123,570, 180,571 and 280,715 at December 31, 2011, 2010 and 2009 respectively. All of these options were anti-dilutive.

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

 

48


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:

 

     2011     2010     2009  

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

     7,593,969        7,593,969        7,593,969   

Effect of ESOP shares

     (126,573     (108,596     (119,829
  

 

 

   

 

 

   

 

 

 

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

     7,467,396        7,485,373        7,474,140   

Effect of dilutive stock options

     —          —          —     
  

 

 

   

 

 

   

 

 

 

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

     7,467,396        7,485,373        7,474,140   
  

 

 

   

 

 

   

 

 

 

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 adopted the level 3 disclosure requirements in the first quarter of 2011 and it had no impact on its financial position, results of operations, and EPS.

In July 2010, the FASB issued ASU 2010-20, an update to ASC 310 “Receivables”. The update to ASC 310 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a roll forward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 became effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period became effective for the Company’s

 

49


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

financial statements beginning on January 1, 2011. The Company has adopted this update and included the disclosure in the notes to the financial statements.

In April 2011, the FASB issued ASU No. 2011-02, an update to ASC 310 “Receivables”. The update to ASC 310 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 will be effective for the Company on July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011. Adoption of ASU 2011-02 did not have a material impact on the Company’s financial statements.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement. The purpose of the standard is to clarify and combine fair value measurements and disclosure requirements for U.S. generally accepted accounting principles, or GAAP, and international financial reporting standards, or IFRS. The new standard provides amendments and wording changes used to describe certain requirements for measuring fair value and for disclosing information about fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011, and should be applied prospectively to the beginning of the annual period of adoption The adoption of this statement did not have a material impact on the consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, an update to ASC 220, “Comprehensive Income.” This update requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

In September 2011, the FASB issued ASU 2011-08, an update to ASC 350 “Intangibles - Goodwill and Other.” This update gives entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-08 is effective for annual and interim impairment tests beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

 

50


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 1 - Significant Accounting Policies (Continued)

 

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

Reclassification

Certain amounts in the 2010 and 2009 financial statements have been reclassified to conform to the 2011 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, 2011

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

U.S. Treasury

   $ 32,073       $ 1,459       $ —         $ 33,532   

U.S. Government agencies

     19,142         855         —           19,997   

GSE - Mortgage-backed securities and CMO’s

     24,016         332         85         24,263   

State and political subdivisions

     10,071         798         —           10,869   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 85,302       $ 3,444       $ 85       $ 88,661   
  

 

 

    

 

 

    

 

 

    

 

 

 

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   

GSE - 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   
  

 

 

    

 

 

    

 

 

    

 

 

 

At both December 31, 2011 and 2010, the Company owned Federal Reserve stock reported at cost of $802,850 and 778,850 respectively and is included in other assets. Also at December 31, 2011 and 2010, the Company owned Federal Home Loan Bank Stock (FHLB) of $2.5 million and $3.3 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, 2011, 2010 and 2009 are as follows:

 

     2011      2010     2009  
     (dollars in thousands)  

Gross proceeds from sales and calls

   $ 25,568       $ 40,623      $ 9,535   
  

 

 

    

 

 

   

 

 

 

Realized gains from sales

   $ 933       $ 1,960      $ 219   

Realized losses from sales

     —           (476     (930
  

 

 

    

 

 

   

 

 

 

Net realized gains (losses)

   $ 933       $ 1,484      $ (711
  

 

 

    

 

 

   

 

 

 

 

51


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 2 - Investment Securities (Continued)

 

At December 31, 2011, 2010 and 2009 securities available for sale with a carrying amount of $37.7 million, $40.7 million and $11.4 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, 2011 and 2010. 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, 2011, the unrealized losses related to three mortgage backed securities and at December 31, 2010 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, 2011

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

Securities available for sale temporary impairment

                 

U.S. Treasury

   $ —         $ —         $ —         $ —         $ —         $ —     

U.S. Gov’t agencies

     —           —           —           —           —           —     

Mortgage-backed securities and CMO’s

     9,734         85         —           —           9,734         85   

State and political subdivisions

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 9,734       $ 85       $ —         $ —         $ 9,734       $ 85   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Declines in the fair value of the investment portfolio are believed by management to be temporary in nature. When evaluating an investment for other-than-temporary impairment management considers among other things, the length of time and the extent to which the fair value has been in a loss position, the financial condition of the issuer and the intent and the ability of the Company to hold the investment until the loss position is recovered.

Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of quality but that the losses are temporary in nature. At December 31, 2011, the Company did not intend to sell and was not likely to be required to sell the available for sale securities that were in a loss position prior to full recovery.

 

52


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, 2011:

 

     Amortized
Cost
     Estimated
Fair Value
 
     (dollars in thousands)  

Due within one year

   $ 2,412       $ 2,454   

Due after one but within five years

     25,559         26,839   

Due after five but within ten years

     31,711         33,354   

Due after ten years

     1,604         1,751   

Mortgage backed securities

     24,016         24,263   
  

 

 

    

 

 

 
   $ 85,302       $ 88,661   
  

 

 

    

 

 

 

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

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

 

     2011      2010  
     (dollars in thousands)  

Balance, beginning of the period

   $ —         $ 1,807   

Impairment losses recognized during the year

     —           —     

Realized losses from sales

     —           (1,807
  

 

 

    

 

 

 

Balance, end of year

   $ —         $ —     
  

 

 

    

 

 

 

Note 3 - Loans Held for Investment

The composition of net loans held for investment by class as of December 31, 2011 and 2010 is as follows:

 

     2011     2010  
     (dollars in thousands)  

Commercial

    

Commercial

   $ 45,907      $ 51,679   

Real estate - commercial

     114,944        105,123   

Other real estate construction loans

     31,601        52,270   

Noncommercial

    

Real estate 1 - 4 family construction

     5,543        4,332   

Real estate - residential

     101,847        103,781   

Home equity

     51,413        52,034   

Consumer loans

     14,710        17,721   

Other loans

     602        739   
  

 

 

   

 

 

 
     366,567        387,679   

Less:

    

Allowance for loan losses

     (6,815     (9,067

Deferred loan (fees) costs, net

     108        90   
  

 

 

   

 

 

 

Loans held for investment, net

   $ 359,860      $ 378,702   
  

 

 

   

 

 

 

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

 

53


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 3 - Loans Held for Investment (Continued)

 

represent 41.81% of total loans. Additionally, there is concentration in commercial loans secured primarily by real estate, shopping center locations, commercial land development, commercial buildings and equipment that comprise 31.36% 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 $33.1 million and $43.3 million at December 31, 2011 and 2010, respectively. The nonaccrual status of these loans had the effect of reducing net income by $571,722 in 2011 and $852,599 in 2010. Of the $33.1 million in impaired loans at December 31, 2011, $18.9 million were in the commercial segment and carried allowances totaling $1.1 million while $14.2 million were in the noncommercial segment and carried allowances totaling $1.5 million. The commercial segment had $14.9 million evaluated and required no specific allowance while the noncommercial segment had $8.5 million evaluated and required no specific allowance. 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. There were no loans 90 past due and still accruing at December 31, 2011 and $407,223 at December 31, 2010.

Restructured loans at December 31, 2011 totaled $6.0 million of which all $6.0 million are included in the impaired loan total. The carrying value of foreclosed properties held as other real estate was $10.3 million and $2.0 million at December 31, 2011 and 2010, 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, 2011, 2010 and 2009 are presented below:

 

     2011     2010     2009  
     (dollars in thousands)  

Balance, beginning of year

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

Charge-offs

     (5,836     (1,189     (871

Recoveries

     133        44        54   

Other

     (5     17        —     

Provision charged against income

     3,456        4,919        1,732   
  

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ 6,815      $ 9,067      $ 5,276   
  

 

 

   

 

 

   

 

 

 

 

54


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 4 - Allowance for Loan Losses (Continued)

 

The following tables is the breakout of allowance for loss by loan class at December 31, 2011 and 2010:

December 31, 2011

 

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

Commercial

   $ 966       $ 493      $ —        $ (336   $ 4       $ 1,127   

Real estate - commercial

     2,240         335        —          (1,123     7         1,459   

Other real estate construction

     2,157         1,119        —          (2,958     —           318   

Real estate construction

     33         215        —          (15     6         239   

Real estate - residential

     1,658         697        —          (383     11         1,983   

Home equity

     971         596        —          (631     5         941   

Consumer loan

     984         (27     —          (390     100         667   

Other loans

     58         28        (5     —          —           81   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 9,067       $ 3,456      $ (5   $ (5,836   $ 133       $ 6,815   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

For the period ending December 31, 2009, the allowance for loan losses totaled $1.205M in the “other real estate construction” category. Approximately 62% of the amount reserved was allotted to one substandard relationship. During the course of 2010, additional provisions were reserved for this relationship as real estate values continued to face downward pressure. In addition, another large relationship was classified as impaired and reserves were allocated for a potential shortfall based on updated appraised value. For the period ending December 31, 2010, these two relationships accounted for 79% of the amount reserved in the allowance for loan losses for the “other real estate construction” category.

In April 2011, the Company moved one of the relationships to foreclosed real estate, and recorded a chargeoff to the allowance in the amount of $1.18M. This charge reduced the overall size of the allowance by approximately 36%. Subsequently, the second relationship was moved to foreclosed real estate, resulting in a further decrease in the allowance. These two relationships represent $2.562M, or 87% of the total amount that was charged off in the “other real estate construction” category for the year ending December 31, 2011. Both of these relationships were external participations on out-of-market properties. These two relationships constituted the largest portion of the Company’s external participations in this loan category, and as a result, management feels it has substantially reduced the overall risk of the portfolio by recognizing a charge to the allowance and moving the properties to foreclosed real estate. The Company also continues to reduce exposure to the “other real estate construction” category, and saw a 40% decline in the overall size of the portfolio during the year.

 

55


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 4 - Allowance for Loan Losses (Continued)

 

The following tables shows period-end loans net of charge offs and reserve balances by loan class both individually and collectively evaluated for impairment at December 31, 2011 and 2010:

December 31, 2011

 

     Individually Evaluated      Collectively Evaluated      Total  
     Reserve      Loans      Reserve      Loans      Reserve      Loans  
            (dollars in thousands)                

Commercial

   $ 578       $ 1,980       $ 549       $ 43,927       $ 1,127       $ 45,907   

Real estate - commercial

     452         12,888         1,007         102,056         1,459         114,944   

Other real estate construction

     107         4,014         211         27,587         318         31,601   

Real estate construction

     202         1,095         37         4,448         239         5,543   

Real estate - residential

     1,001         11,877         982         89,970         1,983         101,847   

Home equity

     124         993         817         50,420         941         51,413   

Consumer loan

     119         242         548         14,468         667         14,710   

Other loans

     —           —           81         602         81         602   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,583       $ 33,089       $ 4,232       $ 333,478       $ 6,815       $ 366,567   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

 

     Individually Evaluated      Collectively Evaluated      Total  
     Reserve      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 tables summarizes the past due information of the loan portfolio by class:

December 31, 2011

 

     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

   $ 212       $ 329       $ 541       $ 45,366       $ 45,907       $ —     

Real estate - commercial

     2,396         2,742         5,138         109,806         114,944         —     

Other real estate construction

     358         2,084         2,442         29,159         31,601         —     

Real estate construction

     —           —           —           5,543         5,543         —     

Real estate - residential

     2,341         2,441         4,782         97,065         101,847         —     

Home equity

     298         255         553         50,860         51,413         —     

Consumer loan

     208         11         219         14,491         14,710         —     

Other loans

     —           —           —           602         602         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,813       $ 7,862       $ 13,675       $ 352,892       $ 366,567       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

56


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 4 - Allowance for Loan Losses (Continued)

 

December 31, 2010

 

     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.

The composition of nonaccrual loans by class as of December 31, 2011 and 2010 is as follows:

 

     2011      2010  
     (dollars in thousands)  

Commercial

   $ 329       $ 501   

Real estate - commercial

     2,742         8,702   

Other real estate construction

     2,084         7,975   

Real estate 1 - 4 family construction

     —           500   

Real estate - residential

     2,441         1,940   

Home equity

     255         75   

Consumer loans

     11         36   

Other loans

     —           —     
  

 

 

    

 

 

 
   $ 7,862       $ 19,729   
  

 

 

    

 

 

 

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

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

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

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

 

57


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 4 - Allowance for Loan Losses (Continued)

 

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.

The tables below summarize risk grades of the loan portfolio by class as of December 31, 2011 and 2010:

December 31, 2011

 

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

Commercial

   $ 42,892       $ 1,670       $ 1,345       $ —         $ 45,907   

Real estate - commercial

     95,699         7,971         11,274         —           114,944   

Other real estate construction

     26,256         745         4,600         —           31,601   

Real estate 1 - 4 family construction

     5,538         5         —           —           5,543   

Real estate - residential

     89,209         4,269         8,369         —           101,847   

Home equity

     49,743         861         809         —           51,413   

Consumer loans

     13,970         332         408         —           14,710   

Other loans

     602         —           —           —           602   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 323,909       $ 15,853       $ 26,805       $ —         $ 366,567   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

 

     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. During 2012 nonperforming loans decreased from $19.7 million at December 31, 2010 to $7.9 million at December 31, 2011, a decrease of $11.8 million. The major contributor to this decrease was a increase foreclosures and the transfer into other real estate owned of $8.2 million. The Company also had a $1.6 million loan relationship that was current and performing that had slipped into nonaccrual during 2010. This relationship was transferred back out of nonaccrual during 2011 after a proven payment history was reestablished and has remained current since that time. The following tables show the breakdown between performing and nonperforming loans by class as of December 31, 2011 and 2010:

 

58


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 4 - Allowance for Loan Losses (Continued)

 

December 31, 2011

 

     Performing      Non-
Performing
     Total  
     (dollars in thousands)  

Commercial

   $ 45,578       $ 329       $ 45,907   

Real estate - commercial

     112,202         2,742         114,944   

Other real estate construction

     29,517         2,084         31,601   

Real estate 1 - 4 family construction

     5,543         —           5,543   

Real estate - residential

     99,406         2,441         101,847   

Home equity

     51,158         255         51,413   

Consumer loans

     14,699         11         14,710   

Other loans

     602         —           602   
  

 

 

    

 

 

    

 

 

 

Total

   $ 358,705       $ 7,862       $ 366,567   
  

 

 

    

 

 

    

 

 

 

December 31, 2010

 

     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 tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class as of December 31, 2011 and 2010 (unpaid principal balance was grossed up for chargeoffs):

December 31, 2011

 

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

Commercial

   $ 2,099       $ 889       $ 1,091       $ 578       $ 1,525       $ 93   

Real estate - commercial

     14,951         11,365         1,523         452         16,520         716   

Other real estate construction

     4,016         2,644         1,370         107         7,746         236   

Real estate 1 - 4 family construction

     1,095         501         594         202         1,249         53   

Real estate - residential

     11,877         7,231         4,646         1,001         10,137         616   

Home equity

     993         753         240         124         1,194         37   

Consumer loans

     242         49         193         119         280         16   

Other loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 35,273       $ 23,432       $ 9,657       $ 2,583       $ 38,651       $ 1,767   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

59


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 4 - Allowance for Loan Losses (Continued)

 

December 31, 2010

 

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

Commercial

   $ 1,439       $ 918       $ 521       $ 399       $ 1,485       $ 68   

Real estate - commercial

     21,985         16,088         4,233         1,384         13,279         1,129   

Other real estate construction

     10,357         2,585         7,770         1,818         9,380         609   

Real estate 1 - 4 family construction

     950         950         —           —           1,100         46   

Real estate - residential

     8,884         5,118         3,766         762         7,257         461   

Home equity

     1,066         677         388         136         821         40   

Consumer loans

     241         23         218         132         367         16   

Other loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 44,922       $ 26,359       $ 16,896       $ 4,631       $ 33,689       $ 2,369   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 5 - Troubled Debts Restructures

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

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

 

60


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 5 - Troubled Debts Restructures (Continued)

 

For the twelve months ended December 31, 2011, the following table presents a breakdown of the types of concessions made by loan class:

 

     Twelve months ended December 31, 2011  
     Number
of Contracts
     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 
            (dollars in thousands)         

Below market interest rate:

        

Commercial

     —         $ —         $ —     

Real estate - commercial

     —           —           —     

Other real estate construction

     —           —           —     

Real estate 1 - 4 family construction

     —           —           —     

Real estate - residential

     1         210         208   

Home equity

     —           —           —     

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     1       $ 210       $ 208   
  

 

 

    

 

 

    

 

 

 

Other:

        

Commercial

     1       $ 43       $ 34   

Real estate - commercial

     1         97         96   

Other real estate construction

     —           —           —     

Real estate 1 - 4 family construction

     —           —           —     

Real estate - residential

     10         1,223         1,203   

Home equity

     —           —           —     

Consumer loans

     4         113         93   

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     16       $ 1,476       $ 1,426   
  

 

 

    

 

 

    

 

 

 

Total

     17       $ 1,686       $ 1,634   
  

 

 

    

 

 

    

 

 

 

 

61


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 5 - Troubled Debts Restructures (Continued)

 

The following table presents loans that were modified as troubled debt restructurings within the previous twelve months and for which there was a payment default during the twelve months ended December 31, 2011:

 

     Twelve months ended
December 31, 2011
 
     Number
of Loans
     Recorded
Investment
 
     (dollars in thousands)  

Below market interest rate:

     

Commercial

     —         $ —     

Real estate - commercial

     —           —     

Other real estate construction

     —           —     

Real estate 1 - 4 family construction

     —           —     

Real estate - residential

     1         208   

Home Equity loans

     —           —     

Consumer loans

     —           —     

Other loans

     —           —     
  

 

 

    

 

 

 
     1       $ 208   
  

 

 

    

 

 

 

Other:

     

Commercial

     —         $ —     

Real estate - commercial

     1         34   

Other real estate construction

     —           —     

Real estate 1 - 4 family construction

     —           —     

Real estate - residential

     4         627   

Home Equity loans

     —           —     

Consumer loans

     3         76   

Other loans

     —           —     
  

 

 

    

 

 

 
     8       $ 737   
  

 

 

    

 

 

 

Total

     9       $ 945   
  

 

 

    

 

 

 

A default on a troubled debt restructure is defined as being past due 90 days or being out of compliance with the modification agreement. As mentioned, the Company considers TDRs to be impaired loans.

The following table presents the successes and failures of the types of modifications within the previous twelve months as of December 31, 2011:

 

     Paid In Full      Paying as restructured      Converted to nonaccrual      Foreclosure/ Default  
     Number of
Loans
     Recorded
Investments
     Number of
Loans
     Recorded
Investments
     Number of
Loans
     Recorded
Investments
     Number of
Loans
     Recorded
Investments
 
     (dollars in thousands)  

Below market interest rate

     —         $ —           1       $ 208         —         $ —           —         $ —     

Other Loans

     —           —           14         1,176         2         250         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           15       $ 1,384         2       $ 250         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

62


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 6 - Mortgage 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 $346 million and $327 million at December 31, 2011 and 2010, respectively. The carrying value of capitalized servicing rights, net of valuation allowances, is included in other assets. A summary of mortgage servicing rights follows:

 

     2011     2010     2009  
     (dollars in thousands)  

Beginning of year mortgage servicing rights:

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

Amounts capitalized

     679        1,113        1,465   

Amortization

     (671     (869     (868

Impairment

     —          —          —     
  

 

 

   

 

 

   

 

 

 

End of year

   $ 2,142      $ 2,134      $ 1,890   
  

 

 

   

 

 

   

 

 

 

Amortization expense is estimated as follows:

 

Year ending December 31,  
(dollars in thousands)  
2012   $ 504   
2013     436   
2014     369   
2015     301   
2016     233   
Thereafter     299   
 

 

 

 
Total   $ 2,142   
 

 

 

 

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

The fair value of mortgage servicing rights was $2.5 million at both December 31, 2011 and 2010. The key assumptions used to value mortgage servicing rights as of December 31, 2011 were as follows; weighted average remaining life 267 months, weighted average discount rate 9.0%, weighted average coupon 4.71% and weighted average prepayment speed 307%.

Note 7 - Premises and Equipment

The major classes of premises and equipment and the total accumulated depreciation at December 31, 2011 and 2010 are listed below:

 

     2011      2010  
     (dollars in thousands)  

Land

   $ 4,094       $ 4,081   

Building and improvements

     10,856         11,205   

Furniture and equipment

     7,254         6,128   
  

 

 

    

 

 

 

Total fixed assets

     22,204         21,414   

Less accumulated depreciation

     7,128         6,860   
  

 

 

    

 

 

 

Net fixed assets

   $ 15,076       $ 14,554   
  

 

 

    

 

 

 

 

63


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

 

Note 8 - Leases

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, 2011 are as follows:

 

Year ending December 31,  
(dollars in thousands)  
2012   $ 60   
2013     60   
2014     60   
2015     60   
2016     60   
Thereafter     40   
 

 

 

 
Total   $ 340   
 

 

 

 

Total rental expense related to the operating leases was $60,450, $85,538, and $106,350 for the years ended December 31, 2011, 2010 and 2009, respectively, and is included in occupancy expense.

Note 9 - Deposits

The composition of deposits at December 31, 2011 and 2010 is as follows:

 

     2011     2010  
     Amount      Percentage
of Total
    Amount      Percentage
of Total
 
     (dollars in thousands)  

Demand deposits

   $ 62,339         15   $ 54,837         13

Interest checking and money market

     185,539         43     187,493         43

Savings

     39,273         9     37,624         8

Time deposits $100,000 and over

     58,274         13     59,431         14

Other time deposits

     85,913         20     94,648         22
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 431,338         100   $ 434,033         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

64


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 9 - Deposits (Continued)

 

The maturities of fixed-rate time deposits at December 31, 2011 are reflected in the table below:

 

Year ending December 31,

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

2012

   $ 28,346       $ 41,695   

2013

     11,814         19,274   

2014

     2,406         8,176   

2015

     4,885         6,870   

2016

     10,823         9,898   

Thereafter

     —           —     
  

 

 

    

 

 

 

Total

   $ 58,274       $ 85,913   
  

 

 

    

 

 

 

Note 10 - Short-Term Borrowed Funds

The following tables set forth certain information regarding the amounts, year-end weighted average rates, average balances, weighted average rate, and maximum month-end balances for short-term borrowed funds, at and during 2011 and 2010:

 

     2011     2010  
     Amount      Rate     Amount      Rate  
     (dollars in thousands)  

At year-end

          

Master notes and other short term borrowing

   $ 7,732         0.94   $ 10,423         0.94

Notes payable

     59         3.80     59         3.82

Short-term advances from FHLB

     13,000         2.04     10,000         4.42
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 20,791         1.70   $ 20,482         2.64
  

 

 

    

 

 

   

 

 

    

 

 

 
     2011     2010  
     Amount      Rate     Amount      Rate  
     (dollars in thousands)  

Average for the year

          

Federal funds purchased

   $ 4         0.74   $ 7         1.17

Master notes and other short term borrowing

     9,556         1.13     11,174         0.95

Notes payable

     59         3.82     58         3.76

Short-term advances from FHLB

     14,629         1.78     15,272         3.83
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 24,248         1.46   $ 26,511         2.62
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     2011      2010  
     (dollars in thousands)  

Maximum month-end balance

     

Federal funds purchased

   $ —         $ 300   

Master notes and other short term borrowing

     11,110         13,454   

Notes payable

     59         58   

Short-term advances from FHLB

     20,450         23,920   

 

65


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 10 - Short-Term Borrowed Funds (Continued)

 

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

The subsidiary banks have combined available lines of credit for federal funds and Federal Reserve discount window availability in the amount of $43.9 million at December 31, 2011.

Note 11 - Long-Term Debt

The Company has a line of credit with the Federal Home Loan Bank secured by qualifying first lien and second mortgage loans, commercial real estate loans and investment securities with eligible collateral value of $64.6 million with remaining availability of $25.9 million at December 31, 2011. The long-term advances under this line amounted to $14.0 million and $24.0 million at December 31, 2011 and 2010, respectively. Interest rates ranged from 0.44% to 4.08% in 2011 and from 1.15% to 4.46% in 2010. 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 $11.7 million at December 31, 2011.

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 were redeemed on March 31, 2011 and replaced with a new issue for subordinated debt securities discussed below.

During the second and third quarters of 2010, the Company began a private placement of 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 December 31, 2018 and may be redeemed by the Company after December 31, 2013. The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.75%. 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 $11.1 million that was outstanding at December 31, 2011.

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 $65,621 at December 31, 2011 down from $74,456 at December 31, 2010.

 

66


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

Note 11 - Long-Term Debt (Continued)

 

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 $100,000 and $150,000 at December 31, 2011 and 2010 respectively.

As of December 31, 2011, the scheduled maturities of these advances and notes payable are as follows:

 

Year ending December 31,  
(dollars in thousands)  
2013   $ 12,560   
2014     1,510   
2015     11   
2016     12   
2017     13   
Thereafter     11,127   
 

 

 

 
Total   $ 25,233   
 

 

 

 

Note 12 - Income Tax Matters

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

 

     2011     2010     2009  
     (dollars in thousands)  

Current tax expense (benefit):

      

Federal

   $ (838   $ 1,021      $ 428   

State

     34        221        146   
  

 

 

   

 

 

   

 

 

 

Total

     (804     1,242        574   
  

 

 

   

 

 

   

 

 

 

Deferred tax expense (benefit):

      

Federal

     890        (891     (620

State

     110        (200     (117