EX-99.1 2 d439974dex991.htm QUARTERLY REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED SEPTEMBER 30, 2012 Quarterly report to shareholders for the period ended September 30, 2012

Exhibit 99.1



Third Quarter Report

September 30, 2012

November 14, 2012

Dear Shareholder:

Economically we are in uncharted waters. The United States has yet to propose a bipartisan strategy to deal with prolonged budget deficits. The looming “Fiscal Cliff” hangs without a solution. The world economy, and in particular Europe, poses unknown risks to our economy and financial markets. Our government and business leaders are in search of certainty in an environment of change. To paraphrase an often-quoted blessing/curse, “May you live in interesting times;” these times are “interesting.” In this muddle-through economy, our challenge is to understand and manage the risks we face.

There are, however, more promising trends beginning to emerge in our economy. Credit quality in our three banks, and we expect within the banking community in North Carolina, is beginning to show signs of improvement even though new loan demand remains far from normal and problem loans continue, albeit at a lessening pace. Delinquencies, foreclosures, and bankruptcies are down and housing prices appear to be stabilizing locally and starting to rise in some parts of the country. Last month, national unemployment numbers broke through the 8% level. While this has not yet happened in North Carolina, or in any of the markets we serve, we believe the national trend suggests our seeing some improvement in Charlotte and the surrounding communities.

In the short term, banks in North Carolina and elsewhere will continue to experience some pressure on earnings due to asset quality hangover and margin compression. For example, the banking industry as a whole continues to experience elevated charge-offs and high default-related expenses as banks rebound from the nation’s asset deflation and debt deleveraging. Many major banks are reporting year-over-year earnings improvements; however, this is more the result of taken back into earnings reduced loan loss reserves than income from continuing operations.

Your Company continues to outperform its peers in earnings and asset quality measures. In the 3rd quarter, your Company reported a 22% improvement in Earnings Before Taxes over the same quarter last year - $371,000 versus $304,000 in 2011. Year-to-date Net Income After Taxes increased 16% to $1.4 million versus $1.2 million in 2011. Mortgage lending achieved a significant improvement in earnings, which was up $695,000 quarter-over-quarter (a 171% increase.) Year-over-year, mortgage income increased 130% from $1.1 million to $2.6 million. We used part of this improvement to offset foreclosed property expenses, which were up approximately $192,000 in the 3rd quarter from the prior year, and up $877,000 in 2012 versus 2011. This increase in foreclosed property expenses allowed the company to reduce its inventory of foreclosed real estate from $10.3 million to $8.9 million over the past 9 months, a 13% decrease.

We are also actively engaged in examining our work processes to improve efficiencies from operations and deployment of personnel. Earnings from ongoing operations (which is defined as excluding bond sale gains/losses and other extraordinary income or expense not in the normal course of business) and after adjusting for credit quality expenses are over $2 million so far in 2012, an improvement of $1.4 million (or 43%) over the same period last year. These ongoing operational earnings have not all yet been driven to the bottom line due to asset quality issues but, as those costs abate, we expect commensurate improvement in profits. The “wild card” for all banks in earnings is asset quality. Opportunities to dispose of substantial parts of foreclosed assets and the associated holding costs they require may involve significant discounts to current appraised values. The Company may take advantage of these opportunities on a case-by-case basis if we deem the net result sufficiently favorable long-term, even though such actions could have a material impact on a given quarter’s earnings.

From time to time, we hear from current shareholders asking when the Company will start paying a dividend on its common stock. For most of Uwharrie Capital Corp’s existence, we experienced annual growth rates of eight to ten percent. To support the growth of assets and a larger earnings base, we retained your earnings and grew the net worth of your Company. Unfortunately, the present environment of uncertainty has destroyed the value of all bank stocks thus not reflecting their real values. Presently, growth has slowed due to the global deflationary cycle and consequently, we are entering a period in history with higher levels of risk. It is new risk levels and a period of increasing uncertainty as previously discussed that is now requiring higher levels of capital; not just for our company but for the entire banking industry. In this environment, Regulators, Management and the Board of Directors believe it would be imprudent to risk lowering capital levels through dividends on common stock.

It was in light of a riskier world that our Commissioner of Banks in North Carolina called together the leadership of all state chartered banks in October of 2008. At the meeting, he informed his banks that if they qualified for TARP (the Treasury’s “Troubled Asset Relief Program”) he insisted the banks take it, as no one could know how bad the economy might get. Accordingly, we did as requested by the Commissioner, took $10.5 million of new capital from the Treasury, and issued preferred stock to them in return. Subsequently, our capital levels then defined us as “well capitalized” from a Regulatory perspective, and remain so today, even without TARP. However, today’s environment – as evidenced by evolving Regulatory attitudes on the sufficiency of capital cushions and with the uncertainty ahead – is not an appropriate time to be selling new common stock and potentially diluting our shareholders. We believe that as the industry recovers from the recession, deflationary cycle, and expected consolidation there will be opportunity for new growth and prosperity that will improve stock prices in the financial sector.

Until that time, we feel it best to maintain our capital by keeping the level of preferred stock that we issued as a part of our capital base. Accordingly, the subsidiary banks of Uwharrie Capital have come to market this quarter with a new preferred stock issue. The purpose of this issue is three-fold: 1) refinance existing preferred stock to take advantage of the current interest-rate environment which will lower the cost of our existing preferred stock, 2) the proceeds from this new preferred will be used to retire the TARP investment in the Company by the U.S. Treasury, and 3) allow the Company to continue to leverage the preferred capital to improve the return on equity to the common stockholders.

Once through this deflationary cycle, we will return to a period of greater certainty and less risk, possibly requiring less capital and hopefully a more favorable environment for bank stocks; a better time to sell new common stock should it be needed.

If we are going to be paying dividends on preferred stock we would prefer to pay them to you and your neighbors. Since inception, we have always been about keeping wealth working in our communities. The new preferred stock is not dilutive to our current common shareholders. Because we are refinancing existing preferred, we are not adding additional dividend burdens on the Company on the refinanced portion – and in fact – are lowering it, as the existing preferred dividend will increase substantially in 2013 if not refinanced or retired. An important benefit of refinancing the Treasury’s preferred stock is that instead of the dividend going out of our communities to Washington, it will directly benefit local market residents, creating our own economic “stimulus” if you will. Existing Uwharrie Capital Corp customers may redeem all or part of their bank CD’s without penalties to invest in the new preferred. We believe this is very beneficial to our customers looking for fixed income returns not available from CD’s, Money Market or Savings accounts.

Each bank is issuing its own preferred stock at a 5.3% annual dividend rate, which is non-cumulative. The preferred stock has no voting rights. It is also not callable (redeemable) by the banks for at least 5 years. The new preferred price is $1,000 per share with a 5 share minimum purchase ($5,000). It is eligible for IRA investments. The preferred stock, like other investments, is not FDIC insured. If you are interested in purchasing preferred stock, please contact one of our bank presidents (Bill Lawhon, Bank of Stanly; Pat Horton, Cabarrus Bank & Trust; or Dana Maness, Anson Bank & Trust).

The economy is steadying slowly, and Congress may be developing the political courage to tackle bipartisan compromises necessary to address this country’s economic realities. However, the truth is that in the near future, many community banks in this country will succumb under the regulatory burdens and industry realities all financial institutions must deal with – either from a lack of will, management vigor,

internal capabilities, insufficient capital, or from some combination of each. While this is a tragedy for their communities, it is an opportunity for those that can and will survive.

Your Company remains well capitalized, with improving earnings and asset quality. We have the tools, systems and people to compete with any financial institution anywhere on core products and services. This is not bragging; it is a fact. We have endured the effects of the recession for over 4 years and it has been brutal but there is light ahead. We must remain dedicated to our Values and our Mission to support economic literacy and growth in our communities. If we do our job well, we will continue to grow, prosper and provide unparalleled value in our products and services to those we serve.

Thank you for your support. It has never been more appreciated or encouraging to those who work on your behalf.



/s/ Roger L. Dick   /s/ Brendan P. Duffey
Roger L. Dick   Brendan P. Duffey
President and Chief Executive Officer   Chief Operating Officer

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets


(Amounts in thousands except share and per share data)

   September 30,
    September 30,



Cash and due from banks

   $ 6,766      $ 7,455   

Interest-earning deposits with banks

     19,431        9,524   

Investment securities available for sale

     130,274        91,793   

Loans held for sale

     1,026        1,787   

Loans held for investment

     339,343        380,828   

Less: Allowance for loan losses

     6,883        7,666   







Net loans held for investment

     332,460        373,162   







Interest receivable

     1,935        1,918   

Premises and equipment, net

     14,968        15,073   

Restricted stock

     2,265        3,543   

Bank-owned life insurance

     6,354        6,119   

Other real estate owned

     8,947        8,898   


     987        987   

Other assets

     9,490        10,064   







Total assets

   $ 534,903      $ 530,323   











Demand, noninterest-bearing

   $ 66,630      $ 58,027   

Interest checking and money market accounts

     203,098        175,545   

Savings accounts

     43,392        39,765   

Time deposits, $100,000 and over

     55,746        58,994   

Other time deposits

     81,534        91,838   







Total deposits

     450,400        424,169   







Interest payable

     277        307   

Short-term borrowed funds

     20,635        30,080   

Long-term debt

     12,676        26,236   

Other liabilities

     4,509        3,634   







Total liabilities

     488,497        484,426   







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

     (125     (225

Common stock, $1.25 par value: 20,000,000 shares authorized; issued and outstanding or in process of issuance 7,522,902 and 7,593,929 shares, respectively. Book value per share $4.79 in 2012 and $4.69 in 2011.

     9,404        9,492   

Additional paid-in capital

     13,828        14,038   

Unearned ESOP compensation

     (883     (726

Undivided profits

     11,258        10,813   

Accumulated other comprehensive income (loss)

     2,424        2,005   







Total shareholders’ equity

     46,406        45,897   







Total liabilities and shareholders’ equity

   $ 534,903      $ 530,323   







Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income


     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  

(Amounts in thousands except share and per share data)

   2012     2011     2012     2011  

Interest Income


Interest and fees on loans

   $ 4,809      $ 5,499      $ 14,957      $ 16,258   

Interest on investment securities

     595        538        1,455        1,669   

Interest-earning deposits with banks and federal funds sold

     29        21        101        39   













Total interest income

     5,433        6,058        16,513        17,966   













Interest Expense


Interest paid on deposits

     623        844        1,948        2,618   

Interest on borrowed funds

     278        348        874        1,078   













Total interest expense

     901        1,192        2,822        3,696   













Net Interest Income

     4,532        4,866        13,691        14,270   

Provision for loan losses

     391        483        1,094        2,012   













Net interest income after provision for loan losses

     4,141        4,383        12,597        12,258   













Noninterest Income


Service charges on deposit accounts

     450        476        1,318        1,369   

Other service fees and commissions

     801        885        2,392        2,651   

Gain (loss) on sale of securities

     —          —          16        933   

Gain on sale of other assets

     (80     (51     216        (56

Income from mortgage loan sales

     1,102        407        2,578        1,121   

Other income

     107        82        345        287   













Total noninterest income

     2,380        1,799        6,865        6,305   













Noninterest Expense


Salaries and employee benefits

     3,215        3,071        9,478        9,166   

Occupancy expense

     293        305        863        888   

Equipment expense

     185        179        556        579   

Data processing

     204        213        638        630   

Other operating expenses

     2,253        2,110        6,003        5,720   













Total noninterest expense

     6,150        5,878        17,538        16,983   













Income before income taxes

     371        304        1,924        1,580   

Provision for income taxes

     109        49        561        407   













Net Income

   $ 262      $ 255      $ 1,363      $ 1,173   













Net Income

   $ 262      $ 255      $ 1,363      $ 1,173   

Dividends - preferred stock

     (161     (161     (484     (484













Net income available to common shareholders

   $ 101      $ 94      $ 879      $ 689   













Net Income Per Common Share



   $ 0.01      $ 0.01      $ 0.12      $ 0.09   

Assuming dilution

   $ 0.01      $ 0.01      $ 0.12      $ 0.09   

Weighted Average Common Shares Outstanding



     7,354,468        7,464,970        7,397,130        7,472,411   

Assuming dilution

     7,354,468        7,464,970        7,397,130        7,472,411