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UWHARRIE CAPITAL CORP - Quarter Report: 2007 September (Form 10-Q)

Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

COMMISSION FILE NUMBER 000-22062

 


UWHARRIE CAPITAL CORP

(Exact name of registrant as specified in its charter)

 


 

NORTH CAROLINA   56-1814206

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

132 NORTH FIRST STREET ALBEMARLE, NORTH CAROLINA   28001
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone number, including area code: (704) 983-6181

N/A

(Former name, former address and former fiscal year, if changed since last report)

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date: 7,255,822 shares of common stock outstanding as of October 31, 2007.

 



Table of Contents

Table of Contents

 

          Page No.
Part I.    FINANCIAL INFORMATION   
Item 1 -    Financial Statements (Unaudited)   
   Consolidated Balance Sheets September 30, 2007 and December 31, 2006    3
   Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006    4
   Consolidated Statement of Changes in Shareholders’ Equity Nine Months Ended September 30, 2007    5
   Consolidated Statements of Cash Flows Nine Months Ended September 30, 2007 and 2006    6
   Notes to Consolidated Financial Statements    7
Item 2 -    Management’s Discussion and Analysis of Financial Condition and Results of Operations    10
Item 3 -    Quantitative and Qualitative Disclosures about Market Risk    17
Item 4T -    Controls and Procedures    18
Part II.    OTHER INFORMATION   
Item 1 -    Legal Proceedings    18
Item 1A -    Risk Factors    18
Item 2 -    Unregistered Sales of Equity Securities and Use of Proceeds    19
Item 3 -    Defaults Upon Senior Securities    20
Item 4 -    Submission of Matters to a Vote of Security Holders    20
Item 5 -    Other Information    20
Item 6 -    Exhibits    20

 

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Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets


Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements

 

    

September 30,

2007

(Unaudited)

   

December 31,

2006*

 
     (dollars in thousands)  

ASSETS

    

Cash and due from banks

   $ 12,095     $ 15,088  

Interest-earning deposits with banks

     2,647       2,147  

Federal funds sold

     620       17,525  

Securities available for sale, at fair value

     43,828       37,150  

Loans:

    

Loans held for sale

     4,194       3,814  

Loans held for investment

     309,817       288,135  

Less allowance for loan losses

     (3,394 )     (3,171 )
                

Net loans

     310,617       288,778  
                

Premises and equipment, net

     8,733       8,618  

Interest receivable

     2,110       1,775  

Federal Home Loan Bank stock

     1,792       1,980  

Bank owned life insurance

     5,256       5,133  

Goodwill

     987       987  

Other assets

     4,283       4,080  
                

Total assets

   $ 392,968     $ 383,261  
                

LIABILITIES

    

Deposits:

    

Demand noninterest-bearing

   $ 45,737     $ 48,149  

Interest checking and money market accounts

     107,593       101,470  

Savings deposits

     26,172       27,833  

Time deposits, $100,000 and over

     44,454       48,450  

Other time deposits

     93,594       83,698  
                

Total deposits

     317,550       309,600  
                

Short-term borrowed funds

     25,705       13,040  

Long-term debt

     16,692       29,289  

Interest payable

     440       503  

Other liabilities

     1,597       1,196  
                

Total liabilities

     361,984       353,628  
                

Off balance sheet items, commitments and contingencies (Note 5)

    

SHAREHOLDERS’ EQUITY

    

Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and outstanding 7,255,822 and 7,423,550 shares, respectively (1)

     9,070       9,279  

Additional paid-in capital

     12,783       13,541  

Unearned ESOP compensation

     (815 )     (859 )

Undivided profits

     9,651       7,502  

Accumulated other comprehensive income

     295       170  
                

Total shareholders’ equity

     30,984       29,633  
                

Total liabilities and shareholders’ equity

   $ 392,968     $ 383,261  
                

(1) A 3% stock dividend was declared, after the balance sheet date, and actual outstanding shares presented have not been adjusted to reflect this dividend.
(*) Derived from audited consolidated financial statements

See accompanying notes

 

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Operations (Unaudited)


 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

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

Interest Income

         

Loans, including fees

   $ 6,174    $ 5,729     $ 17,693     $ 16,207  

Investment securities

         

US Treasury

     25      25       73       74  

US Government agencies and corporations

     376      213       972       609  

State and political subdivisions

     157      160       477       516  

Other

     38      33       112       104  

Interest-earning deposits with banks and federal funds sold

     76      253       711       351  
                               

Total interest income

     6,846      6,413       20,038       17,861  
                               

Interest Expense

         

Interest checking and money market accounts

     639      662       2,015       1,660  

Savings deposits

     132      176       412       570  

Time deposits, $100,000 and over

     529      628       1,701       1,464  

Other time deposits

     1,052      848       3,051       2,148  

Short-term borrowed funds

     352      221       843       574  

Long-term debt

     260      426       972       1,278  
                               

Total interest expense

     2,964      2,961       8,994       7,694  
                               

Net interest income

     3,882      3,452       11,044       10,167  

Provision for loan losses

     18      54       (120 )     298  
                               

Net interest income after provision for loan losses

     3,864      3,398       11,164       9,869  
                               

Noninterest Income

         

Service charges on deposit accounts

     550      508       1,609       1,477  

Other service fees and commissions

     750      579       2,169       1,712  

Loss on sale of securities

     —        —         (76 )     —    

Gain(loss) on sale fixed assets/other assets

     6      (9 )     26       (26 )

Income from mortgage loan sales

     235      281       678       569  

Other income

     119      78       288       243  
                               

Total noninterest income

     1,660      1,437       4,694       3,975  
                               

Noninterest Expense

         

Salaries and employee benefits

     2,493      2,242       7,414       6,757  

Net occupancy expense

     219      174       645       544  

Equipment expense

     150      162       456       471  

Data processing costs

     188      274       551       680  

Other noninterest expense

     1,364      1,048       3,704       3,306  
                               

Total noninterest expense

     4,414      3,900       12,770       11,758  
                               

Income before income taxes

     1,110      935       3,088       2,086  

Income taxes

     336      282       939       566  
                               

Net income

   $ 774    $ 653     $ 2,149     $ 1,520  
                               

Net income per common share

         

Basic

   $ 0.11    $ 0.09     $ 0.29     $ 0.20  
                               

Diluted

   $ 0.10    $ 0.09     $ 0.29     $ 0.20  
                               

Weighted average common shares outstanding

         

Basic

     7,345,988      7,481,813       7,408,847       7,456,059  

Diluted

     7,479,293      7,594,461       7,518,137       7,569,019  

See accompanying notes

 

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity


 

           Additional     Unearned         

Accumulated

Other

      
     Common Stock     Paid-in     ESOP     Undivided    Comprehensive       
   Shares     Amount     Capital     Compensation     Profits    Income    Total  
   (in thousands, except share data)  

Balance, December 31, 2006

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

Net income

   —         —         —         —         2,149      —        2,149  

Other comprehensive income

   —         —         —         —         —        125      125  

Release of ESOP shares

   —         —         25       44       —        —        69  

Common stock issued pursuant to:

                

Stock options exercised

   12,764       16       20       —         —        —        36  

Tax benefit of stock options exercised -

       —         3       —         —        —        3  

Repurchase of common stock

   (180,492 )     (225 )     (840 )     —         —        —        (1,065 )

Stock based compensation

   —         —         34       —         —        —        34  
                                                    

Balance, September 30, 2007

   7,255,822     $ 9,070     $ 12,783     $ (815 )   $ 9,651    $ 295    $ 30,984  
                                                    

(1) A 3% stock dividend was declared, after the balance sheet date, and actual outstanding shares presented have not been adjusted to reflect this dividend

See accompanying notes

 

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Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)


 

    

Nine Months Ended

September 30,

 
     2007     2006  
     (dollars in thousands)  

Cash flows from operating activities

    

Net income

   $ 2,149     $ 1,520  

Adjustments to reconcile net income to net cash

    

Provided (used) by operating activities:

    

Depreciation

     471       473  

Net amortization of security premiums

     (158 )     (19 )

Provision for loan losses

     (120 )     298  

Stock based compensation

     34       47  

Net realized loss on available for sale securities

     76       —    

Income from mortgage loan sales

     (678 )     (569 )

Proceeds from sales of loans held for sale

     32,652       31,475  

Origination of loans held for sale

     (32,354 )     (29,144 )

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

     (26 )     2  

Increase in cash surrender value of life insurance

     (123 )     (122 )

Loss on sale of foreclosed real estate

     —         24  

Release of ESOP shares

     69       71  

Net change in interest receivable

     (335 )     (258 )

Net change in other assets

     (318 )     (414 )

Net change in interest payable

     (63 )     66  

Net change in other liabilities

     401       9  
                

Net cash provided by operating activities

     1,677       3,459  
                

Cash flows from investing activities

    

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

     9,146       5,620  

Purchase of securities available for sale

     (15,542 )     (7,021 )

Net decrease in Federal Home Loan Bank Stock

     188       92  

Net increase in loans

     (21,399 )     (20,561 )

Proceeds from sales of premises, equipment and other assets

     87       —    

Purchases of premises and equipment

     (586 )     (667 )

Proceeds from sales of foreclosed real estate

     39       205  
                

Net cash used in investing activities

     (28,067 )     (22,332 )
                

Cash flows from financing activities

    

Net increase in deposit accounts

     7,950       30,625  

Net increase in short-term borrowed funds

     12,665       3,863  

Net decrease in long-term debt

     (12,597 )     (2,398 )

Repurchase of common stock

     (1,065 )     (145 )

Proceeds from the exercise of stock options

     36       204  

Tax benefit of stock options exercised

     3       —    
                

Net cash provided by financing activities

     6,992       32,149  
                

Increase (decrease) in cash and cash equivalents

     (19,398 )     13,276  

Cash and cash equivalents, beginning of period

     34,760       21,369  
                

Cash and cash equivalents, end of period

   $ 15,362     $ 34,645  
                

 

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UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Basis of Presentation

The financial statements and accompanying notes are presented on a consolidated basis including Uwharrie Capital Corp (the “Company”) and its subsidiaries, Bank of Stanly (“Stanly”), Anson Bank & Trust Co. (“Anson”), Cabarrus Bank & Trust Company (“Cabarrus”), Strategic Investment Advisors, Inc., (“SIA”), and Uwharrie Mortgage Inc. Stanly consolidates its subsidiaries, the Strategic Alliance Corporation, BOS Agency, Inc. and Gateway Mortgage, Inc., each of which is wholly-owned by Stanly.

The information contained in the consolidated financial statements is unaudited. In the opinion of management, the consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and material adjustments necessary for a fair presentation of results of interim periods, all of which are of a normal recurring nature, have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for an entire year. Management is not aware of economic events, outside influences or changes in concentrations of business that would require additional clarification or disclosure in the consolidated financial statements. Certain prior period amounts have been reclassified to conform to current period classifications. These reclassifications had no effect on net income or shareholders’ equity as previously reported.

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to consolidated financial statements filed as part of the Company’s 2006 annual report on Form 10-K. This quarterly report should be read in conjunction with such annual report.

Note 2 – Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
(in thousands)    2007     2006     2007     2006  

Net income

   $ 774     $ 653     $ 2,149     $ 1,520  
                                

Other comprehensive income (loss)

        

Unrealized holding gains (losses) on available for sale securities

     397       505       126       (99 )

Related tax effect

     (153 )     (195 )     (48 )     38  

Reclassification of loss recognized in net income

     —         —         76       —    

Related tax effect

     —         —         (29 )     —    
                                

Total other comprehensive income (loss)

     244       310       125       (61 )
                                

Comprehensive income

   $ 1,018     $ 963     $ 2,274     $ 1,459  
                                

 

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Note 3 – Per Share Data

On October 30, 2007, the Company’s Board of Directors declared a 3% stock dividend payable on December 7, 2007 to shareholders of record on November 13, 2007. All information presented in the accompanying interim consolidated financial statements regarding earnings per share and weighted average number of shares outstanding has been computed giving effect to this stock dividend.

Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for stock dividends. Diluted net income per common share 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 net income of the Company.

Basic and diluted net income per common share have been computed based upon net income as presented in the accompanying consolidated statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding. The computation of basic and dilutive earnings per share is summarized below:

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2007     2006     2007     2006  

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

   7,492,278     7,643,605     7,555,137     7,617,851  

Effect of ESOP shares

   (146,290 )   (161,792 )   (146,290 )   (161,792 )
                        

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

   7,345,988     7,481,813     7,408,847     7,456,059  

Effect of dilutive stock options

   133,305     112,648     109,290     112,960  
                        

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

   7,479,293     7,594,461     7,518,137     7,569,019  
                        

Note 4 – Loans

 

Loans outstanding at period end:

(in thousands)

  

September 30,

2007

  

December 31,

2006

Commercial

   $ 37,079    $ 36,406

Real estate-construction

     39,817      27,342

Real estate-residential

     133,413      126,248

Real estate-commercial

     85,553      84,744

Consumer loans

     13,863      13,262

Loans held for sale

     4,194      3,814

All other loans

     92      133
             

Total

   $ 314,011    $ 291,949
             

 

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Analysis of the allowance for loan losses:   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
(in thousands)    2007     2006     2007     2006  

Balance at beginning of period

   $ 3,337     $ 4,601     $ 3,171     $ 4,482  

Provision charged to operations

     18       54       (120 )     298  

Charge-offs

     (31 )     (1,467 )     (194 )     (1,651 )

Recoveries

     70       4       537       63  
                                

Net charge-offs

     39       (1,463 )     343       (1,588 )
                                

Balance at end of period

   $ 3,394     $ 3,192     $ 3,394     $ 3,192  
                                

Note 5 – Commitments and Contingencies

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

The banks’ risk of loss with the unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The banks use the same credit policies in making commitments under such instruments as they do for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are unsecured. At September 30, 2007, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

(in thousands)     

Commitments to extend credit

   $ 84,308

Credit card commitments

     8,802

Standby letters of credit

     773
      

Total commitments

   $ 93,883
      

Note 6 – Recent Accounting Pronouncements

The provisions of Statement of Financial Accounting Standards No.156 (“SFAS 156”), Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 10, were effective beginning January 1, 2007. The adoption of the provisions of SFAS No. 156 had no effect on financial position or results of operations.

Statement of Financial Accounting Standards No. 157 (“SFAS 157”), Fair Value Measurements, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impact of the adoption of SFAS No. 157 on the consolidated financial statements.

Statement of Financial Accounting Standards No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities, permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this standard is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported

 

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earnings caused by measuring related assets and liabilities differently without having to apply complete hedge accounting provisions. This statement is effective for fiscal years beginning after November 15, 2007, with early adoption permitted under certain circumstances. The Company has chosen not to adopt the provision of SFAS 159 on an early basis. The Company has evaluated this statement and does not believe it will have a material effect on the Company’s consolidated financial statements.

The Company adopted the Financial Accounting Standards Board’s Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. The adoption of FIN 48 did not have a material effect on our consolidated financial position or results of operations.

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.

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q may contain certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services.

Comparison of Financial Condition at September 30, 2007 and December 31, 2006.

During the nine months ended September 30, 2007, the Company’s total assets increased $9.7 million or 2.5% from $383.3 million to $393.0 million. During the nine months, loans held for investment increased $21.7 million or 7.5%, from $288.1 million at December 31, 2006 to $309.8 million at September 30, 2007. Investment securities increased $6.7 million during the period. These increases, however, were offset by a decrease in cash and cash equivalents of $19.4 million.

Cash and cash equivalents decreased $19.4 million during the nine months ended September 30, 2007. Cash and due from banks declined $3.0 million, while federal funds sold decreased $16.9 million. Interest-earning deposits with banks increased $500 thousand for the period. The growth in the loan portfolio was partially funded by the decrease in federal funds sold.

Investment securities increased $6.7 million or 18.0% for the nine month period. The Company executed a transaction selling $4.0 million in securities realizing a loss of $75 thousand and reinvested the proceeds to improve its yield. The Company also had an additional sale realizing a loss of $1 thousand and purchased $12.0 million in new investments.

As stated, loans held for investment increased $21.7 million to $309.8 million during the period ended September 30, 2007. The Company has experienced positive growth trends in all areas

 

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of its loan portfolio. Real estate construction loans lead the way with a $12.5 million increase during the period. Loans held for sale increased 10.0% or $380 thousand during the period. The growth in our residential lending is being generated from the continued growth in the recreational, high end developments. This growth is expected to remain steady in the foreseeable future. The allowance for loan losses was $3.4 million at September 30, 2007 which represents 1.10% of the loans held for investment portfolio, unchanged from December 31, 2006.

Other changes in our consolidated assets related to premises and equipment, interest receivable, Federal Home Loan Bank stock, bank owned life insurance and other assets. Premises and equipment increased $115 thousand, interest receivable grew $335 thousand, impacted by loan and investment growth, bank owned life insurance increased $123 thousand and other assets increased $203 thousand. These increases were offset by a decrease in Federal Home Loan Bank stock of $188 thousand. Owning Federal Home Loan Bank stock is a requirement for member banks that utilize Federal Home Loan Bank for borrowing funds. The amount of stock owned by each member bank is based primarily on the amount of borrowing outstanding.

Customer deposits, our primary funding source experienced an $8.0 million increase during the nine months ended September 30, 2007, increasing from $309.6 million to $317.6 million Interest checking and money market accounts increased $6.1 million while other time deposits grew $9.9 million. This growth was offset by declines in demand noninterest bearing of $2.4 million, savings deposits of $1.6 million and time deposits over $100 thousand of $4.0 million. The increase in interest checking stemmed from a temporary buildup with a major customer that has since adjusted to it’s normal balance.

Total borrowings increased by $68 thousand during the nine month period ended September 30, 2007. Borrowings consist of both short-term and long-term borrowed funds. The Company utilized both short-term and long-term advances from Federal Home Loan Bank. At September 30, 2007, $23.4 million of the total borrowings of $42.4 million were comprised of Federal Home Loan Bank advances.

The Company had long-term debt of $5.2 million of junior subordinated debentures to Uwharrie Statuary Trust I, issued in 2002, in exchange for the proceeds of the trust preferred securities issued by the trust. The junior subordinated debentures were incurred in long-term debt and were redeemable on September 26, 2007 or afterwards. The annual interest rate was LIBOR plus 3.40%. During the third quarter, the Company made a decision to help improve their interest margin by refinancing the subordinated debt. They did repay the debt, however market rates increased during the process and the replacement of the subordinated debt was placed on hold pending more favorable market conditions. The Company did replace the debt with other shorter term borrowings.

At September 30, 2007, total shareholders’ equity was $31.0 million, an increase of $1.4 milliion from December 31, 2006. Net income for the period was $2.1 million and the Company received $36 thousand from the exercise of stock options. Unrealized gains on investment securities, net of tax, increased $125 thousand. These increases were offset by the repurchase of 180,492 shares of the Company’s common stock at a cost of $1.1 million.

At September 30, 2007, the Company and its subsidiary banks exceeded all applicable regulatory capital requirements.

 

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Comparison of Results of Operations For the Three Months Ended September 30, 2007 and 2006.

Net Income

Uwharrie Capital Corp reported net income of $774 thousand, or $0.11 per basic share, for the three months ended September 30, 2007, as compared to $653 thousand, or $0.09, for the three months ended September 30, 2006, an increase of $121 thousand, or $0.02 per share.

Net Interest Income

The Company’s primary source of income, net interest income, increased $430 thousand or 12.5% for the period ending September 30, 2007, as compared to the same period for 2006. Refer to the nine month discussion on page 13 for further information.

Provision for Loan Losses

The provision for loan losses was $18 thousand and $54 thousand for the three months ended September 30, 2007 and 2006 respectively. There were net loan recoveries of $39 thousand for the three months ended September 30, 2007 as compared with net loan charge-offs of $1.5 million during the same period of 2006. Refer to the Asset Quality discussion on page 15 for further information.

Noninterest Income

Total noninterest income increased $223 thousand, from $1.4 million for the quarter ended September 30, 2006 to $1.7 million for the same period in 2007. Service charges on deposit accounts produced revenues of $550 thousand for the three months ended September 30, 2007, an increase of $42 thousand, or 8.5%. Other service fees and commissions experienced a 29.5% increase for the comparable three month periods. Growth in ATM fees of $24 thousand and investment fees on managed accounts of $117 thousand enhanced this increase. Income from mortgage loan sales decreased $46 thousand from $281 thousand for the quarter ended September 30, 2006 to $235 thousand for the same period in 2007.

Noninterest Expense

Noninterest expense for the quarter ended September 30, 2007 was $4.4 million compared to $3.9 million for the same period of 2006, an increase of $514 thousand. Salaries and employee benefits, the largest component of noninterest expense, increased $251 thousand, from $2.2 million for the quarter ending September 30, 2006 to $2.5 million for the same period in 2007. Additions at the executive and bank support staff levels during the past year coupled with normal salary increases contributed to this increase. Other noninterest expense increased $316 thousand from the comparable three month period. In relation to the aforementioned discussion on the subordinated debt, the Company expensed $126 thousand in remaining unamortized issue costs during third quarter contributing to the increase in other noninterest expense. The table below reflects the composition of other noninterest expenses.

 

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Other noninterest expenses

 

     

Three months ended

September 30,

     2007    2006
     (in thousands)

Professional fees and services

   $ 212    $ 158

Marketing and donations

     136      165

Office supplies, printing and postage

     105      100

Telephone and data lines

     58      55

Electronic banking expenses

     182      150

Software amortization and maintenance

     104      101

Loan collection expense

     36      34

Subordinated debt issue costs

     127      1

Other

     404      284
             

Total

   $ 1,364    $ 1,048
             

Income Tax Expense

The Company had income tax expense of $336 thousand for the three months ended September 30, 2007 resulting in an effective tax rate of 30.3% compared to income tax expense of $282 thousand and an effective rate of 30.2% in the 2006 period. Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities, tax free municipal loans and income earned on bank owned life insurance.

Comparison of Results of Operations For the Nine Months Ended September 30, 2007 and 2006.

Net Income

Uwharrie Capital Corp reported net income of $2.1 million, or $0.29 per basic share, for the nine months ended September 30, 2007, an increase of $629 thousand, or $0.09 per share in comparison to the same period in 2006.

Net Interest Income

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

Net interest income for the nine months ended September 30, 2007 was $11.0 million as compared with $10.2 million during the nine months ending September 30, 2006, resulting in an increase of $877 thousand, or 8.6%. During the nine month ending September 30, 2007 our growth in the volume of interest-earning assets outpaced the nine months growth in interest-bearing liabilities by $694 thousand. The average yield on our interest-earning assets increased 28 basis points to 7.49%, while the average rate we paid for our interest-bearing liabilities increased 27 basis points. These increases resulted in an increase of 1 basis point in our interest rate spread, from 3.63% in 2006 to 3.64% in 2007. Our net interest margin was 4.19% and 4.17% for the comparable periods in 2007 and 2006.

 

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The following table presents average balance sheets and a net interest income analysis for the nine months ended September 30, 2007 and 2006:

Average Balance Sheet and Net Interest Income Analysis

For the Nine Months Ended September 30,

 

     Average Balance    Income/Expenses    Rate/Yield  
(in thousands)    2007    2006    2007    2006    2007     2006  

Interest-earning assets:

                

Loans (1)

   $ 299,894    $ 288,518    $ 17,550    $ 16,055    7.82 %   7.44 %

Nontaxable loans (2)

     3,955      4,240      143      152    7.87 %   7.79 %

Taxable securities

     29,044      24,542      1,165      862    5.36 %   4.70 %

Nontaxable securities (2)

     12,932      11,744      469      441    7.88 %   8.18 %

Other (3)

     18,789      8,925      711      351    5.06 %   5.26 %
                                        

Total interest-earning assets

     364,614      337,969      20,038      17,861    7.49 %   7.21 %

Interest-bearing liabilities:

                

Interest-bearing deposits

     263,537      237,452      7,179      5,842    3.64 %   3.29 %

Short-term borrowings

     27,075      17,012      843      574    4.16 %   4.51 %

Long-term borrowings

     21,671      32,691      972      1,278    6.00 %   5.23 %
                                        

Total interest bearing liabilities

     312,283      287,155      8,994      7,694    3.85 %   3.58 %
                                        

Net interest spread

   $ 52,331    $ 50,814    $ 11,044    $ 10,167    3.64 %   3.63 %
                                        

Net interest margin (2) (% of earning assets)

               4.19 %   4.17 %
                        

(1) Average loan balances are stated net of unearned income and include nonaccrual loans. Interest recognized on nonaccrual loans is included in interest income.
(2) Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 38.55% tax rate.
(3) Includes federal funds sold and interest bearing deposits with banks.

Provision for Loan Losses

The provision for loan losses was $(120) thousand and $298 thousand for the nine months ended September 30, 2007 and 2006 respectively. There were net loan recoveries of $343 thousand for the nine months ended September 30, 2007 as compared with net loan charge-offs of $1.6 million during the same period of 2006. Refer to the Asset Quality discussion on page 15 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like all financial institutions, diversification of our earnings base is of major importance in our long term success. Total noninterest income increased $719 thousand, from $4.0 million for the nine months ended September 30, 2006 to $4.7 million for the same period in 2007. Service charges on deposit accounts produced earnings of $1.6 million for the nine months ended September 30, 2007, an increase of $132 thousand, or 9.0%. Other service fees and commissions experienced a 26.7% increase for the comparable nine month periods. Growth in MasterCard fee income of $24 thousand and investment fees on managed accounts of $386 thousand enhanced this increase. Income from mortgage loan sales increased $109 thousand from $569 thousand for the nine months ended September 30, 2006 to $678 thousand for the same period in 2007.

Noninterest Expense

Noninterest expense for the nine months ended September 30, 2007 was $12.8 million compared to $11.8 million for the same period of 2006, an increase of $1.0 million. Salaries and

 

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employee benefits, the largest component of noninterest expense, increased $657 thousand, from $6.8 million for the nine months ending September 30, 2006 to $7.4 million for the same period in 2007. Additions at the executive and bank support staff levels during the past year coupled with normal salary increases contributed to this increase. Net occupancy expense increased $101 thousand while other noninterest expense increased $398 thousand from the comparable nine month period. The table below reflects the composition of other noninterest expenses.

Other noninterest expense

 

    

Nine months ended

September 30,

     2007    2006
     (in thousands)

Professional fees and services

   $ 588    $ 456

Marketing and donations

     413      457

Office supplies, printing and postage

     323      351

Telephone and data lines

     174      163

Electronic banking expenses

     511      432

Software amortization and maintenance

     318      264

Loan collection expense

     104      147

Subordinated debt issue costs

     130      4

Other

     1,143      1,032
             

Total

   $ 3,704    $ 3,306
             

Income Tax Expense

The Company had income tax expense of $939 thousand for the nine months ended September 30, 2007 resulting in an effective tax rate of 30.4% compared to income tax expense of $566 thousand and an effective rate of 27.1% in the 2006 period. Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities, tax free municipal loans and income earned on bank owned life insurance. The increase in the effective tax rate resulted primarily from a decrease in the level of such tax free income as a percentage of net income in the first nine months of 2007 compared to the same period in 2006.

Asset Quality

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

 

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Management uses the risk-grading program to facilitate the evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by loan officers and reviewed and monitored by credit administration. The Company strives to maintain its loan portfolio in accordance with conservative loan underwriting policies that result in loans specifically tailored to the needs of its market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies. The Company has no foreign loans and does not engage in significant lease financing or highly leveraged transactions. The Company follows a loan review program designed to evaluate the credit risk in the loan portfolio. This process includes the maintenance of an internally classified watch list that helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history and the current delinquent status. As a result of this process, certain loans are categorized as substandard, doubtful or loss and reserves are allocated based on management’s judgment and historical experience.

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

The provision for loan losses declined from $298 thousand for the nine months ended September 30, 2006 to $(120) thousand for the current year. Additionally, the allowance expressed as a percentage of loans held for investment was 1.10% at both December 31, 2006 and September 30, 2007. The decline in the level of our provision in the 2007 period resulted primarily from improved trends in our overall asset quality. During the first nine months of 2007 the levels of our impaired loans and the specific impairment identified for those impaired loans decreased by $1.2 million and $132 thousand, respectively, due primarily to the pay-off of one impaired loan that also resulted in a recovery of $173 thousand. Additionally, other potential problem loans, which consist of loans which are currently performing and are not deemed to be impaired, but about which we have serious doubts as to the borrower’s ability to comply with present repayment terms, declined from $2.9 million at December 31, 2006 to $1.8 million at September 30, 2007, while the allowance for these loans decreased during this same period by $257 thousand. Net loan charge-offs for the nine months ending September 30, 2006 were $1.6 million, while the same period in 2007 experienced net loan recoveries of $343 thousand. The recoveries for 2007 directly impacted the aforementioned negative provision of $120 thousand.

The allowance as a percentage of total impaired and potential problem loans has increased from 52.6% at December 31, 2006 to 90.8% at September 30, 2007. Likewise, the portion of the allowance specifically allocable to impaired loans decreased from 28.0% at December 31, 2006 to 22.3% at September 30, 2007. Management believes the current level of allowance for loan losses to be adequate at this time.

 

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Liquidity and Capital Resources

The objective of the Company’s liquidity management policy is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on any opportunities for expansion. Liquidity management addresses the ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.

The Company’s primary sources of internally generated funds are principal and interest payments on loans, cash flows generated from operations and cash flow generated by investments. Growth in deposits is typically the primary source of funds for loan growth. The Company and its subsidiary banks have multiple funding sources in addition to deposits that can be used to increase liquidity and provide additional financial flexibility. These sources are the subsidiary banks’ established federal funds lines with correspondent banks aggregating $20.1 million at September 30, 2007, with available credit of $20.1 million; established borrowing relationships with the Federal Home Loan Bank, with available credit of $31.0 million; access to borrowings from the Federal Reserve Bank discount window, and the sale of securities under agreements to repurchase. In addition, the Company issues commercial paper and has secured long-term debt from other sources. Total debt from these sources aggregated $42.4 million at September 30, 2007, compared to $42.3 million at December 31, 2006.

Banks and bank holding companies, as regulated institutions, must meet required levels of capital. The FDIC and the Federal Reserve, the primary federal regulators of the Company and its subsidiary banks, have adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets.

Regulatory guidelines require a minimum of total capital to risk-adjusted assets ratio of 8 percent and a Tier I leverage ratio of 4 percent. Banks, which meet or exceed a Tier I ratio of 6 percent, a total capital ratio of 10 percent and a Tier I leverage ratio of 5 percent are considered “well capitalized” by regulatory standards. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with those guidelines.

Both the Company and its subsidiary banks have maintained capital levels exceeding minimum levels for “well capitalized” banks and bank holding companies.

Accounting and Regulatory Matters

Management is not aware of any known trends, events, uncertainties or current recommendations by regulatory authorities that will have or that are reasonably likely to have a material effect on the Company’s liquidity, capital resources, or other operations.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The Company’s primary market risk is interest rate risk. Interest rate risk is the result of differing maturities or repricing intervals of interest-earning assets and interest-bearing liabilities and the fact that rates on these financial instruments do not change uniformly. These conditions may impact the earnings generated by the Company’s interest earning assets or the cost of its interest-bearing liabilities, thus directly impacting the Company’s overall earnings. The Company’s management actively monitors and manages interest rate risk. One way this is accomplished is through the development of, and adherence to the Company’s asset/liability policy. This policy sets forth management’s strategy for matching the risk characteristics of the Company’s interest-earning assets and liabilities so as to mitigate the effect of changes in the rate environment. The Company’s market risk profile has not changed significantly since December 31, 2006.

 

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Item 4T. Controls and Procedures

At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14.

Based upon that evaluation, the Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective (1) to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Principal Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

There were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.

Part II. OTHER INFORMATION

 

Item 1. Legal Proceedings

Neither the Company nor its subsidiaries, nor any of their properties are subject to any material legal proceedings other than ordinary routine litigation incidental to their business.

 

Item 1A. Risk Factors

There has been no change in the risk factors included in the Company’s most recent annual report on form 10-K.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information with respect to shares of common stock repurchased by the Company during the three months ended September 30, 2007.

 

     (a) Total
Number of
Shares
Purchased
   (b) Average
Price Paid per
Share
   (c) Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or Program
(1)
   (d) Maximum
Dollar Value of
Shares that May
Yet Be
Purchased Under
the Plans (2)

July 1, 2007 Through July 31, 2007

   61,860    $ 5.80    —      $ —  

August 1, 2007 Through August 31, 2007

   10,724    $ 6.00    —      $ —  

September 1, 2007 Through September 30, 2007

   12,656    $ 5.98    —      $ —  

Total

   85,240    $ 5.85    —        —  

           
  (1) Trades of the Company’s stock occur in the Over-the-Counter marketplace from time to time. The Company also has in place a Stock Repurchase Plan that provides liquidity to its shareholders in the event a willing buyer is not available to purchase shares that are offered for sale. The Company is under no obligation to purchase shares offered; however, it will accommodate such offers as its Stock Repurchase Plan allows. This plan was initially adopted in 1995 and is approved annually by resolution of the Board of Directors or the Executive Committee of the Board.
  (2) On March 20, 2007 the Board of Directors of Uwharrie Capital Corp unanimously approved the repurchase of 95,252, shares of its common stock at a cost of $566,807. This resolution is under a Stock Repurchase Plan that is contingent upon maintaining a well capitalized regulatory capital ratio. The purchase price under the plan is set on a quarterly basis, based on an independent valuation of the Company’s stock price, and is approved by the Board. The Board individually approves stock repurchases that exceed $50,000 in any one transaction.
  (3) On June 28, 2007, the Executive Committee of Uwharrie Capital Corp mandated by resolution that the Company could repurchase up to $375,000 of its common stock during the third quarter of 2007.
  (4) On September 18, 2007, the Board of Directors of Uwharrie Capital Corp mandated by resolution that the Company could repurchase up to an additional $125,000 of its common stock during the third quarter of 2007.

 

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Item 3. Defaults Upon Senior Securities

None

 

Item 4. Submission of Matters to a Vote of Security Holders

None

 

Item 5. Other Information

None

 

Item 6. Exhibits

 

Exhibits

    

31.1

   Certification of Chief Executive Officer pursuant to Rule 13a – 14(a)

31.2

   Certification of Principal Financial Officer pursuant to Rule 13a – 14(a)

32

   Certification pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned who is thereunto duly authorized.

 

  UWHARRIE CAPITAL CORP
  (Registrant)
Date: November 9, 2007   By:  

/s/ Roger L. Dick

    Roger L. Dick
    President and Chief Executive Officer
Date: November 9, 2007   By:  

/s/ Barbara S. Williams

    Barbara S. Williams
    Principal Financial Officer

 

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EXHIBIT INDEX

 

Exhibit
Number
  

Exhibit

    
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)    Filed herewith
31.2    Certification of Principal Financial Officer pursuant to Rule 13a-14(a)    Filed herewith
32    Certification pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    Filed herewith

 

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