Annual Statements Open main menu

UWHARRIE CAPITAL CORP - Quarter Report: 2008 June (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 June 30, 2008

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   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 classes of common stock issuer’s as of the latest practicable date: 7,407,851 shares of common stock outstanding as of August 1, 2008.

 

 

 


Table of Contents

Table of Contents

 

     Page No.

Part I.

 

FINANCIAL INFORMATION

  

Item 1 -

 

Financial Statements (Unaudited)

  
 

Consolidated Balance Sheets June 30, 2008 and December 31, 2007

   3
 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2008 and 2007

   4
 

Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2008

   5
 

Consolidated Statements of Cash Flows Six Months Ended June 30, 2008 and 2007

   6
 

Notes to Consolidated Financial Statements

   7

Item 2 -

 

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

   13

Item 3 -

 

Quantitative and Qualitative Disclosures about Market Risk

   21

Item 4 -

 

Controls and Procedures

   21

Part II.

 

OTHER INFORMATION

  

Item 1 -

 

Legal Proceedings

   22

Item 1A -

 

Risk Factors

   22

Item 2 -

 

Unregistered Sales of Equity Securities and Use of Proceeds

   23

Item 3 -

 

Defaults Upon Senior Securities

   23

Item 4 -

 

Submission of Matters to a Vote of Security Holders

   23

Item 5 -

 

Other Information

   24

Item 6 -

 

Exhibits

   25
 

Exhibit Index

   27

 

-2-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

 

 

Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements

 

     June 30,
2008
(Unaudited)
    December 31,
2007*
 
     (dollars in thousands)  

ASSETS

    

Cash and due from banks

   $ 13,585     $ 13,765  

Interest-earning deposits with banks

     1,381       2,432  

Securities available for sale, at fair value

     48,748       51,005  

Loans held for sale

     1,919       2,916  

Loans:

    

Loans held for investment

     336,735       321,987  

Less allowance for loan losses

     (3,657 )     (3,510 )
                

Net loans held for investment

     333,078       318,477  
                

Premises and equipment, net

     9,323       8,751  

Interest receivable

     1,925       2,055  

Federal Home Loan Bank stock

     2,369       2,137  

Bank owned life insurance

     5,411       5,318  

Goodwill

     987       987  

Other real estate owned

     590       163  

Other assets

     4,852       3,938  
                

Total assets

   $ 424,168     $ 411,944  
                

LIABILITIES

    

Deposits:

    

Demand noninterest-bearing

   $ 46,362     $ 46,597  

Interest checking and money market accounts

     110,454       102,411  

Savings deposits

     26,947       26,200  

Time deposits, $100,000 and over

     56,723       54,729  

Other time deposits

     94,616       94,720  
                

Total deposits

     335,102       324,657  
                

Short-term borrowed funds

     20,251       31,928  

Long-term debt

     34,195       21,691  

Interest payable

     538       596  

Other liabilities

     2,004       1,498  
                

Total liabilities

     392,090       380,370  
                

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 7,407,851 and 7,414,707 shares respectively

     9,259       9,268  

Additional paid-in capital

     13,398       13,453  

Unearned ESOP compensation

     (769 )     (800 )

Undivided profits

     10,540       9,266  

Accumulated other comprehensive income (loss)

     (350 )     387  
                

Total shareholders’ equity

     32,078       31,574  
                

Total liabilities and shareholders’ equity

   $ 424,168     $ 411,944  
                

 

(*) Derived from audited consolidated financial statements

See accompanying notes

 

-3-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Operations (Unaudited)

 

 

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2008    2007     2008    2007  
   (in thousands, except share and per share data)  

Interest Income

          

Loans, including fees

   $ 5,669    $ 5,865     $ 11,638    $ 11,519  

Investment securities

          

US Treasury

     25      24       49      48  

US Government agencies and corporations

     468      316       955      596  

State and political subdivisions

     170      157       328      320  

Other

     32      37       66      74  

Interest-earning deposits with banks and federal funds sold

     18      251       43      635  
                              

Total interest income

     6,382      6,650       13,079      13,192  
                              

Interest Expense

          

Interest checking and money market accounts

     312      666       747      1,376  

Savings deposits

     74      134       169      280  

Time deposits, $100,000 and over

     604      566       1,286      1,172  

Other time deposits

     985      1,009       2,078      1,999  

Short-term borrowed funds

     146      396       334      640  

Long-term debt

     308      201       619      563  
                              

Total interest expense

     2,429      2,972       5,233      6,030  
                              

Net interest income

     3,953      3,678       7,846      7,162  

Provision for loan losses

     171      (138 )     257      (138 )
                              

Net interest income after provision for loan losses

     3,782      3,816       7,589      7,300  
                              

Noninterest Income

          

Service charges on deposit accounts

     537      556       1,067      1,059  

Other service fees and commissions

     754      721       1,502      1,419  

Loss on sale of securities

     —        (76 )     —        (76 )

Income from mortgage loan sales

     357      188       798      443  

Other income

     247      103       393      189  
                              

Total noninterest income

     1,895      1,492       3,760      3,034  
                              

Noninterest Expense

          

Salaries and employee benefits

     2,664      2,476       5,301      4,921  

Net occupancy expense

     236      209       459      426  

Equipment expense

     156      147       296      306  

Data processing costs

     204      185       392      363  

Other noninterest expense

     1,272      1,256       2,607      2,340  
                              

Total noninterest expense

     4,532      4,273       9,055      8,356  
                              

Income before income taxes

     1,145      1,035       2,294      1,978  

Income taxes

     373      318       747      603  
                              

Net income

   $ 772    $ 717     $ 1,547    $ 1,375  
                              

Net income per common share

          

Basic

   $ 0.11    $ 0.10     $ 0.21    $ 0.18  
                              

Diluted

   $ 0.11    $ 0.10     $ 0.21    $ 0.18  
                              

Weighted average shares outstanding

          

Basic

     7,231,869      7,411,526       7,251,938      7,440,060  

Diluted

     7,263,199      7,513,197       7,293,310      7,537,143  

See accompanying notes

 

-4-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

 

 

 

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

Balance, December 31, 2007

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

Net income

   —         —         —         —         1,547       —         1,547  

Other comprehensive loss

   —         —         —         —         —         (737 )     (737 )

Release of ESOP shares

   —         —         9       31       —         —         40  

Common stock issued pursuant to:

              

Stock options exercised

   69,742       87       213       —         —         —         300  

Tax benefit of stock options exercised

   —         —         26       —         —         —         26  

Repurchase of common stock

   (76,598 )     (96 )     (316 )     —         —         —         (412 )

Stock compensation expense

   —         —         13       —         —         —         13  

Adjustment to initially apply EITF 06-4

   —         —         —         —         (273 )     —         (273 )
                                                      

Balance, June 30, 2008

   7,407,851     $ 9,259     $ 13,398     $ (769 )   $ 10,540     $ (350 )   $ 32,078  
                                                      

See accompanying notes

 

-5-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

     Six Months Ended
June 30,
 
     2008     2007  
     (dollars in thousands)  

Cash flows from operating activities

  

Net income

   $ 1,547     $ 1,375  

Adjustments to reconcile net income to net cash

    

Provided by operating activities:

    

Depreciation

     319       312  

Net amortization of security premiums/discounts

     (116 )     (90 )

Amortization of mortgage servicing rights

     237       200  

Provision for loan losses

     257       (138 )

Stock based compensation

     13       23  

Net realized loss on available sale securities

     —         76  

Income from mortgage loan sales

     (798 )     (443 )

Proceeds from sales of loans held for sale

     36,614       19,565  

Origination of loans held for sale

     (35,187 )     (21,680 )

Loss on sale of premises, equipment and other assets

     5       —    

Increase in cash surrender value of life insurance

     (93 )     (86 )

Gain on sales of other assets

     —         (20 )

Release of ESOP shares

     40       44  

Net change in interest receivable

     130       (61 )

Net change in other assets

     (324 )     (908 )

Net change in interest payable

     (58 )     (85 )

Net change in other liabilities

     233       307  
                

Net cash provided (used) by operating activities

     2,819       (1,609 )
                

Cash flows from investing activities

    

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

     4,361       6,874  

Purchase of securities available for sale

     (3,184 )     (11,129 )

Net change in Federal Home Loan Bank stock

     (232 )     8  

Net increase in loans

     (15,285 )     (15,366 )

Proceeds from sales of premises, equipment and other assets

     —         65  

Purchase of premises and equipment

     (896 )     (223 )

Proceeds from sales of foreclosed real estate

     —         39  
                

Net cash used in investing activities

     (15,236 )     (19,732 )
                

Cash flows from financing activities

    

Net increase (decrease) in deposit accounts

     10,445       (3,560 )

Net increase (decrease) in short-term borrowed funds

     (11,677 )     26,233  

Net increase (decrease) in long-term debt

     12,504       (12,840 )

Repurchase of common stock

     (412 )     (566 )

Net proceeds from issuance of common stock

     300       36  

Tax benefit of stock options exercised

     26       3  
                

Net cash provided by financing activities

     11,186       9,306  
                

Decrease in cash and cash equivalents

     (1,231 )     (12,035 )

Cash and cash equivalents, beginning of period

     16,197       34,760  
                

Cash and cash equivalents, end of period

   $ 14,966     $ 22,725  
                

See accompanying notes

 

-6-


Table of Contents

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 2007 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
June 30,
    Six Months Ended
June 30,
 
     2008     2007     2008     2007  
     (in thousands)  

Net Income

   $ 772     $ 717     $ 1,547     $ 1,375  
                                

Other comprehensive loss

        

Unrealized losses on available for sale securities

     (1,009 )     (344 )     (1,196 )     (271 )

Related tax effect

     386       133       459       105  

Reclassification of loss recognized in net income

     —         76       —         76  

Related tax effect

     —         (29 )     —         (29 )
                                

Total other comprehensive loss

     (623 )     (164 )     (737 )     (119 )
                                

Comprehensive income

   $ 149     $ 553     $ 810     $ 1,256  
                                

 

-7-


Table of Contents

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. On June 30, 2008 the Company had 89,798 shares that were anti-dilutive and were excluded from the diluted net income per common share computation.

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
June, 30
    Six Months Ended
June 30,
 
     2008     2007     2008     2007  

Weighted average number of common shares outstanding

   7,366,060     7,561,533     7,386,129     7,590,067  

Effect of ESOP shares

   (134,191 )   (150,007 )   (134,191 )   (150,007 )
                        

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

   7,231,869     7,411,526     7,251,938     7,440,060  

Effect of dilutive stock options

   31,330     101,671     41,372     97,083  
                        

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

   7,263,199     7,513,197     7,293,310     7,537,143  
                        

Note 4 – Investment Securities

Securities available for sale are summarized below:

 

     June 30,
2008
    December 31,
2007
 
     (dollars in thousands)  

Amortized Cost

   $ 49,317     $ 50,378  

Gross unrealized losses

     (1,131 )     (92 )

Gross unrealized gains

     562       719  
                

Fair Value

   $ 48,748     $ 51,005  
                

Management has evaluated these securities to determine whether they should be considered other-than-temporarily impaired at June 30, 2008. This evaluation considered, among other things, the extent and duration of the impairment, current and expected future yields, the

 

-8-


Table of Contents

Company’s ability to continue to hold these securities in its portfolio and the issuers’ credit ratings. The majority of the gross unrealized losses are related mortgage-backed securities portfolio. Further evaluations were made on these investments including analyzing prepayment rates, general market data, delinquency rates on the underlying mortgage loans and current and anticipated losses in foreclosure.

Based on these evaluations, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2008. Management expects to collect all contractual interest and principal payments and that recovery of these temporarily impaired securities will occur within a reasonable time frame. Management will continue to evaluate these securities on an ongoing basis, and if it is subsequently determined that an other than temporary impairment has occurred, the Company will record any such impairment as a charge to earnings.

Note 5 – Loans

 

     June 30,
2008
   December 31,
2007
     (in thousands)

Loans outstanding at period end:

     

Commercial

   $ 44,085    $ 37,724

Real estate-construction

     53,607      46,546

Real estate-residential

     134,975      135,959

Real estate-commercial

     88,242      86,593

Consumer loans

     15,610      15,022

All other loans

     216      143
             

Total

   $ 336,735    $ 321,987
             

 

     Three Months
Ended June 30,
    Six Months Ended
June 30,
 
     2008     2007     2008     2007  
     (in thousands)  

Analysis of the allowance for loan losses

        

Balance at beginning of period

   $ 3,583     $ 3,034     $ 3,510     $ 3,171  

Provision charged to operations

     171       (138 )     257       (138 )

Charge-offs

     (137 )     (16 )     (167 )     (163 )

Recoveries

     40       457       57       467  
                                

Net recoveries (charge-offs)

     (97 )     441       (110 )     304  
                                

Balance at end of period

   $ 3,657     $ 3,337     $ 3,657     $ 3,337  
                                

Note 6 – 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

 

-9-


Table of Contents

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 June 30, 2008, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

 

(in thousands)     

Commitments to extend credit

   $ 81,946

Credit card commitments

     9,737

Standby letters of credit

     1,022
      

Total commitments

   $ 92,705
      

Note 7 – Fair Value Disclosures

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

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

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

Among the Company’s assets and liabilities, investment securities available for sale are reported at their fair values on a recurring basis. Certain other assets are adjusted to their fair value on a nonrecurring basis, including loans held for sale, which are carried at the lower of cost or market, loan servicing rights, where fair value is determined using similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions, foreclosed real estate, which is carried at lower of cost or fair market value and goodwill, which is periodically tested for impairment. Deposits, short-term borrowings and long-term obligations are not reported at fair value.

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114, Accounting by Creditors for Impairment of a Loan, (SFAS 114). The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2008, substantially all of

 

-10-


Table of Contents

the total impaired loans were evaluated based on the fair value of the collateral. In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

For assets and liabilities carried at fair value, the following table provides fair value information as of June 30, 2008:

 

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

Investment securities available for sale

   $ 48,748    $ 9,578    $ 39,170    $ —  
                           

Total assets at fair value

   $ 48,748    $ 9,578    $ 39,170    $ —  
                           

Total liabilities at fair value

   $ —      $ —      $ —      $ —  
                           

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

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of June 30, 2008:

 

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

Loans

   $ 6,913    $ —      $ 6,913    $ —  
                           

Total assets at fair value

   $ 6,913    $ —      $ 6,913    $ —  
                           

Total liabilities at fair value

   $ —      $ —      $ —      $ —  
                           

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

 

-11-


Table of Contents

Note 8 – Recent Accounting Pronouncements

SAB 109

Staff Accounting Bulletin No. 109 (“SAB 109”), “Written Loan Commitments Recorded at Fair Value Through Earnings,” supersedes Staff Accounting Bulletin No. 105 by requiring the expected net future cash flows related to servicing a loan to be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The adoption of SAB 109 on January 1, 2008, did not have a significant impact on the Company’s consolidated financial statements.

SFAS 157

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. The Company adopted the provisions of SFAS 157 on January 1, 2008 as discussed in Note 7 above.

SFAS 159

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 earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective for fiscal years beginning after November 15, 2007, with early adoption permitted under certain circumstances. The adoption of SFAS 159 did not have any impact on the Company’s consolidated financial statements. See Note 7 above.

EITF 06-4

The Emerging Issues Task Force (EITF) reached a consensus at its September 2006 meeting regarding EITF 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. The scope of EITF 06-4 is limited to the recognition of a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to postretirement periods. Therefore, this EITF would not apply to a split-dollar life insurance arrangement that provides a specified benefit to an employee that is limited to the employee’s active service period with an employer. This EITF 06-4 is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. The Company adopted EITF 06-4 on January 1, 2008 and it had the effect of reducing beginning consolidated undivided profits by approximately $273,000.

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 2007 consolidated financial statements have been reclassified to conform to the 2008 presentation. The reclassifications had no effect on net income or shareholders’ equity as previously reported.

 

-12-


Table of Contents

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 June 30, 2008 and December 31, 2007.

During the six months ended June 30, 2008, the Company’s total assets increased $12.3 million, from $411.9 million to $424.2 million. During the six months, loans held for investment increased $14.7 million or 4.6%, from $322.0 million at December 31, 2007 to $336.7 million at June 30, 2008. This increase, however, was offset by a decline in investment securities of $2.3 million and a decrease in loans held for sale of $1.0 million during the period.

Cash and cash equivalents decreased $1.2 million during the six months ended June 30, 2008. Cash and due from banks declined $180 thousand, while interest-earning deposits with banks decreased $1.0 million.

Investment securities decreased $2.3 million or 4.4% for the six months. Market values have declined $1.2 million due to the recent downturn in the investment markets. Management believes this decline in investment market values is only temporary and does not expect to incur a loss at this time. The remainder of the decrease resulted primarily from normal mortgage backed securities pay down activity during the period.

As previously stated, loans held for investment increased $14.7 million to $336.7 million during the period ended June 30, 2008. The Company has experienced positive growth trends in its residential construction, commercial and consumer areas of the loan portfolio. These positive trends were impacted by a decrease in our one to four family residential real estate loan portfolio. Loans held for sale decreased 34.2% or $1.0 million during the period. The allowance for loan losses was $3.7 million at June 30, 2008 which represents 1.09% of the loan portfolio.

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. Fixed assets increased $572 thousand, interest receivable declined $130 thousand, bank owned life insurance increased $93 thousand and other assets increased $1.3 million. Federal Home Loan Bank stock increased $232 thousand. Federal Home Loan Bank stock ownership 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 borrowings outstanding.

Customer deposits, our primary funding source, experienced a $10.4 million increase during the six months ended June 30, 2008, increasing from $324.7 million to $335.1 million. Time deposits $100,000 and over grew by $2.0 million, interest checking and money market accounts increased $8.0 million and savings accounts grew $747 thousand. These increases were offset by declines in other time deposits of $104 thousand and demand deposits of $235 thousand.

Total borrowings increased $827 thousand for the period. Borrowings consist of both short-term and long-term borrowed funds. The Company utilizes both short-term and long-term advances from the Federal Home Loan Bank. At June 30, 2008, $33.7 million of the total borrowings of $54.4 million were comprised of Federal Home Loan Bank advances.

 

-13-


Table of Contents

Other liabilities increased from $1.5 million at December 31, 2007 to $2.0 million at June 30, 2008, an increase of $506 thousand. The Company has a supplemental retirement plan in place for four executive officers. The Company has purchased life insurance policies in order to provide future funding of benefit payments. As discussed in Note 7, with the adoption of EITF 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, the Company recorded a $273 thousand liability. This adjustment coupled with an increase in the reserve for income taxes were the primary factors associated with the increase in other liabilities.

At June 30, 2008, total shareholders’ equity was $32.1 million, an increase of $504 thousand from December 31, 2007. Net income for the period was $1.5 million and the Company received $300 thousand from the exercise of stock options. These increases were offset by the repurchase of 76,598 shares of the Company’s common stock at a cost of $412 thousand and unrealized losses on investment securities, net of tax, of $737 thousand. The Company also recorded a $273 thousand one-time cumulative adjustment to undivided profits for the adoption of EITF 06-4. At June 30, 2008, the Company and its subsidiary banks exceeded all applicable regulatory capital requirements.

Comparison of Results of Operations For the Three Months Ended June 30, 2008 and 2007.

Net Income

Uwharrie Capital Corp reported net income of $772 thousand, or $0.11 per basic share, for the three months ended June 30, 2008, as compared to $717 thousand, or $0.10 per basic share, for the three months ended June 30, 2007, an increase of $55 thousand, or $0.01 per share.

Net Interest Income

The Company’s primary source of income, net interest income, increased $275 thousand or 7.5% for the three months ended June 30, 2008, as compared to the same period for 2007. Refer to the six month discussion on page 16 for further information.

Provision and Allowance for Loan Losses

The provision for loan losses was $171 thousand for the three months ending June 30, 2008 compared to ($138) thousand for the same period in 2007. There were net loan charge-offs of $97 thousand for the three months ended June 30, 2008 as compared with net loan recoveries of $441 thousand during the same period of 2007. Refer to the Asset Quality discussion on page 18 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 $403 thousand, from $1.5 million for the quarter ended June 30, 2007 to $1.9 million for the same period in 2008. Service charges on deposit accounts produced earnings of $537 thousand for the three months ended June 30, 2008. Other service fees and commissions experienced a 4.6% increase for the comparable three month period. Growth in ATM fees of $25 thousand and investment fees on managed accounts of $34 thousand enhanced this increase. Income from mortgage loan sales increased $169 thousand from $188 thousand for the quarter ended June 30, 2007 to $357 thousand for the

 

-14-


Table of Contents

same period in 2008. The interest rate reductions during the first quarter attributed to the increase in mortgage loan sales. The Company also owned shares of MasterCard stock and redeemed this stock during the second quarter of 2008 resulting in other income of $162 thousand. This income was the primary reason for the increase in other income over the comparable period.

Noninterest Expense

Noninterest expense for the quarter ended June 30, 2008 was $4.5 million compared to $4.3 million for the same period of 2007, an increase of $259 thousand. Salaries and employee benefits, the largest component of noninterest expense, increased $188 thousand, from $2.5 million for the quarter ending June 30, 2007 to $2.7 million for the same period in 2008. The Company has a non-qualifying deferred compensation plan for certain executive officers. The costs associated with this plan increased $83 thousand for the comparable periods. This increase coupled with normal salary increases contributed to the overall increase in noninterest expense. Other noninterest expense increased $16 thousand for the comparable three month periods. The table below reflects the composition of other noninterest expense.

Other noninterest expense

 

      Three Months Ended
June 30,
     2008    2007
     (in thousands)

Professional fees and services

   $ 173    $ 218

Marketing and donations

     145      152

Office supplies and printing

     19      30

Telephone and data lines

     62      60

Electronic banking expense

     200      167

Software amortization and maintenance

     124      118

Loan collection expense

     56      43

Shareholder relations expense

     43      55

Dues and subscriptions

     40      38

Postage

     49      46

Other

     361      329
             

Total

   $ 1,272    $ 1,256
             

Income Tax Expense

The Company had income tax expense of $373 thousand for the three months ended June 30, 2008 resulting in an effective tax rate of 32.58% compared to income tax expense of $318 thousand and an effective rate of 30.72% in the 2007 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 the decrease in the level of such tax free income as a percentage of income before income taxes in the current year quarter compared to the 2007 quarter.

Comparison of Results of Operations For the Six Months Ended June 30, 2008 and 2007.

Net Income

Uwharrie Capital Corp reported net income of $1.5 million or $0.21 per basic share, for the six months ended June 30, 2008, as compared to $1.4 million, or $0.18 per basic share, for the six months ended June 30, 2007, an increase of $172 thousand, or $0.03 per share.

 

-15-


Table of Contents

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 six months ended June 30, 2008 was $7.8 million as compared with $7.2 million during the six months ended June 30, 2007, resulting in an increase of $684 thousand, or 9.6%. During the six months ended June 30, 2008 our growth in the volume of interest-earning assets outpaced the growth in interest-bearing liabilities by $947 thousand. The average yield on our interest–earning assets decreased 50 basis points to 6.94%, while the average rate we paid for our interest-bearing liabilities decreased 75 basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve Open Market Committee adjusts interest rates, while, interest-bearing time deposits adjust at the time of maturity. The fore mentioned decreases resulted in an increase of 25 basis points in our interest rate spread, from 3.55% in 2007 to 3.80% in 2008. Our net interest margin was 4.22% and 4.10% for the comparable periods in 2008 and 2007.

The following table presents average balance sheets and a net interest income analysis for the six months ended June 30, 2008 and 2007:

Average Balance Sheet and Net Interest Income Analysis

For the Six Months Ended June 30,

 

     Average Balance    Income/Expenses    Rate/Yield  
(in thousands)    2008    2007    2008    2007    2008     2007  

Interest-earning assets:

                

Taxable securities

   $ 38,537    $ 27,831    $ 1,075    $ 724    5.61 %   5.23 %

Nontaxable securities (1)

     13,726      13,138      323      314    7.70 %   7.85 %

Short-term investments

     3,487      24,482      43      635    2.48 %   5.22 %

Taxable loans

     326,770      295,136      11,550      11,424    7.11 %   7.78 %

Non-taxable loans (1)

     3,895      3,952      88      95    7.44 %   7.85 %
                                        

Total interest-earning assets

     386,415      364,539      13,079      13,192    6.94 %   7.44 %

Interest-bearing liabilities:

                

Interest-bearing deposits

     283,537      264,086      4,280      4,827    3.04 %   3.68 %

Short-term borrowed funds

     18,493      23,944      334      640    3.63 %   5.38 %

Long-term debt

     32,755      23,932      619      563    3.80 %   4.73 %
                                        

Total interest bearing liabilities

     334,785      311,962      5,233      6,030    3.14 %   3.89 %
                                        

Net interest spread

   $ 51,630    $ 52,577    $ 7,846    $ 7,162    3.80 %   3.55 %
                                        

Net interest margin (1) (% of earning assets)

               4.22 %   4.10 %
                        

 

(1) Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 38.55% tax rate.

 

-16-


Table of Contents

Provision and Allowance for Loan Losses

The provision for loan losses was $257 thousand for the six months ending June 30, 2008 compared to ($138) thousand for the same period in 2007. There were net loan charge-offs of $110 thousand for the six months ended June 2008 as compared with net loan recoveries of $304 thousand during the same period of 2007. Refer to the Asset Quality discussion on page 18 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 $726 thousand, from $3.0 million for the six months ended June 30, 2007 to $3.8 million for the same period in 2008. Service charges on deposit accounts produced earnings of $1.1 million for the six months ended June 30, 2008. Other service fees and commissions experienced a 5.8% increase for the comparable six month period. Growth in ATM fees of $60 thousand and investment fees on managed accounts of $91 thousand enhanced this increase. Income from mortgage loan sales increased $355 thousand from $443 thousand for the six months ended June 30, 2007 to $798 thousand for the same period in 2008. The interest rate reductions during the period attributed to the increase in mortgage loan sales. The Company owns shares of VISA stock and MasterCard stock. VISA redeemed a portion of this stock during the first quarter of 2008 resulting in other income of $59 thousand. We sold all of the shares of MasterCard during second quarter of 2008 producing other income of $162 thousand. This income was the primary reason for the increase in other income for the comparable periods.

Noninterest Expense

Noninterest expense for the six months ended June 30, 2008 was $9.1 million compared to $8.4 million for the same period of 2007, an increase of $699 thousand. Salaries and employee benefits, the largest component of noninterest expense, increased $380 thousand, from $4.9 million for the six months ended June 30, 2007 to $5.3 million for the same period in 2008. The Company has a non-qualifying deferred compensation plan for certain executive officers. The costs associated with this plan increased $167 thousand for the comparable periods. This increase coupled with normal salary increases contributed to the overall increase in noninterest expense. Other noninterest expense increased $267 thousand for the comparable six month periods. The table below reflects the composition of other noninterest expense.

 

-17-


Table of Contents

Other noninterest expense

 

      Six Months Ended
June 30,
     2008    2007
     (in thousands)

Professional fees and services

   $ 338    $ 376

Marketing and donations

     317      277

Office supplies and printing

     135      140

Telephone and data lines

     122      116

Electronic banking expense

     386      329

Software amortization and maintenance

     223      222

Loan collection expense

     127      68

Shareholder relations expense

     101      100

Dues and subscriptions

     77      70

Postage

     96      79

Other

     685      563
             

Total

   $ 2,607    $ 2,340
             

Income Tax Expense

The Company had income tax expense of $747 thousand for the six months ended June 30, 2008 resulting in an effective tax rate of 32.56% compared to income tax expense of $603 thousand and an effective rate of 30.49% in the 2007 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 the decrease in the level of such tax free income as a percentage income before income taxes in the current year period compared to the 2007 period.

Asset Quality

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

Management uses the risk-grading program to facilitate the evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by loan officers and reviewed and monitored by credit administration. The Company strives to maintain its loan portfolio in accordance with conservative loan underwriting

 

-18-


Table of Contents

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 was $257 thousand for the six months ended June 30, 2008 as compared to ($138) thousand for the same period in 2007. Additionally, the allowance expressed as a percentage of loans held for investment was 1.09% at both June 30, 2008 and December 31, 2007. During the first six months of 2008 the levels of our impaired loans, which includes all loans in nonaccrual status and other loans deemed by management to be impaired, were $9.7 million compared to $7.5 million at December 31, 2007, an increase of $2.2 million. Of the $9.7 million in impaired loans at June 30, 2008, $6.9 million carried an allowance of $1.3 million while $2.8 million were evaluated and required no specific allowance. The level of specific reserves identified for impaired loans increased by $62 thousand for the same period. These increases were due primarily to the impairment of a loan relationship with one customer of $2.6 million, for which a $50 thousand specific reserve has been provided. Net loan recoveries for the six months ending June 30, 2007 were $304 thousand, while the same period in 2008 experienced net loan charge-offs of $110 thousand.

The allowance as a percentage of total impaired loans has increased from 35.7% at December 31, 2007 to 35.9% at June 30, 2008. The portion of the allowance specifically allocable to impaired loans decreased from 16.8% at December 31, 2007 to 13.6% at June 30, 2008. Management believes the current level of allowance for loan losses to be appropriate given the risk inherence in the loan portfolio at this time.

 

-19-


Table of Contents

The following nonperforming loan table shows the comparison for the six months ended June 30, 2008 to December 31, 2007:

Nonperforming Assets

(dollars in thousands)

 

     June 30,
2008
    December 31,
2007
 

Nonperforming assets:

    

Nonaccrual loans

   $ 1,539     $ 1,795  

Other real estate owned

     590       163  
                

Total nonperforming assets

   $ 2,129     $ 1,958  
                

Accruing loans past due 90 days or more

   $ 11     $ —    

Allowance for loans losses

     3,657       3,510  

Nonperforming loans to total loans

     0.46 %     0.56 %

Allowance for loan losses to total loans

     1.09 %     1.09 %

Nonperforming assets to total loans and other real estate

     0.63 %     0.61 %

Nonperforming assets to total assets

     0.50 %     0.48 %

Allowance for loan losses to

    

Nonperforming loans

     237.62 %     195.57 %

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 $20.4 million at June 30, 2008, with available credit of $14.4 million, established borrowing relationships with the Federal Home Loan Bank, with available credit of $33.1 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 $54.4 million at June 30, 2008, compared to $53.6 million at December 31, 2007.

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.

 

-20-


Table of Contents

Both the Company and its subsidiary banks have maintained capital levels exceeding minimum levels for “well capitalized” banks and bank holding companies. The Company expects to continue to exceed these minimums without altering current operations or strategy. The Company began a private placement of subordinated debt during the second quarter of 2008 that will qualify as regulatory capital. At June 30, 2008, the Company had $2.5 million in subordinated debt. The placement will continue into the third quarter.

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, 2007.

 

Item 4. Controls and Procedures

Evaluation of Disclosure 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 principal 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-15.

Based upon that evaluation, the principal 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 principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosure.

 

-21-


Table of Contents

Changes in Internal Control over Financial Reporting

Management of the Company has evaluated, with the participation of the Company’s principal executive officer and principal financial officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a -15(f) and 15d – 15(f) of the Exchange Act) during the second quarter of 2008. In connection with such evaluation, the Company has determined that 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 legal proceedings other than ordinary routine litigation incidental to their business.

 

Item 1A. Risk Factors

Not applicable.

 

-22-


Table of Contents
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 June 30, 2008.

 

     (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)(3)

April 1, 2008 Through April 30, 2008

   48,865    $ 5.35    —      $ —  

May 1, 2008 Through May 31, 2008

   —      $ —      —      $ —  

June 1, 2008 Through June 30, 2008

   5,427    $ 5.42    —      $ —  

Total

   54,292    $ 5.36    —      $ —  

 

(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 April 15, 2008, the Executive Committee of Uwharrie Capital Corp mandated by resolution that the Company could repurchase 48,865 shares of its common stock at a cost of $261,428.
(3) On June 30, 2008, the Executive Committee of Uwharrie Capital Corp mandated by resolution that the Company could repurchase 5,427 shares of its common stock at a cost of $29,431.

 

Item 3. Defaults Upon Senior Securities

None

 

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

The Company’s annual meeting of shareholders was held on Tuesday, May 13, 2008 in Albemarle, North Carolina. Proposals listed in the Proxy Statement dated March 28, 2008, (1) to elect six (6) directors of the Company to three (3) year terms and (2) to ratify the appointment of the Company’s independent public accountants for 2008, were approved by the shareholders as listed below. There were no other matters submitted for vote of the shareholders at this meeting.

 

-23-


Table of Contents

Proposal (1) To elect six (6) directors to three (3) year terms. Votes for each nominee were as follows:

 

Nominee    For    Withheld

Joe S. Brooks

   4,686,516    20,019

Ronald T. Burleson

   4,682,339    24,196

Charles F. Geschickter

   4,660,254    46,290

W. Chester Lowder

   4,679,620    26,915

John P. Murray

   4,686,286    20,249

Susan J. Rourke

   4,674,627    31,908

The following twelve directors continued in office: Henry E. Farmer, Sr., Thomas M. Hearne, Jr., Charles D. Horne, Joseph R. Kluttz, Jr., James E. Nance, Emmett S. Patterson, Timothy J. Propst, Donald P. Scarborough, John W. Shealy, Jr., Michael E. Snyder, Sr., Douglas L Stafford, and Emily M. Thomas.

Proposal (2) To ratify the appointment of Dixon Hughes PLLC as the Company’s independent registered public accounting firm for 2008.

 

For

   4,660,560

Against

   5,535

Abstain

   40,440

 

Item 5. Other Information

None

 

-24-


Table of Contents
Item 6. Exhibit

 

Exhibit
Number

 

Description of Exhibit

  3.1   Registrant’s Articles of Incorporation *
  3.2   Registrant’s By-laws *
  4   Form of stock certificate *
10.1   Incentive Stock Option Plan, as amended *
10.2   Employee Stock Ownership Plan and Trust **
10.3   2006 Incentive Stock Option Plan ***
10.4   2006 Employee Stock Purchase Plan ***
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

 

* Incorporated by reference from exhibits to Registrant’s Registration Statement on Form S-4 (Reg. No. 33-58882).
** Incorporated by reference to Registrant’s Annual Report on Form 10-KSB for the Fiscal year ended 1999.
*** Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2006.

 

-25-


Table of Contents

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: August 8, 2008     By:  

/s/ Roger L. Dick

      Roger L. Dick
      President and Chief Executive Officer
Date: August 8, 2008     By:  

/s/ Barbara S. Williams

      Barbara S. Williams
      Principal Financial Officer

 

-26-


Table of Contents

EXHIBIT INDEX

 

Exhibit
Number

 

Description of Exhibit

  3.1   Registrant’s Articles of Incorporation *
  3.2   Registrant’s By-laws *
  4   Form of stock certificate *
10.1   Incentive Stock Option Plan, as amended *
10.2   Employee Stock Ownership Plan and Trust *
10.3   2006 Incentive Stock Option Plan *
10.4   2006 Employee Stock Purchase Plan *
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

 

* Incorporated by reference

 

-27-