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UWHARRIE CAPITAL CORP - Quarter Report: 2009 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, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    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: November 10, 2009 shares of common stock outstanding as of 7,593,929.

 

 

 


Table of Contents

Table of Contents

 

          Page No.
Part I.   

FINANCIAL INFORMATION

  
Item 1 -   

Financial Statements (Unaudited)

  
  

Consolidated Balance Sheets September 30, 2009 and December 31, 2008

   3
  

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008

   4
  

Consolidated Statements of Changes in Shareholders’ Equity Nine Months Ended September 30, 2009

   5
  

Consolidated Statements of Cash Flows Nine Months Ended September 30, 2009 and 2008

   6
  

Notes to Consolidated Financial Statements

   7
Item 2 -   

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

   20
Item 3 -   

Quantitative and Qualitative Disclosures about Market Risk

   29
Item 4 -   

Controls and Procedures

   29
Part II.   

OTHER INFORMATION

  
Item 1 -   

Legal Proceedings

   30
Item 1A -   

Risk Factors

   30
Item 2 -   

Unregistered Sales of Equity Securities and Use of Proceeds

   30
Item 3 -   

Defaults Upon Senior Securities

   31
Item 4 -   

Submission of Matters to a Vote of Security Holders

   31
Item 5 -   

Other Information

   31
Item 6 -   

Exhibits

   32
  

Exhibit Index

   34

 

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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,
2009
(Unaudited)
    December 31,
2008*
 
     (dollars in thousands)  

ASSETS

    

Cash and due from banks

   $ 7,837      $ 2,931   

Interest-earning deposits with banks

     3,110        10,353   

Securities available for sale, at fair value

     85,277        68,835   

Loans held for sale

     1,332        2,691   

Loans:

    

Loans held for investment

     351,794        340,830   

Less allowance for loan losses

     (4,828     (4,361
                

Net loans held for investment

     346,966        336,469   
                

Premises and equipment, net

     13,480        11,128   

Interest receivable

     2,174        2,027   

Federal Home Loan Bank stock

     3,201        2,284   

Bank owned life insurance

     5,652        5,511   

Goodwill

     987        987   

Other real estate owned

     2,623        2,816   

Other assets

     8,065        6,436   
                

Total assets

   $ 480,704      $ 452,468   
                

LIABILITIES

    

Deposits:

    

Demand noninterest-bearing

   $ 43,825      $ 46,032   

Interest checking and money market accounts

     120,616        117,325   

Savings deposits

     32,796        26,360   

Time deposits, $100,000 and over

     71,220        63,321   

Other time deposits

     103,030        100,589   
                

Total deposits

     371,487        353,627   
                

Short-term borrowed funds

     29,816        22,249   

Long-term debt

     31,648        32,502   

Interest payable

     456        502   

Other liabilities

     2,807        2,355   
                

Total liabilities

     436,214        411,235   
                

Off balance sheet items, commitments and contingencies (Note 6)

    

SHAREHOLDERS’ EQUITY

    

Preferred stock, no par value: 10,000,000 shares authorized; 10,000 shares of series A issued and outstanding and

     10,000        10,000   

500 shares of series B issued and outstanding

     500        500   

Discount on preferred stock

     (425     (500

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

     9,492        9,492   

Additional paid-in capital

     14,029        14,019   

Unearned ESOP compensation

     (683     (736

Undivided profits

     11,345        10,008   

Accumulated other comprehensive income (loss)

     232        (1,550
                

Total shareholders’ equity

     44,490        41,233   
                

Total liabilities and shareholders’ equity

   $ 480,704      $ 452,468   
                

 

(*) Derived from audited consolidated financial statements

See accompanying notes

 

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Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Operations (Unaudited)

 

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009     2008    2009     2008
     (in thousands, except share and per share data)

Interest Income

         

Loans, including fees

   $ 5,281      $ 5,652    $ 15,874      $ 17,290

Investment securities

         

US Treasury

     1        24      1        73

US Government agencies and corporations

     785        376      2,335        1,331

State and political subdivisions

     145        182      510        510

Interest-earning deposits with banks and federal funds sold

     14        16      57        59
                             

Total interest income

     6,226        6,250      18,777        19,263
                             

Interest Expense

         

Interest checking and money market accounts

     211        345      608        1,092

Savings deposits

     67        68      190        237

Time deposits, $100,000 and over

     505        578      1,597        1,864

Other time deposits

     708        888      2,261        2,966

Short-term borrowed funds

     64        73      250        407

Long-term debt

     374        395      1,106        1,014
                             

Total interest expense

     1,929        2,347      6,012        7,580
                             

Net interest income

     4,297        3,903      12,765        11,683

Provision for loan losses

     295        529      863        786
                             

Net interest income after provision for loan losses

     4,002        3,374      11,902        10,897
                             

Noninterest Income

         

Service charges on deposit accounts

     616        599      1,751        1,666

Other service fees and commissions

     595        737      1,627        2,205

Gain on sale of securities

     124        —        104        —  

Loss on nonmarketable securities

     —          —        (172     —  

Total other-than-temporary impairment (loss)

     —          —        (1,782     —  

Portion of loss recognized in other comprehensive income

     (183     —        1,395        —  
                             

Net impairment recognized in earnings

     (183     —        (387     —  

Gain (loss) fixed assets/other assets

     (18     6      (38     6

Income from mortgage loan sales

     364        206      2,931        1,004

Other income

     135        119      319        612
                             

Total noninterest income

     1,633        1,667      6,135        5,493
                             

Noninterest Expense

         

Salaries and employee benefits

     2,822        2,620      8,581        7,921

Net occupancy expense

     302        250      789        709

Equipment expense

     186        178      547        474

Data processing costs

     203        194      592        586

Other noninterest expense

     1,802        1,300      4,966        3,907
                             

Total noninterest expense

     5,315        4,542      15,475        13,597
                             

Income before income taxes

     320        499      2,562        2,793

Income taxes

     30        156      744        903
                             

Net income

   $ 290      $ 343    $ 1,818      $ 1,890
                             

Net Income

   $ 290        343      1,818        1,890

Dividends – preferred stock

     (159     —        (481     —  
                             

Net income available to common shareholders

   $ 131      $ 343    $ 1,337      $ 1,890
                             

Net income per common share

         

Basic

   $ 0.02      $ 0.05    $ 0.18      $ 0.25
                             

Diluted

   $ 0.02      $ 0.05    $ 0.18      $ 0.25
                             

Weighted average shares outstanding

         

Basic

     7,476,197        7,495,903      7,472,033        7,481,606

Diluted

     7,476,197        7,541,820      7,472,033        7,525,329

See accompanying notes

 

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Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

 

 

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

Balance, December 31, 2008

   7,593,929    $ 10,000    $ 500    $ (500   $ 9,492    $ 14,019    $ (736   $ 10,008      $ (1,550   $ 41,233   
                                                                         

Net income

   —        —        —        —          —        —        —          1,818        —          1,818   

Other comprehensive income

   —        —        —        —          —        —        —          —          1,782        1,782   

Release of ESOP shares

   —        —        —        —          —        —        53        —          —          53   

Stock compensation expense

   —        —        —        —          —        10      —          —          —          10   

Record preferred stock dividend and discount accretion

   —         —        —        75        —        —        —          (481     —          (406
                                                                         

Balance, September 30, 2009

   7,593,929    $ 10,000    $ 500    $ (425   $ 9,492    $ 14,029    $ (683   $ 11,345      $ 232      $ 44,490   
                                                                         

See accompanying notes

 

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Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

     Nine Months Ended
September 30,
 
     2009     2008  
Cash flows from operating activities    (dollars in thousands)  

Net income

   $ 1,818      $ 1,890   

Adjustments to reconcile net income to net cash

    

Provided by operating activities:

    

Depreciation

     583        486   

Net amortization of security premiums/discounts

     84        (158

Impairment of securities available for sale

     387        —     

Net amortization of mortgage servicing rights

     864        352   

Impairment of foreclosed real estate

     34        —     

Provision for loan losses

     863        786   

Stock compensation

     10        20   

Net realized gain on available for sales securities

     (104     —     

Income from mortgage loan sales

     (2,931     (1,004

Proceeds from sales of loans held for sale

     123,462        46,180   

Origination of loans held for sale

     (120,426     (43,804

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

     (1     5   

Loss on nonmarketable securities

     172        —     

Increase in cash surrender value of life insurance

     (141     (141

(Gain) loss on sales of foreclosed real estate

     39        (11

Release of ESOP shares

     53        60   

Net change in interest receivable

     (147     14   

Net change in other assets

     (1,426     (1,583

Net change in interest payable

     (46     (98

Net change in other liabilities

     452        451   
                

Net cash provided by operating activities

     3,599        3,445   
                

Cash flows from investing activities

    

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

     22,272        9,792   

Purchase of securities available for sale

     (36,208     (3,920

Net increase in loans

     (12,378     (19,994

Proceeds from sale of premises, equipment and other assets

     1        —     

Purchase of premises and equipment

     (2,935     (2,037

Proceeds from sales of foreclosed real estate

     1,138        135   

Investment in other assets

     (1,076     —     

(Increase) decrease in Federal Home Loan Bank stock

     (917     45   
                

Net cash used by investing activities

     (30,103     (15,979
                

Cash flows from financing activities

    

Net increase in deposit accounts

     17,860        19,954   

Net increase (decrease) in short-term borrowed funds

     7,567        (22,467

Net increase (decrease) in long-term debt

     (854     15,062   

Repurchase of common stock

     —          (412

Net proceeds from issuance of common stock

     —          300   

Tax benefit of stock options exercised

     —          26   

Dividend on preferred stock

     (406     —     
                

Net cash provided by financing activities

     24,167        12,463   
                

Decrease in cash and cash equivalents

     (2,337     (71

Cash and cash equivalents, beginning of period

     13,284        16,197   
                

Cash and cash equivalents, end of period

   $ 10,947      $ 16,126   
                

See accompanying notes

 

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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.

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 2008 Annual Report on Form 10-K. This Quarterly report should be read in conjunction with such Annual Report.

Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through November 10, 2009, the date the financial statements were issued.

 

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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,
 
     2009     2008     2009     2008  
           (in thousands)        

Net Income

   $ 290      $ 343      $ 1,818      $ 1,890   
                                

Other comprehensive income (loss)

        

Unrealized gain (losses) on available for sale securities

     1,704        (1,087     2,590        (2,283

Related tax effect

     (648     418        (982     877   

Reclassification of gains recognized in net income

     (124     —          (104     —     

Related tax effect

     48        —          40        —     

Reclassification of losses for which credit-related portion was recognized in net income

     183        —          387        —     

Related tax effect

     (71     —          (149     —     
                                

Total other comprehensive gain (loss)

     1,092        (669     1,782        (1,406
                                

Comprehensive income (loss)

   $ 1,382      $ (326   $ 3,600      $ 484   
                                

As of September 30, 2009 and December 31, 2008, total accumulated other comprehensive income (loss) was $232 thousand and $(1.6) million, respectively. The components of accumulated other comprehensive income at September 30, 2009 included $939 thousand of unrealized gains and temporary unrealized losses net of tax, and non credit losses on five other than temporarily impaired investments of $(707) thousand net of tax. Accumulated other comprehensive income at December 31, 2008 consisted of unrealized gains and temporary unrealized losses of $(1.6) million net of tax.

Note 3 – Per Share Data

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. For the three months and nine months ended September 30, 2009, the Company’s 459,856 stock options outstanding did not have a dilutive effect on per share results because the exercise prices exceeded the average share values for each period.

Basic and diluted net income per common share have been computed based upon net income available to common shareholders 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:

 

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Table of Contents
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Weighted average number of common shares outstanding

   7,593,929      7,630,292      7,593,959      7,615,995   

Effect of ESOP shares

   (117,732   (134,389   (121,926   (134,389
                        

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

   7,476,197      7,495,903      7,472,033      7,481,606   

Effect of dilutive stock options

   —        45,917      —        43,723   
                        

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

   7,476,197      7,541,820      7,472,033      7,525,329   
                        

Note 4 – Investment Securities

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

 

September 30, 2009

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

U.S. Treasury

   $ 3,026    $ 5    $ —      $ 3,031

U.S. Government agencies

     20,988      393      —        21,381

Mortgage-backed securities and CMO’s

     37,865      1,351      —        39,219

Private label CMO’s

     10,991      119      2,028      9,082

State and political subdivisions

     12,063      504      —        12,567
                           

Total securities available for sale

   $ 84,933    $ 2,372    $ 2,028    $ 85,277
                           

December 31, 2008

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

U.S. Government agencies

   $ 10,469    $ 229    $ 55    $ 10,643

Mortgage-backed securities and CMO’s

     33,149      691      225      33,615

Private label CMO’s

     11,351      —        3,570      7,781

State and political subdivisions

     16,396      417      17      16,796
                           

Total securities available for sale

   $ 71,365    $ 1,337    $ 3,867    $ 68,835
                           

At September 30, 2009, the Company owned Federal Reserve stock reported at cost of $779 thousand and included in other assets. Also at September 30, 2009 and December 31, 2008, the Company owned Federal Home Loan Bank Stock (FHLB) of $3.2 million and $2.3 million, respectively. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership and borrowings with these banks. These investments are carried at cost since there is no ready market and historically redemption has been made at par value. The Company estimated that the fair value was equal to the cost and that these investments were not impaired at September 30, 2009.

 

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Results from sales of securities available for sale for the three and nine month periods ended September 30, 2009 and September 30, 2008 are as follows:

 

     Three Months Ended
September 30,
     2009     2008
     (dollars in thousands)

Gross proceeds from sales

   $ 3,628      $  
              

Realized gains from sales

   $ 124      $ —  

Realized losses from sales

     —          —  
              

Net realized gains (losses)

   $ 124      $ —  
              
     Nine Months Ended
September 30,
     2009     2008
     (dollars in thousands)

Gross proceeds from sales

   $ 6,171      $  
              

Realized gains from sales

   $ 198      $ —  

Realized losses from sales

     (94     —  
              

Net realized gains (losses)

   $ 104      $ —  
              

At September 30, 2009 and December 31, 2008 securities available for sale with a carrying amount of $15.5 million and $13.2 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2009 and December 31, 2008. These unrealized losses on investment securities are a result of temporary fluctuations in the market prices due to a rise in interest rates, which will adjust if rates decline, and a volatile market and are in no way a reflection of the quality of the investments. At September 30, 2009 the unrealized losses related to seventeen mortgage backed securities and CMOs. At December 31, 2008 the unrealized losses related to three U.S. Government Agencies, fifteen mortgage backed securities and CMOs and twelve state and political subdivisions securities.

 

     Less than 12 Months    12 Months or More    Total

September 30, 2009

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

Securities available for sale temporary impairment:

                 

U.S. Gov’t agencies

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

Mortgage-backed securities and CMO’s

     —        —        —        —        —        —  

Private label CMOs

     —        —        2,923      634      2,923      634

State and political subdivisions

     —        —        —        —        —        —  
                                         
   $ —      $ —      $ 2,923    $ 634    $ 2,923    $ 634
                                         

Other than temporary impairment:

                 

Private label CMOs

   $ —      $ —      $ 4,097    $ 1,394    $ 4,097    $ 1,394
                                         
   $ —      $ —      $ 4,097    $ 1,394    $ 4,097    $ 1,394
                                         

 

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     Less than 12 Months    12 Months or More    Total

December 31, 2008

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

Securities available for sale temporary impairment:

                 

U.S. Gov’t agencies

   $ 3,010    $ 55    $ —      $ —      $ 3,010    $ 55

Mortgage-backed securities and CMO’s

     3,996      212      633      12      4,629      224

Private label CMO’s

     10,506      3,076      657      66      11,163      3,142

State and political subdivisions

     2,648      17      —        —        2,648      17
                                         
   $ 20,160    $ 3,360    $ 1,290    $ 78    $ 21,450    $ 3,438
                                         

Other than temporary impairment:

                 

Private label CMOs

   $ 188    $ 429    $ —      $ —      $ 188    $ 429
                                         
   $ 188    $ 429    $ —      $ —      $ 188    $ 429
                                         

The Company routinely conduct reviews to identify and evaluate each investment security to determine whether OTTI has occurred using several economic models. To determine if the unrealized loss is other-than-temporary, the Company projects total estimated defaults of the underlying troubled and non performing assets (mortgages) and multiply that calculated amount by an estimate of realizable value upon sale in the marketplace (severity) in order to determine the projected collateral loss. The Company also evaluates the current credit enhancement underlying the bond to determine the impact on cash flows. If the Company determines that a given position will be subject to a write-down, loss or decline in yield, the Company records the expected credit loss as a charge to earnings. In addition, the Company estimated the expected loss by taking into account observed performance of the underlying securities, industry studies, market forecasts, as well as our view of the economic outlook affecting bond collateral. Assumptions used in evaluating estimated cash flows include a prepayment speed of six CPR, severity rates ranging from 55% to 60% and the original purchased yield.

Based on these evaluations, the Company did have an other-than-temporary impairment on four private label collateralized mortgage obligations (“CMOs”) at September 30, 2009. In accordance with ASC 320, a $183 thousand other-than-temporary charge due to the credit-related factors was recognized in earnings during the quarter; $1.4 million was determined to relate to other non-credit-related factors in the market place. The difference between total unrealized losses and estimated credit losses on these securities was charged against equity, net of deferred taxes, as a component of Other Comprehensive Income.

The following tables for the three and nine months ended September 30, 2009, shows a roll forward of the amount related to credit losses recognized on debt securities held by the Company for a portion of an other-than-temporary impairment was recognized in other comprehensive income.

 

For three months ended September 30, 2009    (in thousands)  

Balance of credit losses on debt securities at June 30, 2009

   $ 204   

Increase related to the credit loss for which an other-than-temporary impairment was recognized

     183   
        

Balance of credit losses on debt securities at September 30, 2009

   $ 387   
        
For nine months ended September 30, 2009    (in thousands)  

Balance of credit losses on debt securities at December 31, 2008

   $ 159   

Decrease related to sales of other-than-temporary securities

     (159

Increase related to the credit loss for which an other-than-temporary impairment was recognized

     387   
        

Balance of credit losses on debt securities at the end of the current period

   $ 387   
        

 

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The aggregate amortized cost and fair value of the available for sale securities portfolio at September 30, 2009 and December 31, 2008 by remaining contractual maturity are as follows.

 

     September 30, 2009
     Amortized
Cost
   Estimated
Fair Value
     (dollars in thousands)

Securities available for sale

     

U.S. Government agencies

     

Due after one but within five years

     3,026      3,031
             
     3,026      3,031
             

U.S. Government agencies

     

Due after one but within five years

     11,387      11,594

Due after five but within ten years

     9,601      9,787
             
     20,988      21,381
             

Mortgage-backed securities

     

Due after one year but within five years

     288      295

Due after five but within ten year

     8,046      8,454

Due after ten years

     40,522      39,549
             
     48,856      48,298
             

State and political

     

Due within one year

     863      867

Due after one but within five years

     3,712      3,856

Due after five but within ten year

     2,663      2,833

Due after ten years

     4,825      5,011
             
     12,063      12,567
             

Total Securities available for sale

     

Due within one year

     863      867

Due after one but within five years

     18,413      18,776

Due after five but within ten year

     20,310      21,074

Due after ten years

     45,347      44,560
             
   $ 84,933    $ 85,277
             
     December 31, 2008
     Amortized
Cost
   Estimated
Fair Value
     (dollars in thousands)

Securities available for sale

     

U.S. Government agencies

     

Due within one year

     1,512      1,541

Due after one but within five years

     5,532      5,664

Due after five but within ten years

     3,425      3,438
             
     10,469      10,643
             

Mortgage-backed securities

     

Due after one year but within five years

     721      729

Due after five but within ten year

     4,569      4,733

Due after ten years

     39,210      35,934
             
     44,500      41,396
             

State and political

     

Due within one year

     1,063      1,080

Due after one but within five years

     5,313      5,397

Due after five but within ten year

     4,800      4,959

Due after ten years

     5,220      5,360
             
     16,396      16,796
             

Total Securities available for sale

     

Due within one year

     2,575      2,621

Due after one but within five years

     11,566      11,790

Due after five but within ten year

     12,794      13,130

Due after ten years

     44,430      41,294
             
   $ 71,365    $ 68,835
             

 

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Note 5 – Loans

 

     September 30,
2009
   December 31,
2008
     (in thousands)

Loans outstanding at period end:

     

Commercial

   $ 51,983    $ 45,470

Real estate-construction

     45,950      50,661

Real estate-residential

     141,257      139,518

Real estate-commercial

     95,947      89,561

Consumer loans

     16,511      15,499

All other loans

     146      121
             

Total

   $ 351,794    $ 340,830
             

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
     (in thousands)  

Analysis of the allowance for loan losses

        

Balance at beginning of period

   $ 4,732      $ 3,657      $ 4,361      $ 3,510   

Provision charged to operations

     295        529        863        786   

Charge-offs

     (207     (63     (448     (230

Recoveries

     8        20        52        77   
                                

Net (charge-offs)

     (199     (43     (396     (153
                                

Balance at end of period

   $ 4,828      $ 4,143      $ 4,828      $ 4,143   
                                

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 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, 2009, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

(in thousands)     

Commitments to extend credit

   $ 92,592

Credit card commitments

     8,802

Standby letters of credit

     838
      

Total commitments

   $ 102,232
      

Note 7 – Fair Value Disclosures

The Company adopted the provisions of Accounting Standards Codification (ASC) 820 Fair Value Measurements and Disclosures and ASC 825, Financial Instruments on January 1, 2008.

 

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

ASC 820 defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. When 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 ASC 310, Receivables, Loan and Debt Securities. 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 September 30, 2009, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the 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.

 

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For assets and liabilities carried at fair value, the following table provides fair value information as of September 30, 2009 and December 31, 2008:

 

     September 30, 2009
     (dollars in thousands)
     Total    Level 1    Level 2    Level 3

Investment securities available for sale

   $ 85,277    $ 24,411    $ 56,769    $ 4,097
                           

Total assets at fair value

   $ 85,277    $ 24,411    $ 56,769    $ 4,097
                           

Total liabilities at fair value

   $ —      $ —      $ —      $ —  
                           
     December 31, 2008
     (dollars in thousands)
     Total    Level 1    Level 2    Level 3

Investment securities available for sale

   $ 68,835    $ 10,643    $ 58,004    $ 188
                           

Total assets at fair value

   $ 68,835    $ 10,643    $ 58,004    $ 188
                           

Total liabilities at fair value

   $ —      $ —      $ —      $ —  
                           

The following table provides reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) during 2009:

 

(dollars in thousands)       

Balance December 31, 2008

   $ 188   

Total losses realized in earnings included in earnings

     —     

Purchases

     —     

Sales

     (188

Transfers into level 3

     4,097   
        

Balance September 30, 2009

   $ 4,097   
        

Investment securities available for sale having a Level 3 value of $188,000 at December 31, 2008 were disposed of during the first quarter of 2009 with an additional loss of $93,714.

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 September 30, 2009 and December 31, 2008:

 

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     September 30, 2009
     (dollars in thousands)
     Total    Level 1    Level 2    Level 3

Loans

   $ 8,809    $ —      $ 8,809    $ —  

Loans held for sale

     1,332      —        1,332      —  

Other real estate owned

     2,623      —        2,623      —  

Mortgage servicing rights

     1,853      —        —        1,853
                           

Total assets at fair value

   $ 14,617    $ —      $ 12,764    $ 1,853
                           

Total liabilities at fair value

   $ —      $ —      $ —      $ —  
                           
     December 31, 2008
     (dollars in thousands)
     Total    Level 1    Level 2    Level 3

Loans

   $ 6,688    $ —      $ 6,688    $ —  

Loans held for sale

     2,691      —        2,691      —  

Mortgage servicing rights

     1,293      —        —        1,293
                           

Total assets at fair value

   $ 10,672    $ —      $ 9,379    $ 1,293
                           

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.

Note 8 – Fair Values of Financial Instruments and Interest Rate Risk

The fair value estimates presented below are made at September 30, 2009 and December 31, 2008, based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price a liability could be settled for. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of September 30, 2009 and December 31, 2008.

 

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     September 30, 2009    December 31, 2008
     Carrying
Amount
   Estimated
Fair Value
   Carrying
Amount
   Estimated
Fair Value
     (dollars in thousands)

Financial Assets

           

Cash and cash equivalents

   $ 10,947    $ 10,947    $ 13,284    $ 13,284

Securities available for sale

     85,277      85,277      68,835      68,835

Loans held for investment, net

     346,966      361,957      336,469      354,083

Loans held for sale

     1,332      1,332      2,691      2,691

FHLB Stock

     3,201      3,201      2,284      2,284

FRB Stock

     779      779      —        —  

Bank-owned life insurance

     5,652      5,652      5,511      5,511

Accrued interest receivables

     2,174      2,174      2,027      2,027

Financial Liabilities

           

Deposits

   $ 371,487    $ 391,311    $ 353,627    $ 354,589

Short-term borrowings

     29,816      29,816      22,249      22,249

Long-term debt

     31,648      32,956      32,502      33,306

Accrued interest payable

     456      456      502      502

The carrying amount of cash and cash equivalents and accrued interest approximate their fair values due to the short period of time until their expected realization. Securities available for sale are carried at fair value based on quoted market prices. The carrying amount of bank-owned life insurance is the current cash value. It is not practicable to determine fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability and it is presented at its carrying value.

The following methods and assumptions were used by the Company in estimating the fair value of the financial instruments:

 

   

Loans – The fair value of loans is estimated based on discounted expected cash flows using the current interest rates at which similar loans would be made. Loans held for sale, which represent current mortgage production forward sales not yet delivered, are valued based on current market prices. The fair value of loans does not consider the lack of liquidity and uncertainty in the market that would effect the valuation.

 

   

Deposits – The fair value of checking, savings and money market deposit is deemed equal to the amount payable on demand. The fair value of certificates of deposit is estimated based on discounted cash flow analyses using offered market rates.

 

   

Borrowings – The fair value disclosed for short-term borrowings, which are composed of overnight borrowings and debt due within one year approximate the carrying value for such debt. The estimated fair value for long-term borrowings are estimated based on discounted cash flow analyses using offered market rates.

At September 30, 2009, the subsidiary banks had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, they were deemed to have no current fair value. See Note 6.

Note 9 – Recent Accounting Pronouncements

ASC 825

Accounting Standards Codification 825 (“ASC 825”), Financial Instruments, permits entities to choose to measure many financial instruments and certain other items at fair value. The

 

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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 ASC 825 did not have any impact on the Company’s consolidated financial statements.

ASC 815

In March of 2008, the Financial Accounting Standards Board issued Accounting Standards Codification 815 (“ASC 815”), Derivative and Hedging. ASC 815 amends and expands the disclosure requirement for derivative instruments and hedging activities to provide users of financial statements with an enhanced understanding of the derivative instrument’s purpose, how it is accounted for, and its impact on the financial statements. The adoption of ASC 815 on January 1, 2009 did not have a material effect on the Company’s consolidated financial statements.

ASC 855

In May 2009, the Financial Accounting Standards Board issued Accounting Standards Codification (“ASC 855”), Subsequent Events. The new standard is intended to provide guidance on when a subsequent event should be recognized in the financial statements. Subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet should be recognized at the balance sheet date. Subsequent events that provide evidence about conditions that arose after the balance sheet date but before financial statements are issued, or are available to be issued, are not required to be recognized. The date through which subsequent events have been evaluated must be disclosed as well as whether it is the date the financial statements were issued or the date the financial statements were available to be issued. For nonrecognized subsequent events which should be disclosed to keep the financial statements from being misleading, the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made, should be disclosed. This topic has been adopted and disclosures are made.

SAB 111

The Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 111 (FASB ASC 320-10-S99-1) on April 9, 2009 to amend Topic 5.M., “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities” and to supplement FSP SFAS 115-2 and SFAS 124-2. SAB 111 maintains the Staff’s previous views related to equity securities; however, debt securities are excluded from its scope. The SAB provides that “other-than-temporary” impairment is not necessarily the same as “permanent” impairment and unless evidence exists to support a value equal to or greater than the carrying value of the equity security investment, a write-down to fair value should be recorded and accounted for as a realized loss. The SAB was effective upon issuance and had no impact on the Company’s financial position.

In April 2009, the FASB issued guidance on the recognition and presentation of Other-Than-Temporary Impairments (“OTTI”). The recognition practice categorizes losses on debt securities available-for-sale or held-to-maturity determined by management to be other-than-temporarily impaired into losses due to credit issues and losses related to all other factors. Other-than-temporary impairment exists when it is more likely than not that the security will mature or be sold before its amortized cost basis can be recovered. An OTTI related to credit losses should be recognized through earnings. An OTTI related to other factors should be recognized in other comprehensive income. Required annual disclosures are now also required for interim periods (including the aging of securities with unrealized losses). The adoption of the new practices did have an effect and has been disclosed in the Company’s financial statements.

 

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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.

 

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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. Any use of “we” or “our” in the following discussion refers to the Company.

Comparison of Financial Condition at September 30, 2009 and December 31, 2008.

During the nine months ended September 30, 2009, the Company’s total assets increased $28.2 million, from $452.5 million to $480.7 million. During the same period, securities available for sale increased $16.5 million or 23.9%, from $68.8 million at December 31, 2008 to $85.3 million at September 30, 2009. Loans held for investment also increased $11.0 million to $351.8 million.

Cash and cash equivalents decreased $2.3 million during the nine months ended September 30, 2009. Cash and due from banks increased $4.9 million, while interest-earning deposits with banks declined $7.2 million.

Investment securities increased $16.5 million or 23.9% for the nine months ended September 30, 2009. As a result of the financial markets dislocations which occurred in the second half of 2008, the Company had $2.5 million in net unrealized losses at December 31, 2008. Actions taken by the Federal Reserve have mostly stabilized the markets and brought about the resumption of more rational pricing. As a result on September 30, 2009, the Company had net unrealized gains of $344 thousand. The Company owns $11.0 million in whole loan private label CMOs. This portion of the investment portfolio had net unrealized losses of $1.9 million. The Company evaluated its entire investment portfolio for other than temporary impairments. Management believes that all of the unrealized losses are only temporary with the exception of five private label CMO investments. Based on the erosion of the underlying collateral, management determined that an impairment charge was warranted. Thus, the Company recorded $387 thousand in impairments on these five bonds. During the period, the Company purchased $35.9 million in new securities, had $3.0 million in municipal bonds called and sold $3.2 million in securities. At September 30, 2009 the Company had net realized gains of $104 thousand.

As previously stated, loans held for investment increased $11.0 million to $351.8 million. The Company experienced positive growth trends in the commercial, consumer and commercial real estate loans at a growth rate of 14.3%, 6.5% and 7.1%, respectively. The remaining areas of the loan portfolio declined during the first nine months of 2009. Loans held for sale decreased 50.5% or $1.4 million during the period. The allowance for loan losses was $4.8 million at September 30, 2009, which represents 1.37% of the loan portfolio, an increase from $4.4 million or 1.28% at December 31, 2008.

Other changes in our consolidated assets are related to premises and equipment, interest receivable, Federal Home Loan Bank stock, bank owned life insurance, other real estate owned and other assets. The Company completed the purchase of a tract of land for a future branch, purchased a branch building that the Company had been leasing for a long period of time and purchased two other buildings to be used for future office space. Construction has begun on a new branch office in Locust, NC, which will be completed in 2010. These purchases were the

 

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leading factors in the increase of $2.4 million in fixed assets. Bank owned life insurance and interest receivable increased $141 thousand and $147 thousand, respectively, while other real estate owned decreased $193 thousand. The Company did have an investment of $172 thousand in common stock of the parent company of Silverton Bank. On May 1, 2009, the Office of the Comptroller of the Currency closed Silverton Bank, and the Federal Deposit Insurance Corporation (“FDIC”) was appointed receiver. The Company has written off this investment as of March 31, 2009. Federal Home Loan Bank stock increased $917 thousand because member institutions are required to increase their ownership as they increase their utilization of FHLB borrowings. The Company was also required to increase their ownership in Federal Reserve Bank stock by $210 thousand during the period.

Customer deposits, our primary funding source, experienced a $17.9 million increase during the nine months ended September 30, 2009, increasing from $353.6 million to $371.5 million. Interest checking and money market accounts increased $3.3 million, while savings deposits grew $6.4 million. Time deposits over $100,000 and other time deposits experienced positive growth of $7.9 million and $2.4 million, respectively. These positive growth trends were partially offset by a decline in demand, noninterest-bearing accounts of $2.2 million.

Total borrowings increased $6.7 million for the period which consist of both short-term and long-term borrowed funds primarily from the Federal Home Loan Bank. At September 30, 2009, $42.9 million of the total borrowings of $61.5 million were comprised of Federal Home Loan Bank advances. In addition the Company executed a $200 thousand note payable for a building that was purchased during the period and is payable in four annual payments of $50 thousand each. The Company retired a $2.6 million short-term note to a correspondent bank in the first quarter of 2009.

Other liabilities increased from $2.4 million at December 31, 2008 to $2.8 million at September 30, 2009, an increase of $452 thousand.

At September 30, 2009, total shareholders’ equity was $44.5 million, an increase of $3.3 million from December 31, 2008. Net income for the period was $1.8 million. Unrealized gains on investment securities, net of tax improved $1.8 million. These increases were offset as the Company also recorded $406 thousand in dividends and discount accretions on the series A and B preferred stock for the nine months period. At September 30, 2009, the Company and its subsidiary banks exceeded all applicable regulatory capital requirements.

Comparison of Results of Operations For the Three Months Ended September 30, 2009 and 2008.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $290 thousand for the three months ended September 30, 2009, as compared to $343 thousand for the three months ended September 30, 2008, a decrease of $53 thousand. Net income available to common shareholders was $131 thousand or $0.02 per common share at September 30, 2009, compared to $343 thousand or $0.05 per common share at September 30, 2008. Net income available to common shareholders is net income less any dividends and discount accretions on preferred stock related to the $10 million of capital received from the United States Department of the Treasury under the capital purchase program in December 2008.

Net Interest Income

The Company’s primary source of income, net interest income, increased $394 thousand or 10.1% for the three months ended September 30, 2009, as compared to the same period for 2008. Refer to the nine month discussion on page 24 for further information.

 

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Provision and Allowance for Loan Losses

The provision for loan losses was $295 thousand for the three months ending September 30, 2009 compared to $529 thousand for the same period in 2008. There were net loan charge-offs of $199 thousand for the three months ended September 30, 2009 as compared with net loan charge-offs of $43 thousand during the same period of 2008. Refer to the Asset Quality discussion on page 27 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like nearly all financial institutions, diversification of our earnings base is of major importance to our long term success. Total noninterest income decreased $34 thousand for the three month period ending September 30, 2009 as compared to the same period in 2008. Although the volume of mortgage activity has slowed considerably during the third quarter, income from mortgage loan sales increased $158 thousand for the quarter ended September 30, 2009, as compared to the same period in 2008. Service charges on deposit accounts produced earnings of $616 thousand for the three months ended September 30, 2009, an increase of 2.8% due to growth in deposit balances. Other service fees and commissions experienced a 19.3% decrease for the comparable three month period. In this category $66 thousand of the decrease is attributable to reductions in brokerage commissions and assets under management. Net realized gains on the sale and call of securities available for sale was $124 thousand for the period. As previously discussed the Company recorded an additional other-than-temporary impairment of $183 thousand during the quarter. No impairment charges were recognized during the same period in 2008.

Noninterest Expense

Noninterest expense for the quarter ended September 30, 2009 was approximately $5.3 million compared to $4.5 million for the same period of 2008, an increase of $773 thousand. Salaries and employee benefits, the largest component of noninterest expense, increased $202 thousand, from $2.6 million for the quarter ending September 30, 2008 to $2.8 million for the same period in 2009. This increase is attributable to normal salary increases, additions to staff and higher benefit expenses. Net occupancy and equipment expense had a combined increase of $60 thousand. Other noninterest expense increased $502 thousand for the comparable three month period. The majority of the increase in other noninterest expense is attributed to an increase in FDIC assessment costs of $353 thousand. Not only has the assessment rate charged by the FDIC to all FDIC-insured financial institutions increased but also the Company received and utilized FDIC credits that reduced its assessment charges during 2008. The table below reflects the additional breakdown of other noninterest expense.

 

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Other noninterest expense

 

     Three Months Ended
September 30,
     2009     2008
     (in thousands)

Professional fees and services

   $ 301      $ 184

Marketing and donations

     176        146

Office supplies and printing

     66        62

Telephone and data lines

     55        57

Electronic banking expense

     184        221

Software amortization and maintenance

     118        114

Loan collection expense

     (19     46

Foreclosed real estate expense

     68        17

Shareholder relations expense

     51        43

Dues and subscriptions

     37        32

Postage

     51        45

FDIC assessment

     384        31

Other

     330        302
              

Total

   $ 1,802      $ 1,300
              

Income Tax Expense

The Company had income tax expense of $30 thousand for the three months ended September 30, 2009 resulting in an effective tax rate of 9.4% compared to income tax expense of $156 thousand or an effective rate of 31.3% in the 2008 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 decrease in the effective tax rate resulted primarily from the increase in the level of such tax free income as a percentage of income before income taxes in the current year quarter compared to the 2008 quarter.

Comparison of Results of Operations For the Nine Months Ended September 30, 2009 and 2008.

Net Income and Net Income Available to Common Shareholders

The Company reported net income of approximately $1.8 million for the nine months ended September 30, 2009, compared to approximately $1.9 million for 2008. Net income available to common shareholders was $1.3 million or $0.18 per common share at September 30, 2009, compared to $1.9 million or $0.25 per common share at September 30, 2008. Net income available to common shareholders is net income less any dividends and discount accretions on preferred stock pertaining to the $10 million of capital received from the United States Department of the Treasury in December 2008.

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 generally 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

 

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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, 2009 was $12.8 million as compared with $11.7 million during the nine months ending September 30, 2008, resulting in an increase of $1.1 million, or 9.3%. During the nine months ending September 30, 2009 our growth in the volume of interest-earning assets outpaced the growth in interest-bearing liabilities by $1.0 million. The average yield on our interest–earning assets decreased 83 basis points to 5.94%, while the average rate we paid for our interest-bearing liabilities also decreased 87 basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve adjusts interest rates, while, interest-bearing time deposits adjust at the time of maturity. The aforementioned decreases resulted in an increase of three basis points in our interest rate spread, from 3.77% in 2008 to 3.80% in 2009. Our net interest margin was 4.08% and 4.17% for the comparable periods in 2009 and 2008, respectively.

The following table presents average balance sheets and a net interest income analysis for the nine months ended September 30, 2009 and 2008:

Average Balance Sheet and Net Interest Income Analysis

For the Nine Months Ended September 30,

(in thousands)

 

     Average Balance    Income/Expenses    Rate/Yield  
     2009    2008    2009    2008    2009     2008  

Interest-earning assets:

                

Taxable securities

   $ 61,616    $ 36,763    $ 2,344    $ 1,493    5.09   5.42

Nontaxable securities (1)

     14,992      14,298      502      504    7.28   7.66

Short-term investments

     7,222      3,801      57      59    1.06   2.07

Taxable loans

     343,121      330,286      15,712      17,201    6.12   6.96

Non-taxable loans (1)

     5,302      3,909      162      89    6.63   7.45
                                        

Total interest-earning assets

     432,253      389,057      18,777      19,346    5.94   6.77

Interest-bearing liabilities:

                

Interest-bearing deposits

   $ 320,805      286,882      4,656      6,159    1.94   2.87

Short-term borrowed funds

     25,019      17,589      250      407    1.34   3.09

Long-term debt

     30,952      33,117      1,106      1,014    4.78   4.09
                                        

Total interest bearing liabilities

     376,776      337,588      6,012      7,580    2.13   3.00
                                        

Net interest spread

   $ 55,477    $ 51,469    $ 12,765    $ 11,766    3.80   3.77
                                        

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

               4.08   4.17
                        

 

(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.

Provision and Allowance for Loan Losses

The provision for loan losses was $863 thousand for the nine months ending September 30, 2009 compared to $786 thousand for the same period in 2008. There were net loan charge-offs of $396 thousand for the nine months ended September 30, 2009 as compared with net loan charge-offs of $153 thousand during the same period of 2008. Refer to the Asset Quality discussion on page 27 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like nearly all financial institutions, diversification of our earnings base is of major importance to our long term success. Total noninterest income increased $642 thousand for the nine month period ending

 

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September 30, 2009 as compared to the same period in 2008. The leading factor for this increase was the growth in income from mortgage loan sales. With the drastic drop in interest rates during the fourth quarter of 2008, many customers have been able to take advantage by refinancing their mortgage loans to much lower rates. As a result of all this refinancing activity, income from mortgage loan sales for the nine months ended September 30, 2009 was $2.9 million or an increase of $1.9 million over the same period in 2008. Service charges on deposit accounts produced earnings of $1.8 million for the nine months ended September 30, 2009 and reflected an increase of 5.1% compared to the prior year which was attributable to growth in deposit balances. Other service fees and commissions experienced a 26.2% decrease versus the comparable nine month period. In this category, $256 thousand of the decrease was attributable to reductions in brokerage commissions and asset under management. The current downturn in the financial markets and the over all economy has made many investors more nervous about investing in the financial markets thus resulting in the decrease in commission income. Mortgage servicing rights, another component of this category decreased $275 thousand as result of heavy mortgage refinancing volume during the nine month period. The $172 thousand investment the Company had in the stock of Silverton Bank’s holding company was a nonmarketable security that was written off during the first quarter of 2009 due to the take over of Silverton by the regulators. The Company realized gains on the sale and the call of securities available for of sale of $104 thousand. The Company recorded an other-than-temporary impairment of $387 thousand during the nine month period ended September 30, 2009. Other income was down $293 thousand compared to the nine month period of 2008. Of that amount, $221 thousand relates to the 2008 non-recurring gain recognized from the sale of MasterCard and Visa stock.

Noninterest Expense

Noninterest expense for the nine months ended September 30, 2009 was $15.5 million compared to $13.6 million for the same period of 2008, an increase of $1.9 million. Salaries and employee benefits, the largest component of noninterest expense, increased $660 thousand, from $7.9 million for the nine months ending September 30, 2008 to $8.6 million for the same period in 2009. This increase is attributable to normal salary increases, additions to staff and higher benefit expenses. Net occupancy expense and equipment expense had a combined increase of $153 thousand due to the additional depreciation and utilities on a renovated building and associated new furniture and equipment put into service in late 2008. Other noninterest expense increased $1.0 million for the comparable nine month period. The major contributing factor to this increase was an increase of $662 thousand in FDIC assessment charges. The aforementioned rate increases coupled with a special assessment levied on all FDIC-insured financial institutions during the second quarter account for this increase. Another attributing factor to the increase was the fact that during 2008, the Company received and utilized FDIC credits that reduced its assessment charges. Other factors influencing the increase in other noninterest expense include an increase of $191 thousand in professional fees and services, which includes legal fees related to loan collections and foreclosure expense and an increase in foreclosed real estate expense totaling $99 thousand. The table below reflects the composition of other noninterest expense.

 

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Other noninterest expense

 

     Nine Months Ended
September 30,
     2009    2008
     (in thousands)

Professional fees and services

   $ 713    $ 522

Marketing and donations

     509      463

Office supplies and printing

     226      197

Telephone and data lines

     166      179

Electronic banking expense

     539      607

Software amortization and maintenance

     341      327

Loan collection expense

     171      173

Foreclosed real estate expense

     136      37

Shareholder relations expense

     151      144

Dues and subscriptions

     122      109

Postage

     153      141

FDIC assessment

     732      70

Other

     1,007      938
             

Total

   $ 4,966    $ 3,907
             

Income Tax Expense

The Company had income tax expense of $744 thousand for the nine months ended September 30, 2009 resulting in an effective tax rate of 29.0% compared to income tax expense of $903 thousand and an effective rate of 32.3% in the 2008 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 decrease in the effective tax rate resulted primarily from the increase in the level of such tax free income as a percentage of income before income taxes in the current year compared to the 2008 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 following: 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 a 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 is designed to help 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 best 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 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 $863 thousand for the nine months ended September 30, 2009 as compared to $786 thousand for the same period in 2008. Additionally, the allowance expressed as a percentage of loans held for investment was 1.37% at September 30, 2009 compared to 1.28% December 31, 2008. At September 30, 2009 the levels of our impaired loans, which includes all loans in nonaccrual status and other loans deemed by management to be impaired, were $18.7 million compared to $12.5 million at December 31, 2008, an increase of $6.2 million. The increase in the level of impaired loans primarily resulted from three customer relationships that are included in impaired loans totaling $5.7 million. One of these relationships totaling $1.3 million was in nonaccrual at September 30, 2009. Total nonaccrual loans, which are a component of impaired loans, increased from $3.9 million at December 31, 2008 to $6.6 million at September 30, 2009. The Company had one relationship of $789 thousand that was in nonaccrual at the end of the period that has now been foreclosed and is currently included in other real estate owned. The Company had net loan charge-offs for the first nine months of 2009 of $396 thousand compared to net loan charge-offs of $153 thousand for the same period in 2008.

The allowance expressed as a percentage of gross loans held for investment increased nine basis points from 1.28% at December 31, 2008 to 1.37% at September 30, 2009. The allowance, as a percentage of total impaired loans, decreased from 53.3% at December 31, 2008 to 52.7% at September 30, 2009. Likewise, the portion of the allowance specifically allocable to impaired loans decreased from 18.5% at December 31, 2008 to 13.6% at September 30, 2009. Nonperforming loans, which consist solely of nonaccrual loans, were $6.6 million at September 30, 2009 as compared to $3.9 million at December 31, 2008.

 

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Nonperforming loans to total loans increased from 1.14% at December 31, 2008, to 1.88% at September 30, 2009. The total allowance relative to non-performing loans decreased from 111.87% at the end of 2008 to 73.16% at September 30, 2009. During the period the Company had a decrease in other real estate owned of $193 thousand. With the exception of the three aforementioned relationships, of which $4.5 million is in land development, delinquencies have remained relatively constant during the period, even in these difficult economic times Management believes the current level of allowance for loan losses is appropriate given the risk inherent in the Company’s loan portfolio at this time.

The following nonperforming loan table shows the comparison for the nine months ended September 30, 2009 to December 31, 2008:

Nonperforming Assets

(dollars in thousands)

 

     September 30,
2009
    December 31,
2008
 

Nonperforming assets:

    

Nonaccrual loans

   $ 6,600      $ 3,898   

Other real estate owned

     2,623        2,816   
                

Total nonperforming assets

   $ 9,223      $ 6,714   
                

Accruing loans past due 90 days or more

   $ 8      $ 3   

Allowance for loans losses

     4,828        4,361   

Nonperforming loans to total loans

     1.88     1.14

Allowance for loan losses to total loans

     1.37     1.28

Nonperforming assets to total loans and other real estate

     2.62     1.97

Nonperforming assets to total assets

     1.92     1.48

Allowance for loan losses to nonperforming loans

     73.16     111.87

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 $18.8 million at September 30, 2009, with available credit of $18.8 million, established borrowing relationships with the Federal Home Loan Bank, with available credit of $21.9 million, access to borrowings from the Federal Reserve Bank discount window, and the issuance of commercial paper. The Company has also secured long-term debt from other sources. Total

 

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debt from these sources aggregated $61.5 million at September 30, 2009, compared to $54.8 million at December 31, 2008.

Banks and bank holding companies, as regulated institutions, must meet required levels of capital. The Federal Reserve, the primary federal regulator of the Company and its subsidiary banks, has 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 leverage ratio of 4 percent. Banks, which meet or exceed a Tier 1 risk-based capital ratio of 6 percent, a total risked-based capital ratio of 10 percent and a 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.

The Company and its subsidiary banks have each maintained capital levels exceeding minimum levels for “well capitalized” banks and bank holding companies. The Company expects to continue to exceed minimum capital requirements without altering current operations or strategy. The Company completed a private placement of subordinated debt during 2008 that qualifies as regulatory capital. At September 30, 2009, the Company had $7.4 million in subordinated debt and $10 million in preferred stock issued to the United States Department of the Treasury.

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. In management’s opinion, the Company’s market risk profile has not changed significantly since December 31, 2008.

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 (“Exchange Act”) Rule 13a-15.

Based upon that evaluation, the principal executive officer and principal financial officer concluded that in their opinion, the Company’s disclosure controls and procedures were

 

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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 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.

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 third quarter of 2009. 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 ensuring 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. From time to time the Banks are engaged in ordinary routine litigation incidental to their business.

Item 1A. Risk Factors

Not applicable.

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

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.

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

 

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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

 

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Item 6. Exhibits

 

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 ***

10.5

  Amendment to the Employee Stock Ownership Plan and Trust ****

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.
****   Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2008.
*****   Filed here within this report.

 

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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: November 12, 2009   By:   /S/    ROGER L. DICK        
    Roger L. Dick
    President and Chief Executive Officer
Date: November 12, 2009   By:   /S/    ROBERT O. BRATTON        
    Robert O. Bratton
    Principal Financial Officer

 

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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 *

10.5

  Amendment to the Employee Stock Ownership Plan and Trust *

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
**    Filed here within this report

 

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