<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
( X ) QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission file Number 0-22062
UWHARRIE CAPITAL CORP
(Exact name of small business issuer as specified in its charter)
NORTH CAROLINA 56-1814206
(State of incorporation) (I.R.S Employer Identification No.)
167 North Second Street
Albemarle, North Carolina 28001
(Address of principal executive offices)
Issuer's telephone number, including area code: (704) 983-6181
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 of 15(d) of the Exchange Act during the past 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. Yes X No
__ __
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
Title of Each Class Outstanding at July 31, 1998
- ------------------- ----------------------------
Common stock, par value $1.25 per share 2,294,536 shares
Transitional Small Business Disclosure Format (check one):
Yes ___ No _X_
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UWHARRIE CAPITAL CORP AND SUBSIDIARY
FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C> <C>
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets, June 30, 1998 and 1997 (Unaudited) 3
Consolidated Statements of Income for the Three Months and the
Six Months Ended June 30, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Changes in Shareholders' Equity
for the Six Months Ended June 30, 1998 and 1997 (Unaudited) 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II OTHER INFORMATION
Item 4 Submission of Matters to Vote of Security Holders 15
Item 6 Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBIT 27 Financial Data Schedule for the Six Months Ended June 30, 1998 17
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Consolidated Balance Sheets (Unaudited)
- -------------------------------------------------------------------------------
(In thousands)
June 30,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,506 $ 4,675
Securities available for sale:
U.S. Treasury 5,971 4,993
U.S. Government agencies and corporations 14,939 13,594
State and political subdivisions 5,501 5,738
Other securities 1,081 1,579
----------- -----------
Total securities 27,493 25,904
----------- -----------
Federal funds sold 925
Loans (Note 2) 117,625 108,731
Less: Allowance for loan losses 1,162 1,100
----------- -----------
Loans, net 116,463 107,631
----------- -----------
Premises and equipment, net 2,429 2,357
Interest receivable 973 910
Other assets 1,212 1,142
----------- -----------
Total assets $ 154,001 $ 142,619
=========== ===========
LIABILITIES
Deposits:
Demand deposits $ 16,109 $ 14,162
Money market and NOW accounts 28,123 29,672
Savings deposits 33,669 29,165
Time deposits $100,000 and over 16,898 8,038
Other time deposits 33,176 32,442
----------- -----------
Total deposits 127,975 113,479
----------- -----------
Federal funds purchased - 935
Securities sold under repurchase agreements 3,778 3,882
Commercial paper 1,339 239
Other short-term borrowed funds - 4,000
Long-term debt 6,951 7,700
Interest payable 146 190
Other liabilities 536 322
----------- -----------
Total liabilities 140,725 130,747
----------- -----------
Off balance sheet items, commitments and contingencies (Note 4)
SHAREHOLDERS' EQUITY
Common stock, par value $1.25 per share;
authorized 6,000,000; issued and outstanding:
2,294,536 shares at June 30, 1998
2,172,506 shares at June 30, 1997 2,868 2,716
Additional paid-in capital 5,578 4,572
Undivided profits 4,496 4,364
Accumulated other comprehensive income
Net unrealized gain on securities available for
sale, net of related tax effect 334 220
----------- -----------
Total shareholders' equity 13,276 11,872
=========== ===========
Total liabilities and shareholders' equity $ 154,001 $ 142,619
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
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<TABLE>
<CAPTION>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Consolidated Statements of Income (Unaudited)
- ------------------------------------------------------------------------
(In thousands) Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans $ 2,507 $ 2,334 $ 4,945 $ 4,537
Interest on securities:
U.S. Treasury 78 74 152 139
U.S. Government agencies and
corporations 232 247 467 478
State and political subdivisions 80 85 165 171
Other 19 16 39 36
Other interest income 12 9 19 16
---------- ---------- --------- ----------
Total interest income 2,928 2,765 5,787 5,377
INTEREST EXPENSE:
Interest on deposits and borrowed
funds 1,285 1,218 2,530 2,384
---------- ---------- --------- ----------
NET INTEREST INCOME 1,643 1,547 3,257 2,993
Provision for loan losses 51 47 64 85
---------- ---------- --------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,592 1,500 3,193 2,908
---------- ---------- --------- ----------
NONINTEREST INCOME:
Service charges on deposit accounts 236 233 463 449
Other service fees and commissions 159 122 280 249
Other income 17 17 17 29
---------- ---------- --------- ----------
Total noninterest income 412 372 760 727
---------- ---------- --------- ----------
NONINTEREST EXPENSE:
Salaries, wages and employee
benefits 804 708 1,598 1,370
Occupancy expenses 66 62 141 117
Equipment expense 111 100 217 200
Data processing 114 121 219 243
Other expenses 413 412 824 796
---------- ---------- --------- ----------
Total noninterest expense 1,508 1,403 2,999 2,726
---------- ---------- --------- ----------
INCOME BEFORE INCOME TAXES 496 469 954 909
Provision for income taxes 157 151 297 283
---------- ---------- --------- ----------
NET INCOME $ 339 $ 318 $ 657 $ 626
========== ========== ========= ==========
Net Income Per Common Share
Basic $ .07 $ .07 $ .14 $ .14
Assuming dilution $ .07 $ .07 $ .14 $ .13
Weighted Average Shares Outstanding
Basic 4,585,357 4,344,191 4,576,614 4,564,862
Effect of dilutive stock options 160,798 105,255 160,798 105,255
---------- ---------- --------- ----------
Assuming dilution 4,746,155 4,449,446 4,737,412 4,670,117
========== ========== ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
4
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<TABLE>
<CAPTION>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
For The Six Months Ended June 30, 1998 and 1997 (Unaudited)
- -----------------------------------------------------------
(In thousands) Common Undivided Accumulated Other
Stock Surplus Profits Comprehensive Income
----------- ----------- ---------- --------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ 2,719 $ 4,594 $ 3,738 $ 253
Repurchase of common stock (6) (25) - -
Stock options exercised 3 3
Net income - - 626 -
Other comprehensive income,
net of tax:
Net increase (decrease) in
market value of securities
available for sale - - - (33)
----------- ----------- ----------- -----------
Balance, June 30, 1997 $ 2,716 $ 4,572 $ 4,364 $ 220
=========== =========== =========== ===========
Balance, January 1, 1998 $ 2,853 $ 5,524 $ 3,838 $ 319
Stock options exercised 15 54 - -
Net income - - 657 -
Other comprehensive income,
net of tax:
Net increase (decrease) in
market value of securities
available for sale - - - 16
=========== =========== =========== ===========
Balance, June 30, 1998 $ 2,868 $ 5,578 $ 4,495 $ 335
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
5
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<TABLE>
<CAPTION>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1998 and 1997 (In thousands)
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 657 $ 626
Adjustments to reconcile net income to net cash provided
by operations
Depreciation 139 126
Amortization of investment premiums and discounts, net 22 (12)
Provision for loan losses 62 85
Deferred income tax benefit - (7)
Gain on sale of securities available for sale (1) -
(Gain) loss on foreclosed properties 14 -
Changes in assets and liabilities:
Interest receivable (42) (52)
Other assets 3 (98)
Income taxes receivable (47) 20
Interest payable (25) 14
Income taxes payable - 10
Other liabilities 15 (63)
------------ -----------
Net cash provided by operating activities 797 649
------------ -----------
INVESTING ACTIVITIES
Net (increase) decrease in due from banks, interest-bearing (319) 80
Proceeds from sales of securities available for sale - 571
Proceeds from maturities of securities available for sale 2,567 3,017
Purchase of securities available for sale (6,208) (4,315)
Net (increase) decrease in federal funds sold (925) -
Net increase (decrease) in loans made to customers (3,665) (7,913)
Purchase of premises and equipment (224) (365)
Proceeds from sale of / (additions) to foreclosed
properties 34 (42)
------------ -----------
Net cash used in investing activities (8,740) (8,967)
------------ -----------
FINANCING ACTIVITIES
Net increase in deposits accounts 11,070 8,879
Net increase (decrease) in federal funds purchased (1,400) 935
Net increase (decrease) in securities sold under
repurchase agreements (269) (4,274)
Proceeds from long-term advances for Federal Home Loan Bank 2,000 2,000
Repayment of long-term advances for Federal Home Loan Bank (2,623) (565)
Repayment of notes payable (1,223) 1,239
Proceeds from issuance of common stock 69 6
Repurchases of common stock - (30)
------------ -----------
Net cash provided by financing activities 7,624 8,190
DECREASE IN CASH AND DUE FROM BANKS (319) (128)
Cash and due from banks at beginning of period 4,322 4,583
------------ -----------
Cash and due from banks at end of period $ 4,003 $ 4,455
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
6
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UWHARRIE CAPITAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ------------------------------------------------------
NOTE 1 - ACCOUNTING POLICIES
The financial statements and accompanying notes are presented on a consolidated
basis including Uwharrie Capital Corp (the "Company"), it's Subsidiary, Bank of
Stanly ("the Bank") and the Bank's subsidiaries. Bank of Stanly consolidates the
Strategic Alliance Corporation and BOS Agency, Inc. each of which are
wholly-owned by the Bank.
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 generally accepted accounting principles and all
material adjustments necessary for a fair presentation of results of interim
periods have been made. The results of operations for the interim periods are
not necessarily indicative of the results which may be expected for an entire
year. Management is not aware of economic events, outside influences or changes
in concentrations of business that would require additional clarification or
disclosure in the consolidated financial statements. Certain prior period
amounts have been reclassified to conform to current period classifications.
NOTE 2 - LOANS
Loans outstanding at period end:
June 30,
(In thousands) 1998 1997
----------- ----------
Real estate loans $ 89,376 $ 82,414
Commercial and industrial 17,190 15,699
Loans to individuals for household, family and other
consumer expenditures 10,987 10,564
All other loans 72 54
----------- ----------
Total $ 117,625 $ 108,731
=========== ==========
NOTE 3 - COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), which establishes standards for the reporting and display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income is defined as the change in equity during the period for
non-owner transactions and is divided into net income and other comprehensive
income. Other comprehensive income includes revenues, expenses, gains, and
losses that are excluded from earnings under current accounting standards. This
statement does not change or modify the reporting or display in the income
statement. The Company has adopted SFAS No. 130 effective January 1, 1998.
Comparative financial statements for prior periods also reflect the application
of this statement.
NOTE 4 - PER SHARE DATA
On July 21, 1998, the Company's Board of Directors declared a two-for-one stock
split, effected in the form of a dividend, whereby all shareholders will receive
an additional share of common stock for each share of stock currently held. The
dividend is payable on August 20, 1998 to shareholders of record on August 4,
1998. All information presented in the accompanying interim consolidated
financial statements regarding earnings per share and weighted average number of
shares outstanding has been computed given effect to this stock dividend.
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NOTE 5 - COMMITMENTS AND CONTINGENCIES
Financial instruments with off-balance-sheet risk
- -------------------------------------------------
The bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its 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 Bank's risk of loss with the unfunded loans and lines of credit or standby
letters of credits is represented by the contractual amount of these
instruments. The Bank uses the same credit policies in making commitments under
such instruments as it does 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 June 30, 1998,
outstanding financial instruments who contract amounts represent credit risk
were approximately:
Commitments to extend credit $ 14,216,000
Credit card commitments 3,211,000
Standby letters of credit 763,000
------------
$ 18,190,000
============
Contingencies
- -------------
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the financial
statements.
Financial instruments with concentration of credit risk
- -------------------------------------------------------
The Bank makes commercial, agricultural, real estate mortgage, home equity and
consumer loans primarily in Stanly County. A substantial portion of the Bank's
customers' abilities to honor their contracts is dependent on the business
economy in Albemarle, North Carolina and surrounding areas. Although the Bank's
loan portfolio is diversified, there is a concentration of mortgage loans in the
portfolio. The Bank's policies for real estate lending require collateralization
with 20% equity or that the loan be underwritten to conform to FannieMae
guidelines that would allow securitization and/or sale of the loans. Lending
policy for all loans requires that they be supported by sufficient cash flows.
Credit losses related to this real estate concentration are consistent with
credit losses experienced in the portfolio as whole.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Uwharrie Capital Corp, (the Company) was incorporated as Stanly Capital Corp
under the laws of the State of North Carolina as a one bank holding company for
Bank of Stanly (the Bank) in July 1993. The Company changed its name to Uwharrie
Capital Corp in April 1997 to broaden its community perspective and expand its
vision beyond its current service area in Stanly County to the Uwharrie Lakes
region, consisting of a contiguous seven county area in our state.
The Bank was incorporated in 1983 and since commencement of its operations in
January 1984, has engaged in the retail and commercial banking business through
its five offices located in Stanly County, North Carolina. Bank of Stanly
competes with five other commercial banks, a savings bank and a credit union in
its service area, primarily for lending activities and deposit customers. The
Bank enjoys a good reputation as a community focused financial institution, and
has been successful in achieving substantial growth in a market that has not
displayed a significant amount of growth potential.
The Company's financial condition and results of operation are presented in the
following narrative and incorporated tables. References to changes in assets and
liabilities represent end of period balances unless otherwise noted.
EARNINGS
The second quarter of 1998 reflected good operating results with net income of
$339 thousand, an increase of 6.6% when compared to the second quarter of 1997.
This improvement can be primarily attributed to an increase in net interest
income due to growth in the loan portfolio and a relatively stable net interest
margin.
Results for the first six months of 1998 reflect net earnings of $657 thousand
or $.14 per share, after giving effect to the two-for-one stock split declared
by the Board of Directors on July 21, 1998. This compares to income of $626
thousand or $.14, as restated, for the same period in 1997. An increase of $264
thousand in net interest income in the six-month period was largely offset by an
increase of $229 thousand in personnel costs.
NET INTEREST INCOME
Net interest income represents the gross profit from the lending and investment
activities of a banking organization and is the most significant factor
affecting the earnings of the Company. It is the amount by which interest
generated by earnings assets exceeds the cost of funds supporting them.
The two primary earning assets are loans and investment securities. Income
generated from these assets is a function of their quality, growth and yield.
Growth reflected in earning assets was primarily the result of demand for
quality loans as average loans increased by $9.1 million or 8.7%. Average
investment securities increased $695 thousand or 2.7%. The yield on earning
assets, computed on a tax equivalent basis, increased slightly from 8.24% to
8.25% for the six months ended June 30, 1988 and 1997, respectively. Interest
income increase $410 thousand, representing an increased of 7.6% when comparing
these periods.
The cost of funding sources, primarily deposits and other borrowings, increased
$146 thousand or 6.1% for the six months ended June 30, 1998 due to an increased
volume of average interest-bearing liabilities of $6.8 million. The
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average rate paid on interest-bearing liabilities increased one basis point from
4.23% in 1997 to 4.24% in 1998. Strong deposit growth enabled the Company to
reduce the level of borrowings during the current period. Deposits increased to
88.7% of total interest-bearing liabilities at June 30, 1998 compared to 85.3%
at June 30, 1997.
Net interest income increased $264 thousand or 8.8% when comparing the six month
periods presented, attributable to an increased volume of interest earning
assets. The net interest margin increased five basis points from 4.73% in the
first six months of 1997 to 4.78% in the current period.
The following tables present average balance sheets and a net interest income
analysis for the six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Average Balance Sheet and Net Interest Income Analysis
For the Six Months Ended June 30,
- -------------------------------------------------------------------------------------
Average Level Income/Expense Rate/Yield
($ in thousands) 1998 1997 1998 1997 1998 1997
--------- -------- --------- -------- --------- --------
Interest-earning
assets:
<S> <C> <C> <C> <C> <C> <C>
Loans (1) $114,231 $105,082 $ 4,945 $ 4,537 8.73% 8.71%
Taxable securities 21,025 20,250 657 653 6.30% 6.50%
Nontaxable securities
(2) 5,662 5,742 166 171 9.10% 9.24%
Other (3) 474 544 19 16 8.08% 5.93%
--------- -------- --------- -------- --------- --------
Total
interest-earning
assets 141,392 131,524 5,787 5,377 8.25% 8.24%
--------- -------- --------- -------- --------- --------
Interest-bearing
liabilities:
Interest-bearing
deposits 105,416 96,917 2,157 1,925 4.07% 4.01%
Short-term borrowings 9,042 9,288 191 226 4.86% 4.91%
Long-term borrowings 6,272 7,457 182 233 6.44% 6.30%
--------- -------- --------- -------- --------- --------
Total
interest-bearing
liabilities 120,730 113,662 2,530 2,384 4.24% 4.23%
--------- -------- --------- -------- --------- --------
Net interest spread $ 18,212 $17,956 $ 3,257 $ 2,993 4.02% 4.01%
========= ======== ========= ======== ========= ========
Net interest
margin (% of
earnings
assets) 4.78% 4.73%
========= ========
(1) Average loan balances are stated net of unearned income and include
nonaccrual loans. Interest recognized on nonaccrual loans is included in interest income.
(2) Yields related to securities exempt from income taxes are stated on a fully
tax-equivalent basis, assuming a 35% tax rate.
(3) Includes federal funds sold and due from banks, interest-bearing.
</TABLE>
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ASSET QUALITY
Management considers the Company's asset quality to be of primary importance.
The loan portfolio is analyzed periodically in an effort to identify potential
problems before they actually occur. An allowance for loan losses, which is
utilized to absorb actual losses in the loan portfolio, is maintained at a level
sufficient to provide for estimated potential charge-offs of non-collectible
loans. The Company uses a rating method to determine an adequate level of
provision for loan losses which additionally provides early detection of problem
loans. This identification
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process begins with management's assessment of credit reviews, payment histories
of borrowers, loan-to-value ratio, and identified weakness in the credit. The
loans are graded and management establishes a standard percentage to reserve for
each rating. Included in the calculation are loans previously identified by
examiners as loss, doubtful or substandard. The Company's allowance for loan
losses is analyzed quarterly by management.
The provision for loan losses represents a charge against income in an amount
necessary to maintain the allowance at an appropriate level. The monthly
provision for loan losses may fluctuate based on the results of this analysis.
During the six-month period ended June 30, 1998, a total of $64 thousand in loan
loss provision expense was recognized, compared to $85 thousand for this period
in 1997. Charge-offs, net of recoveries, for the six months June 30, 1998
totaled $27 thousand, reflecting a relatively low ratio to average loans of
.02%.
The following table contains a summary of the allowance for loan losses,
including the amount of charge-offs and recoveries by loan type for the six
months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Summary of Allowance for Loan Losses
- --------------------------------------------------------------------------------
June 30,
(In thousands) 1998 1997
----------- -----------
<S> <C> <C>
Beginning balance $ 1,125 $ 1,050
Charge-offs:
Commercial loans - 12
Consumer loans 49 27
Real estate loans 6 5
----------- -----------
Gross charge-offs 55 44
----------- -----------
Recoveries:
Commercial loans - -
Consumer loans 28 9
Real estate loans - -
----------- -----------
Gross recoveries 28 9
----------- -----------
Net charge-offs 27 35
Provision for loan losses 64 85
----------- -----------
Ending balance $ 1,162 $ 1,100
=========== ===========
Percentage of gross loans .99% 1.01%
Ratio of net charge-offs to average loans during
the period .02% .03%
</TABLE>
- --------------------------------------------------------------------------------
Non-performing assets include non-accrual loans, accruing loans contractually
past due 90 days or more, restructured loans, other real estate, and other real
estate under contract for sale. Loans are placed on non-accrual when management
has concerns relating to the ability to collect the loan principal and interest,
and generally when such loans are 90 days or more past due.
While non-performing assets represent potential losses to the Company,
management does not anticipate any aggregate material losses since most loans
are believed to be adequately secured. Management believes the allowance for
loan losses is sufficient to absorb known risks in the portfolio. No assurance
can be given that economic conditions will not adversely affect borrowers and
result in increased losses.
The following table summarizes non-performing assets by type at the June 30,
1998 and 1997. Other than the amounts listed, the were no other loans that (i)
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity or capital
resources or (ii) represent material credits about which management has
information that causes them to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.
11
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<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Schedule of Non-Performing Assets
- -------------------------------------------------------------------------------
(In thousands) June 30,
1998 1997
----------- ----------
<S> <C> <C>
Nonaccrual loans $ 222 $ 219
Loans past due 90 days or more and still accruing 106 92
Other real estate owned, net 85 127
Renegotiated troubled debt - -
----------- -----------
Total non-performing assets $ 413 $ 438
=========== ==========
Non-performing assets as a percentage of gross loans .35% .40%
</TABLE>
- -------------------------------------------------------------------------------
NONINTEREST INCOME AND EXPENSE
Income from service charges and other fees produced earnings of $395 thousand
for the second quarter of 1998 compared to $355 thousand in the prior period, an
increase of 11.3%.
For this same period, noninterest expenses increased by $105 thousand or 7.5%.
Salaries and benefits, the largest component of noninterest expense, increased
by $96 thousand. All other expenses as a group increased by $9 thousand when
comparing results of the second quarter of 1998 to the same three month period
of 1997.
For the six months, total noninterest income amounted to $760 thousand compared
to $727 thousand for 1998 and 1997, respectively. Noninterest expense for these
periods was $3.0 million compared to $2.7 million, respectively, an increase of
$273 thousand or 9.9%. Of this increase, $229 thousand was attributable to
increased personnel costs incurred due to additional staff to support the
Company's growth, normal salary adjustments and associated benefit costs.
INCOME TAX EXPENSE
Income taxes computed at the statutory rate are reduced primarily by the
eligible amount of interest earned on state and municipal securities. Income tax
expense calculated to date in 1998 totaled $297 thousand, an effective tax rate
of 31.1% of pretax income compared to $283 thousand in 1997, which also
reflected an effective rate of 31.1%.
FINANCIAL CONDITION AND CAPITAL RATIOS
As of June 30, 1998 total assets were $154.0 million, an improvement of 8.0%
over June 30, 1997. The Company has experienced steady growth in loans which
increased from $108.7 million at June 30, 1997 to $117.6 million on June 30,
1998, reflecting growth of 8.2%. Asset quality remains good as evidenced by past
due loan percentages, loan loss experience and management's rating of the loan
portfolio.
Shareholders' equity increased from $12.5 million at December 31, 1997 to $13.3
million at June 30, 1998, principally due to net income of $657 thousand during
the period.
Banks and bank holding companies, as regulated institutions, must meet required
levels of capital. The FDIC and the Federal Reserve, the primary regulators of
the Bank and the Company, have adopted minimum capital regulations or guidelines
that categorize components and the level of risk associated with various types
of assets. Financial institutions are expected to maintain a level of capital
commensurate with the risk profile assigned to its
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assets in accordance with those guidelines. Both the Company and the Bank have
maintained capital levels exceeding minimum levels for "well capitalized banks
and bank holding companies, as reflected in the following table.
<TABLE>
<CAPTION>
Regulatory Capital
- --------------------------------------------------------------------------------
June 30, 1998 June 30, 1997
----------- ----------- ----------- ----------
Amount Percent Amount Percent
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Total capital to risk
weighted assets
Consolidated $ 14,103 13.93% $ 12,752 13.94%
Bank 13,910 13.78% 12,630 13.86%
Tier 1 capital to risk
weighted assets
Consolidated 12,941 12.78% 11,652 12.73%
Bank 12,748 12.63% 11,530 12.65%
Tier 1 capital to average
assets (leverage)
Consolidated 12,941 8.57% 11,652 8.29%
Bank 12,748 8.45% 11,530 8.20%
- -------------------------------------------------------------------------------------
</TABLE>
LIQUIDITY
The Company's liquidity management objectives are to provide for deposit
withdrawals and maturing debt obligations, to provide a reliable source of
funding to borrowers, to fund operations on a cost effective basis, and to
capitalize on opportunities for expansion. Management believes that sufficient
resources are available to meet the Company's liquidity objectives through its
debt maturity structure, holdings of liquid assets and access to additional
liquidity through a variety of funding vehicles.
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 has multiple funding sources that can be used to increase liquidity
and provide additional financial flexibility. These sources consist primarily of
established federal funds lines with correspondent banks aggregating $13.5
million at June 30, 1998 and the ability to borrow up to $30.0 million from the
Federal Home Loan Bank, access to borrowings from the Federal Reserve Bank
discount window, and the sale of securities under agreements to repurchase and
issue of commercial paper. Total debt from these sources aggregated $12.1
million at June 30, 1998, compared to $15.8 million at June 30, 1997.
Management is not aware of any events that are reasonably likely to have a
material effect on the Company's liquidity, capital resources or operations.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk primarily stems from interest rate risk, the potential
economic loss due to future changes in interest rates, which is inherent in
lending and deposit gathering activities. The Company's objective is to manage
the mix of interest-sensitive assets and liabilities to moderate interest rate
risk and stabilize the net interest margin which enhancing probability.
13
<PAGE>
ASSET/LIABILITY AND INTEREST RATE RISK MANAGEMENT
The major component of income for Uwharrie Capital Corp is net interest income,
the difference between income earned on assets and interest paid on liabilities.
This differential (or margin) can vary over time as changes in interest rates
occur. Therefore, a primary objective of interest rate sensitivity management is
to ensure the stability and quality of the Company's primary earning component,
net interest income.
This process involves monitoring the Company's balance sheet in order to
determine the potential impact that changes in the interest rate environment
would have on net interest income. Rate sensitive assets and liabilities have
interest rates which are subject to change within a specific time period, due to
either maturity or contractual agreements that allow the instruments to reprice
prior to maturity. Interest rate sensitivity management seeks to ensure that
both assets and liabilities react to changes in interest rates within a similar
time period, thereby minimizing the risk to net interest income.
To identify interest rate sensitivity, a common measure is a gap analysis which
reflects the difference or gap between rate sensitive assets and liabilities
over various time periods. While management compiles and reviews this
information, it has implemented the use of a comprehensive simulation model
which calculates expected net interest income based on projected
interest-earning assets, interest-bearing liabilities and interest rates and
provides a more relevant view of interest rate risk than traditional gap tables.
The simulation allows comparison of flat, rising and falling rate scenarios to
determine sensitivity of earnings to changes in interest rates and identify
trends that may affect overall interest income.
Interest rate risk management and liquidity management are both a part of the
Company's asset/liability management process. The primary oversight of
asset/liability management rests with the Company's Asset Liability Management
Committee (ALCO) , comprised of members of executive and senior management of
the Company and the Bank. This Committee meets on a regular basis to review
asset liability management activities, and monitor market changes in interest
rates and assist with pricing loans and deposit products, consistent with
funding source needs and asset growth projections. The ALCO Committee reports to
the Board of Directors.
ACCOUNTING AND REGULATORY MATTERS
Management is not aware of any know 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.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation affects financial institutions in ways that are different from most
commercial and industrial companies, which have significant investments in fixed
assets and inventories. The effect of inflation on interest rates can materially
impact bank operations, which rely on net interest margins as a major source of
earnings. Noninterest expenses, such as salaries and wages, occupancy and
equipment cost are also negatively impacted by inflation.
YEAR 2000 COMPLIANCE
The "Year 2000" issue confronting the Company and its customers, suppliers,
customers' suppliers and competitors centers on the inability of computer
systems to recognized the Year 2000. If not adequately addressed, the Year 2000
matter could result in a significant adverse impact on products, services and
the competitive condition of the Company.
14
<PAGE>
Financial institution regulators have recently increased their focus on Year
2000 compliance issues, issuing guidance concerning the responsibilities of
senior management and directors. The Federal Financial Institutions Examination
Council ("FFIEC") has issued several interagency statements on Year 2000 Project
Management Awareness. These statements require financial institutions to, among
other things, examine the Year 2000 implications of reliance on vendors, data
exchange and potential impact on customers, suppliers and borrowers. These
statements also require each federally regulated financial institution to survey
its exposure, measure its risk and prepare a plan in order to solve the Year
2000 issue. In addition, the federal banking regulators have issued safety and
soundness guidelines to be followed by insured depository institutions, such as
the Bank, to assure resolution of any Year 2000 problems. The federal banking
agencies have asserted that Year 2000 testing and certification is a key safety
and soundness issue in conjunction with regulatory exams, and thus an
institution's failure to address appropriately the Year 2000 issue could result
in supervisory action, including such enforcement actions as the reduction of
the institution's supervisory ratings, the denial of applications for approval
of a merger or acquisition, or the imposition of civil money penalties.
In order to address the Year 2000 issue and to minimize its potential adverse
impact, management has begun a process to identify areas that will be affected
by the Year 2000, assess their potential impact on operations, monitor the
progress of third party software vendors in addressing the matter, test changes
provided by these vendors, and develop contingency plans for any critical
systems which are not effectively reprogrammed. The plan is divided into the
five phases: (1) awareness, (2) assessment, (3) renovations, (4) validation, and
(5) implementation.
The Company has substantially completed the first two phases of the plan and is
currently working internally and with external vendors on the final three
phases. Because the Company outsources its item processing operations to a
service provider which is jointly owned with another Bank, The Company's Year
2000 compliance is being closely coordinated with that of the service provider.
The Company does not currently expect that the cost of its Year 2000 compliance
program will be material to its financial condition or results of operations,
and expects that it will satisfy such compliance program without material
disruption of its operations. In the event that the Company's significant
suppliers do not successfully and timely achieve Year 2000 compliance, the
Company's business, results of operations or financial condition could be
adversely affected.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on Monday, May 11,
1998 in Albemarle, North Carolina. Proposals listed in the Proxy
Statement dated April 8, 1998, (1) to ratify appointment of the
Company's independent public accounts for 1998 and (2) to elect six
directors of the Company, were approved by the shareholders as proposed.
There were no other matters submitted for vote of the shareholders at
this meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits - Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
There were no reports on Form 8-K filed with the Securities and
Exchange Commission during the second quarter of 1998.
15
<PAGE>
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 July 31, 1998 By:
----------------- ----------------------------------
Roger L. Dick
President and Chief Executive Officer
-------------------------------------
Barbara S. Williams
Senior Vice President-Finance
16
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
UWHARRIE CAPITAL CORP AND SUBSIDIARY For the Six Months Ended June 30, 1998
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,506
<INT-BEARING-DEPOSITS> 111,866
<FED-FUNDS-SOLD> 925
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,493
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 117,625
<ALLOWANCE> 1,162
<TOTAL-ASSETS> 154,001
<DEPOSITS> 127,975
<SHORT-TERM> 5,117
<LIABILITIES-OTHER> 682
<LONG-TERM> 6,951
0
0
<COMMON> 2,868
<OTHER-SE> 10,408
<TOTAL-LIABILITIES-AND-EQUITY> 154,001
<INTEREST-LOAN> 4,945
<INTEREST-INVEST> 823
<INTEREST-OTHER> 19
<INTEREST-TOTAL> 5,787
<INTEREST-DEPOSIT> 2,157
<INTEREST-EXPENSE> 2,530
<INTEREST-INCOME-NET> 3,257
<LOAN-LOSSES> 64
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 2,999
<INCOME-PRETAX> 954
<INCOME-PRE-EXTRAORDINARY> 297
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 657
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
<YIELD-ACTUAL> 4.78
<LOANS-NON> 222
<LOANS-PAST> 106
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,125
<CHARGE-OFFS> 55
<RECOVERIES> 28
<ALLOWANCE-CLOSE> 1,162
<ALLOWANCE-DOMESTIC> 1,162
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
