U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - KSB
(Mark One)
( X ) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997
( ) 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 0-22062
Uwharrie Capital Corp
167 North Second Street
Albemarle, North Carolina 28001
(704) 983-6181
North Carolina 56-1814206
(State of incorporation) (IRS Employer Identification No.)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $1.25 Par Value
The Registrant has filed all reports required by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months and has been
subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the Registrant's
knowledge, in the definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
The Registrant's revenues for the year ended December 31, 1997 were $12,509,582.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the sale price of the common stock in recent transactions
was $21,775,790. Shares of common stock held by each executive officer and
director have been excluded in that such persons are deemed to be affiliates.
As of March 13, 1998, the Registrant had 2,290,353 shares of common stock
outstanding.
Documents Incorporated By Reference
Portions of the Registrant's 1997 Annual Report to Shareholders are incorporated
by reference into Part II of this report. Portions of the Registrant's
definitive Proxy Statement dated April 8, 1998, are incorporated by reference
into Part III.
- --------------------------------------------------------------------------------
Transitional Small Business Disclosure Format (check one) Yes (___) No ( X )
<PAGE>
FORM 10-KSB CROSS REFERENCE INDEX
As indicated below, portions of (i) the Registrant's Annual Report to
Shareholders for the fiscal year ended December 31, 1997, and (ii) the
Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held
May 11, 1998, filed with the Securities and Exchange Commission via EDGAR are
incorporated by reference into Parts II and III of this report.
Key AR Annual Report to Shareholders for the fiscal year ended
December 31, 1997.
Proxy Proxy Statement dated April 8, 1998 for the Annual Meeting of
Shareholders to be held May 11, 1997.
10-KSB 10-KSB for the year ended December 31, 1997
<TABLE>
<CAPTION>
Document
----------------------
Part I
<S> <C> <C> <C>
Item 1. Business...................................................... Page 3 10-KSB
Item 2. Properties.................................................... Page 9 10-KSB
Item 3. Legal Proceedings............................................. Page 10 10-KSB
Item 4. Submission of Matters to a Vote of Security Holders........... Page 10 10-KSB
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... Page 4 AR
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... Page 28 AR
Item 7. Financial Statements and Supplementary Data................... Pages 6 - 27 AR
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... Page 10 10-KSB
Part III
Item 9. Directors, Executive Officers, Promoters, and Control Persons;
Compliance with Section 16(a) of Exchange Act............... Pages 5 -7 Proxy
Item 10. Executive Compensation........................................ Page 8 Proxy
Item 11. Security Ownership of Certain Beneficial Owners and
Management.................................................. Page 2 Proxy
Item 12. Certain Relationships and Related Transactions................ Page 9 Proxy
Part IV
Item 13. Exhibits and Reports on Form 8-K
(a) Index to Exhibits....................................... Page 10 10-KSB
(b) No Reports on Form 8-K were filed for the three
months ended December 31, 1997
</TABLE>
2
<PAGE>
PART I
Item 1. Description of Business
Uwharrie Capital Corp (the "Registrant") was incorporated as Stanly Capital Corp
under the laws of North Carolina on February 24, 1993 at the direction of the
Board of Directors of Bank of Stanly (the "Bank") for the purpose of serving as
a bank holding company for the Bank. Pursuant to an Agreement and Plan of
Reorganization and Merger dated February 24, 1993, effective July 1, 1993, all
outstanding shares of the Bank's common stock held by its shareholders were
converted into and exchanged for shares of the Registrant's $1.25 par value
common stock on a share-for-share basis, the Bank's shareholders became the
shareholders of the Registrant, and the Registrant became the sole shareholder
and parent holding company of the Bank. Upon approval of the shareholders at the
annual meeting held April 22, 1997, the name of the Company was changed to
Uwharrie Capital Corp to better reflect the geographical area which the Company
serves and to signify its commitment to the vision and business opprtunities
within the new emerging economy of the Uwharrie Lakes region.
The Bank is a North Carolina chartered commercial bank which was incorporated in
1983 and which commenced banking operations on January 26, 1984. The Bank's main
banking office is located at 167 North Second Street, Albemarle, North Carolina,
and it operates four other banking offices located in Stanly County, North
Carolina. The Bank is the only commercial bank headquartered in Stanly County
and is owned predominately by residents of Stanly County and the immediately
surrounding area.
At December 31, 1997 the Registrant and its banking subsidiary had 60 full-time
and 42 part-time employees.
Business of the Bank
The Bank engages in a general banking business in Stanly County, North Carolina.
Its operations are primarily retail oriented and directed to individuals and
small to medium-sized businesses located in its market area, and its deposits
and loans are derived primarily from customers in its geographical market. The
Bank provides most traditional commercial and consumer banking services,
including personal and commercial checking and savings accounts, money market
accounts, certificates of deposit, individual retirement accounts, and related
business and individual banking services. The Bank's lending activities include
commercial loans to small-to-medium sized businesses located primarily in its
market area for various purposes, and various consumer-type loans to
individuals, including installment loans, mortgage loans, equity lines of credit
and overdraft checking credit. The Bank also issues Visa(R) Check Card, an
electronic banking card, which functions as a point-of sale card and allows its
customers to access their deposit accounts at one branch of the Bank and at the
automatic teller machines of other banks linked to the HONOR(R) or CIRRUS(R)
networks. The Bank is licensed to offer MasterCard(R) credit cards. A program
called Business Manager(R), an accounts receivable billing system, is offered to
better serve the business community. The Bank does not provide the services of a
trust department.
Non-bank Subsidiaries
The Bank has two wholly-owned subsidiaries, BOS Agency, Inc. ("BOS Agency") and
The Strategic Alliance Corporation ("Strategic Alliance"). BOS Agency was formed
during 1987 and engages in the sale of various insurance products, including
annuities, life insurance, long-term care, disability insurance and Medicare
supplements. Strategic Alliance was formed during 1989 as BOS Financial
Corporation and, during 1993, adopted its current name. It is registered with
the Securities and Exchange Commission and licensed by the National Association
of Securities Dealers as a securities broker-dealer.
3
<PAGE>
Data Processing Joint Venture
During 1992 the Bank entered into a joint venture agreement with two other banks
to form Corporate Data Services, Inc. ("CDS"), a North Carolina corporation that
provides operations and data processing services for community banks. The Bank's
ownership in this venture increased from one-third to one-half during 1995 due
to a merger involving one of the owners and the subsequent forfeiture of their
stock. The Bank's investment in CDS at December 31, 1997 amounted to $240,000.
Competition
The Bank's primary geographic market is Stanly County, North Carolina.
Commercial banking in Stanly County and in North Carolina as a whole is
extremely competitive with state laws permitting state-wide branching. The Bank
competes directly for deposits in Stanly County with other commercial banks,
savings banks, credit unions, agencies issuing United States government
securities and all other organizations and institutions engaged in money market
transactions. In its lending activities, the Bank competes with all other
financial institutions as well as consumer finance companies, mortgage companies
and other lenders engaged in the business of extending credit. In Stanly County,
five other commercial banks (including two of the three largest banks in North
Carolina) presently operate a total of 14 banking offices, one savings bank
operates two offices and a credit union operates one location in the county.
Interest rates, both on loans and deposits, and prices of services are
significant competitive factors among financial institutions generally. Office
location, office hours, customer service, community reputation and continuity of
personnel are also important competitive factors. Many of the Bank's competitors
have greater resources, broader geographic markets and higher lending limits,
and can offer more products and better afford and make more effective use of
media advertising, support services and electronic technology than the Bank. The
Bank depends on its reputation as a community bank in its local market, direct
customer contact, its ability to make credit and other business decisions
locally, and personalized service to counter these competitive disadvantages.
Interstate Banking and Branching
Federal law permits adequately capitalized and managed bank holding companies to
acquire control of the assets of banks in any state (the "Interstate Banking
Law"). Acquisitions are subject to anti-trust provisions that cap at 10% the
portions of the total deposits of insured depository institutions in the United
States that a single bank holding company may control, and generally cap at 30%
the portion of the total deposits in any state that a single bank holding
company may control. Under certain circumstances, states have the authority to
increase or decrease the 30% cap, and states may set minimum age requirements of
up to five years on target banks within their borders.
Beginning June 1, 1997, and subject to certain conditions, the Interstate
Banking Law also permits interstate branching by allowing a bank to merge with a
bank located in a different state. A state may accelerate the effective date for
interstate mergers by adopting a law authorizing such transactions prior to June
1, 1997, or it can "opt out" and thereby prohibit interstate branching by
enacting legislation to that effect prior to that date. The Interstate Banking
Law also permits banks to establish branches in other states by opening new
branches or acquiring existing branches of other banks if the laws of those
other states specifically permit that form of interstate branching. North
Carolina has adopted statutes which, subject to conditions contained therein,
specifically authorize out-of-state bank holding companies and banks to acquire
or merge with North Carolina banks and to establish or acquire branches in North
Carolina. South Carolina,
4
<PAGE>
Tennessee and Virginia have similar laws and interstate mergers or branching has
occurred or has been applied for among these three states and North Carolina.
Supervision and Regulation
The business and operations of the Registrant and its Subsidiary Bank are
subject to extensive federal and state governmental regulation and supervision.
Registrant is a bank holding company registered with the Board of Governors of
the Federal Reserve System (the "Federal Reserve") under the Bank Holding
Company Act of 1956, as amended (the "BHCA"), and is subject to supervision and
examinations by and the regulations and reporting requirements of the Federal
Reserve. Under the BHCA, the activities of the Registrant and the Bank are
limited to banking, managing or controlling banks, furnishing services to or
performing services for their subsidiaries or engaging in any other activity
which the Federal Reserve determines to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
The BHCA prohibits the Registrant from acquiring direct or indirect control of
more than 5% of the outstanding voting stock or substantially all of the assets
of any financial institution, or merging or consolidating with another bank
holding or savings bank holding company, without prior approval of the Federal
Reserve. Additionally, the BHCA prohibits the Registrant from engaging in, or
acquiring ownership or control of more than 5% of the outstanding voting stock
of any company engaged in a non-banking activity unless such activity is
determined by the Federal Reserve to be so closely related to banking as to be
properly incident thereto. In approving an application by the Registrant to
engage in a non-banking activity, the Federal Reserve must consider whether that
activity can reasonably be expected to produce benefits to the public, such as
greater convenience, increased competition or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices.
There are a number of obligations and restrictions imposed by law on a bank
holding company and its insured depository institution subsidiaries that are
designed to minimize potential loss to depositors and the FDIC insurance funds.
For example, if a bank holding company's insured depository institution
subsidiary becomes "undercapitalized," the bank holding company is required to
guarantee (subject to certain limits) the subsidiary's compliance with the terms
of any capital restoration plan filed with its appropriate federal banking
agency.
Also, a bank holding company is required to serve as a source of financial
strength to its depository institution subsidiaries and to commit resources to
support such institutions in circumstances where it might not do so absent such
policy. Under the BHCA, the Federal Reserve has the authority to require a bank
holding company to terminate any activity or to relinquish control of a nonbank
subsidiary upon the Federal Reserve's determination that such activity or
control constitutes a serious risk to the financial soundness and stability of a
depository institution subsidiary of the bank holding company.
As a result of its ownership of a North Carolina-chartered commercial bank, the
Registrant also is registered with and subject to regulation by the North
Carolina Commissioner of Banks (the "Commissioner") under the state's bank
holding company laws. The Commissioner has asserted authority to examine North
Carolina bank holding companies and their affiliates.
The Bank is a North Carolina commercial bank and its deposits are insured by the
FDIC. The Bank is subject to supervision and examination by and the regulations
and reporting requirements of the Commissioner and the FDIC. The Bank also is a
member of the Federal Home Loan Bank System (the "FHLB System").
5
<PAGE>
The Bank is subject to legal limitations on the amounts of dividends it is
permitted to pay. Prior approval of the Commissioner is required if the total of
all dividends declared by the Bank in any calendar year exceeds its net profits
(as defined by statute) for the preceding two calendar years, less any required
transfers to surplus. As an insured depository institution, the Bank also is
prohibited from making capital distributions, including the payment of
dividends, if after making such distribution, it would become "undercapitalized"
(as such term is defined in the Federal Deposit Insurance Act).
Under current federal laws, certain transactions between a depository
institution and its affiliates are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a depository institution is any company or
entity that controls, is controlled by or is under common control with the
institution, and in a holding company context, the parent holding company of a
depository institution and any companies which are controlled by such parent
holding company are affiliates of the depository institution. Generally,
Sections 23A and 23B (i) limit the extent to which a depository institution or
its subsidiaries may engage in covered transactions with any one affiliate, and
(ii) require that such transactions be on terms and under circumstances
substantially the same, or at least as favorable, to the institution or the
subsidiary as those provided to a nonaffiliate.
The Bank is subject to various other state and federal laws and regulations,
including state usury laws, laws relating to fiduciaries, consumer credit and
equal credit, fair reporting laws and laws relating to branch banking. As an
insured institution, the Bank is prohibited from engaging as a principal in
activities that are not permitted for national banks unless (i) the FDIC
determines that the activity would pose no significant risk to the appropriate
deposit insurance fund and (ii) the institution is and continues to be in
compliance with all applicable capital standards. Insured institutions also are
prohibited from directly acquiring or retaining any equity investment of a type
or in an amount not permitted for national banks.
The Federal Reserve, the FDIC and the Commissioner all have broad powers to
enforce laws and regulations applicable to the Registrant and the Bank and to
require corrective action of conditions affecting the safety and soundness of
the Bank. Among others, these powers include cease and desist orders, the
imposition of civil penalties and the removal of officers and directors.
Registrant and the Bank in the past have not had, and do not foresee in the
future, any significant regulatory compliance problems.
Capital Requirements
Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines which require a minimum ratio of total capital to
risk-weighted assets of 8%. At least half of the total capital is required to be
composed of common equity, retained earnings and a limited amount of qualifying
perpetual preferred stock, less certain intangibles ("Tier I capital"). In
addition to the risk-based capital guidelines, the Federal Reserve has adopted a
minimum leverage capital ratio under which a bank holding company must maintain
a level of Tier I capital to average total consolidated assets of at least 3% in
the case of a bank holding company which has the highest regulatory examination
rating and is not contemplating significant growth or expansion. All other bank
holding companies are expected to maintain a leverage capital ratio of at least
1% to 2% above the stated minimum.
The Bank also is subject to capital requirements imposed by the FDIC. Under the
FDIC's regulations, insured institutions that receive the highest rating during
the examination process and are not anticipating or experiencing any significant
growth are required to maintain a minimum leverage ratio of 3% of Tier I capital
to average total consolidated assets. All other insured institutions are
required to maintain a minimum ratio of 1% or 2% above the stated minimum, with
a minimum leverage ratio of not less than 4%. The FDIC also requires the Bank to
have a ratio of total capital to risk-weighted assets of at least 8%.
6
<PAGE>
FDIC Insurance Assessments
The Bank is subject to insurance assessments imposed by the FDIC. Effective
January 1, 1997, the FDIC adopted a risk-based assessment schedule providing for
annual assessment rates ranging from 0% to .27% of an institution's average
assessment base, applicable to institutions insured by both the Bank Insurance
Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"). The actual
assessment to be paid by each insured institution is based on the institution's
assessment risk classification, which is determined based on whether the
institution is considered "well capitalized," "adequately capitalized," or
"under capitalized," as such terms have been defined in applicable federal
regulations, and whether the institution is considered by its supervisory agency
to be financially sound or to have supervisory concerns. The FDIC also is
authorized to impose one or more special assessments in any amount deemed
necessary to enable repayment of amounts borrowed by the FDIC from the United
States Treasury Department, and beginning in 1997, and continuing through the
first half of 1998, banks whose deposits are insured by the BIF will pay an
annual assessment at the rate of .013%.
Effective January 1, 1999, there will be a merger of the SAIF and BIF insurance
funds of the FDIC. One of the principal issues is the amount of additional funds
needed to recapitalize the SAIF prior to the merger. In September 1996, a
one-time special assessment was levied on SAIF-insured deposits (including such
deposits held by commercial banks) at the rate of .657% on all SAIF-insured
deposits held as of March 31, 1995, the assessment date. As of December 31,
1997, the Bank had no SAIF-insured deposits.
Safety and Soundness Standards
The FDIA, as amended by the FDICIA and the Riegle Community Development and
Regulatory Improvement Act of 1995, requires the federal bank regulatory
agencies to prescribe standards, by regulations or guidelines, relating to
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest risk exposure, asset growth, asset
quality, earnings, stock valuation and compensation, fees and benefits and such
other operational and managerial standards as the agencies deem appropriate. The
federal bank regulatory agencies have adopted, effective August 9, 1996, a set
of guidelines prescribing safety and soundness standards pursuant to FDICIA, as
amended.
The guidelines establish general standards relating to internal controls and
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal stockholder. The federal
banking agencies determined that stock valuation standards were not appropriate.
In addition, the agencies adopted regulations that authorize, but do not
require, an agency to order an institution that has been given notice by an
agency that it is not satisfying any of such safety and soundness standards to
submit a compliance plan. If, after being so notified, an institution fails to
submit an acceptable compliance plan, the agency must issue an order directing
action to correct the deficiency and may issue an order directing other actions
of the types to which an undercapitalized association is subject under the
prompt correction action provisions of FDICIA. If an institution fails to comply
with such an order, the agency may seek to enforce such order in judicial
proceedings and to impose civil money penalties.
7
<PAGE>
Community Reinvestment Act
The Bank is subject to the provisions of the Community Reinvestment Act (CRA).
Under the terms of the CRA, the appropriate federal bank regulatory agency is
required, in connection with the examination of a bank, to assess such bank's
record in meeting the credit needs of the community served by that bank,
including low and moderate-income neighborhoods. The regulatory agency's
assessment of the bank's record is made available to the public. Such an
assessment is required of any bank which has applied for any application for a
domestic deposit-taking branch, relocation of a main office, branch or ATM,
merger or consolidation with or acquisition of assets or assumption of
liabilities of a federally insured depository institution.
Under CRA regulations, banks with assets of less than $250,000,000 that are
independent or affiliated with a holding company with total banking assets of
less than $1 billion, are subject to streamlined small bank performance
standards and much less stringent data collection and reporting requirements
than larger banks. The agencies emphasize that small banks are not exempt from
CRA requirements. The streamlined performance method for small banks focuses on
the bank's loan-to-deposit ratio, adjusted for seasonal variations and as
appropriate, other lending-related activities, such as loan originations for
sale to secondary markets or community development lending or qualified
investments; the percentage of loans and, as appropriate, other lending-related
activities located in the bank's assessment areas; the bank's record of lending
to and, as appropriate, other lending-related activities for borrowers of
different income levels and businesses and farms of different sizes; the
geographic distribution of the bank's loans given its assessment areas, capacity
to lend, local economic conditions, and lending opportunities; and the bank's
record of taking action, if warranted, in response to written complaints about
its performance in meeting the credit needs of its assessment areas.
Regulatory agencies will assign a composite rating of "outstanding,"
"satisfactory," "needs to improve," or "substantial noncompliance" to the
institution using the foregoing ground rules. A bank's performance need not fit
each aspect of a particular rating profile in order for the bank to receive that
rating; exceptionally strong performance with respect to some aspects may
compensate for weak performance in others, and the bank's overall performance
must be consistent with safe and sound banking practices and generally with the
appropriate rating profile. To earn an outstanding rating, the bank first must
exceed some or all of the standards mentioned above. The agencies may assign a
"needs to improve" or "substantial noncompliance" rating depending on the degree
to which the bank has failed to meet the standards mentioned above.
The regulation further states that the agencies will take into consideration
these CRA ratings when considering any application and that a bank's record of
performance may be the basis for denying or conditioning approval of an
application.
Change of Control
State and federal law restricts the amount of voting stock of a bank holding
company or a bank that a person may acquire without the prior approval of
banking regulators. The overall effect of such laws is to make it more difficult
to acquire a bank holding company or bank by tender offer or similar means than
it might be to acquire control of another type of corporation.
Pursuant to North Carolina law, no person may, directly or indirectly, purchase
or acquire voting stock of any bank holding company or bank which would result
in the change of control of that entity unless the Commissioner first shall have
approved such proposed acquisition. A person will be deemed to have
8
<PAGE>
acquired "control" of a bank holding company or bank if he, she or it, directly
or indirectly, (i) owns, controls or has the power to vote 10% or more of the
voting stock of the bank holding company or bank, or (ii) possesses the power to
direct or cause the direction of its management and policy.
Federal law imposes additional restrictions on acquisitions of stock in bank
holding companies and FDIC-insured banks. Under the federal Change in Bank
Control Act and the regulations thereunder, a person or group acting in concert
must give advance notice to the Federal Reserve Board or the FDIC before
directly or indirectly acquiring the power to direct the management or policies
of, or to vote 25% or more of any class of voting securities of, any bank
holding company or federally-insured bank. Upon receipt of such notice, the
federal regulator either may approve or disapprove the acquisition. The Change
in Bank Control Act generally creates a rebuttable presumption of a change in
control if a person or group acquires ownership or control of or the power to
vote 10% or more of any class of a bank holding company or bank's voting
securities; the bank or bank holding company has a class of securities that are
subject to registration under the Securities Exchange Act of 1934; and,
following such transaction, no other person owns a greater percentage of that
class of securities.
Government Monetary Policy and Economic Controls
As a bank holding company whose primary asset is the ownership of the capital
stock of a commercial bank, the Registrant is directly affected by the
government monetary policy and the economy in general. The actions and policies
of the FRB which acts as the nation's central bank can directly affect money
supply and, in general, affect banks' lending activities by increasing or
decreasing their costs and availability of funds. An important function of the
FRB is to regulate the national supply of bank credit in order to combat
recession and curb inflationary pressures. Among the instruments of monetary
policy used by the FRB to implement these objectives are open market operations
in U.S. Government securities, changes in the discount rate and surcharge, if
any, on member bank borrowings, and changes in reserve requirements against bank
deposits. These methods are used in varying combinations to influence overall
growth of bank loans, investments and deposits, and interest rates charged on
loans or paid for deposits. The Bank is not a member of the Federal Reserve
System but is subject to reserve requirements imposed by the Federal Reserve on
non-member banks. The monetary policies of the FRB have had a significant effect
on the operating results of commercial banks in the past and are expected to
continue to do so in the future.
Item 2. Properties
The Bank's Main Office is located at 167 North Second Street in Albemarle, North
Carolina. The Bank has leased a portion of this facility since it opened in
1984. The Bank's Main Office also occupies an adjoining building, purchased in
1991, which houses much of the Bank and Registrant's administrative functions.
The Bank purchased a commercial building and parking lot adjacent to its Main
Office in Albemarle in 1988. The Bank is holding this property for possible
future expansion purposes.
The Bank owns its other banking locations at 710 North First Street in
Albemarle, which houses the Village Branch opened in June 1984, its East
Albemarle Branch at 800 Highway 24-27 Bypass in Albemarle acquired in 1988, a
branch office located at 107 S. Main Street in Norwood acquired in 1987 and a
branch located at 624 N. Main Street in Oakboro opened in 1993.
All of the Bank's existing offices are freestanding, fully equipped and have
adequate parking and drive-up banking facilities, except the Main Office which
does not have a drive-up facility. At December 31, 1996, the cost less
accumulated depreciation of the Bank's investment in premises and equipment was
$2,117,249. The Registrant owns all of its properties through its subsidiary,
Bank of Stanly.
9
<PAGE>
Item 3. Legal Proceedings
Neither the Registrant nor the Bank, nor any of their properties, are subject to
any legal proceedings other than ordinary routine litigation incidental to their
business.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Registrant's security holders during
the fourth quarter of 1996.
PART II
Items 5 through 7.
Incorporated by reference to the Registrant's Annual Report to Shareholders for
the fiscal year ended December 31, 1997.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Items 9 through 12.
Incorporated by reference to the Registrant's definitive proxy statement dated
April 8, 1998.
PART IV
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements.
The following consolidated financial statements of the Registrant are
incorporated herein by reference from the indicated pages of the
Registrant's 1997 Annual Report to Shareholders:
(2) Financial Statement Schedules.
All financial statement schedules are omitted as substantially all the
required information is contained in the Registrant's consolidated
financial statements listed above which are incorporated herein by
reference or is not applicable.
10
<PAGE>
(3) Exhibits.
The following exhibits are filed herewith or incorporated herein by
reference.
Exhibit
Number Description of Exhibit
-----------------------------------------------------------------
3(a) * Registrant's Articles of Incorporation
3(b) * Registrant's By-laws
10 * Incentive Stock Option Plan, as amended * *
13 1997 Annual Report to Shareholders (filed herewith)
21 Subsidiary of the Registrant (filed herewith)
27 Financial Data Schedule (filed herewith)
99 Registrant's definitive proxy statement * * *
-----------------------------------------------------------------
* Incorporated by reference from exhibits to Registrant's
Registration Statement on Form S-4 (Reg. No. 33-58882)
** Denotes a management contract or compensatory plan or
arrangement.
*** To be filed with the Commission pursuant to Rule
14a-6(b).
(b) Reports on Form 8-K.
The Registrant did not file a Current Report on Form 8-K during the
three months ended December 31, 1997.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
UWHARRIE CAPITAL CORP
March 20, 1998 By: /s/
----------------------------------
Roger L. Dick, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ March 20, 1998
- -----------------------------------------
Roger L. Dick, President and
Chief Executive Officer
/s/ March 20, 1998
- -----------------------------------------
Barbara S. Williams, Senior Vice President
(Principal Financial and Accounting Officer)
/s/ March 20, 1998
- -----------------------------------------
William S. Aldridge, Jr., Director
/s/ March 20, 1998
- -----------------------------------------
Cynthia H. Beane, Director
/s/ March 20, 1998
- -----------------------------------------
Joe S. Brooks, Director
/s/ March 20, 1998
- -----------------------------------------
Ronald T. Burleson, Director
/s/ March 20, 1998
- -----------------------------------------
William F. Clayton, Director
/s/ March 20, 1998
- -----------------------------------------
James F. Link, D.V.M., Director
12
<PAGE>
/s/ March 20, 1998
- -----------------------------------------
Jerry J. Long, Director
/s/ March 20, 1998
- -----------------------------------------
W. Chester Lowder, Director
/s/ March 20, 1998
- -----------------------------------------
Pamela S. Morton, Director
/s/ March 20, 1998
- -----------------------------------------
John P. Murray, M.D., Director
/s/ March 20, 1998
- -----------------------------------------
Kent E. Newport, Director
/s/ March 20, 1998
- -----------------------------------------
Catherine A. Pickler, Director
/s/ March 20, 1998
- -----------------------------------------
George T. Reaves, Director
/s/ March 20, 1998
- -----------------------------------------
A. James Russell, Director
/s/ March 20, 1998
- -----------------------------------------
B. A. Smith, Director
/s/ March 20, 1998
- -----------------------------------------
Boyce E. Thompson, Director
/s/ March 20, 1998
- -----------------------------------------
Douglas V. Waddell, Director
/s/ March 20, 1998
- -----------------------------------------
G. Chad Efird, Director
13
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- ----------------------------------
13 1997 Annual Report to Shareholders
21 Subsidiary of the Registrant
27 Financial Data Schedule
--------------------------------------------------
14
<PAGE>
Exhibit 13
<PAGE>
Uwharrie Capital Corp
1997
ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
[ This page left blank intentionally]
2
<PAGE>
Description Of Business
Uwharrie Capital Corp ("the Company") was incorporated under the laws of the
State of North Carolina as a bank holding company for Bank of Stanly ("the
Bank"). The Company commenced operations on July 1, 1993. Bank of Stanly was
incorporated under the laws of the State of North Carolina on September 28,
1983. It commenced operations on January 26, 1984.
Since commencement of operations, the Bank has engaged in retail and commercial
banking business. The Bank has three banking offices in the city of Albemarle,
one office in the town of Norwood, and one office in the town of Oakboro, Stanly
County, North Carolina. The Bank conducts a general banking business through its
five offices.
Its depository services include personal and commercial checking, savings, money
market, certificates of deposit accounts and individual retirement accounts
tailored to meet customers' needs. In addition to other commercial related
products, a program called Business Manager(R) is offered to better serve our
business community. Business Manager(R) is an accounts receivable billing system
where commercial accounts receivable are purchased and serviced by the Bank. The
Bank provides fixed and variable rate loans which include mortgage, home equity
lines of credit, consumer and commercial loans, and other lines of credit for
both consumer and commercial customers. The Bank also offers MasterCard(R)
credit cards.
A new service offered by the Bank during 1997 was 24 Hour Telephone Banking,
providing customers the convenience and access to account information, rate
information and accessibility of funds transfers between accounts. Another
service offered is a Visa(R) Check Card which functions as a point-of-sale (POS)
and automated teller machine (ATM) card. Customers can use the Check Card for
purchases at any merchant accepting Visa and at any ATM displaying the HONOR(R)
and CIRRUS(R) networks regionally and worldwide, respectively. Other services
include rental of safe deposit boxes, night depository, wire transfers, incoming
and outgoing collection items, notary service, check safekeeping, and direct
deposit.
The Bank has two wholly-owned subsidiaries. The Strategic Alliance Corporation
is a broker-dealer through the National Association of Securities Dealers
offering a full range of financial and investment planning services to Stanly
County customers through its marketing division, Strategic Alliance(R). In
addition, The Strategic Alliance Corporation offers services to clients outside
Stanly County. BOS Agency, Inc. is a corporate entity that recognizes the risk
management needs of customers and brings life insurance, long-term health care,
Medicare supplement and other insurance industry products to customers'
financial portfolios.
At December 31, 1997, the Bank, through a joint venture agreement with another
community bank, had a 50 percent ownership interest in Corporate Data Services,
Inc., a company that provides operations and data processing services.
Securities offered through Strategic Alliance(R), Member NASD/SIPC.
SECURITIES AND/OR INSURANCE PRODUCTS ARE NOT FDIC INSURED, ARE NOT DEPOSITS OR
OTHER OBLIGATIONS OF ANY DEPOSITORY INSTITUTION, ARE NOT GUARANTEED BY ANY
DEPOSITORY INSTITUTION AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
3
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Financial Highlights
<TABLE>
<CAPTION>
Percent
(Dollars in thousands except per share amounts) 1997 1996 Change
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the year:
Net Income $ 1,186 $ 1,025 15.7
Net income per common share -- basic (1): .52 .45 15.6
Cash dividends paid (2): --
Total 6 216 N/A
Per common share -- .10
Weighted average common shares outstanding -- basic (1): 2,280,253 2,292,509 (.5)
- ---------------------------------------------------------------------------------------------------------------------
At year-end:
Total assets $ 145,704 $ 133,876 8.8
Total earning assets 138,015 126,371 9.2
Loans, net of unearned income 113,985 100,852 13.0
Total interest-bearing liabilities 118,617 109,169 8.7
Shareholders' equity 12,534 11,303 10.9
Book value per share (1) 5.49 4.95 10.9
- ---------------------------------------------------------------------------------------------------------------------
Averages for the year:
Total assets $ 140,508 $ 128,193 9.6
Total earning assets 132,750 121,548 9.2
Loans, net of unearned income 107,696 97,201 10.8
Total interest-bearing liabilities 114,903 104,919 9.5
Shareholders' equity 11,818 11,123 6.2
- ---------------------------------------------------------------------------------------------------------------------
Financial Ratios (in percentage):
Return on average assets .84 .80
Return on average shareholders' equity 10.04 9.22
Average equity to average assets 8.41 8.68
Net interest margin (fully tax equivalent basis) 4.76 4.70
Allowance as % of loans .99 1.04
Allowance as % of nonperforming loans 349 316
Allowance as % of nonperforming assets 247 252
Nonperforming assets to loans .42 .41
Net charge-offs to average loans .09 .06
Dividend payout ratio N/A 21.10
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
1) Net income per share, book value per share, weighted average shares
outstanding and shares outstanding at year-end have been adjusted to
reflect the 5% stock dividend issued in 1997.
2) Includes cash paid in lieu of fractional shares on stock dividends.
* * * *
Market For The Company's Common Stock And Related Security Holder Matters
It is the philosophy of the Company to promote a strong local shareholder base;
therefore, the Company's common stock is neither listed nor traded on a
broker-dealer market. Management of the Company makes every reasonable effort to
match willing buyers with willing sellers as they become known for the purpose
of private negotiations for the purchase or sale of the Company's common stock.
In addition, Uwharrie Capital Corp has adopted a program of on-going open market
purchases of shares of the Company's stock. The combination of private trades
and Company purchases has provided adequate liquidity for the investors of
Uwharrie Capital Corp stock without the cost of brokerage fees.
Approximately 29,461 shares of stock were traded during 1997. During December of
1997, the Company issued a 5% stock dividend and in 1996 paid cash dividends of
$.10 per share and issued a 3% stock dividend. As of December 31, 1997, Uwharrie
Capital Corp had 1,616 shareholders of record.
4
<PAGE>
Independent Auditor's Report
- --------------------------------------------------------------------------------
[LOGO]
DIXON ODOM PLLC
Certified Public Accounts
To the Shareholders and Board of Directors
Uwharrie Capital Corp
Albermarle, North Carolina
We have audited the accompanying consolidated balance sheets of Uwharrie Capital
Corp (formerly Stanly Capital Corp) and subsidiary (the "Company") as of
December 31, 1997 and 1996, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Uwharrie Capital
Corp and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Dixon Odom PLLC
- --------------------
Southern Pines, North Carolina
January 23, 1998
5
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Assets
Cash and due from banks $ 4,322,571 $ 4,583,678
Due from banks, interest-bearing 183,511 299,494
Investment securities available for sale,
at fair value 23,846,794 25,220,437
Loans 113,984,894 100,852,450
Less allowance for loan losses 1,124,970 1,049,833
------------ ------------
Net loans 112,859,924 99,802,617
Premises and equipment, net 2,343,737 2,117,249
Interest receivable 930,503 857,794
Other assets 1,216,914 994,318
------------ ------------
Total assets $145,703,954 $133,875,587
============ ============
Liabilities
Deposits
Demand, noninterest-bearing $ 13,871,742 $ 12,852,376
Money market and NOW accounts 28,569,039 24,112,851
Savings accounts 31,870,829 27,706,578
Time deposits, $100,000 and over 9,045,532 6,502,755
Other time deposits 33,548,182 33,424,904
------------ ------------
Total deposits 116,905,324 104,599,464
Federal funds purchased and securities sold under
repurchase agreements 5,447,330 8,156,145
Other short-term borrowed funds 2,562,058 3,000,000
Long-term debt 7,574,509 6,265,660
Interest payable 171,031 176,042
Other liabilities 509,566 374,871
------------ ------------
Total liabilities 133,169,818 122,572,182
Off balance sheet items, commitments and contingencies - Note 10
Shareholders' equity
Common stock, $1.25 par value
6,000,000 shares authorized; shares issued and
outstanding of 2,282,078 and 2,174,982, respectively 2,852,598 2,718,728
Additional paid-in capital 5,524,178 4,593,661
Undivided profits 3,838,263 3,738,055
Net unrealized gain on securities available
for sale, net of related tax effect 319,097 252,961
------------ ------------
Total shareholders' equity 12,534,136 11,303,405
------------ ------------
Total liabilities and shareholders' equity $145,703,954 $133,875,587
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
6
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Consolidated Statements Of Income
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Interest Income
Loans, including fees $ 9,377,504 $ 8,551,597
Investment securities
U. S. Treasury 287,738 342,402
U. S. Government agencies and corporations 906,045 700,636
State and political subdivisions 340,017 349,680
Other 72,747 52,633
Short-term investments 34,391 43,371
----------- -----------
Total interest income 11,018,442 10,040,319
----------- -----------
Interest Expense
Time deposits, $100,000 and over 432,098 314,446
Other interest-bearing deposits 3,538,597 3,371,130
Federal funds purchased and securities sold under
repurchase agreements 255,575 345,622
Other short-term borrowed funds 177,689 49,047
Long-term debt 474,818 431,176
----------- -----------
Total interest expense 4,878,777 4,511,421
----------- -----------
Net Interest Income 6,139,665 5,528,898
Provision for loan losses 183,300 136,845
----------- -----------
Net interest income after provision for loan losses 5,956,365 5,392,053
----------- -----------
Noninterest Income
Service charges on deposit accounts 911,106 901,360
Other service fees and commissions 482,653 390,854
Gains on securities sold 22,965 29,367
Other income 74,416 39,626
----------- -----------
Total noninterest income 1,491,140 1,361,207
----------- -----------
Noninterest Expense
Salaries and employee benefits 2,920,471 2,542,272
Net occupancy expense 262,287 221,036
Equipment expense 412,405 432,837
Data processing costs 496,194 493,139
Other operating expense 1,630,332 1,587,867
----------- -----------
Total noninterest expenses 5,721,689 5,277,151
----------- -----------
Income before income taxes 1,725,816 1,476,109
Income taxes 539,896 450,720
=========== ===========
Net Income $ 1,185,920 $ 1,025,389
=========== ===========
Net Income Per Common Share
Basic $ .52 $ .45
Assuming dilution .51 .45
Weighted Average Shares Outstanding
Basic 2,280,253 2,292,509
Assuming dilution 2,331,902 2,292,509
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
7
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Consolidated Statements Of Changes In Shareholders' Equity
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock Additional Net Unrealized
--------------------------- Paid-in Undivided Gain (Loss) on
Shares Amount Capital Profits Securities
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996
Balance at beginning of year 2,123,999 $2,654,999 $4,376,560 $3,367,929 $513,193
Net income -- -- -- 1,025,389 --
Common stock issued pursuant to:
3% stock dividend 62,698 78,372 360,514 (438,886) --
Stock options exercised 42,850 53,563 140,270 -- --
Repurchases of common stock (54,565) (68,206) (283,683)
Dividends paid - $.10 per share -- -- -- (216,377) --
Net decrease in fair value of
securities available for sale -- -- -- -- (260,232)
----------- ----------- ----------- ----------- -----------
Balance at end of year 2,174,982 $2,718,728 $4,593,661 $3,738,055 $252,961
=========== =========== =========== =========== ===========
Year Ended December 31, 1997
Balance at beginning of year 2,174,982 $2,718,728 $4,593,661 $3,738,055 $252,961
Net income -- -- -- 1,185,920 --
Common stock issued pursuant to:
5% stock dividend 107,962 134,953 944,667 (1,079,620)
Stock options exercised 3,152 3,940 10,952 -- --
Repurchases of common stock (4,018) (5,023) (25,102)
Dividends paid - fractional shares -- -- -- (6,092) --
Net increase in fair value of
securities available for sale -- -- -- -- 66,136
----------- ----------- ----------- ----------- -----------
Balance at end of year 2,282,078 $2,852,598 $5,524,178 $3,838,263 $319,097
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
8
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Consolidated Statements Of Cash Flows
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Operating Activities
Net income $ 1,185,920 $ 1,025,389
Adjustments to reconcile net income to net cash provided by operations:
Depreciation 257,360 235,280
Accretion of security premiums (10,524) (17,959)
Provision for loan losses 183,300 136,845
Deferred income tax expense 5,329 158,716
Gain on sale of securities available for sale, net (22,965) (29,367)
Loss on disposals of premises and equipment -- 14,752
(Gain) loss on sale of foreclosed properties -- (6,779)
Net change in interest receivable (72,709) 8,012
Net change in other assets (222,596) 20,327
Net change in interest payable (5,011) 11,477
Net change in accrued and other liabilities 86,869 11,463
------------ ------------
Net cash provided by operating activities 1,384,973 1,568,156
------------ ------------
Investing Activities
Net (increase) decrease in due from banks, interest-bearing 115,983 (153,748)
Proceeds from sales of securities available for sale 3,339,581 7,198,862
Proceeds from maturities of securities available for sale 2,490,823 317,821
Purchase of securities available for sale (4,314,639) (10,003,476)
Net increase in loans made to customers (13,289,105) (10,090,781)
Purchase of premises and equipment (483,848) (269,979)
Proceeds from sales of/(additions) to foreclosed properties 48,498 130,691
------------ ------------
Net cash used by investing activities (12,092,707) (12,870,610)
------------ ------------
Financing Activities
Net increase in deposit accounts 12,305,860 8,805,526
Net increase (decrease) in federal funds purchased 1,400,000 (2,850,000)
Net increase (decrease) in securities sold under repurchase agreements (4,108,815) 3,693,805
Net increase (decrease) in other short-term borrowed funds (437,942) 3,000,000
Proceeds from long-term advances from Federal Home Loan Bank 2,000,000 2,000,000
Repayment of long-term advances from Federal Home Loan Bank (691,151) (1,696,552)
Repurchases of common stock (30,125) (351,889)
Proceeds from issuance of common stock 14,892 193,833
Dividends paid (6,092) (216,377)
------------ ------------
Net cash provided by financing activities 10,446,627 12,578,346
------------ ------------
Increase (decrease) in Cash and Due from Banks (261,107) 1,275,892
Cash and due from banks at beginning of year 4,583,678 3,307,786
------------ ------------
Cash and due from banks at end of year $ 4,322,571 $ 4,583,678
============ ============
Supplemental Disclosures of Cash Flow Information
Interest paid $ 4,883,788 $ 4,499,944
Income taxes paid 539,878 457,000
Supplemental Schedule of Non-Cash Investing and Financing Activities
Foreclosure of collateral in partial satisfaction of debt 48,498 123,912
Increase (decrease) in fair value of securities available for sale, net of deferred
taxes (benefit); 1997 - $42,497, 1996 - $(167,219) 66,136 (260,232)
Stock dividends 1997 - 107,962 shares; 1996 - 62,698 shares 1,079,620 438,886
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
9
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Notes To Consolidated Financial Statements
----------
Note 1 - Significant Accounting Policies
Nature of Business
Uwharrie Capital Corp ("the Company") was incorporated under North Carolina law
for the purpose of becoming the holding company for Bank of Stanly ("the Bank").
Regulatory approval was initially sought in March 1993, and was subsequently
received. On July 1,1993, the Bank became a wholly-owned subsidiary of the
Company whereby the common stock of the Bank was deemed shares of the Company.
Bank of Stanly was incorporated on September 28, 1983, under the laws of the
State of North Carolina and began operations on January 26, 1984, in Albemarle,
North Carolina. Deposits with the Bank are insured by the Federal Deposit
Insurance Corporation ("FDIC"); thus, the Bank is under regulation of both the
FDIC and the North Carolina State Banking Commission. Through its five branch
locations in Stanly County, the Bank provides a wide range of deposit accounts,
commercial, consumer, home equity and residential mortgage loans, safe deposit
boxes and automated banking.
In 1987, the Bank established a wholly-owned subsidiary, BOS Agency, Inc. ("BOS
Agency"), which engages in investment and insurance product sales. In 1989, the
Bank established a second wholly-owned subsidiary, BOS Financial Corporation,
for the purpose of conducting business as a broker/dealer in securities. During
1993, BOS Financial Corporation changed its name to The Strategic Alliance
Corporation ("Strategic Alliance") and was licensed as a broker/dealer by the
National Association of Securities Dealers.
Basis of Financial Statement Presentation
The accounting and reporting policies of the Bank conform to generally accepted
accounting principles and general practices within the financial services
industry. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
as of the date of the balance sheet and revenues and expenses for the period.
Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the
Bank and its wholly-owned subsidiaries, BOS Agency and Strategic Alliance. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents are defined as
those amounts included in the caption "cash and due from banks." From time to
time, the Bank may have deposits in excess of insurance coverage at other
institutions.
Securities Held To Maturity
Securities classified as held to maturity are debt securities the Company has
both the intent and ability to hold to maturity regardless of changes in market
conditions, liquidity needs or changes in general economic conditions. These
securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed by the interest method over their contractual
lives.
10
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Notes To Consolidated Financial Statements
----------
Note 1 - Significant Accounting Policies (Continued)
Securities Available For Sale
Securities classified as available for sale are those debt and equity securities
that the Company intends to hold for an indefinite period of time but not
necessarily to maturity. Any decision to sell a security classified as available
for sale would be based on various factors, including significant movements in
interest rates, changes in the maturity mix of the Company's assets and
liabilities, liquidity needs, regulatory capital consideration, and other
similar factors. Securities available for sale are carried at fair value.
Unrealized gains or losses are reported as increases or decreases in
shareholders' equity, net of the related deferred tax effect. Realized gains or
losses, determined on the basis of the cost of specific securities sold, are
included in earnings.
Loans
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off are reported at their outstanding principal
adjusted for any charge-offs, the allowance for loan losses, and any deferred
fees or costs on originated loans and unamortized premiums or discounts on
purchased loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield on the related loan.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. The allowance is
increased by charges to income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is based on
the Bank's past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current economic conditions.
Foreclosed Real Estate
Real estate properties acquired through foreclosure or other proceedings is
initially recorded at fair value upon foreclosure, establishing a new cost
basis. After foreclosure, valuations are performed and the foreclosed property
is adjusted to the lower of cost or fair market value of the properties, less
costs to sell. Any write-down at the time of transfer to foreclosed properties
is charged to the allowance for loan losses. Subsequent write-downs are charged
to other expenses. Property is evaluated regularly to ensure that the recorded
amount is supported by its current fair market value.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Land is
carried at cost. Additions and major replacements or betterments which extend
the useful lives of premises and equipment are capitalized. Maintenance, repairs
and minor improvements are expensed as incurred. Depreciation is computed
principally by the straight-line method over estimated useful lives, except in
the case of leasehold improvements, which are amortized over the term of the
leases, if shorter. Useful lives range from five years for furniture and
fixtures to ten to thirty years for leasehold improvements and buildings,
respectively. Upon retirement or other disposition of the assets, the cost and
the related accumulated depreciation are removed from the accounts and any gains
or losses are reflected in income.
11
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Notes To Consolidated Financial Statements
----------
Note 1 - Significant Accounting Policies (Continued)
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". The Company currently accounts for its stock-based compensation
plans using the accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Since the Company is not
required to adopt the fair value based recognition provisions prescribed under
SFAS No. 123, it has elected only to comply with the disclosure requirements set
forth in the Statement, which includes disclosing pro forma net income as if the
fair value based method of accounting had been applied. (See Note 13.)
Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax return
and separate North Carolina income tax returns. The provision for income taxes
in the accompanying financial statements is provided on a liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
Fair Value of Financial Instruments
Financial Accounting Standards Board Statement No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the consolidated
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. Statement No.
107 excludes certain financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying market value nor liquidation value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Carrying amounts approximate fair values for the following instruments:
Cash and cash equivalents
Accrued interest receivable and payable
Variable rate loans that reprice frequently where no significant
change in credit risk has occurred
Variable rate money market, demand, NOW and savings accounts
Variable rate time deposits
Federal funds purchased and securities sold under repurchase
agreements
Short-term borrowed funds
Quoted market prices, where available, or if not available, based on quoted
market prices of comparable instruments for the following:
Securities available for sale
12
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Notes To Consolidated Financial Statements
----------
Note 1 - Significant Accounting Policies (Continued)
Fair Value of Financial Instruments (continued)
Discounted cash flows using interest rates currently being offered on
instruments with similar terms and with similar credit quality:
Long-term debt
All loans, except variable rate loans described above
Fixed rate time deposits
Investment in Joint Venture
During 1992, the Company entered into a joint venture agreement to form
Corporate Data Services, Inc. ("CDS"), a company that provides operations and
data processing services for community banks. The Company had a 50% ownership
interest at December 31, 1997 and 1996. The Company utilizes the equity method
to account for its ownership in the joint venture.
Earnings per Common Share
Effective with periods ended December 31, 1997, the Company has implemented
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". This Statement simplifies the standards for computing earnings per share
previously found in Accounting Principles Board ("APB") Opinion No. 15,
"Earnings per Share", and makes them comparable to international earnings per
share ("EPS") standards. It replaces the presentation of primary EPS with the
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and the
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and it is computed by
dividing income available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS 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 earnings of the entity.
SFAS No. 128 requires restatement of earnings per share data for all prior
periods presented. For 1996, basic and diluted earnings per share are the same
amounts because the dilutive effect of stock options is not significant.
Basic and dilutive earnings per share have been computed based upon net income
as presented in the accompanying statements of income divided by the weighted
average number of common shares outstanding or assumed to be outstanding as
summarized below.
1997 1996
--------- ---------
Weighted average number of common shares used
in computing basic earnings per share 2,280,253 2,292,509
Effect of dilutive stock options 51,649 N/A
--------- ---------
Weighted average number of common shares and
dilutive potential common shares used in
computing diluted earnings per share 2,331,902 2,292,509
========= =========
13
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Notes To Consolidated Financial Statements
----------
Note 2 - Securities
Carrying amounts and fair values of securities available for sale are summarized
below:
<TABLE>
<CAPTION>
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
- ----------------- --------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 4,990,027 $ 20,263 $ -- $ 5,010,290
U.S. Government agencies and
corporations 1,003,542 -- 10,302 993,240
State and political subdivisions 5,434,737 357,607 -- 5,792,344
Mortgage-backed securities 10,835,374 136,571 -- 10,971,945
----------- ----------- ----------- -----------
Total debt securities 22,263,680 514,441 10,302 22,767,819
FHLB and other stock 1,058,973 20,002 -- 1,078,975
----------- ----------- ----------- -----------
Total securities available for sale $23,322,653 $ 534,443 $ 10,302 $23,846,794
=========== =========== =========== ===========
<CAPTION>
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
- ----------------- --------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 3,980,298 $ 18,860 $ -- $ 3,999,158
U.S. Government agencies and
corporations 2,005,132 -- 18,412 1,986,720
State and political subdivisions 5,490,780 328,619 -- 5,819,399
Mortgage-backed securities 12,025,046 78,766 -- 12,103,812
----------- ----------- ----------- -----------
Total debt securities 23,501,256 426,245 18,412 23,909,089
FHLB and other stock 1,303,673 7,675 -- 1,311,348
----------- ----------- ----------- -----------
Total securities available for sale $24,804,929 $ 433,920 $ 18,412 $25,220,437
=========== =========== =========== ===========
</TABLE>
At December 31, 1997 and 1996, there were no debt securities being held to
maturity.
An analysis of the unrealized holding gain (loss) and the related income tax
effect for the years ended December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Net Increase
Unrealized Deferred Income Tax (Decrease) in
Holding Gain (Loss) Asset (Liability) Shareholders' Equity
------------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 842,959 $ (329,766) $ 513,193
Increase (decrease) in valuation allowance (427,451) 167,219 (260,232)
-------------- -------------- --------------
Balance, December 31, 1996 415,508 (162,547) 252,961
Increase (decrease) in valuation allowance 108,633 (42,497) 66,136
============== ============== ==============
Balance, December 31, 1997 $ 524,141 $ (205,044) $ 319,097
============== ============== ==============
</TABLE>
14
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Notes To Consolidated Financial Statements
----------
Note 2 - Securities (Continued)
The amortized cost and fair value of debt securities available for sale at
December 31, 1997, by contractual maturities, are as follows:
<TABLE>
<CAPTION>
After After
In One One Year Five Years After
Year Through Through Ten
Amortized Cost or Less Five Years Ten Years Years Total
- -------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury $ 1,996,626 $ 2,993,401 $ -- $ -- $ 4,990,027
U.S. Agency -- 1,003,542 -- -- 1,003,542
State and political 75,084 983,384 4,251,269 125,000 5,434,737
Mortgage-backed securities 15,121 969,997 5,355,418 4,494,838 10,835,374
----------- ----------- ----------- ----------- -----------
Total $ 2,086,831 $ 5,950,324 $ 9,606,687 $ 4,619,838 $22,263,680
=========== =========== =========== =========== ===========
<CAPTION>
Fair Value
- ----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury $ 1,991,870 $ 3,018,420 $ -- $ -- $ 5,010,290
U.S. Agency -- 993,240 -- -- 993,240
State and political 75,976 1,033,802 4,551,077 131,489 5,792,344
Mortgage-backed securities 15,167 998,080 5,418,180 4,540,518 10,971,945
----------- ----------- ----------- ----------- -----------
Total $ 2,083,013 $ 6,043,542 $ 9,969,257 $ 4,672,007 $22,767,819
=========== =========== =========== =========== ===========
<CAPTION>
After After
Weighted In One One Year Five Years After
Average Year Through Through Ten
Percentage Yields or Less Five Years Ten Years Years Total
- ----------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury 5.36% 6.37% --% --% 5.96%
U.S. Agency -- 5.47 -- -- 5.47
State and political (1) 9.84 10.15 9.07 8.15 9.25
Mortgage-backed securities 7.28 8.03 6.91 7.11 7.09
----------- ----------- ----------- ----------- -----------
Total 5.54% 7.11% 7.86% 7.13% 7.29%
=========== =========== =========== =========== ===========
</TABLE>
(1) Yield on tax exempt bonds computed on a tax-equivalent basis.
Results from sales of securities available for sale for the years ended December
31, 1997 and 1996 are as follows:
1997 1996
---- ----
Gross proceeds from sales $ 3,339,581 $ 7,198,862
=========== ===========
Realized gains from sales $ 22,965 $ 41,098
Realized losses from sales -- (11,731)
----------- -----------
Net realized gains $ 22,965 $ 29,367
=========== ===========
At December 31, 1997 and 1996, securities available for sale with a carrying
amount of $10,312,546 and $10,863,459, respectively, were pledged as collateral
on public deposits and for other purposes as required or permitted by law.
15
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Notes To Consolidated Financial Statements
----------
Note 3 - Loans
The composition of net loans as of December 31, 1997 and 1996 is as follows:
1997 1996
---- ----
Commercial $ 15,674,015 $ 13,647,142
Real estate - construction 3,840,467 3,716,121
Real estate - residential 58,824,912 51,321,091
Real estate - commercial 24,102,199 21,200,977
Consumer 11,451,481 10,889,647
Other 100,068 112,378
------------- ------------
113,993,142 100,887,356
Deduct:
Allowance for loan losses (1,124,970) (1,049,833)
Unearned net loan fees (8,248) (34,906)
------------- ------------
Loans, net $ 112,859,924 $ 99,802,617
============= ============
Although the Bank's loan portfolio is diversified, there is a concentration of
mortgage real estate loans, primarily one to four family residential mortgage
loans, which represent 51.6% of the total loan portfolio. Commercial loans,
secured primarily by real estate, to finance manufacturing buildings, shopping
center locations, commercial buildings and equipment comprise 21.1% of total
loan dollars. There is not a concentration of a particular type of credit in
this group of commercial loans.
An analysis of fixed-rate loan maturities and repricing frequencies of
variable-rate loans as of December 31, 1997 follows:
Fixed-rate loans with a maturity of:
Three months or less $ 2,507,312
Over three months through twelve months 6,890,639
Over one year through five years 18,679,583
Over five years 22,337,070
-------------
Total fixed-rate loans 50,414,604
-------------
Variable-rate loans with a repricing frequency of:
Three months or less 60,972,944
Over three months through twelve months 2,169,395
Over one year through five years 427,951
Over five years --
-------------
Total variable-rate loans 63,570,290
-------------
Total loans $ 113,984,894
=============
Impaired loans consist of nonaccrual loans which totaled $322,567 and $331,738
at December 31, 1997 and 1996, respectively, which had the effect of reducing
net income $7,440 in 1997 and $14,815 in 1996. When loans exceed 90 days past
due, they are placed in nonaccrual status. At December 31, 1997 and 1996, loans
past due 90 days totaled $9,000 and $57,000, respectively. At December 31, 1997
and 1996, the Company did not have any loans for which terms had been modified
in troubled debt restructuring.
The Company's loan policies are written to address each lending category,
specifically related to loan-to-value ratios and collateralization methods. This
takes into consideration economic and credit risk of lending areas and customers
associated with each category.
16
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Notes To Consolidated Financial Statements
----------
Note 4 - Allowance For Loan Losses
Changes in the allowance for loan losses for the years ended December 31, 1997
and 1996 are listed below:
1997 1996
----------- -----------
Balance, beginning of year $ 1,049,833 $ 975,475
----------- -----------
Charge offs:
Commercial 53,900 2,200
Real estate 16,300 13,000
Consumer 70,027 60,425
----------- -----------
Total charge-offs 140,227 75,625
----------- -----------
Recoveries:
Commercial -- -
Real estate -- -
Consumer 32,064 13,138
----------- -----------
Total recoveries 32,064 13,138
----------- -----------
Net charge-offs 108,163 62,487
Provision charged against income 183,300 136,845
----------- -----------
Balance, end of year $ 1,124,970 $ 1,049,833
=========== ===========
Ratios relative to the allowance for loan losses, nonperforming loans and net
charge-offs for the years ended December 31, 1997 and 1996 are reflected below:
1997 1996
------ ------
Allowance for loan losses to total loans .99% 1.04%
Allowance for loan losses to non-performing loans 348.8 316.5
Nonperforming loans to average loans .30 .34
Net charge-offs to gross loans outstanding .09 .06
The method used for rating the loan portfolio provides for early detection of
problem loans, and an adequate loan loss provision is established quarterly for
loans considered to be loss, doubtful and substandard. This identification
process begins with loans previously identified by examiners and also includes
loans from management's assessment of credit reviews, payment history, loan to
value ratio and weakness in credit. Changes in the ratio of the allowance for
loans losses to total loans and nonperforming loans reflects this assessment.
The allocation of the allowance for loan losses applicable to each category of
loans at December 31, 1997 and 1996 is presented below:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- --------------------------------
Percent of Percent of
Each Category Each Category
Amount to Total Loans Amount to Total Loans
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Commercial $ 36,974 14% $ 44,932 14%
Real estate - construction -- 3% -- 4%
Real estate - mortgage 221,645 73% 212,780 72%
Consumer 18,480 10% 6,002 10%
Unallocated 847,871 N/A 786,119 N/A
----------- ---- ----------- ----
Total $ 1,124,970 100% $ 1,049,833 100%
=========== ==== =========== ====
</TABLE>
17
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Notes To Consolidated Financial Statements
----------
Note 5 - Premises And Equipment
The major classes of premises and equipment and the total accumulated
depreciation at December 31, 1997 and 1996 are listed below:
1997 1996
----------- -----------
Land $ 418,987 $ 341,686
Buildings and improvements 1,991,372 1,865,538
Furniture and equipment 1,862,569 1,616,309
----------- -----------
4,272,928 3,823,533
Less accumulated depreciation 1,929,191 1,706,284
----------- -----------
$ 2,343,737 $ 2,117,249
=========== ===========
Note 6 - Deposits
The composition of deposits at December 31, 1997 and 1996 is as follows:
1997 1996
------------- -------------
Demand deposits $ 13,871,742 12% $ 12,852,376 12%
Money market and NOW accounts 28,569,039 24 24,112,851 23
Savings 31,870,829 27 27,706,578 27
Time deposits, $100,000 and over 9,045,532 8 6,502,755 6
Other time deposits 33,548,182 29 33,424,904 32
------------- -------------
$ 116,905,324 100% $ 104,599,464 100%
============= =============
The maturities of fixed-rate time deposits at December 31, 1997 are reflected in
the table below.
Other
Time Deposits Time
$100,000 and Over Deposits
----------------- ------------
Remaining Maturities
Three months or less $ 3,861,919 $ 11,010,298
Three through twelve months 3,480,991 16,424,627
Over twelve months 1,702,622 6,113,257
------------ ------------
Total $ 9,045,532 $ 33,548,182
============ ============
Note 7 - Short-Term Borrowed Funds
<TABLE>
<CAPTION>
1997 1996
--------------------- --------------------
Amount Rate Amount Rate
----------- ----- ------------ ----
<S> <C> <C> <C> <C>
At year-end
Federal funds purchased $ 1,400,000 8.00% $ -- --%
Securities sold under agreement
to repurchase 4,047,330 4.46 8,156,145 4.16
Master notes 2,562,058 4.42 --
Short-term advances from FHLB -- -- 3,000,000 5.45
----------- ------------
$ 8,009,388 5.06% $ 11,156,145 4.51%
=========== ============
</TABLE>
18
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Notes To Consolidated Financial Statements
----------
Note 7 - Short-Term Borrowed Funds (Continued)
<TABLE>
<CAPTION>
1997 1996
--------------------- --------------------
Amount Rate Amount Rate
----------- ----- ------------ ----
<S> <C> <C> <C> <C>
Average for the year
Federal funds purchased $ 1,058,900 5.92% $ 1,556,126 5.68%
Securities sold under agreement
to repurchase 4,553,482 4.24 5,763,748 4.46
Master notes 907,920 4.36 -- --
Short-term advances from FHLB 2,415,395 5.65 866,667 5.66
----------- ------------
$ 8,935,697 4.83% $ 8,186,541 4.82%
=========== ============
Maximum month-end balance
Federal funds purchased $ 5,725,000 $ 4,675,000
Securities sold under agreement
to repurchase 5,998,530 8,156,145
Master notes 2,658,883 -
Short-term advances from FHLB 8,400,000 3,000,000
</TABLE>
Federal funds purchased represent unsecured overnight borrowings from other
financial institutions. Securities sold under agreement to repurchase represent
short-term borrowings collateralized by securities of the United States
government or its agencies.
The Bank has available lines of credit for federal funds in the amount of
$9,000,000.
Note 8 - Long-Term Debt
Advances from the Federal Home Loan Bank of Atlanta ("FHLB") with original
maturities of one year or more consist of the following at December 31, 1997 and
1996:
Maturing
Year Ending Interest
December 31 Rate (%) 1997 1996
----------- ----------- ------------ ------------
1998 5.40 - 6.94 $ 2,599,252 $ 621,552
1999 6.07 - 6.94 1,574,252 1,596,552
2000 6.41 - 6.94 471,552 571,552
2001 5.80 - 6.94 1,421,552 471,552
2002 6.41 - 6.94 371,552 -
Thereafter 6.41 - 7.53 1,136,349 3,004,452
------------ ------------
$ 7,574,509 $ 6,265,660
============ ============
Pursuant to collateral agreements with the FHLB, advances are collateralized by
all the Company's stock in FHLB and its qualifying first mortgage loans with
principal balances of $48,915,854 and $43,456,511 at December 31, 1997 and 1996,
respectively. Total credit available from the FHLB for short- or long-term
borrowing at December 31, 1997 was $30,000,000.
19
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Notes To Consolidated Financial Statements
----------
Note 9 - Income Tax Matters
The components of income tax expense for the years ended December 31 are
summarized as follows:
1997 1996
--------- ---------
Current tax expense $ 534,567 $ 292,004
Deferred tax expense 5,329 158,716
--------- ---------
$ 539,896 $ 450,720
========= =========
The effective income tax rates for 1997 and 1996 were 31.3% and 30.5%,
respectively. The reasons for the differences between the effective rates and
income taxes computed at the statutory federal income tax rate of 34% for each
of those years are as follows:
1997 1996
--------- ---------
Income taxes at statutory federal rate $ 586,777 $ 501,876
Increases (decreases) resulting from:
Tax exempt interest, net (133,013) (114,380)
State income taxes, net of federal benefit 68,432 38,085
Other 17,700 25,139
========= =========
$ 539,896 $ 450,720
========= =========
Deferred tax assets and liabilities arising from temporary differences at
December 31, 1997 and 1996 are summarized as follows:
1997 1996
--------- ---------
Deferred tax assets relating to:
Bad debt reserves $ 351,135 $ 311,784
Deferred compensation 35,226 16,112
Other -- 3,589
--------- ---------
Total deferred tax asset 386,361 331,485
--------- ---------
Deferred tax liabilities relating to:
Net unrealized gain on securities available for sale (205,044) (162,547)
Depreciation (46,762) (46,618)
Deferred loans fees and costs (137,244) (87,513)
Basis difference in equity investment (31,200) (31,200)
Other (10,330) --
--------- ---------
Total deferred tax liability (430,580) (327,878)
--------- ---------
Net deferred tax asset (liability) $ (44,219) $ 3,607
========= =========
The net deferred tax asset or liability is included in other assets or
liabilities, as appropriate, on the accompanying consolidated balance sheet.
20
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Notes To Consolidated Financial Statements
----------
Note 10 - 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 credit 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. Collateral held varies, but may include accounts receivable,
inventory, real estate and time deposits with financial institutions. 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. As of December 31, 1997 and 1996, outstanding
financial instruments whose contract amounts represent credit risk were as
follows:
1997 1996
----------- -----------
Commitments to extend credit $14,476,645 $13,108,188
Credit card commitments 3,086,572 1,913,015
Standby letters of credit 763,388 348,388
----------- -----------
$18,326,605 $15,369,591
=========== ===========
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 Fannie-Mae
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 a whole.
Note 11 - Related Party Transactions
In the normal course of business, certain directors and executive officers of
the Company, including their immediate families and companies in which they have
a 10% or more beneficial interest, were loan customers. Loans to such groups
totaled $5,621,593 and $2,727,314 at December 31, 1997 and 1996 as summarized
below.
1997 1996
----------- -----------
Balance, beginning $ 2,727,314 $ 4,234,445
Loans made 9,445,168 7,771,662
Payments received (6,892,743) (7,976,645)
Changes in composition 341,854 (1,302,148)
----------- -----------
Balance, ending $ 5,621,593 $ 2,727,314
=========== ===========
At December 31, 1997, the Bank had pre-approved but unused credit lines totaling
$470,775 to executive officers, directors and their affiliates.
21
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Notes To Consolidated Financial Statements
----------
Note 12 - Regulatory Restrictions
The Company and its subsidiary, Bank of Stanly, are subject to certain
requirements imposed by state and federal banking statutes and regulations.
These requirements, among other things, establish minimum levels of capital,
restrict the amount of dividends that may be distributed, and require that
reserves on deposit liabilities be maintained in the form of vault cash or
noninterest-bearing deposits with the Federal Reserve Bank.
North Carolina law prohibits Uwharrie Capital Corp from making any distributions
to shareholders, including the payment of cash dividends, which would render it
insolvent or unable to meet its obligations as they become due in the ordinary
course of business. At December 31, 1997, Uwharrie Capital Corp had consolidated
shareholders' equity of $12,534,136.
As a North Carolina banking corporation, the subsidiary bank may pay dividends
only out of undivided profits as determined pursuant to North Carolina General
Statutes Section 53-87. As of December 31, 1997, the Bank had undivided profits
of $5,769,268 and total capital of $12,409,047.
The Company and its subsidiary bank are subject to federal regulatory risk-based
capital guidelines for banks and bank holding companies. Both must meet specific
capital guidelines that involve quantitative measure of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices which measure Total and Tier 1 Capital to risk- weighted assets and
Tier 1 Capital to average assets. Quantitative measures established by
regulation to ensure capital adequacy and the Company's consolidated capital
ratios are set forth in the table below. The Company expects to meet or exceed
these minimums without altering current operations or strategy.
Adequately Well
Actual Capitalized Capitalized
- --------------------------------------------------------------------------------
As of December 31, 1997:
Total Capital (to risk weighted assets) 13.6% 8% 10%
Tier 1 Capital (to risk weighted assets) 12.5 4 6
Tier 1 Capital (to average assets) 8.4 4 5
As of December 31, 1996:
Total Capital (to risk weighted assets) 14.0% 8% 10%
Tier 1 Capital (to risk weighted assets) 12.8 4 6
Tier 1 Capital (to average assets) 8.2 4 5
- --------------------------------------------------------------------------------
As of December 31, 1997, the most recent notification from the FDIC categorized
the bank subsidiary as adequately capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since that
notification that management believes have changed the Bank's category.
For the reserve maintenance period in effect at December 31, 1997, the
subsidiary bank was required to maintain reserve balances in cash or on deposit
with the Federal Reserve Bank in the aggregate amount of $925,000 as reserves on
deposit liabilities.
22
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Notes To Consolidated Financial Statements
----------
Note 13 - Stock Matters
Employee Stock Plans
During 1996, the Company adopted the 1996 Employment Stock Option Plan ("SOP")
and the Employee Stock Purchase Plan ("SPP"), under which options to purchase
shares of the Company's common stock may be granted to officers and eligible
employees. Options granted under the SOP are exercisable in established
increments according to vesting schedules, and will expire if not exercised
within ten years of the date of grant. Options granted under the SPP are fully
vested at the date of grant and will expire if not exercised within two years.
Under a prior Incentive Stock Option Plan, various grants were awarded during
the period from October 1985 through January 1990. All remaining unexercised
options under that plan were exercised in either 1997 or 1996.
Activity under all option plans, including the effects of the 5% and 3% stock
dividends issued in 1997 and 1996, respectively, are as follows:
1997 1996
--------------------- -----------------------
Weighted- Weighted-
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
--------- -------- --------- ---------
Options outstanding at the
beginning of the year 140,820 $5.80 38,941 $4.28
Increase for stock dividend 6,964 -- 42 --
Options granted 47,220 7.31 144,687 5.83
Options exercised (3,152) 4.72 (42,850) 4.52
-------- ----- -------- -----
Options outstanding at the
end of the year 191,852 $5.86 140,820 $5.80
======== ===== ======== =====
Options exercisable at the
end of the year 66,028 $5.71 21,105 $5.66
======== ===== ======== =====
Weighted-average fair value
of options granted during
the year $1.78 $1.15
===== =====
At December 31, 1997, there were options for 191,852 shares outstanding with a
weighted-average remaining term of eight years and an exercise price of between
$5.55 and $7.38 per share. At December 31, 1997, 66,028 optioned shares were
exercisable at prices between $5.55 and $7.38 per share for a total of $376,880.
When options are exercised, par value of the shares issued is recorded as an
addition to common stock, and the remainder of the proceeds is credited to
additional paid-in capital. No income or expense has been recognized in
connection with the grant or exercise of these options.
23
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Notes To Consolidated Financial Statements
----------
Note 13 - Stock Matters (Continued)
As permitted by SFAS No. 123, the Company has continued to apply APB Opinion No.
25 for measurement of stock-based compensation in the accompanying financial
statements. If the Company had used the fair value based method of accounting
for stock-based compensation, operating results for 1997 and 1996 would have
been affected as set forth below:
As Reported Pro Forma
----------------------- ---------------------
1997 1996 1997 1996
---------- ---------- ---------- --------
Net Income $1,185,920 $1,025,389 $1,118,920 $971,389
Net Income Per Share:
Basic $ 0.52 $ 0.45 $ 0.49 $ 0.42
Assuming Dilution $ 0.51 $ 0.45 $ 0.48 $ 0.42
In determining the pro forma disclosures above, the fair value of options
granted was estimated on the date of grant using the Black-Scholes Option
Pricing Model using the following assumptions; a risk-free interest rate of 5.5%
and 6.0% in 1997 and 1996, respectively, a dividend yield of 2.0%, an expected
life equal to 60% of the term of the option, and a volatility ratio of 20%. The
effects of applying SFAS No. 123 in the above pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards granted
prior to 1995.
Stock Repurchase Program
On February 21, 1995, the Company's Board of Directors authorized and approved a
Stock Repurchase Program, to be reaffirmed annually, pursuant to which the
Company may repurchase shares of the Company's common stock for the primary
purpose of providing liquidity to its shareholders. During the years 1997 and
1996, the Company was authorized to purchase and retire shares up to an
aggregate purchase price of $900,000 annually. Pursuant to stock repurchase
authorizations and limitations, the Company purchased 4,018 shares during 1997
and 54,565 shares during 1996 with an aggregate purchase price of $30,125 and
$351,889, respectively.
Note 14 - Employee and Director Benefit Plans
Employees' Savings Plus and Profit Sharing Plan
The Company has established an associate tax deferred savings plan under Section
401(k) of the Internal Revenue Code of 1986. All associates who are scheduled to
work 1,000 hours or more are eligible to participate upon completion of one year
of employment.
The Company's annual contribution to the plan was $113,099 in 1997 and $104,876
in 1996, determined as follows:
o One percent of each participant's compensation.
o A matching contribution equivalent to 100% of the first 5% of each
associate's compensation contributed to the plan.
o A discretionary contribution, subject to approval by the Board of
Directors, limited to an amount not to exceed the maximum amount
deductible for income tax purposes.
Directors' Deferred Compensation Plan
The Company has established a Directors Deferred Compensation Plan in accordance
with the laws of the State of North Carolina. Each Director may elect to defer
receipt for services rendered to the Company as a Director during the term of
his or her service by entering into a written deferred compensation election.
The balance in deferred directors compensation was $90,046 and $41,312 at
December 31, 1997 and 1996, respectively.
24
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Notes To Consolidated Financial Statements
----------
Note 15 - New Accounting Pronouncements
FASB Statement on Reporting Comprehensive Income. In June 1997, the FASB issued
SFAS No. 130. This Statement establishes standards of reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. In addition to net income as has been historically
determined, comprehensive income for the Company would include unrealized
holding gains and losses on available for sale securities. This Statement will
be effective for the first quarter of the Company's fiscal year ending December
31, 1998. Had the Company early-adopted this Statement, it would have reported
comprehensive income of $1,252,056 and $765,157 for the years ended December 31,
1997 and 1996, respectively.
Note 16 - Fair Values Of Financial Instruments And Interest Rate Risk
The following table reflects a comparison of carrying amounts and the estimated
fair value of the financial instruments as of December 31.
<TABLE>
<CAPTION>
1997 1996
---------------------- ---------------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 4,506 $ 4,506 $ 4,883 $ 4,883
-------- -------- -------- --------
Securities available for sale 23,847 23,847 25,220 25,220
Variable rate loans 63,570 63,570 59,860 59,860
Other loans 50,415 51,024 40,992 40,908
-------- -------- -------- --------
Total loans 113,985 114,594 100,852 100,768
-------- -------- -------- --------
Accrued interest receivable 931 931 858 858
- -------------------------------------------------------------------------------------------------
Financial Liabilities
Deposits
Variable rate, payable on demand $ 74,312 $ 74,312 $ 64,672 $ 64,672
Fixed-rate time certificates of deposit 42,593 42,642 39,927 39,969
-------- -------- -------- --------
Total deposits 116,905 116,954 104,599 104,641
-------- -------- -------- --------
Short-term borrowing 8,009 8,009 11,156 11,156
Long-term debt 7,575 7,575 6,266 6,349
Accrued interest payable 171 171 176 176
- -------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997 the Bank 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, and, therefore, they were deemed to have no
current fair market value. See Note 10.
It should be noted that the estimated fair values disclosed in this 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.
25
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Notes To Consolidated Financial Statements
----------
Note 16 - Fair Values Of Financial Instruments And Interest Rate Risk
(Continued)
Interest Rate Risk
The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, fair
values of the Company's financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are more likely to prepay in a rising rate
environment and less likely to prepay in a falling rate environment. Conversely,
depositors who are receiving fixed rates are more likely to withdraw funds
before maturity in a rising rate environment and less likely to do so in a
falling rate environment. Management monitors rates and maturities of assets and
liabilities and attempts to minimize interest rate risk by adjusting terms of
new loans and deposits and by investing in securities with terms that mitigate
the Company's overall interest rate risk.
26
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Selected Financial Data
<TABLE>
<CAPTION>
In Thousands Except Per Share And Shares Outstanding Information
- -------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest Income $ 11,019 $ 10,040 $ 8,913 $ 7,692 $ 7,025
Interest Expense 4,879 4,511 4,051 3,008 2,589
----------- ----------- ----------- ----------- -----------
Net Interest Income 6,140 5,529 4,862 4,684 4,436
Provision for Loan Losses 183 137 77 181 185
Noninterest Income 1,491 1,361 1,183 270 1,183
Noninterest Expense 5,722 5,277 4,988 4,551 4,116
Income taxes 540 451 199 (38) 303
----------- ----------- ----------- ----------- -----------
Net Income $ 1,186 $ 1,025 $ 781 $ 260 $ 1,015
=========== =========== =========== =========== ===========
Per Common Share
Net Income - Basic (1) $ .52 $ .45 $ .34 $ .11 $ .44
Cash dividends N/A .10 .09 .09 .08
Book Value (1) 5.49 4.95 4.76 4.14 4.49
Weighted Average Shares
Outstanding - Basic (1) 2,280,253 2,292,509 2,309,528 2,328,173 2,323,488
- -------------------------------------------------------------------------------------------------
<CAPTION>
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Selected year-end balances
Assets $ 145,704 $ 133,876 $ 120,839 $ 112,124 $ 102,383
Loans 113,985 100,852 90,948 80,074 69,171
Securities 23,847 25,220 23,114 23,543 26,596
Deposits 116,905 104,599 95,794 93,235 84,469
Borrowed funds 15,584 17,421 13,275 8,886 7,161
Shareholders' equity 12,534 11,303 10,913 9,724 10,413
Selected average balances
Assets $ 140,508 $ 128,193 $ 113,535 $ 108,972 $ 97,905
Loans 107,696 97,201 82,630 75,657 65,880
Securities 25,577 23,594 23,916 25,833 25,398
Deposits 111,593 90,026 80,968 80,068 75,674
Borrowed funds 16,482 14,893 11,891 8,451 3,664
Shareholders' equity 11,818 11,123 10,445 10,278 9,789
- -------------------------------------------------------------------------------------------------
</TABLE>
1) Net income per share, book value per share, weighted average shares
outstanding and shares outstanding at year-end for 1993 through 1996 have
been adjusted to reflect a 5% stock dividend issued in 1997 and 3% stock
dividends issued in 1996, 1995, 1994 and 1993.
27
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
----------
Operating results and the Company's financial condition are presented in the
following narrative and financial tables. The comments are intended to
supplement and should be reviewed in conjunction with the consolidated financial
statements and related footnotes appearing on pages 6 - 26. References to
changes in assets and liabilities represent end of period balances unless
otherwise noted.
This annual report to shareholders contains certain forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and other business of Uwharrie Capital Corp that are subject to
various factors which could cause actual results to differ materially from those
estimates. Factors which could influence the estimates include changes in
national, regional and local market conditions, legislative and regulatory
conditions, and the interest rate environment.
Earnings Overview
Uwharrie Capital Corp (the "Company") recorded net earnings of $1.2 million for
the twelve months ended December 31, 1997, an increase of 15.7% or $161,000 as
compared with net income of $1.0 million in 1996. Earnings per share reflected
$.52 compared to $.45 for the prior year. Growth of 11.0% in net interest
income, supported by a 9.5% increase in non-interest revenues accounted for the
earnings increase.
During 1997 the Company experienced asset growth of $11.8 million, an increase
of 8.8%. Loans increased by $13.1 million or 13.0% resulting in a 9.2% increase
in earning assets. The asset growth was funded mainly by an increase in
deposits, which reflects a lower cost of funds than other funding sources. This
allowed the Company to maintain its interest margin, enhancing earnings.
Net income for the years ended 1997 and 1996 and certain key financial
performance ratios are reflected below:
1997 1996
- -------------------------------------------------------------------------------
Net Income $1,185,920 $1,025,389
Return on average assets .84% .80%
Return on average equity 10.04% 9.22%
Average equity to average assets 8.41% 8.68%
- -------------------------------------------------------------------------------
Uwharrie Capital Corp has managed to achieve good performance while developing
its strategy to remain a strong, viable financial institution. In 1993, the
Company began a program to develop and expand its technology capabilities, which
remains a focus today. This development has provided the capacity to grow the
organization and leverage the high cost of delivering competitive services.
Management believes this strategy will enable the Company to remain competitive
with larger institutions and allow its service area to enjoy the benefits of a
local financial institution and the strength its capital investment provides to
the community.
Net Interest Income
The Company's major source of revenue is net interest income, which is the
excess of interest income earned on loans and securities over interest expense
paid on deposits and borrowings. Net interest income, as reflected on the
consolidated income statement, increased $611 thousand or 11.0% for the year
ended December 31, 1997, as
28
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
----------
compared with the prior year. This improvement can be attributed primarily to
the increase in interest income generated by growth in the loan portfolio. Yield
on loans during 1997 was 8.71% compared to 8.80% in 1996; however, cost of funds
also decreased and margin remained stable.
Securities available for sale produced income of $1.6 million and reflected a
yield of 7.30% on a tax equivalent basis, during the twelve months of 1997
compared to $1.4 million with a tax equivalent yield of 6.92%, during the same
period of 1996.
Interest expense on deposits increased by $285 thousand or 7.7% due to higher
balances. The weighted average rate paid on all interest-bearing deposits was
4.03% in 1997 compared to 4.09% in 1996.
The cost of short-term borrowed funds increased $39 thousand or 9.8%, due to an
increase of $749 thousand in the average outstanding balance from this funding
source. Rates paid for short-term funding were relatively flat when comparing
the two periods, reflecting an average of 4.85% in 1997 and 4.82% in 1996.
Interest expense paid on long-term debt increased $44 thousand, due to an
additional $840 thousand in the average outstanding balance. The average rate
paid on long-term debt decreased from 6.43% to 6.29%.
The Company's net interest margin, the difference between the tax-equivalent
yield on earning assets and the rate paid on funds to support those assets, was
stable during 1996, reflecting margin of 4.70%, and improved slightly in 1997,
reflecting 4.76%. The Company is pleased with this performance as some other
financial institutions have experienced a decrease in net interest margin due to
the competitive nature of the financial services industry and periods of
interest rate changes. A stable margin reflects the Company's ability to manage
the mix and pricing of its interest-bearing assets and liabilities to minimize
the effect of interest rate changes on its balance sheet and the resulting net
interest income. There were no wide swings in interest rates during 1997 or 1996
and rate changes in these periods did not significantly impact the margin.
Financial Table 1 presents a detailed analysis of the components of the
Company's net interest income. The exhibit discloses the dollar change in
average assets and liabilities along with the associated changes in yields and
interest income and expense.
Balance Sheet Analysis
With a continued moderate interest rate environment, the Company's loan demand
remained strong in 1997, primarily in mortgage and commercial loans. Gross
outstanding loans at December 31, 1997 totaled $114.0 million, $13.1 million
greater than at December 31, 1996 representing an increase of 13.0%.
Investment securities, including net unrealized gains, totaled $23.8 million at
December 31, 1997 compared to $25.2 million at this period end in 1996, a
decrease of $1.4 million, which provided additional funding for the loan growth.
Although deposit and economic growth has been relatively low in its service
area, the Company attracted local funds totaling $10.8 million, composed of an
increase in deposits of $12.3 million , decrease in securities sold to customers
under repurchase agreements in the amount of $4.1 million and a shift of funds
into Master Notes of $2.6 during 1997 compared to 1996, reflecting total
percentage growth of 9.5%. Other sources of funds including federal funds
purchased and advances from Federal Home Loan Bank decreased $291 thousand
during this period.
29
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
----------
Nonperforming Assets
Nonperforming assets, composed of nonaccrual loans and foreclosed real estate,
remain at a level below the peer group averages, reflective of the Company's
ongoing commitment to maintaining asset quality. Nonaccrual loans at December
31, 1997 were $323 thousand and represented .28% of outstanding loans compared
with $332 thousand reflecting a ratio of .33% at December 31, 1996. Foreclosed
real estate totaled $133 thousand at year end 1997 and $85 thousand at year end
1996.
Provision and Allowance for Loan Losses
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 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 transactions in the allowance for loan losses are summarized in the Note 4
to the consolidated financial statements. The ratio of net charge-offs to gross
loans outstanding is currently an excellent ratio compared to bank peers
reflecting .09% in 1997 and .06% in 1996.
The amount of provision expensed during 1997 was $183 thousand compared to $137
thousand for the same period in 1996. The higher amount provided in 1997 can be
attributed to an increase in the amount of net charge offs when comparing the
two periods and additional provision provided for growth in the loan portfolio.
Noninterest Income
The Company generates most of its revenue from net interest income; however,
noninterest income is an important revenue stream and is receiving growing focus
in the financial industry. Total noninterest income, exclusive of securities
gains (losses), increased by $136 thousand in the twelve months ended December
31, 1997 compared to 1996, an increase of 10.2%.
The main component, service charges on deposit accounts, amounted to $911
thousand in 1997 compared to $901 thousand in 1996, which represents an increase
of $10 thousand or 1.1%. The ratio of service charge income from the banking
subsidiary to average assets of .65% for 1997 is favorable compared to other
banks of similar size.
Another factor with significant influence to this category is the Bank's
brokerage and insurance subsidiaries, which contributed commission and fee
income of $300 thousand in 1997 and $243 thousand in 1996.
Noninterest Expense
For the twelve months ended December 31, 1997 compared to the same period of
1996, noninterest expenses totaled $5.7 million and $5.3 million, respectively,
an increase of $445 thousand. This moderate increase of 8.4% is due primarily to
increased personnel costs and normal increases in operating expenses.
Personnel costs, composed of salaries, incentives and benefits provided,
continues to be the largest component of noninterest expense, increasing by $378
thousand or 14.9%. Salaries and incentives amounted to $2.5 million in 1997
compared to $2.1 million in the prior year. During 1997 the Company expanded its
management staff,
30
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
----------
adding a President's position at the Bank subsidiary. Other factors affecting
the increase in salary were normal merit salary increases and other staffing
changes. Employee benefits were up by $52 thousand, associated with the growth
in salaries.
Occupancy expense increased by $41 thousand or 18.7% in 1997 compared to 1996,
including $22 thousand on a newly leased facility. Data processing costs have
been relatively stable, reflecting expenses of $496 thousand and $493 thousand
in the two periods, respectively.
Equipment expense includes the cost of depreciation and maintenance associated
with furniture, network computers, PC workstations, other banking equipment and
the amortization of technology related and other software. These expenses, which
totaled $412 thousand in 1997 and $432 thousand in 1996, reflect a decrease of
$20 thousand or 4.7%.
Remaining combined categories of noninterest expense, including professional
fees, marketing, electronic banking delivery, director fees, insurance,
supplies, postage, telephone and other expenses increased by $42 thousand or
2.7% when comparing the two periods. The most significant of these other
expenses are professional fees and marketing. Expenses for professional fees,
which includes accounting, consulting and legal expenses, decreased by $70
thousand. Marketing, including the cost of advertising, sales promotion, public
relations, donations and business development, totaled $289 thousand in 1997
compared to $205 thousand in 1996, which can be attributed to a major marketing
image campaign implemented in 1997.
Capital Resources
The Company continues to maintain strong capital ratios that support its asset
growth. As of December 31, 1997, capital as a percentage of total assets was
8.6%, which exceeds the Company's strategic goal of maintaining this ratio at
8%. The capital position, which is maintained through the retention of earnings
and controlled growth, remains strong.
Regulatory agencies divide capital into Tier I (consisting of shareholders'
equity less ineligible intangible assets) and Tier II (consisting of the
allowable portion of the reserve for loan losses and certain long-term debt) and
measure capital adequacy by applying both capital levels to a banking company's
risk-adjusted assets and off-balance sheet items. Regulatory requirements
presently specify that Tier I capital should exclude the market appreciation or
depreciation of securities available-for-sale arising from valuation adjustments
under FASB 115. In addition to these capital ratios, regulatory agencies have
established a Tier I leverage ratio which measures Tier I capital to average
assets less ineligible intangible assets.
Regulatory guidelines require a minimum of total capital to risk-adjusted assets
ratio of 8 percent with one-half consisting of tangible common shareholders'
equity and a minimum Tier I leverage ratio of 3 percent. Banks which meet or
exceed a Tier I ratio of 6 percent, a total capital ratio of 10 percent and a
Tier I leverage ratio of 5 percent are considered well capitalized by regulatory
standards.
At December 31, 1997, the Company's Tier I to risk-adjusted assets ratio was
12.57% with total capital at 13.72% of risk-adjusted assets and Tier I leverage
ratio at 8.49%. The Company expects to continue to exceed these minimums without
altering current operations or strategy.
Dividends
During 1997 the Board of Directors of Uwharrie Capital Corp declared a 5% stock
dividend compared to the 3% stock dividend and a cash dividend of $.10 per share
in 1996. The stock dividends declared in both years increased each shareholder's
investment in the Company.
31
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
----------
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 for 1997 totaled $540 thousand, an effective tax rate of
31.3%. During 1996 the effective tax rate was 30.5%.
Impact of Inflation and Changing Prices
The consolidated financial statements and accompanying footnotes have been
prepared in accordance with generally accepted accounting principles (`GAAP"),
which require the measurement of financial position and operating results in
terms of historical dollars without consideration for changes in the relative
purchasing power of money over time due to inflation. The assets and liabilities
of the Company are primarily monetary in nature and changes in interest rates
have a greater impact on the Company's performance than do the effects of
inflation.
Liquidity
Liquidity, the ability to raise cash when needed without adversely impacting
profits, is managed primarily by the selection of asset mix and the maturity mix
of liabilities. Maturities and the marketability of securities and other funding
sources provide a source of liquidity to meet deposit fluctuations. Maturities
in the securities portfolio, presented in Note 2, are supported by cash flows
from mortgage-backed securities that have longer-term contractual maturities.
Other funding sources at year end included $10.5 million in federal funds lines
of credit from correspondent banks and a $30 million line of credit from the
Federal Home Loan Bank. The Company can also borrow from the Federal Reserve
Bank discount window. Growth in deposits is typically the primary source of
funding for loans, supported by long-term credit available from the Federal Home
Loan Bank.
At December 31, 1997, the Company's borrowings from available federal funds
lines amounted to $1.4 million. Advances from the Federal Home Loan Bank at that
date consisted of $7.6 million in long-term debt.
Interest Rate Sensitivity
The major component of income for Uwharrie Capital Corp is net interest income,
the difference between yield earned on assets and interest paid on liabilities.
This differential or margin can vary over time as changes in interest rates
occur. The volatility of changes in this differential can be measured by the
timing (or repricing) difference between maturing assets and liabilities.
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. Gap analysis at December 31, 1997 is reflected in
Financial Table 3. While management reviews this information, it has implemented
the use of a 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. The model currently reflects that a fluctuation in rates of
2.00% in a twelve-month period, where rates were increased by 50 basis points in
month one, month three, month five and month seven, would impact net interest
income by less than 2.5% and the impact of a 3.0% rate fluctuation on net margin
based on this scenario would be under 3.0%. Under the same scenarios in a rates
down environment, the effect on net margin was under .3%.
32
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
----------
The principal goals of the Company's asset liability management are the
maintenance of adequate liquidity and the management of interest rate risk.
Interest rate risk management attempts to balance the effects of interest rate
changes on interest-sensitive assets and liabilities to protect net interest
income from wide fluctuations that could result from changes in interest rates.
The Asset Liability Management Committee monitors market changes in interest
rates and assists with pricing loans and deposit products consistent with
funding source needs and asset growth projections.
Year 2000
The Year 2000 compliance issue concerns the readiness of public companies to
meet the information processing challenges at the turn of the century and the
ability of date-sensitive business application software and hardware to
recognize the year 2000.
Uwharrie Capital Corp and its subsidiaries are actively engaged in the execution
of a five phase initiative as outlined by the Federal Financial Institutions
Examination Council to address the readiness of the Company and associated
interdependent business relationships. These phases are 1) Awareness, 2)
Assessment, 3) Renovation, 4) Validation (Testing), and 5) Implementation.
A Year 2000 Steering Committee comprised of members of executive management
appointed by the Board of Directors is responsible for project oversight. A Year
2000 Task Force has been named to execute the initiative and is working
diligently to ensure that time lines and objectives are met.
At this stage of the "Assessment Phase", it is management's opinion that the
financial impact of evaluation, testing and implementation will not have a
material impact on the Company's business, operations, or financial condition.
33
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Financial Tables
Financial Table 1
<TABLE>
<CAPTION>
AVERAGE BALANCE AND
YIELD INFORMATION 1997 1996
(in thousands)
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate (1) Balance Expense Rate (1)
----------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Taxable securities $ 18,753 $ 1,267 6.76% $ 17,679 $ 1,095 6.19%
Non-taxable securities 5,760 340 9.08% 5,915 350 9.10%
Short-term investments 541 34 6.28% 753 43 5.71%
Loans, gross (2) 107,696 9,378 8.71% 97,201 8,552 8.80%
----------------------------- ------------------------------
Total interest-earning assets 132,750 11,019 8.44% 121,548 10,040 8.41%
----------------------------- ------------------------------
Non-earning Assets
Cash and due from banks 3,799 3,761
Premises and equipment, net 2,311 2,069
Interest receivable and other 1,648 815
-------- --------
Total non-earning assets 7,758 6,645
-------- --------
Total assets $140,508 $128,193
======== ========
Interest-bearing liabilities
Savings deposits $ 29,548 $ 1,204 4.07% $ 27,050 $ 1,100 4.07%
Transaction and MMDA deposits 28,195 644 2.28% 23,153 462 2.00%
Other time deposits 40,678 2,123 5.22% 39,823 2,124 5.33%
----------------------------- ------------------------------
Total deposits 98,421 3,971 4.03% 90,026 3,686 4.09%
Short-term borrowed funds 8,936 433 4.85% 8,187 394 4.82%
Long-term debt 7,546 475 6.29% 6,706 431 6.43%
----------------------------- ------------------------------
Total interest-bearing liabilities 114,903 4,879 4.25% 104,919 4,511 4.30%
----------------------------- ------------------------------
Noninterest liabilities
Transaction deposits, interest
payable and other 13,787 12,151
-------- --------
Total liabilities 128,690 117,070
-------- --------
Shareholders' equity 11,818 11,123
-------- --------
Total liabilities and
shareholders' equity $140,508 $128,193
======== ========
Interest rate spread 4.19% 4.11%
Net interest income and net
interest margin $ 6,140 4.76% $ 5,529 4.70%
======= =======
</TABLE>
1) Yields related to securities and loans exempt from federal and/or state
income taxes are stated on a fully tax-equivalent basis, assuming a 35% tax
rate.
2) Nonaccrual loans are included in loans, net of unearned income.
34
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Financial Tables
Financial Table 2
AVERAGE BALANCE SHEETS
AND YIELD INFORMATION
(In thousands)
1997 Compared to 1996
- --------------------------------------------------------------------------------
Income/ Variance
Expense Attributable to
Variance Volume Rate
----- ----- -----
Earning Assets
Taxable securities $ 172 $ 70 $ 102
Non-taxable securities (10) (9) (1)
Short-term investments (9) (13) 4
Loans, gross 826 918 (92)
----- ----- -----
Total earning assets 979 966 13
----- ----- -----
Interest-bearing liabilities
Savings deposits 104 102 2
Transaction and MMDA deposits 182 109 73
Other time deposits (1) 45 (46)
Short-term borrowed funds 39 36 3
Long-term debt 44 53 (9)
----- ----- -----
Total interest-bearing liabilities 368 345 23
----- ----- -----
Net Interest Income $ 611 $ 621 $ (10)
===== ===== =====
- --------------------------------------------------------------------------------
The above table analyzes the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (I) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume), and (iii) net change (the sum of the previous columns).
The change attributable to both rate and volume (changes in rate multiplied by
changes in volume) has been allocated equally to both the changes attributable
to volume and the changes attributable to rate.
35
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Financial Tables
Financial Table 3
INTEREST RATE GAP
(In thousands)
<TABLE>
<CAPTION>
1 - 90 3 - 6 6 - 12 1 - 5 Non-sensitive
days months months years and over 5 yrs. Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets
Due from banks 184 -- -- -- -- 184
Investment securities 998 87 998 6,044 14,641 22,768
FHLB and other stock -- -- -- -- 1,079 1,079
Variable rate loans 60,972 1,220 950 428 -- 63,570
Fixed rate loans 2,507 3,438 3,453 18,680 22,337 50,415
------ ----- ------ ------ ----- -------
Total earning assets 64,661 4,745 5,401 25,152 38,057 138,016
------ ----- ------ ------ ----- -------
Interest-bearing
liabilities
Deposits 67,713 9,401 10,505 7,806 7,609 103,034
Short-term borrowed funds 8,009 -- -- -- -- 8,009
Long-term debt 2,452 24 123 3,840 1,136 7,575
------ ----- ------ ------ ----- -------
Total interest bearing
liabilities 78,174 9,425 10,628 11,646 8,745 118,618
------ ----- ------ ------ ----- -------
Interest rate gap (13,513) (4,680) (5,227) 13,506 29,312
Cumulative gap (13,513) (18,193) (23,420) (9,914) 19,398
Ratios
Cumulative gap to total
earning assets (.10) (.13) (.17) (.07) .14
Cumulative rate sensitive
assets to rate sensitive
liabilities .83 .79 .76 .91 1.16
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
UWHARRIE CAPITAL CORP
Board of Directors
<S> <C> <C>
William S. Aldridge, Jr. James F. Link, D.V.M. Catherine A. Pickler
Secretary -Treasurer Veterinarian and Owner Homemaker and
Manager and Co-owner North Stanly Animal Clinic Community Volunteer
Stanly Funeral Home, Inc.
Cynthia H. Beane Jerry J. Long George T. Reaves
Certified Public Accountant President, Secretary & Co-owner Retired - Vice President Traffic
Cynthia H. Beane, Proprietor Long's Diamond Broker and Transportation
Previously Long's Jewelers, Inc. Collins & Aikman Corporation
Joe S. Brooks W. Chester Lowder A. James Russell
Partner Director of Field Services Construction Manager
Brothers Precision Tool Company N.C. Farm Bureau Federation J.T. Russell & Sons, Inc.
President - Fork L. Farm, Inc.
Ronald T. Burleson Pamela S. Morton B. A. Smith, Jr.
Partner Principal Retired - Pilot and Base Commander
Thurman Burleson & Sons Farm Endy Elementary School United States Air Force
William F. Clayton John P. Murray, M.D. Boyce E. Thompson
Cost Office Supervisor Retired - Physician Treasurer
Aluminum Company of America Albemarle Ear, Nose and Throat Stanly Fixtures Company, Inc.
G. Chad Efird Kent E. Newport Douglas V. Waddell
Retired - Technical Supervisor President, KDC, Inc. Retired - Automotive Dept. Manager
Aluminum Company of America DBA Coy's Laundromat Sears Roebuck and Co.
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
BANK OF STANLY
Board of Directors
<S> <C> <C>
Barton D. Burpeau, Jr. W. Kermit Efird Eric M. Johnsen, M.D.
Special Agent, North Carolina State President President, Physician
Bureau of Investigation Rocky River Springs Fish House, Inc. Stanly Family Care Clinic
Ronald B. Davis James L. Harris James R. Mauney, Sr.
President/Chief Executive Officer Retired - Specialty Sales Manager Retired - President and Owner
Bank of Stanly Southwire Company Mauney Feed Mill
John J. Earnhardt, Jr. Jacqueline S. Jernigan Thomas H. Swaringen
President Executive Vice President Executive Vice President
C. K. Earnhardt & Son, Inc. Retail Banking Credit Administration
Bank of Stanly Bank of Stanly
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
THE STRATEGIC ALLIANCE CORPORATION
Board of Directors
<S> <C>
Jerry W. Almond, Sr. Joseph R. Kluttz, Jr.
President President
Stanly Fixtures Company, Inc Albemarle Insurance Agency, Inc.
Cletus J. Burns, Jr. James E. Nance
Manager - Finishing Department President and General Manager
Collins & Aikman Corporation Confederate Motors, Inc.
Robert L. Isenhour Michael E. Snyder, Sr.
Retired - Owner and Operator Vice President of Research and Development
Stanly Shale Products Division of Sanford E. J. Snyder & Company, Inc.
- ------------------------------------------------------------------------------------------
<CAPTION>
EXECUTIVE OFFICERS
<S> <C>
Ronald B. Davis Tamara M. Singletary
President/Chief Executive Officer Executive Vice President - Investor
Bank of Stanly Relations and Corporate Secretary
Uwharrie Capital Corp
Roger L. Dick Christy D. Stoner
President/Chief Executive Officer President
Uwharrie Capital Corp The Strategic Alliance Corporation
Susan B. Gibson Thomas H. Swaringen
Vice President Executive Vice President
Human Resources Credit Administration
Bank of Stanly Bank of Stanly
Jacqueline S. Jernigan Barbara S. Williams
Executive Vice President Senior Vice President
Retail Banking Finance
Bank of Stanly Uwharrie Capital Corp
Dawn L. Melton O. David Williams, Jr.
Executive Vice President Senior Vice President
Technology Commercial Banking
Uwharrie Capital Corp Bank of Stanly
</TABLE>
38
<PAGE>
EXHIBIT 21
SUBSIDIARY OF THE REGISTRANT
Name of Subsidiary State of Incorporation
------------------ ----------------------
Bank of Stanly North Carolina
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
1997 Annual Report of the Registrant and is qualified in its entirety to
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,506
<INT-BEARING-DEPOSITS> 103,034
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 23,847
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 113,985
<ALLOWANCE> 1,125
<TOTAL-ASSETS> 145,704
<DEPOSITS> 116,905
<SHORT-TERM> 8,009
<LIABILITIES-OTHER> 681
<LONG-TERM> 7,575
0
0
<COMMON> 2,853
<OTHER-SE> 9,681
<TOTAL-LIABILITIES-AND-EQUITY> 145,704
<INTEREST-LOAN> 9,378
<INTEREST-INVEST> 1,606
<INTEREST-OTHER> 34
<INTEREST-TOTAL> 11,018
<INTEREST-DEPOSIT> 3,971
<INTEREST-EXPENSE> 4,879
<INTEREST-INCOME-NET> 6,140
<LOAN-LOSSES> 183
<SECURITIES-GAINS> 23
<EXPENSE-OTHER> 5,722
<INCOME-PRETAX> 1,726
<INCOME-PRE-EXTRAORDINARY> 1,186
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,186
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
<YIELD-ACTUAL> 4.76
<LOANS-NON> 323
<LOANS-PAST> 9
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,050
<CHARGE-OFFS> 140
<RECOVERIES> 32
<ALLOWANCE-CLOSE> 1,125
<ALLOWANCE-DOMESTIC> 1,125
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
