U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
( X ) QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission file Number 0-22062
UWHARRIE CAPITAL CORP
(Exact name of small business issuer as specified in its charter)
NORTH CAROLINA 56-1814206
(State of incorporation) (I.R.S Employer Identification No.)
167 North Second Street
Albemarle, North Carolina 28001
(Address of principal executive offices)
Issuer's telephone number, including area code: (704) 983-6181
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 of 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
Title of Each Class Outstanding at October 31, 1999
- ------------------- -------------------------------
Common stock, par value $1.25 per share 5,391,993 shares outstanding
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets, September 30, 1999 and 1998 (Unaudited) 3
Consolidated Statements of Income for the Three Months and the
Nine Months Ended September 30, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Changes in Shareholders' Equity for the
Nine Months Ended September 30, 1999 and 1998 (Unaudited) 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II OTHER INFORMATION
Item 4 Submission of Matters to Vote of Security Holders 15
Item 6 Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBIT 27 Financial Data Schedule for the Nine Months Ended September 30, 1999 17
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS UWHARRIE CAPITAL CORP AND SUBSIDIARY
<TABLE>
<CAPTION>
Consolidated Balance Sheets (Unaudited)
- --------------------------------------------------------------------------------
(In thousands)
September 30,
1999 1998
--------- ---------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 3,962 $ 4,251
Securities available for sale:
U.S. Treasury 1,993 6,010
U.S. Government agencies and corporations 19,940 13,011
State and political subdivisions 5,353 5,535
Other securities 2,075 1,082
--------- ---------
Total securities 29,361 25,638
--------- ---------
Federal funds sold -- 1,425
Loans (Note 2) 138,792 119,317
Less: Allowance for loan losses 964 1,184
--------- ---------
Loans, net 137,828 118,133
--------- ---------
Premises and equipment, net 3,580 2,828
Interest receivable 1,074 978
Other assets 2,183 1,469
========= =========
Total assets $ 177,988 $ 154,722
========= =========
LIABILITIES
Deposits:
Demand deposits $ 15,616 $ 15,389
Money market and NOW accounts 32,989 27,156
Savings deposits 35,340 34,804
Time deposits $100,000 and over 17,122 17,410
Other time deposits 32,756 33,578
--------- ---------
Total deposits 133,823 128,337
--------- ---------
Federal funds purchased 1,600 --
Securities sold under repurchase agreements 3,287 3,068
Commercial paper 1,947 1,523
Other short-term borrowed funds 1,200 --
Long-term debt 18,275 6,847
Interest payable 190 152
Other liabilities 660 705
--------- ---------
Total liabilities 160,982 140,632
--------- ---------
Off balance sheet items, commitments and contingencies (Note 4)
SHAREHOLDERS' EQUITY
Common stock, $1.25 par value: 20,000,000 shares authorized; issued and
outstanding: and 4,589,492 shares, respectively; 5,400,632 stock subscribed
72,611 shares at September 30, 1998 6,751 5,828
Additional paid-in capital 5,725 3,019
Common stock subscriptions receivable (258) --
Common stock acquired by ESOP (1,200) --
Undivided profits 6,239 4,818
Accumulated other comprehensive income
Net unrealized gain on securities available for sale, net of related tax effect (251) 425
--------- ---------
Total shareholders' equity 17,006 14,090
========= =========
Total liabilities and shareholders' equity $ 177,988 $ 154,722
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Consolidated Statements of Income (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
INTEREST INCOME:
<S> <C> <C> <C> <C>
Interest on loans $ 2,840 $ 2,549 $ 8,300 $ 7,494
Interest on securities:
U.S. Treasury 29 88 127 240
U.S. Government agencies and corporations 337 230 838 697
State and political subdivisions 78 80 235 245
Other 32 19 73 58
Other interest income 11 60 33 79
----------- ----------- ----------- -----------
Total interest income 3,327 3,026 9,606 8,813
INTEREST EXPENSE:
Interest on deposits and borrowed funds 1,460 1,320 4,140 3,850
----------- ----------- ----------- -----------
NET INTEREST INCOME 1,867 1,706 5,466 4,963
Provision for loan losses -- 23 80 87
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,867 1,683 5,386 4,876
----------- ----------- ----------- -----------
NONINTEREST INCOME:
Service charges on deposit accounts 274 237 786 700
Other service fees and commissions 199 114 493 394
Other income(loss) (56) 17 (31) 34
----------- ----------- ----------- -----------
Total noninterest income 417 368 1,248 1,128
----------- ----------- ----------- -----------
NONINTEREST EXPENSE:
Salaries, wages and employee benefits 944 845 2,811 2,443
Occupancy expenses 71 73 209 214
Equipment expense 143 120 413 337
Data processing 121 121 346 340
Other expenses 462 420 1,276 1,244
----------- ----------- ----------- -----------
Total noninterest expense 1,741 1,579 5,055 4,578
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 543 472 1,579 1,426
Provision for income taxes 170 149 484 446
----------- ----------- ----------- -----------
NET INCOME $ 373 $ 323 $ 1,095 $ 980
=========== =========== =========== ===========
Net Income Per Common Share
Basic $ .07 $ .07 $ .21 $ .21
Assuming dilution $ .07 $ .07 $ .21 $ .21
Weighted Average Shares Outstanding
Basic 5,133,210 4,592,509 5,096,567 4,581,971
Effect of dilutive stock options 134,503 165,093 77,752 162,245
----------- ----------- ----------- -----------
Assuming dilution 5,267,713 4,757,602 5,174,319 4,744,216
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
For The Nine Months Ended September 30, 1999 and 1998 (Unaudited)
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
(In thousands) Additional Common Stock Other
Common Paid-in Subscriptions ESOP Notes Undivided Comprehensive
Stock Capital Receivable Receivable Profits Income Total
----- ------- ---------- -------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ 2,853 $ 5,524 $ -- $ -- $ 3,838 $ 319 $ 12,534
Comprehensive income
Net income -- -- -- -- 980 -- 980
Other comprehensive income,
net of tax
Net increase (decrease)
in fair value of
securities available
for sale -- -- -- -- -- 106 106
--------
Total comprehensive income 1,086
--------
Stock options exercised 16 55 -- -- -- -- 71
Subscriptions received for 72,611 91 308 399
shares
Two for one split (100% stock 2,868 (2,868) --
dividend)
Repurchase of common stock -- -- -- -- -- -- --
------------------------------------------------------------------------------------
Balance, September 30, 1998 $ 5,828 $ 3,019 $ -- $ -- $ 4,818 $ 425 $ 14,090
====================================================================================
Balance, January 1, 1999 $ 6,254 $ 4,194 $ (257) $ -- $ 5,144 $ 363 $ 15,698
Comprehensive income
Net income -- -- -- -- 1,095 -- 1,095
Other comprehensive income,
net of tax -- -- -- -- -- -- --
Net increase (decrease)
in fair value of
securities available
for sale -- -- -- -- -- (614) (614)
--------
Total comprehensive income 481
--------
Common stock issued pursuant to:
Sale of common stock 353 1,174 (155) 1,372
218,181 shares issued to ESOP plan 273 927 (1,200) --
Stock options exercised 59 72 131
Repurchase of common stock (188) (642) (830)
Collections of subscriptions receivable 154 154
------------------------------------------------------------------------------------
Balance, September 30, 1999 $ 6,751 $ 5,725 $ (258) $ (1,200) $ 6,239 $ (251) $ 17,006
====================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
(In thousands)
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,095 $ 980
Adjustments to reconcile net income to net cash provided by operations
Depreciation 254 212
Amortization of investment premiums and discounts, net (13) 12
Provision for loan losses 80 87
Deferred income tax benefit -- (26)
Gain on sale of mortgage loans -- (13)
(Gain) loss on sale of securities available for sale (3) 8
Loss on foreclosed properties -- 14
Changes in assets and liabilities:
Interest receivable (133) (48)
Other assets (495) (301)
Interest payable -- (19)
Other liabilities 145 152
-------- --------
Net cash provided by operating activities 930 1,058
-------- --------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 455 1,258
Proceeds from maturities of securities available for sale 7,095 3,312
Purchase of securities available for sale (13,830) (6,208)
Net (increase) decrease in federal funds sold 1,950 (1,425)
Net increase in loans made to customers (6,777) (5,346)
Purchase of premises and equipment (808) (696)
Proceeds from sale of foreclosed properties -- 34
-------- --------
Net cash used in investing activities (11,915) (9,071)
-------- --------
FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts (5,423) 11,431
Net increase (decrease) in federal funds purchased 1,600 (1,400)
Net decrease in securities sold under repurchase agreements (223) (979)
Proceeds from long-term advances from Federal Home Loan Bank 13,025 2,050
Repayment of long-term advances from Federal Home Loan Bank (1,572) (2,772)
Net increase (decrease) in commercial paper 663 (1,042)
Net increase in other short-term borrowed funds 1,197 --
Proceeds from issuance of common stock 3,158 71
Net increase in common stock subscribed (270) --
Proceeds from common stock subscribed -- 399
Repurchases of common stock (860) --
Common stock acquired by ESOP (1,200) --
-------- --------
Net cash provided by financing activities 10,095 7,758
-------- --------
DECREASE IN CASH AND DUE FROM BANKS (890) (255)
Cash and due from banks at beginning of period 4,852 4,506
-------- --------
Cash and due from banks at end of period $ 3,962 $ 4,251
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - ACCOUNTING POLICIES
The financial statements and accompanying notes are presented on a consolidated
basis including Uwharrie Capital Corp (the "Company"), it's Subsidiaries, Bank
of Stanly ("the Bank"), Strategic Investment Advisors, Inc., the Company's 100%
investment in Uwharrie Loan Pool 1, LLC and the Bank's subsidiaries. Bank of
Stanly consolidates the Strategic Alliance Corporation and BOS Agency, Inc. each
of which are wholly-owned by the Bank.
The information contained in the consolidated financial statements is unaudited.
In the opinion of management, the consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and all
material adjustments necessary for a fair presentation of results of interim
periods have been made. The results of operations for the interim periods are
not necessarily indicative of the results which may be expected for an entire
year. Management is not aware of economic events, outside influences or changes
in concentrations of business that would require additional clarification or
disclosure in the consolidated financial statements. Certain prior period
amounts have been reclassified to conform to current period classifications.
NOTE 2 - LOANS
Loans outstanding at period end:
September 30,
(In thousands) 1999 1998
-------- --------
Real estate loans $102,025 $ 92,262
Commercial and industrial 23,502 15,177
Loans to individuals for household, family and other
consumer expenditures 13,243 11,767
All other loans 22 111
-------- --------
Total $138,792 $119,317
======== ========
NOTE 3- PER SHARE DATA
On July 21, 1998, the Company's Board of Directors declared a two-for-one stock
split, effected in the form of a 100% dividend, whereby all shareholders
received an additional share of common stock for each share of stock currently
held. The dividend was paid on August 20, 1998 to shareholders of record on
August 4, 1998. On September 21, 1998, the Company's Board of Directors approved
a new common stock offering at a price of $5.50 per share pursuant to
nontransferable subscription rights to shareholders of the Company as of August
28, 1998 for the first 30 days of the offering. Any remaining shares were
offered to the public at the same price. A total of 870,493 shares were issued
pursuant to the stock offering. All information presented in the accompanying
interim consolidated financial statements regarding earnings per share and
weighted average number of shares outstanding has been computed giving effect to
this stock dividend and the new common stock offering.
NOTE 4- 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.
7
<PAGE>
The Bank's risk of loss with the unfunded loans and lines of credit or standby
letters of credits is represented by the contractual amount of these
instruments. The Bank uses the same credit policies in making commitments under
such instruments as it does for on-balance sheet instruments. The amount of
collateral obtained, if any, is based on management's credit evaluation of the
borrower. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Credit card commitments are unsecured. At September 30, 1999,
outstanding financial instruments whose contract amounts represent credit risk
were approximately:
Commitments to extend credit $ 18,412,405
Credit card commitments 4,659,091
Standby letters of credit 1,197,008
------------
$ 24,268,504
============
Contingencies
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the financial
statements.
Financial instruments with concentration of credit risk
The Bank makes commercial, agricultural, real estate mortgage, home equity and
consumer loans primarily in Stanly County. A substantial portion of the Bank's
customers' abilities to honor their contracts is dependent on the business
economy in Albemarle, North Carolina and surrounding areas. Although the Bank's
loan portfolio is diversified, there is a concentration of mortgage loans in the
portfolio. The Bank's policies for real estate lending require collateralization
with 20% equity or that the loan be underwritten to conform to FannieMae
guidelines that would allow securitization and/or sale of the loans. Lending
policy for all loans requires that they be supported by sufficient cash flows.
Credit losses related to this real estate concentration are consistent with
credit losses experienced in the portfolio as a whole.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Uwharrie Capital Corp, (the Company) was incorporated as Stanly Capital Corp
under the laws of the State of North Carolina as a one bank holding company for
Bank of Stanly (the Bank) in July 1993. The Company changed its name to Uwharrie
Capital Corp in April 1997 to broaden its community perspective and expand its
vision beyond its current service area in Stanly County to the Uwharrie Lakes
region, consisting of a contiguous seven county area in our state.
The Bank was incorporated in 1983 and since commencement of its operations in
January 1984, has engaged in the retail and commercial banking business through
its five offices located in Stanly County, North Carolina. Bank of Stanly
competes with five other commercial banks, a savings bank and a credit union in
its service area, primarily for lending activities and deposit customers. The
Bank enjoys a good reputation as a community focused financial institution, and
has been successful in achieving substantial growth in a market that has not
displayed a significant amount of growth potential.
The Company's financial condition and results of operation are presented in the
following narrative and incorporated tables. References to changes in assets and
liabilities represent end of period balances unless otherwise noted.
EARNINGS
The third quarter of 1999 reflected good operating results with net income of
$373 thousand, an increase of 15.5% when compared to the third quarter of 1998.
This improvement can be primarily attributed to an increase in net interest
income due to growth in the loan portfolio and a relatively stable net interest
margin.
Results for this three-month period reflect net earnings $.07 per share, after
giving effect to the two-for-one stock split declared by the Board of Directors
on July 21, 1998 and the new common stock issued as a result of the stock
offering. This compares to income of $323 thousand or $.07, as restated, for the
same period in 1998. The increase of $50 thousand was generated from an
improvement of $161 thousand from net interest income and an increase in
noninterest income of $49 thousand offset mainly by an increase of $162 thousand
in noninterest expense.
NET INTEREST INCOME
Net interest income represents the gross profit from the lending and investment
activities of a banking organization and is the most significant factor
affecting the earnings of the Company. It is the amount by which interest
generated by earnings assets exceeds the cost of funds supporting them.
The two primary earning assets are loans and investment securities. Income
generated from these assets is a function of their quality, growth and yield.
Growth reflected in earning assets was primarily the result of demand for
quality loans as average loans increased by $21.0 million or 18.3% when
comparing the first nine months of 1999 to the same period in 1998. Average
investment securities were relatively stable. Interest income grew by $793
thousand, representing an increase of 9.0% when comparing these periods.
9
<PAGE>
The cost of funding sources, primarily deposits and other borrowings, increased
$290 thousand or 7.5% for the nine months ended September 30, 1999 due to an
increased volume of average interest-bearing liabilities of $20.4 million.
The average rate paid on interest-bearing liabilities decreased from 4.18% in
1998 to 4.11% in 1999. Interest-bearing deposits, as a percent of total
interest-bearing liabilities was 88.5% at September 30, 1999 compared to 89.5%
at September 30, 1998.
Net interest income increased $503 thousand or 10.1% when comparing the nine
month periods presented, attributable to an increased volume of interest earning
assets. The net interest margin, on a tax equivalent basis, decreased from 4.81%
in the first nine months of 1998 to 4.73% in the current period.
The following tables present average balance sheets and a net interest income
analysis for the nine months ended September 30, 1999 and 1998.
Average Balance Sheet and Net Interest Income Analysis
For the Nine Months Ended September 30,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average Level Income/Expense Rate/Yield
($ in thousands) 1999 1998 1999 1998 1999 1998
----------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) $ 129,428 $ 112,111 $ 8,187 $ 7,382 8.46% 8.80%
Nontaxable loans (2) 2,790 2,811 113 112 8.33% 8.20%
Taxable securities 21,469 21,087 1,038 995 6.46% 6.31%
Nontaxable securities (2) 5,352 5,609 235 245 9.03% 8.98%
Other (3) 800 1,677 33 79 5.51% 6.30%
----------- ----------- ----------- ------------ ----------- -----------
Total interest-earning assets 159,839 143,295 9,606 8,813 8.19% 8.40%
----------- ----------- ----------- ------------ ----------- -----------
Interest-bearing liabilities:
Interest-bearing deposits 119,221 110,230 3,451 3,314 3.87% 4.02%
Short-term borrowings 8,357 6,886 361 245 5.78% 4.76%
Long-term borrowings 7,165 6,111 328 291 6.12% 6.37%
----------- ----------- ----------- ------------ ----------- -----------
Total interest-bearing
liabilities 134,743 123,227 4,140 3,850 4.11% 4.18%
----------- ----------- ----------- ------------ ----------- -----------
Net interest spread $25,096 $ 20,068 $ 5,466 $4,963 4.08% 4.22%
=========== =========== =========== ============ =========== ===========
Net interest margin (2)
(% of earning assets) 4.73% 4.81%
=========== ===========
</TABLE>
(1) Average loan balances are stated net of unearned income and include
nonaccrual loans. Interest recognized on nonaccrual loans is included in
interest income.
(2) Yields related to securities and loans exempt from income taxes are stated
on a fully tax-equivalent basis, assuming a 35% tax rate.
(3) Includes federal funds sold and due from banks, interest-bearing.
- --------------------------------------------------------------------------------
ASSET QUALITY
Management considers the Company's asset quality to be of primary importance.
The loan portfolio is analyzed periodically in an effort to identify potential
problems before they actually occur. An allowance for loan losses, which is
utilized to absorb actual losses in the loan portfolio, is maintained at a level
sufficient to provide for estimated potential charge-offs of non-collectible
loans. The Company uses a rating method to determine an
10
<PAGE>
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 reserve for each rating. Included
in the calculation are loans previously identified by examiners as loss,
doubtful or substandard. The Company's allowance for loan losses is analyzed
quarterly by management.
The provision for loan losses represents a charge against income in an amount
necessary to maintain the allowance at an appropriate level. The monthly
provision for loan losses may fluctuate based on the results of this analysis.
During the nine-month period ended September 30, 1999, a total of $80 thousand
in loan loss provision expense was recognized, compared to $87 thousand for this
period in 1998. Charge-offs, net of recoveries, for the nine months ended
September 30, 1999 totaled $286 thousand, reflecting a ratio to average loans of
.21%.
The following table contains a summary of the allowance for loan losses,
including the amount of charge-offs and recoveries by loan type for the nine
months ended September 30, 1999 and 1998.
Summary of Allowance for Loan Losses
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30,
(In thousands) 1999 1998
-------------- ---------------
<S> <C> <C>
Beginning balance $ 1,170 $ 1,125
Charge-offs:
Commercial loans 137 -
Consumer loans 51 58
Real estate loans 151 6
-------------- ---------------
Gross charge-offs 339 64
-------------- ---------------
Recoveries:
Commercial loans 16 -
Consumer loans 21 36
Real estate loans 16 -
-------------- ---------------
Gross recoveries 53 36
-------------- ---------------
Net charge-offs (recoveries) 286 28
Provision for loan losses 80 87
-------------- ---------------
Ending balance $ 964 $ 1,184
============== ===============
Percentage of gross loans .69% .99%
Ratio of net charge-offs to average loans during the period .21% .02%
</TABLE>
- --------------------------------------------------------------------------------
Non-performing assets include non-accrual loans, accruing loans contractually
past due 90 days or more, restructured loans, other real estate, and other real
estate under contract for sale. Loans are placed on non-accrual when management
has concerns relating to the ability to collect the loan principal and interest,
and generally when such loans are 90 days or more past due.
While non-performing assets represent potential losses to the Company,
management does not anticipate any aggregate material losses since most loans
are believed to be adequately secured. Management believes the allowance for
loan losses is sufficient to absorb known risks in the portfolio. No assurance
can be given that economic conditions will not adversely affect borrowers and
result in increased losses.
11
<PAGE>
The following table summarizes non-performing assets by type at September 30,
1999 and 1998. Other than the amounts listed, there were no other loans that (i)
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity or capital
resources or (ii) represent material credits about which management has
information that causes them to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.
- --------------------------------------------------------------------------------
Schedule of Non-Performing Assets
(In thousands) September 30,
1999 1998
-------- --------
Nonaccrual loans $ 557 $ 230
Loans past due 90 days or more and still accruing 33 14
Other real estate owned, net 85 85
Renegotiated troubled debt - -
-------- --------
Total non-performing assets $ 675 $ 329
======== ========
Non-performing assets as a percentage of gross loans .49% .28%
- --------------------------------------------------------------------------------
NONINTEREST INCOME AND EXPENSE
Income from service charges and fees produced earnings of $473 and $351 thousand
for the third quarters of 1999 and 1998, respectively, an increase of 34.8%.
Other income decreased by $39 thousand, compared to the prior third quarter, due
primarily to the write down of an investment asset to its expected net
realizable value.
For this same period, noninterest expenses increased by $162 thousand or 10.3%.
Salaries and benefits, the largest component of noninterest expense, increased
by $99 thousand. Personnel costs increased due to additional staff to support
the Company's growth, normal salary adjustments and associated benefit costs.
All other expenses as a group increased by $63 thousand when comparing results
of the third quarter of 1999 to the same period in 1998.
INCOME TAX EXPENSE
Income taxes computed at the statutory rate are reduced primarily by the
eligible amount of interest earned on state and municipal securities. Income tax
expense calculated to date in 1999 totaled $484 thousand, an effective tax rate
of 30.7% of pretax income compared to $446 thousand in 1998, which reflected an
effective rate of 31.3%.
FINANCIAL CONDITION AND CAPITAL RATIOS
As of September 30, 1999 total assets were $178.0 million, an improvement of
15.0% over September 30, 1998. The Company has experienced steady growth in
loans which increased from $119.3 million at September 30, 1998 to $138.8
million on September 30, 1999, reflecting growth of 16.3%. Asset quality remains
good as evidenced by past due loan percentages, loan loss experience and
management's rating of the loan portfolio.
Shareholders' equity increased from $15.7 million at December 31, 1998 to $17.0
million at September 30, 1999, principally due to net income of $1,095 thousand
and transactions relating to common stock subscriptions received during the
period.
12
<PAGE>
Banks and bank holding companies, as regulated institutions, must meet required
levels of capital. The FDIC and the Federal Reserve, the primary regulators of
the Bank and the Company, have adopted minimum capital regulations or guidelines
that categorize components and the level of risk associated with various types
of assets. Financial institutions are expected to maintain a level of capital
commensurate with the risk profile assigned to its assets in accordance with
those guidelines. Both the Company and the Bank have maintained capital levels
exceeding minimum levels for "well capitalized" banks and bank holding
companies, as reflected in the following table.
Regulatory Capital
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
--------------- -------------- --------------- ---------------
Amount Percent Amount Percent
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total capital to risk weighted assets
Consolidated $ 18,221 14.94% $ 14,849 14.29%
Bank 15,455 12.77% 14,254 13.81%
Tier 1 capital to risk weighted assets
Consolidated 17,257 14.15% 13,665 13.15%
Bank 14,491 11.97% 13,070 12.67%
Tier 1 capital to average assets (leverage)
Consolidated 17,257 10.16% 13,665 8.83%
Bank 14,491 8.59% 13,070 8.48%
- --------------------------------------------------------------------------------
</TABLE>
LIQUIDITY
The Company's liquidity management objectives are to provide for deposit
withdrawals and maturing debt obligations, to provide a reliable source of
funding to borrowers, to fund operations on a cost effective basis, and to
capitalize on opportunities for expansion. Management believes that sufficient
resources are available to meet the Company's liquidity objectives through its
debt maturity structure, holdings of liquid assets and access to additional
liquidity through a variety of funding vehicles.
The Company's primary sources of internally generated funds are principal and
interest payments on loans, cash flows generated from operations and cash flow
generated by investments. Growth in deposits is typically the primary source of
funds for loan growth.
The Company has multiple funding sources that can be used to increase liquidity
and provide additional financial flexibility. These sources consist primarily of
established federal funds lines with correspondent banks aggregating $15.5
million at September 30, 1999 and the Bank's ability to borrow up to 22% of its
assets from the Federal Home Loan Bank, access to borrowings from the Federal
Reserve Bank discount window, and the sale of securities under agreements to
repurchase and issue of commercial paper. Total debt from these sources
aggregated $26.3 million at September 30, 1999, compared to $11.4 million at
September 30, 1998.
Management is not aware of any events that are reasonably likely to have a
material effect on the Company's liquidity, capital resources or operations.
13
<PAGE>
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk primarily stems from interest rate risk, the potential
economic loss due to future changes in interest rates, which is inherent in
lending and deposit gathering activities. The Company's objective is to manage
the mix of interest-sensitive assets and liabilities to moderate interest rate
risk and stabilize the net interest margin while enhancing profitability.
ASSET/LIABILITY AND INTEREST RATE RISK MANAGEMENT
The major component of income for Uwharrie Capital Corp is net interest income,
the difference between income earned on assets and interest paid on liabilities.
This differential (or margin) can vary over time as changes in interest rates
occur. Therefore, a primary objective of interest rate sensitivity management is
to ensure the stability and quality of the Company's primary earning component,
net interest income.
This process involves monitoring the Company's balance sheet in order to
determine the potential impact that changes in the interest rate environment
would have on net interest income. Rate sensitive assets and liabilities have
interest rates which are subject to change within a specific time period, due to
either maturity or contractual agreements that allow the instruments to reprice
prior to maturity. Interest rate sensitivity management seeks to ensure that
both assets and liabilities react to changes in interest rates within a similar
time period, thereby minimizing the risk to net interest income.
To identify interest rate sensitivity, a common measure is a gap analysis which
reflects the difference or gap between rate sensitive assets and liabilities
over various time periods. While management compiles and reviews this
information, it has implemented the use of a comprehensive simulation model
which calculates expected net interest income based on projected
interest-earning assets, interest-bearing liabilities and interest rates and
provides a more relevant view of interest rate risk than traditional gap tables.
The simulation allows comparison of flat, rising and falling rate scenarios to
determine sensitivity of earnings to changes in interest rates and identify
trends that may affect overall interest income.
Interest rate risk management and liquidity management are both a part of the
Company's asset/liability management process. The primary oversight of
asset/liability management rests with the Company's Asset Liability Management
Committee (ALCO) , comprised of members of executive and senior management of
the Company and the Bank. This Committee meets on a regular basis to review
asset liability management activities, and monitor market changes in interest
rates and assist with pricing loans and deposit products, consistent with
funding source needs and asset growth projections. The ALCO Committee reports to
the Board of Directors.
ACCOUNTING AND REGULATORY MATTERS
Management is not aware of any know trends, events, uncertainties or current
recommendations by regulatory authorities that will have or that are reasonably
likely to have a material effect on the Company's liquidity, capital resources,
or other operations.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation affects financial institutions in ways that are different from most
commercial and industrial companies, which have significant investments in fixed
assets and inventories. The effect of inflation on interest rates can materially
impact bank operations, which rely on net interest margins as a major source of
earnings. Noninterest expenses, such as salaries and wages, occupancy and
equipment cost are also negatively impacted by inflation.
14
<PAGE>
YEAR 2000 COMPLIANCE
The "Year 2000" issue confronting the Company and its customers, suppliers,
customers' suppliers and competitors centers on the potential inability of
computer systems to recognize the Year 2000. If not adequately addressed, the
Year 2000 matter could result in a significant adverse impact on products,
services and the competitive condition of the Company.
Financial institution regulators continue their focus on Year 2000 compliance
issues, issuing guidance concerning the responsibilities of senior management
and directors. The Federal Financial Institutions Examination Council ("FFIEC")
has issued several interagency statements on Year 2000 Project Management
Awareness. These statements require financial institutions to examine the Year
2000 implications of reliance on vendors, data exchange and potential impact on
customers, suppliers and borrowers. These statements also require each federally
regulated financial institution to survey its exposure, measure its risk and
prepare a plan in order to solve the Year 2000 issue. In addition, the federal
banking regulators have issued safety and soundness guidelines to be followed by
insured depository institutions, such as the Bank, to assure resolution of any
Year 2000 problems. The federal banking agencies have asserted that Year 2000
testing and certification is a key safety and soundness issue in conjunction
with regulatory exams, and thus an institution's failure to address
appropriately the Year 2000 issue could result in supervisory action, including
such enforcement actions as the reduction of the institution's supervisory
ratings, the denial of applications for approval of a merger or acquisition, or
the imposition of civil money penalties.
In order to address the Year 2000 issue and to minimize its potential adverse
impact, the Company has undertaken a substantial multi-phased effort to identify
areas that will be affected by the Year 2000, assess their potential impact on
operations, monitor the progress of third party software vendors in addressing
the matter, test changes provided by these vendors, and develop contingency
plans for any critical systems which are not effectively reprogrammed. The plan
is divided into the five phases: (1) awareness, (2) assessment, (3) renovations,
(4) validation, and (5) implementation.
The Company has substantially completed all five phases of the plan. Efforts
during the fourth quarter of 1999 will primarily be concentrated on validating
the contingency plans, monitoring liquidity and cash reserves, customer
relations and employee training.
Subsequent to validation and testing, the Company's management believes all of
its systems are Year 2000 compliant. The Company has also undertaken efforts to
ensure that significant vendor and customer relationships are or will be Year
2000 compliant. However, there can be no guarantee that the systems of other
entities on which the Company either or indirectly relies will be timely
converted, or that a failure to convert by another entity, or a conversion that
is incompatible with the Company's systems, would not have a material adverse
effect on the Company in future periods.
The Company estimates that total Year 2000 compliance costs will approximate
$120,000, all of which will be charged to operations. In addition to the
estimated costs of its Year 2000 compliance, the Company routinely makes annual
investments in technology in its efforts to improve customer service and to
efficiently manage its product and service delivery systems.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits - Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
FORM 8-K dated August 3, 1999 was filed with the Securities and
Exchange Commission on August 4, 1999 to report an Agreement and
Plan of Reorganization and Merger with Anson Bancorp, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned who is thereunto duly authorized.
UWHARRIE CAPITAL CORP
(Registrant)
Date November 10, 1999 By: /s/ Roger L. Dick
-------------------------- -------------------------------------
Roger L. Dick
President and Chief Executive Officer
/s/ Barbara S. Williams
-------------------------------------
Barbara S. Williams
Senior Vice President-Finance
16
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