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 March 31, 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 April 30, 1999
Common stock, par value $1.25 per share 5,429,879 shares outstanding
Transitional Small Business Disclosure Format (check one):
Yes No X
___ __
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UWHARRIE CAPITAL CORP AND SUBSIDIARY
FORM 10-QSB
TABLE OF CONTENTS
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<S> <C> <C>
PAGE
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets, March 31, 1999 and 1998 (Unaudited) 3
Consolidated Statements of Income for the Three Months
Ended March 31, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Changes in Shareholders' Equity for the
Three Months Ended March 31, 1999 and 1998 (Unaudited) 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 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 Three Months Ended March 31, 1999 17
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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UWHARRIE CAPITAL CORP AND SUBSIDIARY
Consolidated Balance Sheets (Unaudited)
- -----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
March 31,
1999 1998
------------ ------------
ASSETS
Cash and cash equivalents $ 4,277 $ 4,587
Securities available for sale:
U.S. Treasury 4,009 4,012
U.S. Government agencies and corporations 12,949 15,637
State and political subdivisions 5,467 5,781
Other securities 1,094 1,082
------------ ------------
Total securities 23,519 26,512
------------ ------------
Federal funds sold - -
Loans (Note 2) 135,092 113,365
Less: Allowance for loan losses 1,214 1,113
------------ ------------
Loans, net 133,878 112,252
------------ ------------
Premises and equipment, net 3,206 2,332
Interest receivable 1,024 974
Other assets 1,738 1,201
----------- -----------
Total assets $167,642 $ 147,858
============ ============
LIABILITIES
Deposits:
Demand deposits $ 15,093 $ 14,783
Money market and NOW accounts 26,487 27,826
Savings deposits 36,485 33,843
Time deposits $100,000 and over 25,914 9,059
Other time deposits 33,866 33,309
------------ ------------
Total deposits 137,845 118,820
------------ ------------
Securities sold under repurchase agreements 3,589 4,801
Commercial paper 1,486 1,851
Other short-term borrowed funds 1,600 3,800
Long-term debt 5,401 4,975
Interest payable 150 161
Other liabilities 660 558
------------ ------------
Total liabilities 150,731 134,966
------------ ------------
Off balance sheet items, commitments and contingencies (Note 4)
SHAREHOLDERS' EQUITY
Common stock, $1.25 par value: 6,000,000 shares authorized;
issued and outstanding: 5,429,879 and 4,589,492 shares, respectively 6,787 2,863
Additional paid-in capital 5,911 5,560
Common stock subscriptions receivable (373) -
Common stock acquired by ESOP (1,200) -
Undivided profits 5,493 4,156
Accumulated other comprehensive income
Net unrealized gain on securities available for sale, net of
related tax effect 293 313
------------ ------------
Total shareholders' equity 16,911 12,892
------------ ------------
Total liabilities and shareholders' equity $167,642 $ 147,858
============ ============
See Notes to Consolidated Financial Statements.
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3
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<TABLE>
<CAPTION>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Consolidated Statements of Income (Unaudited)
- ----------------------------------------------------------------------------------------------
(In thousands) Three Months Ended
March 31,
1999 1998
---------- ----------
<S> <C> <C>
INTEREST INCOME:
Interest on loans $ 2,746 $2,438
Interest on securities:
U.S. Treasury 51 74
U.S. Government agencies and corporations 206 235
State and political subdivisions 80 85
Other 21 20
Other interest income 13 7
---------- ----------
Total interest income 3,117 2,859
INTEREST EXPENSE:
Interest on deposits and borrowed funds 1,349 1,245
---------- ----------
NET INTEREST INCOME 1,768 1,614
Provision for loan losses 30 14
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,738 1,600
---------- ----------
NONINTEREST INCOME:
Service charges on deposit accounts 254 227
Other service fees and commissions 147 121
Other income 11 -
---------- ----------
Total noninterest income 412 348
---------- ----------
NONINTEREST EXPENSE:
Salaries, wages and employee benefits 936 794
Occupancy expenses 68 75
Equipment expense 127 106
Data processing 112 105
Other expenses 405 410
---------- ----------
Total noninterest expense 1,648 1,490
---------- ----------
INCOME BEFORE INCOME TAXES 502 458
Provision for income taxes 153 140
---------- ----------
NET INCOME $ 349 $ 318
========== ==========
Net Income Per Common Share
Basic $ .07 $ .07
Assuming dilution $ .07 $ .07
Weighted Average Shares Outstanding ---------- ----------
Basic 4,993,933 4,572,880
Effect of dilutive stock options 63,963 49,270
---------- ---------
Assuming dilution 5,057,896 4,622,150
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
4
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<TABLE>
<CAPTION>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
For The Three Months Ended March 31, 1999 and 1998 (Unaudited)
- --------------------------------------------------------------
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 - - - - 318 - 318
Other comprehensive
income, net of tax
Net increase
(decrease) in fair
value of securities
available for sale - - - - - (6) (6)
---------
Total comprehensive income - 312
---------
Stock options exercised 10 36 - - - - 46
Repurchase of common stock - - - - - - -
--------- ---------- ------------- ----------- ----------- ------------- ---------
Balance, March 31, 1998 $ 2,863 $ 5,560 $ - $ - $ 4,156 $ 313 $ 12,892
========= ========== ============= =========== =========== ============= =========
Balance, January 1, 1999 $ 6,254 $ 4,194 $ (257) $ - $ 5,144 $ 363 $ 15,698
Comprehensive income
Net income - - - - 349 - 349
Other comprehensive
income, net of tax - -
Net increase
(decrease) in fair
Value of securities
available for sale - (70) (70)
---------
Total comprehensive income - 279
---------
Common stock issued
pursuant to:
Sale of common stock 281 931 (155) 1,057
218,181 shares issued
to ESOP plan 273 927 (1,200) -
Stock options exercised 32 39 71
Repurchase of common stock (53) (180) (233)
Collections of
subscriptions receivable 39 39
--------- ---------- ------------- ----------- ----------- ------------- ---------
Balance, March 31, 1999 $ 6,787 $ 5,911 $ (373) $ (1,200) $ 5,493 $ 293 $ 16,911
========= ========== ============= =========== =========== ============= =========
</TABLE>
See Notes to Consolidated Financial Statements.
5
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<TABLE>
<CAPTION>
UWHARRIE CAPITAL CORP AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Nine Months Ended March 31, 1999 and 1998 (In thousands)
1999 1998
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 349 $ 318
Adjustments to reconcile net income to net cash provided by operations
Depreciation 84 68
Amortization of investment premiums and discounts, net (5) 9
Provision for loan losses 30 14
Loss on foreclosed properties -- 14
Changes in assets and liabilities:
Interest receivable (83) (44)
Other assets (327) (32)
Interest payable (40) (10)
Other liabilities 73 53
------- -------
Net cash provided by operating activities 81 390
------- -------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale -- 1,575
Proceeds from maturities of securities available for sale 3,231 --
Purchase of securities available for sale (2,787) (4,260)
Net decrease in federal funds sold 1,950 --
Net (increase) decrease in loans made to customers (2,777) 594
Purchase of premises and equipment (264) (56)
Proceeds from sale of / (additions) to foreclosed properties -- 34
------- -------
Net cash used in investing activities (647) (2,113)
------- -------
FINANCING ACTIVITIES
Net increase in deposits accounts (1,401) 1,915
Net increase (decrease) in federal funds purchased 1,600 200
Net increase (decrease) in securities sold under repurchase agreements 79 754
Repayment of long-term advances for Federal Home Loan Bank (1,424) (2,599)
Proceeds from short-term borrowed funds 202 1,488
Proceeds from issuance of common stock 2,753 46
Net increase in common stock subscribed (385) --
Repurchases of common stock (233) --
Common stock acquired by ESOP (1,200) --
------- -------
Net cash provided by financing activities (9) 1,804
------- -------
DECREASE IN CASH AND DUE FROM BANKS (575) 81
Cash and due from banks at beginning of period 4,852 4,506
------- -------
Cash and due from banks at end of period $ 4,277 $ 4,587
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
6
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UWHARRIE CAPITAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ------------------------------------------------------
NOTE 1 - ACCOUNTING POLICIES
The financial statements and accompanying notes are presented on a consolidated
basis including Uwharrie Capital Corp (the "Company"), it's Subsidiary, Bank of
Stanly ("the Bank") and the Bank's subsidiaries. Bank of Stanly consolidates the
Strategic Alliance Corporation and BOS Agency, Inc. each of which are
wholly-owned by the Bank.
The information contained in the consolidated financial statements is unaudited.
In the opinion of management, the consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and all
material adjustments necessary for a fair presentation of results of interim
periods have been made. The results of operations for the interim periods are
not necessarily indicative of the results which may be expected for an entire
year. Management is not aware of economic events, outside influences or changes
in concentrations of business that would require additional clarification or
disclosure in the consolidated financial statements. Certain prior period
amounts have been reclassified to conform to current period classifications.
NOTE 2 - LOANS
Loans outstanding at period end:
<TABLE>
<CAPTION>
March 31,
(In thousands) 1999 1998
------------ ------------
<S> <C> <C>
Real estate loans $ 98,837 $ 85,612
Commercial and industrial 17,335 16,275
Loans to individuals for household, family and other
consumer expenditures 18,845 11,408
All other loans 75 70
------------ -----------
Total $ 135,092 $ 113,365
============ ============
</TABLE>
NOTE 3 - COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). This
pronouncement establishes standards for the reporting and display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income is defined as the change in equity during a period for
non-owner transactions and is divided into net income and other comprehensive
income. Other comprehensive income includes revenues, expenses, gains and losses
that are excluded from earnings under current accounting standards. This
statement does not change or modify the reporting or display in the statement of
operations. SFAS No. 130 is effective for the Company for interim and annual
periods beginning on or after December 15, 1997. Comparative financial
statements for earlier periods are required to reflect retroactive applications
of this statement. For the three months ended March 31, 1999 and 1998, total
comprehensive income, consisting of net income and unrealized securities gains
and losses, net of taxes, was $279 thousand and $312 thousand, respectively.
NOTE 4 - PER SHARE DATA
On July 21, 1998, the Company's Board of Directors declared a two-for-one stock
split, effected in the form of a 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 as of March 31, 1999. All information presented
in the accompanying interim consolidated financial statements regarding earnings
per share and weighted average number of shares outstanding has been computed
given effect to this stock dividend and the new common stock offering.
7
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NOTE 5 - COMMITMENTS AND CONTINGENCIES
Financial instruments with off-balance-sheet risk
- -------------------------------------------------
The bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, lines of credit and
standby letters of credit. These instruments involve elements of credit risk in
excess of amounts recognized in the accompanying financial statements.
The Bank's risk of loss with the unfunded loans and lines of credit or standby
letters of credits is represented by the contractual amount of these
instruments. The Bank uses the same credit policies in making commitments under
such instruments as it does for on-balance sheet instruments. The amount of
collateral obtained, if any, is based on management's credit evaluation of the
borrower. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Credit card commitments are unsecured. At March 31, 1999,
outstanding financial instruments whose contract amounts represent credit risk
were approximately:
Commitments to extend credit $ 15,683,000
Credit card commitments 4,201,000
Standby letters of credit 826,000
--------------
$ 20,710,000
==============
Contingencies
- -------------
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the financial
statements.
Financial instruments with concentration of credit risk
- -------------------------------------------------------
The Bank makes commercial, agricultural, real estate mortgage, home equity and
consumer loans primarily in Stanly County. A substantial portion of the Bank's
customers' abilities to honor their contracts is dependent on the business
economy in Albemarle, North Carolina and surrounding areas. Although the Bank's
loan portfolio is diversified, there is a concentration of mortgage loans in the
portfolio. The Bank's policies for real estate lending require collateralization
with 20% equity or that the loan be underwritten to conform to FannieMae
guidelines that would allow securitization and/or sale of the loans. Lending
policy for all loans requires that they be supported by sufficient cash flows.
Credit losses related to this real estate concentration are consistent with
credit losses experienced in the portfolio as 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 first quarter of 1999 reflected good operating results with net income of
$349 thousand, an increase of 9.7% when compared to the first 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 the first three months of 1999 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 $313 thousand or $.07, as restated,
for the same period in 1998. An increase of $154 thousand in net interest income
in the three-month period was largely offset by an increase of $142 thousand in
personnel costs.
NET INTEREST INCOME
Net interest income represents the gross profit from the lending and investment
activities of a banking organization and is the most significant factor
affecting the earnings of the Company. It is the amount by which interest
generated by earnings assets exceeds the cost of funds supporting them.
The two primary earning assets are loans and investment securities. Income
generated from these assets is a function of their quality, growth and yield.
Growth reflected in earning assets was primarily the result of demand for
quality loans as average loans increased by $21.0 million or 18.7%. Average
investment securities decreased $3.0 million or 13.1%. Interest income increased
$258 thousand, representing an increase of 9.0% when comparing these periods.
The cost of funding sources, primarily deposits and other borrowings, increased
$104 thousand or 8.4% for the three months ended March 31, 1999 due to an
increased volume of average interest-bearing liabilities of $15.7 million.
9
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The average rate paid on interest-bearing liabilities decreased from 4.18% in
1998 to 4.01% in 1999. Interest-bearing deposits as a percent of total
interest-bearing liabilities was 91.1% at March 31, 1999 compared to 87.3% at
March 31, 1998.
Net interest income increased $154 thousand or 9.5% when comparing the three
month periods presented, attributable to an increased volume of interest earning
assets. The net interest margin decreased from 4.85% in the first three months
of 1998 to 4.66% in the current period.
The following tables present average balance sheets and a net interest income
analysis for the three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Average Balance Sheet and Net Interest Income Analysis
For the Three Months Ended March 31,
- ---------------------------------------------------------------------------------------------------------
Average Level Income/Expense Rate/Yield
($ in thousands) 1999 1998 1999 1998 1999 1998
--------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) $ 133,481 $ 112,457 $ 2,746 $ 2,438 8.34% 8.79%
Taxable securities 17,605 20,366 278 329 6.40% 6.55%
Nontaxable securities (2) 5,511 5,783 80 85 9.06% 9.17%
Other (3) 1,072 336 13 7 4.92% 8.45%
--------- ---------- --------- --------- --------- ---------
Total interest-earning assets 157,669 138,942 3,117 2,859 8.13% 8.48%
--------- ---------- --------- --------- --------- ---------
Interest-bearing
liabilities:
Interest-bearing deposits 124,401 105,416 1,196 1,058 3.90% 4.07%
Short-term borrowings 5,830 9,042 57 87 3.97% 3.90%
Long-term borrowings 6,251 6,272 96 100 6.23% 6.47%
--------- ---------- --------- --------- --------- ---------
Total interest-bearing
liabilities 136,482 120,730 1,349 1,245 4.01% 4.18%
--------- ---------- --------- --------- --------- ---------
Net interest spread $21,187 $ 18,212 $ 1,768 $1,614 4.12% 4.30%
========= ========== ========= ========= ========= =========
Net interest margin
(% of earning assets) 4.66% 4.85%
========= =========
</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 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 adequate level of
provision for loan losses which additionally provides early detection of problem
loans. This identification
10
<PAGE>
process begins with management's assessment of credit reviews, payment histories
of borrowers, loan-to-value ratio, and identified weakness in the credit. The
loans are graded and management establishes a standard percentage to reserve for
each rating. Included in the calculation are loans previously identified by
examiners as loss, doubtful or substandard. The Company's allowance for loan
losses is analyzed quarterly by management.
The provision for loan losses represents a charge against income in an amount
necessary to maintain the allowance at an appropriate level. The monthly
provision for loan losses may fluctuate based on the results of this analysis.
During the three-month period ended March 31, 1999, a total of $30 thousand in
loan loss provision expense was recognized, compared to $14 thousand for this
period in 1998. Charge-offs, net of recoveries, for the three months ended March
31, 1999 totaled $(14) thousand, reflecting a ratio to average loans of (.01)%.
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 three
months ended March 31, 1999 and 1998.
Summary of Allowance for Loan Losses
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31,
(In thousands) 1999 1998
------------ ------------
<S> <C> <C>
Beginning balance 1,170 $ 1,125
Charge-offs:
Commercial loans - -
Consumer loans 21 41
Real estate loans - -
------------ ------------
Gross charge-offs 21 41
------------ ------------
Recoveries:
Commercial loans 10 -
Consumer loans 9 15
Real estate loans 16 -
------------ ------------
Gross recoveries 35 15
------------ ------------
Net charge-offs (recoveries) (14) 26
Provision for loan losses 30 14
------------ ------------
Ending balance $ 1,214 $ 1,113
============ ============
Percentage of gross loans .89% .98%
Ratio of net charge-offs to average loans during the period (.01)% .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.
The following table summarizes non-performing assets by type at March 31, 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.
11
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<TABLE>
<CAPTION>
Schedule of Non-Performing Assets
- ------------------------------------------------------------------------------------------------
(In thousands) March 31,
1999 1998
------------ ------------
<S> <C> <C>
Nonaccrual loans $ 458 $ 159
Loans past due 90 days or more and still accruing 15 7
Other real estate owned, net 85 85
Renegotiated troubled debt - -
------------ ------------
Total non-performing assets $ 558 $ 251
============ ============
Non-performing assets as a percentage of gross loans .41% .22%
- ----------------------------------------------------------------------------------------------
</TABLE>
NONINTEREST INCOME AND EXPENSE
Income from service charges and fees produced earnings of $401 and $348 thousand
for the first quarters of 1999 and 1998, respectively, an increase of 15.2%.
Other income during the quarter increased by $11 thousand.
For this same period, noninterest expenses increased by $158 thousand or 10.6%.
Salaries and benefits, the largest component of noninterest expense, increased
by $142 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 $16 thousand when comparing results
of the first 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 $153 thousand, an effective tax rate
of 30.5% of pretax income compared to $140 thousand in 1998, which reflected an
effective rate of 30.6%.
FINANCIAL CONDITION AND CAPITAL RATIOS
As of March 31, 1999 total assets were $167.6 million, an improvement of 13.4%
over March 31, 1998. The Company has experienced steady growth in loans which
increased from $113.4 million at March 31, 1998 to $135.1 million on March 31,
1999, reflecting growth of 19.2%. Asset quality remains good as evidenced by
past due loan percentages, loan loss experience and management's rating of the
loan portfolio.
Shareholders' equity increased from $15.7 million at December 31, 1998 to $16.9
million at March 31, 1999, principally due to net income of $349 thousand and
transactions relating to common stock subscriptions received during the period.
Banks and bank holding companies, as regulated institutions, must meet required
levels of capital. The FDIC and the Federal Reserve, the primary regulators of
the Bank and the Company, have adopted minimum capital regulations or guidelines
that categorize components and the level of risk associated with various types
of assets. Financial institutions are expected to maintain a level of capital
commensurate with the risk profile assigned to its 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.
12
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<TABLE>
<CAPTION>
Regulatory Capital
- -------------------------------------------------------------------------------------------------------
March 31, 1999 March 31, 1998
------------ ------------ ------------ ------------
Amount Percent Amount Percent
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total capital to risk weighted assets
Consolidated $ 17,359 15.01% $ 13,691 13.86%
Bank 14,486 12.66% 13,521 13.74%
Tier 1 capital to risk weighted assets
Consolidated 16,145 13.96% 12,578 12.73%
Bank 13,272 11.60% 12,408 12.61%
Tier 1 capital to average assets
(leverage)
Consolidated 16,145 9.75% 12,578 8.63%
Bank 13,272 8.04% 12,408 8.51%
- ------------------------------------------------------------------------------------------------------
</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 March 31, 1999 and the ability to borrow up to $30.0 million from the
Federal Home Loan Bank, access to borrowings from the Federal Reserve Bank
discount window, and the sale of securities under agreements to repurchase and
issue of commercial paper. Total debt from these sources aggregated $12.1
million at March 31, 1999, compared to $15.4 million at March 31, 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.
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.
13
<PAGE>
ASSET/LIABILITY AND INTEREST RATE RISK MANAGEMENT
The major component of income for Uwharrie Capital Corp is net interest income,
the difference between income earned on assets and interest paid on liabilities.
This differential (or margin) can vary over time as changes in interest rates
occur. Therefore, a primary objective of interest rate sensitivity management is
to ensure the stability and quality of the Company's primary earning component,
net interest income.
This process involves monitoring the Company's balance sheet in order to
determine the potential impact that changes in the interest rate environment
would have on net interest income. Rate sensitive assets and liabilities have
interest rates which are subject to change within a specific time period, due to
either maturity or contractual agreements that allow the instruments to reprice
prior to maturity. Interest rate sensitivity management seeks to ensure that
both assets and liabilities react to changes in interest rates within a similar
time period, thereby minimizing the risk to net interest income.
To identify interest rate sensitivity, a common measure is a gap analysis which
reflects the difference or gap between rate sensitive assets and liabilities
over various time periods. While management compiles and reviews this
information, it has implemented the use of a comprehensive simulation model
which calculates expected net interest income based on projected
interest-earning assets, interest-bearing liabilities and interest rates and
provides a more relevant view of interest rate risk than traditional gap tables.
The simulation allows comparison of flat, rising and falling rate scenarios to
determine sensitivity of earnings to changes in interest rates and identify
trends that may affect overall interest income.
Interest rate risk management and liquidity management are both a part of the
Company's asset/liability management process. The primary oversight of
asset/liability management rests with the Company's Asset Liability Management
Committee (ALCO), comprised of members of executive and senior management of
the Company and the Bank. This Committee meets on a regular basis to review
asset liability management activities, and monitor market changes in interest
rates and assist with pricing loans and deposit products, consistent with
funding source needs and asset growth projections. The ALCO Committee reports to
the Board of Directors.
ACCOUNTING AND REGULATORY MATTERS
Management is not aware of any know trends, events, uncertainties or current
recommendations by regulatory authorities that will have or that are reasonably
likely to have a material effect on the Company's liquidity, capital resources,
or other operations.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation affects financial institutions in ways that are different from most
commercial and industrial companies, which have significant investments in fixed
assets and inventories. The effect of inflation on interest rates can materially
impact bank operations, which rely on net interest margins as a major source of
earnings. Noninterest expenses, such as salaries and wages, occupancy and
equipment cost are also negatively impacted by inflation.
YEAR 2000 COMPLIANCE
The 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.
14
<PAGE>
Financial institution regulators have recently increased their focus on Year
2000 compliance issues, issuing guidance concerning the responsibilities of
senior management and directors. The Federal Financial Institutions Examination
Council ("FFIEC") has issued several interagency statements on Year 2000 Project
Management Awareness. These statements require financial institutions to 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 the first four phases of the plan and
has made significant progress in the final phase. The Company outsources its
item and data processing operations to a service provider that is jointly owned
with another bank; therefore, Year 2000 compliance is also being closely
coordinated with that of the service provider. Prior to June 30, 1999, the
Company will have in place a Detailed Contingency Plan should any business
disruption occur due to circumstances beyond its control.
Further, the Company is undertaking efforts to ensure that significant vendor
and customer relationships are or will be Year 2000 compliant. 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's management believes that all of its systems will be verified Year
2000 compliant. The Company estimates that it will incur Year 2000 compliance
costs of approximately $75,000, 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.
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
There were no reports on Form 8-K filed with the Securities and
Exchange Commission during the first quarter of 1999.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned who is thereunto duly authorized.
UWHARRIE CAPITAL CORP
(Registrant)
Date April 30, 1999 By:
------------------- ------------------------------------
Roger L. Dick
President and Chief Executive Officer
------------------------------------
Barbara S. Williams
Senior Vice President-Finance
16
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