UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended JuneSeptember 30, 2009

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

COMMISSION FILE NUMBER 000-22062

 

 

UWHARRIE CAPITAL CORP

(Exact name of registrant as specified in its charter)

 

 

 

NORTH CAROLINA 56-1814206

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

132 NORTH FIRST STREET

ALBEMARLE, NORTH CAROLINA

 28001
(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone number, including area code: (704) 983-6181

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨    No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ¨Yes  ¨    No¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨  Accelerated filer ¨
Non-accelerated filer ¨  (Do not check if a smaller reporting company)  Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate the number of shares outstanding of each of the classes of common stock issuer’s as of the latest practicable date: 7,593,929November 10, 2009 shares of common stock outstanding as of August 1, 2009.7,593,929.

 

 

 


Table of Contents

 

      Page No.

Part I.

  

FINANCIAL INFORMATION

  

Item 1 -

  

Financial Statements (Unaudited)

  
  

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

  3
  

Consolidated Statements of Operations for the Three and SixNine Months
Ended JuneSeptember 30, 2009 and 2008

  4
  

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

  5
  

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

  6
  

Notes to Consolidated Financial Statements

  7
Item 2 -  

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

  2120
Item 3 -  

Quantitative and Qualitative Disclosures about Market Risk

  3029
Item 4 -  

Controls and Procedures

  3029
Part II.  

OTHER INFORMATION

  
Item 1 -  

Legal Proceedings

  3130
Item 1A -  

Risk Factors

  3130
Item 2 -  

Unregistered Sales of Equity Securities and Use of Proceeds

  3130
Item 3 -  

Defaults Upon Senior Securities

  31
Item 4 -  

Submission of Matters to a Vote of Security Holders

  31
Item 5 -  

Other Information

  3231
Item 6 -  

Exhibits

  3332
  

Exhibit Index

  3534

 

-2-


Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

 

Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements

 

  June 30,
2009
(Unaudited)
 December 31,
2008*
   September 30,
2009
(Unaudited)
 December 31,
2008*
 
  (dollars in thousands)   (dollars in thousands) 

ASSETS

      

Cash and due from banks

  $7,750   $2,931    $7,837   $2,931  

Interest-earning deposits with banks

   2,807    10,353     3,110    10,353  

Securities available for sale, at fair value

   74,650    68,835     85,277    68,835  

Loans held for sale

   2,922    2,691     1,332    2,691  

Loans:

      

Loans held for investment

   344,721    340,830     351,794    340,830  

Less allowance for loan losses

   (4,732  (4,361   (4,828  (4,361
              

Net loans held for investment

   339,989    336,469     346,966    336,469  
              

Premises and equipment, net

   12,863    11,128     13,480    11,128  

Interest receivable

   1,987    2,027     2,174    2,027  

Federal Home Loan Bank stock

   3,147    2,284     3,201    2,284  

Bank owned life insurance

   5,608    5,511     5,652    5,511  

Goodwill

   987    987     987    987  

Other real estate owned

   2,497    2,816     2,623    2,816  

Other assets

   8,629    6,436     8,065    6,436  
              

Total assets

  $463,836   $452,468    $480,704   $452,468  
              

LIABILITIES

      

Deposits:

      

Demand noninterest-bearing

  $47,206   $46,032    $43,825   $46,032  

Interest checking and money market accounts

   118,932    117,325     120,616    117,325  

Savings deposits

   32,128    26,360     32,796    26,360  

Time deposits, $100,000 and over

   70,837    63,321     71,220    63,321  

Other time deposits

   102,681    100,589     103,030    100,589  
              

Total deposits

   371,784    353,627     371,487    353,627  
              

Short-term borrowed funds

   14,642    22,249     29,816    22,249  

Long-term debt

   30,648    32,502     31,648    32,502  

Interest payable

   487    502     456    502  

Other liabilities

   3,051    2,355     2,807    2,355  
              

Total liabilities

   420,612    411,235     436,214    411,235  
              

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

      

SHAREHOLDERS’ EQUITY

      

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

   10,000    10,000     10,000    10,000  

500 shares of series B issued and outstanding

   500    500     500    500  

Discount on preferred stock

   (450  (500   (425  (500

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

   9,492    9,492     9,492    9,492  

Additional paid-in capital

   14,028    14,019     14,029    14,019  

Unearned ESOP compensation

   (701  (736   (683  (736

Undivided profits

   11,214    10,008     11,345    10,008  

Accumulated other comprehensive income (loss)

   (859  (1,550   232    (1,550
              

Total shareholders’ equity

   43,224    41,233     44,490    41,233  
              

Total liabilities and shareholders’ equity

  $463,836   $452,468    $480,704   $452,468  
              

 

(*)Derived from audited consolidated financial statements

See accompanying notes

 

-3-


Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Operations (Unaudited)

 

 

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

Interest Income

            

Loans, including fees

  $5,218   $5,669  $10,593   $11,638  $5,281   $5,652  $15,874   $17,290

Investment securities

            

US Treasury

   —      25   —      49   1    24   1    73

US Government agencies and corporations

   769    468   1,550    955   785    376   2,335    1,331

State and political subdivisions

   176    170   365    328   145    182   510    510

Interest-earning deposits with banks and federal funds sold

   19    18   43    43   14    16   57    59
                        

Total interest income

   6,182    6,350   12,551    13,013   6,226    6,250   18,777    19,263
                        

Interest Expense

            

Interest checking and money market accounts

   199    312   397    747   211    345   608    1,092

Savings deposits

   69    74   123    169   67    68   190    237

Time deposits, $100,000 and over

   534    604   1,092    1,286   505    578   1,597    1,864

Other time deposits

   755    985   1,553    2,078   708    888   2,261    2,966

Short-term borrowed funds

   71    146   186    334   64    73   250    407

Long-term debt

   368    308   732    619   374    395   1,106    1,014
                        

Total interest expense

   1,996    2,429   4,083    5,233   1,929    2,347   6,012    7,580
                        

Net interest income

   4,186    3,921   8,468    7,780   4,297    3,903   12,765    11,683

Provision for loan losses

   196    171   568    257   295    529   863    786
                        

Net interest income after provision for loan losses

   3,990    3,750   7,900    7,523   4,002    3,374   11,902    10,897
                        

Noninterest Income

            

Service charges on deposit accounts

   567    537   1,135    1,067   616    599   1,751    1,666

Other service fees and commissions

   575    754   1,032    1,502   595    737   1,627    2,205

Gain (loss) on sale of securities

   20    —     (20  —  

Gain on sale of securities

   124    —     104    —  

Loss on nonmarketable securities

   —      —     (172  —     —      —     (172  —  

Total other-than-temporary impairment loss

   (1,855  —     (1,855  —  

Total other-than-temporary impairment (loss)

   —      —     (1,782  —  

Portion of loss recognized in other comprehensive income

   1,651    —     1,651    —     (183  —     1,395    —  
                        

Net impairment recognized in earnings

   (204  —     (204  —     (183  —     (387  —  

Loss fixed assets/other assets

   (20  —     (20  —  

Gain (loss) fixed assets/other assets

   (18  6   (38  6

Income from mortgage loan sales

   1,131    357   2,567    798   364    206   2,931    1,004

Other income

   104    279   184    459   135    119   319    612
                        

Total noninterest income

   2,173    1,927   4,502    3,826   1,633    1,667   6,135    5,493
                        

Noninterest Expense

            

Salaries and employee benefits

   2,886    2,664   5,759    5,301   2,822    2,620   8,581    7,921

Net occupancy expense

   242    236   487    459   302    250   789    709

Equipment expense

   180    156   361    296   186    178   547    474

Data processing costs

   198    204   389    392   203    194   592    586

Other noninterest expense

   1,775    1,272   3,164    2,607   1,802    1,300   4,966    3,907
                        

Total noninterest expense

   5,281    4,532   10,160    9,055   5,315    4,542   15,475    13,597
            
            

Income before income taxes

   882    1,145   2,242    2,294   320    499   2,562    2,793

Income taxes

   259    373   714    747   30    156   744    903
                        

Net income

  $623   $772  $1,528   $1,547  $290   $343  $1,818   $1,890
                        

Net Income

  $623    772   1,528    1,547  $290    343   1,818    1,890

Dividends – preferred stock

   (160  —     (322  —     (159  —     (481  —  
                        

Net income available to common shareholders

  $463   $772  $1,206   $1,547  $131   $343  $1,337   $1,890
                        

Net income per common share

            

Basic

  $0.06   $0.10  $0.16   $0.21  $0.02   $0.05  $0.18   $0.25
                        

Diluted

  $0.06   $0.10  $0.16   $0.21  $0.02   $0.05  $0.18   $0.25
                        

Weighted average shares outstanding

            

Basic

   7,472,003    7,448,825   7,469,905    7,469,496   7,476,197    7,495,903   7,472,033    7,481,606

Diluted

   7,472,003    7,481,095   7,469,905    7,512,109   7,476,197    7,541,820   7,472,033    7,525,329

See accompanying notes

 

-4-


Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

 

 

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

Balance, December 31, 2008

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

Net income

 —    —    —    —      —    —    —      1,528    —      1,528    —     —     —     —      —     —     —      1,818    —      1,818  

Other comprehensive income

 —    —    —    —      —    —    —      —      691    691    —     —     —     —      —     —     —      —      1,782    1,782  

Release of ESOP shares

 —    —    —    —      —    —    35    —      —      35    —     —     —     —      —     —     53    —      —      53  

Stock compensation expense

 —    —    —    —      —    9  —      —      —      9    —     —     —     —      —     10   —      —      —      10  

Record preferred stock dividend and discount accretion

 —    —    —    50    —    —    —      (322  —      (272  —      —     —     75    —     —     —      (481  —      (406
                                                        

Balance, June 30, 2009

 7,593,929 $10,000 $500 $(450 $9,492 $14,028 $(701 $11,214   $(859 $43,224  

Balance, September 30, 2009

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

See accompanying notes

 

-5-


Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

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

Cash flows from operating activities

     (dollars in thousands) 

Net income

  $1,528   $1,547    $1,818   $1,890  

Adjustments to reconcile net income to net cash

      

Provided by operating activities:

      

Depreciation

   387    319     583    486  

Net amortization of security premiums/discounts

   43    (116   84    (158

Impairment of securities available for sales

   204    —    

Impairment of securities available for sale

   387    —    

Net amortization of mortgage servicing rights

   656    237     864    352  

Impairment of foreclosed real estate

   34    —       34    —    

Provision for loan losses

   568    257     863    786  

Stock compensation

   9    13     10    20  

Net realized loss on available for sales securities

   20    —    

Net realized gain on available for sales securities

   (104  —    

Income from mortgage loan sales

   (2,567  (798   (2,931  (1,004

Proceeds from sales of loans held for sale

   106,574    36,614     123,462    46,180  

Origination of loans held for sale

   (105,337  (35,187   (120,426  (43,804

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

   (1  5     (1  5  

Loss on nonmarketable securities

   172    —       172    —    

Increase in cash surrender value of life insurance

   (97  (93   (141  (141

Loss on sales of foreclosed real estate

   21    —    

(Gain) loss on sales of foreclosed real estate

   39    (11

Release of ESOP shares

   35    40     53    60  

Net change in interest receivable

   40    130     (147  14  

Net change in other assets

   (1,738  (324   (1,426  (1,583

Net change in interest payable

   (15  (58   (46  (98

Net change in other liabilities

   696    233     452    451  
              

Net cash provided by (used in) operating activities

   1,232    2,819  

Net cash provided by operating activities

   3,599    3,445  
              

Cash flows from investing activities

      

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

   13,202    4,361     22,272    9,792  

Purchase of securities available for sale

   (18,175  (3,184   (36,208  (3,920

Net increase in loans

   (4,532  (15,285   (12,378  (19,994

Proceeds from sale of premises, equipment and other assets

   1    —       1    —    

Purchase of premises and equipment

   (2,122  (896   (2,935  (2,037

Proceeds from sales of foreclosed real estate

   708    —       1,138    135  

Investment in other assets

   (602  —       (1,076  —    

Net increase in Federal Home Loan Bank stock

   (863  (232

(Increase) decrease in Federal Home Loan Bank stock

   (917  45  
              

Net cash used by investing activities

   (12,383  (15,236   (30,103  (15,979
              

Cash flows from financing activities

      

Net increase in deposit accounts

   18,157    10,445     17,860    19,954  

Net decrease in short-term borrowed funds

   (7,607  (11,677

Net increase (decrease) in short-term borrowed funds

   7,567    (22,467

Net increase (decrease) in long-term debt

   (1,854  12,504     (854  15,062  

Repurchase of common stock

   —      (412   —      (412

Net proceeds from issuance of common stock

   —      300     —      300  

Tax benefit of stock options exercised

   —      26     —      26  

Dividend on preferred stock

   (272  —       (406  —    
              

Net cash provided by financing activities

   8,424    11,186     24,167    12,463  
              

Decrease in cash and cash equivalents

   (2,727  (1,231   (2,337  (71

Cash and cash equivalents, beginning of period

   13,284    16,197     13,284    16,197  
              

Cash and cash equivalents, end of period

  $10,557   $14,966    $10,947   $16,126  
              

See accompanying notes

 

-6-


UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Basis of Presentation

The financial statements and accompanying notes are presented on a consolidated basis including Uwharrie Capital Corp (the “Company”) and its subsidiaries, Bank of Stanly (“Stanly”), Anson Bank & Trust Co. (“Anson”), Cabarrus Bank & Trust Company (“Cabarrus”), Strategic Investment Advisors, Inc., (“SIA”), and Uwharrie Mortgage Inc. Stanly consolidates its subsidiaries, the Strategic Alliance Corporation, BOS Agency, Inc. and Gateway Mortgage, Inc., each of which is wholly-owned by Stanly.

The information contained in the consolidated financial statements is unaudited. In the opinion of management, the consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and material adjustments necessary for a fair presentation of results of interim periods, all of which are of a normal recurring nature, have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for an entire year. Management is not aware of economic events, outside influences or changes in concentrations of business that would require additional clarification or disclosure in the consolidated financial statements.

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to consolidated financial statements filed as part of the Company’s 2008 Annual Report on Form 10-K. This Quarterly report should be read in conjunction with such Annual Report.

Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through August 11,November 10, 2009, the date the financial statements were issued.

 

-7-


Note 2 – Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

 

  Three Months Ended
June 30,
 Six Months Ended
June 30,
   Three Months Ended
September 30,
 Nine Months Ended
September 30,
 
  2009 2008 2009 2008   2009 2008 2009 2008 
  

(in thousands)

     (in thousands)   

Net Income

  $623   $772   $1,528   $1,547    $290   $343   $1,818   $1,890  
                          

Other comprehensive loss

     

Other comprehensive income (loss)

     

Unrealized gain (losses) on available for sale securities

   (360  (1,009  886    (1,196   1,704    (1,087  2,590    (2,283

Related tax effect

   138    386    (333  459     (648  418    (982  877  

Reclassification of loss (gains) recognized in net income

   (20  —      20    —    

Reclassification of gains recognized in net income

   (124  —      (104  —    

Related tax effect

   (8  —      (8  —       48    —      40    —    

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

   204    —      204    —       183    —      387    —    

Related tax effect

   (71  —      (78  —       (71  —      (149  —    
                          

Total other comprehensive gain (loss)

   (117  (623  691    (737   1,092    (669  1,782    (1,406
                          

Comprehensive income

  $506   $149   $2,219   $810  

Comprehensive income (loss)

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

As of JuneSeptember 30, 2009 and December 31, 2008, total accumulated other comprehensive income (loss) income was $(859)$232 thousand and $(1.55)$(1.6) million, respectively. The components of accumulated other comprehensive income at JuneSeptember 30, 2009 included $156$939 thousand of unrealized gains and temporary unrealized losses net of tax, and non credit losses on fourfive other than temporarily impaired investments of $(1.02) million$(707) thousand net of tax. Accumulated other comprehensive income at December 31, 2008 consisted of unrealized gains and temporary unrealized losses of $(1.55)$(1.6) million net of tax.

Note 3 – Per Share Data

On November 3, 2008, the Company’s Board of Directors declared a 3% stock dividend payable on December 4, 2008 to shareholders of record on November 17, 2008. 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.

Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for stock dividends. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. At JuneFor the three months and nine months ended September 30, 2009, the Company hadCompany’s 459,856 stock options and at this time they are all under market value andoutstanding did not have a dilutive effect on net income.per share results because the exercise prices exceeded the average share values for each period.

Basic and diluted net income per common share have been computed based upon net income available to common shareholders as presented in the accompanying consolidated statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding. The computation of basic and dilutive earnings per share is summarized below:

 

-8-


  Three Months Ended
June 30,
 Six Months Ended
June 30,
   Three Months Ended
September 30,
 Nine Months Ended
September 30,
 
  2009 2008 2009 2008   2009 2008 2009 2008 

Weighted average number of common shares outstanding

  7,593,929   7,587,042   7,593,929   7,607,713    7,593,929   7,630,292   7,593,959   7,615,995  

Effect of ESOP shares

  (121,926 (138,217 (124,024 (138,217  (117,732 (134,389 (121,926 (134,389
                          

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

  7,472,003   7,448,825   7,469,905   7,469,496    7,476,197   7,495,903   7,472,033   7,481,606  

Effect of dilutive stock options

  —     32,270   —     42,613    —     45,917   —     43,723  
                          

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

  7,472,003   7,481,095   7,469,905   7,512,109    7,476,197   7,541,820   7,472,033   7,525,329  
                          

Note 4 – Investment Securities

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

 

June 30, 2009

  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value

September 30, 2009

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

U.S. Treasury

  $3,026  $5  $—    $3,031

U.S. Government agencies

  $8,306  $263  $—    $8,569   20,988   393   —     21,381

Mortgage-backed securities and CMO’s

   53,492   938   2,981   51,449   37,865   1,351   —     39,219

Private label CMO’s

   10,991   119   2,028   9,082

State and political subdivisions

   14,271   374   13   14,632   12,063   504   —     12,567
                        

Total securities available for sale

  $76,069  $1,575  $2,994  $74,650  $84,933  $2,372  $2,028  $85,277
                        

December 31, 2008

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

U.S. Government agencies

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

Mortgage-backed securities and CMO’s

   44,500   691   3,795   41,396   33,149   691   225   33,615

Private label CMO’s

   11,351   —     3,570   7,781

State and political subdivisions

   16,396   417   17   16,796   16,396   417   17   16,796
                        

Total securities available for sale

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

At JuneSeptember 30, 2009, the Company owned Federal Reserve stock reported at cost of $778,850$779 thousand and included in other assets. Also at JuneSeptember 30, 2009 and December 31, 2008, the Company owned Federal Home Loan Bank Stock (FHLB) of $3.1$3.2 million and $2.3 million, respectively. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership and borrowings with these banks. These investments are carried at cost since there is no ready market and historically redemption has been made at par value. The Company estimated that the fair value was equal to the cost and that these investments were not impaired at September 30, 2009.

 

-9-


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

 

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

Gross proceeds from sales

  $1,020   $—    $3,628   $ 
            

Realized gains from sales

  $20   $—    $124   $—  

Realized losses from sales

   —      —     —      —  
            

Net realized gains (losses)

  $20   $—    $124   $—  
            
  Six Months Ended
June 30,
  Nine Months Ended
September 30,
  2009 2008  2009 2008
  (dollars in thousands)  (dollars in thousands)

Gross proceeds from sales

  $2,543   $—    $6,171   $ 
            

Realized gains from sales

  $73   $—    $198   $—  

Realized losses from sales

   (93  —     (94  —  
            

Net realized gains (losses)

  $(20 $—    $104   $—  
            

At JuneSeptember 30, 2009 and December 31, 2008 securities available for sale with a carrying amount of $16.4$15.5 million and $13.2 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at JuneSeptember 30, 2009 and December 31,2008.31, 2008. These unrealized losses on investment securities are a result of temporary fluctuations in the market prices due to a rise in interest rates, which will adjust if rates decline, and a volatile market and are in no way a reflection of the quality of the investments. At JuneSeptember 30, 2009 the unrealized losses related to fifteenseventeen mortgage backed securities and CMOs and seven state and political subdivisions securities.CMOs. At December 31, 2008 the unrealized losses related to three U.S. Government Agencies, fifteen mortgage backed securities and CMOs and twelve state and political subdivisions securities.

 

  Less than 12 Months  12 Months or More  Total  Less than 12 Months  12 Months or More  Total

June 30, 2009

  Fair Value  Unrealized
Losses
  Fair Value  Unrealized
Losses
  Fair Value  Unrealized
Losses

September 30, 2009

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

Securities available for sale temporary impairment:

                        

U.S. Gov’t agencies

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

Mortgage-backed securities and CMO’s

   8,112   166   9,214   1,164   17,326   1,330   —     —     —     —     —     —  

Private label CMOs

   —     —     2,923   634   2,923   634

State and political subdivisions

   1,148   11   97   2   1,245   13   —     —     —     —     —     —  
                                    
  $9,260  $177  $9,311  $1,166  $18,571  $1,343  $—    $—    $2,923  $634  $2,923  $634
                                    

Other than temporary impairment:

                        

Mortgage-backed & CMOs

  $—    $—    $2,757  $1,651  $2,757  $1,651

Private label CMOs

  $—    $—    $4,097  $1,394  $4,097  $1,394
                                    
  $—    $—    $2,757  $1,651  $2,757  $1,651  $—    $—    $4,097  $1,394  $4,097  $1,394
                                    

 

-10-


  Less than 12 Months  12 Months or More  Total  Less than 12 Months  12 Months or More  Total

December 31, 2008

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

Securities available for sale temporary impairment:

                        

U.S. Gov’t agencies

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

Mortgage-backed securities and CMO’s

   14,502   3,288   1,290   78   15,792   3,366   3,996   212   633   12   4,629   224

Private label CMO’s

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

State and political subdivisions

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

Other than temporary impairment:

                        

Mortgage-backed & CMOs

  $188  $429  $—    $—    $188  $429

Private label CMOs

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

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

Based on these evaluations, the Company did have an other-than-temporary impairment on four private label collateralized mortgage obligations (“CMOs”) at JuneSeptember 30, 2009. In accordance with FSP FAS 115-2,ASC 320, a $204$183 thousand other-than-temporary charge due to the credit-related factors was recognized in earnings during the quarter, $1.7quarter; $1.4 million was determined to relate to other non-credit-related factors in the market place. The difference between total unrealized losses and estimated credit losses on these securities was charged against equity, net of deferred taxes, as a component of Other Comprehensive Income.

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

 

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

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

  $204  

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

   183  
    

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

  $387  
    
  June 30,
2009
  (in thousands)

Balance of credit losses on debt securities at the beginning of the period

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

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

  $159  

Decrease related to sales of other-than-temporary securities

   (159

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

   204   387  
       

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

  $204  $387  
       

 

-11-


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

 

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

Securities available for sale

        

U.S. Government agencies

        

Due within one year

   1,002   1,007

Due after one but within five years

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

U.S. Government agencies

    

Due after one but within five years

   4,152   4,316   11,387   11,594

Due after five but within ten years

   3,152   3,246   9,601   9,787
      
         20,988   21,381
   8,306   8,569      
      

Mortgage-backed securities

        

Due after one year but within five years

   423   432   288   295

Due after five but within ten year

   8,618   8,927   8,046   8,454

Due after ten years

   44,451   42,090   40,522   39,549
            
   53,492   51,449   48,856   48,298
            

State and political

        

Due within one year

   487   493   863   867

Due after one but within five years

   5,097   5,194   3,712   3,856

Due after five but within ten year

   3,864   4,016   2,663   2,833

Due after ten years

   4,823   4,929   4,825   5,011
      
         12,063   12,567
   14,271   14,632      
      

Total Securities available for sale

        

Due within one year

   1,489   1,500   863   867

Due after one but within five years

   9,672   9,942   18,413   18,776

Due after five but within ten year

   15,634   16,189   20,310   21,074

Due after ten years

   49,274   47,019   45,347   44,560
            
  $76,069  $74,650  $84,933  $85,277
            
  December 31, 2008  December 31, 2008
  Amortized
Cost
  Estimated
Fair Value
  Amortized
Cost
  Estimated
Fair Value
  (dollars in thousands)  (dollars in thousands)

Securities available for sale

        

U.S. Government agencies

        

Due within one year

   1,512   1,541   1,512   1,541

Due after one but within five years

   5,532   5,664   5,532   5,664

Due after five but within ten years

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

Mortgage-backed securities

        

Due after one year but within five years

   721   729   721   729

Due after five but within ten year

   4,569   4,733   4,569   4,733

Due after ten years

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

State and political

        

Due within one year

   1,063   1,080   1,063   1,080

Due after one but within five years

   5,313   5,397   5,313   5,397

Due after five but within ten year

   4,800   4,959   4,800   4,959

Due after ten years

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

Total Securities available for sale

        

Due within one year

   2,575   2,621   2,575   2,621

Due after one but within five years

   11,566   11,790   11,566   11,790

Due after five but within ten year

   12,794   13,130   12,794   13,130

Due after ten years

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

 

-12-


Note 5 – Loans

 

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

Loans outstanding at period end:

        

Commercial

  $49,231  $45,470  $51,983  $45,470

Real estate-construction

   47,916   50,661   45,950   50,661

Real estate-residential

   139,278   139,518   141,257   139,518

Real estate-commercial

   92,113   89,561   95,947   89,561

Consumer loans

   16,084   15,499   16,511   15,499

All other loans

   99   121   146   121
            

Total

  $344,721  $340,830  $351,794  $340,830
            

 

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

Analysis of the allowance for loan losses

          

Balance at beginning of period

  $4,573   $3,583   $4,361   $3,510    $4,732   $3,657   $4,361   $3,510  

Provision charged to operations

   196    171    568    257     295    529    863    786  

Charge-offs

   (46  (137  (241  (167   (207  (63  (448  (230

Recoveries

   9    40    44    57     8    20    52    77  
                          

Net (charge-offs)

   (37  (97  (197  (110   (199  (43  (396  (153
                          

Balance at end of period

  $4,732   $3,657   $4,732   $3,657    $4,828   $4,143   $4,828   $4,143  
                          

Note 6 – Commitments and Contingencies

The subsidiary banks are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments include commitments to extend credit, lines of credit and standby letters of credit. These instruments involve elements of credit risk in excess of amounts recognized in the accompanying financial statements.

The banks’ risk of loss with the unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The banks use the same credit policies in making commitments under such instruments as they do for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are unsecured. At JuneSeptember 30, 2009, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

(in thousands)

      

Commitments to extend credit

  $92,233  $92,592

Credit card commitments

   8,702   8,802

Standby letters of credit

   1,142   838
      

Total commitments

  $102,077  $102,232
      

Note 7 – Fair Value Disclosures

The Company adopted the provisions of Statement of Financial Accounting Statements (SFAS) No. 157Standards Codification (ASC) 820Fair Value Measurements and Disclosures (SFAS 157) and SFAS No. 159,ASC 825,The Fair Value Option for Financial Assets and LiabilitiesInstruments on (SFAS 159) on January 1, 2008.

 

-13-


SFAS 157ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157ASC 820 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. SFAS 157ASC 820 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation.

SFAS 157ASC 820 defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which those assets or liabilities are sold and considers assumptions that market participants would use when pricing those assets or liabilities. Fair values determined using Level 1 inputs rely on active and observable markets to price identical assets or liabilities. In situations where identical assets and liabilities are not traded in active markets, fair values may be determined based on Level 2 inputs, which exist when observable data exists for similar assets and liabilities. Fair values for assets and liabilities for which identical or similar assets and liabilities are not actively traded in observable markets are based on Level 3 inputs, which are considered to be unobservable.

Among the Company’s assets and liabilities, investment securities available for sale are reported at their fair values on a recurring basis. Certain other assets are adjusted to their fair value on a nonrecurring basis, including loans held for sale, which are carried at the lower of cost or market,market; loan servicing rights, where fair value is determined using similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions,assumptions; foreclosed real estate, which is carried at lower of cost or fair market value and goodwill, which is periodically tested for impairment. Deposits, short-term borrowings and long-term obligations are not reported at fair value.

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114,ASC 310,Accounting by Creditors for Impairment of aReceivables, Loan and Debt Securities.(SFAS 114). The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At JuneSeptember 30, 2009, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

 

-14-


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

 

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

Investment securities available for sale

  $74,650  $8,561  $63,128  $2,961  $85,277  $24,411  $56,769  $4,097
                        

Total assets at fair value

  $74,650  $8,561  $63,128  $2,961  $85,277  $24,411  $56,769  $4,097
                        

Total liabilities at fair value

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

Investment securities available for sale

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

Total assets at fair value

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

Total liabilities at fair value

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

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

 

(dollars in thousands)

        

Balance December 31, 2008

  $188    $188  

Total losses realized in earnings Included in earnings

   —    

Total losses realized in earnings included in earnings

   —    

Purchases

   —       —    

Sales

   (188   (188

Transfers into level 3

   2,961     4,097  
        

Balance June 30, 2009

  $2,961  

Balance September 30, 2009

  $4,097  
        

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

Prices for US Treasury and government agency securities are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the ‘Level 1 input’ column. Prices for mortgage-backed securities and for state, county and municipal securities are obtained for similar securities, and the resulting fair values are shown in the ‘Level 2 input’ column. Prices for all other non-marketable investments are determined based on various assumptions that are not observable. The fair values for these investment securities are shown in the ‘Level 3 input’ column. Non-marketable investment securities, which are carried at their purchase price, include those that may only be redeemed by the issuer.

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of JuneSeptember 30, 2009 and December 31, 2008:

 

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

Loans

  $7,836  $—    $7,836  $—    $8,809  $—    $8,809  $—  

Loans held for sale

   2,922   —     2,922   —     1,332   —     1,332   —  

Other real estate owned

   382   —     382   —     2,623   —     2,623   —  

Mortgage servicing rights

   1,906   —     —     1,906   1,853   —     —     1,853
                        

Total assets at fair value

  $13,046  $—    $11,140  $1,906  $14,617  $—    $12,764  $1,853
                        

Total liabilities at fair value

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

Loans

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

Loans held for sale

   2,691   —     2,691   —     2,691   —     2,691   —  

Mortgage servicing rights

   1,293   —     —     1,293   1,293   —     —     1,293
                        

Total assets at fair value

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

Total liabilities at fair value

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

SFAS 159 allows an entity to elect to measure certain financial assets and liabilities at fair value with changes in fair value recognized in the income statement each period. The statement also requires additional disclosures to identify the effects of an entity’s fair value election on its earnings. Upon the adoption of SFAS 159, the Company did not elect to report any assets and liabilities at fair value.

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

SFAS 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or non-recurring basis.

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

 

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

Financial Assets

                

Cash and cash equivalents

  $10,557  $10,557  $13,284  $13,284  $10,947  $10,947  $13,284  $13,284

Securities available for sale

   74,650   74,650   68,835   68,835   85,277   85,277   68,835   68,835

Loans held for investment, net

   339,989   355,346   336,469   354,083   346,966   361,957   336,469   354,083

Loans held for sale

   2,922   2,814   2,691   2,691   1,332   1,332   2,691   2,691

FHLB Stock

   3,147   3,147   2,284   2,284   3,201   3,201   2,284   2,284

FRB Stock

   779   779   —     —     779   779   —     —  

Bank-owned life insurance

   5,608   5,608   5,511   5,511   5,652   5,652   5,511   5,511

Accrued interest receivables

   1,987   1,987   2,027   2,027   2,174   2,174   2,027   2,027

Financial Liabilities

                

Deposits

  $371,784  $375,060  $353,627  $354,589  $371,487  $391,311  $353,627  $354,589

Short-term borrowings

   14,641   14,641   22,249   22,249   29,816   29,816   22,249   22,249

Long-term debt

   30,648   31,950   32,502   33,306   31,648   32,956   32,502   33,306

Accrued interest payable

   487   487   502   502   456   456   502   502

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

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

 

Loans – The fair value of loans is estimated based on discounted expected cash flows using the current interest rates at which similar loans would be made. Loans held for sale, which represent current mortgage production forward sales not yet delivered, are valued based on current market prices. The fair value of loans does not consider the lack of liquidity and uncertainty in the market that would effect the valuation under SFAS No. 157, but the result is not material.valuation.

 

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

 

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

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

Note 9 – Recent Accounting Pronouncements

SFAS 159ASC 825

Statement of Financial Accounting Standards No. 159Codification 825 (“SFAS 159”ASC 825”),The Fair Value Option for Financial Assets and Financial LiabilitiesInstruments, permits entities to choose to measure many financial

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instruments and certain other items at fair value. The

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objective of this standard is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective for fiscal years beginning after November 15, 2007, with early adoption permitted under certain circumstances. The adoption of SFAS 159ASC 825 did not have any impact on the Company’s consolidated financial statements.

SFAS 161ASC 815

In March of 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 161Codification 815 (“SFAS 161”ASC 815”),Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (“SFAS 161”)Hedging.. SFAS 161 ASC 815 amends and expands the disclosure requirement of Statement No. 133 for derivative instruments and hedging activities to provide users of financial statements with an enhanced understanding of the derivative instrument’s purpose, how it is accounted for, and its impact on the financial statements. The adoption of SFAS 161ASC 815 on January 1, 2009 did not have a material effect on the Company’s consolidated financial statements.

SFAS 162

In May 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 162 (“SFAS 162”),The Hierarchy of Generally Accepted Accounting Principles. The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. Prior to the issuance of SFAS No. 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards (SAS) No. 69,The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SAS 69 has been criticized because it is directed to the auditor rather than the entity. SFAS No. 162 addresses these issues by establishing that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Accordingly, the initial application of SFAS No. 162 will not have an impact on our financial statements

SFAS 165ASC 855

In May 2009, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 162Codification (“SFAS 165”ASC 855”),Subsequent Events.The new standard is intended to provide guidance on when a subsequent event should be recognized in the financial statements. Subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet should be recognized at the balance sheet date. Subsequent events that provide evidence about conditions that arose after the balance sheet date but before financial statements are issued, or are available to be issued, are not required to be recognized. The date through which subsequent events have been evaluated must be disclosed as well as whether it is the date the financial statements were issued or the date the financial statements were available to be issued. For nonrecognized subsequent events which should be disclosed to keep the financial statements from being misleading, the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made, should be disclosed. The standard is effective for interim or annual periods ending after June 15, 2009.

FSP EITF 99-20-1

On January 12, 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position, Emerging Issues Task Force (EITF) 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20. FSP EITF 99-20-1 addresses certain practice issues in EITF No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial

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Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” by making its other-than-temporary impairment assessment guidance consistent with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” FSP EITF 99-20-1 removes the reference to the consideration of a market participant’s estimates of cash flows in EITF 99-20, and instead requires an assessment of whether it is probable, based on current information and events, that the holder of the security will be unable to collect all amounts due according to the contractual terms. If it is probable that thereThis topic has been an adverse change in estimated cash flows, other-than-temporary impairment is deemed to exist,adopted and a corresponding loss shall be recognized in earnings equal to the entire difference between the investment’s carrying value and its fair value at the balance sheet date of the reporting period for which the assessment isdisclosures are made. This FSP is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. The impact of adoption did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the Financial Accounting Standards Board issued the following three FASB Staff Positions intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities:

FSP No. FAS 157-4

FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provide additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have decreased significantly. FSP FAS 157-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly. The provisions of FSP FAS 157-4 are effective for the Company’s interim period ending on June 30, 2009. Management is currently evaluating the effect that the provisions of FSP FAS 157-4 may have on the Company’s consolidated financial statements.

FSP No. 107-1 and APB 28-1

FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The provisions of FSP FAS 107-1 and APB 28-1 are effective for the Company’s interim period ending on June 30, 2009. As FSP FAS 107-1 and APB 28-1 amends only the disclosure requirements about fair value of financial instruments in interim periods, the adoption of FSP FAS 107-1 and APB 28-1 did not have a material effect on the Company’s statement of operations and balance sheet.

FSP Nos. FAS 115-2 and FAS 124-2

FSP Nos., FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” amends current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The Company adopted these as of June 30, 2009 and they did not have a material effect on the Company’s statement of operations and balance sheet.

SAB 111

The Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 111 (FASB ASC 320-10-S99-1) on April 9, 2009 to amend Topic 5.M., “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities” and to supplement FSP SFAS 115-2 and SFAS 124-2. SAB 111 maintains the staff’sStaff’s previous views related to equity securities; however, debt securities are excluded from its scope. The SAB provides that “other-

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than-temporary”“other-than-temporary” impairment is not necessarily the same as “permanent” impairment and unless evidence exists to support a value equal to or greater than the carrying value of the equity security investment, a write-down to fair value should be recorded and accounted for as a realized loss. The SAB was effective upon issuance and had no impact on the Company’s financial position.

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

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From time to time the FASB issues exposure drafts of proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.

 

-20--19-


Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q may contain certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services. Any use of “we” or “our” in the following discussion refers to the Company.

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

During the sixnine months ended JuneSeptember 30, 2009, the Company’s total assets increased $11.3$28.2 million, from $452.5 million to $463.8$480.7 million. During the six months,same period, securities available for sale increased $5.8$16.5 million or 8.4%23.9%, from $68.8 million at December 31, 2008 to $74.6$85.3 million at JuneSeptember 30, 2009. Loans held for investment also increased $3.9$11.0 million to $344.7 million during the period.$351.8 million.

Cash and cash equivalents decreased $2.7$2.3 million during the sixnine months ended JuneSeptember 30, 2009. Cash and due from banks increased $4.8$4.9 million, while interest-earning deposits with banks declined $7.5$7.2 million.

Investment securities increased $5.8$16.5 million or 8.4%23.9% for the six months. Market values thatnine months ended September 30, 2009. As a result of the financial markets dislocations which occurred in the second half of 2008, the Company had declined at December 31, 2008 to $2.5 million in net unrealized losses due toat December 31, 2008. Actions taken by the recent downturnFederal Reserve have mostly stabilized the markets and brought about the resumption of more rational pricing. As a result on September 30, 2009, the Company had net unrealized gains of $344 thousand. The Company owns $11.0 million in whole loan private label CMOs. This portion of the investment markets experienced an improvementportfolio had net unrealized losses of $1.1 million during the second quarter. The total unrealized loss at June 30, 2009 was $1.4$1.9 million. The majority of the unrealized loss is related to the whole loan CMO portfolio. The Company evaluated its entire investment portfolio for other than temporary impairments. Management believes that all of the unrealized losses are only temporary with the exception of fourfive private label CMO investments. Management has deemed that an impairment is necessary basedBased on the erosion of the underlying collateral.collateral, management determined that an impairment charge was warranted. Thus, the Company recorded a $204$387 thousand impairmentin impairments on these fourfive bonds. During the period, the Company purchased $18.6$35.9 million in new securities, during the periodhad $3.0 million in municipal bonds called and sold $1.7$3.2 million in securities at asecurities. At September 30, 2009 the Company had net realized lossgains of $20$104 thousand.

As previously stated, loans held for investment increased $3.9$11.0 million to $344.7 million during the period ended June 30, 2009.$351.8 million. The Company has experienced positive growth trends in the commercial, consumer and commercial real estate commercial areasloans at a growth rate of its loan portfolio. These areas experienced growth of 8.3%14.3%, 6.5% and 2.8%7.1%, respectively. The consumer loan portfolio experienced growth of 3.8% as well. The remaining areas of the loan portfolio declined during the first sixnine months of 2009. Loans held for sale increased 8.6%decreased 50.5% or $231 thousand$1.4 million during the period. The allowance for loan losses was $4.7$4.8 million at JuneSeptember 30, 2009, which represents 1.37% of the loan portfolio.portfolio, an increase from $4.4 million or 1.28% at December 31, 2008.

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

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leading factors in the increase of $1.7$2.4 million in fixed assets. Bank owned life insurance increased $97 thousand, whileand interest receivable increased $141 thousand and $147 thousand, respectively, while other real estate owned decreased $40 thousand and $319 thousand, respectively.$193 thousand. The Company did have an investment of $172 thousand in common stock of the parent company of Silverton Bank. On May 1, 2009, the Office of the Comptroller of the Currency closed Silverton Bank, and the

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Federal Deposit Insurance Corporation (“FDIC”) was appointed receiver. The Company has written off this investment as of March 31, 2009. Federal Home Loan Bank stock increased $863 thousand.$917 thousand because member institutions are required to increase their ownership as they increase their utilization of FHLB borrowings. The Company was also required to increase their ownership in Federal Home LoanReserve Bank stock ownership is a requirement for member banks that utilizeby $210 thousand during the Federal Home Loan Bank for borrowing funds. The amount of stock owned by each member bank is based primarily on the amount of borrowings outstanding.period.

Customer deposits, our primary funding source, experienced an $18.2a $17.9 million increase during the sixnine months ended JuneSeptember 30, 2009, increasing from $353.6 million to $371.8$371.5 million. Demand, noninterest-bearingInterest checking and money market accounts increased $1.2$3.3 million, while savings deposits grew $5.8$6.4 million. Time deposits over $100,000 and other time deposits experienced positive growth of $7.5$7.9 million and $2.1$2.4 million, respectively. The Company also experienced aThese positive growth trendtrends were partially offset by a decline in interest checking and money marketdemand, noninterest-bearing accounts of $1.6$2.2 million.

Total borrowings increased $6.7 million for the period ending June 30, 2009.

Total borrowings decreased $9.5 million for the period. Borrowingswhich consist of both short-term and long-term borrowed funds. The Company utilizes both short-term and long-term advancesfunds primarily from the Federal Home Loan Bank. At JuneSeptember 30, 2009, $27.0$42.9 million of the total borrowings of $45.3$61.5 million were comprised of Federal Home Loan Bank advances. In addition the Company executed a $200 thousand note payable for a building that was purchased during the period. The noteperiod and is payable in four annual payments of $50 thousand each. The Company retired a $2.6 million short-term note to a correspondent bank in the first quarter of 2009.

Other liabilities increased from $2.4 million at December 31, 2008 to $3.1$2.8 million at JuneSeptember 30, 2009, an increase of $696$452 thousand.

At JuneSeptember 30, 2009, total shareholders’ equity was $43.2$44.5 million, an increase of $2.0$3.3 million from December 31, 2008. Net income for the period was $1.5$1.8 million. Unrealized lossesgains on investment securities, net of tax improved $691 thousand. The$1.8 million. These increases were offset as the Company also recorded $322$406 thousand in preferred stock dividends and discount accretions on the series A and B preferred stock for the sixnine months period. At JuneSeptember 30, 2009, the Company and its subsidiary banks exceeded all applicable regulatory capital requirements.

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

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $623$290 thousand for the three months ended JuneSeptember 30, 2009, as compared to $772$343 thousand for the three months ended JuneSeptember 30, 2008, a decrease of $149$53 thousand. Net income available to common shareholders was $463$131 thousand or $0.06$0.02 per common share at JuneSeptember 30, 2009, compared to $772$343 thousand or $0.10$0.05 per common share at JuneSeptember 30, 2008. Net income available to common shareholders is net income less any dividends and discount accretions on preferred stock pertainingrelated to the $10 million of capital received from the United States Department of the Treasury under the capital purchase program in December 2008.

Net Interest Income

The Company’s primary source of income, net interest income, increased $265$394 thousand or 6.7%10.1% for the three months ended JuneSeptember 30, 2009, as compared to the same period for 2008. Refer to the sixnine month discussion on page 1924 for further information.

 

-22--21-


Provision and Allowance for Loan Losses

The provision for loan losses was $196$295 thousand for the three months ending JuneSeptember 30, 2009 compared to $171$529 thousand for the same period in 2008. There were net loan charge-offs of $37$199 thousand for the three months ended JuneSeptember 30, 2009 as compared with net loan charge-offs of $97$43 thousand during the same period of 2008. Refer to the Asset Quality discussion belowon page 27 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like nearly all financial institutions, diversification of our earnings base is of major importance into our long term success. Total noninterest income increased $246decreased $34 thousand for the three month period ending JuneSeptember 30, 2009 as compared to the same period in 2008. IncomeAlthough the volume of mortgage activity has slowed considerably during the third quarter, income from mortgage loan sales reached $1.1 millionincreased $158 thousand for the quarter ended JuneSeptember 30, 2009, a $774 thousand increase from the $357 thousand recorded foras compared to the same period in 2008. The recent decline in interest rates was the leading factor in this increase, as customers were able to refinance at a lower rate. Service charges on deposit accounts produced earnings of $567$616 thousand for the three months ended JuneSeptember 30, 2009, an increase of 5.6%2.8% due to growth in deposit balances. Other service fees and commissions experienced a 23.7%19.3% decrease for the comparable three month period. In this category $98$66 thousand of the decrease is attributable to reductions in brokerage commissions and assets under management. Other income was down $175 thousand compared to the prior year and is attributable to the non-recurring gain recognized in 2008 fromNet realized gains on the sale and call of MasterCard stock. Thesecurities available for sale was $124 thousand for the period. As previously discussed the Company recorded an additional other-than-temporary impairment of $204$183 thousand during the quarter as previously discussed.quarter. No impairment charges were recognized during the same period in 2008.

Noninterest Expense

Noninterest expense for the quarter ended JuneSeptember 30, 2009 was approximately $5.3 million compared to $4.5 million for the same period of 2008, an increase of $749$773 thousand. Salaries and employee benefits, the largest component of noninterest expense, increased $222$202 thousand, from $2.7$2.6 million for the quarter ending JuneSeptember 30, 2008 to $2.9$2.8 million for the same period in 2009. This increase is attributable to normal salary increases, additional executive management and supportadditions to staff and higher benefit expenses. Net occupancy expense and equipment expense had a combined increase of $30$60 thousand. Other noninterest expense increased $503$502 thousand for the comparable three month periods.period. The majority of the increase in other noninterest expense is attributed to an increase in FDIC assessment costs of $262$353 thousand. TheNot only has the assessment rate charged by the FDIC levied a special assessment onto all FDIC-insured financial institutions. The Company’s portion of this special assessment was $214 thousand. During 2008,institutions increased but also the Company received and utilized FDIC credits that reduced its assessment charges.charges during 2008. The table below reflects the further compositionadditional breakdown of other noninterest expense.

 

-23--22-


Other noninterest expense

 

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

Professional fees and services

  $234  $173  $301   $184

Marketing and donations

   169   145   176    146

Office supplies and printing

   83   65   66    62

Telephone and data lines

   56   62   55    57

Electronic banking expense

   178   200   184    221

Software amortization and maintenance

   107   114   118    114

Loan collection expense

   105   56   (19  46

Foreclosed real estate expense

   68    17

Shareholder relations expense

   56   43   51    43

Dues and subscriptions

   42   40   37    32

Postage

   53   49   51    45

FDIC assessment

   281   19   384    31

Other

   411   306   330    302
            

Total

  $1,775  $1,272  $1,802   $1,300
            

Income Tax Expense

The Company had income tax expense of $259$30 thousand for the three months ended JuneSeptember 30, 2009 resulting in an effective tax rate of 29.37%9.4% compared to income tax expense of $373$156 thousand andor an effective rate of 32.58%31.3% in the 2008 period. Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities, tax free municipal loans and income earned on bank owned life insurance. The decrease in the effective tax rate resulted primarily from the increase in the level of such tax free income as a percentage of income before income taxes in the current year quarter compared to the 2008 quarter.

Comparison of Results of Operations For the SixNine Months Ended JuneSeptember 30, 2009 and 2008.

Net Income and Net Income Available to Common Shareholders

The Company reported net income of approximately $1.5$1.8 million for the sixnine months ended JuneSeptember 30, 2009, as compared to $1.5approximately $1.9 million for the six months ended June 30, 2008, a decrease of $19 thousand.2008. Net income available to common shareholders was $1.2$1.3 million or $0.16$0.18 per common share at JuneSeptember 30, 2009, compared at $1.5to $1.9 million or $0.21$0.25 per common share at JuneSeptember 30, 2008. Net income available to common shareholders is net income less any dividends and discount accretions on preferred stock pertaining to the $10 million of capital received from the United States Department of the Treasury in December 2008.

Net Interest Income

As with most financial institutions, the primary component of earnings for our banks is net interest income. Net interest income is the difference between interest income, principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income generally result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Margin is

-23-


influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by levels of noninterest-bearing liabilities and capital.

-24-


Net interest income for the sixnine months ended JuneSeptember 30, 2009 was $8.5$12.8 million as compared with $7.8$11.7 million during the sixnine months ending JuneSeptember 30, 2008, resulting in an increase of $688 thousand,$1.1 million, or 8.8%9.3%. During the sixnine months ending JuneSeptember 30, 2009 our growth in the volume of interest-earning assets outpaced the growth in interest-bearing liabilities by $806 thousand.$1.0 million. The average yield on our interest–earning assets decreased 9683 basis points to 5.99%5.94%, while the average rate we paid for our interest-bearing liabilities also decreased 9687 basis points. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve adjusts interest rates, while, interest-bearing time deposits adjust at the time of maturity. The aforementioned decreases resulted in an increase of onethree basis pointpoints in our interest rate spread, from 3.79%3.77% in 2008 to 3.80% in 2009. Our net interest margin was 4.09%4.08% and 4.21%4.17% for the comparable periods in 2009 and 2008, respectively.

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

Average Balance Sheet and Net Interest Income Analysis

For the SixNine Months Ended JuneSeptember 30,

(in thousands)

 

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

Interest-earning assets:

                      

Taxable securities

  $60,475  $36,383  $1,556  $1,009  5.19 5.59  $61,616  $36,763  $2,344  $1,493  5.09 5.42

Nontaxable securities (1)

   16,103   13,726   359   323  7.32 7.70   14,992   14,298   502   504  7.28 7.66

Short-term investments

   7,224   3,487   43   43  1.20 2.49   7,222   3,801   57   59  1.06 2.07

Taxable loans

   343,380   326,770   10,499   11,550  6.17 7.13   343,121   330,286   15,712   17,201  6.12 6.96

Non-taxable loans (1)

   4,793   3,895   94   88  6.40 7.44   5,302   3,909   162   89  6.63 7.45
                                      

Total interest-earning assets

   431,975   384,261   12,551   13,013  5.99 6.95   432,253   389,057   18,777   19,346  5.94 6.77

Interest-bearing liabilities:

                      

Interest-bearing deposits

   315,987   283,537   3,165   4,280  2.02 3.04  $320,805   286,882   4,656   6,159  1.94 2.87

Short-term borrowed funds

   29,015   18,493   186   334  1.29 3.64   25,019   17,589   250   407  1.34 3.09

Long-term debt

   30,707   32,755   732   619  4.81 3.81   30,952   33,117   1,106   1,014  4.78 4.09
                                      

Total interest bearing liabilities

   375,709   334,785   4,083   5,233  2.19 3.15   376,776   337,588   6,012   7,580  2.13 3.00
                                      

Net interest spread

  $56,266  $49,476  $8,468  $7,780  3.80 3.79  $55,477  $51,469  $12,765  $11,766  3.80 3.77
                                      

Net interest margin (1)

           

(% of earning assets)

          4.09 4.21
               

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

          4.08 4.17
               

 

(1)Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 38.55% tax rate.

Provision and Allowance for Loan Losses

The provision for loan losses was $568$863 thousand for the sixnine months ending JuneSeptember 30, 2009 compared to $257$786 thousand for the same period in 2008. There were net loan charge-offs of $197$396 thousand for the sixnine months ended JuneSeptember 30, 2009 as compared with net loan charge-offs of $110$153 thousand during the same period of 2008. Refer to the Asset Quality discussion on page 2127 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like nearly all financial institutions, diversification of our earnings base is of major importance to our long term success. Total noninterest income increased $676$642 thousand for the sixnine month period ending June

-24-


September 30, 2009 as compared to the same period in 2008. IncomeThe leading factor for this increase was the growth in income from mortgage loan sales. With the drastic drop in interest rates during the fourth quarter of 2008, many customers have been able to take advantage by refinancing their mortgage loans to much lower rates. As a result of all this refinancing activity, income from mortgage loan sales increased $1.8 million from $798 thousand for the sixnine months ended JuneSeptember 30, 2008 to $2.6

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2009 was $2.9 million foror an increase of $1.9 million over the same period in 2009. The recent decline in interest rates was the leading factor in this increase, as customers were able to refinance at a lower rate.2008. Service charges on deposit accounts produced earnings of $1.1$1.8 million for the sixnine months ended JuneSeptember 30, 2009 and reflected an increase of 6.4%5.1% compared to the prior year which was attributable to growth in deposit balances. Other service fees and commissions experienced a 31.3%26.2% decrease versus the comparable sixnine month period. In this category, $194$256 thousand of the decrease iswas attributable to reductions in brokerage commissions and asset under management, while income from mortgagemanagement. The current downturn in the financial markets and the over all economy has made many investors more nervous about investing in the financial markets thus resulting in the decrease in commission income. Mortgage servicing rights, another component of this category decreased $22$275 thousand as a result of heavy mortgage refinancing volume during the second quarter of 2009.nine month period. The $172 thousand investment the Company had in the stock of Silverton Bank’s holding company was a nonmarketable security that was written off during the first quarter of 2009 due to the take over of Silverton by the regulators. The Company realized gains on the sale and the call of securities available for of sale of $104 thousand. The Company recorded an other-than-temporary impairment of $387 thousand during the nine month period ended September 30, 2009. Other income was down $275$293 thousand compared to the sixnine month period of 2008. Of that amount, $220$221 thousand relates to the 2008 non-recurring gain recognized from the sale of MasterCard and Visa stock. The Company recorded an other-than-temporary impairment of $204 thousand during the six month period ended June 30, 2009 as previously discussed

Noninterest Expense

Noninterest expense for the quarternine months ended JuneSeptember 30, 2009 was $10.2$15.5 million compared to $9.1$13.6 million for the same period of 2008, an increase of $1.1$1.9 million. Salaries and employee benefits, the largest component of noninterest expense, increased $458$660 thousand, from $5.3$7.9 million for the sixnine months ending JuneSeptember 30, 2008 to $5.8$8.6 million for the same period in 2009. This increase is attributable to normal salary increases, additional executive management and supportadditions to staff and higher benefit expenses. Net occupancy expense and equipment expense had a combined increase of $93$153 thousand due to the additional depreciation and utilities on a renovated building and associated new furniture and equipment put into servicesservice in late 2008. Other noninterest expense increased $557 thousand$1.0 million for the comparable sixnine month period. The major contributing factor to this increase was an increase of $309$662 thousand in FDIC assessment charges. DuringThe aforementioned rate increases coupled with a special assessment levied on all FDIC-insured financial institutions during the second quarter account for this increase. Another attributing factor to the increase was the fact that during 2008, the Company received and utilized FDIC credits that reduced its assessment charges. ThisOther factors influencing the increase in other noninterest expense include an increase of $191 thousand in professional fees and services, which includes the previously discussed special assessment.

legal fees related to loan collections and foreclosure expense and an increase in foreclosed real estate expense totaling $99 thousand. The table below reflects the composition of other noninterest expense.

-25-


Other noninterest expense

 

   Six Months Ended
June 30,
   2009  2008
   (in thousands)

Professional fees and services

  $412  $338

Marketing and donations

   333   317

Office supplies and printing

   160   135

Telephone and data lines

   111   122

Electronic banking expense

   355   386

Software amortization and maintenance

   223   213

Loan collection expense

   190   127

Shareholder relations expense

   100   101

Dues and subscriptions

   85   77

Postage

   102   96

FDIC assessment

   348   39

Other

   745   656
        

Total

  $3,164  $2,607
        

-26-


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

Professional fees and services

  $713  $522

Marketing and donations

   509   463

Office supplies and printing

   226   197

Telephone and data lines

   166   179

Electronic banking expense

   539   607

Software amortization and maintenance

   341   327

Loan collection expense

   171   173

Foreclosed real estate expense

   136   37

Shareholder relations expense

   151   144

Dues and subscriptions

   122   109

Postage

   153   141

FDIC assessment

   732   70

Other

   1,007   938
        

Total

  $4,966  $3,907
        

Income Tax Expense

The Company had income tax expense of $714$744 thousand for the sixnine months ended JuneSeptember 30, 2009 resulting in an effective tax rate of 31.85%29.0% compared to income tax expense of $747$903 thousand and an effective rate of 32.56%32.3% in the 2008 period. Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities, tax free municipal loans and income earned on bank owned life insurance. The decrease in the effective tax rate resulted primarily from the increase in the level of such tax free income as a percentage of income before income taxes in the current year compared to the 2008 period.

Asset Quality

The Company’s allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. The allowance is increased by provisions charged to operations and by recoveries of amounts previously charged off, and reduced by loans charged off. Management evaluates the adequacy of the allowance at least quarterly. In evaluating the adequacy of the allowance, management considers the followingfollowing: the growth, composition and industry diversification of the portfolio; historical loan loss experience; current delinquency levels; adverse situations that may affect a borrower’s ability to repay; estimated value of any underlying collateral; prevailing economic conditions and other relevant factors. The Company’s credit administration function, through a review process, validates the accuracy of the initial risk grade assessment. In addition, as a given loan’s credit quality improves or deteriorates, the credit administration department has the responsibility to change the borrower’s risk grade accordingly. For loans determined to be impaired, the allowance is based either on discounted cash flows using the loan’s initial effective interest rate or on the fair value of the collateral for certain collateral dependent loans. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans, which may be susceptible to significant change. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require additions for estimated losses based upon judgments different from those of management.

-26-


Management uses a risk-grading program to facilitate the evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by loan officers and reviewed and monitored by credit administration. The Company strives to maintain its loan portfolio in accordance with conservative loan underwriting policies that result in loans specifically tailored to the needs of its market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies. The Company has no foreign loans and does not engage in significant lease financing or highly leveraged transactions. The Company follows a loan review program designed to evaluate the credit risk in the loan portfolio. This process includes the maintenance of an internally classified watch list that is designed to help management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history and the current delinquent status. As a result of this process, certain loans are categorized as substandard, doubtful or loss and reserves are allocated based on management’s judgment and historical experience.

The allowance for loan losses represents management’s best estimate of an appropriate amount to provide for known and inherent losses in the loan portfolio in the normal course of business. While management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ from the assumptions

-27-


used in making the determinations. Furthermore, while management believes it has established the allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing the Company’s portfolio, will not require an adjustment to the allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary, should the quality of any loans deteriorate as a result of the factors discussed herein. Any material increase in the allowance for loan losses may adversely affect the Company’s financial condition and results of operations.

The provision for loan losses was $568$863 thousand for the sixnine months ended JuneSeptember 30, 2009 as compared to $257$786 thousand for the same period in 2008. Additionally, the allowance expressed as a percentage of loans held for investment was 1.37% at JuneSeptember 30, 2009 compared to 1.28% December 31, 2008. During the first six months ofAt September 30, 2009 the levels of our impaired loans, which includes all loans in nonaccrual status and other loans deemed by management to be impaired, were $22.4$18.7 million compared to $12.5 million at December 31, 2008, an increase of $9.9$6.2 million. The increase in the level of impaired loans primarily resulted from three customer relationships that are included in impaired loans totaling $8.2$5.7 million. One of these relationships totaling $1.3 million was for $3.9 million and has been brought current since Junein nonaccrual at September 30, 2009 and is no longer considered by management to be impaired. This relationship was also included in the total nonaccrual loans as of June 30, 2009 and will reduce that number as well.2009. Total nonaccrual loans, which are a component of impaired loans, increased from $3.9 million at December 31, 2008 to $10.4$6.6 million at JuneSeptember 30, 2009. The Company had one relationship of $789 thousand that was in nonaccrual at the end of the period that has now been foreclosed and is currently included in other real estate owned. The Company had net loan charge-offs for the first sixnine months of 2009 of $197$396 thousand compared to net loan charge-offs of $110$153 thousand for the same period in 2008.

The allowance expressed as a percentage of gross loans held for investment increased nine basis points from 1.28% at December 31, 2008 to 1.37% at JuneSeptember 30, 2009. The allowance, as a percentage of total impaired loans, decreased from 53.3% at December 31, 2008 to 53.0%52.7% at JuneSeptember 30, 2009. Likewise, the portion of the allowance specifically allocable to impaired loans decreased from 18.5% at December 31, 2008 to 11.2%13.6% at JuneSeptember 30, 2009. Nonperforming loans, which consist solely of nonaccrual loans, were $10.4$6.6 million at JuneSeptember 30, 2009 as compared to $3.9 million at December 31, 2008.

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Nonperforming loans to total loans increased from 1.14% at December 31, 2008, to 3.02%1.88% at JuneSeptember 30, 2009. The total allowance relative to non-performing loans decreased from 111.87% at the end of 2008 to 45.53%73.16% at JuneSeptember 30, 2009. During the period the Company had a decrease in other real estate owned of $319$193 thousand. With the exception of the three aforementioned relationships, of which $4.5 million is in land development, delinquencies have remained relatively constant during the period, even in these difficult economic times Management believes the current level of allowance for loan losses is appropriate given the risk inherent in the Company’s loan portfolio at this time.

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

Nonperforming Assets

(dollars in thousands)

 

  September 30,
2009
 December 31,
2008
 
  June 30,
2009
 December 31,
2008
 

Nonperforming assets:

      

Nonaccrual loans

  $10,393   $3,898    $6,600   $3,898  

Other real estate owned

   2,497    2,816     2,623    2,816  
       
       

Total nonperforming assets

  $12,890   $6,714    $9,223   $6,714  
              

Accruing loans past due 90 days or more

  $8   $3    $8   $3  

Allowance for loans losses

   4,732    4,361     4,828    4,361  

Nonperforming loans to total loans

   3.02  1.14   1.88  1.14

Allowance for loan losses to total loans

   1.37  1.28   1.37  1.28

Nonperforming assets to total loans and other real estate

   3.74  1.97   2.62  1.97

Nonperforming assets to total assets

   2.78  1.48   1.92  1.48

Allowance for loan losses to nonperforming loans

   45.53  111.87   73.16  111.87

Liquidity and Capital Resources

The objective of the Company’s liquidity management policy is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on any opportunities for expansion. Liquidity management addresses the ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature and to fund new loans and investments as opportunities arise.

The Company’s primary sources of internally generated funds are principal and interest payments on loans, cash flows generated from operations and cash flow generated by investments. Growth in deposits is typically the primary source of funds for loan growth. The Company and its subsidiary banks have multiple funding sources in addition to deposits that can be used to increase liquidity and provide additional financial flexibility. These sources are the subsidiary banks’ established federal funds lines with correspondent banks aggregating $10.5$18.8 million at JuneSeptember 30, 2009, with available credit of $10.5$18.8 million, established borrowing relationships with the Federal Home Loan Bank, with available credit of $43.4$21.9 million, access to borrowings from the Federal Reserve Bank discount window, and the saleissuance of securities under agreements to repurchase. In addition, thecommercial paper. The Company issues commercial paper and has also secured long-term debt from other sources. Total

-28-


debt from these sources aggregated $45.3$61.5 million at JuneSeptember 30, 2009, compared to $54.8 million at December 31, 2008.

The Company’s subsidiary banks had federal funds purchased lines of credit with Silverton Bank for $10.4 million. The Office of the Comptroller of the Currency took control of Silverton Bank on May 1, 2009 and appointed the FDIC receiver. Silverton was later closed. Management has entered into a new correspondent bank relationship with $9.8 million in federal funds lines available. These new lines went into effect on July 16, 2009 and are not included in the total available federal funds lines previously discussed.

-29-


Banks and bank holding companies, as regulated institutions, must meet required levels of capital. The Federal Reserve, the primary federal regulator of the Company and its subsidiary banks, has adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets.

Regulatory guidelines require a minimum of total capital to risk-adjusted assets ratio of 8 percent and a Tier leverage ratio of 4 percent. Banks, which meet or exceed a Tier 1 risk-based capital ratio of 6 percent, a total risked-based capital ratio of 10 percent and a Tier leverage ratio of 5 percent are considered “well capitalized” by regulatory standards. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with those guidelines.

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

Accounting and Regulatory Matters

Management is not aware of any known trends, events, uncertainties or current recommendations by regulatory authorities that will have or that are reasonably likely to have a material effect on the Company’s liquidity, capital resources, or other operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s primary market risk is interest rate risk. Interest rate risk is the result of differing maturities or repricing intervals of interest-earning assets and interest-bearing liabilities and the fact that rates on these financial instruments do not change uniformly. These conditions may impact the earnings generated by the Company’s interest earning assets or the cost of its interest-bearing liabilities, thus directly impacting the Company’s overall earnings. The Company’s management actively monitors and manages interest rate risk. One way this is accomplished is through the development of and adherence to the Company’s asset/liability policy. This policy sets forth management’s strategy for matching the risk characteristics of the Company’s interest-earning assets and liabilities so as to mitigate the effect of changes in the rate environment. In management’s opinion, the Company’s market risk profile has not changed significantly since December 31, 2008.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act (“Exchange Act”) Rule 13a-15.

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

-29-


effective (1) to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act was recorded,

-30-


processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

Management of the Company has evaluated, with the participation of the Company’s principal executive officer and principal financial officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a -15(f) and 15d – 15(f) of the Exchange Act) during the firstthird quarter of 2009. In connection with such evaluation, the Company has determined that there were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensuring that the Company’s systems evolve with its business.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

Neither the Company nor its subsidiaries, nor any of their properties are subject to any material legal proceedings. From time to time the Banks are engaged in ordinary routine litigation incidental to their business.

Item 1A. Risk Factors

Not applicable.

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

Trades of the Company’s stock occur in the Over-the-Counter marketplace from time to time. The Company also has in place a Stock Repurchase Plan that provides liquidity to its shareholders in the event a willing buyer is not available to purchase shares that are offered for sale. The Company is under no obligation to purchase shares offered; however, it will accommodate such offers as its Stock Repurchase Plan allows. This plan was initially adopted in 1995 and is approved annually by resolution of the Board of Directors or the Executive Committee of the Board.

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

-30-


Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

The Company’s annual meeting of shareholders was held on Tuesday, May 12, 2009 in Albemarle, North Carolina. Proposals listed in the Proxy Statement dated March 31, 2009, (1) to elect six (6) directors of the Company to three (3) year terms and one (1) director to a two (2) yearNone

-31-


term, (2) to ratify a non-binding Resolution for Executive Compensation and (3) to ratify the appointment of the Company’s independent public accountants for 2009, were approved by the shareholders as listed below. There were no other matters submitted for vote of the shareholders at this meeting.

Proposal (1) To elect six (6) directors to three (3) year terms. Votes for each nominee were as follows:

Nominee

  

For

  

Withheld

W. Stephen Aldridge, III

  4,617,622  98,014

Bill C. Burnside

  4,624,820  90,816

W. Kenneth Huntley

  4,625,709  89,927

Joseph R. Kluttz, Jr.

  4,623,088  92,548

Lee Roy Lookabill, Jr

  4,625,176  90,460

Edward B.Tyson

  4,619,474  96,162

To elect one (1) director to a two (2) year term. Votes for each nominee were as follows:

Nominee

  

For

  

Withheld

Barry S. Moose

  4,615,114  100,522

The following eleven directors continued in office: Joe S. Brooks, Ronald T. Burleson, Henry E. Farmer, Sr., Charles F. Geschickter,III, Thomas M. Hearne, Jr., Charles D. Horne, W. Chester Lowder, Timothy J. Propst, Susan J. Rourke, Donald P. Scarborough and John W. Shealy, Jr.

Proposal (2) To ratify the Resolution Regarding Executive Compensation.

For

4,147,976

Against

244,937

Abstain

322,723

Proposal (3) To ratify the appointment of Dixon Hughes PLLC as the Company’s independent registered public accounting firm for 2009.

For

4,616,336

Against

19,249

Abstain

80,051

Item 5. Other Information

None

 

-32--31-


Item 6. Exhibits

 

Exhibit
Number

 

Description of Exhibit

3.1

 Registrant’s Articles of Incorporation *

3.2

 Registrant’s By-laws *****

4

 Form of stock certificate *

10.1

 Incentive Stock Option Plan, as amended *

10.2

 Employee Stock Ownership Plan and Trust **

10.3

 2006 Incentive Stock Option Plan ***

10.4

 2006 Employee Stock Purchase Plan ***

10.5

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

31.1

 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-OxleySarbanes- Oxley Act of 2002 (filed herewith)

31.2

 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-OxleySarbanes- Oxley Act of 2002 (filed herewith)

32

 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

 

*Incorporated by reference from exhibits to Registrant’s Registration Statement on Form S-4 (Reg. No. 33-58882).
**Incorporated by reference to Registrant’s Annual Report on Form 10-KSB for the Fiscal year ended 1999.
***Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2006.
****Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2008.
*****Filed here within this report.

 

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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: August 11,November 12, 2009 By: 

/s/ RogerS/    ROGER L. Dick

DICK        
  Roger L. Dick
  President and Chief Executive Officer
Date: August 11,November 12, 2009 By: 

/s/ RobertS/    ROBERT O. Bratton

BRATTON        
  Robert O. Bratton
  Principal Financial Officer

 

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EXHIBIT INDEX

 

Exhibit
Number

 

Description of Exhibit

3.1

 Registrant’s Articles of Incorporation *

3.2

 Registrant’s By-laws ***

4

 Form of stock certificate *

10.1

 Incentive Stock Option Plan, as amended *

10.2

 Employee Stock Ownership Plan and Trust *

10.3

 2006 Incentive Stock Option Plan *

10.4

 2006 Employee Stock Purchase Plan *

10.5

 Amendment to the Employee Stock Ownership Plan and Trust *

31.1

 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 (filed herewith)

31.2

 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 (filed herewith)

32

 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

 

*Incorporated by reference
**Filed here within this report

 

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