Guzzo the Contrarian

I just added to my position in Uwharrie Capital Corporation (UWHR) today. I bought another 500 shares at $3.20/share.

Uwharrie Capital Corporation is a microcap three banking system located in the Uwharrie Lakes Region of North Carolina, located east of Charlotte. It’s headquartered in Albemarle, NC.

I originally wrote about UWHR back in 2006, when Guzzo the Contrarian first started, but that post is long gone. My last post about UWHR only briefly touched upon the stock. So, let me recap the reasons why I bought UWHR and what I like about the company.

My initial interest in UWHR stemmed from screening and researching the varied small cap banks located in the piedmont regions of central North Carolina and Virginia.

I lived a portion of my young life in Charlotte, and recently spent a few years living and working in the region. I found it interesting that this area of the country had so many micro cap community banks, but yet investment in these banks was of interest mostly to those who lived those communities. As such, I though this might be a good sector to find some wallflower stocks at undervalued prices.

UWHR appealed to me for a few reasons, foremost being it’s stock price. At that time, trading around $6.00/share, it was the lowest-priced profitable banking stock in North Carolina. Trading today at less than $3.00/share, it’s STILL the lowest-priced profitable banking stock in NC.

UWHR has also always been a fundamentally sound company and continues to remain a well-capitalized bank holding company. According to excerpts from it’s November 7th 10Q:

Uwharrie Capital Corp reported net income of $1.9 million or $0.25 per basic share, for the nine months ended September 30, 2008, as compared to $2.1 million, or $0.29 per basic share, for the nine months ended September 30, 2007, a decrease of $259 thousand, or $0.04 per share.

At September 30, 2008, total shareholders’ equity was $31.8 million, an increase of $205 thousand from December 31, 2007. Net income for the period was $1.9 million and the Company received $300 thousand from the exercise of stock options. These increases were offset by the repurchase of 76,598 shares of the Company’s common stock at a cost of $412 thousand and unrealized losses on investment securities, net of tax, of $1.4 million. The Company also recorded a $273 thousand one-time cumulative adjustment to undivided profits for the adoption of EITF 06-4. At September 30, 2008, the Company and its subsidiary banks exceeded all applicable regulatory capital requirements.

Both the Company and its subsidiary banks have maintained capital levels exceeding minimum levels for “well capitalized” banks and bank holding companies. The Company expects to continue to exceed these minimums without altering current operations or strategy.

Like most of it’s competitors, the worsening economy has negatively impacted Uwharrie Capital Corporation’s bottom line. It’s had it’s share of setbacks: write-offs, impaired loans, non-performing assets, and unrealized investment losses.

But, unlike many of it’s competitors, UWHR has had no subprime exposure and other portions of it’s diversified portfolio have had gains that offset some of the losses. Even though this quarter’s profits were down, they still managed to generate a profit.

According to Uwharrie Capital Corporation’s latest press release:

ALBEMARLE, N.C. – Uwharrie Capital Corp, parent company for Bank of Stanly, Anson Bank and Trust and Cabarrus Bank and Trust, reported earnings from operations of $1.0 million during third quarter of 2008 compared to $1.1 million in the same period last year. During the quarter ended September 30, 2008, the Company prudently expensed additional reserves to its loan loss provision in light of increased economic risk. Third quarter earnings, after this provision and taxes were $343 thousand compared to $774 thousand for the same period last year.

I was also drawn to this stock by the location of it’s banks. Charlotte has been, and IMO, will continue to be a fast growing city. People will continue to move into the area because the city offers reasonably low real estate prices, a low cost-of-living, and a growing job bank. Charlotte has a well-built highway system with easy access to many cultural and recreational amenities. The area also offers four distinct, but temperate seasons.

The Charlotte metropolitan area has grown tremendously over the last few decades, with most growth occurring along the highways north and northeast towards Lake Norman, Kannapolis and Concord, west towards Gastonia, and south, extending into South Carolina. The city’s slowest rate of growth has occurred eastward because there isn’t a major highway built in that direction.

However, as time progresses, I think expansion will continue at a greater rate eastward into the counties that Uwharrie Capital Corporation represents, as close and buildable land becomes more scarce. UWHR’s business will grow along with this expansion.

What also interested me to invest in Uwharrie Capital Corporation is it’s core values and it’s community mission. Unlike many in the banking industry, UWHR realizes that the key to their success lies in the success of the people living in their communities. Their mission is to “Make a Difference While Making a Profit”. UWHR measure success by how much they contribute to the quality of life and economic well-being of their communities. The success of their community is equally as important as the success of their business. As a matter of fact, their first core value is: We will never put profits before the welfare of people.

IMO, lost focus of the dual importance of business and community is what’s led to many of the problems associated with our current economy. So, when I find a well-run company that realizes the importance of this concept, I see a company being run by a bunch of smart folks. I like to invest my money with smart folks.

These are the reasons for my initial and continued investment in Uwharrie Capital Corporation.

There are some drawbacks to investing in UWHR. The company actually prefers it’s shareholders to be local investors. Entering or leaving a position can be difficult. It’s very thinly-traded, so buying and selling can often test one’s patience. Until it becomes more well known, it wouldn’t be a good stock to trade. One could get locked into a position for a long time.

The stock’s price may not also climb as quickly as desired. I’ve had my position for a few years now, and although I believe it to be a profitable long-term investment, I’m currently in the red. UWHR’s stock price tends to move in tandem with sector prices and may remain in the cellar until the whole sector (and economy) turns around. But, this also makes it’s a good time to buy.

Uwharrie Capital Corporation pays an annual 3% stock dividend. They announce their stock dividend around this time of the year, every year. According to their latest press release:

Uwharrie Capital Corp has declared a 3% stock dividend to be paid to shareholders on December 4, 2008. Mike Snyder, Board of Directors’ Chairman commented, “The Board of Directorsis pleased to make this announcement. Our shareholders continue to show their support by doing business with us and referring their friends. This allows our company to continue creating value and serving our communities well by empowering local people to control their economic destiny.” Shareholders of Uwharrie Capital Corp as of the record date, November 17, 2008, will receive the dividend. Only whole shares of stock will be issued. Shareholders who hold stock certificates will receive a new certificate by mail, representing the 3% stock dividend shares. Certificates will be electronically delivered directly to the appropriate accounts if the stock is being held in brokerage accounts. If applicable, a check for payment of a fractional share may also be enclosed with the new stock certificate.

This was the reason why I was able to buy 500 shares of UWHR today. I noticed that every year, on the record date, a lot of shares usually become available. This year’s record date was 11/17. So, a few days ago I placed a low-ball limit-order in hopes that either the bank or another shareholder would be unloading some shares on 11/18. My strategy paid off.

So, will my investment in Uwharrie Capital Corporation turn out to be a profitable investment, or am I just falling into a value trap? I believe in the former, but only time will time if I’m right or wrong.

I’ll post updates of my investment as they occur. But, you can also visit their SEC filing website if you prefer to keep up with UWHR yourself.