10-Q 1 uwhr-10q_20180930.htm 10-Q uwhr-10q_20180930.htm

ing

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2018

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.      Yes      No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

Emerging growth company

☐ 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 7,019,604 shares of common stock outstanding as of November 5, 2018.

 

 


 

 

Table of Contents

 

 

 

 

 

Page No.

 

 

 

 

 

Part I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1 -

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2018 and 2017

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017

 

5

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2018

 

6

 

 

 

 

 

 

 

Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

 

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2 -

 

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

 

27

 

 

 

 

 

Item 3 -

 

Quantitative and Qualitative Disclosures About Market Risk

 

34

 

 

 

 

 

Item 4 -

 

Controls and Procedures

 

34

 

 

 

 

 

Part II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1 -

 

Legal Proceedings

 

35

 

 

 

 

 

Item 1A -

 

Risk Factors

 

35

 

 

 

 

 

Item 2 -

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

35

 

 

 

 

 

Item 3 -

 

Defaults Upon Senior Securities

 

35

 

 

 

 

 

Item 4 -

 

Mine Safety Disclosures

 

35

 

 

 

 

 

Item 5 -

 

Other Information

 

35

 

 

 

 

 

Item 6 -

 

Exhibits

 

36

 

 

 

 

 

 

 

Signatures

 

37

 

 

 

 

 

 

 

 

 

 

-2-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

 

Part I. Financial Information

Item 1.

Financial Statements.

 

 

 

September 30, 2018 (Unaudited)

 

 

December 31, 2017*

 

 

 

(dollars in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

6,629

 

 

$

7,538

 

Interest-earning deposits with banks

 

 

110,097

 

 

 

62,865

 

Securities available for sale, at fair value

 

 

92,471

 

 

 

95,743

 

Securities held to maturity, at amortized cost (fair value $10,728 and $11,461, respectively)

 

 

10,871

 

 

 

11,458

 

Loans held for sale

 

 

1,946

 

 

 

4,414

 

Loans:

 

 

 

 

 

 

 

 

Loans held for investment

 

 

377,738

 

 

 

356,871

 

Less allowance for loan losses

 

 

(2,365

)

 

 

(2,458

)

Net loans held for investment

 

 

375,373

 

 

 

354,413

 

Premises and equipment, net

 

 

14,849

 

 

 

14,728

 

Interest receivable

 

 

1,681

 

 

 

1,709

 

Restricted stock

 

 

1,094

 

 

 

1,067

 

Bank owned life insurance

 

 

8,642

 

 

 

8,546

 

Other real estate owned

 

 

1,086

 

 

 

2,349

 

Prepaid assets

 

 

708

 

 

 

786

 

Other assets

 

 

11,943

 

 

 

10,742

 

Total assets

 

$

637,390

 

 

$

576,358

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Demand noninterest-bearing

 

$

137,203

 

 

$

113,762

 

Interest checking and money market accounts

 

 

322,730

 

 

 

289,953

 

Savings deposits

 

 

56,802

 

 

 

45,698

 

Time deposits, $250,000 and over

 

 

6,848

 

 

 

7,933

 

Other time deposits

 

 

49,959

 

 

 

55,282

 

Total deposits

 

 

573,542

 

 

 

512,628

 

Short-term borrowed funds

 

 

1,305

 

 

 

1,752

 

Long-term debt

 

 

9,934

 

 

 

9,534

 

Interest payable

 

 

12

 

 

 

148

 

Other liabilities

 

 

8,888

 

 

 

7,756

 

Total liabilities

 

 

593,681

 

 

 

531,818

 

 

 

 

 

 

 

 

 

 

Off balance sheet items, commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and

   outstanding 7,019,604 and 7,112,853

 

 

8,774

 

 

 

8,891

 

Preferred stock, 10,000,000 shares authorized; none issued and outstanding

 

 

 

 

 

 

Additional paid-in capital

 

 

12,414

 

 

 

12,824

 

Undivided profits

 

 

14,198

 

 

 

13,282

 

Accumulated other comprehensive loss

 

 

(2,332

)

 

 

(1,107

)

Total Uwharrie Capital shareholders’ equity

 

 

33,054

 

 

 

33,890

 

Noncontrolling interest

 

 

10,655

 

 

 

10,650

 

Total shareholders’ equity

 

 

43,709

 

 

 

44,540

 

Total liabilities and shareholders’ equity

 

$

637,390

 

 

$

576,358

 

 

(*)

Derived from audited consolidated financial statements

See accompanying notes  

 

 

-3-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands, except share and per share data)

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

4,680

 

 

$

4,214

 

 

$

13,405

 

 

$

12,336

 

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury

 

 

12

 

 

 

5

 

 

 

12

 

 

 

28

 

US Government agencies and corporations

 

 

304

 

 

 

369

 

 

 

1,055

 

 

 

1,122

 

State and political subdivisions

 

 

119

 

 

 

121

 

 

 

363

 

 

 

361

 

Interest-earning deposits with banks and federal funds sold

 

 

539

 

 

 

258

 

 

 

1,181

 

 

 

520

 

Total interest income

 

 

5,654

 

 

 

4,967

 

 

 

16,016

 

 

 

14,367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking and money market accounts

 

 

269

 

 

 

113

 

 

 

605

 

 

 

295

 

Savings deposits

 

 

38

 

 

 

12

 

 

 

63

 

 

 

37

 

Time deposits, $250,000 and over

 

 

10

 

 

 

16

 

 

 

43

 

 

 

46

 

Other time deposits

 

 

55

 

 

 

51

 

 

 

147

 

 

 

143

 

Short-term borrowed funds

 

 

5

 

 

 

1

 

 

 

12

 

 

 

14

 

Long-term debt

 

 

138

 

 

 

138

 

 

 

411

 

 

 

410

 

Total interest expense

 

 

515

 

 

 

331

 

 

 

1,281

 

 

 

945

 

Net interest income

 

 

5,139

 

 

 

4,636

 

 

 

14,735

 

 

 

13,422

 

Provision for (recovery of) loan losses

 

 

(24

)

 

 

(136

)

 

 

92

 

 

 

(309

)

Net interest income after provision (recovery of) for loan losses

 

 

5,163

 

 

 

4,772

 

 

 

14,643

 

 

 

13,731

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

292

 

 

 

299

 

 

 

865

 

 

 

874

 

Interchange and card transaction fees, net

 

 

190

 

 

 

149

 

 

 

476

 

 

 

486

 

Other service fees and commissions

 

 

650

 

 

 

606

 

 

 

1,940

 

 

 

1,994

 

Loss on sale of securities (includes reclassification of $0, ($14,000),

$0, and ($14,000) from accumulated other comprehensive income)

 

 

 

 

 

(14

)

 

 

 

 

 

(14

)

Income from mortgage loan sales

 

 

730

 

 

 

790

 

 

 

2,261

 

 

 

2,539

 

Other income

 

 

119

 

 

 

219

 

 

 

504

 

 

 

571

 

Total noninterest income

 

 

1,981

 

 

 

2,049

 

 

 

6,046

 

 

 

6,450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,074

 

 

 

3,647

 

 

 

12,141

 

 

 

10,987

 

Net occupancy expense

 

 

447

 

 

 

327

 

 

 

1,207

 

 

 

938

 

Equipment expense

 

 

220

 

 

 

151

 

 

 

555

 

 

 

451

 

Data processing costs

 

 

206

 

 

 

429

 

 

 

739

 

 

 

789

 

Office supplies and printing

 

 

59

 

 

 

27

 

 

 

134

 

 

 

89

 

Foreclosed real estate expense

 

 

13

 

 

 

48

 

 

 

85

 

 

 

312

 

Professional fees and services

 

 

280

 

 

 

223

 

 

 

742

 

 

 

570

 

Marketing and donations

 

 

196

 

 

 

251

 

 

 

616

 

 

 

737

 

Electronic banking expense

 

 

98

 

 

 

93

 

 

 

297

 

 

 

263

 

Software amortization and maintenance

 

 

239

 

 

 

198

 

 

 

686

 

 

 

569

 

FDIC insurance

 

 

54

 

 

 

76

 

 

 

185

 

 

 

167

 

Other noninterest expense

 

 

503

 

 

 

504

 

 

 

1,710

 

 

 

1,643

 

Total noninterest expense

 

 

6,389

 

 

 

5,974

 

 

 

19,097

 

 

 

17,515

 

Income before income taxes

 

 

755

 

 

 

847

 

 

 

1,592

 

 

 

2,666

 

Income taxes (includes reclassification of $0, ($5,000), $0,

and ($5,000) from accumulated other comprehensive income)

 

 

112

 

 

 

259

 

 

 

248

 

 

 

829

 

Net income

 

$

643

 

 

$

588

 

 

$

1,344

 

 

$

1,837

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated net income

 

$

643

 

 

$

588

 

 

$

1,344

 

 

$

1,837

 

Less: net income attributable to noncontrolling interest

 

 

(144

)

 

 

(148

)

 

 

(428

)

 

 

(442

)

Net income attributable to Uwharrie Capital Corp and common shareholders

 

$

499

 

 

$

440

 

 

$

916

 

 

$

1,395

 

Net income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.07

 

 

$

0.06

 

 

$

0.13

 

 

$

0.20

 

Diluted

 

$

0.07

 

 

$

0.06

 

 

$

0.13

 

 

$

0.20

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

7,095,120

 

 

 

7,118,720

 

 

 

7,104,841

 

 

 

7,148,405

 

Diluted

 

 

7,095,120

 

 

 

7,119,585

 

 

 

7,104,841

 

 

 

7,149,021

 

 

 

See accompanying notes  

 

 

-4-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

643

 

 

$

588

 

 

$

1,344

 

 

$

1,837

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available for sale securities

 

 

(346

)

 

 

40

 

 

 

(1,587

)

 

 

884

 

Related tax effect

 

 

80

 

 

 

(14

)

 

 

362

 

 

 

(301

)

Reclassification of loss recognized in net income

 

 

 

 

 

14

 

 

 

 

 

 

14

 

Related tax effect

 

 

 

 

 

(5

)

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

 

(266

)

 

 

35

 

 

 

(1,225

)

 

 

592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

 

377

 

 

 

623

 

 

 

119

 

 

 

2,429

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive income (loss) attributable to noncontrolling

   interest

 

 

(144

)

 

 

(148

)

 

 

(428

)

 

 

(442

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to Uwharrie Capital

 

$

233

 

 

$

475

 

 

$

(309

)

 

$

1,987

 

 

See accompanying notes

 

 

-5-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

 

 

 

 

Number of

Common

Shares

Issued

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Undivided

Profits

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Non

Controlling

Interest

 

 

Total

 

 

 

(dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

 

7,112,853

 

 

$

8,891

 

 

$

12,824

 

 

$

13,282

 

 

$

(1,107

)

 

$

10,650

 

 

$

44,540

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

916

 

 

 

 

 

 

428

 

 

 

1,344

 

Repurchase of common stock

 

 

(106,627

)

 

 

(133

)

 

 

(459

)

 

 

 

 

 

 

 

 

 

 

 

(592

)

Stock options exercised

 

 

13,378

 

 

 

16

 

 

 

49

 

 

 

 

 

 

 

 

 

 

 

 

65

 

Other comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,225

)

 

 

 

 

 

(1,225

)

Record preferred stock dividend Series B

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(312

)

 

 

(312

)

Record preferred stock dividend Series C

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(111

)

 

 

(111

)

Balance, September 30, 2018

 

 

7,019,604

 

 

$

8,774

 

 

$

12,414

 

 

$

14,198

 

 

$

(2,332

)

 

$

10,655

 

 

$

43,709

 

 

See accompanying notes

 

 

-6-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

1,344

 

 

$

1,837

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

Provided (used) by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

792

 

 

 

636

 

Provision for (recovery of) loan losses

 

 

92

 

 

 

(309

)

Loss on sale of securities available for sale

 

 

 

 

 

14

 

Loss on sale of OREO

 

 

35

 

 

 

31

 

Net amortization of premium on investment securities AFS

 

 

660

 

 

 

665

 

Net amortization of premium on investment securities HTM

 

 

112

 

 

 

112

 

Net amortization of mortgage servicing rights

 

 

513

 

 

 

557

 

OREO write downs

 

 

 

 

 

92

 

Originations and purchases of mortgage loans for sale

 

 

(67,516

)

 

 

(70,968

)

Proceeds from sales of mortgage loans for sale

 

 

69,471

 

 

 

73,509

 

Cash surrender value of life insurance

 

 

(96

)

 

 

(92

)

Net change in:

 

 

 

 

 

 

 

 

Accrued interest receivable

 

 

28

 

 

 

113

 

Prepaid assets

 

 

78

 

 

 

(174

)

Miscellaneous other assets

 

 

(834

)

 

 

(495

)

Accrued interest payable

 

 

(136

)

 

 

 

Miscellaneous other liabilities

 

 

1,132

 

 

 

1,439

 

Net cash provided by operating activities

 

 

5,675

 

 

 

6,967

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Proceeds from sales of investment securities available for sale

 

 

 

 

 

8,918

 

Proceeds from maturities, calls & paydowns of investment securities held to maturity

 

 

475

 

 

 

385

 

Proceeds from maturities, calls & paydowns of investment securities available for sale

 

 

6,025

 

 

 

5,823

 

Purchase of investment securities available for sale

 

 

(5,000

)

 

 

(6,338

)

Purchase of life insurance investment

 

 

 

 

 

(1,525

)

Net change in restricted stock

 

 

(27

)

 

 

(16

)

Net increase in loans

 

 

(21,212

)

 

 

(8,401

)

Purchase of premises and equipment

 

 

(913

)

 

 

(765

)

Proceeds from sale of OREO

 

 

1,388

 

 

 

1,733

 

Net cash used by investing activities

 

 

(19,264

)

 

 

(186

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net increase in deposit accounts

 

 

60,914

 

 

 

41,534

 

Net decrease in federal funds purchased

 

 

 

 

 

 

 

 

and securities sold under agreements to repurchase and other short-term borrowings

 

 

(447

)

 

 

(380

)

Proceeds from long-term borrowings

 

 

400

 

 

 

 

Repayment of other borrowings

 

 

 

 

 

(506

)

Common stock repurchased

 

 

(592

)

 

 

(372

)

Exercise of stock options

 

 

65

 

 

 

 

Dividends paid on preferred stock

 

 

(428

)

 

 

(442

)

Net cash provided by financing activities

 

 

59,912

 

 

 

39,834

 

Increase in cash and cash equivalents

 

 

46,323

 

 

 

46,615

 

Cash and cash equivalents, beginning of period

 

 

70,403

 

 

 

45,968

 

Cash and cash equivalents, end of period

 

$

116,726

 

 

$

92,583

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

 

 

Interest paid

 

$

1,417

 

 

$

946

 

Income taxes paid

 

 

340

 

 

 

660

 

Supplemental Schedule of Non-Cash Activities

 

 

 

 

 

 

 

 

Net change in fair value securities available for sale, net of tax

 

$

(1,225

)

 

$

592

 

Loans transferred to foreclosed real estate

 

 

160

 

 

 

361

 

Mortgage servicing rights capitalized

 

 

240

 

 

 

451

 

 

 

See accompanying notes

 

-7-


 

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, Uwharrie Bank (the “Bank”), Uwharrie Investment Advisors, Inc., and Uwharrie Mortgage, Inc. The Bank consolidates its subsidiaries, the Strategic Alliance Corporation, BOS Agency, Inc. and Gateway Mortgage, Inc., each of which is wholly-owned by the Bank.

The information contained in the consolidated financial statements is unaudited. In the opinion of management, the consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) 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 2017 Annual Report on Form 10-K. This Quarterly Report should be read in conjunction with such Annual Report.

 

Accounting Changes, Reclassifications and Restatements

 

Certain items in prior financial statements have been reclassified to conform to the current presentation. ASU 2014-09. “Revenue from Contracts with Customers (Topic 606)” was adopted as of January 1, 2018. ASU 2014-09 requires us to report network costs associated with debit card and credit card transactions netted against the related fees from such transactions. Previously, such network costs were reported as a component of other non-interest expense. For the three months and nine months ended September 30, 2018, gross interchange and card transaction fees totaled $437,000 and $1.2 million, respectively, while related network costs totaled $247,000 and $765,000, respectively. On a net basis, we reported $190,000 as interchange and card transaction fees in the accompanying Consolidated Statement of Income for the three months ended September 30, 2018 and $476,000 for the nine months ended September 30, 2018. For the three and nine months ended September 30, 2017, we reported interchange and card transaction fees totaling $381,000 and $1.2 million, respectively, on a gross basis in the accompanying Consolidated Statement of Income while related network costs totaling $232,000 and $679,000, respectively, were reported as a component of other non-interest expense. Interchange and card transaction fees, net of costs, were re-classed in 2018 to report net $149,000 for the three months ended September 30, 2017 and $486,000 for the nine months ended September 30, 2017.

 

Under ASU 2014-09, for revenue not associated with financial instruments, guarantees and lease contracts, we apply the following steps when recognizing revenue from contracts with customers: (i) identify the contract, (ii) identify the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations and (v) recognize revenue when the performance obligation is satisfied. Our contracts with customers are generally short-term in nature, typically due within one year or less or cancellable by us or our customer upon a short notice period. Performance obligations for our customer contracts are generally satisfied at a single point in time, typically when the transaction is complete, or over time. For performance obligations satisfied over time, we primarily use the output method, directly measuring the value of the products/services transferred to the customer, to determine when performance obligations have been satisfied. We typically receive payment from customers and recognize revenue concurrent with the satisfaction of our performance obligations. In most cases, this occurs within a single financial reporting period. For payments received in advance of the satisfaction of performance obligations, revenue recognition is deferred until such time as the performance obligations have been satisfied. In cases where we have not received payment despite satisfaction of our performance obligations, we accrue an estimate of the amount due in the period our performance obligations have been satisfied. For contracts with variable components, only amounts for which collection is probable are accrued. We generally act in a principal capacity, on our own behalf, in most of our contracts with customers. In such transactions, we recognize revenue and the related costs to provide our services on a gross basis in our financial statements. In some cases, we act in an agent capacity, deriving revenue through assisting other entities in transactions with our customers. In such transactions, we recognized revenue and the related costs to provide our services on a net basis in our financial statements. These transactions primarily relate to insurance and brokerage commissions and fees derived from our customers' use of various interchange and ATM/debit card/credit card networks.

Use of Estimates

The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those

-8-


 

estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses.

Note 2 – Comprehensive Income

The Company reports as comprehensive income all changes in shareholders’ equity during the year from sources other than shareholders. Other comprehensive income refers to all components (revenues, expenses, gains, and losses) of comprehensive income that are excluded from net income. The Company’s only component of other comprehensive income is unrealized gains and losses, net of income tax, on investment securities available for sale.

The following table presents the changes in accumulated other comprehensive income for the three and nine months ended September 30, 2018 and 2017:

 

 

 

Unrealized holding gains on available-for-sale securities (net)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

(2,066

)

 

$

(761

)

 

$

(1,107

)

 

$

(1,318

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive income (loss) before reclassifications,

   net of ($80,000), $14,000, ($362,000), and $301,000

   tax effect, respectively

 

 

(266

)

 

 

26

 

 

 

(1,225

)

 

 

583

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other

   comprehensive income net of $0, $5,000, $0, and $5,000

   tax effect, respectively

 

 

 

 

 

9

 

 

 

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive income (loss)

 

 

(266

)

 

 

35

 

 

 

(1,225

)

 

 

592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

 

$

(2,332

)

 

$

(726

)

 

$

(2,332

)

 

$

(726

)

 

 

 

Note 3 – Noncontrolling Interest

In January 2013, the Company’s subsidiary banks issued a total of $7.9 million of Fixed Rate Noncumulative Perpetual Preferred Stock, Series B. The preferred stock qualified as Tier 1 capital at each bank and pays dividends at an annual rate of 5.30%. The preferred stock has no voting rights. This capital is presented as noncontrolling interest in the consolidated balance sheets. Dividends declared on this preferred stock are presented as earnings allocated to the noncontrolling interest in the consolidated statements of income. Effective September 1, 2013, the Fixed Rate Noncumulative Perpetual Preferred Stock, Series B was rolled into one issue under Uwharrie Bank in connection with the consolidation of the Company’s subsidiary banks and name change.

During 2013, the Company’s subsidiary bank, Uwharrie Bank, raised $2.8 million of Fixed Rate Noncumulative Perpetual Preferred Stock, Series C. The preferred stock qualifies as Tier 1 capital at the bank and pays dividends at an annual rate of 5.30%. The preferred stock has no voting rights.

 

 

Note 4 – Per Share Data

 

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. The Company had no stock options outstanding at September 30, 2018 but there were 13,378 shares of common stock underlying outstanding stock options at December 31, 2017. All of these options were dilutive at December 31, 2017 because the strike price was lower than the market price.

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 income divided by the weighted average number of common shares outstanding or assumed to be outstanding.

-9-


 

The computation of basic and diluted earnings per share is summarized below:

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

7,095,120

 

 

 

7,118,720

 

 

 

7,104,841

 

 

 

7,148,405

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive stock options

 

 

 

 

 

865

 

 

 

 

 

 

616

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares and dilutive

   potential common shares used in computing diluted net

   income per common share

 

 

7,095,120

 

 

 

7,119,585

 

 

 

7,104,841

 

 

 

7,149,021

 

 

 

Note 5 – Investment Securities

Carrying amounts and fair values of securities available for sale and held to maturity as of September 30, 2018 and December 31, 2017 are summarized below:

 

September 30, 2018

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

4,937

 

 

$

 

 

$

16

 

 

$

4,921

 

U.S. Government agencies

 

 

52,738

 

 

 

45

 

 

 

1,621

 

 

 

51,162

 

GSE - Mortgage-backed securities and CMO’s

 

 

19,032

 

 

 

 

 

 

825

 

 

 

18,207

 

State and political subdivisions

 

 

13,760

 

 

 

7

 

 

 

592

 

 

 

13,175

 

Corporate bonds

 

 

5,033

 

 

 

18

 

 

 

45

 

 

 

5,006

 

Total securities available for sale

 

$

95,500

 

 

$

70

 

 

$

3,099

 

 

$

92,471

 

 

September 30, 2018

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

857

 

 

$

 

 

$

18

 

 

$

839

 

State and political subdivisions

 

 

6,889

 

 

 

 

 

 

105

 

 

 

6,784

 

Corporate bonds

 

 

3,125

 

 

 

 

 

 

20

 

 

 

3,105

 

Total securities held to maturity

 

$

10,871

 

 

$

 

 

$

143

 

 

$

10,728

 

 

December 31, 2017

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

56,522

 

 

$

33

 

 

$

940

 

 

$

55,615

 

GSE - Mortgage-backed securities and CMO’s

 

 

21,253

 

 

 

12

 

 

 

374

 

 

 

20,891

 

State and political subdivisions

 

 

14,368

 

 

 

27

 

 

 

196

 

 

 

14,199

 

Corporate bonds

 

 

5,042

 

 

 

7

 

 

 

11

 

 

 

5,038

 

Total securities available for sale

 

$

97,185

 

 

$

79

 

 

$

1,521

 

 

$

95,743

 

 

December 31, 2017

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

1,348

 

 

$

 

 

$

9

 

 

$

1,339

 

State and political subdivisions

 

 

6,925

 

 

 

23

 

 

 

36

 

 

 

6,912

 

Corporate bonds

 

 

3,185

 

 

 

25

 

 

 

 

 

 

3,210

 

Total securities held to maturity

 

$

11,458

 

 

$

48

 

 

$

45

 

 

$

11,461

 

 

-10-


 

At September 30, 2018 and December 31, 2017, the Company owned Federal Reserve Bank stock (FRB) reported at cost of $509,000 and $508,000, respectively, and Federal Home Loan Bank stock (FHLB) of $585,000 and $559,000, respectively. The investments in FRB stock and FHLB stock are required investments related to the Company’s membership in, and borrowings with, these banks and classified as restricted stock on the consolidated balance sheet. These investments are carried at cost since there is no ready market and redemption has historically been made at par value. The Company estimated that the fair value approximated cost and that these investments were not impaired at September 30, 2018.

Results from sales of securities available for sale for the three and nine-month periods ended September 30, 2018 and September 30, 2017 are as follows:

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

Gross proceeds from sales

 

$

 

 

$

8,918

 

 

$

 

 

$

8,918

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized gains from sales

 

$

 

 

$

 

 

$

 

 

$

 

Realized losses from sales

 

 

 

 

 

14

 

 

 

 

 

 

14

 

Net realized gains

 

$

 

 

$

(14

)

 

$

 

 

$

(14

)

 

At September 30, 2018 and December 31, 2017, securities available for sale with a carrying amount of $72.0 million and $75.5 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 September 30, 2018 and December 31, 2017. These unrealized losses on investment securities are a result of temporary fluctuations in market prices due to a rise in interest rates, which will adjust if rates decline, and in a volatile market and are in no way a reflection of the credit quality of the investments. Management does not believe these fluctuations are a reflection of the quality of the investments. At September 30, 2018, the unrealized losses on available for sale securities less than twelve months related to one U.S. Treasury bond, six government agency bonds and five government sponsored enterprise (GSE) mortgage backed securities. The Company had fourteen government agency bonds, fourteen GSE mortgage backed securities, eight state and political bonds, and one corporate bond at September 30, 2018 that had been in a loss position for twelve months or more. At September 30, 2018, the unrealized losses on held to maturity securities related to one government agency bond, eight state and political bonds, and two corporate bonds. The held to maturity securities consisted of two state and political bonds that had been in an unrealized loss position for more than twelve months at September 30, 2018.  At December 31, 2017, the unrealized losses on available for sale securities less than twelve months related to six government agency bonds, four GSE mortgage backed securities, one corporate bond, and one state and political subdivision bond. At December 31, 2017, the Company had fifteen government agency bonds, twelve GSE mortgage backed securities, and seven state and political subdivision bonds that had been in a loss position for more than twelve months. At December 31, 2017, the unrealized losses on held to maturity securities related to one government agency security and five state and political subdivision bonds.

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

September 30, 2018

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Securities available for sale temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

4,920

 

 

$

16

 

 

$

 

 

$

 

 

$

4,920

 

 

$

16

 

U.S. Government agencies

 

 

4,987

 

 

 

60

 

 

 

44,001

 

 

 

1,561

 

 

 

48,988

 

 

 

1,621

 

GSE-Mortgage-backed securities and CMO’s

 

 

3,370

 

 

 

59

 

 

 

14,837

 

 

 

766

 

 

 

18,207

 

 

 

825

 

State and political subdivisions

 

 

 

 

 

 

 

 

10,982

 

 

 

592

 

 

 

10,982

 

 

 

592

 

Corporate bonds

 

 

 

 

 

 

 

 

1,969

 

 

 

45

 

 

 

1,969

 

 

 

45

 

Total securities available for sale

 

$

13,277

 

 

$

135

 

 

$

71,789

 

 

$

2,964

 

 

$

85,066

 

 

$

3,099

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

September 30, 2018

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Held to maturity temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

838

 

 

$

18

 

 

$

 

 

$

 

 

$

838

 

 

$

18

 

State and political subdivisions

 

 

4,796

 

 

 

45

 

 

 

1,989

 

 

 

60

 

 

 

6,785

 

 

 

105

 

Corporate bonds

 

 

3,105

 

 

 

20

 

 

 

 

 

 

 

 

 

3,105

 

 

 

20

 

Total securities held to maturity

 

$

8,739

 

 

$

83

 

 

$

1,989

 

 

$

60

 

 

$

10,728

 

 

$

143

 

-11-


 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2017

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Securities available for sale temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

9,028

 

 

$

112

 

 

$

43,352

 

 

$

828

 

 

$

52,380

 

 

$

940

 

GSE-Mortgage-backed securities and CMO’s

 

 

5,074

 

 

 

37

 

 

 

14,057

 

 

 

337

 

 

 

19,131

 

 

 

374

 

State and political subdivisions

 

 

1,182

 

 

 

1

 

 

 

10,317

 

 

 

195

 

 

 

11,499

 

 

 

196

 

Corporate bonds

 

 

2,008

 

 

 

11

 

 

 

 

 

 

 

 

 

2,008

 

 

 

11

 

Total securities available for sale

 

$

17,292

 

 

$

161

 

 

$

67,726

 

 

$

1,360

 

 

$

85,018

 

 

$

1,521

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2017

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Held to maturity temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

1,338

 

 

$

9

 

 

$

 

 

$

 

 

$

1,338

 

 

$

9

 

State and political subdivisions

 

 

4,269

 

 

 

36

 

 

 

 

 

 

 

 

 

4,269

 

 

 

36

 

Total securities held to maturity

 

$

5,607

 

 

$

45

 

 

$

 

 

$

 

 

$

5,607

 

 

$

45

 

 

Declines in the fair value of the investment portfolio are believed by management to be temporary in nature. When evaluating an investment for other-than-temporary impairment management considers, among other things, the length of time and the extent to which the fair value has been in a loss position, the financial condition of the issuer and the intent and the ability of the Company to hold the investment until the loss position is recovered.

Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of quality but that the losses are temporary in nature. As of September 30, 2018, the Company does not intend to sell and is not likely to be required to sell the available for sale securities that were in a loss position prior to full recovery.

-12-


 

The aggregate amortized cost and fair value of the available for sale securities portfolio at September 30, 2018 by remaining contractual maturity are as follows:

 

 

 

September 30, 2018

 

 

 

Amortized

Cost

 

 

Estimated

Fair Value

 

 

Book

Yield

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

4,937

 

 

 

4,921

 

 

 

2.66

%

 

 

 

4,937

 

 

 

4,921

 

 

 

2.66

%

U.S. Government agencies

 

 

 

 

 

 

 

 

 

 

 

 

Due within twelve months

 

 

15,019

 

 

 

14,882

 

 

 

1.15

%

Due after one but within five years

 

 

27,613

 

 

 

26,504

 

 

 

1.65

%

Due after five but within ten years

 

 

7,041

 

 

 

6,680

 

 

 

1.30

%

Due after ten years

 

 

3,065

 

 

 

3,096

 

 

 

0.82

%

 

 

 

52,738

 

 

 

51,162

 

 

 

1.41

%

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

1,710

 

 

 

1,687

 

 

 

2.39

%

Due after five but within ten years

 

 

8,190

 

 

 

7,830

 

 

 

2.01

%

Due after ten years

 

 

9,132

 

 

 

8,690

 

 

 

1.90

%

 

 

 

19,032

 

 

 

18,207

 

 

 

1.99

%

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

Due within twelve months

 

 

1,356

 

 

 

1,362

 

 

 

3.67

%

Due after one but within five years

 

 

1,081

 

 

 

1,055

 

 

 

3.23

%

Due after five but within ten years

 

 

1,695

 

 

 

1,628

 

 

 

3.12

%

Due after ten years

 

 

9,628

 

 

 

9,130

 

 

 

3.10

%

 

 

 

13,760

 

 

 

13,175

 

 

 

3.17

%

Corporate Bonds

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

5,033

 

 

 

5,006

 

 

 

2.88

%

 

 

 

5,033

 

 

 

5,006

 

 

 

2.88

%

Total Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

Due within twelve months

 

 

16,375

 

 

 

16,244

 

 

 

1.36

%

Due after one but within five years

 

 

40,374

 

 

 

39,173

 

 

 

2.00

%

Due after five but within ten years

 

 

16,926

 

 

 

16,138

 

 

 

1.83

%

Due after ten years

 

 

21,825

 

 

 

20,916

 

 

 

2.28

%

 

 

$

95,500

 

 

$

92,471

 

 

 

1.92

%

 

 

 

September 30, 2018

 

 

 

Amortized

Cost

 

 

Estimated

Fair Value

 

 

Book

Yield

 

 

 

(dollars in thousands)

 

Held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

 

 

 

 

 

 

 

 

 

 

Due after five but within ten years

 

$

857

 

 

$

839

 

 

 

2.42

%

 

 

 

857

 

 

 

839

 

 

 

2.42

%

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

5,042

 

 

 

4,952

 

 

 

2.16

%

Due after five but within ten years

 

 

1,847

 

 

 

1,832

 

 

 

2.50

%

 

 

 

6,889

 

 

 

6,784

 

 

 

2.25

%

Corporate Bonds

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

3,125

 

 

 

3,105

 

 

 

2.76

%

 

 

 

3,125

 

 

 

3,105

 

 

 

2.76

%

Total Securities held for maturity

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

8,167

 

 

 

8,057

 

 

 

2.39

%

Due after five but within ten years

 

 

2,704

 

 

 

2,671

 

 

 

2.48

%

 

 

$

10,871

 

 

$

10,728

 

 

 

2.41

%

-13-


 

 

 

Note 6 – Loans Held for Investment

The composition of net loans held for investment by class as of September 30, 2018 and December 31, 2017 are as follows:

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(dollars in thousands)

 

Commercial

 

 

 

 

 

 

 

 

Commercial

 

$

56,223

 

 

$

54,912

 

Real estate - commercial

 

 

136,793

 

 

 

114,712

 

Other real estate construction loans

 

 

30,886

 

 

 

40,186

 

Noncommercial

 

 

 

 

 

 

 

 

Real estate 1-4 family construction

 

 

7,857

 

 

 

5,024

 

Real estate - residential

 

 

80,925

 

 

 

78,023

 

Home equity

 

 

51,221

 

 

 

50,506

 

Consumer loans

 

 

11,803

 

 

 

10,774

 

Other loans

 

 

2,278

 

 

 

2,838

 

 

 

 

377,986

 

 

 

356,975

 

Less:

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(2,365

)

 

 

(2,458

)

Deferred loan (fees) costs, net

 

 

(248

)

 

 

(104

)

 

 

 

 

 

 

 

 

 

Loans held for investment, net

 

$

375,373

 

 

$

354,413

 

 

 

Note 7 – Allowance for Loan Losses

The following table shows the change in the allowance for loss losses by loan segment for the three and nine months ended September 30, 2018 and 2017, respectively:

 

Commercial

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,460

 

 

$

1,323

 

 

$

1,401

 

 

$

1,404

 

Provision (recovery) charged to operations

 

 

(17

)

 

 

(34

)

 

 

49

 

 

 

(169

)

Charge-offs

 

 

(156

)

 

 

(6

)

 

 

(187

)

 

 

(22

)

Recoveries

 

 

10

 

 

 

18

 

 

 

34

 

 

 

88

 

Net (charge-offs) / Recoveries

 

 

(146

)

 

 

12

 

 

 

(153

)

 

 

66

 

Balance at end of period

 

$

1,297

 

 

$

1,301

 

 

$

1,297

 

 

$

1,301

 

 

Non-Commercial

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,123

 

 

$

1,228

 

 

$

1,057

 

 

$

1,303

 

Provision (recovery) charged to operations

 

 

(7

)

 

 

(102

)

 

 

43

 

 

 

(140

)

Charge-offs

 

 

(58

)

 

 

(7

)

 

 

(115

)

 

 

(91

)

Recoveries

 

 

10

 

 

 

28

 

 

 

83

 

 

 

75

 

Net (charge-offs) / Recoveries

 

 

(48

)

 

 

21

 

 

 

(32

)

 

 

(16

)

Balance at end of period

 

$

1,068

 

 

$

1,147

 

 

$

1,068

 

 

$

1,147

 

-14-


 

 

Total

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

2,583

 

 

$

2,551

 

 

$

2,458

 

 

$

2,707

 

Provision (recovery) charged to operations

 

 

(24

)

 

 

(136

)

 

 

92

 

 

 

(309

)

Charge-offs

 

 

(214

)

 

 

(13

)

 

 

(302

)

 

 

(113

)

Recoveries

 

 

20

 

 

 

46

 

 

 

117

 

 

 

163

 

Net (charge-offs) / Recoveries

 

 

(194

)

 

 

33

 

 

 

(185

)

 

 

50

 

Balance at end of period

 

$

2,365

 

 

$

2,448

 

 

$

2,365

 

 

$

2,448

 

 

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at September 30, 2018 and December 31, 2017:

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated

 

 

Collectively Evaluated

 

 

Total

 

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

40

 

 

$

1,484

 

 

$

1,257

 

 

$

222,418

 

 

$

1,297

 

 

$

223,902

 

Non-Commercial

 

 

107

 

 

 

3,311

 

 

 

961

 

 

 

150,525

 

 

 

1,068

 

 

 

153,836

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

147

 

 

$

4,795

 

 

$

2,218

 

 

$

372,943

 

 

$

2,365

 

 

$

377,738

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated

 

 

Collectively Evaluated

 

 

Total

 

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

22

 

 

$

1,788

 

 

$

1,379

 

 

$

208,022

 

 

$

1,401

 

 

$

209,810

 

Non-Commercial

 

 

172

 

 

 

3,781

 

 

 

885

 

 

 

143,280

 

 

 

1,057

 

 

 

147,061

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

194

 

 

$

5,569

 

 

$

2,264

 

 

$

351,302

 

 

$

2,458

 

 

$

356,871

 

 

Past due loan information is used by management when assessing the adequacy of the allowance for loan losses. The following table summarizes the past due information of the loan portfolio by class as of September 30, 2018 and December 31, 2017:

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

30-89 Days

Past Due

 

 

Loans

90 Days

or More

Past due

and Non -

Accrual

 

 

Total Past

Due Loans

 

 

Current

Loans

 

 

Total

Loans

 

 

Accruing

Loans 90 or

More Days

Past Due

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

 

$

 

 

$

 

 

$

56,223

 

 

$

56,223

 

 

$

 

Real estate - commercial

 

 

397

 

 

 

380

 

 

 

777

 

 

 

136,016

 

 

 

136,793

 

 

 

 

Other real estate construction

 

 

 

 

 

48

 

 

 

48

 

 

 

30,838

 

 

 

30,886

 

 

 

 

Real estate 1-4 family construction

 

 

 

 

 

 

 

 

 

 

 

7,857

 

 

 

7,857

 

 

 

 

Real estate - residential

 

 

699

 

 

 

489

 

 

 

1,188

 

 

 

79,489

 

 

 

80,677

 

 

 

 

Home equity

 

 

127

 

 

 

118

 

 

 

245

 

 

 

50,976

 

 

 

51,221

 

 

 

 

Consumer loans

 

 

49

 

 

 

 

 

 

49

 

 

 

11,754

 

 

 

11,803

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

2,278

 

 

 

2,278

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,272

 

 

$

1,035

 

 

$

2,307

 

 

$

375,431

 

 

$

377,738

 

 

$

 

-15-


 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

30-89 Days

Past Due

 

 

Loans

90 Days

or More

Past due

and Non -

Accrual

 

 

Total Past

Due Loans

 

 

Current

Loans

 

 

Total

Loans

 

 

Accruing

Loans 90 or

More Days

Past Due

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

 

$

34

 

 

$

34

 

 

$

54,878

 

 

$

54,912

 

 

$

 

Real estate - commercial

 

 

 

 

 

377

 

 

$

377

 

 

 

114,335

 

 

 

114,712

 

 

 

 

Other real estate construction

 

 

 

 

 

51

 

 

$

51

 

 

 

40,135

 

 

 

40,186

 

 

 

 

Real estate construction

 

 

 

 

 

 

 

 

 

 

 

5,024

 

 

 

5,024

 

 

 

 

Real estate - residential

 

 

579

 

 

 

540

 

 

 

1,119

 

 

 

76,800

 

 

 

77,919

 

 

 

 

Home equity

 

 

108

 

 

 

23

 

 

 

131

 

 

 

50,375

 

 

 

50,506

 

 

 

 

Consumer loan

 

 

83

 

 

 

 

 

 

83

 

 

 

10,691

 

 

 

10,774

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

2,838

 

 

 

2,838

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

770

 

 

$

1,025

 

 

$

1,795

 

 

$

355,076

 

 

$

356,871

 

 

$

 

 

Once a loan becomes 90 days past due, the loan is automatically transferred to a nonaccrual status. The exception to this policy is credit card loans that remain in accruing status 90 days or more until they are paid current or charged off.

The Company had $409,000 in foreclosed residential real estate and $145,000 in residential real estate in the process of foreclosure at September 30, 2018.

The composition of nonaccrual loans by class as of September 30, 2018 and December 31, 2017 is as follows:

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

 

$

34

 

Real estate - commercial

 

 

380

 

 

 

377

 

Other real estate construction

 

 

48

 

 

 

51

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

Real estate – residential

 

 

489

 

 

 

540

 

Home equity

 

 

118

 

 

 

23

 

Consumer loans

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

$

1,035

 

 

$

1,025

 

 

Management uses a risk-grading program to facilitate the evaluation of probable inherent loan losses and to measure the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by the loan officers and reviewed and monitored by the lenders and credit administration. The program has eight risk grades summarized in five categories as follows:

Pass: Loans that are pass grade credits include loans that are fundamentally sound and risk factors are reasonable and acceptable. They generally conform to policy with only minor exceptions and any major exceptions are clearly mitigated by other economic factors.

Watch: Loans that are watch credits include loans on management’s watch list where a risk concern may be anticipated in the near future.

Substandard: Loans that are considered substandard are loans that are inadequately protected by current sound net worth, paying capacity of the obligor or the value of the collateral pledged. All nonaccrual loans are graded as substandard.

Doubtful: Loans that are considered to be doubtful have all weaknesses inherent in loans classified substandard, plus the added characteristic that the weaknesses make the collection or liquidation in full on the basis of current existing facts, conditions and values highly questionable and improbable.

-16-


 

Loss: Loans that are considered to be a loss are considered to be uncollectible and of such little value that their continuance as bankable assets is not warranted.

The tables below summarize risk grades of the loan portfolio by class at September 30, 2018 and December 31, 2017:

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

Watch

 

 

Sub-

standard

 

 

Doubtful

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

54,881

 

 

$

1,331

 

 

$

11

 

 

$

 

 

$

56,223

 

Real estate - commercial

 

 

132,571

 

 

 

2,176

 

 

 

2,046

 

 

 

 

 

 

136,793

 

Other real estate construction

 

 

28,433

 

 

 

2,065

 

 

 

388

 

 

 

 

 

 

30,886

 

Real estate 1 - 4 family construction

 

 

7,857

 

 

 

 

 

 

 

 

 

 

 

 

7,857

 

Real estate - residential

 

 

73,807

 

 

 

5,946

 

 

 

924

 

 

 

 

 

 

80,677

 

Home equity

 

 

50,694

 

 

 

408

 

 

 

119

 

 

 

 

 

 

51,221

 

Consumer loans

 

 

11,716

 

 

 

86

 

 

 

1

 

 

 

 

 

 

11,803

 

Other loans

 

 

2,278

 

 

 

 

 

 

 

 

 

 

 

 

2,278

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

362,237

 

 

$

12,012

 

 

$

3,489

 

 

$

 

 

$

377,738

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

Watch

 

 

Sub-

standard

 

 

Doubtful

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

53,649

 

 

$

1,215

 

 

$

48

 

 

$

 

 

$

54,912

 

Real estate - commercial

 

 

109,224

 

 

 

3,321

 

 

 

2,167

 

 

 

 

 

 

114,712

 

Other real estate construction

 

 

38,082

 

 

 

1,713

 

 

 

391

 

 

 

 

 

 

40,186

 

Real estate 1 - 4 family construction

 

 

5,024

 

 

 

 

 

 

 

 

 

 

 

 

5,024

 

Real estate - residential

 

 

69,645

 

 

 

7,119

 

 

 

1,155

 

 

 

 

 

 

77,919

 

Home equity

 

 

49,743

 

 

 

740

 

 

 

23

 

 

 

 

 

 

50,506

 

Consumer loans

 

 

10,709

 

 

 

64

 

 

 

1

 

 

 

 

 

 

10,774

 

Other loans

 

 

2,838

 

 

 

 

 

 

 

 

 

 

 

 

2,838

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

338,914

 

 

$

14,172

 

 

$

3,785

 

 

$

 

 

$

356,871

 

 

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. At both September 30, 2018 and December 31, 2017 there were no loans 90 days past due and still accruing. The following tables show the breakdown between performing and nonperforming loans by class at September 30, 2018 and December 31, 2017:

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

Non-

Performing

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

56,223

 

 

$

 

 

$

56,223

 

Real estate - commercial

 

 

136,413

 

 

 

380

 

 

 

136,793

 

Other real estate construction

 

 

30,838

 

 

 

48

 

 

 

30,886

 

Real estate 1 – 4 family construction

 

 

7,857

 

 

 

 

 

 

7,857

 

Real estate – residential

 

 

80,188

 

 

 

489

 

 

 

80,677

 

Home equity

 

 

51,103

 

 

 

118

 

 

 

51,221

 

Consumer loans

 

 

11,803

 

 

 

 

 

 

11,803

 

Other loans

 

 

2,278

 

 

 

 

 

 

2,278

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

376,703

 

 

$

1,035

 

 

$

377,738

 

-17-


 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

Non-

Performing

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

54,878

 

 

$

34

 

 

$

54,912

 

Real estate - commercial

 

 

114,335

 

 

 

377

 

 

 

114,712

 

Other real estate construction

 

 

40,135

 

 

 

51

 

 

 

40,186

 

Real estate 1 – 4 family construction

 

 

5,024

 

 

 

 

 

 

5,024

 

Real estate – residential

 

 

77,379

 

 

 

540

 

 

 

77,919

 

Home equity

 

 

50,483

 

 

 

23

 

 

 

50,506

 

Consumer loans

 

 

10,774

 

 

 

 

 

 

10,774

 

Other loans

 

 

2,838

 

 

 

 

 

 

2,838

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

355,846

 

 

$

1,025

 

 

$

356,871

 

 

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired, a specific calculation is performed and a specific reserve is allocated, if necessary. The tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class at September 30, 2018 and December 31, 2017.

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

With No

Allowance

 

 

Recorded

Investment

With

Allowance

 

 

Related

Allowance

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

7

 

 

$

 

 

$

7

 

 

$

 

Real estate - commercial

 

 

1,381

 

 

 

199

 

 

 

1,182

 

 

 

36

 

Other real estate construction

 

 

634

 

 

 

101

 

 

 

48

 

 

 

4

 

Real estate 1 - 4 family construction

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

3,148

 

 

 

812

 

 

 

2,336

 

 

 

105

 

Home equity

 

 

130

 

 

 

97

 

 

 

33

 

 

 

1

 

Consumer loans

 

 

33

 

 

 

 

 

 

33

 

 

 

1

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,333

 

 

$

1,209

 

 

$

3,639

 

 

$

147

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

With No

Allowance

 

 

Recorded

Investment

With

Allowance

 

 

Related

Allowance

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

44

 

 

$

10

 

 

$

34

 

 

$

10

 

Real estate - commercial

 

 

1,593

 

 

 

1,305

 

 

 

288

 

 

 

9

 

Other real estate construction

 

 

689

 

 

 

101

 

 

 

50

 

 

 

3

 

Real estate 1 - 4 family construction

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

3,701

 

 

 

1,319

 

 

 

2,382

 

 

 

171

 

Home equity

 

 

35

 

 

 

22

 

 

 

13

 

 

 

1

 

Consumer loans

 

 

45

 

 

 

45

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

6,107

 

 

$

2,802

 

 

$

2,767

 

 

$

194

 

-18-


 

 

 

 

Three Months Ended September 30, 2018

 

 

Three Months Ended September 30, 2017

 

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

8

 

 

$

 

 

$

11

 

 

$

1

 

Real estate - commercial

 

 

1,455

 

 

 

11

 

 

 

1,661

 

 

 

17

 

Other real estate construction

 

 

97

 

 

 

1

 

 

 

154

 

 

 

1

 

Real estate 1- 4 family construction

 

 

 

 

 

 

 

 

2

 

 

 

 

Real estate - residential

 

 

3,277

 

 

 

27

 

 

 

3,560

 

 

 

39

 

Home equity

 

 

113

 

 

 

2

 

 

 

112

 

 

 

 

Consumer loans

 

 

35

 

 

 

1

 

 

 

51

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,985

 

 

$

42

 

 

$

5,551

 

 

$

58

 

 

 

 

Nine Months Ended September 30, 2018

 

 

Nine Months Ended September 30, 2017

 

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

7

 

 

$

 

 

$

20

 

 

$

1

 

Real estate - commercial

 

 

1,381

 

 

 

41

 

 

 

1,664

 

 

 

46

 

Other real estate construction

 

 

96

 

 

 

2

 

 

 

223

 

 

 

4

 

Real estate 1- 4 family construction

 

 

 

 

 

 

 

 

4

 

 

 

 

Real estate - residential

 

 

3,148

 

 

 

110

 

 

 

3,777

 

 

 

124

 

Home equity

 

 

130

 

 

 

4

 

 

 

74

 

 

 

1

 

Consumer loans

 

 

33

 

 

 

2

 

 

 

55

 

 

 

3

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,795

 

 

$

159

 

 

$

5,817

 

 

$

179

 

 

 

Note 8 – Troubled Debt Restructures

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification involves providing a concession to the existing loan contract. The Company offers various types of concessions when modifying loans to troubled borrowers, however, forgiveness of principal is rarely granted. Concessions offered are term extensions, capitalizing accrued interest, reducing interest rates to below current market rates or a combination of any of these. Combinations from time to time may include allowing a customer to be placed on interest-only payments. The presentations below in the “other” category are TDRs with a combination of concessions. At the time of a TDR, additional collateral or a guarantor may be requested.

Loans modified as TDRs are typically already on nonaccrual status and in some cases, partial charge-offs may have already been taken against the outstanding loan balance. The Company classifies TDR loans as impaired loans and evaluates the need for an allowance for loan loss on a loan-by-loan basis. An allowance is based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the estimated fair value of the underlying collateral less any selling costs, if the loan is deemed to be collateral dependent.

At September 30, 2018, the Company had $3.8 million in TDRs outstanding, of which one was on a non-accruing basis.

-19-


 

For the three and nine months ended September 30, 2018 and 2017, the following table presents a breakdown of the types of concessions made by loan class:

  

 

 

For the three months ended September 30, 2018

 

 

 

Number

of Contracts

 

 

Pre-Modification

Outstanding Recorded

Investment

 

 

Post-Modification

Outstanding Recorded

Investment

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

$

 

 

$

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

Other real estate construction

 

 

 

 

 

 

 

 

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

 

 

 

Real estate – residential

 

 

3

 

 

 

218

 

 

 

203

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

3

 

 

$

218

 

 

$

203

 

 

 

 

 

For the three months ended September 30, 2017

 

 

 

Number

of Contracts

 

 

Pre-Modification

Outstanding Recorded

Investment

 

 

Post-Modification

Outstanding Recorded

Investment

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

$

 

 

$

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

Other real estate construction

 

 

 

 

 

 

 

 

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

 

 

 

Real estate – residential

 

 

1

 

 

 

186

 

 

 

186

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

1

 

 

 

9

 

 

 

7

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

2

 

 

$

195

 

 

$

193

 

 

 

 

 

For the nine months ended September 30, 2018

 

 

 

Number

of Contracts

 

 

Pre-Modification

Outstanding Recorded

Investment

 

 

Post-Modification

Outstanding Recorded

Investment

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

$

 

 

$

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

Other real estate construction

 

 

 

 

 

 

 

 

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

 

 

 

Real estate – residential

 

 

6

 

 

 

434

 

 

 

390

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

6

 

 

$

434

 

 

$

390

 

 

-20-


 

 

 

For the nine months ended September 30, 2017

 

 

 

Number

of Contracts

 

 

Pre-Modification

Outstanding Recorded

Investment

 

 

Post-Modification

Outstanding Recorded

Investment

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1

 

 

$

12

 

 

$

11

 

Real estate - commercial

 

 

1

 

 

 

166

 

 

 

163

 

Other real estate construction

 

 

 

 

 

 

 

 

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

 

 

 

Real estate – residential

 

 

5

 

 

 

661

 

 

 

630

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

1

 

 

 

9

 

 

 

7

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

8

 

 

$

848

 

 

$

811

 

 

During the twelve months ended September 30, 2018, there was one TDR for which there was a payment default. During the twelve months ended September 30, 2017, there were three TDRs for which there was a payment default.

A default on a TDR is defined as being past due 90 days or being out of compliance with the modification agreement. As previously mentioned, the Company considers TDRs to be impaired loans and has $139,000 in the allowance for loan losses as of September 30, 2018, as a direct result of these TDRs. At September 30, 2017, there was $123,000 in the allowance for loan losses related to TDRs.

The following table presents the successes and failures of the types of loan modifications within the previous twelve months as of September 30, 2018 and 2017:

 

 

 

Paid In Full

 

 

Paying as restructured

 

 

Converted to nonaccrual

 

 

Foreclosure/ Default

 

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

 

(dollars in thousands)

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Below market

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

Extended payment Terms

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forgiveness of Principal/Other

 

 

8

 

 

 

742

 

 

 

8

 

 

 

447

 

 

 

 

 

 

 

 

 

1

 

 

 

156

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

8

 

 

$

742

 

 

 

8

 

 

$

447

 

 

 

 

 

$

 

 

 

1

 

 

$

156

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Below market

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

Extended payment Terms

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forgiveness of Principal/Other

 

 

5

 

 

 

562

 

 

 

8

 

 

 

811

 

 

 

 

 

 

 

 

 

1

 

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

5

 

 

$

562

 

 

 

8

 

 

$

811

 

 

 

 

 

$

 

 

 

1

 

 

$

15

 

 

The Company has not committed to fund any additional disbursements for TDRs.

 

 

Note 9 - Commitments and Contingencies

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

The bank’s risk of loss with unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The bank uses the same credit policies in making commitments under such instruments as it does for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the

-21-


 

borrower. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are unsecured.

At September 30, 2018, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

 

 

(dollars in thousands)

 

Commitments to extend credit

 

$

114,574

 

Credit card commitments

 

 

10,334

 

Standby letters of credit

 

 

935

 

Total commitments

 

$

125,843

 

 

Additionally, Uwharrie Bank has a five-year operating lease for commercial property. The term expires on September 30, 2021. The annual cost of the lease is $156,000 and includes a 2.625% annual escalator.

 

In the first quarter of 2018, Uwharrie Bank entered into a second lease for a branch. The lease has a ten-year term expiring in 2028 with two five-year renewal options. The annual cost of the lease is $189,000 and includes a 2.0% annual escalator.

 

 

Note 10 – Fair Value Disclosures

Accounting Standards Codification (ASC) 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. ASC 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.

ASC 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 other real estate owned, impaired loans, loans held for sale, which are carried at the lower of cost or 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; and goodwill, which is periodically tested for impairment. Deposits, short-term borrowings and long-term obligations are not reported at fair value.

Prices for US Treasury 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 government agency securities, 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 changes in securities between Level 1 and Level 2 were related to the purchase and sale of several securities and not the transfer of securities.

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 by using one of several methods including collateral value, fair value of similar debt or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected repayments or fair value of collateral exceed the recorded investments in such loans. The Company typically bases the fair value of the collateral on appraised values which the Company considers Level 3 valuations.

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at the estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the

-22-


 

property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. The Company typically bases the fair value of the collateral on appraised values which the Company considers Level 3 valuations.

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate, based on secondary market prices. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. These loans are recorded in Level 2

The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017:

 

 

 

September 30, 2018

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury

 

$

4,921

 

 

$

4,921

 

 

$

 

 

$

 

U.S. Government agencies

 

 

51,162

 

 

 

 

 

 

51,162

 

 

 

 

GSE - Mortgage-backed securities and CMO’s

 

 

18,207

 

 

 

 

 

 

18,207

 

 

 

 

State and political subdivisions

 

 

13,175

 

 

 

 

 

 

13,175

 

 

 

 

Corporate bonds

 

 

5,006

 

 

 

 

 

 

5,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

92,471

 

 

$

4,921

 

 

$

87,550

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities at fair value

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

December 31, 2017

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

55,615

 

 

$

 

 

$

55,615

 

 

$

 

GSE - Mortgage-backed securities and CMO’s

 

 

20,891

 

 

 

 

 

 

20,891

 

 

 

 

State and political subdivisions

 

 

14,199

 

 

 

 

 

 

14,199

 

 

 

 

Corporate bonds

 

 

5,038

 

 

 

 

 

 

5,038

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

95,743

 

 

$

 

 

$

95,743

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities at fair value

 

$

 

 

$

 

 

$

 

 

$

 

 

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. GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value less cost to sell at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of September 30, 2018 and December 31, 2017:

 

 

 

September 30, 2018

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

3,540

 

 

$

 

 

$

 

 

$

3,540

 

Other real estate owned

 

 

990

 

 

 

 

 

 

 

 

 

990

 

Total assets at fair value

 

$

4,530

 

 

$

 

 

$

 

 

$

4,530

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities at fair value

 

$

 

 

$

 

 

$

 

 

$

 

-23-


 

 

 

 

December 31, 2017

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

2,624

 

 

$

 

 

$

 

 

$

2,624

 

Other real estate owned

 

 

1,785

 

 

 

 

 

 

 

 

 

1,785

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

4,409

 

 

$

 

 

$

 

 

$

4,409

 

Total liabilities at fair value

 

$

 

 

$

 

 

$

 

 

$

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

September 30, 2018

 

 

 

 

 

 

 

 

Valuation Technique

 

Unobservable Input

 

General

Range

Nonrecurring measurements:

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

Discounted appraisals

 

Collateral discounts and

   Estimated costs to sell

 

0 – 25%

 

 

Discounted cash flows

 

Discount Rate

 

4%-8.75%

 

 

 

 

 

 

 

OREO

 

Discounted appraisals

 

Collateral discounts and

   Estimated costs to sell

 

0 – 10%

 

December 31, 2017

 

 

 

 

 

 

 

 

Valuation Technique

 

Unobservable Input

 

General

Range

Nonrecurring measurements:

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

Discounted appraisals

 

Collateral discounts and

   Estimated costs to sell

 

0 – 25%

 

 

Discounted cash flows

 

Discount rates

 

4%-8.75%

 

 

 

 

 

 

 

OREO

 

Discounted appraisals

 

Collateral discounts and

   Estimated costs to sell

 

0 – 10%

 

At September 30, 2018, impaired loans were being evaluated with discounted expected cash flows and discounted appraisals were being used on collateral dependent loans.

 

 

Note 11 Fair Values of Financial Instruments and Interest Rate Risk

ASC 825, “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 at September 30, 2018 and December 31, 2017 are 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 at which a liability could be settled. 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 valuations at September 30, 2018 are observed under the exit price notion as a result of adoption of ASU 2016-01. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of September 30, 2018 and December 31, 2017:

-24-


 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

Value

 

 

Estimated

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(dollars in thousands)

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

116,726

 

 

$

116,726

 

 

$

114,518

 

 

$

2,208

 

 

$

 

Securities available for sale

 

 

92,471

 

 

 

92,471

 

 

 

4,921

 

 

 

87,550

 

 

 

 

Securities held to maturity

 

 

10,871

 

 

 

10,728

 

 

 

 

 

 

10,728

 

 

 

 

Loans held for investment, net

 

 

377,738

 

 

 

371,808

 

 

 

 

 

 

 

 

 

371,808

 

Loans held for sale

 

 

1,946

 

 

 

1,946

 

 

 

 

 

 

1,946

 

 

 

 

Restricted stock

 

 

1,094

 

 

 

1,094

 

 

 

1,094

 

 

 

 

 

 

 

Mortgage servicing rights

 

 

1,912

 

 

 

3,532

 

 

 

 

 

 

3,532

 

 

 

 

Accrued interest receivable

 

 

1,681

 

 

 

1,681

 

 

 

 

 

 

 

 

 

1,681

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

573,542

 

 

$

526,741

 

 

$

 

 

$

526,741

 

 

$

 

Short-term borrowings

 

 

1,305

 

 

 

1,305

 

 

 

 

 

 

1,305

 

 

 

 

Long-term borrowings

 

 

9,934

 

 

 

9,944

 

 

 

 

 

 

 

 

 

9,944

 

Accrued interest payable

 

 

12

 

 

 

12

 

 

 

 

 

 

 

 

 

12

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

Value

 

 

Estimated

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(dollars in thousands)

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

70,403

 

 

$

70,379

 

 

$

67,913

 

 

$

2,466

 

 

$

 

Securities available for sale

 

 

95,743

 

 

 

95,743

 

 

 

 

 

 

95,743

 

 

 

 

Securities held to maturity

 

 

11,458

 

 

 

11,461

 

 

 

 

 

 

11,461

 

 

 

 

Loans held for investment, net

 

 

356,871

 

 

 

359,325

 

 

 

 

 

 

 

 

 

359,325

 

Loans held for sale

 

 

4,414

 

 

 

4,414

 

 

 

 

 

 

4,414

 

 

 

 

Restricted stock

 

 

1,067

 

 

 

1,067

 

 

 

1,067

 

 

 

 

 

 

 

Mortgage servicing rights

 

 

2,125

 

 

 

3,310

 

 

 

 

 

 

3,310

 

 

 

 

 

Accrued interest receivable

 

 

1,709

 

 

 

1,709

 

 

 

 

 

 

 

 

 

1,709

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

512,628

 

 

 

481,300

 

 

 

 

 

 

481,300

 

 

 

 

Short-term borrowings

 

 

1,752

 

 

 

1,752

 

 

 

 

 

 

1,752

 

 

 

 

Long-term borrowings

 

 

9,534

 

 

 

9,658

 

 

 

 

 

 

 

 

 

9,658

 

Accrued interest payable

 

 

148

 

 

 

148

 

 

 

 

 

 

 

 

 

148

 

 

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

 

Cash and cash equivalents – The carrying amount of cash and cash equivalents approximate their fair values due to the short period of time until their expected realization and are recorded in Level 1 with the exception of time deposits due from banks that are in Level 2.

 

Securities available for sale – Securities available for sale are carried at fair value based on quoted and observable market prices and are recorded in Levels 1 and 2. Also see discussion in Note 5.

 

Securities held to maturity – Securities held to maturity are carried at amortized cost and are recorded in Level 2.

 

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, a future expected credit loss based on historical charge-offs, and a liquidity discount based on the overall risk grade of the load portfolio. These loans are carried in Level 3. Loans held for sale, which represent current mortgage production forward sales not yet delivered, are valued based on secondary market prices. Loans held for sale are recorded in Level 2.

 

Restricted stock – It is not practicable to determine fair value of restricted stock which is comprised of Federal Home Loan Bank and Federal Reserve Bank stock due to restrictions placed on its transferability and it is presented at its carrying value and is recorded in Level 1 due to the redemption provisions of the Federal Home Loan Bank and the Federal Reserve Bank.

-25-


 

 

Mortgage servicing rights – The fair value disclosed for mortgage servicing rights is based on an independent market valuation and is recorded at Level 2.

 

Accrued interest receivable and payable – Both accrued interest receivable and payable are recorded in Level 3, as there are not active markets for these.

 

Deposits – The fair value of deposits is estimated based on discounted cash flow analyses using offered market rates and is recorded in Level 2. The fair value of deposits does not consider any customer related intangibles.

 

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 and is recorded in Level 2. The estimated fair value for long-term borrowings are estimated based on discounted cash flow analyses using offered market rates. Total borrowings are carried in Level 2. Long-term debt is fair valued based on discounted cash flow analyses and is recorded in Level 3.

At September 30, 2018, the subsidiary bank had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, the fair value is the fee the bank is expected to receive. This amount is deemed immaterial by management. See Note 9.

 

 

Note 12 – Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, “Leases, Topic 842 (“ASU 2016-02”)”. This ASU increases the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The key difference between existing standards and this ASU is the requirement for lessees to recognize on their balance sheet all lease contracts with lease terms greater than 12 months, including operating leases. Both a right-of-use asset, representing the right to use the leased asset, and a lease liability, representing the contractual obligation, are required to be recognized on the balance sheet of the lessee at lease commencement. Further, this ASU requires lessees to classify leases as either operating or finance leases, which are substantially similar to the current operating and capital leases classifications. The distinction between these two classifications under the new standard does not relate to balance sheet treatment but relates to treatment in the statements of income and cash flows. Lessor guidance remains largely unchanged with the exception of how a lessor determines the appropriate lease classification for each lease to better align the lessor guidance with revised lessee classification guidance. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the new standard, which we will adopt during the first quarter of 2019. We currently have two properties that we operate under a lease, both of which will be recorded on the Consolidated Balance Sheet upon adoption.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. Entities will apply the standard’s provisions as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently exploring vendor-based options for outsourcing our current model as well as extending our current model to comply with CECL. We continue to assess the potential financial impact to the Company’s financial position.

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.

Reclassification

Certain amounts in the 2017 financial statements have been reclassified to conform to the 2018 presentation. These reclassifications do not have a material impact on net income or shareholders’ equity. Please refer to the disclosure in Note 1 on page 8 for further specific reclassification information.

-26-


 

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 on a consolidated basis.

Comparison of Financial Condition at September 30, 2018 and December 31, 2017.

During the nine months ended September 30, 2018, the Company’s total assets increased $61.0 million or 10.6%, from $576.4 million to $637.4 million.

Cash and cash equivalents increased $46.3 million during the nine months ended September 30, 2018. The increase is directly related to the increase in both noninterest-bearing and interest-bearing customer deposits.

Investment securities consist of securities available for sale and securities held to maturity. Investment securities decreased $3.9 million to $103.3 million for the nine-month period ended September 30, 2018 due to contractual principal pay downs. At September 30, 2018, the Company had net unrealized losses on securities available for sale of $3.0 million.

Loans held for investment increased $21.0 million to $375.4 million for the nine-month period ended September 30, 2018, or 7.9% annualized growth. The Company experienced the majority of growth in the commercial real estate loan segment, which grew $22.1 million, or 19.3%, during the nine-month period ended September 30, 2018. The largest decline was in the other real estate construction segment of $9.3 million or 23.1%. The majority of the decrease in this segment was due to completed construction on commercial real estate, which attributed to the growth in the commercial real estate segment. Loans held for sale decreased 55.9%, or $2.5 million, which is normal fluctuation as loans are originated and sold throughout the year. The allowance for loan losses was $2.4 million at September 30, 2018, which represented 0.63% of the total loan portfolio compared to $2.5 million or 0.69% at December 31, 2017.

Other changes in our consolidated assets are primarily related to other real estate owned and other assets. Other real estate owned decreased $1.3 million. During the nine months ended September 30, 2018, the Company sold nine pieces of property totaling $1.5 million, which generated a loss of $35,000. Two new properties moved into other real estate owned totaling $160,000. Other assets increased $1.2 million due to the annual funding of executive supplemental employee retirement accounts and deferred tax adjustments on the unrealized loss of securities available for sale.

Customer deposits, our primary funding source, experienced a $60.9 million increase during the nine-month period ended September 30, 2018, increasing from $512.6 million to $573.5 million or 15.8% annualized growth. Demand noninterest-bearing checking increased $23.4 million, interest checking and money market accounts increased $32.8 million, and savings deposits increased $11.1 million. These increases were offset by declines in time deposits of $6.4 million.

Total short-term borrowings decreased $447,000 for the period due to normal fluctuations, while long-term debt increased $400,000. Occasionally, due to timing and expenses, the Company leverages available debt for operations.

Other liabilities increased from $7.8 million at December 31, 2017 to $8.9 million at September 30, 2018, an increase of $1.1 million primarily related to an increase in the annual funding of executive supplemental employee retirement accounts.

At September 30, 2018, total shareholders’ equity was $43.7 million, a decrease of $831,000 from December 31, 2017. Net income for the nine-month period was $1.3 million. Unrealized losses on investment securities, net of tax, decreased by $1.2 million. The Company repurchased 106,627 shares of common stock for a total value of $592,000, though we issued 13,378 shares for a value of $65,000 upon the exercising of the final remaining outstanding stock options. The Company paid $428,000 in dividends attributed to noncontrolling interest.

Comparison of Results of Operations for the Three Months Ended September 30, 2018 and 2017.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $643,000 for the three months ended September 30, 2018, as compared to $588,000 for the three months ended September 30, 2017, an increase of $55,000. Net income available to common shareholders was $499,000 or

-27-


 

$0.07 per common share at September 30, 2018, compared to $440,000 or $0.06 per common share at September 30, 2017. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.

Net Interest Income

As with most financial institutions, the primary component of earnings for our subsidiary bank 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 wholesale borrowings. Changes in net interest income 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 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.

Net interest income for the three months ended September 30, 2018 was $5.1 million compared to $4.6 million for the three months ended September 30, 2017, an increase of $503,000. During the third quarter of 2018, the average yield on our interest–earning assets increased 0.16% to 3.88%, which was offset by the increase in the average rate we paid for our interest-bearing liabilities, which increased 0.15% to 0.47%. The aforementioned changes resulted in a higher interest rate spread of 3.41% as of September 30, 2018 compared to 3.40% as of September 30, 2017. Our net interest margin was 3.53% and 3.47% for the comparable periods in 2018 and 2017, respectively.

The following table presents average balance sheets and a net interest income analysis for the three months ended September 30, 2018 and 2017:

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended September 30,

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balance

 

 

Income/Expenses

 

 

Rate/Yield

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

$

84,553

 

 

$

95,670

 

 

$

325

 

 

$

386

 

 

 

1.52

%

 

 

1.60

%

Nontaxable securities (1)

 

 

17,490

 

 

 

16,260

 

 

 

110

 

 

 

109

 

 

 

3.15

%

 

 

4.29

%

Short-term investments

 

 

104,091

 

 

 

76,098

 

 

 

539

 

 

 

258

 

 

 

2.05

%

 

 

1.35

%

Taxable loans

 

 

366,985

 

 

 

342,246

 

 

 

4,619

 

 

 

4,146

 

 

 

4.99

%

 

 

4.81

%

Non-taxable loans (1)

 

 

9,777

 

 

 

10,800

 

 

 

61

 

 

 

68

 

 

 

3.13

%

 

 

4.01

%

Total interest-earning assets

 

 

582,896

 

 

 

541,074

 

 

 

5,654

 

 

 

4,967

 

 

 

3.88

%

 

 

3.72

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

428,166

 

 

 

399,205

 

 

 

372

 

 

 

192

 

 

 

0.34

%

 

 

0.19

%

Short-term borrowed funds

 

 

1,459

 

 

 

1,556

 

 

 

5

 

 

 

1

 

 

 

136.00

%

 

 

0.25

%

Long-term debt

 

 

9,551

 

 

 

9,534

 

 

 

138

 

 

 

138

 

 

 

5.73

%

 

 

5.74

%

Total interest-bearing liabilities

 

 

439,176

 

 

 

410,295

 

 

 

515

 

 

 

331

 

 

 

0.47

%

 

 

0.32

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

$

143,720

 

 

$

130,779

 

 

$

5,139

 

 

$

4,636

 

 

 

3.41

%

 

 

3.40

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.53

%

 

 

3.47

%

(1)

Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 21% tax rate in 2018 and a 34% tax rate in 2017.

Provision and Allowance for Loan Losses

The recovery for loan losses was $24,000 for the three months ending September 30, 2018 compared to a recovery of $136,000 for the same period in 2017. There were net loan charge offs of $194,000 for the three months ended September 30, 2018, as compared with net loan recoveries of $33,000 during the same period of 2017. Aiding in the reduction of the allowance for loan loss was the continued improvement in the payment history and credit score reporting of our customers. Refer to the Asset Quality discussion on page 32 for further information.

-28-


 

Noninterest Income

The Company generates most of its revenue from net interest income; however, diversification of our revenue sources is important as well. Total noninterest income decreased $68,000 for the three-month period ending September 30, 2018 as compared to the same period in 2017. The primary factor contributing to the overall decrease was a decrease in income from supplemental employee retirement plans of $99,000, which is reported in other income, and a decrease in income from mortgage sales of $60,000 as margins compress due to the Federal Reserve Bank’s anticipated benchmark interest rate increase and competition.

Interchange fees, or “swipe” fees, are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. Interchange and card transaction fees consist of income from check card usage, point of sale income from PIN-based debit card transactions, ATM service fees, and credit card usage. Beginning in 2018, in connection with the adoption of Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” interchange and card transaction fees are reported net of related network costs. Previously, such network costs were reported as a component of other non-interest expense. Interchange and card transaction fees for the three months ended September 30, 2018 and 2017 reported on a net basis totaled $190,000 and $149,000, respectively. A comparison of gross interchange and card transaction fees and interchange and card transaction fees net of associated network costs for the reported periods is presented in the table below:

 

 

 

Three Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Income from debit card transactions

 

$

349

 

 

$

305

 

Income from credit card transactions

 

 

88

 

 

 

76

 

Gross interchange and transaction fee income

 

 

437

 

 

 

381

 

Network costs - debit card

 

 

149

 

 

 

147

 

Network costs - credit card

 

 

98

 

 

 

85

 

Total

 

$

190

 

 

$

149

 

Noninterest Expense

Noninterest expense for the quarter ended September 30, 2018 was $6.4 million compared to $6.0 million for the same period of 2017. Salaries and employee benefits, the largest component of noninterest expense, increased $427,000 for the quarter ending September 30, 2018 compared to the same period in 2017. The majority of this increase is attributable to the increase in personnel associated with staffing the Company’s new Charlotte, NC branch, which opened in first quarter 2018, as well as increased personnel in other fee income producing business lines (e.g., SBA lending and Mortgage). Net occupancy expense increased $120,000 from $327,000 at September 30, 2017 to $447,000 at September 30, 2018. The increase is attributed to increased rent associated with the new branch location. In addition, professional fees and services has increased $57,000 from September 30, 2017 to September 30, 2018 due to consulting, training, and travel associated with the core conversion. Data processing expense decreased $223,000 in comparative quarters ended September 30, 2018 and September 30, 2017 due to a one-time de-conversion expense recognized in the third quarter of 2017. The de-conversion expense reflects the expense paid to the core system provider (at that time) to provide system reports and integration to move the Bank’s data from their platform to the new core system provider’s platform.

The table below reflects the composition of other noninterest expense.

 

 

 

Three Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

Postage

 

$

61

 

 

$

45

 

Telephone and data lines

 

 

46

 

 

 

43

 

Loan costs

 

 

103

 

 

 

83

 

Shareholder relations expense

 

 

40

 

 

 

48

 

Dues and subscriptions

 

 

62

 

 

 

56

 

Other

 

 

191

 

 

 

229

 

Total

 

$

503

 

 

$

504

 

Income Tax Expense

The Company had income tax expense of $112,000 for the three months ended September 30, 2018 at an effective tax rate of 14.83% compared to income tax expense of $259,000 with an effective tax rate of 30.58% in the comparable 2017 period. Income taxes computed at the statutory rate are affected 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. In 2018, the effective tax rate decreased significantly due to the

-29-


 

enactment of the Tax Cuts and Jobs Act of 2017, which lowered the overall federal corporate income tax rate from 35% to 21% effective January 1, 2018.

Comparison of Results of Operations for the Nine Months Ended September 30, 2018 and 2017.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $1.3 million for the nine months ended September 30, 2018, as compared to $1.8 million for the nine months ended September 30, 2017, a decrease of $493,000. Net income available to common shareholders was $916,000 or $0.13 per common share at September 30, 2018, compared to $1.4 million or $0.20 per common share at September 30, 2017. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest. The decrease in net income was primarily attributable to start-up costs associated with our new branch, which opened in the first quarter of 2018, and our new government lending team, which focuses on origination and sales of government guaranteed business loans.

Net Interest Income

Net interest income for the nine months ended September 30, 2018 was $14.7 million compared to $13.4 million for the nine months ended September 30, 2017, an increase of $1.3 million. During the first nine months of 2018, the average yield on our interest–earning assets increased 0.12% to 3.85%, which was offset by an increase in the average rate we paid for our interest-bearing liabilities, which increased 0.08% to 0.40%. The aforementioned changes resulted in a higher interest rate spread of 3.45% as of September 30, 2018 compared to 3.42% as of September 30, 2017. Our net interest margin was 3.55% and 3.49% for the comparable periods in 2018 and 2017, respectively.

The following table presents average balance sheets and a net interest income analysis for the nine months ended September 30, 2018 and 2017:

Average Balance Sheet and Net Interest Income Analysis

For the Nine Months Ended September 30,

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balance

 

 

Income/Expenses

 

 

Rate/Yield

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

$

85,803

 

 

$

97,694

 

 

$

1,096

 

 

$

1,185

 

 

 

1.71

%

 

 

1.62

%

Nontaxable securities (1)

 

 

17,647

 

 

 

16,936

 

 

 

334

 

 

 

326

 

 

 

3.20

%

 

 

4.15

%

Short-term investments

 

 

86,837

 

 

 

62,181

 

 

 

1,181

 

 

 

520

 

 

 

1.82

%

 

 

1.12

%

Taxable loans

 

 

360,207

 

 

 

338,794

 

 

 

13,211

 

 

 

12,135

 

 

 

4.90

%

 

 

4.79

%

Non-taxable loans (1)

 

 

10,401

 

 

 

10,657

 

 

 

194

 

 

 

201

 

 

 

3.16

%

 

 

4.06

%

Total interest-earning assets

 

 

560,895

 

 

 

526,262

 

 

 

16,016

 

 

 

14,367

 

 

 

3.85

%

 

 

3.73

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

411,716

 

 

 

388,948

 

 

 

858

 

 

 

521

 

 

 

0.28

%

 

 

0.18

%

Short-term borrowed funds

 

 

1,765

 

 

 

2,267

 

 

 

12

 

 

 

14

 

 

 

0.91

%

 

 

0.83

%

Long-term debt

 

 

9,535

 

 

 

9,534

 

 

 

411

 

 

 

410

 

 

 

5.76

%

 

 

5.75

%

Total interest bearing liabilities

 

 

423,016

 

 

 

400,749

 

 

 

1,281

 

 

 

945

 

 

 

0.40

%

 

 

0.32

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

$

137,879

 

 

$

125,513

 

 

$

14,735

 

 

$

13,422

 

 

 

3.45

%

 

 

3.42

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.55

%

 

 

3.49

%

(1)

Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 21% tax rate in 2018 and a 34% tax rate in 2017.

Provision and Allowance for Loan Losses

The provision for loan losses was $92,000 for the nine months ending September 30, 2018 compared to a recovery of $309,000 for the same period in 2017. There were net loan charge-offs of $185,000 for the nine months ended September 30, 2018, as compared with net loan recoveries of $50,000 during the same period of 2017. Refer to the Asset Quality discussion on page 32 for further information.

-30-


 

Noninterest Income

The Company generates most of its revenue from net interest income; however, diversification of our revenue sources is important as well. Fee income revenue sources may be volatile and have fluctuations, but are important to the Company’s overall strategic goals. Total noninterest income decreased $404,000 for the nine-month period ending September 30, 2018 as compared to the same period in 2017. The primary factor contributing to the overall decrease versus the comparable period was a decrease in revenue from mortgage loan sales of $278,000. Rising interest rates, as well as a shortage in the housing supply, has reduced the number of applications for new home purchases.

Interchange fees, or “swipe” fees, are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. Interchange and card transaction fees consist of income from check card usage, point of sale income from PIN-based debit card transactions, ATM service fees, and credit card usage. Beginning in 2018, in connection with the adoption of Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” interchange and card transaction fees are reported net of related network costs. Previously, such network costs were reported as a component of other non-interest expense. Interchange and card transaction fees for the nine months ended September 30, 2018 and 2017 reported on a net basis totaled $476,000 and $486,000, respectively. A comparison of gross interchange and card transaction fees and interchange and card transaction fees net of associated network costs for the reported periods is presented in the table below:

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Income from debit card transactions

 

$

996

 

 

$

936

 

Income from credit card transactions

 

 

245

 

 

 

229

 

Gross interchange and transaction fee income

 

 

1,241

 

 

 

1,165

 

Network costs - debit card

 

 

481

 

 

 

455

 

Network costs - credit card

 

 

284

 

 

 

224

 

Total

 

$

476

 

 

$

486

 

Noninterest Expense

Noninterest expense for the nine months ending September 30, 2018 was $19.1 million compared to $17.5 million for the same period of 2017. Salaries and employee benefits, the largest component of noninterest expense, increased $1.2 million for the period ending September 30, 2018. The majority of this increase is attributable to the increase in personnel associated with staffing the Company’s new Charlotte, NC branch, which opened in first quarter 2018, as well as increased personnel in other fee income producing business lines (e.g., SBA lending and Mortgage). Net occupancy expense increased $269,000 from $938,000 at September 30, 2017 to $1.2 million at September 30, 2018. The increase is attributed to increased rent associated with the new branch location. Professional fees expense increased $172,000 year-over-year for the year-to-date period of 2018 due to consulting, travel, and training associated with the core conversion project, which was completed in August of 2018.

These increases have been offset by decline in foreclosed real estate expenses. Foreclosed real estate expenses have declined from $312,000 at September 30, 2017 to $85,000 at September 30, 2018. As the Company’s other real estate holdings decline, the expenses associated with holding the property also declines. The table below reflects the composition of other noninterest expense.

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Postage

 

$

165

 

 

$

142

 

Telephone and data lines

 

 

136

 

 

 

124

 

Loan costs

 

 

282

 

 

 

256

 

Shareholder relations expense

 

 

113

 

 

 

110

 

Dues and subscriptions

 

 

196

 

 

 

163

 

Other

 

 

818

 

 

 

848

 

Total

 

$

1,710

 

 

$

1,643

 

 

Income Tax Expense

The Company had income tax expense of $248,000 for the nine months ended September 30, 2018 at an effective tax rate of 15.58% compared to income tax expense of $829,000 with an effective tax rate of 31.10% in the comparable 2017 period. Income taxes computed at the statutory rate are affected primarily by the eligible amount of interest earned on state and municipal securities, tax-

-31-


 

free municipal loans and income earned on bank owned life insurance. In 2018, the effective tax rate decreased significantly due to the enactment of the Tax Cuts and Jobs Act of 2017, which lowered the overall federal corporate income tax rate from 35% to 21% effective January 1, 2018.

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 decreased by recoveries of amounts previously charged off and is reduced by recovery of provisions and loans charged off. Management continuously evaluates the adequacy of the allowance for loan losses. In evaluating the adequacy of the allowance, management considers the following: 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, periodically 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 on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the estimated fair value of the underlying collateral less the selling costs. 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.

Management uses a risk-grading program designed to evaluate the credit risk in the loan portfolio. In this program, risk grades are initially assigned by loan officers then reviewed and monitored by credit administration. This process includes the maintenance of an internally classified loan 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. Because of this process, certain loans are deemed to be impaired and evaluated as an impaired loan.

The allowance for loan losses represents management’s best estimate of an appropriate amount to provide for probable credit risk inherent 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 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 banking 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 because 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.

At September 30, 2018, the levels of our impaired loans, which includes all loans in nonaccrual status, TDRs and other loans deemed by management to be impaired, were $4.8 million compared to $5.6 million at December 31, 2017, a net decrease of $773,000. Total nonaccrual loans, which are a component of impaired loans, increased from $1.03 million at December 31, 2017 to $1.04 million at September 30, 2018. During the first nine months of 2018, seven additional loans of $425,000 were added to impaired loans. The increase was offset by pay-off of seven impaired relationships totaling $644,000, foreclosure of two loans totaling $160,000, charge-off of one loan totaling $157,000, as well as net pay downs of $264,000.

The allowance, expressed as a percentage of gross loans held for investment, decreased 0.06% from 0.69% at December 31, 2017 to 0.63% at September 30, 2018. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 0.64% at December 31, 2017 and 0.59% at September 30, 2018. The decrease is attributable to a larger pool of non-impaired loans as gross loans continue to grow on the balance sheet from new originations. Additionally, the Company’s customers’ credit scores and payment history reporting continue to improve, lowering the probabilities of default. The individually evaluated allowance as a percentage of individually evaluated loans decreased from 3.49% to 3.13% for the same periods due to an increase of individually evaluated loans that are sufficiently collateralized with expected returns of principal cash flow as contracted; therefore, requiring no additional allowance. The portion of the Company’s allowance for loan loss model related to general reserves captures the mean loss of individual loans within the loan portfolio and adds additional loss based on economic uncertainty and volatility. Specifically, the Company calculates probable losses on loans by computing a probability of loss and multiplying that by a loss given default derived from historical experience, thus deriving the estimated loss scenario by FDIC call report codes. Together, these expected components, as well as a reserve determined by management for qualitative factors based on economic conditions and portfolio concentrations, form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.

-32-


 

The Company assesses the probability of losses inherent in the loan portfolio using probability of default data acquired from a third-party vendor representing a one-year loss horizon for each obligor. The Company updates the data inputs into the model; specifically, the loss given default and the probability of defaults obtained from the vendor annually during the second quarter. The probability of default associated with each credit score is a major driver in the allowance for loan losses. Additionally, the Company updates the customer associated credit scores, which is one of the components used within the allowance model, semi-annually during the first and third quarters.

The ratio of nonperforming loans, which consist of nonaccrual loans and loans past due 90 days and still accruing, to total loans decreased from 0.29% at December 31, 2017, to 0.27% at September 30, 2018.

Management believes the current level of the allowance for loan losses is appropriate in light of the risk inherent in the loan portfolio.

Other real estate owned decreased $910,000 during 2018. The Company sold nine pieces of foreclosed property totaling $1.4 million realizing a loss of $35,000. The Company had no write-downs for the period ending September 30, 2018. There were two loans foreclosed on during 2018 totaling $160,000.

Troubled debt restructured loans at September 30, 2018 totaled $3.8 million compared to $4.6 million at December 31, 2017 and are included in impaired loans. At September 30, 2018, there was one troubled debt restructured loan in nonaccrual status.

The following table shows the comparison of nonperforming assets at September 30, 2018 to December 31, 2017:

Nonperforming Assets

(dollars in thousands)

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Nonperforming assets:

 

 

 

 

 

 

 

 

Loans past due 90 days or more

 

$

 

 

$

 

Nonaccrual loans

 

 

1,035

 

 

 

1,025

 

Other real estate owned

 

 

1,086

 

 

 

2,349

 

Total nonperforming assets

 

$

2,121

 

 

$

3,374

 

 

 

 

 

 

 

 

 

 

Allowance for loans losses

 

$

2,365

 

 

$

2,458

 

Nonperforming loans to total loans

 

 

0.27

%

 

 

0.29

%

Allowance for loan losses to total loans

 

 

0.63

%

 

 

0.69

%

Nonperforming assets to total assets

 

 

0.33

%

 

 

0.59

%

Allowance for loan losses to nonperforming loans

 

 

228.50

%

 

 

239.80

%

 

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 for funding loan growth. The Company and its subsidiary bank 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 bank’s established federal funds lines with correspondent banks totaling $28 million at September 30, 2018, with available credit of $28 million; established borrowing relationships with the Federal Home Loan Bank, with available credit of $23.2 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of $28.7 million and the issuance of commercial paper. The Company has also secured long-term debt from other sources. Total debt from these sources totaled $9.9 million at September 30, 2018, compared to $9.5 million at December 31, 2017.

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 bank, has adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets.

-33-


 

The Company continues to maintain capital ratios that support its asset growth. Bank regulatory agencies approved regulatory capital guidelines (“Basel III”) aimed at strengthening existing capital requirements for banking organizations. Under the final Basel III rules, minimum requirements increased for both the quantity and quality of capital held by the Company. The rules require a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.50%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.00%, a minimum ratio of total capital to risk-weighted assets of 8.00%, and a minimum Tier 1 leverage ratio of 4.00%. A capital conservation buffer, comprised of common equity Tier 1 capital, was also established above the regulatory minimum capital requirements. This capital conservation buffer began to be phased in on January 1, 2016 at 0.625% of risk-weighted assets and increases each subsequent year by an additional 0.625% until reaching its final level of 2.50% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. The final rules also revise the definition and calculation of Tier 1 capital, total capital, and risk-weighted assets.

The phase-in period for the final rules became effective for the Company and its subsidiary bank on January 1, 2015, with full compliance of all the final rules’ requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019. As of September 30, 2018, the Company and its subsidiary bank continue to exceed minimum capital standards and remain well-capitalized under applicable capital guidelines.

As previously discussed, the Company’s subsidiary bank has a net total of $10.6 million in outstanding Fixed Rate Noncumulative Perpetual Preferred Stock. The preferred stock qualifies as Tier 1 capital at the bank and will pay dividends at an annual rate of 5.30%. The net total of $10.6 million is presented as noncontrolling interest at the Company level and qualifies as Tier 1 capital at the Company. At September 30, 2018, the Company had $9.5 million in subordinated debt outstanding that qualifies as Tier 2 capital. The Company has made all interest and dividend payments in a timely manner.

Off-Balance Sheet Arrangements

Off-balance sheet arrangements include transactions, agreements or other contractual arrangements to which an unconsolidated entity of the Company is a party and pursuant to which the Company has obligations, including an obligation to provide guarantees on behalf of an unconsolidated entity, or retains an interest in assets transferred to an unconsolidated entity. We have no off-balance sheet arrangements of this kind.

Derivative financial instruments include futures contracts, forward contracts, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in significant derivative activities through September 30, 2018 and have no current plans to do so.

Contractual Obligations

The timing and amount of our contractual obligations has not changed materially since December 31, 2017, detail of which is presented on page 78 of our 2017 Annual Report to Shareholders filed as Exhibit 13 with our 2017 Annual Report on Form 10-K.

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Disclosure under this item is not required for smaller reporting companies.

 

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 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, 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.

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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 control over financial reporting (as defined in Rule 13a -15(f) and 15d - 15(f) of the Exchange Act) during the third quarter of 2018. 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 Company’s subsidiary bank is engaged in ordinary routine litigation incidental to its business.

Item 1A.

Risk Factors.

Disclosure under this item is not required for smaller reporting companies.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information with respect to shares of common stock repurchased by the Company during the three months ended September 30, 2018.

 

 

 

(a) Total

Number of

Shares

Purchased

 

 

(b) Average

Price Paid per

Share

 

 

(c) Total Number

of Shares

Purchased as

Part of Publicly

Announced

Plans or Program

(1)

 

 

(d) Maximum

Dollar Value of

Shares that May

Yet Be

Purchased Under

the Plans 

 

July 1, 2018 Through July 31, 2018

 

 

 

 

$

 

 

 

 

 

$

 

August 1, 2018 Through August 31, 2018

 

 

 

 

$

 

 

 

 

 

$

 

September 1, 2018 Through September 30, 2018

 

 

81,145

 

 

$

5.54

 

 

 

 

 

$

 

Total

 

 

81,145

 

 

$

5.54

 

 

 

 

 

$

 

 

 

(1)

Trades of the Company’s stock occur on the OTC Pink market 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.

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Mine Safety Disclosures

Not applicable

Item 5.

Other Information

None.

 

 

-35-


 

Item 6.Exhibits

 

The following exhibits are being filed herewith:

 

Exhibit

Number

 

Description of Exhibit

 

 

 

 

 

 

 

 

 

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 (furnished herewith)

 

 

 

101

 

Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018, in XBRL (eXtensible Business Reporting Language) (filed herewith)

 

 

 

 

 

-36-


 

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, thereunto duly authorized.

 

 

 

 

 

UWHARRIE CAPITAL CORP

 

 

 

 

(Registrant)

 

 

 

 

 

 

 

Date:

 

November 6, 2018

 

By:

 

/s/ Roger L. Dick

 

 

 

 

Roger L. Dick

 

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

Date:

 

November 6, 2018

 

By:

 

/s/ R. David Beaver, III

 

 

 

 

R. David Beaver, III

 

 

 

 

Principal Financial Officer

 

 

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