10-Q 1 uwhr-10q_20190630.htm 10-Q uwhr-10q_20190630.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 June 30, 2019

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 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 an 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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

None

 

 

 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 7,072,062 shares of common stock outstanding as of August 2, 2019.


 

 

Table of Contents

 

 

 

 

 

Page No.

 

 

 

 

 

Part I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1 -

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2019 and 2018

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018

 

5

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018

 

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2 -

 

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

 

28

 

 

 

 

 

Item 3 -

 

Quantitative and Qualitative Disclosures about Market Risk

 

35

 

 

 

 

 

Item 4 -

 

Controls and Procedures

 

35

 

 

 

 

 

Part II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1 -

 

Legal Proceedings

 

36

 

 

 

 

 

Item 1A -

 

Risk Factors

 

36

 

 

 

 

 

Item 2 -

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

36

 

 

 

 

 

Item 3 -

 

Defaults Upon Senior Securities

 

36

 

 

 

 

 

Item 4 -

 

Mine Safety Disclosures

 

36

 

 

 

 

 

Item 5 -

 

Other Information

 

36

 

 

 

 

 

Item 6 -

 

Exhibits

 

37

 

 

 

 

 

 

 

 

Signatures

 

38

 

-2-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

 

Part I. Financial Information

Item 1.

Financial Statements.

 

 

 

June 30, 2019 (Unaudited)

 

 

December 31, 2018*

 

 

 

(dollars in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

5,314

 

 

$

4,473

 

Interest-earning deposits with banks

 

 

107,544

 

 

 

113,461

 

Securities available for sale, at fair value

 

 

87,741

 

 

 

91,299

 

Securities held to maturity, at amortized cost (fair value $10,704 and $10,750, respectively)

 

 

10,639

 

 

 

10,837

 

Loans held for sale

 

 

2,517

 

 

 

4,800

 

Loans:

 

 

 

 

 

 

 

 

Loans held for investment

 

 

374,566

 

 

 

369,970

 

Less allowance for loan losses

 

 

(2,179

)

 

 

(2,374

)

Net loans held for investment

 

 

372,387

 

 

 

367,596

 

Premises and equipment, net

 

 

16,823

 

 

 

14,800

 

Interest receivable

 

 

1,733

 

 

 

1,763

 

Restricted stock

 

 

1,144

 

 

 

1,094

 

Bank-owned life insurance

 

 

8,726

 

 

 

8,671

 

Other real estate owned

 

 

686

 

 

 

1,047

 

Prepaid assets

 

 

1,109

 

 

 

558

 

Other assets

 

 

11,000

 

 

 

11,905

 

Total assets

 

$

627,363

 

 

$

632,304

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Demand noninterest-bearing

 

$

148,930

 

 

$

129,714

 

Interest checking and money market accounts

 

 

237,723

 

 

 

324,391

 

Savings deposits

 

 

56,782

 

 

 

54,784

 

Time deposits, $250,000 and over

 

 

57,759

 

 

 

7,920

 

Other time deposits

 

 

55,722

 

 

 

50,092

 

Total deposits

 

 

556,916

 

 

 

566,901

 

Short-term borrowed funds

 

 

839

 

 

 

1,190

 

Long-term debt

 

 

9,974

 

 

 

9,974

 

Interest payable

 

 

47

 

 

 

16

 

Other liabilities

 

 

11,534

 

 

 

9,048

 

Total liabilities

 

 

579,310

 

 

 

587,129

 

 

 

 

 

 

 

 

 

 

Off balance sheet items, commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

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

   outstanding 7,072,062 and 7,126,541

 

 

8,840

 

 

 

8,908

 

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

 

 

 

 

 

 

Additional paid-in capital

 

 

12,683

 

 

 

12,885

 

Undivided profits

 

 

15,782

 

 

 

14,421

 

Accumulated other comprehensive income (loss)

 

 

93

 

 

 

(1,694

)

Total Uwharrie Capital shareholders’ equity

 

 

37,398

 

 

 

34,520

 

Noncontrolling interest

 

 

10,655

 

 

 

10,655

 

Total shareholders’ equity

 

 

48,053

 

 

 

45,175

 

Total liabilities and shareholders’ equity

 

$

627,363

 

 

$

632,304

 

 

(*)

Derived from audited consolidated financial statements

See accompanying notes  

 

 

-3-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(in thousands, except share and per share data)

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

4,735

 

 

$

4,469

 

 

$

9,402

 

 

$

8,725

 

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

 

32

 

 

 

 

 

 

65

 

 

 

 

U.S. Government agencies and corporations

 

 

345

 

 

 

364

 

 

 

693

 

 

 

751

 

State and political subdivisions, non-taxable

 

 

88

 

 

 

111

 

 

 

194

 

 

 

224

 

State and political subdivisions, taxable

 

 

25

 

 

 

9

 

 

 

34

 

 

 

20

 

Interest-earning deposits with banks and federal funds sold

 

 

687

 

 

 

365

 

 

 

1,480

 

 

 

642

 

Total interest income

 

 

5,912

 

 

 

5,318

 

 

 

11,868

 

 

 

10,362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking and money market accounts

 

 

343

 

 

 

192

 

 

 

768

 

 

 

336

 

Savings deposits

 

 

26

 

 

 

13

 

 

 

53

 

 

 

25

 

Time deposits, $250,000 and over

 

 

237

 

 

 

17

 

 

 

302

 

 

 

33

 

Other time deposits

 

 

156

 

 

 

47

 

 

 

236

 

 

 

92

 

Short-term borrowed funds

 

 

5

 

 

 

4

 

 

 

11

 

 

 

7

 

Long-term debt

 

 

141

 

 

 

138

 

 

 

282

 

 

 

273

 

Total interest expense

 

 

908

 

 

 

411

 

 

 

1,652

 

 

 

766

 

Net interest income

 

 

5,004

 

 

 

4,907

 

 

 

10,216

 

 

 

9,596

 

Provision for (recovery of) loan losses

 

 

(315

)

 

 

38

 

 

 

(428

)

 

 

116

 

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

 

 

5,319

 

 

 

4,869

 

 

 

10,644

 

 

 

9,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

341

 

 

 

290

 

 

 

668

 

 

 

573

 

Interchange and card transaction fees, net

 

 

204

 

 

 

144

 

 

 

398

 

 

 

286

 

Other service fees and commissions

 

 

573

 

 

 

652

 

 

 

1,329

 

 

 

1,290

 

Income from mortgage loan sales

 

 

1,087

 

 

 

869

 

 

 

1,579

 

 

 

1,531

 

Other income (loss)

 

 

2

 

 

 

216

 

 

 

(19

)

 

 

385

 

Total noninterest income

 

 

2,207

 

 

 

2,171

 

 

 

3,955

 

 

 

4,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,252

 

 

 

4,121

 

 

 

8,385

 

 

 

8,067

 

Net occupancy expense

 

 

418

 

 

 

396

 

 

 

823

 

 

 

760

 

Equipment expense

 

 

183

 

 

 

165

 

 

 

359

 

 

 

335

 

Data processing costs

 

 

172

 

 

 

283

 

 

 

394

 

 

 

533

 

Office supplies and printing

 

 

33

 

 

 

39

 

 

 

60

 

 

 

75

 

Foreclosed real estate expense

 

 

4

 

 

 

33

 

 

 

60

 

 

 

72

 

Professional fees and services

 

 

199

 

 

 

214

 

 

 

352

 

 

 

462

 

Marketing and donations

 

 

173

 

 

 

209

 

 

 

377

 

 

 

420

 

Electronic banking expense

 

 

102

 

 

 

98

 

 

 

201

 

 

 

199

 

Software amortization and maintenance

 

 

225

 

 

 

234

 

 

 

444

 

 

 

447

 

FDIC insurance

 

 

52

 

 

 

65

 

 

 

132

 

 

 

131

 

Other noninterest expense

 

 

485

 

 

 

638

 

 

 

911

 

 

 

1,207

 

Total noninterest expense

 

 

6,298

 

 

 

6,495

 

 

 

12,498

 

 

 

12,708

 

Income before income taxes

 

 

1,228

 

 

 

545

 

 

 

2,101

 

 

 

837

 

Income taxes

 

 

277

 

 

 

78

 

 

 

460

 

 

 

136

 

Net income

 

$

951

 

 

$

467

 

 

$

1,641

 

 

$

701

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated net income

 

$

951

 

 

$

467

 

 

$

1,641

 

 

$

701

 

Less: net income attributable to noncontrolling interest

 

 

(140

)

 

 

(141

)

 

 

(280

)

 

 

(284

)

Net income attributable to Uwharrie Capital Corp and common shareholders

 

 

811

 

 

 

326

 

 

 

1,361

 

 

 

417

 

Net income per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.11

 

 

$

0.04

 

 

$

0.19

 

 

$

0.06

 

Diluted

 

$

0.11

 

 

$

0.04

 

 

$

0.19

 

 

$

0.06

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

7,095,756

 

 

 

7,249,390

 

 

 

7,110,578

 

 

 

7,251,978

 

Diluted

 

 

7,095,756

 

 

 

7,249,390

 

 

 

7,110,578

 

 

 

7,251,978

 

 

 

See accompanying notes  

 

 

-4-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

951

 

 

$

467

 

 

$

1,641

 

 

$

701

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available for sale securities

 

 

1,367

 

 

 

(142

)

 

 

2,320

 

 

 

(1,241

)

Related tax effect

 

 

(314

)

 

 

32

 

 

 

(533

)

 

 

282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

 

1,053

 

 

 

(110

)

 

 

1,787

 

 

 

(959

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

 

2,004

 

 

 

357

 

 

 

3,428

 

 

 

(258

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive income attributable to noncontrolling

   interest

 

 

(140

)

 

 

(141

)

 

 

(280

)

 

 

(284

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to Uwharrie Capital

 

$

1,864

 

 

$

216

 

 

$

3,148

 

 

$

(542

)

 

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, March 31, 2018

 

 

7,107,520

 

 

$

8,884

 

 

$

12,793

 

 

$

13,373

 

 

$

(1,956

)

 

$

10,653

 

 

$

43,747

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

326

 

 

 

 

 

 

141

 

 

 

467

 

Repurchase of common stock

 

 

(6,771

)

 

 

(8

)

 

 

(31

)

 

 

 

 

 

 

 

 

 

 

 

(39

)

Other comprehensive (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(110

)

 

 

 

 

 

(110

)

Record preferred stock dividend Series B

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(103

)

 

 

(103

)

Record preferred stock dividend Series C

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37

)

 

 

(37

)

Balance, June 30, 2018

 

 

7,100,749

 

 

$

8,876

 

 

$

12,762

 

 

$

13,699

 

 

$

(2,066

)

 

$

10,654

 

 

$

43,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2019

 

 

7,097,227

 

 

$

8,871

 

 

$

12,776

 

 

$

14,971

 

 

$

(960

)

 

$

10,655

 

 

$

46,313

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

811

 

 

 

 

 

 

140

 

 

 

951

 

Repurchase of common stock

 

 

(25,165

)

 

 

(31

)

 

 

(93

)

 

 

 

 

 

 

 

 

 

 

 

(124

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,053

 

 

 

 

 

 

1,053

 

Record preferred stock dividend Series B

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(103

)

 

 

(103

)

Record preferred stock dividend Series C

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37

)

 

 

(37

)

Balance, June 30, 2019

 

 

7,072,062

 

 

$

8,840

 

 

$

12,683

 

 

$

15,782

 

 

$

93

 

 

$

10,655

 

 

$

48,053

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

417

 

 

 

 

 

 

284

 

 

 

701

 

Repurchase of common stock

 

 

(25,482

)

 

 

(31

)

 

 

(111

)

 

 

 

 

 

 

 

 

 

 

 

(142

)

Stock options exercised

 

 

13,378

 

 

 

16

 

 

 

49

 

 

 

 

 

 

 

 

 

 

 

 

65

 

Other comprehensive (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(959

)

 

 

 

 

 

(959

)

Record preferred stock dividend Series B

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(206

)

 

 

(206

)

Record preferred stock dividend Series C

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(74

)

 

 

(74

)

Balance, June 30, 2018

 

 

7,100,749

 

 

$

8,876

 

 

$

12,762

 

 

$

13,699

 

 

$

(2,066

)

 

$

10,654

 

 

$

43,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

 

 

7,126,541

 

 

$

8,908

 

 

$

12,885

 

 

$

14,421

 

 

$

(1,694

)

 

$

10,655

 

 

$

45,175

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

1,361

 

 

 

 

 

 

280

 

 

 

1,641

 

Repurchase of common stock

 

 

(54,479

)

 

 

(68

)

 

 

(202

)

 

 

 

 

 

 

 

 

 

 

 

(270

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,787

 

 

 

 

 

 

1,787

 

Record preferred stock dividend Series B

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(206

)

 

 

(206

)

Record preferred stock dividend Series C

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(74

)

 

 

(74

)

Balance, June 30, 2019

 

 

7,072,062

 

 

$

8,840

 

 

$

12,683

 

 

$

15,782

 

 

$

93

 

 

$

10,655

 

 

$

48,053

 

 

See accompanying notes

 

 

-6-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

(dollars in thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

1,641

 

 

$

701

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

Provided (used) by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

536

 

 

 

515

 

Provision for (recovery of) loan losses

 

 

(428

)

 

 

116

 

Gain on sale of premises and equipment

 

 

(4

)

 

 

 

Loss on sale of OREO

 

 

38

 

 

 

27

 

Net amortization of premium on investment securities AFS

 

 

341

 

 

 

364

 

Net amortization of premium on investment securities HTM

 

 

70

 

 

 

75

 

Net amortization of mortgage servicing rights

 

 

332

 

 

 

346

 

Originations and purchases of mortgage loans for sale

 

 

(54,120

)

 

 

(48,033

)

Proceeds from sales of mortgage loans for sale

 

 

56,076

 

 

 

46,809

 

Accrued interest receivable

 

 

30

 

 

 

(5

)

Prepaid assets

 

 

(551

)

 

 

(364

)

Cash surrender value of life insurance

 

 

(55

)

 

 

(67

)

Miscellaneous other assets

 

 

367

 

 

 

(275

)

Accrued interest payable

 

 

31

 

 

 

1

 

Miscellaneous other liabilities

 

 

2,486

 

 

 

696

 

Net cash provided by operating activities

 

 

6,790

 

 

 

906

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

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

 

 

128

 

 

 

265

 

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

 

 

15,975

 

 

 

3,709

 

Purchase of investment securities available for sale

 

 

(10,438

)

 

 

 

Net change in restricted stock

 

 

(50

)

 

 

(27

)

Net increase in loans

 

 

(4,363

)

 

 

(13,857

)

Purchase of premises and equipment

 

 

(2,721

)

 

 

(851

)

Proceeds from sale of OREO

 

 

323

 

 

 

1,043

 

Proceeds from sales of premises, equipment and other assets

 

 

166

 

 

 

 

Net cash used in investing activities

 

 

(980

)

 

 

(9,718

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net increase (decrease) in deposit accounts

 

 

(9,985

)

 

 

38,025

 

Net increase in federal funds purchased

 

 

 

 

 

 

 

 

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

 

 

(351

)

 

 

(230

)

Common stock repurchased

 

 

(270

)

 

 

(142

)

Exercise of stock options

 

 

 

 

 

65

 

Dividends paid on preferred stock (noncontrolling interest)

 

 

(280

)

 

 

(284

)

Net cash provided (used) by financing activities

 

 

(10,886

)

 

 

37,434

 

Increase (decrease) in cash and cash equivalents

 

 

(5,076

)

 

 

28,622

 

Cash and cash equivalents, beginning of period

 

 

117,934

 

 

 

70,403

 

Cash and cash equivalents, end of period

 

$

112,858

 

 

$

99,025

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

 

 

Interest paid

 

$

1,662

 

 

$

765

 

Income taxes paid

 

 

508

 

 

 

335

 

Supplemental Schedule of Non-Cash Activities

 

 

 

 

 

 

 

 

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

 

$

1,787

 

 

$

(959

)

Loans transferred to foreclosed real estate

 

 

 

 

 

160

 

Mortgage servicing rights capitalized

 

 

243

 

 

 

169

 

 

 

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. (“UIA”), 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 2018 Annual Report on Form 10-K. This Quarterly Report should be read in conjunction with such Annual Report.

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

Accounting Changes, Reclassifications and Restatements

Certain amounts in the 2018 financial statements have been reclassified to conform to the 2019 presentation. These reclassifications do not have a material impact on net income or shareholders’ equity.

Accounting Standards Update (“ASU”) 2016-02 “Leases, Topic 842” was adopted January 1, 2019 and comparative periods have not been restated. 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.  

At the time of adoption, Uwharrie Capital Corp currently had two properties that were considered in-scope for application of ASU 2016-02. The Company has recognized a $2.1 million operating lease right-of-use asset (“ROU”), which is included in premises and equipment on the balance sheet, and a corresponding $2.2 million operating lease liability, recorded in other liabilities on the balance sheet. See Note 9 – Leases for additional information.

During the second quarter of 2019, the Company reclassified its reserve for unfunded liabilities (i.e. lines of credit that were available, but not yet drawn by the customer) of $86,000 from allowance for loan loss to other liabilities. There was no impact to the income statement for this reclassification. .

 

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.

-8-


 

The following table presents the changes in accumulated other comprehensive income for the three and six months ended June 30, 2019 and 2018:

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

(960

)

 

$

(1,956

)

 

$

(1,694

)

 

$

(1,107

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before reclassifications,

   net of $314, ($32), $533 and ($282)

   tax effect, respectively

 

 

1,053

 

 

 

(110

)

 

 

1,787

 

 

 

(959

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other

   comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive income (loss)

 

 

1,053

 

 

 

(110

)

 

 

1,787

 

 

 

(959

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

93

 

 

$

(2,066

)

 

$

93

 

 

$

(2,066

)

 

 

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 corresponding 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 June 30, 2019 or December 31, 2018.

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.

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

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

7,095,756

 

 

 

7,249,390

 

 

 

7,110,578

 

 

 

7,251,978

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares and dilutive

   potential common shares used in computing diluted net

   income per common share

 

 

7,095,756

 

 

 

7,249,390

 

 

 

7,110,578

 

 

 

7,251,978

 

 

 

-9-


 

Note 5 – Investment Securities

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

 

June 30, 2019

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

4,960

 

 

$

48

 

 

$

 

 

$

5,008

 

U.S. Government agencies

 

 

33,244

 

 

 

9

 

 

 

250

 

 

 

33,003

 

GSE - Mortgage-backed securities and CMO’s

 

 

32,112

 

 

 

406

 

 

 

198

 

 

 

32,320

 

State and political subdivisions

 

 

12,281

 

 

 

157

 

 

 

2

 

 

 

12,436

 

Corporate bonds

 

 

5,024

 

 

 

5

 

 

 

55

 

 

 

4,974

 

Total securities available for sale

 

$

87,621

 

 

$

625

 

 

$

505

 

 

$

87,741

 

 

June 30, 2019

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

723

 

 

$

15

 

 

$

 

 

$

738

 

State and political subdivisions

 

 

6,851

 

 

 

41

 

 

 

1

 

 

 

6,891

 

Corporate bonds

 

 

3,065

 

 

 

10

 

 

 

 

 

 

3,075

 

Total securities held to maturity

 

$

10,639

 

 

$

66

 

 

$

1

 

 

$

10,704

 

 

December 31, 2018

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

4,944

 

 

$

11

 

 

$

 

 

$

4,955

 

U.S. Government agencies

 

 

52,935

 

 

 

47

 

 

 

1,066

 

 

 

51,916

 

GSE - Mortgage-backed securities and CMO’s

 

 

17,217

 

 

 

 

 

 

515

 

 

 

16,702

 

State and political subdivisions

 

 

13,373

 

 

 

5

 

 

 

423

 

 

 

12,955

 

Corporate bonds

 

 

5,030

 

 

 

6

 

 

 

265

 

 

 

4,771

 

Total securities available for sale

 

$

93,499

 

 

$

69

 

 

$

2,269

 

 

$

91,299

 

 

December 31, 2018

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

855

 

 

$

 

 

$

12

 

 

$

843

 

State and political subdivisions

 

 

6,877

 

 

 

6

 

 

 

61

 

 

 

6,822

 

Corporate bonds

 

 

3,105

 

 

 

 

 

 

20

 

 

 

3,085

 

Total securities held to maturity

 

$

10,837

 

 

$

6

 

 

$

93

 

 

$

10,750

 

 

At June 30, 2019 and December 31, 2018, the Company owned Federal Reserve Bank (FRB) stock reported at cost of $509,000 for both periods, and Federal Home Loan Bank (FHLB) stock of $635,000 and $585,000, 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 is 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 June 30, 2019.

There were no sales of securities available for sale for the three and six month periods ended June 30, 2019 and June 30, 2018.

 

At June 30, 2019 and December 31, 2018, securities available for sale with a carrying amount of $68.9 million and $71.5 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

-10-


 

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 June 30, 2019 and December 31, 2018. 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 are in no way a reflection of the credit quality of the investments. At June 30, 2019, the unrealized losses on available for sale securities less than twelve months related to two government agency bonds and one corporate bond. The Company had fourteen government agency bonds, sixteen GSE mortgage backed securities, one state and political subdivision bond, and one corporate bond at June 30, 2019, that had been in a loss position for twelve months or more. At June 30, 2019, the unrealized losses on held to maturity securities for twelve months or more related to one state and political subdivision bond.  At December 31, 2018, the unrealized losses on available for sale securities less than twelve months related to four government agency bonds, one GSE mortgage backed security, and one corporate bond. At December 31, 2018, the Company had sixteen government agency bonds, sixteen GSE mortgage backed securities, eight state and political subdivision bonds, and one corporate bond that had been in a loss position for twelve months or more. At December 31, 2018, the unrealized losses for less than twelve months on held to maturity securities related to two corporate bonds and two state and political subdivision bonds. The unrealized losses for twelve months or more on the held to maturity portfolio for December 31, 2018 related to one government agency and six state and political subdivision bonds.

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

June 30, 2019

 

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

 

$

581

 

 

$

2

 

 

$

27,561

 

 

$

248

 

 

$

28,142

 

 

$

250

 

GSE-Mortgage-backed securities and CMO’s

 

 

 

 

 

 

 

 

19,553

 

 

 

198

 

 

 

19,553

 

 

 

198

 

State and political subdivisions

 

 

 

 

 

 

 

 

715

 

 

 

2

 

 

 

715

 

 

 

2

 

Corporate bonds

 

 

2,161

 

 

 

50

 

 

 

2,004

 

 

 

5

 

 

 

4,165

 

 

 

55

 

Total securities available for sale

 

$

2,742

 

 

$

52

 

 

$

49,833

 

 

$

453

 

 

$

52,575

 

 

$

505

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

June 30, 2019

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Securities held to maturity temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and political subdivisions

 

$

 

 

$

 

 

$

1,009

 

 

$

1

 

 

$

1,009

 

 

$

1

 

Total securities held to maturity

 

$

 

 

$

 

 

$

1,009

 

 

$

1

 

 

$

1,009

 

 

$

1

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2018

 

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

 

$

1,924

 

 

$

29

 

 

$

47,814

 

 

$

1,037

 

 

$

49,738

 

 

$

1,066

 

GSE-Mortgage-backed securities and CMO’s

 

 

526

 

 

 

6

 

 

 

15,602

 

 

 

509

 

 

 

16,128

 

 

 

515

 

State and political subdivisions

 

 

 

 

 

 

 

 

11,109

 

 

 

423

 

 

 

11,109

 

 

 

423

 

Corporate bonds

 

 

1,989

 

 

 

224

 

 

 

1,971

 

 

 

41

 

 

 

3,960

 

 

 

265

 

Total securities available for sale

 

$

4,439

 

 

$

259

 

 

$

76,496

 

 

$

2,010

 

 

$

80,935

 

 

$

2,269

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2018

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Securities held to maturity temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

 

 

$

 

 

$

843

 

 

$

12

 

 

$

843

 

 

$

12

 

State and political subdivisions

 

 

755

 

 

 

6

 

 

 

5,157

 

 

 

55

 

 

 

5,912

 

 

 

61

 

Corporate bonds

 

 

3,085

 

 

 

20

 

 

 

 

 

 

 

 

 

3,085

 

 

 

20

 

Total securities held to maturity

 

$

3,840

 

 

$

26

 

 

$

6,000

 

 

$

67

 

 

$

9,840

 

 

$

93

 

 

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.

-11-


 

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. At June 30, 2019, 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.

The aggregate amortized cost and fair value of the available for sale securities portfolio at June 30, 2019 by remaining contractual maturity are as follows:

 

 

 

June 30, 2019

 

 

 

Amortized

Cost

 

 

Estimated

Fair Value

 

 

Book

Yield

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

4,960

 

 

 

5,008

 

 

 

2.66

%

 

 

 

4,960

 

 

 

5,008

 

 

 

2.66

%

U.S. Government agencies

 

 

 

 

 

 

 

 

 

 

 

 

Due within twelve months

 

 

5,436

 

 

 

5,428

 

 

 

1.38

%

Due after one but within five years

 

 

18,945

 

 

 

18,851

 

 

 

1.55

%

Due after five but within ten years

 

 

6,827

 

 

 

6,694

 

 

 

1.94

%

Due after ten years

 

 

2,036

 

 

 

2,030

 

 

 

1.28

%

 

 

 

33,244

 

 

 

33,003

 

 

 

1.59

%

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

7,413

 

 

 

7,380

 

 

 

2.02

%

Due after five but within ten years

 

 

17,469

 

 

 

17,812

 

 

 

2.59

%

Due after ten years

 

 

7,230

 

 

 

7,128

 

 

 

2.14

%

 

 

 

32,112

 

 

 

32,320

 

 

 

2.36

%

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

1,337

 

 

 

1,336

 

 

 

3.64

%

Due after five but within ten years

 

 

1,413

 

 

 

1,422

 

 

 

2.73

%

Due after ten years

 

 

9,531

 

 

 

9,678

 

 

 

3.10

%

 

 

 

12,281

 

 

 

12,436

 

 

 

3.12

%

Corporate bonds

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

5,024

 

 

 

4,974

 

 

 

2.94

%

 

 

 

5,024

 

 

 

4,974

 

 

 

2.94

%

Total securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

Due within twelve months

 

 

5,436

 

 

 

5,428

 

 

 

1.38

%

Due after one but within five years

 

 

37,679

 

 

 

37,549

 

 

 

2.05

%

Due after five but within ten years

 

 

25,709

 

 

 

25,928

 

 

 

2.43

%

Due after ten years

 

 

18,797

 

 

 

18,836

 

 

 

2.53

%

 

 

$

87,621

 

 

$

87,741

 

 

 

2.22

%

-12-


 

 

 

 

June 30, 2019

 

 

 

Amortized

Cost

 

 

Estimated

Fair Value

 

 

Book

Yield

 

 

 

(dollars in thousands)

 

Held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. Government agencies

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

$

723

 

 

$

738

 

 

 

2.57

%

 

 

 

723

 

 

 

738

 

 

 

2.57

%

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

5,527

 

 

 

5,551

 

 

 

2.21

%

Due after five but within ten years

 

 

1,324

 

 

 

1,340

 

 

 

2.42

%

 

 

 

6,851

 

 

 

6,891

 

 

 

2.25

%

Corporate Bonds

 

 

 

 

 

 

 

 

 

 

 

 

Due within twelve months

 

 

1,523

 

 

 

1,526

 

 

 

2.73

%

Due after one but within five years

 

 

1,542

 

 

 

1,549

 

 

 

2.79

%

 

 

 

3,065

 

 

 

3,075

 

 

 

2.76

%

Total securities held for maturity

 

 

 

 

 

 

 

 

 

 

 

 

Due within twelve months

 

 

1,523

 

 

 

1,526

 

 

 

2.73

%

Due after one but within five years

 

 

7,792

 

 

 

7,838

 

 

 

2.36

%

Due after five but within ten years

 

 

1,324

 

 

 

1,340

 

 

 

2.42

%

 

 

$

10,639

 

 

$

10,704

 

 

 

2.42

%

 

 

Note 6 – Loans Held for Investment

The composition of net loans held for investment by class as of June 30, 2019 and December 31, 2018 are as follows:

 

 

 

June 30, 2019

 

 

December 31, 2018

 

 

 

(dollars in thousands)

 

Commercial

 

 

 

 

 

 

 

 

Commercial

 

$

61,452

 

 

$

57,176

 

Real estate - commercial

 

 

143,720

 

 

 

130,634

 

Other real estate construction loans

 

 

21,384

 

 

 

31,141

 

Noncommercial

 

 

 

 

 

 

 

 

Real estate 1-4 family construction

 

 

6,906

 

 

 

7,805

 

Real estate - residential

 

 

75,553

 

 

 

76,564

 

Home equity

 

 

51,094

 

 

 

52,541

 

Consumer loans

 

 

12,706

 

 

 

12,159

 

Other loans

 

 

2,012

 

 

 

2,110

 

 

 

 

374,827

 

 

 

370,130

 

Less:

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(2,179

)

 

 

(2,374

)

Deferred loan (fees) costs, net

 

 

(261

)

 

 

(160

)

 

 

 

 

 

 

 

 

 

Loans held for investment, net

 

$

372,387

 

 

$

367,596

 

 

 

Note 7 – Allowance for Loan Losses

During the second quarter of 2019, the Company transitioned its current in-house incurred loss allowance for loan loss model to an external vendor incurred loss model that is CECL-ready. The overall financial impact related to switching models is considered immaterial. As a result of the change in models, there has been a change is methodology.

For example, default in the allowance for loan loss model is now considered 90 days past due, whereas default was defined as a charge-off event in the previous model. This increases the probabilities of default for the Company, but reduces the loss given default ratio in the portfolio.

Probabilities of default are now more representative of the Company’s customers. Previously, an analysis was performed with a sample of North Carolina consumers to calculate the probabilities of default by credit score. In the new model, the Company is able to track

-13-


 

probabilities of default based on historical information of loans in the portfolio. This is the largest impact of the model transition, resulting in an immaterial recovery of provision for loan loss.

In addition, the Company now uses better defined qualitative factors including qualitative factors to model recessionary impact to expected loss based on historical impact, current volatility in the market, and management’s analysis of local economic factors and industry-specific outlooks.

The following table shows the change in the allowance for loss losses by loan segment for the three and six months ended June 30, 2019 and 2018, respectively:

 

Commercial

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,281

 

 

$

1,461

 

 

$

1,334

 

 

$

1,401

 

Provision for (recovery of) loan losses

 

 

(350

)

 

 

21

 

 

 

(414

)

 

 

66

 

Charge-offs

 

 

 

 

 

(31

)

 

 

(5

)

 

 

(31

)

Recoveries

 

 

341

 

 

 

9

 

 

 

357

 

 

 

24

 

Net (charge-offs) / Recoveries

 

 

341

 

 

 

(22

)

 

 

352

 

 

 

(7

)

Reclassification of reserve for off balance sheet commitments

 

 

(32

)

 

 

 

 

 

(32

)

 

 

 

Balance at end of period

 

$

1,240

 

 

$

1,460

 

 

$

1,240

 

 

$

1,460

 

 

Non-Commercial

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

952

 

 

$

1,086

 

 

$

1,040

 

 

$

1,057

 

Provision for (recovery of) loan losses

 

 

35

 

 

 

17

 

 

 

(14

)

 

 

50

 

Charge-offs

 

 

(12

)

 

 

(40

)

 

 

(65

)

 

 

(57

)

Recoveries

 

 

18

 

 

 

60

 

 

 

32

 

 

 

73

 

Net (charge-offs) / Recoveries

 

 

6

 

 

 

20

 

 

 

(33

)

 

 

16

 

Reclassification of reserve for off balance sheet commitments

 

 

(54

)

 

 

 

 

 

(54

)

 

 

 

Balance at end of period

 

$

939

 

 

$

1,123

 

 

$

939

 

 

$

1,123

 

 

Total

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

2,233

 

 

$

2,547

 

 

$

2,374

 

 

$

2,458

 

Provision for (recovery of) loan losses

 

 

(315

)

 

 

38

 

 

 

(428

)

 

 

116

 

Charge-offs

 

 

(12

)

 

 

(71

)

 

 

(70

)

 

 

(88

)

Recoveries

 

 

359

 

 

 

69

 

 

 

389

 

 

 

97

 

Net (charge-offs) / Recoveries

 

 

347

 

 

 

(2

)

 

 

319

 

 

 

9

 

Reclassification of reserve for off balance sheet commitments

 

 

(86

)

 

 

 

 

 

(86

)

 

 

 

Balance at end of period

 

$

2,179

 

 

$

2,583

 

 

$

2,179

 

 

$

2,583

 

 

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at June 30, 2019 and December 31, 2018:

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated

 

 

Collectively Evaluated

 

 

Total

 

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

29

 

 

$

1,774

 

 

$

1,211

 

 

$

224,782

 

 

$

1,240

 

 

$

226,556

 

Non-Commercial

 

 

126

 

 

 

3,218

 

 

 

813

 

 

 

144,792

 

 

 

939

 

 

 

148,010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

155

 

 

$

4,992

 

 

$

2,024

 

 

$

369,574

 

 

$

2,179

 

 

$

374,566

 

-14-


 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated

 

 

Collectively Evaluated

 

 

Total

 

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

42

 

 

$

1,359

 

 

$

1,292

 

 

$

217,592

 

 

$

1,334

 

 

$

218,951

 

Non-Commercial

 

 

112

 

 

 

3,119

 

 

 

928

 

 

 

147,900

 

 

 

1,040

 

 

 

151,019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

154

 

 

$

4,478

 

 

$

2,220

 

 

$

365,492

 

 

$

2,374

 

 

$

369,970

 

 

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:

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

46

 

 

$

 

 

$

46

 

 

$

61,406

 

 

$

61,452

 

 

$

 

Real estate - commercial

 

 

 

 

 

173

 

 

 

173

 

 

 

143,547

 

 

 

143,720

 

 

 

 

Other real estate construction

 

 

 

 

 

 

 

 

 

 

 

21,384

 

 

 

21,384

 

 

 

 

Real estate 1-4 family construction

 

 

 

 

 

 

 

 

 

 

 

6,906

 

 

 

6,906

 

 

 

 

Real estate - residential

 

 

767

 

 

 

760

 

 

 

1,527

 

 

 

73,765

 

 

 

75,292

 

 

 

 

Home equity

 

 

211

 

 

 

168

 

 

 

379

 

 

 

50,715

 

 

 

51,094

 

 

 

 

Consumer loans

 

 

32

 

 

 

 

 

 

32

 

 

 

12,674

 

 

 

12,706

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

2,012

 

 

 

2,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,056

 

 

$

1,101

 

 

$

2,157

 

 

$

372,409

 

 

$

374,566

 

 

$

 

 

December 31, 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

 

$

54

 

 

$

 

 

$

54

 

 

$

57,122

 

 

$

57,176

 

 

$

 

Real estate - commercial

 

 

 

 

 

273

 

 

$

273

 

 

 

130,361

 

 

 

130,634

 

 

 

 

Other real estate construction

 

 

 

 

 

47

 

 

$

47

 

 

 

31,094

 

 

 

31,141

 

 

 

 

Real estate 1-4 family construction

 

 

 

 

 

 

 

 

 

 

 

7,805

 

 

 

7,805

 

 

 

 

Real estate - residential

 

 

890

 

 

 

606

 

 

 

1,496

 

 

 

74,908

 

 

 

76,404

 

 

 

 

Home equity

 

 

100

 

 

 

118

 

 

 

218

 

 

 

52,323

 

 

 

52,541

 

 

 

 

Consumer loan

 

 

86

 

 

 

 

 

 

86

 

 

 

12,073

 

 

 

12,159

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

2,110

 

 

 

2,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,130

 

 

$

1,044

 

 

$

2,174

 

 

$

367,796

 

 

$

369,970

 

 

$

 

 

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 $115,000 in foreclosed residential real estate and $497,000 of residential real estate in process of foreclosure at June 30, 2019. At December 31, 2018, the Company had $371,000 in foreclosed residential real estate and $161,000 of residential real estate in process of foreclosure.

-15-


 

The composition of nonaccrual loans by class as of June 30, 2019 and December 31, 2018 is as follows:

 

 

 

June 30, 2019

 

 

December 31, 2018

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

 

$

 

Real estate - commercial

 

 

173

 

 

 

273

 

Other real estate construction

 

 

 

 

 

47

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

Real estate – residential

 

 

760

 

 

 

606

 

Home equity

 

 

168

 

 

 

118

 

Consumer loans

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

$

1,101

 

 

$

1,044

 

 

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.

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 June 30, 2019 and December 31, 2018:

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

Watch

 

 

Sub-

standard

 

 

Doubtful

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

59,495

 

 

$

1,950

 

 

$

7

 

 

$

 

 

$

61,452

 

Real estate - commercial

 

 

137,847

 

 

 

4,426

 

 

 

1,447

 

 

 

 

 

 

143,720

 

Other real estate construction

 

 

19,205

 

 

 

1,866

 

 

 

313

 

 

 

 

 

 

21,384

 

Real estate 1 - 4 family construction

 

 

6,906

 

 

 

 

 

 

 

 

 

 

 

 

6,906

 

Real estate - residential

 

 

69,949

 

 

 

4,315

 

 

 

1,028

 

 

 

 

 

 

75,292

 

Home equity

 

 

49,986

 

 

 

940

 

 

 

168

 

 

 

 

 

 

51,094

 

Consumer loans

 

 

12,615

 

 

 

85

 

 

 

6

 

 

 

 

 

 

12,706

 

Other loans

 

 

2,012

 

 

 

 

 

 

 

 

 

 

 

 

2,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

358,015

 

 

$

13,582

 

 

$

2,969

 

 

$

 

 

$

374,566

 

-16-


 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

Watch

 

 

Sub-

standard

 

 

Doubtful

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

55,883

 

 

$

1,284

 

 

$

9

 

 

$

 

 

$

57,176

 

Real estate - commercial

 

 

127,592

 

 

 

1,518

 

 

 

1,524

 

 

 

 

 

 

130,634

 

Other real estate construction

 

 

28,711

 

 

 

2,070

 

 

 

360

 

 

 

 

 

 

31,141

 

Real estate 1 - 4 family construction

 

 

7,805

 

 

 

 

 

 

 

 

 

 

 

 

7,805

 

Real estate - residential

 

 

69,900

 

 

 

5,470

 

 

 

1,034

 

 

 

 

 

 

76,404

 

Home equity

 

 

52,028

 

 

 

395

 

 

 

118

 

 

 

 

 

 

52,541

 

Consumer loans

 

 

12,085

 

 

 

73

 

 

 

1

 

 

 

 

 

 

12,159

 

Other loans

 

 

2,110

 

 

 

 

 

 

 

 

 

 

 

 

2,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

356,114

 

 

$

10,810

 

 

$

3,046

 

 

$

 

 

$

369,970

 

 

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. At both June 30, 2019 and December 31, 2018 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 June 30, 2019 and December 31, 2018:

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

Non-

Performing

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

61,452

 

 

$

 

 

$

61,452

 

Real estate - commercial

 

 

143,547

 

 

 

173

 

 

 

143,720

 

Other real estate construction

 

 

21,384

 

 

 

 

 

 

21,384

 

Real estate 1 – 4 family construction

 

 

6,906

 

 

 

 

 

 

6,906

 

Real estate – residential

 

 

74,532

 

 

 

760

 

 

 

75,292

 

Home equity

 

 

50,926

 

 

 

168

 

 

 

51,094

 

Consumer loans

 

 

12,706

 

 

 

 

 

 

12,706

 

Other loans

 

 

2,012

 

 

 

 

 

 

2,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

373,465

 

 

$

1,101

 

 

$

374,566

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

Non-

Performing

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

57,176

 

 

$

 

 

$

57,176

 

Real estate - commercial

 

 

130,361

 

 

 

273

 

 

 

130,634

 

Other real estate construction

 

 

31,094

 

 

 

47

 

 

 

31,141

 

Real estate 1 – 4 family construction

 

 

7,805

 

 

 

 

 

 

7,805

 

Real estate – residential

 

 

75,798

 

 

 

606

 

 

 

76,404

 

Home equity

 

 

52,423

 

 

 

118

 

 

 

52,541

 

Consumer loans

 

 

12,159

 

 

 

 

 

 

12,159

 

Other loans

 

 

2,110

 

 

 

 

 

 

2,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

368,926

 

 

$

1,044

 

 

$

369,970

 

 

-17-


 

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 June 30, 2019 and December 31, 2018.

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

With No

Allowance

 

 

Recorded

Investment

With

Allowance

 

 

Related

Allowance

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

5

 

 

$

 

 

$

5

 

 

$

 

Real estate - commercial

 

 

1,724

 

 

 

536

 

 

 

1,188

 

 

 

26

 

Other real estate construction

 

 

45

 

 

 

 

 

 

45

 

 

 

3

 

Real estate 1 - 4 family construction

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

3,023

 

 

 

1,023

 

 

 

2,000

 

 

 

97

 

Home equity

 

 

168

 

 

 

50

 

 

 

118

 

 

 

29

 

Consumer loans

 

 

27

 

 

 

 

 

 

27

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,992

 

 

$

1,609

 

 

$

3,383

 

 

$

155

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

With No

Allowance

 

 

Recorded

Investment

With

Allowance

 

 

Related

Allowance

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

7

 

 

$

 

 

$

7

 

 

$

 

Real estate - commercial

 

 

1,258

 

 

 

93

 

 

 

1,165

 

 

 

38

 

Other real estate construction

 

 

632

 

 

 

47

 

 

 

47

 

 

 

4

 

Real estate 1 - 4 family construction

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

3,005

 

 

 

901

 

 

 

2,104

 

 

 

110

 

Home equity

 

 

83

 

 

 

51

 

 

 

32

 

 

 

1

 

Consumer loans

 

 

31

 

 

 

 

 

 

31

 

 

 

1

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,016

 

 

$

1,092

 

 

$

3,386

 

 

$

154

 

 

 

 

Three Months ended June 30, 2019

 

 

Three Months ended June 30, 2018

 

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

6

 

 

$

 

 

$

25

 

 

$

 

Real estate - commercial

 

 

1,434

 

 

 

15

 

 

 

1,541

 

 

 

15

 

Other real estate construction

 

 

69

 

 

 

 

 

 

123

 

 

 

 

Real estate 1- 4 family construction

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

2,975

 

 

 

33

 

 

 

3,540

 

 

 

41

 

Home equity

 

 

124

 

 

 

3

 

 

 

66

 

 

 

2

 

Consumer loans

 

 

28

 

 

 

 

 

 

38

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,636

 

 

$

51

 

 

$

5,333

 

 

$

58

 

-18-


 

 

 

 

Six Months Ended June 30, 2019

 

 

Six Months Ended June 30, 2018

 

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

6

 

 

$

 

 

$

32

 

 

$

 

Real estate - commercial

 

 

1,375

 

 

 

35

 

 

 

1,566

 

 

 

30

 

Other real estate construction

 

 

77

 

 

 

1

 

 

 

132

 

 

 

2

 

Real estate 1- 4 family construction

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

2,985

 

 

 

72

 

 

 

3,598

 

 

 

82

 

Home equity

 

 

110

 

 

 

4

 

 

 

55

 

 

 

2

 

Consumer loans

 

 

29

 

 

 

1

 

 

 

41

 

 

 

1

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,582

 

 

$

113

 

 

$

5,424

 

 

$

117

 

 

 

 

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 June 30, 2019, the Company had $3.9 million in TDRs outstanding, of which one with a balance of $28,000 was on a non-accruing basis.

For the three and six months ended June 30, 2019 and 2018, the following table presents a breakdown of the types of concessions made by loan class:

  

 

 

For the three months ended June 30, 2019

 

 

 

Number

of Contracts

 

 

Pre-Modification

Outstanding Recorded

Investment

 

 

Post-Modification

Outstanding Recorded

Investment

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

$

 

 

$

 

Real estate - commercial

 

 

1

 

 

 

1,629

 

 

 

857

 

Other real estate construction

 

 

 

 

 

 

 

 

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

 

 

 

Real estate – residential

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

1

 

 

$

1,629

 

 

$

857

 

-19-


 

 

 

 

For the three months ended June 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

 

 

 

387

 

 

 

387

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

3

 

 

$

387

 

 

$

387

 

 

 

 

For the six months ended June 30, 2019

 

 

 

Number

of Contracts

 

 

Pre-Modification

Outstanding Recorded

Investment

 

 

Post-Modification

Outstanding Recorded

Investment

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

$

 

 

$

 

Real estate - commercial

 

 

1

 

 

 

1,629

 

 

 

857

 

Other real estate construction

 

 

 

 

 

 

 

 

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

 

 

 

Real estate – residential

 

 

3

 

 

 

217

 

 

 

198

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

4

 

 

$

1,846

 

 

$

1,055

 

 

 

 

For the six months ended June 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

 

 

4

 

 

 

445

 

 

 

444

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

4

 

 

$

445

 

 

$

444

 

 

During the twelve months ended for June 30, 2019, there were two TDRs for which there was a payment default. During the twelve months ended June 30, 2018, there was one TDR 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 $117,000 in the allowance for loan losses as of June 30, 2019, as a direct result of these TDRs. At June 30, 2018, there was $156,000 in the allowance for loan losses related to TDRs.

-20-


 

The following table presents the status of the types of loan modifications within the previous twelve months as of June 30, 2019 and 2018:

 

 

 

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)

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Below market

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

Extended payment Terms

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forgiveness of Principal/Other

 

 

5

 

 

 

895

 

 

 

4

 

 

 

1,847

 

 

 

 

 

 

 

 

 

2

 

 

 

282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

5

 

 

$

895

 

 

 

4

 

 

$

1,847

 

 

 

 

 

$

 

 

 

2

 

 

$

282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Below market

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

Extended payment Terms

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forgiveness of Principal/Other

 

 

5

 

 

 

109

 

 

 

8

 

 

 

687

 

 

 

 

 

 

 

 

 

1

 

 

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

5

 

 

$

109

 

 

 

8

 

 

$

687

 

 

 

 

 

$

 

 

 

1

 

 

$

17

 

 

The Company has not committed to fund any additional disbursements for TDRs as of June 30, 2019.

 

Note 9 - Leases

Operating leases in which we are the lessee are recorded as operating lease right of use (“ROU”) assets and operating lease liabilities, included in premises and equipment and other liabilities, respectively, on our consolidated balance sheet. We do not currently have any significant finance leases in which we are the lessee.

Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental collateralized borrowing rate at the lease commencement date. ROU assets are further adjusted for the lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in the net occupancy expense in the consolidated statement of income.

Our leases relate to three office locations, two of which are branch locations, with remaining terms of two to ten years. Certain lease arrangements contain extension options which range from five to ten years at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term. As of June 30, 2019, operating lease ROU assets were $2.1 million and the lease liability was $2.2 million. Lease costs associated with all leases is $133,000 and $244,000 for the three and six months ended June 30, 2019, respectively.

The table below summarizes other information related to our operating leases:

-21-


 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

 

(in thousands except percent and period data)

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

Operating cash flows from operating leases

 

$

169

 

Right-of-use assets obtained in exchange for new operating lease liabilities

 

 

2,107

 

Weighted-average remaining lease term - operating leases, in years

 

 

7.9

 

Weighted-average discount rate - operating leases

 

 

2.8

%

 

The table below summarizes the maturity of remaining lease liabilities:

 

 

 

 

 

 

June 30, 2019

 

 

 

(in thousands)

 

 

 

 

 

 

2019

 

$

188

 

2020

 

 

381

 

2021

 

 

347

 

2022

 

 

225

 

2023

 

 

229

 

2024 and thereafter

 

 

1,079

 

Total lease payments

 

 

2,449

 

Less: Interest

 

 

(280

)

Present value of lease liabilities

 

 

2,169

 

 

 

Note 10 - 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 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 June 30, 2019, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

 

 

(dollars in thousands)

 

Commitments to extend credit

 

$

118,650

 

Credit card commitments

 

 

11,278

 

Standby letters of credit

 

 

1,044

 

Total commitments

 

$

130,972

 

 

 

 

Note 11 – 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

-22-


 

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 value; 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 U.S. 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 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 June 30, 2019 and December 31, 2018:

 

 

 

June 30, 2019

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

5,008

 

 

$

5,008

 

 

$

 

 

$

 

U.S. Government agencies

 

 

33,003

 

 

 

 

 

 

33,003

 

 

$

 

GSE - Mortgage-backed securities and CMO’s

 

 

32,320

 

 

 

 

 

 

32,320

 

 

 

 

State and political subdivisions

 

 

12,436

 

 

 

 

 

 

12,436

 

 

 

 

Corporate bonds

 

 

4,974

 

 

 

 

 

 

4,974

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

87,741

 

 

$

5,008

 

 

$

82,733

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities at fair value

 

$

 

 

$

 

 

$

 

 

$

 

-23-


 

 

 

 

December 31, 2018

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

4,955

 

 

$

4,955

 

 

$

 

 

$

 

U.S. Government agencies

 

 

51,916

 

 

 

 

 

 

51,916

 

 

 

 

GSE - Mortgage-backed securities and CMO’s

 

 

16,702

 

 

 

 

 

 

16,702

 

 

 

 

State and political subdivisions

 

 

12,955

 

 

 

 

 

 

12,955

 

 

 

 

Corporate bonds

 

 

4,771

 

 

 

 

 

 

4,771

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

91,299

 

 

$

4,955

 

 

$

86,344

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 value 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 June 30, 2019 and December 31, 2018:

 

 

 

June 30, 2019

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

3,228

 

 

$

 

 

$

 

 

$

3,228

 

Other real estate owned

 

 

686

 

 

 

 

 

 

 

 

 

686

 

Total assets at fair value

 

$

3,914

 

 

$

 

 

$

 

 

$

3,914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities at fair value

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

December 31, 2018

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

3,279

 

 

$

 

 

$

 

 

$

3,279

 

Other real estate owned

 

 

951

 

 

 

 

 

 

 

 

 

951

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

4,230

 

 

$

 

 

$

 

 

$

4,230

 

Total liabilities at fair value

 

$

 

 

$

 

 

$

 

 

$

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

June 30, 2019

 

 

 

 

 

 

 

 

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%

-24-


 

 

December 31, 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 rates

 

4%-8.75%

 

 

 

 

 

 

 

OREO

 

Discounted appraisals

 

Collateral discounts and

   Estimated costs to sell

 

0 – 10%

 

At June 30, 2019, impaired loans were being evaluated with discounted expected cash flows and discounted appraisals were being used on collateral dependent loans.

 

 

Note 12 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 June 30, 2019 and December 31, 2018 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 June 30, 2019 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 June 30, 2019 and December 31, 2018:

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

Value

 

 

Estimated

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(dollars in thousands)

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

112,858

 

 

$

112,853

 

 

$

110,617

 

 

$

2,236

 

 

$

 

Securities available for sale

 

 

87,741

 

 

 

87,741

 

 

 

5,008

 

 

 

82,733

 

 

 

 

Securities held to maturity

 

 

10,639

 

 

 

10,704

 

 

 

 

 

 

10,704

 

 

 

 

Loans held for investment, net

 

 

374,566

 

 

 

373,442

 

 

 

 

 

 

 

 

 

373,442

 

Loans held for sale

 

 

2,517

 

 

 

2,517

 

 

 

 

 

 

2,517

 

 

 

 

Restricted stock

 

 

1,144

 

 

 

1,144

 

 

 

1,144

 

 

 

 

 

 

 

Loan servicing rights

 

 

1,657

 

 

 

3,338

 

 

 

 

 

 

3,338

 

 

 

 

Accrued interest receivable

 

 

1,733

 

 

 

1,733

 

 

 

 

 

 

 

 

 

1,733

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

556,916

 

 

$

530,741

 

 

$

 

 

$

530,741

 

 

$

 

Short-term borrowings

 

 

839

 

 

 

839

 

 

 

 

 

 

839

 

 

 

 

Long-term borrowings

 

 

9,974

 

 

 

9,984

 

 

 

 

 

 

 

 

 

9,984

 

Accrued interest payable

 

 

47

 

 

 

47

 

 

 

 

 

 

 

 

 

47

 

-25-


 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

Value

 

 

Estimated

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(dollars in thousands)

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

117,934

 

 

$

117,901

 

 

$

115,693

 

 

$

2,208

 

 

$

 

Securities available for sale

 

 

91,299

 

 

 

91,299

 

 

 

4,955

 

 

 

86,344

 

 

 

 

Securities held to maturity

 

 

10,837

 

 

 

10,750

 

 

 

 

 

 

10,750

 

 

 

 

Loans held for investment, net

 

 

367,596

 

 

 

364,636

 

 

 

 

 

 

 

 

 

364,636

 

Loans held for sale

 

 

4,800

 

 

 

4,800

 

 

 

 

 

 

4,800

 

 

 

 

Restricted stock

 

 

1,094

 

 

 

1,094

 

 

 

1,094

 

 

 

 

 

 

 

Mortgage servicing rights

 

 

1,850

 

 

 

3,455

 

 

 

 

 

 

3,455

 

 

 

 

 

Accrued interest receivable

 

 

1,763

 

 

 

1,763

 

 

 

 

 

 

 

 

 

1,763

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

566,901

 

 

 

521,508

 

 

 

 

 

 

521,508

 

 

 

 

Short-term borrowings

 

 

1,190

 

 

 

1,190

 

 

 

 

 

 

1,190

 

 

 

 

Long-term debt

 

 

9,974

 

 

 

10,086

 

 

 

 

 

 

 

 

 

10,086

 

Accrued interest payable

 

 

16

 

 

 

16

 

 

 

 

 

 

 

 

 

16

 

 

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 loan 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. The fair value of loans held for sale does not consider uncertainty in the market that would affect the valuation. 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 stock.

 

Loan servicing rights – The fair value disclosed for loan 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 June 30, 2019, 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 10.

 

-26-


 

Note 13 – Recent Accounting Pronouncements

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.

On July 17, 2019, FASB voted to propose a delay in implementation of CECL until January 2023 for certain companies, which includes smaller reporting companies (as defined by the SEC). The Company qualifies as a smaller reporting company. The Company is currently revising their implementation project plan to allow for additional time to evaluate the impact and effectively implement the standard.

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.

 

 

 

-27-


 

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

Caution Regarding Forward-Looking Statements

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 June 30, 2019 and December 31, 2018.

During the six months ended June 30, 2019, the Company’s total assets decreased $4.9 million, from $632.3 million to $627.4 million.

Cash and cash equivalents decreased $5.1 million during the six months ended June 30, 2019. Cash and due from banks increased $841,000, while interest-earning deposits with banks decreased $5.9 million. The decrease is directly related to the decrease in interest-bearing deposits.

Investment securities consist of securities available for sale and securities held to maturity. Investment securities decreased $3.8 million to $98.4 million for the six-month period ended June 30, 2019, due to contracted principal pay downs and maturities. At June 30, 2019, the Company had net unrealized gains on securities available for sale of $120,000, compared to net unrealized losses of $2.2 million as December 31, 2018. The significant improvement is directly related to the decline of the mid- to long-term bond yields during the second quarter of 2019.

Loans held for investment increased from $370 million to $374.6 million, an increase of $4.6 million for the six months. The Company experienced growth in the commercial real estate, commercial, and consumer loan segments during the first six months of 2019. The commercial real estate segment had the largest increase in the portfolio of 10.8% or $14.1 million. The largest decline is in the commercial real estate construction segment of $9.8 million or 31.3%. Loans held for sale decreased 47.6%, or $2.2 million, as many of the loans produced near year-end were not sold on the secondary market until 2019.

The allowance for loan losses was $2.2 million at June 30, 2019, which represented 0.58% of the total loan portfolio compared to $2.4 million or 0.64% of the total loan portfolio at December 31, 2018. During the second quarter of 2019, the Company reclassified its reserve for unfunded liabilities (i.e. lines of credit that were available, but not yet drawn by the customer) of $86,000 from allowance for loan loss to other liabilities.

Other changes in our consolidated assets are primarily related to premises and equipment, other real estate owned, prepaid assets, and other assets. Premises and equipment increased $2.0 million from $14.8 million at December 31, 2018 to $16.8 million at June 30, 2019, due to the adoption of ASU 2016-02, Leases, Topic 842 (“ASU 2016-02”). A $2.1 million right-of-use asset is recorded to reflect the applicable lease agreements held by the Company. Other real estate owned decreased $361,000. During the six months ended June 30, 2019, the Company sold four pieces of property totaling $368,000. The Company recorded $38,000 of losses associated with the sold property. Prepaid assets have increased $551,000 from December 31, 2018 to June 30, 2019, as a large 3-year prepaid invoice for company-wide insurance was paid. Other assets decreased $905,000, primarily due to the reduction in deferred tax based on the net unrealized gain/loss on securities.

Customer deposits, our primary funding source, experienced a $10 million decrease during the six-month period ended June 30, 2019, decreasing from $566.9 million to $556.9 million, a 1.8% decline. Demand noninterest-bearing checking increased $19.2 million and savings deposits increased $2.0 million. Interest checking and money market accounts decreased by $86.7 million. Time deposits greater than $250,000 increased by $49.8 million. One relationship moved $40 million from a money market to a time deposit and, in addition, transferred its remaining $45 million in money market funds to another institution. Other time deposits increased $5.6 million.

Total short-term borrowings decreased $351,000 for the period.

Other liabilities increased from $9.0 million at December 31, 2018 to $11.5 million at June 30, 2019, an increase of $2.5 million, of which $2.2 million is related to the adoption of ASU 2016-02, regarding the recognition of a lease liability to reflect the contractual lease obligations of the Company.

At June 30, 2019, total shareholders’ equity was $48.1 million, an increase of $2.9 million from December 31, 2018. Net income for the six-month period was $1.6 million. Unrealized gains/losses on investment securities, net of tax, improved by $1.8 million. The

-28-


 

Company repurchased 54,479 shares of common stock for a total value of $270,000 during the first six months of 2019. The Company paid $280,000 in dividends attributed to noncontrolling interest during the first six months of 2019.

Comparison of Results of Operations for the Three Months Ended June 30, 2019 and 2018.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $951,000 for the three months ended June 30, 2019, as compared to $467,000 for the three months ended June 30, 2018, an increase of $484,000. Net income available to common shareholders was $811,000, or $0.11 per common share, at June 30, 2019, compared to $326,000, or $0.04 per common share, at June 30, 2018. 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 June 30, 2019 was $5.0 million, compared to $4.9 million for the three months ended June 30, 2018, an increase of $97,000. During the second quarter of 2019, the average yield on our interest-earning assets increased sixteen basis points to 3.99%, as the average rate we paid for our interest-bearing liabilities increased forty-four basis points to 0.83%. The aforementioned changes resulted in a lower interest rate spread of 3.16% as of June 30, 2019, compared to 3.44% as of June 30, 2018. Our net interest margin was 3.38% and 3.54% for the comparable periods in 2019 and 2018, respectively.

The following table presents average balance sheet and a net interest income analysis for the three months ended June 30, 2019 and 2018:

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended June 30,

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balance

 

 

Income/Expenses

 

 

Rate/Yield

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

$

82,866

 

 

$

85,170

 

 

$

386

 

 

$

374

 

 

 

1.87

%

 

 

1.76

%

Nontaxable securities (1)

 

 

16,839

 

 

 

17,495

 

 

 

104

 

 

 

110

 

 

 

3.10

%

 

 

3.20

%

Short-term investments

 

 

125,399

 

 

 

88,255

 

 

 

687

 

 

 

365

 

 

 

2.20

%

 

 

1.66

%

Taxable loans

 

 

365,105

 

 

 

360,202

 

 

 

4,680

 

 

 

4,403

 

 

 

5.14

%

 

 

4.90

%

Non-taxable loans (1)

 

 

8,871

 

 

 

10,581

 

 

 

55

 

 

 

66

 

 

 

3.14

%

 

 

3.17

%

Total interest-earning assets

 

 

599,080

 

 

 

561,703

 

 

 

5,912

 

 

 

5,318

 

 

 

3.99

%

 

 

3.83

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

429,304

 

 

 

408,331

 

 

 

762

 

 

 

269

 

 

 

0.71

%

 

 

0.26

%

Short-term borrowed funds

 

 

1,207

 

 

 

1,848

 

 

 

5

 

 

 

4

 

 

 

1.66

%

 

 

0.87

%

Long-term debt

 

 

9,972

 

 

 

9,538

 

 

 

141

 

 

 

138

 

 

 

5.67

%

 

 

5.80

%

Total interest bearing liabilities

 

 

440,483

 

 

 

419,717

 

 

 

908

 

 

 

411

 

 

 

0.83

%

 

 

0.39

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

$

158,597

 

 

$

141,986

 

 

$

5,004

 

 

$

4,907

 

 

 

3.16

%

 

 

3.44

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.38

%

 

 

3.54

%

(1)

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

-29-


 

Provision and Allowance for Loan Losses

The recovery for loan losses was $315,000 for the three months ending June 30, 2019, compared to a provision of $38,000 for the same period in 2018. There were net loan recoveries of $347,000 for the three months ended June 30, 2019, as compared with net loan charge offs of $2,000 during the same period of 2018. Refer to the Asset Quality discussion below for further information.

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 increased slightly by $36,000 for the three-month period ending June 30, 2019, as compared to the same period in 2018. The primary factor contributing to the overall increase was an increase in income from mortgage loan sales of $218,000, increasing from $869,000 for the quarter ended June 30, 2018 to $1.1 million for the same period in 2019. Stronger production due to the continued expansion in the Mecklenburg County market has impacted revenue from our mortgage division. Furthermore, valuation adjustments for assets in a rabbi trust for the supplemental employee retirement plans resulted in a decrease of other income by $151,000 from June 30, 2018 to June 30, 2019.

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. 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 June 30,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Income from debit card transactions

 

$

389

 

 

$

350

 

Income from credit card transactions

 

 

112

 

 

 

75

 

Gross interchange and transaction fee income

 

 

501

 

 

 

425

 

Network costs - debit card

 

 

152

 

 

 

179

 

Network costs - credit card

 

 

145

 

 

 

102

 

Total

 

$

204

 

 

$

144

 

Noninterest Expense

Noninterest expense for the quarter ended June 30, 2019 declined $197,000 from $6.5 million at June 30, 2018, compared to $6.3 million for the same period of 2019. Salaries and benefits, the largest component of noninterest expense, increased $131,000 to account for wage and benefit cost increases

This increase is offset by declines in both data processing and other noninterest expense. Data processing decreased $111,000 from $283,000 for the quarter ended June 30, 2018 to $172,000 for the same period in 2019, due to one-time de-conversion expenses in 2018.

The table below reflects the composition of other noninterest expense.

 

 

 

Three Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

(dollars in thousands)

 

Postage

 

$

44

 

 

$

55

 

Telephone and data lines

 

 

46

 

 

 

45

 

Insurance expense

 

 

56

 

 

 

102

 

Shareholder relations expense

 

 

37

 

 

 

35

 

Dues and subscriptions

 

 

71

 

 

 

66

 

Other

 

 

231

 

 

 

335

 

Total

 

$

485

 

 

$

638

 

Income Tax Expense

The Company had income tax expense of $277,000 for the three months ended June 30, 2019 at an effective tax rate of 22.6%, compared to income tax expense of $78,000 at an effective tax rate of 14.3% in the comparable 2018 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 2019, the effective tax rate increased due to less impact from tax-free instruments.

-30-


 

Comparison of Results of Operations for the Six Months Ended June 30, 2019 and 2018.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $1.6 million for the six months ended June 30, 2019, as compared to $701,000 for the six months ended June 30, 2018, an increase of $940,000. Net income available to common shareholders was $1.4 million, or $0.19 per common share, at June 30, 2019, compared to $417,000, or $0.06 per common share, at June 30, 2018. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.

Net Interest Income

Net interest income for the six months ended June 30, 2019 was $10.2 million, compared to $9.6 million for the six months ended June 30, 2018, an increase of $620,000. During 2019, the average yield on our interest-earning assets increased seventeen basis points to 4.01%, as the average rate we paid for our interest-bearing liabilities increased thirty-eight basis points to 0.75%. The aforementioned changes resulted in a lower interest rate spread of 3.26% as of June 30, 2019, compared to 3.47% as of June 30, 2018. Our net interest margin was 3.46% and 3.56% for the comparable periods in 2019 and 2018, respectively.

The following table presents average balance sheet and a net interest income analysis for the six months ended June 30, 2019 and 2018:

Average Balance Sheet and Net Interest Income Analysis

For the Six Months Ended June 30,

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balance

 

 

Income/Expenses

 

 

Rate/Yield

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

$

83,671

 

 

$

86,438

 

 

$

776

 

 

$

771

 

 

 

1.87

%

 

 

1.80

%

Nontaxable securities (1)

 

 

16,995

 

 

 

17,726

 

 

 

210

 

 

 

224

 

 

 

3.12

%

 

 

3.23

%

Short-term investments

 

 

127,055

 

 

 

78,067

 

 

 

1,480

 

 

 

642

 

 

 

2.35

%

 

 

1.66

%

Taxable loans

 

 

364,110

 

 

 

356,566

 

 

 

9,290

 

 

 

8,592

 

 

 

5.15

%

 

 

4.86

%

Non-taxable loans (1)

 

 

8,993

 

 

 

10,717

 

 

 

112

 

 

 

133

 

 

 

3.15

%

 

 

3.17

%

Total interest-earning assets

 

 

600,824

 

 

 

549,514

 

 

 

11,868

 

 

 

10,362

 

 

 

4.01

%

 

 

3.84

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

434,726

 

 

 

403,354

 

 

 

1,359

 

 

 

486

 

 

 

0.63

%

 

 

0.24

%

Short-term borrowed funds

 

 

1,326

 

 

 

1,912

 

 

 

11

 

 

 

7

 

 

 

1.67

%

 

 

0.74

%

Long-term debt

 

 

9,973

 

 

 

9,536

 

 

 

282

 

 

 

273

 

 

 

5.72

%

 

 

5.77

%

Total interest-bearing liabilities

 

 

446,025

 

 

 

414,802

 

 

 

1,652

 

 

 

766

 

 

 

0.75

%

 

 

0.37

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

$

154,799

 

 

$

134,712

 

 

$

10,216

 

 

$

9,596

 

 

 

3.26

%

 

 

3.47

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.46

%

 

 

3.56

%

 

(1)

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

Provision and Allowance for Loan Losses

The recovery for loan losses was $428,000 for the six months ending June 30, 2019, compared to a provision of $116,000 for the same period in 2018. There were net loan recoveries of $319,000 for the six months ended June 30, 2019, as compared with net loan recoveries of $9,000 during the same period of 2018. Refer to the Asset Quality section below for further information.

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 by $110,000 for the six-month period ending June 30, 2019, as compared to the same period in 2018. The primary factor contributing to the overall decrease was a decrease of $404,000 in other income. This decrease is due to valuation adjustments on the assets held in a rabbi trust for the supplemental employee retirement plans.

-31-


 

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. 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:

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Income from debit card transactions

 

$

731

 

 

$

647

 

Income from credit card transactions

 

 

219

 

 

 

157

 

Gross interchange and transaction fee income

 

 

950

 

 

 

804

 

Network costs - debit card

 

 

313

 

 

 

332

 

Network costs - credit card

 

 

239

 

 

 

186

 

Total

 

$

398

 

 

$

286

 

Noninterest Expense

Noninterest expense for the six months ended June 30, 2019 declined $210,000 from $12.7 million at June 30, 2018, compared to $12.5 million for the same period of 2019. Salaries and benefits, the largest component of noninterest expense, increased $318,000 to account for wage and benefit cost increases.

This increase is offset by declines in data processing, professional fees and services, and other noninterest expense. Data processing decreased $139,000 from $533,000 for the six months ended June 30, 2018 to $394,000 for the same period in 2019, due to one-time de-conversion expenses in 2018. Professional fees and services decreased $110,000 from $462,000 for the six months ended June 30, 2018 to $352,000 for the same period in 2019, due to consulting and training expenses regarding the core conversion project in 2018.

The table below reflects the composition of other noninterest expense.

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Postage

 

$

108

 

 

$

104

 

Telephone and data lines

 

 

92

 

 

 

90

 

Loan costs

 

 

145

 

 

 

179

 

Shareholder relations expense

 

 

77

 

 

 

74

 

Dues and subscriptions

 

 

132

 

 

 

133

 

Other

 

 

357

 

 

 

627

 

Total

 

$

911

 

 

$

1,207

 

 

Income Tax Expense

The Company had income tax expense of $460,000 for the six months ended June 30, 2019 at an effective tax rate of 21.9% compared to income tax expense of $136,000 with an effective tax rate of 16.2% in the comparable 2018 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 2019, the effective tax rate increased due to less impact from tax-free instruments.

Asset Quality

During the second quarter of 2019, the Company transitioned its current in-house incurred loss allowance for loan loss model to an external vendor incurred loss model that is CECL-ready. The overall financial impact related to switching models is considered immaterial. As a result of the change in models, there has been a change is methodology.

For example, default in the allowance for loan loss model is now considered 90 days past due, whereas default was defined as a charge-off event in the previous model. This increases the probabilities of default for the Company, but reduces the loss given default ratio in the portfolio.

Probabilities of default are now more representative of the Company’s customers. Previously, an analysis was performed with a sample of North Carolina consumers to calculate the probabilities of default by credit score. In the new model, the Company is able to track

-32-


 

probabilities of default based on historical information of loans in the portfolio. This is the largest impact of the model transition, resulting in an immaterial recovery of provision for loan loss.

In addition, the Company now uses better defined qualitative factors including qualitative factors to model recessionary impact to expected loss based on historical impact, current volatility in the market, and management’s analysis of local economic factors and industry-specific outlooks.

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 June 30, 2019, the levels of our impaired loans, which includes all loans in nonaccrual status, TDRs, and other loans deemed by management to be impaired, were $5.0 million, compared to $4.5 million at December 31, 2018, a net increase of $514,000. Total nonaccrual loans, which are a component of impaired loans, increased from $1.0 million at December 31, 2018 to $1.1 million at June 30, 2019. During the first six months of 2019, four additional loans totaling $681,000 were added to impaired loans.  That was offset by the pay-off of five impaired relationships totaling $302,000 as well as net pay downs of $135,000.

The allowance, expressed as a percentage of gross loans held for investment, decreased six basis points from 0.64% at December 31, 2018 to 0.58% at June 30, 2019. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 0.61% at December 31, 2018 and 0.55% at June 30, 2019. The decrease is attributable to a continued improvement in the credit quality of the current portfolio as charge offs remain low and classified assets continue to improve. Additionally, $86,000, or 0.02%, of the collectively evaluated allowance was reclassified to other liabilities, which represents the reserve associated with exposures on loans not yet funded, such as credit limits available. The individually evaluated allowance as a percentage of individually evaluated loans decreased from 3.43% to 3.11% for the same periods, mainly due to a $535,000 relationship that was deemed impaired during the second quarter of 2019 due to its TDR classification, though no reserve is recognized based on the present value of the expected future cash flows discounted at the loan’s effective interest rate. 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. An additional calculation based on economic uncertainty is added to the probable losses, thus deriving the estimated loss scenario by FDIC call report codes. Together, these expected components, as well as a reserve for qualitative factors based on management’s discretion of economic conditions form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.

-33-


 

The Company assesses the probability of losses inherent in the loan portfolio using probability of default data derived from the Company’s internal historical data, representing a one-year loss horizon for each obligor. Credit scores are used within the model to determine the probability of default. The Company updates the credit scores for individuals that either own a loan, or are financially responsible for the loan, semi-annually, during the first and third quarters. During the first quarter, the average effective credit score of the portfolio, excluding loans in default, rose from 766 to 768. The probability of default associated with each credit score is a major driver in the allowance for loan losses.

The ratio of nonperforming loans, which consist of nonaccrual loans and loans past due 90 days and still accruing, to total loans increased slightly from 0.28% at December 31, 2018, to 0.29% at June 30, 2019.

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 $361,000 during the first six months of 2019. The Company sold four pieces of foreclosed property totaling $368,000, realizing a loss of $38,000. The Company had no write-downs for the period ending June 30, 2019. There have been no loans foreclosed on during the first six months of 2019.

Troubled debt restructured loans at June 30, 2019 totaled $3.9 million compared to $3.4 million at December 31, 2018 and are included in impaired loans. At June 30, 2019, there was one troubled debt restructured loan in nonaccrual status, which had a balance of $28,000.

The following table shows the comparison of nonperforming assets at June 30, 2019 to December 31, 2018:

Nonperforming Assets

(dollars in thousands)

 

 

 

June 30, 2019

 

 

December 31, 2018

 

Nonperforming assets:

 

 

 

 

 

 

 

 

Loans past due 90 days or more

 

$

 

 

$

 

Nonaccrual loans

 

 

1,101

 

 

 

1,044

 

Other real estate owned

 

 

686

 

 

 

1,047

 

Total nonperforming assets

 

$

1,787

 

 

$

2,091

 

 

 

 

 

 

 

 

 

 

Allowance for loans losses

 

$

2,179

 

 

$

2,374

 

Nonperforming loans to total loans

 

 

0.29

%

 

 

0.28

%

Allowance for loan losses to total loans

 

 

0.58

%

 

 

0.64

%

Nonperforming assets to total assets

 

 

0.28

%

 

 

0.33

%

Allowance for loan losses to nonperforming loans

 

 

197.91

%

 

 

227.39

%

 

Liquidity and Capital Resources

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

The Company’s primary sources of internally generated funds are principal and interest payments on loans, cash flows generated from operations and cash flow generated by investments. Growth in deposits is typically the primary source of funds for loan growth. The Company and its subsidiary 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 aggregating $28 million at June 30, 2019, with available credit of $28 million; established borrowing relationships with the Federal Home Loan Bank, with available credit of $71.3 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of $20.6 million and the issuance of commercial paper. The Company has also secured long-term debt from other sources. Total debt from these sources include $9.5 million of junior subordinated debt and notes payable of $440,000 at both June 30, 2019 and December 31, 2018.

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.

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The Company continues to maintain capital ratios that support its asset growth. The federal bank regulatory agencies have implemented regulatory capital rules known as “Basel III.” The Basel III 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%. There is also a capital conservation buffer that requires banks to hold common equity Tier 1 capital in excess of minimum risk-based capital ratios by at least 2.5% to avoid limits on capital distributions and certain discretionary bonus payments to executive officers and similar employees.

The Basel III rules began to phase in for the Company and its subsidiary bank on January 1, 2015, with full compliance of all the rules’ requirements effective on January 1, 2019. Pursuant to the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is exempt from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level. As of June 30, 2019, the Bank continues to exceed minimum capital standards and remain well-capitalized under the applicable rules.

 

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 pays 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 June 30, 2019, the Company had $9.5 million in subordinated debt outstanding, of which $7.6 million 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 June 30, 2019 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, 2018, detail of which is presented on page 77 of our 2018 Annual Report to Shareholders, filed as Exhibit 13 with our 2018 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.

Changes in Internal Control over Financial Reporting

Management of the Company has evaluated, with the participation of the Company’s principal executive officer and principal financial officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the second quarter of 2019. In connection with such evaluation, the Company has determined that there

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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 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 June 30, 2019.

 

 

 

(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 

 

April 1, 2019 Through April 30, 2019

 

 

 

 

$

 

 

 

 

 

$

 

May 1, 2019 Through May 31, 2019

 

 

 

 

$

 

 

 

 

 

$

 

June 1, 2019 Through June 30, 2019

 

 

25,165

 

 

$

4.95

 

 

 

 

 

$

 

Total

 

 

25,165

 

 

$

4.95

 

 

 

 

 

$

 

 

 

(1)

Trades of the Company’s common stock are quoted 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

 

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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 (filed herewith)

 

 

 

101

 

Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019, in XBRL (eXtensible Business Reporting Language) (filed herewith)

 

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

UWHARRIE CAPITAL CORP

 

 

 

 

(Registrant)

 

 

 

 

 

 

 

Date:

 

August 6, 2019

 

By:

 

/s/ Roger L. Dick

 

 

 

 

Roger L. Dick

 

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

Date:

 

August 6, 2019

 

By:

 

/s/ R. David Beaver, III

 

 

 

 

R. David Beaver, III

 

 

 

 

Principal Financial Officer

 

 

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