10-Q 1 uwhr-10q_20170930.htm 10-Q uwhr-10q_20170930.htm

1

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2017

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

 

☐ (Do not check if a smaller reporting company.)

 

Smaller reporting company

 

Emerging growth company

 

☐ 

 

 

 

 

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 6,979,244 shares of common stock outstanding as of November 6, 2017.

 

 


 

 

Table of Contents

 

 

 

 

 

Page No.

 

 

 

 

 

Part I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1 -

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets September 30, 2017 and December 31, 2016

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2017 and 2016

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016

 

5

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2017

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016

 

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2 -

 

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

 

27

 

 

 

 

 

Item 3 -

 

Quantitative and Qualitative Disclosures About Market Risk

 

33

 

 

 

 

 

Item 4 -

 

Controls and Procedures

 

33

 

 

 

 

 

Part II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1 -

 

Legal Proceedings

 

34

 

 

 

 

 

Item 1A -

 

Risk Factors

 

34

 

 

 

 

 

Item 2 -

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

34

 

 

 

 

 

Item 3 -

 

Defaults Upon Senior Securities

 

34

 

 

 

 

 

Item 4 -

 

Mine Safety Disclosures

 

34

 

 

 

 

 

Item 5 -

 

Other Information

 

35

 

 

 

 

 

Item 6 -

 

Exhibits

 

36

 

 

 

 

 

 

 

Signatures

 

37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-2-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

 

Part I. Financial Information

Item 1.

Financial Statements.

 

 

 

September 30, 2017 (Unaudited)

 

 

December 31, 2016*

 

 

 

(dollars in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

6,826

 

 

$

9,422

 

Interest-earning deposits with banks

 

 

85,757

 

 

 

36,546

 

Securities available for sale, at fair value

 

 

97,717

 

 

 

105,899

 

Securities held to maturity, at amortized cost (fair value $11,575 and $11,934, respectively)

 

 

11,493

 

 

 

11,990

 

Loans held for sale

 

 

2,725

 

 

 

5,823

 

Loans:

 

 

 

 

 

 

 

 

Loans held for investment

 

 

349,919

 

 

 

341,829

 

Less allowance for loan losses

 

 

(2,448

)

 

 

(2,707

)

Net loans held for investment

 

 

347,471

 

 

 

339,122

 

Premises and equipment, net

 

 

14,302

 

 

 

14,173

 

Interest receivable

 

 

1,516

 

 

 

1,629

 

Restricted stock

 

 

1,068

 

 

 

1,052

 

Bank owned life insurance

 

 

8,514

 

 

 

6,897

 

Other real estate owned

 

 

2,681

 

 

 

4,176

 

Prepaid assets

 

 

1,000

 

 

 

826

 

Other assets

 

 

10,882

 

 

 

10,675

 

Total assets

 

$

591,952

 

 

$

548,230

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Demand noninterest-bearing

 

$

118,459

 

 

$

103,138

 

Interest checking and money market accounts

 

 

295,330

 

 

 

272,968

 

Savings deposits

 

 

45,075

 

 

 

42,452

 

Time deposits, $250,000 and over

 

 

10,408

 

 

 

7,472

 

Other time deposits

 

 

57,981

 

 

 

59,689

 

Total deposits

 

 

527,253

 

 

 

485,719

 

Short-term borrowed funds

 

 

1,788

 

 

 

2,674

 

Junior subordinated debt

 

 

9,534

 

 

 

9,534

 

Interest payable

 

 

151

 

 

 

151

 

Other liabilities

 

 

8,066

 

 

 

6,627

 

Total liabilities

 

 

546,792

 

 

 

504,705

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

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

   outstanding 6,978,263 and 7,050,315

 

 

8,723

 

 

 

8,813

 

Additional paid-in capital

 

 

12,258

 

 

 

12,540

 

Undivided profits

 

 

14,262

 

 

 

12,867

 

Accumulated other comprehensive loss

 

 

(726

)

 

 

(1,318

)

Total Uwharrie Capital Corp shareholders’ equity

 

 

34,517

 

 

 

32,902

 

Noncontrolling interest

 

 

10,643

 

 

 

10,623

 

Total shareholders’ equity

 

 

45,160

 

 

 

43,525

 

Total liabilities and shareholders’ equity

 

$

591,952

 

 

$

548,230

 

 

(*)

Derived from audited consolidated financial statements

See accompanying notes  

 

 

-3-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(in thousands, except share and per share data)

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

4,214

 

 

$

4,025

 

 

$

12,336

 

 

$

11,820

 

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury

 

 

5

 

 

 

11

 

 

 

28

 

 

 

34

 

US Government agencies and corporations

 

 

369

 

 

 

313

 

 

 

1,122

 

 

 

939

 

State and political subdivisions

 

 

121

 

 

 

125

 

 

 

361

 

 

 

375

 

Interest-earning deposits with banks and federal funds sold

 

 

258

 

 

 

78

 

 

 

520

 

 

 

236

 

Total interest income

 

 

4,967

 

 

 

4,552

 

 

 

14,367

 

 

 

13,404

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking and money market accounts

 

 

113

 

 

 

82

 

 

 

295

 

 

 

229

 

Savings deposits

 

 

12

 

 

 

12

 

 

 

37

 

 

 

35

 

Time deposits, $250,000 and over

 

 

16

 

 

 

14

 

 

 

46

 

 

 

44

 

Other time deposits

 

 

51

 

 

 

59

 

 

 

143

 

 

 

255

 

Short-term borrowed funds

 

 

1

 

 

 

3

 

 

 

14

 

 

 

32

 

Long-term debt

 

 

138

 

 

 

139

 

 

 

410

 

 

 

412

 

Total interest expense

 

 

331

 

 

 

309

 

 

 

945

 

 

 

1,007

 

Net interest income

 

 

4,636

 

 

 

4,243

 

 

 

13,422

 

 

 

12,397

 

Provision for (recovery of) loan losses

 

 

(136

)

 

 

240

 

 

 

(309

)

 

 

70

 

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

 

 

4,772

 

 

 

4,003

 

 

 

13,731

 

 

 

12,327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

299

 

 

 

309

 

 

 

874

 

 

 

904

 

Other service fees and commissions

 

 

1,003

 

 

 

1,055

 

 

 

3,206

 

 

 

3,330

 

Gain (loss) on sale of securities (includes reclassification of ($14,000), $2,000, ($14,000) and $544,000 from accumulated other comprehensive income)

 

 

(12

)

 

 

2

 

 

 

(12

)

 

 

544

 

Gain (loss) on fixed assets and other assets

 

 

3

 

 

 

(1

)

 

 

3

 

 

 

(3

)

Income from mortgage loan sales

 

 

790

 

 

 

1,111

 

 

 

2,539

 

 

 

2,769

 

Other income

 

 

215

 

 

 

117

 

 

 

567

 

 

 

389

 

Total noninterest income

 

 

2,298

 

 

 

2,593

 

 

 

7,177

 

 

 

7,933

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

3,647

 

 

 

3,626

 

 

 

10,987

 

 

 

10,792

 

Net occupancy expense

 

 

327

 

 

 

327

 

 

 

938

 

 

 

850

 

Equipment expense

 

 

151

 

 

 

159

 

 

 

451

 

 

 

488

 

Data processing costs

 

 

429

 

 

 

161

 

 

 

789

 

 

 

529

 

Office supplies and printing

 

 

27

 

 

 

34

 

 

 

89

 

 

 

117

 

Foreclosed real estate expense

 

 

48

 

 

 

29

 

 

 

312

 

 

 

204

 

Professional fees and services

 

 

223

 

 

 

171

 

 

 

570

 

 

 

541

 

Marketing and donations

 

 

251

 

 

 

224

 

 

 

737

 

 

 

651

 

Electronic banking expense

 

 

317

 

 

 

303

 

 

 

921

 

 

 

884

 

Software amortization and maintenance

 

 

198

 

 

 

174

 

 

 

569

 

 

 

508

 

FDIC insurance

 

 

76

 

 

 

86

 

 

 

167

 

 

 

257

 

Other noninterest expense

 

 

529

 

 

 

534

 

 

 

1,712

 

 

 

1,934

 

Total noninterest expense

 

 

6,223

 

 

 

5,828

 

 

 

18,242

 

 

 

17,755

 

Income before income taxes

 

 

847

 

 

 

768

 

 

 

2,666

 

 

 

2,505

 

Income taxes (includes reclassification of ($5,000), $1,000, ($5,000)

and $210,000 from accumulated other comprehensive income)

 

 

259

 

 

 

228

 

 

 

829

 

 

 

745

 

Net income

 

$

588

 

 

$

540

 

 

$

1,837

 

 

$

1,760

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: net income attributable to noncontrolling interest

 

 

(148

)

 

 

(149

)

 

 

(442

)

 

 

(444

)

Net income attributable to Uwharrie Capital Corp

 

 

440

 

 

 

391

 

 

 

1,395

 

 

 

1,316

 

Dividends – preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$

440

 

 

$

391

 

 

$

1,395

 

 

$

1,316

 

Net income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.06

 

 

$

0.06

 

 

$

0.20

 

 

$

0.19

 

Diluted

 

$

0.06

 

 

$

0.06

 

 

$

0.20

 

 

$

0.19

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

6,979,137

 

 

 

7,095,112

 

 

 

7,008,240

 

 

 

7,111,733

 

Diluted

 

 

6,979,985

 

 

 

7,095,112

 

 

 

7,008,845

 

 

 

7,111,733

 

 

 

See accompanying notes  

 

 

-4-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

588

 

 

$

540

 

 

$

1,837

 

 

$

1,760

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on available for sale securities

 

 

40

 

 

 

(268

)

 

 

884

 

 

 

1,165

 

Related tax effect

 

 

(14

)

 

 

90

 

 

 

(301

)

 

 

(422

)

Reclassification of (gain) losses recognized in net income

 

 

14

 

 

 

(2

)

 

 

14

 

 

 

(544

)

Related tax effect

 

 

(5

)

 

 

1

 

 

 

(5

)

 

 

210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

 

35

 

 

 

(179

)

 

 

592

 

 

 

409

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

623

 

 

 

361

 

 

 

2,429

 

 

 

2,169

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive income attributable to noncontrolling

   interest

 

 

(148

)

 

 

(149

)

 

 

(442

)

 

 

(444

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Uwharrie Capital Corp

 

$

475

 

 

$

212

 

 

$

1,987

 

 

$

1,725

 

 

See accompanying notes

 

 

-5-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

 

 

 

 

Number of

Common

Shares

Issued

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Undivided

Profits

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Non

Controlling

Interest

 

 

Total

 

 

 

(dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2016

 

 

7,050,315

 

 

$

8,813

 

 

$

12,540

 

 

$

12,867

 

 

$

(1,318

)

 

$

10,623

 

 

$

43,525

 

Net income

 

 

 

 

 

 

 

 

 

 

 

1,395

 

 

 

 

 

 

442

 

 

 

1,837

 

Repurchase of common stock

 

 

(72,052

)

 

 

(90

)

 

 

(282

)

 

 

 

 

 

 

 

 

 

 

 

(372

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

592

 

 

 

 

 

 

592

 

Record preferred stock dividend Series B

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(311

)

 

 

(311

)

Record preferred stock dividend Series C

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(111

)

 

 

(111

)

Balance, September 30, 2017

 

 

6,978,263

 

 

$

8,723

 

 

$

12,258

 

 

$

14,262

 

 

$

(726

)

 

$

10,643

 

 

$

45,160

 

 

See accompanying notes

 

 

-6-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

 

(dollars in thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

1,837

 

 

$

1,760

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

Provided (used) by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

636

 

 

 

615

 

Provision/ (recovery) of loan losses

 

 

(309

)

 

 

70

 

(Gain) loss on sale of securities available for sale

 

 

12

 

 

 

(544

)

(Gain) loss on sale of OREO

 

 

31

 

 

 

(20

)

Net amortization of premium on investment securities AFS

 

 

665

 

 

 

745

 

Net amortization of premium on investment securities HTM

 

 

112

 

 

 

103

 

Net amortization of mortgage servicing rights

 

 

557

 

 

 

756

 

OREO write downs

 

 

92

 

 

 

15

 

Net change in:

 

 

 

 

 

 

 

 

Originations and purchases of mortgage loans for sale

 

 

(70,968

)

 

 

(82,825

)

Proceeds from sales of mortgage loans for sale

 

 

73,509

 

 

 

85,453

 

Accrued interest receivable

 

 

113

 

 

 

44

 

Prepaid assets

 

 

(174

)

 

 

(490

)

Cash surrender value of life insurance

 

 

(92

)

 

 

(98

)

Miscellaneous other assets

 

 

(493

)

 

 

(231

)

Accrued interest payable

 

 

 

 

 

(18

)

Miscellaneous other liabilities

 

 

1,439

 

 

 

1,202

 

Net cash provided by operating activities

 

 

6,967

 

 

 

6,537

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Proceeds from sales of investment securities available for sale

 

 

8,918

 

 

 

23,095

 

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

 

 

385

 

 

 

143

 

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

 

 

5,823

 

 

 

5,668

 

Purchase of investment securities held to maturity

 

 

 

 

 

(1,027

)

Purchase of investment securities available for sale

 

 

(6,338

)

 

 

(39,597

)

Purchase of life insurance investment

 

 

(1,525

)

 

 

 

Net change in restricted stock

 

 

(16

)

 

 

(12

)

Net increase in loans

 

 

(8,401

)

 

 

(24,515

)

Proceeds from sales of premises, equipment, and other assets

 

 

 

 

 

150

 

Purchase of premises and equipment

 

 

(765

)

 

 

(324

)

Proceeds from sale of OREO

 

 

1,733

 

 

 

880

 

Net cash used by investing activities

 

 

(186

)

 

 

(35,539

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net increase in deposit accounts

 

 

41,534

 

 

 

21,322

 

Net decrease in federal funds purchased and other short-term borrowings

 

 

(380

)

 

 

(3,972

)

Repayment of other borrowings

 

 

(506

)

 

 

(10

)

Common stock repurchases

 

 

(372

)

 

 

(260

)

Dividends paid on preferred stock

 

 

(442

)

 

 

(424

)

Net cash provided by financing activities

 

 

39,834

 

 

 

16,656

 

Increase (decrease) in cash and cash equivalents

 

 

46,615

 

 

 

(12,346

)

Cash and cash equivalents, beginning of period

 

 

45,968

 

 

 

68,933

 

Cash and cash equivalents, end of period

 

$

92,583

 

 

$

56,587

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

 

 

Interest paid

 

$

946

 

 

$

1,025

 

Income taxes paid

 

 

660

 

 

 

252

 

Supplemental Schedule of Non-Cash Activities

 

 

 

 

 

 

 

 

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

 

$

592

 

 

$

410

 

Loans transferred to foreclosed real estate

 

 

361

 

 

 

315

 

Mortgage servicing rights capitalized

 

 

451

 

 

 

756

 

 

 

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 2016 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.

 

 

Note 2 – Comprehensive Income

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

The following table presents the changes in accumulated other comprehensive income for the three and nine months ended September 30, 2017 and 2016:

 

 

 

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

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

(761

)

 

$

376

 

 

$

(1,318

)

 

$

(212

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive income (loss) before reclassifications,

   net of ($14,000), $90,000, ($301,000) and ($422,000) tax

   effect, respectively

 

 

26

 

 

 

(178

)

 

 

583

 

 

 

743

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other

   comprehensive income, net of ($5,000), $1,000, ($5,000)

   and $210,000 tax effect

 

 

9

 

 

 

(1

)

 

 

9

 

 

 

(334

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive income (loss)

 

 

35

 

 

 

(179

)

 

 

592

 

 

 

409

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

 

$

(726

)

 

$

197

 

 

$

(726

)

 

$

197

 

 

 

-8-


 

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 a 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 and name change of the Company’s subsidiary banks.

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 stock options outstanding covering 13,116 shares of common stock at both September 30, 2017 and December 31, 2016. All of these options were dilutive because the strike price was lower than the market price.

Basic and diluted net income per common share have been computed based upon net income available to common shareholders as presented in the accompanying consolidated statements of income divided by the weighted average number of common shares outstanding or assumed to be outstanding.

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

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

6,979,137

 

 

 

7,095,112

 

 

 

7,008,240

 

 

 

7,111,733

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive stock options

 

 

848

 

 

 

 

 

 

605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares and dilutive

   potential common shares used in computing diluted net

   income per common share

 

 

6,979,985

 

 

 

7,095,112

 

 

 

7,008,845

 

 

 

7,111,733

 

 

 

Note 5 – Investment Securities

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

 

September 30, 2017

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

 

 

$

 

 

$

 

 

$

 

U.S. Government agencies

 

 

57,007

 

 

 

24

 

 

 

619

 

 

 

56,412

 

GSE - Mortgage-backed securities and CMO’s

 

 

22,352

 

 

 

36

 

 

 

271

 

 

 

22,117

 

State and political subdivisions

 

 

14,413

 

 

 

47

 

 

 

348

 

 

 

14,112

 

Corporate bonds

 

 

5,045

 

 

 

34

 

 

 

3

 

 

 

5,076

 

Total securities available for sale

 

$

98,817

 

 

$

141

 

 

$

1,241

 

 

$

97,717

 

-9-


 

 

September 30, 2017

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

1,351

 

 

$

9

 

 

$

 

 

$

1,360

 

State and political subdivisions

 

 

6,938

 

 

 

63

 

 

 

28

 

 

 

6,973

 

Corporate bonds

 

 

3,204

 

 

 

38

 

 

 

 

 

 

3,242

 

Total securities held to maturity

 

$

11,493

 

 

$

110

 

 

$

28

 

 

$

11,575

 

 

December 31, 2016

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

4,017

 

 

$

 

 

$

3

 

 

$

4,014

 

U.S. Government agencies

 

 

58,506

 

 

 

28

 

 

 

863

 

 

 

57,671

 

GSE - Mortgage-backed securities and CMO’s

 

 

26,195

 

 

 

39

 

 

 

586

 

 

 

25,648

 

State and political subdivisions

 

 

14,123

 

 

 

71

 

 

 

658

 

 

 

13,536

 

Corporate bonds

 

 

5,054

 

 

 

14

 

 

 

38

 

 

 

5,030

 

Total securities available for sale

 

$

107,895

 

 

$

152

 

 

$

2,148

 

 

$

105,899

 

 

December 31, 2016

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

1,754

 

 

$

 

 

$

17

 

 

$

1,737

 

State and political subdivisions

 

 

6,974

 

 

 

7

 

 

 

60

 

 

 

6,921

 

Corporate bonds

 

 

3,262

 

 

 

14

 

 

 

 

 

 

3,276

 

Total securities held to maturity

 

$

11,990

 

 

$

21

 

 

$

77

 

 

$

11,934

 

 

At September 30, 2017 and December 31, 2016, the Company owned Federal Reserve Bank (FRB) stock reported at cost of $509,000 and $507,000, and Federal Home Loan Bank (FHLB) stock of $559,000 and $545,000, respectively. The investments in FRB stock and FHLB stock are required investments related to the Company’s membership in, and borrowings with, these banks and classified as restricted stock on the consolidated balance sheet. These investments are carried at cost since there is no ready market and redemption has historically been made at par value. The Company estimated the fair value approximated cost and that these investments were not impaired at September 30, 2017.

Results from sales of securities available for sale for the three and nine-month periods ended September 30, 2017 and September 30, 2016 are as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(dollars in thousands)

 

Gross proceeds from sales

 

$

8,918

 

 

$

 

 

$

8,918

 

 

$

20,225

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized gains from sales

 

$

 

 

$

2

 

 

$

 

 

$

544

 

Realized losses from sales

 

 

12

 

 

 

 

 

 

12

 

 

 

 

Net realized gains

 

$

(12

)

 

$

2

 

 

$

(12

)

 

$

544

 

 

At September 30, 2017 and December 31, 2016, securities available for sale with a carrying amount of $80.7 million and $74.8 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2017 and December 31, 2016. These unrealized losses on investment securities are a result of temporary fluctuations in market prices due to a rise in interest rates, which will adjust if rates decline, and in a volatile market and are in no way a reflection of the credit quality of the investments.

-10-


 

Management does not believe these fluctuations are a reflection of the quality of the investments. At September 30, 2017, the unrealized losses on available for sale securities less than twelve months related to eight government agency bonds, four government sponsored enterprise (GSE) mortgage backed securities, and one state and political bond.  The Company had twelve government agency bonds, nine GSE mortgage backed securities, and one corporate bond that had been in a loss position for more than twelve months. At September 30, 2017, the unrealized losses on held to maturity securities related to two state and political bonds.  At December 31, 2016, the unrealized losses on available for sale securities less than twelve months related to one U.S. Treasury, seventeen government agency bonds, ten GSE mortgage backed securities, one corporate bond and seven state and political subdivision bonds. The Company had six government agency bonds, four GSE mortgage backed securities and one corporate bond that had been in a loss position for more than twelve months. At December 31, 2016, the unrealized losses on held to maturity securities related to one government agency security and eight state and political subdivision bonds.

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

September 30, 2017

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Securities available for sale temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Gov’t agencies

 

 

29,110

 

 

 

235

 

 

 

21,377

 

 

 

384

 

 

 

50,487

 

 

 

619

 

GSE-Mortgage-backed securities and CMO’s

 

 

6,148

 

 

 

40

 

 

 

11,456

 

 

 

231

 

 

 

17,604

 

 

 

271

 

State and political

 

 

1,162

 

 

 

25

 

 

 

10,224

 

 

 

323

 

 

 

11,386

 

 

 

348

 

Corporate bonds

 

 

 

 

 

 

 

 

806

 

 

 

3

 

 

 

806

 

 

 

3

 

Total securities available for sale

 

$

36,420

 

 

$

300

 

 

$

43,863

 

 

$

941

 

 

$

80,283

 

 

$

1,241

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

September 30, 2017

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Held to maturity temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and political

 

 

2,033

 

 

 

28

 

 

 

 

 

 

 

 

 

2,033

 

 

 

28

 

Total securities held to maturity

 

$

2,033

 

 

$

28

 

 

$

 

 

$

 

 

$

2,033

 

 

$

28

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2016

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Securities available for sale temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

4,014

 

 

$

3

 

 

$

 

 

$

 

 

$

4,014

 

 

$

3

 

U.S. Gov’t agencies

 

 

48,192

 

 

 

807

 

 

 

4,164

 

 

 

56

 

 

 

52,356

 

 

 

863

 

GSE-Mortgage-backed securities and CMO’s

 

 

16,250

 

 

 

395

 

 

 

5,251

 

 

 

191

 

 

 

21,501

 

 

 

586

 

State and political

 

 

9,994

 

 

 

658

 

 

 

 

 

 

 

 

 

9,994

 

 

 

658

 

Corporate bonds

 

 

1,999

 

 

 

27

 

 

 

800

 

 

 

11

 

 

 

2,799

 

 

 

38

 

Total securities available for sale

 

$

80,449

 

 

$

1,890

 

 

$

10,215

 

 

$

258

 

 

$

90,664

 

 

$

2,148

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2016

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Held to maturity temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Gov’t agencies

 

$

1,895

 

 

$

17

 

 

$

 

 

$

 

 

$

1,895

 

 

$

17

 

State and political

 

 

6,056

 

 

 

60

 

 

 

 

 

 

 

 

 

6,056

 

 

 

60

 

Total securities held to maturity

 

$

7,951

 

 

$

77

 

 

$

 

 

$

 

 

$

7,951

 

 

$

77

 

 

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

Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of quality but that the losses are temporary in nature. At

-11-


 

September 30, 2017, 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 September 30, 2017 by remaining contractual maturity are as follows:

 

 

 

September 30, 2017

 

 

 

Amortized

Cost

 

 

Estimated

Fair Value

 

 

Book

Yield

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

36,569

 

 

 

36,238

 

 

 

1.40

%

Due after five but within ten years

 

 

15,022

 

 

 

14,799

 

 

 

1.90

%

Due after ten years

 

 

5,416

 

 

 

5,375

 

 

 

1.77

%

 

 

 

57,007

 

 

 

56,412

 

 

 

1.57

%

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

2,662

 

 

 

2,645

 

 

 

2.02

%

Due after five but within ten years

 

 

5,875

 

 

 

5,866

 

 

 

2.15

%

Due after ten years

 

 

13,815

 

 

 

13,606

 

 

 

1.93

%

 

 

 

22,352

 

 

 

22,117

 

 

 

2.00

%

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

1,955

 

 

 

2,000

 

 

 

4.90

%

Due after five but within ten years

 

 

2,703

 

 

 

2,657

 

 

 

3.12

%

Due after ten years

 

 

9,755

 

 

 

9,455

 

 

 

2.45

%

 

 

 

14,413

 

 

 

14,112

 

 

 

2.91

%

Corporate Bonds

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

2,829

 

 

 

2,826

 

 

 

2.15

%

Due after five but within ten years

 

 

2,216

 

 

 

2,250

 

 

 

1.50

%

 

 

 

5,045

 

 

 

5,076

 

 

 

1.86

%

Total Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

44,015

 

 

 

43,709

 

 

 

1.64

%

Due after five but within ten years

 

 

25,816

 

 

 

25,572

 

 

 

2.05

%

Due after ten years

 

 

28,986

 

 

 

28,436

 

 

 

2.07

%

 

 

$

98,817

 

 

$

97,717

 

 

 

1.88

%

 

 

 

September 30, 2017

 

 

 

Amortized

Cost

 

 

Estimated

Fair Value

 

 

Book

Yield

 

 

 

(dollars in thousands)

 

Held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. Government agencies

 

 

 

 

 

 

 

 

 

 

 

 

Due after five but within ten years

 

$

1,351

 

 

$

1,360

 

 

 

2.49

%

 

 

 

1,351

 

 

 

1,360

 

 

 

2.49

%

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

3,700

 

 

 

3,710

 

 

 

2.28

%

Due after five but within ten years

 

 

3,238

 

 

 

3,263

 

 

 

3.03

%

 

 

 

6,938

 

 

 

6,973

 

 

 

2.63

%

Corporate Bonds

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

3,204

 

 

 

3,242

 

 

 

2.76

%

 

 

 

3,204

 

 

 

3,242

 

 

 

2.76

%

Total Securities held for maturity

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

6,904

 

 

 

6,952

 

 

 

2.51

%

Due after five but within ten years

 

 

4,589

 

 

 

4,623

 

 

 

2.87

%

 

 

$

11,493

 

 

$

11,575

 

 

 

2.65

%

 

 

-12-


 

Note 6 – Loans Held for Investment

The composition of net loans held for investment by class as of September 30, 2017 and December 31, 2016 are as follows:

 

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

(dollars in thousands)

 

Commercial

 

 

 

 

 

 

 

 

Commercial

 

$

56,469

 

 

$

55,752

 

Real estate - commercial

 

 

116,178

 

 

 

109,752

 

Other real estate construction loans

 

 

32,511

 

 

 

26,718

 

Noncommercial

 

 

 

 

 

 

 

 

Real estate 1-4 family construction

 

 

4,360

 

 

 

5,625

 

Real estate - residential

 

 

77,447

 

 

 

81,700

 

Home equity

 

 

49,840

 

 

 

50,815

 

Consumer loans

 

 

10,431

 

 

 

9,711

 

Other loans

 

 

2,703

 

 

 

1,687

 

 

 

 

349,939

 

 

 

341,760

 

Less:

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(2,448

)

 

 

(2,707

)

Deferred loan (fees) costs, net

 

 

(20

)

 

 

69

 

 

 

 

 

 

 

 

 

 

Loans held for investment, net

 

$

347,471

 

 

$

339,122

 

 

 

Note 7 – Allowance for Loan Losses

The following table shows the change in the allowance for loan losses by loan segment for the three and nine months ended September 30, 2017 and 2016, respectively:

 

Commercial

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,323

 

 

$

1,346

 

 

$

1,404

 

 

$

1,310

 

Provision (recovery) charged to operations

 

 

(34

)

 

 

271

 

 

 

(169

)

 

 

342

 

Charge-offs

 

 

(6

)

 

 

(69

)

 

 

(22

)

 

 

(131

)

Recoveries

 

 

18

 

 

 

12

 

 

 

88

 

 

 

39

 

Net (charge-offs) / Recoveries

 

 

12

 

 

 

(57

)

 

 

66

 

 

 

(92

)

Balance at end of period

 

$

1,301

 

 

$

1,560

 

 

$

1,301

 

 

$

1,560

 

 

Non-Commercial

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,228

 

 

$

1,360

 

 

$

1,303

 

 

$

1,574

 

Provision (recovery) charged to operations

 

 

(102

)

 

 

(31

)

 

 

(140

)

 

 

(272

)

Charge-offs

 

 

(7

)

 

 

(118

)

 

 

(91

)

 

 

(198

)

Recoveries

 

 

28

 

 

 

78

 

 

 

75

 

 

 

185

 

Net (charge-offs) / Recoveries

 

 

21

 

 

 

(40

)

 

 

(16

)

 

 

(13

)

Balance at end of period

 

$

1,147

 

 

$

1,289

 

 

$

1,147

 

 

$

1,289

 

-13-


 

 

Total

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

2,551

 

 

$

2,706

 

 

$

2,707

 

 

$

2,884

 

Provision (recovery) charged to operations

 

 

(136

)

 

 

240

 

 

 

(309

)

 

 

70

 

Charge-offs

 

 

(13

)

 

 

(187

)

 

 

(113

)

 

 

(329

)

Recoveries

 

 

46

 

 

 

90

 

 

 

163

 

 

 

224

 

Net (charge-offs) / Recoveries

 

 

33

 

 

 

(97

)

 

 

50

 

 

 

(105

)

Balance at end of period

 

$

2,448

 

 

$

2,849

 

 

$

2,448

 

 

$

2,849

 

 

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at September 30, 2017 and December 31, 2016:

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated

 

 

Collectively Evaluated

 

 

Total

 

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

13

 

 

$

1,856

 

 

$

1,288

 

 

$

203,302

 

 

$

1,301

 

 

$

205,158

 

Non-Commercial

 

 

154

 

 

 

3,534

 

 

 

993

 

 

 

141,227

 

 

 

1,147

 

 

 

144,761

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

167

 

 

$

5,390

 

 

$

2,281

 

 

$

344,529

 

 

$

2,448

 

 

$

349,919

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated

 

 

Collectively Evaluated

 

 

Total

 

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

16

 

 

$

1,993

 

 

$

1,388

 

 

$

190,229

 

 

$

1,404

 

 

$

192,222

 

Non-Commercial

 

 

123

 

 

 

4,096

 

 

 

1,180

 

 

 

145,511

 

 

 

1,303

 

 

 

149,607

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

139

 

 

$

6,089

 

 

$

2,568

 

 

$

335,740

 

 

$

2,707

 

 

$

341,829

 

 

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:

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

30-89 Days

Past Due

 

 

Loans

90 Days

or More

Past due

 

 

Total Past

Due Loans

 

 

Current

Loans

 

 

Total

Loans

 

 

Accruing

Loans 90 or

More Days

Past Due

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

34

 

 

$

 

 

$

34

 

 

$

56,435

 

 

$

56,469

 

 

$

 

Real estate - commercial

 

 

114

 

 

 

457

 

 

 

571

 

 

 

116,064

 

 

 

116,178

 

 

 

 

Other real estate construction

 

 

 

 

 

53

 

 

 

53

 

 

 

32,511

 

 

 

32,511

 

 

 

 

Real estate 1-4 family construction

 

 

 

 

 

 

 

 

 

 

 

4,360

 

 

 

4,360

 

 

 

 

Real estate - residential

 

 

1,356

 

 

 

190

 

 

 

1,546

 

 

 

76,071

 

 

 

77,427

 

 

 

 

Home equity

 

 

171

 

 

 

58

 

 

 

229

 

 

 

49,669

 

 

 

49,840

 

 

 

 

Consumer loans

 

 

12

 

 

 

2

 

 

 

14

 

 

 

10,417

 

 

 

10,431

 

 

 

2

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

2,703

 

 

 

2,703

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,687

 

 

$

760

 

 

$

2,447

 

 

$

348,230

 

 

$

349,919

 

 

$

2

 

-14-


 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 

 

$

 

 

$

 

 

$

55,752

 

 

$

55,752

 

 

$

 

Real estate - commercial

 

 

 

 

 

392

 

 

 

392

 

 

 

109,360

 

 

 

109,752

 

 

 

 

Other real estate construction

 

 

106

 

 

 

190

 

 

 

296

 

 

 

26,422

 

 

 

26,718

 

 

 

 

Real estate construction

 

 

 

 

 

 

 

 

 

 

 

5,625

 

 

 

5,625

 

 

 

 

Real estate - residential

 

 

510

 

 

 

846

 

 

 

1,356

 

 

 

80,413

 

 

 

81,769

 

 

 

 

Home equity

 

 

66

 

 

 

22

 

 

 

88

 

 

 

50,727

 

 

 

50,815

 

 

 

 

Consumer loan

 

 

36

 

 

 

 

 

 

36

 

 

 

9,675

 

 

 

9,711

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

1,687

 

 

 

1,687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

718

 

 

$

1,450

 

 

$

2,168

 

 

$

339,661

 

 

$

341,829

 

 

$

 

 

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. Also, mortgage loans that were originated for sale but were not sold and are being held in the loan portfolio remain in an accruing status until they are foreclosed.

The Company had $1.1 million in foreclosed residential real estate and no residential real estate in the process of foreclosure at September 30, 2017.

The composition of nonaccrual loans by class as of September 30, 2017 and December 31, 2016 is as follows:

 

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

457

 

 

 

392

 

Other real estate construction

 

 

53

 

 

 

190

 

Real estate – residential

 

 

190

 

 

 

846

 

Home equity

 

 

58

 

 

 

22

 

Consumer loans

 

 

2

 

 

 

 

 

 

$

760

 

 

$

1,450

 

 

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 with risk factors that 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.

-15-


 

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

The tables below summarize risk grades of the loan portfolio by class at September 30, 2017 and December 31, 2016:

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

Watch

 

 

Sub-

standard

 

 

Doubtful

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

55,202

 

 

$

1,252

 

 

$

15

 

 

$

 

 

$

56,469

 

Real estate - commercial

 

 

110,810

 

 

 

3,091

 

 

 

2,277

 

 

 

 

 

 

116,178

 

Other real estate construction

 

 

30,382

 

 

 

1,736

 

 

 

393

 

 

 

 

 

 

32,511

 

Real estate 1 - 4 family construction

 

 

4,360

 

 

 

 

 

 

 

 

 

 

 

 

4,360

 

Real estate - residential

 

 

69,364

 

 

 

6,839

 

 

 

1,224

 

 

 

 

 

 

77,427

 

Home equity

 

 

48,981

 

 

 

800

 

 

 

59

 

 

 

 

 

 

49,840

 

Consumer loans

 

 

10,361

 

 

 

69

 

 

 

1

 

 

 

 

 

 

10,431

 

Other loans

 

 

2,703

 

 

 

 

 

 

 

 

 

 

 

 

2,703

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

332,163

 

 

$

13,787

 

 

$

3,969

 

 

$

 

 

$

349,919

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

Watch

 

 

Sub-

standard

 

 

Doubtful

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

54,906

 

 

$

827

 

 

$

19

 

 

$

 

 

$

55,752

 

Real estate - commercial

 

 

105,366

 

 

 

1,937

 

 

 

2,449

 

 

 

 

 

 

109,752

 

Other real estate construction

 

 

24,312

 

 

 

1,876

 

 

 

530

 

 

 

 

 

 

26,718

 

Real estate 1 - 4 family construction

 

 

5,625

 

 

 

 

 

 

 

 

 

 

 

 

5,625

 

Real estate - residential

 

 

71,105

 

 

 

8,551

 

 

 

2,113

 

 

 

 

 

 

81,769

 

Home equity

 

 

49,818

 

 

 

973

 

 

 

24

 

 

 

 

 

 

50,815

 

Consumer loans

 

 

9,545

 

 

 

163

 

 

 

3

 

 

 

 

 

 

9,711

 

Other loans

 

 

1,687

 

 

 

 

 

 

 

 

 

 

 

 

1,687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

322,364

 

 

$

14,327

 

 

$

5,138

 

 

$

 

 

$

341,829

 

 

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. At September 30, 2017 there was one loan 90 days past due and still accruing and no loans at December 31, 2016. The following tables show the breakdown between performing and nonperforming loans by class at September 30, 2017 and December 31, 2016:

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

Non-

Performing

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

56,469

 

 

$

 

 

$

56,469

 

Real estate - commercial

 

 

115,721

 

 

 

457

 

 

 

116,178

 

Other real estate construction

 

 

32,458

 

 

 

53

 

 

 

32,511

 

Real estate 1 – 4 family construction

 

 

4,360

 

 

 

 

 

 

4,360

 

Real estate – residential

 

 

77,238

 

 

 

190

 

 

 

77,427

 

Home equity

 

 

49,781

 

 

 

58

 

 

 

49,840

 

Consumer loans

 

 

10,429

 

 

 

2

 

 

 

10,431

 

Other loans

 

 

2,703

 

 

 

 

 

 

2,703

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

349,159

 

 

$

760

 

 

$

349,919

 

-16-


 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

Non-

Performing

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

55,752

 

 

$

 

 

$

55,752

 

Real estate - commercial

 

 

109,360

 

 

 

392

 

 

 

109,752

 

Other real estate construction

 

 

26,528

 

 

 

190

 

 

 

26,718

 

Real estate 1 – 4 family construction

 

 

5,625

 

 

 

 

 

 

5,625

 

Real estate – residential

 

 

80,923

 

 

 

846

 

 

 

81,769

 

Home equity

 

 

50,793

 

 

 

22

 

 

 

50,815

 

Consumer loans

 

 

9,711

 

 

 

 

 

 

9,711

 

Other loans

 

 

1,687

 

 

 

 

 

 

1,687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

340,379

 

 

$

1,450

 

 

$

341,829

 

 

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired, a specific calculation is performed and a specific reserve is allocated, if necessary. The tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class at September 30, 2017 and December 31, 2016.

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

With No

Allowance

 

 

Recorded

Investment

With

Allowance

 

 

Related

Allowance

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

11

 

 

$

11

 

 

$

 

 

$

 

Real estate - commercial

 

 

1,692

 

 

 

1,412

 

 

 

280

 

 

 

9

 

Other real estate construction

 

 

691

 

 

 

53

 

 

 

100

 

 

 

4

 

Real estate 1 - 4 family construction

 

 

1

 

 

 

 

 

 

1

 

 

 

 

Real estate - residential

 

 

3,413

 

 

 

1,417

 

 

 

1,996

 

 

 

122

 

Home equity

 

 

71

 

 

 

28

 

 

 

42

 

 

 

32

 

Consumer loans

 

 

49

 

 

 

50

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,928

 

 

$

2,971

 

 

$

2,419

 

 

$

167

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

With No

Allowance

 

 

Recorded

Investment

With

Allowance

 

 

Related

Allowance

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

29

 

 

$

13

 

 

$

16

 

 

$

2

 

Real estate - commercial

 

 

1,671

 

 

 

1,552

 

 

 

119

 

 

 

9

 

Other real estate construction

 

 

831

 

 

 

190

 

 

 

103

 

 

 

5

 

Real estate 1 - 4 family construction

 

 

6

 

 

 

 

 

 

6

 

 

 

 

Real estate - residential

 

 

3,994

 

 

 

2,072

 

 

 

1,922

 

 

 

123

 

Home equity

 

 

35

 

 

 

35

 

 

 

 

 

 

 

Consumer loans

 

 

61

 

 

 

61

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

6,627

 

 

$

3,923

 

 

$

2,166

 

 

$

139

 

-17-


 

 

 

 

Three Months ended September 30, 2017

 

 

Three Months ended September 30, 2016

 

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

11

 

 

 

1

 

 

$

31

 

 

 

 

Real estate - commercial

 

 

1,661

 

 

 

17

 

 

 

620

 

 

 

9

 

Other real estate construction

 

 

154

 

 

 

1

 

 

 

297

 

 

 

1

 

Real estate 1- 4 family construction

 

 

2

 

 

 

 

 

 

9

 

 

 

1

 

Real estate - residential

 

 

3,560

 

 

 

39

 

 

 

4,542

 

 

 

65

 

Home equity

 

 

112

 

 

 

 

 

 

46

 

 

 

 

Consumer loans

 

 

51

 

 

 

 

 

 

71

 

 

 

2

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,551

 

 

$

58

 

 

$

5,616

 

 

$

78

 

 

 

 

Nine Months Ended September 30, 2017

 

 

Nine Months Ended September 30, 2016

 

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

20

 

 

$

1

 

 

$

48

 

 

$

1

 

Real estate - commercial

 

 

1,664

 

 

 

46

 

 

 

624

 

 

 

28

 

Other real estate construction

 

 

223

 

 

 

4

 

 

 

299

 

 

 

4

 

Real estate 1- 4 family construction

 

 

4

 

 

 

 

 

 

11

 

 

 

1

 

Real estate - residential

 

 

3,777

 

 

 

124

 

 

 

4,522

 

 

 

176

 

Home equity

 

 

74

 

 

 

1

 

 

 

47

 

 

 

1

 

Consumer loans

 

 

55

 

 

 

3

 

 

 

74

 

 

 

5

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,817

 

 

$

179

 

 

$

5,625

 

 

$

216

 

 

 

Note 8 – Troubled Debt Restructures

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

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

At September 30, 2017, the Company had $4.7 million in TDRs outstanding, none of which were on a non-accruing basis.

-18-


 

For the three and nine months ended September 30, 2017 and 2016, the following table presents a breakdown of the types of concessions made by loan class:

   

 

 

For the Three Months Ended September 30, 2017

 

 

 

Number

of Contracts

 

 

Pre-Modification

Outstanding Recorded

Investment

 

 

Post-Modification

Outstanding Recorded

Investment

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

$

 

 

$

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

Other real estate construction

 

 

 

 

 

 

 

 

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

 

 

 

Real estate – residential

 

 

1

 

 

 

186

 

 

 

186

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

1

 

 

 

9

 

 

 

7

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

2

 

 

$

195

 

 

$

193

 

 

 

 

For the Three Months Ended September 30, 2016

 

 

 

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

 

 

2

 

 

 

226

 

 

 

214

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

2

 

 

$

226

 

 

$

214

 

 

 

 

For the Nine Months Ended September 30, 2017

 

 

 

Number

of Contracts

 

 

Pre-Modification

Outstanding Recorded

Investment

 

 

Post-Modification

Outstanding Recorded

Investment

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1

 

 

$

12

 

 

$

11

 

Real estate - commercial

 

 

1

 

 

 

166

 

 

 

163

 

Other real estate construction

 

 

 

 

 

 

 

 

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

 

 

 

Real estate – residential

 

 

5

 

 

 

661

 

 

 

630

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

1

 

 

 

9

 

 

 

7

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

8

 

 

$

848

 

 

$

811

 

-19-


 

 

 

 

For the Nine Months Ended September 30, 2016

 

 

 

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

 

 

 

555

 

 

 

482

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

4

 

 

$

555

 

 

$

482

 

 

During the twelve months ended September 30, 2017 and September 30, 2016, 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 $123,000 in the allowance for loan losses as of September 30, 2017, as a direct result of these TDRs. At September 30, 2016, there was $106,000 in the allowance for loan losses related to TDRs.

The following table presents the successes and failures of the types of loan modifications within the previous twelve months as of September 30, 2017 and 2016:

 

 

 

Paid In Full

 

 

Paying as restructured

 

 

Converted to nonaccrual

 

 

Foreclosure/ Default

 

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

 

(dollars in thousands)

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Below market

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

Extended payment Terms

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forgiveness of Principal/Other

 

 

5

 

 

 

562

 

 

 

8

 

 

 

811

 

 

 

 

 

 

 

 

 

1

 

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

5

 

 

$

562

 

 

 

8

 

 

$

811

 

 

 

 

 

$

 

 

 

1

 

 

$

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Below market

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

Extended payment Terms

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forgiveness of Principal/Other

 

 

6

 

 

 

433

 

 

 

8

 

 

 

501

 

 

 

 

 

 

 

 

 

4

 

 

 

59

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

6

 

 

$

433

 

 

 

8

 

 

$

501

 

 

 

 

 

$

 

 

 

4

 

 

$

59

 

 

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

 

 

Note 9 – Commitments and Contingencies

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

The Bank’s risk of loss with unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments under such instruments as it does for on-

-20-


 

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 September 30, 2017, outstanding financial instruments whose contract amounts represented credit risk were approximately:

 

 

 

(dollars in thousands)

 

Commitments to extend credit

 

$

106,808

 

Credit card commitments

 

 

10,419

 

Standby letters of credit

 

 

1,349

 

Total commitments

 

$

118,576

 

 

In 2016, the Bank entered into a five-year operating lease for commercial property. The term expires on September 30, 2021. The annual cost of the lease is $151,875 with a 2.625% annual adjustor.

 

During the second quarter of 2017, the Bank entered into a lease that following completion of construction will be ten years and three months.  Construction is expected to be complete no later than first quarter of 2018.

 

 

Note 10 – Fair Value Disclosures

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

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

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

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

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment by using one of several methods including collateral value, fair value of similar debt or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected repayments or fair value of collateral exceed the recorded investments in such loans. The Company typically bases the fair value of the collateral on appraised values which the Company considers Level 3 valuations.

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at the estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial

-21-


 

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 September 30, 2017 and December 31, 2016:

 

 

 

September 30, 2017

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Government Agencies

 

 

56,412

 

 

 

 

 

 

56,412

 

 

 

 

GSE - Mortgage-backed securities and CMO’s

 

 

22,117

 

 

 

 

 

 

22,117

 

 

 

 

State and political subdivisions

 

 

14,112

 

 

 

 

 

 

14,112

 

 

 

 

Corporate bonds

 

 

5,076

 

 

 

 

 

 

5,076

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

97,717

 

 

$

 

 

$

97,717

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities at fair value

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

December 31, 2016

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury

 

$

4,014

 

 

$

4,014

 

 

$

 

 

$

 

US Gov’t

 

 

57,671

 

 

 

 

 

 

57,671

 

 

 

 

Mortgage-backed securities and CMO’s

 

 

25,648

 

 

 

 

 

 

25,648

 

 

 

 

State and political subdivisions

 

 

13,536

 

 

 

 

 

 

13,536

 

 

 

 

Corporate bonds

 

 

5,030

 

 

 

 

 

 

5,030

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

105,899

 

 

$

4,014

 

 

$

101,885

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities at fair value

 

$

 

 

$

 

 

$

 

 

$

 

 

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value less cost to sell at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of September 30, 2017 and December 31, 2016:

 

 

 

September 30, 2017

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

2,304

 

 

$

 

 

$

 

 

$

2,304

 

Other real estate owned

 

 

1,827

 

 

 

 

 

 

 

 

 

1,827

 

Total assets at fair value

 

$

4,131

 

 

$

 

 

$

 

 

$

4,131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities at fair value

 

$

 

 

$

 

 

$

 

 

$

 

-22-


 

 

 

 

December 31, 2016

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

2,217

 

 

$

 

 

$

 

 

$

2,217

 

Other real estate owned

 

 

3,130

 

 

 

 

 

 

 

 

 

3,130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

5,347

 

 

$

 

 

$

 

 

$

5,347

 

Total liabilities at fair value

 

$

 

 

$

 

 

$

 

 

$

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

September 30, 2017

 

 

 

 

 

 

 

 

Valuation Technique

 

Unobservable Input

 

General

Range

Nonrecurring measurements:

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

Discounted appraisals

 

Collateral discounts and

   Estimated costs to sell

 

0 – 25%

 

 

Discounted cash flows

 

Discount Rate

 

4%-8.75%

 

 

 

 

 

 

 

OREO

 

Discounted appraisals

 

Collateral discounts and

   Estimated costs to sell

 

0 – 10%

 

December 31, 2016

 

 

 

 

 

 

 

 

Valuation Technique

 

Unobservable Input

 

General

Range

Nonrecurring measurements:

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

Discounted appraisals

 

Collateral discounts and

   Estimated costs to sell

 

0 – 25%

 

 

Discounted cash flows

 

Discount rates

 

4%-8.75%

 

 

 

 

 

 

 

OREO

 

Discounted appraisals

 

Collateral discounts and

   Estimated costs to sell

 

0 – 10%

 

At September 30, 2017, impaired loans were being evaluated with discounted expected cash flows and discounted appraisals were being used on collateral dependent loans.

 

 

Note 11 Fair Values of Financial Instruments and Interest Rate Risk

ASC 825, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or non-recurring basis.

-23-


 

The fair value estimates presented at September 30, 2017 and December 31, 2016 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 following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of September 30, 2017 and December 31, 2016:

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

Value

 

 

Estimated

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(dollars in thousands)

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

92,583

 

 

 

92,583

 

 

$

90,093

 

 

$

2,490

 

 

$

 

Securities available for sale

 

 

97,717

 

 

 

97,717

 

 

 

 

 

 

97,717

 

 

 

 

Securities held to maturity

 

 

11,493

 

 

 

11,575

 

 

 

 

 

 

11,575

 

 

 

 

Loans held for investment, net

 

 

349,919

 

 

 

354,125

 

 

 

 

 

 

 

 

 

354,125

 

Loans held for sale

 

 

2,725

 

 

 

2,725

 

 

 

 

 

 

2,725

 

 

 

 

Restricted stock

 

 

1,068

 

 

 

1,068

 

 

 

1,068

 

 

 

 

 

 

 

Accrued interest receivable

 

 

1,516

 

 

 

1,516

 

 

 

 

 

 

 

 

 

1,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

527,253

 

 

$

500,388

 

 

$

 

 

$

500,388

 

 

$

 

Short-term borrowings

 

 

1,788

 

 

 

1,788

 

 

 

 

 

 

1,788

 

 

 

 

Junior subordinated debt

 

 

9,534

 

 

 

9,651

 

 

 

 

 

 

 

 

 

9,651

 

Accrued interest payable

 

 

151

 

 

 

151

 

 

 

 

 

 

 

 

 

151

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

Value

 

 

Estimated

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(dollars in thousands)

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45,968

 

 

$

45,995

 

 

$

43,478

 

 

$

2,517

 

 

$

 

Securities available for sale

 

 

105,899

 

 

 

105,899

 

 

 

4,014

 

 

 

101,885

 

 

 

 

Securities held to maturity

 

 

11,990

 

 

 

11,934

 

 

 

 

 

 

11,934

 

 

 

 

Loans held for investment, net

 

 

339,122

 

 

 

337,348

 

 

 

 

 

 

 

 

 

337,348

 

Loans held for sale

 

 

5,823

 

 

 

5,685

 

 

 

 

 

 

5,685

 

 

 

 

Restricted stock

 

 

1,052

 

 

 

1,052

 

 

 

1,052

 

 

 

 

 

 

 

Accrued interest receivable

 

 

1,629

 

 

 

1,629

 

 

 

 

 

 

 

 

 

1,629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

485,719

 

 

 

447,784

 

 

 

 

 

 

447,784

 

 

 

 

Short-term borrowings

 

 

2,674

 

 

 

2,674

 

 

 

 

 

 

2,674

 

 

 

 

Junior subordinated debt

 

 

9,534

 

 

 

9,673

 

 

 

 

 

 

 

 

 

9,673

 

Accrued interest payable

 

 

151

 

 

 

151

 

 

 

 

 

 

 

 

 

151

 

 

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 and 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 does not

-24-


 

 

consider the lack of liquidity and 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.

 

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. Junior subordinated debt is fair valued based on discounted cash flow analyses and is recorded in Level 3.

At September 30, 2017, the Company’s subsidiary bank had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, the fair value is the fee the Bank is expected to receive. This amount is deemed immaterial by management. See Note 9.

 

 

Note 12 – Recent Accounting Pronouncements

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in this ASU address certain aspects of recognition, measurement, presentation and disclosure. The amendments in this ASU (i) require equity investments to be measured at fair value with changes in fair value recognized in net income; (ii) simplify the impairment assessment of equity investments without readily determinable fair value; (iii) require public business entities to use exit prices, rather than entry prices, when measuring fair value of financial instruments for disclosure purposes; (iv) require separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; (v) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet; (vi) require separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; and (vii) state that a valuation allowance on deferred tax assets related to available-for-sale securities should be evaluated in combination with other deferred tax assets. The amendments in this ASU are effective for public business entities for fiscal periods beginning after December 15, 2017, including interim periods within those fiscal years. The ASU only permits early adoption of the instrument-specific credit risk provision. The Company currently does not invest in equity securities, therefore the impact from the adoption of this standard is not expected to be material to the financial position or results of operations of the Company, but new disclosures on fair value will be implemented.

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

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent considerations (Reporting Revenue Gross versus Net)”. ASU 2016-08 updates the new revenue standard by clarifying the principal

-25-


 

versus agent implementation guidance, but does not change the core principle of the new standard. The updates to the principal versus agent guidance:  (i) require an entity to determine whether it is a principal or an agent for each distinct good or service (or a distinct bundle of goods or services) to be provided to the customer; (ii) illustrate how an entity that is a principal might apply the control principle to goods, services, or rights to services, when another party is involved in providing goods or services to a customer and (iii) Clarify that the purpose of certain specific control indicators is to support or assist in the assessment of whether an entity controls a good or service before it is transferred to the customer, provide more specific guidance on how the indicators should be considered, and clarify that their relevance will vary depending on the facts and circumstances.  For public business entities, the effective date and transition requirements for these amendments are the same as the effective date and transition requirements of ASU 2014-09 which is effective for interim and annual periods beginning after December 15, 2017. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this new guidance recognized at the date of initial application.  Our revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income.  ASU 2016-08 and 2014-09 could require us to change how we recognize certain revenue streams within non-interest income, however, we do not expect these changes to have a significant impact on our financial statements.  We continue to evaluate the impact of ASU 2016-08 and 2014-09 on our Company and expect to adopt the standard in the first quarter of 2018 with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be significant.

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

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

Reclassification

Certain amounts in the 2016 financial statements have been reclassified to conform to the 2017 presentation. These reclassifications do not have an impact on net income or shareholders’ equity.

-26-


 

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

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

Comparison of Financial Condition at September 30, 2017 and December 31, 2016.

During the nine months ended September 30, 2017, the Company’s total assets increased $43.7 million, from $548.2 million to $591.9 million.

Cash and cash equivalents increased $46.6 million during the nine months ended September 30, 2017. Cash and due from banks decreased $2.6 million, while interest-earning deposits with banks increased $49.2 million. The increase is directly related to the increase in noninterest-bearing deposits.

Investment securities consist of securities available for sale and securities held to maturity. Investment securities decreased $8.7 million to $109.2 million for the nine-month period ended September 30, 2017. At September 30, 2017, the Company had net unrealized losses on securities available for sale of $1.1 million.

Loans held for investment increased from $341.8 million to $349.9 million, an increase of $8.1 million or 2.37%. The Company experienced growth in the commercial, other real estate commercial and construction, and other loan segments during the first nine months of 2017. The other real estate construction segment has the largest increase in the portfolio of 21.7% or $5.8 million. The largest decline is in the residential real estate segment of $4.3 million or 5.2%. Loans held for sale decreased 53.2%, or $3.1 million as many of the loans produced near year-end were not sold on the secondary market until first quarter 2017. The allowance for loan losses was $2.4 million at September 30, 2017, which represented 0.69% of the total loan portfolio compared to $2.7 million or 0.79% at December 31, 2016.

Other changes in consolidated assets are primarily related to bank owned life insurance and other real estate owned. Bank owned life insurance increased $1.6 million due to an additional $1.5 million investment for an executive officer. Other real estate owned decreased $1.5 million. During the nine months ended September 30, 2017, the Company sold thirteen pieces of property totaling $1.8 million. The Company recorded net valuation write-down adjustments of $92,000.

Customer deposits, our primary funding source, experienced a $41.5 million increase during the nine-month period ended September 30, 2017, increasing from $485.7 million to $527.2 million or 8.55%. Demand noninterest bearing checking increased $15.3 million, interest checking and money market accounts increased $22.3 million, savings deposits increased $2.6 million and time deposits greater than $250,000 increased $2.9 million. This increase was offset by declines in other time deposits of $1.7 million.

Total short-term borrowings decreased $886,000 for the first nine months of 2017 due to a payoff of an outstanding line of credit.

Other liabilities increased from $6.6 million at December 31, 2016 to $8.1 million at September 30, 2017, an increase of $1.4 million related to an increase in supplemental executive retirement plans (SERPs) valuation and annual funding, of which there is a corresponding increase in Rabbi Trust assets.  Additionally, reserve balances increased due to timing of payables which is to recognize expenses to be paid within the calendar year.  

At September 30, 2017, total shareholders’ equity was $45.2 million, an increase of $1.6 million from December 31, 2016. Net income for the nine-month period ended September 30, 2017 was $1.8 million. Unrealized gains and losses on investment securities, net of tax, increased by $592,000. The Company also repurchased 72,052 shares of common stock for a total value of $372,000. The Company paid $422,000 in dividends attributed to noncontrolling interest.

Comparison of Results of Operations for the Three Months Ended September 30, 2017 and 2016.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $588,000 for the three months ended September 30, 2017, as compared to $540,000 for the three months ended September 30, 2016, a increase of $48,000. Net income available to common shareholders was $440,000 or $0.06 per common share at September 30, 2017, compared to $391,000 or $0.06 per common share at September 30, 2016. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.

-27-


 

Net Interest Income

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

Net interest income for the three months ended September 30, 2017 was $4.6 million compared to $4.2 million for the three months ended September 30, 2016, an increase of $393,000. During the third quarter of 2017, the average yield on our interest–earning assets decreased three basis points to 3.72%, while the average rate we paid for our interest-bearing liabilities remained flat at 0.32%. The aforementioned changes resulted in a decrease of two basis points interest rate spread to 3.40% for the third quarter of 2017 compared to 3.42% in 2016. Our net interest margin decreased one basis point to 3.47% in the third quarter of 2017 from 3.48% in the comparable period in 2016. A portion of the Company’s loan portfolio has interest rate floors and caps in place on the loans. This feature has allowed the Company to maintain a stronger interest margin, while there has been a decline in rates; however, this feature could hurt the margin in a rising rate environment.

The following table presents average balance sheets and a net interest income analysis for the three months ended September 30, 2017 and 2016:

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended September 30,

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balance

 

 

Income/Expenses

 

 

Rate/Yield

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

$

95,670

 

 

$

87,217

 

 

$

386

 

 

$

324

 

 

 

1.60

%

 

 

1.48

%

Nontaxable securities (1)

 

 

16,260

 

 

 

19,440

 

 

 

109

 

 

 

125

 

 

 

4.29

%

 

 

4.20

%

Short-term investments

 

 

76,098

 

 

 

48,799

 

 

 

258

 

 

 

78

 

 

 

1.35

%

 

 

0.64

%

Taxable loans

 

 

342,246

 

 

 

327,457

 

 

 

4,146

 

 

 

3,929

 

 

 

4.81

%

 

 

4.77

%

Non-taxable loans (1)

 

 

10,800

 

 

 

15,296

 

 

 

68

 

 

 

96

 

 

 

4.01

%

 

 

4.18

%

Total interest-earning assets

 

 

541,074

 

 

 

498,209

 

 

 

4,967

 

 

 

4,552

 

 

 

3.72

%

 

 

3.75

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

399,205

 

 

 

370,622

 

 

 

192

 

 

 

167

 

 

 

0.19

%

 

 

0.18

%

Short-term borrowed funds

 

 

1,556

 

 

 

2,183

 

 

 

1

 

 

 

3

 

 

 

0.25

%

 

 

0.55

%

Long-term debt

 

 

9,534

 

 

 

9,538

 

 

 

138

 

 

 

139

 

 

 

5.74

%

 

 

5.80

%

Total interest bearing liabilities

 

 

410,295

 

 

 

382,343

 

 

 

331

 

 

 

309

 

 

 

0.32

%

 

 

0.32

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

$

130,779

 

 

$

115,866

 

 

$

4,636

 

 

$

4,243

 

 

 

3.40

%

 

 

3.42

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.47

%

 

 

3.48

%

 

(1)

Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 34.00% tax rate.

Provision and Allowance for Loan Losses

The provision for loan losses was a recovery of $136,000 for the three months ending September 30, 2017 compared to an expense of $240,000 for the same period in 2016. There were net loan recoveries of $22,000 for the three months ended September 30, 2017, as compared with net loan charge offs of $97,000 during the same period of 2016. Refer to the Asset Quality discussion on page 32 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, diversification of our revenue base is of major importance in our long-term success. Total noninterest income decreased $295,000 for the three-month period ending September 30,

-28-


 

2017 as compared to the same period in 2016. The primary factor contributing to the overall decrease was a decrease in service fees and commissions from our investment division of $52,000, and a decrease of mortgage loan sales of $321,000 to $2.5 million for the quarter ended September 30, 2017 from $2.8 million for the same period in 2016.

Noninterest Expense

Noninterest expense for the quarter ended September 30, 2017 was $6.2 million compared to $5.8 million for the same period of 2016. The largest component of noninterest expense comes from $250,000 for deconversion costs of our core accounting software. Salaries and employee benefits increased $21,000 for the quarter ending September 30, 2017.  Net occupancy expense remained flat at September 30, 2017. Foreclosed real estate expense has increased $17,000 from $29,000 at September 30, 2016 to $48,000 at September 30, 2017 due to write downs for updated appraisals and contract prices to sell the property.  FDIC insurance has decreased $10,000 from September 30, 2016 to September 30, 2017 due to the decline in troubled assets, as well as the altered deposit insurance calculation that took effect in the first quarter of 2017. The table below reflects the composition of other noninterest expense.  Total loan cost increased $16,000 for the three-month period ended September 30, 2017 compared to the three-month period ended September 30, 2016 due to reduced loan collection, cost of loans in process of foreclosure, and reduced bank paid closing cost expenses.

Other noninterest expense

 

 

 

Three Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

 

(dollars in thousands)

 

Postage

 

$

45

 

 

$

48

 

Telephone and data lines

 

 

43

 

 

 

41

 

Loan costs (recoveries)

 

 

81

 

 

 

65

 

Shareholder relations expense

 

 

47

 

 

 

33

 

Dues and subscriptions

 

 

55

 

 

 

49

 

Other

 

 

258

 

 

 

298

 

Total

 

$

529

 

 

$

534

 

Income Tax Expense

The Company had income tax expense of $259,000 for the three months ended September 30, 2017 at an effective tax rate of 30.58% compared to income tax expense of $228,000 with an effective tax rate of 29.69% in the comparable 2016 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. The effective tax rate increased as we had less interest income from tax-free bonds and loans. 

Comparison of Results of Operations for the Nine Months Ended September 30, 2017 and 2016.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported an increase of $77,000 in net income for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. Net income available to common shareholders was $1.4 million or $0.20 per common share for the nine months ended September 30, 2017, compared to $1.3 million or $0.19 per common share for the nine months ended September 30, 2016. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.

Net Interest Income

Net interest income for the nine months ended September 30, 2017 was $13.4 million compared to $12.4 million for nine months ending September 30, 2016. During the nine months ending September 30, 2017, the volume of interest-earning assets increased $40 million as the volume of interest-bearing liabilities increased $24 million. The average yield on our interest–earning assets declined seven basis points to 3.73%, while the average rate we paid for our interest-bearing liabilities decreased four basis points to 0.32%. The Company’s assets that are interest rate sensitive adjust at the time the Federal Reserve adjusts interest rates, while interest-bearing time deposits adjust at the time of maturity. The aforementioned changes resulted in a decrease of two basis points in our interest rate spread to 3.42% for the first nine months of 2017, compared to 3.44% for the first nine months of 2016. Our net interest margin was 3.49% and 3.52% for the comparable nine-month periods in 2017 and 2016, respectively. A portion of the Company’s loan portfolio has interest rate floors and caps in place on the loans. This feature has allowed the Company to maintain a stronger interest margin, while there has been a decline in rates; however, this feature could hurt the margin in a rising rate environment.

-29-


 

The following table presents average balance sheets and a net interest income analysis for the six months ended September 30, 2017 and 2016:

 

Average Balance Sheet and Net Interest Income Analysis

For the Nine Months Ended September 30,

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balance

 

 

Income/Expenses

 

 

Rate/Yield

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

$

97,694

 

 

$

85,149

 

 

$

1,185

 

 

$

973

 

 

 

1.62

%

 

 

1.53

%

Nontaxable securities (1)

 

 

16,936

 

 

 

19,291

 

 

 

326

 

 

 

375

 

 

 

4.15

%

 

 

4.20

%

Short-term investments

 

 

62,181

 

 

 

49,458

 

 

 

520

 

 

 

235

 

 

 

1.12

%

 

 

0.63

%

Taxable loans

 

 

338,794

 

 

 

316,102

 

 

 

12,135

 

 

 

11,506

 

 

 

4.79

%

 

 

4.86

%

Non-taxable loans (1)

 

 

10,657

 

 

 

16,405

 

 

 

201

 

 

 

315

 

 

 

4.06

%

 

 

4.21

%

Total interest-earning assets

 

 

526,262

 

 

 

486,405

 

 

 

14,367

 

 

 

13,404

 

 

 

3.73

%

 

 

3.80

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

388,948

 

 

 

363,839

 

 

 

521

 

 

 

563

 

 

 

0.18

%

 

 

0.21

%

Short-term borrowed funds

 

 

2,267

 

 

 

3,582

 

 

 

14

 

 

 

32

 

 

 

0.83

%

 

 

1.19

%

Long-term debt

 

 

9,534

 

 

 

9,543

 

 

 

410

 

 

 

412

 

 

 

5.75

%

 

 

5.77

%

Total interest bearing liabilities

 

 

400,749

 

 

 

376,964

 

 

 

945

 

 

 

1,007

 

 

 

0.32

%

 

 

0.36

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

$

125,513

 

 

$

109,441

 

 

$

13,422

 

 

$

12,397

 

 

 

3.42

%

 

 

3.44

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.49

%

 

 

3.52

%

 

(1)

Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 34.00% tax rate.

Provision and Allowance for Loan Losses

The Company recovered $309,000 for the nine months ending September 30, 2017 compared to $70,000 provision for the same period in 2016. There were net loan recoveries of $49,000 for the nine months ended September 30, 2017 as compared with net loan charge-offs of $8,000 during the same period of 2016. Refer to the Asset Quality discussion on page 32 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, like all financial institutions, diversification of our earnings base is of major importance in our long-term success. Total noninterest income decreased $756,000 for the nine-month period ending September 30, 2017 as compared to the same period in 2016. Income from mortgage loan sales was $2.5 million for the nine months ended September 30, 2017 compared to $2.8 million for the same period in 2016. Service charges on deposit accounts produced revenue of $874,000 for the nine months ended September 30, 2017, a decrease of $30,000 compared to the same period in 2016. Other service fees and commissions experienced a 1.6% decrease for the comparable nine-month period. This decrease was directly related to brokerage commissions and mortgage loan sales decreasing. September 30, 2017 losses realized on the sale of securities were $14,000 for the first nine months in 2017 compared to gains of $544,000 for the same period in 2016.  

Noninterest Expense

Noninterest expense for the nine months ended September 30, 2017 was $18.2 million compared to $17.8 million for the same period of 2016; an increase of $487,000. Salaries and employee benefits, the largest component of noninterest expense, increased $195,000 for the nine months ending September 30, 2017. Professional fees and services increased $52,000 during the nine months ending September 30, 2017 as compared to the same period in 2016. Data processing fees increased $250,000 for deconversion costs of our core accounting software.  FDIC deposit insurance premiums also declined $90,000 for the comparable periods. Foreclosed real estate expense increased $108,000 for the nine months ending September 30, 2017 compared to the same period in 2016. The driver of this increase was due to write downs to contracts of sale. Other noninterest expense decreased $222,000 for the comparable nine-month periods. The table below reflects the composition of other noninterest expense.  Total loan cost declined $157,000 for the nine-month period September 30, 2017 compared to September 30, 2016 due to reduced loan collection, cost of loans in process of foreclosure, and reduced bank paid closing cost expenses.

-30-


 

Other noninterest expense

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Postage

 

$

142

 

 

$

145

 

Telephone and data lines

 

 

124

 

 

 

125

 

Loan costs

 

 

249

 

 

 

406

 

Shareholder relations expense

 

 

110

 

 

 

100

 

Dues and subscriptions

 

 

163

 

 

 

146

 

Other

 

 

924

 

 

 

1,012

 

Total

 

$

1,712

 

 

$

1,934

 

Income Tax Expense

The Company had income tax expense of $829,000 for the nine months ended September 30, 2017 resulting in an effective tax rate of 31.10%, compared to income tax expense of $745,000 and an effective rate of 29.74% in the 2016 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. The effective tax rate increased as we had less interest income from tax-free bonds and loans. 

Asset Quality

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

Management uses a risk-grading program designed to evaluate the credit risk in the loan portfolio. In this program, risk grades are initially assigned by loan officers then reviewed and monitored by credit administration. This process includes the maintenance of an internally classified loan list that is designed to help management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history and the current delinquent status. Because of this process, certain loans are deemed to be impaired and evaluated as an impaired loan.

The allowance for loan losses represents management’s best estimate of an appropriate amount to provide for probable credit risk inherent in the loan portfolio in the normal course of business. While management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ from the assumptions used in making the determinations. Furthermore, while management believes it has established the allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that banking regulators, in reviewing the Company’s portfolio, will not require an adjustment to the allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary, should the quality of any loans deteriorate because of the factors discussed herein. Any material increase in the allowance for loan losses may adversely affect the Company’s financial condition and results of operations.

At September 30, 2017, the levels of our impaired loans, which includes all loans in nonaccrual status, TDRs and other loans deemed by management to be impaired, were $5.4 million compared to $6.1 million at December 31, 2016, a net decrease of $699,000. Total nonaccrual loans, which are a component of impaired loans, decreased from $1.5 million at December 31, 2016 to $758,000 at

-31-


 

September 30, 2017. During the first nine months of 2017, four relationships totaling $140,000 were added to impaired loans. The addition was offset by twelve impaired relationships totaling $849,000 being charged off, paid out, and net pay downs of $182,000.

The allowance, expressed as a percentage of gross loans held for investment, decreased ten basis points from 0.79% at December 31, 2016 to 0.69% at September 30, 2017. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans decreased from 0.78% at December 31, 2016 to 0.69% at September 30, 2017. Intuitively, growth in the loan portfolio would indicate an increase in the reserve; however, the overall quality of performing loans in the loan portfolio improved. Additionally, charge-offs have declined $217,000 during the first three quarters compared to the same period of 2016. Recoveries have also decreased $62,000 resulting in an improvement in net charge-offs of $155,000.  The improved charge off position contributed to the decrease in the reserve for loan loss. New loan production has credit metrics that we believe indicate a lower probability of default, thus lowering the expected loss associated with those credits compared to the overall loan portfolio. The combined (current book and new production) loan portfolio is less risky; therefore, as current loans contractually pay down and new production is booked – growing the overall portfolio – the allowance as a percentage of loans, declines, similar to the expected loss of the overall blended portfolio. The individually evaluated allowance as a percentage of individually evaluated loans increased from 2.28% at December 31, 2016 to 3.11% at September 30, 2017 due to an increase of individually evaluated loans that are not sufficiently collateralized, therefore requiring additional allowance. The portion of the Company’s allowance for loan loss model related to general reserves captures the mean loss of individual loans and the rare event of severe loss that can occur within the loan portfolio. Specifically, the Company calculates probable losses on loans by computing a probability of loss and expected loss scenario by FDIC call report codes. Together, these expected components as well as a level of more extreme unexpected losses form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.

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

Nonperforming loans, which consist of nonaccrual loans and loans past due 90 days and still accruing, to total loans decreased from 0.42% at December 31, 2016, to 0.22% at September 30, 2017.

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 $1.7 million during the nine month period ended September 30, 2017. The Company sold fifteen pieces of foreclosed property totaling $1.8 million realizing a loss of $31,000. The Company had seven write-downs of $142,000 which was offset by improved valuations and sales activity of $50,000.  There were two loans foreclosed on during the third quarter with a book value of $113,000.

Troubled debt restructured loans at September 30, 2017 totaled $4.7 million compared to $4.5 million at December 31, 2016 and are included in impaired loans. At September 30, 2017, there were no troubled debt restructured loans in nonaccrual status.

The following table shows the comparison of nonperforming assets at September 30, 2017 to December 31, 2016:

Nonperforming Assets

(dollars in thousands)

 

 

 

September 30, 2017

 

 

December 31, 2016

 

Nonperforming assets:

 

 

 

 

 

 

 

 

Loans past due 90 days or more

 

$

2

 

 

$

 

Nonaccrual loans

 

 

758

 

 

 

1,450

 

Other real estate owned

 

 

2,681

 

 

 

4,176

 

Total nonperforming assets

 

$

3,441

 

 

$

5,626

 

 

 

 

 

 

 

 

 

 

Allowance for loans losses

 

$

2,448

 

 

$

2,707

 

Nonperforming loans to total loans

 

 

0.22

%

 

 

0.42

%

Allowance for loan losses to total loans

 

 

0.69

%

 

 

0.79

%

Nonperforming assets to total assets

 

 

0.58

%

 

 

1.03

%

Allowance for loan losses to nonperforming loans

 

 

322.96

%

 

 

186.69

%

-32-


 

 

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 September 30, 2017, with available credit of $28.0 million; established borrowing relationships with the Federal Home Loan Bank, with available credit of $40.5 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of $30.7 million and the issuance of commercial paper. The Company has also secured long-term debt from other sources. Total debt from these sources aggregated $9.5 million at both September 30, 2017, and December 31, 2016.

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.

The Company continues to maintain capital ratios that support its asset growth. Bank regulatory agencies approved regulatory capital guidelines (“Basel III”) aimed at strengthening existing capital requirements for banking organizations. Under the final rules, minimum requirements increase for both the quantity and quality of capital held by the Company. The rules include a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.50%, an increase in the minimum ratio of Tier 1 capital to risk-weighted assets of 6.00%, require a minimum ratio of total capital to risk-weighted assets of 8.00%, and require a minimum Tier 1 leverage ratio of 5.00%. A  capital conservation buffer, comprised of common equity Tier 1 capital, was also established above the regulatory minimum capital requirements. This capital conservation buffer will be phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increase each subsequent year by an additional 0.625% until reaching its final level of 2.50% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. The final rules also revise the definition and calculation of Tier 1 capital, total capital, and risk-weighted assets.

The phase-in period for the final rules became effective for the Company and its subsidiary bank on January 1, 2015, with full compliance of all the final rules’ requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019. As of September 30, 2017, the Company and its subsidiary bank continue to exceed minimum capital standards and remain well-capitalized under the new rules.

As previously discussed, the Company’s subsidiary bank has a net total of $10.6 million in outstanding Fixed Rate Noncumulative Perpetual Preferred Stock. The preferred stock qualifies as Tier 1 capital at the Bank and 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 September 30, 2017, the Company had $9.5 million in subordinated debt outstanding that qualifies as Tier 2 capital. The Company has made all interest and dividend payments in a timely manner.

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

The Company’s primary market risk is interest rate risk. Interest rate risk is the result of differing maturities or repricing intervals of interest-earning assets and interest-bearing liabilities and the fact that rates on these financial instruments do not change uniformly. These conditions may impact the earnings generated by the Company’s interest earning assets or the cost of its interest-bearing liabilities, thus directly impacting the Company’s overall earnings. The Company’s management actively monitors and manages interest rate risk. One way this is accomplished is through the development of and adherence to the Company’s asset/liability policy. This policy sets forth management’s strategy for matching the risk characteristics of the Company’s interest-earning assets and liabilities so as to mitigate the effect of changes in the rate environment. In management’s opinion, the Company’s market risk profile has not changed significantly since December 31, 2016.

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

-33-


 

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 third quarter of 2017. In connection with such evaluation, the Company has determined that there were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensuring that the Company’s systems evolve with its business.

 

 

Part II. OTHER INFORMATION

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

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

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information with respect to shares of common stock repurchased by the Company during the three months ended September 30, 2017.

 

 

 

(a) Total

Number of

Shares

Purchased

 

 

(b) Average

Price Paid per

Share

 

 

(c) Total Number

of Shares

Purchased as

Part of Publicly

Announced

Plans or Program

(1)

 

 

(d) Maximum

Dollar Value of

Shares that May

Yet Be

Purchased Under

the Plans

 

July 1, 2017 Through July 31, 2017

 

 

 

 

$

 

 

 

 

 

$

 

August 1, 2017 Through August 31, 2017

 

 

 

 

$

 

 

 

 

 

$

 

September 1, 2017 Through September 30, 2017

 

 

981

 

 

$

5.25

 

 

 

 

 

$

 

Total

 

 

981

 

 

$

5.25

 

 

 

 

 

$

 

 

 

(1)

Trades of the Company’s common stock occur on the OTC Pink market from time to time. The Company also has in place a Stock Repurchase Plan that provides liquidity to its shareholders in the event a willing buyer is not available to purchase shares that are offered for sale. The Company is under no obligation to purchase shares offered; however, it will accommodate such offers as its Stock Repurchase Plan allows.

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Mine Safety Disclosures

Not applicable

-34-


 

Item 5.

Other Information

None.

 

 

-35-


 

Item 6.

Exhibits

 

The following exhibits are being filed herewith:

 

 

Exhibit

Number

 

Description of Exhibit

 

 

 

 

 

 

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32

 

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101

 

Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017, in XBRL (eXtensible Business Reporting Language)

 

 

 

-36-


 

Signatures

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

 

 

 

 

 

UWHARRIE CAPITAL CORP

 

 

 

 

(Registrant)

 

 

 

 

 

 

 

Date:

 

November 7, 2017

 

By:

 

/s/ Roger L. Dick

 

 

 

 

Roger L. Dick

 

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

Date:

 

November 7, 2017

 

By:

 

/s/ R. David Beaver, III

 

 

 

 

R. David Beaver, III

 

 

 

 

Principal Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-37-