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ing

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2018

OR

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

For the transition period from                      to                     .

COMMISSION FILE NUMBER 000-22062

 

UWHARRIE CAPITAL CORP

(Exact name of registrant as specified in its charter)

 

 

NORTH CAROLINA

 

56-1814206

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

132 NORTH FIRST STREET

ALBEMARLE, NORTH CAROLINA

 

28001

(Address of Principal Executive Offices)

 

(Zip Code)

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

N/A

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

 

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

Indicate by check mark whether the registrant has submitted electronically 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: 7,107,520 shares of common stock outstanding as of April 27, 2018.

 

 


 

 

Table of Contents

 

 

 

 

 

Page No.

 

 

 

 

 

Part I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1 -

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets March 31, 2018 and December 31, 2017

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income for the Three Months Ended March 31, 2018 and 2017

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017

 

5

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2018

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

 

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2 -

 

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

 

26

 

 

 

 

 

Item 3 -

 

Quantitative and Qualitative Disclosures about Market Risk

 

31

 

 

 

 

 

Item 4 -

 

Controls and Procedures

 

31

 

 

 

 

 

Part II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1 -

 

Legal Proceedings

 

32

 

 

 

 

 

Item 1A -

 

Risk Factors

 

32

2

 

 

 

 

Item 2 -

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

32

 

 

 

 

 

Item 3 -

 

Defaults Upon Senior Securities

 

32

 

 

 

 

 

Item 4 -

 

Mine Safety Disclosures

 

32

 

 

 

 

 

Item 5 -

 

Other Information

 

32

 

 

 

 

 

Item 6 -

 

Exhibits

 

33

 

 

 

 

 

 

 

Exhibit Index

 

34

 

 

 

Signatures

 

35

 

-2-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

 

Part I. Financial Information

Item 1.

Financial Statements.

 

 

 

March 31, 2018 (Unaudited)

 

 

December 31, 2017*

 

 

 

(dollars in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

7,276

 

 

$

7,538

 

Interest-earning deposits with banks

 

 

85,453

 

 

 

62,865

 

Securities available for sale, at fair value

 

 

92,914

 

 

 

95,743

 

Securities held to maturity, at amortized cost (fair value $11,022 and $11,461, respectively)

 

 

11,153

 

 

 

11,458

 

Loans held for sale

 

 

2,149

 

 

 

4,414

 

Loans:

 

 

 

 

 

 

 

 

Loans held for investment

 

 

365,154

 

 

 

356,871

 

Less allowance for loan losses

 

 

(2,547

)

 

 

(2,458

)

Net loans held for investment

 

 

362,607

 

 

 

354,413

 

Premises and equipment, net

 

 

14,934

 

 

 

14,728

 

Interest receivable

 

 

1,705

 

 

 

1,709

 

Restricted stock

 

 

1,094

 

 

 

1,067

 

Bank owned life insurance

 

 

8,584

 

 

 

8,546

 

Other real estate owned

 

 

1,733

 

 

 

2,349

 

Prepaid assets

 

 

1,233

 

 

 

786

 

Other assets

 

 

11,153

 

 

 

10,742

 

Total assets

 

$

601,988

 

 

$

576,358

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Demand noninterest-bearing

 

$

132,119

 

 

$

113,762

 

Interest checking and money market accounts

 

 

297,165

 

 

 

289,953

 

Savings deposits

 

 

47,703

 

 

 

45,698

 

Time deposits, $250,000 and over

 

 

7,562

 

 

 

7,933

 

Other time deposits

 

 

53,357

 

 

 

55,282

 

Total deposits

 

 

537,906

 

 

 

512,628

 

Short-term borrowed funds

 

 

2,279

 

 

 

1,752

 

Long-term debt

 

 

9,534

 

 

 

9,534

 

Interest payable

 

 

147

 

 

 

148

 

Other liabilities

 

 

8,375

 

 

 

7,756

 

Total liabilities

 

 

558,241

 

 

 

531,818

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

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

   outstanding 7,107,520 and 7,112,853

 

 

8,884

 

 

 

8,891

 

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

 

 

 

 

 

 

Additional paid-in capital

 

 

12,793

 

 

 

12,824

 

Undivided profits

 

 

13,373

 

 

 

13,282

 

Accumulated other comprehensive income (loss)

 

 

(1,956

)

 

 

(1,107

)

Total Uwharrie Capital shareholders’ equity

 

 

33,094

 

 

 

33,890

 

Noncontrolling interest

 

 

10,653

 

 

 

10,650

 

Total shareholders’ equity

 

 

43,747

 

 

 

44,540

 

Total liabilities and shareholders’ equity

 

$

601,988

 

 

$

576,358

 

 

(*)

Derived from audited consolidated financial statements

See accompanying notes  

 

 

-3-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands, except share and per share data)

 

Interest Income

 

 

 

 

 

 

 

 

Loans, including fees

 

$

4,256

 

 

$

3,990

 

Investment securities

 

 

 

 

 

 

 

 

US Treasury

 

 

 

 

 

11

 

US Government agencies and corporations

 

 

387

 

 

 

375

 

State and political subdivisions

 

 

124

 

 

 

123

 

Interest-earning deposits with banks and federal funds sold

 

 

277

 

 

 

104

 

Total interest income

 

 

5,044

 

 

 

4,603

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

 

 

 

 

 

 

Interest checking and money market accounts

 

 

144

 

 

 

84

 

Savings deposits

 

 

12

 

 

 

12

 

Time deposits, $250,000 and over

 

 

16

 

 

 

11

 

Other time deposits

 

 

45

 

 

 

47

 

Short-term borrowed funds

 

 

3

 

 

 

7

 

Long-term debt

 

 

135

 

 

 

135

 

Total interest expense

 

 

355

 

 

 

296

 

Net interest income

 

 

4,689

 

 

 

4,307

 

Provision for (recovery of) loan losses

 

 

78

 

 

 

(59

)

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

 

 

4,611

 

 

 

4,366

 

 

 

 

 

 

 

 

 

 

Noninterest Income

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

283

 

 

 

289

 

Interchange and card transaction fees

 

 

142

 

 

 

136

 

Other service fees and commissions

 

 

661

 

 

 

814

 

Income from mortgage loan sales

 

 

662

 

 

 

871

 

Other income

 

 

169

 

 

 

286

 

Total noninterest income

 

 

1,917

 

 

 

2,396

 

 

 

 

 

 

 

 

 

 

Noninterest Expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

3,946

 

 

 

3,698

 

Net occupancy expense

 

 

364

 

 

 

304

 

Equipment expense

 

 

170

 

 

 

152

 

Data processing costs

 

 

250

 

 

 

182

 

Office supplies and printing

 

 

36

 

 

 

25

 

Foreclosed real estate expense

 

 

39

 

 

 

88

 

Professional fees and services

 

 

248

 

 

 

176

 

Marketing and donations

 

 

211

 

 

 

258

 

Electronic banking expense

 

 

93

 

 

 

78

 

Software amortization and maintenance

 

 

213

 

 

 

181

 

FDIC insurance

 

 

66

 

 

 

45

 

Other noninterest expense

 

 

600

 

 

 

701

 

Total noninterest expense

 

 

6,236

 

 

 

5,888

 

Income before income taxes

 

 

292

 

 

 

874

 

Income taxes

 

 

58

 

 

 

257

 

Net income

 

$

234

 

 

$

617

 

 

 

 

 

 

 

 

 

 

Consolidated net income

 

$

234

 

 

$

617

 

Less: net income attributable to noncontrolling interest

 

 

(143

)

 

 

(146

)

Net income attributable to Uwharrie Capital Corp and common shareholders

 

 

91

 

 

 

471

 

Net income (loss) per common share

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

 

$

0.07

 

Diluted

 

$

0.01

 

 

$

0.07

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

7,112,347

 

 

 

7,185,992

 

Diluted

 

 

7,112,347

 

 

 

7,186,645

 

 

 

See accompanying notes  

 

 

-4-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

234

 

 

$

617

 

 

 

 

 

 

 

 

 

 

Unrealized gain on available for sale securities

 

 

(1,099

)

 

 

377

 

Related tax effect

 

 

250

 

 

 

(128

)

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

 

(849

)

 

 

249

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

(615

)

 

 

866

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive income attributable to noncontrolling

   interest

 

 

(143

)

 

 

(146

)

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Uwharrie Capital

 

$

(758

)

 

$

720

 

 

See accompanying notes

 

 

-5-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

 

 

 

 

Number of

Common

Shares

Issued

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Undivided

Profits

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Non

Controlling

Interest

 

 

Total

 

 

 

(dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

 

7,112,853

 

 

$

8,891

 

 

$

12,824

 

 

$

13,282

 

 

$

(1,107

)

 

$

10,650

 

 

$

44,540

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

91

 

 

 

 

 

 

143

 

 

 

234

 

Repurchase of common stock

 

 

(18,711

)

 

 

(23

)

 

 

(80

)

 

 

 

 

 

 

 

 

 

 

 

(103

)

Stock options exercised

 

 

13,378

 

 

 

16

 

 

 

49

 

 

 

 

 

 

 

 

 

 

 

 

65

 

Other comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(849

)

 

 

 

 

 

(849

)

Record preferred stock dividend Series B

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(103

)

 

 

(103

)

Record preferred stock dividend Series C

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37

)

 

 

(37

)

Balance, March 31, 2018

 

 

7,107,520

 

 

$

8,884

 

 

$

12,793

 

 

$

13,373

 

 

$

(1,956

)

 

$

10,653

 

 

$

43,747

 

 

See accompanying notes

 

 

-6-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

234

 

 

$

617

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

Provided (used) by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

240

 

 

 

217

 

Provision for (recovery of) loan losses

 

 

78

 

 

 

(59

)

Gain on sale of OREO

 

 

9

 

 

 

(7

)

Net amortization of premium on investment securities AFS

 

 

170

 

 

 

230

 

Net amortization of premium on investment securities HTM

 

 

40

 

 

 

38

 

Net amortization of mortgage servicing rights

 

 

167

 

 

 

179

 

OREO write downs

 

 

 

 

 

48

 

Net change in:

 

 

 

 

 

 

 

 

Originations and purchases of mortgage loans for sale

 

 

(18,608

)

 

 

(22,007

)

Proceeds from sales of mortgage loans for sale

 

 

20,706

 

 

 

26,336

 

Accrued interest receivable

 

 

4

 

 

 

30

 

Prepaid Assets

 

 

(447

)

 

 

(294

)

Cash surrender value of life insurance

 

 

(38

)

 

 

(28

)

Miscellaneous other assets

 

 

(158

)

 

 

(105

)

Accrued interest payable

 

 

(1

)

 

 

(3

)

Miscellaneous other liabilities

 

 

619

 

 

 

485

 

Net cash provided by operating activities

 

 

3,015

 

 

 

5,677

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

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

 

 

265

 

 

 

138

 

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

 

 

1,560

 

 

 

2,396

 

Purchase of life insurance investment

 

 

 

 

 

(1,525

)

Net change in restricted stock

 

 

(27

)

 

 

(15

)

Net decrease (increase) in loans

 

 

(8,272

)

 

 

(2,435

)

Purchase of premises and equipment

 

 

(446

)

 

 

(198

)

Proceeds from sale of OREO

 

 

607

 

 

 

818

 

Net cash used by investing activities

 

 

(6,313

)

 

 

(821

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net increase in deposit accounts

 

 

25,278

 

 

 

13,993

 

Net increase (decrease) in federal funds purchased

 

 

 

 

 

 

 

 

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

 

 

527

 

 

 

(41

)

Repayment of other borrowings

 

 

 

 

 

(2

)

Common stock repurchased

 

 

(103

)

 

 

(241

)

Exercise of stock options

 

 

65

 

 

 

 

Dividends paid on preferred stock

 

 

(143

)

 

 

(146

)

Net cash provided by financing activities

 

 

25,624

 

 

 

13,563

 

Increase in cash and cash equivalents

 

 

22,326

 

 

 

18,419

 

Cash and cash equivalents, beginning of period

 

 

70,403

 

 

 

45,968

 

Cash and cash equivalents, end of period

 

$

92,729

 

 

$

64,387

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

 

 

Interest paid

 

$

296

 

 

$

299

 

Income taxes paid

 

 

 

 

 

 

Supplemental Schedule of Non-Cash Activities

 

 

 

 

 

 

 

 

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

 

$

849

 

 

$

249

 

Loans transferred to foreclosed real estate

 

 

 

 

 

111

 

Mortgage servicing rights capitalized

 

 

74

 

 

 

179

 

 

 

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 2017 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 accounting principles generally accepted in the United States of America (“GAAP”), requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses.

Accounting Changes, Reclassifications and Restatements

Certain items in prior financial statements have been reclassified to conform to the current presentation. ASU 2014-09. “Revenue from Contracts with Customers (Topic 606)” was adopted as of January 1, 2018. ASU 2014-09 requires us to report network costs associated with debit card and credit card transactions netted against the related fees from such transactions. Previously, such network costs were reported as a component of other non-interest expense. For the three months ended March 31, 2018, gross interchange and card transaction fees totaled $379,000 while related network costs totaled $237,000. On a net basis, we reported $142,000 as interchange and card transaction fees in the accompanying Consolidated Statement of Income for the three months ended March 31, 2018. For the three months ended March 31, 2017, we reported interchange and card transaction fees totaling $383,000 on a gross basis in the accompanying Consolidated Statement of Income while related network costs totaling $247,000 were reported as a component of other non-interest expense. 2017 was reclassed in 2018 to report net $136,000 in interchange and card transaction fees.

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

-8-


 

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 months ended March 31, 2018 and 2017:

 

 

 

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

 

 

 

For the Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

(1,107

)

 

$

(1,318

)

 

 

 

 

 

 

 

 

 

Other Comprehensive income (loss) before reclassifications,

   net of ($250,000) and $128,000

   tax effect, respectively

 

 

(849

)

 

 

249

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other

   comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive income (loss)

 

 

(849

)

 

 

249

 

 

 

 

 

 

 

 

 

 

Ending Balance

 

$

(1,956

)

 

$

(1,069

)

 

 

Note 3 – Noncontrolling Interest

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

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

 

 

Note 4 – Per Share Data

 

Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for stock dividends. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. The Company had no stock options outstanding at March 31, 2018 but there were 13,116 shares of common stock at December 31, 2017. All of these options were dilutive at December 31, 2017 because the strike price was lower than the market price.

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

-9-


 

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

 

 

 

For the Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

7,112,347

 

 

 

7,185,992

 

 

 

 

 

 

 

 

 

 

Effect of dilutive stock options

 

 

 

 

 

653

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares and dilutive

   potential common shares used in computing diluted net

   income per common share

 

 

7,112,347

 

 

 

7,186,645

 

 

 

Note 5 – Investment Securities

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

 

March 31, 2018

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

55,856

 

 

$

49

 

 

$

1,409

 

 

$

54,496

 

GSE - Mortgage-backed securities and CMO’s

 

 

20,238

 

 

 

5

 

 

 

636

 

 

 

19,607

 

State and political subdivisions

 

 

14,322

 

 

 

18

 

 

 

508

 

 

 

13,832

 

Corporate bonds

 

 

5,039

 

 

 

8

 

 

 

68

 

 

 

4,979

 

Total securities available for sale

 

$

95,455

 

 

$

80

 

 

$

2,621

 

 

$

92,914

 

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

1,074

 

 

$

 

 

$

29

 

 

$

1,045

 

State and political subdivisions

 

 

6,913

 

 

 

1

 

 

 

82

 

 

 

6,832

 

Corporate bonds

 

 

3,166

 

 

 

 

 

 

21

 

 

 

3,145

 

Total securities held to maturity

 

$

11,153

 

 

$

1

 

 

$

132

 

 

$

11,022

 

 

December 31, 2017

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

56,522

 

 

$

33

 

 

$

940

 

 

$

55,615

 

GSE - Mortgage-backed securities and CMO’s

 

 

21,253

 

 

 

12

 

 

 

374

 

 

 

20,891

 

State and political subdivisions

 

 

14,368

 

 

 

27

 

 

 

196

 

 

 

14,199

 

Corporate bonds

 

 

5,042

 

 

 

7

 

 

 

11

 

 

 

5,038

 

Total securities available for sale

 

$

97,185

 

 

$

79

 

 

$

1,521

 

 

$

95,743

 

 

December 31, 2017

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

1,348

 

 

$

 

 

$

9

 

 

$

1,339

 

State and political subdivisions

 

 

6,925

 

 

 

23

 

 

 

36

 

 

 

6,912

 

Corporate bonds

 

 

3,185

 

 

 

25

 

 

 

 

 

 

3,210

 

Total securities held to maturity

 

$

11,458

 

 

$

48

 

 

$

45

 

 

$

11,461

 

 

At March 31, 2018 and December 31, 2017, the Company owned Federal Reserve Bank stock (FRB) reported at cost of $509,000 and $508,000, and Federal Home Loan Bank stock (FHLB) of $585,000 and $559,000, respectively. The investments in FRB stock and

-10-


 

FHLB stock are required investments related to the Company’s membership in, and borrowings with, these banks and classified as restricted stock on the consolidated balance sheet. These investments are carried at cost since there is no ready market and redemption has historically been made at par value. The Company estimated that the fair value approximated cost and that these investments were not impaired at March 31, 2018.

There were no sales of securities available for sale for the three-month periods ended March 31, 2018 and March 31, 2017.

 

 

At March 31, 2018 and December 31, 2017, securities available for sale with a carrying amount of $73.3 million and $75.5 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2018 and December 31, 2017. These unrealized losses on investment securities are a result of temporary fluctuations in market prices due to a rise in interest rates, which will adjust if rates decline, and in a volatile market and are in no way a reflection of the credit quality of the investments. Management does not believe these fluctuations are a reflection of the quality of the investments. At March 31, 2018, the unrealized losses on available for sale securities less than twelve months related to four government agency bonds, five government sponsored enterprise (GSE) mortgage backed securities, one state and political bond, and two corporate bonds. The Company had eleven government agency bonds, fourteen GSE mortgage backed securities, and seven corporate bonds at March 31, 2018, that had been in a loss position for more than twelve months. At March 31, 2018, the unrealized losses on held to maturity securities related to one government agency bond, nine state and political bonds, and two corporate bonds.  At December 31, 2017, the unrealized losses on available for sale securities less than twelve months related to six government agency bonds, four GSE mortgage backed securities, one corporate bond and one state and political subdivision bond. At December 31, 2017, the Company had fifteen government agency bonds, twelve GSE mortgage backed securities and seven state and political subdivision bonds that had been in a loss position for more than twelve months. At December 31, 2017, the unrealized losses on held to maturity securities related to one government agency security and five state and political subdivision bonds.

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

March 31, 2018

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Securities available for sale temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

7,973

 

 

$

196

 

 

$

40,860

 

 

$

1,213

 

 

$

48,833

 

 

$

1,409

 

GSE-Mortgage-backed securities and CMO’s

 

 

5,702

 

 

 

112

 

 

 

13,211

 

 

 

524

 

 

 

18,913

 

 

 

636

 

State and political subdivisions

 

 

1,137

 

 

 

42

 

 

 

10,009

 

 

 

466

 

 

 

11,146

 

 

 

508

 

Corporate bonds

 

 

4,164

 

 

 

68

 

 

 

 

 

 

 

 

 

4,164

 

 

 

68

 

Total securities available for sale

 

$

18,976

 

 

$

418

 

 

$

64,080

 

 

$

2,203

 

 

$

83,056

 

 

$

2,621

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

March 31, 2018

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Held to maturity temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

1,045

 

 

$

29

 

 

$

 

 

$

 

 

$

1,045

 

 

$

29

 

State and political subdivisions

 

 

6,319

 

 

 

82

 

 

 

 

 

 

 

 

 

6,319

 

 

 

82

 

Corporate bonds

 

 

3,145

 

 

 

21

 

 

 

 

 

 

 

 

 

3,145

 

 

 

21

 

Total securities held to maturity

 

$

10,509

 

 

$

132

 

 

$

 

 

$

 

 

$

10,509

 

 

$

132

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2017

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Securities available for sale temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

9,028

 

 

$

112

 

 

$

43,352

 

 

$

828

 

 

$

52,380

 

 

$

940

 

GSE-Mortgage-backed securities and CMO’s

 

 

5,074

 

 

 

37

 

 

 

14,057

 

 

 

337

 

 

 

19,131

 

 

 

374

 

State and political subdivisions

 

 

1,182

 

 

 

1

 

 

 

10,317

 

 

 

195

 

 

 

11,499

 

 

 

196

 

Corporate bonds

 

 

2,008

 

 

 

11

 

 

 

 

 

 

 

 

 

2,008

 

 

 

11

 

Total securities available for sale

 

$

17,292

 

 

$

161

 

 

$

67,726

 

 

$

1,360

 

 

$

85,018

 

 

$

1,521

 

-11-


 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2017

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Held to maturity temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

1,338

 

 

$

9

 

 

$

 

 

$

 

 

$

1,338

 

 

$

9

 

State and political subdivisions

 

 

4,269

 

 

 

36

 

 

 

 

 

 

 

 

 

4,269

 

 

 

36

 

Total securities held to maturity

 

$

5,607

 

 

$

45

 

 

$

 

 

$

 

 

$

5,607

 

 

$

45

 

 

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

Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of quality but that the losses are temporary in nature. At March 31, 2018, the Company does not intend to sell and is not likely to be required to sell the available for sale securities that were in a loss position prior to full recovery.

The aggregate amortized cost and fair value of the available for sale securities portfolio at March 31, 2018 by remaining contractual maturity are as follows:

 

 

 

March 31, 2018

 

 

 

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

 

 

42,703

 

 

 

41,594

 

 

 

1.47

%

Due after five but within ten years

 

 

11,082

 

 

 

10,832

 

 

 

2.29

%

Due after ten years

 

 

2,071

 

 

 

2,070

 

 

 

2.53

%

 

 

 

55,856

 

 

 

54,496

 

 

 

1.68

%

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

1,012

 

 

 

1,013

 

 

 

2.46

%

Due after five but within ten years

 

 

14,638

 

 

 

14,224

 

 

 

2.14

%

Due after ten years

 

 

4,588

 

 

 

4,370

 

 

 

1.94

%

 

 

 

20,238

 

 

 

19,607

 

 

 

2.11

%

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

Due within twelve months

 

 

810

 

 

 

816

 

 

 

4.97

%

Due after one but within five years

 

 

1,856

 

 

 

1,847

 

 

 

2.96

%

Due after five but within ten years

 

 

1,964

 

 

 

1,903

 

 

 

3.39

%

Due after ten years

 

 

9,692

 

 

 

9,266

 

 

 

3.10

%

 

 

 

14,322

 

 

 

13,832

 

 

 

3.12

%

Corporate Bonds

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

5,039

 

 

 

4,979

 

 

 

2.74

%

 

 

 

5,039

 

 

 

4,979

 

 

 

2.74

%

Total Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

Due within twelve months

 

 

810

 

 

 

816

 

 

 

4.97

%

Due after one but within five years

 

 

50,610

 

 

 

49,433

 

 

 

1.67

%

Due after five but within ten years

 

 

27,684

 

 

 

26,959

 

 

 

2.28

%

Due after ten years

 

 

16,351

 

 

 

15,706

 

 

 

2.70

%

 

 

$

95,455

 

 

$

92,914

 

 

 

2.05

%

-12-


 

 

 

 

March 31, 2018

 

 

 

Amortized

Cost

 

 

Estimated

Fair Value

 

 

Book

Yield

 

 

 

(dollars in thousands)

 

Held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. Government agencies

 

 

 

 

 

 

 

 

 

 

 

 

Due after five but within ten years

 

$

1,074

 

 

$

1,045

 

 

 

2.39

%

 

 

 

1,074

 

 

 

1,045

 

 

 

2.39

%

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

5,059

 

 

 

4,987

 

 

 

2.16

%

Due after five but within ten years

 

 

1,854

 

 

 

1,845

 

 

 

2.50

%

 

 

 

6,913

 

 

 

6,832

 

 

 

2.25

%

Corporate Bonds

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

3,166

 

 

 

3,145

 

 

 

2.76

%

 

 

 

3,166

 

 

 

3,145

 

 

 

2.76

%

Total Securities held for maturity

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

8,225

 

 

 

8,132

 

 

 

2.39

%

Due after five but within ten years

 

 

2,928

 

 

 

2,890

 

 

 

2.46

%

 

 

$

11,153

 

 

$

11,022

 

 

 

2.41

%

 

 

Note 6 – Loans Held for Investment

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

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

(dollars in thousands)

 

Commercial

 

 

 

 

 

 

 

 

Commercial

 

$

54,180

 

 

$

54,912

 

Real estate - commercial

 

 

122,370

 

 

 

114,712

 

Other real estate construction loans

 

 

40,451

 

 

 

40,186

 

Noncommercial

 

 

 

 

 

 

 

 

Real estate 1-4 family construction

 

 

5,030

 

 

 

5,024

 

Real estate - residential

 

 

79,280

 

 

 

78,023

 

Home equity

 

 

50,074

 

 

 

50,506

 

Consumer loans

 

 

11,055

 

 

 

10,774

 

Other loans

 

 

2,932

 

 

 

2,838

 

 

 

 

365,372

 

 

 

356,975

 

Less:

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(2,547

)

 

 

(2,458

)

Deferred loan (fees) costs, net

 

 

(218

)

 

 

(104

)

 

 

 

 

 

 

 

 

 

Loans held for investment, net

 

$

362,607

 

 

$

354,413

 

 

 

-13-


 

Note 7 – Allowance for Loan Losses

The following table shows the change in the allowance for loss losses by loan segment for the three months ended March 31, 2018 and 2017, respectively:

 

Commercial

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,401

 

 

$

1,404

 

Provision (recovery) charged to operations

 

 

45

 

 

 

(28

)

Charge-offs

 

 

 

 

 

 

Recoveries

 

 

15

 

 

 

63

 

Net (charge-offs) / Recoveries

 

 

15

 

 

 

63

 

Balance at end of period

 

$

1,461

 

 

$

1,439

 

 

Non-Commercial

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,057

 

 

$

1,303

 

Provision (recovery) charged to operations

 

 

33

 

 

 

(31

)

Charge-offs

 

 

(17

)

 

 

(58

)

Recoveries

 

 

13

 

 

 

24

 

Net (charge-offs) / Recoveries

 

 

(4

)

 

 

(34

)

Balance at end of period

 

$

1,086

 

 

$

1,238

 

 

Total

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

2,458

 

 

$

2,707

 

Provision (recovery) charged to operations

 

 

78

 

 

 

(59

)

Charge-offs

 

 

(17

)

 

 

(58

)

Recoveries

 

 

28

 

 

 

87

 

Net (charge-offs) / Recoveries

 

 

11

 

 

 

29

 

Balance at end of period

 

$

2,547

 

 

$

2,677

 

 

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

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated

 

 

Collectively Evaluated

 

 

Total

 

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

45

 

 

$

1,743

 

 

$

1,416

 

 

$

215,258

 

 

$

1,461

 

 

$

217,001

 

Non-Commercial

 

 

117

 

 

 

3,747

 

 

 

969

 

 

 

144,406

 

 

 

1,086

 

 

 

148,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

162

 

 

$

5,490

 

 

$

2,385

 

 

$

359,664

 

 

$

2,547

 

 

$

365,154

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated

 

 

Collectively Evaluated

 

 

Total

 

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

22

 

 

$

1,788

 

 

$

1,379

 

 

$

208,022

 

 

$

1,401

 

 

$

209,810

 

Non-Commercial

 

 

172

 

 

 

3,781

 

 

 

885

 

 

 

143,280

 

 

 

1,057

 

 

 

147,061

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

194

 

 

$

5,569

 

 

$

2,264

 

 

$

351,302

 

 

$

2,458

 

 

$

356,871

 

 

-14-


 

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:

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 

 

$

32

 

 

$

32

 

 

$

54,148

 

 

$

54,180

 

 

$

 

Real estate - commercial

 

 

65

 

 

 

291

 

 

 

356

 

 

 

122,014

 

 

 

122,370

 

 

 

 

Other real estate construction

 

 

 

 

 

50

 

 

 

50

 

 

 

40,401

 

 

 

40,451

 

 

 

 

Real estate 1-4 family construction

 

 

 

 

 

 

 

 

 

 

 

5,030

 

 

 

5,030

 

 

 

 

Real estate - residential

 

 

1,047

 

 

 

532

 

 

 

1,579

 

 

 

77,483

 

 

 

79,062

 

 

 

 

Home equity

 

 

29

 

 

 

89

 

 

 

118

 

 

 

49,956

 

 

 

50,074

 

 

 

 

Consumer loans

 

 

34

 

 

 

 

 

 

34

 

 

 

11,021

 

 

 

11,055

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

2,932

 

 

 

2,932

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,175

 

 

$

994

 

 

$

2,169

 

 

$

362,985

 

 

$

365,154

 

 

$

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

30-89 Days

Past Due

 

 

Loans

90 Days

or More

Past due

and Non -

Accrual

 

 

Total Past

Due Loans

 

 

Current

Loans

 

 

Total

Loans

 

 

Accruing

Loans 90 or

More Days

Past Due

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

 

$

34

 

 

$

34

 

 

$

54,878

 

 

$

54,912

 

 

$

 

Real estate - commercial

 

 

 

 

 

377

 

 

$

377

 

 

 

114,335

 

 

 

114,712

 

 

 

 

Other real estate construction

 

 

 

 

 

51

 

 

$

51

 

 

 

40,135

 

 

 

40,186

 

 

 

 

Real estate construction

 

 

 

 

 

 

 

 

 

 

 

5,024

 

 

 

5,024

 

 

 

 

Real estate - residential

 

 

579

 

 

 

540

 

 

 

1,119

 

 

 

76,800

 

 

 

77,919

 

 

 

 

Home equity

 

 

108

 

 

 

23

 

 

 

131

 

 

 

50,375

 

 

 

50,506

 

 

 

 

Consumer loan

 

 

83

 

 

 

 

 

 

83

 

 

 

10,691

 

 

 

10,774

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

2,838

 

 

 

2,838

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

770

 

 

$

1,025

 

 

$

1,795

 

 

$

355,076

 

 

$

356,871

 

 

$

 

 

Once a loan becomes 90 days past due, the loan is automatically transferred to a nonaccrual status. The exception to this policy is credit card loans that remain in accruing status 90 days or more until they are paid current or charged off. 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 $545,000 in foreclosed residential real estate and $184,000 of residential real estate in process of foreclosure at March 31, 2018.

-15-


 

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

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

32

 

 

$

34

 

Real estate - commercial

 

 

291

 

 

 

377

 

Other real estate construction

 

 

50

 

 

 

51

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

Real estate – residential

 

 

532

 

 

 

540

 

Home equity

 

 

89

 

 

 

23

 

Consumer loans

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

$

994

 

 

$

1,025

 

 

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

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

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

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

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

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 March 31, 2018 and December 31, 2017:

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

Watch

 

 

Sub-

standard

 

 

Doubtful

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

52,024

 

 

$

2,110

 

 

$

46

 

 

$

 

 

$

54,180

 

Real estate - commercial

 

 

116,079

 

 

 

4,240

 

 

 

2,051

 

 

 

 

 

 

122,370

 

Other real estate construction

 

 

37,925

 

 

 

2,136

 

 

 

390

 

 

 

 

 

 

40,451

 

Real estate 1 - 4 family construction

 

 

5,030

 

 

 

 

 

 

 

 

 

 

 

 

5,030

 

Real estate - residential

 

 

71,087

 

 

 

6,836

 

 

 

1,139

 

 

 

 

 

 

79,062

 

Home equity

 

 

49,178

 

 

 

807

 

 

 

89

 

 

 

 

 

 

50,074

 

Consumer loans

 

 

10,965

 

 

 

89

 

 

 

1

 

 

 

 

 

 

11,055

 

Other loans

 

 

2,932

 

 

 

 

 

 

 

 

 

 

 

 

2,932

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

345,220

 

 

$

16,218

 

 

$

3,716

 

 

$

 

 

$

365,154

 

-16-


 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

Watch

 

 

Sub-

standard

 

 

Doubtful

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

53,649

 

 

$

1,215

 

 

$

48

 

 

$

 

 

$

54,912

 

Real estate - commercial

 

 

109,224

 

 

 

3,321

 

 

 

2,167

 

 

 

 

 

 

114,712

 

Other real estate construction

 

 

38,082

 

 

 

1,713

 

 

 

391

 

 

 

 

 

 

40,186

 

Real estate 1 - 4 family construction

 

 

5,024

 

 

 

 

 

 

 

 

 

 

 

 

5,024

 

Real estate - residential

 

 

69,645

 

 

 

7,119

 

 

 

1,155

 

 

 

 

 

 

77,919

 

Home equity

 

 

49,743

 

 

 

740

 

 

 

23

 

 

 

 

 

 

50,506

 

Consumer loans

 

 

10,709

 

 

 

64

 

 

 

1

 

 

 

 

 

 

10,774

 

Other loans

 

 

2,838

 

 

 

 

 

 

 

 

 

 

 

 

2,838

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

338,914

 

 

$

14,172

 

 

$

3,785

 

 

$

 

 

$

356,871

 

 

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

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

Non-

Performing

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

54,148

 

 

$

32

 

 

$

54,180

 

Real estate - commercial

 

 

122,079

 

 

 

291

 

 

 

122,370

 

Other real estate construction

 

 

40,401

 

 

 

50

 

 

 

40,451

 

Real estate 1 – 4 family construction

 

 

5,030

 

 

 

 

 

 

5,030

 

Real estate – residential

 

 

78,530

 

 

 

532

 

 

 

79,062

 

Home equity

 

 

49,985

 

 

 

89

 

 

 

50,074

 

Consumer loans

 

 

11,055

 

 

 

 

 

 

11,055

 

Other loans

 

 

2,932

 

 

 

 

 

 

2,932

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

364,160

 

 

$

994

 

 

$

365,154

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

Non-

Performing

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

54,878

 

 

$

34

 

 

$

54,912

 

Real estate - commercial

 

 

114,335

 

 

 

377

 

 

 

114,712

 

Other real estate construction

 

 

40,135

 

 

 

51

 

 

 

40,186

 

Real estate 1 – 4 family construction

 

 

5,024

 

 

 

 

 

 

5,024

 

Real estate – residential

 

 

77,379

 

 

 

540

 

 

 

77,919

 

Home equity

 

 

50,483

 

 

 

23

 

 

 

50,506

 

Consumer loans

 

 

10,774

 

 

 

 

 

 

10,774

 

Other loans

 

 

2,838

 

 

 

 

 

 

2,838

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

355,846

 

 

$

1,025

 

 

$

356,871

 

 

-17-


 

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

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

With No

Allowance

 

 

Recorded

Investment

With

Allowance

 

 

Related

Allowance

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

42

 

 

$

 

 

$

42

 

 

$

8

 

Real estate - commercial

 

 

1,553

 

 

 

357

 

 

 

1,196

 

 

 

33

 

Other real estate construction

 

 

686

 

 

 

101

 

 

 

49

 

 

 

4

 

Real estate 1 - 4 family construction

 

 

 

 

 

 

 

 

0

 

 

 

 

Real estate - residential

 

 

3,673

 

 

 

1,016

 

 

 

2,657

 

 

 

117

 

Home equity

 

 

34

 

 

 

34

 

 

 

 

 

 

 

Consumer loans

 

 

40

 

 

 

40

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

6,028

 

 

$

1,548

 

 

$

3,944

 

 

$

162

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

With No

Allowance

 

 

Recorded

Investment

With

Allowance

 

 

Related

Allowance

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

44

 

 

$

10

 

 

$

34

 

 

$

10

 

Real estate - commercial

 

 

1,593

 

 

 

1,305

 

 

 

288

 

 

 

9

 

Other real estate construction

 

 

689

 

 

 

101

 

 

 

50

 

 

 

3

 

Real estate 1 - 4 family construction

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

3,701

 

 

 

1,319

 

 

 

2,382

 

 

 

171

 

Home equity

 

 

35

 

 

 

22

 

 

 

13

 

 

 

1

 

Consumer loans

 

 

45

 

 

 

45

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

6,107

 

 

$

2,802

 

 

$

2,767

 

 

$

194

 

 

 

 

Three Months Ended March 31, 2018

 

 

Three Months Ended March 31, 2017

 

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

43

 

 

 

 

 

$

28

 

 

 

 

Real estate - commercial

 

 

1,573

 

 

 

15

 

 

 

1,667

 

 

 

15

 

Other real estate construction

 

 

149

 

 

 

2

 

 

 

292

 

 

 

1

 

Real estate 1- 4 family construction

 

 

 

 

 

 

 

 

6

 

 

 

 

Real estate - residential

 

 

3,687

 

 

 

41

 

 

 

3,995

 

 

 

42

 

Home equity

 

 

34

 

 

 

 

 

 

35

 

 

 

1

 

Consumer loans

 

 

43

 

 

 

1

 

 

 

59

 

 

 

1

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,529

 

 

$

59

 

 

$

6,082

 

 

$

60

 

 

 

 

-18-


 

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 March 31, 2018, the Company had $4.6 million in TDRs outstanding, of which two were on a non-accruing basis.

For the three months ended March 31, 2018 and 2017, the following table presents a breakdown of the types of concessions made by loan class:

  

 

 

For the three months ended March 31, 2018

 

 

 

Number

of Contracts

 

 

Pre-Modification

Outstanding Recorded

Investment

 

 

Post-Modification

Outstanding Recorded

Investment

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

$

 

 

$

 

Real estate - commercial

 

 

1

 

 

 

12

 

 

 

11

 

Other real estate construction

 

 

 

 

 

 

 

 

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

 

 

 

Real estate – residential

 

 

4

 

 

 

357

 

 

 

355

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

1

 

 

 

9

 

 

 

3

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

6

 

 

$

378

 

 

$

369

 

 

 

 

For the three months ended March 31, 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

 

 

3

 

 

 

410

 

 

 

408

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

3

 

 

$

410

 

 

$

408

 

 

During the twelve months ended March 31, 2018, there were two TDRs for which there was a payment default. During the twelve months ended March 31, 2017, 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 $141,000 in the allowance for loan losses as of March 31, 2018, as a direct result of these TDRs. At March 31, 2017, there was $134,000 in the allowance for loan losses related to TDRs.

-19-


 

The following table presents the successes and failures of the types of loan modifications within the previous twelve months as of March 31, 2018 and 2017:

 

 

 

Paid in Full

 

 

Paying as restructured

 

 

Converted to nonaccrual

 

 

Foreclosure/ Default

 

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

 

(dollars in thousands)

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Below market

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

Extended payment Terms

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forgiveness of Principal/Other

 

 

6

 

 

 

216

 

 

 

6

 

 

 

369

 

 

 

 

 

 

 

 

 

1

 

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

6

 

 

$

216

 

 

 

6

 

 

$

369

 

 

 

 

 

$

 

 

 

1

 

 

$

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Below market

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

Extended payment Terms

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forgiveness of Principal/Other

 

 

6

 

 

 

1,099

 

 

 

6

 

 

 

654

 

 

 

 

 

 

 

 

 

3

 

 

 

370

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

6

 

 

$

1,099

 

 

 

6

 

 

$

654

 

 

 

 

 

$

 

 

 

3

 

 

$

370

 

 

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

 

 

Note 9 - Commitments and Contingencies

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

The bank’s risk of loss with unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The bank uses the same credit policies in making commitments under such instruments as it does for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the 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 March 31, 2018, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

 

 

(dollars in thousands)

 

Commitments to extend credit

 

$

113,474

 

Credit card commitments

 

 

10,966

 

Standby letters of credit

 

 

985

 

Total commitments

 

$

125,425

 

 

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

 

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

 

 

Note 10 – Fair Value Disclosures

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

-20-


 

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

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

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

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

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at the estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the 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 March 31, 2018 and December 31, 2017:

 

 

 

March 31, 2018

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agencies

 

$

54,496

 

 

$

 

 

$

54,496

 

 

$

 

GSE - Mortgage-backed securities and CMO’s

 

 

19,607

 

 

 

 

 

 

19,607

 

 

 

 

State and political subdivisions

 

 

13,832

 

 

 

 

 

 

13,832

 

 

 

 

Corporate bonds

 

 

4,979

 

 

 

 

 

 

4,979

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

92,914

 

 

$

 

 

$

92,914

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities at fair value

 

$

 

 

$

 

 

$

 

 

$

 

-21-


 

 

 

 

December 31, 2017

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

55,615

 

 

$

 

 

$

55,615

 

 

$

 

GSE - Mortgage-backed securities and CMO’s

 

 

20,891

 

 

 

 

 

 

20,891

 

 

 

 

State and political subdivisions

 

 

14,199

 

 

 

 

 

 

14,199

 

 

 

 

Corporate bonds

 

 

5,038

 

 

 

 

 

 

5,038

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

95,743

 

 

$

 

 

$

95,743

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities at fair value

 

$

 

 

$

 

 

$

 

 

$

 

 

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value less cost to sell at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of March 31, 2018 and December 31, 2017:

 

 

 

March 31, 2018

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

3,832

 

 

$

 

 

$

 

 

$

3,832

 

Other real estate owned

 

 

1,305

 

 

 

 

 

 

 

 

 

1,305

 

Total assets at fair value

 

$

5,137

 

 

$

 

 

$

 

 

$

5,137

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities at fair value

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

December 31, 2017

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

2,624

 

 

$

 

 

$

 

 

$

2,624

 

Other real estate owned

 

 

1,785

 

 

 

 

 

 

 

 

 

1,785

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

4,409

 

 

$

 

 

$

 

 

$

4,409

 

Total liabilities at fair value

 

$

 

 

$

 

 

$

 

 

$

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

March 31, 2018

 

 

 

 

 

 

 

 

Valuation Technique

 

Unobservable Input

 

General

Range

Nonrecurring measurements:

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

Discounted appraisals

 

Collateral discounts and

   Estimated costs to sell

 

0 – 25%

 

 

Discounted cash flows

 

Discount Rate

 

4%-8.75%

 

 

 

 

 

 

 

OREO

 

Discounted appraisals

 

Collateral discounts and

   Estimated costs to sell

 

0 – 10%

-22-


 

 

December 31, 2017

 

 

 

 

 

 

 

 

Valuation Technique

 

Unobservable Input

 

General

Range

Nonrecurring measurements:

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

Discounted appraisals

 

Collateral discounts and

   Estimated costs to sell

 

0 – 25%

 

 

Discounted cash flows

 

Discount rates

 

4%-8.75%

 

 

 

 

 

 

 

OREO

 

Discounted appraisals

 

Collateral discounts and

   Estimated costs to sell

 

0 – 10%

 

At March 31, 2018, impaired loans were being evaluated with discounted expected cash flows and discounted appraisals were being used on collateral dependent loans.

 

 

Note 11 Fair Values of Financial Instruments and Interest Rate Risk

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

The fair value estimates presented at March 31, 2018 and December 31, 2017 are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price at which a liability could be settled. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company. The valuations at March 31, 2018 are observed under the exit price notion as a result of adoption of ASU 2016-01. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of March 31, 2018 and December 31, 2017:

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

Value

 

 

Estimated

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(dollars in thousands)

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

92,729

 

 

$

92,694

 

 

$

90,238

 

 

$

2,456

 

 

$

 

Securities available for sale

 

 

92,914

 

 

 

92,914

 

 

 

 

 

 

92,914

 

 

 

 

Securities held to maturity

 

 

11,153

 

 

 

11,022

 

 

 

 

 

 

11,022

 

 

 

 

Loans held for investment, net

 

 

365,154

 

 

 

360,553

 

 

 

 

 

 

 

 

 

360,553

 

Loans held for sale

 

 

2,149

 

 

 

2,149

 

 

 

 

 

 

2,149

 

 

 

 

Restricted stock

 

 

1,094

 

 

 

1,094

 

 

 

1,094

 

 

 

 

 

 

 

Mortgage servicing rights

 

 

2,032

 

 

 

3,713

 

 

 

 

 

 

3,713

 

 

 

 

Accrued interest receivable

 

 

1,705

 

 

 

1,705

 

 

 

 

 

 

 

 

 

1,705

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

537,906

 

 

$

491,754

 

 

$

 

 

$

491,754

 

 

$

 

Short-term borrowings

 

 

2,279

 

 

 

2,279

 

 

 

 

 

 

2,279

 

 

 

 

Long-term borrowings

 

 

9,534

 

 

 

9,652

 

 

 

 

 

 

 

 

 

9,652

 

Accrued interest payable

 

 

147

 

 

 

147

 

 

 

 

 

 

 

 

 

147

 

-23-


 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

Value

 

 

Estimated

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(dollars in thousands)

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

70,403

 

 

$

70,379

 

 

$

67,913

 

 

$

2,466

 

 

$

 

Securities available for sale

 

 

95,743

 

 

 

95,743

 

 

 

 

 

 

95,743

 

 

 

 

Securities held to maturity

 

 

11,458

 

 

 

11,461

 

 

 

 

 

 

11,461

 

 

 

 

Loans held for investment, net

 

 

356,871

 

 

 

359,325

 

 

 

 

 

 

 

 

 

359,325

 

Loans held for sale

 

 

4,414

 

 

 

4,414

 

 

 

 

 

 

4,414

 

 

 

 

Restricted stock

 

 

1,067

 

 

 

1,067

 

 

 

1,067

 

 

 

 

 

 

 

Mortgage servicing rights

 

 

2,125

 

 

 

3,310

 

 

 

 

 

 

3,310

 

 

 

 

 

Accrued interest receivable

 

 

1,709

 

 

 

1,709

 

 

 

 

 

 

 

 

 

1,709

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

512,628

 

 

 

481,300

 

 

 

 

 

 

481,300

 

 

 

 

Short-term borrowings

 

 

1,752

 

 

 

1,752

 

 

 

 

 

 

1,752

 

 

 

 

Long-term debt

 

 

9,534

 

 

 

9,658

 

 

 

 

 

 

 

 

 

9,658

 

Accrued interest payable

 

 

148

 

 

 

148

 

 

 

 

 

 

 

 

 

148

 

 

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

 

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

 

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

 

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

 

Loans – The fair value of loans is estimated based on discounted expected cash flows using the current interest rates at which similar loans would be made, a future expected credit loss based on historical charge-offs, and a liquidity discount based on the overall risk grade of the load portfolio. These loans are carried in Level 3. Loans held for sale, which represent current mortgage production forward sales not yet delivered, are valued based on secondary market prices. The fair value of loans held for sale does not consider uncertainty in the market that would affect the valuation. Loans held for sale are recorded in Level 2.

 

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

 

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

 

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

 

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

 

Borrowings – The fair value disclosed for short-term borrowings, which are composed of overnight borrowings and debt due within one year approximate the carrying value for such debt and is recorded in Level 2. The estimated fair value for long-term borrowings are estimated based on discounted cash flow analyses using offered market rates. Total borrowings are carried in Level 2. Long-term debt is fair valued based on discounted cash flow analyses and is recorded in Level 3.

At March 31, 2018, the subsidiary bank had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, the fair value is the fee the bank is expected to receive. This amount is deemed immaterial by management. See Note 9.

 

 

-24-


 

Note 12 – Recent Accounting Pronouncements

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

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

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

Reclassification

Certain amounts in the 2017 financial statements have been reclassified to conform to the 2018 presentation. These reclassifications do not have a material impact on net income or shareholders’ equity.

-25-


 

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 March 31, 2018 and December 31, 2017.

During the three months ended March 31, 2018, the Company’s total assets increased $25.6 million, from $576.4 million to $602 million.

Cash and cash equivalents increased $22.3 million during the three months ended March 31, 2018. Cash and due from banks decreased $262,000, while interest-earning deposits with banks increased $22.6 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 $3.1 million to $104.1 million for the three-month period ended March 31, 2018 due to contracted principal pay downs. At March 31, 2018, the Company had net unrealized losses on securities available for sale of $2.5 million.

Loans held for investment increased from $356.9 million to $365.2 million, an increase of $8.3 million for the quarter or 9.3% annualized growth. The Company experienced growth in the commercial real estate, other real estate, residential real estate, consumer, and other loan segments during the first three months of 2018. The commercial real estate segment has the largest increase in the portfolio of 6.68% or $7.7 million. The largest decline is in the commercial segment of $732,000 or 1.33%. Loans held for sale decreased 51.31%, or $2.3 million as many of the loans produced near year-end were not sold on the secondary market until first quarter 2018. The allowance for loan losses was $2.55 million at March 31, 2018, which represented 0.70% of the total loan portfolio compared to $2.46 million or 0.69% at December 31, 2017.

Other changes in our consolidated assets are primarily related to other real estate owned, prepaid assets, and other assets. Other real estate owned decreased $616,000. During the three months ended March 31, 2018, the Company sold three pieces of property totaling $632,000. The Company recorded $9,000 of losses associated with the sold property. Prepaid assets have increased $447,000 from December 31, 2017 to March 31, 2018 as many prepaid invoices are paid in first quarter and amortized over the remaining year per contract terms. Other assets increased $411,000 due to the annual funding of executive supplemental employee retirement accounts.

Customer deposits, our primary funding source, experienced a $25.3 million increase during the three-month period ended March 31, 2018, increasing from $512.6 million to $537.9 million or 19.7% annualized growth. Demand noninterest-bearing checking increased $18.4 million, interest checking and money market accounts increased $7.2 million, and savings deposits increased $2.0 million. These increases were offset by declines in time deposits of $2.3 million.

Total short-term borrowings increased $527,000 for the period.

Other liabilities increased from $7.8 million at December 31, 2017 to $8.4 million at March 31, 2018, an increase of $619,000 related to an increase in the annual funding of executive supplemental employee retirement accounts.

At March 31, 2018, total shareholders’ equity was $43.7 million, a decrease of $793,000 from December 31, 2017. Net income for the three-month period was $234,000. Unrealized losses on investment securities, net of tax, increased by $849,000. The Company repurchased 18,711 shares of common stock for a total value of $103,000, though issued 13,378 shares for a value of $65,000 due to the exercise of the remaining outstanding stock options. The Company paid $140,000 in dividends attributed to noncontrolling interest.

Comparison of Results of Operations for the Three Months Ended March 31, 2018 and 2017.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $234,000 for the three months ended March 31, 2018, as compared to $617,000 for the three months ended March 31, 2017, a decrease of $383,000. Net income available to common shareholders was $91,000 or $0.01 per common share at March 31, 2018, compared to $471,000 or $0.07 per common share at March 31, 2017. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.

-26-


 

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 March 31, 2018 was $4.7 million compared to $4.3 million for the three months ended March 31, 2017, an increase of $382,000. During the first quarter of 2018, the average yield on our interest–earning assets increased 7 basis points to 3.84%, as the average rate we paid for our interest-bearing liabilities increased four basis points to 0.35%. The aforementioned changes resulted in a higher interest rate spread of 3.49% as of March 31, 2018 compared to 3.46% as of March 31, 2017. Our net interest margin was 3.58% and 3.53% for the comparable periods in 2018 and 2017, respectively.

The following table presents average balance sheets and a net interest income analysis for the three months ended March 31, 2018 and 2017:

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended March 31,

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balance

 

 

Income/Expenses

 

 

Rate/Yield

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

$

87,725

 

 

$

99,396

 

 

$

398

 

 

$

398

 

 

 

1.84

%

 

 

1.62

%

Nontaxable securities (1)

 

 

17,960

 

 

 

17,597

 

 

 

113

 

 

 

112

 

 

 

3.23

%

 

 

4.16

%

Short-term investments

 

 

67,815

 

 

 

46,122

 

 

 

277

 

 

 

104

 

 

 

1.66

%

 

 

0.91

%

Taxable loans

 

 

352,893

 

 

 

333,883

 

 

 

4,189

 

 

 

3,926

 

 

 

4.81

%

 

 

4.77

%

Non-taxable loans (1)

 

 

10,852

 

 

 

10,274

 

 

 

67

 

 

 

63

 

 

 

3.17

%

 

 

4.01

%

Total interest-earning assets

 

 

537,245

 

 

 

507,272

 

 

 

5,044

 

 

 

4,603

 

 

 

3.84

%

 

 

3.77

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

398,666

 

 

 

376,307

 

 

 

217

 

 

 

154

 

 

 

0.22

%

 

 

0.17

%

Short-term borrowed funds

 

 

1,976

 

 

 

2,773

 

 

 

3

 

 

 

7

 

 

 

0.62

%

 

 

1.02

%

Long-term debt

 

 

9,534

 

 

 

9,533

 

 

 

135

 

 

 

135

 

 

 

5.74

%

 

 

5.74

%

Total interest-bearing liabilities

 

 

410,176

 

 

 

388,613

 

 

 

355

 

 

 

296

 

 

 

0.35

%

 

 

0.31

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

$

127,069

 

 

$

118,659

 

 

$

4,689

 

 

$

4,307

 

 

 

3.49

%

 

 

3.46

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.58

%

 

 

3.53

%

 

(1)

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

Provision and Allowance for Loan Losses

The provision for loan losses was $78,000 for the three months ending March 31, 2018 compared to a recovery of $59,000 for the same period in 2017. There were net loan recoveries of $11,000 for the three months ended March 31, 2018, as compared with net loan recoveries of $29,000 during the same period of 2017. Refer to the Asset Quality discussion on page 27 for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, diversification of our revenue sources is important as well. Total noninterest income decreased $479,000 for the three-month period ending March 31, 2018 as compared to the same period in 2017. The primary factor contributing to the overall decrease was a decrease in income from mortgage loan sales of $209,000, decreasing from $871,000 for the quarter ended March 31, 2017 to $662,000 for the same period in 2018. Rising interest rates, as well as a shortage in the housing supply has reduced the number of applications for new home purchases. Additionally, a shortage of qualified buyers has exacerbated the reduced mortgage production, all directly contributing to the reduction in noninterest income.

-27-


 

Furthermore, during 2017, the Strategic Alliance Corporation, the broker-dealer subsidiary of Uwharrie Bank, acting as the selling agent, completed a private placement offering of slightly over $4 million, which resulted in $203,000 of revenue.  

Interchange fees, or “swipe” fees, are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. Interchange and card transaction fees consist of income from check card usage, point of sale income from PIN-based debit card transactions, ATM service fees, and credit card usage. Beginning in 2018, in connection with the adoption of Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” interchange and card transaction fees are reported net of related network costs. See Note 1 - Significant Accounting Policies. Previously, such network costs were reported as a component of other non-interest expense. Interchange and card transaction fees for the three months ended March 31, 2018 and 2017 reported on a net basis totaled $142,000 and $136,000, respectively. A comparison of gross interchange and card transaction fees and interchange and card transaction fees net of associated network costs for the reported periods is presented in the table below:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Income from debit card transactions

 

$

297

 

 

$

308

 

Income from cedit card transactions

 

 

82

 

 

 

75

 

Gross interchange and transaction fee income

 

 

379

 

 

 

383

 

Network costs - debit card

 

 

153

 

 

 

165

 

Network costs - credit card

 

 

84

 

 

 

82

 

Total

 

$

142

 

 

$

136

 

Noninterest Expense

Noninterest expense for the quarter ended March 31, 2018 was $6.5 million compared to $6.1 million for the same period of 2017. Salaries and employee benefits, the largest component of noninterest expense, increased $248,000 for the quarter ending March 31, 2018. The majority of this increase is attributable to the increase in personnel associated with staffing the Company’s new branch, which opened in first quarter 2018. Net occupancy expense increased $60,000 from $304,000 at March 31, 2017 to $364,000 at March 31, 2018. The increase is attributed to increased rent associated with the new branch location. Data processing expense increased $68,000 year-over-year for the first quarter of 2018 due to the on-going core conversion project scheduled for completion in August of 2018. The Company has incurred both conversion and de-conversion costs associated with this project. In addition, professional fees and services has increased $72,000 from March 31, 2017 to March 31, 2018 due to consulting, training, and travel associated with the core conversion training.

These increases have been offset by declines in both foreclosed real estate expenses and marketing expenses. Foreclosed real estate has declined from $88,000 at March 31, 2017 to $39,000 at March 31, 2018. As the Company’s other real estate holdings continue to decline, the expenses associated with holding the property also declines. Marketing has declined $47,000 from March 31, 2017 to March 31, 2018 due to the completion of a three-year marketing contract that assisted the Company with branding after the Company merged its subsidiary banks and changed its subsidiary bank name. The table below reflects the composition of other noninterest expense.

Other noninterest expense

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Postage

 

$

49

 

 

$

48

 

Telephone and data lines

 

 

45

 

 

 

40

 

Loan costs

 

 

75

 

 

 

82

 

Shareholder relations expense

 

 

38

 

 

 

33

 

Dues and subscriptions

 

 

67

 

 

 

54

 

Other

 

 

326

 

 

 

444

 

Total

 

$

600

 

 

$

701

 

 

-28-


 

Income Tax Expense

The Company had income tax expense of $58,000 for the three months ended March 31, 2018 at an effective tax rate of 19.86% compared to income tax expense of $257,000 with an effective tax rate of 29.41% in the comparable 2017 period. Income taxes computed at the statutory rate are affected primarily by the eligible amount of interest earned on state and municipal securities, tax-free municipal loans and income earned on bank owned life insurance. In 2018, the effective tax rate decreased significantly due to the enactment of the Tax Cut and Jobs Act of 2017, which lowered the overall federal corporate income tax rate from 35% to 21% effective January 1, 2018.

Asset Quality

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

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

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

At March 31, 2018, the levels of our impaired loans, which includes all loans in nonaccrual status, TDRs and other loans deemed by management to be impaired, were $5.5 million compared to $5.7 million at December 31, 2017, a net decrease of $79,000. Total nonaccrual loans, which are a component of impaired loans, decreased from $1.0 million at December 31, 2017 to $994,000 at March 31, 2018. During the first three months of 2018, one additional loan of $66,000 was added to a relationship already in impaired loans.  That was offset by pay-off of two impaired relationships totaling $81,000 as well as net pay downs of $15,000.

The allowance, expressed as a percentage of gross loans held for investment, increased one basis point from 0.69% at December 31, 2017 to 0.70% at March 31, 2018. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 0.64% at December 31, 2017 and 0.66% at March 31, 2018. The increase is attributable to a slight increase in economic uncertainty, or market risk. The individually evaluated allowance as a percentage of individually evaluated loans decreased from 3.49% to 2.96% for the same periods due to an increase of individually evaluated loans that are sufficiently collateralized with expected returns of principal cash flow as contracted, therefore requiring no additional allowance. The portion of the Company’s allowance for loan loss model related to general reserves captures the mean loss of individual loans within the loan portfolio and adds additional loss based on economic uncertainty and volatility. Specifically, the Company calculates probable losses on loans by computing a probability of loss and multiplying that by a loss given default derived from historical experience, thus deriving the estimated loss scenario by FDIC call report codes. Together, these expected components, as well as a reserve for qualitative factors based on management’s discretion of

-29-


 

economic conditions and portfolio concentrations form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.

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 allowance for loan losses.

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

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

Other real estate owned decreased $616,000 during the first quarter of 2018. The Company sold three pieces of foreclosed property totaling $632,000 realizing a loss of $9,000. The Company had no write-downs for the period ending March 31, 2018. There were no loans foreclosed on during the first quarter.

Troubled debt restructured loans at March 31, 2018 totaled $4.58 million compared to $4.60 million at December 31, 2016 and are included in impaired loans. At March 31, 2018, there were two troubled debt restructured loans in nonaccrual status.

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

Nonperforming Assets

(dollars in thousands)

 

 

 

March 31, 2018

 

 

December 31, 2017

 

Nonperforming assets:

 

 

 

 

 

 

 

 

Loans past due 90 days or more

 

$

 

 

$

 

Nonaccrual loans

 

 

994

 

 

 

1,025

 

Other real estate owned

 

 

1,733

 

 

 

2,349

 

Total nonperforming assets

 

$

2,727

 

 

$

3,374

 

 

 

 

 

 

 

 

 

 

Allowance for loans losses

 

$

2,547

 

 

$

2,458

 

Nonperforming loans to total loans

 

 

0.27

%

 

 

0.29

%

Allowance for loan losses to total loans

 

 

0.70

%

 

 

0.69

%

Nonperforming assets to total assets

 

 

0.45

%

 

 

0.59

%

Allowance for loan losses to nonperforming loans

 

 

256.24

%

 

 

239.80

%

 

Liquidity and Capital Resources

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

The Company’s primary sources of internally generated funds are principal and interest payments on loans, cash flows generated from operations and cash flow generated by investments. Growth in deposits is typically the primary source 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 March 31, 2018, with available credit of $28 million; established borrowing relationships with the Federal Home Loan Bank, with available credit of $42.7 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of $33.0 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 March 31, 2018, compared to $9.5 million at December 31, 2017.

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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 require a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.50%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.00%, a minimum ratio of total capital to risk-weighted assets of 8.00%, and a minimum Tier 1 leverage ratio of 4.00%. A capital conservation buffer, comprised of common equity Tier 1 capital, was also established above the regulatory minimum capital requirements. This capital conservation buffer began to be phased in on January 1, 2016 at 0.625% of risk-weighted assets and increases each subsequent year by an additional 0.625% until reaching its final level of 2.50% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. The final rules also revise the definition and calculation of Tier 1 capital, total capital, and risk-weighted assets.

The phase-in period for the final rules became effective for the Company and its subsidiary bank on January 1, 2015, with full compliance of all the final rules’ requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019. As of March 31, 2018, the Company and its subsidiary bank continue to exceed minimum capital standards and remain well-capitalized under applicable capital guidelines.

As previously discussed, the Company’s subsidiary bank has a net total of $10.6 million in outstanding Fixed Rate Noncumulative Perpetual Preferred Stock. The preferred stock qualifies as Tier 1 capital at the bank and will pay dividends at an annual rate of 5.30%. The net total of $10.6 million is presented as noncontrolling interest at the Company level and qualifies as Tier 1 capital at the Company. At March 31, 2018, the Company had $9.5 million in subordinated debt outstanding that qualifies as Tier 2 capital. The Company has made all interest and dividend payments in a timely manner.

 

 

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, 2017.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

Based upon that evaluation, the principal executive officer and principal financial officer concluded that in their opinion, the Company’s disclosure controls and procedures were effective (1) to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

Management of the Company has evaluated, with the participation of the Company’s principal executive officer and principal financial officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a -15(f) and 15d – 15(f) of the Exchange Act) during the first quarter of 2018. In connection with such evaluation, the Company has determined that there were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews

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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 March 31, 2018.

 

 

 

(a) Total

Number of

Shares

Purchased

 

 

(b) Average

Price Paid per

Share

 

 

(c) Total Number

of Shares

Purchased as

Part of Publicly

Announced

Plans or Program

(1)

 

 

(d) Maximum

Dollar Value of

Shares that May

Yet Be

Purchased Under

the Plans 

 

January 1, 2018 Through January 31, 2018

 

 

 

 

$

 

 

 

 

 

$

 

February 1, 2018 Through February 28, 2018

 

 

13,378

 

 

$

5.46

 

 

 

 

 

$

 

March 1, 2018 Through March 31, 2018

 

 

5,333

 

 

$

5.77

 

 

 

 

 

$

 

Total

 

 

18,711

 

 

$

5.55

 

 

 

 

 

$

 

 

 

(1)

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

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Mine Safety Disclosures

Not applicable

Item 5.

Other Information

None.

 

 

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Item 6.

Exhibits

 

The following exhibits are being filed herewith:

 

Exhibit

Number

 

Description of Exhibit

 

 

 

 

 

 

 

 

 

31.1

 

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

 

 

 

31.2

 

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

 

 

 

32

 

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

 

 

 

101

 

Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018, in XBRL (eXtensible Business Reporting Language) (filed herewith)

 

 

 

 

 

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EXHIBIT INDEX

 

Exhibit

Number

 

Description of Exhibit

 

 

 

 

 

 

31.1

 

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

 

 

 

31.2

 

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

 

 

 

32

 

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

 

 

 

101

 

Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018, in XBRL (eXtensible Business Reporting Language) (filed herewith)

 

 

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Signatures

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

 

 

 

 

 

UWHARRIE CAPITAL CORP

 

 

 

 

(Registrant)

 

 

 

 

 

 

 

Date:

 

May 8, 2018

 

By:

 

/s/ Roger L. Dick

 

 

 

 

Roger L. Dick

 

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

Date:

 

May 8, 2018

 

By:

 

/s/ R. David Beaver, III

 

 

 

 

R. David Beaver, III

 

 

 

 

Principal Financial Officer

 

 

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