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UWHARRIE CAPITAL CORP - Quarter Report: 2020 June (Form 10-Q)

ing

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2020

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)

 

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

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

None

 

 

 

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 6,970,141 shares of common stock outstanding as of July 31, 2020.


 

 

Table of Contents

 

 

 

 

 

Page No.

 

 

 

 

 

Part I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1 -

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2020 and 2019

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2020 and 2019

 

5

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019

 

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2 -

 

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

 

29

 

 

 

 

 

Item 3 -

 

Quantitative and Qualitative Disclosures about Market Risk

 

36

 

 

 

 

 

Item 4 -

 

Controls and Procedures

 

36

 

 

 

 

 

Part II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1 -

 

Legal Proceedings

 

37

 

 

 

 

 

Item 1A -

 

Risk Factors

 

37

 

 

 

 

 

Item 2 -

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

37

 

 

 

 

 

Item 3 -

 

Defaults Upon Senior Securities

 

37

 

 

 

 

 

Item 4 -

 

Mine Safety Disclosures

 

37

 

 

 

 

 

Item 5 -

 

Other Information

 

37

 

 

 

 

 

Item 6 -

 

Exhibits

 

38

 

 

 

 

 

 

 

 

Signatures

 

39

 

-2-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

 

Part I. Financial Information

Item 1.

Financial Statements.

 

 

 

June 30, 2020 (Unaudited)

 

 

December 31, 2019*

 

 

 

(dollars in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

5,922

 

 

$

7,520

 

Interest-earning deposits with banks

 

 

106,010

 

 

 

147,678

 

Cash and cash equivalents

 

 

111,932

 

 

 

155,198

 

Securities available for sale, at fair value

 

 

110,593

 

 

 

88,524

 

Securities held to maturity, at amortized cost (fair value $28,357 and $13,499, respectively)

 

 

27,344

 

 

 

13,428

 

Equity security, at fair value

 

 

1,234

 

 

 

 

Loans held for sale

 

 

4,369

 

 

 

2,946

 

Loans:

 

 

 

 

 

 

 

 

Loans held for investment

 

 

454,856

 

 

 

357,950

 

Less allowance for loan losses

 

 

(3,426

)

 

 

(1,981

)

Net loans held for investment

 

 

451,430

 

 

 

355,969

 

Premises and equipment, net

 

 

16,728

 

 

 

17,062

 

Interest receivable

 

 

2,284

 

 

 

1,666

 

Restricted stock

 

 

1,166

 

 

 

1,144

 

Bank-owned life insurance

 

 

8,866

 

 

 

8,796

 

Other real estate owned

 

 

359

 

 

 

494

 

Prepaid assets

 

 

1,208

 

 

 

714

 

Other assets

 

 

10,733

 

 

 

10,852

 

Total assets

 

$

748,246

 

 

$

656,793

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Demand noninterest-bearing

 

$

205,643

 

 

$

150,283

 

Interest checking and money market accounts

 

 

338,508

 

 

 

263,136

 

Savings deposits

 

 

66,221

 

 

 

57,136

 

Time deposits, $250,000 and over

 

 

9,678

 

 

 

55,682

 

Other time deposits

 

 

54,048

 

 

 

59,641

 

Total deposits

 

 

674,098

 

 

 

585,878

 

Short-term borrowed funds

 

 

499

 

 

 

626

 

Long-term debt

 

 

10,992

 

 

 

9,992

 

Interest payable

 

 

29

 

 

 

55

 

Other liabilities

 

 

9,973

 

 

 

11,384

 

Total liabilities

 

 

695,591

 

 

 

607,935

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

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

   outstanding 6,970,141 and 7,095,920, respectively

 

 

8,713

 

 

 

8,870

 

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

 

 

 

 

 

 

Additional paid-in capital

 

 

12,250

 

 

 

12,784

 

Undivided profits

 

 

17,874

 

 

 

16,226

 

Accumulated other comprehensive income

 

 

3,163

 

 

 

323

 

Total Uwharrie Capital shareholders’ equity

 

 

42,000

 

 

 

38,203

 

Noncontrolling interest

 

 

10,655

 

 

 

10,655

 

Total shareholders’ equity

 

 

52,655

 

 

 

48,858

 

Total liabilities and shareholders’ equity

 

$

748,246

 

 

$

656,793

 

 

(*)

Derived from audited consolidated financial statements

See accompanying notes  

 

 

-3-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(in thousands, except share and per share data)

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

5,031

 

 

$

4,735

 

 

$

9,584

 

 

$

9,402

 

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

 

33

 

 

 

32

 

 

 

66

 

 

 

65

 

U.S. Government agencies and corporations

 

 

357

 

 

 

345

 

 

 

726

 

 

 

693

 

State and political subdivisions. non-taxable

 

 

195

 

 

 

88

 

 

 

294

 

 

 

194

 

State and political subdivisions, taxable

 

 

179

 

 

 

25

 

 

 

269

 

 

 

34

 

Interest-earning deposits with banks and federal funds sold

 

 

38

 

 

 

687

 

 

 

590

 

 

 

1,480

 

Total interest income

 

 

5,833

 

 

 

5,912

 

 

 

11,529

 

 

 

11,868

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking and money market accounts

 

 

180

 

 

 

343

 

 

 

478

 

 

 

768

 

Savings deposits

 

 

14

 

 

 

26

 

 

 

35

 

 

 

53

 

Time deposits, $250,000 and over

 

 

44

 

 

 

237

 

 

 

300

 

 

 

302

 

Other time deposits

 

 

134

 

 

 

156

 

 

 

287

 

 

 

236

 

Short-term borrowed funds

 

 

1

 

 

 

5

 

 

 

2

 

 

 

11

 

Long-term debt

 

 

144

 

 

 

141

 

 

 

275

 

 

 

282

 

Total interest expense

 

 

517

 

 

 

908

 

 

 

1,377

 

 

 

1,652

 

Net interest income

 

 

5,316

 

 

 

5,004

 

 

 

10,152

 

 

 

10,216

 

Provision for (recovery of) loan losses

 

 

767

 

 

 

(315

)

 

 

1,399

 

 

 

(428

)

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

 

 

4,549

 

 

 

5,319

 

 

 

8,753

 

 

 

10,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

209

 

 

 

341

 

 

 

522

 

 

 

668

 

Interchange and card transaction fees, net

 

 

182

 

 

 

204

 

 

 

374

 

 

 

398

 

Other service fees and commissions

 

 

558

 

 

 

573

 

 

 

1,323

 

 

 

1,329

 

Gain on sale of securities (includes reclassification of $0, $0, $58 and $0 from accumulated other comprehensive income)

 

 

 

 

 

 

 

 

58

 

 

 

 

Unrealized gain on equity security

 

 

102

 

 

 

 

 

 

333

 

 

 

 

Income from mortgage loan sales

 

 

3,701

 

 

 

1,087

 

 

 

4,766

 

 

 

1,579

 

Other income (expense)

 

 

(324

)

 

 

2

 

 

 

58

 

 

 

(19

)

Total noninterest income

 

 

4,428

 

 

 

2,207

 

 

 

7,434

 

 

 

3,955

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

5,030

 

 

 

4,252

 

 

 

9,454

 

 

 

8,385

 

Net occupancy expense

 

 

416

 

 

 

418

 

 

 

831

 

 

 

823

 

Equipment expense

 

 

179

 

 

 

183

 

 

 

362

 

 

 

359

 

Data processing costs

 

 

162

 

 

 

172

 

 

 

320

 

 

 

394

 

Loan costs

 

 

167

 

 

 

56

 

 

 

254

 

 

 

145

 

Foreclosed real estate expense (income)

 

 

(14

)

 

 

4

 

 

 

(21

)

 

 

60

 

Professional fees and services

 

 

209

 

 

 

199

 

 

 

403

 

 

 

352

 

Marketing and donations

 

 

192

 

 

 

173

 

 

 

411

 

 

 

377

 

Electronic banking expense

 

 

121

 

 

 

102

 

 

 

226

 

 

 

201

 

Software amortization and maintenance

 

 

300

 

 

 

225

 

 

 

564

 

 

 

444

 

FDIC insurance

 

 

91

 

 

 

52

 

 

 

108

 

 

 

132

 

Other noninterest expense

 

 

93

 

 

 

462

 

 

 

831

 

 

 

826

 

Total noninterest expense

 

 

6,946

 

 

 

6,298

 

 

 

13,743

 

 

 

12,498

 

Income before income taxes

 

 

2,031

 

 

 

1,228

 

 

 

2,444

 

 

 

2,101

 

Income taxes (includes reclassification of $0, $0, ($11) and $0 from accumulated other comprehensive income)

 

 

429

 

 

 

277

 

 

 

514

 

 

 

460

 

Net income

 

$

1,602

 

 

$

951

 

 

$

1,930

 

 

$

1,641

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated net income

 

$

1,602

 

 

$

951

 

 

$

1,930

 

 

$

1,641

 

Less: net income attributable to noncontrolling interest

 

 

(141

)

 

 

(140

)

 

 

(282

)

 

 

(280

)

Net income attributable to Uwharrie Capital Corp and common shareholders

 

 

1,461

 

 

 

811

 

 

 

1,648

 

 

 

1,361

 

Net income per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.21

 

 

$

0.11

 

 

$

0.23

 

 

$

0.19

 

Diluted

 

$

0.21

 

 

$

0.11

 

 

$

0.23

 

 

$

0.19

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

6,983,493

 

 

 

7,237,290

 

 

 

7,025,622

 

 

 

7,252,598

 

Diluted

 

 

6,983,493

 

 

 

7,237,290

 

 

 

7,025,622

 

 

 

7,252,598

 

 

 

See accompanying notes  

 

 

-4-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,602

 

 

$

951

 

 

$

1,930

 

 

$

1,641

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on available for sale securities

 

 

1,606

 

 

 

1,367

 

 

 

3,747

 

 

 

2,320

 

Related tax effect

 

 

(370

)

 

 

(314

)

 

 

(860

)

 

 

(533

)

Reclassification of gain recognized in net income

 

 

 

 

 

 

 

 

(58

)

 

 

 

Related tax effect

 

 

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

 

1,236

 

 

 

1,053

 

 

 

2,840

 

 

 

1,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

2,838

 

 

 

2,004

 

 

 

4,770

 

 

 

3,428

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive income attributable to noncontrolling

   interest

 

 

(141

)

 

 

(140

)

 

 

(282

)

 

 

(280

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Uwharrie Capital

 

$

2,697

 

 

$

1,864

 

 

$

4,488

 

 

$

3,148

 

 

See accompanying notes

 

 

-5-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

 

 

 

 

Number of

Common

Shares

Issued

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Undivided

Profits

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Non

Controlling

Interest

 

 

Total

 

 

 

(dollars in thousands, except share data)

 

Balance, March 31, 2019

 

 

7,097,227

 

 

$

8,871

 

 

$

12,776

 

 

$

14,971

 

 

$

(960

)

 

$

10,655

 

 

$

46,313

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

811

 

 

 

 

 

 

140

 

 

 

951

 

Repurchase and retirement of common stock

 

 

(25,165

)

 

 

(31

)

 

 

(93

)

 

 

 

 

 

 

 

 

 

 

 

(124

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,053

 

 

 

 

 

 

1,053

 

Record preferred stock dividend Series B

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(103

)

 

 

(103

)

Record preferred stock dividend Series C

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37

)

 

 

(37

)

Balance, June 30, 2019

 

 

7,072,062

 

 

$

8,840

 

 

$

12,683

 

 

$

15,782

 

 

$

93

 

 

$

10,655

 

 

$

48,053

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2020

 

 

6,984,582

 

 

$

8,731

 

 

$

12,311

 

 

$

16,413

 

 

$

1,927

 

 

$

10,655

 

 

$

50,037

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

1,461

 

 

 

 

 

 

141

 

 

 

1,602

 

Repurchase and retirement of common stock

 

 

(14,441

)

 

 

(18

)

 

 

(61

)

 

 

 

 

 

 

 

 

 

 

 

(79

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,236

 

 

 

 

 

 

1,236

 

Record preferred stock dividend Series B

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(104

)

 

 

(104

)

Record preferred stock dividend Series C

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37

)

 

 

(37

)

Balance, June 30, 2020

 

 

6,970,141

 

 

$

8,713

 

 

$

12,250

 

 

$

17,874

 

 

$

3,163

 

 

$

10,655

 

 

$

52,655

 

 

 

 

 

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, 2018

 

 

7,126,541

 

 

$

8,908

 

 

$

12,885

 

 

$

14,421

 

 

$

(1,694

)

 

$

10,655

 

 

$

45,175

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

1,361

 

 

 

 

 

 

280

 

 

 

1,641

 

Repurchase and retirement of common stock

 

 

(54,479

)

 

 

(68

)

 

 

(202

)

 

 

 

 

 

 

 

 

 

 

 

(270

)

Stock options exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,787

 

 

 

 

 

 

1,787

 

Record preferred stock dividend Series B

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(206

)

 

 

(206

)

Record preferred stock dividend Series C

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(74

)

 

 

(74

)

Balance, June 30, 2019

 

 

7,072,062

 

 

$

8,840

 

 

$

12,683

 

 

$

15,782

 

 

$

93

 

 

$

10,655

 

 

$

48,053

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

 

7,095,920

 

 

$

8,870

 

 

$

12,784

 

 

$

16,226

 

 

$

323

 

 

$

10,655

 

 

$

48,858

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

1,648

 

 

 

 

 

 

282

 

 

 

1,930

 

Repurchase and retirement of common stock

 

 

(125,779

)

 

 

(157

)

 

 

(534

)

 

 

 

 

 

 

 

 

 

 

 

(691

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,840

 

 

 

 

 

 

2,840

 

Record preferred stock dividend Series B

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(208

)

 

 

(208

)

Record preferred stock dividend Series C

   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(74

)

 

 

(74

)

Balance, June 30, 2020

 

 

6,970,141

 

 

$

8,713

 

 

$

12,250

 

 

$

17,874

 

 

$

3,163

 

 

$

10,655

 

 

$

52,655

 

 

 

See accompanying notes

 

 

-6-


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

 

(dollars in thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

1,930

 

 

$

1,641

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

provided (used) by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

574

 

 

 

536

 

Provision for (recovery of) loan losses

 

 

1,399

 

 

 

(428

)

Gain on sale of securities available for sale

 

 

(58

)

 

 

 

Gain on sale of premises and equipment

 

 

 

 

 

(4

)

(Gain) loss on sale of OREO

 

 

(53

)

 

 

38

 

OREO write-downs

 

 

21

 

 

 

 

Unrealized gain on equity securities

 

 

(333

)

 

 

 

Net amortization of premium on investment securities AFS

 

 

241

 

 

 

341

 

Net amortization of premium on investment securities HTM

 

 

71

 

 

 

70

 

Net amortization of mortgage servicing rights

 

 

35

 

 

 

332

 

Originations and purchases of mortgage loans for sale

 

 

(126,653

)

 

 

(54,120

)

Proceeds from sales of mortgage loans for sale

 

 

125,200

 

 

 

56,076

 

Accrued interest receivable

 

 

(618

)

 

 

30

 

Prepaid assets

 

 

(494

)

 

 

(551

)

Cash surrender value of life insurance

 

 

(70

)

 

 

(55

)

Miscellaneous other assets

 

 

365

 

 

 

367

 

Accrued interest payable

 

 

(26

)

 

 

31

 

Miscellaneous other liabilities

 

 

(1,411

)

 

 

2,486

 

Net cash provided by operating activities

 

 

120

 

 

 

6,790

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Proceeds from sales of investment securities available for sale

 

 

7,586

 

 

 

 

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

 

 

2,593

 

 

 

128

 

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

 

 

3,425

 

 

 

15,975

 

Purchase of investment securities held to maturity

 

 

(16,580

)

 

 

 

Purchase of investment securities available for sale

 

 

(29,574

)

 

 

(10,438

)

Purchase of equity securities

 

 

(901

)

 

 

 

Purchase of investments in other assets

 

 

(1,100

)

 

 

 

Net change in restricted stock

 

 

(22

)

 

 

(50

)

Net increase in loans

 

 

(96,860

)

 

 

(4,363

)

Purchase of premises and equipment

 

 

(240

)

 

 

(2,721

)

Proceeds from sale of OREO

 

 

167

 

 

 

323

 

Proceeds from sales of premises, equipment and other assets

 

 

 

 

 

166

 

Net cash used by investing activities

 

 

(131,506

)

 

 

(980

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net increase (decrease) in deposit accounts

 

 

88,220

 

 

 

(9,985

)

Net decrease in federal funds purchased

 

 

 

 

 

 

 

 

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

 

 

(127

)

 

 

(351

)

Proceeds from long-term borrowings

 

 

1,000

 

 

 

 

Common stock repurchased

 

 

(691

)

 

 

(270

)

Dividends paid on preferred stock (noncontrolling interest)

 

 

(282

)

 

 

(280

)

Net cash provided (used) by financing activities

 

 

88,120

 

 

 

(10,886

)

Decrease in cash and cash equivalents

 

 

(43,266

)

 

 

(5,076

)

Cash and cash equivalents, beginning of period

 

 

155,198

 

 

 

117,934

 

Cash and cash equivalents, end of period

 

$

111,932

 

 

$

112,858

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

 

 

Interest paid

 

$

1,293

 

 

$

1,662

 

Income taxes paid

 

 

615

 

 

 

508

 

Supplemental Schedule of Non-Cash Activities

 

 

 

 

 

 

 

 

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

 

$

2,840

 

 

$

1,787

 

Mortgage servicing rights capitalized

 

 

1,367

 

 

 

243

 

Company financed OREO

 

 

90

 

 

 

70

 

 

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 continues to evaluate the impact of COVID-19, the disease caused by the novel Coronavirus, beyond the current impacts as of June 30, 2020, which are discussed throughout the accompanying notes of this report. Management is not aware of additional 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 2019 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 4, 2020. This Quarterly Report should be read in conjunction with such Annual Report.

Risks and Uncertainties

Congress, the President, the Federal Reserve, and other federal agencies have taken several actions designed to mitigate the economic fallout of the COVID-19 pandemic. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent or mitigate a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

While it is not possible to know the full extent of the damage to the U.S. and local economies that have been created by the impact of COVID-19, the following are certain areas that could be adversely impacted:

Financial position and results of operations

The Company’s interest income could be reduced due to COVID-19. The Company is actively working with customers affected by the pandemic to defer payments, interest and fees. The interest and fees will continue to accrue, based on GAAP guidelines; however, should credit losses on the deferred payments occur, the accrued interest and fees would be reversed. As such, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

Lending operations and accommodations to borrowers

As outlined in the CARES Act, the Company is providing a payment deferral option for commercial and consumer loans adversely affected by the pandemic. In accordance with the CARES Act, these modifications are not required to be reported as troubled debt restructurings. The Company is initially providing up to a three-month deferral period or conversion to interest only repayment for up to three months to allow for re-evaluation in a timely manner based on the economic impact at that time. Additional extensions may be considered. Loans are reviewed on a case-by-case basis and the Company will work with borrowers that express an interest in the assistance program. As of June 30, 2020, 179 outstanding loans were modified with a recorded investment of $55.3 million. Six modified loans with original deferred balances totaling $634,000 have come out of deferment during the period, four of which were paid-off and two of which were out of accommodation and current at June 30, 2020.

With the passage of the Paycheck Protection Program (“PPP”) as part of the CARES Act, administered by the Small Business Administration (“SBA”), the Company is actively participating in assisting its customers with applications for resources through the program.  PPP loans have a two-year term or, if approved after June 5, 2020, a five-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.  As of June 30, 2020, the Company has funded 1,004 PPP loans representing $77.3 million. The Company projects to fund an additional 120

-8-


 

loans for approximately $2 million as of the date of this report. It is the Company’s understanding that loans funded through the PPP are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for loan loss through additional provision expense charged to earnings.

Allowance for loan losses

As a result of job losses, business closures, and the impending termination of certain fiscal stimulus programs enacted under the CARES Act, the Company could incur additional provision expense to increase the allowance for loan losses. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.  

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses.

Accounting Changes, Reclassifications and Restatements

Certain amounts in the 2019 financial statements have been reclassified to conform to the 2020 presentation. These reclassifications did not have an impact on net income or shareholders’ equity.

 

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 (loss) for the three and six months ended June 30, 2020 and 2019:

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,927

 

 

$

(960

)

 

$

323

 

 

$

(1,694

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income before reclassifications,

   net of ($370), ($314), ($860) and ($533) tax effect, respectively

 

 

1,236

 

 

 

1,053

 

 

 

2,887

 

 

 

1,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other

   comprehensive income, net of $0, $0, $11 and $0 tax effect, respectively

 

 

 

 

 

 

 

 

(47

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive income

 

 

1,236

 

 

 

1,053

 

 

 

2,840

 

 

 

1,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

3,163

 

 

$

93

 

 

$

3,163

 

 

$

93

 

 

 

Note 3 – Noncontrolling Interest

In 2013, the Company’s subsidiary bank issued a total of $10.7 million of Fixed Rate Noncumulative Perpetual Preferred Stock, Series B and Series C. The preferred stock qualified as Tier 1 capital at the 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.

 

 

-9-


 

Note 4 – Per Share Data

 

Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for stock dividends. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. The Company had no stock options outstanding at June 30, 2020 or December 31, 2019.

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

The weighted average number of common shares outstanding was 6,983,493 for the three-month period ended June 30, 2020 compared to 7,237,290 for the three-month period ended June 30, 2019. For the six-month period ended June 30, 2020, the weighted average common shares outstanding was 7,025,622 compared to 7,252,598 for the six-month period ended June 30, 2019. The number of shares and earnings per share for the 2019 periods have been adjusted for the 2% stock dividend declared on November 12, 2019.

 

 

Note 5 – Investment Securities

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

 

June 30, 2020

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

4,992

 

 

$

32

 

 

$

 

 

$

5,024

 

U.S. Government agencies

 

 

28,836

 

 

 

667

 

 

 

19

 

 

 

29,484

 

GSE - Mortgage-backed securities and CMO’s

 

 

32,983

 

 

 

1,964

 

 

 

24

 

 

 

34,923

 

State and political subdivisions

 

 

30,775

 

 

 

1,270

 

 

 

40

 

 

 

32,005

 

Corporate bonds

 

 

8,900

 

 

 

314

 

 

 

57

 

 

 

9,157

 

Total securities available for sale

 

$

106,486

 

 

$

4,247

 

 

$

140

 

 

$

110,593

 

 

June 30, 2020

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

523

 

 

$

13

 

 

$

 

 

$

536

 

State and political subdivisions

 

 

19,321

 

 

 

998

 

 

 

 

 

 

20,319

 

Corporate bonds

 

 

7,500

 

 

 

2

 

 

 

 

 

 

7,502

 

Total securities held to maturity

 

$

27,344

 

 

$

1,013

 

 

$

 

 

$

28,357

 

 

December 31, 2019

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

4,976

 

 

$

36

 

 

$

 

 

$

5,012

 

U.S. Government agencies

 

 

25,869

 

 

 

18

 

 

 

201

 

 

 

25,686

 

GSE - Mortgage-backed securities and CMO’s

 

 

38,305

 

 

 

413

 

 

 

142

 

 

 

38,576

 

State and political subdivisions

 

 

13,937

 

 

 

329

 

 

 

45

 

 

 

14,221

 

Corporate bonds

 

 

5,018

 

 

 

11

 

 

 

 

 

 

5,029

 

Total securities available for sale

 

$

88,105

 

 

$

807

 

 

$

388

 

 

$

88,524

 

-10-


 

 

December 31, 2019

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

578

 

 

$

5

 

 

$

 

 

$

583

 

State and political subdivisions

 

 

6,826

 

 

 

62

 

 

 

 

 

 

6,888

 

Corporate bonds

 

 

6,024

 

 

 

5

 

 

 

1

 

 

 

6,028

 

Total securities held to maturity

 

$

13,428

 

 

$

72

 

 

$

1

 

 

$

13,499

 

 

At June 30, 2020 and December 31, 2019, the Company owned Federal Reserve Bank (FRB) stock reported at cost of $509,000 for both periods, and Federal Home Loan Bank (FHLB) stock of $657,000 and $635,000, respectively. The investments in FRB stock and FHLB stock are required investments related to the Company’s membership in, and borrowings with, these banks and is classified as restricted stock on the consolidated balance sheet. These investments are carried at cost since there is no ready market and redemption has historically been made at par value. The Company estimated that the fair value approximated cost and that these investments were not impaired at June 30, 2020.

Results from sales of securities available for sale for the three and six month periods ended June 30, 2020 and June 30, 2019 are as follows:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(dollars in thousands)

 

Gross proceeds from sales

 

$

 

 

$

 

 

$

7,586

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized gains from sales

 

$

 

 

$

 

 

$

58

 

 

$

 

Realized losses from sales

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gains (losses)

 

$

 

 

$

 

 

$

58

 

 

$

 

 

At June 30, 2020 and December 31, 2019, securities available for sale with a carrying amount of $66.3 million and $65.3 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 June 30, 2020 and December 31, 2019. These unrealized losses on investment securities are a result of temporary fluctuations in market prices and are in no way a reflection of the credit quality of the investments. At June 30, 2020, the unrealized losses on available for sale securities less than twelve months related to three government-sponsored enterprise (“GSE”) mortgage backed securities, two state and political subdivision bonds, two government agency bonds, and one corporate bond. At December 31, 2019, the unrealized losses on available for sale securities less than twelve months related to three government agency bonds, six GSE mortgage backed securities, and one state and political subdivision bond. At December 31, 2019, the Company had four government agency bonds and nine GSE mortgage backed securities that had been in a loss position for twelve months or more. At December 31, 2019, the unrealized losses for less than twelve months on held to maturity securities related to one corporate bond.

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

June 30, 2020

 

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

 

$

3,156

 

 

$

19

 

 

$

 

 

$

 

 

$

3,156

 

 

$

19

 

GSE-Mortgage-backed securities and CMO’s

 

 

4,574

 

 

 

24

 

 

 

 

 

 

 

 

 

4,574

 

 

 

24

 

State and political subdivisions

 

 

1,442

 

 

 

40

 

 

 

 

 

 

 

 

 

1,442

 

 

 

40

 

Corporate bonds

 

 

2,151

 

 

 

57

 

 

 

 

 

 

 

 

 

2,151

 

 

 

57

 

Total securities available for sale

 

$

11,323

 

 

$

140

 

 

$

 

 

$

 

 

$

11,323

 

 

$

140

 

-11-


 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

June 30, 2020

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Securities held to maturity temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and political subdivisions

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Corporate bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities held to maturity

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2019

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Securities available for sale temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

11,956

 

 

$

55

 

 

$

9,704

 

 

$

146

 

 

$

21,660

 

 

$

201

 

GSE-Mortgage-backed securities and CMO’s

 

 

17,613

 

 

 

61

 

 

 

7,431

 

 

 

81

 

 

 

25,044

 

 

 

142

 

State and political subdivisions

 

 

1,694

 

 

 

45

 

 

 

 

 

 

 

 

 

1,694

 

 

 

45

 

Total securities available for sale

 

$

31,263

 

 

$

161

 

 

$

17,135

 

 

$

227

 

 

$

48,398

 

 

$

388

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2019

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Securities held to maturity temporary impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

1,502

 

 

$

1

 

 

$

 

 

$

 

 

$

1,502

 

 

$

1

 

Total securities held to maturity

 

$

1,502

 

 

$

1

 

 

$

 

 

$

 

 

$

1,502

 

 

$

1

 

 

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 June 30, 2020, the Company does not intend to sell and is not likely to be required to sell the available for sale securities that were in a loss position prior to full recovery.

-12-


 

The aggregate amortized cost and fair value of the available for sale securities portfolio at June 30, 2020 by remaining contractual maturity are as follows:

 

 

 

June 30, 2020

 

 

 

Amortized

Cost

 

 

Estimated

Fair Value

 

 

Book

Yield

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

 

 

 

 

 

 

 

 

 

 

 

Due within twelve months

 

 

4,992

 

 

 

5,024

 

 

 

2.66

%

 

 

 

4,992

 

 

 

5,024

 

 

 

2.66

%

U.S. Government agencies

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

18,971

 

 

 

19,346

 

 

 

1.55

%

Due after five but within ten years

 

 

9,865

 

 

 

10,138

 

 

 

1.90

%

 

 

 

28,836

 

 

 

29,484

 

 

 

1.67

%

     Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

     Due within twelve months

 

 

203

 

 

 

205

 

 

 

3.17

%

     Due after one but within five years

 

 

890

 

 

 

900

 

 

 

1.24

%

Due after five but within ten years

 

 

17,595

 

 

 

19,209

 

 

 

2.41

%

Due after ten years

 

 

14,295

 

 

 

14,609

 

 

 

1.55

%

 

 

 

32,983

 

 

 

34,923

 

 

 

2.01

%

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

 

1,437

 

 

 

1,445

 

 

 

3.79

%

Due after five but within ten years

 

 

2,773

 

 

 

2,815

 

 

 

2.14

%

Due after ten years

 

 

26,565

 

 

 

27,745

 

 

 

2.90

%

 

 

 

30,775

 

 

 

32,005

 

 

 

2.88

%

Corporate bonds

 

 

 

 

 

 

 

 

 

 

 

 

     Due within twelve months

 

 

2,803

 

 

 

2,819

 

 

 

2.06

%

Due after one but within five years

 

 

6,097

 

 

 

6,338

 

 

 

2.47

%

 

 

 

8,900

 

 

 

9,157

 

 

 

2.34

%

Total securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

Due within twelve months

 

 

7,998

 

 

 

8,048

 

 

 

2.46

%

Due after one but within five years

 

 

27,395

 

 

 

28,029

 

 

 

1.86

%

Due after five but within ten years

 

 

30,233

 

 

 

32,162

 

 

 

2.22

%

Due after ten years

 

 

40,860

 

 

 

42,354

 

 

 

2.43

%

 

 

$

106,486

 

 

$

110,593

 

 

 

2.23

%

-13-


 

 

 

 

June 30, 2020

 

 

 

Amortized

Cost

 

 

Estimated

Fair Value

 

 

Book

Yield

 

 

 

(dollars in thousands)

 

Held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. Government agencies

 

 

 

 

 

 

 

 

 

 

 

 

Due after one but within five years

 

$

523

 

 

$

536

 

 

 

2.89

%

 

 

 

523

 

 

 

536

 

 

 

2.89

%

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

Due within twelve months

 

 

1,500

 

 

 

1,502

 

 

 

2.53

%

Due after one but within five years

 

 

4,268

 

 

 

4,385

 

 

 

2.50

%

Due after ten years

 

 

13,553

 

 

 

14,432

 

 

 

3.45

%

 

 

 

19,321

 

 

 

20,319

 

 

 

3.17

%

Corporate Bonds

 

 

 

 

 

 

 

 

 

 

 

 

Due within twelve months

 

 

1,500

 

 

 

1,502

 

 

 

2.79

%

Due after five but within ten years

 

 

6,000

 

 

 

6,000

 

 

 

5.33

%

 

 

 

7,500

 

 

 

7,502

 

 

 

4.83

%

Total securities held for maturity

 

 

 

 

 

 

 

 

 

 

 

 

Due within twelve months

 

 

3,000

 

 

 

3,004

 

 

 

2.66

%

Due after one but within five years

 

 

4,791

 

 

 

4,921

 

 

 

2.54

%

Due after five but within ten years

 

 

6,000

 

 

 

6,000

 

 

 

5.33

%

Due after ten years

 

 

13,553

 

 

 

14,432

 

 

 

3.45

%

 

 

$

27,344

 

 

$

28,357

 

 

 

3.62

%

 

 

Note 6 – Loans Held for Investment

The composition of net loans held for investment by class as of June 30, 2020 and December 31, 2019 are as follows:

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

 

(dollars in thousands)

 

Commercial

 

 

 

 

 

 

 

 

Commercial

 

$

60,477

 

 

$

59,075

 

SBA Paycheck Protection Program (PPP)

 

 

77,298

 

 

 

 

Real estate - commercial

 

 

137,426

 

 

 

130,998

 

Other real estate construction loans

 

 

33,474

 

 

 

23,043

 

Other loans

 

 

2,757

 

 

 

1,939

 

Noncommercial

 

 

 

 

 

 

 

 

Real estate 1-4 family construction

 

 

8,040

 

 

 

7,600

 

Real estate - residential

 

 

74,762

 

 

 

71,370

 

Home equity

 

 

51,347

 

 

 

51,216

 

Consumer loans

 

 

11,853

 

 

 

12,957

 

 

 

 

457,434

 

 

 

358,198

 

Less:

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(3,426

)

 

 

(1,981

)

Deferred loan fees net

 

 

(2,578

)

 

 

(248

)

 

 

 

 

 

 

 

 

 

Loans held for investment, net

 

$

451,430

 

 

$

355,969

 

 

 

Note 7 – Allowance for Loan Losses

During the second quarter of 2020, management made adjustments to the allowance for loan losses methodology. The qualitative factors were expanded to include additional reserves for niche lending portfolios of hotel, retained interest in the unguaranteed portion of Small Business Administration (SBA) Loans (not including PPP loans), and SBA PPP loans. The risk in these portfolios is measurable in addition to the standard probable loss calculation performed on all non-impaired loans.

-14-


 

With the impact of COVID-19 on all industries, the hotel and SBA (non-PPP) loan categories on the Company’s balance sheet have been identified as having elevated credit risk. The SBA (non-PPP) reflects the unguaranteed portion of SBA guaranteed loans originated by the Company. SBA PPP loans, while 100% guaranteed by SBA, could result in some loss if fraud occurs or there are reporting issues or duplicate funding of loans. These additional reserves allocated $172,000 to the reserve that was not present prior to June 30, 2020.

In addition, management eliminated its qualitative factor based on a 21-day weighted average of the VIX index, a real-time index that measures the expectation of the market’s 30-day forward-looking volatility, and replaced it with a multi-factor linear regression encompassing the following economic data: Case Shiller for North Carolina (NC) home price index, NC unemployment rate, 2-year 10-year US Treasury spread, customer sentiment, and a VIX quarterly average factor. This qualitative factor update increased provisions by approximately $379,000 from March 31, 2020 to June 30, 2020.  

The following table shows the change in the allowance for loss losses by loan segment for the three and six months ended June 30, 2020 and 2019, respectively:

 

Commercial

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

1,512

 

 

$

1,281

 

 

$

1,087

 

 

$

1,334

 

Provision for (recovery of) loan losses

 

 

580

 

 

 

(350

)

 

 

1,002

 

 

 

(414

)

Charge-offs

 

 

(35

)

 

 

 

 

 

(38

)

 

 

(5

)

Recoveries

 

 

54

 

 

 

341

 

 

 

60

 

 

 

357

 

Net (charge-offs) / Recoveries

 

 

19

 

 

 

341

 

 

 

22

 

 

 

352

 

Reclassification of reserve for off balance sheet commitments

 

 

 

 

 

(32

)

 

 

 

 

 

(32

)

Balance at end of period

 

$

2,111

 

 

$

1,240

 

 

$

2,111

 

 

$

1,240

 

 

Non-Commercial

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,115

 

 

$

952

 

 

$

894

 

 

$

1,040

 

Provision for (recovery of) loan losses

 

 

187

 

 

 

35

 

 

 

397

 

 

 

(14

)

Charge-offs

 

 

(17

)

 

 

(12

)

 

 

(24

)

 

 

(65

)

Recoveries

 

 

30

 

 

 

18

 

 

 

48

 

 

 

32

 

Net (charge-offs) / Recoveries

 

 

13

 

 

 

6

 

 

 

24

 

 

 

(33

)

Reclassification of reserve for off balance sheet commitments

 

 

 

 

 

(54

)

 

 

 

 

 

(54

)

Balance at end of period

 

$

1,315

 

 

$

939

 

 

$

1,315

 

 

$

939

 

 

Total

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

2,627

 

 

$

2,233

 

 

$

1,981

 

 

$

2,374

 

Provision for (recovery of) loan losses

 

 

767

 

 

 

(315

)

 

 

1,399

 

 

 

(428

)

Charge-offs

 

 

(52

)

 

 

(12

)

 

 

(62

)

 

 

(70

)

Recoveries

 

 

84

 

 

 

359

 

 

 

108

 

 

 

389

 

Net (charge-offs) / Recoveries

 

 

32

 

 

 

347

 

 

 

46

 

 

 

319

 

Reclassification of reserve for off balance sheet commitments

 

 

 

 

 

(86

)

 

 

 

 

 

(86

)

Balance at end of period

 

$

3,426

 

 

$

2,179

 

 

$

3,426

 

 

$

2,179

 

 

-15-


 

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at June 30, 2020 and December 31, 2019:

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated

 

 

Collectively Evaluated

 

 

Total

 

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

53

 

 

$

5,400

 

 

$

2,058

 

 

$

303,740

 

 

$

2,111

 

 

$

309,140

 

Non-Commercial

 

 

79

 

 

 

3,226

 

 

 

1,236

 

 

 

142,490

 

 

 

1,315

 

 

 

145,716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

132

 

 

$

8,626

 

 

$

3,294

 

 

$

446,230

 

 

$

3,426

 

 

$

454,856

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated

 

 

Collectively Evaluated

 

 

Total

 

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

32

 

 

$

3,660

 

 

$

1,055

 

 

$

209,456

 

 

$

1,087

 

 

$

213,116

 

Non-Commercial

 

 

109

 

 

 

3,175

 

 

 

785

 

 

 

141,659

 

 

 

894

 

 

 

144,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

141

 

 

$

6,835

 

 

$

1,840

 

 

$

351,115

 

 

$

1,981

 

 

$

357,950

 

 

Past due loan information is used by management when assessing the adequacy of the allowance for loan losses. The following tables summarize the past due information of the loan portfolio by class as of the dates indicated:

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 

 

$

 

 

$

 

 

$

60,477

 

 

$

60,477

 

 

$

 

SBA Paycheck Protection Program (PPP)

 

 

 

 

 

 

 

 

 

 

 

75,006

 

 

 

75,006

 

 

 

 

Real estate - commercial

 

 

 

 

 

2,083

 

 

 

2,083

 

 

 

135,343

 

 

 

137,426

 

 

 

 

Other real estate construction

 

 

55

 

 

 

1,080

 

 

 

1,135

 

 

 

32,339

 

 

 

33,474

 

 

 

 

Real estate 1-4 family construction

 

 

 

 

 

 

 

 

 

 

 

8,040

 

 

 

8,040

 

 

 

 

Real estate - residential

 

 

70

 

 

 

711

 

 

 

781

 

 

 

73,695

 

 

 

74,476

 

 

 

 

Home equity

 

 

58

 

 

 

65

 

 

 

123

 

 

 

51,224

 

 

 

51,347

 

 

 

 

Consumer loans

 

 

24

 

 

 

 

 

 

24

 

 

 

11,829

 

 

 

11,853

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

2,757

 

 

 

2,757

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

207

 

 

$

3,939

 

 

$

4,146

 

 

$

450,710

 

 

$

454,856

 

 

$

 

-16-


 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

30-89 Days

Past Due

 

 

Loans

90 Days

or More

Past due

and Non -

Accrual

 

 

Total Past

Due Loans

 

 

Current

Loans

 

 

Total

Loans

 

 

Accruing

Loans 90 or

More Days

Past Due

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

190

 

 

$

 

 

$

190

 

 

$

58,885

 

 

$

59,075

 

 

$

 

Real estate - commercial

 

 

 

 

 

2,088

 

 

$

2,088

 

 

 

128,910

 

 

 

130,998

 

 

 

 

Other real estate construction

 

 

14

 

 

 

 

 

$

14

 

 

 

23,029

 

 

 

23,043

 

 

 

 

Real estate 1-4 family construction

 

 

 

 

 

 

 

 

 

 

 

7,600

 

 

 

7,600

 

 

 

 

Real estate - residential

 

 

326

 

 

 

752

 

 

 

1,078

 

 

 

70,044

 

 

 

71,122

 

 

 

 

Home equity

 

 

57

 

 

 

82

 

 

 

139

 

 

 

51,077

 

 

 

51,216

 

 

 

 

Consumer loan

 

 

27

 

 

 

 

 

 

27

 

 

 

12,930

 

 

 

12,957

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

1,939

 

 

 

1,939

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

614

 

 

$

2,922

 

 

$

3,536

 

 

$

354,414

 

 

$

357,950

 

 

$

 

 

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

The Company had $0 in foreclosed residential real estate and $272,000 of residential real estate in process of foreclosure at June 30, 2020. At December 31, 2019, the Company had $130,000 in foreclosed residential real estate and $387,000 of residential real estate in process of foreclosure.

The composition of non-accrual loans by class as of June 30, 2020 and December 31, 2019 was as follows:

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

 

$

 

SBA Paycheck Protection Program (PPP)

 

 

 

 

 

 

Real estate - commercial

 

 

2,083

 

 

 

2,088

 

Other real estate construction

 

 

1,080

 

 

 

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

Real estate – residential

 

 

711

 

 

 

752

 

Home equity

 

 

65

 

 

 

82

 

Consumer loans

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

$

3,939

 

 

$

2,922

 

 

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

Pass: Loans that are pass grade credits include loans that are fundamentally sound, with risk factors that are reasonable and acceptable. They generally conform to policy with only minor exceptions; 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 and paying capacity of the obligor or the value of the collateral pledged. All non-accrual loans are graded as substandard.

-17-


 

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

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

The tables below summarize risk grades of the loan portfolio by class at June 30, 2020 and December 31, 2019:

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

Watch

 

 

Sub-

standard

 

 

Doubtful

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

57,902

 

 

$

2,575

 

 

$

 

 

$

 

 

$

60,477

 

SBA Paycheck Protection Program (PPP)

 

 

75,006

 

 

 

 

 

 

 

 

 

 

 

 

75,006

 

Real estate - commercial

 

 

133,358

 

 

 

1,156

 

 

 

2,912

 

 

 

 

 

 

137,426

 

Other real estate construction

 

 

31,728

 

 

 

392

 

 

 

1,354

 

 

 

 

 

 

33,474

 

Real estate 1 - 4 family construction

 

 

8,040

 

 

 

 

 

 

 

 

 

 

 

 

8,040

 

Real estate - residential

 

 

71,175

 

 

 

2,336

 

 

 

965

 

 

 

 

 

 

74,476

 

Home equity

 

 

50,307

 

 

 

975

 

 

 

65

 

 

 

 

 

 

51,347

 

Consumer loans

 

 

11,759

 

 

 

82

 

 

 

12

 

 

 

 

 

 

11,853

 

Other loans

 

 

2,757

 

 

 

 

 

 

 

 

 

 

 

 

2,757

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

442,032

 

 

$

7,516

 

 

$

5,308

 

 

$

 

 

$

454,856

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

Watch

 

 

Sub-

standard

 

 

Doubtful

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

56,151

 

 

$

2,921

 

 

$

3

 

 

$

 

 

$

59,075

 

Real estate - commercial

 

 

126,498

 

 

 

1,194

 

 

 

3,306

 

 

 

 

 

 

130,998

 

Other real estate construction

 

 

21,253

 

 

 

1,477

 

 

 

313

 

 

 

 

 

 

23,043

 

Real estate 1 - 4 family construction

 

 

7,600

 

 

 

 

 

 

 

 

 

 

 

 

7,600

 

Real estate - residential

 

 

67,647

 

 

 

2,464

 

 

 

1,011

 

 

 

 

 

 

71,122

 

Home equity

 

 

50,255

 

 

 

879

 

 

 

82

 

 

 

 

 

 

51,216

 

Consumer loans

 

 

12,877

 

 

 

79

 

 

 

1

 

 

 

 

 

 

12,957

 

Other loans

 

 

1,939

 

 

 

 

 

 

 

 

 

 

 

 

1,939

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

344,220

 

 

$

9,014

 

 

$

4,716

 

 

$

 

 

$

357,950

 

 

Loans that are in non-accrual status or 90 days past due and still accruing are considered to be nonperforming. At both June 30, 2020 and December 31, 2019 there were no loans 90 days past due and still accruing. The following tables show the breakdown between performing and nonperforming loans by class at June 30, 2020 and December 31, 2019:

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

Non-

Performing

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

60,477

 

 

$

 

 

$

60,477

 

SBA Paycheck Protection Program (PPP)

 

 

75,006

 

 

 

 

 

 

75,006

 

Real estate - commercial

 

 

135,343

 

 

 

2,083

 

 

 

137,426

 

Other real estate construction

 

 

32,394

 

 

 

1,080

 

 

 

33,474

 

Real estate 1 – 4 family construction

 

 

8,040

 

 

 

 

 

 

8,040

 

Real estate – residential

 

 

73,765

 

 

 

711

 

 

 

74,476

 

Home equity

 

 

51,282

 

 

 

65

 

 

 

51,347

 

Consumer loans

 

 

11,853

 

 

 

 

 

 

11,853

 

Other loans

 

 

2,757

 

 

 

 

 

 

2,757

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

450,917

 

 

$

3,939

 

 

$

454,856

 

-18-


 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

Non-

Performing

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

59,075

 

 

$

 

 

$

59,075

 

Real estate - commercial

 

 

128,910

 

 

 

2,088

 

 

 

130,998

 

Other real estate construction

 

 

23,043

 

 

 

 

 

 

23,043

 

Real estate 1 – 4 family construction

 

 

7,600

 

 

 

 

 

 

7,600

 

Real estate – residential

 

 

70,370

 

 

 

752

 

 

 

71,122

 

Home equity

 

 

51,134

 

 

 

82

 

 

 

51,216

 

Consumer loans

 

 

12,957

 

 

 

 

 

 

12,957

 

Other loans

 

 

1,939

 

 

 

 

 

 

1,939

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

355,028

 

 

$

2,922

 

 

$

357,950

 

 

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired, a specific calculation is performed and a specific reserve is allocated, if necessary. The tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class at June 30, 2020 and December 31, 2019.

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

With No

Allowance

 

 

Recorded

Investment

With

Allowance

 

 

Related

Allowance

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

693

 

 

$

41

 

 

$

652

 

 

$

20

 

SBA Paycheck Protection Program (PPP)

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

3,584

 

 

 

2,084

 

 

 

1,500

 

 

 

30

 

Other real estate construction

 

 

1,123

 

 

 

1,080

 

 

 

43

 

 

 

3

 

Real estate 1 - 4 family construction

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

3,143

 

 

 

1,698

 

 

 

1,445

 

 

 

72

 

Home equity

 

 

65

 

 

 

19

 

 

 

46

 

 

 

7

 

Consumer loans

 

 

18

 

 

 

 

 

 

18

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

8,626

 

 

$

4,922

 

 

$

3,704

 

 

$

132

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

With No

Allowance

 

 

Recorded

Investment

With

Allowance

 

 

Related

Allowance

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

4

 

 

$

 

 

$

4

 

 

$

 

Real estate - commercial

 

 

3,612

 

 

 

1,923

 

 

 

1,689

 

 

 

29

 

Other real estate construction

 

 

44

 

 

 

 

 

 

44

 

 

 

3

 

Real estate 1 - 4 family construction

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

3,070

 

 

 

987

 

 

 

2,083

 

 

 

99

 

Home equity

 

 

82

 

 

 

13

 

 

 

69

 

 

 

10

 

Consumer loans

 

 

23

 

 

 

 

 

 

23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

6,835

 

 

$

2,923

 

 

$

3,912

 

 

$

141

 

-19-


 

 

 

 

 

Three Months ended June 30, 2020

 

 

Three Months ended June 30, 2019

 

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

388

 

 

$

17

 

 

$

6

 

 

$

 

SBA Paycheck Protection Program (PPP)

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

3,591

 

 

 

13

 

 

 

1,434

 

 

 

15

 

Other real estate construction

 

 

1,123

 

 

 

 

 

 

69

 

 

 

 

Real estate 1- 4 family construction

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

3,223

 

 

 

29

 

 

 

2,975

 

 

 

33

 

Home equity

 

 

73

 

 

 

 

 

 

124

 

 

 

3

 

Consumer loans

 

 

19

 

 

 

1

 

 

 

28

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

8,417

 

 

$

60

 

 

$

4,636

 

 

$

51

 

 

 

 

Six Months Ended June 30, 2020

 

 

Six Months Ended June 30, 2019

 

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

Average

Recorded

Investment

 

 

Interest

Income

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

260

 

 

$

17

 

 

$

6

 

 

$

 

SBA Paycheck Protection Program (PPP)

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

3,598

 

 

 

42

 

 

 

1,375

 

 

 

35

 

Other real estate construction

 

 

763

 

 

 

1

 

 

 

77

 

 

 

1

 

Real estate 1- 4 family construction

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

3,172

 

 

 

69

 

 

 

2,985

 

 

 

72

 

Home equity

 

 

76

 

 

 

1

 

 

 

110

 

 

 

4

 

Consumer loans

 

 

20

 

 

 

1

 

 

 

29

 

 

 

1

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

7,889

 

 

$

131

 

 

$

4,582

 

 

$

113

 

 

 

 

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

At June 30, 2020, the Company had $4.8 million in TDRs outstanding, of which two with balances totaling $69,000 were on a non-accruing basis. Comparatively, the Company had $3.9 million of outstanding TDRs, of which one with a balance of $26,000 was non-accruing, at December 31, 2019.  

-20-


 

For the three and six months ended June 30, 2020 and 2019, the following table presents a breakdown of the types of concessions made by loan class:

 

 

For the three months ended June 30, 2020

 

 

 

Number

of Contracts

 

 

Pre-Modification

Outstanding Recorded

Investment

 

 

Post-Modification

Outstanding Recorded

Investment

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1

 

 

$

650

 

 

$

650

 

SBA Paycheck Protection Program (PPP)

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

1

 

 

 

829

 

 

 

829

 

Other real estate construction

 

 

 

 

 

 

 

 

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

 

 

 

Real estate – residential

 

 

1

 

 

 

114

 

 

 

114

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

3

 

 

$

1,593

 

 

$

1,593

 

 

 

 

For the three months ended June 30, 2019

 

 

 

Number

of Contracts

 

 

Pre-Modification

Outstanding Recorded

Investment

 

 

Post-Modification

Outstanding Recorded

Investment

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

$

 

 

$

 

Real estate - commercial

 

 

1

 

 

 

1,629

 

 

 

857

 

Other real estate construction

 

 

 

 

 

 

 

 

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

 

 

 

Real estate – residential

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

1

 

 

$

1,629

 

 

$

857

 

 

 

 

For the six months ended June 30, 2020

 

 

 

Number

of Contracts

 

 

Pre-Modification

Outstanding Recorded

Investment

 

 

Post-Modification

Outstanding Recorded

Investment

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

2

 

 

$

691

 

 

$

691

 

SBA Paycheck Protection Program (PPP)

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

1

 

 

 

829

 

 

 

829

 

Other real estate construction

 

 

 

 

 

 

 

 

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

 

 

 

Real estate – residential

 

 

2

 

 

 

335

 

 

 

335

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

5

 

 

$

1,855

 

 

$

1,855

 

-21-


 

 

 

 

For the six months ended June 30, 2019

 

 

 

Number

of Contracts

 

 

Pre-Modification

Outstanding Recorded

Investment

 

 

Post-Modification

Outstanding Recorded

Investment

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

$

 

 

$

 

Real estate - commercial

 

 

1

 

 

 

1,629

 

 

 

857

 

Other real estate construction

 

 

 

 

 

 

 

 

 

Real estate 1 – 4 family construction

 

 

 

 

 

 

 

 

 

Real estate – residential

 

 

3

 

 

 

217

 

 

 

198

 

Home equity

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

4

 

 

$

1,846

 

 

$

1,055

 

During the twelve months ended June 30, 2020, there were two TDRs for which there was a payment default. During the twelve months ended June 30, 2019, there was two 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 $133,000 in the allowance for loan losses as of June 30, 2020, as a direct result of these TDRs. At June 30, 2019, there was $117,000 in the allowance for loan losses related to TDRs.

The following table presents the status of the types of loans modified as TDRs within the previous twelve months as of June 30, 2020 and 2019:

 

 

 

Paid In Full

 

 

Paying as restructured

 

 

Converted to non-accrual

 

 

Foreclosure/ Default

 

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

 

(dollars in thousands)

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Below market interest rate

 

 

 

 

$

 

 

 

1

 

 

$

219

 

 

 

 

 

$

 

 

 

 

 

$

 

Extended payment Terms

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forgiveness of Principal/Other

 

 

1

 

 

 

37

 

 

 

10

 

 

 

2,434

 

 

 

1

 

 

 

46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

1

 

 

$

37

 

 

 

11

 

 

$

2,653

 

 

 

1

 

 

$

46

 

 

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Below market interest rate

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

Extended payment Terms

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forgiveness of Principal/Other

 

 

5

 

 

 

895

 

 

 

4

 

 

 

1,847

 

 

 

 

 

 

 

 

 

2

 

 

 

282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

5

 

 

$

895

 

 

 

4

 

 

$

1,847

 

 

 

 

 

$

 

 

 

2

 

 

$

282

 

Effective March 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was signed into law on March 27, 2020, allows the Company to suspend the TDR classifications described above in an effort to provide relief to borrowers impacted by COVID-19. The Company has elected to adopt this suspension until December 31, 2020 or sixty days after the national emergency terminates, per the CARES Act. Modifications of loans for COVID-19 reasons, and that were current as of December 31, 2019, are not considered TDRs and are tracked internally as “COVID-19 Modifications”.

-22-


 

The Company is initially providing up to a three-month deferral period or conversion to interest only repayment for up to three months. Additional extensions may be considered. Loans are reviewed on a case-by-case basis and the Company will work with borrowers that express an interest in the assistance program. As of June 30, 2020, the Company had modified 179 current outstanding loans with a recorded investment of $55.3 million.

As of June 30, 2020, the Company’s modifications of loans for COVID-19 related reasons are disclosed in the table below:

 

 

Interest only

 

 

Payment deferral

 

 

Other

 

 

Total COVID-19 modifications

 

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

Number of

Loans

 

 

Recorded

Investments

 

 

 

(dollars in thousands)

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

2

 

 

$

232

 

 

 

25

 

 

$

2,520

 

 

 

 

 

$

 

 

 

27

 

 

$

2,752

 

Real estate - commercial

 

 

14

 

 

 

15,626

 

 

 

50

 

 

 

25,443

 

 

 

 

 

 

 

 

 

64

 

 

 

41,069

 

Other real estate construction

 

 

1

 

 

 

350

 

 

 

7

 

 

 

4,493

 

 

 

 

 

 

 

 

 

8

 

 

 

4,843

 

Other loans

 

 

 

 

 

 

 

 

1

 

 

 

10

 

 

 

 

 

 

 

 

 

1

 

 

 

10

 

Real estate – residential

 

 

1

 

 

 

149

 

 

 

38

 

 

 

5,818

 

 

 

 

 

 

 

 

 

39

 

 

 

5,967

 

Home equity

 

 

 

 

 

 

 

 

7

 

 

 

349

 

 

 

 

 

 

 

 

 

7

 

 

 

349

 

Consumer loans

 

 

8

 

 

 

84

 

 

 

24

 

 

 

238

 

 

 

1

 

 

 

20

 

 

 

33

 

 

 

342

 

Total

 

 

26

 

 

 

16,441

 

 

 

152

 

 

 

38,871

 

 

 

1

 

 

 

20

 

 

 

179

 

 

 

55,332

 

 

Note 9 - Leases

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

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

Our leases relate to three office locations, two of which are branch locations, with remaining terms of two to ten years. Certain lease arrangements contain extension options which range from five to ten years at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise and they are not included in the lease term. As of June 30, 2020, operating lease ROU assets were $1.8 million and the lease liability was $1.9 million, compared to ROU assets and a lease liability of $2.1 million for both at June 30, 2019. Lease costs associated with all leases is $96,000 and $192,000 for the three and six months ended June 30, 2020 respectively.

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

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

 

(in thousands except percent and period data)

 

 

 

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

189

 

 

$

169

 

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

 

 

1,782

 

 

 

2,107

 

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

 

 

7.3

 

 

 

7.9

 

Weighted-average discount rate - operating leases

 

 

2.9

%

 

 

2.8

%

 

-23-


 

The table below summarizes the maturity of remaining lease liabilities:

 

 

 

 

 

 

June 30, 2020

 

 

 

(in thousands)

 

 

 

 

 

 

2020

 

$

192

 

2021

 

 

347

 

2022

 

 

225

 

2023

 

 

229

 

2024

 

 

233

 

2025 and thereafter

 

 

846

 

Total lease payments

 

 

2,072

 

Less: Interest

 

 

(222

)

Present value of lease liabilities

 

 

1,850

 

 

 

Note 10 - Commitments and Contingencies

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

The Bank’s risk of loss with unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments under such instruments as it does for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are unsecured.

At June 30, 2020, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

 

$

141,185

 

 

$

134,241

 

Credit card commitments

 

 

13,042

 

 

 

11,650

 

Standby letters of credit

 

 

1,216

 

 

 

1,213

 

Total commitments

 

$

155,443

 

 

$

147,104

 

 

Note 11 – Fair Value Disclosures

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

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

Among the Company’s assets and liabilities, investment securities available for sale are reported at their fair values on a recurring basis. Certain other assets are adjusted to their fair value on a nonrecurring basis, including other real estate owned, impaired loans, loans held for sale, which are carried at the lower of cost or market value; loan servicing rights, where fair value is determined using similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions; and

-24-


 

goodwill, which is periodically tested for impairment. Deposits, short-term borrowings and long-term obligations are not reported at fair value.

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

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

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at the estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. The Company typically bases the fair value of the collateral on appraised values, which the Company considers Level 3 valuations.

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

The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019:

 

 

 

June 30, 2020

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

5,024

 

 

$

5,024

 

 

$

 

 

$

 

U.S. Government agencies

 

 

29,484

 

 

 

 

 

 

29,484

 

 

 

 

GSE - Mortgage-backed securities and CMO’s

 

 

34,923

 

 

 

 

 

 

34,923

 

 

 

 

State and political subdivisions

 

 

32,005

 

 

 

 

 

 

32,005

 

 

 

 

Corporate bonds

 

 

9,157

 

 

 

 

 

 

9,157

 

 

 

 

Equity securities

 

 

1,234

 

 

 

1,234

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value on a recurring basis

 

$

111,827

 

 

$

6,258

 

 

$

105,569

 

 

$

 

 

 

 

December 31, 2019

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

5,012

 

 

$

5,012

 

 

$

 

 

$

 

U.S. Government agencies

 

 

25,686

 

 

 

 

 

 

25,686

 

 

 

 

GSE - Mortgage-backed securities and CMO’s

 

 

38,576

 

 

 

 

 

 

38,576

 

 

 

 

State and political subdivisions

 

 

14,221

 

 

 

 

 

 

14,221

 

 

 

 

Corporate bonds

 

 

5,029

 

 

 

 

 

 

5,029

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value on a recurring basis

 

$

88,524

 

 

$

5,012

 

 

$

83,512

 

 

$

 

 

-25-


 

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or market value that were recognized at fair value less cost to sell at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of June 30, 2020 and December 31, 2019:

 

 

 

June 30, 2020

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

6,289

 

 

$

 

 

$

 

 

$

6,289

 

Other real estate owned

 

 

359

 

 

 

 

 

 

 

 

 

359

 

Total assets at fair value on a nonrecurring basis

 

$

6,648

 

 

$

 

 

$

 

 

$

6,648

 

 

 

 

December 31, 2019

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

3,771

 

 

$

 

 

$

 

 

$

3,771

 

Other real estate owned

 

 

364

 

 

 

 

 

 

 

 

 

364

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value on a nonrecurring basis

 

$

4,135

 

 

$

 

 

$

 

 

$

4,135

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

June 30, 2020

 

 

 

 

 

 

 

 

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%

 

December 31, 2019

 

 

 

 

 

 

 

 

Valuation Technique

 

Unobservable Input

 

General

Range

Nonrecurring measurements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

Discounted appraisals

 

Collateral discounts and

   Estimated costs to sell

 

0 – 25%

 

 

Discounted cash flows

 

Discount rates

 

4%-8.75%

 

 

 

 

 

 

 

 

OREO

 

Discounted appraisals

 

Collateral discounts and

   Estimated costs to sell

 

0 – 10%

 

At June 30, 2020, impaired loans were being evaluated with discounted expected cash flows or discounted appraisals were being used on collateral dependent loans.

 

 

Note 12 Fair Values of Financial Instruments and Interest Rate Risk

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

The fair value estimates presented at June 30, 2020 and December 31, 2019 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

-26-


 

valuations at June 30, 2020 are observed under the exit price notion as a result of adoption of ASU 2016-01. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of June 30, 2020 and December 31, 2019:

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

Value

 

 

Estimated

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(dollars in thousands)

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

111,932

 

 

$

111,948

 

 

$

109,940

 

 

$

2,008

 

 

$

 

Securities available for sale

 

 

110,593

 

 

 

110,593

 

 

 

5,024

 

 

 

105,569

 

 

 

 

Securities held to maturity

 

 

27,344

 

 

 

28,357

 

 

 

 

 

 

22,357

 

 

 

6,000

 

Equity securities

 

 

1,234

 

 

 

1,234

 

 

 

1,234

 

 

 

 

 

 

 

Loans held for investment, net

 

 

451,430

 

 

 

446,916

 

 

 

 

 

 

 

 

 

446,916

 

Loans held for sale

 

 

4,369

 

 

 

4,369

 

 

 

 

 

 

4,369

 

 

 

 

Restricted stock

 

 

1,166

 

 

 

1,166

 

 

 

1,166

 

 

 

 

 

 

 

Loan servicing rights

 

 

2,439

 

 

 

2,641

 

 

 

 

 

 

2,641

 

 

 

 

 

Accrued interest receivable

 

 

2,284

 

 

 

2,284

 

 

 

 

 

 

 

 

 

2,284

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

674,098

 

 

$

674,436

 

 

 

 

 

 

674,436

 

 

 

 

Short-term borrowings

 

 

499

 

 

 

499

 

 

 

 

 

 

499

 

 

 

 

Long-term borrowings

 

 

10,992

 

 

 

11,172

 

 

 

 

 

 

 

 

 

11,172

 

Accrued interest payable

 

 

29

 

 

 

29

 

 

 

 

 

 

 

 

 

29

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

Value

 

 

Estimated

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(dollars in thousands)

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

155,198

 

 

$

155,202

 

 

$

152,957

 

 

$

2,245

 

 

$

 

Securities available for sale

 

 

88,524

 

 

 

88,524

 

 

 

5,012

 

 

 

83,512

 

 

 

 

Securities held to maturity

 

 

13,428

 

 

 

13,499

 

 

 

 

 

 

10,499

 

 

 

3,000

 

Loans held for investment, net

 

 

355,969

 

 

 

354,269

 

 

 

 

 

 

 

 

 

354,269

 

Loans held for sale

 

 

2,946

 

 

 

2,946

 

 

 

 

 

 

2,946

 

 

 

 

Restricted stock

 

 

1,144

 

 

 

1,144

 

 

 

1,144

 

 

 

 

 

 

 

Loan servicing rights

 

 

1,723

 

 

 

3,228

 

 

 

 

 

 

3,228

 

 

 

 

 

Accrued interest receivable

 

 

1,666

 

 

 

1,666

 

 

 

 

 

 

 

 

 

1,666

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

585,878

 

 

 

567,130

 

 

 

 

 

 

567,130

 

 

 

 

Short-term borrowings

 

 

626

 

 

 

626

 

 

 

 

 

 

626

 

 

 

 

Long-term debt

 

 

9,992

 

 

 

10,180

 

 

 

 

 

 

 

 

 

10,180

 

Accrued interest payable

 

 

55

 

 

 

55

 

 

 

 

 

 

 

 

 

55

 

At June 30, 2020 the subsidiary bank had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, the fair value is the fee the Bank is expected to receive. This amount is deemed immaterial by management. See Note 10.

 

Note 13 – Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. During 2019, the effective date was extended to fiscal years beginning on or after December 15, 2022 for public entities that qualify as smaller reporting companies, per the Securities and Exchange Commission definition, which currently includes the Company. Entities will apply the

-27-


 

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 have entered into a contract to outsource our current model with a CECL-ready vendor. We are currently evaluating the various methods of determining credit losses within the software. The impact of the adoption is dependent on loan portfolio composition and credit quality at adoption date, as well as economic conditions and forecasts at that time.

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.

 

 

 

-28-


 

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

Caution Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors that could cause actual results to differ materially from these estimates. These factors include, but are not limited to: the impact of the novel Coronavirus disease, or COVID-19, on our borrowers’ ability to meet their financial obligations to us; increases in our past due loans and provisions for loan losses that may result from COVID-19; declines in general economic conditions, including increased stress in the financial markets due to COVID-19; changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services. Any use of “we” or “our” in the following discussion refers to the Company on a consolidated basis.

Comparison of Financial Condition at June 30, 2020 and December 31, 2019.

During the six months ended June 30, 2020, the Company’s total assets increased $91.4 million, from $656.8 million to $748.2 million.

Cash and cash equivalents decreased $43.3 million during the six months ended June 30, 2020. The decrease is directly related to the increased investments made in the securities portfolio in an effort to sustain the yield on earning assets after rates dropped significantly during the first quarter.

Investment securities consist of securities available for sale and securities held to maturity. Investment securities increased $36.0 million to $137.9 million for the six-month period ended June 30, 2020, due to investments of cash into longer-term, higher yielding assets. At June 30, 2020, the Company had net unrealized gains on securities available for sale of $4.1 million, compared to net unrealized gains of $419,000 as December 31, 2019. The significant improvement is directly related to the decline of the bond yields at June 30, 2020 compared to December 31, 2019, as the market reacted to the COVID-19 outbreak worldwide.

An additional investment was made into an equity security during the six months ended June 30, 2020 of $901,000. The value of the equity security increased $333,000 by the end of the second quarter, resulting in a fair value of $1.2 million for the security at June 30, 2020.

Loans held for investment increased from $358.0 million to $454.9 million, an increase of $96.9 million for the six-month period. The Company experienced net growth in nearly all sectors with the largest increase (not including PPP loans) occurring in the other real estate construction segment related to funding on two large hotel loans. During the second quarter of 2020, the Company funded 1,004 SBA PPP loans for a total of $77.3 million. These loans are unsecured commercial loans, but are 100% guaranteed by the SBA. Loans held for sale increased 48.3%, or $1.4 million, as many of the loans produced near the June 30, 2020 quarter-end date were not sold on the secondary market until early July. The increase in re-finance activity due to a favorable interest rate environment for borrowers has increased production for the mortgage division of the Company.

The allowance for loan losses was $3.4 million at June 30, 2020, which represented 0.75% of the total loans held for investment compared to $2.0 million or 0.55% of the total loans held for investment at December 31, 2019. Additional discussion regarding the increase in the allowance is included in the Asset Quality section below.

Other changes in our consolidated assets are primarily related to prepaid assets, other assets and loan servicing assets. Prepaid assets have increased $494,000 from December 31, 2019 to June 30, 2020, as annual property and business insurance payments are due during the first quarter of the year. Other assets decreased $834,000 during the first six months of 2020, primarily due to the distribution of supplemental executive retirement plan benefits related to an executive retirement in January 2020. Loan servicing assets increased by $716,000 during the six-month period as a result of the aforementioned production growth within the Company’s mortgage division.

Customer deposits, our primary funding source, experienced an $88.2 million increase during the six-month period ended June 30, 2020, increasing from $585.9 million to $674.1 million, a 15.05% increase. A portion of this increase is related to funding of SBA PPP loans, some of the proceeds of which were deposited by our customers into their deposit accounts held at the Company’s subsidiary bank. Demand noninterest-bearing checking accounts increased $55.3 million and savings deposits increased $9.1 million. Interest checking and money market accounts increased by $75.4 million, of which $41.0 million is related to an account that moved from time deposits greater than $250,000. Other time deposits decreased $51.6 million during the six-month period ended June 30, 2020.

-29-


 

Total short-term borrowings decreased $127,000 for the period due to a reduction in consumer overnight sweep accounts. At June 30, 2020, the Company has $11.0 million in long-term debt outstanding, which consisted primarily of its fixed rate junior subordinated debt securities issued on September 30, 2019. The subordinated debt securities have a final maturity date of September 30, 2029, though may be redeemed by the Company on or after September 30, 2024. The junior subordinated debt pays interest quarterly at an annual fixed rate of 5.25%. The Company has a $3 million line of credit of which $1 million was in use at June 30, 2020.

Other liabilities decreased from $11.4 million at December 31, 2019 to $10 million at June 30, 2020, a decrease of $1.4 million, primarily due to the distribution of supplemental executive retirement plan benefits related to an executive’s retirement in January 2020.

At June 30, 2020, total shareholders’ equity was $52.7 million, an increase of $3.8 million from December 31, 2019. Net income for the six-month period was $1.9 million. Unrealized gains/losses on investment securities, net of tax, improved by $2.8 million. The Company repurchased 125,779 shares of common stock at a total cost of $691,000 during the first six months of 2020. The Company paid $282,000 in dividends attributed to noncontrolling interest during the first six months of 2020.

Comparison of Results of Operations for the Three Months Ended June 30, 2020 and 2019.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $1.6 million for the three months ended June 30, 2020, as compared to $951,000 for the three months ended June 30, 2019, an increase of $650,000. Net income available to common shareholders was $1.5 million or $0.21 per common share, at June 30, 2020, compared to $811,000 or $0.11 per common share, at June 30, 2019. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.

Net Interest Income

Net interest income for the three months ended June 30, 2020 was $5.3 million, compared to $5.0 million for the three months ended June 30, 2019, an increase of $312,000. During the second quarter of 2020, the average yield on our interest-earning assets decreased forty-eight basis points to 3.51%, and the average rate we paid for our interest-bearing liabilities decreased thirty-nine basis points to 0.44%. The aforementioned changes resulted in a lower interest rate spread of 3.07% as of June 30, 2020, compared to 3.16% as of June 30, 2019. Our net interest margin was 3.20% and 3.38% for the comparable periods in 2020 and 2019, respectively.

The following table presents average balance sheet and a net interest income analysis for the three months ended June 30, 2020 and 2019:

Average Balance Sheet and Net Interest Income Analysis

For the Three Months Ended June 30,

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balance

 

 

Income/Expenses

 

 

Rate/Yield

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

$

108,672

 

 

$

82,866

 

 

$

569

 

 

$

386

 

 

 

2.11

%

 

 

1.87

%

Nontaxable securities (1)

 

 

26,274

 

 

 

16,839

 

 

 

195

 

 

 

104

 

 

 

3.75

%

 

 

3.10

%

Short-term investments

 

 

109,195

 

 

 

125,399

 

 

 

38

 

 

 

687

 

 

 

0.14

%

 

 

2.20

%

Taxable loans

 

 

422,246

 

 

 

365,105

 

 

 

4,961

 

 

 

4,680

 

 

 

4.73

%

 

 

5.14

%

Non-taxable loans (1)

 

 

10,010

 

 

 

8,871

 

 

 

70

 

 

 

55

 

 

 

3.51

%

 

 

3.14

%

Total interest-earning assets

 

 

676,397

 

 

 

599,080

 

 

 

5,833

 

 

 

5,912

 

 

 

3.51

%

 

 

3.99

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

459,397

 

 

 

429,304

 

 

 

372

 

 

 

762

 

 

 

0.33

%

 

 

0.71

%

Short-term borrowed funds

 

 

397

 

 

 

1,207

 

 

 

1

 

 

 

5

 

 

 

1.01

%

 

 

1.67

%

Long-term debt

 

 

11,410

 

 

 

9,972

 

 

 

144

 

 

 

141

 

 

 

5.08

%

 

 

5.69

%

Total interest bearing liabilities

 

 

471,204

 

 

 

440,483

 

 

 

517

 

 

 

908

 

 

 

0.44

%

 

 

0.83

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

$

205,193

 

 

$

158,597

 

 

$

5,316

 

 

$

5,004

 

 

 

3.07

%

 

 

3.16

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.20

%

 

 

3.38

%

(1)

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

-30-


 

Provision (Recovery) and Allowance for Loan Losses

The provision for loan losses was $767,000 for the three months ended June 30, 2020, compared to a recovery of $315,000 for the same period in 2019. There were net loan recoveries of $32,000 for the three months ended June 30, 2020, as compared with net loan recoveries of $347,000 during the same period of 2019. Refer to the Asset Quality section below for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, diversification of our revenue sources is important as well. Total noninterest income increased by $2.2 million for the three-month period ended June 30, 2020, as compared to the same period in 2019. The primary factor contributing to the overall increase was an increase of $2.6 million in income from mortgage loan sales. This increase is due to stronger margins and increased production from refinance transactions as long-term rates remained low during the second quarter of 2020.

In addition, an unrealized gain on an equity investment in preferred stock of another bank produced gains of $102,000, which is reported in noninterest income.

Interchange fees, or “swipe” fees, are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. Interchange and card transaction fees consist of income from check card usage, point-of-sale income from PIN-based debit card transactions, ATM service fees, and credit card usage. A comparison of gross interchange and card transaction fees and interchange and card transaction fees net of associated network costs for the reported periods is presented in the table below:

 

 

 

Three Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Income from debit card transactions

 

$

408

 

 

$

389

 

Income from credit card transactions

 

 

91

 

 

 

112

 

Gross interchange and transaction fee income

 

 

499

 

 

 

501

 

Network costs - debit card

 

 

172

 

 

 

152

 

Network costs - credit card

 

 

145

 

 

 

145

 

Total net income

 

$

182

 

 

$

204

 

Noninterest Expense

Noninterest expense for the three months ended June 30, 2020 increased by $648,000 from June 30, 2019, to $6.9 million. Salaries and benefits, the largest component of noninterest expense, increased $778,000 to account for wage and benefit cost increases as well as increased commissions for increased production in the mortgage division. As a result of production growth in the mortgage division, loan costs increased by $111,000 to $167,000 for the three months ended June 30, 2020. These increases were offset in part by a $401,000 decline in supplemental executive retirement plan expenses due to market value adjustments during the second quarter.

The table below reflects the composition of other noninterest expense.

 

 

 

Three Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

 

(dollars in thousands)

 

Postage

 

$

47

 

 

$

44

 

Telephone and data lines

 

 

47

 

 

 

46

 

Insurance expense

 

 

29

 

 

 

33

 

Shareholder relations expense

 

 

30

 

 

 

37

 

Dues and subscriptions

 

 

107

 

 

 

71

 

Other

 

 

(167

)

 

 

231

 

Total

 

$

93

 

 

$

462

 

Income Tax Expense

The Company had income tax expense of $429,000 for the three months ended June 30, 2020 at an effective tax rate of 21.1% compared to income tax expense of $277,000 with an effective tax rate of 22.5% in the comparable 2019 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 2020, the effective tax rate decreased slightly due to more impact from tax-free instruments.

-31-


 

Comparison of Results of Operations for the Six Months Ended June 30, 2020 and 2019.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $1.9 million for the six months ended June 30, 2020, as compared to $1.6 million for the six months ended June 30, 2019, an increase of $289,000. Net income available to common shareholders was $1.6 million, or $0.23 per common share, at June 30, 2020, compared to $1.4 million or $0.19 per common share, at June 30, 2019. Net income available to common shareholders is net income less dividends on the aforementioned noncontrolling interest.

Net Interest Income

Net interest income for the six months ended June 30, 2020 and 2019 was $10.2 million. During the first two quarters of 2020, the average yield on our interest-earning assets decreased forty basis points to 3.61%, and the average rate we paid for our interest-bearing liabilities decreased fifteen basis points to 0.60%. The aforementioned changes resulted in a lower interest rate spread of 3.01% as of June 30, 2020, compared to 3.27% as of June 30, 2019. Our net interest margin was 3.18% and 3.46% for the comparable periods in 2020 and 2019, respectively.

The following table presents average balance sheet and a net interest income analysis for the six months ended June 30, 2020 and 2019:

Average Balance Sheet and Net Interest Income Analysis

For the Six Months Ended June 30,

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balance

 

 

Income/Expenses

 

 

Rate/Yield

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

$

98,527

 

 

$

83,671

 

 

$

1,062

 

 

$

776

 

 

 

2.17

%

 

 

1.87

%

Nontaxable securities (1)

 

 

21,170

 

 

 

16,995

 

 

 

293

 

 

 

210

 

 

 

3.50

%

 

 

3.12

%

Short-term investments

 

 

130,037

 

 

 

127,055

 

 

 

590

 

 

 

1,480

 

 

 

0.91

%

 

 

2.35

%

Taxable loans

 

 

388,631

 

 

 

364,110

 

 

 

9,447

 

 

 

9,290

 

 

 

4.89

%

 

 

5.15

%

Non-taxable loans (1)

 

 

9,902

 

 

 

8,993

 

 

 

137

 

 

 

112

 

 

 

3.50

%

 

 

3.15

%

Total interest-earning assets

 

 

648,267

 

 

 

600,824

 

 

 

11,529

 

 

 

11,868

 

 

 

3.61

%

 

 

4.01

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

449,040

 

 

 

434,726

 

 

 

1,100

 

 

 

1,359

 

 

 

0.49

%

 

 

0.63

%

Short-term borrowed funds

 

 

449

 

 

 

1,326

 

 

 

2

 

 

 

11

 

 

 

0.90

%

 

 

1.67

%

Long-term debt

 

 

10,701

 

 

 

9,973

 

 

 

275

 

 

 

283

 

 

 

5.17

%

 

 

5.72

%

Total interest-bearing liabilities

 

 

460,190

 

 

 

446,025

 

 

 

1,377

 

 

 

1,653

 

 

 

0.60

%

 

 

0.75

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

$

188,077

 

 

$

154,799

 

 

$

10,152

 

 

$

10,215

 

 

 

3.01

%

 

 

3.27

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.18

%

 

 

3.46

%

 

(1)

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

Provision (Recovery) and Allowance for Loan Losses

The provision for loan losses was $1.4 million for the six months ended June 30, 2020, compared to a recovery of $428,000 for the same period in 2019. There were net loan recoveries of $46,000 for the six months ended June 30, 2020, as compared with net loan recoveries of $319,000 during the same period of 2019. Refer to the Asset Quality section below for further information.

Noninterest Income

The Company generates most of its revenue from net interest income; however, diversification of our revenue sources is important as well. Total noninterest income increased by $3.5 million for the six-month period ended June 30, 2020, as compared to the same period in 2019. The primary factor contributing to the overall increase was an increase of $3.2 million in income from mortgage loan sales. This increase is due to stronger margins and increased production from refinance transactions as long-term rates fell during the first quarter and remained historically low during the second quarter of 2020.

-32-


 

In addition, an unrealized gain on an equity investment in preferred stock of another bank produced gains of $333,000, which is reported in noninterest income.

Interchange fees, or “swipe” fees, are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. Interchange and card transaction fees consist of income from check card usage, point-of-sale income from PIN-based debit card transactions, ATM service fees, and credit card usage. A comparison of gross interchange and card transaction fees and interchange and card transaction fees net of associated network costs for the reported periods is presented in the table below:

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Income from debit card transactions

 

$

793

 

 

$

731

 

Income from credit card transactions

 

 

212

 

 

 

219

 

Gross interchange and transaction fee income

 

 

1,005

 

 

 

950

 

Network costs - debit card

 

 

344

 

 

 

313

 

Network costs - credit card

 

 

287

 

 

 

239

 

Total net income

 

$

374

 

 

$

398

 

Noninterest Expense

Noninterest expense for the six months ended June 30, 2020 increased by $1.2 million from June 30, 2019, to $13.7 million. Salaries and benefits, the largest component of noninterest expense, increased $1.1 million to account for wage and benefit cost increase as well as increased commissions for increased production in the mortgage division. As a result of production growth in the mortgage division, loan costs increased by $109,000 to $254,000 for the six months ended June 30, 2020.

The table below reflects the composition of other noninterest expense.

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Postage

 

$

92

 

 

$

108

 

Telephone and data lines

 

 

93

 

 

 

92

 

Office supplies and printing

 

 

51

 

 

 

60

 

Shareholder relations expense

 

 

64

 

 

 

77

 

Dues and subscriptions

 

 

171

 

 

 

132

 

Other

 

 

360

 

 

 

357

 

Total

 

$

831

 

 

$

826

 

Income Tax Expense

The Company had income tax expense of $514,000 for the six months ended June 30, 2020 at an effective tax rate of 21.0% compared to income tax expense of $460,000 with an effective tax rate of 21.9% in the comparable 2019 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 2020, the effective tax rate decreased slightly due to more impact from tax-free instruments.

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

-33-


 

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.

During the second quarter of 2020, management made adjustments to the allowance for loan losses methodology. The qualitative factors were expanded to include additional reserves for niche lending portfolios of hotel, retained interest in the unguaranteed portion of Small Business Administration (SBA) Loans (not including PPP loans), and SBA PPP loans. The risk in these portfolios is measurable in addition to the standard probable loss calculation performed on all non-impaired loans. With the impact of COVID-19 on all industries, the hotel and SBA (non-PPP) loan categories on the Company’s balance sheet have been identified as having elevated credit risk. The SBA (non-PPP) reflects the unguaranteed portion of SBA guaranteed loans originated by the Company. SBA PPP loans, while 100% guaranteed by SBA, could result in some loss if fraud occurs or there are reporting issues or duplicate funding of loans. These additional reserves allocated $172,000 to the reserve that was not present prior to June 30, 2020. In addition, management eliminated its qualitative factor based on a 21-day weighted average of the VIX index, a real-time index that measures the expectation of the market’s 30-day forward-looking volatility, and replaced it with a multi-factor linear regression encompassing the following economic data: Case Shiller for North Carolina (NC) home price index, NC unemployment rate, 2-year 10-year US Treasury spread, customer sentiment, and a VIX quarterly average factor. This qualitative factor update increased provisions by approximately $379,000 from March 31, 2020 to June 30, 2020.  

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. Unexpected global events, such as the unprecedented economic disruption due to COVID-19, are the type of future events that often cause material adjustments to the allowance to be necessary. Any material increase in the allowance for loan losses may adversely affect the Company’s financial condition and results of operations.

At June 30, 2020, the levels of our impaired loans, which includes all loans in non-accrual status, TDRs, and other loans deemed by management to be impaired, were $8.6 million, compared to $6.8 million at December 31, 2019, a net increase of $1.8 million. The increase is related to one large relationship moving into non-accrual status during the first quarter of 2020 and one large relationship being modified as a TDR in the second quarter of 2020. Total non-accrual loans, which are a component of impaired loans, increased from $2.9 million at December 31, 2019 to $3.9 million at June 30, 2020. During the first six months of 2020, five additional loans totaling $2.0 million were added to impaired loans; however, two loans totaling $136,000 were closed.  That was offset by net pay downs of $112,000.

The allowance, expressed as a percentage of gross loans held for investment, increased twenty basis points from 0.55% at December 31, 2019 to 0.75% at June 30, 2020. The collectively evaluated reserve allowance as a percentage of collectively evaluated loans was 0.52% at December 31, 2019 and 0.74% at June 30, 2020. The increase is attributable to the model adjustments discussed above allowing additional economic factors to increase qualitative factors related to the worldwide COVID-19 outbreak. This outbreak, which resulted in many businesses closing and staff layoffs, led management to increase the allowance allocated based on economic outlook in the model to the largest allowable based on internal policy. The individually evaluated allowance as a percentage of individually evaluated loans decreased from 2.06% to 1.53% for the same periods, mainly due to the two large relationships totaling $1.7 million that were deemed impaired during the first six months of 2020, though little reserve is recognized based on the net realizable value. 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 specific indicators of potential issues in the market. Specifically, the Company calculates probable losses on loans by computing a probability of loss and multiplying that by a loss given default derived from historical experience. An additional calculation based on economic uncertainty is added to the probable losses, thus deriving the estimated loss scenario by FDIC call report codes. Together, these expected components, as well

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as a reserve for qualitative factors based on management’s discretion of economic conditions, form the basis of the allowance model. The loans that are impaired and included in the specific reserve are excluded from these calculations.

The Company assesses the probability of losses inherent in the loan portfolio using probability of default data derived from the Company’s internal historical data, representing a one-year loss horizon for each obligor. Credit scores are used within the model to determine the probability of default. The Company updates the credit scores for individuals that either have a loan, or are financially responsible for the loan, semi-annually, during the first and third quarters. During the first six months of 2020, the average effective credit score of the portfolio, excluding loans in default, declined slightly from 770 to 768. The probability of default associated with each credit score is a major driver in the allowance for loan losses.

The ratio of nonperforming loans, which consist of non-accrual loans and loans past due 90 days and still accruing, to total loans increased from 0.82% at December 31, 2019, to 0.87% at June 30, 2020, related to the large impaired relationship added in the first quarter, for which the Company believes it is sufficiently collateralized.

As of June 30, 2020, management believed the level of the allowance for loan losses was appropriate in light of the risk inherent in the loan portfolio.

Other real estate owned decreased $135,000 during the first six months of 2020. The Company sold three pieces of foreclosed property totaling $130,000, realizing a gain of $53,000. The Company had $21,000 in write-downs for the period ended June 30, 2020. There were no loans foreclosed on during the first six months of 2020.

Troubled debt restructured loans at June 30, 2020 totaled $4.8 million compared to $3.9 million at December 31, 2019 and are included in impaired loans. The increase is related to one relationship of $650,000 added. At June 30, 2020, there were two troubled debt restructured loans in non-accrual status, which had a balance of $69,000.

As discussed in Note 8 of our Notes to Consolidated Financial Statements, the CARES Act allows for loan modifications related to COVID-19 impacts to be excluded from TDR status. As of June 30, 2020, the Company had current outstanding loan portfolio modifications of 179 COVID-19 impacted loans for $55.3 million.

The following table shows the comparison of nonperforming assets at June 30, 2020 to December 31, 2019:

Nonperforming Assets

(dollars in thousands)

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Nonperforming assets:

 

 

 

 

 

 

 

 

Loans past due 90 days or more

 

$

 

 

$

 

Non-accrual loans

 

 

3,939

 

 

 

2,922

 

Other real estate owned

 

 

359

 

 

 

494

 

Total nonperforming assets

 

$

4,298

 

 

$

3,416

 

 

 

 

 

 

 

 

 

 

Allowance for loans losses

 

$

3,426

 

 

$

1,981

 

Nonperforming loans to total loans

 

 

0.87

%

 

 

0.82

%

Allowance for loan losses to total loans

 

 

0.75

%

 

 

0.55

%

Nonperforming assets to total assets

 

 

0.57

%

 

 

0.52

%

Allowance for loan losses to nonperforming loans

 

 

86.98

%

 

 

67.80

%

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 June 30, 2020, with available credit of $28 million; established borrowing relationships with the

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Federal Home Loan Bank, with available credit of $54.0 million; access to borrowings from the Federal Reserve Bank discount window, with available credit of $24.5 million and the issuance of commercial paper. The Company also secured a $3.0 million line of credit with TIB The Independent BankersBank, N.A., during the first quarter of 2020. The line is secured with 100% of the outstanding common shares of the Company’s subsidiary bank. As of June 30, 2020, we had $2.0 million that had not been extended and remained available for use on the line of credit. The Company has also previously secured long-term debt from other sources. Total outstanding debt from these sources included $10.0 million of junior subordinated debt at both June 30, 2020 and December 31, 2019.

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. The federal bank regulatory agencies have implemented regulatory capital rules known as “Basel III.” The Basel III rules require a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.50%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.00%, a minimum ratio of total capital to risk-weighted assets of 8.00%, and a minimum Tier 1 leverage ratio of 4.00%. There is also a capital conservation buffer that requires banks to hold common equity Tier 1 capital in excess of minimum risk-based capital ratios by at least 2.5% to avoid limits on capital distributions and certain discretionary bonus payments to executive officers and similar employees.

The Basel III rules began to phase in for the Company and its subsidiary bank on January 1, 2015, with full compliance of all the rules’ requirements effective on January 1, 2019. As of June 30, 2020, the Company’s subsidiary bank continued to exceed minimum capital standards and remained well-capitalized under the applicable rules.

The Company’s subsidiary bank has a net total of $10.6 million in outstanding Fixed Rate Noncumulative Perpetual Preferred Stock. The preferred stock qualifies as Tier 1 capital at the Bank and pays dividends at an annual rate of 5.30%. The net total of $10.6 million is presented as noncontrolling interest at the Company level and qualifies as Tier 1 capital at the Company. At June 30, 2020, the Company had $10.0 million in subordinated debt outstanding, which qualifies as Tier 2 capital at the Company level. The Company has made all interest and dividend payments in a timely manner.

Off-Balance Sheet Arrangements

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

Derivative financial instruments include futures contracts, forward contracts, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in significant derivative activities through June 30, 2020 and have no current plans to do so.

Contractual Obligations

The timing and amount of our contractual obligations has not changed materially since our 2019 Annual Report to Shareholders, which is filed as Exhibit 13 to our 2019 Annual Report on Form 10-K.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

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

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

Based upon that evaluation, the principal executive officer and principal financial officer concluded that in their opinion, the Company’s disclosure controls and procedures were effective (1) to provide reasonable assurance that information required to be

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

Changes in Internal Control over Financial Reporting

Management of the Company has evaluated, with the participation of the Company’s principal executive officer and principal financial officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the second quarter of 2020. In connection with such evaluation, the Company has determined that there were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and ensuring that the Company’s systems evolve with its business.

 

Part II. OTHER INFORMATION

Item 1.

Legal Proceedings.

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

Item 1A.

Risk Factors.

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

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

The following table sets forth information with respect to shares of common stock repurchased by the Company during the three months ended June 30, 2020.

 

 

 

(a) Total

Number of

Shares

Purchased

 

 

(b) Average

Price Paid per

Share

 

 

(c) Total Number

of Shares

Purchased as

Part of Publicly

Announced

Plans or Program

(1)

 

 

(d) Maximum

Dollar Value of

Shares that May

Yet Be

Purchased Under

the Plans 

 

April 1, 2020 Through April 30, 2020

 

 

 

 

$

 

 

 

 

 

$

 

May 1, 2020 Through May 31, 2020

 

 

 

 

$

 

 

 

 

 

$

 

June 1, 2020 Through June 30, 2020

 

 

14,441

 

 

$

5.48

 

 

 

 

 

$

 

Total

 

 

14,441

 

 

$

5.48

 

 

 

 

 

$

 

 

(1)

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

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Mine Safety Disclosures.

Not applicable.

Item 5.     Other Information.

None.

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Item 6.

Exhibits.

Set forth below is the exhibit index for this quarterly report:

 

Exhibit

Number

 

Description of Exhibit

 

 

 

 

 

 

31.1

 

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

 

 

 

31.2

 

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

 

 

 

32

 

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

 

 

 

101

 

Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020, in XBRL (eXtensible Business Reporting Language) (filed herewith)

 

 

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Signatures

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

 

 

 

 

 

UWHARRIE CAPITAL CORP

 

 

 

 

(Registrant)

 

 

 

 

 

 

 

Date:

 

August 4, 2020

 

By:

 

/s/ Roger L. Dick

 

 

 

 

Roger L. Dick

 

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

Date:

 

August 4, 2020

 

By:

 

/s/ R. David Beaver, III

 

 

 

 

R. David Beaver, III

 

 

 

 

Principal Financial Officer

 

 

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