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UWHARRIE CAPITAL CORP - Quarter Report: 2023 June (Form 10-Q)

10-Q

 

 

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, 2023

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: 7,057,847 shares of common stock outstanding as of August 7, 2023.

 

 


 

Table of Contents

 

 

 

Page No.

 

 

 

 

 

Part I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1 -

 

Financial Statements (Unaudited)

 

2

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022

 

2

 

 

 

 

 

 

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2023 and 2022

 

3

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2023 and 2022

 

4

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2023 and 2022

 

5

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022

 

6

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2 -

 

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

 

31

 

 

 

 

 

Item 3 -

 

Quantitative and Qualitative Disclosures about Market Risk

 

39

 

 

 

 

 

Item 4 -

 

Controls and Procedures

 

39

 

 

 

 

 

Part II.

 

OTHER INFORMATION

 

40

 

 

 

 

 

Item 1 -

 

Legal Proceedings

 

40

 

 

 

 

 

Item 1A -

 

Risk Factors

 

40

 

 

 

 

 

Item 2 -

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

 

 

 

 

 

Item 3 -

 

Defaults Upon Senior Securities

 

40

 

 

 

 

 

Item 4 -

 

Mine Safety Disclosures

 

40

 

 

 

 

 

Item 5 -

 

Other Information

 

40

 

 

 

 

 

Item 6 -

 

Exhibits

 

41

 

 

 

 

 

 

 

Signatures

 

42

 

1


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

Part I. Financial Information

Item 1. Financial Statements.

 

 

June 30, 2023 (Unaudited)

 

 

December 31, 2022*

 

 

 

(dollars in thousands)

 

ASSETS

 

 

 

 

 

 

Cash and due from banks

 

$

10,608

 

 

$

5,357

 

Interest-earning deposits with banks

 

 

83,245

 

 

 

109,224

 

Cash and cash equivalents

 

 

93,853

 

 

 

114,581

 

Securities available for sale, at fair value (amortized cost $362,720 and $365,936, respectively)

 

 

324,484

 

 

 

324,683

 

Securities held to maturity, at amortized cost (fair value $25,812 and $27,178, respectively)

 

 

29,191

 

 

 

30,306

 

Less allowance for credit losses on securities held to maturity

 

 

(65

)

 

 

 

Net securities held to maturity

 

 

29,126

 

 

 

30,306

 

Equity security, at fair value

 

 

303

 

 

 

292

 

Loans held for sale

 

 

3,297

 

 

 

2,774

 

Loans held for investment

 

 

534,364

 

 

 

497,889

 

Less allowance for credit losses on loans

 

 

(4,713

)

 

 

(2,290

)

Net loans held for investment

 

 

529,651

 

 

 

495,599

 

Premises and equipment, net

 

 

15,206

 

 

 

14,735

 

Interest receivable

 

 

3,712

 

 

 

3,633

 

Restricted stock

 

 

1,468

 

 

 

1,428

 

Bank-owned life insurance

 

 

7,721

 

 

 

7,652

 

Deferred income tax benefit

 

 

10,593

 

 

 

10,726

 

Loan servicing assets

 

 

4,615

 

 

 

4,931

 

Mortgage banking derivatives

 

 

519

 

 

 

 

Other assets

 

 

9,415

 

 

 

8,150

 

Total assets

 

$

1,033,963

 

 

$

1,019,490

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Demand noninterest-bearing

 

$

277,685

 

 

$

261,882

 

Interest checking and money market accounts

 

 

426,997

 

 

 

486,548

 

Savings deposits

 

 

98,118

 

 

 

104,301

 

Time deposits, $250,000 and over

 

 

55,873

 

 

 

35,979

 

Other time deposits

 

 

91,597

 

 

 

51,146

 

Total deposits

 

 

950,270

 

 

 

939,856

 

Short-term borrowed funds

 

 

932

 

 

 

1,044

 

Long-term debt

 

 

29,066

 

 

 

29,607

 

Mortgage banking derivatives

 

 

 

 

 

175

 

Other liabilities

 

 

12,135

 

 

 

11,411

 

Total liabilities

 

 

992,403

 

 

 

982,093

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Common stock, $1.25 par value: 20,000,000 shares authorized; shares issued and
   outstanding
7,057,847 and 7,075,125 at June 30, 2023 and December 31, 2022, respectively

 

 

8,823

 

 

 

8,844

 

Additional paid-in capital

 

 

12,521

 

 

 

12,633

 

Undivided profits

 

 

39,012

 

 

 

37,030

 

Accumulated other comprehensive loss

 

 

(29,451

)

 

 

(31,765

)

Total Uwharrie Capital Corp shareholders’ equity

 

 

30,905

 

 

 

26,742

 

Noncontrolling interest

 

 

10,655

 

 

 

10,655

 

Total shareholders’ equity

 

 

41,560

 

 

 

37,397

 

Total liabilities and shareholders’ equity

 

$

1,033,963

 

 

$

1,019,490

 

(*) Derived from audited consolidated financial statements

See accompanying notes

2


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands, except share and per share data)

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

6,989

 

 

$

5,297

 

 

$

13,356

 

 

$

10,404

 

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities, taxable

 

 

2,623

 

 

 

1,228

 

 

 

5,115

 

 

 

2,243

 

Investment securities, non-taxable

 

 

323

 

 

 

370

 

 

 

693

 

 

 

728

 

Equity Securities

 

 

5

 

 

 

5

 

 

 

10

 

 

 

10

 

Interest-earning deposits with banks and federal funds sold

 

 

1,181

 

 

 

247

 

 

 

2,251

 

 

 

287

 

Total interest income

 

 

11,121

 

 

 

7,147

 

 

 

21,425

 

 

 

13,672

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking and money market accounts

 

 

1,485

 

 

 

146

 

 

 

2,907

 

 

 

259

 

Savings deposits

 

 

88

 

 

 

19

 

 

 

168

 

 

 

37

 

Time deposits, $250,000 and over

 

 

496

 

 

 

14

 

 

 

792

 

 

 

28

 

Other time deposits

 

 

643

 

 

 

34

 

 

 

961

 

 

 

66

 

Short-term borrowed funds

 

 

10

 

 

 

 

 

 

19

 

 

 

1

 

Long-term debt

 

 

332

 

 

 

337

 

 

 

666

 

 

 

673

 

Total interest expense

 

 

3,054

 

 

 

550

 

 

 

5,513

 

 

 

1,064

 

Net interest income

 

 

8,067

 

 

 

6,597

 

 

 

15,912

 

 

 

12,608

 

Provision for (recovery of) credit losses

 

 

102

 

 

 

(13

)

 

 

386

 

 

 

105

 

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

 

 

7,965

 

 

 

6,610

 

 

 

15,526

 

 

 

12,503

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

264

 

 

 

261

 

 

 

513

 

 

 

504

 

Other service fees and commissions

 

 

822

 

 

 

801

 

 

 

1,711

 

 

 

1,702

 

Interchange and card transaction fees, net

 

 

315

 

 

 

303

 

 

 

619

 

 

 

541

 

Gain (loss) on sale of securities

 

 

9

 

 

 

 

 

 

(42

)

 

 

(91

)

Realized/unrealized gain (loss) on equity securities

 

 

(23

)

 

 

(56

)

 

 

11

 

 

 

(65

)

Income from mortgage banking

 

 

891

 

 

 

1,172

 

 

 

1,585

 

 

 

2,439

 

Supplemental executive retirement plan gain (loss)

 

 

317

 

 

 

(504

)

 

 

(18

)

 

 

(552

)

Other income

 

 

91

 

 

 

275

 

 

 

289

 

 

 

403

 

Total noninterest income

 

 

2,686

 

 

 

2,252

 

 

 

4,668

 

 

 

4,881

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,932

 

 

 

4,912

 

 

 

9,676

 

 

 

9,928

 

Net occupancy expense

 

 

432

 

 

 

427

 

 

 

885

 

 

 

852

 

Equipment expense

 

 

195

 

 

 

193

 

 

 

383

 

 

 

381

 

Data processing costs

 

 

204

 

 

 

194

 

 

 

408

 

 

 

406

 

Loan costs

 

 

105

 

 

 

95

 

 

 

198

 

 

 

264

 

Professional fees and services

 

 

179

 

 

 

204

 

 

 

437

 

 

 

416

 

Marketing and donations

 

 

342

 

 

 

205

 

 

 

724

 

 

 

539

 

Electronic banking expense

 

 

141

 

 

 

117

 

 

 

270

 

 

 

228

 

Software amortization and maintenance

 

 

296

 

 

 

308

 

 

 

603

 

 

 

619

 

FDIC insurance

 

 

117

 

 

 

91

 

 

 

234

 

 

 

153

 

Supplemental executive retirement plan gain (loss)

 

 

317

 

 

 

(504

)

 

 

(18

)

 

 

(552

)

Other noninterest expense

 

 

589

 

 

 

628

 

 

 

1,167

 

 

 

1,189

 

Total noninterest expense

 

 

7,849

 

 

 

6,870

 

 

 

14,967

 

 

 

14,423

 

Income before income taxes

 

 

2,802

 

 

 

1,992

 

 

 

5,227

 

 

 

2,961

 

Income taxes

 

 

579

 

 

 

310

 

 

 

1,050

 

 

 

478

 

Net income

 

$

2,223

 

 

$

1,682

 

 

$

4,177

 

 

$

2,483

 

Consolidated net income

 

$

2,223

 

 

$

1,682

 

 

$

4,177

 

 

$

2,483

 

Less: net income attributable to noncontrolling interest

 

 

(141

)

 

 

(141

)

 

 

(280

)

 

 

(280

)

Net income attributable to Uwharrie Capital Corp and common shareholders

 

 

2,082

 

 

 

1,541

 

 

 

3,897

 

 

 

2,203

 

Net income per common share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.29

 

 

$

0.22

 

 

$

0.55

 

 

$

0.31

 

Diluted

 

$

0.29

 

 

$

0.22

 

 

$

0.55

 

 

$

0.31

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

7,073,689

 

 

 

7,103,985

 

 

 

7,074,403

 

 

 

7,114,812

 

Diluted

 

 

7,073,689

 

 

 

7,103,985

 

 

 

7,074,403

 

 

 

7,114,812

 

See accompanying notes

3


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,223

 

 

$

1,682

 

 

$

4,177

 

 

$

2,483

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available for sale securities

 

 

(2,889

)

 

 

(12,356

)

 

 

2,975

 

 

 

(30,678

)

Related tax effect

 

 

664

 

 

 

2,840

 

 

 

(695

)

 

 

7,053

 

Reclassification of (gain) loss recognized in net income

 

 

(9

)

 

 

 

 

 

42

 

 

 

91

 

Related tax effect

 

 

2

 

 

 

2

 

 

 

(8

)

 

 

(17

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

 

(2,232

)

 

 

(9,514

)

 

 

2,314

 

 

 

(23,551

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

 

(9

)

 

 

(7,832

)

 

 

6,491

 

 

 

(21,068

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive income attributable to noncontrolling interest

 

 

(141

)

 

 

(141

)

 

 

(280

)

 

 

(280

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to Uwharrie Capital Corp

 

$

(150

)

 

$

(7,973

)

 

$

6,211

 

 

$

(21,348

)

See accompanying notes

4


 

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, 2022

 

 

6,930,717

 

 

$

8,664

 

 

$

11,814

 

 

$

31,213

 

 

$

(15,188

)

 

$

10,655

 

 

$

47,158

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

1,541

 

 

 

 

 

 

141

 

 

 

1,682

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,514

)

 

 

 

 

 

(9,514

)

Record preferred stock dividend Series B
   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(103

)

 

 

(103

)

Record preferred stock dividend Series C
   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(38

)

 

 

(38

)

Balance, June 30, 2022

 

 

6,930,717

 

 

$

8,664

 

 

$

11,814

 

 

$

32,754

 

 

$

(24,702

)

 

$

10,655

 

 

$

39,185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2023

 

 

7,075,125

 

 

$

8,844

 

 

$

12,633

 

 

$

36,930

 

 

$

(27,219

)

 

$

10,655

 

 

$

41,843

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

2,082

 

 

 

 

 

 

141

 

 

 

2,223

 

Repurchase and retirement of common stock

 

 

(17,278

)

 

 

(21

)

 

 

(112

)

 

 

 

 

 

 

 

 

 

 

 

(133

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,232

)

 

 

 

 

 

(2,232

)

Record preferred stock dividend Series B
   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(103

)

 

 

(103

)

Record preferred stock dividend Series C
   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(38

)

 

 

(38

)

Balance, June 30, 2023

 

 

7,057,847

 

 

$

8,823

 

 

$

12,521

 

 

$

39,012

 

 

$

(29,451

)

 

$

10,655

 

 

$

41,560

 

 

 

 

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, 2021

 

 

6,959,556

 

 

$

8,700

 

 

$

12,032

 

 

$

30,551

 

 

$

(1,151

)

 

$

10,655

 

 

$

60,787

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

2,203

 

 

 

 

 

 

280

 

 

 

2,483

 

Repurchase and retirement of common stock

 

 

(28,839

)

 

 

(36

)

 

 

(218

)

 

 

 

 

 

 

 

 

 

 

 

(254

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,551

)

 

 

 

 

 

(23,551

)

Record preferred stock dividend Series B
   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(206

)

 

 

(206

)

Record preferred stock dividend Series C
   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(74

)

 

 

(74

)

Balance, June 30, 2022

 

 

6,930,717

 

 

$

8,664

 

 

$

11,814

 

 

$

32,754

 

 

$

(24,702

)

 

$

10,655

 

 

$

39,185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2022

 

 

7,075,125

 

 

$

8,844

 

 

$

12,633

 

 

$

37,030

 

 

$

(31,765

)

 

$

10,655

 

 

$

37,397

 

Cumulative effect of change in accounting principle

 

 

 

 

 

 

 

 

 

 

 

(1,915

)

 

 

 

 

 

 

 

 

(1,915

)

Net Income

 

 

 

 

 

 

 

 

 

 

 

3,897

 

 

 

 

 

 

280

 

 

 

4,177

 

Repurchase and retirement of common stock

 

 

(17,278

)

 

 

(21

)

 

 

(112

)

 

 

 

 

 

 

 

 

 

 

 

(133

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,314

 

 

 

 

 

 

2,314

 

Record preferred stock dividend Series B
   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(206

)

 

 

(206

)

Record preferred stock dividend Series C
   (noncontrolling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(74

)

 

 

(74

)

Balance, June 30, 2023

 

 

7,057,847

 

 

$

8,823

 

 

$

12,521

 

 

$

39,012

 

 

$

(29,451

)

 

$

10,655

 

 

$

41,560

 

See accompanying notes

5


 

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

4,177

 

 

$

2,483

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

552

 

 

 

575

 

Right of use asset amortization

 

 

187

 

 

 

171

 

Provision for credit losses

 

 

387

 

 

 

105

 

Loss on sale of securities available for sale

 

 

42

 

 

 

91

 

Gain on sale of premises and equipment

 

 

(37

)

 

 

(160

)

Gain on sale of mortgage loans

 

 

(285

)

 

 

(1,851

)

Realized/unrealized (gain) loss on equity securities

 

 

(11

)

 

 

65

 

Net amortization of premium on investment securities available for sale

 

 

960

 

 

 

1,424

 

Net amortization of premium on investment securities held to maturity

 

 

71

 

 

 

73

 

Amortization of loan servicing rights

 

 

613

 

 

 

679

 

Originations and purchases of mortgage loans for sale

 

 

(38,413

)

 

 

(70,823

)

Proceeds from sales of mortgage loans for sale

 

 

38,175

 

 

 

81,097

 

Mortgage banking derivatives

 

 

(694

)

 

 

(513

)

Loan servicing assets

 

 

(297

)

 

 

(732

)

Accrued interest receivable

 

 

(79

)

 

 

(102

)

Prepaid assets

 

 

(714

)

 

 

(184

)

Cash surrender value of life insurance

 

 

(69

)

 

 

(59

)

Miscellaneous other assets

 

 

(222

)

 

 

1,182

 

Accrued interest payable

 

 

124

 

 

 

63

 

Miscellaneous other liabilities

 

 

591

 

 

 

(689

)

Net cash provided by operating activities

 

 

5,058

 

 

 

12,895

 

Cash flows from investing activities

 

 

 

 

 

 

Proceeds from sales of investment securities available for sale

 

 

11,329

 

 

 

8,398

 

Proceeds from maturities, calls and paydowns of securities available for sale

 

 

13,235

 

 

 

19,280

 

Proceeds from maturities, calls and paydowns of securities held to maturity

 

 

1,044

 

 

 

347

 

Purchase of investment securities available for sale

 

 

(22,350

)

 

 

(44,544

)

Purchase of investments in other assets

 

 

(187

)

 

 

(409

)

Net change in restricted stock

 

 

(40

)

 

 

(507

)

Net increase in loans

 

 

(36,992

)

 

 

(40,249

)

Purchase of premises and equipment

 

 

(1,172

)

 

 

(705

)

Proceeds from sale of premises and equipment

 

 

38

 

 

 

545

 

Net cash used by investing activities

 

 

(35,095

)

 

 

(57,844

)

Cash flows from financing activities

 

 

 

 

 

 

Net increase in deposit accounts

 

 

10,414

 

 

 

73,378

 

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

 

 

(112

)

 

 

51

 

Repayment of long-term borrowings

 

 

(580

)

 

 

 

Repurchase of common stock, net

 

 

(133

)

 

 

(254

)

Dividends paid on preferred stock (noncontrolling interest)

 

 

(280

)

 

 

(280

)

Net cash provided by financing activities

 

 

9,309

 

 

 

72,895

 

Increase (decrease) in cash and cash equivalents

 

 

(20,728

)

 

 

27,946

 

Cash and cash equivalents, beginning of period

 

 

114,581

 

 

 

94,410

 

Cash and cash equivalents, end of period

 

$

93,853

 

 

$

122,356

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

Interest paid

 

$

5,347

 

 

$

959

 

Income taxes paid

 

 

1,225

 

 

 

1,210

 

Supplemental schedule of non-cash activities

 

 

 

 

 

 

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

 

$

2,314

 

 

$

(23,551

)

Initial ROU asset for leased properties

 

 

 

 

 

128

 

Initial lease liability for leased properties

 

 

 

 

 

126

 

Loans transferred to foreclosed real estate

 

 

142

 

 

 

 

See accompanying notes

6


 

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

Note 1 – Basis of Presentation

The financial statements and accompanying notes are presented on a consolidated basis including Uwharrie Capital Corp (the “Company”) and its subsidiaries, Uwharrie Bank (the “Bank”), Uwharrie Investment Advisors, Inc. (“UIA”), and Uwharrie Mortgage, Inc. The Bank consolidates its subsidiaries, the Strategic Alliance Corporation, BOS Agency, Inc. and Gateway Mortgage, Inc., each of which is wholly owned by the Bank.

The information contained in the consolidated financial statements is unaudited. In the opinion of management, the consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) and material adjustments necessary for a fair presentation of results of interim periods, all of which are of a normal recurring nature, have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for an entire year. Management is not aware of 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 2022 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 8, 2023. This Quarterly Report should be read in conjunction with such Annual Report.

Use of Estimates

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

Accounting Changes and Reclassifications

Certain amounts in the 2022 financial statements have been reclassified to conform to the 2023 presentation. These reclassifications did not have an impact on net income or shareholders’ equity.

The Company’s significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in Note 1 of the audited financial statements for the year ended December 31, 2022 and are contained in the Company’s Annual Report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2022, except for the following:

Accounting Standards Adopted in 2023

On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASC 326”). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held to maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. In addition, CECL made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities.

In concurrence with the adoption of CECL, the Company also adopted ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 enhanced disclosures for loan modifications made for borrowers experiencing financial difficulty and eliminated the Troubled Debt Restructurings (“TDR”) accounting guidance for financial institutions that have adopted CECL. See Note 8 (Modifications to Borrowers Experiencing Financial Difficulty) to the Company’s Notes to Consolidated Financial Statements for additional discussion of the adoption of ASU 2022-02.

The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition

7


 

adjustment of the adoption of CECL included an increase in the allowance for credit losses on loans of $2.41 million, which is presented as a reduction to net loans held for investment, and an increase in the allowance for credit losses on unfunded loan commitments of $9,000, which is recorded within Other Liabilities. The Company recorded an allowance for credit losses for held to maturity securities of $70,000, which is presented as a reduction to securities held to maturity. The Company recorded a net decrease to retained earnings of $1.9 million as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”). As a practical expedient, the Company has excluded interest receivable from the credit loss analysis under CECL for all applicable financial instruments.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available for sale securities was not necessary.

 

Allowance for credit losses

January 1, 2023
As Reported Under ASC 326

 

 

December 31, 2022
Pre-ASC 326 Adoption

 

 

Impact of
ASC 326 Adoption

 

 

(dollars in thousands)

 

Assets

 

 

 

 

 

 

 

 

Securities held to maturity

 

 

 

 

 

 

 

 

State and political subdivisions

$

3

 

 

$

 

 

$

3

 

Corporate bonds

 

67

 

 

 

 

 

 

67

 

Securities held to maturity, total

 

70

 

 

 

 

 

 

70

 

 

 

 

 

 

 

 

 

 

Loans held for investment

 

 

 

 

 

 

 

 

Commercial

 

1,137

 

 

 

435

 

 

 

702

 

Real estate - commercial

 

1,777

 

 

 

760

 

 

 

1,017

 

Other real estate construction

 

306

 

 

 

177

 

 

 

129

 

Real estate 1-4 family construction

 

14

 

 

 

 

 

 

14

 

Real estate - residential

 

635

 

 

 

561

 

 

 

74

 

Home equity

 

652

 

 

 

277

 

 

 

375

 

Consumer loans

 

167

 

 

 

76

 

 

 

91

 

Other loans

 

9

 

 

 

4

 

 

 

5

 

Loans held for investment, total

 

4,697

 

 

 

2,290

 

 

 

2,407

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Allowance for credit losses for unfunded commitments

 

150

 

 

 

141

 

 

 

9

 

 

 

 

 

 

 

 

 

 

Total

$

4,917

 

 

$

2,431

 

 

$

2,486

 

 

Allowance for Credit Losses – Available for Sale Securities

Management evaluates all available for sale securities in an unrealized loss position on a quarterly basis, or more frequently if economic or market conditions warrant. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.

If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the length of time and extent to which the security has been in a loss position, performance of any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled principal or interest payments and adverse conditions specifically related to the security. If the evaluation indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.

Changes in the allowance for credit loss are recorded as provision for (or recovery of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available for sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At June 30, 2023, there was no allowance for credit loss related to the

8


 

available for sale portfolio. Accrued interest receivable on available for sale debt securities, included in Interest Receivable in the consolidated balance sheets, totaled $2.0 million at June 30, 2023 and was excluded from the estimate of credit losses.

Allowance for Credit Losses – Held to Maturity Securities

Management measures expected credit losses on held to maturity debt securities on a collective basis by major security type. Accrued interest receivable on held to maturity debt securities, included in Interest Receivable in the consolidated balance sheets, totaled $246,000 at June 30, 2023 and was excluded from the estimate of credit losses.

The estimate of expected credit losses is primarily based on the ratings assigned to the securities by debt rating agencies and the average of the annual historical loss rates associated with those ratings. The Company then multiplies those loss rates, as adjusted for any modifications to reflect current conditions and reasonable and supportable forecasts as considered necessary, by the remaining lives of each individual security to arrive at a lifetime expected loss amount. Management classifies the held to maturity portfolio into the following major security types: U.S. government agencies, state and political subdivisions and corporate bonds. All of the U.S. government agency securities are issued by government-sponsored agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. As a result, no allowance for credit losses was recorded for these securities at June 30, 2023. The state and political subdivisions securities held by the Company are highly rated by major rating agencies. As such, there was minimal allowance for credit losses recorded at June 30, 2023 for state and political subdivisions securities.

Allowance for Credit Losses – Loans

The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified segments for Consumer loans based on credit score and collateral and for Commercial loans based on risk grade and collateral. The allowance for credit losses for each segment is calculated using a Non-Discounted Cash Flow methodology. The Non-Discounted Cash Flow methodology incorporates macroeconomic forecasts to project expected losses. Significant macroeconomic factors used in estimating the expected losses include the National Unemployment Rate and the 10-Year T-Bill. A third-party forecast is utilized to project defaults for two years followed by a one year reversion period to the historical long run average economic forecast for the remainder of the portfolio life.

The Company individually reviews loans that are experiencing financial difficulty with total relationship exposure greater than or equal to $100,000 that are determined to be collateral dependent. These collateral dependent loans are evaluated based on the fair value of the underlying collateral as repayment of the loan is expected to be made through the operation or sale of the collateral. Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date unadjusted for selling costs as appropriate.

Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending management experience and risk tolerance, loan review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in underlying collateral, external factors and economic conditions not already captured.

Allowance for Credit Losses – Unfunded Commitments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

9


 

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancellable, through a charge to provision for unfunded commitments in the Company’s income statements. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.

Note 2 – Comprehensive Income (Loss)

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, 2023 and 2022:

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

(27,219

)

 

$

(15,188

)

 

$

(31,765

)

 

$

(1,151

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before reclassifications,
   net of $
664, $2,840, ($695) and $7,053 tax effect, respectively

 

 

(2,225

)

 

 

(9,516

)

 

 

2,280

 

 

 

(23,625

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income,
   net of $
2, $2, ($8) and ($17) tax effect, respectively

 

 

(7

)

 

 

2

 

 

 

34

 

 

 

74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive income (loss)

 

 

(2,232

)

 

 

(9,514

)

 

 

2,314

 

 

 

(23,551

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

(29,451

)

 

$

(24,702

)

 

$

(29,451

)

 

$

(24,702

)

 

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 qualifies as Tier 1 capital at the Bank and pays dividends at an annual rate of 5.30%. The preferred stock has no voting rights. 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.

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, 2023 or December 31, 2022. The number of shares and earnings per share for the 2022 periods have been adjusted for the 2.5% stock dividend declared on October 18, 2022.

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 7,073,689 for the three-month period ended June 30, 2023 compared to 7,103,985 for the three-month period ended June 30, 2022. For the six-month period ended June 30, 2023, the weighted average number of common shares outstanding was 7,074,403 compared to 7,114,812 for the six-month period ended June 30, 2022.

10


 

Note 5 – Investment and Equity Securities

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

June 30, 2023

 

Amortized
Cost

 

 

Gross
Unrealized
Gains

 

 

Gross
Unrealized
Losses

 

 

Fair
Value

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

54,965

 

 

$

 

 

$

4,347

 

 

$

50,618

 

U.S. government agencies

 

 

41,647

 

 

 

58

 

 

 

1,015

 

 

 

40,690

 

GSE - Mortgage-backed securities and CMOs

 

 

130,424

 

 

 

 

 

 

16,276

 

 

 

114,148

 

Asset-backed securities

 

 

33,710

 

 

 

157

 

 

 

348

 

 

 

33,519

 

State and political subdivisions

 

 

95,974

 

 

 

 

 

 

15,935

 

 

 

80,039

 

Corporate bonds

 

 

6,000

 

 

 

 

 

 

530

 

 

 

5,470

 

Total securities available for sale

 

$

362,720

 

 

$

215

 

 

$

38,451

 

 

$

324,484

 

June 30, 2023

 

Amortized
Cost

 

 

Gross
Unrealized
Gains

 

 

Gross
Unrealized
Losses

 

 

Fair
Value

 

 

Allowance for
Credit Losses

 

 

 

(dollars in thousands)

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

143

 

 

$

 

 

$

3

 

 

$

140

 

 

$

 

State and political subdivisions

 

 

14,048

 

 

 

 

 

 

1,288

 

 

 

12,760

 

 

 

 

Corporate bonds

 

 

15,000

 

 

 

 

 

 

2,088

 

 

 

12,912

 

 

 

65

 

Total securities held to maturity

 

$

29,191

 

 

$

 

 

$

3,379

 

 

$

25,812

 

 

$

65

 

December 31, 2022

 

Amortized
Cost

 

 

Gross
Unrealized
Gains

 

 

Gross
Unrealized
Losses

 

 

Fair
Value

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

54,948

 

 

$

 

 

$

4,318

 

 

$

50,630

 

U.S. government agencies

 

 

34,746

 

 

 

64

 

 

 

1,048

 

 

 

33,762

 

GSE - Mortgage-backed securities and CMOs

 

 

132,059

 

 

 

 

 

 

16,064

 

 

 

115,995

 

Asset-backed securities

 

 

37,228

 

 

 

70

 

 

 

612

 

 

 

36,686

 

State and political subdivisions

 

 

100,955

 

 

 

 

 

 

18,689

 

 

 

82,266

 

Corporate bonds

 

 

6,000

 

 

 

 

 

 

656

 

 

 

5,344

 

Total securities available for sale

 

$

365,936

 

 

$

134

 

 

$

41,387

 

 

$

324,683

 

December 31, 2022

 

Amortized
Cost

 

 

Gross
Unrealized
Gains

 

 

Gross
Unrealized
Losses

 

 

Fair
Value

 

 

 

(dollars in thousands)

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

152

 

 

$

 

 

$

5

 

 

$

147

 

State and political subdivisions

 

 

15,154

 

 

 

 

 

 

1,775

 

 

 

13,379

 

Corporate bonds

 

 

15,000

 

 

 

 

 

 

1,348

 

 

 

13,652

 

Total securities held to maturity

 

$

30,306

 

 

$

 

 

$

3,128

 

 

$

27,178

 

 

The Company owned Federal Reserve Bank (FRB) stock reported at cost of $959,000 at June 30, 2023 and December 31, 2022. The Company owned Federal Home Loan Bank (FHLB) stock reported at cost of $509,000 and $469,000 at June 30, 2023 and December 31, 2022, 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 are 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, 2023.

There is no allowance for credit losses on available for sale securities. The following table shows a rollforward of the allowance for credit losses on held to maturity securities for the six months ended June 30, 2023.

 

11


 

 

 

U.S. government agencies

 

 

State and political subdivisions

 

 

Corporate bonds

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2022

 

$

 

 

$

 

 

$

 

Cumulative effect of change in accounting principle

 

 

 

 

 

3

 

 

 

67

 

Provision for (recovery of) credit losses

 

 

 

 

 

(3

)

 

 

(2

)

Charge-offs of securities

 

 

 

 

 

 

 

 

 

Recoveries

 

 

 

 

 

 

 

 

 

Balance, June 30, 2023

 

$

 

 

$

 

 

$

65

 

On a quarterly basis, the Company monitors the credit quality of the debt securities held to maturity through the use of credit ratings. For unrated securities, primarily corporate bonds consisting of subordinated debt of bank holding companies, individual financial reports are reviewed quarterly. Capital, profitability, liquidity and other ratios are reviewed to assist in determining credit quality. U.S. government agency bonds are either explicitly or implicitly guaranteed by the U.S. government and have a long history of no credit losses.

The following table summarizes the credit ratings of debt securities held to maturity, presented at amortized cost, by major security type at June 30, 2023.

 

June 30, 2023

 

U.S. government agencies

 

 

State and political subdivisions

 

 

Corporate bonds

 

 

Total

 

 

 

(dollars in thousands)

 

Aaa

 

$

 

 

$

1,167

 

 

$

 

 

$

1,167

 

Aa1/Aa2/Aa3

 

 

 

 

 

12,881

 

 

 

 

 

 

12,881

 

A1/A2

 

 

 

 

 

 

 

 

 

 

 

 

BBB

 

 

 

 

 

 

 

 

 

 

 

 

Not rated

 

 

143

 

 

 

 

 

 

15,000

 

 

 

15,143

 

Total

 

$

143

 

 

$

14,048

 

 

$

15,000

 

 

$

29,191

 

At June 30, 2023, the Company had no securities held to maturity that were past due 30 days or more as to principal or interest payments. The Company had no securities held to maturity classified as nonaccrual for the six months ended June 30, 2023.

Results from sales of securities available for sale for the three and six-month periods ended June 30, 2023 and 2022, respectively, were as follows:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

Gross proceeds from sales

 

$

4,536

 

 

$

 

 

$

11,329

 

 

$

8,398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized gains from sales

 

$

48

 

 

$

 

 

$

54

 

 

$

52

 

Realized losses from sales

 

 

39

 

 

 

 

 

 

96

 

 

 

143

 

Net realized gains (losses)

 

$

9

 

 

$

 

 

$

(42

)

 

$

(91

)

 

At June 30, 2023 and December 31, 2022, securities available for sale with a carrying amount of $129.7 million and $153.3 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

12


 

We believe the unrealized losses on investment securities are a result of a volatile market and fluctuations in market prices due to a rise in interest rates, which will adjust if rates decline. Management does not believe these fluctuations are a reflection of the credit quality of the investments. At June 30, 2023, the unrealized losses on available for sale securities less than twelve months related to one U.S. Treasury bond, seven government agency bonds, seven government-sponsored enterprise (GSE) mortgage-backed securities, one asset-backed security and nine state and political subdivision bonds. At June 30, 2023, the Company had eight U.S. Treasury bonds, seventeen government agency bonds, fifty-eight GSE mortgage-backed securities, nine asset-backed securities, fifty-four state and political subdivision bonds and three corporate bonds that were classified as available for sale and in a loss position for twelve months or more. The following table shows the gross unrealized losses and estimated fair value of available for sale securities for which an allowance has not been recorded aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2023.

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

June 30, 2023

 

Fair Value

 

 

Unrealized
Losses

 

 

Fair Value

 

 

Unrealized
Losses

 

 

Fair Value

 

 

Unrealized
Losses

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

19,516

 

 

$

272

 

 

$

31,103

 

 

$

4,075

 

 

$

50,619

 

 

$

4,347

 

U.S. government agencies

 

 

12,798

 

 

 

40

 

 

 

14,587

 

 

 

975

 

 

 

27,385

 

 

 

1,015

 

GSE-Mortgage-backed securities and CMOs

 

 

12,439

 

 

 

402

 

 

 

101,709

 

 

 

15,874

 

 

 

114,148

 

 

 

16,276

 

Asset-backed securities

 

 

1,161

 

 

 

8

 

 

 

13,849

 

 

 

340

 

 

 

15,010

 

 

 

348

 

State and political subdivisions

 

 

13,589

 

 

 

285

 

 

 

66,134

 

 

 

15,650

 

 

 

79,723

 

 

 

15,935

 

Corporate bonds

 

 

 

 

 

 

 

 

5,470

 

 

 

530

 

 

 

5,470

 

 

 

530

 

Total securities available for sale

 

$

59,503

 

 

$

1,007

 

 

$

232,852

 

 

$

37,444

 

 

$

292,355

 

 

$

38,451

 

At December 31, 2022, the unrealized losses on available for sale securities less than twelve months related to four U.S. Treasury bonds, six government agency bonds, twenty-eight GSE mortgage-backed securities, twelve asset-backed securities and fourteen state and political subdivision bonds. Unrealized losses on held to maturity securities related to one government agency bond, nine state and political subdivision bonds and four corporate bonds that had been in a loss position less than twelve months at December 31, 2022. At December 31, 2022, the Company had five U.S. Treasury bonds, fourteen government agency bonds, thirty-four GSE mortgage-backed securities, five asset-backed securities, fifty state and political subdivision bonds and three corporate bonds that were classified as available for sale and in a loss position twelve months or more. Unrealized losses on held to maturity securities related to one state and political subdivision bond and ten corporate bonds that had been in a loss position twelve months or more at December 31, 2022. The following tables show the gross unrealized losses and estimated fair value of available for sale securities and held to maturity securities aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 2022.

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2022

 

Fair Value

 

 

Unrealized
 Losses

 

 

Fair Value

 

 

Unrealized
Losses

 

 

Fair Value

 

 

Unrealized
Losses

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

27,991

 

 

$

509

 

 

$

22,639

 

 

$

3,809

 

 

$

50,630

 

 

$

4,318

 

U.S. government agencies

 

 

8,580

 

 

 

69

 

 

 

13,994

 

 

 

979

 

 

 

22,574

 

 

 

1,048

 

GSE-Mortgage-backed securities and CMOs

 

 

35,657

 

 

 

2,021

 

 

 

77,799

 

 

 

14,043

 

 

 

113,456

 

 

 

16,064

 

Asset-backed securities

 

 

22,828

 

 

 

315

 

 

 

7,326

 

 

 

297

 

 

 

30,154

 

 

 

612

 

State and political subdivisions

 

 

19,381

 

 

 

688

 

 

 

61,359

 

 

 

18,001

 

 

 

80,740

 

 

 

18,689

 

Corporate bonds

 

 

 

 

 

 

 

 

5,344

 

 

 

656

 

 

 

5,344

 

 

 

656

 

Total securities available for sale

 

$

114,437

 

 

$

3,602

 

 

$

188,461

 

 

$

37,785

 

 

$

302,898

 

 

$

41,387

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2022

 

Fair Value

 

 

Unrealized
Losses

 

 

Fair Value

 

 

Unrealized
Losses

 

 

Fair Value

 

 

Unrealized
Losses

 

 

 

(dollars in thousands)

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

147

 

 

$

5

 

 

$

 

 

$

 

 

$

147

 

 

$

5

 

State and political subdivisions

 

 

12,354

 

 

 

1,621

 

 

 

1,025

 

 

 

154

 

 

 

13,379

 

 

 

1,775

 

Corporate bonds

 

 

6,383

 

 

 

367

 

 

 

7,269

 

 

 

981

 

 

 

13,652

 

 

 

1,348

 

Total securities held to maturity

 

$

18,884

 

 

$

1,993

 

 

$

8,294

 

 

$

1,135

 

 

$

27,178

 

 

$

3,128

 

 

13


 

Declines in the fair value of the available for sale investment portfolio are believed by management to be temporary in nature. When evaluating an investment for credit losses, 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 through the review of credit ratings and, if necessary, corporate financial statements; adverse conditions specifically related to the security such as past due principal or interest; underlying assets that collateralize the debt security; other economic conditions and demographics; 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 credit quality, but that the losses are temporary in nature. At June 30, 2023, the Company does not intend to sell and is not likely to be required to sell the available for sale securities that were in a loss position prior to full recovery.

The following tables show contractual maturities of the investment portfolio as of June 30, 2023:

 

 

June 30, 2023

 

 

 

Amortized
Cost

 

 

Estimated
Fair Value

 

 

Book
Yield

 

 

 

(dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due within twelve months

 

 

6,153

 

 

 

6,064

 

 

 

6.11

%

Due after one but within five years

 

 

45,818

 

 

 

43,686

 

 

 

3.21

%

Due after five but within ten years

 

 

85,914

 

 

 

74,826

 

 

 

2.10

%

Due after ten years

 

 

224,835

 

 

 

199,908

 

 

 

3.34

%

 

 

$

362,720

 

 

$

324,484

 

 

 

3.08

%

 

 

 

June 30, 2023

 

 

 

Amortized
Cost

 

 

Estimated
Fair Value

 

 

Book
Yield

 

 

 

(dollars in thousands)

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due within twelve months

 

 

653

 

 

 

648

 

 

 

2.73

%

Due after one but within five years

 

 

382

 

 

 

379

 

 

 

3.01

%

Due after five but within ten years

 

 

17,702

 

 

 

15,371

 

 

 

4.28

%

Due after ten years

 

 

10,454

 

 

 

9,414

 

 

 

3.40

%

 

 

$

29,191

 

 

$

25,812

 

 

 

3.92

%

 

The portion of unrealized gains and losses for the three and six months ended June 30, 2023 and 2022 related to equity securities still held at the reporting date is calculated as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

Gross proceeds from sales

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains (losses) recognized during the period on equity securities

 

$

(23

)

 

$

(56

)

 

$

11

 

 

$

(65

)

Less: Net gains (losses) recognized from equity securities sold during the period

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) recognized during the period on equity securities still held at the reporting date

 

$

(23

)

 

$

(56

)

 

$

11

 

 

$

(65

)

 

14


 

Note 6 – Loans Held for Investment

The composition of net loans held for investment by class as of June 30, 2023 and December 31, 2022 was as follows:

 

 

June 30, 2023

 

 

December 31, 2022

 

 

 

(dollars in thousands)

 

Commercial

 

 

 

 

 

 

Commercial

 

$

80,347

 

 

$

85,917

 

SBA Paycheck Protection Program (PPP)

 

 

243

 

 

 

545

 

Real estate - commercial

 

 

204,562

 

 

 

183,550

 

Other real estate construction loans

 

 

37,058

 

 

 

37,077

 

Other loans

 

 

6,424

 

 

 

6,666

 

Noncommercial

 

 

 

 

 

 

Real estate 1-4 family construction

 

 

8,501

 

 

 

6,613

 

Real estate - residential

 

 

125,805

 

 

 

108,669

 

Home equity

 

 

59,734

 

 

 

58,186

 

Consumer loans

 

 

10,768

 

 

 

9,762

 

 

 

 

533,442

 

 

 

496,985

 

Less:

 

 

 

 

 

 

Allowance for credit losses

 

 

(4,713

)

 

 

(2,290

)

Deferred loan costs net

 

 

922

 

 

 

904

 

 

 

 

 

 

 

 

Loans held for investment, net

 

$

529,651

 

 

$

495,599

 

 

Note 7 – Allowance for Credit Losses on Loans

The following tables summarize the activity related to the allowance for credit losses on loans for the three and six months ended June 30, 2023 under the CECL methodology.

 

 

Commercial Loans

 

 

Noncommercial Loans

 

 

 

 

(dollars in thousands)

 

Commercial

 

 

Real estate
commercial

 

 

Other
real estate
construction

 

 

Other
loans

 

 

Real estate
1-4 family
construction

 

 

Real estate
residential

 

 

Home
equity

 

 

Consumer

 

 

Total
Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2023

 

$

1,010

 

 

$

1,860

 

 

$

325

 

 

$

7

 

 

$

 

 

$

657

 

 

$

567

 

 

$

170

 

 

$

4,596

 

Provision for credit losses

 

 

11

 

 

 

20

 

 

 

31

 

 

 

 

 

 

23

 

 

 

9

 

 

 

7

 

 

 

 

 

 

101

 

Charge-offs

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22

)

 

 

(23

)

Recoveries

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

24

 

 

 

39

 

Net recoveries

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

2

 

 

 

16

 

Balance, June 30, 2023

 

$

1,028

 

 

$

1,880

 

 

$

356

 

 

$

7

 

 

$

23

 

 

$

666

 

 

$

581

 

 

$

172

 

 

$

4,713

 

 

 

 

Commercial Loans

 

 

Noncommercial Loans

 

 

 

 

(dollars in thousands)

 

Commercial

 

 

Real estate
commercial

 

 

Other
real estate
construction

 

 

Other
loans

 

 

Real estate
1-4 family
construction

 

 

Real estate
residential

 

 

Home
equity

 

 

Consumer

 

 

Total
Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2022

 

$

435

 

 

$

760

 

 

$

177

 

 

$

4

 

 

$

 

 

$

561

 

 

$

277

 

 

$

76

 

 

$

2,290

 

Cumulative effect of change in accounting principle

 

 

702

 

 

 

1,017

 

 

 

143

 

 

 

5

 

 

 

 

 

 

74

 

 

 

375

 

 

 

91

 

 

 

2,407

 

Provision for (recovery of) credit losses

 

 

224

 

 

 

103

 

 

 

78

 

 

 

(2

)

 

 

23

 

 

 

30

 

 

 

(79

)

 

 

15

 

 

 

392

 

Charge-offs

 

 

(344

)

 

 

 

 

 

(42

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(58

)

 

 

(444

)

Recoveries

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

8

 

 

 

48

 

 

 

68

 

Net (charge-offs) recoveries

 

 

(333

)

 

 

 

 

 

(42

)

 

 

 

 

 

 

 

 

1

 

 

 

8

 

 

 

(10

)

 

 

(376

)

Balance, June 30, 2023

 

$

1,028

 

 

$

1,880

 

 

$

356

 

 

$

7

 

 

$

23

 

 

$

666

 

 

$

581

 

 

$

172

 

 

$

4,713

 

 

15


 

Prior to the adoption of ASU 2016-13 on January 1, 2023, the Company calculated the allowance for loan losses under the incurred loss methodology. The following tables are disclosures related to the allowance for loan losses in prior periods.

Allowance for loan losses and loan balances as of December 31, 2022

 

Individually Evaluated

 

 

Collectively Evaluated

 

 

Total

 

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

40

 

 

$

704

 

 

$

1,336

 

 

$

313,181

 

 

$

1,376

 

 

$

313,885

 

Non-Commercial

 

 

133

 

 

 

2,368

 

 

 

781

 

 

 

181,636

 

 

 

914

 

 

 

184,004

 

Total

 

$

173

 

 

$

3,072

 

 

$

2,117

 

 

$

494,817

 

 

$

2,290

 

 

$

497,889

 

 

Allowance for loan losses for the three months ended June 30, 2022

 

Commercial

 

 

Non-Commercial

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

2,626

 

 

$

1,530

 

 

$

4,156

 

Provision for (recovery of) loan losses

 

 

(124

)

 

 

111

 

 

 

(13

)

Charge-offs

 

 

 

 

 

(18

)

 

 

(18

)

Recoveries

 

 

58

 

 

 

11

 

 

 

69

 

Net (charge-offs) recoveries

 

 

58

 

 

 

(7

)

 

 

51

 

Balance at end of period

 

$

2,560

 

 

$

1,634

 

 

$

4,194

 

 

Allowance for loan losses for the six months ended June 30, 2022

 

Commercial

 

 

Non-Commercial

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

2,429

 

 

$

1,597

 

 

$

4,026

 

Provision for (recovery of) loan losses

 

 

66

 

 

 

39

 

 

 

105

 

Charge-offs

 

 

 

 

 

(24

)

 

 

(24

)

Recoveries

 

 

65

 

 

 

22

 

 

 

87

 

Net (charge-offs) recoveries

 

 

65

 

 

 

(2

)

 

 

63

 

Balance at end of period

 

$

2,560

 

 

$

1,634

 

 

$

4,194

 

 

Allowance for loan losses and loan balances as of June 30, 2022

 

Individually Evaluated

 

 

Collectively Evaluated

 

 

Total

 

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

Reserve

 

 

Loans

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

51

 

 

$

838

 

 

$

2,509

 

 

$

292,283

 

 

$

2,560

 

 

$

293,121

 

Non-Commercial

 

 

164

 

 

 

2,470

 

 

 

1,470

 

 

 

165,500

 

 

 

1,634

 

 

 

167,970

 

Total

 

$

215

 

 

$

3,308

 

 

$

3,979

 

 

$

457,783

 

 

$

4,194

 

 

$

461,091

 

 

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, 2023

 

Loans
30-89 Days
Past Due

 

 

Nonaccrual Loans

 

 

Total Past
Due Loans

 

 

Current
Loans

 

 

Total
Loans

 

 

Loans 90 Days or More Past Due and Still Accruing

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

 

$

53

 

 

$

53

 

 

$

80,294

 

 

$

80,347

 

 

$

 

SBA Paycheck Protection Program (PPP)

 

 

18

 

 

 

 

 

 

18

 

 

 

220

 

 

 

238

 

 

 

 

Real estate - commercial

 

 

532

 

 

 

 

 

 

532

 

 

 

204,165

 

 

 

204,697

 

 

 

 

Other real estate construction

 

 

 

 

 

 

 

 

 

 

 

37,058

 

 

 

37,058

 

 

 

 

Real estate 1-4 family construction

 

 

 

 

 

 

 

 

 

 

 

8,501

 

 

 

8,501

 

 

 

 

Real estate - residential

 

 

371

 

 

 

348

 

 

 

719

 

 

 

125,878

 

 

 

126,597

 

 

 

 

Home equity

 

 

226

 

 

 

 

 

 

226

 

 

 

59,508

 

 

 

59,734

 

 

 

 

Consumer loans

 

 

30

 

 

 

 

 

 

30

 

 

 

10,738

 

 

 

10,768

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

6,424

 

 

 

6,424

 

 

 

 

Total

 

$

1,177

 

 

$

401

 

 

$

1,578

 

 

$

532,786

 

 

$

534,364

 

 

$

 

 

16


 

 

December 31, 2022

 

Loans
30-89 Days
Past Due

 

 

Nonaccrual Loans

 

 

Total Past
Due Loans

 

 

Current
Loans

 

 

Total
Loans

 

 

Loans 90 Days or More Past Due and Still Accruing

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

 

$

71

 

 

$

71

 

 

$

85,846

 

 

$

85,917

 

 

$

 

SBA Paycheck Protection Program (PPP)

 

 

252

 

 

 

 

 

 

252

 

 

 

279

 

 

 

531

 

 

 

 

Real estate - commercial

 

 

230

 

 

 

 

 

 

230

 

 

 

183,464

 

 

 

183,694

 

 

 

 

Other real estate construction

 

 

 

 

 

183

 

 

 

183

 

 

 

36,894

 

 

 

37,077

 

 

 

 

Real estate 1-4 family construction

 

 

 

 

 

 

 

 

 

 

 

6,613

 

 

 

6,613

 

 

 

 

Real estate - residential

 

 

507

 

 

 

117

 

 

 

624

 

 

 

108,819

 

 

 

109,443

 

 

 

 

Home equity

 

 

107

 

 

 

28

 

 

 

135

 

 

 

58,051

 

 

 

58,186

 

 

 

 

Consumer loan

 

 

29

 

 

 

 

 

 

29

 

 

 

9,733

 

 

 

9,762

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

6,666

 

 

 

6,666

 

 

 

 

Total

 

$

1,125

 

 

$

399

 

 

$

1,524

 

 

$

496,365

 

 

$

497,889

 

 

$

 

 

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

The Company had $0 in foreclosed residential real estate and $0 of residential real estate in process of foreclosure at June 30, 2023 and December 31, 2022.

The composition of nonaccrual loans by class as of June 30, 2023 and December 31, 2022 was as follows:

 

 

CECL

 

 

Six Months Ended

 

 

Incurred Loss

 

 

 

June 30, 2023

 

 

June 30, 2023

 

 

December 31, 2022

 

 

 

Nonaccrual Loans with No Allowance

 

 

Nonaccrual Loans with an Allowance

 

 

Total Nonaccrual Loans

 

 

Interest Income

 

 

Nonaccrual Loans

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

 

$

53

 

 

$

53

 

 

$

 

 

$

71

 

SBA Paycheck Protection Program (PPP)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

183

 

Real estate 1-4 family construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

187

 

 

 

161

 

 

 

348

 

 

 

7

 

 

 

117

 

Home equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28

 

Consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

187

 

 

$

214

 

 

$

401

 

 

$

7

 

 

$

399

 

A loan may be individually assessed for determining the allowance for credit losses when it is determined that it does not share similar risk characteristics with other assets. Loans that are on nonaccrual status will be reviewed to determine if they will be individually, rather than collectively, assessed. If the loan is deemed to be collateral dependent and the relationship’s outstanding balance is $100,000 or greater, it will be individually assessed. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Collateral dependent loans require an analysis of the collateral. The fair value of the collateral is discounted by liquidation costs. If the discounted fair value of the collateral is greater than the amortized loan balance, no allowance is required. Otherwise the difference between the balance and the collateral is charged off if deemed uncollectible.

 

17


 

The following table details the amortized cost of collateral dependent loans and any related allowance at June 30, 2023.

 

 

 

 

 

 

 

 

June 30, 2023

 

Amortized Cost

 

 

Allowance for Credit Losses

 

 

 

(dollars in thousands)

 

Commercial

 

$

 

 

$

 

SBA Paycheck Protection Program (PPP)

 

 

 

 

 

 

Real estate - commercial

 

 

 

 

 

 

Other real estate construction

 

 

 

 

 

 

Real estate 1-4 family construction

 

 

 

 

 

 

Real estate - residential

 

 

177

 

 

 

 

Home equity

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

Total

 

$

177

 

 

$

 

 

Management uses a risk-grading program to facilitate the evaluation of probable inherent loan losses and to measure the adequacy of the allowance for credit losses on loans. 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 nine risk grades summarized in six 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 acceptable but show signs of weakness in either adequate sources of repayment or collateral but have demonstrated mitigating factors that minimize the risk of delinquency or loss. These loans may deserve management’s attention.

Special Mention: Loans that exhibit potential weakness that deserves management’s close attention. Credits within this category exhibit risk that is increasing beyond the point where the loan would have been originally approved.

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

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

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

18


 

The following table presents the Company’s recorded investment in loans by credit quality indicators by year of origination as of June 30, 2023:

 

June 30, 2023

 

Term Loans by Year of Origination

 

 

 

 

 

 

 

 

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

Prior

 

 

Revolving

 

 

Total

 

 

 

(dollars in thousands)

 

Commercial (including SBA PPP)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

5,378

 

 

$

23,452

 

 

$

16,668

 

 

$

8,928

 

 

$

2,492

 

 

$

12,080

 

 

$

11,457

 

 

$

80,455

 

Watch

 

 

43

 

 

 

26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

69

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21

 

 

 

 

 

 

21

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39

 

 

 

 

 

 

 

 

 

39

 

Total commercial (including SBA PPP)

 

 

5,421

 

 

 

23,478

 

 

 

16,668

 

 

 

8,928

 

 

 

2,531

 

 

 

12,101

 

 

 

11,457

 

 

 

80,584

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

29,833

 

 

 

46,563

 

 

 

39,110

 

 

 

26,480

 

 

 

16,287

 

 

 

42,401

 

 

 

2,362

 

 

 

203,036

 

Watch

 

 

 

 

 

 

 

 

 

 

 

 

 

 

79

 

 

 

 

 

 

 

 

 

79

 

Special Mention

 

 

 

 

 

 

 

 

995

 

 

 

248

 

 

 

179

 

 

 

161

 

 

 

 

 

 

1,583

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate - commercial

 

 

29,833

 

 

 

46,563

 

 

 

40,105

 

 

 

26,728

 

 

 

16,545

 

 

 

42,562

 

 

 

2,362

 

 

 

204,698

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

12,472

 

 

 

11,744

 

 

 

4,474

 

 

 

5,055

 

 

 

605

 

 

 

2,306

 

 

 

353

 

 

 

37,009

 

Watch

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49

 

 

 

 

 

 

49

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other real estate construction

 

 

12,472

 

 

 

11,744

 

 

 

4,474

 

 

 

5,055

 

 

 

605

 

 

 

2,355

 

 

 

353

 

 

 

37,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate 1-4 family construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

2,703

 

 

 

5,298

 

 

 

500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,501

 

Watch

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate 1-4 family construction

 

 

2,703

 

 

 

5,298

 

 

 

500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,501

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

21,574

 

 

 

42,498

 

 

 

26,219

 

 

 

11,816

 

 

 

3,632

 

 

 

17,325

 

 

 

545

 

 

 

123,609

 

Watch

 

 

 

 

 

 

 

 

210

 

 

 

84

 

 

 

125

 

 

 

726

 

 

 

 

 

 

1,145

 

Special Mention

 

 

110

 

 

 

560

 

 

 

506

 

 

 

 

 

 

 

 

 

330

 

 

 

 

 

 

1,506

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

195

 

 

 

 

 

 

143

 

 

 

 

 

 

338

 

Total real estate - residential

 

 

21,684

 

 

 

43,058

 

 

 

26,935

 

 

 

12,095

 

 

 

3,757

 

 

 

18,524

 

 

 

545

 

 

 

126,598

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

213

 

 

 

291

 

 

 

189

 

 

 

252

 

 

 

144

 

 

 

1,858

 

 

 

56,636

 

 

 

59,583

 

Watch

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19

 

 

 

132

 

 

 

 

 

 

151

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total home equity

 

 

213

 

 

 

291

 

 

 

189

 

 

 

252

 

 

 

163

 

 

 

1,990

 

 

 

56,636

 

 

 

59,734

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

2,603

 

 

 

2,776

 

 

 

966

 

 

 

173

 

 

 

248

 

 

 

414

 

 

 

3,543

 

 

 

10,723

 

Watch

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention

 

 

 

 

 

45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total consumer loans

 

 

2,603

 

 

 

2,821

 

 

 

966

 

 

 

173

 

 

 

248

 

 

 

414

 

 

 

3,543

 

 

 

10,768

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

 

 

 

1,620

 

 

 

2,985

 

 

 

1,350

 

 

 

 

 

 

468

 

 

 

 

 

 

6,423

 

Watch

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other loans

 

 

 

 

 

1,620

 

 

 

2,985

 

 

 

1,350

 

 

 

 

 

 

468

 

 

 

 

 

 

6,423

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

$

74,929

 

 

$

134,873

 

 

$

92,822

 

 

$

54,581

 

 

$

23,849

 

 

$

78,414

 

 

$

74,896

 

 

$

534,364

 

During six months ended June 30, 2023, twenty-four loans totaling $959,000 were converted from revolving to term loans.

19


 

The following table presents gross charge-offs by origination date as of June 30, 2023:

 

June 30, 2023

 

Gross Loan Charge-offs by Year of Origination

 

 

 

 

 

 

 

 

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

Prior

 

 

Revolving

 

 

Total

 

 

 

(dollars in thousands)

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

 

$

 

 

$

 

 

$

 

 

$

273

 

 

$

71

 

 

$

 

 

$

344

 

SBA Paycheck Protection Program (PPP)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate construction

 

 

 

 

 

42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncommercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate 1-4 family construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

23

 

 

 

4

 

 

 

3

 

 

 

 

 

 

4

 

 

 

24

 

 

 

58

 

Total charge-offs

 

$

 

 

$

65

 

 

$

4

 

 

$

3

 

 

$

273

 

 

$

75

 

 

$

24

 

 

$

444

 

The following table presents the Company’s recorded investment in loans by credit quality indicators as of December 31, 2022:

 

December 31, 2022

 

Pass

 

 

Watch

 

 

Sub-
standard

 

 

Doubtful

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

85,789

 

 

$

57

 

 

$

71

 

 

$

 

 

$

85,917

 

SBA Paycheck Protection Program (PPP)

 

 

531

 

 

 

 

 

 

 

 

 

 

 

 

531

 

Real estate - commercial

 

 

182,110

 

 

 

1,584

 

 

 

 

 

 

 

 

 

183,694

 

Other real estate construction

 

 

36,717

 

 

 

51

 

 

 

309

 

 

 

 

 

 

37,077

 

Real estate 1-4 family construction

 

 

6,613

 

 

 

 

 

 

 

 

 

 

 

 

6,613

 

Real estate - residential

 

 

106,968

 

 

 

2,359

 

 

 

116

 

 

 

 

 

 

109,443

 

Home equity

 

 

58,050

 

 

 

108

 

 

 

28

 

 

 

 

 

 

58,186

 

Consumer loans

 

 

9,715

 

 

 

47

 

 

 

 

 

 

 

 

 

9,762

 

Other loans

 

 

6,666

 

 

 

 

 

 

 

 

 

 

 

 

6,666

 

Total

 

$

493,159

 

 

$

4,206

 

 

$

524

 

 

$

 

 

$

497,889

 

 

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. At both June 30, 2023 and December 31, 2022 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, 2023 and December 31, 2022:

June 30, 2023

 

Performing

 

 

Non-
Performing

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

80,294

 

 

$

53

 

 

$

80,347

 

SBA Paycheck Protection Program (PPP)

 

 

238

 

 

 

 

 

 

238

 

Real estate - commercial

 

 

204,697

 

 

 

 

 

 

204,697

 

Other real estate construction

 

 

37,058

 

 

 

 

 

 

37,058

 

Real estate 1-4 family construction

 

 

8,501

 

 

 

 

 

 

8,501

 

Real estate - residential

 

 

126,249

 

 

 

348

 

 

 

126,597

 

Home equity

 

 

59,734

 

 

 

 

 

 

59,734

 

Consumer loans

 

 

10,768

 

 

 

 

 

 

10,768

 

Other loans

 

 

6,424

 

 

 

 

 

 

6,424

 

Total

 

$

533,963

 

 

$

401

 

 

$

534,364

 

 

20


 

 

December 31, 2022

 

Performing

 

 

Non-
Performing

 

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

85,846

 

 

$

71

 

 

$

85,917

 

SBA Paycheck Protection Program (PPP)

 

 

531

 

 

 

 

 

 

531

 

Real estate - commercial

 

 

183,694

 

 

 

 

 

 

183,694

 

Other real estate construction

 

 

36,894

 

 

 

183

 

 

 

37,077

 

Real estate 1-4 family construction

 

 

6,613

 

 

 

 

 

 

6,613

 

Real estate - residential

 

 

109,326

 

 

 

117

 

 

 

109,443

 

Home equity

 

 

58,158

 

 

 

28

 

 

 

58,186

 

Consumer loans

 

 

9,762

 

 

 

 

 

 

9,762

 

Other loans

 

 

6,666

 

 

 

 

 

 

6,666

 

Total

 

$

497,490

 

 

$

399

 

 

$

497,889

 

 

Prior to the adoption of ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. Impaired loans include loans on nonaccrual status and troubled debt restructurings. The Company individually assessed for impairment all nonaccrual loans and troubled debt restructurings. If a loan was deemed impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral. The table below summarizes the loans deemed impaired and the amount of specific reserves allocated by class at December 31, 2022.

 

December 31, 2022

 

Unpaid
Principal
Balance

 

 

Recorded
Investment
With No
Allowance

 

 

Recorded
Investment
With
Allowance

 

 

Related
Allowance

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

18

 

 

$

 

 

$

18

 

 

$

22

 

SBA Paycheck Protection Program (PPP)

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

503

 

 

 

 

 

 

503

 

 

 

18

 

Other real estate construction

 

 

183

 

 

 

183

 

 

 

 

 

 

 

Real estate 1-4 family construction

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

2,318

 

 

 

572

 

 

 

1,746

 

 

 

131

 

Home equity

 

 

28

 

 

 

28

 

 

 

 

 

 

 

Consumer loans

 

 

22

 

 

 

 

 

 

22

 

 

 

2

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

3,072

 

 

$

783

 

 

$

2,289

 

 

$

173

 

The table below shows interest income received on impaired loans by class for the six months ended June 30, 2022.

 

 

 

Six Months Ended June 30, 2022

 

 

 

Average
Recorded
Investment

 

 

Interest
Income

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

Commercial

 

$

657

 

 

$

29

 

SBA Paycheck Protection Program (PPP)

 

 

 

 

 

 

Real estate - commercial

 

 

1,195

 

 

 

34

 

Other real estate construction

 

 

 

 

 

 

Real estate 1-4 family construction

 

 

 

 

 

 

Real estate - residential

 

 

2,142

 

 

 

90

 

Home equity

 

 

42

 

 

 

1

 

Consumer loans

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

Total

 

$

4,036

 

 

$

154

 

 

21


 

Note 8 – Modifications to Borrowers Experiencing Financial Difficulty

The Company adopted ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” effective January 1, 2023. The amendments in ASU 2022-02 enhanced disclosures for loan modifications made for borrowers experiencing financial difficulty and eliminated the Troubled Debt Restructurings (“TDR”) accounting guidance for financial institutions that have adopted CECL.

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses due to the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. The Company rarely modifies loans by providing principal forgiveness. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. In some cases, the Company will modify a loan by providing multiple types of concessions. Typically one type of concession is granted initially. If the borrower continues to experience financial difficulty, another concession may be granted. Types of concessions include term extensions, capitalizing accrued interest, reducing interest rates to below current market rates or principal forgiveness.

The Company did not modify any loans for borrowers experiencing financial difficulty during the six-month period ended June 30, 2023. Accordingly, the Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the first half of 2023 that subsequently defaulted. A default on a modified loan is defined as being past due 90 days or being out of compliance with the modification agreement.

Prior to adoption of ASU 2016-13, modification of a loan constituted a troubled debt restructuring when a borrower was experiencing financial difficulty and the modification involved providing a concession to the existing loan contract. The Company offered various types of concessions when modifying loans to troubled borrowers, however, forgiveness of principal was rarely granted. Concessions offered were 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 included 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 have been requested. Loans modified as TDRs were typically already on nonaccrual status and in some cases, partial charge-offs may have already been taken against the outstanding loan balance. The Company classified TDR loans as impaired loans and evaluated the need for an allowance for loan loss on a loan-by-loan basis. An allowance was 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 was deemed to be collateral dependent.

At December 31, 2022, the Company had $2.8 million in TDRs outstanding, of which two with balances totaling $52,000 were on a nonaccrual basis. There was one loan modified as a TDR during the six-month period ended June 30, 2022.

The following table presents as of June 30, 2022, the status of the types of loans modified as TDRs within the twelve months preceding such date.

 

 

Paid In Full

 

 

Paying as restructured

 

 

Converted to nonaccrual

 

 

Foreclosure/Default

 

June 30, 2022

 

Number
of Loans

 

 

Recorded
Investments

 

 

Number
of Loans

 

 

Recorded
Investments

 

 

Number
of Loans

 

 

Recorded
Investments

 

 

Number
of Loans

 

 

Recorded
Investments

 

 

 

(dollars in thousands)

 

Below market interest rate

 

 

1

 

 

$

219

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

Extended payment terms

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forgiveness of principal/other

 

 

7

 

 

 

2,144

 

 

 

4

 

 

 

1,240

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

8

 

 

$

2,363

 

 

 

4

 

 

$

1,240

 

 

 

 

 

$

 

 

 

 

 

$

 

 

22


 

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. 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 any lease incentives. Operating lease expense, which is composed 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. We do not currently have any finance leases in which we are the lessee.

Our leases relate to four office locations, three of which are branch locations, with remaining terms of three to six years. Certain lease arrangements contain extension options which range from five to ten years at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term. As of June 30, 2023, operating lease ROU assets were $1.7 million and the operating lease liability was $1.8 million, compared to operating lease ROU assets of $2.1 million and an operating lease liability of $2.2 million at June 30, 2022. Lease costs associated with all leases was $106,000 and $212,000 for the three and six months ended June 30, 2023, respectively.

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

 

 

Six Months Ended June 30,

 

 

 

2023

 

 

2022

 

 

 

(in thousands except percent and period data)

 

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

216

 

 

$

198

 

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

 

 

1,685

 

 

 

2,096

 

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

 

 

4.4

 

 

 

5.4

 

Weighted-average discount rate - operating leases

 

 

2.56

%

 

 

2.54

%

 

The table below summarizes the maturity of remaining lease liabilities:

 

 

 

June 30, 2023

 

 

 

 

(in thousands)

2023 (remaining six months)

 

$

218

 

 

2024

 

 

446

 

 

2025

 

 

455

 

 

2026

 

 

416

 

 

2027

 

 

260

 

 

2028 and thereafter

 

 

117

 

 

Total lease payments

 

 

1,912

 

 

Less: Interest

 

 

(111

)

 

Present value of lease liabilities

 

 

1,801

 

 

 

23


 

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. Collateral held varies, but may include accounts receivable, inventory, real estate and time deposits with financial institutions. 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, 2023 and December 31, 2022, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

 

 

June 30, 2023

 

 

December 31, 2022

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

Commitments to extend credit

 

$

198,823

 

 

$

165,992

 

Credit card commitments

 

 

22,608

 

 

 

20,376

 

Standby letters of credit

 

 

7,988

 

 

 

8,135

 

Total commitments

 

$

229,419

 

 

$

194,503

 

 

The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable. The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans. The allowance for credit losses for unfunded loan commitments of $150,000 and $141,000 at June 30, 2023 and December 31, 2022, respectively, is separately classified on the balance sheet within Other Liabilities.

The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the six months ended June 30, 2023.

 

 

 

Total Allowance for Credit Losses - Unfunded Commitments

 

 

 

(dollars in thousands)

 

 

 

 

 

Balance, December 31, 2022

 

$

141

 

Cumulative effect of change in accounting principle

 

 

9

 

Provision for (recovery of) credit losses

 

 

 

Balance, June 30, 2023

 

$

150

 

 

24


 

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 and mortgage banking derivatives 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, and 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. Deposits, short-term borrowings and long-term obligations are not reported at fair value.

Prices for U.S. Treasury and marketable equity 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, asset-backed securities and 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.

Mortgage banking derivatives, which are composed of interest rate lock commitments, or IRLCs, mortgage forward sales commitments and to-be-announced mortgage-backed securities trades (TBAs), are recorded at fair value on a recurring basis. Fair value of the IRLCs is based on projected pull-through rates and anticipated margins based on changes in market interest rates. The Company considers these to be Level 3 valuations. The fair value of mortgage forward sales commitments and TBAs is based on the gain or loss that would occur if the Company were to pair-off the transaction at the measurement date and is considered to be a Level 2 input.

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.

25


 

The following tables provide fair value information for assets and liabilities measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022:

 

 

June 30, 2023

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

50,618

 

 

$

50,618

 

 

$

 

 

$

 

U.S. government agencies

 

 

40,690

 

 

 

 

 

 

40,690

 

 

 

 

GSE - Mortgage-backed securities and CMOs

 

 

114,148

 

 

 

 

 

 

110,142

 

 

 

4,006

 

Asset-backed securities

 

 

33,519

 

 

 

 

 

 

33,519

 

 

 

 

State and political subdivisions

 

 

80,039

 

 

 

 

 

 

80,039

 

 

 

 

Corporate bonds

 

 

5,470

 

 

 

 

 

 

5,470

 

 

 

 

Equity securities

 

 

303

 

 

 

303

 

 

 

 

 

 

 

Mortgage banking derivatives

 

 

519

 

 

 

 

 

 

204

 

 

 

315

 

Total assets at fair value on a recurring basis

 

$

325,306

 

 

$

50,921

 

 

$

270,064

 

 

$

4,321

 

 

 

December 31, 2022

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

50,630

 

 

$

50,630

 

 

$

 

 

$

 

U.S. government agencies

 

 

33,762

 

 

 

 

 

 

33,762

 

 

 

 

GSE - Mortgage-backed securities and CMOs

 

 

115,995

 

 

 

 

 

 

111,996

 

 

 

3,999

 

Asset-backed securities

 

 

36,686

 

 

 

 

 

 

36,686

 

 

 

 

State and political subdivisions

 

 

82,266

 

 

 

 

 

 

82,266

 

 

 

 

Corporate bonds

 

 

5,344

 

 

 

 

 

 

5,344

 

 

 

 

Equity securities

 

 

292

 

 

 

292

 

 

 

 

 

 

 

Mortgage banking derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value on a recurring basis

 

$

324,975

 

 

$

50,922

 

 

$

270,054

 

 

$

3,999

 

Mortgage banking derivatives

 

$

175

 

 

$

 

 

$

80

 

 

$

95

 

Total liabilities at fair value on a recurring basis

 

$

175

 

 

$

 

 

$

80

 

 

$

95

 

 

The following table provides a rollforward for recurring Level 3 fair value measurements:

 

 

June 30, 2023

 

 

Mortgage banking derivatives: Interest rate lock commitments

 

 

Securities available for sale: GSE mortgage-backed securities and CMOs

 

 

Total

 

 

(dollars in thousands)

 

Balance at December 31, 2022

$

(95

)

 

$

3,999

 

 

$

3,904

 

Change in fair value:

 

 

 

 

 

 

 

 

Included in income from mortgage banking

 

410

 

 

 

 

 

 

410

 

Included in accumulated other comprehensive income (loss)

 

 

 

 

7

 

 

 

7

 

Change in observability of significant inputs:

 

 

 

 

 

 

 

 

Included in income from mortgage banking

 

 

 

 

 

 

 

 

Included in accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

Balance at June 30, 2023

$

315

 

 

$

4,006

 

 

$

4,321

 

 

During the fourth quarter of 2022, the Company had one mortgage-backed security that was transferred from Level 2 to Level 3 due to changes in the observability of significant inputs. At December 31, 2022, the Company was unable to observe a credit rating, pricing or recent trade history for the security or other such similar assets. At June 30, 2023, there were no significant observable inputs, and the fair value of the security remained classified as Level 3.

The fair value of mortgage IRLCs at June 30, 2023 was calculated based on a notional amount of $14.4 million. Significant unobservable inputs are used to determine the fair value of these derivatives. At June 30, 2023, such inputs included anticipated

26


 

margins to be earned based on market movement from the original lock date and an overall projected pull-through rate of 88.6% determined by loan product, loan stage, and loan purpose. The fair value of mortgage IRLCs at December 31, 2022 was calculated based on a notional amount of $8.9 million. Significant unobservable inputs were the same as those used for the six months ended June 30, 2023 and assumed a projected pull-through rate of 92.98% at December 31, 2022. Changes in interest rates and other assumptions could significantly change these estimated values.

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. generally accepted accounting principles. 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, 2023 and December 31, 2022:

 

 

 

June 30, 2023

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated loans

 

$

 

 

$

 

 

$

 

 

$

 

OREO

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value on a nonrecurring basis

 

$

 

 

$

 

 

$

 

 

$

 

 

 

December 31, 2022

 

 

 

(dollars in thousands)

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

2,116

 

 

$

 

 

$

 

 

$

2,116

 

Total assets at fair value on a nonrecurring basis

 

$

2,116

 

 

$

 

 

$

 

 

$

2,116

 

 

Quantitative Information about Level 3 Fair Value Measurements

June 30, 2023

 

 

 

 

 

 

 

 

Valuation Technique

 

Unobservable Input

 

General
Range

Nonrecurring measurements:

 

 

 

 

 

 

Individually evaluated loans

 

Discounted appraisals

 

Collateral discounts and estimated costs to sell

 

0 - 25%

OREO

 

Discounted appraisals

 

Collateral discounts and estimated costs to sell

 

0 - 10%

 

December 31, 2022

 

 

 

 

 

 

 

 

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%

 

At June 30, 2023, individually evaluated loans were being evaluated with discounted appraisals for individually assessed nonaccrual loans deemed collateral dependent.

27


 

Note 12 Fair Values of Financial Instruments

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, 2023 and December 31, 2022 are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price at which a liability could be settled. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company.

The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of June 30, 2023 and December 31, 2022:

June 30, 2023

 

Carrying
Value

 

 

Estimated
Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(dollars in thousands)

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

93,853

 

 

$

93,853

 

 

$

93,853

 

 

$

 

 

$

 

Securities available for sale

 

 

324,484

 

 

 

324,484

 

 

 

50,618

 

 

 

269,860

 

 

 

4,006

 

Securities held to maturity

 

 

29,191

 

 

 

25,812

 

 

 

 

 

 

12,900

 

 

 

12,912

 

Equity securities

 

 

303

 

 

 

303

 

 

 

303

 

 

 

 

 

 

 

Loans held for investment, net

 

 

529,651

 

 

 

486,008

 

 

 

 

 

 

 

 

 

486,008

 

Loans held for sale

 

 

3,297

 

 

 

3,297

 

 

 

 

 

 

3,297

 

 

 

 

Restricted stock

 

 

1,468

 

 

 

1,468

 

 

 

1,468

 

 

 

 

 

 

 

Loan servicing assets

 

 

4,615

 

 

 

7,139

 

 

 

 

 

 

7,139

 

 

 

 

Mortgage banking derivatives

 

 

519

 

 

 

519

 

 

 

 

 

 

204

 

 

 

315

 

Accrued interest receivable

 

 

3,712

 

 

 

3,712

 

 

 

 

 

 

 

 

 

3,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

950,270

 

 

 

948,235

 

 

 

 

 

 

948,235

 

 

 

 

Short-term borrowings

 

 

932

 

 

 

932

 

 

 

 

 

 

932

 

 

 

 

Long-term borrowings

 

 

29,066

 

 

 

25,360

 

 

 

 

 

 

 

 

 

25,360

 

Mortgage banking derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued interest payable

 

 

232

 

 

 

232

 

 

 

 

 

 

 

 

 

232

 

December 31, 2022

 

Carrying
Value

 

 

Estimated
Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(dollars in thousands)

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

114,581

 

 

$

114,581

 

 

$

114,581

 

 

$

 

 

$

 

Securities available for sale

 

 

324,683

 

 

 

324,683

 

 

 

50,630

 

 

 

270,054

 

 

 

3,999

 

Securities held to maturity

 

 

30,306

 

 

 

27,178

 

 

 

 

 

 

13,526

 

 

 

13,652

 

Equity securities

 

 

292

 

 

 

292

 

 

 

292

 

 

 

 

 

 

 

Loans held for investment, net

 

 

495,599

 

 

 

458,479

 

 

 

 

 

 

 

 

 

458,479

 

Loans held for sale

 

 

2,774

 

 

 

2,774

 

 

 

 

 

 

2,774

 

 

 

 

Restricted stock

 

 

1,428

 

 

 

1,428

 

 

 

1,428

 

 

 

 

 

 

 

Loan servicing assets

 

 

4,931

 

 

 

6,972

 

 

 

 

 

 

6,972

 

 

 

 

Accrued interest receivable

 

 

3,633

 

 

 

3,633

 

 

 

 

 

 

 

 

 

3,633

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

939,856

 

 

$

938,114

 

 

$

 

 

$

938,114

 

 

$

 

Short-term borrowings

 

 

1,044

 

 

 

1,044

 

 

 

 

 

 

1,044

 

 

 

 

Long-term borrowings

 

 

29,607

 

 

 

25,869

 

 

 

 

 

 

 

 

 

25,869

 

Mortgage banking derivatives

 

 

175

 

 

 

175

 

 

 

 

 

 

80

 

 

 

95

 

Accrued interest payable

 

 

108

 

 

 

108

 

 

 

 

 

 

 

 

 

108

 

 

28


 

At June 30, 2023 the Company’s subsidiary bank had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, the fair value is the fee the Bank is expected to receive. This amount is deemed immaterial by management. See Note 10 (Commitments and Contingencies) to the Notes to Consolidated Financial Statements.

Note 13 – Recent Accounting Pronouncements and Other Changes

ASC 848, “Reference Rate Reform,” was set forth to eliminate certain reference rates and introduce new reference rates that are based on a larger, more liquid population of observable transactions that are less vulnerable to manipulation. The reference rate reform discontinues the use of certain widely used reference rates such as the London Interbank Offered Rate, or LIBOR. In response to likely challenges arising from contract modifications due to reference rate reform, the Financial Accounting Standards Board (the "FASB") issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” in March 2020 to provide optional expedients and exceptions for applying GAAP to contract modifications. As such, modifications to debt contracts may be accounted for as a continuation of the existing contract by prospectively adjusting the effective interest rate. This amendment could be applied beginning March 12, 2020 through a sunset date of December 31, 2022. In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848.” These amendments extend the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision based on expectations of when LIBOR would cease being published. In 2021, the UK Financial Conduct Authority delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023. To ensure the relief provided in Topic 848 covers the period of time during which a significant number of modifications may take place, ASU 2022-06 defers the sunset date from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. ASU 2022-06 was effective upon issuance. The Company currently holds, but no longer issues, loan contracts that reference LIBOR. The Company is evaluating the most effective manner in which to modify those contracts, but does not anticipate a material financial impact.

The Inflation Reduction Act of 2022 (“IRA”) created a new nondeductible 1% excise tax on repurchases of corporate stock by certain publicly traded corporations or their specified affiliates after December 31, 2022. The tax is imposed on the fair value of the stock of a covered corporation that is repurchased in a given year, less the fair market value of any stock issued in that year. A “covered corporation” is any domestic corporation whose stock is traded on an established securities market, such as an OTC market. The excise tax applies to all of the stock of a covered corporation regardless of whether the corporation has profits or losses. The IRA contains several exceptions to the excise tax, including, but not limited to, any repurchase of stock: in which the total value of the repurchased stock in a given year does not exceed $1,000,000; that is contributed to an employer-sponsored retirement plan or other similar stock compensation plan; or that is taxed as a dividend. The impact of the IRA on our consolidated financial statements will be dependent on the extent of stock repurchases made in future periods.

ASU 2023-01 “Leases (Topic 842) – Common Control Arrangements” requires entities to determine whether a related party arrangement between entities under common control is a lease. If the arrangement is determined to be a lease, an entity must classify and account for the lease on the same basis as an arrangement with a related party (on the basis of legally enforceable terms and conditions). ASU 2023-01 is effective January 1, 2024 and is not expected to have an impact on our consolidated financial statements.

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.

29


 

Note 14 Mortgage Banking Derivatives

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding, otherwise known as Interest Rate Lock Commitments (IRLCs). IRLCs on mortgage loans that will be held for resale are considered to be derivatives and must be accounted for at fair value on the balance sheet. Accordingly, such commitments are recorded at fair value in the mortgage banking derivatives asset or liability with changes in fair value recorded in income from mortgage banking within the consolidated statement of income. Fair value is based on anticipated margins determined by market movement from the original lock date and projected pull-through rates on each loan by loan product, loan stage, and loan purpose.

During the term of the IRLC, the Company is exposed to the risk that the interest rate will change from the rate quoted to the borrower. In an effort to mitigate interest rate risk, the Company also enters into mortgage forward sales commitments on a mandatory basis for future delivery of residential mortgage loans after an interest rate lock is committed to the borrower. Mandatory commitments require that the loan must be delivered to the investor or a pair-off fee be paid. These forward commitments are recorded at fair value in the mortgage banking derivatives asset or liability, and changes in fair value are recorded to income from mortgage banking within the consolidated statement of income. The fair value of the forward commitments is based on the gain or loss that would occur if the Company were to pair-off the transaction at the measurement date.

The Company also enters into purchase and sale agreements of to-be-announced mortgage-backed securities trades (TBAs). A TBA trade is a contract to buy or sell mortgage-backed securities on a specific date while the underlying mortgages are not announced until just prior to settlement. These TBA trades provide an economic hedge against the effect of changes in interest rates resulting from IRLCs. TBAs are accounted for as derivatives under FASB ASC 815 when either of the following conditions exist: (i) when settlement of the TBA trade is not expected to occur at the next regular settlement date (which is typically the next month) or (ii) a mechanism exists to settle the contract on a net basis. As a result, these instruments are recorded at fair value in the mortgage banking derivatives asset or liability with changes in fair value recorded in income from mortgage banking within the consolidated statement of income. The fair value of the TBA trades is based on the gain or loss that would occur if the Company were to pair-off the trade at the measurement date.

The following table reflects the notional amount and fair value of mortgage banking derivatives included in the balance sheet at fair value as of June 30, 2023 and December 31, 2022.

 

 

Notional Amount

 

 

Fair Value

 

 

(dollars in thousands)

 

 

 

 

 

 

 

Balance at June 30, 2023

 

 

 

 

 

Included in mortgage banking derivatives asset:

 

 

 

 

 

Interest rate lock commitments

$

14,439

 

 

$

315

 

Forward sales commitments

 

2,027

 

 

 

49

 

To-be-announced mortgage-backed securities trades

 

24,000

 

 

 

155

 

Included in mortgage banking derivatives liability:

 

 

 

 

 

Interest rate lock commitments

 

 

 

 

 

Forward sales commitments

 

 

 

 

 

To-be-announced mortgage-backed securities trades

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2022

 

 

 

 

 

Included in mortgage banking derivatives asset:

 

 

 

 

 

Interest rate lock commitments

$

 

 

$

 

Forward sales commitments

 

 

 

 

 

To-be-announced mortgage-backed securities trades

 

 

 

 

 

Included in mortgage banking derivatives liability:

 

 

 

 

 

Interest rate lock commitments

 

8,863

 

 

 

95

 

Forward sales commitments

 

 

 

 

 

To-be-announced mortgage-backed securities trades

 

10,000

 

 

 

80

 

 

30


 

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 within the meaning of the Private Securities Litigation Reform Act of 1995. These statements generally relate to 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: increases in our past due loans and provision for credit losses that may result from local and/or broader economic effects, including the impacts of inflation and constraints on the availability of credit that may impact our borrowers; declines in general economic conditions, including increased stress in the financial markets, whether due to the recent high-profile bank failures or other factors; 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, 2023 and December 31, 2022.

During the six months ended June 30, 2023, the Company’s total assets increased $14.5 million, from $1.019 billion to $1.034 billion.

Cash and cash equivalents decreased $20.7 million during the six months ended June 30, 2023, from $114.6 million to $93.9 million. The decrease in cash and cash equivalents was used to fund growth in the loan portfolio.

Investment securities consist of securities available for sale and securities held to maturity. For the six-month period ended June 30, 2023, investment securities decreased $1.3 million to $353.7 million at June 30, 2023. At June 30, 2023, the Company had unrealized losses on securities available for sale of $38.2 million, compared to unrealized losses of $41.3 million at December 31, 2022, an improvement of $3.0 million. The improvement in the unrealized loss position, leading to the increase in value of securities, is directly related to the improvement in the market rates on our fixed income portfolio.

On January 1, 2023, the Company adopted ASC 326, requiring credit loss reserves on held to maturity securities. The adoption resulted in a $70,000 allowance for credit losses on securities held to maturity, which was allowed as a one-time adjustment to retained earnings at adoption. During the first half of 2023, a $5,000 recovery was realized due to two maturing bonds, leaving a $65,000 allowance for credit losses on securities held to maturity at June 30, 2023.

At June 30, 2023, equity securities improved in value from $292,000 at December 31, 2022 to $303,000 as a result of the increase in value in the equity market.

Loans held for sale increased $523,000 from December 31, 2022 to $3.3 million at June 30, 2023, as mortgage loan production increased during the first six months of 2023. Loans held for investment increased from $497.9 million at December 31, 2022 to $534.4 million at June 30, 2023, an increase of $36.5 million. The Company experienced a net increase in all loan sectors with the exception of commercial loans, commercial real estate construction loans and commercial other loans.

The allowance for loan losses was $2.3 million at December 31, 2022, which represented 0.46% of the total loans held for investment. On January 1, 2023, the Company adopted ASC 326, requiring a change to the allowance methodology. The result of the accounting standard adoption was a $2.4 million increase in the allowance for credit losses on loans, which was allowed as a one-time adjustment to retained earnings at adoption. During the six months ended June 30, 2023, the model called for a $391,000 increase to our current expected credit losses to account for charge-offs during the same period. The allowance as a percentage of loans held for investment was 0.88% at June 30, 2023. Additional discussion regarding the allowance is included in the Asset Quality section below.

Other changes in the Company’s consolidated assets are primarily related to prepaid expenses, included in other assets, which increased $714,000 from $830,000 as of December 31, 2022 to $1.5 million at June 30, 2023.

31


 

Customer deposits, our primary funding source, experienced a $10.4 million increase during the six-month period ended June 30, 2023, increasing from $939.9 million to $950.3 million, a 1.1% increase. The growth in the number of deposit accounts and relationship sizes contributed to the increase in deposits. As the banking subsidiary of the Company operates in a primarily rural market, many competitors have exited the markets where we remain, which has driven deposit growth in our current markets. Demand noninterest-bearing checking accounts increased $15.8 million and time deposits increased $60.3 million during the six-month period ended June 30, 2023. Interest checking and money market accounts decreased $59.6 million and savings deposits decreased $6.2 million during the six months ended June 30, 2023. The decrease in interest checking, money market accounts and savings accounts is primarily related to the movement of funds into the Company’s promotional time deposits. While the Company did not require funding for the balance sheet and believes it has ample liquidity, the Company wants to ensure its depositors are paid a fair, market rate for their deposits.

Total short-term borrowings decreased $112,000 for the six-month period ended June 30, 2023. At June 30, 2023, the Company had $29.1 million in long-term debt outstanding, which consists solely of its junior subordinated debt securities. During the third quarter of 2019, the Company issued $10.0 million in subordinated debt securities with a final maturity date of September 30, 2029 that may be redeemed on or after September 30, 2024. This junior subordinated debt pays interest quarterly at an annual fixed rate of 5.25%. During the third quarter of 2021, the Company issued $12.0 million and $8.0 million of 10-year and 15-year fixed-to-floating rate subordinated debt securities, respectively. The 10-year subordinated notes mature on September 3, 2031, though they are redeemable at the Company’s option on or after September 3, 2026, and initially pay interest quarterly at an annual rate of 3.5%. From and including September 3, 2026 to but excluding September 3, 2031, or up to any early redemption date, the interest rate on the 10-year subordinated notes will reset quarterly to an annual rate equal to the then-current three-month secured overnight financing rate (“SOFR”), plus 283 basis points payable quarterly in arrears. The 15-year subordinated notes mature on September 3, 2036, though they are redeemable at the Company’s option on or after September 3, 2031, and initially pay interest quarterly at an annual rate of 4.0%. From and including September 3, 2031 to but excluding September 3, 2036, or up to any early redemption date, the interest rate on the 15-year subordinated notes will reset quarterly to an annual rate equal to the then-current three-month SOFR plus 292 basis points payable quarterly in arrears. The subordinated debt has been structured to qualify as and is included in the calculation of the Company’s Tier 2 capital. The Company also has a $3.0 million line of credit of which $3.0 million was available to use at June 30, 2023.

Other changes in the Company’s liabilities are related to an increase of $724,000 in other liabilities from December 31, 2022 to June 30, 2023 resulting primarily from accrual of reserves for payables due throughout 2023. Additionally, accrued interest payable increased during the same six-month period as higher interest rates were paid on deposit accounts.

At June 30, 2023, total shareholders’ equity was $41.6 million, an increase of $4.2 million from December 31, 2022. This increase is largely a result of unrealized losses on investment securities, net of tax, decreasing by $2.3 million as the yield curve steepened. Net income for the six-month period ended June 30, 2023 was $4.2 million, which positively contributed to our shareholders’ equity. ASC 326 was adopted on January 1, 2023, requiring an adoption entry to reduce retained earnings by the current expected credit losses adjustment, net of tax, of $1.9 million, which partially offset the impact of the Company’s net income for the first half of 2023. During the six months ended June 30, 2023, the Company paid $280,000 in dividends attributable to noncontrolling interest. See Note 3 (Noncontrolling Interest) to the Company’s Notes to Consolidated Financial Statements for additional discussion of the noncontrolling interest.

Results of Operations for the Three Months Ended June 30, 2023 and 2022.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $2.2 million for the three months ended June 30, 2023, as compared to $1.7 million for the three months ended June 30, 2022, an increase of $541,000. Net income available to common shareholders was $2.1 million, or $0.29 per common share, for the three months ended June 30, 2023, compared to $1.5 million, or $0.22 per common share, for the same period in 2022. 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, 2023 was $8.0 million, a $1.4 million increase from the $6.6 million reported for the comparative period in 2022. During the second quarter of 2023, the average yield on our interest-earning assets increased 147 basis points to 4.58% from the same period in 2022, and the average rate we paid for our interest-bearing liabilities increased 139 basis points to 1.73%. These changes resulted in a higher interest rate spread of 2.85% as of June 30, 2023, compared to 2.77% as of June 30, 2022. The Company’s net interest margin was 3.34% and 2.87% for the comparable periods in 2023 and 2022, respectively. The Federal Reserve Bank increased overnight rates seven times in 2022 and three times in the first half of 2023 for a total of 500 basis points, repricing many of the Company’s variable rate assets and deposit funding sources.

32


 

The following table presents average balance sheet and a net interest income analysis for the three months ended June 30, 2023 and 2022, respectively:

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balance

 

 

Income/Expenses

 

 

Rate/Yield

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

$

299,789

 

 

$

285,230

 

 

$

2,623

 

 

$

1,228

 

 

 

3.51

%

 

 

1.73

%

Non-taxable securities (1)

 

 

59,259

 

 

 

66,818

 

 

 

323

 

 

 

370

 

 

 

2.74

%

 

 

2.72

%

Short-term investments

 

 

94,382

 

 

 

119,709

 

 

 

1,181

 

 

 

247

 

 

 

5.02

%

 

 

0.83

%

Equity securities

 

 

326

 

 

 

383

 

 

 

5

 

 

 

5

 

 

 

6.15

%

 

 

5.24

%

Taxable loans

 

 

516,067

 

 

 

453,442

 

 

 

6,922

 

 

 

5,233

 

 

 

5.38

%

 

 

4.63

%

Non-taxable loans (1)

 

 

12,161

 

 

 

11,251

 

 

 

67

 

 

 

64

 

 

 

2.77

%

 

 

2.78

%

Total interest-earning assets

 

 

981,984

 

 

 

936,833

 

 

 

11,121

 

 

 

7,147

 

 

 

4.58

%

 

 

3.11

%

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

675,984

 

 

 

618,010

 

 

 

2,712

 

 

 

213

 

 

 

1.61

%

 

 

0.14

%

Short-term borrowed funds

 

 

948

 

 

 

1,124

 

 

 

10

 

 

 

0

 

 

 

4.23

%

 

 

 

Long-term debt

 

 

29,224

 

 

 

29,560

 

 

 

332

 

 

 

337

 

 

 

4.56

%

 

 

4.57

%

Total interest bearing liabilities

 

 

706,156

 

 

 

648,694

 

 

 

3,054

 

 

 

550

 

 

 

1.73

%

 

 

0.34

%

Net interest spread

 

$

275,828

 

 

$

288,139

 

 

$

8,067

 

 

$

6,597

 

 

 

2.85

%

 

 

2.77

%

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.34

%

 

 

2.87

%

(1)
Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 21% effective tax rate.

Provision for Credit Losses

The provision for credit losses on loans and securities held to maturity was $102,000 for the three months ended June 30, 2023, compared to a recovery of $13,000 for the same period in 2022. There were net loan recoveries of $16,000 for the three months ended June 30, 2023, as compared to net loan recoveries of $51,000 during the same period of 2022. Refer to the Asset Quality section below for further information.

Noninterest Income

The Company places significant emphasis on diversification of revenue sources rather than relying solely upon interest income. Total noninterest income increased by $434,000 for the three-month period ended June 30, 2023, as compared to the same period in 2022. Significant positive market adjustments of supplemental executive retirement plans contributed $821,000 to the increase in total noninterest income. This increase was offset in part by a decline in income from mortgage banking due to reduced mortgage loan production in the second quarter of 2023 compared to the second quarter of 2022, as rates rose sharply during 2022.

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 net of associated network costs for the reported periods is presented in the table below:

 

 

 

Three Months Ended June 30,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Income from debit card transactions

 

$

578

 

 

$

578

 

Income from credit card transactions

 

 

168

 

 

 

155

 

Gross interchange and transaction fee income

 

 

746

 

 

 

733

 

Network costs - debit card

 

 

288

 

 

 

277

 

Network costs - credit card

 

 

143

 

 

 

153

 

Total

 

$

315

 

 

$

303

 

Noninterest Expense

Noninterest expense for the three months ended June 30, 2023 increased by $979,000 from the same period in 2022, to $7.8 million. Positive market adjustments of supplemental executive retirement plans contributed $821,000 to the increase in total noninterest expense.

33


 

Total other noninterest expense decreased $39,000 for the three months ended June 30, 2023, compared to the same period in 2022. The table below reflects the composition of other noninterest expense for the referenced periods.

 

 

 

Three Months Ended June 30,

 

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

Postage

 

$

53

 

 

$

52

 

Telephone and data lines

 

 

48

 

 

 

49

 

Office supplies and printing

 

 

23

 

 

 

19

 

Shareholder relations expense

 

 

52

 

 

 

36

 

Dues and subscriptions

 

 

72

 

 

 

74

 

Other

 

 

341

 

 

 

398

 

Total

 

$

589

 

 

$

628

 

Income Tax Expense

The Company had income tax expense of $579,000 for the three months ended June 30, 2023 at an effective tax rate of 20.7% compared to income tax expense of $310,000 with an effective tax rate of 15.6% in the comparable 2022 period. Income taxes computed at the statutory rate are primarily affected by the state income tax expense offset by the eligible amount of interest earned on state and municipal securities, tax-free municipal loans and income earned on bank-owned life insurance. For the three months ended June 30, 2023, the effective tax rate increased due to the increase in interest expense disallowance resulting from compliance with the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”). The larger disallowance is due to significantly greater projected interest expense for 2023 compared to 2022.

Results of Operations for the Six Months Ended June 30, 2023 and 2022.

Net Income and Net Income Available to Common Shareholders

Uwharrie Capital Corp reported net income of $4.2 million for the six months ended June 30, 2023, as compared to $2.5 million for the six months ended June 30, 2022, an increase of $1.7 million. Net income available to common shareholders was $3.9 million, or $0.55 per common share, for the six months ended June 30, 2023, compared to $2.2 million, or $0.31 per common share, for the six months ended June 30, 2022. 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, 2023 was $15.9 million, a $3.3 million increase from the $12.6 million reported for the comparative period in 2022. During the first six months of 2023, the average yield on our interest-earning assets increased 142 basis points to 4.46% from the same period in 2022, and the average rate we paid for our interest-bearing liabilities increased 123 basis points to 1.57%. These changes resulted in a higher interest rate spread of 2.89% as of June 30, 2023, compared to 2.70% as of June 30, 2022. The Company’s net interest margin was 3.33% and 2.81% for the comparable periods in 2023 and 2022, respectively. The Federal Reserve Bank increased overnight rates seven times in 2022 and three times in the first half of 2023 for a total of 500 basis points, repricing many of the Company’s variable rate assets and deposit funding sources.

34


 

The following table presents average balance sheet and a net interest income analysis for the six months ended June 30, 2023 and 2022, respectively:

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balance

 

 

Income/Expenses

 

 

Rate/Yield

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

$

297,005

 

 

$

291,033

 

 

$

5,115

 

 

$

2,243

 

 

 

3.47

%

 

 

1.55

%

Non-taxable securities (1)

 

 

61,767

 

 

 

66,004

 

 

 

693

 

 

 

728

 

 

 

2.83

%

 

 

2.72

%

Short-term investments

 

 

101,950

 

 

 

104,153

 

 

 

2,251

 

 

 

287

 

 

 

4.45

%

 

 

0.56

%

Equity securities

 

 

310

 

 

 

388

 

 

 

10

 

 

 

10

 

 

 

6.51

%

 

 

5.20

%

Taxable loans

 

 

504,928

 

 

 

451,336

 

 

 

13,221

 

 

 

10,290

 

 

 

5.28

%

 

 

4.60

%

Non-taxable loans (1)

 

 

12,377

 

 

 

9,437

 

 

 

135

 

 

 

114

 

 

 

2.75

%

 

 

2.98

%

Total interest-earning assets

 

 

978,337

 

 

 

922,351

 

 

 

21,425

 

 

 

13,672

 

 

 

4.46

%

 

 

3.04

%

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

676,045

 

 

 

608,032

 

 

 

4,828

 

 

 

390

 

 

 

1.44

%

 

 

0.13

%

Short-term borrowed funds

 

 

977

 

 

 

1,109

 

 

 

19

 

 

 

1

 

 

 

3.92

%

 

 

0.18

%

Long-term debt

 

 

29,349

 

 

 

29,550

 

 

 

666

 

 

 

673

 

 

 

4.58

%

 

 

4.59

%

Total interest-bearing liabilities

 

 

706,371

 

 

 

638,691

 

 

 

5,513

 

 

 

1,064

 

 

 

1.57

%

 

 

0.34

%

Net interest spread

 

$

271,966

 

 

$

283,660

 

 

$

15,912

 

 

$

12,608

 

 

 

2.89

%

 

 

2.70

%

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.33

%

 

 

2.81

%

(1)
Yields related to securities and loans exempt from income taxes are stated on a fully tax-equivalent basis, assuming a 21% effective tax rate.

Provision for Credit Losses

The provision for credit losses on loans and securities held to maturity was $386,000 for the six months ended June 30, 2023, compared to a provision of $105,000 for the same period in 2022. There were net loan charge-offs of $376,000 for the six months ended June 30, 2023, as compared to net loan recoveries of $63,000 during the same period of 2022. Refer to the Asset Quality section below for further information.

Noninterest Income

The Company places significant emphasis on diversification of revenue sources rather than relying solely upon interest income. Total noninterest income decreased by $213,000 for the six-month period ended June 30, 2023, as compared to the same period in 2022. The primary factor contributing to the overall decline in noninterest income was a decrease of $854,000 in income from mortgage banking. This decrease is due to the reduction in production, particularly mortgage refinancing activity, as interest rates rose sharply during 2022. Additionally, positive market adjustments of $534,000 on supplemental executive retirement plans served to help offset the impact of the reduction in mortgage banking 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 net of associated network costs for the reported periods is presented in the table below:

 

 

 

Six Months Ended June 30,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Income from debit card transactions

 

$

1,131

 

 

$

1,083

 

Income from credit card transactions

 

 

339

 

 

 

300

 

Gross interchange and transaction fee income

 

 

1,470

 

 

 

1,383

 

Network costs - debit card

 

 

544

 

 

 

531

 

Network costs - credit card

 

 

307

 

 

 

311

 

Total

 

$

619

 

 

$

541

 

Noninterest Expense

Noninterest expense for the six months ended June 30, 2023 increased by $544,000 from the same period in 2022, to $15.0 million. Positive market adjustments totaling $534,000 on supplemental executive retirement plans was the primary contributor to the increase in total noninterest expense.

35


 

Total other noninterest expense decreased $22,000 for the six months ended June 30, 2023, compared to the same period in 2022. The table below reflects the composition of other noninterest expense for the referenced periods.

 

 

Six Months Ended June 30,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Postage

 

$

112

 

 

$

117

 

Telephone and data lines

 

 

99

 

 

 

105

 

Office supplies and printing

 

 

46

 

 

 

43

 

Shareholder relations expense

 

 

88

 

 

 

73

 

Dues and subscriptions

 

 

141

 

 

 

150

 

Other

 

 

681

 

 

 

701

 

Total

 

$

1,167

 

 

$

1,189

 

Income Tax Expense

The Company had income tax expense of $1.1 million for the six months ended June 30, 2023 at an effective tax rate of 20.1% compared to income tax expense of $478,000 with an effective tax rate of 16.1% in the comparable 2022 period. Income taxes computed at the statutory rate are primarily affected by the state income tax expense offset by the eligible amount of interest earned on state and municipal securities, tax-free municipal loans and income earned on bank-owned life insurance. For the six months ended June 30, 2023, the effective tax rate increased due to the increase in interest expense disallowance resulting from compliance with the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”). The larger disallowance is due to significantly greater projected interest expense for 2023 compared to 2022.

Asset Quality

The Company’s allowance for credit losses on loans is established through charges to earnings in the form of a provision for losses. The allowance is increased by provisions charged to operations and 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 credit 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 allowance for credit losses on loans represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. 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.

The Company individually reviews loans with total relationship exposure greater than or equal to $100,000 that are determined to be collateral dependent. These collateral dependent loans are evaluated based on the fair value of the underlying collateral as repayment of the loan is expected to be made through the operation or sale of the collateral. Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date unadjusted for selling costs as appropriate. This evaluation is inherently subjective, as it requires material estimates, including internal and external appraisal services. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for credit losses on loans and may require additions for estimated losses based upon judgments different from those of management.

The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified segments for Consumer loans based on credit score and collateral and for Commercial loans based on risk grade and collateral. The allowance for credit losses for each segment is calculated using a Non-Discounted Cash Flow methodology. 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 and 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 credit losses on loans. 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.

36


 

Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending management experience and risk tolerance, loan review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in underlying collateral, external factors and economic conditions not already captured.

At June 30, 2023, the level of our individually assessed loans, which includes all loans in nonaccrual status with total relationship exposure of more than $100,000 of collateral dependency, was $187,000.

The allowance, expressed as a percentage of gross loans held for investment, increased forty-two basis points from 0.46% at December 31, 2022 to 0.88% at June 30, 2023. The initial adoption of ASU 2016-13 on January 1, 2023 added forty-eight basis points to the December 31, 2022 reported allowance as a percentage of gross loans held for investment. Activity and forecast updates within the CECL model from January 1, 2023 to June 30, 2023 required a reduction of 6 basis points in allowance as a percentage of loans.

The ratio of nonaccrual loans to total loans decreased from 0.08% at December 31, 2022 to 0.07% at June 30, 2023, and was related to the $36.5 million increase in the held for investment loan portfolio. Three loans were converted to nonaccrual during the first half of 2023, offset by one loan that was moved to other real estate owned, one loan that was removed from nonaccrual status and one loan that was charged off.

Other real estate owned increased to $141,000 at June 30, 2023 compared to $0 at December 31, 2022 as there was one loan foreclosed on during the first quarter of 2023.

As of June 30, 2023, management believed the level of the allowance for credit losses on loans was appropriate in light of the risk inherent in the loan portfolio.

The following table shows the comparison of nonperforming assets at June 30, 2023 and December 31, 2022:

Nonperforming Assets

(dollars in thousands)

 

 

 

June 30, 2023

 

 

December 31, 2022

 

Nonperforming assets:

 

 

 

 

 

 

Accruing loans past due 90 days or more

 

$

 

 

$

 

Nonaccrual loans

 

 

401

 

 

 

399

 

Other real estate owned

 

 

141

 

 

 

 

Total nonperforming assets

 

$

542

 

 

$

399

 

Allowance for credit losses on loans

 

$

4,713

 

 

$

2,290

 

Nonaccrual loans to total loans

 

 

0.07

%

 

 

0.08

%

Allowance for credit losses on loans to total loans

 

 

0.88

%

 

 

0.46

%

Allowance for credit losses on loans to nonaccrual loans

 

 

1,176.17

%

 

 

573.93

%

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. Estimated uninsured deposits, including deposits collateralized by pledged assets, represented 36% and 38% of total deposits at June 30, 2023 and December 31, 2022, respectively. 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. At June 30, 2023, these sources were the subsidiary bank’s established federal funds lines with correspondent banks aggregating $38.0 million, with available credit of $38.0 million; an established borrowing relationship with the Federal Home Loan Bank, with available credit of $140.8 million; and access to borrowings from the Federal Reserve Bank discount window, with available credit of $14.8 million. The Company also has a $3.0 million line of credit with TIB The Independent BankersBank, N.A. The line is held by the holding company and is secured with 100% of the outstanding common shares of the Company’s subsidiary bank. As of June 30, 2023, $3.0 million remained available for

37


 

use on the line of credit. The Company has also secured long-term debt from other sources consisting of $29.1 million of junior subordinated debt at June 30, 2023 and $29.6 million at December 31, 2022.

The following table summarizes the Company’s interest-earning cash and cash equivalents as of the periods indicated.

 

 

 

June 30, 2023

 

 

December 31, 2022

 

 

 

(dollars in thousands)

 

Interest-earning cash and cash equivalents

 

 

83,245

 

 

 

109,224

 

Interest-earning cash and cash equivalents as a percent of:

 

 

 

 

 

 

Total loans held for investment

 

 

15.6

%

 

 

21.9

%

Total earning assets

 

 

8.5

%

 

 

11.3

%

Total deposits

 

 

8.8

%

 

 

11.6

%

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 Company’s accumulated other comprehensive income or loss, resulting from unrealized gains and losses, net of income tax, on investment securities available for sale, is excluded from regulatory capital.

As of June 30, 2023, 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, 2023, the Company had $29.1 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, 2023, with the exception of mortgage banking derivatives. See Note 14 (Mortgage Banking Derivatives) to the Company’s Notes to Consolidated Financial Statements for additional discussion of mortgage banking derivatives.

Contractual Obligations

The timing and amount of our contractual obligations has not changed materially since our 2022 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 8, 2023.

38


 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

Management of the Company has evaluated, with the participation of the Company’s principal executive officer and principal financial officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the second quarter of 2023. 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.

39


 

Part II. OTHER INFORMATION

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, 2023.

 

 

(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 (in thousands) of
Shares that May Yet
Be Purchased Under
the Plans

 

April 1, 2023 Through April 30, 2023

 

 

 

 

$

 

 

 

 

 

$

 

May 1, 2023 Through May 31, 2023

 

 

 

 

$

 

 

 

 

 

$

 

June 1, 2023 Through June 30, 2023

 

 

17,278

 

 

$

7.71

 

 

 

 

 

$

 

Total

 

 

17,278

 

 

$

7.71

 

 

 

 

 

$

 

(1)
Trades of the Company’s common stock are quoted on the OTCQX 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.

40


 

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, 2023, in inline XBRL (eXtensible Business Reporting Language) (filed herewith)

 

104

 

Cover page interactive data file (formatted in inline XBRL and contained in Exhibit 101)

 

 

41


 

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 8, 2023

 

By:

 

/s/ Roger L. Dick

 

 

 

 

Roger L. Dick

 

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

Date:

 

August 8, 2023

 

By:

 

/s/ Heather H. Almond

 

 

 

 

Heather H. Almond

 

 

 

 

Principal Financial Officer

 

42